Rothesay Life has loans of some £1.7bn to the Tchenguiz interests, which are secured against ground rents that are paid annually by residential leaseholders.
The UK’s Prudential Regulation Authority has come under fire for playing “fast and loose” with pensions over its willingness to nod through transfers of savings from long-established insurers to newer specialist rivals. A group of pensions experts and policyholders has written to Sam Woods, the watchdog’s chief executive, questioning its handling of a recent case involving Prudential, the UK insurance company.
These investments have come under scrutiny after criticisms by the Leasehold Knowledge Partnership and others that pensions regulator the Prudential Regulation Authority nodded through transfers of savings from long-established insurers to newer concerns like Rothesay Life.
Prudential, the UK insurance company, was seeking to transfer £12 billion of annuities to Rothesay Life, but the high court blocked the move in August in what the FT terms a “shock judgement”.
The FT reports:
“The judge concluded that savers who had picked Prudential because of its reputation and financial strength should not be forced to switch to a firm that did not have “an established reputation in the business”.
“This was despite the PRA’s recommendation that the transfer be allowed to proceed.”
Rothesay Life was set up in 2007 by Goldman Sachs and it now belongs to US private equity giant Blackstone, Singaporean sovereign wealth fund GIC and MassMutual, a US insurer.
The Leasehold Knowledge Partnership has long been concerned at pension exposure to ground rents: a concern seemingly now shared by the high court, which has to sanction pension transfers to protect saver’s interests.
Prudential and Rothesay Life say they will appeal the decision.
The Leasehold Knowledge Partnership also expressed concern to the PRA that it downplayed the “weak financial position” of Rothesay Life relative to Prudential by neglecting to flag its heavy dependence on “artificial capital”.
Insurers bolster their capital by a practice known as “Matching Adjustment, which means investment in higher yielding assets than “safe” 30-year UK government bonds and similar, which are core to pensions.
All insurers use Matching Adjustment to some degree.
Prudential had solvency capital of £35.7 billion at end 2018, says the FT, of which £2.1 billion “was created by matching adjustment”.
In contrast, Rothesay Life “reported capital of only £3.9bn of which £4.6bn is matching adjustment, leaving its true capital position as negative £0.7bn”, according to LKP.
Matching Adjustments are when insurers invest the funds from which they will pay annuities in higher-yielding assets These can include some “safe” instruments such as 30 year UK government bonds, but generally encompass assets such as corporate bonds and loans linked to property values.
The FT reports that the PRA says Matching Adjustment serves a useful purpose by giving incentives to “buy-and-hold” investors to hold on to higher-yielding assets. But the practice of taking profits early has been criticised by numerous financial experts, including David Miles, a former member of the Bank of England’s Monetary Policy Committee, who called it “nonsense and a dangerous road to go down”, the FT reports.
LKP trustee Dean Buckner, a former regulator at the Prudential Regulatory Authority, said the PRA was acting “on the side of powerful vested interests”. By not disclosing the full risk of Rothesay’s assets it was “playing fast and loose with the hard-earned life savings of ordinary working people”.
Rothesay Life strongly contests these claims, arguing that they contain “multiple significant factual inaccuracies and errors”.
Rothesay Life notes today the judgement of the High Court of England and Wales (“the High Court”) in connection with the proposed transfer of a portfolio of annuities from The Prudential Assurance Company Limited (“PAC”), a subsidiary of M&GPrudential, to Rothesay Life.
These include “basing [the] analysis on the wrong Prudential company [the group and not the demerged M&G entity], and asserting that our owners have taken dividends out of the company”.
“Rothesay Life is one of the best capitalised insurers amongst its peers and has significant backing from its shareholders, who in the last month injected £700m of new capital in order to fund further growth of the business,” the firm said.
“Policyholders can gain comfort from the high level of security offered by the PRA’s regulatory capital regime as well as its support from strong and committed shareholders.”
Rothesay Life has also said that it will not profit from leasehold forfeiture windfalls when a lease is forfeited, usually owing to a money dispute concerning ground rent or service charges. Freeholders can gain the entirety of the asset even when relatively small debts are involved.
Kevin Dowd, a professor of finance at Durham university, who was also a signatory to the LKP letter, said:
“Private equity firms are making a lot of money from a flawed business model that could have calamitous consequences down the road.”