SCOTTISH EQUITABLE PLC. Supplementary report of the. Chief Actuary

Transcription

1 SCOTTISH EQUITABLE PLC Supplementary report of the Chief Actuary on the proposed transfer of business from Scottish Equitable plc to Rothesay Life plc pursuant to Part VII of the Financial Services and Markets Act 2000 James Crispin FFA Chief Actuary (Scottish Equitable) June 2017 Page 1 of 25

2 Contents 1. INTRODUCTION DEVELOPMENTS IN SE DEVELOPMENTS IN ROTHESAY THE SCHEME AND RELATED DEVELOPMENTS SE RISK MANAGEMENT UPDATED SE FINANCIAL IMPACTS UPDATED ROTHESAY FINANCIAL IMPACTS CONCLUSION Page 2 of 25

3 REPORT OF THE CHIEF ACTUARY 1. INTRODUCTION 1.1. In my capacity as Chief Actuary, I prepared a report dated February 2017 (the Main Report ) in which I reviewed the impact on policyholders in Scottish Equitable plc ( SE ) of the proposed transfer (the Transfer ) of certain non-profit annuity policies which are currently liabilities of the Non-Profit Sub-Fund ( NPSF ) and With-Profits Sub-Fund ( WPSF ) of SE to Rothesay Life plc ( Rothesay ) The Transfer is to take effect by means of a court approved insurance business transfer scheme (the Scheme ) under Part VII of the Financial Services and Markets Act 2000 ( FSMA ) In my Main Report (which was prepared for the Board of SE plc (the SE Board ) I considered the Transfer from the perspective of the policyholders of SE (both those policyholders transferring to Rothesay under the Scheme, and those remaining in SE) and whether the Transfer has any materially adverse impact on these policyholders Following the Directions Hearing held on 27 February 2017, subsequent correspondence with policyholders, and further discussion with regulatory authorities, it is intended that the High Court will be asked to approve the proposed Transfer at a hearing on 12 June Within this context, the purpose of this Supplementary Chief Actuary s report is to consider: Any material changes that have been made to the Scheme or other material developments that have taken place in the period since my last report. Updated financial information including updated consideration of the solvency position of SE after the Transfer. Objections and comments on the proposal that have been received as a result of the communication with policyholders and other stakeholders. Whether the conclusions presented in my Main Report remain valid This report is written for the SE Board in my capacity as Chief Actuary for SE, and should be read in conjunction with my Main Report, the Scheme, the With-Profits Actuary s report dated February 2017, the With-Profits Actuary s supplementary report, the report by the Independent Expert ( IE ) dated 23 February 2017, and the supplementary report by the IE. Status and Disclosure 1.7. I am a Fellow of the Institute & Faculty of Actuaries, having qualified in 1996, and hold a Chief Actuary (Life) Practising Certificate issued by the Institute & Faculty of Actuaries. I have over 25 years of experience working in the UK life assurance industry, including 5 years of working for SE, becoming Actuarial Function Holder in 2014, and then Chief Actuary when the new EU Solvency II framework came into effect on 1 January I am an employee of Aegon UK Corporate Services Ltd ( AUKCS ), an Aegon UK Group service company which provides services to SE. SE is a significant part of the Group to which the service company provides services. Page 3 of 25

4 1.9. Details of any Aegon interests: As an employee of AUKCS I am subject to a similar pay and benefits structure as Identified Staff in the organisation. I have no individual performance incentives directly related to the success or otherwise of this Part VII transfer. As part of the 2014 and 2015 bonus schemes 50% of bonuses were awarded as Aegon NV shares vesting in May 2018 and May 2019 respectively. Similarly 59.8% of the 2016 bonus was awarded in shares vesting in May I have an ISA with Aegon as a customer of Aegon Investment Solutions Ltd. I have a Group Personal Pension Policy with SE as part of the company s Staff Pension Arrangements I consider myself to be free from conflict that would prevent me from assessing the impact of the Scheme on policyholder benefits and the security of those benefits. Other advice and opinions Mr Nick Dumbreck of Milliman LLP has continued to act in the capacity of Independent Expert. In finalising this Supplementary Chief Actuary s report, I have read a draft of his supplementary report and considered his conclusions. A copy of this report has also been provided to Mr Dumbreck In addition, I have read and considered the supplementary report of the With- Profits Actuary, Mr Alan McBride. A copy of this Supplementary Chief Actuary s report has also been provided to Mr McBride. Definitions and abbreviations A list of the defined terms and abbreviations used in this report is included in Annex A. Defined terms used but not defined in this report have the same meaning as those used in the Scheme document and the IE s Report unless otherwise highlighted. Compliance with Technical Actuarial Standards This report has been prepared in accordance with, and complies with, the Technical Actuarial Standards on Insurance, Data, Modelling, Transformations, and Reporting issued by the Financial Reporting Council. Review of actuarial work With effect from 1 July 2015, actuaries are required to comply with the requirements of Actuarial Professional Standard X2: Review of Actuarial Work. In this regard therefore, this document has been reviewed by a suitably qualified actuary employed by AUKCS. Page 4 of 25

