England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		16/10/2009

Mr Justice Norris :

1. On 18 September 2009 I sanctioned a transfer of insurance business concerning the affairs of the Commercial Union Life Assurance Company Limited, CGNU Life Assurance Limited, Norwich Union Life (RBS) Limited and Aviva Life & Pensions UK Limited. I now give at greater length my reasons for doing so.
2. The General Life Assurance Company was constituted by a Deed of Settlement in May 1838. In 1927 it became incorporated as an unlimited company, and subsequently reregistered as a limited company. From 1985 it was known as General Accident Life Assurance Limited. It has conducted the business of life assurance in all its branches, including the issue of "with profits" policies, for which purpose it maintained a "with profits fund". It changed its name in 1998 following the merger of the General Accident and Commercial Union groupsand is now known as CGNU Life Assurance Limited ("CGNU").
3. The British General Insurance Company Limited was incorporated in January 1904 and in 1975 changed its name to Commercial Union Life Assurance Company Limited ("CULAC"). It has conducted the business of insurance in all its branches, including the issue of "with profits" life assurance policies, for which purpose it too has maintained a "with profits fund". After the 1998 merger the "with profits" business written by CGNU has been reassured on a quota share basis to CULAC in order to make efficient use of the available capital.
4. Provident Mutual Managed Pension Funds Limited was incorporated in 1973. As part of a joint venture arrangement it offered "with-profit" bond policies to customers of the National Westminster Bank, Royal Bank of Scotland and Ulster Bank, which offered access to the established CGNU and CULAC "with profits" funds through reassurance arrangements. The reassurance treaty expressly states that as a matter of general principle the reassured policies will be treated in the same way as policies directly written by CGNU and CULAC. In 2001 it changed its name to Norwich Union Life (RBS) Limited ("NUL (RBS)"). It has not written any new business directly since February 2005.
5. In 2000 there was a merger between CGU plc and Norwich Union plc. The merged group is now called "Aviva". Norwich Union plc had itself come about through the demutualisation of the Norwich Union Life Insurance Society in 1997. As part of the demutualisation process there was established Norwich Union Life & Pensions Limited ("NULAP") (now known as Aviva Life & Pensions Limited) to conduct the long-term insurance business. In 2005 Aviva reorganised part of its long-term insurance business (relating particularly to non-profit business) by an insurance business transfer scheme now known as "the NULAP scheme".
6. Aviva is now engaged in a further programme of rationalisation and simplification of its corporate structure resulting from the merger. As part of this restructuring it is proposed that the whole of the long-term insurance business carried on by CGNU, CULAC and NUL (RBS) should be transferred to NULAP under the provisions of Part VII of the Financial Services and Markets Act 2000 ("FSMA"). The opportunity is being taken to seek a re-attribution of the inherited estates of CGNU and CULAC. This latter feature is not essential to the transfer of the insurance business. I therefore have before me for consideration (a) an insurance business transfer scheme including a re-attribution of the inherited estates ("the Main Scheme"); and (b) an insurance business transfer scheme simpliciter (" the Alternative Scheme"). The sanction of either of these Schemes would mean that part of the NULAP Scheme had been superseded, and I am also asked to sanction consequential amendment of that scheme.
7. By section 111 of FSMA the Court must be satisfied that the proposed scheme is an "insurance business transfer scheme" within the Act, that the relevant jurisdictional criteria set out in Schedule 12 FSMA have been satisfied, and that "in all the circumstances of the case it is appropriate to sanction the scheme". (Save for one minor point with which I will deal at the end of this judgment) the only contention in this case relates to the third of those requirements. Beyond recording that, having considered the evidence, I am satisfied that the first two requirements are indeed met I will therefore say no more about them.
8. The question for my decision is accordingly whether it is in all the circumstances of the case appropriate to sanction the Main Scheme or the Alternative Scheme. It is important to state this at the outset, in view of some of the objections which have been raised before me. It is not my function to conduct an enquiry into the former conduct of the business of CGNU, CULAC or NUL (RBS) to see whether in the past "with profits" bonus declarations could have been at a higher level or whether their reserves could have been dealt with differently. It is not my function to conduct an enquiry into individual cases to examine the circumstances in which expectations entertained when the policies were taken out (particularly mortgage endowment policies) have come to be disappointed. It is not my function to direct the boards of the relevant companies (to whom the conduct of the companies' affairs have been entrusted) to embark upon any particular course of action, by undertaking a distribution or otherwise. It is not my function to tinker with either the Main Scheme or the Alternative Scheme so as to alter individual provisions in favour of particular classes of policyholder. It is certainly not my function to consider the conduct of "with profits" business generally within the industry and, upon the narrow evidential basis relating to the facts of this case and in the light of the various sectional arguments advanced in this particular case, to attempt to influence any current public debate, or to support or undermine any particular campaign. Indeed, for anyone to seek to use this hearing for that purpose would be to abuse the Court process.
9. It is my function to judge whether, in all the circumstances of the case, the Main Scheme or the Alternative Scheme is as a whole "appropriate", that is to say promoted for a proper purpose and operating fairly as between those classes of person whose rights are affected by it. This does not require me to be satisfied that no better scheme could be devised; nor does it require me to assess whether the present schemes might be improved by further negotiation. Such has long been the law: see the convenient summary of the relevant principles and of their origin by Evans-Lombe J in Re Axa Equity & Law life Assurance Society [200]1 All ER (Comm) 1010 at 1011- 1012. The decision is in a sense a "binary" one. That said, if a judge forms a clear view that a particular provision or group of provisions is manifestly unsatisfactory and is of such fundamental importance that sanction might be withheld on that account, it would plainly be right to draw that matter to the attention of the applicants and afford the opportunity for amendment. I have borne that possibility in mind when considering this case.
10. To assist the Court in its consideration of an insurance business transfer scheme FSMA s.109 provides that the application must be accompanied by the report of an independent expert, appearing to the FSA to have the necessary skills and approved for this specific purpose by the FSA. As was pointed out by Pumphrey J in Re Eagle Star Insurance Co Limited [2006] EWHC 1850 at para. [13], although such a report shares certain features with experts' reports prepared in inter partes litigation, that is not its real nature. The report is intended to be, and the FSA takes care to ensure that it is, an objective assessment of the scheme by a highly skilled person to whom the importance of retaining their independence and objectivity has been repeatedly emphasised. The independent expert in this case is Mr Dumbreck FIA (Past President of the Institute of Actuaries), a highly experienced actuary who has acted as independent expert (or discharged the predecessor role of "independent actuary") in a number of other schemes involving the transfer of long-term insurance business. He has produced a substantial detailed Report and three Supplementary Reports, each of which I have read. I have also been provided with a searchable electronic copy which has enabled me to trace particular themes. It is his view

a) that the governance arrangements intended to be put in place for the implementation of the Main Scheme are capable of protecting the interests of both transferring policyholders and of existing policyholders provided that appropriate persons are appointed to the With Profits Committee well-suited to discharge the responsibilities involved;

b) that, based on the financial position of the companies as disclosed in the latest financial data, current policyholders who are being transferred and current policyholders in the funds receiving the transfers will not experience a significant reduction in the level of the security for their guaranteed benefits as a result of the schemes;

c) that no group of policyholders will experience a material reduction in reasonable benefit expectations as a result of the Main Scheme;

d) that in each of the relevant companies the schemes are equitable to all classes and generations of policyholders;

e) that the rules determining eligibility to elect for an incentive payment are consistent with Aviva's statements to its customers;

f) that the allocation of the incentive payments to be offered to eligible policyholders as part of the re-attribution is fair;

g) that the proposed allocation of transferring policies and transferring long-term insurance liabilities between the proposed new funds is reasonable and that the allocation of long-term insurance assets is fair;

h) that because under the Main Scheme sub-funds in which non-electing policyholders will be entitled to participate in profits are to be managed together with sub-funds in which there is no participation in profits and with funds capable of being released to shareholders, all as one fund, the benefit expectations of with profits policyholders are not materially adversely affected, and the proposed governance arrangements are designed to manage the potential for conflict and to protect the interests of transferring with profits policyholders.

