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Timestamp: 2019-11-13 09:41:30
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Summary of the Scheme and of the Independent Expert's Report BACKGROUND - PDF
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1 TRANSFER OF ANNUITY BUSINESS OF THE EQUITABLE LIFE ASSURANCE SOCIETY TO CANADA LIFE LIMITED Summary of the Scheme and of the Independent Expert's Report BACKGROUND It is proposed that certain annuity business (the "Business") of The Equitable Life Assurance Society ("Equitable Life") be transferred to Canada Life Limited ("Canada Life"). The transfer of the Business (the "Transfer") is to be implemented under the statutory process available under Part VII of the Financial Services and Markets Act 2000 ("FSMA") for the transfer of insurance businesses. The Business comprises approximately 31,000 non-profit and unit-linked annuity policies. This document provides: a summary of the terms of the legal document under which it is intended that the Transfer will be implemented (the "Scheme"); and a summary of the report on the terms of the Scheme dated 7 October 2015 prepared by an independent expert (the "Independent Expert's Report"). The Independent Expert's Report was prepared by Mr Nick Dumbreck of Milliman LLP, a Fellow of the Institute and Faculty of Actuaries (the "Independent Expert"). It provides an independent expert opinion on how the Transfer is likely to affect the policyholders of Equitable Life and Canada Life. If you require further information, we recommend that you read the Independent Expert's Report and Scheme document in full. Copies of each can be obtained, free of charge, from the companies' websites or on request using the telephone numbers or addresses set out below: The Equitable Life Assurance Society Walton Street Aylesbury HP21 7QW Canada Life Limited Canada Life Place Potters Bar Hertfordshire EN6 5BA Ref: Transfer of annuities from Equitable Life Equitable Life telephone: Canada Life telephone: Equitable Life overseas telephone: Canada Life overseas telephone:
2 - 2 - SUMMARY OF THE SCHEME 1. REQUIREMENT FOR COURT APPROVAL The Transfer is subject to the approval of the High Court of Justice (the "Court"). The Court hearing at which the Transfer will be considered will be held on 8 February 2016 at the Rolls Building, Fetter Lane, London, EC4A 1NL. Subject to the Court approving the Transfer, the Scheme will become effective on 19 February 2016 (the "Effective Date"). Unless the Scheme becomes effective on 19 February 2016, or such later date as the Court may allow upon the application of Equitable Life and Canada Life, it will lapse. 2. TRANSFER OF THE BUSINESS On the Effective Date, the Equitable Life annuity policies comprised within the Business will be transferred to Canada Life, together with certain investment assets and cash. Under the terms of the Scheme: Policies included in the Business will (except as set out in the paragraph headed Residual Policies below) be transferred on the Effective Date to Canada Life, which will become the insurer under those policies in place of Equitable Life. Canada Life will be responsible for all annuity payments on the policies comprised within the Business after the Effective Date. Equitable Life will retain all liabilities arising from its acts or omissions in relation to the Business which occur on or before the Effective Date (the "Excluded Liabilities"). The Excluded Liabilities include any liability for: o o the mis-selling of any policies included in the Business; and the breach of the terms of any of the transferring policies. Other than the substitution of Canada Life for Equitable Life as insurer, the terms of the policies to be transferred to Canada Life from Equitable Life under the Scheme will remain the same and you will be entitled to the same rights with Canada Life in respect of your annuity as you had with Equitable Life. The Business shall be allocated to the non-profit sub-fund of Canada Life's long-term insurance fund. 3. PREMIUMS AND MANDATES From the Effective Date, monies payable by Equitable Life in respect of policies transferred to Canada Life will automatically be payable by Canada Life. Mandates and instructions in relation to the payment of monies by Equitable Life will continue in force from the Effective Date as an effective authority of Canada Life. Any mandate or other instruction relating to the payment of premiums to Equitable Life in respect of the transferred policies will take effect from the Effective Date as if it had provided for and authorised such payment to Canada Life. 4. UNIT-LINKED POLICIES From the Effective Date, the benefits under any policies included in the Business which are unitlinked policies will become linked to Canada Life unit-linked fund(s) which Equitable Life and Canada Life have agreed provide investment exposure which is reasonably equivalent to the Equitable Life unit-linked fund(s) to which those policies are linked prior to the Transfer.
