IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE MISCELLANEOUS PROCEEDINGS NO OF and.

Transcription

1 HCMP 2027 / 2013 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE MISCELLANEOUS PROCEEDINGS NO OF 2013 IN THE MATTER OF THE PRUDENTIAL ASSURANCE COMPANY LIMITED 英國保誠保險有限公司 1 st Petitioner and IN THE MATTER OF PRUDENTIAL HONG KONG LIMITED 保誠保險有限公司 and 2 nd Petitioner IN THE MATTER OF an application under Section 24 and Section 25 of the Insurance Companies Ordinance (Cap. 41) SCHEME 11 th Floor, One Pacific Place 88 Queensway Hong Kong Ref: TAF/44330/00067

2 CONTENTS CLAUSE PAGE PART A INTRODUCTION 1 1. BACKGROUND TO THE SCHEME 1 2. PAC 3 3. PHKL 3 4. DEFINITIONS AND INTERPRETATION 3 PART B TRANSFER 4 5. TRANSFER OF THE LONG TERM BUSINESS OF PAC CARRIED ON IN OR FROM HONG KONG AND OTHER ASSETS 4 6. CONTINUITY OF PROCEEDINGS 6 7. RIGHTS AND OBLIGATIONS IN RELATION TO THE TRANSFERRING BUSINESS 6 8. PREMIUMS AND MANDATES 8 9. DECLARATION OF TRUST BY PAC INDEMNITY 9 PART C FUND STRUCTURE AND ALLOCATIONS ESTABLISHMENT OF THE PHKL FUNDS ALLOCATION OF POLICIES ALLOCATION OF ASSETS ALLOCATION OF LIABILITIES LINKED FUNDS AND INVESTMENT FUNDS DISPUTES IN RELATION TO ALLOCATIONS EFFECT OF ALLOCATIONS 13 PART D OPERATION OF THE PHKL LONG TERM FUND MAINTENANCE OF FUNDS DISTRIBUTIONS OF SURPLUS IN THE WPF DEBITS AND CREDITS MANAGEMENT OF THE WPF THE PHKL WITH-PROFITS COMMITTEE THE PHKL PENSION MIS-SELLING COSTS ASSURANCE THE NEW BUSINESS SUPPORT COMMITMENT MERGER OF THE IFSF AND THE NBSF 19 PART E MISCELLANEOUS PROVISIONS TRANSFER DATE AMENDMENTS TO THE SCHEME EVIDENCE OF TRANSFER 24

3 - ii COSTS AND EXPENSES INDEPENDENT ACTUARIES PRIORITY GOVERNING LAW 24 SCHEDULE 1 25 Definitions and Interpretation 25 SCHEDULE 2 47 Calculation of the Final IFSF Transfer Amount 47 SCHEDULE 3 49 Principles of Financial Management 49 SCHEDULE 4 84 The PHKL With-Profits Committee 84 SCHEDULE 5 94 Extract from the PAC PPFM relating to the PAC Pension Mis-selling Costs Assurance 94 SCHEDULE 6 95 Methodology for the calculation of the Final IFSF Transfer Amount 95

4 PART A INTRODUCTION 1. BACKGROUND TO THE SCHEME 1.1 The Prudential Group is structured along geographical lines, with separate operating units that include Prudential UK & Europe and Prudential Corporation Asia. The Long Term Business of the Hong Kong branch of PAC does not currently fit into this structure since, from a legal perspective, it is part of PAC, the Prudential UK & Europe holding company, while, from an operating perspective, it is part of Prudential Corporation Asia. In order to mitigate this structural anomaly, the Prudential Group wishes to transfer the Hong Kong Long Term Business of PAC into PHKL, a subsidiary of PAC incorporated in Hong Kong. This is expected to have the benefit of: (d) better aligning the Prudential Group's operating units along regional lines; improving the efficiency of decision making; removing the tensions that currently exist within PAC as a result of the differing risk profiles and regulatory regimes that apply to its Hong Kong and its UK & Europe businesses, leaving each territory to pursue the strategy that best fits the needs of its market, Policyholders and shareholders; and improving longer-term corporate flexibility. 1.2 The purpose of this Scheme, the EEA Policies Scheme and the PAL Reinsurance is to transfer the whole of the Long Term Business carried on by PAC in or from Hong Kong and certain other assets which will support the writing of new business in Hong Kong from PAC to PHKL. 1.3 An application will be made to the English Court for the Case 3 Order, under which the English Court will be requested to sanction this Scheme as if it were an insurance business transfer scheme for the purposes of Part VII of FSMA. 1.4 The EEA Policies Scheme will transfer the EEA Policies from PAC to PHKL. 1.5 The transfer will not proceed unless this Scheme and the EEA Policies Scheme are approved by the Hong Kong Court on terms satisfactory to the Parties. The transfer will also not proceed unless the English Court, having accepted jurisdiction to hear the application for the Case 3 Order, grants the Case 3 Order on terms satisfactory to the Parties. 1.6 To maintain the reasonable benefit and security expectations of the Transferring With- Profits Policyholders and to enable PHKL to write new Long Term Business in the amounts proposed in its business plan, it is proposed that a portion of the PAC Inherited Estate will also transfer from PAC to PHKL. The apportionment of the PAC Inherited Estate will be achieved pursuant to Schedules 2 and 6 and the PAL Reinsurance, which shall take effect on the Transfer Date. 1.7 The apportionment assumes that the risk level associated with the Transferring With- Profits Policies and the risk level associated with the rest of the With-Profits Policies of the PAC With-Profits Sub-Fund and the PAC Defined Charge Participating Sub-Fund are aligned, or are capable of being so aligned within an appropriate time period and in any event within nine months of the Transfer Date, in accordance with PAC's prior practice and the statement explaining the Reasonable Expectations of the Transferring With- Profits Policyholders maintained by PAC for internal purposes and taking into account the relevant facts and circumstances. The existing alignment of the risks of the Policies and the risk of misalignment arising prior to the Transfer Date, and the ability to align in the

