The Proposed Scheme of Arrangement Between the Royal London Mutual Insurance Society Limited and the Holders of Certain United Friendly Ordinary Branch Policies

MILLIMAN REPORT

The proposed scheme of arrangement between The Royal London Mutual Insurance Society Limited and the holders of certain United Friendly Ordinary Branch policies

The report of the Independent Expert

1 July 2021

Oliver Gillespie FIA

Table of Contents

1. EXECUTIVE SUMMARY ...... 2 2. BACKGROUND TO RLMIS AND THE IN-SCOPE WITH-PROFITS FUNDS ...... 10 3. A SUMMARY OF THE PROPOSED OFFER AND THE PROPOSED SCHEME ...... 25 4. THE PROCESS AND TIMETABLE FOR THE PROPOSED SCHEME ...... 40 5. THE COMMUNICATIONS STRATEGY FOR THE PROPOSED SCHEME ...... 45 6. THE CONSIDERATIONS OF THE INDEPENDENT EXPERT ...... 52 7. THE SECURITY OF POLICYHOLDER BENEFITS TEST ...... 60 8. THE POLICYHOLDER OUTCOMES TEST – OVERVIEW ...... 68 9. THE POLICYHOLDER OUTCOMES TEST – THE REASONABLE BENEFIT EXPECTATIONS OF THE POLICYHOLDERS OF THE UFOB SUB-FUND ...... 69 10. THE POLICYHOLDER OUTCOMES TEST – THE REASONABLE BENEFIT EXPECTATIONS OF THE EXISTING POLICYHOLDERS OF THE RL OPEN FUND ...... 88 11. THE POLICYHOLDER OUTCOMES TEST – THE REASONABLE BENEFIT EXPECTATIONS OF THE REMAINING POLICYHOLDERS OF RLMIS ...... 93 12. THE POLICYHOLDER OUTCOMES TEST – THE STANDARDS OF ADMINISTRATION, SERVICING AND GOVERNANCE APPLYING TO THE RLMIS POLICYHOLDERS ...... 94 13. THE POLICYHOLDER OUTCOMES TEST – SHOULD THE PROPOSED SCHEME BE CONSIDERED TO BE A REATTRIBUTION OF THE UFOB SUB-FUND ESTATE? ...... 95 14. THE POLICYHOLDER OUTCOMES TEST – MY CONCLUSION ...... 97 15. THE ADVERSE SCENARIO TEST ...... 98 16. THE POLICYHOLDER COMMUNICATIONS TEST ...... 102 17. THE POLICYHOLDER VOTE TEST ...... 106 18. THE FAIR CONDUCT TEST ...... 110 19. OTHER CONSIDERATIONS ARISING FROM THE SCHEME ...... 115 20. MY CONCLUSIONS...... 126 21. RELIANCES AND LIMITATIONS OF THIS REPORT ...... 128

APPENDIX A: FINANCIAL INFORMATION ON A SOLVENCY II PILLAR 1 BASIS ...... 130 APPENDIX B: THE UK LIFE INSURANCE MARKET AND REGULATORY ENVIRONMENT ...... 131 APPENDIX C: DATA RELIED UPON ...... 137 APPENDIX D: CERTIFICATE OF COMPLIANCE ...... 138 APPENDIX E: GLOSSARY OF TERMS ...... 139

1. Executive summary

BACKGROUND TO ROYAL LONDON AND THE UFOB SUB-FUND

The Royal London Mutual Insurance Society Limited

1.1 The Royal London Mutual Insurance Society Limited (“RLMIS”) is a mutual insurance company that is the parent entity of the Royal London Group (“RLG”).

1.2 As at 31 December 2020, RLMIS had £148 billion of funds under administration, 8.8 million policies in force and £95.3 billion of Technical Provisions.

1.3 RLMIS currently consists of the Royal London Open Fund (the “RL Open Fund”) and six ring-fenced funds referred to collectively as the “RLMIS Closed Funds”. The RLMIS Closed Funds contain the assets and liabilities relating to business acquired through various acquisitions by RLMIS as described in Section 2. The most relevant sub- funds for this report are:

 The RL Open Fund; and

 The United Friendly Ordinary Branch Sub-Fund (the “UFOB Sub-Fund”).

1.4 All financial information in this report is (unless otherwise stated) as at 31 March 2021.

The RL Open Fund

1.5 The RL Open Fund is the largest fund within RLMIS, and all new policies issued by RLMIS, with the exception of increments or options on existing policies allocated to some other funds, are written in the RL Open Fund.

1.6 The inherited estate of the RL Open Fund (the “RL Open Fund Estate”) provides capital to support the business activities of RLMIS, including writing new business in the RL Open Fund. In return, the RL Open Fund Estate receives profits (or incurs losses) from these business activities.

1.7 As at 31 March 2021, the RL Open Fund1 had:

 Assets of £72.4 billion;

 Own Funds2 (on an internal Pillar 2 basis) of £5.0 billion; and

 A standalone Internal SCR Cover of 191%.

1.8 The Internal SCR Cover is a measure of the financial strength of the RL Open Fund and is calculated as the ratio of the RL Open Fund Own Funds to the RL Open Fund Solvency Capital Requirement where the Own Funds and Solvency Capital Requirement are internally calculated by RLMIS.

The UFOB Sub-Fund

1.9 The UFOB Sub-Fund arose from the acquisition of United Assurance Group (“UAG”) by RLMIS in 2000 and the transfer, in 2001, of the business of the insurance companies within UAG into RLMIS pursuant to an insurance business transfer scheme (the “UAG Scheme”).

1.10 Under the UAG Scheme, various subsets of the assets and liabilities of the insurance companies within UAG were transferred into the RL Open Fund, subject to separate ‘additional accounts’ being maintained for each subset. The presence of the additional accounts, in conjunction with the provisions in Chapter 20 of the Financial Conduct Authority’s (“FCA”) Conduct of Business Sourcebook ("COBS 20") in relation to the segregation of assets, means

1 The financial position of the RL Open Fund is set out here assuming the RAIB Sub-Fund Consolidation (described in more detail in Section 2) had already been implemented as at 31 March 2021. 2 Under the Solvency II regime, the excess of assets over liabilities, plus any subordinated liabilities, is known as Own Funds. Own Funds can be thought of as the capital resources available in the company to cover capital requirements.

that RLMIS has been treating these subsets as separate sub-funds of the RL Open Fund for reporting and communication purposes since 2004.

1.11 The UFOB Sub-Fund is one of these sub-funds, comprising the Ordinary Branch (“OB”) business originally sold by United Friendly Life Assurance plc. and consists primarily of conventional with-profits (“CWP”) pension business alongside a small number of CWP life policies.

1.12 As at 31 March 2021, the UFOB Sub-Fund had:

 Approximately 148,000 policies3;

 Assets of £2.9 billion;

 Own Funds (on an internal Pillar 2 basis) of £191 million;

 An estate (also referred to as an additional account) of £191 million; and

 A standalone Internal SCR Cover of 556%.

1.13 Since the end of 2007, RLMIS has been distributing the additional account of the UFOB Sub-Fund (the “UFOB Additional Account”) which forms part of the UFOB Sub-Fund, to its policyholders using a combination of enhancements to asset shares and uplifts to claim values.

1.14 Under the terms of the UAG Scheme, RLMIS is required to allocate the UFOB Additional Account in full (less the provision for outstanding tax liabilities at that time) to the asset shares of the with-profits policies in the UFOB Sub- Fund when the total asset share falls below £100 million (the “UFOB Sunset Clause Threshold”), which is expected to be reached in 2039. At this point, the requirement to maintain any separation from the RL Open Fund would fall away and the UFOB Sub-Fund would be consolidated into the RL Open Fund.

THE PROPOSED SCHEME OF ARRANGEMENT

What is a scheme of arrangement?

1.15 A scheme of arrangement is a statutory procedure under Part 26 of the Companies Act 2006 whereby a company may make a compromise or arrangement with its members or creditors (or any class of them).

1.16 A scheme of arrangement must be approved at a creditor (i.e. the policyholder) meeting (convened by the court – for this Scheme it is the High Court of England and Wales – the “High Court") by a particular majority of creditors, namely a majority (i.e. more than half) in number representing at least three quarters by value of the creditors (or each class of creditors, if applicable) who vote. It must also be approved (i.e. sanctioned) by the High Court.

The RLMIS offer to policyholders and the scheme of arrangement

1.17 RLMIS proposes to make an offer (the “Offer”) to all of the holders of with-profits policies in the UFOB Sub-Fund, with the exception of:

 Those policies with maturity dates prior to 31 December 2021; and

 With-profits policies of the UFOB Sub-Fund immediately prior to the Calculation Date (31 March 2021) in respect of which, based on Royal London's best estimate assumptions applied as at the Calculation Date, the projected value of the benefits payable under the policy as at the expected date of claim is not expected to be

3 The policy counts shown are as at 31 December 2020, however no material change is expected between the 31 December 2020 and 31 March 2021.

increased by the application of the Offer Uplift (see 1.22 below) and the uplifts to premiums paid (see 1.22 below), if applicable, under this Scheme.

Such excluded policies are referred to in this Report as heavily in the money (“HITM”)4 policies.

1.18 Policies that are eligible to receive the Offer are referred to in this Report as “Eligible Policies” and holders of Eligible Policies are referred to as “Eligible Policyholders”. Details of eligibility to receive the Offer are given in Section 3.

1.19 The Offer will be implemented by way of a scheme of arrangement (the “Scheme” or the “UFOB Sub-Fund Scheme”).

1.20 The Scheme will apply on the “Implementation Date” (expected to be 31 December 2021 but which can be delayed by RLMIS to no later than 31 March 2022) to Eligible Policyholders whose Eligible Policies remain in-force on 31 December 2021. These policyholders are referred to as “Included Policyholders”, and their policies that are within the scope of the Scheme are referred to as “Included Policies”.

1.21 Throughout this Report, I have used the term “additional account” to refer to the excess of the UFOB Sub-Fund’s assets over its liabilities, as this term is used in the UAG Scheme document and by RLMIS internally. However, for the purposes of this Report, the terms “estate”, “inherited estate” and “additional account” can be interpreted as being synonymous.

1.22 The Offer made to Eligible Policyholders would be as follows:

 Eligible policyholders would receive an immediate uplift to the asset shares (the “Offer Uplift”) of their Included Policies on the Implementation Date.

The Offer Uplift percentage (6.4%) would be applied to the asset shares of Included Policies.

This compares to the expected business-as-usual (“BAU”) uplift on claim values in 2022 for with-profits policies of the UFOB Sub-Fund of 5.6%.

 In addition, for Included Policies where the policyholder is still paying regular contractual premiums (i.e. the policy has not been made paid-up and the policyholder has not reached the fully free paid age), the Offer Uplift percentage would also be applied to the amount allocated to asset share in respect of future premiums as and when those premiums are paid and credited to asset shares.

 Following the application of the Offer Uplift, the UFOB Additional Account would cease to exist, and Included Policies would not receive any future distributions from any other inherited estates (other than though ProfitShare).

The application of the Offer Uplift would be expected to exhaust the UFOB Additional Account (less the Scheme Contribution – described below).

1.23 If the Offer were to be approved then the Scheme would be implemented and, on the Implementation Date, the Offer Uplift would be applied to Included Policies’ asset shares and the business of the UFOB Sub-Fund would be consolidated into the RL Open Fund.

1.24 After the implementation of the proposed Scheme, the RL Open Fund Estate would meet any additional capital requirements resulting from the consolidation, and would also meet the costs of designing, analysing and implementing the Scheme.

4 With-profits policies typically include a final bonus, which is an increase to guaranteed benefits that ensures that the policy pay-out is not below a target range around the policy’s asset share (often subject to some smoothing). A with-profits policy is described as being ‘in the money’ if the policy’s guaranteed benefits (without any final bonus) are such that they projected to be in excess of the policy’s asset share upon the policy’s maturity/retirement date, and therefore no final bonus is expected to be paid.

1.25 If the Scheme were to be approved, an amount (the “Scheme Contribution”) would be deducted from the UFOB Additional Account and would not be allocated to asset shares under the Offer Uplift. The Scheme Contribution would be made up of three distinct components:

 The Closed Fund Contribution (the “CFC”).

The CFC would be paid to the RL Open Fund as compensation for the opportunity costs that the RL Open Fund would incur in using its assets to meet some of the additional capital requirements in the RL Open Fund resulting from the consolidation. These capital requirements exclude those in respect of market risk.

The CFC for the UFOB Sub-Fund Scheme is zero.

 The “Project Costs Allowance”.

This would be paid to the RL Open Fund as compensation to the RL Open Fund for meeting the costs of the Scheme, including any cost overruns relative to the costs that are expected.

The Project Costs Allowance for the UFOB Sub-Fund Scheme is £16.9 million.

 The “Premium Uplift Contribution”.

This is a portion of the UFOB Additional Account that would be paid to the RL Open Fund in order that the amount allocated to asset share when future premiums are paid by premium-paying with-profits policies of the UFOB Sub-Fund may be uplifted by the same percentage as Included Policies’ asset shares. This uplift would occur in the future and be paid from the RL Open Fund.

The Premium Uplift Contribution for the UFOB Sub-Fund Scheme is £0.9 million.

What are the reasons for the proposed Scheme?

1.26 RLMIS has described its main motivations behind the Scheme as follows:

 The speed at which the UFOB Additional Account can be distributed to with-profits policyholders in the UFOB Sub-Fund is currently constrained by the requirement to cover the UFOB Sub-Fund’s capital requirements.

If the Scheme were to proceed, the UFOB Sub-Fund would be consolidated into the RL Open Fund, which would enable an immediate and certain distribution of the UFOB Additional Account (less the Scheme Contribution) to Included Policyholders and likely improved outcomes for these longstanding policyholders;

 It would simplify the RLMIS fund structure by reducing the number of RLMIS Closed Funds; and

 It would provide reduced costs of reporting, accounting and audit and thereby provide benefits to the wider group of RLMIS policyholders.

1.27 The Scheme is taking place as part of a programme of other changes (the “Simplification Programme”) across RLMIS with similar objectives as described further in Section 3. The principal changes relevant to this Report are the UFIB Sub-Fund Scheme and the SL Fund Scheme, both of which are described in Section 2.

1.28 There are a number of motivations to carry out this Scheme sooner rather than later:

 Tontine smoothing5:

The removal of the need for the UFOB Additional Account to cover the capital requirements of the UFOB Sub- Fund would allow an earlier consolidation and the application of a uniform uplift across all policyholders’ eligible

5 In the context of a with-profits fund, a tontine may arise when the fund is closed to new policies and some of its surplus assets have been held back from being distributed to its policyholders, often as a result of the fund needing to hold sufficient surplus assets to meet its own capital requirements. This may result in a so-called tontine effect, where by the time a fund’s surplus assets can be fully distributed, the number of with-profits policyholders remaining in the fund is very small which, if unchecked, could result in the last policyholders left in the fund receiving disproportionate distributions of the fund’s estate/additional account. Tontine smoothing refers to a situation in which the estate/additional account is distributed more evenly across the fund’s policyholders, rather than being held back in such a way that a tontine is created.

asset shares and future premiums, which would help to mitigate the risk of a tontine effect and improve fairness for different generations of policyholders.

 The certainty of distribution:

The future distributions from the UFOB Additional Account to the with-profits policyholders of the UFOB Sub- Fund are currently uncertain in terms of both timing and amount.

If the Scheme were to be implemented, the UFOB Additional Account (less the Scheme Contribution) would be distributed to policies immediately and at a set percentage of asset share.

 The spreading of project costs:

At the point of cessation of the UFOB Sub-Fund and the distribution of the UFOB Additional Account, the costs of consolidation (which are largely fixed in nature) would be spread over the remaining with-profits policies in the UFOB Sub-Fund.

Earlier consolidation would enable the spreading of these costs over a larger number of policies thereby reducing the impact on each individual policy.

 Diversification benefits:

The consolidation of the UFOB Sub-Fund into the RL Open Fund would allow the earlier realisation of diversification benefits6 between the risks of the two funds, resulting in a lower overall capital requirement.

 Expense synergies:

In Section 3 I describe the Simplification Programme, which includes a fund consolidation programme. RLMIS expects that undertaking the Scheme as part of this fund consolidation programme will realise expense synergies that can be shared with the current policies of the UFOB Sub-Fund.

MY ROLE AS THE INDEPENDENT EXPERT

1.29 I have been appointed by RLMIS to fulfil the role of Independent Expert and report on the terms of the Offer under the Scheme and its effects on, and fairness to, the policyholders of RLMIS. The FCA has confirmed its non- objection to my appointment.

1.30 I am a Fellow of the Institute and Faculty of Actuaries and hold certificates issued by the Institute and Faculty of Actuaries enabling me to fulfil the roles of Chief Actuary and With-Profits Actuary under the FCA’s and Prudential Regulation Authority’s (“PRA”) Senior Managers and Certification Regime.

1.31 I am a partner of Milliman LLP (“Milliman”), part of Milliman Inc., a global consulting firm. I have over 20 years’ experience in the UK life insurance industry and I have previously fulfilled the role of Independent Expert a number of times in relation to transfers of long-term insurance business under Part VII of the Financial Services and Markets Act 2000 (“FSMA”) on schemes that have been approved by the High Court.

1.32 In relation to my independence from RLMIS:

 I am not a member of RLMIS;

 I do not have any policies with RLG nor with any of its constituent companies; and

 I am not a member of a pension scheme administered by RLG or by any of its constituent companies.

6 Diversification benefit refers to a situation in which a fund is exposed to a number of unconnected/unrelated risks, which means that the fund is less affected by the manifestation of any single risk. The Solvency II rules permit insurers whose risks are well diversified to take more credit through their capital requirements for this additional resilience than insurers exposed to a single risk or to risks that are strongly related to each other.

MY REPORT ON AND REVIEW OF THE SCHEME

1.33 The purpose of this Report is to set out my review of the proposed Scheme and its likely effect on, and fairness to, the RLMIS policyholders.

1.34 In assessing the impact of the implementation of the Scheme on the policyholders of RLMIS, and whether those policyholders would be treated fairly and reasonably if the Scheme were to be implemented, I have had regard to the extent to which the Scheme meets a series of fairness tests (the “Fairness Tests”).

 The Security of Policyholder Benefits Test

This test considers the effect that the implementation of the Scheme would have on the security of policyholders’ guaranteed benefits received under the policies of RLMIS.

 The Policyholder Outcomes Test

This test considers whether the effects of the proposals are fair and reasonable in respect of outcomes for different groups of policyholders in RLMIS. The security of benefits is considered in the Security of Policyholder Benefits Test and so this test focusses on

o Policyholders’ reasonable benefit expectations; and

o The standards of servicing, administration, management, and governance experienced by the policyholders.

 The Adverse Scenario Test

This test considers whether the proposals would remain fair and reasonable under a range of circumstances and scenarios.

 The Policyholder Communications Test

This test considers whether the information that is provided to policyholders in respect of the Scheme is clear, concise, and of an appropriate level of detail, and in respect of Eligible Policyholders, has been provided with sufficient time for them to assess the proposals and make an informed decision regarding the Policyholder Vote.

 The Policyholder Vote Test

This test considers the fairness of the various features of the Policyholder Vote and these include, the number of voting classes and the class composition, the approach to the calculation of the value given to each vote in the interpretation of the results of the vote, and the requirements for the proposals to be approved.

 The Fair Conduct Test

This test considers whether the conduct of RLMIS in relation to the proposed Scheme is fair and reasonable to all policyholders and in particular, the approach to eligibility for the Offer, the treatment of uncontactable policyholders, and the compulsion involved if the Scheme were to be sanctioned.

1.35 The Fairness Tests are set out in detail in Section 6 of this Report.

1.36 My Report will be presented to the High Court and will be made available to policyholders and others via the RLG website. My Report does not provide financial or other advice to individual policyholders.

THE ALLOCATION OF EXCEPTIONAL COSTS

1.37 It is currently the case that any costs deemed to be exceptional costs (as defined in the UAG Scheme) that would be allocated to the UFOB Sub-Fund should, in line with the UAG Scheme, be charged 50% to the UFOB Sub-Fund and 50% to the RL Open Fund.

1.38 However, in respect of the costs of the proposed UFOB Sub-Fund Scheme and those of the wider Simplification Programme relevant to the UFOB Sub-Fund, although Royal London would consider these to be exceptional costs, it is proposing a change to the allocation of costs as part of the overall compromise with its policyholders under the UFOB Sub-Fund Scheme such that these costs should be met 100% by the UFOB Sub-Fund rather than shared equally between the UFOB Sub-Fund and the RL Open Fund.

1.39 As set out in Section 18, I am satisfied that this approach to the allocation of the costs of the UFOB Sub-Fund Scheme and the wider Simplification Programme is reasonable.

THE COVID-19 PANDEMIC

1.40 In Section 19 I consider the conclusions in this Report in light of the continued impact of the COVID-19 pandemic, including the potential for further volatility in financial markets, the potential operational disruption within RLMIS, the potential disruption to third parties that play a role in the implementation of the Scheme and the wider societal impacts caused by the COVID-19 outbreak.

1.41 The future course of the pandemic and the associated impacts on all aspects of life remain uncertain, and it is not possible for me to comment on every possible future scenario. However, in Section 19 I have covered the scenarios that, in my view, are the most plausible and relevant to the Scheme.

1.42 In the event that COVID-19 were to result in impacts that, in my view, would render it inappropriate for RLMIS to proceed with the Scheme within the planned timeframes I would make my views on this known to RLMIS. I would also expect to be informed of any changes to the planned implementation of the Scheme.

1.43 Based on current conditions, in my view it remains appropriate for RLMIS to continue to pursue the implementation of the UFOB Sub-Fund Scheme.

MY CONCLUSIONS ON THE SCHEME

1.44 This Report sets out my analysis of the proposed Scheme in respect of each of the Fairness Tests and various other considerations in Sections 6 to 19. I will produce a further report (my “Supplementary Report”) prior to the Sanction Hearing. My Supplementary Report will update my conclusions from this Report in light of updated financial information and any other new or updated information available at the time.

1.45 Based on the position at the date of this Report I am satisfied that if the proposed Scheme were to be implemented there would not be a material adverse effect on:

 The security of guaranteed benefits of the policies of RLMIS;

 The reasonable benefit expectations of policyholders of RLMIS; and

 The standards of administration, servicing, management, and governance applying to the policies of RLMIS.

1.46 I am further satisfied that:

 The Scheme would remain fair and reasonable under a range of circumstances and scenarios;

 The information that has been or is to be provided to policyholders in respect of the Scheme is clear, concise, and of an appropriate level of detail, and will have been provided to policyholders with sufficient time for them to assess the proposals and make an informed decision regarding the vote.

 The proposal to include uncontactable policyholders within the scope of the Scheme is appropriate;

 The proposed approach to the policyholder vote is fair and reasonable; and

 In respect of the following areas the conduct of RLMIS in respect of the proposed Scheme is fair and reasonable to all policyholders:

o The approach to eligibility for the Offer;

o The approach to the allocation of the costs of the UFOB Sub-Fund Scheme and the wider Simplification Programme;

o The treatment of uncontactable policyholders; and

o The compulsion of non-respondents and those who vote against the Offer.

1.47 I am therefore satisfied that the requirements of the Fairness Tests set out in Section 6 have been met.

1.48 I am satisfied that these conclusions would hold whether or not the UFIB Sub-Fund Scheme or the SL Fund Scheme were to proceed.

1.49 I will review the following in my Supplementary Report:

 An update on the effect of the implementation of the Scheme based upon more up to date financial information and on any other material developments since the date of this Report.

 The results of the policyholder vote.

 The actual response rates and policyholder comments in relation to the Scheme.

 The communication materials in respect of the UFOB Sub-Fund Scheme due to be issued to policyholders after the implementation of the Scheme.

 Consideration of the non-respondents and those who vote against the Offer, and whether these groups of policyholders might be more likely to suffer an adverse outcome as a result of the Scheme.

 Any significant events or market changes that may occur between the finalisation of this Report and the finalisation of my Supplementary Report.

TERMINOLOGY USED IN THIS REPORT

1.50 Throughout this Report I have used certain terms that are in common usage within the UK insurance industry, particularly terms that relate to with-profits products and to the accounting, regulatory and solvency regime that applies to UK insurers.

1.51 Definitions and explanations of these terms, and the abbreviations used herein, are given in Appendix E of this Report.

2. Background to RLMIS and the in-scope with-profits funds

BACKGROUND

2.1 The Royal London Mutual Insurance Society Limited (“RLMIS”) is a mutual life insurance company that is the parent entity of the Royal London Group (“RLG”). RLG operates in the protection, retirement, savings, and investments markets, and operates primarily in the UK. RLMIS is the sole UK insurance entity in RLG.

2.2 Figure 2.1 below illustrates the simplified corporate structure of RLG, including the entities of particular interest for the UFOB Sub-Fund Scheme that is the subject of this Report.

FIGURE 2.1 RLG SIMPLIFIED CORPORATE STRUCTURE

RLMIS

Royal London Royal London Other subsidiaries, Asset Management Management including RLI DAC Limited Services Limited

2.3 Within RLG, there exists:

 Royal London Asset Management Limited (“RLAM”), which was established in 1988 to undertake investment management for all of the RLMIS funds.

 Royal London Management Services Limited (“RLMS”), a UK-based administration services company, which provides policy administration services and has ownership of the legacy administration systems.

2.4 RLMIS also has a fully owned subsidiary, Royal London Insurance DAC (“RLI DAC”), which is an insurance company incorporated and authorised in the Republic of Ireland. Certain business was transferred to RLI DAC effective for accounting purposes on 1 January 2019. RLI DAC was authorised by the Central Bank of Ireland to write new life insurance business in the Republic of Ireland with effect from 1 January 2019.

THE ACQUISITION OF UAG AND THE UAG SCHEME

2.5 In 2000, RLMIS acquired the United Assurance Group (“UAG”) comprising Refuge Assurance plc, United Friendly Insurance plc, Refuge Investments Limited, United Friendly Life Assurance plc and Canterbury Life Assurance Company Limited. UAG had been formed in 1996 through a merger of Refuge Assurance plc and United Friendly Insurance plc.

2.6 On 1 January 2001, the business of the five companies comprising UAG was transferred to RLMIS pursuant to an insurance business transfer scheme made under Section 49 and Schedule 2C to the Insurance Companies Act 1982 (the “UAG Scheme”).

2.7 Under the UAG Scheme a separate sub-fund, the Refuge Assurance Ordinary Branch Sub-Fund (the “RAOB Sub- Fund”), was established owing to the existence of deferred shares held by former Refuge Assurance plc shareholders. The deferred shares expired without value in 2006 and thereafter the UAG Scheme no longer

required the separate sub-fund to be maintained. The RAOB Sub-Fund was consolidated into the RL Open Fund on 31 December 2006, following the review by an independent expert and non-objection from the Financial Services Authority.

2.8 Under the UAG Scheme, the liabilities of the relevant businesses at that time, other than the liabilities of the RAOB Sub-Fund, were transferred to the RL Open Fund together with sufficient assets to meet these liabilities on a best estimate basis.

2.9 The UAG Scheme did not explicitly establish distinct sub-funds for the business of UAG other than the RAOB Sub- Fund; however, the excess assets that formed the inherited estates7 of the UFOB Sub-Fund (subject to the reduction described in paragraph 2.12) and the UFIB Sub-Fund (and, historically, the RAIB Sub-Fund) have, since the implementation of the UAG Scheme, been kept separate from the RL Open Fund (and from each other).

2.10 The UAG Scheme refers to these separate pools of assets as the ‘additional accounts’. The additional account for each of these sub-funds is maintained for the purpose of meeting ongoing costs in that sub-fund, such as any deficit arising in relation to the sub-fund’s liabilities. Conversely, the value of the additional account would be increased in relation to any surplus arising in relation to the sub-fund’s liabilities.

2.11 Throughout this Report, I refer to the additional account of the UFOB Sub-Fund as the “UFOB Additional Account”.

2.12 Under the UAG Scheme, 50% of the UFOB Additional Account was transferred to the RL Open Fund and, going forward, the RL Open Fund meets 50% of any exceptional costs apportioned to the UFOB Sub-Fund.

2.13 The presence of the additional accounts, in conjunction with the provisions in Chapter 20 of the FCA’s Conduct of Business Sourcebook ("COBS 20") in relation to the segregation of assets, means that RLMIS has been treating the UFOB Sub-Fund, as well as the United Friendly Industrial Branch Sub-Fund (“UFIB Sub-Fund”) and (historically) the Refuge Assurance Industrial Branch Sub-Fund (the “RAIB Sub-Fund”) as separate sub-funds for reporting and communication purposes from 2004.

2.14 Under Solvency II, the UFOB Sub-Fund and the UFIB Sub-Fund (and historically the RAIB Sub-Fund) are treated as ring-fenced funds within RLMIS and the capital requirements for each are separately determined from those of the RL Open Fund. Therefore, there is assumed to be no diversification of risks between these sub-funds and the RL Open Fund in the calculation of the capital requirements of either the RL Open Fund or these sub-funds.

2.15 The UFIB Sub-Fund is subject to its own scheme of arrangement (the UFIB Sub-Fund Scheme) and is not within the scope of the UFOB Sub-Fund Scheme that is the subject of this Report.

THE RAIB SUB-FUND CONSOLIDATION

2.16 The Refuge Assurance Industrial Branch (“RAIB”) Sub-Fund was a sub-fund of RLMIS that contained the industrial branch business of Refuge Assurance acquired by RLMIS from UAG and transferred into RLMIS pursuant to the UAG Scheme.

2.17 During the first half of 2021, RLMIS went through a process to increase the sunset clause threshold for the RAIB Sub-Fund (the “RAIB Sunset Clause Threshold”) to £200 million (from £100 million) with the result that the clause was triggered in 2021. This process was carried out using the existing amendment powers contained in the UAG Scheme, which did not require approval by the High Court or the regulators and resulted in an amendment to the “Other Principles of Financial Management” contained therein.

2.18 The process enabled RLMIS to distribute the RAIB Additional Account (less any deductions deemed to be appropriate) to its with-profits policyholders and to consolidate the RAIB Sub-Fund into the RL Open Fund. This

7 The inherited estate of a with-profits fund is the difference between the value of the assets and the best estimate value of the liabilities of the fund.

process was implemented on 30 June 2021 and is referred to in this Report as the “RAIB Sub-Fund Consolidation”.

2.19 The financial position of the RL Open Fund shown in this Report is presented assuming that the RAIB Sub-Fund Consolidation had already been implemented as at 31 March 2021.

THE CURRENT FUND STRUCTURE OF RLMIS

2.20 As at 31 December 2020, RLMIS had £148 billion of funds under administration, 8.8 million policies in force and £95.3 billion of Technical Provisions.

2.21 RLMIS is authorised to undertake long term insurance business falling in Classes I, II, IV, VI and VII, as set out in Part II of Schedule 1 to the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001.

2.22 RLMIS currently consists of the RL Open Fund and six ring-fenced funds that are closed to new business. These closed funds contain the assets and liabilities relating to business acquired through various acquisitions by RLMIS. These are:

 The UFOB Sub-Fund;

 The UFIB Sub-Fund;

 The Scottish Life Fund (“SL Fund”);

 The PLAL With-Profits Fund (the “PLAL WPF”);

 The Royal Liver With-Profits Fund (the “Royal Liver WPF”); and

 The Royal London (CIS) Fund (the “RLCIS Fund”).

2.23 These six closed funds are referred to collectively as the “RLMIS Closed Funds”.

FIGURE 2.2 RLMIS FUND STRUCTURE

RLMIS

PLAL RL Open Royal RLCIS SL Fund WPF Fund Liver WPF Fund

UFIB Sub- UFOB Fund Sub-Fund

2.24 The policies directly affected by the Scheme are policies of the UFOB Sub-Fund.

MEMBERSHIP OF RLMIS

2.25 RLMIS is a mutual life insurance company and, as such, its members are its proprietors, with the RLMIS Board having a duty to promote the success of the business for the benefit of its current and future members.

2.26 Members are generally policyholders who have purchased policies from RLMIS that allow them to participate in the profits of RLMIS.

2.27 Policyholders whose policies have been transferred to RLMIS through previous acquisitions and subsequent schemes of transfer have not gained membership. The policies in the UFOB Sub-Fund were all written prior to the implementation of the UAG Scheme. Therefore, none of the Eligible Policies confer membership of RLMIS on the Eligible Policyholders.

2.28 Members of RLMIS have the right to vote at the Annual General Meeting or an Extraordinary General Meeting of RLMIS. All members have voting rights of one vote per member, all ranking equally.

2.29 The rules of membership are contained in the Articles of Association of RLMIS.

THE UFOB SUB-FUND

Introduction

2.30 The business of the UFOB Sub-Fund was acquired by RLMIS as part of the acquisition of the UAG in 2000.

2.31 The UFOB Sub-Fund comprises predominantly CWP pension business alongside a small number of CWP life policies. There were also approximately 11,500 non-profit policies in the UFOB Sub-Fund as at 31 December 2020.

2.32 The Principles and Practices of Financial Management applicable to the business in the UFOB Sub-Fund are set out in the RL Long Term Fund PPFM which also covers the business of the RL Open Fund and the UFIB Sub- Fund.

The UFOB Sub-Fund pensions business

2.33 The CWP pension business consists of individual personal pension policies which can be split into three types:

 Contracted-out Appropriate Personal Pensions (“APPs”): personal pension savings where recurrent single premiums were paid by rebates from National Insurance contributions.

 Personal Pensions (“PPs”): personal pension savings policies where policyholders pay premiums directly.

 Freestanding Additional Voluntary Contribution (“FSAVC”): policies linked to a defined benefit workplace pension scheme whereby members can pay additional contributions towards their pension savings.

2.34 PP and FSAVC policies in the UFOB Sub-Fund can, at the instigation of the policyholder, be made “paid up”. This means that the policyholder ceases paying premiums in return for a lower benefit amount. Paid up policies remain with-profits after the premiums cease.

2.35 PP and FSAVC policies which were made paid up prior to 2010 have guaranteed benefits that often exceed the policy’s asset share by a considerable margin, to the point where the asset shares are unlikely ever to increase above the level of the guaranteed benefit.

The UFOB Sub-Fund life business

2.36 The CWP life business within the UFOB Sub-Fund comprises primarily whole of life policies, with a small number of endowment policies which are a mix of CWP endowment assurances and mortgage endowments. There are additional rider benefits that exist on some of the life policies, namely accidental death, and family income benefits.

2.37 There are a number of possible product conversions available to holders of life policies in the UFOB Sub-Fund.

2.38 Before 2003, most UFOB life policies had the option to take out a loan secured against the proceeds of their policies. This option ceased in May 2003; however, some pre-existing loans remain. The outstanding amount of the loan and the interest is repaid at policy maturity from the claim amount or by instalments paid by the policyholder. If the value of the loan and interest exceeds the claim value, then the difference is written off.

2.39 The whole of life policy premiums cease at age 80 and the policy becomes “paid up”. Paid up policies remain with- profits after the premiums cease.

2.40 Table 2.3 below shows the breakdown of the types and number of policies in the UFOB Sub-Fund, as at 31 December 2020.

TABLE 2.3 BREAKDOWN OF THE NUMBER OF POLICIES IN THE UFOB SUB-FUND AT 31 DECEMBER 2020 Number of Product type policies Pensions: APP 99,774 Pensions: PP 25,475 Pensions: FSAVC 507 Whole of Life 21,198 Endowment 444 Term Assurance 249 Total 147,647

Policy administration and charges to policies in the UFOB Sub-Fund

2.41 Through its historical acquisitions, RLMIS currently operates a number of administration systems specific to different books of business within the RLMIS Closed Funds. These legacy administration systems currently service the RLMIS Closed Funds but are owned and maintained by RLMIS.

2.42 The costs of operating the legacy administration systems in respect of the UFOB Sub-Fund are charged to the sub- fund on the basis of ‘actual cost’ plus a profit margin, and for the UFOB Sub-Fund this margin is 15%. These maintenance expenses are defined in a management service agreement with RLMS.

2.43 For the purposes of charging the expenses to asset shares:  For APP policies the expense is charged as a percentage of asset share; and

 For all other policies the total maintenance expense is split into two parts:

o The first part of the maintenance expense is reflected in a charge to asset shares as a fixed monetary amount per policy per annum; and

o The second part is reflected as a charge to asset shares in proportion to the premium payable under the policy (and so does not apply where the policy is paid-up).

2.44 The 15% margin for maintenance expenses is reviewed every three years to ensure that the overall charges that are applied are no more than the level of policy administration charges that would be levied if the maintenance of this business were to be outsourced to an external service provider. This periodic review is intended to provide a cap on the administration charges to the UFOB Sub-Fund as, if average third party provider rates were to be observed to be lower than those charged by RLMS then the actual charges applied to the UFOB Sub-Fund asset shares would be capped at the average third party rate. The excess of the actual charges over the total charged to asset shares would be paid by the RL Open Fund.

2.45 If asset share charges were not capped in this situation, then it would be expected that the RLMIS WPC and WPA would recommend that the policy administration for the UFOB Sub-Fund policies should be moved to an external provider.

2.46 Recent analysis carried out by RLMIS indicates that, in respect of the policies in the UFOB Sub-Fund, the administration rates charged by RLMIS are lower than those charged in the UK market for similar products.

2.47 The expenses arising from investment management that are charged to asset shares reflect the actual investment expenses incurred plus a 15% margin charged by RLAM as specified in the investment management agreement. For the UFOB Sub-Fund, the actual investment expenses incurred (i.e. before the addition of the 15% margin) have been approximately 0.08% of the value of the assets under management in recent years.

The UFOB Sunset Clause

2.48 Under the terms of the UAG Scheme, RLMIS is required to allocate the UFOB Additional Account in full (less the provision for outstanding tax liabilities at that time) to the asset shares of the with-profits policies in the UFOB Sub- Fund when the total asset share of policies in the UFOB Sub-Fund falls below £100 million. In this Report, I refer to this £100 million threshold as the “UFOB Sunset Clause Threshold”.

2.49 Under current best-estimate projections, the UFOB Sunset Clause Threshold is expected to be reached in 2039.

2.50 When the total asset share in the UFOB Sub-Fund reaches the UFOB Sunset Clause Threshold, the UAG Scheme requires that the UFOB Additional Account is allocated to the asset shares of its with-profits policies in a manner approved by the “RL Appointed Actuary”8. Following this allocation, the UAG Scheme requires that benefits available for surviving policies should be calculated having regard only to the value of the augmented asset share, with smoothing as considered appropriate by the RL Appointed Actuary.

2.51 Furthermore, as the UFOB Additional Account would be exhausted under this allocation, the requirement to maintain any separation from the RL Open Fund would fall away. At this point, RLMIS would no longer treat the UFOB Sub-Fund as a separate sub-fund for reporting and communication purposes, and it would be consolidated into the RL Open Fund.

2.52 There is no provision under the UAG Scheme in respect of who should bear the costs of the actions taken upon reaching the UFOB Sunset Clause Threshold, and in particular there is no indication in the UAG Scheme as to which (if any) costs would be borne by policyholders in the UFOB Sub-Fund. However, in practice, the RLMIS management expects that some of the costs associated with fund consolidation upon reaching the UFOB Sunset Clause Threshold would be charged to the UFOB Additional Account, as the costs of fund consolidation are considerably higher now than may have been envisaged when the clause in the UAG Scheme was written.

2.53 Under the provisions of the UAG Scheme, future costs that would fall to the UFOB Sub-Fund that are considered ‘exceptional’ should be shared 50:50 with the RL Open Fund.

The operation of the UFOB Sub-Fund with-profits business

2.54 Since the end of 2007, RLMIS has been distributing the UFOB Additional Account to the policyholders of the UFOB Sub-Fund using a combination of enhancements to asset shares and uplifts to claim values. The level of the asset share enhancement and the uplift to claim values are chosen to manage the Internal SCR Cover of the UFOB Sub- Fund to a target level over a short period of years, in line with the capital management framework.

2.55 In 2022, the uplift expected to be paid on claim values on the with-profits business of the UFOB Sub-Fund as part of business as usual is 5.6% (the “BAU uplift”). The BAU uplift for claims in 2021 was 5.8%.

2.56 Within the UFOB Sub-Fund, the amount by which pay-outs on maturity and death vary from one year to the next are smoothed for similar with-profits policies with similar terms. This is done by comparing asset share (including the asset share enhancement) to the pay-out on similar policies in the previous year. The size of the UFOB Additional Account, i.e. the strength of the capital position of the UFOB Sub-Fund, is taken into account when deciding the extent of smoothing of pay-outs.

2.57 RLMIS currently maintains a number of annual bonus scales9 for policies in the UFOB Sub-Fund. Policies in the UFOB Sub-Fund are not eligible to receive annual bonuses if they are made paid-up10, although they remain as with-profits and so still receive any applicable final bonuses.

2.58 Final bonuses are added to guaranteed benefits to provide the required total pay-outs as determined using total asset shares, allowing for asset share enhancements and uplifts to claim values for distribution of the UFOB

8 Defined in the UAG Scheme as “the actuary from time to time appointed by RLMIS pursuant to Section 19 of the Insurance Companies Act 1982”. 9 A bonus scale is a set of bonuses (either annual or final) applied to a group of policies with similar characteristics. 10 A policy is made “paid-up” when the policyholder stops paying premiums before the end of the contracted premium paying term.

Additional Account. A final bonus scale is determined for each policy term after any smoothing required to avoid anomalies.

2.59 Owing to the historical nature of the UFOB Sub-Fund, the UAG Scheme prescribes that the declaration of annual and final bonuses leads to a corresponding transfer of funds from the UFOB Sub-Fund to the RL Open Fund. These transfers are referred to in this Report as “Cost of Bonus Transfers” and are equal to one ninth of the value of declared bonuses.

2.60 The RL Open Fund’s balance sheet includes an asset that represents the present value of future Cost of Bonus Transfers expected to be paid to the RL Open Fund from the UFOB Sub-Fund and other relevant sub-funds based on the level of future bonuses estimated to be supportable based on the asset shares of the policies of these sub- funds.

2.61 Where exceptional costs occur, RLMIS can charge part of the cost to the RL Open Fund if an agreement can be reached on how the total cost is apportioned across the RL Open Fund and the RLMIS Closed Funds. Exceptional costs may be apportioned to the various funds based on the policy count or size of the best estimate liability (the “BEL”) (typically including any unit reserves) within each fund. Any exceptional costs apportioned to the UFOB Sub-Fund would be charged to the UFOB Additional Account, which would reduce future bonuses payable to with- profits policies (and the RL Open Fund’s Cost of Bonus Transfers due from the UFOB Sub-Fund).

2.62 Under the terms of the UAG Scheme, the RL Open Fund would cover 50% of any exceptional cost allocated to the UFOB Sub-Fund.

The risk profile of the UFOB Sub-Fund

2.63 As described above, the UFOB Sub-Fund is primarily comprised of CWP pension business alongside a smaller number of with-profits life policies. The risk profile of the UFOB Sub-Fund is dominated by market risk11 in relation to with-profits guarantees.

2.64 Table 2.4 below shows a percentage breakdown of the UFOB Sub-Fund’s post-diversification Solvency Capital Requirement (“SCR”), based on the RLMIS internal view of its financial position, at 31 December 2020. This breakdown is shown based on the SCR before allowance for the loss absorbency of deferred tax.

TABLE 2.4 PERCENTAGE BREAKDOWN OF THE UFOB SUB-FUND’S POST-DIVERSIFICATION SCR AT 31 DECEMBER 2020 Percentage breakdown of Risk category12 Internal SCR (post- diversification) Market 96% Expense 1% Persistency 0% Operational 3% Total 100%

2.65 Table 2.4 demonstrates that non-market risks are (compared to market risks) insignificant for the UFOB Sub-Fund, with the most significant being operational risk.

THE RL OPEN FUND

Introduction

2.66 All new policies issued by RLMIS, with the exception of increments or options on some existing policies of the closed funds, are written in the RL Open Fund. The estate of the RL Open Fund (the “RL Open Fund Estate”)

11 Risk arising from the level or volatility of market prices of financial instruments that have an impact upon the value of a company’s assets and / or liabilities. 12 The risk categories included here are explained in Appendix B to this Report.

provides capital to support the business activities of RLMIS, including writing new business. In return, the RL Open Fund Estate receives profits (or incurs losses) from these business activities.

2.67 On 1 October 2020, RLMIS acquired Police Mutual Assurance Society Limited (“PMAS”). The business of PMAS, which includes with-profits (CWP and Unitised With-Profits (“UWP”)), unit-linked and non-profit business, was transferred into the RL Open Fund under section 86 of the Friendly Societies Act 1992.

