SALAS Changes

Court application to facilitate the merger of the Scottish Amicable Insurance Fund with the Prudential With-Profits Sub-Fund

The Prudential Assurance Company Limited (Prudential) made an application to Court (the Court Application) for consent to amend the scheme (the Scheme) under which the business of the Scottish Amicable Life Assurance Society (SALAS) was transferred to Prudential in 1997.

Under the Scheme, the majority of SALAS's business was allocated to a fund established within Prudential called the Scottish Amicable Insurance Fund (SAIF). The Scheme requires the SAIF to be merged with the rest of Prudential’s long-term insurance business when the SAIF’s assets fall below a specified amount (the Threshold). Current projections indicate that the Threshold is likely to be reached in 2024. The Scheme also permits the SAIF to be merged with the rest of Prudential’s long-term insurance business before the Threshold is reached. Prudential is proposing to merge the SAIF with the With-Profits Sub-Fund (WPSF), which is its largest with-profits fund, before the Threshold is reached (Early Merger). It is proposed that the Early Merger is implemented on 1 April 2021 (the Proposed Early Merger Date). 

The Court Application was made in order to obtain the Court's consent to the amendment of certain provisions of the Scheme which relate to the merger of the SAIF with the rest of Prudential's long-term insurance business (the Scheme Amendments).

The Court granted this application at the Final Hearing held on 5 November 2020.

Policyholder communications regarding an Early Merger

The possibility of an Early Merger was first communicated to the holders of policies allocated or reassured to the SAIF (the SAIF Policyholders) in the 2017 statement provided by the Chairman of the Scottish Amicable Board (the Scottish Amicable Board). The 2020 Chairman’s statement confirmed active consideration was being given to an Early Merger.

Under the Scheme, the Scottish Amicable Board is responsible for the management of the SAIF and is required to consider only the interests of the SAIF Policyholders. As required by the Scheme, the Scottish Amicable Board has been advised since the Scheme became effective in 1997 by an actuary, known as the Monitoring Actuary, on the proper operation of the SAIF in order to safeguard the interests and reasonable expectations of the SAIF Policyholders (the Monitoring Actuary).

A legal notice advertising the Court Application and the procedure for policyholders, or any other interested parties, to submit their Answers on or objections to the Proposed Scheme Amendments to the Court was publicised in newspapers and legal gazettes. A further legal notice confirming that the Court of Session approved the Scheme Amendments was then published in the agreed newspapers and legal gazettes following the Final Hearing on 5 November 2020.

In November and December 2020, SAIF policyholders were sent a letter confirming that the merger of the SAIF with the WPSF is expected to take place on 1 April 2021. The letter also advised that the merger will require some changes to our Principles and Practices of Financial Management as a result of the merger. Additional information on the proposed merger of the SAIF with the WPSF is available at pru.co.uk/saifmerger

The SAIF is closed to new business and all of the surplus of its assets over its liabilities is being used to provide enhancements to pay-outs on the with-profits policies in the SAIF (the SAIF With-Profits Policies).

As a result of being closed to new business, the SAIF is reducing in size. As it reduces in size, so the volatility to which it's exposed increases. An Early Merger on the terms proposed (specifically those described at the bullet headed "The Distribution of the assets of the SAIF amongst the SAIF With-Profits Policyholders" below) would provide increased certainty to SAIF With-Profits Policyholders in respect of the share of the surplus assets of the SAIF which they would receive as enhancements to their pay-outs after the Early Merger. This would mitigate the risk of additional volatility that they are exposed to sooner than would be the case if a merger is only implemented when the Threshold is reached. An Early Merger would give the SAIF With-Profits Policyholders access to the WPSF's investment strategy sooner than would be the case if a merger is only implemented when the Threshold is reached.

In addition, while the funds have similar investment strategies, the SAIF has historically had a slightly more conservative strategy than the WPSF due to the different risk profiles of the funds. This has resulted in slightly lower long-term returns for SAIF relative to the WPSF. As a result of the merger, SAIF will adopt the same higher risk investment strategy as the WPSF which will be expected to result in slightly higher overall long-term returns. However, future investment performance cannot be guaranteed.

Prudential concluded that it would be impossible or impractical to implement either the proposed Early Merger, or any other merger of the SAIF with the rest of Prudential’s long-term insurance business, under the existing terms of the Scheme.

In summary, this was because: (i) of changes in the management of Prudential's insurance business since the Scheme was implemented in 1997; (ii) Prudential needed to clarify certain terms of the Scheme; and (iii) Prudential needed to amend the Scheme in order that it can implement the Early Merger on terms that achieve an appropriate balance of interests between SAIF policyholders and existing WPSF policyholders.

The Court Application was made because the Court's consent was required in order for any amendments to be made to the Scheme. 