5 Structure of report This report is structured as follows: - Section 2 considers developments that have taken place within the operations of SE since my Main Report; - Section 3 considers developments that have taken place within the operations of Rothesay since my Main Report; - Section 4 considers changes that have been made to the Scheme and other related developments (including the objections that have been received in response to the policyholder communications exercise) since my Main Report was finalised; - Section 5 provides an update on the SE approach to risk management. - Section 6 provides updated information on the financial position of SE before and after the Transfer; - Section 7 provides updated information on the financial position of Rothesay before and after the Transfer; - Section 8 summarises my conclusions; and - Annex A lists the defined terms and abbreviations used in this report. Summary of key conclusions I have updated my review of the potential impact of the Scheme on the security and benefit expectations of transferring and non-transferring policyholders of SE. My conclusion remains that the Scheme will not result in a materially adverse impact on the security of transferring and non-transferring SE policyholders or their benefit expectations compared to the status quo. Page 5 of 25

6 2. DEVELOPMENTS IN SE 2.1. In Section 3 of my Main Report, I provided information on the operations of SE, including details of recent initiatives. In addition to the events that I have previously mentioned, I note the following developments that have also taken place: Subsequent to 31 December 2016, SE exercised an option to add additional annuity policies written in the NPSF in 2016 (plus any other policies in force at 31 December 2015 not identified as part of the original reinsurance exercise) to the reinsurance arrangement with Rothesay, such that these policies would also transfer to Rothesay as part of the Scheme. This mechanism was described in Sections 2.8 and 2.9 of my Main Report. The additional policies represent c. 200m of technical provisions in the NPSF and c. 3m of technical provisions in the WPSF. The reinsurance premium payable to Rothesay in respect of the NPSF liabilities was initially funded by an internal loan from the WPSF to the NPSF, pending the disposal of the relevant NPSF assets backing this block of business. Neither the additional reinsurance nor the loan has a material impact on the solvency of SE as a whole or the NPSF or WPSF in isolation. Under the reinsurance agreement with Rothesay, a data audit period was defined to allow any discrepancies in the liability data underlying the agreement to be identified and investigated, with a true-up payment then made in respect of the impact of any data corrections on the amount of assets transferred at the time of the original reinsurance. The true-up amount is paid either from SE to Rothesay or vice versa as required. To enable all data queries and incidents identified on the annuity data to be addressed and the premium to be adjusted, the data audit period has been extended beyond the planned one year period ending on the first anniversary of the signing date (11 April 2017). This exercise is not expected to be fully completed by the SED, however we will commit to resolving with Rothesay any issues still open at the SED in a timely manner. As mentioned above, resolving these issues may lead to a true-up payment from SE to Rothesay or vice versa. Any true-up would have changed SE s annuity liability pre the reinsurance to Rothesay by a similar amount to the change in the premium paid to Rothesay and as such does not affect my conclusions on the Transfer. The Directions Hearing in respect of the separate transfer under Part VII of the FSMA of a further portfolio of annuity liabilities of the NPSF to Legal and General Assurance Society Limited ( LGAS ) took place at the High Court on 22 May Following subsequent correspondence with policyholders, and further discussion with regulatory authorities, it is intended that the High Court will be asked to approve the proposed LGAS transfer at a hearing in August In addition to these specific developments, SE will also have experienced some evolution of its in-force portfolio through policy exits (for example due to maturities, lapses/surrenders, and deaths) and new business. Market movements will also have affected the underlying financial position of SE. The impact of these changes is reflected in the discussion contained in Section 6 of this report Taking these developments into account, I am satisfied that there has not been a material change to the nature of the business undertaken by SE or to the risk profile of SE compared to that which I discussed in Section 3 and Sections 7.24 and 7.25 of my Main Report. I therefore do not discuss the relative risk profile of SE before and after the Transfer further in this report. Page 6 of 25

7 Page 7 of 25

8 3. DEVELOPMENTS IN ROTHESAY 3.1. In Section 5 of my Main Report, I provided information on the operations of Rothesay. In addition to the events that I have previously mentioned, and to the inclusion of additional policies in the reinsurance agreement as described in Section 2.1 above, I note the following developments that have also taken place: During the second half of 2016 a small tranche of a separate reinsurance arrangement with Zurich Assurance Limited ( ZAL ) was transacted by Rothesay. No further new business was transacted by Rothesay during the second half of A scheme sanctioning the transfer to Rothesay of all the ZAL annuities currently reinsured to Rothesay was sanctioned by the Court on 24 May The policies will be transferred to Rothesay in June 2017, before the expected transfer of the SE annuities under the Scheme. One outward reinsurance transaction was carried out by Rothesay during December 2016 which increased the reinsurance coverage over the liabilities of eight schemes of in-payment and deferred lives previously partially reinsured. The trade removed around 3% of the longevity risk held by Rothesay. One further outward reinsurance transaction was carried out by Rothesay during early 2017 reflecting an increase to the level of reinsurance on a previously reinsured pensioner-only tranche of business. The trade removed around 1% of the longevity risk held by Rothesay. Two further new business liability trades have transacted during 2017 covering approximately 320m of in payment and deferred pensioner liabilities. I understand that there were no unusual features of these transactions No allowance has been made in the 31 December 2016 financial information contained in this report for the activity during The Chief Actuary of Rothesay has advised that when taken together, none of the transactions materially changed the solvency coverage of Rothesay In addition to these specific developments, Rothesay will also have experienced some evolution of its in-force portfolio through policy exits (for example due to maturities, lapses/surrenders, and deaths). Market movements will also have affected the underlying financial position of Rothesay. The impact of these changes is reflected in the discussion contained in Section 7 of this report Taking these developments into account, I am satisfied that there has not been a material change to the nature of the business undertaken by Rothesay or to the risk profile of Rothesay compared to that which I discussed in Section 5.7 and Sections 8.5 and 8.6 of my Main Report. Page 8 of 25