The risk profile of the RL Open Fund

2.68 RLMIS has not written material volumes of traditional with-profits business in the RL Open Fund for some time. Therefore, unit-linked with-profits business (i.e. unit-linked business entitled to ProfitShare, which is set out in paragraphs 2.116 to 2.118 and which is sold in material volumes) and non-profit business are becoming more significant in the context of the overall risk profile of the RL Open Fund.

2.69 Table 2.5 below shows a percentage breakdown of the RL Open Fund’s post-diversification SCR, based on the RLMIS internal view of its capital requirements, at 31 December 2020. This breakdown is shown before allowance for management actions that might be available to mitigate the impact of the stressed scenarios.

TABLE 2.5 PERCENTAGE BREAKDOWN POST-DIVERSIFICATION COMPONENTS OF THE RL OPEN FUND’S SCR AT 31 DECEMBER 2020 Percentage breakdown of Internal Risk category13 SCR (post-diversification) Market 53% Expense 8% Persistency 21% Mortality 0% Longevity 5% Operational 8% Other 4% Total 100 %(*)

(*) Sum is less than 100% due to rounding in the presentation shown above.

2.70 Market risk is a key risk in the RL Open Fund, although proportionally to a lesser extent than for the UFOB Sub- Fund. The RL Open Fund’s exposure to market risk is predominantly in relation to equity risk. Equity risk in the RL Open Fund arises in relation to the value of income from charges on unit-linked business, guarantees on with- profits business and the staff pension scheme, whose funding is a liability of the RL Open Fund.

2.71 Other key risks in the RL Open Fund are:

 Persistency risk in relation to policyholders either transferring or becoming paid up earlier than expected (thus reducing the expected level of future profits) or lapses being lower than expected on older protection policies (thus increasing expected claim outgo) or on with-profits policies with valuable guarantees.

 Expense risk in relation to unit-linked business, whereby an increase in expenses reduces the profit margin of charges levied on policies relative to expenses incurred by the RL Open Fund.

2.72 The obligation to meet losses arising as a result of the crystallisation of operational risk in respect of administering the RLMIS Closed Funds (other than the RLCIS Fund) by RLMS primarily sits within the RL Open Fund.

13 The risk categories included here are explained in Appendix B to this Report.

THE OTHER FUNDS OF RLMIS

The UFIB Sub-Fund

2.73 The UFIB Sub-Fund contains the liabilities of some of the business of UAG that was transferred to RLMIS pursuant to the UAG Scheme.

2.74 The UFIB Sub-Fund consists of Industrial Branch (“IB”)14 business which is mainly CWP whole of life business with a small number of CWP endowment policies. The policies of the UFIB Sub-Fund were originally sold as non-profit policies but were converted to with-profits policies at an unknown date. The Principles and Practices of Financial Management applicable to the business in the UFIB Sub-Fund are set out in the RL Long Term Fund PPFM which is clear that these policies are currently treated as with-profits policies.

2.75 As at 31 March 2021, the UFIB Sub-Fund had:

 Approximately 740,000 policies15;

 Assets of approximately £1.1 billion;

 Own Funds (on an internal Pillar 2 basis) of £103 million;

 An estate (also referred to as an additional account) of £108 million; and

 A standalone Internal SCR Cover of 407%.

The UFIB Sub-Fund Scheme

2.76 During 2021 RLMIS plans to undertake a scheme of arrangement pursuant to Part 26 of the Companies Act 2006 – this is called the “UFIB Sub-Fund Scheme”. If approved, the UFIB Sub-Fund Scheme is expected to be implemented on the same day as the Scheme considered in this Report, and would result in:

 The consolidation of the UFIB Sub-Fund into the RL Open Fund;

 A payment being made from the UFIB Sub-Fund to the RL Open Fund to compensate the RL Open Fund for meeting the ongoing capital requirements of the business of the UFIB Sub-Fund (which would be consolidated into the RL Open Fund) and for meeting the costs associated with the implementation of the UFIB Sub-Fund Scheme;

 The distribution of the additional account of the UFIB Sub-Fund (after deduction of the payment to the RL Open Fund described above) to its with-profits policies through a uniform percentage uplift to the asset shares of the UFIB Sub-Fund policies; and

 The declaration of a special bonus for all with-profits policies currently in the UFIB Sub-Fund.

2.77 I have been appointed as Independent Expert for the UFIB Sub-Fund Scheme and have commented on any implications of the UFIB Sub-Fund Scheme for the policies of the UFOB Sub-Fund in this Report.

The SL Fund

2.78 RLMIS acquired Scottish Life Assurance Company (“SL”) by way of a demutualisation of SL. In July 2001, the long-term business of SL was transferred to RLMIS under a scheme of transfer.

2.79 The SL Fund principally comprises CWP pensions business and a smaller, but still significant, volume of UWP pensions business. The SL Fund also contains a small volume of deposit administration and non-profit business.

14 In the past, this term was used to describe policies sold through IB channels with premiums typically paid to a collector who called at policyholders’ homes. 15 UFIB Sub-Fund policy count is as at 31 December 2020.

2.80 As at 31 March 2021, the SL Fund had:

 Approximately 76,000 policies16;

 Assets of approximately £2.1 billion;

 Own Funds (on an internal Pillar 2 basis) of £307 million;

 An estate (also referred to as an additional account) of £238 million; and

 A standalone Internal SCR Cover of 204%.

The SL Fund Scheme

2.81 During 2021 RLMIS plans to undertake a scheme of arrangement pursuant to Part 26 of the Companies Act 2006 (the “SL Fund Scheme”). If approved, the SL Fund Scheme is expected to be implemented on the same day as the Scheme considered in this Report (and the UFIB Sub-Fund-Scheme), and would result in:

 The consolidation of the SL Fund into the RL Open Fund;

 A payment being made from the SL Fund to the RL Open Fund to compensate the RL Open Fund for meeting the ongoing capital requirements of the business of the SL Fund (which would be consolidated into the RL Open Fund) and for meeting the costs associated with the implementation of the SL Fund Scheme; and

 The distribution of the estate of the SL Fund (after deduction of the payment to the RL Open Fund described above) to its with-profits policies through a uniform percentage uplift to the eligible portion of the asset shares of the policies with investments in the SL Fund.

2.82 I have been appointed as Independent Expert for the SL Fund Scheme and have commented on any implications of the SL Fund Scheme for the policies of the UFOB Sub-Fund in this Report.

The PLAL WPF

2.83 Phoenix Life Assurance Limited (“PLAL”)17 was acquired together with the Self Assurance and Pegasus protection business from Scottish Mutual Assurance Limited (“SMA”) and Scottish Provident Limited (“SPL”) in August 2008.

2.84 In December 2008, the long-term business of PLAL was transferred to RLMIS by way of a scheme of transfer into the newly established PLAL WPF. The long-term business acquired from SMA and SPL was similarly transferred to RLMIS, into the RL Open Fund, by way of a scheme of transfer.

The PLAL WPF comprises only UWP business, with an approximately equal split of life and pension business.

The Royal Liver WPF

2.85 The Royal Liver WPF was formed in 2011 following the acquisition of Royal Liver Assurance (“RLA”), a friendly society incorporated in 1850. Between 2000 and 2002, RLA acquired Caledonian Life and GRE Life Ireland Limited, the long-term business of the Civil Servants’ Annuities Assurance Society, the industrial branch of Friends Provident Life Office, the industrial branch business of Friends Provident, and the long-term business of Irish Life Assurance plc.

2.86 In 2011 and 2012, the business of RLA, including the business RLA acquired, was transferred into the Royal Liver WPF.

2.87 The Royal Liver WPF comprises a mixture of:

 UWP business (principally pension business);

 IB and OB CWP endowments, whole of life and pension;

16 SL Fund policy count is as at 31 December 2020. 17 Phoenix Life Assurance Limited is now also the name of a legal entity in the Phoenix Group, which is unrelated to RLMIS and this Scheme.

 Non-profit life and pension business; and

 Unit-linked life and pension business.

2.88 Certain business of the Royal Liver WPF was transferred to RLI DAC by way of a transfer pursuant to Part VII of the Financial Services and Markets Act 2000 on 7 February 2019, effective for accounting purposes on 1 January 2019. Immediately following the Part VII transfer, certain intra-group reinsurance agreements were put in place to reinsure the investments of some of the transferred contracts back to RLMIS.

The RLCIS Fund 2.89 RLMIS acquired the Co-operative Insurance Society Limited (“CIS”) on 31 July 2013, which was subsequently renamed to RLCIS. The long-term business of RLCIS was transferred into the RLCIS Fund in December 2014. The RLCIS Fund contains three segregated sub-funds: the RLCIS Ordinary & Industrial Branch Fund, the RLCIS With-Profits Pension Fund and the RLCIS With-Profits Stakeholder Fund.

2.90 The RLCIS Fund comprises a mixture of IB and OB business consisting of:

 CWP business, including whole of life business, endowments, personal pensions, and deferred annuities;

 UWP business, including funeral plans; and

 Non-profit business.

CAPITAL SUPPORT ARRANGEMENTS

2.91 In general, all of the RLMIS Closed Funds are managed in a way that enables them to run off and be funded by their own assets without requiring support from elsewhere in RLG. However, within RLMIS there exist general inter-fund agreements between the RL Open Fund and the RLMIS Closed Funds whereby capital support can be provided between funds if required.

2.92 The RL Long Term Fund PPFM covers the RL Open Fund and sets out the following:

 The RL Open Fund Estate is available in extreme circumstances to provide capital support to the RLMIS Closed Funds should this be required. Any such payment to the funds (other than payments to the UFOB Sub-Fund and the UFIB Sub-Fund) would be refunded to the RL Open Fund Estate once the support is no longer required.

 The estates of the RLMIS Closed Funds are available in extreme circumstances to provide capital support to the RL Open Fund should this be required. Any such payment would be refunded to the relevant estate once the support is no longer required.

2.93 To date no capital support has been required, or provided, in either direction between the RL Open Fund and the RLMIS Closed Funds.

RISK AND CAPITAL MANAGEMENT

2.94 RLMIS manages the capital in each of its funds on a standalone basis. For the RL Open Fund and the RLMIS Closed Funds, this is undertaken in line with an overarching framework that sets out how capital is measured, managed, monitored, and reported (the “RLMIS Capital Framework”). The RLMIS Capital Framework is applied consistently but separately to each of the RLMIS Closed Funds.

2.95 The RLMIS Capital Framework sets out the capital target for each of the in-scope funds. For the UFOB Sub-Fund, and for the RL Open Fund, the capital target is set as that required such that the fund could withstand a 1-in-20

year event18 over the next year and to still have sufficient Internal Own Funds to be able to meet its Internal SCR, where:

 “Internal Own Funds” are calculated in a similar way to regulatory Own Funds.

In particular, allowance is made for the Transitional Measure on Technical Provisions (“TMTP”) in the RL Open Fund and the RLMIS Closed Funds.

 The “Internal SCR” represents the RLMIS view of the capital required to meet a 1-in-200 year event and is calculated in accordance with the internal model developed by RLMIS and approved by the PRA (the “RLMIS Internal Model”).

2.96 The RLMIS Capital Framework defines a Red-Amber-Green (“RAG”) status to set out the capital target and trigger levels in respect of the level of capitalisation of each fund. The RAG statuses and trigger levels for all funds, except the Royal Liver WPF, are as follows:

 Upper Red: Sufficient capital to withstand a 1-in-100 year event over the next year and still meet the Internal SCR.

 Upper Amber: Sufficient capital to withstand between a 1-in-100 year and a 1-in-50 year event over the next year and still meet the Internal SCR.

 Green: Sufficient capital to withstand between a 1-in-50 year and a 1-in-20 year event over the next year and still meet the Internal SCR.

 Light Green: Sufficient capital to withstand between a 1-in-20 year and a 1-in-10 year event over the next year and still meet the Internal SCR.

 Lower Amber: Sufficient capital to withstand between a 1-in-10 year and a 1-in-5 year event over the next year and still meet the Internal SCR.

 Lower Red: Capital falls below the level required to withstand a 1-in-5 year event over the next year and still meet the Internal SCR.

2.97 The RLMIS Capital Framework includes “red” and “amber” categories for situations in which a fund is considered either over-capitalised or under-capitalised. For shareholder-backed insurance business it would be typical for a capital framework only to regard an under-capitalised fund as undesirable; however, in the case of a with-profits fund, it is undesirable for the fund to be over-capitalised as this could indicate an over cautious approach to the distribution of the excess surplus to with-profits policyholders of the fund. The Green and Light Green statuses are therefore also referred to as the “target” range.

2.98 The RLMIS Capital Framework also sets out the possible additional management responses, beyond those management actions already assumed in the calculation of the Internal SCR, that may be taken should the capital position of the fund move outside of a defined range. The management responses vary between the RL Open Fund and the RLMIS Closed Funds and include varying the distribution of profits or the funds’ estates/additional accounts or engaging in de-risking or re-risking strategies.

FINANCIAL CONDITION

2.99 In the UK, a firm’s SCR can be calculated using a Standard Formula or an internal model.

2.100 The Standard Formula is a methodology for calculating a firm’s SCR prescribed by the European Insurance and Occupational Pensions Authority (“EIOPA”).

18 An event that is expected to occur only once in every 20 years. Events in the remaining 19 years would be expected to require less capital to withstand.

2.101 Under Solvency II a firm is also permitted to use its own internal model (or a combination known as a “partial internal model” of an internal model for some risks and the standard formula for others) to derive the SCR. These internal models and partial internal models (and changes to them) are subject to prior approval by the relevant regulator and in the UK, this is the Prudential Regulation Authority (“PRA”).

2.102 The PRA granted approval on 23 September 2019 for RLMIS to use its internal model (the “RLMIS Internal Model”) for Solvency II reporting and all of the RLMIS reported Solvency II financial information and its financial position presented in this Report are calculated using the RLMIS Internal Model.

2.103 Furthermore, RLMIS uses its internal “Pillar 2” basis to prepare the balance sheet that it uses for its day-to-day management, rather than the “Pillar 1” basis that will be reported publicly, and this is the basis on which it makes decisions in relation to the RL Open Fund and the RLMIS Closed Funds. I have therefore presented the financial information in this Report on the internal Pillar 2 basis. For completeness, I have also provided the Pillar 1 financial information in Appendix A to this Report.

2.104 The Pillar 1 and Pillar 2 bases are closely aligned as both are calculated using the RLMIS Internal Model. For the avoidance of doubt, both bases allow for the TMTP.

2.105 Table 2.6 below shows the Solvency II Pillar 2 financial position of the UFOB Sub-Fund and the RL Open Fund, as at 31 March 2021. The financial position of the RL Open Fund is presented assuming the RAIB Sub-Fund Consolidation had been implemented as at 31 March 2021.

TABLE 2.6 SOLVENCY II PILLAR 2 BALANCE SHEET AT 31 MARCH 2021

£million UFOB Sub-Fund RL Open Fund

Assets (A) 2,872 72,394

Liabilities (B) 2,681 68,650

Of which asset shares 2,583 6,572

Of which Cost of Bonus Transfers 102 (158)

Available capital before adjustments (C = A - B) 191 3,745

Risk margin (D) - 950

TMTP (E) - 663

Sub-debt (F) - 1,560

Internal Own Funds (G = C - D + E + F) 191 5,018

Internal SCR (H) 34 2,626

Excess capital (G - H) 157 2,392

Internal SCR Cover (G / H) 556% 191%

2.106 Table 2.6 shows that, as at 31 March 2021:

 The UFOB Sub-Fund had excess capital of £157 million and an Internal SCR Cover of 556%. This corresponds to Upper Red status under the RLMIS Capital Framework.

The relative size of the UFOB Additional Account compared to the total asset share of the UFOB Sub-Fund makes the Internal SCR Cover volatile. Given this volatility, RLMIS continues to pay uplifts on claims to distribute the UFOB Additional Account rather than distributing the excess capital immediately as an asset share enhancement.

 The RL Open Fund had excess capital of approximately £2.4 billion and an Internal SCR Cover of 191%. This corresponds to the target range status under the RLMIS Capital Framework.

INVESTMENT STRATEGY

2.107 As at 31 December 2020, the asset share equity backing ratio (the “EBR”)19 for the with-profits policies of the UFOB Sub-Fund was 51% (with the exceptions listed in paragraph 3.99).

2.108 The asset share EBR for the RL Open Fund was 63% as at 31 December 2020 but there are some groups of policies, with significant (in terms of the size of the guarantee and/or the amount in the money) guarantees for which the backing assets have been separately assigned, with a lower EBR (including 0%).

2.109 The UFOB Additional Account is invested in cash and gilts i.e. it is invested with an EBR of 0%.

WITH-PROFITS BUSINESS GOVERNANCE

2.110 The governance of the with-profits business within RLMIS principally consists of the With-Profits Actuary (“WPA”), the With-Profits Committee (“WPC”) and the RLMIS Board.

2.111 There are also supervisory committees in respect of the SL Fund and the Royal Liver WPF, but these funds are not in scope of the UFOB Sub-Fund Scheme that is the subject of this Report.

2.112 The RL Long Term Fund PPFM covers the business of the RL Open Fund and also includes the principles and practices in respect of the UFOB Sub-Fund and the UFIB Sub-Fund.

2.113 There are separate PPFMs for each of the other four closed ring-fenced funds of RLMIS (the SL Fund, the PLAL WPF, the Royal Liver WPF, and the CIS WPF). The PPFMs set out how the with-profits business within each of the funds will be managed.

2.114 The UAG Scheme also contains a number of principles of financial management (“PFMs”) which govern the financial management of the UFOB Sub-Fund business and the UFIB Sub-Fund business. The PFMs cover a number of areas including bonus policy, surrender values and credit/charges to asset shares should an exceptional event occur and also govern the maintenance of an additional account for each of these sub-funds and the sunset clause threshold for each additional account.

2.115 The WPA and WPC are responsible for advising the RLMIS Board on managing the with-profits business in line with the PPFMs and, more generally, treating with-profits policyholders fairly. This includes making recommendations to the RLMIS Board on the size of pay-outs to with-profits policyholders, including in respect of final bonus scales and the level of estate distribution.

PROFITSHARE

2.116 ProfitShare is a mechanism used by RLMIS to distribute part of the profits emerging in the RL Open Fund to certain policyholders. ProfitShare is currently allocated only to with-profits policies in:

 The RL Open Fund;

 The UFOB Sub-Fund;

 The SL Fund (to the extent these are invested in the RL Open Fund);

 Unit-linked pensions policies written by RLMIS with an inception date from 2001; and

 Certain business in RLI DAC via a reinsurance mechanism with RLMIS.

19 The proportion of the fund that can be invested in ‘risky’ asset classes such as equities and property.

2.117 ProfitShare is allocated by means of discretionary enhancements to asset share, or an allocation of additional units for unit-linked policies.

2.118 The size of the funds currently eligible for ProfitShare as at 30 June 2020 is shown in Table 2.7 below:

TABLE 2.7 SIZE OF FUNDS ELIGIBLE FOR PROFITSHARE

Eligible funds £ billion

RL Open Fund – with-profits 5.8 RL Open Fund – unit-linked 40.0 Total 45.8

3. A summary of the proposed Offer and the proposed Scheme

INTRODUCTION

3.1 Under the proposed Scheme, RLMIS proposes to make an offer (the “Offer”) to all Eligible Policyholders in the UFOB Sub-Fund as defined below.

ELIGIBLE/INCLUDED POLICIES AND ELIGIBLE/INCLUDED POLICYHOLDERS

3.2 Policies that are eligible for the Offer are referred to in this Report as “Eligible Policies” and holders of Eligible Policies20 as at 31 March 2021 (the “Calculation Date”) are referred to as “Eligible Policyholders”.

3.3 An Eligible Policy is a with-profits policy allocated to the UFOB Sub-Fund which is not an Excluded Policy (see paragraph 3.4) and which:

 Will not have reached its scheduled maturity date or retirement date, where applicable, before 31 December 2021;

There are certain endowment policies in the UFOB Sub-Fund that have the option to extend their maturity date under their terms and conditions. Approximately 20 of these policies would currently mature between the Calculation Date and 31 December 2021 but the holders of these policies have the option to extend the maturity date to after 31 December 2021 (also expected to be the Implementation Date of the Scheme), in which case they would receive the Offer. These policies would not be Eligible Policies but would receive an additional payout if the Scheme were to be implemented (see paragraphs 3.36 to 3.38).

 Has not been claimed in full on maturity, retirement, surrender, transfer, or death as at the Calculation Date nor as at the date of the Scheme Meeting (see paragraph 4.1).

3.4 “Excluded Policy” means a with-profits policy allocated to the UFOB Sub-Fund immediately prior to the Calculation Date in respect of which, based on the best estimate assumptions applied as at the Calculation Date, the projected value of the benefits payable on the with-profits policy as at the expected date of claim is not expected to be increased by the application of the Offer Uplift and the increase in future premiums, if applicable. Such Excluded Policies are referred to as heavily-in-the-money (the “HITM”) policies.

3.5 The policies that actually receive the Offer are referred to in this Report as “Included Policies” and holders of Included Policies are referred to as “Included Policyholders”21.

3.6 If the Scheme were to be implemented, Included Policies would comprise all Eligible Policies which, as at 31 December 2021:

 Have not reached their scheduled maturity or retirement date;

 Have not been claimed in full (or come into payment in full) on maturity, retirement, surrender, transfer, or death, in each case in accordance with the terms of the Policy; and

 Have not ceased to be entitled to receive benefits in accordance with the policy terms.

3.7 Although not Eligible Policies, the endowment policies referred to above (paragraph 3.3) would also receive the Offer Uplift as described in paragraphs 3.36 to 3.38.

20 Eligible Policyholders’ include RLMIS as, in its capacity as the trustee of the United Friendly Insurance Plc Additional Contribution Plan, RLMIS is the holder of certain Eligible Policies as at the Calculation Date. Eligible Policyholders also include the members of the United Friendly Insurance Plc Additional Contribution Plan who have an interest in an Eligible Policy as at the Calculation Date. For the avoidance of doubt the Offer Uplift will accrue to the beneficiaries of the underlying products. 21 Included Policyholders include RLMIS as holder of certain Included Policies as at 31 December 2021 in its capacity as the trustee of the United Friendly Insurance Plc Additional Contribution Plan as at 31 December 2021. Included Policyholders also include the members of the United Friendly Insurance Plc Additional Contribution Plan who have an interest in an Included Policy as at 31 December 2021.

THE BACKGROUND TO THE OFFER

3.8 As described in Section 2:

 Under the terms of the UAG Scheme, the liabilities of the UFOB Sub-Fund were transferred into the RL Open Fund and are ring-fenced under Solvency II. The capital requirements of the UFOB Sub-Fund are currently covered by the assets in the UFOB Additional Account.

 The UFOB Additional Account is expected to be distributed over time to with-profits policyholders in the UFOB Sub-Fund using a combination of enhancements to asset shares and uplifts to claim values.

 The RLMIS Capital Framework sets out the capital target for the UFOB Sub-Fund and the UFOB Sub-Fund is managed on a standalone basis in line with this. This management includes varying the level of distribution of the UFOB Additional Account to manage the UFOB Sub-Fund towards its capital target.

3.9 The speed at which the UFOB Additional Account can be distributed to the with-profits policies in the UFOB Sub- Fund is constrained by the requirement to cover the UFOB Sub-Fund’s capital requirements (including the 1-in-20 year buffer above these requirements held in each sub-fund in line with the RLMIS Capital Framework).

3.10 For the avoidance of doubt, the UFOB Additional Account that can be distributed to with-profits policyholders in the UFOB Sub-Fund does not include any allowance for transitional measures (such as the TMTP) as described in Appendix B and that can be seen in the tables of financial information in Sections 2, 7 and Appendix A. The same is true for the additional account of the UFIB Sub-Fund, and the SL Fund Estate, and was true for the additional account of the RAIB Sub-Fund before its consolidation into the RL Open Fund in 2021.

A SUMMARY OF THE OFFER

3.11 The Offer made to Eligible Policyholders would be as follows:

 To receive an immediate uplift (the “Offer Uplift”) to the asset shares of their Included Policies on the Implementation Date.

The Offer Uplift percentage (6.4%) would be applied to the asset shares of Included Policies. This compares to the expected BAU uplift on claim values in 2022 for with-profits policies of the UFOB Sub-Fund of 5.6%.

 In addition, for Included Policies where the policyholder is still paying regular premiums (i.e. the policy has not been made paid-up and the policyholder has not reached the fully free paid age), the Offer Uplift percentage (6.4%) would also be made to the amount allocated to asset share in respect of future premiums as and when those premiums are paid and credited to asset shares.

 The application of the Offer Uplift is expected to exhaust the UFOB Additional Account (less the Scheme Contribution – described below) and therefore, following the application of the Offer Uplift, the UFOB Additional Account would cease to exist, and Included Policies will not receive any future distributions from the UFOB Additional Account.

Once transferred into the RL Open Fund, UFOB Sub-Fund policies would not receive any future distributions from the inherited estate of the RL Open Fund other than through ProfitShare.

3.12 The Offer Uplift percentage of 6.4% (when rounded to the nearest 0.1%) included in the voting packs that would be sent to policyholders was calculated based on the Solvency II balance sheet for the UFOB Sub-Fund as at 31 March 2021. The Offer Uplift percentage will be fixed until the Implementation Date of the UFOB Sub-Fund Scheme, which is expected to be 31 December 2021. There will be no recalculation of the Offer Uplift percentage at any point.

3.13 For those policies where, after the uplift, the value of guaranteed benefits exceeds the uplifted asset share, the Scheme would have no effect on the benefits paid.

3.14 Beyond the changes described above, there would be no further changes to the terms and conditions of any policies as a result of the Scheme. In particular:

 The Included Policies would remain as with-profits policies following the uplift to their asset shares and the consolidation of the business of the UFOB Sub-Fund into the RL Open Fund; and

 The Offer would not affect any additional policy benefits.

3.15 However, as described in paragraphs 3.108 to 3.111, RLMIS intends to make certain changes to the operation of some policies at or around the same time as the implementation of the Scheme; these changes are separate from the Scheme and will take place regardless of the outcome of the Scheme.

THE PROPOSED SCHEME

3.16 The Offer would be formally made using a Scheme of Arrangement, which is the UFOB Sub-Fund Scheme that is the subject of this Report.

3.17 If the proposed UFOB Sub-Fund Scheme were to be implemented, then on the Implementation Date:

 The Scheme Contribution would be paid to the RL Open Fund from the UFOB Sub-Fund. The Scheme Contribution is the sum of:

o The Closed Fund Contribution (the “CFC”), which is described in paragraphs 3.46 to 3.56;

o The Project Costs Allowance, which is described in paragraph 3.57 to 3.72; and

o The Premium Uplift Contribution, which is described in paragraphs 3.73 to 3.76.

 An immediate (i.e. at the Implementation Date of the Scheme) uplift, fixed in percentage terms, would be applied to the asset share backing each Included Policy and each HITM policy22.

For premium-paying Included Policies, an uplift to future regular premiums, fixed at the same percentage as that applied to asset shares, would be credited to asset shares as and when these premiums are paid.

The uplifts applied to asset shares have been determined as at the Calculation Date at a level that would, based on RLMIS’s central projections, be expected to extinguish the UFOB Additional Account at the Implementation Date after the deduction of the Scheme Contribution described above.

 The policies of the UFOB Sub-Fund would be consolidated into the RL Open Fund and the capital requirements of the UFOB Sub-Fund business would be covered by the assets in the RL Open Fund.

 The assets and liabilities of the UFOB Sub-Fund would no longer be ring-fenced in the RL Open Fund. Following the application of the uplift and the payment of the Scheme Contribution, the assets of the UFOB Sub-Fund can be thought of as:

o The assets backing the uplifted asset shares of the Included Policies;

o The assets backing the non-profit business; and

o The assets backing the portion of the BEL of the Included Policies that is in excess of the uplifted asset shares. This amount principally represents the amount in excess of uplifted asset shares required to meet the expected future costs of guaranteed benefits and smoothing under the Included Policies.

Assets to back the capital requirements of the UFOB Sub-Fund business would be provided from the resources of the RL Open Fund.

22 The uplifts to HITM policy asset shares and future premiums will, strictly speaking, be applied outside of the provisions of the Scheme, albeit that they will only be applied if the Scheme is implemented.

3.18 The Scheme is taking place as part of a planned programme of other changes across RLMIS with the objectives of rationalising and simplifying the RLMIS fund structure and administration systems (the “Simplification Programme”). The fund structure rationalisation is to be achieved by consolidating a number of blocks of business, currently accounted in separate with-profits funds or sub-funds, into the RL Open Fund.

3.19 Under the provisions of the UAG Scheme, future costs that would fall to the UFOB Sub-Fund that are considered ‘exceptional’ should be shared 50:50 with the RL Open Fund and this would, in general (subject to paragraph 3.21 below), continue to be the case if the UFOB Sub-Fund Scheme were to be implemented.

3.20 RLMIS considers that the costs of the proposed Scheme and of the wider Simplification Programme would be considered exceptional, and the external legal advisers of RLMIS (Pinsent Masons LLP) has confirmed that it would be satisfied for RLMIS to charge these costs on that basis under the UAG Scheme.

3.21 As exceptional costs, under the terms of the UAG Scheme, such costs should be shared equally between the UFOB Sub-Fund and the RL Open Fund but it is proposed that, as part of the overall proposed compromise between RLMIS and its policyholders under the UFOB Sub-Fund Scheme, the costs of the UFOB Sub-Fund Scheme and those of the wider Simplification Programme attributable to the UFOB Sub-Fund, should be paid 100% by the UFOB Sub-Fund rather than shared equally between the UFOB Sub-Fund and the RL Open Fund.

THE OPTIONS FOR ELIGIBLE POLICYHOLDERS UNDER THE OFFER

3.22 Under the Offer, Eligible Policyholders have two options:

i. To vote in favour of or against the Offer.

If the High Court were to sanction the Scheme then it would become binding on all Eligible Policies held by Eligible Policyholders that remain in-force at 31 December 2021, the expected Implementation Date of the Scheme, including those who voted against the Offer.

ii. To do nothing.

Eligible Policyholders may decide that they do not wish to respond to the Offer. If the Scheme were to be sanctioned by the High Court then it would become binding on all Eligible Policies held by Eligible Policyholders that remain in-force at 31 December 2021 as above, including those who do not respond to the Offer.

3.23 If the High Court were to decline to sanction the Scheme, then it would not be implemented, and all of the Eligible Policies would remain unchanged.

THE SCHEME IMPLEMENTATION CONDITIONS

3.24 For the Offer to proceed and the proposed Scheme to be implemented the following conditions must be met:

 The proposed Scheme must be approved by the necessary majority of Eligible Policyholders at the Scheme Meeting as set out in the Offer Acceptance Thresholds (described in Section 4); and

 The High Court must sanction the Scheme at the Sanction Hearing.

3.25 I refer to these conditions in this Report as the “Scheme Implementation Conditions” and, once these conditions are met the RLMIS Board can choose whether it will resolve to implement the Scheme.

THE HEAVILY IN THE MONEY (“HITM”) POLICIES

3.26 HITM policies (defined in Section 2 and Section 3) in the UFOB Sub-Fund are not included within the scope of the Scheme and holders of HITM policies would not be asked to vote upon the Scheme.

3.27 There are approximately 18,000 policies classified as HITM policies in the UFOB Sub-Fund, with asset shares of approximately £50.5 million (as at 31 March 2021).

3.28 However, if the Scheme were to be implemented:

 HITM policies would receive the Offer Uplift percentage applied to their asset shares23.

For the avoidance of doubt this would be at the same percentage level as that received by Included Policies.

 HITM policies would be transferred into the RL Open Fund.

HITM policies would not be consolidated into the RL Open Fund under the provisions of the Scheme.

However, the volume of HITM policies in the UFOB Sub-Fund would be small enough such that, following the transfer of the Included Policies into the RL Open Fund, the UFOB Sunset Clause Threshold would be breached and so the HITM policies would be consolidated into the RL Open Fund on the Implementation Date of the Scheme under the provisions of the UFOB Sunset Clause.

3.29 It should be noted that, if the Scheme were to be implemented (and the UFOB Sunset Clause Threshold triggered), while HITM policies’ asset shares would receive the uplift, a HITM policy would only receive a higher pay-out on claim as a result of the uplift if:

 The holder of the policy elected to access their policy benefits on a date on which their guaranteed benefits did not apply; or

 Investment returns on assets backing asset shares were to exceed expectations to such a degree that the guaranteed benefits would no longer be in-the-money.

3.30 This is because (by definition) for the HITM policies, if the guaranteed benefits remain in-the-money, then the uplifted asset share of the policy would not be relevant in determining the policy’s pay-out if the policy were to be held to maturity or to a date on which the guaranteed benefits would apply. In addition, there would be limited financial incentive for the policyholder to cash in their policy on a date on which the guaranteed benefits do not apply if to do so would result in a lower pay-out.

3.31 In Section 18, I consider the fairness of excluding the HITM policies from the scope of the Scheme.

3.32 If the Scheme were to be implemented (and HITM policies were to be consolidated into the RL Open Fund under the UFOB Sunset Clause), holders of HITM policies would receive a letter notifying them of their consolidation into the RL Open Fund after the Implementation Date.

3.33 As policies classified as being HITM would receive the Offer Uplift if the Scheme were to be implemented (albeit that the uplift would be applied outside of the provisions of the Scheme), where this Report comments on Included Policies in the context of the receipt of the uplift, such comments would also be applicable to HITM policies unless otherwise stated.

NON-PROFIT POLICIES OF THE UFOB SUB-FUND

3.34 If the Scheme were to be implemented, non-profit policies of the UFOB Sub-Fund would be consolidated into the RL Open Fund under the same mechanism as that used to consolidate the HITM policies: the UFOB Sunset Clause Threshold would be breached thus leading to the consolidation of the HITM policies and non-profit policies into the RL Open Fund.

3.35 The implementation of the Scheme would not result in any changes being made to the terms and conditions of the non-profit policies of the UFOB Sub-Fund, and in particular the guaranteed benefits under these policies would be unchanged.

23 There are no HITM policies that are premium-paying and therefore no HITM policies are eligible for uplifts to future premium payments.

THE ENDOWMENTS WITH TERM EXTENSION OPTIONS

3.36 There are certain endowment policies in the UFOB Sub-Fund that have the option to extend their maturity date under their terms and conditions. Approximately 20 of these policies would currently mature between the Calculation Date and the 31 December 2021. These policies would not be Eligible Policies as they are currently scheduled to mature ahead of 31 December 2021.

3.37 However, the holders of these policies have the option to extend the maturity date to after 31 December 2021 and if they had done so they would have received the Offer. Therefore, if the Scheme is implemented, RLMIS would write to these policyholders with compensation to allow for the benefit of the Offer Uplift they would have received.

3.38 This compensation payment would be the difference between the BAU uplift applied to the policy when it matured (5.8% for claims arising in 2021 and 5.6% for claims arising in 2022) and the Offer Uplift percentage of 6.4%.

THE MOTIVATIONS FOR THE PROPOSED SCHEME

3.39 The main motivations for the proposed Scheme are as follows:

 The speed at which the UFOB Additional Account can be distributed to with-profits policyholders in the UFOB Sub-Fund is currently constrained by the requirement for the additional account to cover the UFOB Sub-Fund’s capital requirements. If the Scheme were to proceed, the UFOB Sub-Fund would be consolidated into the RL Open Fund, which would enable:

o An immediate and certain distribution of the UFOB Additional Account (less the Scheme Contribution) to Included Policyholders; and

o The avoidance of the development of a tontine.

 It would simplify the RLMIS fund structure by reducing the number of RLMIS Closed Funds.

 It would provide reduced costs of reporting, accounting and audit and thereby provide benefits to the wider group of RLMIS policyholders.

3.40 It is also relevant to note that the Scheme is taking place as part of a planned programme of other changes across RLMIS with the objectives of rationalising and simplifying the RLMIS fund structure and administration systems (the “Simplification Programme”). The fund structure rationalisation is to be achieved by consolidating a number of blocks of business currently accounted in separate with-profits funds or sub-funds into the RL Open Fund.

3.41 It would be more efficient to undertake the Scheme as part of the Simplification Programme as the overall costs of implementing the Simplification Programme would be lower than if the constituent parts of the Simplification Programme were undertaken separately and at different times. The approach proposed in relation to the costs of the Scheme and the wider Simplification Programme is described later in this section.

3.42 Three other relevant parts of the Simplification Programme are:

 The RAIB Sub-Fund Consolidation (via an amendment to the UAG Scheme);

 The UFIB Sub-Fund Scheme; and

 The SL Fund Scheme,

as described in Section 2.

3.43 In writing this Report it has been assumed that the UFIB Sub-Fund Scheme and the SL Fund Scheme have not been implemented and I consider the implications for the UFOB Sub-Fund Scheme of the implementation of both the UFIB Sub-Fund Scheme and the SL Fund Scheme in Section 19. The RAIB Sub-Fund Consolidation took place on 30 June 2021.

3.44 Any future material changes to the structure of RLMIS or to the policies of RLMIS, including those arising from the Simplification Programme, would be subject to due scrutiny and process, potentially including a review by the UK regulators (and the UK regulators would be notified of future material changes), the RLMIS WPC and the RLMIS WPA. If schemes of arrangement were to be required, they would require sanction by the High Court and scrutiny by the regulators. I have not explicitly addressed any other potential future changes (other than those mentioned in paragraph 3.42) of this Report.

3.45 RLMIS has listed a number of motivations to carry out this Scheme sooner rather than later:

 Tontine smoothing

As the UFOB Sub-Fund runs off and its capital requirements reduce, it is expected that distributions from the UFOB Additional Account would increase, which would potentially lead to a disadvantage to the policies which reach their maturity date or are otherwise claimed in the short term. However, the materialisation of significant risks later in the policy term could have a detrimental effect on the longer term policies thus leading to an advantage to the shorter term policies.

The removal of the need for the UFOB Additional Account to meet the capital requirements of the UFOB Sub- Fund and the consolidation of the UFOB Sub-Fund into the RL Open Fund (together with the application of the Offer Uplift percentage (6.4%) across all policyholders’ eligible asset shares and future premiums) would reduce the uncertainty, help to mitigate the risk of a tontine effect, and improve fairness for different generations of policyholders.

 The certainty of distribution

The future distributions from the UFOB Additional Account to the policyholders of the UFOB Sub-Fund are currently uncertain in terms of both amount and timing. If the Scheme were to be implemented, the UFOB Additional Account (less the Scheme Contribution) would be distributed to the Included Policies immediately which would give each such policy certainty in respect of how much (at least as a percentage of asset share) and timing (it would be on the Implementation Date).

 Spreading of Project Costs

If the Scheme were to be implemented, the costs of the fund consolidation project would be spread over the affected policies. Earlier consolidation would enable the spreading of these costs over a larger number of policies.

 Diversification benefits

The consolidation of the UFOB Sub-Fund into the RL Open Fund would allow the earlier realisation of diversification benefits between the risks of the two funds, which would result in a lower overall capital requirement.

 Expense synergies

Above I describe the Simplification Programme, which includes a fund consolidation programme. RLMIS expects that undertaking the Scheme as part of this fund consolidation programme would realise expense synergies that would be shared with the policies currently in the UFOB Sub-Fund.

THE SCHEME CONTRIBUTION

Introduction

3.46 As set out in paragraph 3.16, the Scheme Contribution that would be deducted from the UFOB Additional Account and paid to the RL Open Fund prior to the remainder of the UFOB Additional Account being distributed is the sum of:

 The CFC;

 The Project Costs Allowance; and

 The Premium Uplift Contribution.

The CFC

3.47 The CFC has been included in the Scheme Contribution for other schemes proposed to take place as part of the Simplification Programme, such as the UFIB Sub-Fund Scheme and the SL Fund Scheme. However, for the UFOB Sub-Fund Scheme the CFC component of the Scheme Contribution is zero.

3.48 If it were non-zero, the CFC would be a payment from the UFOB Sub-Fund to the RL Open Fund to compensate the RL Open Fund for taking on coverage of the capital requirements in respect of the policies currently in the UFOB Sub-Fund.

3.49 If the UFOB Sub-Fund Scheme were to be implemented, the assets of the RL Open Fund would be used to meet the capital requirements in respect of the policies currently in the UFOB Sub-Fund. The RL Open Fund would therefore incur an “opportunity cost” as the assets required to be set aside to support these capital requirements could otherwise be invested in other ventures, such as writing new business or acquisitions, on which it would expect to earn a significantly higher return.

3.50 Taking on the capital requirements of the UFOB Sub-Fund would create a net balance sheet strain for the RL Open Fund as a result of the following:

 The increase in the Internal SCR of the RL Open Fund as a result of consolidating the business of the UFOB Sub-Fund into the RL Open Fund, allowing for additional diversification benefits;

 The change in the 1-in-20 year buffer above the Internal SCR in line with the capital target under the RLMIS Capital Framework; and

 The increase in the risk margin (in respect of the UFOB Sub-Fund business).

3.51 As a result, an amount (the CFC) would be paid to the RL Open Fund. The CFC would be calculated as a ‘cost of capital’ amount to compensate the RL Open Fund for the net balance sheet strain it would incur, at a ‘cost of capital’ rate consistent with returns the RL Open Fund would expect to achieve on other investments.

3.52 However, some of the balance sheet strain described above relates to the capital requirements held against market risk inherent in the UFOB Sub-Fund business, and in particular the risks associated with the investments held by the UFOB Sub-Fund and the risk that their values reduce in such a way that they are insufficient to meet the UFOB Sub-Fund’s liabilities to its policyholders.

3.53 As it would be possible to reduce the current level of market risk to (in theory at least) an immaterial level by entering into suitable hedging arrangements, no CFC should be calculated in respect of the market risk.

3.54 Furthermore, the assets being transferred to the RL Open Fund to back the UFOB Sub-Fund liabilities would (by design) be sufficient to meet the costs of such hedging arrangements without any further contributions from the UFOB Additional Account.

3.55 Therefore, the CFC would be based on the balance sheet strain assuming no capital requirements are held in relation to market risk.

3.56 However, as can be seen from Table 2.4, non-market risks are (compared to market risks) insignificant for the UFOB Sub-Fund. As the CFC would only cover non-market risks, no CFC would be payable from the UFOB Additional Account to the RL Open Fund as part of the Scheme Contribution.

The Project Costs Allowance

The Aggregate Project Costs Allowance

3.57 As set out above the Scheme would be part of the wider Simplification Programme, which includes other similar consolidations of RLMIS Closed Funds into the RL Open Fund.

3.58 The fund consolidation elements of the Simplification Programme, the proposed changes described in paragraphs 3.108 to 3.112, and some other minor product changes across the RLMIS Closed Funds (together, “the Fund Consolidations”), which may include the consolidation of other of the RLMIS Closed Funds, are taking place as a single project within RLMIS, which RLMIS believes will result in cost efficiencies relative to undertaking each fund consolidation separately as separate projects.

3.59 As RLMIS views the Fund Consolidations as a single project, and, as some parts of the Fund Consolidations will be completed at different times, in order to ensure that any cost overruns do not fall disproportionately on funds whose consolidation takes place later, it is proposed that the RL Open Fund should meet the costs of the Fund Consolidations in return for a fixed contribution from each of the affected RLMIS Closed Funds.

3.60 The total contribution across the affected RLMIS Closed Funds is referred to as the “Aggregate Project Costs Allowance” which comprises three components, namely:

 The “Past Costs” which are the total costs it has incurred to date in effecting the Fund Consolidations; plus

 The “Expected Future Costs” which are those it expects to incur in the future (i.e. after the Calculation Date) in undertaking the Fund Consolidations; plus

 The “Indemnity Premium” (described below).

3.61 The Aggregate Project Costs Allowance was calculated based on the costs as at 31 March 2021 and is £39.9 million, comprising Past Costs of £17.7 million, Estimated Future Costs of £20.3 million and an Indemnity Premium of £1.8 million.

3.62 The Past Costs and Expected Future Costs total £38.1 million across the four years of the Fund Consolidations, which covers multiple sub-funds.

The Indemnity Premium

3.63 If the actual costs of the Fund Consolidations were to exceed the expected costs used to derive the project costs allowances that would be charged to the appropriate funds then the excess cost would, in effect, be met by the RL Open Fund and would not be charged back to the funds (or the policies in those funds). If the costs of the Fund Consolidations were to be lower than those expected, the benefit would accrue to the RL Open Fund.