3 - 3 - Policyholders will be allocated units in those Canada Life unit-linked fund(s) in such amount as will mean that the value of units used to calculate payments under the unit-linked annuities will be the same immediately following the Effective Date as the value of units used to calculate payments immediately prior to the Effective Date. As noted above, there will be no changes to the terms or conditions of any policies comprised within the Business as a result of the Transfer. This means that, to the extent that the terms of unit-linked policies included within the Business entitle policyholders to make switches between different unitlinked funds, policyholders will continue to have that right with Canada Life. Likewise, to the extent that policyholders have a contractual right to make such switches without charge, then that right will not be affected by the Scheme, although Canada Life (like Equitable Life) will retain the right to apply charges where it is entitled to do so. However, holders of transferred unit-linked policies will be entitled to make one free switch from each initial Canada Life linked fund to an alternative linked fund offered by Canada Life, provided that such switch takes place within 12 months from the Effective Date. 5. DATA PROTECTION Following the Effective Date, Canada Life will take over all rights and responsibilities relating to personal information comprised within the Business to which the Data Protection Act 1998 applies. This means that, from the Effective Date, Canada Life will become the "data controller" for the purposes of the Data Protection Act 1998 and will be under the same duties to respect the confidentiality and privacy of any person in relation to that data as Equitable Life was prior to the Effective Date. Any consent given in respect of such data to Equitable Life will be treated as having been given to Canada Life. 6. LEGAL PROCEEDINGS Following the Effective Date, any legal proceedings by or against Equitable Life (including any claims made to any regulator or ombudsman) that relate to rights and obligations in respect of the Business shall be commenced or continued by or against Canada Life. This includes all claims in respect of policies transferred to Canada Life as part of the Business and arising after the Transfer becomes effective, but not claims in respect of any acts or omissions of Equitable Life in relation to the Business which occur on or before the Effective Date. 7. RESIDUAL POLICIES If for any reason a policy included in the Business is not capable of being transferred pursuant to the Scheme on the Effective Date, then that policy (a "Residual Policy") will not be transferred to Canada Life and all liabilities attributable to the Residual Policy shall remain with Equitable Life. However, Canada Life will fully reassure the Residual Policies from the Effective Date and this reassurance arrangement will remain in place until either Equitable Life and Canada Life agree to terminate the arrangement or at any time after the date falling 12 calendar months after the Effective Date, either Equitable Life or Canada Life gives notice to the other that it wishes to terminate the arrangement. If any Residual Policy becomes capable of transfer to Canada Life pursuant to the Scheme prior to the termination of the reassurance arrangement, that policy will be transferred to Canada Life under the terms of the Scheme. Any Residual Policies which do not become capable of transfer prior to the termination of the reassurance arrangement will become Excluded Policies (see below). If your policy becomes an Excluded Policy, we will let you know.
4 EXCLUDED POLICIES The policies comprised within the Business will be specified in lists agreed by Equitable Life and Canada Life prior to the Effective Date. Certain categories of Equitable Life policy ("Excluded Policies") are specifically excluded from the Transfer, including: Any policies or benefits which are not non-profit or unit-linked annuity policies and benefits. This means that all Equitable Life with-profits policies are Excluded Policies. Policies which are a continuation of non-profit deferred annuity policies that were reassured in March 2001, which include both index-linked and non-profit annuities in payment and policies which have remained deferred policies (the letters to be sent to Equitable Life policyholders in connection with the Transfer will make clear whether a policyholder holds such a policy). Any policy which has not transferred to Canada Life and ceases to be a Residual Policy as a result of the termination of the reassurance arrangement for Residual Policies. 9. MODIFICATIONS AND ADDITIONS At any time prior to the Transfer being approved by the Court, Equitable Life and Canada Life may consent to any modification, addition, condition or provision to the Scheme which is approved by the Court, provided that any such modification, addition, condition or provision which is material to the Scheme may only be made with the consent of the Prudential Regulation Authority and Financial Conduct Authority (or any successor regulators) (the "Insurance Regulators"). At any time after the Transfer has been approved by the Court, Equitable Life and Canada Life may jointly apply to the Court for consent to amend the terms of the Scheme, provided that: the Insurance Regulators have been notified of the hearing; and the application is accompanied by a certificate from an independent actuary to the effect that in his opinion the proposed amendment will not adversely affect the security or reasonable expectations of Equitable Life or Canada Life policyholders, including the holders of policies transferred to Canada Life under the Scheme. Subject to certain other protections (including a requirement to give notice of the proposed change to the Insurance Regulators), the consent of the Court shall not be required in relation to minor and/or technical amendments to the Scheme that Equitable Life and Canada Life agree and amendments which are reasonably considered necessary to ensure the provisions of the Scheme operate as intended in circumstances where they are materially affected by a change in regulatory requirements (for example, the introduction of Solvency II, which is expected on 1 January 2016). 10. OVERSEAS SCHEMES JERSEY AND GUERNSEY The transfer of certain policies comprised within the Business requires the consent of the Royal Courts in Jersey and Guernsey. The terms of the Jersey and Guernsey schemes are based on and are substantially the same as the terms of the Scheme. The summary of the Scheme above applies equally to the Jersey and Guernsey schemes. Where we refer to the approval of the Court in this summary, you should read this as also referring to the approval by the Royal Court of Jersey or the Royal Court of Guernsey, as the case may be.
