With-Profits Actuary

Transcription

1 SCOTTISH EQUITABLE PLC Report of the With-Profits Actuary on the proposed transfer of business from BlackRock Life Limited to Scottish Equitable plc pursuant to Part VII of the Financial Services and Markets Act 2000 Alan McBride FFA With-Profits Actuary (Scottish Equitable) February 2018 Page 1 of 22

2 Contents 1. SUMMARY INTRODUCTION OVERVIEW OF WITH-PROFITS SUB-FUND SE RISK MANAGEMENT SE FINANCIAL POSITION BEFORE AND AFTER TRANSFER EFFECT OF THE SCHEME ON SE WPSF POLICYHOLDERS CONCLUSION Page 2 of 22

3 REPORT OF THE WITH-PROFITS ACTUARY 1. SUMMARY Purpose 1.1. I am the With-Profits Actuary of Scottish Equitable plc ( SE ) and the purpose of my report to the Scottish Equitable plc Board ( SE Board ) is to review the impact on policyholders in the SE With-Profits Sub-Fund ( WPSF ) of the proposed transfer (the Transfer ) of certain unitised defined contribution pensions policies which are currently liabilities of BlackRock Life Limited ( BLL ) to the Non-Profit Sub-Fund ( NPSF ) of SE My review of the impact of the Scheme covers both policyholders of the WPSF who participate in the profits and losses arising in the WPSF and policyholders of the WPSF who do not participate in the profits and losses that arise in the WPSF. The impact on all SE policyholders is considered by the Chief Actuary in his report which should be read in conjunction with this report and the other technical documents, including the Independent Expert s report. Scope of the Scheme 1.3. On 29 April 2016, SE agreed to purchase the majority of BLL s defined contribution platform and pensions administration business The Transferring Business is entirely comprised of unit-linked pensions business with further detail by product type shown in the following table (figures are as at 30 June 2017): Type of Business Number of Schemes Number of Members Number of Contracts Unitised Funds Under Management Investment Only 235 schemes N/A 235 contracts c. 8.1bn Master Trust and Trust 92 schemes c. 172k members 79 contracts c. 3.2bn Defined Contribution Contract 144 schemes c. 236k members c. 236k contracts c. 3.8bn Total 471 schemes c. 408k members c. 236k contracts c. 15.2bn 1.5. Under the agreement with BLL, the majority of the employees and the majority of systems within the scope of Transferring Business were transferred to Aegon UK Corporate Services Ltd ( AUKCS ) following signing As part of the agreement, in the period following the transfer of the employees and the systems, up to the proposed Scheme Effective Date ( SED ), AUKCS will administer the relevant insurance policies comprising the Transferring Business under the Insurance Administration Services Agreement with BLL It was also agreed that SE and BLL would use reasonable endeavours to effect the transfer of the Transferring Business to SE, pursuant to a court approved insurance business scheme of transfer under Part VII of the Financial Services and Markets Act 2000 ( FSMA ). The proposed Scheme Effective Date is 1 July Finally, SE and BLL agreed to investigate the possibility of undertaking Page 3 of 22

4 restructuring activities in relation to the funds which underpin the Transferring Business, with a view to reducing SE s reinsurance counterparty credit risk to BLL. The planned activity will reduce SE s existing exposure to BLL as well as reduce the exposure that would otherwise arise as a consequence of the proposed Transfer. Further information on the proposed fund restructuring activities is set out later in this document There is no transfer of policyholders into or out of the SE WPSF under the Scheme. Key features of the Scheme I have considered the impact of the Transfer of business on SE WPSF policyholders and in my view, the key features to note are: Ref Outline of key features of the Transfer Practical aspects affecting the operation of policies and benefits due to policyholders (i) (ii) (iii) (iv) No business is being transferred into or out of the WPSF under the Transfer. The Transfer has no impact on the policy terms and conditions of any WPSF policy. There will be no changes to the principles or practices by which the SE WPSF is managed or governed. Scottish Equitable Policyholders Trust Limited ( SEPT ) will continue to provide independent oversight in relation to the management of the SE WPSF in accordance with its agreed terms of reference. The existing scheme of transfer, which established the post-demutualisation structure of SE - the Scottish Equitable Life Assurance Society Scheme ( SELAS Scheme ) - is unchanged by the Scheme and will continue to have effect following the implementation of the Scheme to the extent relevant. There is no tax impact on WPSF policyholder benefits as policyholder tax treatment does not change as a result of the Transfer. Aspects relating to financial strength and risk (i) The post-transfer financial position of the SE WPSF on a stand-alone basis is unchanged versus the pre-transfer position. The post-transfer financial position of SE, is such that regulatory requirements are expected to be more than covered. Moreover, SE, and the SE WPSF, will be subject to the same capital and risk appetite management policies as existed pre-transfer. Conclusions on the Transfer I have considered the potential impact of the Scheme on the security and benefit expectations of the WPSF policyholders in SE. Based on this consideration and taking into account the key features of the Transfer outlined above (and the discussion of these and other matters contained in the remainder of this report), it is my view that: (i) (ii) As no policies are being transferred into or out of the WPSF, WPSF policyholder benefits will not be directly affected as a result of the Scheme. Taking into account the assets and liabilities transferring from BLL, the security of WPSF policyholder benefits will not be materially adversely impacted as a result of the Scheme. (iii) The capital and risk appetite policies of SE provides further comfort that the security of WPSF policyholder benefits will not be materially adversely impacted as a result of the Scheme. Page 4 of 22