11. The fact that Mr Dumbreck is satisfied that the security and benefit expectations of no group of policyholders are materially adversely affected does not relieve me of the responsibility of reaching my own view on the evidence adduced: I share the view expressed by Briggs J at paragraph [6] of his judgment in Re Pearl Assurance (Unit Linked Pensions) Limited [2006] EWHC 2291. Mr Dumbreck's opinion evidence is not all of the same character. Some of it is highly technical, and the court is wholly dependent upon it. If it is not to be accepted then it must be demonstrated by specialist evidence of equal weight that there is a significant technical error. Some of it consists of the expression of judgment (that something is "fair" or "reasonable" or "appropriate"). Here the court may be more confident in undertaking its own assessment. But the opinion of the independent expert is informed by a depth and breadth of specialist knowledge, so that the court would not be entitled to reject the judgment of the independent expert unless unpersuaded by the reasoning in the expert report, or satisfied that there was some manifestly unreasonable assumption or that there were strong grounds for supposing that the opinion lacked a factual basis. The conclusions I express have been reached notwithstanding my adoption of that approach.
12. Some objectors have attacked Mr Dumbreck's competence, and have complained at his acting on information provided by Aviva rather than independently verifying all underlying data. Others have attacked his integrity, suggesting collusion with Aviva's own actuarial function holder (whose views are also before me). Regrettably such attacks are almost routine in cases of this sort: see Norwich Union Linked Life Assurance Limited [2004] EWHC 2802 and Re Allied Dunbar Assurance [2005] EWHC 28. In my judgment there is not the faintest hint of any incompetence or impropriety. I accept Mr Dumbreck as trustworthy and consider him to have acted fully in accord with his declarations to the Court.
13. Some objectors have attacked Mr Dumbreck's conclusions, because they are qualified by the words "significant" or "material", and because he provides no unconditional guarantees. I do not consider this a fair ground of objection. The complexity of the process is such that no one could guarantee a complete absence of detriment in every eventuality and in every single case. Indeed I would be wary of any opinion which purported to do so. What is important is whether there is any detriment of materiality: and that is the approach which Mr Dumbreck has adopted.
14. By way of further assistance to the Court in considering whether to sanction such a scheme, FSMA s.107 gives the Financial Services Authority the right to be heard on the application. Amongst the regulatory objectives of the FSA are the maintenance of market confidence and the protection of consumers, and it has a statutory duty to act in the way which it considers most appropriate for the purpose of achieving those objectives. In fulfilment of that duty it has appeared at the hearing by leading and junior counsel and has submitted two Reports (the second of which is substantial and expresses the FSA's opinion having considered the objections which have been advanced). Based on its final evaluation of the regulatory issues raised by the Main Scheme and relying upon its own calculations and assessments (not those of Aviva) the FSA is satisfied that the Main Scheme is within the range of reasonable and fair schemes available to Aviva to achieve its objectives, and that the transfers comprised in it are unlikely materially adversely to affect the interests of policyholders and other affected persons.
15. In order to judge whether the Main Scheme falls within the range of reasonable and fair schemes the FSA has had to consider whether it complies both with generally applicable principles of fairness and with specific regulatory requirements. In undertaking the former in relation to the reattribution proposals the FSA has compared the benefit to electing policyholders with the benefit to shareholders. That comparison has been informed by a very considerable volume of material produced by the Policyholder Advocate, Ms. Clare Spottiswoode CBE ("the PHA").
16. In its statement of the principles by which a firm must conduct its business the FSA has stated (as Principle 6) that "a firm must pay due regard to the interests of its customers and treat them fairly" ("Treating Customers Fairly" or "TCF"). It has elaborated that general guidance by detailed regulations applying to the conduct of "with profit" business. These are now to be found in the Conduct of Business Sourcebook Chapter 20 ("COBS 20") of the FSA Handbook which replaces nearly identical earlier provisions. Under COBS 20.2.42 a firm that is seeking to make a reattribution of its inherited estate must identify at the earliest appropriate point a "policyholder advocate" whose function is to negotiate with the firm on behalf of the relevant "with profits" policyholders the benefits to be offered to them in exchange for the rights or interests the policyholders will be asked to give up, to explain the proposals to policyholders, and to tell the policyholders (with reasons) whether the firm's proposals are in their interests. Such a person must be free from any conflicts of interest and approved by the FSA. The PHA fulfils a role as negotiator which the FSA could not itself fulfil, because the FSA must ultimately assess whether the concluded deal is fair and compliant.
17. Ms Spottiswoode has assumed that role under the terms of an agreement with CGNU, CULAC, NULAP and others. This agreement required the PHA to produce a report for the policyholders, to be provided to the FSA, addressing matters required to be addressed by COBS 20 "and such other matters as the PHA considers that the relevant policyholders should be made aware of in relation to the reattribution proposals". In its explanation of the role of PHA the FSA explained that the PHA could "challenge any part of the operation of the with-profits fund in the course of negotiations with the firm". The breadth of these terms of reference has encouraged Ms Spottiswoode to conduct a review of aspects of "with-profits" business generally and to form opinions upon practices which have hitherto been regarded as lawful, proper and compliant with the FSA's requirements.
18. There can in this case (the first of its kind) be no complaint that Ms Spottiswoode has acted in that way. It is no doubt healthy that public debate should be informed by the personal opinions of someone who has been afforded a special insight into a particular business and assisted by advice from two leading counsel (Mr Rhodri Thomson QC and Mr James Ayliffe QC), from two prominent firms of solicitors (Lovells and Freshfields Bruckhaus Deringer), from KPMG discharging an actuarial function and Deloitte discharging a tax advisory function, and with LECG providing commercial input. But her informed personal opinions about the current regulatory environment for "with profits" policyholders generally are not a "circumstance" relevant to be taken into account at the sanction hearing. What is material to my consideration is the nature of the report by the PHA to the FSA and to the policyholders about the negotiations on behalf of the "with-profits" policyholders affected by the Main Scheme, the conclusion reached upon terms of the negotiated offer and the reasons given for that conclusion. It is in the light of these that I am able to assess the material adduced and opinions expressed by the FSA, on whom FSMA has conferred entitlement to be heard at the sanction hearing.
19. Some objectors have said that Ms Spottiswoode has failed to produce anything of value in that regard. They say that her independence has been compromised by the fact that her office has operated from Aviva's premises, that it is directly funded by Aviva, and supported by staff seconded from and facilities provided by Aviva. They say that she has misinformed policyholders in order to coerce them to accept Aviva's proposals. They say that she has failed to achieve anything. In my judgment there is not a scintilla of substance in the charge that Ms Spottiswoode lacks independence and is incompetent, or in the assertion that she has achieved nothing. As a pioneer in the role she was faced with the task of discharging her function without the ability to call upon any previous experience. She has, it seems to me, if anything gone to greater lengths than her appointment strictly required to ensure that her duties were performed in a complete and transparent way. The distillation of an extremely complex proposal contained in her Guide to Policyholders, and the comprehensiveness of her report, give me confidence that the FSA's view (that the Main Scheme is fair) is soundly based.
20. Mr Thompson QC told me that the PHA was anxious to create a good precedent and to put pressure on FSA policy. I have been concerned to see whether her consideration of the position of "with profits" policyholders generally within the savings industry, her identification of areas of practice that are of personal concern to her as an informed observer, and her personal criticisms of the role of the FSA in the process have distracted her from the crucial role assigned to her under the current regime, i.e. negotiating within a reasonable time frame the terms to be offered to these particular policyholders and explaining to and advising them upon the proposal. But the advice she has received has been well balanced, being firmly grounded in reality yet with an element of judicious speculation about where current arguments might ultimately lead: and I am satisfied that this advice has been used to advantage in the negotiations and has not simply been used as a platform from which to conduct a broader public campaign. Nor do I think that the pursuit of these broader concerns can be fairly said to have delayed the process and caused a reduction in the terms available (because of adverse market movements).
21. It is the view of the PHA that she has succeeded in obtaining an offer which she believes (adopting the assumptions of her own advisers, and not those of Aviva) is very substantially in excess of what current policyholders could reasonably expect to receive by way of future distributions from the inherited estate under the current regulatory regime. That last qualification is important. The PHA expresses the opinion that the regulatory landscape currently drawn by the FSA imposed serious constraints on her ability to negotiate on behalf of policyholders. By this she meant that if the current law and practice relating to the management of "with-profits" funds was to be altered in favour of the current generation of "with profits" policyholders then she might have been able to negotiate a better deal. Such a change might, of course, have had quite other consequences, not apparent in the present specific case: and that is why consultation and consideration of competing interests is important before policy relating to widely-held long term investment products is altered or regulations are changed, and why I am going to decide this case on the law as it is, rather than the law as Ms Spottiswoode personally would prefer it to be. (Indeed I heard from one policyholder who saw things very differently from Ms Spottiswoode).
22. The Main Scheme has taken nearly 4 years to come to fruition and both it and the Alternative Scheme are exceptionally complex. I will set out its key features in outline, but with sufficient detail to enable the basis of my decision to be understood. I will focus on the Main Scheme.
23. As I have explained, the main scheme provides for the transfer of the whole of the long-term insurance business carried on by CGNU, CULAC and NUL(RBS) to NULAP. NUL(RBS) itself has no inherited estate, but CGNU and CULAC both do. At the hearing before me this transfer was (almost without exception) accepted as uncontroversial. A Mr Baker (who is a NULAP policyholder and a shareholder in Aviva) did object (in a moderate and thoughtful way) to the transfer on the footing (a) that there was a "contagion risk" to the security of his existing policy (and those of the 74% of CGNU and CULAC policyholders who were ineligible to participate in the reattribution) deriving from the fact that this was a transfer of long-term insurance business that in part was not supported by an inherited estate and in part supported only by an inherited estate depleted by a special distribution: and (b) that it might be necessary to support that increased risk in the receiving fund by use of shareholders' money, (as, indeed, the Main Scheme did by the creation of a special reserve account). For him the preservation of a solid inherited estate as security against the risk of a double dip recession was of great importance (and he was alarmed at what he saw as the PHA's preference for a policy of full distribution).
24. Mr Baker's objections do not stand in the way of sanction. His points were well made, but cannot undermine the strength of Mr Dumbreck's evidence: that even in the circumstances referred to no existing policyholder of NULAP will experience a significant reduction in the level of security for their guaranteed benefits as a result of the schemes or a material reduction in reasonable benefit expectations as a result of the schemes. This is technical evidence of a sort which FSMA has entrusted to the independent expert to give. The grounds for it are carefully explained: in short, any working capital freed up by the re-attribution process must be retained to support the existing "with profits" business so long as it is required, and the new structure exactly replicates the existing structure so as to preserve present benefit expectations.
25. The bulk of the objections have centred upon the reattribution of the inherited estate. Aviva's declared policy is to ensure that policyholders are not prejudiced by the re-attribution, whether they participate or not. The objectors say that the whole process of reattribution is wrong (whether or not it prejudices anybody). In the description of the proposals that follow, the Main Scheme should not be taken as a blueprint for all future schemes, nor should the results of the negotiations be taken as establishing some sort of benchmark. Every scheme is different. But the key features of this particular scheme that have impressed me are

