England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		8 December 2006

THE CHANCELLOR:

1. This is a Part 8 claim issued by Alba Life Limited, Britannic Assurance Public Limited Company, Britannic Retirement Solutions Limited, Britannic Unit Linked Assurance Limited, Century Life Plc, Phoenix Life & Pensions Limited ("the Transferors") seeking an order under s. 111(1) of the Financial Services and Markets Act to sanction the transfer of their long term business to Phoenix Life Limited ("Phoenix") and for certain ancillary orders under s. 112 under that Act.
2. If I sanction the scheme there follow immediately petitions by five of the transferors, namely Britannic Assurance Public Limited Company, Britannic Unit Linked Assurance Limited, Century Group Limited, Century Life Plc and Phoenix Life & Pensions Limited seeking the confirmation of the court to the reduction of their capital so that their issued capital, share premium account and capital redemption reserve may better reflect their assets following the transfers.
3. The background to this matter can be shortly stated. In June 2005 the Britannic Group Plc and Resolution Life Group Limited announced a merger of the two groups. That merger was carried out by about September 2005 and Britannic Group Plc was renamed Resolution Plc. I should mention for the sake of completeness that in September 2006 the Resolution Group completed the purchase of the Life & Pension business of subsidiaries of Abbey National Group, but these proposals do not affect any of them.
4. On 31 December 2005 the transferors had between them assets and liabilities of some £22.738 billion and £19.582 billion, and Phoenix had assets and liabilities of £7.48 billion and £6.815 billion.
5. In summary, the proposed scheme involves the transfer of 3.87 million policies held by some 2.5 million policyholders and the reduction in the number of insurance companies in the group from 8 to 2. That is to be accomplished, except in the cases of Century with profits fund and BULA, by what is described as a lift of the funds of the individual companies and their drop into Phoenix as sub-funds in the enlarged fund of Phoenix.. The adoption for the enlarged fund as a whole of a stronger capital policy than that previously applied in respect of any of its parts is said to give greater protection to the policyholders of the sub-funds than they previously enjoyed as policyholders of the individual transferors.
6. In addition to the application before me, similar applications are or have been made overseas in relation to any long term business written in other EEC states. The reductions of capital are also to be approved by the courts of the country of incorporation in respect of the respective transferors who were not incorporated in England.
7. The claim form was issued on 18 July 2006. The claim is supported by, first, the report of the Actuarial Function Holder for each of the transferors. It is also supported by an Independent Expert's Report, dated 19 July 2006, of Mr Mike Arnold, approved for the purpose by the Financial Services Authority on 23 February 2006. This was succeeded in the light of subsequent events by three letters dated 31 October, 20 November and 7 December 2006, and a further report of Mr Arnold made on 1 December 2006.
8. The claim is also supported by the witness statement of Mr Ian Maidens, a director and the Group Chief Actuary of Phoenix, made on 20 July 2006. This too was followed by two further witness statements each made on 1 December 2006.
9. On 25 July 2006 Mr Registrar Simmonds made orders with regard to the notices to be given and those notices and advertisements were duly published in early 2006 in all the papers directed by the registrar. Following these advertisements there was substantial correspondence between Phoenix and a number of policyholders, some of whom have appeared on this application.
10. On 27 November 2006 the Financial Services Authority indicated that they did not propose to be represented at the hearing which took place before me on 6 and 7 December 2006. The applicants were represented by leading counsel and the following policyholders appeared in person to voice their concerns as to the propriety of the scheme, namely: Dr Malcolm Cohen, for himself and his wife, Mr Roland Baker, Mr Peter Lambert, for himself and his wife, Miss Winifred Houghton and Miss Norma Richards. I shall refer to their concerns in due course. If I approve the scheme it will take effect as from 31 December 2006.
11. It is convenient to start with a consideration of the legislative framework. Part 7 of the Financial Services and Markets Act 2000 controls the transfers of businesses of certain descriptions. Insurance business is one of them if it satisfies the conditions laid down by s. 105. It is not in dispute that the businesses and schemes with which I am concerned come within that section. Accordingly, as provided by s. 104, the scheme will have no effect unless an order of the court is made under s. 111.
12. S. 109 provides that an application for such an order must be accompanied by a report on the terms of the scheme by a person approved for the purpose by the Financial Services Authority. As I have already indicated, Mr Arnold was so approved by the Financial Services Authority on 11 February.
13. S. 111 provides:

(1) This section sets out the conditions which must be satisfied before the court may make an order under this section sanctioning an insurance business transfer scheme or a banking business transfer scheme.

(2) The court must be satisfied that-

(a) the appropriate certificates have been obtained (as to which see Parts I and II of Schedule 12);

(b) the transferee has the authorisation required (if any) to enable the business, or part, which is to be transferred to be carried on in the place to which it is to be transferred (or will have it before the scheme takes effect).