5 - 5 - SUMMARY OF THE INDEPENDENT EXPERT'S REPORT 1. BACKGROUND The Independent Expert 1.1 When an insurance company decides to transfer some or all of its long-term insurance business to another insurance company, the law in the UK requires the transfer to be approved by the Court, and an Independent Expert to be appointed to report to the Court on the terms of the transfer and, in particular, to consider the effects on the holders of policies affected by the transfer. 1.2 I have been instructed by Equitable Life and Canada Life to report in the capacity of Independent Expert on the terms of the proposed transfer of certain non-profit annuities of Equitable Life to Canada Life (see the above "Summary of the Scheme" for further details regarding the scope of the transferring business). The Transfer will be effected by means of the Scheme. 1.3 I am a Fellow of the Institute and Faculty of Actuaries in the UK and a partner of Milliman LLP ("Milliman"). I have fulfilled the role of Independent Expert on over 20 insurance business transfers that have been approved by the Court. I confirm that I do not have any direct or indirect interest in Equitable Life, Canada Life or any other related firms that could influence my independence. 1.4 This report is a summary of my full report dated 7 October 2015, which is available to Equitable Life and Canada Life policyholders and other interested parties on request. Both this summary report and my full report are also available on the websites of the two companies. Please refer to my full report for the scope of work and my conclusions, and the reliances, limitations and standards applying to my work. The full report and this summary do not provide financial or other advice to individual policyholders. 1.5 The purpose of my work is to review the proposed transfer of certain non-profit annuity business of Equitable Life to Canada Life. In particular, I have considered the effects of the proposed Transfer on the security of the benefits and on the reasonable benefit expectations of the transferring and non-transferring long-term policyholders of Equitable Life and the existing long-term policyholders of Canada Life. I have also considered the effect of the implementation of the Scheme on the service standards and governance applicable to policyholders. 1.6 Some of the transferring business is carried on in Jersey and Guernsey. Separate schemes will also be presented to the relevant courts in Jersey and Guernsey and will be substantially on the same terms as the Scheme. This summary and the conclusions within it apply equally to business carried on in, or from within, the Bailiwick of Guernsey or Jersey and to policies issued to residents of the Bailiwick of Guernsey or Jersey as they do to business comprising policies held by residents in the UK or any other territory. 2. EQUITABLE LIFE AND CANADA LIFE: THE COMPANIES CONCERNED IN THE SCHEME 2.1 Equitable Life is a mutual life assurance company. Its business consists of protection products (including life cover and critical illness) and retirement income planning products (including annuities) for groups and individuals, as well as savings products. Equitable Life closed to new business in December 2000.