9 4. THE SCHEME AND RELATED DEVELOPMENTS 4.1. This section considers the developments that have taken place since the Main Report was finalised in relation to: The Scheme itself. The objections that have been received in response to the policyholder communications exercise. Taxation. Transfer of policyholder records and administration from SE to Rothesay Changes to the Scheme 4.2. There have been some minor changes to the Scheme compared to the version on which my Main Report was based, though these changes do not change my conclusions as set out in that report. Notification to policyholders 4.3. Following approval at the Directions Hearing on 27 February 2017, the communications plan outlined in my Main Report (see Sections to 10.14) has been put into effect, and policyholders have been contacted to inform them of the nature and effect of the Scheme. The communications package has included direct mailing, press adverts, and web content Letters sent to policyholders indicated that the SE contact number provided was a Freephone number. It has subsequently been identified that the number quoted is a local rate number. Unfortunately it is not possible for the number to be converted to Freephone. To minimise the detrimental effect of this error on policyholders, the following actions are being taken upon receipt of a phone call: Callers are immediately informed that the number is not Freephone and are offered an apology; Callers are also informed that due to this error, SE will be making a donation to charity of 1 per call received, including in respect of calls received prior to the issue being identified; Callers are offered a call back if they are concerned with the call not being free; and If the caller wished to be reimbursed for any call cost incurred they will be reimbursed by SE. Additionally, the posted web materials have been updated to make clear that the contact number is local rate rather than Freephone. Note that the number quoted on the SE website for the Transfer has subsequently been updated to be a Freephone number Following the communications exercise, up to 26 May 2017, 4,068 letters, s, and calls have been received (representing around 1.4% of the total number of letters sent out). Within this, 85% of the letter and calls have related to policy specific business as usual queries or general queries on the Transfer, and only 231 formal objections to the Scheme have been received, representing around 6% of the number of letters and calls received, and less than 0.09% of the total number of mailings. Page 9 of 25

10 4.6. A policyholder (as opposed to a regulatory, statutory, or commercial) concern, having exhausted the standard response classifications, will be recorded as an objection where the policyholder singly or severally: Self-categorises their Part VII communication as an objection; Indicates they wish to attend or be represented at Court; Raises a meaningful material transfer related point that goes beyond a technical query or clarification; or Demonstrates a depth of concern, without initially formally objecting, that requires a considered response worthy of being shared with the Regulators and High Court I have reviewed the objections that have been made and have taken these into account in assessing whether my previous conclusion on the impact of the Scheme on policyholder benefits and security remains valid. Of the objections received, a number of consistent themes have arisen. The following table summarises the main areas of objection. Item Objection Response 1) Benefit security policyholders have objected to their policy moving to Rothesay as they feel their benefits will be less secure or may change given Rothesay s smaller size and relative young age as a company. Some policyholders are also unhappy at being transferred to what they feel is not a recognised brand name. The contractual policy benefits, terms, and conditions are unchanged as a result of the Transfer. The security of benefits for transferring policyholders is provided by: The Solvency II regulatory requirements, which are intended to ensure that the company can remain solvent after a 1 in 200 year event; and Rothesay s own capital policy, which provides an additional buffer over the Solvency II requirements. I remain satisfied that the capital required under Solvency II together with the additional capital held under the Rothesay capital policy provide comparable level of security for transferring policyholders as compared with the position were they to remain in SE. Rothesay s solvency position remains slightly stronger than SE which provides further comfort over the security of transferring policies benefits. Finally, policyholders protections and rights as provided by the Financial Services Compensation Scheme are unaffected by the Transfer. Paragraphs 9.16 to 9.18 of my Main Report plus the update in 4.16 below provide details of why I am satisfied that service standards for transferring policyholders will not be adversely affected. Given all of the above, I am also satisfied that the relatively young age of Rothesay as a company does not affect my conclusions on the Transfer. Page 10 of 25