(3) The court must consider that, in all the circumstances of the case, it is appropriate to sanction the scheme."

14. I should say at the outset that I am satisfied by the voluminous evidence before me as to compliance with subsection (2) of that section. Thus, the question which now remains is whether:

"in all the circumstances of the case it is appropriate to sanction the scheme."

15. The Financial Services Authority are responsible for the regulation of insurance companies and the conduct of their business. To that end it has published a document entitled "Principle and Practice of Financial Management" ("PPFM"). PPFM applies to any person carrying on with profits insurance business. Conduct of Business Rule 6.10.5 provides:

"(1) A firm must establish and maintain the Principles and Practices of Financial Management according to which the business of its with-profits funds is conducted.

(2) A firm must make a record of its Principles and Practices of Financial Management … and retain that record for six years from the date on which it was superseded by a more up-to-date record."

16. Conduct of Business Rule 6.12.13 to 6.12.15 provide:

"COB 6.12.13: General approach to operating a with-profits fund.

Subject to COB 6.12.15 R, a firm must not change its PPFM unless that change is justified, in the reasonable opinion of the firm's governing body by the need to:

(1) respond to changes in the business or economic environment;

(2) protect the interests of policyholders; or

(3) change the firm's with-profits practices better to achieve its with-profits principles.

6.12.14: A firm should:

(1) monitor the business and economic environment continuously; and

(2) maintain procedures that will enable it to identify promptly, and bring to the attention of its senior managers or its governing body, all material legal, regulatory, tax and other developments that are relevant to the conduct of its with-profits business.

6.12.15: Notwithstanding COB 6.12.13, a firm may change its PPFM if that change:

(1) is necessary to correct an error or omission in the PPFM; or

(2) would improve the clarity or presentation of the PPFM without materially affecting its substance; or

(3) is immaterial."

17. The Conduct of Business Rules are an important part of the regulatory framework and provide the legal underpin for much of the scheme I am asked to sanction.
18. There have been a number of reported cases over the last few years dealing with applications such as this. For present purposes it is sufficient to quote from the judgment of Mr Justice Evans-Lombe in Re Axa [2001] 1AER (Comm.) 1010 at 1012 where, in relation to the statutory forerunner of s. 111, he said this:

"[The principles] are:

(1) the 1982 Act [for which I substitute the 2000 Act] confers an absolute discretion on the court whether or not to sanction a scheme but this is a discretion which must be exercised by giving due recognition to the commercial judgment entrusted by the company's contribution to its directors.

(2) The court is concerned whether a policyholder, employee or other interested person, or any group of them will be adversely affected by the scheme.

(3) This is primarily a matter of actuarial judgment involving a comparison of the security and reasonable expectations of policyholders without the scheme with what would be the result of the scheme were implemented. For the purpose of this comparison the 1982 Act assigns an important role to the independent actuary to whose report the court will give close attention.

(4) The FSA by reason of its regulatory powers can also be expected to have the necessary material and expertise to express an informed opinion on whether policyholders are likely to be adversely affected. Again the court will pay close attention to any views expressed by the FSA.

(5) That individual policyholders or groups of policyholders may be adversely affected does not mean that the scheme has to be rejected by the court. The fundamental question is whether the scheme as a whole is fair as between the interests of the different classes of persons affected.

(6) It is not the function of the court to produce what, in its view, is the best possible scheme. As between different schemes, all of which the court may deem fair, is the company's directors' choice which to pursue.

(7) Under the same principle the details of the scheme are not a matter for the court provided that the scheme as a whole is found to be fair. Thus the court will not amend the scheme because it thinks that individual provisions could be improved upon.

(8) It seems to me to follow from the above and in particular paras (2), (3) and (5) that the court, in arriving at its conclusion, should first determine what the contractual rights and reasonable expectations of policyholders were before the scheme was promulgated and then compare those with the likely result on the rights and expectations of policyholders if the scheme is put into effect."

19. The scheme is a long and complicated document. For present purposes its effect may be summarised as follows:

(1) Clause 3 provides for the transfer to Phoenix of the business (including assets) of each of the transferors immediately prior to the time and date the scheme takes effect under clause 37.1 with some immaterial exceptions;

(2) by clause 5 Phoenix becomes entitled to all the rights of the transferor under all the transferred policies;

(3) by clause 9 Phoenix gives a corresponding indemnity to the transferors;

(4) clause 10 provides that any allocation of assets or liabilities under the scheme for the purpose of establishing a policyholder's entitlement should not be taken to limit the assets available to meet the liabilities of Phoenix;

(5) clauses 11 to 16 provide for the establishment within Phoenix of sub-funds corresponding to the various businesses transferred and the allocation to such sub-funds of policies, assets and liabilities and costs and expenses; in particular clause 16 provides for the costs of the scheme to be borne by the non-profit fund of Phoenix;

(6) clause 17 provides for the maintenance of the sub-funds and of records adequate to identify their respective assets and liabilities;

(7) clauses 20, 21 and 22 provide for the merger or closure of certain named funds;

(8) clause 23 deals with the distribution of surpluses in accordance with the actuary's advice;

(9) clause 25 deals with capital support within Phoenix providing in effect that resort must be had to the surplus assets of the non-profit fund and to the shareholders funds before those of any with profits fund;

(10) clause 26 requires Phoenix to manage its affairs, and those of each with profits sub-fund in accordance with the Conduct of Business rules and not to change the relevant PPFM of a with profits fund without the consent of the FSA;

(11) Schedule 1 sets out the individual PPFMs of each sub-fund.