The key details of the Scheme Amendments are as follows:

  • The merger of the SAIF with the WPSF
    The Scheme Amendments clarify that the SAIF will merge with the WPSF. This is considered to be the best available option for the SAIF With-Profits Policyholders because the WPSF has been used as the reference fund for the management of the SAIF since the Scheme became effective in 1997 and already contains policies transferred from SALAS, and because its with-profits business is similar to the SAIF with-profits business.
  • The management of the SAIF with-profits business post-merger
    The Scheme Amendments clarify that the SAIF with-profits business will be managed in accordance with the performance and experience of the WPSF. This includes investment and bonus policy and charges and expenses to be allocated to the SAIF With-Profits Policies.
  • The distribution of the assets of the SAIF amongst the SAIF With-Profits Policyholders
    Currently, under the terms of the Scheme, the enhancements to pay-outs on the SAIF With-Profits Policies through which the surplus assets of the SAIF are being distributed are reviewed and adjusted from time to time. On merger, the percentage enhancement will be fixed (the Final Enhancement) which increases the certainty for SAIF With-Profits Policyholders in respect of the share of the surplus assets of the SAIF that they will receive.

    The Scheme Amendments clarify the calculation of the Final Enhancement and provide for an estimate of the Final Enhancement to be used between the date on which the merger of the SAIF with the WPSF takes effect (a SAIF Merger Date) and the next bonus declaration for the SAIF With-Profits Policies. The Final Enhancement will be calculated on the basis of information available at the SAIF Merger Date and will be applied from the next bonus declaration.

    The SAIF With-Profits Policyholders will have no right to participate in any future distributions of excess surplus which may arise from time to time from the WPSF's inherited estate.
  • Compensation for the WPSF for early acceptance of risks relating to the SAIF business
    Implementing the Early Merger would mean the WPSF taking on risks relating to the SAIF business earlier than would be the case if the SAIF is not merged with the WPSF until the Threshold is reached. The Scheme Amendments permit the WPSF to be appropriately compensated for the early acceptance of those risks. The compensation to the WPSF has been included in an assessment carried out by the Independent Actuary who has confirmed that the nature of the compensation  is fair and reasonable.

Prudential has carefully considered the interests of all its policyholders throughout the development of the Scheme Amendments and the Early Merger. On the basis of currently available information, Prudential considers that the Early Merger should be beneficial to the SAIF With-Profits Policyholders compared to a merger when the Threshold is reached, and is not expected to have an adverse effect on Prudential's other policyholders. Prudential will reconsider the effect of the Early Merger on all of its policyholders nearer to the time of the Proposed Early Merger Date.

The process for implementing the Scheme Amendments and the Early Merger contains a number of safeguards that together ensure that the interests of all Prudential policyholders are protected. These safeguards can be summarised as follows:

I. The Prudential Board

The Board of Directors of Prudential (the Prudential Board) approved the Court Application and concluded that the Scheme Amendments are in the best interests of the SAIF Policyholders and are not expected to adversely affect Prudential's other policyholders. In reaching those conclusions, the Prudential Board considered the reports prepared by the Independent Actuary, Prudential's Chief Actuary and With-Profits Actuary, and the Monitoring Actuary which are referred to below.

Prior to the final hearing (which is referred to below) (the Final Hearing), the Prudential Board gave its in principle agreement to the Early Merger having taken into account the actuarial reports prepared by the Chief Actuary, the With-Profits Actuary and the Monitoring Actuary which are referred to below and updates to those reports.

The Prudential Board will review and re-consider its conclusions in relation to the Early Merger closer to the Proposed Early Merger Date, having taken into account the views of the Scottish Amicable Board and the latest advice from the Chief Actuary, the With-Profits Actuary and the Monitoring Actuary.

The Prudential Board is also advised by the Prudential With-Profits Committee in relation to the Scheme Amendments and the Early Merger. The With-Profits Committee's role is to ensure that the interests of all Prudential's with-profits policyholders are appropriately considered. The members of the With-Profits Committee are independent of Prudential. 

II. The Scottish Amicable Board

The Scottish Amicable Board approved the Court Application and concluded that the Scheme Amendments are in the best interests of the SAIF Policyholders. The Scottish Amicable Board is required to consider only the interests of the SAIF Policyholders. In reaching those conclusions, the Scottish Amicable Board has considered carefully the actuarial reports referred to below.

The Scottish Amicable Board has taken the same approach as the Prudential Board and given its in principle approval for the Early Merger prior to the Final Hearing having taken into account the latest actuarial reports prepared by the Chief Actuary, the With-Profits Actuary and the Monitoring Actuary.

The Scottish Amicable Board will review and re-consider its conclusions in relation to the Early Merger closer to the Proposed Early Merger Date, having taken into account the views of the Prudential Board and the latest advice from the Chief Actuary, the With-Profits Actuary and the Monitoring Actuary.

III. The Independent Actuary

As part of the Court Application, the Scheme Amendments were considered by an independent actuary, Mr Richard Baddon, a partner of Deloitte MCS Ltd (the Independent Actuary), who concluded that, in his opinion, the Scheme Amendments will not adversely affect the reasonable expectations of, or reduce the protection conferred by the Scheme on, the holders of policies transferred from SALAS to Prudential.