5 (iv) The Scheme will not result in changes to the benefit expectations of any SE WPSF participating or non-participating policyholders I therefore conclude that the Scheme will not result in a materially adverse impact on the security of WPSF policyholders or their benefit expectations compared to the status quo I am also satisfied that there will be no material change to the servicing that WPSF policyholders will receive as a result of the Scheme Further, I am satisfied that the proposed communications plan is appropriate for WPSF policyholders and has paid due regard to the interests of WPSF policyholders and the need to treat them fairly Taking all of the above into account, I am satisfied that the obligations to treat WPSF customers fairly will not be materially adversely affected by the Transfer. It is therefore my conclusion that the Transfer may proceed SEPT has reviewed this report and has not objected to any of the conclusions. Page 5 of 22

6 2. INTRODUCTION 2.1. On 29 April 2016, SE agreed to purchase the majority of BLL s defined contribution platform and pensions administration business Under the agreement with BLL, the majority of the employees and some of the systems within the scope of Transferring Business were transferred to SE following signing It was also agreed that SE and BLL would use reasonable endeavours to effect the transfer of the Transferring Business to SE, pursuant to a court approved insurance business scheme of transfer under Part VII of the Financial Services and Markets Act The proposed Scheme Effective Date (SED) is 1 July The Transferring Business is entirely comprised of unit-linked pensions business with further detail by product type shown in the following table (figures are as at 30 June 2017): Type of Business Number of Schemes Number of Members Number of Contracts Unitised Funds Under Management Investment Only 235 schemes N/A 235 contracts c. 8.1bn Master Trust and Trust 92 schemes c. 172k members 79 contracts c. 3.2bn Defined Contribution Contract 144 schemes c. 236k members c. 236k contracts c. 3.8bn Total 471 schemes c. 408k members c. 236k contracts c. 15.2bn 2.5. As part of the agreement, in the period following the transfer of the employees and the systems, up to the proposed SED, Aegon UK Corporate Services Ltd will administer the relevant insurance policies comprising the Transferring Business under the Insurance Administration Services Agreement with BLL Finally, SE and BLL agreed to investigate the possibility of undertaking restructuring activities in relation to the funds which underpin the Transferring Business, with a view to reducing SE s reinsurance counterparty credit risk to BLL. The planned activity will reduce SE s existing exposure to BLL as well as reduce the exposure that would otherwise arise as a consequence of the proposed Transfer. Further information with respect to the proposed fund restructuring activities is set out later in this document There is no transfer of policyholders into or out of the SE WPSF under the Scheme In this report I consider the Transfer from the perspective of the WPSF policyholders (whether invested directly or by way of reinsurance) of SE and whether the Transfer has any materially adverse impact on these policyholders This report is written for the SE Board in my capacity as With-Profits Actuary ( WPA ) for SE, and should be read in conjunction with the Scheme, the Chief Actuary ( CA ) report and the report by the Independent Expert ( IE ). It has also been shared with the Board of Scottish Equitable Policyholders Trust Ltd (SEPT) which has certain oversight responsibilities placed upon it under the SELAS Scheme and performs the role of with-profits committee for SE. SEPT has confirmed that it Page 6 of 22