3.64 As the RL Open Fund would take on the risk of a cost overrun in relation to the Fund Consolidations the allocation of the expected cost of the Fund Consolidations that would be charged to the UFOB Additional Account (with reference to the total asset shares plus the UFOB Additional Account) would be increased by an amount intended to represent an “Indemnity Premium”.

3.65 At the point of calculation, certain of the costs of the Fund Consolidations would be known as they would:

 Already have been incurred; or

 Be incurred in the future but would be subject to fixed cost contracts and so would not vary from their expected level.

3.66 An Indemnity Premium would not be charged in respect of such known costs.

3.67 The Indemnity Premium has been set as a fixed percentage (15%) of the future, non-fixed expected costs of the Fund Consolidations.

3.68 In Section 9 I consider the reasonableness of the Indemnity Premium in respect of the UFOB Sub-Fund.

The allocation of the Aggregate Project Costs Allowance

3.69 The Aggregate Project Costs Allowance would be allocated between the RLMIS Closed Funds that are part of the Fund Consolidations in proportion with the asset shares of with-profits policies in the relevant fund and estates/additional accounts of each of those funds as at the Calculation Date.

3.70 The Project Costs Allowance that would be deducted from the UFOB Additional Account prior to its distribution under the Scheme would therefore be equal to the Aggregate Project Costs Allowance multiplied by the ratio of:

 The sum of the UFOB Sub-Fund with-profits asset shares and the UFOB Additional Account as at 31 March 2021; and

 The sum of the with-profits asset shares and estates/additional accounts of all of the RLMIS Closed Funds that are part of the Fund Consolidations as at 31 March 2021.

The total Project Costs Allowance for the UFOB Sub-Fund

3.71 Overall, the Indemnity Premium attributable to the UFOB Sub-Fund is expected to be £0.8 million and this would be added to the expected cost allocation for the UFOB Sub-Fund of £16.1 million to give a total Project Costs Allowance for the UFOB Sub-Fund of £16.9 million.

3.72 In Section 9 I consider the reasonableness of the Project Costs Allowance and the approach used to determine it.

The Premium Uplift Contribution

3.73 The Offer would involve an immediate distribution of the UFOB Additional Account (less the Scheme Contribution) to Included Policies. This distribution would take the form of the uplift that would be applied to the asset shares of the Included Policies on the Implementation Date and to the amount allocated to asset share when future premiums are paid.

3.74 In respect of future premiums, the additional uplift to asset shares would take place as and when the premiums are paid and credited to asset shares for those with-profits policies of the UFOB Sub-Fund that are still paying regular premiums (i.e. the policy has not been made paid-up and the policyholder has not reached the fully free paid age).

3.75 The portion of the UFOB Additional Account that would be held back to cover the uplift in respect of future premiums is referred to as the Premium Uplift Contribution. This contribution is based on a best-estimate assessment of expected future premiums to be paid on with-profits policies of the UFOB Sub-Fund.

3.76 For the avoidance of doubt, the application of the uplift to the amount allocated to asset share when future premiums are paid would not result in an increase to the premiums payable by policyholders.

EXHAUSTING THE UFOB ADDITIONAL ACCOUNT

3.77 As set out in paragraph 3.12, the Offer Uplift percentage of 6.4% that was calculated as at 31 March 2021 will be fixed until the Implementation Date of the UFOB Sub-Fund Scheme, which is expected to be 31 December 2021. There will be no recalculation of the Offer Uplift percentage at any point as it will be guaranteed over this period (as will the Scheme Contribution).

3.78 As a result of this guarantee, the value of the assets backing the UFOB Additional Account at the Implementation Date may be too high or too low to meet the guaranteed uplift to the asset shares of Included Policies plus the Scheme Contribution. To address this, RLMIS would process a payment either:

 From the RL Open Fund to the UFOB Sub-Fund to make good any shortfall in the UFOB Additional Account; or

 From the UFOB Sub-Fund to the RL Open Fund to ensure that any surplus in the UFOB Additional Account does not lead to there being residual value in the UFOB Additional Account immediately after the Scheme is implemented.

3.79 RLMIS would process this payment immediately before the implementation of the Scheme such that, at the Implementation Date, the value of the UFOB Additional Account exactly matches the aggregate value of the Offer Uplift to all Included Policies to be applied on the Implementation Date plus the Scheme Contribution.

3.80 While it is expected that, in almost all scenarios, any surplus in the UFOB Additional Account relative to the funds required to support the uplift would accrue to the RL Open Fund, RLMIS does not consider it appropriate for the RL Open Fund to benefit from a significant profit as a result of the arrangement. It should be noted that such a significant gain is unlikely but could arise in the event of extreme and unexpected volatility in financial markets between the Calculation Date and the Implementation Date.

3.81 Therefore, RLMIS proposes that, if the RLMIS WPA were to determine that fluctuations in the value of the UFOB Additional Account between the Calculation Date and the Implementation Date have led to a profit to the RL Open Fund that is considered excessive, the RLMIS Board would (on the advice of the RLMIS WPA) take such steps as may be necessary to address any resulting inequity as between policies allocated to the RL Open Fund and the reallocated UFOB Sub-Fund policies.

3.82 In particular, in the event of an excessive profit accruing to the RL Open Fund as a result of the arrangement described in paragraph 3.78, such steps may include a special distribution of some element of that excess to Included Policies (and Excluded Policies) following the implementation of the Scheme.

THE COST APPORTIONMENT IF THE SCHEME IS NOT IMPLEMENTED

3.83 In the event that the Scheme were not ultimately to be implemented, the costs deemed to be attributable to the UFOB Sub-Fund and incurred up until the point of abandonment would be apportioned equally between the RL Open Fund Estate and the UFOB Additional Account.

PROFITSHARE

3.84 As described in Section 2, the terms of the UAG Scheme state that the with-profits policies in the UFOB Sub-Fund should receive ProfitShare.

3.85 The UFOB Sub-Fund policies receive a proportion that relates to the value of the UFOB Fund’s estate transferred to the RL Open Fund when RL acquired UAG compared to the value of the RL Open Fund’s estate at the time of that transfer. As a result of this proportion, the UFOB Sub-Fund policies receive a lower amount of ProfitShare than other eligible lines of business.

3.86 The implementation of the proposed Scheme would not affect the entitlement of the UFOB Included Policies to ProfitShare or the level of ProfitShare to which these policies would be entitled.

3.87 The effect of the Scheme on this is covered in Section 9.

THE OPERATION OF WITH-PROFITS POLICIES FOLLOWING THE IMPLEMENTATION OF THE SCHEME

3.88 If the Scheme were to be implemented, the RL Open Fund Estate would support the management of the Included Policies and this would include meeting any smoothing costs arising from smoothing the amounts by which pay- outs on similar with-profits policies with similar terms vary from one year to the next.

3.89 The way in which pay-outs on maturity and death claims are smoothed from one year to the next would remain as described in Section 2. However, there would be a change to this approach in the first year following the implementation of the Scheme to ensure that the current smoothing approach is applied to the pay-out before the addition of the uplift to policies under the Scheme. This would prevent the distributions under the Scheme being reduced owing to the effect of smoothing, which would ensure that Included Policyholders who exit during the first year following implementation of the Scheme would receive the full distribution presented under the Offer.

3.90 If the Scheme were to be implemented, the Included Policies would not be entitled to any distributions from the RL Open Fund Estate, although they would continue to be entitled to future allocations of ProfitShare. Upon consolidation of the UFOB Sub-Fund into the RL Open Fund, the UFOB Additional Account would be exhausted by uplifting the asset shares of Included Policies. The Included Policies would therefore receive no further estate distributions via asset share enhancements or uplift to claim values.

3.91 The implementation of the Scheme would not directly result in any changes to the process for setting annual or final bonuses for Included Policies, but some changes to bonus-setting processes will take place at or around the same time as the Scheme, as described in paragraphs 3.108 to 3.111.

3.92 The implementation of the Scheme would result in some changes to the Cost of Bonus Transfers in respect of the Included Policies as follows:

 The recognition of the full Cost of Bonus Transfers:

o Under the current fund structure:

. The value of the future Cost of Bonus Transfers that would arise as bonuses are declared in respect of the distribution of the UFOB Additional Account are not recognised in the RL Open Fund’s Solvency II balance sheet.

. The portion of the value of the future Cost of Bonus Transfers that can be supported by the excess of asset shares over guaranteed benefits is allowed for in the Solvency II balance sheet of the RL Open Fund (as described in paragraph 2.60).

o If the Scheme were to be implemented, the full value of the future Cost of Bonus Transfers would be recognised in the RL Open Fund’s balance sheet.

 A reduction in the overall Cost of Bonus Transfers payable from the UFOB Sub-Fund to the RL Open Fund:

The overall Cost of Bonus Transfers payable from the UFOB Sub-Fund to the RL Open Fund will be reduced to the extent that the UFOB Additional Account is reduced by the Scheme Contribution, as this will reduce the expected value of future bonuses to be declared.

 Following fund consolidation, these payments will no longer necessitate a reallocation of assets between funds.

EXCEPTIONAL COSTS

3.93 As set out in Section 2, it is currently the case that where exceptional costs occur then, with the approval of the WPA and the WPC of the proposed apportionment between the RL Open Fund and the RLMIS Closed Funds, part of the exceptional costs can be charged to the UFOB Sub-Fund. Exceptional costs are typically apportioned to the various funds based on the total BEL including any unit reserves within each fund (rather than being allocated based on asset shares).

3.94 According to the UAG Scheme it is currently the case that any costs deemed to be exceptional costs affecting the UFOB Sub-Fund should be charged 50% to the UFOB Additional Account and 50% to the RL Open Fund Estate.

Thus, all else being equal, exceptional costs reduce future distributions of the UFOB Additional Account to with- profits policies in the UFOB Sub-Fund.

3.95 If the Scheme were to be implemented, there would be no UFOB Additional Account to which to charge any exceptional costs relating to policies transferred from the UFOB Sub-Fund. Instead, the amount that would have been charged to the UFOB Additional Account would either be:

 In most circumstances, met by the RL Open Fund Estate and then recovered over time from the asset shares of policies transferred from the UFOB Sub-Fund, charging the amount of the exceptional cost over the projected future run-off of these policies. Interest would be charged on these costs at a risk-free interest rate; or

 In some circumstances (if determined to be fair and reasonable by the RLMIS Board and the WPC), charged directly to the asset shares of policies transferred from the UFOB Sub-Fund in the form of an immediate, uniform deduction across all such policies in-force at that time.

This approach to charging for exceptional expenses is expected to be adopted where all policyholders are expected to benefit equally from the action being taken that has incurred the cost.

3.96 Both of the above approaches need to take into account advice from the RLMIS WPA, the rationale for the Scheme and for the calculation of the CFC, and the associated representations made by RLMIS in respect of the Scheme to its policyholders.

3.97 For the avoidance of doubt, the RL Open Fund would continue to meet 50% of the exceptional costs assigned to the former UFOB Sub-Fund policies, in line with the UAG Scheme.

MEMBERSHIP RIGHTS FOLLOWING THE SCHEME

3.98 The implementation of the Scheme will have no impact on the membership rights of RLMIS policyholders. In particular:

 The policies in the UFOB Sub-Fund do not confer membership of RLMIS to the holders of those policies and this will not change as a result of the implementation of the Scheme; and

 The membership status of policyholders of the RL Open Fund will be unchanged as a result of the implementation of the Scheme.

THE INVESTMENT STRATEGY FOLLOWING THE SCHEME

3.99 If the UFOB Sub-Fund Scheme were to be implemented then the UFOB Sub-Fund would be consolidated into the RL Open Fund and the assets backing the asset shares of the majority of Included Policies would be pooled with the other with-profits policies in the RL Open Fund. Consequently, a uniform asset share EBR would be applied across all of the with-profits asset shares in the RL Open Fund with the exception of:

 The UFOB Sub-Fund policies for which the backing assets are currently separately assigned and invested with an EBR of 0%.

There would be no change to the 0% EBR for these policies.

If the SL Fund Scheme were also to be implemented, the assets backing these policies would be pooled with the deferred annuity policies transferring into the RL Open Fund from the SL Fund, for which the backing assets are also currently invested with a 0% EBR.

 The groups of policies in the RL Open Fund with significant guarantees for which the backing assets have been separately assigned, as described in paragraph 2.108.

There would be no change to the asset strategies for this business as a result of the proposed Scheme and the backing assets would continue to be separately assigned.

3.100 As at 31 December 2020, the EBR for the asset shares in the UFOB Sub-Fund was 51% (with the exceptions listed in paragraph 3.99 above), and the EBR for the asset shares in the RL Open Fund was 63%.

3.101 The UFOB Additional Account is currently invested in cash and gilts. If the UFOB Sub-Fund Scheme were to be implemented then, following consolidation of the UFOB Sub-Fund into the RL Open Fund, trades to purchase additional equities would be required to ensure an asset share EBR of 63% would be achieved in the RL Open Fund following the application of the Offer Uplift to the asset shares of Included Policies.

3.102 The costs of these trades would be attributed to the asset shares of the policies in the RL Open Fund.

THE IMPACT OF THE SCHEME ON THE RISK EXPOSURES OF INCLUDED POLICIES AND THE RL OPEN FUND

3.103 Currently the risks associated with policies of the UFOB Sub-Fund (principally market-related risks) apply in the following way:

 Market falls and increases to expenses flow through into the asset shares of the policies in the UFOB Sub- Fund. To the extent that these are material, such changes will flow through into pay-outs on these policies (unless they have significant guarantees) through lower bonuses being declared.

 To the extent that market falls and/or increases to expenses are severe enough to result in asset shares falling below the level of guaranteed benefits, the assets of the UFOB Additional Account would be used to meet the excess of pay-outs over asset shares.

The capital requirements for the UFOB Sub-Fund reflect that asset shares are able to absorb losses until they fall below guaranteed benefits, and therefore the capital requirement only includes the component of losses that would need to be met by the additional account in a severe adverse scenario.

3.104 The principal impact of the implementation of the Scheme in this area would therefore be to shift responsibility for meeting any excess of guaranteed benefits over asset shares from the UFOB Additional Account to the estate of the RL Open Fund. This would change the exposures of the Included Policies to the risks from the RL Open Fund and of the RL Open Fund to the risks from the Included Policies.

WITH-PROFITS BUSINESS GOVERNANCE

3.105 As set out in Section 2, the RL Long Term Fund PPFM includes the principles and practices in respect of the RL Open Fund, the UFOB Sub-Fund and the UFIB Sub-Fund.

3.106 Following the implementation of the Scheme, the RL Long Term Fund PPFM would be updated to reflect changes to the principles and practices for the Included Policies, principally in respect of removing references to the UFOB Additional Account.

THE IMPACT OF THE SCHEME ON THE UAG SCHEME

3.107 If the UFOB Sub-Fund Scheme were to be implemented, the UAG Scheme would be terminated and would cease to govern the operation of the relevant aspects of RLMIS.

OTHER CHANGES COINCIDING WITH THE SCHEME

3.108 RLMIS intends to make certain changes to the operation of certain policies in the UFOB Sub-Fund at or around the time the Scheme is implemented.

3.109 These changes are principally intended to allow RLMIS to improve automation of administration processes and to improve flexibility for policyholders. RLMIS has received legal advice that the changes proposed can be effected via a combination of unilateral contract variation and other mechanisms outside of the Scheme.

3.110 The principal changes are:

 The conversion of pension policies from CWP to accumulating with-profits (“AWP”). RLMIS believes this will improve administration processes and will provide additional flexibility to policyholders by allowing them to pay additional premiums and to take benefits other than at the original selected retirement date.

 Annual bonuses on life policies will be calculated on a simple rather than compound basis24, and final bonuses will be calculated on a compound rather than a simple basis. This will align the calculation with how bonuses are calculated on most of the other RLMIS business lines, which will improve the efficiency of the bonus processes.

3.111 Although the changes described above are not part of this Scheme, RLMIS intends to explain the changes as part of the communications sent to Eligible Policyholders under the Scheme.

3.112 As they are not part of this Scheme I have not commented on the proposed changes in this Report. I note that they will be subject to the RLMIS with-profits governance processes.

24 Bonuses calculated on a simple basis are applied only to the policy’s original sum assured and are not applied to any increase in the sum assured arising from bonuses awarded since the policy’s inception. By contrast, compound bonuses are applied both to the original sum assured and any attaching bonuses. Existing bonuses would remain unchanged by the switch to simple bonuses.

4. The process and timetable for the proposed Scheme

OVERVIEW

4.1 In order to implement the Scheme, the Scheme Implementation Conditions (set out in Section 3) must be met and the steps undertaken to meet these have been, and will be, as follows:

 The Appetite Mailing:

RLMIS sent the Appetite Mailing (see paragraph 5.7) to Eligible Policyholders for whom a validated address was held over an eight week period commencing 15 February 2021.

The Appetite Mailing feedback window closed on 7 May 2021.

 Determination of Eligible Policies

RLMIS determined the set of Eligible Policies based on policies that were in-force on 31 March 2021 (the “Eligibility Date”) using the criteria set out in Section 3.

 The calculation of the Offer Uplift

The Offer Uplift quoted in the Voting Packs was calculated based on the financial position of the UFOB Sub- Fund as at 31 March 2021. This Offer Uplift percentage is fixed until the Implementation Date of the UFOB Sub-Fund Scheme, which is expected to be 31 December 2021.

 The Convening Hearing

The Convening Hearing (see paragraph 4.2) for the Scheme will take place on 15 and 16 July 2021 and this Report will be submitted to the High Court for that hearing.

 The Policyholder Vote

The Voting Pack (see paragraph 5.9) will be sent to Eligible Policyholders over an eight week period commencing 19 July 2021.

Eligible Policyholders will be able to register their votes on the Scheme by post until midday on 1 November 2021 (see paragraph 4.6).

If RLMIS has not received an Eligible Policyholder’s vote within four weeks of mailing their Voting Pack, a Reminder Mailing (see paragraph 5.10) will be sent to the policyholder.

 The Scheme Meeting

The Scheme Meeting will be held on 4 November 2021.

The results of the policyholder vote at the Scheme Meeting constitute the first of the Scheme Implementation Conditions set out in Section 3.

 The review of the Independent Expert

In advance of the Sanction Hearing, I will produce my Supplementary Report that will update my conclusions from this Report in light of updated financial information and any other new or updated information available at the time.

 The Sanction Hearing

The Sanction Hearing (see paragraph 4.32) for the UFOB Sub-Fund Scheme will take place on 25 and 26 November 2021 and I will submit a supplementary report to the High Court for that hearing.

The sanction of the UFOB Sub-Fund Scheme by the High Court is the second of the Scheme Implementation Conditions set out in Section 3.

 The Implementation Date

If the Scheme Implementation Conditions are met, and the RLMIS Board decides to proceed with the Scheme, then the Implementation Date of the Scheme is expected to be 31 December 2021 but this can be delayed by RLMIS to no later than 31 March 2022.

The Confirmation Mailing (see paragraph 5.11) would be sent to all UFOB Sub-Fund policyholders following the Implementation Date, with the wording amended as necessary for each sub-group.

THE CONVENING HEARING

4.2 The main purpose of the Convening Hearing is to ask the High Court to convene the Scheme Meeting.

4.3 In considering whether to grant an order convening the Scheme Meeting, the High Court will consider whether more than one meeting of creditors is required and, if so, the appropriate composition of the meetings.

4.4 Since RLMIS proposes that the Eligible Policyholders should vote together as a single class at a single meeting in relation to the Scheme, the High Court would need to be satisfied that this is appropriate, having regard to the rights which the Eligible Policyholders have and the effect of the Offer on those rights. The High Court would take into account any representations that policyholders may make, particularly in relation to the proposal that there should be a single class and a single Scheme Meeting.

4.5 The High Court will also consider and be asked to approve the RLMIS proposed voting arrangements and its approach to determining the result of the Policyholder Vote.

THE POLICYHOLDER VOTE

Introduction

4.6 RLMIS would communicate its Offer to each Eligible Policyholder in the Voting Pack (see paragraph 5.9). In this pack, there would be a decision form to be completed by the policyholder and returned by post. Alternatively, the policyholder would be able to vote on the Offer online or the policyholder or their nominated proxy may cast their vote in person at the Scheme Meeting, to be held on 4 November 2021. The voting options available to the Eligible Policyholder would be:

 Vote in favour of the Offer; or

 Vote against the Offer.

The Scheme Meeting

4.7 At the “Scheme Meeting” votes on the Offer would be formally cast and Eligible Policyholders would be able to discuss the Scheme with members of the RLMIS management team. Eligible Policyholders who had chosen to vote by post or online would be counted as having voted by proxy as the Chair of the Scheme Meeting would formally vote on their behalf at the Scheme Meeting unless they were to appoint another person to act as their proxy.

4.8 I would also attend the Scheme Meeting and be available to take questions from policyholders.

4.9 Eligible Policyholders who vote by post or online would not need to attend the Scheme Meeting. However, where policyholders do vote in person or by proxy at the Scheme Meeting, this decision would be counted, and any other votes submitted would be ignored.

4.10 Due to the COVID-19 pandemic and the possibility that this may affect policyholders’ ability to attend the Scheme meeting in person, RLMIS would give policyholders the option to attend the Scheme Meeting either in person (unless government and medical advice prevent this) or virtually. The Voting Pack (see paragraph 5.9) contains instructions for both attendance options.

The voting classes

4.11 The subdivision of Eligible Policyholders into different “voting classes” must be such that the Eligible Policyholders in each voting class are not so dissimilar as to make it impossible for them to consult together and to form a common view on account of their common interest.

4.12 The external legal advisers of RLMIS have carried out a due diligence exercise on the policies of the UFOB Sub- Fund and this included consideration of the terms and conditions of Eligible Policies, as well as the legal rights of the Eligible Policyholders. One of the primary purposes of this due diligence was to identify any class tensions that might suggest that the Eligible Policyholders should be subdivided into more than one voting class.

4.13 Following this due diligence exercise, RLMIS has elected to constitute the Scheme with a single voting class, noting that HITM policies will not be part of the Scheme, as described in paragraphs 3.26 to 3.33.

4.14 In reaching this conclusion RLMIS has had regard to advice from its external legal advisers (Pinsent Masons LLP), who have conducted an analysis of the Scheme and concluded that the only areas that may give rise to class or fairness tensions under the UFOB Sub-Fund Scheme proposals relate to the outstanding terms of the policies.

4.15 The particular issue is that the holders of policies with short remaining terms are projected to receive a higher distribution of the UFOB Additional Account under the Scheme than they would have received in the absence of the Scheme, with the opposite being true for holders of policies with long remaining terms, noting that there is significant uncertainty around distributions and pay-outs in the future in the absence of the Scheme.

4.16 In mitigation of this, the external legal advisers have highlighted the importance of ensuring that all relevant fairness considerations are addressed in communications to policyholders and the High Court.

4.17 I cover this in detail in Section 17 (the Policyholder Vote Test).

The Offer Acceptance Thresholds

4.18 There are two thresholds (the “Offer Acceptance Thresholds”) set out in Part 26 of the Companies Act 2006, both of which have to be met by the result of the vote before RLMIS may seek the sanction of the Scheme from the High Court. The Offer Acceptance Thresholds, which would need to be met are:

 Threshold 1: More than 50% of the Eligible Policyholders who vote on the Offer must vote in favour of the Offer; and

 Threshold 2: Those Eligible Policyholders who vote in favour of the Offer must represent at least 75% in value (see below) of those voting.

The Vote Value

4.19 For a given Eligible Policyholder, a weighting will be attached to the policyholder’s vote (the “Vote Value”) used in assessing the vote result against Threshold 2. This Vote Value is proposed to be:

 The sum of the amounts payable on a claim under all of the policyholder’s Eligible Policies at the Calculation Date; plus

 The sum of future premiums on all of the policyholder’s Eligible Policies as at the Calculation Date until their contractual end point for premiums.

The contractual end-point is identified as the point at which the policy becomes fully free-paid (if the policy is a whole of life policy), matures (if the policy is an endowment policy), or at which the policyholder will reach the retirement date on the policy (if the policy is a pension policy).

4.20 The amount payable on a claim is defined to be the following as at the Calculation Date:

 For pension policies, the transfer value25 of the policy;

 For endowment policies, the cash-in value26 of the policy; and

 For other life policies, the death value27 of the policy

4.21 RLMIS has informed me that it would have the ability to alter the Vote Values, as derived as at the Calculation Date, up until the date of the Scheme Meeting, but would only seek to do this if there was a material divergence between the Vote Values at the Calculation Date and those that would be derived based on the date of the Scheme Meeting.

The voting arrangements for pension schemes for which RLMIS is the trustee

4.22 RLMIS is the trustee under two pension schemes in the UFOB Sub-Fund:

 The ‘United Friendly Insurance PLC Personal Pension Scheme’ (the “UFI PPS”), which holds the APP and PP policies; and

 The ‘United Friendly Insurance PLC Additional Contribution Plan’ (the “UFI ACP”) , which holds the FSAVC policies.

4.23 Although RLMIS is the trustee of the UFI PPS, the way in which the underlying personal pension policies were written means that the members of the UFI PPS are the legal holders of these policies (rather than Royal London as the trustee). Therefore, the members of the UFI PPS, i.e. the holders of APP and PP policies, would automatically be Eligible Policyholders under the UFOB Sub-Fund Scheme and would be able to vote on the UFOB Sub-Fund Scheme.

4.24 Conversely, the FSAVC policies in the UFI ACP were written in such a way that RLMIS is the legal creditor (in effect the policyholder) rather than the holders of the FSAVC policies (i.e. the scheme members). As at 31 December 2020, there were around 300 FSAVC policies that would be Eligible Policies under the UFOB Sub- Fund Scheme.

4.25 It is proposed that, after the Convening Hearing, a Deed Poll would be executed under which the scheme members under the UFI ACP with Eligible Policies would become creditors of RLMIS for the purposes of the proposed UFOB Sub-Fund Scheme. This would allow these scheme members to vote on the Scheme.

4.26 The Court would need to approve this proposal at the Convening Hearing.

The result of the Policyholder Vote

4.27 If the result of the Policyholder Vote were to meet the Offer Acceptance Thresholds, then all Eligible Policyholders would be bound by the decision of the High Court in relation to the Scheme. For the avoidance of doubt this would include:

 Any Eligible Policyholders who voted against the Offer;

 Any Eligible Policyholders who did not respond to the Offer; and

 Any Eligible Policyholders that are uncontactable.

25 The transfer value is the proceeds that would be available under the Eligible Policy if the customer wished to transfer their policy to another provider as at the Calculation Date. 26 The cash-in value is the payment that would be made if the policyholder elected to surrender the policy as at the Calculation Date. 27 The death value of a policy is the payment that would be made if the policyholder died on the Calculation Date.

4.28 If the necessary conditions were not to hold then RLMIS would not proceed with the Scheme and all Eligible Policies would be unchanged and the UFOB Sub-Fund would not be consolidated into the RL Open Fund.

4.29 Whilst the High Court will consider the fairness of the Scheme more widely, the Offer Acceptance Thresholds are the only requirements set out in legislation that the result of the vote itself needs to meet in order that RLMIS can seek the sanction of the High Court.

4.30 However, even in the event that the Offer Acceptance Thresholds are met, RLMIS will consider all aspects of the result of the vote carefully before deciding whether to proceed to the Sanction Hearing.

4.31 It is important to note that, whilst the meeting of the Offer Acceptance Thresholds is a necessary condition for the Scheme to proceed it is also necessary for the Scheme to be sanctioned by the High Court.

THE SANCTION HEARING BY THE HIGH COURT

4.32 The sanctioning of the proposed Scheme by the High Court at the Sanction Hearing is a Scheme Implementation Condition as set out in Section 3. If the Offer were to be approved at the Scheme Meeting, the Sanction Hearing for the Scheme is expected to take place on 25 – 26 November 2021.

4.33 At the Sanction Hearing, the High Court would be asked to make an order approving the Scheme. In considering whether to make such an order, the High Court will consider four key matters:

 Whether the requirements of Part 26 of the Companies Act 2006 have been complied with, including whether the Scheme was approved at the Scheme Meeting by the necessary majorities.

 Whether the Eligible Policyholders were fairly represented by those who attended the Scheme Meeting (in person or by proxy) and that the statutory majority of policyholders in favour of the Scheme are acting bona fide and not coercing the minority in order to promote interests adverse to those of Eligible Policyholders as a whole.

 Whether an intelligent and honest person who was an Eligible Policyholder and was acting in his own interest might reasonably approve the Scheme.

 Whether there is a "blot" on the Scheme, that is, some technical or legal defect that means, for example, that it does not work according to its own terms, or that it would infringe some mandatory provision of law.

4.34 In coming to its decision, the High Court will consider the overall fairness of the Offer and whether it is appropriate for Eligible Policyholders who are uncontactable or decide for any reason not to respond to the Offer to be bound by the decision of the majority. This is likely to involve consideration of whether there are good reasons for the Offer to be made using a scheme of arrangement, and also consideration of matters such as the way in which the Offer has been communicated to policyholders. The High Court will also consider any benefit to RLMIS. I consider a number of matters relevant to these wider fairness considerations in Sections 16 to 19.

THE IMPLEMENTATION DATE

4.35 The Implementation Date for the Scheme is expected to be 31 December 2021, but this can be delayed by RLMIS to no later than 31 March 2022. This is the date on which, provided that the High Court has sanctioned the Scheme:

 The Offer Uplift of 6.4% would be applied to the asset shares of Included Policies; and

 The UFOB Sub-Fund would be consolidated into the RL Open Fund.

5. The communications strategy for the proposed Scheme

OVERVIEW

5.1 The RLMIS stated communications strategy for the Scheme is to produce policyholder communications that are clear, fair, and not misleading, enabling policyholders to make informed voting decisions within an appropriate timeframe.

5.2 Policyholder research was undertaken during 2020 to test appetite for the proposed fund consolidation and Scheme design, and to test effectiveness of the draft communications in the development stage.

5.3 RLMIS proposes to only send communications regarding the Scheme to Eligible Policyholders; that is, communications regarding the Scheme will not be sent to:

 Those policyholders in the UFOB Sub-Fund that are not Eligible Policyholders, as described in Section 3;

 Policyholders holding policies in the RL Open Fund; and

 Policyholders holding policies in the other RLMIS Closed Funds (i.e. the RLMIS Closed Funds excluding the UFOB Sub-Fund).

5.4 The stated objectives of the RLMIS communications strategy are to ensure that:

 Policyholders are provided with communications that are clear, simple, and easy to understand;

 Policyholders are provided with communications that are created with full understanding of the demographic and their requirements;

 Policyholders are provided with communications that are balanced and factual to enable policyholders to draw their own conclusions;

 As many Eligible Policyholders are contacted as possible;

 Eligible Policyholders engage at feedback and voting stages within the specified timescales; and

 Communications are reflective of the RLMIS brand and values.

5.5 The specific methods by which RLMIS aims to achieve these objectives are described in more detail below.

THE COMMUNICATIONS PACKS

5.6 By the time of the Sanction Hearing, RLMIS will have sent at least two communications by post to all Eligible Policyholders for whom it has a validated address:

 The “Appetite Mailing”:

o This was sent over an eight-week period commencing 15 February 2021 such that policyholders received it a minimum of twelve weeks in advance of the Convening Hearing and the contents are described in detail below.

o The Appetite Mailing was sent in an envelope designed to highlight the importance of the communication and to encourage policyholders to engage with the contents. The United Friendly logo, along with the RLMIS logo, was included on the envelope as many Eligible Policyholders may be more familiar with this brand.

o The Appetite Mailing was intended to inform Eligible Policyholders of:

. The mechanics of their with-profits policy and the current approach to distributing the estate and was intended to avoid overloading Eligible Policyholders, (of which a large number are potentially vulnerable policyholders), with extensive technical information at an early stage.

. The key parts of the process such as the need for a sufficient number of Eligible Policyholders to be supportive of the Scheme, the High Court to agree, at the Convening Hearing, to convene the Scheme Meeting, and the subsequent expectation of a Voting Pack and the Policyholder Vote.

 The “Voting Pack”:

The Voting Pack will be sent over an eight-week period commencing 19 July 2021, after the Convening Hearing for the Scheme.

5.7 The Appetite Mailing contained:

 A covering letter that signposted the information booklet for more substantive information on the proposals, but included the following points:

o A reminder of the policyholder’s policy and that it is managed by RLMIS, as some policyholders will not have heard from RLMIS in many years or may only recognise the United Friendly brand;

o Why RLMIS is writing to the relevant policyholder and an introduction to the Scheme;

o A call to action to provide feedback using the feedback form by 7 May 2021; and

o Key steps in the project timeline, including notice of the Convening Hearing date and location.

 An information leaflet explaining how with-profits policies work.

 An information booklet providing a high-level guide to the Scheme, including information on:

o How the policyholder’s with-profits policy and with-profits fund came to be a part of the RLMIS with- profits fund structure, what it means to be part of a mutual and the connection to the values of RLMIS;

o An introduction to the proposals, including what fund consolidation will mean for the policyholder’s with-profits policy and highlighting that there would be no “opt-out” option in the Policyholder Vote for the policyholder to opt-out of the process;

o Context around the RLMIS simplification programme and how the proposals tie in with this;

o Why RLMIS is undertaking this exercise now, setting out the benefits for Included Policyholders and the operational benefits for RLMIS;

o An introduction to the legal scheme of arrangement process, e.g. explaining the vote to follow as part of the Voting Pack;

o An explanation of the RLMIS approach to the composition of voting classes;

o A timeline for the proposals, highlighting when the policyholder needs to take action;

o What the Offer could look like for an average holder of a policy in the various affected product classes;

o Details of how the policyholder can provide feedback to the Convening Hearing, including in relation to the composition of the voting classes; and

o A set of questions and answers (“Q&As”) and a glossary.

 A feedback form containing a question and a free text box, along with a reply envelope with pre-paid postage, to capture interest, any comments and to uncover potential objections from Eligible Policyholders.

5.8 RLMIS did not provide any formal illustrations at the Appetite Mailing stage.

5.9 The Voting Pack will contain:

 A covering letter that refers policyholders to the Policyholder Circular for more substantive information on the Scheme, but will include the following:

o An update on the Scheme and confirmation that following High Court approval at the Convening Hearing, RLMIS are now asking Eligible Policyholders to vote on the Scheme;

o Signposting to sections in the Policyholder Circular and the RLMIS website for the full reports of the WPA and the Chief Actuary, and for this Report (as only summaries of these reports will be provided in the Voting Pack);

o Signposting to the personalised illustration of the effect of the Scheme on the policyholder’s policy;

o A call to action to vote on the Scheme using the voting form by midday 1 November 2021;

o Details of the Scheme Meeting (including how to attend in person or online) and the Sanction Hearing;

o Details of how to object to the proposals; and

o Confirmation that if the Offer Acceptance Thresholds are met and the High Court sanctions the Scheme at the Sanction Hearing, the Scheme will effect the proposed changes to the policyholder’s policy regardless of the policyholder’s specific voting decision, or if they did not vote.

 A “Policyholder Circular” that will explain the impact of the Scheme on policyholders, including information on:

o Background to the Scheme and the terms of the Scheme;

o How policyholders’ policies currently work, including the distribution of the estate;

o The effect of the Scheme on the UFOB Sub-Fund and the RL Open Fund, including details of the Scheme Contribution;

o The consequences if the Scheme does or does not go ahead;

o How the interests of, and fairness to, policyholders were taken into account in designing the Scheme;

o A summary of the WPA’s report and the Chief Actuary’s report;

o A summary of this Report (written by me);

o Details of the Scheme Meeting and how the policyholder can vote on the Scheme, including instructions to accompany the voting form;

o Details of the Sanction Hearing and what happens after the Scheme Meeting;

o The Scheme document;

o The legal notice of the Scheme Meeting; and

o A set of Q&As and a glossary.

 A pack with information on the vote that contains:

o A voting form, which the policyholder can use to vote on the Offer; and

o A personalised illustration showing the effect of the Offer Uplift percentage of 6.4% and explanation of the illustration.

THE REMINDER MAILING

5.10 If RLMIS has not received an Eligible Policyholder’s vote within four weeks of mailing their Voting Pack, the “Reminder Mailing” will be sent to policyholders. The Reminder Mailing is intended to:

 Promote policyholder engagement with the Voting Pack; and

 Encourage all policyholders to vote on the Scheme and highlight the importance of taking action, as non- responders would be bound by the Offer if it were to be implemented.

THE CONFIRMATION MAILING

5.11 A letter will be sent to all Included Policyholders following the Implementation Date to notify them of the outcome of the Scheme and, in particular, to confirm:

 The fund consolidation is now complete;

 Their policy now resides in the RL Open Fund; and

 Any consequent changes to their policy value (i.e. asset share).

COMMUNICATION DOCUMENT VARIANTS

5.12 RLMIS has produced a number of variants of the four mailings outlined above (Appetite Mailing, Voting Pack, Reminder Mailing, and Confirmation Mailing) so that Eligible Policyholders would receive variants of the communication documents tailored to the specific Eligible Policy type they hold.

5.13 Members of the two pension schemes (the UFI PPS and the UFI ACP as set out in Section 4) for which RLMIS is the trustee (and who have Eligible Policies) would receive the same communication documents as any other Eligible Policyholder, albeit tailored to their specific Eligible Policy type.

OTHER SOURCES OF INFORMATION

5.14 Eligible Policyholders would be able to access further information or assistance over the phone, with a dedicated team to deal with policyholder queries. The team consists of approximately 50 employees to ensure there is appropriate resource to deal with queries in relation to the Scheme.

5.15 Additionally, the following documents will be available on the RLMIS website:

 A sample copy of the Appetite Mailing;

 A sample copy of the Voting Pack;

 The Scheme document;

 This Report;

 The reports of the RLMIS WPA and the RLMIS Chief Actuary;

 the RLMIS Annual Report and Accounts; and

 The proposed updates to the RL Long Term Fund PPFM, which currently also includes the principles and practices in respect of the UFOB Sub-Fund.

5.16 The above documents will also be available from RLMIS by written request to the address specified in the legal notice.

THE ROUTE FOR POLICYHOLDER RESPONSES, ENQUIRIES AND OBJECTIONS

5.17 Policyholder responses, enquiries and objections following the Appetite Mailing and Voting Pack will be received via phone, email, and postal routes.

5.18 The response rate on the feedback form included in the Appetite Mailing was 12.7%, with a positive response (indicating the policyholder would likely vote in favour of the Scheme) of 86.1% by count and 87.5% by Vote Value (as at 21 May 2021). These results provide a significant margin over the Offer Acceptance Thresholds, giving an indication of policyholder perception of the Scheme and of the possible outcomes for the Policyholder Vote.

5.19 The feedback received has been considered and taken into account in the development of the Scheme.

5.20 Feedback that constitutes an objection may need to be presented to the High Court at the Convening Hearing, in particular when making submissions as to class composition. Any objections received too late to be presented at the Convening Hearing or otherwise not presented at that meeting would be presented to the High Court for the Sanction Hearing.

SUPPORT FOR VULNERABLE POLICYHOLDERS

5.21 The FCA has defined a vulnerable policyholder as “someone who, due to their personal circumstances, is especially susceptible to detriment, particularly when a firm is not acting with appropriate levels of care”.

5.22 RLMIS currently considers a vulnerable policyholder as someone who has:

 A learning or physical disability;

 A physical or mental illness, chronic or otherwise including an addiction to alcohol or drugs;

 A reduction in physical or mental capacity;

 A dependency upon others in the performance of, or a requirement for, assistance in the performance of physical functions;

 Severe impairment in the ability to communicate with others;

 Impairment in a person’s ability to protect him or herself from assault, abuse, or neglect; or

 Is a person deemed not to display the mental capacity to make informed decisions.

5.23 RLMIS considers a policyholder in a potentially vulnerable situation as someone whose situation includes (noting this list is not exhaustive):

 Physical and/or mental medical conditions;

 Disability;

 Learning difficulties;

 Influence of alcohol or drugs;

 Times of stress or anxiety (e.g. bereavement, redundancy);

 Financial vulnerability; or

 English not being the policyholder’s first language.

5.24 The average age of holders of with-profits policyholders in the UFOB Sub-Fund is 55 and these policyholders are generally invested in pension products and so there are not expected to be a substantial number of vulnerable policyholders affected by this Scheme.

5.25 In addition to standards already established as part of the RLMIS Vulnerable Policyholders Policy, RLMIS will undertake further activities to facilitate the identification and support of vulnerable policyholders affected by the Scheme, including (but not limited to):

 Supporting vulnerable policyholders to articulate their needs and what adjustments would help them, for example by asking questions about needs and preferences in any contact RLMIS has with them;

 Ensuring all communications are made available in alternative formats (e.g. large print, braille, audio);

 Engaging directly with a policyholder’s representative, e.g. person appointed under a Power of Attorney where RLMIS has been instructed to do so;

 Ensuring inbound response management personnel have received the necessary training to identify vulnerability and the processes to be followed in response to this;

 Making policyholders aware of the options available to them for help, e.g. third-party support, and representation (i.e. Power of Attorney);

 Tailoring communications, where proportionate to do so, to meet the specific needs of vulnerable policyholders;

 Using multiple channels to ensure, where appropriate, vulnerable policyholders have a choice on how to access the information;

 Establishing quality assurance processes that identify areas that require improvement; and

 Producing, and regularly reviewing, management information regarding the outcomes for vulnerable policyholders.

5.26 Furthermore, where possible RLMIS has ensured and will ensure vulnerable policyholders are prioritised in the dispatch schedule to maximise the time period they have to respond or vote.

5.27 The Scheme Meeting at which the vote on the UFOB Sub-Fund Scheme would take place is scheduled for 4 November 2021.

5.28 In light of the COVID-19 pandemic and the effect it could potentially have on policyholders’ ability to attend the Scheme Meeting in person, RLMIS will give policyholders the option to attend the Scheme Meeting in person or virtually. The Voting Pack contains instructions on how to attend the Scheme Meeting virtually. This option may be of particular benefit to policyholders who may be considered vulnerable customers.

UNCONTACTABLE POLICYHOLDERS

5.29 A policyholder is considered a gone-away where their provider is unable to contact them regarding their policy or benefits using paper or electronic correspondence28.

5.30 RLMIS has an aspiration to reduce the proportion of policies that become unclaimed and has set up initiatives designed to improve engagement with policyholders. RLMIS defines these two classes of policyholder as follows:

 Gone-away: Policyholders for whom RLMIS holds an address record that has been identified as invalid through outbound mail being returned undelivered in the normal course of business.

28 ABI Framework for the Management of ‘Gone-Away’ Policyholders in the Life and Pensions Market

 Address unknown: Policyholders for whom RLMIS systems do not hold an address record.

5.31 Throughout this Report, I refer to these two classes of policyholders collectively as “uncontactable”.

5.32 In 2015, RLMIS established and commenced a centralised tracing process for attempting to verify or rediscover the addresses of gone-away policyholders and applies this tracing process across its legacy business, including the business allocated to the UFOB Sub-Fund.

5.33 The centralised tracing process had the aim to undertake at least one tracing attempt for each gone-away policyholder in the legacy business and involved a combination of in-house operations and outsourced operations completed by specialist tracing partners. RLMIS has not applied any de-minimis rules in respect of its gone-away policyholders and the centralised tracing process has been carried out for each gone-away regardless of policy value.

5.34 As a consequence of the centralised tracing process, RLMIS had re-engaged with approximately 200,000 gone- away policyholders across the RLMIS Closed Funds (including the UFOB Sub-Fund) by 16 June 2021.

5.35 In an attempt to reduce the number of policyholders for whom the address is unknown, in 2016 RLMIS established and commenced a process to attempt to capture data and tracing activity across a number of customer groups, including the UFOB Sub-Fund. This process involved manually checking scanned pages of the original paper policy records for addresses. Where an address was found, electronic tracing and validation was attempted. As a consequence of this process, RLMIS had successfully re-engaged with approximately 43,000 address unknown policyholders across the RLMIS Closed Funds (including the UFOB Sub-Fund) by 16 June 2021.

5.36 In 2020, RLMIS instructed its tracing partner to undertake a further audit to further reduce the number of uncontactable policyholders. This process highlighted 20,957 traced records, 9,644 negative or unverified records and 768 deceased. The negative or unverified records have been placed through the Department for Work and Pensions (the “DWP”) tracing process. The DWP attempts to take a full name, date of birth and national insurance number to identify the policyholder and a corresponding address. Policyholders are then mailed by the DWP and directed to RLMIS if they wish to re-engage. The DWP tracing process has led to a further 3,766 UFOB Sub-Fund Eligible Policyholders re-engaging (as at 16 June 2021).