5 - 2 - event of an existing misalignment or a misalignment arising prior to the Transfer Date, will accordingly be reviewed and confirmed by the Independent Experts and by the PAC AFH and PAC WPA in reports prepared by them shortly before the sanctions hearings of the Hong Kong Court and of the English Court. These reports will be made available to the Hong Kong Court, the English Court, the Hong Kong Insurance Authority and the UK Insurance Authority. The Scheme will not become effective unless the Independent Experts confirm in writing to the Parties, the UK Insurance Authority and the Hong Kong Insurance Authority, not more than two days prior to the Transfer Date that, as far as they are aware and on the basis of their discussions with the PAC AFH: no event has occurred which would result in the risk level associated with the Transferring With-Profits Policies and the risk level associated with the rest of the With-Profits Policies of the PAC With-Profits Sub-Fund and the PAC Defined Charge Participating Sub-Fund not being aligned; or if such an event has occurred, the risk levels are capable of being so aligned within an appropriate time period and in any event within nine months of the Transfer Date, in accordance with PAC's prior practice and the statement explaining the Reasonable Expectations of the Transferring With-Profits Policyholders maintained by PAC for internal purposes and taking into account the relevant facts and circumstances. 1.8 It is proposed that PHKL will establish separate funds to receive the Transferring Business which is currently allocated to the PAC With-Profits Sub-Fund and the PAC Non-Profit Sub-Fund, namely the WPF and the NPF. The WPF will in turn comprise the IFSF, to which the Transferring With-Profits Policies will be allocated, and the NBSF, in which PHKL will write new With-Profits Policies. To protect the rights and Reasonable Expectations of Transferring With-Profits Policyholders, it is further proposed that: PHKL will manage the Transferring With-Profits Policies in accordance with the Principles of Financial Management contained in Schedule 3, until such time as the Principles of Financial Management terminate in accordance with the terms of the Scheme; and the PHKL With-Profits Committee will advise the PHKL Board on PHKL s compliance with the Scheme, including the Principles of Financial Management, and on whether PHKL is having appropriate regard to the rights and Reasonable Expectations of the Transferring With-Profits Policyholders. The role of the PHKL With-Profits Committee is set out in Schedule 4. The Scheme includes provisions (in paragraph 25) that will enable PHKL to merge the IFSF and the NBSF in the future when a defined run-off threshold is reached. 1.9 All assets and liabilities of PAC, other than those comprised in or attributable to the Transferring Policies, the Transferring Assets, the Transferring Liabilities, the Residual Assets and the Residual Liabilities, shall not be affected by the Scheme including (for the avoidance of doubt): the Long Term Business carried on by PAC in or from the UK and certain other jurisdictions (but excluding Hong Kong);

6 - 3 - the General Business carried on by PAC, including any such business carried on in or from Hong Kong, and the assets and liabilities of PAC comprised in or attributable to that General Business; and assets and liabilities comprised in or attributable to the EEA Policies. 2. PAC 2.1 PAC is registered in Hong Kong as a non-hong Kong company under Part XI of the Companies Ordinance and is authorised as a composite insurer under the Ordinance to carry on Long Term Business of class A (life and annuity), class C (linked long term), class D (permanent health), class G (retirement scheme management category I), class H (retirement scheme management category II) and class I (retirement scheme management category III) set out in Part 2 of Schedule 1 to the Ordinance in or from Hong Kong. PAC is also authorised under the Ordinance to carry on General Business of classes 1 to 4, 6 to 10 and 12 to 17 set out in Part 3 of Schedule 1 to the Ordinance. The principal place of business of PAC in Hong Kong is 25/F, One Exchange Square, Central, Hong Kong. 2.2 PAC has permission under Part 4A of the FSMA to carry on Long Term Business of classes I, II, III, IV, VI and VII set out in Part II of Schedule 1 to the Regulated Activities Order and General Business of all kinds referred to in Part I of Schedule 1 to the Regulated Activities Order in or from the UK. 3. PHKL 3.1 PHKL is a company incorporated in Hong Kong and is a wholly-owned subsidiary of PAC. The registered office and principal place of business of PHKL is 25/F, One Exchange Square, Central, Hong Kong. 3.2 An application for authorisation to carry on Long Term Business of class A (life and annuity), class C (linked long term), class D (permanent health), class G (retirement scheme management category I), class H (retirement scheme management category II) and class I (retirement scheme management category III) in or from Hong Kong has been made by PHKL to the Hong Kong Insurance Authority. It is anticipated that formal authorisation will be granted to PHKL as soon as the Scheme is sanctioned by the Hong Kong Court and, amongst other things, upon payment to the Hong Kong Insurance Authority of the requisite authorisation fee prescribed under the Ordinance. After the formal authorisation has been obtained, PHKL will commence the carrying on of its insurance business. PHKL will not have conducted any insurance business or other business prior to that time. 4. DEFINITIONS AND INTERPRETATION Definitions and interpretation used in this Scheme are set out in Schedule 1.