11 Item Objection Response 2) Encashment policyholders have asked that they be able to take the value of their annuity as a lump sum or as a payment into a SIPP rather than transfer their benefits to Rothesay. 3) Policyholders would like to choose which provider they are transferred to, with a common preferred choice being Legal & General. Some policyholders are unhappy that they cannot choose to stay with SE or vote on whether they want the Transfer to go ahead. 4) Policyholders have concerns over the qualification of the Independent Expert to assess the appropriateness of the Transfer, and of their impartiality. Some policyholders also have the concern that the IE cannot offer a 100% guarantee that the Transfer will have no effect on transferring policyholders. 5) Some policyholders are concerned about the quality of the ongoing administration of their policies following the Transfer. SE do not allow annuities in payment to be converted into lump sum cash payments, either directly to the policyholder or as a payment to a SIPP. This is established SE practice and is consistent with the policy terms and conditions. The agreement to reinsure and transfer the annuity policies in question to Rothesay was a commercial decision reached in conjunction with Rothesay. There is therefore no scope for policyholders to choose for their annuity to transfer to a different provider. As described in 1) above I remain satisfied that policyholders benefits will retain a similar level of protection post Transfer as they currently do within SE. Paragraphs 1.19 to 1.23 of the IE s report sets out his qualifications and notes that his appointment as independent expert was approved by the PRA (after consulting with the FCA). Further, Appendix 1 of his report provides a statement of independence from the IE. While the terms and conditions, and hence contractual benefits of policies, will be unchanged by the Transfer, there will be changes to the governance and management of the policies, to the risk profile to which the policies are exposed, and to the administration of the policies for the majority being transferred. While it is impossible to be 100% certain given the inherent uncertainty over future events, the IE s conclusions are based on his judgement on what is likely to happen and allow for a materiality threshold. The process followed by the IE is in line with that used for previous insurance business transfers that have been approved by the Court. Paragraphs 9.16 to 9.18 of my Main Report plus the update in 4.17 below provide details of why I am satisfied that service standards for transferring policyholders will not be adversely affected. Page 11 of 25

12 Item Objection Response 6) Some policyholders expect to receive compensation as a result of the Scheme. 7) Some policyholders have objected that they have not been given sufficient notice to allow them to consider the ramifications of the proposed Transfer. 8) Some policyholders have seemingly misunderstood the proposal, including: - The concern that SE and Rothesay are profiting from the Transfer at the expense of policyholders; and - The concern that the collapse upon Transfer of the reinsurance arrangements between SE and Rothesay means that policyholders will be disadvantaged once the Transfer has taken place unless Rothesay put equivalent reinsurance in place. As set out in my Main Report and in this report, there are no materially adverse impacts on the following as a result of the Scheme: - Policy terms and conditions and hence contracted benefits; - Quality of policy administration; and - Security of benefits. As a result, transferring policyholders will not be materially adversely affected by the Transfer and hence I don t consider that there is any aspect of the Scheme which warrants payment of compensation to transferring policyholders. The policyholder notification exercise was carried out in accordance with PRA policy. Specifically all policyholders included in the policyholder mailing exercise were notified at least six weeks prior to the date of the final court hearing. Additionally, a legal notice was published in some national newspapers on 10 March Given this I am satisfied that the amount of time given to policyholders to consider the Scheme is adequate. Where policyholders have misunderstood the workings and consequences of the Transfer, SE has written to these policyholders to allay their concerns and further explain why they will not be materially adversely affected by the Transfer. On the specific items mentioned here: - There are no changes to the terms and conditions of the transferring policies and so the contractual benefits are unchanged. As such the Scheme will not result in SE or Rothesay profiting at the expense of policyholders. - The purpose of the reinsurance between SE and Rothesay is to transfer the risk associated with the policies to Rothesay. Upon completion of the Transfer the policies will sit directly on Rothesay s balance sheet and hence the reinsurance will no longer be required I also note that: In addition to notifying policyholders, European Economic Area ( EEA ) states and reinsurers have been notified directly of the proposals, with Independent Financial Advisers ( IFA ) advised through the regular IFA newsletter. There has been one objection raised by an IFA with the same concerns around benefit security and lack of choice of provider as described above. There have been no objections received from any EEA state or reinsurer Overall, having reviewed the nature of the objections, I am satisfied that the concerns raised do not alter my consideration of policyholder benefits or policyholder security and/or that the concerns can be adequately addressed with reference to the features of the Transfer. I am therefore satisfied that my previous Page 12 of 25

13 Taxation conclusions (i.e. that the Scheme will not result in a materially adverse impact on the security of transferring and non-transferring SE policyholder benefits or their benefit expectations) are not affected by the objections received As mentioned in my Main Report, SE is working with Rothesay to minimise short term fluctuations to net of tax annuity payments resulting from the Transfer. For c. 3,400 policyholders transferring to Rothesay who have another annuity policy remaining with SE (e.g. transferring to LGAS under a separate scheme) or who have multiple policies transferring to Rothesay (that are paid on different days or at different frequencies) new tax codes will be required To minimise the impact on policyholders it has been agreed with HMRC that an emergency tax code (based on basic rate with a personal allowance) will be used for these cases. HMRC will then provide Rothesay with new tax codes for these policies and any over or under payments of tax will be corrected. These policyholders may therefore see a temporary fluctuation in the level of tax paid. The approach is designed to minimise the number of policyholders who experience a reduction in their month one net payment following the Transfer The latest analysis provided by Rothesay shows there is one policyholder who, due to their current tax code, is expected to have a reduction of 25 (1.6%) in their monthly net annuity payment. HMRC has agreed to prioritise any such cases for the revised tax code work so the tax code for this policyholder may be corrected in time for the first payment. Overall 2,900 will see an increase in net payment and 465 no change Over 99% of policyholders who could experience an increase in their first payment will receive less than 100 of extra net income. HMRC has agreed to prioritise the cases with the largest potential increase in payment with a view to updating their tax codes prior to their first payment being made The affected policyholders may experience fluctuations in their net payments for two to three months after the SED while HMRC update the tax codes. Policyholders overall tax liability against their transferring annuity will remain the same over the 2017/18 tax year. It should be noted that fluctuations in tax codes may also occur for the transferring policyholder for other reasons outside of the Transfer Letters will be sent to the c. 3,400 policyholders expected to receive a new tax code as a result of the transfer following the Sanctions Hearing. The one policyholder who is at risk of experiencing a reduction if the tax code change is not processed quickly enough will be advised of this and asked to get in touch if this is going to be an issue for them so we can discuss what assistance can be provided. For the remaining affected policyholders the letter will alert them that they may see an increase in net pay in the first two to three months and that any underpayment of tax will be collected when HMRC provide Rothesay with the revised tax codes. Page 13 of 25