20. I turn now to the report of the independent expert. This is required by s.109(1) of the Financial Services and Markets Act 2000. It has been provided by Mr Mike Arnold who, as I have indicated, was approved for the purpose on 23 February 2006.
21. After setting out the background to Resolution, the various transferors and the outline to the scheme, he turns in chapter 6 to his general considerations. In that chapter he points out that the basic principle is that policyholders must be treated fairly. He adds in paragraph 6.2 and 6.3:

"In order to ensure the customers are treated fairly in the future it is necessary to establish the ways in which customers have been treated in the past. From the policyholders' perspective the successful implementation of the Scheme must be on the basis that their benefits and fair treatment are not materially adversely affected.

6.3: I need to consider the terms of the Scheme generally and how the different groups of policyholders are likely to be affected by the Scheme and, in particular:

the effect of the Scheme on the security of the policyholders' contractual rights, including the likelihood and potential effects of the insolvency of the insurer; and

the likely effects of the Scheme on the benefit expectations of policyholders."

22. In paragraph 6.10 to 6.16 he describes the risk-based capital framework introduced by the Financial Services Authority in 2004. Under this framework companies are required to assess their solvency under two regimes called Pillar I and Pillar II. An understanding of these regimes is essential to a proper consideration of the merits of this scheme and the validity or otherwise of the objections to it.
23. Accordingly I should quote paragraphs 6.11 to 6.16 in full where Mr Arnold explains the position. He says this:

6.11. Pillar I is closely aligned to the statutory or regulatory measure of solvency under the old regulatory regime where companies calculated their assets at broadly market value and their liabilities with allowance for prudence. Under Pillar I, reserves and capital requirements are calculated on a regulatory and realistic basis. Under this new regulatory regime, in addition to holding capital to cover these liabilities, companies must hold further amounts of capital to cover themselves against adverse deviations in view to experience and one off shocks to investment performance - called the CRR.

6.12. The Long-Term Insurance Capital Requirement (LTICR), the Resilient Capital Requirement (RCR) and the With-Profits Insurance Capital Component (WPICC) are elements of the CRR, specifically mentioned later in this report.

6.13. The capital that must be held under Pillar II is an amount set by the Individual Capital Assessment (ICA) which is the company's own assessment of its capital requirements. Pillar II is intended to provide a more realistic and complete view of the risks to which the company is exposed and to provide a framework within which the company should be managed in the future.

6.14. Under Section 2.3 of the Integrated Prudential Sourcebook of the FSA Handbook, the FSA requires firms, when preparing their ICA, to identify the major risks they face and, where capital is appropriate to mitigate those risks, to quantify how much (and what type of) capital is appropriate. The FSA expects firms to conduct stress tests and scenario analyses in respect of each risk. The stress tests and scenario analyses, together with the assumptions used, should be documented, and along with the results, submitted to the FSA as the ICA - the company is required not to publish its Pillar II capital requirement.

6.15. The FSA will review the ICA and may prescribe an additional amount of capital that must be held by the firm in addition to the ICA - this additional amount of capital is called Individual Capital Guidance (ICG).

6.16. For the ICA, a firm needs to assess the amount of capital it needs to hold to remain able to meet its liabilities as they fall due in all but the most extreme circumstances. The FSA has indicated that ICG will be given, taking into consideration capital resources consistent with a 99.5% confidence level that the firm will be able to meet its liabilities over a one year timeframe or, if appropriate to the firm's business, an equivalent lower confidence level over a longer timeframe."

24. In substance, therefore, the retention of capital equal to a company's Individual Capital Assessment should be sufficient to meet its liabilities as they fall due in all but the most extreme (that is odds of 200-1 against or longer) circumstances. Anything in excess of that is an extra margin of safety.
25. In chapter 7 Mr Arnold describes the Phoenix Capital Policy ("PCP"). It includes, in respect of a with profits fund, a requirement that the company shall hold capital of in effect not less than 140 per cent of its ICA, and in the case of a non-profit fund 110 per cent of its ICA.
26. In paragraphs 7.5 to 7.10 Mr Arnold said this:

"7.5. The percentages used above in the various tests (eg 140% and 110%) were derived from internally derived stress tests applied to the Pillar II ICAs for the different funds within the life companies. The percentages were chosen so that holding capital at the level required by the PCP would ensure that, even in adversely stressed conditions, Phoenix would still be able to meets its regulatory Pillar I and Pillar II capital requirements.