7 - 4 - PART B TRANSFER 5. TRANSFER OF THE LONG TERM BUSINESS OF PAC CARRIED ON IN OR FROM HONG KONG AND OTHER ASSETS 5.1 Each part of the Transferring Business, the Residual Assets and the Residual Liabilities shall be transferred to and be vested in PHKL in accordance with this Scheme, so that: (d) on and with effect from the Transfer Date, each Transferring Asset and all the interest of PAC in it shall, by the Order and without any further act or instrument, be transferred to and be vested in PHKL, subject to all Encumbrances (if any) affecting such asset in accordance with this Scheme; subject to paragraph 9, on and with effect from each Subsequent Transfer Date, each Residual Asset to which such Subsequent Transfer Date applies and all the interest of PAC in it shall, by the Order and without any further act or instrument, be transferred to and be vested in PHKL, subject to all Encumbrances (if any) affecting such asset in accordance with this Scheme, whereupon it shall constitute a Transferring Asset for the purposes of the Scheme; on and with effect from the Transfer Date, each Transferring Liability shall, by the Order and without any further act or instrument, be transferred to and become a liability of PHKL in accordance with this Scheme and shall cease to be a liability of PAC; and on and with effect from each Subsequent Transfer Date, each Residual Liability to which such Subsequent Transfer Date applies shall, by the Order and without any further act or instrument, be transferred to and become a liability of PHKL in accordance with this Scheme and shall cease to be a liability of PAC, whereupon it shall constitute a Transferring Liability for the purposes of the Scheme. 5.2 On the Transfer Date, as part of the Transferring Assets, assets with a value equal to the Initial IFSF Transfer Amount shall be transferred from PAC to PHKL. This amount shall be subject to adjustment in accordance with Schedule 2, under which the Final IFSF Transfer Amount shall be calculated. To the extent that the Final IFSF Transfer Amount is different to the Initial IFSF Transfer Amount, a transfer of assets with a value equal to the IFSF True-Up Payment determined pursuant to Schedule 2 shall be made between PAC and PHKL. Any such assets, whether transferred to or from PHKL, may be transferred pursuant to this Scheme or otherwise on the same basis as Residual Assets transferred on a Subsequent Transfer Date. 5.3 PHKL shall accept without investigation or requisition such title as PAC shall have at the Transfer Date to the Transferring Assets and, at any Subsequent Transfer Date, to each Residual Asset then transferred. 5.4 The Transferring Business shall be allocated in accordance with Part C. 5.5 On and with effect from the Transfer Date: PHKL shall succeed to all rights, liabilities and obligations of PAC in respect of any personal data in the Business Records and which is subject to the Personal Data (Privacy) Ordinance (Cap. 486 of the Laws of Hong Kong); PHKL shall become the data user of any personal data in the Business Records and which is subject to the Personal Data (Privacy) Ordinance (Cap. 486 of the

8 - 5 - Laws of Hong Kong) in place of PAC and shall be deemed to have been the data user of all such data at all material times when personal data was collected; and any consent or notice given or request made by any person to PAC with respect to any personal data in the Business Records, including any consent with respect to marketing to that person, shall be deemed to apply to PHKL, and in any consent given by a data subject in respect of such data as is mentioned in this paragraph 5.5, any reference to PAC shall be deemed to include a reference to PHKL. 5.6 Neither the transfer of the Transferring Business nor this Scheme nor anything done or omitted to be done in connection with the transfer of the Transferring Business or this Scheme shall, in relation to the Transferring Business or any Transferring Policy, Transferring Asset, Transferring Liability, Residual Asset, Residual Liability or any other asset, property, liability or business of any member of the Prudential Group including the business of PAC, whether before or after the Transfer Date: (d) (e) (f) invalidate, discharge or result in the termination of any Policy, agreement, instrument, trust deed, indenture, Encumbrance, right, interest, benefit, power, obligation or title; or constitute a breach of or default, event of default, potential event of default, termination event, mandatory prepayment event, enforcement event, perfection event or other similar event or condition (however described) under, or allow any person to terminate, any Policy, agreement, instrument, trust deed, indenture, Encumbrance, right, interest, benefit, power, obligation or title; or require any registration, re-registration or filing or any amendment to any existing registration or filing in respect of any Policy, agreement, instrument, trust deed, indenture, Encumbrance, right, interest, benefit, power, obligation or title; or require any person to perform any new or additional obligation or to take any new or additional step or action, including the giving of any notice, the obtaining of any consent, approval or determination, the accession to any agreement, the payment of any fee, cost, expense, interest or other amount, the granting of any new or additional Encumbrance or the transfer of any asset or property; or entitle or require any person to exercise any right or remedy, to reduce, suspend, delay, alter or discharge its rights or obligations, to accelerate, terminate, suspend, delay, alter or discharge the performance of any rights or obligations or otherwise to vary, amend, disclaim, repudiate or terminate any Policy, agreement, instrument or Encumbrance; or affect the enforceability, priority or ranking of any Encumbrance. 5.7 Residual Assets and Residual Liabilities may be transferred to PHKL pursuant to this Scheme or by any other process or procedure. 5.8 The holders of Policies which are not transferred from PAC to PHKL by this Scheme shall, on and with effect from the Transfer Date, have no rights or reasonable expectations in relation to the Transferring Business. Subject to the foregoing, this Scheme will not have any effect on the rights and reasonable expectations of the holders of Policies not transferred from PAC to PHKL by this Scheme.

