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Business focus: Prudential court ruling prompts questions for burgeoning sector

Michael Bow

Like most people approaching retirement, Dr Jay Ginn thought long and hard about which insurer to buy an annuity off when she chose to cash in a small pension pot in 2005.

Such choices are often among the most important decisions people make, given that lifetime annuities pay you a regular income until you die.

After shopping around, Ginn picked venerable British insurer Prudential, due to its good rates and reputation but last year she received a shock. After more than a decade, the Pru were transferring her to a company she’d never heard of — little known pension specialist Rothesay Life.

“When I saw the letter I thought, this doesn’t seem right,” says Ginn, who as a sociologist has held posts at the University of Surrey and, post retirement, at King’s College London.

“You’re presented with this picture that you can choose something that will suit you for the rest of your life. There’s no mention they might transfer you to another provider. What is the point in choosing if you can be transferred?”

Ginn wasn’t alone. About 370,000 other Prudential customers received similar news after the FTSE 100 giant sold an annuity book to Rothesay in a landmark £12 billion deal designed to smooth the spin-off of its UK unit.

When an insurer sells a business it must be approved by the High Court, an archaic law seen as a rubber-stamping exercise. But for the Pru case, the judge, Justice Snowden, took the unprecedented step of blocking the transfer after 1,000 policyholders objected. Eight appeared at the hearing to protest to the judge in person.

Prudential and Rothesay, who had assumed the deal would be approved, last week said they would appeal but the judgment has upended the cosy world of blockbuster annuity transfers.

“The whole industry was taken by surprise. It is very, very unusual,” said Hymans Robertson’s Michael Abramson, an insurance veteran.

Charlie Finch, a pension consultant at LCP, also said he had never seen an annuity transfer declined before.

“But then again,” he added, “I’ve never seen so many objections to an annuity transfer from policyholders”.

To understand what all the fuss is about, it’s important to stress how important annuity transfers have become to reshaping the City.

Over the past few years, household-names have been selling off dusty old books of pension, savings and insurance policies to a group of newbie consolidators such as Phoenix Group, ReAssure and Rothesay.

Rothesay has been one of the most active, picking up multi-billion-pound books from Aegon and Zurich.

Man from the Pru

When Pru chairman Lord Hunt of Tanworth launched the iconic grey and red “prudence” logo in 1986 he said the Wolff Olins-designed symbol showed the Pru’s “wise conduct and integrity”. That reputation has been woven into the fabric of British life for a generation but the face of the 170-year old insurer is changing.

It is best known for its trilby-hat wearing “Man from the Pru” ad launched in 1949 when one in three Brits had a Pru policyBut from next week the historic UK operations will become a new company called M&G Plc as it separates from Prudential’s Asian and US operations. The Rothesay Life deal was a key plank of the separation plan. M&G needed to offload the annuity book to reduce its capital requirements.

That has freed up insurers from holding excess capital and created a new breed of specialists who can run policies more efficiently, delivering lucrative returns for their backers.

Yet in the rush to consolidate, objections from transferring policyholders have often been neglected.

Former pensions minister Baroness Altmann said it was time that changed.

“Pensions are precious and having them passed around without policyholders having any say into the quality of the company they are passed onto is a principle [which needs to be looked at],” she says.

“Maybe it would be fair to say that if you don’t want to be backed by Rothesay you can resell your annuity on the secondary market or transfer to another provider.”

In the City, the judgment raised questions over whether watchdogs have been too ready to approve such deals.

Both the Financial Conduct Authority and Prudential Regulation Authority signed off on the Prudential-Rothesay transaction, and an independent expert enlisted by the judge — respected actuary Nick Dumbreck — also said Rothesay was stronger financially than Prudential.

Justice Snowden said the transfer could have a “material disadvantage” for policyholders because Rothesay is a “relatively new entrant without an established reputation”.

Rothesay, which declined to comment, was started as an under-the-radar spin-out of Goldman Sachs but now pays the retirement incomes of 800,000 Brits. It is backed by Blackstone, Singapore’s sovereign wealth fund GIC and Barings-owner MassMutual.

The firm is led by chief executive Addy Loudiadis, the former Goldman Sachs banker considered the architect of a controversial Greek government debt deal.

Snowden said there was no certainty these companies would be backing Rothesay over the decades-long time-scale required by policy holders.

Policyholders complained in court that Rothesay did not have the age and established reputation of Prudential in the UK — run by chief executive John Foley — which were major factors that had led them to choose Pru.

The ruling has also triggered fears that wholesale annuity deals — and other “de-risking” deals — could stagnate.

“There are billions of pounds of potential portfolio-transfer transactions which potentially could be affected,” says Slaughter and May’s Jonathan Marks. “You may get a slightly ossified market where you have companies like Prudential [who are] trying to reduce their exposure and they can’t transfer readily to people who want to increase it — is that actually healthy?”

Ginn, who will be at the High Court to hear the Pru’s appeal next spring, still thinks there’s a deeper problem. “The annuity providers have all the freedom to switch and we have none,” she said. “It is an asymmetry of power between provider and customer.”

Prudential declined to comment.