7.6. From my discussions with Phoenix management I understand that the Phoenix Board will regularly review the PCP and reserves the right to change the PCP in the future - both the percentages and the form of the test - in order that the PCP continues to meet the requirements of the Phoenix Board in relation to capital sufficiency in internally specified adverse scenarios.

7.7. It is expected that an excess above the greatest capital requirement from the three tests above will be maintained to ensure that the tests are covered despite daily fluctuations.

7.8. Any capital in the Phoenix [Shareholders' Fund] or surplus in the Non-Profit Fund, over and above that required to satisfy the PCP, can be transferred to shareholders or used for other purposes, subject to the usual legal restrictions regarding distributions. For the avoidance of doubt this does not include the undistributed surplus of the with-profits funds excepting that part distributed when bonuses are granted to policyholders.

7.9. Therefore, the excessive assets held in the Non-Profit Fund and the Phoenix [Shareholders' Fund] above that required under the PCP will be of limited significance to policyholders. Indeed the financial projections produced by Phoenix management to illustrate the expected position immediately after the Effective Date show that there will be an excess of assets in the Non-Profit Fund and Phoenix [Shareholders' Fund] over those required by the PCP. However, I do not rely on this excess in making my conclusions regarding this Scheme as I see no reason why, after the Effective Date, a significant proportion of it could not be transferred across to shareholders (subject to the usual legal restrictions).

7.10. Currently each life company concerned with the Scheme has its own capital policy which operates at a fund level. After the Scheme, the Phoenix Board will ensure that all the funds in Phoenix will satisfy the PCP and, in general, for each fund, the level of capital that is required to be held under the PCP is expected to be higher than that required to be held under the current capital policies of the companies concerned with the Scheme."

27. In chapter 8 Mr Arnold returned to the issue of fair treatment of with profits policyholders. He set out tables of figures showing the financial position both before and after the scheme is effected. He then considered the PPFMs after the scheme in considerable detail.
28. In chapter 9 Mr Arnold considered the "contagion risk" for the with profits funds. This somewhat alarmist expression is used to denote the risk associated with the fact that the various businesses being transferred will thereby lose the insulation from the liabilities of the others they now enjoy as separate corporate bodies. The independent expert accepted the existence of such a risk and considered that the question for him was whether the scheme contained sufficient suitable measures to mitigate the risk and reduce it to a reasonable level.
29. He then referred at some length to the Phoenix Capital Policy. In paragraphs 9.8 and 9.9 he referred to two advantages to be derived from the transfers of the individual funds into a single fund. They are respectively the enlargement of the fund available to meet the liabilities of each sub-fund and the increase in surplus arising from a pooling of risk in the non-profit fund.
30. He referred to the Phoenix ICA in paragraphs 9.13 to 9.18 in these terms:

"9.13. This identification of the capital to be held by the firm to mitigate its own risks is called the Pillar II ICA. The FSA will review the ICA and may prescribe an additional amount of capital that must be held by the firm in addition to the ICA - this additional amount is called ICG.

9.14. The FSA has indicated that ICG will be taking into consideration capital resources consistent with a 99.5% confidence level that the firm will be able to meets its liabilities as they fall due over a one year timeframe, or, if appropriate to the firm's business, a lower confidence level over a longer timeframe.

9.15. The Phoenix ICA calculation will be determined assuming surplus assets in any with-profits fund are strictly non-transferrable to either the Non-Profit Fund or the other with-profits funds.

9.16. After the Effective Date Phoenix will, under the PCP, in respect of each with-profits fund hold at least enough capital to cover the higher of :

140% of the ICA; and

110% of the ICA plus ICG.

9.17. Under the proposed PCP therefore, Phoenix will be holding capital in respect of each with-profits fund to cover, with a probability of more than 99.5 per cent over a one-year timeframe, the liabilities of that fund.

9.18. This capital is therefore in excess of that required by the FSA, thereby reducing the probability that Phoenix will be unable to meet its liabilities as they fall due to less than 0.5% over a one year timeframe."

31. In paragraph 9.20 Mr Arnold noted that Resolution Life has access to the capital markets but is under no obligation to provide funds to Phoenix. After referring to Alba's non-exposure to equities, he concluded in paragraphs 9.23 and 9.24:

"9.23. In my view, surplus assets in the with-profits funds, on a realistic basis, will only be called upon to support any other fund within Phoenix if Phoenix is at a regulatory intervention point anyway and/or Phoenix is insolvent on a Companies Act basis since at this point the fund boundaries would break down.