6 Equitable Life currently has one fund, the Ordinary Long Term Fund (the Equitable Life OLTF ). 2.3 Canada Life is a proprietary company that is a wholly owned subsidiary of The Canada Life Group (U.K.) Limited which in turn is owned by Canada Life Financial Corporation. Since July 2003, Canada Life Financial Corporation has been a wholly owned subsidiary of Great- West Lifeco Inc. A diagram of this structure is contained within section 4 of my full report. 2.4 Canada Life offers protection products (including life cover, income protection and critical illness) and retirement income planning products (including annuities and pension bonds) to groups and individuals, as well as savings and investments. 2.5 Canada Life maintains a shareholder's fund ("Canada Life SHF") and a Long Term Business Fund ("Canada Life LTBF"). 2.6 The Canada Life LTBF is divided into three sub-funds: the Canada Life Non-Profit Fund ("Canada Life NPF"); the Canada Life Manulife Fund; and the Canada Life With-Profits Fund. 2.7 In section 4 of my full report I provide some more detail on the types of business in these sub-funds. 3. EQUITABLE LIFE AND CANADA LIFE: THE PROPOSED TRANSFER 3.1 It is proposed to transfer approximately 31,000 non-profit annuity policies of Equitable Life, constituting around 975 million of insurance liabilities (as at 31 December 2014), together with the associated assets and liabilities to the Canada Life NPF on the Effective Date of the Scheme, which is proposed to be 19 February Equitable Life has reinsured the non-profit annuity business to be transferred, other than the unit-linked annuities, to Canada Life with effect from 1 January 2015 under a reinsurance arrangement (the "Reassurance Arrangement"). In order to protect Equitable Life from counterparty risk (the risk that Canada Life is unable to meet its reinsurance obligations to Equitable Life) the premium paid has been deposited back to Equitable Life. At the Effective Date, the Reassurance Arrangement will be terminated and the balance of these deposited funds will be transferred to Canada Life upon completion of the transfer. The total assets to be transferred will also include allowance for any new non-profit annuities written by Equitable Life between 2 March 2015 and the Effective Date, an amount in respect of the unit-linked annuities, and any other adjustments required. 3.3 The Equitable Life unit-linked annuities in force at the Effective Date will be transferred to Canada Life under the Scheme. Equitable Life and Canada Life have agreed which Canada Life unit-linked investment funds provide reasonably equivalent investment exposure to the current Equitable Life funds. At the Effective Date, Canada Life will allocate to each transferring unit-linked policy units in the relevant Canada Life unit-linked fund so that the amount of each annuity payment calculated immediately following the Transfer will be the same as the amount of each annuity payment calculated immediately before the Transfer. See section 4 of the "Summary of the Scheme" for further details.
7 THE EFFECT OF THE IMPLEMENTATION OF THE SCHEME ON TRANSFERRING EQUITABLE LIFE POLICIES 4.1 As a result of the implementation of the Scheme, the transferring Equitable Life policies will transfer into and become direct policies of the Canada Life NPF. 4.2 None of the policies to be transferred under this Scheme carries membership rights of Equitable Life, although policyholders may be members through ownership of other policies. 4.3 The current solvency regime for insurers is made up of two "Pillars", namely "Pillar I" and "Pillar II", and Pillar I itself has a "Regulatory basis" and a "Realistic basis". The Pillar I Realistic basis is only for companies with significant levels of with-profits business, and Canada Life is not required to report on this basis. Further details of the different solvency regimes are contained in my full report in section 3. Only the Pillar I position is published. 4.4 If the Transfer had taken place on 31 December 2014, the solvency cover of Canada Life on the "Pillar I Regulatory" basis post-transfer would have been significantly lower than that of Equitable Life pre-transfer. Nevertheless, Canada Life would have remained capitalised to a level in excess of that required by its own capital policy on this basis, which includes a buffer over the minimum solvency level required by law. 4.5 Policyholder security is affected not only by current solvency cover but also by the insurance company's capital management policy, which influences its future solvency position. The current capital policies of Equitable Life and Canada Life are not readily comparable on a Pillar I basis, but on a Pillar II basis they target similar levels of solvency capital coverage. 4.6 I have been shown the Pillar II solvency positions of both companies as at 31 December 2014 before and after the Transfer, which indicate that both companies exceeded their minimum target capital on this basis before the Transfer, and also that the Transfer is expected to have a minimal impact on the solvency of both companies on a Pillar II basis. 4.7 In conclusion I am satisfied that: The capital policies of Equitable Life and Canada Life are of broadly similar strength on a Pillar II basis, and therefore the security afforded to the transferring business by the applicable capital policy will not change materially as a result of the Scheme. The cessation of the Reassurance Arrangement and the associated restrictions on the deposited assets will not have a material effect on the security of benefits for the transferring business. While the financial strength of Canada Life on a Pillar I basis after implementation of the Scheme is expected to be materially lower than that of Equitable Life currently, it is still sufficient to provide an appropriate level of security for the transferring business. 4.8 I understand that Canada Life is proposing to reinsure approximately 90% of the sterlingdenominated transferring annuities (not including the unit-linked annuities) to Canada Life Assurance Company (Barbados branch) prior to the Effective Date. This would operate in a similar way to two existing Canada Life reinsurance agreements with that company. Once the Scheme has been implemented, the primary responsibility to pay the transferring annuities will be with Canada Life, regardless of this onwards reinsurance. I have been informed that this reinsurance is expected to be completed during October If it does