(a) that it follows a distribution;

(b) that it is entirely voluntary;

(c) that the payment to policyholders reflects not simply their hope of future participation but also their present negotiating position as holding the key to a redeployment of capital;

(d) that the costs of the reattribution (including financing the PIP) are not borne by the inherited estate;

(e) that great pains have been taken to ensure as far as is possible that the only consequence of exercising choice in a particular way relates to participation in future distributions out of the inherited estate, and the choice made has no impact upon security, benefit expectations, or the prospect of future distributions for non-participants.

26. The value of the aggregate CGNU and CULAC inherited estate is to be assessed as at the effective date by a process of averaging over the preceding three months (a method which the independent expert considers equitable and of which no substantial criticism has been made). It will be approximately £1.2 billion. A population of eligible policyholders has been identified. These are policyholders with CGNU, CULAC and NUL(RBS) (plus Norwich Union International Limited) who held policies invested wholly or in part in "with profits" funds of CGNU or CULAC on or before 21 November 2006 and which remain in force at the scheme date. Provision is made for qualifying policyholders who cease to be such before the scheme date by reason of an involuntary act. All eligible policyholders are offered a choice. They can continue in their present relationship with Aviva: alternatively they may elect to receive a cash payment or other benefit (a "Policyholder Incentive Payment" or "PIP") in return for giving up their hope of participating in any future distribution from the proportion of the inherited estate referable to their policy. The size of the aggregate PIP will depend on the value of the inherited estate at the scheme date: but the aggregate PIPs are to be divided up in such a way that there is a minimum payment of £200 per eligible policy.
27. Those who elect to remain as they are will have their policies allocated to or reassured to a "with profits" sub-fund called "the Old WPSF", and they will be entitled to participate in the distribution of any surplus from the part of the inherited estate allocated to the Old WPSF (if ever there is such a distribution). Long-term insurance assets will be allocated to the Old WPSF having a market value equal to the sum of the realistic liabilities of the sub-fund on the scheme date, together with a proportionate part of the combined inherited estate. There are detailed provisions for adjustments to ensure that this initial allocation is, in the actual circumstances obtaining at and after the scheme date, fair to those who wish to preserve the existing arrangements. The highly technical arrangements by which these objectives are sought to be achieved have been considered by Mr Dumbreck and he is satisfied that they are appropriate.
28. Those who elect to take a PIP will have their elected policies allocated to or reassured to a new "with profits" sub-fund called "the New WPSF"; they will not be entitled to participate in any future distribution from the inherited estate. Long-term insurance assets will be allocated to the New WPSF with a market value equal to the amount of benefits that are highly likely to be paid out in the future under the "with profits" policies allocated or reassured to this fund. The guaranteed benefits will to the extent necessary be met out of a special reserve which would otherwise accrue to the shareholders. Mr Dumbreck is satisfied that the arrangements are technically and actuarially sound.
29. That part of the inherited estate which is not allocated to one of the new sub- funds constitutes the reattributed inherited estate, which may be released to the shareholders. But the part of the inherited estate released by this means will not be immediately available to the shareholders. It is retained as part of a special reserve, operated in a manner consistent with the operation of the inherited estates of CGNU and CULAC prior to the implementation of the main scheme, supporting the "with profits" funds and available to be used for the purposes which any inherited estate may be used. The object of this is to ensure that, for policyholders who elect to take a PIP, the reattributed inherited estate provides appropriate security for their guaranteed benefits, that their policies will be operated in a manner consistent with their reasonable expectations and that their policy payouts will reflect these expectations. The special reserve must last a minimum of six years; but such are the tests which have to be satisfied before any surplus can be released that it may well be a very long time before the shareholders gain free access to the surplus. It will therefore be important for strong governance to be in place to manage the tension between the interests of all "with profits" policyholders in the retention of the special reserve, and the interests of the shareholders in the identification and application of any surplus.
30. The Old WPSF and the New WPSF will be operated alongside the existing long-term insurance sub-funds of NULAP (and with the special reserve). The Main Scheme requires the NULAP board to adopt investment policies that are consistent between the Old WPSF and the New WPSF so as to ensure that the same returns are credited to the asset shares of equivalent policies. It further requires the Board to make the same deductions for expenses and the cost of guarantees from (and to make the same allocations of profits and losses arising from mortality, sickness and surrender risk to) equivalent policies. It also requires identical bonus rates to be declared for equivalent policies (subject to detailed exceptions, themselves generated by the need to treat policyholders equally). Equality of treatment and of expectation is thereby written into the scheme.
31. To reinforce these obligations the NULAP board is required to appoint a With Profits Committee ("WPC"). The stated purpose of the WPC is to provide independent oversight and challenge to NULAP so that NULAP can ensure that with profits policyholders are treated fairly as regards their actual and prospective benefits and security. To discharge this function the WPC is required to consider, and to provide NULAP with an assessment of, the fairness of any material proposals, and make an annual report to the board as to NULAP's compliance with the Principles and Practices of Financial Management (Aviva's public statement of the overarching principles that the company will follow when managing its "with profits" business). The WPC must have a majority of members who are independent of Aviva, is inquorate without such a majority, and must be chaired by an independent member: the initial appointees have been identified, and they are persons whose probity, independence and skills lie well beyond any reasonable challenge. Importantly, it has power to review its own terms of reference: it is therefore a dynamic body able to adapt to any new challenges and to adopt any future best practice.