9.24. I therefore conclude that the risk from contagion that will be introduced by the Scheme will be mitigated to a level that will not lead to a material reduction in the security of policyholder benefits."

32. In chapter 10 Mr Arnold considered the contagion risk from the point of view of non-profit funds. His conclusions set out in paragraphs 10.19 to 10.21 are as follows:

" 10.19. I am satisfied that the level of capital support that will be available in the Non-Profit Fund (taking into account the potential for calls for support from the with-profit funds) will not lead to a material reduction in the security for the benefits of the non-profit policyholders that will be in that fund after the Effective Date.

10.20. I am satisfied that the breakdown of the non-profit fund boundaries will not have a material adverse effect on the security of the benefits of the non-profit policyholders that will be in the Non-Profit Fund after the Effective Date.

10.21 From my discussions with Phoenix management, the Phoenix Board has no current intention to undertake a significant rationalisation of the linked funds in Phoenix after the Scheme. That given, even if a rationalisation were to occur, I am satisfied that the benefit expectations of the linked policyholders of BA and BRS, BULA, Century, PLP and Phoenix will not be materially adversely affected by the implementation of the Scheme."

33. In chapter 11 Mr Arnold considered the future governance of Phoenix and, in particular, its intention to have a single with profits committee constituted as described. In paragraph 11.21 he concluded:

"I am satisfied that the intended arrangements for the future governance of Phoenix will provide adequate protection for the security of policyholder benefits, the benefit expectations and fair treatment of policyholders of Phoenix. Whilst I recognise that the precise governance arrangements could change in the future, I am satisfied that any material changes could only be carried out within the constraints of the FSA framework of rules and principles and I am satisfied that that will provide an adequate safeguard."

34. The remaining chapters deal with new business, tax, the individual position of each transferor, and the position of Phoenix. The independent expert's overall conclusion is contained in chapter 21 in these terms:

"In summary, in my opinion:

The security of the benefits of the policyholders of BA, Alba, BRS, BULA, Century, Phoenix and PLP will not be materially adversely affected by the implementation of the scheme on the Effective Date;

The equitable treatment and reasonable benefit expectations of the policyholders of BA, Alba, BRS, BULA and Century, Phoenix and PLP will not be materially adversely affected by the implementation of the Scheme on the Effective Date; and

In particular, the benefit expectations of the with-profits policyholders of BA, Alba, BULA, Century, Phoenix and PLP will not be materially adversely affected by the implementation of the Scheme and (so far as those provisions did not previously apply) the introduction of provisions for their conversion to non-profit policies. BRS has no with-profits policyholders."

35. The appendices to his report contain the terms of reference given to Mr Arnold, a description of the scope of the work he undertook, what is described as selected financial material as at 31 December 2005 and a list of the information he considered.
36. I have already mentioned the three letters and supplemental report put in by Mr Arnold to deal with certain specific matters, I but do not need to refer to them any further at this stage.
37. Counsel for the applicants emphasises that the court is not concerned with whether the scheme put forward is the best scheme which could be devised for the benefit of the policyholders, but with the different questions of whether the scheme is fair to different classes of policyholder or whether they would be adversely affected by it. He submits that this scheme is fair to the various classes of policyholder and that they will not be adversely affected by it. He contends that the scheme is one which is, in the words of s. 111(3), "In all the circumstances appropriate to sanction".
38. He summarises his reasons for those submissions in paragraph 16.1 of his written argument in the following terms:

(1) the scheme gives effect to a reasonable commercial objective;

(2) the independent expert concludes that the scheme will not materially reduce the security or benefit expectations of any group of policyholders;

(3) The FSA, having been served with the relevant materials, did not appear at the hearing;

(4) The scheme is fully explained in the documents made available to policyholders in accordance with the court's order;

(5) no sufficient grounds for objection have been raised;

(6) all statutory requirements have been complied with;

(7) the ancillary orders are within the court's jurisdiction and there is no reason not to make the orders which are commercially desirable.