8 - 8 - not go ahead Canada Life s post-scheme solvency ratios will be affected; however, I am satisfied that this would not materially affect my conclusions within my full report or this summary. 4.9 The transferring Equitable Life policies are all non-profit in-payment annuities, and therefore policyholders' reasonable expectations in respect of their policies are principally that: They receive their income as guaranteed under the policy, or for unit-linked annuities as determined in accordance with the terms of their policy, on the dates specified, from the point of purchase; The administration, management, and governance of the policies are in line with the contractual terms under the policies; and The standards of service received are at least as good as those they currently receive The transferring policies are currently administered directly by Equitable Life, other than certain Irish policies, which are, in part, administered by a third party company Canada Life currently administers over 440,000 annuities in payment, with the majority of the processing being automated and therefore largely insensitive to business volumes. The existing Canada Life systems will require some development to ensure that they have the capability to support the transferring business. To reflect this additional complexity and the potential need for manual interventions, Canada Life has planned for an increase in support staff, identified development requirements and prepared contingency plans to ensure servicing levels are maintained. Progress on systems development remains on track and I will continue to monitor this over the coming months In addition, it is currently proposed that the Irish and German euro denominated annuities be 100% reinsured to Irish Life Assurance plc and Canada Life Assurance Europe Limited respectively, principally for ease of administration. Both are companies within the Canada Life group and have existing euro denominated annuities in payment. Canada Life may instead choose to transfer responsibility for the administration of the German eurodenominated annuities to Canada Life Assurance Europe Limited without reinsuring the liabilities. A decision will be made before implementation of the Scheme Although Canada Life administers significant volumes of unit-linked business, it does not currently administer any unit-linked annuities, and the company is therefore developing its systems and processes to be able to administer this business, with contingency plans already identified. I will provide an update on the progress of the systems developments in my supplementary report, and will provide an assessment of the contingency plans if appropriate There will be no changes to the transferring policies' terms and conditions, except that the policies will become policies of Canada Life. There will be no change to the benefits under the transferring policies Following the implementation of the Scheme, the transferring business will be subject to the governance of the Canada Life board, which is experienced in the management and governance of non-profit annuity business In addition to the points identified in paragraph 4.9 which are relevant for all transferring policyholders, there are a number of specific issues in respect of the expectations of the unit-linked annuity policyholders, which are considered below.
9 - 9 - The range of investment funds available to policyholders and how these compare to the current Equitable Life fund choice: Equitable Life and Canada Life have agreed which Canada Life unit-linked investment funds provide reasonably equivalent investment exposures and annual management charges to the current Equitable Life funds. The proposed mapping of Equitable Life funds to the Canada Life funds is shown in Appendix 3 of the guide to the Transfer provided by Equitable Life. The number of units allocated in the appropriate Canada Life funds at the Effective Date will be such that the amount of each annuity payment calculated immediately following the Transfer will be the same as the amount of each annuity payment calculated immediately before the Transfer. The range of funds available to the annuitants will be wider after implementation of the Scheme and will consist of funds managed by either Canada Life or external fund managers. All transferring unit-linked policyholders will be allowed to make one switch in respect of each unit-linked fund to which their policy is linked at no cost within 12 months of the Effective Date. Such switches will be in addition to any rights under the terms of their policy. Both Equitable Life and Canada Life have informed me that they do not currently charge a fee to switch funds; however both have the right to do so in the future under the terms and conditions of the unit-linked policies. Canada Life has confirmed that it has no current plans to introduce such a fee. There are five Equitable Life funds where the mapping to the most appropriate Canada Life fund would result in higher charges; namely, the Ethical, Smaller Companies, Special Situations, Far Eastern and High Income funds. In each of these cases the unit-linked annuity policyholders will be compensated for the excess of the Canada Life fund charge over the corresponding Equitable Life fund charge for as long as the Equitable Life charges remain lower. Equitable Life is intending to review its unit-linked fund charges in 2016, and it is likely that some of the charges will be increased as a result. The mechanics of the compensation are being developed and I will provide an update in my supplementary report which will be available on the Equitable Life and Canada Life websites shortly before the final Court hearing. Equitable Life will write to all unit-linked annuity policyholders before the end of For unit-linked policyholders who will be allocated units in any of these five funds that have higher charges the letter will inform them that: the Canada Life funds to which some or all of their benefits will be linked following implementation of the Scheme have higher charges than the corresponding Equitable Life funds; if they remain invested in those funds, they will receive compensation sufficient to cancel out the impact of the higher charges for as long as the Equitable Life charges remain lower following the Effective Date; and they have the right to make one switch in respect of each unit-linked fund to which their policy is linked, without charge, within 12 months of the Effective Date.