9 CONTINUITY OF PROCEEDINGS 6.1 On and with effect from the Transfer Date (or, in relation to Proceedings in respect of any Residual Assets or Residual Liabilities, the Subsequent Transfer Date applicable thereto), any Proceedings issued, served, pending, threatened or otherwise in connection with the Transferring Business in respect of which PAC is a party (including as the plaintiff, claimant, applicant, defendant, respondent, pursuer, defender or petitioner), and including any such Proceedings commenced in error against PAC on or after the Transfer Date, shall be continued or (as the case may be) commenced by or against PHKL and PHKL shall be entitled to all defences, claims, counterclaims, settlements, rights of set-off and any other rights that would have been available to PAC in relation to the Transferring Business and such Proceedings. In relation to Proceedings in respect of any Residual Assets or Residual Liabilities, until the Subsequent Transfer Date applicable thereto the relevant Proceedings shall be continued by or against PAC, provided that PAC shall consult with PHKL and take account of any reasonable comments made by it in relation to such Proceedings. 6.2 Any judgment, settlement, order or award obtained by or against PAC to the extent that it relates to any part of the Transferring Business and which is not fully satisfied before the Transfer Date or, as the case may be, the applicable Subsequent Transfer Date shall, on that date and to the extent to which it was enforceable by or against PAC immediately prior to such date, become enforceable by or against PHKL (to the exclusion of PAC). 7. RIGHTS AND OBLIGATIONS IN RELATION TO THE TRANSFERRING BUSINESS 7.1 On and with effect from the Transfer Date, PHKL shall become entitled to all the rights, discretions, authorities, benefits and powers of PAC whatsoever subsisting on the Transfer Date under or by virtue of the Transferring Policies or any other agreement relating to the Transferring Business that PAC is a party to or has the benefit of. 7.2 Every person who is a Policyholder in respect of a Transferring Policy or is a party to, or has the benefit of, any other agreement with PAC relating to the Transferring Business shall, on and with effect from the Transfer Date, become entitled, in succession to, and to the exclusion of, any rights which he may have had against PAC under such Transferring Policy or any other such agreement relating to the Transferring Business, to the same rights against PHKL (subject to the terms of this Scheme) as were available to him against PAC under such Transferring Policy or such other agreement relating to the Transferring Business and (as regards a Transferring Policy under which premiums or other sums attributable or referable thereto continue to be payable by him) shall, on and with effect from the Transfer Date, account to PHKL for any further or additional premiums or other sums attributable or referred thereto, if any, as and when the same become due and payable. 7.3 If any person entitled to do so with respect to a Transferring Policy exercises any right or option granted under the terms of that Transferring Policy and the right or option provides for a new, additional or replacement Policy to be issued, such person shall be entitled to require that the obligation thereby arising shall be satisfied by the issue by PHKL of a Policy which complies with the terms of such right or option. 7.4 All references in any Transferring Policy or any other agreement or document relating to the Transferring Business (including in an agreement to which PAC is a party or has the benefit of, in an agreement that PAC is not a party to or does not have the benefit of or in any other document or instrument or elsewhere and whether in writing or not) to PAC, the PAC Board, the PAC HK Actuary or any other officers, employees or agents of PAC shall,

10 - 7 - on and with effect from the Transfer Date, be read as references to PHKL, the PHKL Board, the PHKL Actuary or any other officers, employees or agents of PHKL, as the case may be. In particular, but without limitation, and subject to the other provisions of this Scheme, all rights and/or duties exercisable or expressed to be exercisable or responsibilities to be performed by PAC, the PAC Board, the PAC HK Actuary or any other officers, employees or agents of PAC in relation to any of the Transferring Policies or other agreement or document relating, in each case, to the Transferring Business (including in an agreement to which PAC is a party or has the benefit of, in an agreement that PAC is not a party to or does not have the benefit of or in any other document or instrument or elsewhere and whether in writing or not) shall, on and with effect from the Transfer Date, be exercisable or required to be performed by PHKL, the PHKL Board, the PHKL Actuary or any other officers, employees or agents of PHKL, as the case may be. 7.5 Without prejudice to the generality of paragraph 7.1, where the benefits of any Transferring Policy are held under the terms of a trust, such terms, together with the terms of any rules applicable to any pension scheme in the case of any pension scheme under which benefits are referable to a Transferring Policy, shall operate and be construed, on and with effect from the Transfer Date, on a basis which is consistent with the transfer of such Transferring Policy in accordance with the provisions of this Scheme. For the avoidance of doubt: where the consent of PAC is required under any such terms, the consent of PHKL shall, from the Transfer Date, instead be treated as required; and where a power to appoint trustees under such terms is conferred on PAC, that power shall, from the Transfer Date, instead be treated as conferred on PHKL. 7.6 PHKL shall, on and with effect from the Transfer Date, take over from PAC the administration and negotiation of the Pipeline Business and PHKL shall bear all expenses and liabilities in relation thereto. Without prejudice to the generality of paragraph 7.4, on and with effect from the Transfer Date: any application, offer or invitation to treat comprised in the Pipeline Business made to or by PAC prior to the Transfer Date shall be construed and have effect as an application, offer or invitation to treat made to or by PHKL; if a person executes an agreement or other document as a result of any offer or invitation to treat referred to in paragraph 7.6 which would, when completed, on its face be an agreement with, or other document in favour of, PAC, such agreement or other document shall operate as if with or in favour of PHKL; and paragraph 7.4 shall apply in relation to any references to PAC, the PAC Board, the PAC HK Actuary or any other officers, employers or agents of PAC in or relating to such application, offer, invitation to treat, agreement or other document and any further document relating thereto. Nothing contained herein shall oblige PHKL to accept any application received by or on behalf of PAC before the Transfer Date but not accepted by PAC by then.