14 4.16. Given there is only one policyholder who may experience a potential reduction in payment, it is hoped that this approach will maximise the likelihood of their tax code being updated prior to their first payment date to ensure there is no change to their net payment. I am satisfied that the reduction is suitably small, both in monetary and percentage terms, that the policyholder in question will not be materially adversely affected by any short term underpayment which occurs The other transferring policyholders, who have only a single annuity transferring to Rothesay and do not hold another non-transferring policy with SE, will not be affected by this procedural difference Confirmations and clearances have been received from HMRC that the transaction is not for an unallowable purpose for corporation tax purposes which means the main purpose of the transaction (or one of the main purposes) is not to obtain a tax advantage. Confirmation has been received that the transfer of going concern treatment (i.e. no VAT) will apply for VAT purposes if the arrangements are implemented as described to HMRC. Transfer of policyholder records and administration from SE to Rothesay There are two streams of migration activity relating to Rothesay s choice of administrators for the transferring business, being Capita for immediate annuities and JLT and HS Admin for deferred annuities Testing of the data transfer and switch over processes has been undertaken as well as dual running of payroll. As at 25 May 2017, c. 98% and c. 98% of data extracts have been successfully built in respect of Capita and JLT respectively. No extracts are required for buy-in and buy-out customers already administered by JLT and HS Admin as they are currently already serviced by these third party providers. Testing of systems and processes under both normal and anticipated peak load conditions is ongoing with c. 90% and c. 70% complete for Capita and JLT respectively Detailed plans are in place to ensure migration is completed for all blocks of transferring business by the SED Based on the testing carried out to date, and on the comparison of key applicable service standards between Rothesay and SE which I considered in my Main Report, I am still satisfied that the service for transferring policyholders will not be adversely affected. Conclusions on the overall impact of the Scheme on policyholder benefit expectations and policy servicing Taking into account the discussion above, and the developments in the companies outlined in Sections 2 and 3, I am satisfied that no new material factors relating to how benefits payable to policyholders may be affected by the Scheme have emerged. The discussion covered in Sections 9 and 10 of my Main Report therefore remains applicable and, as a result, I am satisfied that my previous conclusion (i.e. that transferring and non-transferring SE policyholder benefits will not be materially adversely affected by the Scheme) remains appropriate Similarly, I am satisfied that no new material factors relating to how policies will be serviced after the Transfer have emerged and that, as a result, I am satisfied that my previous conclusion (i.e. that transferring and non-transferring SE policyholder benefits will not be materially adversely affected by the Scheme) remains appropriate. Page 14 of 25

15 4.25. In Sections 6 and 7 of this report, I consider the impact of the developments summarised in this Section, and in Sections 2 and 3, on the financial positions of SE and Rothesay, and further review the appropriateness of my previous conclusion that the Scheme will not have a material impact on the security of transferring and non-transferring SE policyholder benefits. Page 15 of 25

16 5. SE RISK MANAGEMENT 5.1. As the SE risk management approach formed an important consideration in the discussion contained in my Main Report, I consider it useful to reiterate the SE approach to risk and capital management and, in particular, the requirement under the SE capital management policy for SE to maintain extra capital above its regulatory capital requirements. This additional capital aims to protect SE from breaching its regulatory capital requirements following a range of adverse events considered as part of setting the target level of capital under the capital management policy. This policy continues to operate as described in my Main Report and will not be changed as a result of the Scheme. Page 16 of 25