7 has no objections to its conclusions. Status and disclosure I am a Fellow of the Institute & Faculty of Actuaries, having qualified in 2001, and hold a Practising Certificate issued by the Institute & Faculty of Actuaries to act as a Chief Actuary and a Practising Certificate to act as a With-Profits Actuary. I have over 21 years of experience working in the UK life assurance industry, and since 2014 have been the With-Profits Actuary for SE I am an employee of 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 Details of any Aegon interests: As an employee of AUKCS I am subject to a similar pay and benefits structure as other senior managers in the organisation. I have no individual performance incentives directly related to the success or otherwise of this Part VII transfer. I do not currently hold any Aegon NV shares. I have an ISA (Individual Savings Account) investment 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 WPSF policyholder benefits and the security of those benefits. Other advice and opinions Mr Nick Dumbreck of Milliman LLP has been retained in the capacity of Independent Expert and has been approved as such by the relevant regulatory bodies. In finalising my report, I have read a draft of his report on the terms of the Scheme and considered his conclusions. A copy of this With-Profits Actuary s report has also been provided to Mr Dumbreck In addition, I have read and considered the report of the Chief Actuary, Mr James Crispin, assessing the impact of the Scheme on all policyholders of Scottish Equitable. A copy of this With-Profits Actuary s report has also been provided to Mr Crispin. 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 TAS 100: Principals for Technical Actuarial Work and TAS 200: Insurance issued by the Financial Reporting Council and applicable from 1 July Page 7 of 22

8 2017. Review of actuarial work 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. Structure of report This report is structured as follows: - Sections 3-4 provide an overview of the WPSF, and its risk and capital policy; - Section 5 considers the financial position and risk profiles of SE, covering both NPSF and WPSF, before and after the Transfer; - Section 6 summarises the effect of the Scheme on SE WPSF policyholders; - Section 7 sets out my conclusions; - Annex A lists the defined terms and abbreviations used in this report; and - Annex B explains the various solvency calculation bases and how these are assessed in this report. Further information on SE, the Scheme, the background to the capital regime, and the impact of the Scheme on NPSF policyholders can be found in the Chief Actuary s report on the Transfer. Page 8 of 22

9 3. OVERVIEW OF WITH-PROFITS SUB-FUND 3.1. SE consists of a long-term fund ( LTF ) (comprising a With-Profits Sub-Fund (WPSF), a Non-Profit Sub-Fund (NPSF)) and a Shareholder fund ( SHF ). Within this structure, the following features are noteworthy: the WPSF comprises primarily participating conventional with-profits policies, the investment element of participating unitised with-profits policies and the investment element of non-participating unit-linked business with investment return smoothing features (branded as New Generation With-Profits ); the NPSF comprises all other policies including unit-linked business and protection business; the division of the LTF between the WPSF and NPSF exists for internal accounting purposes, enabling respective policyholder entitlements to be established; profits (and losses) on assets and liabilities notionally allocated to the WPSF are for the benefit of with-profits policyholders; profits (and losses) on assets and liabilities notionally allocated to the NPSF are for the benefit of the shareholder; and assets in the NPSF and SHF are available to support WPSF solvency should there be insufficient assets within the WPSF to meet its liabilities and vice versa. In line with the requirements of the SELAS Scheme the WPSF is managed with the intention that such support from the NPSF and SHF should not be required, and vice versa. A detailed overview of SE is provided in section 3 of the Chief Actuary s report on the Transfer Following the implementation of the Solvency II regulations (see Annex B), the requirement to maintain a separate LTF has been removed, and this is now only maintained for management purposes. The WPSF is a ring-fenced fund under Solvency II Under the SELAS Scheme of 1993, certain provisions were specified to protect the future interests of policyholders who held policies at the time of the demutualisation. This scheme established the SE WPSF as a separate sub-fund in the SE LTF and assigned to it conventional with-profits policies, the investment element of unitised with-profits policies, and all immediate and deferred annuity policies in force at the SELAS scheme effective date. In June 2017, the majority of non-profit immediate and deferred annuity policies were transferred to Rothesay Life plc under a separate scheme. The SE WPSF has been maintained in accordance with the provisions of the SELAS scheme (and other protections) and now contains business written both before and after demutualisation. The business was predominantly sold in the UK With-profits bonuses are set in line with the fund s published Principles and Practices of Financial Management ( PPFM ). Investment policy and amounts credited and debited to the WPSF are also determined in line with the published PPFM (which itself recognises the SELAS Scheme provisions). The PPFM is available for customers to view on the aegon.co.uk website There are no policies being transferred into or out of the SE WPSF and therefore no changes are required to the PPFM as a result of the Transfer. Page 9 of 22