11 Without prejudice to the generality of paragraph 7.4, if and to the extent that, on or at any time within three months of the Transfer Date, PAC purports to make or receive any offer or invitation to treat or to execute any agreement or other document or otherwise agree anything relating to the Transferring Business: the offer or invitation to treat shall be construed and have effect as an offer or invitation to treat made to or by PHKL; the agreement or document shall be construed and have effect as an agreement or document executed by PHKL; and paragraph 7.4 shall apply in relation to any references to PAC, the PAC Board, the PAC HK Actuary or any other officers, employers or agents of PAC in or relating to such offer, invitation to treat, agreement or other document and any further document relating thereto. 8. PREMIUMS AND MANDATES 8.1 On and with effect from the Transfer Date, all premiums attributable or referable to the Transferring Policies shall be payable to (and receivable by) PHKL and shall be allocated to the fund within its Long Term Fund to which the Policy to which they relate is allocated at the relevant time. 8.2 Any direct debit mandate, standing order or other instruction in force on the Transfer Date and providing for the payment by a bank or other intermediary of premiums or other amounts payable to PAC under or in respect of any Transferring Policy or Transferring Asset shall thereafter take effect as if it had provided for and authorised such payment to PHKL. 8.3 Any mandate or other instruction in force on the Transfer Date as to the manner of payment by PAC of any sum payable under any Transferring Policy shall continue in force as an effective instruction or authority to PHKL. 9. DECLARATION OF TRUST BY PAC 9.1 If: any property of PAC comprised in or attributable to the Transferring Business is not, or is not capable of being, transferred to and vested in PHKL by the Order on the Transfer Date by reason of such property being a Residual Asset; or any Residual Asset is not, or is not capable of being, transferred to and vested in PHKL by the Order on the Subsequent Transfer Date applicable thereto, then PAC shall, on and with effect from the Transfer Date (but save to the extent that giving effect to such a trust would require a consent or waiver which has not been obtained or that such a trust would not be recognised by any applicable law or that the Parties agree not to give effect to such a trust for any reason), hold any property referred to in paragraphs 9.1 and 9.1, together with any proceeds of sale or income or other right accrued or return arising in respect thereof, as trustee for PHKL. 9.2 Unless otherwise agreed by the Parties, PAC shall be subject to the exclusive directions of PHKL in respect of any property referred to in paragraphs 9.1 and 9.1 from the Transfer Date until the relevant property is transferred to or otherwise vested in PHKL or is disposed of (whereupon PAC shall account to PHKL for the proceeds of the sale

12 - 9 - thereof), and PHKL shall have authority to act as the attorney of PAC in respect of such property and PHKL shall indemnify PAC on demand against any reasonable costs or liability, including any salary or internal administrative expense of PAC, incurred in complying with any direction given by PHKL. 10. INDEMNITY 10.1 On and with effect from the Transfer Date and subject to paragraph 29, PHKL shall discharge on PAC's behalf or, failing that, shall indemnify PAC against: charges, costs and claims arising in respect of (i) all Transferring Liabilities and (ii) all Residual Liabilities which are not, or are not capable of being, transferred by this Scheme (other than liabilities which are the subject of paragraph 10.1 or paragraph 10.2) until the relevant liability is transferred to or becomes a liability of PHKL; and any amount paid by PAC in respect of any Transferring Liabilities and Residual Liabilities of PAC that are, whether wholly or in part, the subject of a policy of indemnity insurance or a claim or right of recovery against a third party, but only to the extent that PAC, having made a claim under such a policy or against such third party, shall have failed to recover any such amount pursuant to rights it may have under such policy, claim or right of recovery (having used reasonable endeavours to do so) PAC shall take such steps as PHKL shall require in order to pursue the rights it may have under any policy of indemnity insurance or against any such third party as is referred to in paragraph PHKL shall be entitled, upon notice to PAC, to have conduct of all litigation or other Proceedings in respect of any such claim. In that connection, PAC shall give all such assistance as PHKL may reasonably require in conducting any such Proceedings. PHKL shall indemnify PAC against any costs and/or expenses which it may incur in pursuing any claim under any such policy of indemnity insurance or against any such third party as is referred to in paragraph 10.1 or otherwise pursuant to this paragraph 10.2.

13 ESTABLISHMENT OF THE PHKL FUNDS PART C FUND STRUCTURE AND ALLOCATIONS 11.1 On and with effect from the Transfer Date, PHKL shall establish the following funds within its Long Term Fund: the NPF; and the WPF On and with effect from the Transfer Date, PHKL shall establish the following sub-funds within the WPF: the IFSF; and the NBSF. 12. ALLOCATION OF POLICIES On and with effect from the Transfer Date: the Transferring Policies to the extent allocated to the PAC With-Profits Sub-Fund immediately prior to the Transfer Date shall be allocated to the same extent to the IFSF within the WPF; and the Transferring Policies to the extent allocated to the PAC Non-Profit Sub-Fund immediately prior to the Transfer Date shall be allocated to the same extent to the NPF. 13. ALLOCATION OF ASSETS 13.1 On and with effect from the Transfer Date, the following shall be allocated to the IFSF: all Transferring Assets allocated to the PAC With-Profits Sub-Fund immediately prior to the Transfer Date other than those Transferring Assets which are NBSF Assets; and the beneficial interest in all property held on trust pursuant to paragraph 9.1 to the extent that, but for falling within the provisions of paragraph 9.1, such property would have fallen within the provisions of paragraph On and with effect from the Transfer Date, the following shall be allocated to the NBSF: all Transferring Assets allocated to the PAC With-Profits Sub-Fund immediately prior to the Transfer Date which are NBSF Assets; and the beneficial interest in all property held on trust pursuant to paragraph 9.1 to the extent that, but for falling within the provisions of paragraph 9.1, such property would have fallen within the provisions of paragraph On and with effect from the Transfer Date, the following shall be allocated to the NPF: all Transferring Assets allocated to the PAC Non-Profit Sub-Fund immediately prior to the Transfer Date; and