32. Whilst not asking me to refuse sanction to the scheme the PHA took the opportunity of the oral hearing to lay before me detailed negotiating points regarding the WPC on which she had failed to secure agreement from Aviva, and she asked me to take account of her preferences as part of the "circumstances". None of the points was fundamental to the fairness of the Main Scheme (as demonstrated by the FSA's opinion and the PHA's own recommendation of the offer to policyholders): and since it was acknowledged that I could not force Aviva to alter the detailed terms of its offer, the only effect of the submissions was to give publicity to the PHA's opinions and to demonstrate to policyholders the lengths to which she had gone in trying to protect their interests. I in fact take the view that it is important to underscore that it is the responsibility of the Aviva board as a whole to see that the TCF principles are applied to the conduct of its business as regards "with profits funds" and that the terms of the scheme should not suggest that this is somehow the responsibility of the WPC, to whom the relevant powers are delegated.
33. There are some 850,000 eligible policyholders (approximately 25% of the total number of policyholders). Of those, 687,666 (about 80% of the eligible policyholders) had as at 21 August 2009 responded to Aviva's offer to exchange the hope of future participation for a present PIP. Of those respondents, 96.5% had accepted the offer of a PIP and 3.5% had declined the offer. At the sanction hearing four objectors spoke, one of whom (Mrs Budd) had in fact elected to receive the PIP, and two of whom ( Dr Pilkington and Mr Meadowcroft) spoke on behalf of the Norwich Union Policyholders Action Group ("NUPAG") (though Mr Meadowcroft was not himself an eligible policyholder). I also received written observations from 13 policyholders directly, and was provided with some 130 other objections which had been received by Aviva, the independent expert, the FSA and the PHA (some being from ineligible policyholders). These I have read. Some of the objectors were objecting to a scheme in which they themselves had declined to participate: the effect of their opposition to sanction was thus that those who did wish to participate should not be allowed to do so.
34. An analysis conducted by the PHA makes it readily understandable why such a large proportion of eligible policyholders has elected to take the PIP. Using sophisticated modelling techniques the PHA has sought to project the timing and value of potential distributions to policyholders. Distilling the results by taking four sample policyholders (one single premium and three regular premium payers, whose policies mature respectively in 2016, 2017 - 2021 and after 2021) and taking four possible factual scenarios, the PHA has concluded that in 7 of the 16 possible combinations the PIP will always be worth more than any predicted distribution, and in the remaining 9 cases the earliest date on which the possible distribution might be worth more than the PIP ranged from 2018 to 2028.
35. Before addressing these objections I should set out some background matters against which they can be considered.
36. In "with profits" business the regular premium payments of the policyholder secure for him guaranteed death benefits, and the prospect of a payment enhanced by a return upon the investment of that part of this premium not required for the provision of the guaranteed benefits. The policyholder believes that he is securing the investment expertise of the insurer so that his premium (along with those of all other policyholders) is being invested in an appropriate mix of UK and international equities, properties, government and corporate bonds and cash. In a "with profits" bond it is that investment element that predominates: such bonds often take the form of the simultaneous issue of a "cluster" of policies (ranging in number from 20 up to 250) to facilitate tax efficient realisation. The key feature of "with profits" business is "smoothing": this is the process of spreading profits and losses from one year to the next with the aim of providing an element of stability in the payouts and so reducing the effect of peaks and troughs in the investment markets, with the ideal objective of making the process broadly neutral to policyholders collectively over the long term. (There may of course be sustained or significant falls in value which fall outside the range of variations that can be accommodated by smoothing). This model requires the board of the insurer to identify what may properly be regarded as "profit" for a given year (and this may in large measure be unrealised investment gains), and then to decide the extent to which that profit is to be subjected to smoothing i.e. holding back in good years or enhancement in bad. Once that is done the smoothed profit is attributed to policyholders: and a further decision has to be taken as to what is to be attributed by way of annual bonus to the current policies and what is to be payable by way of terminal bonuses on maturing policies. Once an annual bonus is declared it then, of course, becomes a cost which has to be met out of the fund; and that will influence the extent to which profits in future years can be attributed to policyholders.
37. According to current thinking (though this has not always been the approach) to assist in making decisions about payments a policyholder is treated as having a notional asset share in the fund: this is (broadly speaking) the historical accumulation of the premiums he has paid plus an allocation of the investment return, but less the cost of administering the policy, the provision of the death and other risk benefits, taxation and so forth. The concept of an asset share now takes a more central role in the management of "with profits" business and, in very general terms, has led to a less cautious approach to reserving profits. But the employment of this concept most emphatically does not mean that any individual policyholder has any actual property interest in any part of the "with profits" fund.
38. In a proprietary insurer there is, of course, another body of persons interested in the profits generated by the insurance fund viz. the shareholders. Conventionally the Articles of Association will limit the expectation of the shareholders to participate in such profits. For example, in the instant case CGNU's Articles oblige the directors annually to cause an actuary to investigate the financial condition of the company in respect of its long-term insurance business; and they then provide that the profit (if any) is to be ascertained by such methods as the directors (on the advice of the actuary) shall think fit. Once that is done the board must then determine the amount of such profit (if any) which may be distributed. Of the profit so declared distributable at least 90% must be appropriated to the "with profits" policyholders in such manner as the directors may determine.
39. Just as in the Articles the contractual right of a shareholder to participate in distributable profits identified by the board is limited to 10%, so in the individual policies which are taken out, the expectation of a policyholder to participate in 90% of the distributable profits identified by the board is given contractual force. Clause 8 of Dr Pilkington's Single Premium Portfolio Bond (a cluster of 20 policies) typically declares:-

"Each With Profit Fund participates in the profits of the Company's Life Assurance Fund. At least 90% of the profits are attributed to policyholders with the remainder being attributable to shareholders. The profits of the With-Profit Fund(s) largely arise as a result of favourable investment performance but are supplemented by profits arising from Without-Profit business and other sources. Profits are attributed to policyholders by means of (i) Reversionary Bonuses … and (ii) Terminal Bonus….."