The reports prepared by the Independent Actuary on the Scheme Amendments, the scope of which was the SALAS policyholders, were submitted to the Court.

 IV. Prudential's Chief Actuary and With-Profits Actuary

The Scheme Amendments and the Early Merger have been reviewed by Prudential's Chief Actuary and With-Profits Actuary. The Chief Actuary confirmed that the Scheme Amendments will not adversely affect the reasonable expectations of, or reduce the protection provided by the Scheme on, the holders of policies transferred from SALAS to Prudential and will have no adverse effect on the WPSF policyholders or any other policyholders of Prudential. The With-Profits Actuary has reached the same conclusion with respect to Prudential's with-profits policyholders.

Based on the available information, the Chief Actuary and the With-Profits Actuary have confirmed that the Early Merger should be beneficial to the SAIF With-Profits Policyholders compared to a merger at the time that the Threshold is reached, and is not expected to have any adverse effect on the WPSF with-profits policyholders. The Chief Actuary also considers that the Early Merger will not adversely affect Prudential's other policyholders.

The reports of the Chief Actuary and the With-Profits Actuary were  also submitted to the Court. They will reconsider their conclusions in relation to the Early Merger closer to the Proposed Early Merger Date.

V. The Monitoring Actuary

The Scheme Amendments and the Early Merger were also reviewed by the Monitoring Actuary with respect to the SAIF Policyholders. In his opinion:

  • the Scheme Amendments will not adversely affect the reasonable expectations or security of the SAIF Policyholders; and
  • based on currently available information, the Early Merger is expected to be beneficial to the SAIF With-Profits Policyholders compared to a merger at the time that the Threshold is reached.

The Monitoring Actuary's reports were also submitted to the Court.

The Monitoring Actuary will reconsider his conclusions in relation to the Early Merger closer to the Proposed Early Merger Date.

VI. Discussions with Prudential's regulators

As part of the development of the Scheme Amendments and the Early Merger, Prudential has had a number of discussions with its regulators, the Prudential Regulation Authority and the Financial Conduct Authority (the Regulators).

In advance of the Final Hearing on 5 November 2020, Prudential confirmed that the Regulators did not have any objections to the Scheme Amendments. Similarly, shortly before the Proposed Early Merger Date, Prudential will check again with the Regulators whether they have any objections to the Early Merger.

An initial Court hearing was held on 10 September 2020 at which the Court made orders in relation to the publication in newspapers of legal notices advertising the Court Application and the procedure for policyholders or any other interested parties to submit their Answers on or objections to the Proposed Scheme Amendments to the Court.

The Court granted Prudential consent to make the Proposed Scheme Amendments at the Final Hearing held on 5 November 2020 at the Court of Session, Parliament House, Parliament Square, Edinburgh, EH1 1RQ.

A legal notice confirming that the Court of Session approved the Scheme Amendments was published in the agreed newspapers and legal gazettes in November 2020.

Prudential has sent a letter to the SAIF Policyholders explaining the terms of the Early Merger and notifying them that changes will be made to the Principles and Practices of Financial Management (PPFM) as a result of the Early Merger. The PPFM is a document which Prudential maintains on its website which explains how it manages its with-profits business.  Prudential has also made information on the Early Merger available on its website.

The Early Merger will continue to be the subject of ongoing review by the Prudential Board, the Scottish Amicable Board, the Chief Actuary, the With-Profits Actuary, the Monitoring Actuary and Prudential's With-Profits Committee. The Early Merger will only proceed if the Prudential Board and the Scottish Amicable Board continue to consider that it is in the best interests of the SAIF Policyholders and has no material adverse effect on the interests of Prudential's other policyholders.

Additional information on the proposed merger is also available at pru.co.uk/saifmerger

Although the Scottish Amicable Board will cease to exist when the SAIF merges with the WPSF, the SAIF Policyholders will still benefit from significant protections available under Prudential's governance processes. Following the Proposed Early Merger Date, Prudential's management of the SAIF With-Profits Policies will continue to be overseen by its With-Profits Committee and With-Profits Actuary. In addition, as a regulated insurance company, Prudential will continue to be subject to supervision by the Regulators, including in relation to the management of its business.

Further information

A summary of the Independent Actuary's report prepared for the initial Court hearing can be obtained here.

A copy of the Independent Actuary’s report prepared for the initial Court hearing can be obtained here.

A copy of the Independent Actuary’s supplementary report prepared for the final Court hearing can be obtained here.

A statement of the conclusions of each of Prudential's Chief Actuary and With-Profits Actuary and of the Monitoring Actuary prepared for the initial Court hearing can be obtained here.

A copy of the legal notice published following the initial Court hearing on 10 September 2020 can be obtained here.

A copy of the legal notice published following the final Court hearing on 5 November 2020 can be obtained here.

A copy of the consent to amend the Scheme by the Court of Session on 5 November 2020 can be obtained here.
 

Additional information on the proposed merger is available at pru.co.uk/saifmerger