Millions of people who invest their pension pots in annuities can ultimately rely on the law to guarantee their financial security. In a case on point, the High Court overruled financial regulators and refused to sanction the transfer of about 370,000 annuity policies from one insurance company to another.
The policies had all been taken out with a long-established insurer (insurer 1) which, with a view to reducing its regulatory capital requirements, wished to transfer them to a relatively recent entrant into the annuities market (insurer 2). The scheme involved no change to the policies' terms and had been approved following considerable analysis by an independent expert, the Prudential Regulation Authority and the Financial Conduct Authority.
After insurer 1 sought the Court's approval to the scheme under Part VII of the Financial Services and Markets Act 2000, a number of policyholders objected. They argued that they had selected insurer 1 as their annuity provider due to its long history and established reputation. The large group of which it formed part could be relied on to provide it with financial support if the need arose. Having no right to encash or transfer their policies, policyholders had assumed that insurer 1 was under a reciprocal obligation to honour their policies for as long as they lived.
In ruling on the matter, the Court found that insurer 1 had made no contractual promise to policyholders that their annuities would never be transferred to another provider. There was also no statutory bar on such transfers. Policyholders had, however, reasonably assumed that insurer 1 would not seek to offload the policies and would remain committed to them for life.
In refusing to sanction the scheme, the Court noted that the impact on policyholders of the transfer of annuities is very different from that of the transfer of general insurance policies. The former involved investment of very substantial sums and, if the scheme went ahead, the policyholders would be involuntarily bound to insurer 2 for the rest of their lives. Having entrusted their pension pots to insurer 1, they could not change that choice and had understandably assumed that it would be insurer 1, and none other, that would provide them with a lifelong annuity income.
The Court expressed no views as to the suitability of insurer 2 as an annuity provider and acknowledged that the conclusions of the expert and the regulators carried substantial weight. However, given the duration of the policies, the possibility of either insurer 1 or 2 requiring external financial support could not be viewed as fanciful. Insurer 1 would in such circumstances be likely to benefit from the very substantial resources of the wider group, but no equivalent measure of comfort was available in relation to insurer 2.
It has been announced that the insurers intend to appeal the decision, so this may not be the end of the matter.