40. The contractual legal right of each "with profits" policyholder is to participate in distributable profits identified by the board. A "with profits" policyholder has no legal right to require the board to make a distribution in a particular form or to require the board to declare profits at a particular level. Such matters are within the discretion of the board. But that discretion is no longer completely unfettered and the policyholders collectively have a legitimate and reasonable expectation that the board will conduct the affairs of the fund in a manner that is compliant with current regulations.
41. The current regulatory environment is prescribed by the FSA in COBS 20. Recognising the nature and extent of the discretions conferred upon the board by the nature of "with profits" business itself, COBS 20 requires a firm to give careful consideration to its operating practices to ensure that they do not lead to an unfair benefit to shareholders, and lays down a number of rules which address specific situations where the risk of unfair treatment of policyholders is particularly acute. One such situation is the cumulative effect of the annual decisions concerning the ascertainment of profit and the level of distributable profit to be attributed to policies. This cumulative effect leads to the creation of an "inherited estate".
42. The "inherited estate" of a "with-profits" fund is the excess of the realistic value of the assets of the fund over the realistic value of the liabilities of the fund. Being a calculated difference between two assessed values, it is an integral part of the "with profits" fund itself, and it does not exist as a separate pool of assets. It constantly varies. (Thus, by way of example, the PHA's advisers noted that a decline in property values and movements in fixed interest yields and index-linked government securities after December 2008 had reduced asset share values and increased the cost of meeting policyholders' guaranteed benefits, leading to a reduction in the estimated inherited estate from £1.57 billion to possibly £1.05 billion).
43. The "realistic value of the liabilities" has at its core the cost of providing the benefits to which policyholders are contractually entitled. This of itself involves assumptions, particularly in relation to morbidity and mortality. But it also takes account of the reasonable benefit expectations of policyholders. Although the realistic value of the liabilities does reflect the reasonable benefit expectations of the current "with profits" policyholders, no prudent insurer could regard the excess over those liabilities as surplus to the requirements of the fund. The current value of the assets of the fund could reduce dramatically. The current estimate of the future costs of guaranteeing the benefits due to current policyholders and of meeting expectations could be falsified by changes in market conditions or rendered false by actual morbidity or mortality experience. The retention of the excess therefore most obviously provides security for policyholder benefits whilst meeting their reasonable benefit expectations in the event of adverse future developments. There are detailed regulatory requirements as to the solvency capital that must be maintained and as to the type of assets that are admissible for the maintenance of such a margin: and the retention of the excess in the inherited estate supports the fulfilment of these requirements.
44. But the retention of the excess also has less obvious benefits. First, it provides working capital which enables a fund, charged with liabilities to provide guaranteed benefits, to maintain an investment strategy that involves investment in risk-bearing assets such as equities and property (with their potentially higher rewards), rather than being constricted to the risk-free but low-yielding assets that the obligation to cover guaranteed and non-discretionary contractual benefits would otherwise require. The board of an insurer will have a particular "risk appetite": in the case of Aviva it is to maintain a risk rating between AA and AAA. A sufficient excess is retained in the "with profits" fund to secure that, having regard to the range of investments in the fund, that rating is maintained. Policyholders' interests in this use of the inherited estate cannot be regarded as uniform. Those with recently incepted policies will naturally have the security of their future benefits as a primary concern: those whose policies are about to mature into claims may well consider whether an adjustment in the risk appetite might free up assets for distribution whilst they were still policyholders. It is the task of the board to moderate these competing interests, to set the "risk appetite", to define the capital requirement, and to deploy the capital to best advantage to secure a return for policyholders and shareholders within those parameters.
45. Second, the retention of the excess enables the fund to grow by writing new business. The full benefits of a policy apply from inception. So the initial capital and other costs of writing new business can be significant. The insurer will seek to recoup those costs by the premium stream received over the life of the policy. But if the initial strain can be borne by the excess (or inherited estate), then the upfront cost of the product to the policyholder can be reduced (or a higher proportion of early premiums can be invested). This was referred to in some of the material before me as the "intergenerational transfer": the benefits conferred upon current and prospective policyholders by the returns ultimately derived from the contributions of previous generations of policyholders.
46. The FSA regards this intergenerational transfer as an intrinsic part of the operation of a "with profits" fund (provided that the business is managed with a view to recovering the initial costs and repaying them to the inherited estate over a reasonable period). The PHA is unhappy that it should be so regarded. Her view is that the consequence of the intergenerational transfer is that the expectations of the current generation of policyholders as to distributions are highly sensitive to the anticipated level of new business – the greater the anticipated volume of new business the lower the expectation. She would prefer a significant change to occur. Whilst the current generation of policyholders themselves benefited from the "intergenerational" transfer, she would prefer that they be enabled to charge future generations of policyholder for the use of the inherited estate (in exactly the same way as if the capital used was funded by a third party finance provider). This does not immediately strike me as fair: but in any event I have to assess the Main Scheme on the law as it is.
47. As the PHA has identified, extent to which this support for new business is required depends upon the assumptions that are made regarding that anticipated new business. The higher the levels of anticipated new business, the higher the strain of supporting that assumed new business will be, and the greater the level of actual capital needed for that purpose. There will be an incentive for an insurer to produce optimistic new business forecasts, for that would justify the maintenance of the inherited estate (whereas a pessimistic forecast might lead to the identification of a surplus). In the instant case the new business assumptions have been the subject of vigorous debate and the impact of the assumptions upon the payments that can be made and the funds that can be maintained has been the subject of rigorous analysis.
48. This support for new business by the "intergenerational transfer" is to be distinguished from another form of new business support. The inherited estate is sometimes used as a permanent subsidy to cover part of the cost of guarantees and expenses of particular products, enabling them to be sold as loss leaders in order to maintain a market presence. This was in fact the case in relation to CGNU and CULAC in 2007 where a specific and limited subsidy to particular types of new business was permitted: this usage stopped with effect from 1 January 2008. (The PHA secured in negotiations that this subsidy should be written back into the inherited estate for the purposes of the reattribution process, both for the purpose of calculating the PIP and for the purpose of repaying the Old WPSF).
49. But in addition to these benefits to policyholders (security, adjustment of risk and spreading of cost over time) the inherited estate has conventionally been used as part of the ordinary working capital of the firm for two other purposes: to meet certain costs and to hold certain assets. These uses are not integral to the "with profits" model, though they are historically well established.
50. Costs which have conventionally been charged to the inherited estate (in addition to specific new business subsidies) include both liabilities for mis-selling and the payment of shareholder tax. Until very recently it has been permissible (and was normal market practice) to charge the cost of investigating and compensating for any mis-selling of a policy to the sub-fund in which the mis-sold business was written. The argument was that the sub-fund derived a benefit from the new business written and should bear the burden of any mistakes that were made. On 31 July 2009 the FSA rules were changed with prospective effect so as to prohibit any compensation costs arising from events after that date from being charged to a with-profits fund.
51. Historically it has been and still is permissible and in accordance with normal market practice to charge to the inherited estate any tax liability incurred on the transfer to shareholders of their 10% entitlement. The tax so charged is not the individual income or corporation tax of the individual shareholder to whom the distribution is made: because of the taxation arrangements relating to distributions from the inherited estate it is simply necessary to gross up the distribution to shareholders in order to secure that they actually receive 10% of any distribution and the policyholders 90%.