5.37 To complement its tracing activity, RLMIS has also used external media advertising as a further means of re- engaging uncontactable policyholders.

5.38 RLMIS has posted information about the UFOB Sub-Fund Consolidation on its website (www.royallondon.com) and has published legal notices in a variety of UK newspapers, based on a demographic analysis of the newspapers’ readerships.

5.39 Based on policy data as at 16 June 2021, the uncontactable percentage for UFOB Sub-Fund Eligible Policyholders is around 18% (of c. 107,000 Eligible Policyholders).

ADVICE AND GUIDANCE

5.40 RLMIS has not established a formal guidance or advice proposition for Eligible Policyholders affected by the Scheme.

5.41 RLMIS has concluded that, given the complexity of the decision involved, the costs of providing advice and guidance to Eligible Policyholders, which would be borne by the UFOB Sub-Fund, would be disproportionate to the additional benefits it would bring to Eligible Policyholders.

6. The considerations of the Independent Expert

THE ROLE OF THE INDEPENDENT EXPERT

6.1 My role as Independent Expert is to consider the proposed Scheme and its effects on the policyholders of RLMIS, and whether the proposed scheme of arrangement meets the overall requirement of being fair and reasonable to policyholders.

6.2 In assessing the impact of the implementation of the Scheme on the policyholders of RLMIS, and whether those policyholders are being treated fairly and reasonably as a result of the implementation of the Scheme, I have had regard to the extent to which the Scheme meets a series of fairness tests as set out below. These fairness tests have been devised by me and are not set out in the regulations.

6.3 This Report will be presented to the High Court and will be made available to policyholders and others via the RLMIS website. The website will also contain copies of other Scheme-related documents, including a summary of the Scheme and a summary of this Report. Eligible Policyholders will receive a pack of information from RLMIS, including details of the offer being made to them and a decision form.

6.4 My role as Independent Expert for this Scheme is not one that is required by statute or regulation, but I have approached the role as if it were required in such a way, and accordingly I have proceeded on the basis of an obligation to assist the High Court in its deliberations. In particular I have included the certificate of compliance required by Part 35 of the Civil Procedure Rules in Appendix D of this Report.

6.5 There are no documents or other items of information that I have requested and that have not been provided. Appendix C contains a list of the main sources of data upon which I have relied.

6.6 As far as I am aware, there are no matters that I have not taken into account in undertaking my assessment of the Scheme, and in preparing this Report, which should be drawn to the attention of the High Court in its consideration of the Scheme.

6.7 I have principally considered the terms of the Scheme presented to me, but in Section 19 I have considered a number of potential alternatives available to RLMIS that might achieve similar objectives. However, as my role is primarily to consider whether the terms of the Scheme with which I am presented are fair and reasonable, and not to conclude that the Scheme represents the best possible option available to RLMIS, I have only considered those options that RLMIS considered when examining how to achieve its objectives. I have not considered the full range of strategic options that might have been available to RLMIS in relation to the UFOB Sub-Fund.

THE INDEPENDENT EXPERT’S FAIRNESS TESTS FOR THE PROPOSED SCHEME

Overview

6.8 In order to assess the effects of the proposed Scheme and the fairness to the RLMIS policyholders, I have developed a set of tests that the Scheme should pass in order for me to be satisfied that the implementation of the Scheme would be fair and reasonable to the policyholders of RLMIS. These tests are called the “Fairness Tests” and are as follows:

 The Security of Policyholder Benefits Test;

 The Policyholder Outcomes Test;

 The Adverse Scenario Test;

 The Policyholder Communications Test;

 The Policyholder Vote Test; and

 The Fair Conduct Test.

6.9 These are described below and covered in turn in detail in separate sections of this report.

The Security of Policyholder Benefits Test

6.10 This test considers the effect that the implementation of the Scheme would have on the security of policyholders’ guaranteed benefits received under the policies of RLMIS.

6.11 This test needs to be considered separately for the following groups of policyholders:

 Included Policyholders, along with policyholders in the RL Open Fund, who would all be policyholders of the RL Open Fund if the Scheme is implemented;

 Policyholders with benefits in the UFOB Sub-Fund who would not be Included Policyholders, for example holders of HITM policies (defined in Section 2); and

 Policyholders with benefits in the other RLMIS Closed Funds (i.e. the RLMIS Closed Funds excluding the UFOB Sub-Fund), whose benefits in those funds would remain unchanged.

6.12 In order for the proposed Scheme to pass this test I would need to be able to conclude that the implementation of the Scheme would not lead to a material adverse effect on the security of the benefits of the RLMIS policies.

The Policyholder Outcomes Test

6.13 This test considers whether the effects of the proposals are fair and reasonable in respect of outcomes for different groups of policyholders in RLMIS. The security of benefits is considered in the Security of Policyholder Benefits Test and so this test focusses on:

 Policyholders’ reasonable benefit expectations; and

 The standards of servicing, administration, management, and governance experienced by the policyholders.

6.14 Furthermore, this test involves consideration of the distribution of the effects of the proposed Scheme on the different groups of policies in RLMIS (both eligible and ineligible) given the rights, interests, and expectations of the different groups of policies, as well as the risks and costs posed by the proposals.

6.15 A key part of the consideration of the effect of the Scheme on policyholders’ reasonable benefit expectations is consideration of the fairness of the Offer Uplift that would be applied to the Included Policies if the Scheme were to be implemented. This includes consideration of the fairness of the following:

 The Scheme Contribution; and

 The distribution of the UFOB Additional Account via the uniform Offer Uplift percentage to the asset share of each Included Policy.

6.16 In addition, the Policyholder Outcomes Test includes consideration of:

 The effect of the Scheme on the Cost of Bonus Transfers that would, absent the Scheme, be payable from the UFOB Sub-Fund to the RL Open Fund;

 The fairness of the allocation of the costs associated with the Scheme between the RLMIS Closed Funds;

 Any amendments made to policy conditions as part of the Scheme; and

 Whether the proposed Scheme should be considered to be a ‘Reattribution of the Inherited Estate’ as set out in Chapter 20 of the FCA's Conduct of Business Sourcebook (“COBS”) rules.

6.17 In order for the proposed Scheme to pass this test I would need to be able to conclude that the implementation of the Scheme would not lead to a material adverse effect on policyholder benefit expectations or on the standards of servicing, administration, management, and governance of the RLMIS policies.

The Adverse Scenario Test

6.18 This test considers whether the conclusions formed in light of the results of the Security of Policyholder Benefits Test and the Policyholder Outcomes Test would change under different circumstances and scenarios, and hence whether the proposals would remain fair and reasonable under a range of circumstances and scenarios.

The Policyholder Communications Test

6.19 This test considers whether the information that is provided to Eligible Policyholders in respect of the Scheme is clear, concise, and of an appropriate level of detail, and has been provided to Eligible Policyholders with sufficient time for them to assess the proposals and make an informed decision regarding the Policyholder Vote.

6.20 This includes consideration of the adequacy of the RLMIS arrangements for supporting and guiding policyholders through the process, for example:

 Helpline capacity;

 Staff training;

 The route for policyholders to object / complain; and

 The nature of any additional support for any vulnerable policyholders.

The Policyholder Vote Test

6.21 This test considers the fairness of the various features of the Policyholder Vote that are required before the Scheme could be sanctioned by the High Court and implemented. These considerations include:

 The number of voting classes and the class composition;

 The approach to the calculation of the value given to each vote in the interpretation of the results of the vote; and

 The requirements for the proposals to be approved.

The Fair Conduct Test

6.22 This test considers whether the conduct of RLMIS in relation to the proposed Scheme is fair and reasonable to all policyholders. In particular, I have considered the following:

 The approach to eligibility for the Offer;

 The treatment of uncontactable policyholders; and

 The compulsion involved if the Scheme is sanctioned; in this case compulsion would apply to non-respondents and those who vote against the Offer.

“EXTENT BETTER OFF” CONSIDERATIONS

6.23 If the proposed Scheme were to be implemented, the Included Policies would be transferred to the RL Open Fund but would remain with-profits in nature. In some other Schemes of Arrangement, there has been a fundamental change to some of the included policies as they have changed in nature from with-profits to non-profit or unit-linked. In such schemes it has been thought necessary to consider the extent to which the included policies would be better off under the scheme and to consider whether this extent sufficiently mitigates the fundamental change in nature.

6.24 If the proposed Scheme that is the subject of this report were to be implemented there would be no fundamental change to the nature of any of the policies in the UFOB Sub-Fund or in the rest of RLMIS and so I am satisfied that I do not need to consider a fairness test along the lines of an “extent better off” test.

THE UFIB SUB-FUND SCHEME AND THE SL FUND SCHEME

6.25 As described in Section 2, RLMIS intends to carry out the UFIB Sub-Fund Scheme and the SL Fund Scheme, and it is currently intended that the UFIB Sub-Fund Scheme and the SL Fund Scheme would be effective on the same date as the Implementation Date for the UFOB Sub-Fund Scheme.

6.26 Throughout Sections 7 to 18 of this Report, in my considerations of the Fairness Tests listed above, I have considered the UFOB Sub-Fund Scheme in isolation assuming that the UFIB Sub-Fund Scheme and the SL Fund Scheme have not taken place and that the UFIB Sub-Fund and the SL Fund remain as two of the RLMIS Closed Funds.

6.27 In Section 19 I then cover the expected impacts in respect of the proposed UFOB Sub-Fund Scheme if the UFIB Sub-Fund Scheme and the SL Fund Scheme were to take place on the same date as the Implementation Date for the Scheme.

EXCLUSIONS FROM THE CONSIDERATIONS OF THE INDEPENDENT EXPERT

6.28 In this Report I have only commented on the effects of the implementation of the Scheme on existing RLMIS policyholders, including those that become policyholders between the date of this Report and 31 December 2021.

6.29 I have not considered the effects of the Scheme on policyholders entering into contracts after 31 December 2021.

MY ASSESSMENT OF THE EFFECT OF THE PROPOSED SCHEME

6.30 Given the inherent uncertainty of the outcome of future events, it is not possible to be certain of the effect of the Scheme on policyholders.

6.31 My assessment of the effect of the Scheme is ultimately a matter of expert judgement regarding the likelihood and impact of future possible events and, acknowledging this inherent uncertainty, my conclusions are framed using a qualitative materiality threshold. If the potential impact under consideration is very unlikely to happen and does not have a significant impact or is likely to happen but has a very small impact, then it is not considered to have a material effect.

6.32 In assessing the proposals, I have had regard to:

 The reports of the Chief Actuary and the WPA of RLMIS on the impact of the implementation of the Scheme.

 Various documents produced by the regulators:

There are no specific regulations or guidance governing the considerations of an independent expert appointed to report on the terms of a scheme of arrangement but I have had regard to relevant parts of the regulations and guidance applicable to independent experts appointed to report on insurance business transfers, in particular:

o From the PRA, Policy Statement PS 7/15: “The Prudential Regulation Authority’s approach to insurance business transfers”;

o Chapter 18 of the Supervision Manual contained in the FCA Handbook; and

o From the FCA, Finalised Guidance FG18/4: “The FCA’s approach to the review of Part VII insurance business transfers”.

THE RELIANCE OF THE INDEPENDENT EXPERT ON THE WORK OF OTHERS

Reliance on legal advice

6.33 My Report has been prepared for the High Court as part of the process of submission of the Scheme to the High Court. I am not an expert in legal matters and hold no qualifications in UK law (insurance regulations or otherwise) and therefore I have relied on the conclusions of experts in UK insurance law in relation to a number of areas.

6.34 In the absence of such a legal analysis, it would not be possible for me to provide conclusions on those aspects of the Scheme that are outside of my expertise and that have an impact on the fairness of the Scheme.

6.35 I have received input and advice in legal matters from two sources:

 The external legal advisers of RLMIS: Pinsent Masons LLP (“Pinsent Masons” or the “external legal advisers”); and

 My own legal advisers: Freshfields Bruckhaus Deringer LLP (“Freshfields”).

6.36 The areas where I have relied upon the advice and analysis provided to RLMIS by Pinsent Masons are:

 A review of the RLMIS review of the UAG Scheme.

If the Scheme were to be implemented, then the UAG Scheme would be terminated and so RLMIS carried out a review of the provisions of the UAG Scheme to ensure that its termination would not result in a material adverse impact on policyholders. Pinsent Masons reviewed the output of the RLMIS review and were satisfied that the termination of the UAG Scheme would not lead to a material adverse effect on policyholders.

 Advice given to RLMIS in order to ensure that my understanding of the legal process and the Scheme, and my description of its relevant features in this Report, is materially accurate.

6.37 The areas where Freshfields has provided me with information and advice in relation to the Scheme are:

 A review of the advice provided to RLMIS by Pinsent Masons on the proposed number of voting classes and the class composition for the Scheme;

 A review of the advice provided to RLMIS by Pinsent Masons on whether the proposed Scheme could be considered to be a Reattribution of the Inherited Estate as set out in Chapter 20 of the FCA's COBS rules; and

 A review of the legal due diligence report produced by Pinsent Masons in relation to the proposed Scheme.

6.38 It should be noted that Pinsent Masons has not been retained by me and has no liability to me or Milliman for any advice provided by Pinsent Masons to RLMIS that has been made available to me in my assessment of the Scheme.

6.39 I am content to rely upon the advice given to RLMIS by Pinsent Masons and to me by Freshfields because:

 Both Pinsent Masons and Freshfields are large international legal firms with wide ranges of experience in UK insurance company transactions and schemes of arrangement and it is my view that they have the relevant and appropriate qualifications and knowledge of the laws and regulations governing schemes of arrangement in the UK; and

 The nature of the information and advice provided by Pinsent Masons to RLMIS upon which I have relied is mostly factual in nature and, in particular, concerns how a particular aspect of RLMIS (pre or post the implementation of the Scheme) works in accordance with UK law.

Tax advice

6.40 RLMIS has conducted a review of the Scheme, supported by an external review of the Scheme Uplift, to assess the effect of the Scheme on the UK tax liabilities of the Included Policyholders. The external review was carried out by a large consultancy firm with a large practice of tax specialists (the “external tax experts”). I am satisfied

that RLMIS’s in-house tax team and this large consultancy have the relevant expertise and that it is therefore reasonable for me to rely on their advice. The report produced under the external review has been shared with me.

6.41 I am not an expert in tax matters and hold no qualifications in UK tax and therefore I have relied on the conclusions of RLMIS’s in-house tax team and the external tax experts retained by RLMIS.

6.42 It should be noted that the external tax experts have not been retained by me and have no liability to me for any advice provided to RLMIS that has been made available to me in my assessment of the Scheme.

The financial information in this Report

6.43 The financial information used in the analysis of the effects of the Scheme is set out in Section 7 and Appendix A to this Report. This includes:

 The current (i.e. before the implementation of the Scheme) Solvency II Pillar 1 balance sheet for the UFOB Sub-Fund and the RL Open Fund as at 31 March 2021;

 The pro forma post-Scheme Solvency II Pillar 1 balance sheet for the RL Open Fund as at 31 March 2021 assuming the Scheme had been implemented on that date;

 The current (i.e. before the implementation of the Scheme) Solvency II Pillar 2 balance sheets for the UFOB Sub-Fund and the RL Open Fund as at 31 March 2021;

 The pro forma post-Scheme Solvency II Pillar 2 balance sheet for the RL Open Fund as at 31 March 2021 assuming the Scheme had been implemented on that date; and

 The calculation of the Offer Uplift percentage, including the calculation of the Premium Uplift Contribution.

6.44 As set out in Section 2, all of the RLMIS reported Solvency II financial information and its financial position presented in this Report are based on the RLMIS Internal Model.

6.45 The RLMIS reported Solvency II financial information is on a Solvency II Pillar 1 basis but RLMIS uses the Solvency II Pillar 2 basis for its day-to-day management and this is the basis on which it makes decisions in relation to the RL Open Fund and the RLMIS Closed Funds. I have therefore presented the financial information in this Report on a Pillar 2 basis and this is the basis to which I have had principal regard in reaching my conclusions on the Scheme. For completeness, I have also provided the Pillar 1 financial information in Appendix A to this Report.

6.46 Both the Pillar 1 and Pillar 2 bases are closely aligned as both are derived using the RLMIS Internal Model. Pillar 2 includes an allowance for provisions that are recognised under the RLMIS European Embedded Value29 reporting metric, whereas Pillar 1 does not. For the avoidance of doubt, both bases allow for the TMTP.

6.47 The use by RLMIS of the RLMIS Internal Model has been approved by the PRA and as part of this approval process RLMIS was required to put in place strict governance and control processes to ensure that the RLMIS Internal Model would not be materially changed without adherence to the internal checking controls and that for major changes re-approval from the PRA would be required. RLMIS confirmed that it has adhered to these processes and controls.

6.48 The consolidation of the UFOB Sub-Fund into the RL Open Fund would not constitute a major model change under the RLMIS Internal Model Change Policy on either qualitative or quantitative grounds. A separate major change application was submitted to the PRA at the end of June 2021 and approval is expected to be received for changing the RLMIS Internal Model ahead of the expected UFOB Sub-Fund Scheme Implementation date (expected to be 31 December 2021).

29 Embedded Value is a term used in the insurance industry for a realistic estimate of the value of an insurer’s surplus and any additional value expected to emerge from its in-force insurance business. Embedded Value often recognises sources of additional value that are not permitted to be recognised in published accounts. European Embedded Value refers to a particular form of Embedded Value reporting based on principles issued by the European Insurance CFO Forum.

6.49 Further background on the Solvency II regulatory regime, and the pillars on which it is based, is provided in Appendix B to this Report.

6.50 My Supplementary Report will contain more up to date financial information and will provide an update on the effect of the implementation of the Scheme based upon these figures and on any other material developments since the date of this Report.

The checks carried out on the financial information

6.51 The “RLMIS Actuarial Systems” consist of:

 A reporting cashflow model (the “RLMIS Cashflow Model”), which calculates the Technical Provisions and Own Funds on best estimate assumptions for reporting purposes; and

 The RLMIS Internal Model which, as stated above, is used to calculate the SCR for the RL Open Fund and each of the RLMIS Closed Funds. Scenarios are chosen from the RLMIS Internal Model and run through the RLMIS Cashflow Model to calculate the impact of each scenario on the RLMIS Own Funds, and thus derive the SCR.

6.52 I have not carried out an independent review of the financial information as at 31 March 2021, but I note that:

 The RLMIS Internal Model has been approved by the PRA and as part of this approval process RLMIS was required to put in place strict governance and control processes to ensure that the RLMIS Internal Model would not be materially changed without adherence to these internal checking controls and, in the event of major changes, RLMIS would need to apply for re-approval from the PRA.

 The RLMIS reported Solvency II balance sheet as at 31 December 2020 was externally audited by PricewaterhouseCoopers LLP without the identification of material issues.

 The RLMIS Actuarial Systems and (non-economic) assumptions used to calculate the financial information as at 31 March 2021 were unchanged from those used for the audited Solvency II balance sheet as at 31 December 2020. The economic assumptions were updated to reflect market conditions as at 31 March 2021.

6.53 I am satisfied that it is appropriate to rely on this financial information.

6.54 RLMIS has also supplied information that has allowed me to understand the expected impact of the Scheme on its Solvency II financial position had the Scheme been implemented as at 31 March 2021. This information, together with the internal checks carried out by RLMIS on the pro forma post-Scheme balance sheet has allowed me to conclude that I am comfortable relying on the pro forma post-Scheme balance sheets at 31 March 2021 on a Solvency II basis.

The checks carried out on the Offer Uplift percentage

6.55 The Offer Uplift percentage has been calculated using the “RLMIS Tactical Model” that has been built by RLMIS specifically for the Simplification Programme and is separate from the RLMIS Actuarial Systems described in paragraph 6.51. This model has been developed, checked, and reviewed within the RLMIS project team as well as being reviewed by the RLMIS Risk Function. RLMIS has also produced a checking tool which shows that the results of the RLMIS Tactical Model behave as would be expected.

6.56 As additional assurance RLMIS engaged an external third party (one of the ‘big four’ UK accounting firms other than the RLMIS auditors) to provide a further review of both the calculations and the inputs to those calculations in the RLMIS Tactical Model. I have been provided with the output of this external review and I understand that no material concerns were raised in the review and that no material changes to the calculated Offer Uplift percentage were required.

6.57 The Offer Uplift percentage that would be applied to Included Policies has been based on calculations as at 31 March 2021 carried out using the RLMIS Tactical Model. The RLMIS Tactical Model uses output from the

RLMIS Actuarial Systems, such as Own Funds from the RLMIS Cashflow Model and the SCR calculated using a combination of the RLMIS Cashflow Model and the RLMIS Internal Model.

6.58 The reporting output from the RLMIS Actuarial Systems was last externally audited as at 31 December 2020. Some amendments are made to the inputs to the RLMIS Cashflow Model for the purposes of calculating the Uplift such as allowing for changes to the EBR in the RL Open Fund (as set out in paragraphs 3.99 to 3.101) and allowing for the Offer Uplift itself as this changes the cost of guarantees (and so the value of the UFOB Additional Account available for distribution).

6.59 Given the timing of the uplift calculation and these necessary adjustments to the inputs, the output from the RLMIS Actuarial Systems used by the RLMIS Tactical Model to calculate the Offer Uplift would not be externally audited. However:

 The results from the RLMIS Actuarial Systems used to calculate the Offer Uplift are subject to sign-off from the RLMIS Internal Model Change Committee. This is the same committee that approves changes which go into the model used to produce published financial results;

 The Offer Uplift percentage has been subject to review by the RLMIS WPA and the oversight of the RLMIS WPC, the Scottish Life Supervisory Committee (on behalf of the SL Fund) and the RLMIS Board; and

 The (non-economic) assumptions used to calculate the BEL for the purposes of determining the value of the UFOB Additional Account (and so the Offer Uplift) as at 31 December 2021, based on projections from 31 March 2021, were unchanged from those used for the audited Solvency II balance sheet as at 31 December 2020, and these assumptions reflect the RLMIS best estimate view of future outcomes. The economic assumptions were updated to reflect market conditions as at 31 March 2021.

6.60 There are few assumptions used in the RLMIS Tactical Model that are not also assumptions within the RLMIS Actuarial Systems and that therefore have not been reviewed as part of the year end process and subject to external audit. The key assumption is the run-off of the SCR and this follows the same approach as used in the calculation of the risk margin in the RLMIS published financial results.

6.61 In addition to the internal checks and governance carried out by RLMIS, my team has conducted a high-level review of the RLMIS Tactical Model and its outputs and has not identified any material issues. These checks included:

 The calculation of the Project Costs Allowance and the Premium Uplift Contribution payable from the UFOB Additional Account to the RL Open Fund (calculated as at 31 March 2021);

 The calculation of the projected remaining UFOB Additional Account available for distribution as at 31 December 2021, projected from 31 March 2021, after allowing for:

o The deduction of the Project Costs Allowance and the Premium Uplift Contribution;

o The impact of the uplift, e.g. the change in the cost of guarantees as a result of the uplift; and

o The consolidation of the policies of the UFOB Sub-Fund into the RL Open Fund, e.g. changes to the asset share EBR following the consolidation.

These are the adjustments to the inputs to the RLMIS Cashflow Model noted in paragraph 6.58.

 The calculation of Offer Uplift percentage to be applied to the asset shares of the Included Policies at 31 December 2021. This Offer Uplift percentage was calculated as at 31 March 2021 and will remain fixed regardless of the financial position of the UFOB Sub-Fund at 31 December 2021.

6.62 Given the level of external review and internal checking and governance to which the financial information and Offer Uplift calculations have been subject, as well as my own review and reasonableness checks, I am satisfied that it is appropriate to rely upon the financial information and Offer Uplift calculations for the purpose of this Report.

7. The Security of Policyholder Benefits Test

OVERVIEW

7.1 This section of the Report summarises the outcome of the Security of Policyholder Benefits Test based on the financial conditions and actuarial assumptions as at 31 March 2021.

The Security of Policyholder Benefits Test The objective of this test is to demonstrate that the implementation of the Scheme would not have a material adverse effect on the security of policyholders’ guaranteed benefits received under the policies of RLMIS.

These need to be considered separately for the following groups of existing policyholders in RLMIS:

 Policyholders of the UFOB Sub-Fund, along with policyholders in the RL Open Fund, who would all be policyholders of the RL Open Fund if the Scheme is implemented; and

 Policyholders with benefits in the other RLMIS Closed Funds (i.e. the RLMIS Closed Funds excluding the UFOB Sub-Fund), whose benefits in those funds would remain unchanged.

THE EFFECT OF THE SCHEME ON THE SECURITY OF THE GUARANTEED BENEFITS OF THE RLMIS POLICYHOLDERS

Introduction

7.2 Currently, the RLMIS policyholders derive security for their guaranteed benefits from:

 The assets held to cover:

o The Technical Provisions and Internal SCR calculated in accordance with the Solvency II regulatory regime; and

o The additional financial strength required in excess of its Internal SCR in line with the RLMIS Capital Framework (as described in paragraph 2.95) and including the strength of the governance around the risk appetite statement and the governance around any future changes to it.

 The capital support arrangements set out in the RL Long Term Fund PPFM, under which the RL Open Fund Estate is available to provide capital support to the RLMIS Closed Funds should this be required, and vice versa (as described in paragraph 2.92).

7.3 To the extent that the RLMIS regulatory capital requirements (as opposed to its Internal SCR) are more onerous than its Pillar 2 capital requirements, the assets held to cover the excess also provide security for guaranteed benefits.

7.4 In the remainder of this section, I separately consider the impact of the Scheme on the security of guaranteed benefits of the:

 Policyholders of the RL Open Fund and the UFOB Sub-Fund, who would all be policyholders of the RL Open Fund if the Scheme were to be implemented; and

 Policyholders of the other RLMIS Closed Funds (i.e. the RLMIS Closed Funds excluding the UFOB Sub-Fund).

7.5 My conclusions in this section in relation to policies of the UFOB Sub-Fund apply equally to Included Policies as to policies that are not Included Policies.

Policyholders of the RL Open Fund and the UFOB Sub-Fund

Introduction

7.6 If the Scheme were to be implemented, the UFOB Sub-Fund policies would be consolidated into the RL Open Fund and these policies, together with the existing policies in the RL Open Fund, would derive security for their guaranteed benefits from:

 The assets in the RL Open Fund held to cover (in respect of the current RL Open Fund policies as well as the policies currently in the UFOB Sub-Fund):

o The Technical Provisions and Internal SCR calculated in accordance with the Solvency II regulatory regime; and

o The buffer held in excess of its Internal SCR in line with the RLMIS Capital Framework; and

 The capital support arrangements set out in the RL Long Term Fund PPFM, under which, in extreme circumstances, the estates of the remaining RLMIS Closed Funds would be available to provide capital support to the RL Open Fund should this be required.

Other than in extreme scenarios, the Scheme would not directly affect the RLMIS Closed Funds other than the UFOB Sub-Fund.

7.7 While the impact of the implementation of the Scheme on the excess assets of the RL Open Fund is useful to understand, RLMIS is not obliged to maintain assets in the RL Open Fund in excess of the buffer required by the RLMIS Capital Framework, and so any excess assets should only be relied on for benefit security to the extent that those assets are required to meet the RLMIS Capital Framework. Therefore, the key considerations for benefit security are:

 The extent to which the implementation of the Scheme would lead to a material change to the RL Open Fund’s financial strength in the context of the RLMIS Capital Framework;

 Whether the implementation of the Scheme would result in a material change to the strength of the RLMIS Capital Framework to which the RL Open Fund is subject;

 In the case of the policies currently in the UFOB Sub-Fund, whether the RL Open Fund would, post Scheme, be subject to a materially weaker capital framework (under the RLMIS Capital Framework) than the capital frameworks to which the UFOB Sub-Fund is currently subject; and

 Whether the implementation of the Scheme would lead to a material change to the risk exposures of the RL Open Fund (for example because of the change in the mix of business in the fund).

The effect of the proposed Scheme on the financial strength of the RL Open Fund and the UFOB Sub-Fund

7.8 Table 7.1 below shows the pre-Scheme financial position of the RL Open Fund and the UFOB Sub-Fund, as well as the pro forma post-Scheme financial position of the RL Open Fund, on a Solvency II Pillar 2 basis at 31 March 2021. The pre-Scheme financial position of the RL Open Fund is presented assuming the RAIB Sub- Fund Consolidation had already been implemented as at 31 March 2021.

TABLE 7.1 PRE-SCHEME AND PRO FORMA POST-SCHEME FINANCIAL POSITION (SOLVENCY II PILLAR 2) AS AT 31 MARCH 2021 OF THE FUNDS DIRECTLY AFFECTED BY THE SCHEME

Pre-Scheme Post-Scheme

£million UFOB Sub-Fund RL Open Fund RL Open Fund

Assets (A) 2,872 72,394 75,249

Liabilities (B) 2,681 68,650 71,502

Of which asset shares 2,583 6,572 9,321

Of which Cost of Bonus Transfers 102 (158) (56)

Available capital before adjustments (C = A - B) 191 3,745 3,746

Risk margin (D) - 950 925

TMTP (E) - 663 639

Sub-debt (F) - 1,560 1,560

Internal Own Funds (G = C - D + E + F) 191 5,018 5,020

Internal SCR (H) 34 2,626 2,597

Excess capital (G - H) 157 2,392 2,423

Internal SCR Cover (G / H) 556% 191% 193%

7.9 Table 7.1 shows that, had the Scheme been implemented at 31 March 2021, it would have resulted in:

 An increase in the RL Open Fund’s Internal Own Funds of approximately £2 million;

 The RL Open Fund’s excess capital would increase by around £31 million; and

 The RL Open Fund’s Internal SCR Cover would increase by 2 percentage points to 193%.

7.10 The figures in paragraph 7.9 show the impact of the Scheme on the RL Open Fund in isolation, i.e. comparing the pre-Scheme financial position of the RL Open Fund only with the pro forma post-Scheme financial position. However to understand fully the impact of the Scheme, consideration should be given to the impact of the Scheme on the combined position of the RL Open Fund and the UFOB Sub-Fund, i.e. a comparison of the pre-Scheme financial position of the RL Open Fund and the UFOB Sub-Fund in total with the pro forma post-Scheme financial position of the RL Open Fund following fund consolidation.

7.11 This expected financial impact of the Scheme (had it been implemented at 31 March 2021) can be broken down as:

 A reduction of £18.1 million in the combined assets of the RL Open Fund and the UFOB Sub-Fund

This reflects the expected project costs (the RLMIS estimate of the costs of implementing the Scheme) paid by the UFOB Sub-Fund and the RL Open Fund (these include the project costs, system migration costs and tax offsets).

 An increase of £172 million in the combined liabilities of the RL Open Fund and the UFOB Sub-Fund

This reflects:

o An increase of £172 million as a result of the application of the Offer Uplift to the asset shares of Included Policies to exhaust the UFOB Additional Account.

This is the available capital before adjustments of £191 million in the UFOB Sub-Fund, less the Project Costs Allowance of £16.9 million and the Premium Uplift Contribution of £0.9 million, less £1.9 million of costs for administration system changes taking place outside of the Scheme30.

o The total uplift to asset shares as a result of the Scheme is £165 million rather than the £172 million calculated above, as a result of an adjustment of £6 million to allow for an increase to the pre- Scheme guarantee costs due to the uplift.

It should be noted that the figures above are based on the total asset shares of Eligible Policies (£2.6 billion) and the amount that could have been added to these asset shares if the Scheme had been implemented on 31 March 2021 (£165 million). This is an uplift to asset shares of 6.4%, which is the same as the Offer Uplift percentage (when rounded to the nearest 0.1%) based on the projected balance sheet as at 31 December 2021.

o No change in the combined liability for the Cost of Bonus Transfers.

As described in paragraph 3.92, the application of the Offer Uplift to the asset shares of Included Policies enables allowance in the Solvency II balance sheet for the future Cost of Bonus Transfers attributable to the UFOB Additional Account. In isolation (i.e. without fund consolidation) this would result in an increase in the liability for the Cost of Bonus Transfers in the UFOB Sub-Fund.

However, following consolidation of the UFOB Sub-Fund into the RL Open Fund, these Cost of Bonus Transfers would no longer necessitate a reallocation of assets between funds. The Cost of Bonus Transfers attributable to the UFOB Sub-Fund would therefore not be held as an asset of the RL Open Fund.

 A reduction of £25 million in the combined Risk Margin for the RL Open Fund and the UFOB Sub-Fund

This is as a result of the reduction in the combined Internal SCR, as described below.

 A reduction of £63 million in the combined Internal SCR for the RL Open Fund and the UFOB Sub-Fund

This is as a result of the diversification benefits generated and the release of unused management actions by consolidating the UFOB Sub-Fund into the RL Open Fund.

Overall, this results in a reduction in the combined excess capital for the RL Open Fund and the UFOB Sub-Fund of £127 million.

7.12 I have also reviewed the financial position of the RL Open Fund and the UFOB Sub-Fund on a Solvency II Pillar 1 basis, as well as the pro forma post-Scheme financial position of the RL Open Fund on a Pillar 1 basis as if the Scheme had been implemented as at 31 March 2021. I have included this financial information in Appendix A to this Report.

7.13 As described in paragraph 2.104, the differences between the Pillar 1 and Pillar 2 bases are minimal leading to positions on each basis that are closely aligned. The RL Open Fund does have a higher excess capital position on a Pillar 1 basis than on a Pillar 2 basis. The implementation of the Scheme would result in a reduction in combined excess capital of £127 million on a Pillar 1 basis (£127 million under Pillar 2).

30 These changes relate to parts of the Simplification Programme outside of the Fund Consolidations (and hence outside the scope of the Scheme), with costs being charged to Closed Funds in accordance with RLMIS’s usual practice for cost allocation.

7.14 Based on figures as at 31 March 2021, if the Scheme had been implemented on this date then:

 There would have been no material change to the RL Open Fund’s Internal SCR Cover;

 The UFOB Sub-Fund business would be transferred to a fund with an Internal SCR Cover of 191% which, although lower than that of the UFOB Sub-Fund, would comfortably exceed the requirements of the RLMIS Capital Framework and therefore be sufficiently strong such that the effect on the security of the benefits of the UFOB Sub-Fund policies would not be material;

 The RL Open Fund would have remained within the target range of the RLMIS Capital Framework (i.e. able to withstand a 1-in-20 year event without breaching its Internal SCR)31; and

 There would have been no change to the trigger levels of the RLMIS Capital Framework and therefore no change to the strength of the RL Open Fund capital target, which would remain as being able to withstand a 1-in-20 year event over the next year and to have sufficient Internal Own Funds to be able to meet its Internal SCR.

7.15 Based on the financial information as at 31 March 2021, the current Internal SCR Cover of the UFOB Sub-Fund prior to the implementation of the Scheme was 556% as at 31 March 2021, and, if the UFOB Sub-Fund Scheme had been implemented on this date it is expected that the RL Open Fund’s Internal SCR Cover would have been 193%.

7.16 The relatively high current Internal SCR Cover arises principally because the SCR of the UFOB Sub-Fund is small in absolute terms. The Internal SCR Cover of 193% remains a high coverage of the SCR (itself the capital estimated to ensure solvency over a one-year time horizon with a likelihood of at least 99.5%) and therefore, it is my view that UFOB Sub-Fund policyholders would not experience a material adverse impact on the security of their benefits as a result of the difference between the pre-Scheme and post-Scheme Internal SCR Cover.

7.17 The RLMIS Capital Framework is currently applied consistently to the RL Open Fund and the UFOB Sub-Fund, and these funds have consistent capital targets, as described above. The RL Open Fund’s capital target is therefore currently of similar strength to that of the UFOB Sub-Fund, and as the Scheme would not affect the strength of the capital target of the RL Open Fund, I am satisfied that the strength of the capital target applied to the policies currently in the UFOB Sub-Fund would be unchanged by the implementation of the Scheme.

7.18 Overall, I am satisfied that the implementation of the Scheme would not have a material adverse effect on the financial strength of the RL Open Fund.

The risk that the transferred assets are insufficient to cover the transferring liabilities

7.19 If the Scheme were to be implemented, assets would be transferred into the RL Open Fund which would cover the liabilities relating to the Included Policies and the amount of such assets is expected to be sufficient to cover the Included Policies’ liabilities as at the Implementation Date.

7.20 The amount of assets so calculated would be a ‘best estimate’ of the expected outgoing cash flows from the Included Policies and therefore would be expected to have an equal likelihood of being too large or too small in the future.

7.21 To the extent that assumption changes, economic experience or policyholder claim patterns were to result in these assets becoming insufficient to cover the Included Policies’ liabilities in the future, any shortfall would be met by the surplus assets of the RL Open Fund, including those backing the capital requirements of the former business of the UFOB Sub-Fund. Similarly, to the extent these assets proved sufficient to cover more than this expected outgo the surplus would fall to the RL Open Fund.

31 It should be noted the RL Open Fund remaining within the target range of the RLMIS Capital Framework following the implementation of the Scheme is not a necessary condition for me to conclude that there is no material effect on the security of benefits of policyholders; it just happens to be true in the case of this Scheme.

7.22 It should be noted that:

 In the absence of the implementation of the Scheme, any shortfall in the UFOB Sub-Fund would be met by the assets of the UFOB Additional Account;

 As can be seen from Table 7.1 above, the UFOB Sub-Fund is small in comparison to the RL Open Fund (the UFOB Sub-Fund is approximately 4% of the size of the RL Open Fund when measured by assets as at 31 March 2021); and

 The risk of the best estimate liability proving insufficient to cover the associated liabilities is, under Solvency II, covered to an extent by the Risk Margin and the SCR.

7.23 I am therefore satisfied that, although there is a risk of the transferred assets not being sufficient to cover the eventual cash flows from the Included Policies, this risk is mitigated by the points above such that there would not be a material adverse effect on the policies of the RL Open Fund or the UFOB Sub-Fund.

The change to the risk profile of the UFOB Sub-Fund and the RL Open Fund arising from the Scheme

TABLE 7.2 THE PERCENTAGE BREAKDOWN OF THE POST-DIVERSIFICATION SCR OF THE UFOB SUB-FUND AND THE RL OPEN FUND AT 31 DECEMBER 2020

Risk category UFOB Sub-Fund RL Open Fund SCR £ million 37 2,515

Market 96% 53% Expense 1% 8% Persistency 0% 21% Longevity 0% 5% Operational 3% 8% Other 0% 4%

Total 100% 100 %* *Sum is less than 100% due to rounding in the presentation shown above.

7.24 As shown in Table 7.2, the risk profile of the RL Open Fund is currently different to that of the UFOB Sub-Fund:

 The UFOB Sub-Fund’s risk profile is dominated by market risks; and

 The RL Open Fund is significantly larger and is exposed to a more diverse range of risks including risks around policyholder behaviour such as persistency risk.

7.25 If the Scheme were to be implemented:

 Policyholders of the RL Open Fund

From the perspective of the policyholders with policies in the RL Open Fund, the UFOB Sub-Fund is relatively small compared to the size of the RL Open Fund and therefore their consolidation into the RL Open Fund would not result in a material change to the risk profile of the RL Open Fund.

 Policyholders of the UFOB Sub-Fund

From the perspective of policyholders with policies in the UFOB Sub-Fund, their policies would not share in the experience of the RL Open Fund’s policies that is not related to their policy. So, whilst the wider expense and (for example) mortality experience of the RL Open Fund would be shared but wider experience that would accrue to the RL Open Fund Estate, would not affect the current UFOB Sub-Fund policies after consolidation.

Therefore the wider risk exposure of the RL Open Fund would only affect Included Policies’ guaranteed benefits to the extent that there were to be an extreme deterioration in the financial strength of the RL Open Fund such that the guaranteed benefits of policies in the RL Open Fund were not able to be paid.

The RL Open Fund holds capital in accordance with the RLMIS Capital Framework which provides a buffer against the risks to which it is exposed. The capital requirements reflect both the quantum of the various risks, as well as the level of diversification of risk that results from having a range of risks within the fund, and if the Scheme were to proceed the capital held would be updated to take account of the risks in respect of the consolidated policies from the UFOB Sub-Fund.

Therefore, while Included Policyholders would be exposed to a different risk profile following the implementation of the Scheme, the capital held by the RL Open Fund would ensure that the Included Policies would still have a high level of security.

It should also be noted that the UFOB Sub-Fund is already, to an extent and albeit indirectly, exposed to the risks of the RL Open Fund owing to the fact that the UFOB Sub-Fund would be required to provide capital support to the RL Open Fund in certain extreme circumstances.

7.26 Taking the above into account, I am satisfied that the change to the risk profile of the RL Open Fund arising from the Scheme would not have a material adverse effect on the security of benefits of the policies of the RL Open Fund or the policies of the UFOB Sub-Fund.

7.27 It should be noted that the UFIB Sub-Fund Scheme and the SL Fund Scheme that are proposed to take place at the same time as the UFOB Sub-Fund Scheme as part of the wider Simplification Programme would result in other business or sub-funds being consolidated into the RL Open Fund and would result a change to the profile of risks to which the policies of the RL Open Fund (including the Included Policies).

7.28 The UFIB Sub-Fund Scheme and the SL Fund Scheme would be subject to appropriate oversight and governance at the time including a report from an independent expert and the approval of the High Court, which would include consideration of the impact of the proposals on the RL Open Fund.

Conclusion for policyholders of the RL Open Fund and the UFOB Sub-Fund

7.29 I am satisfied that the implementation of the proposed Scheme would not have a material effect on the security of the guaranteed benefits of the policyholders of the RL Open Fund or on the security of the guaranteed benefits of the policyholders of the UFOB Sub-Fund.

Policyholders of the other RLMIS Closed Funds

7.30 If the Scheme were to be implemented, there would be no change to the assets and capital support arrangements that currently provide security for the guaranteed benefits of the policyholders of the other RLMIS Closed Funds that are not directly within the scope of the Scheme.

7.31 From the perspective of the policyholders with policies in the other RLMIS Closed Funds the implementation of the proposed Scheme would only have an effect if it were to have a material effect on the financial strength of the RL Open Fund and thereby on the security provided by the RL Open Fund to the other RLMIS Closed Funds.

7.32 As noted in paragraph 7.14, based on figures at 31 March 2021, the implementation of the Scheme would have resulted in no material change to the RL Open Fund’s Internal SCR Cover, and the RL Open Fund would have remained within the target range of the RLMIS Capital Framework.

7.33 Furthermore, the UFOB Sub-Fund is small in relation to the size of the RL Open Fund and therefore its consolidation into the RL Open Fund would not result in a material change to the risk profile of the RL Open Fund.

7.34 Therefore, although the implementation of the Scheme would lead to a change to the RL Open Fund, it would not materially reduce the strength of the capital support arrangements whereby the RL Open Fund Estate is available in extreme circumstances to provide capital support to the other RLMIS Closed Funds should this be required.

7.35 Furthermore, the implementation of the Scheme would not transfer any assets or liabilities into or out of the other RLMIS Closed Funds and so would have no impact on the financial strengths of the other RLMIS Closed Funds.

7.36 Therefore, I am satisfied that the implementation of the Scheme would not have a material effect on the security of guaranteed benefits of the policyholders of the other RLMIS Closed Funds.

MY CONCLUSION FOR THE SECURITY OF POLICYHOLDER BENEFITS TEST

7.37 In summary, the implementation of the Scheme would have no material effect on the security of guaranteed benefits of any of the policies of RLMIS. For the avoidance of doubt, this conclusion applies to all policyholders of RLMIS, including those within and outside of the scope of the Scheme.

7.38 I am therefore satisfied that the requirements of the Security of Policyholder Benefits Test have been met.

8. The Policyholder Outcomes Test – overview

8.1 The next test to consider is the Policyholder Outcomes Test as set out below.

The Policyholder Outcomes Test

This test considers the effect that the implementation of the Scheme would have on:

 Policyholders’ reasonable benefit expectations; and

 Standards of servicing, administration, management, and governance. This involves consideration of the effects of the proposed Scheme on the different groups of policies in RLMIS (both eligible and ineligible) given the rights, interests, and expectations of the different groups of policies, as well as the risks and costs posed by the proposals.

The following groups of policyholders have been considered separately:

 Included Policyholders;

 Existing policyholders of the RL Open Fund; and

 Policyholders of the other RLMIS Closed Funds (i.e. the RLMIS Closed Funds excluding the UFOB Sub- Fund).

In addition, I consider whether the proposed Scheme should be considered a reattribution of the UFOB Sub-Fund Estate (as defined in the FCA’s Conduct of Business Sourcebook).

