The Prudential Regulation Authority has been criticised over its approval of the potential transfer of a £12bn annuity book from Prudential to Rothesay Life.
In a letter to PRA chief executive Sam Woods, sent earlier this month and seen by FTAdviser, a group of pension experts and policyholders raised concerns about the regulator’s oversight of the transfer. The letter was first reported by the Financial Times.
Prudential announced its plan to sell £12bn worth of annuities, covering 400,000 policies, to de-risking expert Rothesay Life in March 2018. Having been approved by the PRA and the Financial Conduct Authority, the transfer was blocked by the High Court this August due to concerns over client detriment.
Justice Snowden found Prudential had not informed its clients that a transfer to another provider was possible, and described Rothesay as “a relatively new entrant without an established reputation in the business”. Rothesay filed an appeal against the decision on September 30.
The authors of the letter have posed their own questions as to why the PRA did not object to the transfer. Among their issues are the respective capital positions of the two companies.
At the heart of these concerns is the use of “matching adjustment” practices permitted under Solvency II rules, which allow insurers to discount future liabilities to savers at above the risk-free rate if they invest in higher-yielding assets.
The authors note that the practice locks in returns before they have been made, and say it does not reflect a company’s true capital position as a result. They claim Rothesay has a greater reliance on such adjustments than Prudential.
Stating “there is no conceivable circumstance in which such a capital position could be regarded as a ‘strong’ one,” they ask whether the PRA should have told the court about the way in which the two companies’ capital positions are structured.
The letter also suggests the PRA should have disclosed details about certain of Rothesay’s “risky” assets, including £1.7bn of loans secured against ground rents. The authors say the government’s crackdown on leaseholder charges equates to a growing political risk that the regulator should have taken into account.
Rothesay told the FT that the letter contained “multiple significant factual inaccuracies and errors” and said it was “one of the best capitalised insurers among its peers”.
It added that policyholders can "gain comfort from the high level of security offered by the PRA’s regulatory capital regime as well as its support from strong and committed shareholders".
The company, along with Prudential and the PRA, declined to comment to FTAdviser.
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