52. The assets which have conventionally been held as part of the inherited estate are so-called "strategic assets" (equity or debt of companies in which Aviva has a strategic interest). These are retained for the value of their connection rather than for their value as investments. The practice is entirely permissible under the current regulatory regime: but their allocation between particular "with profit" funds will raise questions of fairness.
53. The inherited estate is regarded as part of the working capital of the insurer, and is so reported for accounting and regulatory purposes. There may come a time when the board considers that the working capital is more than sufficient to perform the functions required of it, and that part of it (the "excess surplus") need no longer be retained. As part of the working capital the excess is (in a proprietary insurer) legally and beneficially an asset of the company, managed and controlled by its directors. Under the company's Articles those directors will owe contractual and fiduciary duties to the shareholders in dealing with it. But their freedom is further constrained (a) by statute (which limits the way in which transfers can be made out of a long-term fund) (b) the contractual obligations entered into with policyholders in relation to any excess it is decided to distribute and (c) by any regulatory obligations to which they are subject in relation to the excess.
54. The detailed regulatory obligations are a working out of the TCF principle. COBS 20.2.21 now requires that at least once a year the board must consider whether any "with profits" fund has an "excess surplus". If it does, and if to retain that excess surplus would be a breach of the TCF principle (a significant qualification), then the board is obliged to consider whether it should "(a) make a distribution … or (b) carry out a reattribution". No individual generation of policyholder has anything more than a hope (or a "spes") that the circumstances will be such that during the currency of its policies (a) it is possible to identify an excess surplus and (b) the obligation to "treat customers fairly" requires that that excess surplus should not be left in the fund for future generations of policyholder.
55. In 2007 Aviva carried out this process. By hedging some of the investment risks to which the inherited estate is exposed (in particular the exposure to equity risk of the guarantee costs attached to a policy) it was possible to reduce the realistic value of the liabilities of the fund and so to create an excess which it was no longer necessary to retain to cover the risk i.e. an excess surplus. The board decided to pay to with profits policyholders a Deferred Special Bonus ("DSB") amounting to £2.1 billion as at 1 January 2008 (being 90% of a distribution of £2.363 billion), to be phased over a three-year period. The DSB would overlap with any implementation of the Main Scheme. So far as the costs of distributing the payment on 1 January 2009 and of making the payment on 1 January 2010 are concerned these are to be borne proportionately by the New WPSF and by the Old WPSF (with detailed adjustment provisions to ensure equality of treatment).
56. So a very large distribution of the inherited estate has already taken place. Now in my judgement a distribution and a reattribution are fundamentally different processes, and to present them as alternatives (as COBS 20.2.22 appears to do) is not entirely accurate. A distribution is a unilateral act of the insurer which applies to all "with profit" policyholders; it affects funds which are truly surplus to all requirements, and it results in 90% of the distribution being attributed to the policyholders and 10% being made freely available to the shareholders, nothing being retained. A re-attribution is a bilateral act dependent on a contract with the individual policyholders (though if implemented by means of a scheme of arrangement dissentient policyholders might become bound by a statutory contract); it may affect working capital which is not truly surplus to requirements but which can be more flexibly, efficiently and effectively employed if unlocked from the conditions attaching to an inherited estate ("the re-attributed estate"); and it results in a bargained-for payment being made to policyholders in return for their giving up certain expectations regarding the reattributed estate, which reattributed estate is not necessarily immediately and freely available to the shareholders, being retained as part of the working capital.
57. In the present case (and following the distribution) an estate capable of being reattributed has been identified, that is to say working capital which is not presently available for immediate division between policyholders and shareholders, but which could be more efficiently employed if the respective expectations concerning it were adjusted by agreement. It is that which forms the subject matter of the re-attribution proposal in the Main Scheme.
58. Although it is not possible to obtain evidence for the entire life of the CGNU and CULAC "with profits" funds the independent expert is satisfied from the asset share calculations he has undertaken that the current generation of policyholders has not contributed to the reattribution estate: this view is shared by Aviva's own actuarial function holder and by KPMG (who have been advising the PHA). Indeed it would be surprising if, having received a DSB of £2.1 billion, the current generation of policyholders had funded the reattribution estate of £1.2 billion to any extent at all. What is being re-attributed is accumulated investment returns and excess reserves and provisions funded by past policyholders and held (in part) for the benefit of future generations of policyholder.
59. Aviva can only gain (eventual) access to this with the agreement of the current generation of policyholders. By buying out each current policyholder's "spes" Aviva can access capital that would otherwise remain locked in the "with profits" fund in which future policyholders would also hope to participate. Any scheme that was fair would both compensate a current policyholder for the loss of his spes and recognise his negotiating position. Given the very nature of a spes and the imponderables that surround it, there can be no uniform method of achieving a fair price.
60. The PHA has sought to achieve a fair price by using modelling techniques applied to assumptions regarded as reasonable in order to estimate the level and timing of any future distribution; and she has in addition looked for a proportionate division of the residue of the reattributed estate. Aviva has sought to offer a fair price by looking at the predicted internal rate of return ("IRR") on the reattributed estate that will be released: if that return was particularly high then it might properly be said that the capital was being made available too cheaply. For the purpose of its negotiations Aviva adopted a rate of 8.9%: but in a briefing to analysts it suggested a rate as high as 13.5%. I am satisfied that this substantial discrepancy has been explained in the evidence, and that the key variable (the anticipated level of new business) is the subject of an appropriate "clawback" mechanism. The FSA has also focused on the IRR, asking whether (on the FSA's own independently supported assumptions upon key questions such as levels of new business) it falls outside the reasonable range of returns that the firm could expect to achieve from alternative uses of its capital. It would be plainly imprudent of the FSA to disclose what it regards as a reasonable range (for that would simply enable future propounders of schemes to go directly to the most advantageous limit of the range). But I accept and rely on the FSA's opinion that the bargain struck is within the reasonable range of outcomes.
61. With that background I can now address the objections. For convenience I have collated them. Though I deal with them relatively shortly they have merited careful consideration: and it is my endeavour to understand them fully and consider them fairly that has caused me to set out the present proposals and the background to the objections at the length I have.
62. "The inherited estate belongs to the policyholders and they should obtain 90% of it". The inherited estate is part of the working capital of and belongs to the company. Policyholders have no property interest in it. They have the right to participate in any annual profits that are declared and made available for distribution: they otherwise have only the hope that during the remaining term of their policy there may be an excess surplus that might be distributed. The reattribution does not relate either to annual profit or a distributable excess surplus. The PIP is not a distribution: it is the price (financed from outside the "with profit" funds) that Aviva is willing to pay for something.
63. "The PIP should represent 90% of the profits made by the fund". The PIP does not reflect a policyholder's contribution to the inherited estate. It represents the price the company is willing to offer to obtain less restricted access to part of its working capital. What the policyholder is being asked to give up in return is the hope of participation in any future distribution of that working capital, uncertain as to time and amount. The price has been fixed both by reference to the "hope" the policyholder is giving up and by reference to the greater freedom over capital that Aviva gains.
64. "It has not been conclusively proved as a matter of fact that the part of the inherited estate which is being dealt with does not result from the contribution of current policyholders". This is not a matter of conclusive proof. The court acts on the balance of probabilities. All expert opinion is united in the view that the reattributed estate does not derive from the current generation of policyholders. There is no credible evidence of equal weight that suggests otherwise. I accept that fact as proved on the balance of probabilities. In any event the PIP is not a return of contributions: it is an externally funded price.