10 3.6. The existing WPSF policies will remain in the WPSF and no changes are being proposed to their terms and conditions under the Scheme Those costs associated with the Scheme that are attributable to SE will be met from shareholder funds. With-profits policyholders and the WPSF will bear no part of the cost of the Scheme. Page 10 of 22

11 4. SE RISK MANAGEMENT 4.1. In order to protect the interests of policyholders, insurance business is subject to significant regulatory oversight. In particular, regulations set out requirements for how much capital an insurer should maintain to cover the risks associated with its liabilities. A summary of the current regulatory regime for UK insurers is provided in Annex B In addition to these regulatory capital requirements, extra capital is maintained by SE in accordance with the SE capital management policy approved by the SE Board and in line with the Aegon Group Capital Policy 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 Regulatory requirements oblige companies to hold sufficient Own Funds (which is the difference between the value of a company s assets and technical provisions) to cover 100% of their regulatory capital requirements. Under the SE capital management policy, a level of additional capital is targeted such that SE aims to cover between 140% and 180% of its regulatory capital requirement In addition to the overall capital management policy for SE, the WPSF aims to maintain sufficient assets to cover 100% of the regulatory capital requirements associated with the liabilities of the WPSF plus further assets sufficient to maintain an appropriate amount of working capital within the fund The position against the capital and risk appetite policy is subject to regular monitoring and is also shared with regulators (as part of a close and continuous monitoring relationship) The SE capital management policy is reviewed at least annually by the SE Board. No change to the SE capital management policy is planned as a result of the Scheme. Section 5 shows that SE s solvency position after implementation of the Scheme remains at least sufficient to provide the protection required under the SE capital management policy as described above More information on the background to the capital regime is contained in section 7 of the Chief Actuary s report and in the interests of brevity these details are not repeated here Role of SEPT and the With-Profits Actuary 4.8. Additional governance protection for the WPSF is provided by SEPT. SEPT was established under the SELAS scheme of demutualisation and at that point was provided with a range of powers related to the governance of SE and the WPSF in particular SEPT also performs the role of with-profits committee for SE as defined in the FCA Conduct of Business Rules, which gives it further powers and duties in respect of the management of SE s with-profits business Further oversight and protection is given by the regulatory requirement to appoint a With-Profits Actuary, the author of this report, to advise SE on its exercise of discretion affecting with-profits customers, which allows him to present his advice directly to the SE Board of directors if required. The With-Profits Actuary is also required to work closely with SEPT and to investigate any matters which are of concern to it. Page 11 of 22

12 Other risk management policies/practices In addition to the SE capital management policy, other ongoing governance processes include: Maintenance of Risk Appetite policies which set limits for the different types of risk exposures faced by the business. These limits define the amount of risk that the organisation is prepared to seek, accept, or tolerate and are aligned to Aegon strategy. As such, Risk Appetite is subject to a regular reporting cycle to the SE Board and regulators (as part of a close and continuous monitoring relationship). A specific Risk Tolerance framework for the WPSF, defining relevant risk tolerance measures for the fund and the extent to which assumed future management actions can be employed in the calculation of the Solvency Capital Requirement. A three lines of defence model which provides a mechanism for the identification, quantification, prioritisation, and management of risk in accordance with SE policies and regulatory requirements. Under this model, the first line refers to the work and governance undertaken by management and senior management to manage risk. Separate second line assurance of risk and capital management is performed by the SE Risk function while the independent third line assurance is provided through SE Internal Audit I note that these and other aspects of SE risk management (which provide comfort that risks are identified, understood, and managed) are not being changed by the Scheme under consideration in this report. Page 12 of 22