14 the beneficial interest in all property held on trust pursuant to paragraph 9.1 to the extent that, but for falling within the provisions of paragraph 9.1, such property would have fallen within the provisions of paragraph On and with effect from the Transfer Date, the following shall be allocated to the PHKL Shareholders' Fund: all Transferring Assets allocated to the PAC Shareholders' Fund immediately prior to the Transfer Date; and the beneficial interest in all property held on trust pursuant to paragraph 9.1 to the extent that, but for falling within the provisions of paragraph 9.1, such property would have fallen within the provisions of paragraph On and with effect from the relevant Subsequent Transfer Date, each Residual Asset shall be allocated to the fund in which it would have been comprised at the relevant Subsequent Transfer Date had it been allocated in accordance with the provisions of paragraphs 13.1 to 13.4 inclusive as a Transferring Asset on the Transfer Date. 14. ALLOCATION OF LIABILITIES 14.1 On and with effect from the Transfer Date, the following shall be allocated to the IFSF: all Transferring Liabilities allocated to the PAC With-Profits Sub-Fund immediately prior to the Transfer Date other than those Transferring Liabilities which are attributable to the NBSF Assets; the liability to indemnify PAC pursuant to paragraph 9.2, to the extent that the payment or property to which such indemnity relates is allocated by paragraph 13.1 to the IFSF; and the liability to discharge liabilities on PAC's behalf, or failing that to indemnify PAC, pursuant to paragraph 10.1 and the liability to indemnify PAC pursuant to paragraph 10.2, to the extent that such liability relates to any Long Term Business to which any Transferring Liability falling within paragraph 14.1 relates On and with effect from the Transfer Date, the following shall be allocated to the NBSF: all Transferring Liabilities allocated to the PAC With-Profits Sub-Fund immediately prior to the Transfer Date which are attributable to the NBSF Assets; the liability to indemnify PAC pursuant to paragraph 9.2, to the extent that the payment or property to which such indemnity relates is allocated by paragraph 13.2 to the NBSF; and the liability to discharge liabilities on PAC's behalf, or failing that to indemnify PAC, pursuant to paragraph 10.1 and the liability to indemnify PAC pursuant to paragraph 10.2, to the extent that such liability relates to any Long Term Business to which any Transferring Liability falling within paragraph 14.2 relates On and with effect from the Transfer Date, the following shall be allocated to the NPF: all Transferring Liabilities allocated to the PAC Non-Profit Sub-Fund immediately prior to the Transfer Date;

15 the liability to indemnify PAC pursuant to paragraph 9.2, to the extent that the payment or property to which such indemnity relates is allocated by paragraph 13.3 to the NPF; and the liability to discharge liabilities on PAC's behalf, or failing that to indemnify PAC, pursuant to paragraph 10.1 and the liability to indemnify PAC pursuant to paragraph 10.2, to the extent that such liability relates to any Long Term Business to which any Transferring Liability falling within paragraph 14.3 relates On and with effect from the Transfer Date, the following shall be allocated to the PHKL Shareholders' Fund: all Transferring Liabilities allocated to the PAC Shareholders' Fund immediately prior to the Transfer Date; the liability to indemnify PAC pursuant to paragraph 9.2, to the extent that the payment or property to which such indemnity relates is allocated by paragraph 13.4 to the PHKL Shareholders' Fund; and the liability to discharge liabilities on PAC's behalf, or failing that to indemnify PAC, pursuant to paragraph 10.1 and the liability to indemnify PAC pursuant to paragraph 10.2, to the extent that such liability relates to any Long Term Business to which any Transferring Liability falling within paragraph 14.4 relates On and with effect from the relevant Subsequent Transfer Date, each Residual Liability shall be allocated to the fund in which it would have been comprised at the relevant Subsequent Transfer Date had it been allocated in accordance with the provisions of paragraphs 14.1 to 14.4 inclusive as a Transferring Liability on the Transfer Date. 15. LINKED FUNDS AND INVESTMENT FUNDS 15.1 On and with effect from the Transfer Date, the property and any associated liabilities comprised in each Linked Fund and each Investment Fund relating to the Transferring Business shall be allocated to and become comprised in a corresponding Linked Fund or Investment Fund of PHKL, as appropriate, within the WPF or NPF, as appropriate, comprising immediately following the Transfer Date, where appropriate, the same number and value of units as were comprised within the relevant Linked Fund of PAC immediately prior to the Transfer Date On and with effect from the Transfer Date: subject to the provisions of this paragraph 15, in relation to any benefits under Transferring Policies which are linked to a Linked Fund of PHKL pursuant to paragraph 15.1, PHKL shall become entitled to the same rights and powers and be subject to the same duties and liabilities as applied to PAC in relation to the corresponding Linked Fund of PAC immediately prior to the Transfer Date; and benefits under any Transferring Policy which, immediately prior to the Transfer Date, were linked to any one or more Linked Fund(s) of PAC shall become linked to the corresponding Linked Fund(s) of PHKL and PHKL shall allocate to each such Transferring Policy the same number and classes of units in the corresponding Linked Fund(s) of PHKL as the number and classes of units in the relevant Linked Fund(s) of PAC which were allocated to the Transferring Policy immediately prior to the Transfer Date.