65. "It has not been established conclusively as a matter of law what are the precise rights of a policyholder in the inherited estate". The decision of the PHA not to mount a test case is entirely rational. She had no funding. Her advisers recognised that the position for which they were arguing was not that currently accepted as orthodox: the outcome was therefore uncertain. The process would have been protracted. It was possible to deploy (and obtain value for) the arguments in the course of negotiation, and in the face of some of the arguments Aviva made concessions and adjusted the Main Scheme.
66. "There should be a distribution and not a reattribution". There has already been a distribution. A distribution and a re-attribution are very different things. The fact that there can be a reattribution does not mean that there could be a distribution. The PHA has demonstrated that a further distribution is only a realistic possibility many years hence. I cannot compel the board to make a distribution. The management of the company's capital is something entrusted by the Articles to the board: I am not entitled to substitute my commercial judgment for theirs.
67. "The re-attribution is a breach of the Articles". The Articles limit the right of a shareholder to participate in distributions of profit. The Articles do not prohibit the company from making bilateral arrangements with individual policyholders. The reattribution is entirely voluntary. It does not involve a distribution.
68. "The reattribution is a breach of contract". The expectations of a particular policyholder to participate in any future distribution of the inherited estate are only varied with the consent of that policyholder. It is a consensual variation. Policyholder A (an objector) has no contractual right to prevent policyholder B (an eligible policyholder who elects to take a PIP) varying his policy contract as he wishes.
69. "The Court should not sanction anything that is not a 90/10 split". A distribution and re-attribution are different things. Just because a distribution would result in a 90/10 split it does not follow that a re-attribution must do. The PHA considers that Aviva's offer is in the interests of the great majority of policyholders; and in fact the great majority of policyholders wish to take it up. The question is whether the court should deprive them of the opportunity.
70. "Aviva is only paying £500 million to obtain access to assets worth £1 billion and that is not fair." The assets already belong to Aviva. Aviva is paying to obtain greater freedom to deal with them. It is paying the current generation of policyholders (to whom it is currently making a phased distribution of £2.1 billion). On the PHA's view it is paying that generation a sum considerably greater than the value of its present expectations. It can do so because what is effectively happening is that the expectations of future generations of policyholders to participate in distributions from the reattributed estate that might be made in (say) 2018 are being acquired for nothing and divided up between the current generation of policyholders and the shareholders.
71. "CGNU and CULAC are both closed funds so that there ought to be an immediate distribution of the entire inherited estate and no question of any new business". This objection of the Norwich Union Policyholders Action Group is founded upon a misunderstanding. The entirety of the expert evidence is to the effect that these are not closed funds: and this is also the view of the FSA. According to the independent expert in 2008 the funds wrote new business with an annual premium equivalent of £223 million.
72. "The offer should not assume that Aviva can use the inherited estate to subsidise new business". This is a use to which the inherited estate is currently put, by meeting the initial costs of new business and recouping that out of the premium stream over the term of the policy. The "intergenerational transfer" (from which the current generation of policyholders themselves benefited) is an intrinsic part of the "with profits" business model, and recognised by the FSA as such. The PHA is personally opposed to the practice, but nonetheless recognises that the offer is for the benefit of the vast majority of policyholders. Sanction must be granted or withheld by reference to the law as it is.
73. "The offer should not assume that the inherited estate can be used to support new business because both CGNU and CULAC said that the practice had stopped". This objection confuses two different sorts of support. The "intergenerational transfer" continues. Writing loss-leading business (where the premium stream will not during the term of the policy recoup the initial costs borne by the fund) which is supported by a specific subsidy has rightly stopped.
74. "The offer assumes too high a level of new business in order to overstate the capital requirement (so inflating the inherited estate that has to be retained and depressing the prospect of a distribution)". The offer has been assessed by the PHA and by the FSA by reference to their own assumptions as to the growth (or indeed the decline) in new business. The assumptions used by Aviva in the negotiations are in fact below the levels currently being achieved (though it would not be safe to predict that this will necessarily continue). "Clawback" provisions have been negotiated. The WPC exists to monitor the fair treatment of policyholders as regards inter alia the inherited estate. The FSA has an ongoing supervisory role to see that there is proper compliance with COBS 20.2.21.
75. "The offer should not assume that the inherited estate can be used to pay mis-selling costs". At a time when the offer was formulated such use was permissible and normal market practice. That is no longer the case, but the change is prospective and not retrospective. The offer is now on the basis that mis-selling costs from activities or events after the 31 July 2009 will not be charged to the inherited estate, but there is no reimbursement in respect of pre- 31 July 2009 costs. That arrangement cannot itself be described as unfair or improper so as to justify withholding sanction; and it is not my role to tinker with individual terms of the offer.
76. "The offer should not assume that Aviva can use the inherited estate to pay shareholder tax". This is a use to which the inherited estate is currently put. It is permitted by the FSA. An offer cannot be described as "unfair" because it is based on the continuation of a current lawful practice: nor could sanction be withheld in those circumstances. In any event this relates to one assumption in an extremely complex calculation. It is not my function to tinker with the offer.
77. "The offer should not proceed on the footing that the inherited estate can be used to house strategic assets, because that is to use the inherited estate for shareholders' purposes and not for policyholders' purposes". The offer reflects current practice. The FSA has taken the practice into account in deciding whether the present proposals are fair. The scheme contains detailed provisions as to the allocation of assets to the Old WPSF and the New WPSF so as to replicate the present position. Both the WPC and the FSA have continuing monitoring roles. The proposed arrangement cannot be described as improper or unfair so as to justify withholding sanction. It is not my role to tinker with the terms of the offer.
78. "The inherited estate increased between 2003 and 2006 but has sharply reduced since the original offer was made. This must be due to under payment of bonuses to current policyholders between 2003 and 2006 followed by a transfer of value to shareholders, or mismanagement". The inherited estate does not exist as a cake available to be sliced up in portions to policyholders and shareholders. It is the constantly varying difference between two assessed values. Movements in market prices affect both sets of values. A fall in the value of assets or a drop in interest rates can reduce the value of the fund and at the same time increase the costs of guaranteed benefits. Likewise a rise in the value of assets or in interest rates can increase the value of the fund and reduce the cost of providing guaranteed benefits. The view of the independent expert is that market movements entirely account for variations in the size of the inherited estate, and do not indicate improper treatment of net investment returns or transfers of value to shareholders. This is also the view of the PHA.
79. The objection of NUPAG is based on performance of the FTSE 100 (they say that a fall of 4.17% between 31 December 2008 and 30 June 2009 cannot translate into a 20% fall in the value of the inherited estate over the same period, which they say has occurred). The FTSE 100 is a poor proxy for the asset mix in a "with profits" fund. Moreover, concentrating on the value of the fund overlooks the fact that the inherited estate is the difference between two values (the other being the cost of meeting the liabilities)..
80. "Present market conditions are adverse. The court should refuse sanction and require Aviva to make an offer at a more favourable time". I have no power to direct the board to make a new reattribution offer. My function is to decide whether to sanction the offer which the board has chosen to make as "appropriate". The factual basis for saying that things will be better in the near or medium term is not made out.
81. "It is unfair to make the payment only to current policyholders when past policyholders must have contributed in some way: the offer should be backdated". The PIP does not represent a repayment of contributions made to the inherited estate. It represents the price that Aviva is willing to pay to acquire the future expectations of current policyholders. Someone whose policy has already matured (with its accrued annual and terminal bonuses) has no expectation of any future distribution: Aviva does not have to acquire their "expectations" and is consequently not offering to make a payment.