13 5. SE FINANCIAL POSITION BEFORE AND AFTER TRANSFER 5.1. In order to assess whether or not the security of WPSF policyholder benefits is materially affected by the Scheme, it is helpful to compare the solvency position of SE, considering both WPSF and NPSF, before and after the Transfer The excess of the Own Funds (which is the difference between the value of a company s assets and technical provisions) over and above the Solvency Capital Requirement ( SCR ) gives the Solvency II surplus and this surplus provides a useful indicator of the immediate impact of the Scheme on the level of security provided to policyholders The SE solvency assessment as at 30 June 2017 is shown in the tables below. I consider the positions at this date to be suitable for the purpose of assessing the impact on the Scheme on WPSF policyholder security The solvency position shown has been adjusted from the reported 30 June 2017 position to allow for planned fund restructuring activity to reduce SE s existing exposure to BLL The figures presented in this report are as presented in the Chief Actuary s report. Section 7 of that report includes details of the figures calculated including any limitations or areas of judgement Where existing SE unitised policyholders choose to invest in unit-linked funds that are structured as long-term insurance funds within an external entity, these investments are treated as a reinsurance asset on SE s balance sheet. SE is currently liable to fund any losses incurred in respect of these policyholder investments which result from the external entity defaulting and not being able to meet all of its outstanding liabilities. The planned fund restructuring activity will move policyholder s investments from unit-linked long-term insurance funds held within BLL to equivalent mutual funds held outwith BLL, thus removing the link to BLL s solvency. Further detail on this planned activity is included in Section 3 of the Chief Actuary s report The solvency position shown has also been adjusted from the reported 30 June 2017 position for the following items: Completion of the Part VII transfer of NPSF annuity policies to Legal and General Assurance Society Limited under a separate scheme with scheme effective date of 22 September 2017; Implementation of a revised Partial Internal Model following approval by the College of Supervisors in July 2017 of SE s major model change application; The impact of applying updated best estimate assumptions approved by the Board and methodology changes approved through internal governance in Q3 2017; The payment on 12 October 2017 of a dividend of 338m by SE to Scottish Equitable Holdings Ltd; and Planned fund restructuring activity to reduce SE s existing exposure to BLL. See the Chief Actuary s report for more detail on the items listed above. Page 13 of 22

14 5.8. In addition to the items mentioned above, the solvency position will have moved due to the following since 30 June 2017: Market movements impacting both NPSF and WPSF; Unwind of existing business impacting both NPSF and WPSF; New business written impacting only NPSF; The reduction in the Loss Absorbing Capacity of Deferred Tax within the NPSF SCR following the enactment of Finance Bill 2017 which restricted the level of carried forwarded losses that can be offset against future profits in any individual year; Changes to provisions for modelling and data improvements impacting the WPSF; and A reduction in the annual charge applied to participating with-profits benefits as a contribution to the cost of guarantees within the WPSF. No allowance has been made for these additional items in the solvency figures presented below and any such allowance would not alter the conclusions of my report Taking these items into account, I am not aware of any events since 30 June 2017 (up to the date of this report) that would materially alter the conclusions on the Transfer obtained from the adjusted 30 June 2017 position presented below However, I will continue to monitor the solvency position and risk profile of both the WPSF and SE as a whole and will provide an update in a Supplementary Report to the SE Board which will also be shared with the regulators and the IE prior to the final High Court Sanction hearing in June The post-transfer figures shown below consider the position immediately following completion of the Transfer, allowing for the planned pre-transfer restructuring by BLL of transferring funds; and the position which is expected to be reached following further fund restructuring which is planned to complete post-transfer. See Section 3 of the Chief Actuary s report for more detail on fund restructuring. Solvency II position pre-transfer The table below shows the (pro-forma) pre-transfer Solvency II position for SE, allowing for the adjustments described in Section 5.7 above. The pre-transfer positions are based on the reported position at 30 June 2017 as presented to the SE Board. SII Results ( m) NPSF WPSF WPSF Ringfence SE Plc Own Funds 2, (233) 2,180 SCR 1, ,133 Surplus (deficit) 1, (233) 1,047 Solvency ratio 203% 302% N/A 192% Note that the WPSF is a stand-alone ring-fenced fund, with any excess assets ultimately being distributed to WPSF policyholders over the remaining life of the fund. As a result, the WPSF surplus shown in the table does not increase surplus at a total SE plc level. Page 14 of 22