8.2 There is a lot to cover in the context of this test and so this has been divided up into several sections in this Report as follows:

 An overview of the Policyholder Outcomes Test – this Section 8;

 The effect of the Scheme on the reasonable benefit expectations of:

o The policyholders of the UFOB Sub-Fund – Section 9;

o The existing policyholders of the RL Open Fund – Section 10; and

o The policyholders of the other RLMIS Closed Funds (i.e. the RLMIS Closed Funds excluding the UFOB Sub-Fund) – Section 11.

 The effect of the Scheme on the standards of administration, servicing and governance applying to the RLMIS policyholders – Section 12;

 Whether the Scheme should be considered a reattribution – Section 13; and

 The conclusion for the Policyholder Outcomes Test – Section 14.

8.3 The Policyholder Outcomes Test is based on financial conditions as at 31 March 2021.

8.4 My analysis and conclusions in Sections 9 to 14 have been formed assuming that the UFIB Sub-Fund Scheme and the SL Fund Scheme have not been implemented.

8.5 In Section 19, I consider the implications for the UFOB Sub-Fund Scheme of the implementation of those other schemes.

9. The Policyholder Outcomes Test – the reasonable benefit expectations of the policyholders of the UFOB Sub-Fund

9.1 In this section I assess the impact of the Scheme on the reasonable benefit expectations of UFOB Sub-Fund policyholders and whether the Scheme affects the likelihood of those reasonable expectations being met.

9.2 I have considered the following groups of policyholders separately:

 The Included Policyholders; and

 Policyholders of the UFOB Sub-Fund who are not Included Policyholders.

THE CURRENT REASONABLE BENEFIT EXPECTATIONS OF INCLUDED POLICYHOLDERS

9.3 The current reasonable benefit expectations of the Included Policyholders should be that they receive:

 Their guaranteed benefits, i.e. the sum assured plus any attaching annual bonuses declared to date;

plus

 Future bonuses that are yet to be declared:

o Annual bonuses that, if greater than 0%, would increase the guaranteed sum assured;

plus

o A final bonus that, if greater than 0%, would increase pay-outs upon claim.

9.4 In relation to their final bonus, Included Policyholders’ reasonable expectations will be that the final bonus will reflect the policy’s asset share, including any historical enhancements to asset share in respect of the distribution of the UFOB Additional Account and any historical ProfitShare allocations.

9.5 Included Policyholders are likely to have an additional reasonable expectation, based on the recent practice of RLMIS (as set out in the RL Long Term Fund PPFM), that their policy will be allocated a fair proportion of the remaining UFOB Additional Account.

9.6 However, in my view, Included Policyholders would not have a reasonable expectation as to the mechanism by which they would receive that allocation other than the ways by which the UFOB Additional Account had been distributed before (i.e. through an asset share uplift or through an enhancement at the point of claim).

THE REASONABLE BENEFIT EXPECTATIONS OF INCLUDED POLICYHOLDERS AFTER THE SCHEME

9.7 If the Scheme were to be implemented, each Included Policy would receive an uplift to its asset share calculated by applying an uplift percentage to that asset share. The Offer Uplift percentage would be the same for all Included Policies and has been set such that, across all Included Policies, and taking into account the Scheme Contribution, the UFOB Additional Account would be expected to be exhausted.

9.8 Included Policies would receive no further estate distribution via asset share enhancements or uplifts to claim values beyond those that result from the Scheme. As set out in Section 3, Included Policies would continue to be entitled to receive ProfitShare, but other than this, Included Policies would not be entitled to distributions from the RL Open Fund Estate.

9.9 If the Scheme were to be implemented, the benefit expectations of Included Policyholders would be that they receive:

 Their guaranteed benefits, i.e. the sum assured plus any attaching annual bonuses declared to date;

plus

 Future bonuses that are yet to be declared:

o Annual bonuses that, if greater than 0%, would increase the guaranteed sum assured;

plus

o A final bonus that, if greater than 0%, would increase pay-outs upon claim, which policyholders would expect to reflect the asset share underlying their policy including:

. The uplift granted as part of the Scheme;

. Any historical enhancements to asset share in respect of the distribution of the UFOB Additional Account and any historical ProfitShare allocations; and

. Any future allocations of ProfitShare between the Implementation Date of the Scheme and the date that the policyholder claims their policy benefits.

9.10 Other than future allocations of ProfitShare, there would be no reasonable expectation of future enhancements or a further uplift at the point of claim.

9.11 Therefore, through comparisons of the policyholder expectations listed at paragraph 9.3 with those listed at paragraph 9.9, when considering the effects of the Scheme on the benefit expectations of the Included Policyholders, I need to consider the effect of the implementation of the Scheme on:

 The expected enhancements to the asset shares of the Included Policies.

This distils down to a comparison of the following:

o The size and certainty of the expected future accumulation of asset share enhancements and uplifts to claim values, which would be used to distribute the UFOB Additional Account in the absence of the Scheme; and

o The application of the Offer Uplift to asset shares that is proposed under the Scheme.

 The expected investment return and volatility of the investment return earned by the assets backing the asset shares of the Included Policies.

 The expenses that would be charged to the asset shares of the Included Policies.

 The smoothing of pay-out values on the Included Policies.

 The future annual and final bonuses that would be declared on the Included Policies.

 Future allocations of ProfitShare.

9.12 I cover these points in turn below.

THE ENHANCEMENTS TO THE ASSET SHARES OF THE INCLUDED POLICIES

Introduction

9.13 In comparing the expected future accumulation of asset share enhancements and uplifts to claim values in the absence of the Scheme with the Offer Uplift percentage proposed to be applied to asset shares if the Scheme were to be implemented, I have considered the following:

 The method of distribution of the UFOB Additional Account.

If the Scheme were to be implemented it is proposed that the UFOB Additional Account would be distributed via the immediate application of the Offer Uplift percentage to the asset shares of the Included Policies.

 The size of the UFOB Additional Account available to be distributed under the Offer.

 The size of the Scheme Contribution.

This reduces the overall amount available to be distributed to Included Policyholders and, as set out in Section 3, the Scheme Contribution is the sum of:

o The CFC although this component of the Scheme Contribution is zero for the UFOB Sub-Fund Scheme;

o The Project Costs Allowance; and

o The Premium Uplift Contribution.

 The groups of policies who will receive a higher proportion of the additional account as a result of the Scheme and the groups who will receive a lower proportion.

In particular, the approach of applying a constant percentage uplift to policy asset shares will result in a different allocation of the UFOB Additional Account across the Included Policies than would have been the case under the pattern of UFOB Additional Account distribution in the absence of the Scheme. This means that some groups of policies would receive a higher allocation of the UFOB Additional Account as a result of the Scheme, and some would receive a lower allocation.

This needs to be considered both for subsets of similar policies, as well as in relation to the general fairness of the approach of allocating the UFOB Additional Account in proportion to asset share.

9.14 I cover these in turn below.

The method of distribution of the UFOB Additional Account

9.15 Under the proposed Scheme, the Offer Uplift would be applied as an immediate (i.e. at the Implementation Date of the Scheme) uplift to asset shares of Included Policies. The application of the Offer Uplift is expected to exhaust the UFOB Additional Account (less the Scheme Contribution).

9.16 For premium-paying Included Policies, there would also be an uplift to the amount allocated to asset share as and when those future premiums were to be paid.

9.17 RLMIS has been distributing the UFOB Additional Account to its policyholders using a combination of enhancements to asset shares and uplifts to claim values since 2006. These enhancements and uplifts are in proportion to the policy asset shares and so the proposed method of the distribution of the UFOB Additional Account under the UFOB Sub-Fund Scheme (i.e. as the application of the Offer Uplift percentage to asset shares) would be consistent with the current distribution practice for the UFOB Additional Account.

9.18 Currently, the future distributions from the UFOB Additional Account to the policyholders of the UFOB Sub-Fund are uncertain in terms of both amount and timing. If the UFOB Sub-Fund Scheme were to be implemented, the UFOB Sub-Fund with-profits policies would receive the Offer Uplift immediately (at the Implementation Date) which would give each Included Policy certainty in respect of the size (at least as a percentage of asset share) and timing (it would be on the Implementation Date) of the distributions.

9.19 I am satisfied that the proposed method of distribution under the UFOB Sub-Fund Scheme would be fair and reasonable and would be consistent with Included Policyholders’ expectations in respect of their benefits.

The size of the UFOB Additional Account available to be distributed under the Offer

9.20 The UFOB Additional Account is equal to (broadly speaking) the assets of UFOB Sub-Fund less the liabilities (including the BEL) of the UFOB Sub-Fund. The BEL is valued using assumptions about the future, informed by experience data and expert judgement. The size of the UFOB Additional Account therefore depends on these assumptions.

9.21 In the normal course of managing the UFOB Sub-Fund, as the liabilities run-off, these assumptions would be adjusted (for example to reflect changing experience) so that the amount of the UFOB Additional Account available for distribution to with-profits policyholders in the UFOB Sub-Fund will vary with experience over time.

9.22 If the Scheme were to be implemented, the value of the UFOB Additional Account would be locked in at the point of calculation of the Offer Uplift (the Calculation Date) based on assumptions made at that time about the future. It is important that the assumptions represent a best estimate view of future experience so that the size of the UFOB Additional Account is not materially overvalued or undervalued when calculating the Offer Uplift percentage that will be applied to the Eligible Policyholders’ asset shares because, after the implementation of the Scheme, the RL Open Fund Estate would benefit from any undervaluation of the UFOB Additional Account or would be required to make up any shortfall because of overvaluation of the UFOB Additional Account.

9.23 As set out in Section 6, given the timing of the Offer Uplift calculation and some necessary adjustments to the inputs, the output from the RLMIS Actuarial Systems used by the RLMIS Tactical Model to calculate the Offer Uplift would not be externally audited. However, the (non-economic) assumptions used to calculate the BEL for the purposes of determining the value of UFOB Additional Account (and so the Offer Uplift) as at 31 December 2021, based on projections from 31 March 2021, were unchanged from those used for the audited Solvency II balance sheet as at 31 December 2020. The economic assumptions were updated to reflect market conditions as at 31 March 2021. All of these assumptions reflect RLMIS’s best estimate view of future outcomes.

9.24 I have reviewed RLMIS’s approach to setting these assumptions, as well as the best-estimate assumptions themselves at a high level, and I am satisfied that they are reasonable.

9.25 One of the key areas of uncertainty in the assumptions is in respect of uncontactable policyholders and the likelihood that they will make a claim under their policy in the future. Any assets that are not expected to be claimed by policyholders in the future (“unclaimed assets”) would be recycled back into the UFOB Sub-Fund for distribution to the other with-profits policyholders in the UFOB Sub-Fund. An allowance for some proportion of the unclaimed assets to be included in the value of the UFOB Additional Account would increase the Offer Uplift percentage proposed to Eligible Policyholders under the Scheme.

9.26 A reduction in the number of uncontactable policyholders would reduce the materiality of the assumption in respect of how many of these policyholders will re-establish contact with RLMIS to claim on their policies, as this would reduce the volume of unclaimed assets. As set out in Section 5, RLMIS has taken significant steps to trace its uncontactable policyholders, including those in the UFOB Sub-Fund, as part of its ongoing centralised tracing process.

9.27 For those policyholders that remain uncontactable, RLMIS has made assumptions about the number of these policyholders that will eventually make a claim on their policies as part of its BAU assumption setting process and has considered these assumptions with increased scrutiny ahead of commencing the Simplification Programme.

9.28 For the UFOB Sub-Fund, it is expected that the majority of uncontactable policyholders will re-establish contact with RLMIS at the point of claim, particularly for pensions policies where policyholders will want to access their savings for retirement. However, the UFOB Sub-Fund contains a high proportion of small value, DWP-only contracted out business, which would be expected to result in some future unclaimed assets. Therefore, a small adjustment has been made to the BEL for the UFOB Sub-Fund (about 0.1% of the BEL) to allow for a proportion of these policies that would not be expected to be claimed in the future. This does not have a material impact on the size of the UFOB Additional Account or the size of the Offer Uplift percentage under the Scheme.

9.29 I am satisfied that the assumptions made in respect of uncontactable policyholder and future unclaimed assets are reasonable.

9.30 For the avoidance of doubt, uncontactable policyholders who re-establish contact with RLMIS to make a claim under their policy would be able to do so and would receive the Offer Uplift under the Scheme on their policy if it would otherwise have been an Included Policy (i.e. regardless of the uncontactable status). The assumptions made to distribute a proportion of the unclaimed assets to other policyholders would not affect this right.

9.31 The inclusion of uncontactable policyholders in the scope of the Scheme and the consequent binding of them by the decision of the High Court in relation to the Scheme is covered in Section 18.

9.32 Overall, I am satisfied that the size of the UFOB Additional Account used to determine the Offer Uplift percentage for the UFOB Sub-Fund Scheme has been calculated based on a reasonable set of assumptions that reflect RLMIS’s best estimate view of future outcomes.

The CFC payable from the UFOB Sub-Fund to the RL Open Fund

9.33 Upon the implementation of the Scheme, the UFOB Sub-Fund policies would be consolidated into the RL Open Fund and the RL Open Fund would be responsible for coverage of the liabilities and capital requirements of the consolidating policies. This would enable an immediate distribution of the UFOB Additional Account (less the Scheme Contribution) to the with-profits policyholders in the UFOB Sub-Fund.

9.34 There is a cost (or opportunity cost) associated with the restrictions associated with holding assets to provide coverage of the capital requirements in respect of the consolidating policies and so it is reasonable to expect a payment to be made to the RL Open Fund for this. This payment is called the CFC and is intended to compensate the RL Open Fund for providing the Included Policies with access to the expected benefits under the Scheme.

9.35 As described in Section 3, the CFC would be calculated as a ‘cost of capital’ amount for the net balance sheet strain. However, some of the balance sheet strain will relate to the market risk inherent in the UFOB Sub-Fund business, and in particular the risks associated with the investments held by the UFOB Sub-Fund and the risk that they are insufficient to meet the UFOB Sub-Fund’s liabilities to its policyholders.

9.36 As the RL Open Fund could elect to reduce the current level of market risk to (in theory at least) an immaterial level by entering into suitable hedging arrangements, it would not be appropriate for the RL Open Fund to be compensated by the UFOB Sub-Fund for the components of the balance sheet strain that relate to this market risk.

9.37 Therefore, any capital requirements relating to market risk of the Included Policies and associated assets after the implementation of the Scheme would be as a result of a conscious decision by the RL Open Fund not to hedge itself against avoidable market risk, for example in an attempt to generate additional profits on its investment portfolio. The capital requirements resulting from such avoidable risks should not result in a charge being levied on Included Policies through the CFC. Therefore, the CFC would be based on the balance sheet strain assuming no capital requirements are held in relation to market risk.

9.38 As non-market risks are (compared to market risks) insignificant for the UFOB Sub-Fund and the CFC would only cover non-market risks, no CFC would be payable from the UFOB Additional Account to the RL Open Fund as part of the Scheme Contribution.

9.39 In my view, it is fair and reasonable that the RL Open Fund should only receive a payment for covering the non- market risk components of the capital requirements in respect of the policies of the UFOB Sub-Fund. Therefore, I am satisfied that it is reasonable that no CFC is payable as part of the Scheme Contribution from the UFOB Sub- Fund to the RL Open Fund.

The Project Costs Allowance

Introduction

9.40 As set out in Section 3 the Aggregate Project Costs Allowance that would be paid to the RL Open Fund from the appropriate RLMIS Closed Funds (i.e. the sum across each affected RLMIS Closed Fund of that fund’s Project Costs Allowance) would be made up of:

 The Past Costs, i.e. the costs incurred up to the Calculation Date in effecting the Fund Consolidations;

 The Expected Future Costs, i.e. a central estimate of the costs expected to be incurred after the Calculation Date in effecting the Fund Consolidations; and

 The Indemnity Premium.

9.41 I describe my analysis of these below.

The allocation of the expected cost of the Fund Consolidations part of the Simplification Programme

9.42 As described in paragraph 3.40, RLMIS is undertaking the Simplification Programme that consists of systems migrations and various schemes of arrangement and amendments to existing schemes that, amongst other things, would effect the consolidation of various of the RLMIS Closed Funds into the RL Open Fund.

9.43 The costs of the various schemes of arrangement (and other mechanisms) that would enable the implementation of the Fund Consolidations would be met by the RL Open Fund when due in return for the Aggregate Project Costs Allowance payable by the relevant RLMIS Closed Funds to the RL Open Fund as compensation for those costs.

9.44 Each closed fund’s contribution to the Aggregate Project Costs Allowance is referred to as the Project Costs Allowance for that closed fund, with each of the RLMIS Closed Funds paying a different Project Costs Allowance.

9.45 At the time the Aggregate Project Costs Allowance were determined (the Calculation Date), the total costs of the Fund Consolidations were not known and so the Aggregate Project Costs Allowance was based on the costs incurred to date (the Past Costs) plus the expected future costs of the Fund Consolidations after that date (the Expected Future Costs), plus the Indemnity Premium.

9.46 The size of the Project Costs Allowance allocated to a given RLMIS Closed Fund has been determined by allocating the Aggregate Project Costs Allowance between those of the RLMIS Closed Funds within the scope of the Fund Consolidations in proportion to the with-profits asset shares plus estates/additional accounts of that RLMIS Closed Fund at the Calculation Date.

9.47 The reason for basing the allocation on the asset share plus estate/additional account are as follows:

 This is a measure of the post-uplift asset shares of the sub-fund and therefore a proxy for the size of the sub- fund and for the extent to which the policies of the sub-fund would benefit from the fund consolidations.

 The Simplification Programme is only taking place in multiple stages for logistical reasons and to allow RLMIS to manage the associated operational complexities, but it is viewed as one overall programme and could in theory take place in one stage.

Given this, it is not appropriate to base the Project Costs Allowance on the costs incurred in effecting any given stage of the Simplification Programme, as this would result in funds involved in earlier stages of the Simplification Programme (including the UFOB Sub-Fund) being allocated disproportionately high costs as the later stages of the Simplification Programme would benefit from cost synergies brought about by the work that has taken place on the earlier stages.

 The use of asset shares plus estate/additional account rather than, for example, policy counts, avoids a disproportionate allocation to sub-funds that have IB business, which tend to have a high volume of relatively low value policies.

 The use of asset shares plus estate/additional account rather than allocating a fixed amount to each sub-fund means that the Project Costs Allowance is based on the ability of each sub-fund to pay; allocating a fixed amount to each sub-fund would result in smaller funds having a much higher allocation in relative terms than larger sub-funds.

9.48 I have reviewed a breakdown of the Past Costs and Expected Future Costs of the Fund Consolidations part of the Simplification Programme which has been put together based on the RLMIS experience of costs incurred in effecting a previous scheme of arrangement, and I am satisfied that the estimate is based on reasonable assumptions and is a true ‘best estimate’ such that it is considered equally likely that the total cost would be above or below the estimate.

9.49 For the UFOB Sub-Fund, this would result in an allocation of expected costs (Past Costs and Future Expected Costs) of £16.1 million plus an Indemnity Premium of £0.8 million. I am satisfied that this total allocation of £16.9 million of the Aggregate Project Costs Allowance and Indemnity Premium of the Fund Consolidations part of the Simplification Programme to the UFOB Sub-Fund is reasonable.

The overall estimate of the costs of the Fund Consolidations

9.50 The overall estimate of the costs of the Fund Consolidations as at the Calculation Date (including the Past Costs) is £38.1 million. This reflects the total costs of a four-year programme across all affected sub-funds. I have been provided with a breakdown of these costs into the broad categories listed below (for confidentiality reasons I am not able to disclose this breakdown in this Report):

 Actuarial Systems – the costs of implementing changes to the RLMIS Actuarial Systems to reflect the implementation of the Scheme, and costs of producing the actuarial analysis for inclusion in this Report and other reports on the Fund Consolidations. This cost is broadly split 80:20 between staff costs and IT costs.

 Core Project Team – the costs of the core Fund Consolidations project team over the four year programme.

 Solvency II Internal Model – the costs of implementing and seeking approval for changes to the RLMIS Internal Model that are a necessary consequence of the Fund Consolidations.

 External Legal Advisers – the costs of the external legal advisers in relation to the Fund Consolidations.

 Customer Service – the costs of the additional staff required to provide customer service support to the Fund Consolidations, including the staffing of the helpline RLMIS has set up to respond to customer queries on the Fund Consolidations.

 Communications – the costs involved with communicating the Fund Consolidations with affected policyholders.

 Independent Expert – the fees of the Independent Expert and any legal advice received by the Independent Expert in relation to the Fund Consolidations.

 Project Management – the costs of project management resources for the Fund Consolidations.

 Finance Systems – the costs of implementing changes to the RLMIS finance systems arising from the Fund Consolidations.

 Tax advice – the costs associated with the internal and external tax advice sought by RLMIS in relation to the Fund Consolidations.

 FCA Fee – the special project fee payable to the FCA to cover its costs associated with its review of the Fund Consolidations.

9.51 I have sought additional information from RLMIS in relation to some of the areas listed in paragraph 9.50, noting that an overall programme cost of £38.1 million is material and I therefore need to be comfortable that all of the

costs allocated to the Fund Consolidations part of the Simplification Programme are indeed costs that would not otherwise have been incurred by RLMIS in the absence of the Fund Consolidations.

9.52 RLMIS has provided breakdowns of the expected costs of the most material items listed in paragraph 9.50, along with details of the assumptions underlying their derivation. RLMIS has also confirmed that the project costs to date are tracking broadly in line with the assumptions underlying the derivation of the estimate.

9.53 The RLMIS WPA has also confirmed that he has reviewed the cost breakdown and is comfortable that the cost estimates are, in his view, consistent with central estimates of the likely costs and represent costs that RLMIS would not have incurred in the absence of the Fund Consolidations. The RLMIS WPC has also reviewed and challenged the costs of the Fund Consolidations and is satisfied that the costs are reasonable. The Scottish Life Supervisory Committee (the “SLSC”) has also reviewed the basis on which the SL Fund’s share of the project costs has been calculated and is satisfied that it is reasonable.

9.54 While I am not in a position to undertake a detailed audit of RLMIS’s costs and its staffing levels for the various components of the Fund Consolidations, the review of the RLMIS WPA, the RLMIS Board and the RLMIS WPC in general (and the review of the SLSC in relation to the SL Fund Scheme) give comfort that the costs charged for the Fund Consolidations (and the UFOB Sub-Fund’s share of those costs) are reasonable. This, along with the information provided in relation to the derivation of the total programme cost of £38.1 million, gives comfort in the level of costs, and that the costs would not otherwise have been incurred by RLMIS in the absence of the Fund Consolidations.

9.55 As described in paragraph 9.49, it is proposed that the UFOB Sub-Fund’s allocation of the total costs (excluding the total Indemnity Premium) of £38.1 million is £16.1 million.

The Indemnity Premium

9.56 As set out in Section 3 (paragraphs 3.63 to 3.71) the amount payable to the RL Open Fund by the affected RLMIS Closed Funds (i.e. the Aggregate Project Costs Allowance) would include the Indemnity Premium.

9.57 If the actual costs of the Fund Consolidations were to exceed the expected costs then the excess cost would, in effect, be paid by the RL Open Fund and would not be charged back to the RLMIS Closed Funds.

9.58 As the RL Open Fund would take on the risk that the overall cost of the Fund Consolidations would turn out to be higher than expected, I am satisfied that, in principle, it would be reasonable that an Indemnity Premium should be paid and that, as set out in Section 3, this should be in respect of unknown costs only so that no Indemnity Premium would be payable in respect of the costs already incurred (at the Calculation Date), or costs expected to be incurred after that date but which are fixed in nature.

9.59 The Indemnity Premium has been set as a fixed percentage (15%) of the future, non-fixed expected costs of the Fund Consolidations.

9.60 The 15% parameter has been derived based on internal RLMIS data sources around premiums typically charged by external suppliers when RLMIS has sought fixed price contracts. This analysis indicated that a premium of 10% to 30% would be typical, depending on the level of certainty and control around the activity.

9.61 In my experience, it would be typical for expense agreements / fixed price contracts to include an indemnity premium of closer to 10% than 30%, although it is obviously difficult to benchmark the level of the indemnity premium as this is not an area in which much reliable and comparable data exists and I am not aware of similar arrangements in relation to project costs.

9.62 However, it is not uncommon for with-profits funds to arrange fixed expense deals whereby a premium is paid in return for certainty in respect of the future expenses that would be charged to the fund. Such expense deals vary considerably between funds in terms of their duration and the allowance for inflation but an increase to current costs of 5% to 15% would, in my experience, be typical.

9.63 In this context and considering the Fund Consolidations programme is a complex project with multiple workstreams, I am satisfied that an Indemnity Premium of 15% is reasonable.

9.64 As set out above, I am satisfied that the expected cost of the Fund Consolidations is a “central estimate”, such that it is considered equally likely that the total cost would be above or below the estimate.

9.65 For the avoidance of doubt, in the event that the overall costs of the Fund Consolidations were to be lower than expected, it is not proposed that the RL Open Fund should refund any of the payments to the RLMIS Closed Funds. Therefore, assuming the costs of the Fund Consolidations were to be as expected, the costs would, in effect, be met by the RLMIS Closed Funds through their respective Project Costs Allowances and the RL Open Fund would make a ‘profit’ of the Indemnity Premium (15% of the non-fixed costs incurred after the Calculation Date).

9.66 As stated above in paragraph 9.58, I am satisfied that it is reasonable that an indemnity premium should be paid in return for the RL Open Fund taking on the risk of costs being higher than expected, as well as benefiting from costs being lower than expected.

9.67 Taking all of the above into account I am satisfied that it is reasonable for an indemnity premium to be paid and that the calculation of the Indemnity Premium as 15% of non-fixed costs incurred after the Calculation Date is reasonable.

Conclusion on the Project Costs Allowance for the UFOB Sub-Fund

9.68 Overall, the Indemnity Premium attributable to the UFOB Sub-Fund would be £0.8 million and this would be added to the cost allocation for the UFOB Sub-Fund of £16.1 million to give a total Project Costs Allowance for the UFOB Sub-Fund of £16.9 million.

9.69 I am satisfied that it is reasonable to allocate the Project Costs Allowance to the UFOB Sub-Fund as described above for the following reasons:

 As noted in Section 2, the UAG Scheme does not explicitly provide for the costs of actions taken upon reaching the Sunset Clause Threshold to be borne by policyholders in that fund but, in practice, it is expected that the costs associated with fund consolidation upon reaching the Sunset Clause Threshold would be charged to the additional account of the relevant sub-fund and therefore it is reasonable to allocate a portion of the costs of the Scheme to the UFOB Sub-Fund.

 On reaching the Sunset Clause Threshold, the cost of implementing the fund consolidation into the RL Open Fund would be spread over a significantly smaller number of policies which would be likely to increase the per- policy cost.

 The fixed Project Costs Allowance provides certainty to Eligible Policyholders over their contribution to the costs of the Scheme as they will have no further liability for costs.

9.70 I am satisfied that it is reasonable to allocate the Project Costs Allowance of £16.9 million to the UFOB Sub-Fund.

9.71 As noted in paragraph 2.62, it is currently the case that, under the terms of the UAG Scheme, 50% of exceptional costs that would be allocated to the UFOB Sub-Fund should be allocated to the RL Open Fund. However, as set out in Section 3, it is part of the proposed UFOB Sub-Fund Scheme that the costs associated with the UFOB Sub- Fund Scheme and those of the wider Simplification Programme attributable to the UFOB Sub-Fund, should be paid 100% by the UFOB Sub-Fund rather than shared equally between the UFOB Sub-Fund and the RL Open Fund.

9.72 I consider the fairness of this change in allocation in Section 18 under the Fair Conduct Test.

Cost apportionment in the event of an abandoned Scheme

9.73 As described in Section 3, in the event that the implementation of the Scheme were to be abandoned or if the Scheme were not to be sanctioned by the High Court, the costs incurred up to the point of abandonment of designing, analysing and implementing the Scheme would be apportioned equally between the RL Open Fund Estate and the UFOB Additional Account.

9.74 Given the volume of feedback received by RLMIS from Eligible Policyholders and the high proportion of responses supportive of the Scheme, I am satisfied that it is reasonable to conclude that Eligible Policyholders are supportive of the Scheme for the purposes of cost apportionment. Furthermore, regular checkpoints have been built into the process between the Appetite Mailing and the date of the Sanction Hearing such that the project could be halted if the indications from policyholders in respect of the Scheme are not positive. This would limit the costs incurred before the Scheme is abandoned.

9.75 I understand that any decision to apportion costs of an abandoned Scheme to the UFOB Sub-Fund would be subject to review and challenge by the WPC and the WPA, and in practice would not take place without their support.

9.76 I am satisfied that the approach to apportioning the costs of an abandoned Scheme is reasonable.

The Premium Uplift Contribution

9.77 Currently, the UFOB Additional Account is being distributed partially through enhancements to pay-outs when a claim payment is made. At this point all of the premiums under a contract would have been paid.

9.78 If the Scheme were to be implemented, the UFOB Additional Account would be distributed through an immediate, single enhancement to asset share which would not reflect contractual premiums yet to be paid.

9.79 Under the premium-paying with-profits policies of the UFOB Sub-Fund, policyholders are contractually entitled to continue paying premiums at a certain level into the future and so it seems fair that such premiums should attract the Offer Uplift percentage. Therefore, if the Scheme were to be implemented, the Premium Uplift Contribution would ensure that there would not be a material adverse effect on the premium-paying with-profits policies of the UFOB Sub-Fund.

9.80 The Premium Uplift Contribution is part of the Scheme Contribution and would be paid to the RL Open Fund to ensure that future contractual premiums on with-profits policies of the UFOB Sub-Fund would receive the same uplift as applied to the Included Policies’ asset shares.

9.81 The Offer Uplift percentage would be applied to the amount allocated to asset share in respect of contractual future premiums payable by premium-paying with-profits policies of the UFOB Sub-Fund as and when those future premiums were to be paid.

9.82 The Premium Uplift Contribution would comprise an estimated £0.9 million of the UFOB Additional Account that would be held back from immediate distribution to Included Policies.

9.83 I am satisfied that it is reasonable to extend the uplift to the amount allocated to asset share in respect of future premiums in this way, and therefore that it is reasonable to include the Premium Uplift Contribution in the terms of the Scheme.

Analysis of the UFOB Additional Account distribution and associated uncertainty before and after the Scheme

Introduction

9.84 If the Scheme were to be implemented, the Offer Uplift would be applied as an immediate (i.e. at the Implementation Date of the Scheme) uplift to the asset shares backing the Included Policies. The application of the Offer Uplift is expected to exhaust the UFOB Additional Account (less the Scheme Contribution).

9.85 The Offer Uplift would be structured as a fixed percentage uplift for all Included Policies (6.4% for the UFOB Sub- Fund), together with the same percentage uplift to future premiums on premium-paying Included Policies as and when those premiums are credited to asset shares. The 6.4% was calculated based on the Solvency II balance sheet for the UFOB Sub-Fund as at 31 March 2021.

9.86 For those policies where, after the uplift, the value of guaranteed benefits exceeds the uplifted asset share, the Scheme would have no effect on the benefits paid.

9.87 The implementation of the Scheme would result in a different allocation of the UFOB Additional Account across the Included Policies than would have been the case under the future pattern of distribution in the absence of the Scheme. Some groups of policies would receive a higher additional account allocation as a result of the Scheme, and some would receive a lower allocation.

9.88 For the avoidance of doubt, it should be noted that as the Scheme Contribution would be deducted prior to distribution, the total amount distributed if the Scheme were to be implemented would (under a central scenario) be lower than the total amount distributed in the absence of the Scheme.

9.89 Analysis has been carried out to compare the Offer Uplift percentage with the expected pattern of UFOB Additional Account distribution in the absence of the Scheme over the run-off period for the UFOB Sub-Fund.

9.90 Figure 9.1 below shows this analysis for the UFOB Sub-Fund. The projections in the scenario where the proposed Scheme were not to proceed were based on a set of assumptions that I have reviewed and that I am satisfied is reasonable. The Offer Uplift percentage is shown by the black dotted line, while the 90% confidence interval for the (uncertain) pattern of distributions in the absence of the Scheme is shown by the pink shaded area.

FIGURE 9.1: COMPARISON OF THE OFFER UPLIFT TO THE PATTERN OF DISTRIBUTIONS IN THE ABSENCE OF THE SCHEME, AND EXPECTED RUN-OFF PATTERN OF ELIGIBLE POLICIES

9.91 Figure 9.1 shows that:

 In the absence of the Scheme, the central estimate of the asset share uplift arising from future distributions of the UFOB Additional Account would be at approximately 5.6% for claims arising in 2022 (after the expected Implementation Date of the Scheme) and increases to 9.4% for claims arising in 2035.

 If the Scheme were to be implemented, the Offer Uplift percentage that would be applied to asset shares under the Offer would be 6.4% (as shown by the black dashed line in Figure 9.1) for all Included Policies.

 The central estimate uplift in the absence of the Scheme has been estimated to be greater than the uniform uplift (6.4% as shown by the black dotted line) under the Scheme (the Offer Uplift) from the start of 2029 onwards at which point it is projected that 57% of the UFOB Sub-Fund policies would remain.

That is, those policyholders making a claim from the start of 2029 onwards would expect, under current best estimate assumptions about the future development of the fund, to receive a greater distribution of the additional account in the absence of the Scheme.

 The pink shaded area in Figure 9.1 shows the potential range of uplifts in the absence of the Scheme with 90% confidence. That is, the potential range of uplifts excluding the most extreme 10% of future scenarios.

This indicates that, in the absence of the Scheme, Included Policyholders could receive up to approximately 8 percentage points more or less than the central estimate of the actual uplift with the higher differences occurring in the more extreme scenarios.

In contrast, if the Scheme were to be implemented, the Offer Uplift percentage applied to asset shares would be certain. As shown in Figure 9.1, the Offer Uplift percentage of 6.4% sits towards the lower end of the range of expected pay-outs if the Scheme were not to proceed (this range being approximately -5% to 25%, as shown by the pink shaded area).

It should be noted that the Offer Uplift percentage was determined based on the financial information as at 31 March 2021 and will be fixed until the Implementation Date of the UFOB Sub-Fund Scheme, which is expected to be 31 December 2021.

9.92 As described in paragraph 9.5, based on the recent practice of RLMIS (as set out in the RL Long Term Fund PPFM) Included Policyholders would have an expectation that their policy would be allocated a fair proportion of the remaining UFOB Additional Account available for distribution. However, this expectation would not extend to the precise pattern of distribution of uplifts or the total amount distributed in the absence of the Scheme. If the Scheme were to be implemented, then the constraints on the distribution of the UFOB Additional Account would be lifted and therefore I need to consider whether a uniform distribution (via the Offer Uplift percentage) to all Included Policies and HITM policies represents a fair distribution.

9.93 When considering the distribution of a with-profits fund estate, firms would consider the contributing factors to the estate of the fund and the risks borne by the different groups of policies. This would typically lead firms to aim to pay out more to those policyholders who have borne the most risk for the longest period of time, which would indicate favouring the larger policies and those with the longest expired duration at the time of distribution. This is broadly the approach taken by RLMIS in respect of the UFOB Additional Account to date.

9.94 A uniform percentage uplift would result in the larger policies receiving larger absolute amounts and it should be noted that, in respect of the risks faced in the future, if the proposed Scheme were to be implemented, the risks of the UFOB Sub-Fund that result in the expected pattern of additional account distribution shown in Figure 9.1 would be passed to the RL Open Fund. This would mean that the Included Policyholders would receive more certainty and less volatility in the likely pay-outs as a result of the distribution of the UFOB Additional Account. It should be remembered that there would remain volatility in pay-outs due to other sources such as market volatility and policyholder experience.

9.95 For consideration of the UFOB Sub-Fund policies I have divided the Included Policyholders approximately into three parts follows:

 Category 1: The first 1/3rd of Included Policyholders who are expected to claim in the near term.

From the second chart in Figure 9.1 this is those Included Policies expected to claim before the end of 2026 when there are expected to be approximately 69.0% of Included Policies remaining in-force (so 31% have claimed up to this point).

Included Policyholders in Category 1 are expected, under a central projection, to be better off as a result of the implementation of the Scheme compared to the situation where the Scheme is not implemented.

 Category 2: The second 1/3rd of Included Policyholders who are expected to claim in the medium term.

From the second chart in Figure 9.1 this is those Included Policies expected to claim after the end of 2026 and before the end of 2031 when there is expected to be approximately 35.7% of Included Policies remaining in- force. Included Policyholders in Category 2 may, under a central projection, be either better or worse off as a result of the Scheme, depending on precisely when they claim on their policy. If the Scheme were to be implemented, the uncertainty for these policyholders over the proportional share of the UFOB Additional Account that is allocated to their policy would be removed and therefore the possibility of being worse off would be (to some extent) offset by this increased certainty.

 Category 3: The final 1/3rd of Included Policyholders who are expected to be the last to claim.

From the second chart in Figure 9.1 this is those Included Policies expected to claim after the start of 2032.

Included Policyholders in Category 3 are expected, under a central projection, to be worse off as a result of the Scheme.

9.96 If the Scheme were to be implemented, policyholders in Category 3 would be expected to be worse off than if the Scheme did not proceed. This is because, in the absence of the Scheme and under a central projection, they would, even allowing for reasonable actions to be taken by management, benefit from a larger tontine effect than if the Scheme were to be implemented. However, the following points should be noted:

 The uncertainty in respect of the size and timing of distributions from the UFOB Additional Account is at its highest in the later years of the projections, and it is expected that some policyholders in Category 3 would receive a lower distribution in the absence of the Scheme than that proposed under the Scheme (6.4% shown by the dotted black line).

 In my view the expectation to receive a tontine should not form part of policyholders’ reasonable benefit expectations. This view is shared by the FCA and is backed up by a recent ruling on a scheme of arrangement involving The Equitable Life Assurance Society where Mr Justice Zacaroli stated that, “I consider that Equitable is indeed facing a problem that requires a solution – namely the emergence of a tontine which can properly be characterised as leading to an unfair distribution of capital among remaining policyholders. The FCA, whose statutory objectives include securing an appropriate degree of protection for consumers and ensuring that the relevant markets function well, is of the view that a tontine is not a desirable outcome and should not form part of policyholders’ reasonable expectations.”

 The reasonable expectations of policyholders are determined by reference to policy documents, scheme documents and communications and following the analysis of such documents by the external legal advisers (Pinsent Masons), they were content that these policies would have no reasonable expectation of a tontine.

Conclusion on the size and certainty of the enhancements in the absence of the scheme compared with the Offer Uplift percentage

9.97 I am satisfied that if the Scheme were to be implemented:

 The Category 1 Included Policyholders would be likely to be better off than if the Scheme were not to be implemented;

 The Category 2 Included Policyholders have a reasonable trade-off between the increased certainty in their distribution from the UFOB Additional Account and the possibility of being worse off than if the Scheme had not proceeded; and

 The Category 3 Included Policyholders should have no expectation of a benefit from the build-up of a tontine and as the uncertainty over the distributions of the additional account is at its highest in the later years of the projections, some policyholders in Category 3 could receive a lower distribution in the absence of the Scheme than that proposed under the Scheme.

9.98 I am satisfied that the proposed Offer Uplift percentage that would be applied to the asset shares of the Included Policies under the Scheme is fair and reasonable, and in particular would not result in a material adverse impact on the benefit expectations of the Included Policyholders.

THE EFFECT OF THE SCHEME ON THE EXPECTED RETURN AND VOLATILITY OF INVESTMENT RETURN FOR ASSET SHARES

9.99 If the proposed Scheme were to be implemented, the UFOB Sub-Fund would be consolidated into the RL Open Fund. As a result the assets backing the asset shares of the Included Policies would be pooled with the assets backing the asset shares of the existing with-profits policies of the RL Open Fund, with some exceptions as described in Section 3.

9.100 In respect of the Included Policies, these exceptions include the policies for whom the backing assets would continue to be separately identified from the assets backing other policies and invested with an EBR of 0%.

9.101 As at 31 December 2020, the EBR for the asset shares in the UFOB Sub-Fund was 51% (with the exceptions listed in paragraph 3.99), and the EBR for the asset shares in the RL Open Fund was 63%.

9.102 The UFOB Additional Account is currently invested in cash and gilts and therefore, if the UFOB Sub-Fund Scheme were to be implemented, the application of the Offer Uplift percentage to the asset shares of Included Policies using the assets of the UFOB Additional Account would result in a decrease to the UFOB Sub-Fund asset share EBR from 51%. 9.103 A small rebalancing exercise would be required to ensure the asset share EBR of 63% would be achieved for the asset shares of the RL Open Fund following the implementation of the UFOB Sub-Fund Scheme, the application of the Offer Uplift to the asset shares of Included Policies and the subsequent pooling of assets backing the asset shares of the UFOB Sub-Fund policies with those of the RL Open Fund.

9.104 The cost of the trades required to achieve the 63% asset share EBR in the RL Open Fund would be small and would be carried out after the Implementation Date of the Scheme. The costs associated with this asset rebalancing would be spread across the asset shares of the RL Open Fund as part of the regular rebalancing processes.

9.105 Given the close alignment of the investment strategy of the UFOB Sub-Fund and the RL Open Fund, the change in asset mix would fall within the tolerances RLMIS provides to the investment manager to use their discretion and take active strategies. Therefore, whether any rebalance is required will depend on whether the investment manager wishes to use the opportunity to take a particular position, e.g. to change exposure to equities or bonds.

9.106 This increase to the EBR of the assets backing the asset shares of the UFOB Sub-Fund policies (with the exceptions listed in paragraph 3.99) would be expected to result in higher expected returns on assets backing the Included Policies, albeit with a higher level of potential volatility in those investment returns.

9.107 I am satisfied that the post-Scheme asset share EBR (63%) would be in line with the expectations of UFOB Sub- Fund policyholders as set out in both the current and post-Scheme RL Long Term Fund PPFM.

9.108 I am satisfied that the implementation of the Scheme would not have a material effect on the expected return or volatility of investment returns as a result of the investment strategy.

THE EFFECT OF THE SCHEME ON THE EXPENSES THAT WOULD BE CHARGED TO ASSET SHARES

9.109 The implementation of the Scheme is not expected to lead directly to any changes to the level of administration expenses charged to the asset shares of Included Policies.

9.110 One of the objectives of the RLMIS wider simplification programme (described in Section 3) is to reduce administration costs and so it is expected that the simplification programme should lead to reductions in the expenses incurred in administering the policies currently in the UFOB Sub-Fund. As administration expenses are currently (as monitored by the RLMIS WPA and in accordance with the RL Long Term Fund PPFM) charged to the

policies on an ‘actual cost plus a profit margin’ basis, the charges to the asset shares of the Included Policies would be expected to reduce. This potential change is not part of the Scheme and so does not form part of my conclusions.

9.111 Currently, charges for exceptional costs attributable to the UFOB Sub-Fund would reduce pay-outs on the with- profits policies in the UFOB Sub-Fund by reducing the UFOB Additional Account available to pay enhancements to the asset shares or claim values of these policies.

9.112 If the Scheme were to be implemented:

 The UFOB Additional Account would no longer be available to meet its 50% share of future exceptional costs, i.e. one-off or infrequent project costs, allocated to the UFOB Sub-Fund policies.

 50% of the exceptional costs would be charged to the former UFOB Sub-Fund policies and the remaining 50% would be charged to the RL Open Fund.

 These charges would reduce pay-outs on the with-profits policies as they would reduce asset shares directly. This charge to asset shares may be taken in one of two ways, as follows (and as described in paragraph 3.93):

i. It could be met by the RL Open Fund Estate and then recovered over time from the asset shares of policies transferred from the UFOB Sub-Fund, charging the amount of the exceptional cost over the projected future run-off of these policies. Interest would be charged on these costs at a risk- free interest rate.

ii. It could be charged directly to the asset shares of policies transferred from the UFOB Sub-Fund in the form of an immediate, uniform deduction across all such investments in-force at that time.

This approach could only be taken if the WPC and the RLMIS Board were satisfied that such action would be fair and reasonable.

Both approaches need to take into account the advice from the RLMIS WPA, the rationale for the Scheme and the associated representations made by RLMIS in respect of the Scheme to its policyholders.

9.113 The first proposed approach of spreading the exceptional costs over the future run-off of the former UFOB Sub- Fund with-profits policies would allow for a greater proportion of these exceptional costs to be charged to those policies that remain in the RL Open Fund for longer. This approach would be consistent with the distribution of costs between generations of UFOB Sub-Fund with-profits policyholders under the current approach and is expected to be used in most circumstances.