17 6. UPDATED SE FINANCIAL IMPACTS 6.1. This section contains updated information on the financial position of SE before and after the Transfer and supplements the information that was provided in Section 7 of my Main Report. Background context on the solvency measures and the SE capital management policy was provided in my Main Report. Within the results discussed in this Section, the developments discussed in Section 2 have been reflected (except where stated otherwise in Section 2). Solvency calculations 6.2. My Main Report considered the Solvency II position of SE pre and post Transfer using financial information as at 30 June The same information using 31 December 2016 information is set out below (with the 30 June 2016 position that was included in my Main Report shown for comparison). The 31 December 2016 information is taken from the regulatory submission of quantitative reporting templates for 31 December 2016 as presented to the SE Board As mentioned in my Main Report, and in Section 2.1 of this report, a separate scheme to transfer an additional portfolio of immediate annuities from the NPSF of SE to LGAS is planned to be implemented with a planned SED in September Results are shown below illustrating the impact on SE of the Transfer to Rothesay whether or not the transfer to LGAS is completed The solvency position is estimated to have moved since 31 December 2016 due to the following: Market movements to end-march 2017 have improved solvency levels in the NPSF and SE as a whole. The WPSF has seen a modest reduction in solvency coverage over the period. Subsequent to 31 December 2016, SE exercised an option to add additional annuity policies written in the NPSF in 2016 (plus any other policies in force at 31 December 2015 not identified as part of the original reinsurance exercise) to the reinsurance arrangement with Rothesay, such that these policies would also transfer to Rothesay as part of the Scheme (see Section 2.1). The additional policies represent c. 200m of technical provisions, with the reinsurance premium payable to Rothesay initially funded by an internal loan from the WPSF to the NPSF, pending the disposal of the relevant NPSF assets backing this block of business. The premium paid to Rothesay in respect of these policies was also c. 200m and hence the execution of the option had no material impact on the solvency position of SE as a whole or the WPSF or NPSF in isolation. As the loan is recognised as an asset of the WPSF and liability of the NPSF it has no impact on the capital position of either sub-fund. The conclusions drawn from the pre and post Transfer SE solvency positions shown below are not materially affected by the addition of this business to the reinsurance and to the business transferring to Rothesay under the Scheme. Any errors and omissions identified during the period of data cleansing prior to the proposed Transfer may alter the best estimate liabilities of the NPSF and WPSF when corrected. These are not expected to materially change the impact on the fund of the proposed Transfer. Taking these items into account, I am not aware of any events since 31 December 2016 (up to the date of this report) that would materially alter the conclusions on the Transfer obtained from the 31 December 2016 position. Page 17 of 25

18 Solvency II position pre-transfer 6.5. The table below shows the pre-transfer Solvency II position for SE at 31 December 2016 and 30 June SII Results ( m) 31 December 2016 NPSF WPSF WPSF Ringfence SE Plc Own Funds 2, (148) 2,342 SCR 1, ,551 Surplus (deficit) (148) 792 Solvency ratio 157% 198% N/A 151% SII Results ( m) 30 June 2016 NPSF WPSF WPSF Ringfence SE Plc Own Funds 1, (140) 2,103 SCR 1, ,483 Surplus (deficit) (140) 619 Solvency ratio 147% 182% N/A 142% 6.6. The results show that the solvency position of SE has improved between 30 June 2016 and 31 December This is primarily due to the following: Market movements are estimated to have reduced the solvency of both the NPSF and WPSF. During H2 2016, the PRA approved the final methodology to be used to calculate counterparty default risk capital in respect of the annuity reinsurances related to the proposed Part VII transfers. This revised methodology led to the capital add on only reflecting the proposed increase in SCR in respect of the counterparty risk. The original estimates assumed that the increase in Risk Margin due to the counterparty risk would be included in the capital add on. Following the agreement of the add on, this is now included as increase in the Risk Margin, reducing own funds. As part of the updated calculation at 31 December 2016, the diversification benefit for the additional counterparty risk reduced, leading to an increase in Risk Margin compared to the original assumption. This has increased the allowance made in the NPSF for this counterparty default risk and hence reduced NPSF solvency. The capital add on approved by the PRA made no explicit additional allowance in respect of counterparty default risk in the WPSF at 31 December There is therefore a small improvement in solvency over the position presented in my Main Report which allowed for a small capital add on in the WPSF at 30 June It is, however, recognised that there is an increased level of counterparty risk in the WPSF with additional capital currently being held as part of the WPSF internal risk tolerance capital held over and above the regulatory requirement. Changes to demographic assumptions arising from the annual assumptions review have increased the solvency of the NPSF while having minimal impact on the WPSF. Page 18 of 25

19 Solvency II position post Rothesay Transfer with LGAS Transfer 6.7. The table below shows the (pro forma) post-transfer Solvency II position for SE. In this scenario, the transfer of additional annuity policies to LGAS as described above is assumed to have also occurred. SII Results ( m) 31 December 2016 NPSF WPSF WPSF Ringfence SE Plc Own Funds 2, (158) 2,416 SCR 1, ,462 Surplus (deficit) (158) 954 Solvency ratio 173% 206% N/A 165% SII Results ( m) 30 June 2016 NPSF WPSF WPSF Ringfence SE Plc Own Funds 1, (158) 2,099 SCR 1, ,319 Surplus (deficit) (158) 781 Solvency ratio 167% 198% N/A 159% Solvency II position post Rothesay Transfer without LGAS Transfer 6.8. The table below shows the (pro forma) post-transfer Solvency II position for SE. In this scenario, the transfer of additional annuity policies to LGAS as described above is assumed not to have occurred. SII Results ( m) 31 December 2016 NPSF WPSF WPSF Ringfence SE Plc Own Funds 2, (158) 2,338 SCR 1, ,516 Surplus (deficit) (158) 823 Solvency ratio 160% 206% N/A 154% SII Results ( m) 30 June 2016 NPSF WPSF WPSF Ringfence SE Plc Own Funds 1, (158) 2,030 SCR 1, ,431 Surplus (deficit) (158) 599 Solvency ratio 147% 198% N/A 142% Impact of Transfer 6.9. The results show that post the Rothesay Transfer, whether the LGAS transfer happens or not, the solvency ratio of SE continues to remain within or above the target range of 130% to 150% as set in the SE capital management policy. This demonstrates that non-transferring policyholder benefits will retain a similar level of ongoing protection after the Transfer. Page 19 of 25