82. "There cannot be a distributable surplus when annual bonuses are small". The reattribution does not involve the identification of a distributable surplus. It involves the identification of working capital which needs to be retained for the time being but which can be more effectively used. Annual bonuses are small principally because in the period 2000 to 2003 and in 2008 investment returns were low, the projected investment returns continue to be low, and the costs of providing guaranteed benefits are high. The inherited estate is used for the purposes of "smoothing", that it is levelling out the total investment returns over the life of the policy. It is not used for the purpose of enhancing the total investment returns so that they exceed the actual returns over the life of the policy in order to accord more with the expectations that existed at the inception of the policy. Redeployment of working capital and the declaration of annual bonuses involve different considerations: and they are the responsibility of the board.
83. "There cannot be a distributable surplus when mortgage endowment policies are in shortfall". The previous answer applies. Mortgage endowment policies are not producing their hoped-for values because of depressed investment returns (both in the past and in the foreseeable future) and an increase in the cost of providing the guaranteed minimum benefits. But in addition Aviva has made a "mortgage endowment promise" to enhance returns in respect of "with profit" policies connected with endowment mortgages. When it was made this promise was subject to an "affordability condition": but it is part of the Main Scheme that this condition should be waived. This group of policyholders is therefore already favourably treated: the PHA detected resistance from the general body of policyholders to further favourable treatment for this particular class. She did not seek to negotiate further special terms. It is not my function to do so.
84. "It is unfair to expect policyholders to consider an offer when so many legal factual and regulatory issues relating to the inherited estate have not been conclusively determined." This is a variation of the objection concerning legal interests in the inherited estate. It is perfectly possible to conduct negotiations by reference to potential arguments and their respective strengths: and the PHA has approached her task by testing the offer against various scenarios which allow for realistic changes to the FSA rules. Even on that approach her view is that it was not in the general interests of the policyholders to refuse to consider any offer in the hope (a) that the FSA decided to change its rules and (b) that Aviva then decided to make a further and better offer. That is entirely rational.
85. "It is unfair to larger policyholders to offer a minimum PIP" and " It is unfair to the holders of cluster policies not to give a minimum PIP for each individual policy". Views may legitimately differ about the existence and size of any minimum PIP: holders of single policy investment products and holders of cluster policy investment products might well differ in their view as to what is the "fair" treatment of the investment product they purchased. (In fact fewer than a dozen of the 300,000 policyholders to whom the "cluster policy" point was open chose to pursue it). The present arrangements cannot be described as obviously unfair: and in any event they are the only ones that Aviva is prepared to offer and the PHA to recommend. No policyholder is obliged to accept them: and the choice whether to accept or reject them is perfectly clear cut. If the holder of a large policy considers that the existence of a minimum PIP has reduced the price offered for the surrender of his spes below an acceptable level he will not accept the offer. If the holder of a cluster policy does not consider that a PIP which treats it as a single investment policy does not offer him enough he will not accept the offer.
86. "The behaviour of Aviva and of the PHA has co-erced policyholders and produced a rigged ballot". It is important at the outset to understand the true nature of the "election" that has occurred. Each policyholder is involved in an "election" in that each policyholder has to choose (or "elect") between alternative courses: no policyholder is involved in an "election" in the sense that they are voting for a result that will be binding on other people (so how many "votes" a cluster policy carries is not an issue). Save in one respect numbers are irrelevant. There has to be a sufficient number of policyholders who elect to take the PIP to release a worthwhile amount of working capital and to produce a New WPSF that is cost-effective and workable. But once that threshold is passed numbers are irrelevant. I would have sanctioned this scheme even if those electing to take the PIP had not been a majority, because I would have seen no proper ground to deprive electing policyholders of a choice they wished to make. Participation is voluntary. The interests of non-participators are entirely protected.
87. But in any event I consider the accusations of coercion or of misinformation to be unfounded. There is simply no evidential basis for characterising the vast numbers of policyholders who have elected to take the PIP as ignorant dupes who do not know what is good for them and are incapable of exercising free choice. I consider that the likelihood is that they are ordinary intelligent investors who, with the benefit of an explanation of what is undoubtedly a complex proposal, understand the nature of the choice which faces them (if not the intricacies of what lies behind it) and are able to judge for themselves where their individual best interests lie. They judge that a bird in the hand is worth two in the bush: and they accept the advice of those far more highly qualified than themselves that the bird is sufficiently plump to be attractive. It cannot be said that such advice was wrong. It seems to me that Aviva and the PHA have gone to enormous lengths to put relevant information in a comprehensible form to the policyholders who have to make the choice. To extend the deadlines within which the choice has to be made does not compel anyone to choose one way or the other: it simply affords an opportunity.
88. In addition to the categories of complaint with which I have now dealt there were a number of complaints which invited me to consider the phasing of the DSB, to consider the position of policyholders whose policies had already matured when the DSB was announced, to examine the individual circumstances of some policyholders, and to direct enquiries as to why the expectations of some policyholders in relation to their investments had been disappointed. I do not belittle these concerns. But the nature of the question I am called upon to answer on this application does not necessitate their examination.
89. Having considered the object and nature of the Main Scheme, the background against which it fell to be considered, and the detailed objections advanced both in writing and orally before me, I reached the clear view that this was a scheme that I could properly sanction; and I saw no reason to deprive the many policyholders who had elected to take the PIP of the opportunity so to do.
90. There remains one small point related to jurisdiction. Before the Court can make an order under FSMA section 111 it must be satisfied that the appropriate certificates have been obtained. The need for one such certificate arises where any policy or insurance is included in the proposed transfer in respect of which an EEA state other than the United Kingdom ("the Member State") is the state of commitment. In such circumstances the FSA must have given a certificate certifying that the regulator responsible for supervising insurers in the Member State has been notified of the scheme and either (a) that regulator has consented to the scheme or (b) the period of three months beginning with the notification has elapsed and the authority has not refused its consent.
91. The FSA notified the Portuguese regulator on 22 May 2009 . The Portuguese regulator wished to consult with Portuguese policyholders but he expected Aviva to provide all contact details. (The 150 Portuguese policyholders were likely to be British expatriates, since no Portuguese policy documents had ever been issued). He was informed of the court hearing set for 14 September 2009. On 31 July the Portuguese regulator initiated a 60 day consultation period. On 22 August the three month period beginning with notification elapsed. As at that date the Portuguese regulator had not refused consent. The FSA was reluctant to issue a certificate that satisfies section 111 out of a sense of "comity between regulators" because the consultation period was still in train. But in my judgement the conditions for the issue of the certificate had been satisfied. A period of three months had elapsed and the consent of the Portuguese regulator had not been refused. I was therefore satisfied that the certificate ought to be issued and that I had jurisdiction to sanction the scheme according to the timetable laid down by the English Court.
92. I have taken into account the position of the Portuguese regulator as a factor when considering whether it was appropriate to sanction the scheme. No other Member State's regulatory authority has refused its consent. The Main Scheme does not discriminate in any way against Portuguese policyholders: and my attention has been drawn to no peculiar disadvantage that they would suffer by reason of the laws of Portugal. The Portuguese policyholders are small in number. Any delay occasioned by the need to provide them with the full consultation period provided for by Portuguese regulations would very seriously disrupt the implementation of the Main Scheme (which I have otherwise approved). Since I have jurisdiction, the balance of advantage comes down heavily in favour of my exercising it.

Mr Justice Norris……………………………………………………16 October 2009