Deloitte. Summary of the Independent Expert review of proposed amendments to Standard Life Scheme of Demutualisation 27 April 216 (
Introduction The purpose of this document is to provide policyholders, and other interested parties, with a summarised version of my report as independent expert on changes that Standard Life Assurance Limited (SLAL) are proposing to make to the Scheme. The Scheme was approved by the Court of Session in Scotland (the Court) on 9 June 26 and gave effect to the demutualisation of the Standard Life Assurance Company, transferring substantially all of its insurance business to SLAL. In this summary of my report I have highlighted key terms in bold. On 1 January 216, a new regulatory regime for insurance companies became effective. This regime, known as Solvency II, represents a fundamental change in insurance regulation and SLAL is proposing to make certain amendments to the Scheme to reflect this. The proposed amendments to the Scheme wi ll be submitted to the Court for its approval at a final hearing expected to be scheduled for the end of June 216. I will continue to assess the impact of the Scheme in the run up to its submission to the Court and, if relevant, will produce a Supplementary Report outlining any factors that have changed my assessment of the proposed amendments to the Scheme or my conclusions. Once complete, this Supplementary Report will also be made available online and on request. () This is intended to be a standalone summary of my report, but policyholders may wish to read my full report, which provides more details of the Scheme and a more comprehensive explanation for my conclusions. Section 1 of my full report provides details of the scope, reliances and limitations of my work and why I believe that my work has been prepared in line with the relevant regulatory and professional guidance. The information in that section applies equally to this summary report. My role as the Independent Expert Under the terms of the Scheme it is necessary for the proposed amendments to be approved by the Court and, as part of that process, for an independent expert to provide a certificate that these changes will not: "materially and adversely affect the reasonable expectations of policyholders with policies that transferred under the Scheme". I have been appointed as the independent expert for this purpose. I am independent of SLAL, and my appointment has been approved by the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA), the bodies that regulate the UK insurance industry. The Scheme does not define the term "materially". For the purposes of my assessment, if an adverse effect for one group of policyholders is extremely unlikely to occur or would have an extremely small impact, I do not consider that effect to be material. Similarly, I consider the term "reasonable expectations" as referring to the benefit expectations and security of benefits that a reasonable policyholder would have. The security of benefits refers to the security of policyholders' contractual rights. Benefit expectations have been created through communications with the policyholder (including at the time of Scheme's approval), actions taken by SLAL's management in the past, applicable regulations and other publicly available information. Overall conclusion For the reasons set out in the remainder of this summary, I am satisfied that the proposed amendments to the Scheme will not materially and adversely affect the reasonable expectations of policyholders with policies that transferred under the Scheme. Background to the proposed amendments The Scheme is an important part of the framework for the management of SLAL and, in particular, the Heritage With Profits Fund (HWPF), which is referred to in the Scheme as the "With Profits Fund". It sets out the "Core Principles" by which the HWPF is operated, with further details provided in the publicly available Principles and Practices of Financial Management (PPFM) document. Summary of the Independent Expert review of proposed amendments to Standard l ife Scheme of Demutuatisation
The Scheme includes a number of references to the solvency regime that was applicable when it was approved. These references ceased to apply under Solvency II, leading to the requirement to make changes to the Scheme. I discuss the proposed amendments in further detail below but, in general, they represent a natural update to the Scheme to reflect the Solvency II regime. Discussion of proposed amendments The remainder of this summary sets out the proposed changes and my assessment of them. I have grouped the most significant changes in line with the key aspects of the Scheme that are affected, as it is important to consider related changes as a whole. In particular, I have considered the following highlevel themes: 1. The definition of the "residual estate" 2. Calculation of shareholder transfers 3. Construction of the Notional Company 4. Test for shareholder transfer 5. Other changes The definition of the "residual estate" The Scheme defines the "residual estate" - broadly speaking, the excess of the assets of the HWPF over the liabilities of that fund - and sets out how it is expected that this excess will be used in future. This definition is currently specified in terms of the previous regulatory regime, and is defined based on a realistic value of assets and liabilities, with no allowance for prudence. The Scheme does not provide explicit requirements around an appropriate target size of the estate. The proposed amendments to the Scheme re-define the residual estate in Solvency II terms, but it remains a realistic value with no allowance for prudence. The definition is not exactly equivalent and leads to a change in the calculated residual estate, but I am satisfied that this change has no direct bearing on the management of the fund or the amounts that will be paid to policyholders in due course. The Scheme sets out principles about the use of the residual estate and, particularly, imposes restrictions where certain actions could have a