Corporate Governance
UAG SchemeUAG scheme changes
Summary of Changes to the UAG Scheme
Updated: 15 December 2009
1. Introduction and Background
Royal London has undertaken a review of the investment strategy it applies to the Royal London Main Fund (RL Main Fund). Amongst the options it has considered is a proposal (the Proposal) to group the liabilities of the RL Main Fund into separate pools and determine the investment strategy for each pool separately. This is known as hypothecation. A final decision on the Proposal has not yet been taken, but it is likely that the Proposal will be implemented. If the Proposal is implemented, further information will follow in the first quarter of 2010.
Section 2.6 of the Principles and Practices of Financial management of the RL Main Fund (the PPFM) specifically allows the introduction of a hypothecation investment strategy, such as the Proposal. Here is a copy of Royal London PPFM.
The transfer scheme under which the long term insurance business of the United Assurance Group (UAG) was transferred to Royal London in 2000 (the UAG Scheme) envisages and allows a hypothecation investment strategy for the affected asset shares, but did not provide the flexibility in the operation of the Additional Accounts (see description in section 2) necessary to implement the Proposal. The UAG Scheme has been amended to provide such flexibility.
The UAG Scheme provides that, if its terms prove "impossible, impracticable or inequitable to implement", then Royal London may decide to apply to the High Court for consent to amend the terms of the UAG Scheme, provided that:
- the Financial Services Authority (FSA), is notified of the High Court hearing and has the right to be heard at the hearing; and
- an independent actuary certifies that in his opinion, the amendments will not adversely affect the reasonable expectations of Royal London policyholders whose policies were transferred by the UAG Scheme.
A copy of the independent actuary's certificate in relation to the amendments to the UAG Scheme confirming that, in the independent actuary's opinion, the amendments to the UAG Scheme will not adversely affect the reasonable expectations of Royal London policyholders whose policies were transferred under the UAG Scheme is available here for information only. The independent actuary's report also contains the full text of the amendments to the UAG Scheme.
The Board of Royal London concluded that continued implementation of the UAG Scheme would have become impossible if the Proposal were implemented. As a result, the Board applied to the High Court to make some minor amendments to the UAG Scheme.
The next section of this document summarises and explains the changes to the UAG Scheme approved by the High Court.
2. Changes to the UAG Scheme
The UAG Scheme established three accounts to hold the assets which were not attributable to the asset shares of three categories of transferring policyholders (the Refuge Assurance industrial branch, the United Friendly industrial branch and the United Friendly ordinary branch policyholders) at the time of the transfer of the UAG business to Royal London in 2000 (the Additional Accounts). Prior to the amendments being made the UAG Scheme provided that the rate of investment return credited to each Additional Account would be the same as the investment return credited to the asset shares of the policies in each corresponding sub-fund. However, following implementation of the Proposal, it is: (a) very likely that there will be more than one rate of investment return for the asset shares of the policies in the corresponding sub-funds; and (b) possible that the assets allocated to the Additional Accounts will not be held in the same proportions as those backing the asset shares of the policies in the corresponding sub-funds.
The changes to the UAG Scheme allow Royal London to determine the rate of investment return to be credited to the Additional Accounts by the same process, and with the same controls, as apply to Royal London's determination of the rate of return to be attributed to asset shares but with reference to the rate of return achieved on the assets allocated to the Additional Accounts. This change allows the Proposal to be implemented fairly.
Apart from the minor changes made in connection with the rate of return to be credited to the Additional Accounts, no other changes have been made to the UAG Scheme. A copy of the order of the High Court approving the changes to the UAG Scheme is available here.
The changes to the UAG Scheme are independent of the Proposal. The terms of any Proposal will be discussed with the FSA before it is implemented. If Royal London decides to implement the Proposal it will write to all affected customers in the first quarter of 2010 with further information.