15 Solvency II position post-transfer before additional fund restructuring The table below shows the (pro forma) post-transfer Solvency II position for SE. As described in Section 5.7 above, this allows for the impact of planned pre- Transfer restructuring of transferring funds by BLL. SII Results ( m) NPSF WPSF WPSF Ringfence SE Plc Own Funds 2, (233) 2,177 SCR 1, ,241 Surplus (deficit) (233) 936 Solvency ratio 183% 302% N/A 175% Solvency II position post Transfer following additional fund restructuring The table below shows the (pro forma) post-transfer Solvency II position for SE. As described in Section 5.7 above, this allows for the additional impact of planned post-transfer restructuring of transferring BlackRock funds. SII Results ( m) NPSF WPSF WPSF Ringfence SE Plc Own Funds 2, ] (233) 2,185 SCR 1, ] - 1,229 Surplus (deficit) ] (233) 956 Solvency ratio 186% 302%] N/A 178% Impact of Transfer The WPSF position is not directly affected by the Transfer as no policies are transferring into or out of the WPSF The results show that while the impact of the Transfer is to reduce SE s solvency ratio, the ratio remains within the target range of 140% to 180% as set in the SE capital management policy. This is the case both before and after the additional fund restructuring planned to be done after completion of the Transfer. Further detail on the drivers of the reduction in solvency are included in the Chief Actuary s report Under SE s dividend policy, subject to a number of constraints, planned dividend payments to be made by SE to the extent that such payments leave SE s solvency ratio within the target range of 140% to 180%. In addition, the policy allows a reduced dividend to be paid provided such payments do not reduce SE s solvency ratio below 135% Any reduction in solvency ratio from the base end-june position presented above will reduce the size of any potential dividend payment, with policyholder security ultimately being provided by the target solvency coverage ratio of 140% to 180% as described above. The reduction in solvency ratio which occurs as a result of the Transfer does not take the solvency ratio below the bottom of the target range and does not therefore significantly affect WPSF policyholder security when viewed in combination with the dividend policy. Page 15 of 22

16 Conclusions on the overall financial impact of the Scheme and its impact on WPSF policyholder security Based on the analysis undertaken and summarised above, I consider that the security of benefits of SE WPSF policyholders is not materially adversely affected by the Scheme. In presenting this conclusion I would note in particular: The analyses and results discussed in this section demonstrate that SE s WPSF solvency position will be unaffected by the Transfer; and The overall solvency position of SE will remain within the target range set by SE s capital management policy The existing WPSF and SE capital and risk appetite policies will not be changed as a result of the Scheme and this provides me with additional comfort that WPSF policyholder benefits will retain a similar level of ongoing protection after the Transfer. Overall impact of the Scheme on risk profile The Scheme will transfer a portfolio of unitised pensions policies from BLL to SE. The effect on SE s risk profile will be to increase the overall exposure to the main risks to which SE is exposed through its existing unitised pensions business, being market risk (equity and credit risk), persistency risk, and expense risk While the level of counterparty risk will increase as a result of the Transfer, SE s overall level of counterparty exposure is not expected to change significantly from its 30 June 2017 level once the benefit of the planned fund restructuring activity (pre and post-transfer) in respect of SE s existing exposure to BLL is taken into account Post the Transfer, to ensure that transferring policyholders retain the same level of protection following the restructure and transfer of their investments, SE will protect them in respect of their investments in funds that are subject to fund restructuring (where these funds are listed in the policyholder communications), including both where the transferring policyholder is invested in a fund that is being restructured, or is invested in a fund which itself is invested in a fund which is being restructured (see Section 9 of the Chief Actuary s report). In the event that a transferring policyholder suffers loss in respect of such investments as a direct result of the insolvency of the fund manager or depositary, or the trustee of the new mutual fund (e.g. caused by negligence or fraud by the fund manager or depositary, or the trustee), SE will offer protection The amount of protection offered by SE in that case will be equivalent to the amount of protection that would have been available to the transferring policyholder before the fund restructuring and Transfer. The loss will be assessed in terms of the amount by which the value of the transferring policyholder s investment has reduced as a direct result of the insolvency of the fund manager or depositary, or the trustee of the new mutual fund. The transferring policyholder retains investment risk in line with the position before transfer and fund restructuring I understand that the additional NPSF SCR in respect of this risk is not material and has not been included in the figures presented above (see Sections 7 and 9 of the Chief Actuary s report for details). The inclusion of this additional capital requirement in the results presented would not alter the conclusions of my report. Page 16 of 22