20 6.10. The impact of the Transfer in the scenario where the LGAS transfer also happens has changed versus the figures presented in my Main Report due to: The review of expense assumptions prior to end-2016 has removed the need for the NPSF to hold a reserve in respect of annuity administration expenses on the reinsured business (see Section 7.19 of my Main Report). As a reserve is no longer held the pre transfer solvency position has improved and there is no longer a reserve to release on Transfer, reducing the benefit at 31 December 2016 relative to that shown based on the 30 June 2016 results. As described in Section 6.6 above, the overall counterparty default risk capital allowance has increased in the NPSF pre-transfer, giving a larger release on Transfer at 31 December 2016 relative to that at 30 June Additionally, as described in Section 6.6 above, the capital add on approved by the PRA made no explicit additional allowance in respect of counterparty default risk in the WPSF at 31 December There is therefore a smaller release of counterparty default risk capital upon Transfer at 31 December 2016 compared to the equivalent figures at 30 June 2016 which allowed for release of the add on. As mentioned above, it is recognised that there is an increased level of counterparty risk in the WPSF with additional capital currently being held as part of the WPSF internal risk tolerance capital which will be released upon Transfer The impact of the Transfer on the NPSF in the scenario where the LGAS transfer does not happen has changed versus the figures presented in my Main Report due to: The additional allowance made for future maintenance expenses on annuity business described in Section 7.21 of my Main Report is reduced relative to the position at 30 June 2016 due to the review of expense assumptions described above. As well as increasing the overall allowance for counterparty default risk, the split of the counterparty default risk capital add-on between the Rothesay and LGAS reinsurance has changed between 30 June 2016 and 31 December following implementation of the approved methodology. As a result, the release upon Transfer of NPSF counterparty default risk capital relating to Rothesay is greater at 31 December 2016 relative to 30 June The release of counterparty capital following the completion of the Rothesay Part VII without the LGAS transfer proceeding is based on the current calculation of the revised level of counterparty capital required in respect of the LGAS reinsurance. This will be subject to approval by the PRA for a modification to the Counterparty Capital Add on and may be subject to change. The potential impact of any change will not affect my conclusions in this report These results highlight that compared to the results presented in my Main Report: The impact of the Transfer on the financial position of SE continues to be positive. The reduction in risk exposure upon Transfer remains the same as set out in my Main Report. Upon Transfer SE will no longer be exposed to Rothesay as a reinsurance counterparty. Removal of this exposure is the primary change to SE s risk profile which will result from implementation of the Scheme. Page 20 of 25

21 While the implementation of the LGAS transfer does affect the impact of the Rothesay Transfer, in both cases the solvency position post-transfer continues to remain at least in the target range as defined by the SE capital management policy. The WPSF position continues to be unaffected by the LGAS transfer as no WPSF policies will be transferred to LGAS. Conclusions on the overall financial impact of the Scheme and its impact on policyholder security I therefore do not consider that this updated financial analysis impacts upon the conclusion set out in my Main Report that these is no materially adverse impact on non-transferring SE policyholder security as a result of the Transfer. Page 21 of 25

22 7. UPDATED ROTHESAY FINANCIAL IMPACTS 7.1. The figures and statements in this section have been prepared and supplied by the Chief Actuary of Rothesay. I have not reviewed or checked these statements or the calculations, however, the pre-transfer solvency position detailed in 7.2 below has been subject to full external audit and I take comfort from that. Impact of the Transfer on Rothesay s solvency position 7.2. The Solvency II financial position of Rothesay before and after the proposed Transfer (as if it had been effective on 31 December 2016) is set out in the table below. As the policies in question are reinsured to Rothesay and the transaction was fully funded at the point of sale, with assets transferred to Rothesay, there is no change in the solvency position of Rothesay due to the Scheme. This is in line with the position presented at 30 June 2016 in my Main Report. Rothesay Solvency II financial position pre and post proposed transfer ( m) Post-Part VII pro forma Assets 23,566 23,566 Net Technical Provisions (20,736) (20,736) Own Funds 2,830 2,830 Solvency Capital Requirement (1,603) (1,603) Free Assets/Surplus 1,227 1,227 SCR cover (%) 177% 177% 7.3. The figures also include a transitional on technical provisions as approved by the PRA during December 2015 and recalculated as at 30 June The effect is to limit the impact of the change in the regulatory regime from Solvency I to Solvency II as the size of the transitional is calculated utilising the Solvency I results. The results shown include the first linear amortisation of the transitional The Chief Actuary of Rothesay has advised that if the transitional had been recalculated at 31 December 2016 the SCR coverage would be around 3% lower than the reported figures. Due to the small impact no recalculation was sought from the PRA by Rothesay The Chief Actuary of Rothesay does not expect the proposed Transfer to have any impact on the Solvency II capital position of Rothesay. Subsequent Events 7.6. The Chief Actuary of Rothesay has advised that to the best of his knowledge there have been no further material events subsequent to the date of the financial information provided above that would significantly alter the solvency position I understand from Rothesay management that a dividend of around 240m may be paid from Rothesay to Rothesay HoldCo to enable Rothesay HoldCo to repay loan capital taken out during 2016 to support new business. The solvency impact of the proposed dividend would be around a 15% reduction in SCR coverage. Considering this in light of the results shown in the table above, the SCR coverage of Rothesay after the proposed dividend would remain in excess of the target range. The table below shows the Rothesay solvency position if a dividend of 240m is assumed to be paid. Page 22 of 25