10 For all other Equitable Life unit-linked annuity policyholders the same letter will set out the matters they should take into account when considering the appropriateness of the new Canada Life fund(s) to which their policies will be linked. Furthermore, Canada Life has undertaken that, at or around the Effective Date, it will write to all policyholders with unit-linked annuities reminding them of their ability to make one switch in respect of each unit-linked fund to which their policy is linked without charge within 12 months of the Effective Date. The new funds will not have precisely the same investment mandate as the existing Equitable Life funds, and their performance is likely to differ from that of the existing funds. Both the Equitable Life and the Canada Life fund ranges have a mixed past performance record. I am satisfied that the proposed arrangements provide a reasonably equivalent match to the current fund choice, and give the policyholder the option to change their investment choice if they wish to do so. The methodologies and systems used to determine the unit prices and the governance of the unit pricing process: In most cases, any differences between Equitable Life and Canada Life in the way in which unit prices are determined is not expected to have a material effect on transferring policyholders. However, the Canada Life UK Property Fund is currently expanding and is priced allowing for the expenses of buying properties, which are substantial. If the fund starts to contract, pricing is likely to change to reflect the expected proceeds from sale of properties, net of sale costs, and the unit price could fall by around 8%. This risk does not arise with the Equitable Life Property Fund, which is already contracting and is priced accordingly. Canada Life proposes that, at or around the Effective Date, it will write to all policyholders with annuities linked to the Canada Life UK Property Fund about the potential impact of a change in the pricing basis for the fund and to inform them of their ability to make one switch in respect of each unit-linked fund to which their policy is linked for free within 12 months of the Effective Date. There are other features of the Canada Life UK Property Fund which are arguably more attractive than those of the Equitable Life Property Fund; these are described in paragraph 6.61(ii) of my full report. I have discussed the unit pricing processes and governance with the management of Equitable Life and Canada Life, and do not consider that there will be any material changes to the reasonable expectations of the transferring unit-linked policyholders as a result of these aspects The UK Government is in the process of developing plans to allow existing annuitants to assign or cash in their annuities, and it is currently expected that any new measures would take effect from April However, the details of the proposals are not yet known; accordingly it is too early for either Canada Life or Equitable Life to be in a position to confirm how they might respond to such changes, and therefore whether the proposed Transfer will affect the availability of, or proceeds from, this additional flexibility for transferring policyholders I am satisfied that: the implementation of the Scheme will not have a material effect on the security of the guaranteed benefits of transferring Equitable Life policies;
11 (d) (e) (f) the implementation of the Scheme will not lead to any change to the contractual benefits under any of transferring Equitable Life policies; the majority of transferring unit-linked annuitants will benefit from lower charges. Those unit-linked annuitants moving to Canada Life funds with higher charges will be appropriately compensated; although there is a possibility of some limited detriment to transferring policyholders whose annuity payments are linked to the Equitable Life Property fund, I consider that the proposed specific communication to policyholders is an appropriate response; the implementation of the Scheme will not materially affect the administration and service standards applicable to the holders of transferring Equitable Life policies; and the implementation of the Scheme will not have a material effect on the management or the governance of transferring Equitable Life policies On this basis I am satisfied that the Scheme will not have a material effect on the reasonable expectations of any of the transferring Equitable Life policies. Overall conclusion for transferring Equitable Life policies 4.20 I am satisfied that the implementation of the Scheme will not have a material effect on: the security of benefits under transferring Equitable Life policies; the reasonable expectations of transferring Equitable Life policyholders; or the service standards and governance applicable to transferring Equitable Life policies. 5. THE EFFECT OF THE SCHEME ON NON-TRANSFERRING EQUITABLE LIFE POLICIES 5.1 The non-transferring Equitable Life policies include: conventional and accumulating with-profits policies; conventional non-profit policies (principally deferred non-profit annuities); and unit-linked policies. There are also small volumes of other policy types such as index-linked policies, and withprofits annuities written in Germany. 5.2 The Scheme is expected to result in an increase in the capital coverage ratio for Equitable Life under the current Pillar I Regulatory Basis calculations, and the Pillar II position of Equitable Life at 31 December 2014 would also be improved marginally by the implementation of the Scheme. 5.3 Equitable Life's ability to comply with its capital policy will not change materially as a result of the implementation of the Scheme. 5.4 No changes are being proposed to the terms and conditions of non-transferring policies in Equitable Life. Furthermore, there will be no change to the operation of Equitable Life and