17 5.25. The Transfer is expected to increase SE s exposure to operational risk. SE s approach to modelling operational risk involves considering a series of scenarios and attaching probabilities and potential losses to them. The operational risk modelling following the Transfer will give full consideration to the Transferring business, with the assessment of appropriate loss events and corresponding probabilities forming part of the overall process for SE. The figures presented above include an approximate allowance for the increase in operational risk SCR derived from the level of operational risk capital allocated to SE s existing unitlinked business SE has existing expertise to analyse and manage the risks to which exposure will increase upon transfer. Overall, the increase in SCR from the Transfer is c. 8% of SE s pre-transfer SCR Following the Transfer, SE will be required to hold additional SCR commensurate with the additional risks taken on, and is expected to retain sufficient additional capital above SCR to maintain compliance with its capital management policy There is no change to the risk profile of the WPSF in isolation. Conclusions on the overall impact of the Scheme on risk profile Based on the discussion undertaken and summarised above, I do not consider that a materially adverse impact will arise as a result of changes in risk profile that will occur as a result of the Scheme. Page 17 of 22

18 6. EFFECT OF THE SCHEME ON SE WPSF POLICYHOLDERS Security of benefits 6.1. Currently the security of benefits for all policies in SE is provided by: SE meeting its Solvency II capital requirements; SE meeting the additional capital requirements required by its capital policy; and the strength of SE s capital policy, including review and governance processes in place around any future changes to that policy Section 5 of this report shows that following the Transfer, the financial position of the WPSF within SE will remain unchanged, and that SE s solvency coverage ratio remains within the target range of 140% to 180% as set in the SE capital management policy. Benefit expectations of policies 6.3. No changes are proposed under the Scheme to the contractual terms and conditions of any WPSF policies, the PPFM of the WPSF or the way in which the Board exercises its discretion around with-profits benefits. Taxation 6.4. There is no materially adverse tax impact on policyholder benefits as policyholder tax treatment does not change as a result of the transfer Confirmations and clearances are being sought from HM Revenue and Customs ( HMRC ) where appropriate. Policies in the With-Profits Sub-Fund 6.6. No changes are being proposed to the way in which the WPSF is operated following the Transfer. Section 5 of this report shows that the solvency position of the stand-alone WPSF is unchanged as a result of the Transfer. The solvency position of SE continues to comply with SE s capital management policy following the Transfer. There is therefore no materially adverse impact on WPSF policies as a result of the Transfer. Quality of administration 6.7. There are no changes planned to the administration of WPSF policies as a consequence of the Scheme. The servicing of the transferring policies is carried out by a separate team in a separate location with no involvement in WPSF policy servicing, so there is no reason to expect the quality of WPSF policy administration to change as a consequence of the Scheme. Treating Customers Fairly 6.8. I believe that the contents of the Scheme are consistent with the requirements to treat customers fairly with respect of the WPSF policyholders. This is because there is no materially adverse impact on the level of security provided for benefits of WPSF policies compared to that available before the Transfer and because there Page 18 of 22

19 will be no changes to WPSF policyholder contractual or expected discretionary benefits as a consequence of the Scheme. Notification to policyholders 6.9. The regulations surrounding Part VII transfers require that, unless the Court otherwise orders, all policyholders in all affected companies should be written to in order to inform them of the proposed Scheme SE is applying for a waiver for this requirement in respect of all of its existing policyholders. The policy conditions for these policyholders remain unchanged as a result of the Scheme, there will be no change to the operation of the NPSF or the WPSF, and as set out in this section and in Section 5 of this paper, the Transfer will not have a materially adverse impact on policyholder benefit security. As a result these policyholders will not be materially adversely affected by the Transfer Notifications to the transferring BLL policyholders, plus the other Part VII notification requirements, including notices in national and international newspapers, will be carried out by BLL in their role as the transferor In addition SE intends to make financial advisers aware of the Scheme through its regular adviser newsletter Overall, I am satisfied that the proposed communication plan is appropriate for WPSF policyholders and has paid due regard to their interests and the need to treat them fairly. Conclusion on WPSF policyholders For the reasons set out above, I consider that the Scheme will not adversely change the position of WPSF policyholders. Page 19 of 22