9.114 The second approach would only be adopted where all policyholders would be expected to benefit equally from the action being taken that has incurred the cost. Therefore, it would be reasonable in these circumstances to apply an equal charge to all remaining former UFOB Sub-Fund with-profits policies.

9.115 I consider the proposed approach to charging for exceptional costs following the implementation of the Scheme to be reasonable.

9.116 Furthermore, I consider it appropriate to charge interest on the costs to compensate the RL Open Fund for meeting the costs upfront and charging these to the former UFOB Sub-Fund with-profits policies over their expected run- off. The change in approach to charging for exceptional costs is a consequence of the Scheme rather than an intentional change for the benefit of the with-profits policyholders of the UFOB Sub-Fund, and so I consider a risk- free rate to be appropriate to not unduly penalise those policyholders.

9.117 I am satisfied that the implementation of the proposed Scheme would not have a material adverse effect on the expenses that are charged to the asset shares of the Included Policies.

THE EFFECT OF THE SCHEME ON THE SMOOTHING OF PAY-OUT VALUES

9.118 Currently, the UFOB Additional Account meets the costs of smoothing the pay-outs on policies in the UFOB Sub- Fund.

9.119 If the proposed Scheme were to be implemented these costs would be met by the RL Open Fund and the only other change to the smoothing of pay-outs would be that in the first year following the implementation of the Scheme, the smoothing approach would be applied to the claim value before the addition of the asset share uplift.

9.120 This approach is taken to avoid the distributions under the Scheme being reduced by the effects of smoothing and would ensure that Included Policyholders who exit during the first year following implementation of the Scheme receive their full uplift under the Offer.

9.121 There would be no other changes to the way in which pay-outs on maturity and death claims on Included Policies would be smoothed from one year to the next.

9.122 I am satisfied that this approach to smoothing is fair and reasonable and that the way in which pay-outs on maturity and death claims are smoothed from one year to the next would not be materially affected by the implementation of the Scheme.

THE EFFECT OF THE SCHEME ON FUTURE ANNUAL AND FINAL BONUSES TO BE DECLARED IN RESPECT OF INCLUDED POLICIES

9.123 The implementation of the Scheme would lead to an uplift to the asset shares and any future contractual premiums payable on Included Policies to reflect the distribution of the UFOB Additional Account. In the absence of the Scheme such a distribution would not occur in full until the policy claimed.

9.124 I have concluded above that the application of the Offer Uplift to the asset shares of the Included Policies would be fair and reasonable.

9.125 The implementation of the proposed Scheme would not directly result in any changes to the process for setting annual or final bonuses for Included Policies, and these bonuses would continue to target a range around asset shares.

9.126 I am therefore satisfied that, although the declarations would be different, any changes in future bonuses for the Included Policies as a result of the implementation of the Scheme would not constitute a material adverse effect on their reasonable benefit expectations.

THE EFFECT OF THE SCHEME ON INCLUDED POLICYHOLDERS’ ELIGIBILITY TO PARTICIPATE IN PROFITSHARE

9.127 According to the terms of the UAG Scheme, with-profits policies in the UFOB Sub-Fund (and so all of the Included Policies) receive ProfitShare and the implementation of the proposed Scheme would not change this entitlement.

9.128 I am therefore satisfied that the eligibility for ProfitShare for the Included Policies following the implementation of the proposed Scheme is reasonable.

SAFEGUARDS TO THE AMOUNTS DISTRIBUTED TO INCLUDED POLICYHOLDERS AS A RESULT OF THE SCHEME

9.129 As part of my analysis of the effect of the Scheme on the reasonable benefit expectations of the Included Policyholders, I have also considered the protections that would exist after the implementation of the Scheme around the amounts likely to be distributed to such policyholders as a result of the Scheme.

9.130 As part of this I have considered the following factors that could have an effect on the amount of the distribution paid to policyholders when they eventually receive the pay-outs from their policy:

 Future charges taken from the asset shares of the Included Policies.

Future charges taken from asset share reduce pay-outs (on policies where the asset share exceeds the guaranteed value of the policy) to Included Policyholders, so if the Scheme were to have an adverse effect on these charges then there would be an adverse outcome for policyholders.

As described in paragraphs 2.42 and 2.47, administration expenses and investment management expenses are charged to the policies on an ‘actual cost plus a profit margin’ basis. For the UFOB Sub-Fund this margin is 15%, and it is set out in the management service agreement with RLMS and the investment management agreement with RLAM for administration and investment management charges, respectively.

The 15% margin would be unchanged by the Scheme and is annually compared with the third party rates available in the market with administration and investment management outsourcing companies. If the 15% margin exceeds those third party rates available, it is capped at the third party rates.

 Exceptional costs charged to asset shares in the absence of the UFOB Additional Account.

Currently, charges for exceptional costs would be met by the UFOB Additional Account and thereby reduce pay-outs on the with-profits policies in the UFOB Sub-Fund.

If the Scheme were to be implemented, there would no longer be the UFOB Additional Account to which to charge these costs and so they would instead be met by the asset shares of the Included Policies, using one of the two approaches described in paragraph 3.93 (the exact mechanism used would be determined to be appropriate at that time by the RLMIS Board, the RLMIS WPC and the RLMIS WPA).

Therefore, to the extent that such exceptional costs arise after the implementation of the Scheme, these would reduce the asset shares of the Included Policies and therefore reduce the proportion of the distribution under the Scheme received by the Included Policyholders.

However, as set out in paragraphs 9.113 and 9.114:

o The first proposed approach would be consistent with the distribution of costs between generations of UFOB Sub-Fund with-profits policyholders under the current approach and is expected to be used in most circumstances; and

o The second proposed approach would only be adopted where all policyholders would be expected to benefit equally from the action being taken that has incurred the cost and so it would be reasonable in these circumstances to apply an equal charge to all remaining Included Policies.

The implementation of the Scheme would not lead to any change to the definition of ‘exceptional costs’ or to any change to the costs that could be considered ‘exceptional’.

Furthermore, the RL Open Fund Estate would continue to meet 50% of the exceptional costs allocated to the former UFOB Sub-Fund with-profits policies, as prescribed in the UAG Scheme.

I am satisfied that the change in approach to charging for exceptional costs would not have a material adverse effect on the pay-outs received by policyholders when they claim on their Included Policies.

 The approach to setting annual bonuses for the Included Policies.

The asset shares of UFOB policies are used as a guide when setting the annual bonus rates that are recommended to the RLMIS Board by the RLMIS WPA and the RLMIS WPC.

The RL Long Term Fund PPFM sets out the guidelines by which the WPA and WPC set the annual bonus rates and this would be materially unchanged by the implementation of the proposed Scheme.

As set out in paragraph 9.126, the implementation of the proposed Scheme would not directly result in any change to the process for setting annual bonuses for Included Policies and any changes to these in the future would require approval by the RLMIS Board following recommendations from the RLMIS WPA and the RLMIS WPC.

I am satisfied that the Scheme would not lead to any change to the approach to setting annual bonuses.

 The approach to setting final bonuses for the Included Policies.

The asset shares of UFOB policies are used as a guide to determine the pay-out when the policy is claimed. The actual pay-outs on UFOB policies are determined by final bonus rates (where historical annual bonus additions have not resulted in guaranteed benefits already being greater than asset share) and these bonus rates are recommended to the RLMIS Board by the RLMIS WPA and the RLMIS WPC.

The RL Long Term Fund PPFM (which also includes the principles and practices in respect of the UFOB Sub- Fund) states that RLMIS aim to set bonus rates so that the vast majority of pay-outs fall between 80% and 130% of asset share for the business in the UFOB Sub-Fund.

As described in paragraph 9.9, the benefit expectations of Included Policyholders after the implementation of the proposed Scheme would include that they receive a final bonus that reflects (among other things), the uplift granted as part of the Scheme. The proportion of the distribution of the UFOB Additional Account under the Scheme that Included Policyholders receive when they take the pay-outs on their Included Policies would therefore depend on the final bonus rate applicable at the time of the claim.

As set out in paragraph 9.126, the implementation of the proposed Scheme would not directly result in any change to the process for setting final bonuses for Included Policies or any changes to the target range for pay-outs used to set these final bonuses. Any changes to these in the future would require approval by the RLMIS Board following recommendations from the RLMIS WPA and the RLMIS WPC.

I am satisfied that the Scheme would not lead to any change to the approach to setting final bonuses.

 Future adjustments to asset shares if future experience departs significantly from the best estimate assumptions used in the calculation of the Offer Uplift percentage and beyond the level captured within the SCR used in the CFC calculation.

The UFOB Sub-Fund Scheme contains an ‘exceptional events’ clause under which the RLMIS WPA has the discretion to make adjustments to asset shares following the implementation of the Scheme if future experience were to show a material departure from the best estimate assumptions used in calculating the size of the UFOB Additional Account for the purposes of setting the Offer Uplift percentage and beyond the level captured within the SCR used in the CFC calculation. These deviations would include sufficiently material deviations in assumptions in respect of uncontactable policyholders and unclaimed assets.

I am satisfied that the safeguards in the Scheme that permit future adjustments to asset shares in the event of material differences from the assumptions made when calculating the size of the UFOB Additional Account are reasonable.

9.131 I am satisfied that there are suitable processes and safeguards in place, in particular the governance and oversight from the WPC, the WPA and the RLMIS Board, and the regulatory oversight from the FCA and the PRA in respect of treating customers fairly, so that the amounts distributed to Included Policyholders as a result of the Scheme would not be reduced unfairly over time or at the point at which Included Policyholders eventually receive the pay- outs from their Included Policies.

MY CONCLUSION ON THE EFFECT OF THE SCHEME ON THE REASONABLE BENEFIT EXPECTATIONS OF THE INCLUDED POLICYHOLDERS

9.132 Taking into account my conclusions set out in the sub-sections above, as well as my conclusion in Section 7 that the implementation of the Scheme would have no material effect on the security of the guaranteed benefits under the Included Policies, I am satisfied that the implementation of the Scheme would not have a material adverse effect on the reasonable benefit expectations of Included Policyholders.

THE CURRENT REASONABLE BENEFIT EXPECTATIONS OF NON-INCLUDED POLICYHOLDERS

9.133 In this sub-section I consider the impact of the implementation of the Scheme on those policyholders of the UFOB Sub-Fund who are not Included Policyholders (the “Non-Included Policyholders”). The Non-Included Policyholders comprise:

 Holders of HITM policies; and

 Holders of non-profit policies.

9.134 As HITM policies are not expected to receive any discretionary bonuses they can be viewed as similar to non-profit policies in a number of ways, and therefore I have considered HITM policies and non-profit policies together.

9.135 The current reasonable benefit expectations of the Non-Included Policyholders should be:

 That they receive their guaranteed benefits in full, i.e. the sum assured plus any attaching annual bonuses declared to date; and

 Where Non-Included Policyholders receive benefits, whose amounts are at the discretion of RLMIS, such as surrender or transfer values, that these amounts are derived in line with the approach set out in the relevant PPFM and in line with RLMIS’s duty to treat customers fairly.

9.136 It should be noted that:

 I concluded in Section 7 that the implementation of the Scheme would not have a material effect on the security of guaranteed benefits of any of the policies of RLMIS; and

 In relation to discretionary benefits, the only potential change arising from the UFOB Sub-Fund Scheme arises in relation to surrender or transfer values on HITM policies and, if the Scheme were to be implemented, the uplifted asset share would be used to determine surrender values and transfer values, and the same considerations apply to this situation as those set out in the rest of this section around the reasonable benefit expectations of Included Policyholders,

9.137 Taking into account the above, as well as my conclusion in Section 7 that the implementation of the Scheme would have no material effect on the security of the guaranteed benefits under the policies of the UFOB Sub-Fund, I am satisfied that there will be no material impact on the reasonable benefit expectations of the Non-Included Policyholders as a result of the implementation of the Scheme.

10. The Policyholder Outcomes Test – the reasonable benefit expectations of the existing policyholders of the RL Open Fund

INTRODUCTION

10.1 If the Scheme were to be implemented the UFOB Sub-Fund would be consolidated into the RL Open Fund and would no longer be treated as a ring-fenced fund under Solvency II. The capital requirements for the UFOB Sub- Fund would no longer be kept separate from those of the RL Open Fund and the RL Open Fund Estate would have the responsibility for the coverage of the capital requirements of the UFOB Sub-Fund.

10.2 Therefore, when considering the effects of the Scheme on the reasonable benefit expectations of the existing policyholders of the RL Open Fund who are not Included Policyholders, I need to consider the effect of the implementation of the Scheme on:

 The financial strength of the RL Open Fund as this enables the provision of security and bonuses to the RL Open Fund policies.

This distils down to consideration of:

o The Scheme Contribution paid to the RL Open Fund from the UFOB Sub-Fund; and

o The Cost of Bonus Transfers paid to the RL Open Fund due to bonuses paid on the Included Policies.

 The expected returns under the policies in the RL Open Fund.

This distils down to consideration of the effect of the Scheme on:

o How returns are allocated to the policies;

o The expected investment return earned by the assets backing the asset shares; and

o The level of ProfitShare earned by the policies.

10.3 I cover these points in turn below.

THE EFFECT OF THE SCHEME ON THE FINANCIAL STRENGTH OF THE RL OPEN FUND

The security of benefits under the RL Open Fund policies

10.4 In Section 7 of this report I concluded that the implementation of the Scheme would not have a material effect on the security of the guaranteed benefits of the existing policies in the RL Open Fund.

The Scheme Contribution paid to the RL Open Fund

10.5 Under the terms of the Scheme, a payment (the Scheme Contribution) would be made from the UFOB Additional Account to the RL Open Fund. This Scheme Contribution consists of the following:

 The CFC, but this component of the Scheme Contribution is proposed to be zero for this scheme.

 The Project Costs Allowance of £16.9 million in respect of the total costs of the Fund Consolidations.  The Premium Uplift Contribution of £0.9 million, which would be offset by a liability in the RL Open Fund to uplift future premium payments on with-profits policies of the UFOB Sub-Fund by the same percentage as that applied to asset shares under the Scheme.

10.6 I cover these in turn below.

The CFC

10.7 I have considered the appropriateness of the CFC amount for this Scheme, and I reached the conclusion in paragraph 9.39 that it is reasonable that a CFC of zero would be payable as part of the Scheme Contribution from the UFOB Sub-Fund to the RL Open Fund.

The Project Costs Allowance

10.8 The Project Costs Allowance comprises an allocation to meet the expected costs of the Scheme plus a 15% Indemnity Premium payable to the RL Open Fund where the 15% is applied to the non-fixed costs incurred after the Calculation Date. In return for the Indemnity Premium, the RL Open Fund would meet any costs of the Scheme in excess of the expected costs. To the extent that the costs of the Scheme are lower than expected, this benefit would accrue to the RL Open Fund.

10.9 As set out in section 9, I am satisfied that it would be reasonable for the RL Open Fund to:

 Receive an Indemnity Premium from the UFOB Sub-Fund in return for the RL Open Fund accepting the risk of costs being higher than expected; and

 Benefit from the scenario where costs were lower than expected.

10.10 As set out above in paragraph 9.67, I am satisfied that the calculation of the Indemnity Premium as 15% of non- fixed costs incurred after the Calculation Date is reasonable.

The Premium Uplift Contribution 10.11 Upon the implementation of the Scheme, the RL Open Fund will receive assets equal to the Premium Uplift Contribution. This will be offset by a liability in the RL Open Fund to uplift asset share in respect of future premium payments on premium-paying with-profits policies of the UFOB Sub-Fund by the same percentage as that applied to asset shares under the Scheme.

10.12 To the extent that future premium patterns are different from those expected, or that the investment return on the assets representing the Premium Uplift Contribution is different from expected, the assets representing the Premium Uplift Contribution may turn out to be insufficient to meet the application of the Offer Uplift to asset share pledged in respect of future premium payments.

10.13 However, in the context of the size of the RL Open Fund (assets of approximately £72.4 billion assuming the RAIB Sub-Fund Consolidation had been implemented as at 31 March 2021) and a Premium Uplift Contribution of approximately £0.9 million, I do not consider that that this would lead to a material adverse effect on the RL Open Fund, and the risk to the RL Open Fund is symmetrical, i.e. there is an equal chance of the Premium Uplift Contribution being more than sufficient as being insufficient.

The Cost of Bonus Transfers in respect of Included Policies of the UFOB Sub-Fund

10.14 As described in Section 3, the application of the Offer Uplift to the asset shares of the Included Policies would enable the additional Cost of Bonus Transfers to be allowed for in the Solvency II balance sheet for the RL Open Fund.

10.15 The Scheme would have additional effects on the Cost of Bonus Transfers payable to the RL Open Fund in respect of the policies currently in the UFOB Sub-Fund:  The Scheme would likely result in an acceleration of bonuses granted to the policies currently in the UFOB Sub-Fund as the increase to asset shares would be immediate whereas in the absence of the Scheme it would primarily occur at the point of claim.

 The overall Cost of Bonus Transfers payable from the UFOB Sub-Fund to the RL Open Fund would be reduced to the extent that the UFOB Additional Account is reduced by the Scheme Contribution.

10.16 I am satisfied that these effects are second order (and would counteract each other) and that therefore the implementation of the proposed Scheme would not lead to a material change to the Cost of Bonus Transfers to the RL Open Fund.

Conclusion on the effect of the Scheme on the financial strength of the RL Open Fund

10.17 I am satisfied that the implementation of the proposed Scheme would not have a material adverse effect on the financial strength of the RL Open Fund.

THE EFFECT OF THE SCHEME ON THE EXPECTED RETURNS ON THE EXISTING POLICIES OF THE RL OPEN FUND

Introduction

10.18 The implementation of the UFOB Sub-Fund Scheme would not change:

 The terms and conditions of the policies of the RL Open Fund;

 The principles and practices used in the management of the RL Open Fund (although there would be some changes to the RL Long Term Fund PPFM to allow for the changes as a result of the various fund consolidations);

 The methodology (including smoothing) used to calculate asset shares, maturity values, death values and surrender values of the policies of the RL Open Fund;

 The bonus and pay-out policies applied to the with-profits policies of the RL Open Fund;

 The operation of the RL Open Fund (apart from there would be no interaction with the UFOB Sub-Fund or UFOB Additional Account as these will cease following the implementation of the proposed Scheme);

 The governance applicable to the RL Open Fund;

 The capital policy and risk appetite to which the RL Open Fund is managed; or

 The charges that apply to the policies of the RL Open Fund.

The asset share EBR for the RL Open Fund

10.19 As described above, if the Scheme were to be implemented, the UFOB Sub-Fund would be consolidated into the RL Open Fund and the assets backing the asset shares of the UFOB Included Policies would be pooled (with the exception of some policies as set out in Section 2) with the assets backing the asset shares of with-profits policies in the RL Open Fund. The UFOB Additional Account is currently invested in cash and gilts and these assets would be reassigned to the asset shares of the UFOB Included Policies as a result of the application of the Offer Uplift.

10.20 As at 31 December 2020, the EBR backing the asset shares of the UFOB Sub-Fund was 51% (with the exceptions listed in paragraph 3.99) and the EBR backing the asset shares of the RL Open Fund was 63%. Therefore, after the consolidation of the UFOB Sub-Fund into the RL Open Fund, trades would be required to ensure an asset share EBR of 63% would be maintained in the RL Open Fund following implementation of the UFOB Sub-Fund Scheme.

10.21 The number of such trades required should be relatively small and the cost of the trades required to achieve the 63% asset share EBR would be expected to be small in the context of RL Open Fund asset shares.

10.22 The costs associated with this asset rebalancing would be spread across the asset shares of the RL Open Fund 10.23 The implementation of the Scheme would result in a modest increase in the EBR backing the asset shares of with- profits policies of the UFOB Sub-Fund. This is not concerning as it is reasonable that the size, financial strength and level of risk diversification of the RL Open Fund could support a higher EBR than a smaller and less diversified sub-fund such as the UFOB Sub-Fund, and a higher EBR should, all else being equal, result in higher expected returns on assets backing asset shares.

10.24 I am satisfied that the pooling of assets would not have a material adverse impact on the reasonable benefit expectations of the existing policyholders of the RL Open Fund.

ProfitShare

10.25 The level of ProfitShare declared each year takes into account the financial strength of the RL Open Fund and the ability of RLMIS to distribute the profits of the RL Open Fund. I analysed the possible effects of the Scheme on the financial strength in Section 7 of this Report and I concluded that the implementation of the proposed Scheme would not have a material adverse effect on the financial strength of the RL Open Fund.

10.26 The overall financial impact of the Scheme on the RL Open Fund is shown in Table 7.1, with a detailed breakdown of this impact given in paragraph 7.11.

10.27 Table 7.1 shows that, if the Scheme had been implemented on 31 March 2021, it would have led to a small increase in the Internal SCR Cover of the RL Open Fund and the RL Open Fund would have remained within the target range of the RLMIS Capital Framework.

10.28 If the Scheme were to be implemented, there would be no change to:

 The rights of the existing RL Open Fund policies to any future distributions from the RL Open Fund, including that those policies of the RL Open Fund currently eligible to participate in ProfitShare would remain so.

 The eligibility for ProfitShare for the Included Policies, which would continue to be eligible for ProfitShare at the existing lower level than other eligible lines of business.

10.29 Furthermore, if the Scheme were to be implemented, additional profits should emerge through the payment of the Scheme Contribution from the UFOB Sub-Fund, and from efficiency savings from the fund consolidation. These additional profits would increase the total expected future level of ProfitShare relative to the level in the absence of the Scheme.

10.30 I am satisfied that the implementation of the Scheme would not have a material adverse effect on the level of ProfitShare distributed to those policies in the RL Open Fund that are eligible to receive it.

The change to the risk profile of the RL Open Fund arising from the Scheme

10.31 As shown in Tables 2.4 and 2.5, the risk profile of the RL Open Fund is different to that of the UFOB Sub-Fund. The RL Open Fund is significantly larger and is exposed to a more diverse range of risks, including risks in respect of policyholder behaviour such as persistency risk whereas in contrast, the UFOB Sub-Fund’s risk profile is dominated by market risk.

10.32 Given the relatively small size of the UFOB Sub-Fund in relation to the RL Open Fund, its consolidation into the RL Open Fund would not materially affect the risk profile to which RL Open Fund policyholders are exposed, and therefore I am satisfied that the implementation of the Scheme will not have a material adverse effect on the profile of risks to which RL Open Fund policyholders are exposed.

The charging of exceptional costs following implementation of the Scheme

10.33 Following the implementation of the Scheme, 50% of any exceptional costs attributable to the former UFOB Sub- Fund policies would, in most circumstances, be met by the RL Open Fund Estate in the first instance, with the costs subsequently being recovered over time from the asset shares of former UFOB Sub-Fund with-profits policies. The remaining 50% of these exceptional costs would be met by the RL Open Fund Estate (with no charge back to the former UFOB Sub-Fund policies) in line with the UAG Scheme and current practice.

10.34 Given the relative sizes of the RL Open Fund and the UFOB Sub-Fund and given that this mechanism means that the incurring of any exceptional costs would be neutral to the solvency position of the RL Open Fund, and given that the charging of 50% of exceptional costs to the RL Open Fund would be unaffected by the Scheme, I am satisfied that the proposed exceptional cost arrangement would not cause a material detriment to the RL Open Fund.

Conclusion on the effect of the Scheme on the expected returns under the policies of the RL Open Fund

10.35 I am satisfied that the implementation of the proposed Scheme would not have a material adverse effect on the expected returns under the existing RL Open Fund policies.

MY CONCLUSION ON THE EFFECT OF THE SCHEME ON THE REASONABLE BENEFIT EXPECTATIONS OF THE EXISTING POLICYHOLDERS OF THE RL OPEN FUND

10.36 Taking into account my conclusions set out in the sub-sections above, as well as my conclusion in Section 7 that the implementation of the Scheme would have no material effect on the security of the guaranteed benefits under the policies of the RL Open Fund, I am satisfied that the implementation of the Scheme would not have a material adverse effect on the reasonable benefit expectations of the existing policyholders of the RL Open Fund.

11. The Policyholder Outcomes Test – the reasonable benefit expectations of the remaining policyholders of RLMIS

INTRODUCTION

11.1 The remaining policyholders of RLMIS are the policyholders with policies in the RLMIS Closed Funds other than the UFOB Sub-Fund (I refer to these as the “other RLMIS Closed Funds”).

THE EFFECT OF THE SCHEME ON THE REMAINING POLICYHOLDERS OF RLMIS

11.2 The implementation of the Scheme would have no impact on the financial strength of the other RLMIS Closed Funds and, as concluded in Section 7, the implementation of the Scheme would not have a material adverse effect on the security of guaranteed benefits of the policyholders of the other RLMIS Closed Funds.

11.3 The remaining policies of RLMIS are not eligible to participate in ProfitShare, other than certain investments of policies in the SL Fund, and this would not be changed by the implementation of the Scheme. The implementation of the Scheme would not change the eligibility of these investments of policies in the SL Fund to participate in ProfitShare.

11.4 Additionally, the implementation of the Scheme would not change:

 The terms and conditions of the policies of the other RLMIS Closed Funds;

 The existing guaranteed benefits of the policies of the other RLMIS Closed Funds;

 The principles and practices used in the management of the other RLMIS Closed Funds;

 The rights of the policies of the other RLMIS Closed Funds to any future distributions from the estates of those funds where they exist;

 The methodology used to calculate asset shares and surrender values of the policies of the other RLMIS Closed Funds;

 The bonus and pay-out methodologies applied to the with-profits policies of the other RLMIS Closed Funds;

 The investment strategy applicable to the with-profits policies of the other RLMIS Closed Funds;

 The operation of the other RLMIS Closed Funds;

 The governance applicable to the other RLMIS Closed Funds;

 The capital policy and risk appetite to which the other RLMIS Closed Funds are managed; or

 The charges that apply to the other RLMIS Closed Funds (and to the polices within).

MY CONCLUSION ON THE EFFECT OF THE SCHEME ON THE REASONABLE BENEFIT EXPECTATIONS OF THE REMAINING POLICYHOLDERS OF RLMIS

11.5 Taking into account the above, as well as my conclusion in Section 7 that the implementation of the Scheme would have no material effect on the security of the guaranteed benefits under the policies of the other RLMIS Closed Funds, I am satisfied that the implementation of the Scheme would not have a material adverse effect on the reasonable benefit expectations of the policyholders of the other RLMIS Closed Funds.

12. The Policyholder Outcomes Test – the standards of administration, servicing and governance applying to the RLMIS policyholders

BACKGROUND

12.1 The implementation of the UFOB Sub-Fund Scheme would not have any direct effect on:

 The systems on which the RLMIS policies are stored and administered;

 The processes by which the RLMIS policies are serviced;

 The personnel in the RLMIS teams that currently administer the policies (including those policies currently in the UFOB Sub-Fund);

 The standards and levels of service that RLMIS requires; or

 The metrics against which RLMIS measures its success or otherwise in customer servicing.

12.2 Following the implementation of the UFOB Sub-Fund Scheme, the RL Long Term Fund PPFM would be updated to reflect changes to the principles and practices for the UFOB Sub-Fund policies, principally in respect of removing references to the UFOB Additional Account and the UFOB Sub-Fund.

12.3 Some of the amendments will require changes to the wording of the Principles included in the RL Long Term Fund PPFM, which require 3 months’ advance notice to be given to policyholders. The formal notification of these amendments to the Principles will be included as part of the communications strategy (covered in Section 5) for the Eligible Policyholders. RLMIS intends to notify with-profits policyholders of the RL Open Fund of these amendments through their annual statements.

12.4 If the UFIB Sub-Fund Scheme and the UFOB Sub-Fund Scheme were to be implemented, then the UAG Scheme would be terminated and the UAG Scheme would no longer govern the business formerly of the UFIB Sub-Fund and the UFOB Sub-Fund.

12.5 As set out in Section 6, the RLMIS actuarial team has reviewed the UAG Scheme and has confirmed that all relevant provisions of the UAG Scheme would be included in the new PPFM for the RL Open Fund, and so there would not be any material adverse effect on policyholders from the termination of the UAG Scheme. The external legal advisers (Pinsent Masons) have confirmed this conclusion.

12.6 I am satisfied that the termination of the UAG Scheme would not lead to a material adverse effect on the business currently in the UFOB Sub-Fund that would be transferred to the RL Open Fund following the implementation of the UFOB Sub-Fund Scheme.

12.7 In relation to standards of administration and servicing, as described in paragraphs 3.108 to 3.111, RLMIS intends to make changes to the operation of certain policies at or around the same time as the implementation of the Scheme. These changes are not part of the Scheme and could be undertaken by RLMIS at any time, subject to its applicable governance processes, and therefore I have not considered their impact in this Report.

MY CONCLUSION

12.8 I am satisfied that the implementation of the Scheme would not have a material adverse effect on the administration and service standards applicable to policies and policyholders of RLMIS.

13. The Policyholder Outcomes Test – should the proposed Scheme be considered to be a reattribution of the UFOB Sub-Fund Estate?

INTRODUCTION

13.1 COBS 20 defines a reattribution of a with-profits fund’s inherited estate as:

“the process under which a firm which carries on with-profits business seeks to redefine the rights and interests that the with-profits policyholders have over the inherited estate.”

13.2 COBS 20 sets out a process that firms seeking to carry out a reattribution should follow, including but not limited to:

 The appointment (and regulatory approval) of a “policyholder advocate” to negotiate with the firm on behalf of relevant with-profits policyholders;

 The appointment of a “reattribution expert” to undertake an objective assessment of the reattribution proposals (this is not required if an independent expert has already been appointed in relation to the reattribution process or to a wider process that includes the reattribution process, such as a scheme of arrangement); and

 Allow with-profits policyholders to either individually accept the reattribution proposals or vote on whether the firm should go ahead with the proposals (in which case the majority would bind the minority).

13.3 As described in Section 3, if the Scheme were to be implemented, then on the Implementation Date:

 The Scheme Contribution would be paid from the UFOB Sub-Fund to the RL Open Fund; and

 The UFOB Additional Account (after deduction of the Scheme Contribution) would be transferred to the RL Open Fund in return for an uplift of a fixed percentage (determined as at the Calculation Date) to the asset shares of the Included Policies and to future regular premiums payable by Included Policies.

13.4 As the actions described in paragraph 13.3 involve a change to the current approach taken to managing the inherited estate of the UFOB Sub-Fund, it is relevant to consider whether these actions, individually or taken together, constitute a reattribution of the inherited estate of the UFOB Sub-Fund pursuant to COBS 20.

13.5 RLMIS has received advice from its legal advisers, Pinsent Masons, that neither of the two actions described in paragraph 13.3 constitute a reattribution for the purposes of COBS 20 for the following (summarised) reasons:

 The Scheme Contribution does not constitute a redefinition of with-profits policyholders’ rights, interests and entitlements to the inherited estate or the manner in which it may be used for the following reasons:

o The Scheme Contribution is another mechanism used to implement actions that RLMIS might otherwise have taken to mitigate and manage the risks to which the inherited estate is already exposed;

o It is not unusual for with-profits funds’ estates to be used to cover the risks of the fund; and

o It is reasonable for part of the inherited estate to be used to mitigate these risks given the fairness issues that would otherwise arise for policyholders of the RL Open Fund.

 The allocation of the inherited estate is not a redefinition or reallocation of policyholders’ rights and interests as it is intended to distribute that inherited estate in accordance with those rights.

 The fixed percentage uplift approach to allocating the inherited estate does not constitute a redefinition of with- profits policyholders’ rights, interests and entitlements to the inherited estate or the manner in which it may be used as it is consistent with the run-off plan for the UFOB Sub-Fund and allows RLMIS to achieve better compliance with this run-off plan (and provisions within COBS 20 that are relevant to run-off plans).

 The fixing of the percentage uplift at the Calculation Date rather than the Implementation Date does not constitute a redefinition of with-profits policyholders’ rights, but instead represents a transaction entered into between the UFOB Sub-Fund and the RL Open Fund that is:

o ultimately for the benefit of the Included Policyholders (i.e. to implement the approach to uplifting Included Policies’ asset shares and future regular premiums); and

o designed to address a specific risk to which Included Policyholders will be exposed (i.e. the risk that the UFOB Additional Account less the Scheme Contribution is not sufficient to provide for the uplift at the Implementation Date), and which if not addressed would necessarily create uncertainty or otherwise impede the distribution of the UFOB Additional Account by way of the Scheme.

13.6 My legal advisers, Freshfields, have reviewed the legal advice produced by Pinsent Masons and concluded that it provides a sufficiently robust and reasonable basis for RLMIS to proceed on the basis that no reattribution arises in relation to the aspects of the Scheme considered by it.

13.7 I am satisfied that given the advice I have received from Freshfields and the advice received by RLMIS from Pinsent Masons that the implementation of the proposed Scheme would not constitute a reattribution of the UFOB Sub- Fund estate.

13.8 From the perspective of fairness to Included Policyholders, I have also considered whether the actions taken by RLMIS, and the process being followed by, RLMIS are adequate to ensure that the proposals are fair and reasonable for Included Policyholders. In forming a view on this, I have had regard to the following:

 The proposed changes could be made at the time the UFOB Sunset Clause Threshold were to be met;

 RLMIS has appointed me to form a view on whether the Scheme is fair and reasonable in the capacity of Independent Expert;

 The Scheme will be subject to the scrutiny and sanction of the High Court;

 The Scheme has been subject to the scrutiny of the FCA and the PRA;

 My conclusion that the Scheme Contribution is reasonable; and

 The Scheme has been reviewed by the RLMIS WPA and the RLMIS WPC.

13.9 In my view these factors indicate that sufficient processes are in place in relation to the Scheme to ensure that the actions described in paragraph 13.3 are fair and reasonable to the Included Policyholders.

14. The Policyholder Outcomes Test – my conclusion

14.1 Based on the analysis set out in Sections 8 to 13, I am satisfied that if the proposed Scheme were to be implemented, it would not have a material adverse effect on:  The reasonable benefit expectations of:

o Included Policyholders;

o Non-Included Policyholders of the UFOB Sub-Fund;

o Existing policyholders of the RL Open Fund; and

o Policyholders of the other RLMIS Closed Funds (i.e. the RLMIS Closed Funds excluding the UFOB Sub-Fund); or

 The standards of administration, servicing, management, and governance applying to: o Included Policyholders;

o Non-Included Policyholders of the UFOB Sub-Fund;

o Existing policyholders of the RL Open Fund; and

o Policyholders of the other RLMIS Closed Funds (i.e. the RLMIS Closed Funds excluding the UFOB Sub-Fund).

14.2 I am therefore satisfied that the requirements of the Policyholder Outcomes Test have been met.

15. The Adverse Scenario Test

OVERVIEW

15.1 This section of the Report summarises the outcome of the Adverse Scenario Test.

The Adverse Scenario Test The objective of this test is to consider whether the proposed Offer and Scheme would remain fair (to the Included Policyholders and to other affected RLMIS policyholders) under a range of circumstances and scenarios.

In other words, would the results of the Security of Policyholder Benefits Test and the Policyholder Outcomes Test be different under different circumstances and scenarios.

15.2 As set out in Section 4, this Report will be presented to the High Court for consideration at the Convening Hearing for the UFOB Sub-Fund Scheme. If the High Court were to approve the Scheme at the Convening Hearing then the Voting Packs would be sent to Eligible Policyholders and these Voting Packs would include the Offer Uplift percentage (6.4%).

15.3 As set out in Section 3, the final Offer Uplift percentage has been calculated based on the Solvency II balance sheet for the UFOB Sub-Fund as at 31 March 2021, projected forward to the expected Implementation Date of the UFOB Sub-Fund Scheme (31 December 2021), and will be fixed until the Implementation Date.

15.4 Therefore, under the Adverse Scenario Test, I need to consider events and scenarios that could occur between the date of the calculation of the Offer Uplift (31 March 2021) and the date on which the Offer Uplift would be applied to the Included Policies (the Implementation Date, expected to be 31 December 2021), and whether they would lead to a material adverse effect on outcomes for policyholders such as:

 For Included Policyholders of the UFOB Sub-Fund the (theoretical) Offer Uplift percentage calculated as at the Implementation Date could be materially higher than the Offer Uplift percentage (which was calculated at the Calculation Date); and

 For policyholders whose security of benefits or benefit expectations rely upon the RL Open Fund Estate the Offer Uplift percentage calculated as at the Implementation Date could be materially lower than the Offer Uplift percentage (which was calculated at the Calculation Date) so that the RL Open Fund Estate would need to cover the excess Offer Uplift that was communicated to, and guaranteed to, the Included Policyholders of the UFOB Sub-Fund.

15.5 My analysis and conclusions in this section have been formed assuming that the UFIB Sub-Fund Scheme and the SL Fund Scheme have not been implemented.

15.6 In Section 19, I consider the implications for the UFOB Sub-Fund Scheme of the implementation of those other schemes.

THE IMPACT OF CHANGING INVESTMENT CONDITIONS AND A CHANGE IN THE RUN-OFF PATTERN

Introduction

15.7 As stated above, the Offer Uplift percentage that will be quoted in the Voting Packs has been calculated based on the financial position of the UFOB Sub-Fund as at the Calculation Date (31 March 2021), projected forward to the expected Implementation Date (31 December 2021).

15.8 If conditions were to change materially between the Calculation Date (31 March 2021) and the Implementation Date (expected to be 31 December 2021) then the value of the UFOB Additional Account might change by a different percentage than the Scheme Contribution or the assets backing the asset shares in the UFOB Sub-Fund.

15.9 In this scenario it could be the case that, if calculated at the Implementation Date, the UFOB Additional Account less the UFOB Sub-Fund Scheme Contribution would be a different percentage of the total asset shares of the Included Policies than that calculated as at the Calculation Date and that therefore the Included Policies would receive a different Offer Uplift percentage than if it were calculated at the Implementation Date. As a consequence, there would be the risk that either the Included Policies or the RL Open Fund Estate would suffer an adverse outcome.

15.10 Furthermore, if it were the case that the Included Policies would receive a lower percentage of their asset shares than implied by a recalculation of the Offer Uplift percentage at the Implementation Date then it would be the case that not all of the UFOB Additional Account (after deduction of the Scheme Contribution) would be distributed to Included Policyholders.

15.11 The particular conditions that could have a material effect on the Offer Uplift percentage are:

 A change to the levels of equity markets or interest rates; and/or

 Differences in actual policy run-off patterns (policy surrenders, transfers, maturities, retirements, and deaths) compared with those expected and used in the calculation of the Offer Uplift percentage at the Calculation Date.

15.12 I cover these in turn below.

Analysis of the effects of changes to investment conditions

15.13 RLMIS has carried out some analysis of the possible changes in investment conditions that could occur in the period between the Calculation Date and the Implementation Date. In each such investment scenario an Offer Uplift percentage has been calculated as at the Implementation Date and compared with the actual Offer Uplift percentage that was calculated as at the Calculation Date.

15.14 Analysis of these scenarios assumed to occur between the Calculation Date and the Implementation Date shows that in scenarios such as those with a likelihood of occurring of 1-in-10 years32, the Offer Uplift percentage that would be calculated at the Implementation Date would be:

 0.7 percentage points higher (so an Offer Uplift percentage of 7.2%) following a 1-in-10 year fall in the value of equities;

 0.8 percentage points lower (so an Offer Uplift percentage of 5.7%) following a 1-in-10 year increase in the value of equities;

 0.4 percentage points higher (so an Offer Uplift percentage of 6.8%) following a 1-in-10 year increase in interest rates; and

 0.6 percentage points lower (so an Offer Uplift percentage of 5.8%) following a 1-in-10 year decrease in interest rates.

15.15 In summary, this analysis shows for 1-in-10 year market changes:

 The maximum uplift that the Included Policyholders could have received if the Offer Uplift percentage had not been locked in would be around 7.2%, or a 0.8 percentage points increase to the asset shares of their Included Policies; and

32 This refers to a change in the value of equities or a change in interest rates that is severe enough that it would have a likelihood of occurring over the next year of 1-in-10.

 The maximum shortfall the RL Open Fund Estate would need to cover is 0.7% of the Included Policies’ asset shares at the Implementation Date.

Based on the 31 March 2021 asset shares of the UFOB Sub-Fund of £2.6 billion (as shown in Table 7.1), this is approximately £18.1 million (or 0.5% of the RL Open Fund Estate based on its value at 31 March 2021 also shown in Table 7.1).

The RL Open Fund would not be compensated for this risk through the CFC payment as the CFC only covers non-market risk components of the capital requirements.

However, as concluded in Section 9, in my view it is fair and reasonable for UFOB Additional Account not to compensate the RL Open Fund (through the CFC) for market risk as this would be as a result of a conscious decision by the RL Open Fund not to hedge itself against such (avoidable) market risk.

15.16 I am satisfied that that the possibility of adverse changes in investment markets between the Calculation Date and the Implementation Date would not have a material adverse effect on policyholder outcomes.

Analysis of the effects of changes to the expected run-off pattern of UFOB policies

15.17 RLMIS has carried out some analysis of the possible impacts relevant to the Scheme relating to the pattern of surrenders of Eligible Policies that could occur in the period between the Calculation Date and the Implementation Date.

15.18 For the UFOB Sub-Fund, the majority of policies are pension policies and so exposure to death claims is low. Policyholders of the UFOB Sub-Fund are also contacted regularly through annual statements and so it is unlikely that the Scheme mailings would cause a significant “disturbance effect” whereby policyholders are reminded of their policy resulting in higher than normal surrenders.

15.19 The most plausible scenario for changes in policy run-off in the period between the Calculation Date and the Implementation Date is therefore that policyholders may hold off surrendering their policies until after the Implementation Date in order to benefit from the Offer Uplift, resulting in a lower lapse rate than that assumed in the best estimate assumptions.

15.20 The impact of this scenario would be more Eligible Policies would become Included Policies at the Implementation Date and so the amount required to uplift asset shares at this point would be greater than assumed in calculating the best estimate uplift. For the avoidance of doubt, the Included Policies would continue to receive their locked- in Offer Uplift percentage of 6.4% and so would not lose out from these changes in policy run-off over this period.

15.21 Any Eligible Policies exiting over the period between the Calculation Date and the Implementation Date would still receive the current 2021 BAU Uplift on claim values of 5.8%, and so the impact of these adverse scenarios is limited to the excess of the Offer Uplift percentage over this BAU claim uplift (6.4% - 5.8% = 0.6%). That is an additional 0.8% of the asset share on these non-occurring (relative to best estimate) exits would need to be made up by the RL Open Fund Estate at the Implementation Date.

15.22 Analysis of this scenarios shows that a 1 percentage point decrease in surrender volumes (relative to a best estimate surrender assumption over this period of 2.5%) would result in a deficit in the UFOB Additional Account at the Implementation Date of less than 0.05% of Included Policies asset shares (or approximately £1.3 million or less than 0.05% of the RL Open Fund Estate based on its value at 31 March 2021).

15.23 I am satisfied that that the possibility of adverse changes in the expected run-off pattern of the UFOB Sub-Fund policies between the Calculation Date and the Implementation Date would not have a material adverse effect on policyholder outcomes.

100

The reduction in volatility provided by the Scheme

15.24 In the absence of the Scheme, Eligible Policyholders would be exposed to volatility in the value of the UFOB Additional Account as such volatility would affect the distributions of the UFOB Additional Account that they would receive. Such volatility could be due to changes in investment markets or to changes in the run-off of the Eligible Policies.

15.25 If the Scheme were to be implemented, the Offer Uplift percentage would be fixed at the Calculation Date thus providing protection against volatility in the value of the UFOB Additional Account. By fixing the Offer Uplift percentage at the Calculation Date, the RL Open Fund is acting as the guarantor of the application of the Offer Uplift to UFOB Sub-Fund Included Policies and is, in effect, taking on the market risk and insurance risk exposures in respect of the Included Policies of the UFOB Sub-Fund for the nine month period from the Calculation Date to the Implementation Date.

15.26 The existence of the guarantee would provide Eligible UFOB Sub-Fund Policyholders with certainty in terms of what they would receive under the proposed offer. The implementation of the Scheme would therefore remove the exposure to volatility in the value of the UFOB Additional Account between the Calculation Date and the Implementation Date and thus remove the exposure of the Eligible Policyholders to the potential downsides from such adverse scenarios.

15.27 Based on experience of previous schemes of arrangement in the UK industry, such certainty would be viewed as a positive policyholder outcome.