16 If any property comprised in a Linked Fund or an Investment Fund of PAC falls within the provisions of paragraph 9.1, all interests and rights in relation to such property shall be allocated to the relevant Linked Fund or Investment Fund of PHKL to which such property would, had it been a Transferring Asset, have been allocated On and with effect from the relevant Subsequent Transfer Date, each Residual Asset which is comprised in a Linked Fund or an Investment Fund of PAC shall be allocated to the Linked Fund or Investment Fund of PHKL in which it would have been comprised at the relevant Subsequent Transfer Date had it been allocated pursuant to this paragraph 15 as a Transferring Asset on the Transfer Date. 16. DISPUTES IN RELATION TO ALLOCATIONS 16.1 If at any time any doubt shall arise as to the allocation of any Transferring Policy, Transferring Asset, Transferring Liability, Residual Asset or Residual Liability, the same shall be determined by the PHKL Board, having regard to advice from the PHKL Actuary and the PHKL With-Profits Committee For the avoidance of doubt, any decision by PHKL to backdate the start date of a Policy written by PHKL on or after the Transfer Date for the purposes of calculating the benefits due under the Policy shall not result in that Policy being treated as a Transferring Policy for the purposes of this Scheme For the avoidance of doubt, all allocations of Policies, assets and liabilities pursuant to this Part C shall be made in compliance with all applicable law and regulations, including the Ordinance. 17. EFFECT OF ALLOCATIONS 17.1 Any allocation or re-allocation of property or liabilities which is made under the terms of this Scheme is for the purpose of establishing Policyholder entitlements and shall not be taken to limit the availability of all the property of PHKL to meet the liabilities which it is obliged by law to meet Subject to compliance with all applicable laws and regulations and the terms of this Scheme (including the Principles of Financial Management), nothing shall prevent the subsequent allocation or re-allocation of any Transferring Asset, Transferring Liability, Residual Asset or Residual Liability to or from the Long Term Fund, or any fund within the Long Term Fund, of PHKL.

17 PART D OPERATION OF THE PHKL LONG TERM FUND 18. MAINTENANCE OF FUNDS 18.1 On and with effect from the Transfer Date: the WPF and the NPF shall be separately maintained as funds within the Long Term Fund of PHKL for so long as they each continue to exist; and the IFSF and the NBSF shall be separately maintained as sub-funds within the WPF for so long as they each continue to exist Subject to Schedule 3, nothing in this Scheme shall at any time prevent PHKL from: establishing and maintaining any new funds within the PHKL Long Term Fund or any new Investment Fund or Linked Fund (including new with-profits funds with such profit sharing arrangements between Policyholders and the PHKL Shareholders' Fund as the PHKL Board considers appropriate), provided that no further funds shall be created within the WPF except for Investment Funds and Linked Funds; or dissolving or merging any fund within the PHKL Long Term Fund, any Investment Fund or any Linked Fund, provided that paragraph 25 and paragraph 27 shall apply in respect of any dissolution or merger of the WPF, IFSF and NBSF; or writing in or reinsuring to the NPF, the WPF or any other of its funds any new business, including new business reinsured from another fund of PHKL Assets of the IFSF and the NBSF may be pooled for the purposes of portfolio management, but subject to the foregoing no assets of the WPF may be pooled with assets of any other fund. Subject to the foregoing and to paragraph 18.4, in considering any pooling of assets of any fund or funds, or the specific allocation of assets to a particular fund, the PHKL Board will have regard to the rights and Reasonable Expectations of the Transferring With-Profits Policyholders. For the avoidance of doubt, hypothecation does not include any steps relating to the pooling of assets Any policy for the pooling of assets of the WPF, including the asset categories constituting each pool of assets, and any amendment to any such policy shall be approved by the PHKL Board, having regard to advice from the PHKL Actuary and the PHKL With-Profits Committee Hypothecation may be undertaken within each of the IFSF and the NBSF but no hypothecation may be undertaken (i) between the IFSF and the NBSF or (ii) between the WPF or any sub-fund of the WPF and any other fund of PHKL. Subject to the foregoing, in considering any hypothecation within either the IFSF or the NBSF, the PHKL Board will have regard to the rights and Reasonable Expectations of the Transferring With-Profits Policyholders. Any policy for any such hypothecation and any amendment to any such policy shall be approved by the PHKL Board, having regard to advice from the PHKL Actuary and the PHKL With-Profits Committee PHKL shall procure that, as far as reasonably possible, the assets and liabilities allocated to the IFSF and the WPF, including any interest in any asset pool referred to in paragraph 18.4, can at all times be readily identified by maintaining separate fund accounting records for the IFSF and the WPF.

18 In order to protect the Transferring With-Profits Policyholders, PHKL shall produce internal accounting and valuation reports on a standalone basis for the IFSF, the WPF and any other fund for which the PHKL Board considers it appropriate to do so, having regard to advice from the PHKL Actuary and the PHKL With-Profits Committee. 19. DISTRIBUTIONS OF SURPLUS IN THE WPF 19.1 The PHKL Board, having regard to advice from the PHKL Actuary, shall from time to time determine the amount of surplus (the "Total Surplus") within each of the IFSF and the NBSF. The PHKL Board shall then determine out of such Total Surplus within each of the IFSF and the NBSF: the proportion thereof (the "Divisible Surplus") to be divided between the With- Profits Policies allocated or reinsured to each such fund (to the extent that such Policies are entitled to participate in such Divisible Surplus) and the PHKL Shareholders' Fund; and the proportion to be carried forward within each such fund. Subject to paragraph 19.3 and the rights and Reasonable Expectations of the relevant holders of With-Profits Policies, not less than 90 per cent. (the "Required Percentage") of the Divisible Surplus shall be distributed by way of bonus or alternative profit distribution mechanisms specified in policy documents amongst the With-Profits Policies allocated or reinsured to each of the IFSF and the NBSF (to the extent that such Policies are entitled to participate in such Divisible Surplus). The balance of the Divisible Surplus may be transferred from each such fund and allocated to the PHKL Shareholders' Fund or to a non-profit fund In determining the amount of the Total Surplus and the Divisible Surplus in each such fund at any time, the PHKL Board shall, subject to applicable law and regulations: use any methodology or assumptions for the calculation thereof which is consistent with or reflects the terms of any Policies or other contracts issued in connection with the business of the IFSF or the NBSF (as the case may be); and have appropriate regard to the rights and Reasonable Expectations of the holders of With-Profits Policies allocated or reinsured to the IFSF and the NBSF and the Principles of Financial Management The transfer of any amount of free capital within the IFSF Inherited Estate to the NBSF pursuant to paragraph 12 of Schedule 3 shall not constitute a distribution of surplus of the IFSF and accordingly shall not be subject to any apportionment by reference to the Required Percentage referred to in paragraph DEBITS AND CREDITS 20.1 Amounts debited or credited to the IFSF and the NBSF shall be determined in accordance with the terms of this Scheme (including, where applicable, the Principles of Financial Management) Subject to paragraph 20.1, on and with effect from the Transfer Date, PHKL shall transfer from or debit or charge to the IFSF or to the NBSF (as the case may be) all of the following: any amount permitted or required by this Scheme;