20 7. CONCLUSION 7.1. I have produced this report in my role as With-Profits Actuary of SE to set out the expected impacts of the Part VII Transfer on the policyholders of SE s WPSF In assessing the potential impacts of this Scheme, I have given due consideration to the effects of the planned Transfer on the security and benefit expectations of the WPSF policyholders Based on this consideration and taking into account the key features of the Transfer outlined in this report, it is my view that: (i) (ii) As no policies are being transferred into or out of the WPSF, WPSF policyholder benefits will not be directly affected as a result of the Scheme. Taking into account the assets and liabilities transferring from BLL and the impact of this on SE, the security of existing WPSF policyholder benefits will not be materially adversely impacted as a result of the Scheme. (iii) The capital and risk appetite policies of SE provides further comfort that the security of WPSF policyholder benefits will not be materially adversely impacted as a result of the Scheme. (iv) The Scheme will not result in changes to the benefit expectations of any SE WPSF participating or non-participating policyholders I therefore conclude that the Scheme will not result in a materially adverse impact on the security of WPSF policyholders or their benefit expectations compared to the status quo I am also satisfied that there will be no material change to the servicing that WPSF policyholders will receive as a result of the Scheme Further, I am satisfied that the proposed communications plan is appropriate for WPSF policyholders and has paid due regard to the interests of WPSF policyholders and the need to treat them fairly Taking all of the above into account, I am satisfied that the obligations to treat WPSF customers fairly will not be materially adversely affected by the Transfer. It is therefore my conclusion that the Transfer may proceed SEPT has reviewed this report and has not objected to any of the conclusions. Alan McBride FFA With-Profits Actuary to Scottish Equitable February Page 20 of 22

21 ANNEX A DEFINED TERMS AND ABBREVIATIONS USED WITHIN THIS REPORT AUK AUKCS BLL CA Aegon UK Aegon UK Corporate Services Ltd BlackRock Life Limited Chief Actuary FSMA Financial Services and Markets Act 2000 FCA FLAOR HMRC IE LTF NPSF ORSA Own Funds PPFM PRA Financial Conduct Authority Forward Looking Assessment of Own Risks HM Revenue and Customs Independent Expert Long Term Fund which for SE includes its NPSF and its WPSF Non-Profit Sub-Fund which is a separate account in the LTF maintained in respect of business other than with-profits business Own Risk and Solvency Assessment This is the difference between the value of a company s assets and the value of its liabilities on a Solvency II basis Principles and Practices of Financial Management Prudential Regulation Authority SCR SE SED SE Board SELAS Scheme SEPT SHF Solvency II Transfer WPA WPSF 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 Existing SE Scheme of Demutualisation Scottish Equitable Policyholders Trust Ltd which acts as the with-profits committee for SE s WPSF Shareholder Fund which represents assets of a company other than assets in its LTF 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 LGAS With-Profits Actuary With-Profits Sub-Fund which is a separate account in the LTF maintained in respect of with-profits business Page 21 of 22

22 ANNEX B OVERVIEW OF SOLVENCY BASES SUPPORTING THIS REPORT Described below are the key features of the various solvency assessment bases supporting this report and used to understand the impact on policyholders. Solvency II The regulatory capital regime for insurers was replaced by a new European Directive, referred to as Solvency II, on 1 January The Solvency II requirements require companies to apply to use an Internal Model or to adopt the Standard Formula to assess the amount of capital they hold, to ensure that it remains able to meet its liabilities to policyholders in all but the most extreme circumstances. The Directive also requires that the business conducts an Own Risk and Solvency Assessment ( ORSA ) that includes an evaluation of the overall solvency needs taking into account the specific risk profile, approved risk tolerance limits, and the business strategy. Of particular importance is the consideration of the Forward Looking Assessment of Own Risks ( FLAOR ). As part of FLAOR, insurance companies are expected to address the following issues: All material risks from all assets and liabilities; Management practices, systems and controls, including risk mitigation; The quality of processes and inputs, and in particular the related governance issues; The link between business planning and the overall solvency needs (which we understand incorporates regulatory and internal capital requirements, e.g. target rating capital requirements); Explicit identification of possible emerging risk scenarios; Relevance of potential external stresses; Use of a consistent valuation basis. The Solvency II assessments have been scrutinised in preparing this report and have also been shared with the IE and regulators in the preparation of their reports. Page 22 of 22