15.28 As set out in Section 9, the compensation paid for this certainty is that the potential upside, where conditions change and the theoretical Offer Uplift percentage as at the Implementation Date would be higher than the actual Offer Uplift percentage, is given away. The fairness of this compensation is considered in Section 9.

15.29 From the point of view of the policyholders in the RL Open Fund, I am satisfied that it is appropriate for the RL Open Fund to take on these exposures because:

 The exposures are broadly symmetrical, i.e. there is a broadly equal probability of a gain or loss of the same magnitude and so the risk represents a ‘fair bet’.

 To the extent that a cost arises as a result of changes in market conditions, it would not affect the operating profit under UK GAAP and hence would not affect ProfitShare.

 The RL Open Fund has an interest in offering a guarantee in order to minimise the risk that the Scheme does not pass the Offer Acceptance Thresholds (as defined in Section 3) and thereby maximise the chances of the Scheme being successful so that it may receive the broader benefits of the Scheme.

15.30 I am satisfied that it is reasonable for the RL Open Fund to act as a guarantor for the Offer Uplift percentages.

CONCLUSION FOR THE ADVERSE SCENARIO TEST

15.31 Taking the above into account, I am satisfied that my conclusions in relation to the Security of Policyholder Benefits Test and the Policyholder Outcomes Test would not be affected by foreseeable changes in investment conditions and/or unexpected changes in the volume or mix of business in the UFOB Sub-Fund between the Calculation Date (31 March 2021) of the Offer Uplift percentages that will be quoted in the Voting Packs and the Implementation Date of the Scheme (expected to be 31 December 2021).

15.32 I am therefore satisfied that the requirements of the Adverse Scenario Test have been met.

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16. The Policyholder Communications Test

OVERVIEW

16.1 This section of the Report summarises the outcome of the Policyholder Communications Test.

The Policyholder Communications Test The objective of this test is to consider whether the information provided to policyholders in respect of the Scheme, together with the time allowed and assistance provided to consider that information, is sufficient for policyholders to make an informed decision regarding the vote.

This includes consideration of the adequacy of the RLMIS arrangements for supporting policyholders through the process, for example:

 Helpline capacity;

 Staff training;

 The route for policyholders to object / complain; and

 The nature of any additional support for any vulnerable policyholders.

It also includes consideration of the RLMIS decision not to provide advice and guidance for Eligible Policyholders.

16.2 My analysis and conclusions in this section have been formed assuming that the UFIB Sub-Fund Scheme and the SL Fund Scheme have not been implemented.

16.3 In Section 19 I consider the implications for the UFOB Sub-Fund Scheme of the implementation of those other schemes.

THE RLMIS COMMUNICATIONS STRATEGY IN RESPECT OF THE SCHEME

16.4 I have reviewed the RLMIS communications strategy for the proposed Scheme, as described in Section 5 of this Report. The communications strategy has had input from subject matter experts across the business, the RLMIS WPA, the RLMIS WPC, and external experts, including the RLMIS legal advisers and a specialist design team.

16.5 In addition, policyholder research has been carried out to test the effectiveness of the draft communications in the development stage, in particular with the aim of ensuring that the relevant issues are clearly set out for Eligible Policyholders.

16.6 It is proposed that communications regarding the Scheme would only be sent to Eligible Policyholders. I consider this to be a reasonable approach on the basis that:

 There would be no direct changes to the policies in the RL Open Fund;

 As concluded in Section 7 and Sections 8 to 14 under the Security of Policyholder Benefits Test and the Policyholder Outcomes Test, I am satisfied that the implementation of the proposed Scheme would not have a material adverse effect on the benefits of the policies of the RL Open Fund;

 A consolidation of the UFOB Sub-Fund into the RL Open Fund would take place eventually under the terms of the UAG Scheme;

 The UFOB Sub-Fund Scheme would not lead to any changes to policies in the other RLMIS Closed Funds; and

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 Sending communications only to those policyholders that are affected by the Scheme is, in my view, consistent with the approach taken for other similar schemes (both schemes of arrangement and schemes under Part VII of FSMA).

16.7 In addition to these methods, RLMIS executed an external media campaign during the first quarter of 2021 to encourage uncontactable policyholders to re-engage with RLMIS.

16.8 If the Scheme were to be implemented then, as set out in Section 3, the remaining policies (which would include the HITM policies) would be consolidated into the RL Open Fund under the UFOB Sunset Clause. The holders of HITM policies would receive a letter notifying them of their consolidation into the RL Open Fund after the Implementation Date. I am satisfied that it is reasonable for RLMIS to notify these policyholders after the implementation of the Scheme.

16.9 I have addressed the RLMIS approach under the proposed Scheme to the HITM policies and to uncontactable policyholders in Section 18 of this Report.

THE COMMUNICATIONS PACKS

16.10 As described in paragraph 5.6, RLMIS proposes to send at least two communications by post to all Eligible Policyholders for whom it has a validated address:

 The Appetite Mailing, which was sent over an eight week period commencing 15 February 2021; and

 The Voting Pack, which will be sent over an eight week period commencing 19 July 2021, after the Convening Hearing for the Scheme.

16.11 Sample copies of the Appetite Mailing and the Voting Pack will also be made available online, via the RLMIS website, or by written request to the address specified in the legal notice.

16.12 I have reviewed working versions of both the Appetite Mailing and the Voting Pack and have provided challenge and feedback to RLMIS in respect of these. I am satisfied that this challenge and feedback has been appropriately addressed in the latest versions.

16.13 I will provide an update on the actual response rates and on the policyholder comments in relation to the Scheme in due course in my Supplementary Report.

THE CONFIRMATION MAILING

16.14 A letter will be sent to all Included Policyholders following the Implementation Date to notify them of the outcome of the Scheme and, in particular, to confirm:

 The fund consolidation is now complete;

 Their policy now resides in the RL Open Fund; and

 Any consequent changes to their policy value (i.e. asset share).

16.15 I have not yet seen a working version of this letter. I will provide an update on its contents in due course in my Supplementary Report.

THE ROUTE FOR POLICYHOLDER RESPONSES, ENQUIRIES AND OBJECTIONS

16.16 The approach described in Section 5 to dealing with policyholder responses, enquiries and objections is similar to the approach I have seen taken for other schemes of arrangement and transfers of insurance business.

16.17 RLMIS has an established support team to deal with policyholder queries, particularly over the phone. This is staffed by approximately 50 employees. This number has been determined by reference to:

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 The volume of mailing packs sent out in relation to the Scheme; and

 The expected propensity of policyholders to seek information over the phone.

16.18 RLMIS has experience from a previous scheme of arrangement and from Part VII transfers that it believes provide a reasonable indication of the likely response rate to the communications packs and the likely average length of calls.

16.19 I have reviewed the analysis carried out by RLMIS around the resources likely to be required to support policyholder queries, and I am satisfied that reasonable provision is being made for this, and that resource arrangements would be able to adapt to any higher-than-expected demand.

16.20 Further to the above, I have reviewed working versions of the telephone helpline scripts, the guidance framework and the training materials provided to the RLMIS customer services team.

SUPPORT FOR VULNERABLE POLICYHOLDERS

16.21 I have reviewed the RLMIS arrangements to support vulnerable policyholders as described in Section 5.

16.22 I am satisfied that these arrangements are sufficient to ensure that vulnerable policyholders will be adequately supported throughout the process and will not be less well informed or unfairly disadvantaged as a result of their personal circumstances.

ADVICE AND GUIDANCE

16.23 I have reviewed information provided by RLMIS on the likely costs of providing formal advice and guidance and I note:

 Under the proposed Scheme, policyholders are making a decision about the certainty of their share of the UFOB Additional Account, but policyholders are not being asked to give up e.g. guarantees on their policies in exchange for the Offer Uplift; and

 For the UFOB Sub-Fund, the cost of providing advice would be around 60% of the average uplift an Eligible Policy will receive under the Offer.

16.24 Furthermore, I have reviewed the communications strategy and policyholder communications, and I am satisfied that the information provided to Eligible Policyholders, in conjunction with the access to further information or assistance available over the phone, on request by post and on the RLMIS website, will be sufficient to ensure that Eligible Policyholders have access to an appropriate level of support to aid their decision on the Offer.

16.25 I therefore consider that the costs of providing formal advice and guidance, which would be borne by the UFOB Sub-Fund, would be disproportionate to the additional benefits it would bring to Eligible Policyholders.

16.26 Therefore, I am satisfied that the RLMIS proposal to not provide formal advice and guidance to Eligible Policyholders is reasonable.

POLICYHOLDERS OTHER THAN ELIGIBLE POLICYHOLDERS

16.27 If the Scheme were to be implemented, Non-Eligible Policyholders (consisting of policyholders holding HITM policies and/or non-profit policies in the UFOB Sub-Fund) would receive a letter from RLMIS after the Implementation Date informing them that their policy had been consolidated into the RL Open Fund.

16.28 Given that the only impact of the Scheme for Non-Eligible Policyholders would be:

 For non-profit policies, the consolidation of their policy into the RL Open Fund; and

 For HITM policies, the application of the Offer Uplift percentage to their asset share (and to future regular premiums) and the consolidation of their policy into the RL Open Fund;

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I am satisfied that it is reasonable for RLMIS to notify these policyholders after the implementation of the Scheme.

16.29 No other policyholders of RLMIS would receive communications specifically related to the UFOB Sub-Fund Scheme.

16.30 Given the following:

 The small financial impact that the Scheme is expected to have on the financial position of the RL Open Fund;

 That the Scheme would not affect the other RLMIS Closed Funds; and

 That the effort involved in understanding and reaching a decision on the Scheme and its proposals for Eligible Policyholders would be likely to be significant and so it would be difficult to justify providing the Non-Eligible Policyholders with significant volumes of communications on the Scheme when there is unlikely to be a material effect on their benefits,

16.31 I am satisfied that this is reasonable.

MY CONCLUSION FOR THE POLICYHOLDER COMMUNICATIONS TEST

16.32 I am satisfied that:

 The information provided to Eligible Policyholders in respect of the Scheme, together with the time allowed to consider that information, would be sufficient for Eligible Policyholders to make an informed decision regarding the Offer and the vote;

 the RLMIS decision not to provide advice and guidance for Eligible Policyholders is reasonable; and

 The proposed approach to only send communications regarding the Scheme to Eligible Policyholders is reasonable.

16.33 I am therefore satisfied that the requirements of the Policyholder Communications Test have been met.

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17. The Policyholder Vote Test

OVERVIEW

17.1 This section of the Report summarises the outcome of the Policyholder Vote Test.

The Policyholder Vote Test The objective of this test is to consider whether the various features of the policyholder vote that are required before the Scheme could be sanctioned by the High Court and implemented are fair and reasonable to all policyholders. In particular, I have considered the following:

 The number of voting classes and the class composition;

 The approach to the calculation of the value given to each vote in the interpretation of the results of the vote; and

 The requirements for the proposals to be approved.

THE VOTING CLASSES

17.2 As described in paragraph 4.13, it is proposed that there should be a single voting class for the proposed UFOB Sub-Fund Scheme.

17.3 The external legal advisers of RLMIS have carried out a due diligence exercise on the policies of the UFOB Sub- Fund and this included consideration of the terms and conditions of Eligible Policies, as well as the legal rights of the Eligible Policyholders. One of the primary purposes of this due diligence was to identify any class tensions that might suggest that the Eligible Policyholders should be subdivided into more than one voting class.

17.4 The external legal advisers have conducted an analysis of the Scheme and concluded that the only areas that risk giving rise to class or fairness tensions under the RLMIS proposals relate to the fact that, under the analysis shown in Sections 8 to 14, and under the RLMIS central projection, holders of policies with short remaining terms are projected to receive a higher distribution of the UFOB Additional Account under the Scheme than they would have received in the absence of the Scheme, with the opposite being true for holders of policies with long remaining terms. It should be noted that there exists significant uncertainty around the level of future distributions of the UFOB Additional Account in the absence of the Scheme.

17.5 In the case of the outcomes that could vary by remaining term, the RLMIS legal advisers have highlighted the importance of ensuring that all relevant fairness considerations are addressed in communications to policyholders and the High Court.

17.6 The other areas considered by the RLMIS legal advisers in relation to class and fairness tensions were as follows. In all cases the RLMIS legal advisers concluded that these areas would not lead to class or fairness tensions:

 The presence of HITM policies in the UFOB Sub-Fund;

 The existence of both life and pension policies in the UFOB Sub-Fund;

 The entitlement to ProfitShare allocations;

 The differing circumstances of policyholders;

 Premium Uplift Contribution;

 Differences in Vote Value approach;

 Policies held in more than one consolidating sub-fund;

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 Some different characteristics of the UFOB Sub-Fund life products; and

 Some different characteristics of the UFOB Sub-Fund pension products.

17.7 Eligible Policyholders who have more than one Eligible Policy would only be able to vote once and would not get a vote for each of their Eligible Policies. However, each of their Eligible Policies would contribute to their Vote Value, as discussed below.

17.8 In my view, the matter of voting classes is predominantly a legal issue and I sought the opinion of my legal adviser (Freshfields) to also consider this point. On the basis of the information provided by Pinsent Masons and RLMIS, Freshfields have not identified any potential issues around a single voting class.

17.9 Having considered both sets of advice I am satisfied that it is reasonable to provide for a single voting class.

THE APPROACH TO THE CALCULATION OF THE VOTE VALUE

17.10 The weighting that will be attached to an Eligible Policyholder’s vote (i.e. the Vote Value) used in assessing the vote result would be:

 The sum of the amounts payable on a claim under all of the policyholder’s Eligible Policies at the Calculation Date; plus

 The sum of contractual future premiums on all of the policyholder’s Eligible Policies in the UFOB Sub-Fund from the Calculation Date until their contractual endpoint.

17.11 Using benefits payable would ensure consistency between the Eligible Policyholder’s interest in the UFOB Sub- Fund (as the Vote Value is summed across all of their Eligible Policies) and the basis underlying the Vote Value.

17.12 Benefits available on a claim do not directly represent the benefit of the Scheme for each Eligible Policy as the uplift would be applied to asset share but the claim value of a policy should be a reasonable proxy for the asset share (as the uplift would be a single percentage applied across the Included Policies) and is a value that should be understood by policyholders.

17.13 Furthermore, including an allowance for future premiums in the Vote Value would reflect the additional interest that Eligible Policyholders paying contractual regular premiums have in the Scheme since the Offer Uplift would be applied to their asset share and also in respect of future contractual premiums as and when the premiums are paid.

17.14 For the purposes of the Vote Value it is reasonable to use the sum of future premiums as a proxy for a more accurate value calculated using a discount rate and various decrements.

17.15 In light of the above, I am satisfied that setting the Vote Value to be the amounts payable on claim plus the sum of future contractual premiums is a reasonable approach and one that should help to achieve alignment between the weighting attached to the policyholder’s vote and the relative financial significance of the Offer for that policyholder.

THE REQUIREMENTS FOR THE PROPOSALS TO BE APPROVED

17.16 As described in Section 3, the Offer Acceptance Thresholds are:

 Threshold 1: More than 50% of the Eligible Policyholders who vote on the Offer must vote in favour of the Offer; and

 Threshold 2: Those Eligible Policyholders who vote in favour of the Offer must represent at least 75% of the Vote Value of those voting.

17.17 The above thresholds are legal requirements for schemes of arrangement. While RLMIS has no discretion in relation to Threshold 1, which requires that a majority (by number) of the voting Eligible Policyholders approve the

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Offer, it has an element of discretion in relation to Threshold 2 in terms of the approach it uses to determine the Vote Value.

17.18 As set out above, I am satisfied that the approach used to determine the Vote Value underlying Threshold 2 is reasonable.

17.19 Once the results of the vote are known, it will be important that RLMIS can demonstrate to the High Court why it is appropriate for the High Court to sanction the Scheme in light of the results of the vote. In particular, in deciding whether to sanction the Scheme, the High Court will give consideration to whether:

 The requirements of the Companies Act 2006 have been complied with;

 The Eligible Policyholders were fairly represented by those who voted, and those who voted in favour of the Scheme are acting without the intention of promoting interests that are adverse to the group of Eligible Policyholders overall;

 Whether an intelligent (or informed) and honest person, as a member of the group of Eligible Policyholders and acting in respect of his own interest, might reasonably approve the Scheme; and

 Whether there is any technical or legal defect in the Scheme.

17.20 I will comment on the results of the vote in my Supplementary Report.

THE VOTING ARRANGEMENTS FOR PENSION SCHEMES FOR WHICH RLMIS IS THE TRUSTEE

17.21 As described in Section 4, RLMIS is the trustee for two pension schemes in the UFOB Sub-Fund. These are the UFI PPS and the UFI ACP and the voting arrangements for these pension schemes are:

 For the UFI PPS which holds the APP and PP policies, RLMIS is the trustee but the policies are written such that the members of the pension scheme are the legal holders of these policies. The members of the UFI PPS would therefore automatically be Eligible Policyholders and would be able to vote on the proposed UFOB Sub- Fund Scheme.

 For the UFI ACP which holds the FSAVC policies and for which RLMIS is currently the legal creditor, a Deed Poll would be executed following the Convening Hearing (subject to agreement from the High Court) to allow the underlying scheme members with Eligible Policies to vote on the proposed UFOB Sub-Fund Scheme.

17.22 It would not, in my view, be appropriate for RLMIS to vote on the UFOB Sub-Fund Scheme on behalf of the UFI ACP scheme members as RLMIS would be expected to vote in favour of the UFOB Sub-Fund Scheme, and so could influence the outcome, and I am therefore satisfied that it is appropriate to execute the Deed Poll to allow the underlying members of the UFI ACP with Eligible Policies to vote on the proposed UFOB Sub-Fund Scheme.

OTHER CONSIDERATIONS

17.23 Eligible Policyholders who have more than one Eligible Policy would only be able to vote once and would not have a separate vote for each of their Eligible Policies. However, each of their Eligible Policies would contribute to their Vote Value, as defined in paragraph 4.19.

17.24 I am satisfied that this is reasonable for the following reasons:

 The fact that an Eligible Policyholder has more than one policy in the UFOB Sub-Fund would be reflected in the assessment against Threshold 2, which is significantly higher in terms of the requirement for success than Threshold 1;

 If it were to be implemented, the Scheme would apply to all Included Policies and so I think it unlikely that an Eligible Policyholder would rationally wish to exercise a different vote for different policies within the UFOB Sub-Fund; and

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 I understand that the approach being taken in this regard is consistent with the legal advice received by RLMIS and with practice in relation to other schemes of arrangements involving retail life insurance business.

MY CONCLUSION FOR THE POLICYHOLDER VOTE TEST

17.25 I am satisfied that the proposed approach to the policyholder vote is fair and reasonable to all policyholders.

17.26 I am therefore satisfied that the requirements of the Policyholder Vote Test have been met.

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18. The Fair Conduct Test

OVERVIEW

18.1 This section of the Report summarises the outcome of the Fair Conduct Test.

The Fair Conduct Test The objective of this test is to consider whether the conduct of RLMIS in respect of the proposed Scheme is fair and reasonable to all policyholders. In particular, I have considered the following:

 The approach to eligibility for the Offer;

 The charging of 100% of the costs of the UFOB Sub-Fund Scheme and relevant costs of the wider Simplification Programme to the UFOB Additional Account (rather than 50% in line with the UAG Scheme);

 The treatment of uncontactable policyholders; and

 The compulsion of non-respondents and those who vote against the Offer.

THE APPROACH TO ELIGIBILITY FOR THE OFFER

18.2 The UFOB Sub-Fund policies are almost all with-profits policies and, apart from rider benefits on these with-profits policies and around 11,500 non-profit policies, there are no other policy types (such as unit-linked) in the fund. Therefore, with the exceptions listed below, all policyholders with policies in the UFOB Sub-Fund are Eligible Policyholders.

18.3 The with-profits policies of the UFOB Sub-Fund that will not be eligible for the Offer are:

 Policies for which the legal owner(s) of the policy are deceased;

 Policies that will have reached their scheduled maturity date, where applicable, ahead of 31 December 2021;

 Policies classified as HITM (see paragraph 3.3);

 Policies that have otherwise been claimed as at the Calculation Date; and

 Policies that have ceased to be entitled to receive benefits in accordance with the policy terms as at the Calculation Date.

18.4 Given that it is currently the RLMIS practice to apply asset share uplifts to HITM policies when UFOB Additional Account distributions are made, it seems reasonable that HITM policies’ asset shares should receive the Offer Uplift if the Scheme were to be implemented, despite HITM policies not being eligible to vote on the Scheme.

18.5 In practice, while HITM policies’ asset shares would receive the uplift, an HITM policy would only receive a higher pay-out on claim as a result of the uplift if:

 The holder of the policy were to elect to access their policy benefits on a date on which their guaranteed benefits did not apply; or

 Investment returns on assets backing asset shares were to exceed expectations to such a degree that the guaranteed benefits would no longer be in-the-money.

18.6 The RLMIS legal advisers have considered the proposed exclusion of HITM policies and consider that the exclusion of HITM policies from the scope of the Scheme to be reasonable.

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18.7 In my view it is reasonable to exclude the HITM policies from the scope of the Scheme for the following reasons:

 If the Scheme were to be implemented, holders of HITM policies would not (other than in the relatively limited circumstances listed above) be giving anything up and therefore there is no compromise.

 The Scheme would not (other than in the relatively limited circumstances listed above) affect the level of pay- out on the HITM policies and so holders of HITM policies invested in the UFOB Sub-Fund would not benefit from the uplift.

 The HITM policies’ asset shares would receive the Offer Uplift to asset share (outside of the provisions of the Scheme), and therefore excluding them from the Scheme would not preclude them from receiving the benefit of the Offer Uplift in the circumstances set out above.

 The effort involved in understanding and reaching a decision on the Scheme and its proposals for Eligible Policyholders is likely to be significant and it is difficult to justify providing the holders of HITM policies with significant volumes of communications on the Scheme when there is unlikely to a material effect on their benefits.

 Inclusion of the HITM policies in the Scheme would require the HITM policies to be considered as a different voting class to the other Included Policies. Given the low numbers of HITM policies and the lack of impact of the Scheme on HITM policies presents, it would be likely that holders of HITM policies would not wish to read, digest and vote on a lengthy communication from RLMIS on a proposal that did not materially affect them.

18.8 I am also satisfied that the RLMIS approach to identifying which policies are classified as HITM is reasonable. In particular, RLMIS has erred on the side of prudence in this regard by only classifying policies as HITM if they are expected never to benefit from the Scheme (rather than simply not benefiting from it if they claim immediately).

18.9 Overall, I am satisfied that the approach to eligibility for the Offer is reasonable.

THE CHARGING OF 100% OF THE COSTS OF THE UFOB SUB-FUND SCHEME AND THE RELEVANT COSTS OF THE WIDER SIMPLIFICATION PROGRAMME TO THE UFOB SUB-FUND

18.10 As set out in Section 3 of this report, it is currently the case that, pursuant to the UAG Scheme, any costs deemed to be exceptional costs (as defined in the UAG Scheme) that would be allocated to the UFOB Sub-Fund should be charged 50% to the UFOB Sub-Fund and 50% to the RL Open Fund.

18.11 However, in respect of the costs of the proposed Scheme and of the wider Simplification Programme, although RLMIS would consider these to be exceptional costs, it is proposing that as part of the compromise with its policyholders under the UFOB Sub-Fund Scheme, the costs of the Scheme and the wider simplification programme should be met 100% by the UFOB Sub-Fund rather than shared equally between the UFOB Sub-Fund and the RL Open Fund.

18.12 In respect of this approach to the allocation of the costs of the UFOB Sub-Fund Scheme and the relevant costs of the wider Simplification Programme I note that:

 The change to a 50:50 allocation of these costs would remove £8.5 million of costs from the UFOB Sub-Fund. In the context of total asset shares of £2.6 billion (as at 31 March 2021) the effect on the Offer Uplift would be small;

 The RLMIS WPA is satisfied that this allocation of costs is fair and reasonable;

 The allocation of costs has been reviewed by the WPC; and

 The external legal advisers (Pinsent Masons) has confirmed that the RLMIS approach is consistent with Part 26 of the Companies Act 2006.

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18.13 This change to the allocation of the costs of the UFOB Sub-Fund Scheme and those costs of the wider Simplification Programme that would be allocated to the UFOB Sub-Fund is part of the compromise between RLMIS and the UFOB Sub-Fund policyholders set out in the UFOB Sub-Fund Scheme. The compromise implemented by way of the UFOB Sub-Fund Scheme should be viewed in its totality as the viewing of individual parts in isolation can be misleading. For example, some parts of the scheme might appear in isolation to favour policyholders (such as the uplift to asset shares) and some to favour RLMIS.

18.14 It is therefore important that the policyholders are made aware of all the different aspects of the compromise under the proposed UFOB Sub-Fund Scheme on which they are being asked to vote. This is the main reason for the Communications Test (in Section 16) and in respect of the proposed change to the allocation of the costs of the Scheme and the wider Simplification Programme I am satisfied that RLMIS is making this clear in their communications with policyholders regarding the UFOB Sub-Fund Scheme. I also make this clear in my summary report which is part of those communications.

18.15 I am satisfied that RLMIS’s approach to this aspect of the compromise is reasonable.

THE TREATMENT OF UNCONTACTABLE POLICYHOLDERS

18.16 I have reviewed the RLMIS strategy for re-engaging with previously uncontactable policyholders (i.e. gone-away and ‘address unknown’ policyholders) as described in Section 3 of this Report, and I am satisfied that the steps that have been taken to minimise the number of uncontactable Eligible Policyholders are reasonable.

18.17 In respect of the approach to ensuring that uncontactable policyholders are treated fairly under the Scheme, I note that:

 Based on my assessments under the Fairness Tests I am satisfied that the Scheme would be fair and reasonable to policyholders overall and that the Offer should be attractive to a large number of Eligible Policyholders. The findings from policyholder research conducted by RLMIS back this up.

 There is no reason to conclude that the benefits of the Scheme for uncontactable policyholders would be any different than for other Eligible Policyholders and therefore there is no reason to believe that the Scheme would be any more or less appealing to uncontactable policyholders or that such uncontactable policyholders would vote any differently to the (contactable) Eligible Policyholders who elect to vote on the Scheme.

 Although not a sufficient reason in isolation, for the avoidance of doubt, the RLMIS approach is consistent with that used for other similar schemes of arrangement.

18.18 I therefore consider it appropriate for RLMIS to include uncontactable policyholders within the scope of the Scheme and that uncontactable policyholders would be bound by the decision of the High Court in relation to the Scheme.

COMPULSION OF NON-RESPONDENTS AND THOSE WHO VOTE AGAINST THE OFFER

18.19 Under the Scheme, those Eligible Policyholders who:

 Do not respond to the notice of the Scheme or vote in the Scheme Meeting (in person or by proxy) (“non- respondents”);

 Vote against the Offer, either by post or at the Scheme Meeting (in person or by proxy); or

 Are uncontactable.

would be bound by the Scheme if it were to be implemented.

18.20 In considering whether it would be reasonable to bind non-respondents and those who were to vote against the Offer, I have considered alternatives to this approach, such as:

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 Including an opt-out mechanism in the Scheme; or

 Requiring Eligible Policyholders to opt into the Scheme (which would not require a Scheme of Arrangement).

18.21 An alternative approach, such as those listed above, would allow for the possibility of a proportion of the policies in the UFOB Sub-Fund remaining in that sub-fund after the implementation of the Scheme. This would prevent the UFOB Sub-Fund from being consolidated into the RL Open Fund until the UFOB Sunset Clause Threshold were to be reached.

18.22 However, preventing fund consolidation would remove, or reduce, the expected benefits from the proposed Scheme to the policyholders of the UFOB Sub-Fund (as described in Section 3) and so these are therefore not practical alternatives. In particular, only part of the UFOB Additional Account could be distributed, and the remaining UFOB Sub-Fund would have fewer resources to meet the costs of administering its business.

18.23 Based on my assessments under my Fairness Tests, I am satisfied that the Scheme is fair and reasonable overall and that the Offer should be attractive to a large number of Eligible Policyholders.

18.24 As described in Section 9 and as shown in Figure 9.1, the pattern of distributions of the UFOB Additional Account would be different in the absence of the Scheme compared to the way in which the UFOB Additional Account would be distributed under the Scheme.

18.25 In particular, Included Policies that exit soon after the implementation of the Scheme would be the ones most likely to benefit from the implementation of the Scheme in terms of a comparison of the uplift with their estimated additional account allocation in the absence of the Scheme. By contrast, Included Policies that exit a longer time after the implementation of the Scheme would be the ones most likely to receive a lower pay-out as a result of the Scheme’s implementation (I set out in Section 9 why I believe this outcome is, in general, reasonable).

18.26 In respect of Eligible Policyholders who do not vote on the Scheme, and in particular those policyholders classified as uncontactable, it is possible that this group of Eligible Policyholders contains a disproportionate number of policyholders who are less likely to be in a position to engage fully with the Scheme (for a number of reasons) and in relation to this group, I note the following:

 For life policies, policyholders of higher ages would be more likely to claim in the near term and so would be more likely to receive a higher pay-out as a result of the implementation of the Scheme.

 For pension policies the policyholders are not likely to be elderly.

 I have explained in Section 9 why, in general, the impact of the Scheme on the pattern of distributions of the UFOB Additional Account do not constitute material adverse changes to the reasonable benefit expectations of Included Policyholders.

18.27 I am therefore satisfied that the Eligible Policyholders who are uncontactable or who otherwise do not vote on the Scheme would not be bound by a Scheme that is inherently unfair to them.

18.28 As described in Section 4, there are two Offer Acceptance Thresholds which would need to be met by the result of the vote before RLMIS could seek the sanction of the Scheme from the High Court. However, even in the event that the Offer Acceptance Thresholds are met, RLMIS will consider all aspects of the result of the vote carefully before deciding whether to proceed to the Sanction Hearing. This would include consideration of the non- respondents and those who vote against the Offer, and whether these groups of policyholders might be more likely to suffer an adverse outcome as a result of the Scheme. I will also provide my conclusions in this regard in my Supplementary Report.

18.29 There is no reason to conclude that the benefits of the Scheme for non-respondents would be systematically any different than for other Eligible Policyholders, and therefore no reason to conclude that respondents’ and non- respondents’ interests are not aligned.

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18.30 Furthermore, I am satisfied that RLMIS has taken reasonable steps to engage as many Eligible Policyholders as possible in relation to the Offer and the associated risks, and the action that they need to take. In particular, the draft communications I have seen make it clear that the information is important, and that action is required.

18.31 I am therefore satisfied that it is appropriate for non-respondents and those who voted against the Offer to be bound by the decision of the High Court in relation to the Scheme.

MY CONCLUSION FOR THE FAIR CONDUCT TEST

18.32 I am satisfied that the conduct of RLMIS in respect of the following areas of the proposed UFOB Sub-Fund Scheme is fair and reasonable to all policyholders:

 The approach to eligibility for the Offer;

 The approach to the allocation of the costs of the UFOB Sub-Fund Scheme and the wider Simplification Programme;

 The treatment of uncontactable policyholders; and

 The compulsion of non-respondents and those who vote against the Offer.

18.33 I am therefore satisfied that the requirements of the Fair Conduct Test have been met.

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19. Other considerations arising from the Scheme

19.1 In this section I consider areas that are not covered by my Fairness Tests but that might nonetheless have a bearing on the Scheme and its impact on the RLMIS policyholders.

THE UFIB SUB-FUND SCHEME AND THE SL FUND SCHEME

Introduction

19.2 As described in Section 2, during 2021 RLMIS intends to seek the approval of the High Court for:  The UFIB Sub-Fund Scheme:

The UFIB Sub-Fund would be consolidated into the RL Open Fund and its additional account (after deduction of a Scheme Contribution) distributed to its with-profits policies.

 The SL Fund Scheme:

The SL Fund would be consolidated into the RL Open Fund and the SL Fund Estate (after deduction of a Scheme Contribution) would be distributed to eligible with-profits policies in both the SL Fund and the RL Open Fund.

19.3 The UFIB Sub-Fund Scheme and the SL Fund Scheme would, if approved by the High Court, become effective on the same day as the UFOB Sub-Fund Scheme (i.e. 31 December 2021).

19.4 The UFIB Sub-Fund Scheme and SL Fund Scheme are similar to the UFOB Sub-Fund Scheme in that they would involve the distribution of the UFIB Additional Account and the SL Fund Estate (after deduction of a Scheme Contribution) to the with-profits policies with benefits in the relevant sub-fund, and the consolidation of the UFIB Sub-Fund and the SL Fund into the RL Open Fund. The principal differences between the UFOB Sub-Fund Scheme and the UFIB Sub-Fund Scheme and the SL Fund Scheme are:  As described in Section 2, the UFIB Sub-Fund has a different mix of business to the UFOB Sub-Fund, comprising principally IB CWP whole life and endowment business;

 As described in Section 2, the SL Fund also has a different mix of business to the UFOB Sub-Fund, comprising principally CWP and UWP pensions business, as well as a small volume of deposit administration and non- profit business;

 The financial position of the UFIB Sub-Fund is such that a special reversionary bonus is proposed to be declared on all with-profits policies in the UFIB Sub-Fund upon the implementation of the UFIB Sub-Fund Scheme;

 Only certain investments in the SL Fund are currently eligible for distributions of the SL Fund Estate and so only this portion of the asset shares of eligible policies will receive the uplift under the SL Fund Scheme; and

 Certain policies in the RL Open Fund (as well as policies in the SL Fund) may have investments in the SL Fund and so would be entitled to distributions from the SL Fund Estate.

19.5 Throughout Sections 7 to 18 of this Report, including in the financial information presented, I have considered the effects of the implementation of the proposed Scheme in isolation assuming that the UFIB Sub-Fund Scheme and the SL Fund Scheme have not been implemented, and that the UFIB Sub-Fund and the SL Fund remain in the group of RLMIS Closed Funds.

19.6 In this sub-section I consider the effects of the implementation of the proposed Scheme on the RLMIS policies in the scenario where the UFIB Sub-Fund Scheme and the SL Fund Scheme have been implemented.

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19.7 As at the Calculation Date there were:  Approximately 4,000 Eligible Policyholders who also had at least one with-profits policy in the UFIB Sub-Fund; and

 Approximately 150 Eligible Policyholders who also had at least one with-profits policy in the SL Fund.

19.8 I am satisfied that the effects of the implementation of the proposed Scheme would not be any different for these policyholders than for any of the other Eligible Policyholders.

19.9 It should be noted that there are separate processes under which the UFIB Sub-Fund Scheme and the SL Fund Scheme would be implemented. I have been appointed as the Independent Expert for both of these schemes and will be considering those processes and concluding on their fairness to policyholders in separate reports.

19.10 Therefore this section does not reach a conclusion on the fairness and reasonableness of the UFIB Sub-Fund Scheme or the SL Fund Scheme but is focused on whether the implementation of the UFIB Sub-Fund Scheme and/or the SL Fund Scheme would have any effects on my conclusions in Sections 7 to 18 regarding the implementation of the proposed Scheme.

The Security of Policyholder Benefits Test

19.11 As described in Section 7, based on financial information at 31 March 2021, the implementation of the UFOB Sub- Fund Scheme on 31 March 2021 would have resulted in:  An increase of 2.2 percentage points in the Internal SCR Cover ratio of the RL Open Fund, and so it would increase to 193%; and

 No change to the strength of the RL Open Fund capital target, which would remain as being able to withstand a 1-in-20 year event over the next year and to have sufficient Internal Own Funds to be able to meet its Internal SCR.

19.12 In the event that one of the UFIB Sub-Fund Scheme and the SL Fund Scheme were also implemented, or both were implemented at the same time as the UFOB Sub-Fund Scheme, the overall impact of the two/three schemes on the financial position of the RL Open Fund would have been:

 An immaterial change to the Internal SCR Cover Ratio of the RL Open Fund; and  No change to the strength of the RL Open Fund capital target, which would remain as being able to withstand a 1-in-20 year event over the next year and to have sufficient Internal Own Funds to be able to meet its Internal SCR.

19.13 Therefore, the overall impact of the UFIB Sub-Fund Scheme or the SL Fund Scheme (or both together) alongside this UFOB Sub-Fund Scheme on the RL Open Fund’s financial position and its SCR Cover Ratio would not have been materially different to the impact of the implementation of the UFOB Sub-Fund Scheme in isolation. The RL Open Fund would have remained within the target range under the RLMIS Capital Framework.

19.14 This is relevant because it is the financial position of the RL Open Fund after the implementation of the UFOB Sub- Fund Scheme that will largely determine the financial strength available to support the guaranteed benefits of the UFOB Sub-Fund policies that are to be consolidated into the RL Open Fund under the UFOB Sub-Fund Scheme, as well as the existing policies of the RL Open Fund.

19.15 The financial information as at 31 March 2021 shows further that the UFIB Sub-Fund Scheme, SL Fund Scheme or both together would not have a material effect on either the pre-Scheme financial position of the RL Open Fund or the pro forma position of the RL Open Fund if the proposed UFOB Sub-Fund Scheme had been implemented on this date.

19.16 I am therefore satisfied that the implementation of the UFIB Sub-Fund Scheme, the SL Fund Scheme or both together, alongside this UFOB Sub-Fund Scheme would not have any effect on my conclusions under the Security

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of Policyholder Benefits Test in respect of the policies in the RL Open Fund, the UFOB Sub-Fund and the other RLMIS Closed Funds.

The other Fairness Tests

19.17 As described above, the impact of the implementation of the UFOB Sub-Fund Scheme on the financial position of the RL Open Fund would be materially unchanged by the UFIB Sub-Fund Scheme and the SL Fund Scheme.

19.18 In respect of the RL Open Fund, the UFOB Sub-Fund, the UFIB Sub-Fund, the SL Fund and the other RLMIS Closed Funds, neither the UFIB Sub-Fund Scheme nor the SL Fund Scheme would have any effect on:

 The terms and conditions of any of the policies of any of these funds;

 The standards of servicing, management, administration, or governance applying to the policies in any of these funds;

 The terms of the proposed UFOB Sub-Fund Scheme;

 The approach to eligibility for the Offer under the UFOB Sub-Fund Scheme;

 The Offer Uplift that would be applied to the UFOB Sub-Fund under the Offer;

 The RLMIS communications strategy in relation to the proposed UFOB Sub-Fund Scheme;

 The conduct of the policyholder vote, and in particular will not affect the outcome in relation to voting classes or Vote Values;

 The treatment of uncontactable policyholders under the UFOB Sub-Fund Scheme; or

 The question of whether, if the voting thresholds were met it would be appropriate to compel non-respondents and those who vote against the Offer.

19.19 Outside of the various schemes in the Simplification Programme, RLMIS intends to make some changes to ProfitShare. As a result of these changes ProfitShare would be extended to the following investments:

 UWP monies currently invested in the SL Fund.

Currently these investments do not receive ProfitShare but these policyholders could elect to switch their UWP investments in the SL Fund to the RL Open Fund and thus receive ProfitShare on these investments.

 Investments made by all future regular premiums paid into existing UWP SL Fund policies at existing contractual levels or as new non-contractual increments to these policies.

Currently only a proportion of the investments made by these future premiums receive ProfitShare.

19.20 Neither the implementation of the SL Fund Scheme nor the changes to RLMIS’s practices in relation to ProfitShare would directly or indirectly affect the entitlement of the UFOB Included Policies (or policies in the RL Open Fund or any of the RLMIS Closed Funds) to ProfitShare or the level of ProfitShare to which these policies would be entitled. Extending ProfitShare to other investments of the SL Fund policies could, in theory, dilute the rates of these ProfitShare distributions, but this proposed change would result in around £4 million of additional ProfitShare distributions being made, which is not material enough in practice to dilute existing ProfitShare distributions.

19.21 I have discussed the likely future distributions from ProfitShare with the RLMIS WPA and senior management and I take comfort from the following:

 The intended changes to ProfitShare are expected to be financially sustainable over the medium term and would not pose unnecessary risk to the existing policyholders entitled to ProfitShare.

 The intended changes to ProfitShare would not have a material impact on the ongoing sustainability of the current levels of ProfitShare.

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 If the SL Fund Scheme were to be implemented, additional profits should emerge through the payment of the Scheme Contribution from the SL Fund, and from efficiency savings from the fund consolidation. These additional profits would increase the total expected future level of ProfitShare relative to the level in the absence of the Scheme but, as noted above, it would be spread over a larger number of policies owing to the planned changes to ProfitShare.

19.22 I am satisfied that the implementation of the SL Fund Scheme and planned changes to ProfitShare would not have a material adverse effect on the level of ProfitShare distributed to the policies of the UFOB Sub-Fund, the RL Open Fund or any of the other RLMIS Closed Funds that are eligible to receive it.

Conclusion on the impact on the UFOB Sub-Fund Scheme of the UFIB Sub-Fund Scheme and the SL Fund Scheme

19.23 I am satisfied that the implementation of the UFIB Sub-Fund Scheme and/or the SL Fund Scheme would not affect my conclusions set out in Sections 7 to 18 that if the proposed Scheme were to be implemented the requirements of all the Fairness Tests set out in Section 6 would be met.

THE IMPACT OF COVID-19

19.24 At the time of writing this Report, the COVID-19 pandemic remains ongoing, and it is therefore necessary for me to consider its effects, if any, on my conclusions in relation to the Scheme.

19.25 Of particular relevance to the Scheme are the following potential impacts of the pandemic:

 The potential for further volatility in financial markets;

 Operational disruption within RLMIS, either within the project team working on the implementation of the Scheme, or more widely within RLMIS;

 Disruption to third parties that play a role in the implementation of the Scheme, for example the High Court, the PRA, the FCA or third party suppliers of RLMIS; and

 Wider societal impacts, such as government-imposed restrictions or a significant economic downturn, that could affect the ability or inclination of Eligible Policyholders to engage with the details of the Scheme.

The potential for further volatility in financial markets

19.26 It is possible that one of the effects of the COVID-19 pandemic could be further financial market volatility such as that observed in March 2020, for example in the areas of interest rates, equity markets, property values and credit spreads33.

19.27 The principal impact of increased market volatility would be that the relative sizes of the UFOB Additional Account, the Scheme Contribution and the asset shares of the Eligible Policies of the UFOB Sub-Fund would be volatile, and therefore the size of the UFOB Additional Account after deduction of the Scheme Contribution, as a proportion of asset shares, could vary over time.

19.28 As set out in Section 3, the Offer Uplift percentage would be fixed at the Calculation Date with the RL Open Fund acting as the guarantor of the Offer Uplift percentage.

19.29 The fact that the Offer Uplift was guaranteed at 31 March 2021 and the advantages and disadvantages to policyholders of this being done was, and will be, made clear to policyholders in the communications in respect of the UFOB Sub-Fund Scheme.

33 “Credit spreads” are a concept relating to fixed interest bond investments. “Credit spread” refers to the excess of the yield on a bond over the yield that could be earned on a risk-free investment. It is generally considered to be indicative of the premium required by investors to accept the risk associated with the bond, for example the risk that the bondholder defaults on its obligations. During times of financial stress, the market price of such bonds often reduces, which indicates that investors believe that the credit spread (i.e. the level of riskiness on the bond) has increased.

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19.30 Therefore, I am satisfied that the risks from market volatility (due to COVID-19 or anything else) are mitigated and that the UFOB Sub-Fund Scheme should provide policyholders with more certainty around their ultimate claim values than would be the case in the absence of the Scheme.

Operational disruption within RLMIS

19.31 It is possible that a resurgence of the pandemic could cause operational disruption within RLMIS that could affect the implementation of the Scheme. For example, this could occur for the following reasons:

 Management attention and project resources within RLMIS are diverted to more pressing matters requiring immediate attention; or

 Resourcing shortfalls could materialise within the RLMIS project team, or within other teams within RLMIS providing input into the Scheme.

19.32 Based on my interactions with RLMIS, I am satisfied that the project team is well resourced and able to absorb unexpected events, but in the event of a severe or prolonged shortage of resources that threatens the implementation of the Scheme, I anticipate that a decision would be taken to delay the implementation.

19.33 However, I understand that RLMIS did not suffer material operational disruption during the early stages of the pandemic, and therefore I consider it unlikely that such disruption could occur in this scenario.

Disruption to third parties

19.34 A resurgence of the pandemic could cause disruption amongst third parties that are important to the implementation of the Scheme. Such third parties could include:

 the High Court;

 the FCA or the PRA;

 third party suppliers of RLMIS, such as postal services used to distribute communications packs to Eligible Policyholders; or

 third parties on which Eligible Policyholders may rely in order to fully understand and make their views known on the Scheme, such as the postal service, financial advisers, or legal advisers.