39. I accept the submissions made in paragraphs (1), (2), (6) and (7). It is the case that the FSA did not appear at the hearing, but I understand that it seldom does. I do not think that this is a factor on which I should place any weight.
40. I also accept that the applicants did their best to explain the nature and effect of the scheme to policyholders, but in a scheme of this complexity it must be doubtful whether the relative lack of reaction from them is due to a mute acceptance or baffled incomprehension.
41. I turn to consider the objections which have been raised. The principal objector was Dr Malcolm Cohen, on behalf of himself and Dr Hedy Cohen. It is convenient to deal with the points made by the other objectors who appeared before me first. They are (1) Miss Norma May Richards, (2) Miss Winifred Houghton, (3) Mr Peter Lambert, and (4) Mr Roland Baker.
42. Miss Richards, a policyholder in Britannic Unit Linked Assurance Limited, wrote on 1 September 2006 to the managing director of Britannic complaining that the policy which she originally took out with Cornhill had been transferred to Britannic Life and was now proposed to be further transferred to Phoenix Life. She asked that their "terms and conditions be overruled" and for a return of the premium she had paid since 1998 because of these various changes.
43. A substantive answer to her letter was sent by the head of the Actuarial Life Division of Britannic on 13 October 2006. He emphasised that these changes did not change the terms and conditions of her policy or payment of the benefits to which she is entitled. He pointed out that the scheme was subject to the independent scrutiny of Mr Arnold and required the sanction of the court if it was to become effective.
44. Miss Richards repeated her concerns in her oral submissions to me. I can well understand them. But the fact is that the scheme will not change the terms of her policy, only the identity of the insurer. Her entitlement to benefit and the security for it is not, in the opinion of Mr Arnold, materially prejudiced. I see nothing in the written or oral submissions of Miss Richards to justify withholding the court's sanction to the scheme.
45. Miss Houghton has a policy with Alba Life Limited. As she told me, she is 81 years old and in receipt of benefit under her policy. It seems that at the same time as Alba was communicating the essence of the scheme to her and other policyholders another arm of Alba was seeking confirmation of her continued existence, failing which, so they said, her benefit would be stopped. She was outraged at this latter communication.
46. In a later conversation with an official at Alba she confirmed that she did not object to the proposed transfer provided that her benefits were properly protected, only the treatment she had received. She considered that the personnel at Alba had not treated her with proper respect. Seemingly she had already complained to the Financial Ombudsman concerning the treatment of closed life funds.
47. Again, I can well understand the feelings of Miss Houghton and her scepticism regarding the treatment of closed life funds, but I can see nothing in the transcript of her telephone conversation or in her oral observations to me to justify me in withholding the court's sanction to this scheme.
48. Mr Lambert and his wife have had policies with Royal which was taken over successively by Sun Alliance and Phoenix and with Century Life. He wrote to the applicants' solicitors on behalf of himself and his wife on 27 October 2006 indicating that he would attend the hearing "to lodge my objection on the basis of personal experience of incompetency and an apparent lack of funds to justify this action". At the hearing he produced a joint statement of himself and his wife. With regard to the Royal policy he was concerned at the apparent decline in its value. In the case of the Century policy he referred to the independent expert's view that his interests would not be "materially affected". He observed that a non-material change to him when aggregated with similar non-material changes to all other policyholders could add up to a substantial benefit to the shareholders in the applicants. He suggested that:

"It would be better for everyone if all these companies were to put their respective companies in a profitable position with sound investments before amalgamation again hides the weaknesses that exist."

49. The problem that I have with this submission is that Mr Lambert did not identify any existing weakness which was liable to be hidden by the scheme or was otherwise relevant to it. Again, I see nothing in Mr Lambert's observations to justify me in withholding the court's sanction to the scheme.
50. Mr Roland Baker is a policyholder with Phoenix Life & Pensions Limited, having originally taken it out with Royal. It matures in June 2008. He wrote to Phoenix on 20 November 2006 expressing his concern at the existing cut in the maturity value of his policy and the "contagion risk" his fund would sustain, given that the original Royal fund was, according to Mr Baker, the strongest legacy fund in the merger. On 24 November 2006 the head of actuarial at Phoenix replied to Mr Baker at some length in an effort to assuage his concerns.
51. Mr Baker wrote again on 30 November to which he received a length reply from Mr Maidens, the Group Chief Actuary, dated 4 December. At the hearing Mr Baker made further observations on those aspects of the scheme which concerned him most.
52. First, whilst he did not criticise the ability or integrity of Mr Arnold, he did suggest that the pool from which the independent experts are drawn is too limited. Second, he pointed out that the scheme imposed no requirement on the applicants actually to apply the PCP as opposed to the capital policies of the sub-funds. Third, he was concerned that the applicant should be obliged to implement their intention, as recorded in paragraph 11.6 of the independent expert's report, to set up a "with profits committee" as described in succeeding paragraphs of that report.
53. The second point made by Mr Baker was a good one. There was no requirement in the scheme to implement the PCP. Indeed it was not even identified. The applicants accepted the force of his objection and have agreed that the PCP shall be verified by affidavit or witness statement and that they will undertake to implement it in accordance with the Conduct of Business rules.
54. In relation to Mr Baker's third point, counsel for the applicants reiterated their intention to set up the committee as described by Mr Arnold. I see no reason not to accept this assurance.
55. With regard to the first point, counsel for the applicants told me that Mr Arnold had been concerned in the scheme of arrangement relating to Equitable Life. He suggested, and I agree, that this did not in any way disqualify him from acting as the independent expert in this case.
56. Accordingly, Mr Baker's intervention was valuable in pointing out a lacuna in the scheme which will be made good. But his remaining points would not justify me in withholding the sanction of the court.
57. Dr Malcolm Cohen disclaimed any actuarial or legal expertise. He described himself as a businessman. He submitted on behalf of himself and Dr Hedy Cohen in November 2006 a 17-page skeleton argument, followed by a supplemental skeleton argument of a further 6 pages. These documents would have done credit to experienced counsel specialising in this field. His oral submissions were of equal value.
58. Policyholders of all the applicants have reason to be grateful to Dr Cohen for highlighting matters of concern. Given the welter of paper and detail his was a masterly performance.
59. The validity of two of his points was accepted by the applicants. It is convenient therefore to deal with them at the outset. The first related to the current capital policy of Britannic Assurance Plc. Paragraph 3.6 of the report of the actuarial function holder on the impact of the scheme it was stated that the current capital policy meant that in practice it held sufficient capital to cover the greater of:

"200 per cent of its Capital Resources Requirement ('CRR') less any with profits insurance capital component ('WPICC')."

60. In paragraph 33 of his first skeleton argument Dr Cohen pointed out that any such policy would be more onerous than that to be adopted by Phoenix not, as the proponents in the scheme claimed, less so. In his third witness statement Mr Maidens sated that until December 2005 Britannic had no capital policy at all and that the PCP was not weaker than that then adopted. At the hearing Dr Cohen demonstrated by reference to detailed tables set out in the independent expert's report that something must be wrong.
61. And so it proved. On the morning of the second day Counsel for the applicants produced a third witness statement of Mr Maidens. He acknowledged that there was a mistake and that the mistake arose from the terms of paragraph 3.6 of the report of the actuarial function holder on the impact of the scheme. It should have read:

"Pillar I capital requirements plus a margin of 200 per cent of the LDICR less any WPICC."

62. It is unnecessary to go into what this formula means. Suffice it to say that when properly expressed it does show that the PCP will be stronger than the strongest of any of the transferors capital policies, including Britannic, prior to the transfer. The mistake was drawn to the attention of Mr Arnold. In his letter of 7 December 2006 he described his discussions with the Phoenix management and a BA valuation report produced to him in which the BA capital policy was correctly described and it continued at paragraph 5 and 6 of his letter:

"5. I can confirm that, based on those discussions of the BA Valuation Report, I am satisfied that the current capital policy of BA is substantially the same and the PCP and that, in forming my views for the purposes of my Report and my Supplemental Report, I did not rely on the description of BA's capital policy in paragraph 3.6 of the AFH Report (which refers to the holding of sufficient capital to cover 200% of its Capital Resources Requirement, less any With-Profits Insurance Capital Component rather than sufficient capital to cover 200% of its Long Term Insurance Capital Requirement less any With-Profits Insurance Capital Component).

6. I can accordingly confirm that my conclusions as to the effects of the Scheme are not affected by the comments of Drs Cohen at paragraph 33 of their skeleton."

Thus although Dr Cohen had uncovered a mistake, it was not one which had any materiality to Mr Arnold's conclusion.