23 Rothesay Solvency II financial position at ( m) Post-Part VII pro forma Post 240m Dividend Assets 23,326 Net Technical Provisions (20,736) Own Funds 2,590 Solvency Capital Requirement (1,603) Free Assets/Surplus 987 SCR cover (%) 162% Rothesay Capital Policy 7.8. The Rothesay capital policy continues to operate as described in my Main Report and will not be changed as a result of the Scheme The Chief Actuary of Rothesay has indicated that as at 31 December 2015, 30 June 2016, and 31 December 2016 (and, to the best of his knowledge, the period in between and at the time of writing this report) Rothesay held surplus assets in excess of the minimum requirements as per the capital policy on a Solvency II basis. Conclusions on the overall financial impact of the Scheme and its impact on policyholder security As described in my Main Report, Rothesay s capital policy provides a similar level of protection to SE s capital management policy. Rothesay s solvency position is slightly stronger than SE which provides further comfort over the security of transferring policies benefits The capital required under Solvency II together with the additional capital held under the Rothesay capital policy provide comparable level of security for transferring policyholders as compared with the position were they to remain in SE I therefore do not consider that this updated financial analysis impacts upon the conclusion set out in my Main Report that these is no materially adverse impact on transferring SE policyholder security as a result of the Transfer. Page 23 of 25

24 8. CONCLUSION 8.1. I have produced this report in my role as Chief Actuary of SE to consider whether any developments since my Main Report have changed the conclusions I reached in that report Based on the considerations summarised in this report, it continues to be my view that: (i) (ii) (iii) (iv) Taking into account the assets and liabilities transferred to Rothesay, the security of transferring SE policyholder benefits will not be materially adversely impacted as a result of the Scheme. Taking into account the assets and liabilities transferred, the security of the non-transferring SE policyholder benefits will not be materially adversely impacted as a result of the Scheme. The capital and risk appetite policies of SE and of Rothesay provide a similar level of protection, which in turn provides further comfort that the security of transferring and non-transferring SE policyholder benefits will not be materially adversely impacted as a result of the Scheme. The Scheme will not result in material changes to the benefit expectations of any SE with-profits, non-profit, or unit-linked policyholders I therefore continue to be satisfied that the Scheme will not result in a materially adverse impact on the security of transferring and non-transferring SE policyholders or their benefit expectations compared to the status quo I also continue to be satisfied that there will be no material change to the servicing that non-transferring and transferring SE policyholders will receive as a result of the Scheme Taking all of the above into account, I continue to be satisfied that the obligations to treat customers fairly will not be materially adversely affected by the Transfer. It is therefore my conclusion that the Transfer may proceed My conclusions above would remain the same whether or not the LGAS scheme is implemented. James Crispin FFA Chief Actuary to Scottish Equitable June Page 24 of 25

25 ANNEX A DEFINED TERMS AND ABBREVIATIONS USED WITHIN THIS REPORT AUKCS EEA Aegon UK Corporate Services Ltd European Economic Area FSMA Financial Services and Markets Act 2000 HMRC IE IFA LGAS NPSF Own Funds PRA Rothesay SCR SE SED SE Board SEPT Solvency II Transfer WPSF ZAL HM Revenue and Customs Independent Expert Independent Financial Adviser Legal and General Assurance Society Limited Non-Profit Sub-Fund which is a separate account in the LTF maintained in respect of business other than with-profits business This is the difference between the value of a company s assets and the value of its liabilities on a Solvency II basis Prudential Regulation Authority Rothesay Life plc Solvency Capital Requirement which is regulatory capital that is required to be held by an insurer under Solvency II regulations Scottish Equitable plc Scheme Effective Date Scottish Equitable plc Board Scottish Equitable Policyholders Trust Ltd which acts as the withprofits committee for SE s WPSF Risk based prudential regime for insurance and reinsurance undertakings in the European Union Proposed transfer of a portfolio of non-profit annuity policies from SE to Rothesay With-Profits Sub-Fund which is a separate account in the LTF maintained in respect of with-profits business Zurich Assurance Limited Page 25 of 25