19.35 In the event that the High Court were to suffer disruption arising from COVID-19, there would be likely to be no alternative but to delay the Scheme’s implementation, and I would expect RLMIS to keep Eligible Policyholders informed of events in this scenario and their possible implications.

19.36 In the event that the FCA suffered disruption arising from COVID-19, I would expect that the FCA would inform RLMIS in the event that the disruption was likely to adversely affect the FCA’s input into the Scheme, and in extremis I would expect the FCA to request that RLMIS delay the implementation of the Scheme. In my view it would be highly unlikely that RLMIS would not agree to such a request. The PRA is less directly involved in the Scheme than the FCA, but I would expect the same to apply to the PRA if it suffered similar disruption.

19.37 In the event that third party suppliers of RLMIS suffered disruption, for example postal services used to distribute communications packs on the Scheme, I would expect RLMIS to evaluate the potential impact and take action if necessary; the principal action available to RLMIS would be likely to be to delay the implementation of the Scheme by a suitable period.

19.38 In the event that third parties on which Eligible Policyholders may rely were to suffer disruption, RLMIS would need to consider whether the nature of this disruption warranted a delay to the Scheme in order to give Eligible Policyholders more time to consider the Scheme and make their views known. As Independent Expert I would expect to be involved in such discussions and would seek to ensure that policyholders were treated fairly.

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Wider societal impacts

19.39 A resurgence of the pandemic could result in tougher government restrictions on movement or a more severe economic downturn.

19.40 Such a scenario could have the effect of making it less likely that Eligible Policyholders would be in a position, or would wish, to engage with the details of the Scheme. In this scenario, RLMIS would obviously have to consider whether it was appropriate to proceed with the Scheme based on the specific circumstances at the time. Depending on the severity of the scenario, RLMIS may elect to delay the implementation of the Scheme until more normal conditions resume. As Independent Expert, I would expect to be involved in such discussions and would seek to ensure that policyholders were treated fairly.

Conclusions in relation to COVID-19

19.41 The future course of the pandemic, the programme of vaccines, the spread of new variants, and the associated impacts on all aspects of life remain highly uncertain, and it is not possible for me to comment on every possible scenario that might eventuate. However, I have covered above the scenarios that, in my view, are the most plausible and relevant to the Scheme.

19.42 In the event that COVID-19 resulted in impacts that, in my view, rendered it inappropriate for RLMIS to continue to pursue the Scheme within the planned timeframes I would, of course, make my views on this known to RLMIS. I would also expect to be informed of any changes to the planned implementation of the Scheme.

19.43 However, based on current conditions, in my view it remains appropriate for RLMIS to continue to pursue the implementation of the Scheme.

THE FUTURE OPERATION OF THE SCHEME

19.44 If the Scheme were to be sanctioned by the High Court (and subject to any subsequent amendment of the Scheme, as considered below) and implemented, the Directors of RLMIS would be committed to implementing the Scheme as set out in the Scheme document (and reflected in this Report) in accordance with their fiduciary responsibilities under UK company law.

19.45 This Scheme would become sanctioned when a copy of the High Court Order has been delivered for registration to the Registrar of Companies and would be implemented on the Implementation Date. However, if the Scheme were not implemented before 31 March 2022, the Offer and the Scheme would lapse and none of its terms would take effect.

19.46 At any time after the High Court’s sanction of the Scheme, RLMIS must apply to the High Court for sanction of any amendments to it, except where the amendment is considered to be minor or technical. In this case, the amendment may be approved by the RLMIS Board having regard to advice from the WPA provided that the PRA and the FCA have been notified at least 60 days in advance of the amendment and have not objected to the amendment.

19.47 As described in Section 2, RLMIS is subject to a number of previous schemes, and is therefore experienced in ensuring that the provisions of those schemes are adhered to.

19.48 In my opinion there are reasonable safeguards in place to ensure that, if approved by the High Court, the Scheme will be operated as presented to the High Court.

THE EFFECT OF THE UFOB SUB-FUND SCHEME ON PREVIOUS SCHEMES

19.49 If the UFIB Sub-Fund Scheme and the UFOB Sub-Fund Scheme were to be implemented, then the UAG Scheme would be terminated and the UAG Scheme would no longer govern the business formerly of the UFIB Sub-Fund and the UFOB Sub-Fund.

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19.50 As set out in Section 6, the RLMIS actuarial team has reviewed the UAG Scheme and has confirmed that all relevant provisions of the UAG Scheme would be included in the new PPFM for the RL Open Fund, and so there would not be any material adverse effect on policyholders from the termination of the UAG Scheme. The external legal advisers (Pinsent Masons) have confirmed this conclusion.

19.51 I am satisfied that the termination of the UAG Scheme would not lead to a material adverse effect on the business currently in the UFOB Sub-Fund that would be transferred to the RL Open Fund following the implementation of the UFOB Sub-Fund Scheme.

19.52 RLMIS has not undertaken detailed reviews of any interaction between the Scheme and other previous schemes to which RLMIS is party as it does not expect there to be any issues that have a bearing on this Scheme.

THE UK TAX IMPLICATIONS OF THE SCHEME

19.53 As described in Section 6, RLMIS has conducted a review of the Scheme, supported by an external review of the Scheme Uplift, to assess the effect of the Scheme on the UK tax liabilities of the Included Policyholders.

19.54 As described at paragraph 3.14, RLMIS has concluded that no changes are required to be made to terms and conditions in conjunction with the Scheme. RLMIS has considered these conclusions from a UK product tax perspective and concluded that the changes proposed as a result of the implementation of the Scheme should not affect the tax treatment of the Included Policyholders for UK tax purposes.

19.55 I am not an expert in tax matters and hold no qualifications in UK tax and therefore I have relied on the conclusions of RLMIS’s in-house tax team as supported by the external tax experts retained by RLMIS in this regard.

19.56 As set out in Section 6 the external tax experts have not been retained by me and have no liability to me for any advice provided to RLMIS that has been made available to me in my assessment of the Scheme.

IMPACT OF THE SCHEME ON REINSURANCE ARRANGEMENTS

19.57 As set out in paragraph 2.88, certain business of the Royal Liver WPF was transferred to RLI DAC on 1 January 2019 and immediately following the Part VII transfer, certain intra-group reinsurance agreements were effected to reinsure the investments of some of the transferred contracts back to RLMIS.

19.58 The proposed Scheme would not change these intra-group reinsurance agreements and so I am satisfied the Scheme would not have a material effect on RLI DAC.

HM REVENUE AND CUSTOMS CLEARANCES

19.59 RLMIS has confirmed to me that no non-statutory business clearance requests have been made as no uncertainties in the tax legislation have been identified.

19.60 In accordance with RLMIS’s Tax Strategy, RLMIS has submitted a full explanation of the transaction and associated UK tax consequences to HM Revenue and Customs.

MEMBERSHIP RIGHTS

19.61 As described in paragraph 3.98, the implementation of the Scheme would not change the membership rights of any RLMIS policyholders, and in particular the Included Policyholders would not become members of RLMIS following the consolidation of their policies into the RL Open Fund.

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19.62 I am satisfied that this is fair and reasonable because:  Entitlement to membership is a matter for the RLMIS constitution and not for a scheme of arrangement;

 Included Policyholders are not currently members of RLMIS so this would not be an adverse effect on them and there is no reason why the distribution of an additional account/estate should bring about a change to membership rights; and

 Rights brought about by membership are largely procedural, such as the right to vote at the RLMIS Annual General Meeting on matters such as the approval of the RLMIS report and accounts and the appointment of its directors, and therefore I do not consider it to be a material adverse impact on Included Policyholders not to be accorded these rights given that they do not have these rights currently.

CHANGES TO THE RL LONG TERM FUND PPFM

19.63 RLMIS has provided me with details of the changes that it proposes to make to the RL Long Term Fund PPFM, as a result of the Scheme (and as a result of the UFIB Sub-Fund Scheme and the SL Fund Scheme). The RL Long Term Fund PPFM governs the operation of the RL Open Fund, the UFOB Sub-Fund and the UFIB Sub-Fund.

19.64 Following the implementation of the Scheme the RL Long Term Fund PPFM would be updated to reflect the fact that the UFOB Sub-Fund would no longer exist as a distinct sub-fund.

19.65 The changes are required to reflect the changes as a consequence of the implementation of the Scheme. Examples of changes relevant to the Scheme include:  Removal of references to the UFOB Additional Account;

 Inclusion of references to the Scheme (and any other scheme of arrangement) and consequent implications for the management of the fund;

 Reference to the one-off distribution of the UFOB Additional Account upon consolidation into the RL Open Fund;

 Updated definition of the RLMIS Closed Funds; and

 Updated structure diagram.

19.66 I am satisfied that these changes reflect the impact of the Scheme upon the operation of RLMIS, and therefore that they are reasonable. Any changes proposed that do not relate to the impact of the Scheme appear to be both minor and purely presentational and therefore are not of concern.

THE PRA’S PROPOSED CHANGE TO THE INTEREST RATE CURVE UNDER SOLVENCY II

19.67 In line with current UK Solvency II regulations, RLMIS uses a set or curve of duration dependent risk-free interest rates derived from the London Interbank Offered Rate (the “LIBOR”) swap rates to value the best-estimate liabilities in each of its with-profits funds.

19.68 In January 2021, the PRA published a consultation paper (CP 01/21) setting out proposals for how the risk-free interest rate curve for GBP liabilities under the UK regulatory solvency regime will be determined using the Sterling Overnight Index Average (the “SONIA”) rates rather than the LIBOR in the second half of 2021 (with 31 July 2021 being the earliest possible date).

19.69 In June 2021, the PRA published a Policy Statement (PS12/21), in which it confirmed that from 31 July 2021 the risk-free interest rate curve for GBP liabilities under the UK regulatory solvency regime will be determined using the SONIA rates.

19.70 This change is independent of RLMIS and of the UFOB Sub-Fund Scheme.

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19.71 On the basis of PS12/21, RLMIS does not expect the move to SONIA to have a material impact and so has not made any adjustment to the Offer Uplift percentage in respect of the proposed transition from LIBOR to SONIA and I am satisfied this is reasonable.

SOME ALTERNATIVE COURSES OF ACTION TO THE SCHEME

Introduction

19.72 RLMIS has considered a number of possible alternatives to the Scheme (and to subsequent proposed schemes of arrangement under Project Skye):  An “Amendment to Scheme” process, similar to that used for the RAIB Sub-Fund Consolidation.

 The internal reinsurance of the liabilities of the UFOB Sub-Fund to the RL Open Fund.

 The external reinsurance of the liabilities of the UFOB Sub-Fund to a third party.

 The sale of the business in the UFOB Sub-Fund.

 Take no action and allow the UFOB Sub-Fund to run-off.

19.73 I have considered these alternatives in order to satisfy myself that the implementation of the Scheme as constituted is not a materially inferior option in terms of potential outcomes for policyholders relative to the options considered by RLMIS as available alternatives. This is not strictly within the scope of the Independent Expert’s work and has been included to show the alternatives considered by RLMIS and to give confidence in the process by which the decision to undertake the Scheme was made. This list should not be considered a complete list of all possible alternatives or the best possible alternatives. I consider each of these alternatives below.

Amendment to Scheme

19.74 The RAIB Sub-Fund Consolidation was carried out via an amendment to the RAIB Sunset Clause Threshold as set out in the PFMs contained in the UAG Scheme. This process is called an “Amendment to Scheme” process and does not require a High Court application or the approval of the High Court.

19.75 Given the relatively short time (approximately two years) until the RAIB Sub-Fund was expected to breach the RAIB Sunset Clause Threshold, the Amendment to Scheme process did not require a material change to the RAIB Sunset Clause Threshold for the RAIB Sub-Fund.

19.76 However, as the UFOB Sub-Fund is not expected to meet the UFOB Sunset Clause Threshold until 2039, the UFOB Sunset Clause Threshold would have to be increased from £100 million currently to around £2.6 billion in order to facilitate an amendment to scheme process for the UFOB Sub-Fund.

19.77 I am satisfied that the Amendment to Scheme process would not be appropriate for the UFOB Sub-Fund.

Internal or external reinsurance

19.78 The reinsurance of the liabilities of the UFOB Sub-Fund to the RL Open Fund or an external third party would achieve the transfer of risk from the UFOB Sub-Fund but would not:

 Simplify the RLMIS fund structure by reducing the number of RLMIS Closed Funds; or

 Provide reduced reporting and accounting overheads.

19.79 Furthermore, reinsurance would give rise to additional operational and oversight costs to manage the reinsurance arrangement, with some portion of this being charged to the UFOB Sub-Fund, and residual capital requirements would need to be held in the UFOB Sub-Fund and covered by the UFOB Additional Account.

19.80 It is also far from certain that an external reinsurer would have the appetite to take on all of the risks associated with the wide range of relatively complex with-profits business in the UFOB Sub-Fund.

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19.81 For these reasons, I am satisfied that it is reasonable for RLMIS to pursue the Scheme rather than a reinsurance arrangement.

Sale of the business in the UFOB Sub-Fund

19.82 Analysis of historical transactions of insurance business undertaken by RLMIS indicates that if RLMIS were to sell the business in the UFOB Sub-Fund then it could expect to receive around 70% of the Value of In-Force business34.

19.83 A sale agreed on these terms would represent a considerable loss in value and would arguably not be in the interests of the RLMIS policyholders. There would also be no guarantee of the price that would be achieved, or that a willing buyer would be found, and there would be considerable costs associated with a sale process.

19.84 A sale of the business in the UFOB Sub-Fund would not be aligned to the RLMIS wider business strategy, which has been to acquire back books over time with any disposals being fairly minor. Also, depending on the terms of the sale, the outcome of a sale for policyholders of the UFOB Sub-Fund would not necessarily be a distribution of the additional account of those sub-funds.

19.85 For these reasons, I am satisfied that it is reasonable for RLMIS to pursue the Scheme rather than a sale of the business.

Take no action

19.86 RLMIS could maintain the status quo and allow the UFOB Sub-Fund to run-off until it reaches the UFOB Sunset Clause Threshold, at which point it would be consolidated into the RL Open Fund.

19.87 In the absence of the Scheme:

 The UFOB Sub-Fund would continue to be managed on a stand-alone basis, with the assets of the UFOB Additional Account covering the UFOB Sub-Fund’s capital requirements (and buffer above this in line with the RLMIS Capital Framework) with no assumed diversification of risks between the UFOB Sub-Fund and the RL Open Fund (or any of the other RLMIS Closed Funds).

 The speed at which the UFOB Additional Account could be distributed to the with-profits policyholders in the UFOB Sub-Fund would continue to be constrained by the requirement for the UFOB Additional Account to cover these capital requirements.

 On reaching the UFOB Sunset Clause Threshold, the cost of implementing the fund consolidation of the UFOB Sub-Fund into the RL Open Fund would be spread over a smaller number of policies.

These costs would, in the absence of a Court process, be expected to be lower in total but, given the likely requirement for actuarial and legal advice, it is expected that the overall per-policy costs (all else being equal) would increase.

19.88 On the other hand, in the absence of the Scheme, the UFOB Additional Account would not be reduced by a Scheme Contribution payment to the RL Open Fund, so that, all else being equal, a larger overall amount would be available to distribute to with-profits policyholders in the UFOB Sub-Fund. The trade-off to this is that, in the absence of the Scheme, the UFOB Sub-Fund would bear the risk of future adverse outcomes, which could result in an erosion of the additional account over time.

19.89 I have considered the balance of the benefits and costs to Included Policyholders in Section 9 of this Report and concluded that it is fair and reasonable. Moreover, it would be fairer to distribute the UFOB Additional Account sooner rather than later to ensure that as many policyholders as possible are able to benefit from the distribution.

19.90 The “no action” option would delay this distribution owing to the constraints imposed by the requirement to meet the UFOB Sub-Fund’s capital requirements, and would result in the costs of meeting those capital requirements falling upon the policyholders who are more likely to claim in the near future (as these policyholders will receive a

34 The Value of In-Force business represents the discounted value of the profits expected to arise from the relevant in-force business.

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lower estate distribution under the “no action” option as distributions are constrained until capital requirements are released).

19.91 By contrast, the policyholders who are more likely to be a long way from making a claim and whose policies arguably impose the more onerous capital requirements are the ones who are more likely to benefit from the “no action” option through a higher estate distribution, albeit they are subject to greater uncertainty around this.

19.92 I am therefore satisfied that it is reasonable for RLMIS to pursue the Scheme rather than taking no action.

My conclusions in respect of the possible alternatives to the Scheme

19.93 I am satisfied that it is reasonable for RLMIS to pursue the Scheme rather than the alternatives listed in paragraph 19.72.

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20. My conclusions

20.1 This Report sets out my analysis of the proposals for the UFOB Sub-Fund Scheme in respect of each of the Fairness Tests and various other considerations in Sections 6 to 19.

20.2 I am satisfied that if the proposed UFOB Sub-Fund Scheme were to be implemented there would not be a material adverse effect on:

 The security of guaranteed benefits of the policies of RLMIS;

 The reasonable benefit expectations of policyholders of RLMIS; and

 The standards of administration, servicing, management, and governance applying to the policies of RLMIS.

20.3 I am further satisfied that:

 The Scheme would remain fair and reasonable under a range of circumstances and scenarios.

 The proposal to include uncontactable policyholders within the scope of the Scheme is appropriate.

 The proposed approach to the policyholder vote is fair and reasonable.

 In respect of the following areas the conduct of RLMIS in respect of the proposed Scheme is fair and reasonable to all policyholders:

o The approach to eligibility for the Offer;

o The approach to the allocation of the costs of the UFOB Sub-Fund Scheme and the wider Simplification Programme;

o The treatment of uncontactable policyholders; and

o The compulsion of non-respondents and those who vote against the Offer.

20.4 I am therefore satisfied that the requirements of the Fairness Tests set out in Section 6 have been met.

20.5 I have considered the impact of the COVID-19 pandemic on my conclusions in Section 19, and in my view it remains appropriate for RLMIS to continue to pursue the implementation of the Scheme in current conditions.

20.6 I am satisfied that these conclusions would hold whether or not the UFIB Sub-Fund Scheme and the SL Fund Scheme were to proceed.

20.7 I will review the following in my Supplementary Report:

 An update on the effect of the implementation of the Scheme based upon more up to date financial information and on any other material developments since the date of this Report.

 The results of the policyholder vote.

 The actual response rates and policyholder comments in relation to the Scheme.

 The communication materials in respect of the UFOB Sub-Fund Scheme due to be issued to policyholders after the implementation of the Scheme.

 Consideration of the non-respondents and those who vote against the Offer, and whether these groups of policyholders might be more likely to suffer an adverse outcome as a result of the Scheme.

 Any significant events or market changes that may occur between the finalisation of this Report and the finalisation of my Supplementary Report.

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Oliver Gillespie 1 July 2021

Partner of Milliman LLP

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21. Reliances and limitations of this Report

MATTERS CONSIDERED

21.1 As far as I am aware, there are no matters that I have not taken into account in undertaking my assessment of the Scheme proposals and in preparing this Report that nonetheless should be drawn to the attention of policyholders in their consideration of the terms of the Scheme proposals.

21.2 I will prepare a further report (the “Supplementary Report”) prior to the Sanction Hearing to provide an update for the High Court on my conclusions on the impact of the implementation of the Scheme on the different groups of policyholders in light of any significant events subsequent to the date of the finalisation of this Report.

INFORMATION AND DATA PROVIDED

21.3 In preparing this Report, I have had access to certain documentary evidence provided by RLMIS and I have had access to, and discussions with the senior management of RLMIS. My conclusions depend upon the substantial accuracy of this information and I have relied on this information without independent verification. I have considered, and am satisfied with, the reasonableness of this information based upon my own experience across the UK life assurance industry.

21.4 In addition to the principal documents listed in Appendix C to this Report, I have also relied upon the accuracy of financial information which has been provided to me by RLMIS. There has been no information that I have requested that has not been provided.

21.5 In order to get a sound legal understanding of the Scheme I considered it necessary to obtain independent legal advice and I have relied upon the independent legal advice provided to me by Freshfields in relation to certain aspects of the Scheme.

21.6 RLMIS has been advised by its own legal advisers, Pinsent Masons, and, in respect of certain matters, I have reviewed the legal advice provided by Pinsent Masons to RLMIS and have relied on that advice in reaching my conclusions on the basis set out in Section 6. I have described in Section 6 why I believe it is reasonable to rely on advice given to RLMIS by Pinsent Masons. For the avoidance of doubt, Pinsent Masons has no liability to me in respect of that advice.

USE OF THIS REPORT

21.7 This Report must be considered in its entirety as individual sections, if considered in isolation, may be misleading. Draft versions of this Report should not be relied upon for any purpose. I have provided a summary of this Report for inclusion in the Policyholder Circular in the Voting Pack (and, where relevant, distribution to any persons requesting a copy of it); other than this, no summary of this Report may be made without my express consent.

21.8 This Report has been prepared on the basis of terms of reference agreed with RLMIS, for use by the High Court, RLMIS and the other bodies listed below in the context of the Scheme and must not be relied upon for any other purpose. No liability will be accepted by Milliman, or me, for any application of this Report to a purpose for which it was not intended, nor for the results of any misunderstanding by any user of any aspect of this Report. In particular, no liability will be accepted by Milliman or me under the terms of the Contracts (Rights of Third Parties) Act 1999.

21.9 This Report, the summary of this Report and the Supplementary Report do not provide financial or other advice to individual policyholders. In particular, in this Report, I have considered the impact of the Scheme on different groups of policyholders at what I believe is a level of granularity that is sufficient for me to make an assessment of the overall fairness of the terms of the Scheme. However, I have not considered the terms of offers made at the level of individual policyholders. Affected policyholders may wish to consider seeking guidance or advice before

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making a decision on the course of action that is most suitable for their individual circumstances and this Report is not a substitute for such advice or guidance.

THE PARTIES FOR WHOM THIS REPORT HAS BEEN PREPARED

21.10 This Report, and any extract or summary thereof has been prepared particularly for the use of:

 The High Court;

 The Directors and senior management of RLMIS;

 The RLMIS WPC;

 The PRA and the FCA as the regulators of RLMIS; and

 The insurance regulator of any EEA country who requests a copy of this Report.

21.11 I am available to assist any of the parties listed above in interpreting this Report.

21.12 The Report is also to be made available to the policyholders of RLMIS.

PROFESSIONAL STANDARDS

21.13 This Report has been prepared subject to the terms of Technical Actuarial Standards (the “TASs”) applicable to insurance related work. In my opinion this Report complies with TAS 100 (Principles for Technical Actuarial Work) and TAS 200 (Insurance) issued by the Financial Reporting Council.

21.14 To the extent that these Technical Actuarial Standards apply to the work done by RLMIS and its agents in order to produce the information upon which I have relied in preparing this Report, I have relied without independent verification upon individuals within RLMIS and its agents to have complied with those standards in producing that information, except where non-compliance is explicitly stated. Subject to this reliance, in my opinion this Report complies with TAS 100 and TAS 200.

21.15 Actuarial Profession Standard X2, as issued by the Institute and Faculty of Actuaries (“IFoA”), requires members of the IFoA to consider whether their work requires an independent peer review.

21.16 In my view this Report does require independent peer review, and this has been carried out by a senior actuary in Milliman who has not been part of the team working on this assignment.

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Appendix A: Financial Information on a Solvency II Pillar 1 basis

A.1 Table A.1 below shows the pre-Scheme financial position of the UFOB Sub-Fund and the RL Open Fund on a Solvency II Pillar 1 basis at 31 March 2021. The pre-Scheme financial position of the RL Open Fund is presented assuming the RAIB Sub-Fund Consolidation had already been implemented as at 31 March 2021.

A.2 Table A.1 also shows the pro forma post-Scheme financial position of the RL Open Fund on a Solvency II Pillar 1 basis as if the Scheme had been implemented as at 31 March 2021.

TABLE A.1: PRE- AND PRO FORMA POST-SCHEME FINANCIAL POSITION (SOLVENCY II PILLAR 1) OF THE FUNDS RELEVANT TO THE SCHEME AT 31 MARCH 2021

As at 31 March 2021 Pre-Scheme Post-Scheme

£million UFOB Sub-Fund RL Open Fund RL Open Fund

Assets (A) 2,872 72,295 75,149

Liabilities (B) 2,681 68,567 71,420

Of which asset shares 2,583 6,572 9,321

Of which Cost of Bonus Transfers 102 (158) (56)

Available capital before adjustments (C = A - B) 191 3,728 3,730

Risk margin (D) - 922 897

TMTP (E) - 663 639

Sub-debt (F) - 1,560 1,560

Internal Own Funds (G = C - D + E + F) 191 5,029 5,031

Internal SCR (H) 34 2,477 2,449

Excess capital (G - H) 157 2,552 2,582

SCR Cover (G / H) 556% 203% 205%

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Appendix B: The UK life insurance market and regulatory environment

INTRODUCTION

B.1 The regulatory regime to which UK insurers are subject, and the applicable solvency requirements, are relevant to my considerations as Independent Expert and are summarised in this section.

THE UK REGULATORS

B.2 Prior to 1 April 2013, regulation of insurance companies was the responsibility of the Financial Services Authority. Since 1 April 2013, responsibility for the regulation of such companies has been split between the PRA and the FCA.

B.3 The PRA is a part of the Bank of England and carries out the prudential regulation and supervision of banks, building societies, credit unions, insurers, and major investment firms.

B.4 The PRA has statutory objectives to promote the safety and soundness of the insurers that it regulates, and to contribute to ensuring that policyholders are appropriately protected. More generally, these statutory objectives can be advanced by seeking to ensure that regulated insurers have resilience against failure and that disruption to the stability of the UK financial system from regulated insurers is minimised.

B.5 The FCA regulates the conduct of all financial services firms in relation to consumer protection, industry stability and the promotion of healthy competition between providers.

THE SOLVENCY II REGULATORY REGIME

Introduction B.6 The current regulatory solvency framework for the European Economic Area (“EEA”) insurance and reinsurance industry came into effect on 1 January 2016. This regime is known as Solvency II, and it imposes solvency requirements that reflect the specific risks faced by each insurer and reinsurer and aims to achieve consistency across the EEA. All but the smallest EEA insurance companies are subject to Solvency II, and as a result are required to adhere to a set of risk-based capital requirements, and to disclose their solvency position in a public document.

B.7 The Solvency II regime applied to UK insurers until 31 December 2020 which was the end of the transition period agreed following the UK’s exit from the EU (and the EEA). Since 31 December 2020 the UK has been free to determine an appropriate regulatory regime for insurance companies. However, at the current time, no material changes have been made to the Solvency II regime and it is currently widely expected that the Solvency II regime will continue in its current form in the UK for the short term future and at least beyond 31 December 2021 (the proposed Implementation Date of this Scheme).

B.8 It would be speculative to comment on the nature of any future UK regulatory regime and therefore this Appendix B focuses on the Solvency II requirements.

The Solvency II three pillars

B.9 Solvency II is based on three pillars:

 Under Pillar 1, quantitative requirements define a market consistent35 framework for valuing the company’s assets and liabilities, the results of which will be publicly disclosed.

 Under Pillar 2, insurers must meet minimum standards for their corporate governance and their risk and capital management. There is a requirement for permanent internal audit and actuarial functions. Insurers must

35 A market-consistent framework requires the values placed on assets and liabilities to be consistent with the market prices of listed securities and traded derivative instruments.

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regularly undertake a forward-looking assessment of risks, solvency needs and adequacy of capital resources, called the Own Risk and Solvency Assessment (“ORSA”), and senior management must demonstrate that the ORSA actively informs business planning, management actions and risk mitigation.

 Under Pillar 3, there are explicit requirements governing disclosures to supervisors and to the public. Firms produce private reports to supervisors and a publicly available solvency and financial condition report.

The Pillar 1 requirements B.10 The determination of a market consistent value of liabilities under Solvency II requires the insurer to calculate the best estimate liability (“BEL”). The expected future obligations of the insurer are projected over the lifetime of the contracts using the most up-to-date financial information and using best estimate actuarial assumptions, and the BEL represents the present value of these projected cash flows.

B.11 Under Solvency II, a company’s Pillar 1 liabilities are called the “Technical Provisions” which consist of the sum of the BEL and the “Risk Margin”. The Risk Margin is an adjustment designed to bring the Technical Provisions up to the amount that another insurance or reinsurance undertaking would be expected to require in order to take over and meet the insurance obligations in an arm’s length transaction.

B.12 Insurers are permitted to apply to their regulator (the PRA in the UK) to make use of the transitional measures on Technical Provisions (“TMTP”), which allows firms to phase in the increase in Technical Provisions under Solvency II Pillar 1 (in relation to business written prior to 1 January 2016) over a sixteen year period. In the UK, the increase is measured relative to the firm’s insurance liabilities under the previous Solvency I Pillar II regime. In the UK, the TMTP is subject to a mandatory recalculation every two years, and additionally, firms are permitted to seek approval from the PRA to undertake a recalculation of their TMTP every six months if their risk profile has changed materially since the previous recalculation.

B.13 Under Pillar 1, the assets of the insurer are, broadly speaking, recognised at their market value.

B.14 The Solvency Capital Requirement (“SCR”) under Solvency II is the capital requirement under Pillar 1 and is intended to be the amount required to ensure that the firm’s assets continue to exceed its Technical Provisions over a one year time frame with a probability of 99.5%.

B.15 The Minimum Capital Requirement (“MCR”), which is lower than the SCR, defines the point of intensive regulatory intervention. The MCR calculation is simpler, more formulaic and less risk-sensitive than the SCR calculation.

B.16 In calculating the SCR, the majority of firms use the “standard formula”, as prescribed by the European Insurance and Occupational Pensions Authority (“EIOPA”). However, Solvency II also permits firms to use their own internal models (or a combination of a “partial internal model” and the standard formula) to derive the SCR. These internal models and partial internal models are subject to approval by the relevant regulator: in the UK this is the PRA.

Own Funds and capital resources B.17 Under the Solvency II regime, the excess of assets over liabilities, plus any subordinated liabilities, is known as Own Funds. Own Funds can be thought of as the capital resources available in the company to cover capital requirements.

B.18 Under Solvency II, companies are required to classify their Own Funds into three tiers, which broadly represent the quality of the Own Funds in relation to their ability to absorb losses. The Own Funds of the highest quality are classified as Tier 1. In order to be classified as Tier 1, Own Funds must exhibit both of the following:

 Permanent availability, i.e. the item is available, or can be called up on demand, to fully absorb losses on a going concern basis, as well as in the case of winding up.

 Subordination, i.e. in the case of winding up, the total amount of the item is available to absorb losses and the repayment of the item is refused to its holder until all other obligations, including insurance and reinsurance obligations towards policyholders and beneficiaries of insurance and reinsurance contracts, have been met.

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B.19 Own Funds that are classified as Tier 2 or Tier 3 are of a lower quality, with less ability to fully absorb losses.

Ring-fenced funds B.20 Solvency II includes the concept of a ring-fenced fund. This refers to any arrangement where an identified set of assets and liabilities are managed as though they were a separate undertaking, meaning that there are restrictions on the extent to which surplus in the ring-fenced fund may be transferred to shareholders or used to cover losses outside the ring-fenced fund.

B.21 In the UK, many firms have established ring-fenced funds in order to reflect the arrangements applicable to their with-profits funds (as defined under the previous regulatory regime) and the with-profits and non-profit business allocated to such with-profits funds.

THE PRODUCTS AND LONG-TERM BUSINESS RELEVANT TO THIS REPORT

B.22 The Royal London Mutual Insurance Society Limited (“RLMIS”) has a wide variety of in-force long-term insurance policies, covering both with-profits and non-profit life and pension policies.

B.23 Non-profit business refers to insurance business whose policyholders do not share in the profits of the insurer and all surplus is typically attributable to the providers of capital, for example the company’s shareholders or holders of with-profits policies issued by the company. Non-profit business typically refers to the following classes of insurance business:

 Conventional non-profit business;

 Unit-linked business; and

 Index-linked business.

B.24 Conventional non-profit business refers to insurance business where the benefits received by policyholders are fixed in terms of monetary amount, for example a life insurance policy that pays a fixed death benefit or a pension annuity that pays a fixed annuity amount each year whilst the policyholder remains alive. Insurance companies make a profit from conventional non-profit business by setting premium amounts that, in conjunction with the investment returns earned on invested policyholder premiums, are more than sufficient to cover the benefits payable and any associated expenses.

B.25 Unit-linked business is principally a type of investment product where policyholders’ premiums are used to buy units in investment funds. The value of the policyholder’s units is generally updated on a daily basis, such that it moves in line with the performance of the investments in the fund, net of any charges levied on the policy. Insurance companies’ profits from unit-linked contracts are determined by the extent to which the income they receive from these charges exceed the expenses they incur in incepting and maintaining the business.

B.26 Index-linked business is an insurance product where the policyholder’s benefits are determined by reference to an index, such as an inflation index, rather than being a fixed monetary amount. An annuity whose payments are linked to changes in the Retail Prices Index is an example of an index-linked contract.

B.27 With-profits business refers to insurance business where policyholders are entitled to share in the profits of a specified pool of assets and liabilities. It typically refers to both of the following:

 CWP business; and

 Unitised with-profits (“UWP”) or accumulating with-profits (“AWP”), business.

B.28 CWP business typically refers to policies where policyholders’ premiums are fixed, and they have a benefit that is guaranteed at the outset in monetary terms if the policy is held to maturity. This benefit can subsequently be increased by annual bonuses that are awarded at the discretion of the insurer, depending upon the amount of surplus emerging in the insurance fund in which the policies are invested. Once they have been awarded, bonuses

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are typically guaranteed, and insurers are not able to take them away. A final bonus may also be awarded at maturity.

B.29 UWP and AWP business typically refers to policies where policyholders’ premiums are used to buy units whose value is then increased through bonuses that are awarded at the discretion of the insurer, again depending on the surplus emerging in the relevant insurance fund. At maturity, policyholders typically receive the value of their units, which again may include a final bonus amount or a Market Value Reduction.

B.30 For with-profits business, it is typical for insurers to target policyholder pay-outs to be relatively close to the policy’s “asset share”, which is a measure of the true value of the policy based on actual investment returns and expenses incurred by the fund. Therefore, where final bonuses are paid, it is typical for these to be calibrated in order to target something close to asset share, subject often to a degree of smoothing, as well as being subject to honouring any guaranteed benefits to which the policyholder is entitled.

The inherited estate of a with-profits fund B.31 Within a ring-fenced with-profits fund, the excess of assets of the fund over the fund’s Solvency II BEL (plus any other liabilities of the fund) is known as the fund’s “inherited estate”. In the case of the UFOB Sub-Fund, the inherited estate is referred to as the fund’s “additional account”.

B.32 The inherited estate is available to be used in a number of ways, such as to support:

 The smoothing of claim pay-outs over time;

 The capital requirements and any associated capital buffers of the with-profits fund;

 Increased investment freedom within the with-profits fund; and

 The capital requirements associated with writing profitable new business within the fund.

B.33 For a with-profits fund that is closed to new business, the insurer must put in place a run-off plan that demonstrates how the inherited estate will be distributed fairly.

THE GOVERNANCE OF UK LONG-TERM INSURERS

B.34 For most UK long-term insurers, the Board of Directors is the firm’s governing body, and is ultimately responsible for setting the strategic direction of the firm, overseeing the activities of the firm’s day-to-day management, and approving the firm’s financial statements.

B.35 Under Solvency II, all insurers are required to establish the following key functions:

 Actuarial function: The actuarial function is responsible for, inter alia, coordinating the calculation of the Technical Provisions and providing an opinion on the firm’s underwriting policy and the adequacy of the firm’s reinsurance arrangements.

 Compliance function: This function is required, inter alia, to advise the insurer on compliance with the Solvency II regulations.

 Internal audit function: This function is required, inter alia, to evaluate the adequacy and effectiveness of the insurer’s internal control system and other elements of its system of governance. The internal audit function is required to be objective and independent from the company’s operational functions.

 Risk management function: This function is required, inter alia, to facilitate the implementation of the insurer’s risk management system.

B.36 These functions are not defined by the Solvency II regulations as being performed by an individual; however, in the UK, the PRA and FCA have introduced a governance regime for UK insurers is called the Senior Managers

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and Certification Regime (“SM&CR”), which became effective on 10 December 2018 and defines a set of senior management functions (“SMF”), including:

 SMF 1 - Chief Executive Officer;

 SMF 2 - Chief Financial Officer;

 SMF 4 - Chief Risk Officer (“CRO”);

 SMF 5 - Head of Internal Audit;

 SMF 6 - Head of Key Business Area;

 SMF 20 - Chief Actuary; and

 SMF20a - With-Profits Actuary (“WPA”).

B.37 Under the SM&CR, the persons having responsibility for the actuarial function, internal audit function and risk management under Solvency II are the Chief Actuary, Head of Internal Audit and CRO respectively, and the individuals responsible for these functions are subject to PRA approval.

B.38 In addition, those firms with with-profits business must appoint an actuary (or actuaries) to perform the WPA function. This individual’s responsibilities include advising the firm’s management on the key aspects of the discretion to be exercised affecting those classes of the with-profits business of the firm in respect of which they have been appointed.

B.39 Under the SM&CR, SMF holders are subject to a ‘Duty of Responsibility’. If a firm breaches a regulatory requirement, the regulators can take action directly against the SMF holder responsible for the area relevant to the breach if the regulators can show that the SMF holder had failed to take reasonable steps to prevent or stop the breach.

B.40 In relation to each with-profits fund, firms must appoint a With-Profits Committee (“WPC”) (or a “with-profits advisory arrangement” if appropriate given the size, nature, and complexity of the fund in question). The role of the RLMIS WPC is to advise and provide recommendations to the firm’s governing body on the management of the with-profits business, and to act as a means by which the interests of with-profits policyholders are appropriately considered within a firm’s governance structures.

A FIRM’S RISK APPETITE AND INTERNAL CAPITAL POLICY

B.41 The Board of a firm is responsible for the management of the company and for its exposure to risk. The Board will typically set out its appetite for risk in a form which references the probability that the Board is willing to accept of not being able to pay policyholder liabilities as they fall due and/or meet regulatory requirements.

B.42 In order to ensure that day-to-day fluctuations in markets and other experience do not lead to a breach of their risk appetite and regulatory capital requirements, insurers usually aim to hold more capital than strictly required to meet the regulatory minimum. The details of the target level of capital buffer are typically set out in the firm’s capital management policy.

B.43 The capital management policy of a firm is set by and owned by the Board and describes the capital that the Board has determined should be held in the company. Changes to this policy usually require Board approval and appropriate consultation with the prudential regulator (the PRA in the UK).

B.44 The capital management policy is typically stated in terms of the capital requirements set down by the relevant regulations. The regulatory capital requirements typically target a particular probability of remaining solvent over a certain time horizon: for example, for the Solvency II regulatory regime it is a 99.5% probability of remaining solvent over a one-year time horizon. By requiring additional capital to be held on top of the regulatory requirements, adherence to the capital management policy increases the probability of remaining solvent over a

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particular timeframe and therefore increases the security of the benefits provided under the policies subject to that policy.

B.45 The level of capital required may also be driven by the desire of the Board to maintain a certain credit rating with external credit rating agencies.

RISK CATEGORIES RELEVANT TO RLMIS

B.46 It is common for insurers to divide the risks to which they are exposed into categories. Categories of risk to which RLMIS is exposed are:

 Market risk: The risk of adverse changes in the price, level or volatility of financial instruments and market variables such as interest rates, inflation, and equity prices.

 Expense level risk: The risk of the insurer underestimating the level of its expense base, resulting in higher than expected expense outgo.

 Persistency risk: The risk of unexpected changes in policyholder behaviour, such as the number of policyholders who surrender their policies or the proportion of policyholders who choose to exercise a contractual option or take advantage of a guarantee.

 Mortality risk: The risk of higher than expected deaths amongst holders of life insurance policies.

 Longevity risk: The risk of greater than expected longevity amongst holders of annuities and other products.

 Operational risk: the risk of loss resulting from inadequate or failed internal processes, people, and systems or from external events.

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Appendix C: Data relied upon

C.1 In addition to discussions (both orally and electronically) with RLMIS staff, I have relied upon the following principal documents in formulating my conclusions:

 Balance Sheet Data – Output from the RLMIS Tactical Model

 Charging Exceptional Costs to Closed Funds Post Skye

 Funnel of Doubt Charts

 Legacy Simplification Scheme – Royal London’s Fairness Criteria

 Policyholder Communication Packs

 Project Skye Mass Lapse Presentation

 Project Skye Wave 2 Class Composition Paper

 Project Skye Wave 2 Design Pack

 Project Skye Wave 2 Due Diligence Report

 Responses to the Milliman Query Log

 Risk Appetite Framework

 Risk Breakdown Data

 The RL Long Term Fund PPFM

 UAG Scheme Document

 UFOB Scheme Document for submission to the High Court

 UFOB Scheme of Arrangement Chief Actuary Report

 UFOB Scheme of Arrangement WPA Report

 WPC Legacy Simplification Wave 2 Design

 WPC Terms of Reference

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Appendix D: Certificate of Compliance

I understand that my duty in preparing my report is to help the High Court on all matters within my expertise and that this duty overrides any obligations I have to those instructing me and / or paying my fee. I confirm that I have complied with this duty.

I confirm that I am aware of the requirements applicable to experts set out in Part 35 of the Civil Procedure Rules, the Practice Direction, and the Protocol for Instruction of Experts to give Evidence in Civil Claims. As required by Part 35 of the Civil Procedure Rules, I hereby confirm that I have understood my duty to the High Court.

I confirm that I have made clear which facts and matters referred to in my report are within my own knowledge and which are not. Those that are within my own knowledge I confirm to be true. The opinions I have expressed represent my true and complete professional opinions on the matters to which they refer.

Oliver Gillespie 1 July 2021

Fellow of the Institute and Faculty of Actuaries

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Appendix E: Glossary of terms

A glossary of abbreviations used throughout this Report is given below. A ABI Association of British Insurers

Additional accounts Under the UAG Scheme, various subsets of the assets and liabilities of the insurance companies within UAG were transferred into the RL Open Fund, subject to separate ‘additional accounts’ being maintained for each subset. APP Appropriate Personal Pension AWP Accumulating With-Profits B BEL Best Estimate Liability C CFC Closed Fund Contribution CI Confidence Interval CIS Co-operative Insurance Society Limited COBS Conduct of Business Sourcebook CRO Chief Risk Officer CWP Conventional With-Profits D DWP Department for Work and Pensions E EBR Equity Backing Ratio EEA European Economic Area EIOPA European Insurance and Occupational Pensions Authority F FCA Financial Conduct Authority FSAVC Freestanding Additional Voluntary Contribution FSMA Financial Services and Markets Act 2000 G GMP Guaranteed Minimum Pension H HITM Heavily in the Money I IB Industrial Branch IFoA Institute and Faculty of Actuaries L LLP Limited Liability Partnership M MCR Minimum Capital Requirement O OB Ordinary Branch

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ORSA Own Risk and Solvency Assessment P PFM Principles of Financial Management PLAL Phoenix Life Assurance Limited PMAS Police Mutual Assurance Society Limited PP Personal Pension PPFM Principles and Practices of Financial Management PRA Prudential Regulation Authority Q Q&As Questions and Answers R RAG Red-Amber-Green RAIB Refuge Assurance Industrial Branch RAOB Refuge Assurance Ordinary Branch RLA Royal Liver Assurance RLAM Royal London Asset Management Limited RLCIS Royal London (CIS) RLG Royal London Group RLI DAC Royal London Insurance DAC RLMIS The Royal London Mutual Insurance Society Limited RLMS Royal London Management Services Limited S SCR Solvency Capital Requirement SL Scottish Life Assurance Company Limited SM&CR Senior Managers and Certification Regime SMA Scottish Mutual Assurance Limited SMF Senior Management Functions SPL Scottish Provident Limited T TAS Technical Actuarial Standard TMTP Transitional Measure on Technical Provisions U UAG United Assurance Group UFIB United Friendly Industrial Branch

UFI ACS The ‘United Friendly Insurance PLC Additional Contribution Plan which holds the FSAVC policies.

UFI PPS United Friendly Insurance PLC Personal Pension Scheme which holds the APP and PP policies; and UFOB United Friendly Ordinary Branch UFOB Additional Account The United Friendly Ordinary Branch additional account set up under the UAG Scheme. UWP Unitised With-Profits

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W WPA With-Profits Actuary WPC With-Profits Committee WPF With-Profits Fund

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