63. Dr Cohen also objected to clause 16 of the scheme whereunder the substantial costs, some £12 million, were to be charged to the non-profit fund. He accepted that, as the evidence showed, it is likely that this fund may be distributed to the members of the companies, but objected to it being treated as if it had been before any such distribution had been made. The applicants maintained that this liability had been taken into account in the formulation of the PCP and pointed to paragraph 8.5 of the independent expert's report where he noted that the estimated costs had been taken account of.
64. In my view there was substance in this objection. In the event, counsel for the applicants amended clause 16 of the scheme to substitute "shareholders fund" for "non-profit fund". With that amendment Dr Cohen's reasonable objection is fully met.
65. I turn then to the more debatable objections of Dr Cohen. As a policyholder of Alba he was concerned about the capital support available after the scheme was effected when compared with that in place before. The scheme is put forward on the basis that the assets available to meet the liabilities of Alba will be increased. This was disputed by Dr Cohen on the basis of figures to be found in the tables on pages 30 and 106 of the independent expert's report. He compared the figures of "excess assets after CRR…293" in the former with "excess assets…248" in the latter, the figures being £million. As he correctly pointed out, the former is bigger than the latter, thereby apparently falsifying the basis on which the scheme was propounded.
66. As counsel for the applicants pointed out in his reply, Dr Cohen was making a false comparison in that one figure was after CRR and the other was not. If the correct comparisons are made then the relevant figures are after CRR 293 and 55.8 and excess assets 3.228 and 248, in each case £million. The former figures are obviously larger than the latter, thereby confirming the basis on which the scheme is propounded.
67. The second capital support objection was to the effect that before the scheme RLL was legally obliged to support Alba, but after the scheme it is not. That this is so was accepted by counsel for the applicants but, he submitted, it is immaterial because the assets available to answer the liabilities of Alba were, because of PCP, substantially greater. The riposte of Dr Cohen was to the effect that: true it is that the available assets are larger, but they have to discharge a larger pool of liabilities.
68. In the end of the day the question for me is whether these considerations which have some force are sufficient to undermine the opinions expressed by the independent expert in paragraphs 7.10, 9.24, 10.20 and 20.1 of his report, which I have already read. In my judgment they are not. The existence of a legal liability is only material in this context if it likely to be called upon. The PCP is designed to provide for sufficient capital resource to ensure that there would be no occasion to do so.
69. Dr Cohen also made two points of more limited application relating to longevity and equity risk. The former arises from the terms of paragraphs 35 and 36 of Mr Maidens third witness statement. In the former he pointed out that because of the composition of its business Alba's existing longevity risk, by which is meant the likelihood of an annuitant living longer than expected, is 30.4 per cent. After the transfer the longevity risk of Phoenix is only 17.1 per cent. Dr Cohen suggested that this contention was inconsistent with the preservation of separate sub-funds. I do not agree.
70. It is quite consistent with the maintenance of separate sub-funds that the overall risk profile of Phoenix should change. Such change leads to a reduction in the overall longevity risk and so to a strengthening in the capital support available to Alba.
71. Alba has no equity investments. Consequently it is not at present exposed to loss if the equity market collapses. After the transfers Alba will be exposed to the equity risk of others. These are, in summary, the contentions of Dr Cohen. Theoretically he is right, but this is merely an aspect of the contagion risk point with which Mr Arnold has dealt at length. But, as Mr Maidens pointed out at paragraph 41 of his third witness statement, the risk does not exist in practice. The exposure only exists in relation to assets surplus to the liabilities of Alba. Alba has no surplus assets. Accordingly, I do not see any substance in either of these points.
72. In concluding his oral submissions Dr Cohen emphasised that he did not impugn the ability or integrity of Mr Arnold. Like Mr Baker, he was concerned at the limited pool of experts and their inevitable proximity to the companies and city institutions who instruct them. He emphasised that this scheme affects 2.5 million policyholders who therefore rely on this court to give the proposals anxious scrutiny.
73. I remind myself that the question I have to determine is whether I am satisfied that in all the circumstances of the case it is appropriate to sanction this scheme. In approaching that question, I have to consider whether the scheme is fair to the various classes of policyholder. I am not required to determine whether it is for their positive benefit, nor with whether a better scheme from their point of view might be devised.
74. Given the question, I answer it in the affirmative. As counsel for the applicants correctly points out, the Phoenix capital policy gives greater backing to the liabilities of the sub-funds than the regulatory regime now requires. That is an advantage for the policyholders provided at the expense of the shareholders. There ought to be efficiency savings too, though the evidence is silent as to whether any such savings are likely to enure for the benefit of the policyholders. In addition, some sub-funds will benefit from an injection of further assets, and from mergers or closure.
75. I appreciate the fears and concerns of the policyholders as expressed to this court and in the correspondence brought to my attention. Insofar as they revealed three substantial objections, one from Mr Baker and two from Dr Cohen, they have been explained or otherwise dealt with. What remains is not enough for me to conclude that it would be inappropriate to sanction this scheme.
76. I remain concerned at the procedure by which the court is required to perform the task placed on it by s. 111 of the Financial Services and Management Act. As Mr Justice Briggs rightly observed in Re Pearl Assurance [2006] EWHC 2291 at 6 this is not a rubber stamp jurisdiction. The legislation makes provision for an independent expert on whose views inevitably the court will place great weight. But experts are not infallible. In complicated actuarial and financial fields, such as this, there is often ample room for more than one opinion. Equally, counsel are well aware of and fully perform their duty to the court to bring to its attention all relevant matters, whichever side they favour.
77. None of these considerations is any substitute for the appearance of a party with the requisite expertise and experience, and the interest or duty critically to examine the scheme being propounded. It seems to me that this was the role that Parliament, when enacting in s.110(a) of the Financial Services and Management Act, expected the Financial Services Authority to perform. I note that that appears also to have been the view of Evans-Lombe J in paragraph 4 from the passage I quoted, appearing on page 1013 of his judgment in Re AXA Equity and Law.
78. I understand from counsel for the applicants, who has great experience in this field, that only occasionally does the FSA appear at the hearing. In this case they informed the solicitors for the applicants that they did not intend to do so on 27 November. I do not know whether they considered, and with what consequence if they did, either of the two skeleton arguments submitted by Dr Cohen. Nor did they hear the oral submissions of Mr Baker and Dr Cohen. Thus it is that I do not place any weight, as counsel for the applicant asked me to do, on the fact that the FSA did not appear on the hearing. Rather, I would invite the FSA to reconsider its apparent policy of not appearing on applications such as this.
79. For all these reasons I will grant the relief sought by the part 8 claim, subject to the various alterations and additions to which I have referred, and proceed to hear the various consequential petitions to sanction the reduction of the capital of the five applicants in question.