19 (d) (e) (f) (g) any amounts payable in respect of all Policies written in or allocated or reinsured to the relevant fund arising by reason of surrender, death, disability, maturity or other event giving rise to a claim (including amounts payable because of any guarantee or option in any such Policy or the payment or vesting of an annuity); any costs, expenses, charges, liabilities, losses and declines in value arising from the assets or business allocated to the relevant fund, including from the purchase, holding, valuation or sale of any assets or business allocated to the relevant fund; any amount relating to the servicing or repayment of financial assistance or support (if any) provided to the relevant fund; any amount payable in accordance with the contractual obligations of PHKL, including any reinsurance arrangement or in respect of any administration or investment management services, attributable to the relevant fund; any amount in respect of taxation which is attributable to the relevant fund; and any other amounts which are determined by the PHKL Board (having regard to the advice of the PHKL Actuary) to be properly debited from, or properly charged to, the relevant fund. The PHKL Board shall also have regard to advice from the PHKL With-Profits Committee where such amounts are material. For these purposes, whether an amount is material shall be determined by the PHKL Board, having regard to advice from the PHKL Actuary and the PHKL With-Profits Committee Subject to paragraph 20.1, on and with effect from the Transfer Date, PHKL shall transfer or credit to the IFSF or to the NBSF (as the case may be) all of the following: (d) any amount permitted or required by this Scheme; any premiums received by PHKL in respect of all Policies written in or allocated or reinsured to the relevant fund; any investment gains, earnings, income and profits arising from the assets or business allocated to the relevant fund; the amount or value (in whatever form or manner it shall be received) of: (i) (ii) any financial assistance or support given to the relevant fund; or the consideration received by the relevant fund in respect of any financial assistance or support given to another fund; (e) (f) any amount received pursuant to any contract entered into by PHKL, including any reinsurance agreement, attributable to the relevant fund; and any other amounts which are determined by the PHKL Board (having regard to the advice of the PHKL Actuary) to be properly attributable to or properly received by the relevant fund. The PHKL Board shall also have regard to advice from the PHKL With-Profits Committee where such amounts are material. For these purposes, whether an amount is material shall be determined by the PHKL Board, having regard to advice from the PHKL Actuary and the PHKL With-Profits Committee.

20 MANAGEMENT OF THE WPF On and with effect from the Transfer Date, the Principles of Financial Management shall apply until such time as they cease to apply in accordance with paragraph 25 or paragraph 27. The purpose of the Principles of Financial Management is to protect the rights and Reasonable Expectations of the Transferring With-Profits Policyholders. 22. THE PHKL WITH-PROFITS COMMITTEE On and with effect from the Transfer Date, the provisions relating to the PHKL With-Profits Committee contained in Schedule 4 shall apply until such time as the role of the PHKL With-Profits Committee is terminated in accordance with paragraph 25 or paragraph THE PHKL PENSION MIS-SELLING COSTS ASSURANCE 23.1 This paragraph 23 sets out the terms of the PHKL Pension Mis-selling Costs Assurance. The PHKL Pension Mis-selling Costs Assurance replaces the PAC Pension Mis-selling Costs Assurance with respect to the Transferring With-Profits Policies on and with effect from the Transfer Date. Schedule 5 sets out the summary of the PAC Pension Mis-selling Costs Assurance contained in the PAC PPFM The PAC Pension Mis-selling Costs Assurance applies to all With-Profits Policies of PAC in issue on 31 December 2003 and any regular premiums (including fixed, retail prices index or salary-related increases and Department for Work and Pensions rebates) paid on those Policies after that date (the "Affected Policies"). The maximum amount of support available under the PAC Pension Mis-selling Costs Assurance (the "PAC Pension Misselling Costs Assurance Amount") reduces as the company pays claims on the Affected Policies On and with effect from the Transfer Date: the investment and bonus policy of the IFSF will be set as if the PHKL Pension Mis-selling Costs Assurance Amount was allocated to the IFSF; and subject to paragraphs 23.4 and 23.5, support shall be provided from the PHKL Shareholders' Fund to the IFSF to the extent required to enable PHKL to satisfy its obligations under paragraph 23.3 (the "PHKL Pension Mis-selling Costs Assurance") The PHKL Pension Mis-selling Costs Assurance Amount at any time on or after the Transfer Date (the "Relevant Time") shall be the amount determined by the following calculation: where: /, / 1 "A" is the Initial PHKL Pension Mis-selling Costs Assurance Amount adjusted for investment return during the period from the Transfer Date to the Relevant Time inclusive of both dates where that investment return is calculated using a rate which is equivalent to the rate of investment return (after deduction of tax and expenses) attributable to the IFSF Inherited Estate from the Transfer Date to the Relevant Time inclusive of both dates but disregarding any return on assets or financial instruments used to reduce or eliminate risks of the IFSF;