significant negative bearing on the size of the residual estate. I am satisfied that the change to the definition of the residual estate will not, of itself, result in a material change in the ongoing management of the HWPF and, importantly, any distributions from it. Calculation of shareholder transfers () The Scheme defines the level of shareholder transfers arising from certain specified blocks of business in the HWPF. These Defined Blocks are non-profit and unitised with-profits policies and the transfer mechanism is called the Recourse Cashflow (RCF). The RCF definitions in the Scheme are based on the old regulatory regime and, as such, are being updated to reflect the Solvency II regime. In particular, the transfers are currently based on liabilities that include a margin for prudence. The update to the ongoing RCF calculation reflects a natural mapping from the previous regulatory regime into Solvency II. However, the change in definitions will lead to a change in the emergence of the RCF, with a one-off higher transfer initially followed by a lower level of transfer in future years. This change in emergence occurs because the margins for prudence in the liabilities are released and transferred to the shareholder. This would have happened anyway, albeit at a later date. The Scheme anticipates the possibility of such a one-off transfer resulting from the introduction of a new regulatory regime and provides for the effect on policyholders of such a transfer to be smoothed over 1 years. This provides additional benefit security to the policyholder in the HWPF as the value of the transfer will remain available to support the fund for a period after the Scheme is amended. I am satisfied that the proposed amendments to the Scheme define this one-off transfer appropriately to reflect the amounts that would otherwise have been retained within the HWPF or have been transferred to the shareholder by means of the RCF over time. This is consistent with my interpretation of the Scheme and, as a result, will not materially and adversely affect the reasonable expectations of policyholders. Summary of the Independent Expert rev1ew of proposed amendments to Standard Life Scheme of Oemutualisation 2
Construction of the Notional Company The Scheme defines the concept of a Notional Company. This concept was designed so that the key features of the management of the HWPF reflected the management of the company prior to the demutualisation. In particular, the Scheme defined the assets, liabilities and capital instruments of the Notional Company, which are assumed to be available to support the choice of investment strategy and the philosophy for setting bonuses in the HWPF. The Scheme sets out a number of capital instruments which are similar in nature to the subordinated debt held prior to demutualisation. The Scheme also sets out how the level of the capital assumed to be held changes as the amount of business in the HWPF changes over time. As a result of the implementation of Solvency II, there have been changes to the rules for how companies classify certain capital instruments and how this debt is allowed for in regulatory capital calculations. The Scheme has been updated to reflect the new terminology under Solvency II and to highlight that, at the end of a ten year transitional period during which the Solvency II regulations permit a continuation of the old treatment and classification of certain capital instruments, a future amendment will be required. I am satisfied that the proposed changes to the Scheme wording will not result in a material change to the level of capital available to the Notional Company and, therefore, will not cause a material change to the management of the HWPF. Consequently, the benefit expectations of the policyholders in the HWPF will not be materially affected. In addition, the proposed amendments to the Scheme include a change to the runoff of the capital instruments assumed to be held by the Notional Company. The current definition is based on terminology from the old regulatory regime. The proposed amendments redefine this in line with the Solvency II regime. While the definitions are not directly equivalent, I am satisfied that the proposed amendments represents an appropriate measure on which to run off the amounts of the capital instruments; indeed it reduces the unexpected volatility of the current measure, resulting in a more stable value of Notional Capital with which to manage the HWPF. A number of other small changes have been proposed to the section detailing the construction of the Notional Company. These are minor clarifications of the Scheme wording. Overall, I am satisfied that these proposed amendments will not materially and adversely affect the reasonable expectations of policyholders. Test for shareholder transfer The Scheme sets out limits on the size of shareholder transfers from the HWPF, to protect against transfers being made which could lead to a shortfall in the level of capital available in the fund. The current limits are based on the old regulatory environment. The proposed changes to the Scheme are substantially a continuation of the existing test, adjusted for the Solvency II regime. Furthermore, the updated test includes a new forward-looking statement requiring the ability to demonstrate the future solvency of the fund. This strengthens the protection of policyholders' interests. I am satisfied that this proposed amendment will not materially and adversely affect the reasonable expectations of policyholders. Other changes There are a number of places in the Scheme where changes have been made to update references to the old regulatory solvency regime or where cross-references are required to be updated. I have considered each of these proposed changes and am satisfied that these will not materially and adversely affect the reasonable expectations of policyholders. Summary of the Independent Expert review of proposed amendments to Standard Life Scheme of Demutualisation 3
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