12 the governance of non-transferring Equitable Life policies will continue to be the responsibility of the Equitable Life board. 5.5 No changes are being proposed to the unit-linked funds in which non-transferring unit-linked policies are invested as a result of the Scheme. 5.6 The non-transferring policies in Equitable Life will continue to be serviced and administered under the same arrangements and will therefore not experience any change to service standards. Asset management arrangements will continue unchanged. 5.7 A marginal reduction in the risks to which Equitable Life is exposed and a small increase in capital coverage following the implementation of the Scheme gives rise to slightly larger surplus capital in Equitable Life, and the potential for a marginal acceleration in their distribution to with-profits policyholders. I note that Equitable Life has increased the capital distribution from 1 April 2015 from 25% to 35%, in part due to the reinsurance and planned Transfer of the annuity business. I also note the opinion of the Equitable Life with-profits actuary that the reinsurance and planned Transfer are beneficial to the with-profits policyholders within the Equitable Life OLTF, even allowing for the associated costs and for the loss of future profits that could have been expected to emerge over time. I agree with the Equitable Life with-profits actuary s opinion. This release of capital and early realisation of part of the expected future profit will allow all current with-profits policyholders to benefit, not just those remaining in the Equitable Life OLTF for longer. 5.8 The Scheme will have no effect on the benefits payable under non-profit policies remaining in Equitable Life. In particular, the terms for cancellation of units for unit-linked annuities should have no effect on the value of units held for other unit-linked policyholders. Overall conclusion for non-transferring Equitable Life policies 5.9 For these reasons I am satisfied that the implementation of the Scheme will not have a material adverse effect on: the security of benefits under non-transferring policies in Equitable Life; the reasonable benefit expectations of non-transferring policyholders in Equitable Life; or the service standards and governance applicable to non-transferring policies in Equitable Life. 6. THE EFFECT OF THE IMPLEMENTATION OF THE SCHEME ON CANADA LIFE POLICIES 6.1 The existing Canada Life policies can be divided into the following groups: existing policies in the Canada Life NPF; and other Canada Life policies in the Canada Life LTBF, namely those in the Canada Life With-Profits Fund and the Canada Life Manulife Fund. The Canada Life NPF policies 6.2 Currently, security for the guaranteed benefits of the existing policyholders in the Canada Life NPF is provided by: the assets in the Canada Life NPF backing the reserves held to meet the guaranteed benefits of the existing Canada Life policies;
13 the assets backing the regulatory capital requirements of the Canada Life NPF (excluding those assets backing the capital requirements of the business reinsured from Equitable Life); and excess capital resources in the Canada Life NPF and the Canada Life SHF. After the implementation of the Scheme, the security for the guaranteed benefits of the existing policyholders in the Canada Life NPF will continue to be provided from these three sources. 6.3 If the Scheme had become effective as at 31 December 2014, there would have been little change to the excess assets in the Canada Life NPF and Canada Life SHF. 6.4 The Reassurance Arrangement has increased the direct exposure of the Canada Life NPF to longevity risk (the risk that Canada Life underestimates the length of time its annuitants live for and so has to pay out more than expected) and credit risk (risk of loss from failure of Canada Life's counterparties to honour their obligations). Since the transfer of these risks from Equitable Life to Canada Life has already occurred under the Reassurance Arrangement, the implementation of the Scheme will not add to these risks. In addition, following the Effective Date, Canada Life will assume responsibility for administering the transferring business and thus will take on additional expense and operational risk; however, these are small in relation to the existing risk profile of the Canada Life NPF. 6.5 After the Scheme has been implemented the Reassurance Arrangement will end and the deposit back arrangement will cease. Canada Life will have a wider pool of assets to use to provide security for benefits. 6.6 The Scheme will not alter the terms and conditions of existing policies in the Canada Life NPF. 6.7 Canada Life management has discretion over the level of charges on existing unit-linked business in the Canada Life NPF. The extent of this discretion will not be affected by the Scheme. 6.8 The implementation of the Scheme will not lead to any changes to the servicing and administration arrangements and existing Canada Life NPF policies will continue to be serviced by the Canada Life administration team. No change is expected to service standards for the existing Canada Life NPF policies as a result of the Scheme; nevertheless, Canada Life has a contingency budget in place to allow for additional temporary support staff should this be required. 6.9 The governance of the existing non-profit policies will continue to be the responsibility of the Canada Life board Following discussion with the senior management of Canada Life, I am satisfied that: the implementation of the Scheme will not affect the charges on unit-linked business in the Canada Life NPF; and the implementation of the Scheme will not lead to any change to the contractual benefits under any of the Canada Life NPF policies. Overall conclusion for Canada Life NPF policies 6.11 I am satisfied that the implementation of the Scheme will not have a material effect on:
14 the security of benefits of the policyholders of the Canada Life NPF; the reasonable expectations of the policyholders of the Canada Life NPF; or the service standards and governance applicable to the policyholders of the Canada Life NPF. With-profits policies of Canada Life 6.12 The Canada Life With-Profits Fund and the Canada Life Manulife Fund will continue to operate as separate ring-fenced funds and hence will not be required to support the transferring business, except in very extreme scenarios As the implementation of the Scheme is not expected to have a material effect on the financial strength of the Canada Life NPF, there will not be a material impact on the likelihood of extra calls on the capital in Canada Life that also provides support for the Canada Life With-Profits Fund and the Canada Life Manulife Fund. Overall conclusion for Canada Life With-Profits Fund and Canada Life Manulife Fund policies 6.14 I am satisfied that the implementation of the Scheme will not affect the service standards, management or governance of the policies in the Canada Life With-Profits Fund and the Canada Life Manulife Fund. I am therefore satisfied that the implementation of the Scheme will not have a material effect on the benefit security or reasonable expectations of the policyholders of those funds. 7. OTHER CONSIDERATIONS ARISING FROM THE SCHEME Solvency II 7.1 A new regulatory solvency regime, known as Solvency II, is due to be introduced with effect from 1 January 2016 for the European Union insurance and reinsurance industry. Solvency II's implementation will fall between the date of this summary report and the Effective Date and the current solvency regime will no longer apply from 1 January Both Equitable Life and Canada Life have projects underway to enable them to meet the requirements of Solvency II. As for all insurance companies across Europe, Solvency II presents a significant challenge in terms of changes to both financial requirements and governance arrangements, with a number of the detailed rules having been finalised only relatively recently. In particular there are various aspects which require regulatory approval, and this approval process will continue over the coming months. 7.3 While the Solvency II regulations are finalised, the application of certain provisions to Equitable Life and Canada Life remains dependent on regulatory approval. Therefore, at the time of preparation of this summary, there is still some uncertainty as to precisely how the financial position of Equitable Life and Canada Life will be determined. However, Equitable Life and Canada Life have shared their internal Solvency II calculations and estimates with me, and we have discussed the possible ranges of outcomes. Assuming the expected approvals being sought are granted in full, these estimates indicate that both Equitable Life and Canada Life would have been able to cover their solvency capital requirements under Solvency II at the end of Under the range of outcomes there are some scenarios where if certain approvals are not granted in full to Canada Life, it would need to strengthen its solvency position before the Scheme takes effect.
15 I am satisfied that the introduction of Solvency II would not make a material difference to my conclusions in this summary report. I expect to be able to comment further on the preparedness for Solvency II for both companies in a supplementary report which I will prepare in January 2016, prior to the final Court hearing, and which will be available on the websites of Equitable Life and Canada Life shortly before that hearing. Alternative considerations 7.5 An alternative approach would be to consider the combined impact of the Reassurance Arrangement and the Scheme as this would provide an indication of the outcome if either Equitable Life or Canada Life chose to terminate the Reassurance Arrangement if the Scheme is not approved. While this alternative approach does change some of the detail of the analysis, I can confirm that it does not change any of my overall conclusions for any group of policyholders. Tax 7.6 Equitable Life and Canada Life do not expect there to be any adverse policyholder tax impacts for transferring policyholders. I will provide an update on this in my supplementary report. The future operation of the Scheme 7.7 In my opinion there are reasonable safeguards in place to ensure that, if approved by the Court, the Scheme will be operated as presented to the Court. 8. OVERALL CONCLUSIONS 8.1 I am satisfied that the implementation of the Scheme will not have a material adverse effect on: the security of benefits of the policyholders of Equitable Life and Canada Life; the reasonable benefit expectations of the policyholders of Equitable Life and Canada Life; or the service standards and governance applicable to the Equitable Life and Canada Life policies. 8.2 I am satisfied that the Scheme is equitable to all classes and generations of Canada Life and Equitable Life policyholders. Nick Dumbreck 7 October 2015 Fellow of the Institute and Faculty of Actuaries
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