The Proposed Scheme of Arrangement Between the Royal London Mutual

MILLIMAN REPORT

The proposed scheme of arrangement between The Royal London Mutual Insurance Society Limited and the holders of United Friendly Industrial Branch with-profits 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 ...... 24 4. THE PROCESS AND TIMETABLE FOR THE PROPOSED SCHEME ...... 38 5. THE COMMUNICATIONS STRATEGY FOR THE PROPOSED SCHEME ...... 43 6. THE CONSIDERATIONS OF THE INDEPENDENT EXPERT ...... 50 7. THE SECURITY OF POLICYHOLDER BENEFITS TEST ...... 58 8. THE POLICYHOLDER OUTCOMES TEST – OVERVIEW ...... 66 9. THE POLICYHOLDER OUTCOMES TEST – THE REASONABLE BENEFIT EXPECTATIONS OF THE INCLUDED POLICYHOLDERS ...... 67 10. THE POLICYHOLDER OUTCOMES TEST – THE REASONABLE BENEFIT EXPECTATIONS OF THE EXISTING POLICYHOLDERS OF THE RL OPEN FUND ...... 90 11. THE POLICYHOLDER OUTCOMES TEST – THE REASONABLE BENEFIT EXPECTATIONS OF THE REMAINING POLICYHOLDERS OF RLMIS ...... 94 12. THE POLICYHOLDER OUTCOMES TEST – THE STANDARDS OF ADMINISTRATION, SERVICING AND GOVERNANCE APPLYING TO RLMIS’S POLICYHOLDERS ...... 95 13. THE POLICYHOLDER OUTCOMES TEST – SHOULD THE PROPOSED SCHEME BE CONSIDERED TO BE A REATTRIBUTION OF THE UFIB SUB-FUND INHERITED ESTATE ...... 96 14. THE POLICYHOLDER OUTCOMES TEST – CONCLUSION ...... 98 15. THE ADVERSE SCENARIO TEST ...... 99 16. THE POLICYHOLDER COMMUNICATIONS TEST ...... 104 17. THE POLICYHOLDER VOTE TEST ...... 107 18. THE FAIR CONDUCT TEST ...... 110 19. OTHER CONSIDERATIONS ARISING FROM THE SCHEME ...... 113 20. MY CONCLUSIONS...... 123 21. RELIANCES AND LIMITATIONS OF THIS REPORT ...... 124

APPENDIX A: FINANCIAL INFORMATION ON A SOLVENCY II PILLAR 1 BASIS ...... 126 APPENDIX B: THE UK LIFE INSURANCE MARKET AND REGULATORY ENVIRONMENT ...... 127 APPENDIX C: DATA RELIED UPON ...... 133 APPENDIX D: CERTIFICATE OF COMPLIANCE ...... 134 APPENDIX E: GLOSSARY OF TERMS ...... 135

1. Executive summary

BACKGROUND TO ROYAL LONDON AND THE UFIB 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 Industrial Branch Sub-Fund (the “UFIB 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 UFIB Sub-Fund

1.9 The UFIB 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 UFIB Sub-Fund is one of these sub-funds, comprising the Industrial Branch (“IB”) business originally sold by United Friendly Insurance plc and consists principally of IB conventional with-profits (“CWP”) whole of life contracts, along with a small number of CWP endowment contracts.

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

 Approximately 740,000 policies, of which approximately 600 are endowments, with the remainder being whole of life contracts3;

 Assets of £1.1 billion;

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

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

 A standalone Internal SCR Cover of 407%.

1.13 Since 2006, RLMIS has been distributing the additional account of the UFIB Sub-Fund (the “UFIB Additional Account”), which forms part of the UFIB 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 UFIB 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 UFIB Sub- Fund when the total asset share falls below £100 million (the “Sunset Clause Threshold”), which is expected to be reached in 2043. At this point, the requirement to maintain any separation from the RL Open Fund would fall away and the UFIB 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.

RLMIS’s 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 UFIB Sub-Fund with the exception of the small number of endowments with maturity dates prior to 31 December 2021.

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 “UFIB 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

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.

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 UFIB 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:

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

The Offer Uplift percentage (9.7%) 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 UFIB Sub-Fund of 8.8%.

 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 UFIB Additional Account will cease to exist, and Included Policies will not receive any future distributions from any other inherited estates.

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

 Furthermore, there would be a declaration of a special reversionary bonus (the “Special Reversionary Bonus”) on Included Policies.

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 UFIB 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.

1.25 If the Scheme were to be approved, an amount (the “Scheme Contribution”) would be deducted from the UFIB 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 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 UFIB Sub-Fund Scheme is £3.4 million.

 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 UFIB Sub-Fund Scheme is £6.1 million.

 The “Premium Uplift Contribution”.

This is a portion of the UFIB Additional Account that would be paid to the RL Open Fund in order that the amount allocated to asset share when future contractual premiums are paid by Included Policies may be uplifted by the same percentage as Included Policies’ asset shares under the Offer. This uplift would occur in the future and be paid from the RL Open Fund.

The Premium Uplift Contribution for the UFIB Sub-Fund Scheme is £3.7 million.

What are the reasons for the proposed Scheme?

1.26 The main motivations behind the Scheme are as follows:

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

If the Scheme were to proceed the UFIB Sub-Fund would be consolidated into the RL Open Fund, which would enable an immediate and certain distribution of the estate contained within the additional account (less the Scheme Contribution) to those Included Policyholders and likely improved outcomes for these longstanding policyholders.

 The Scheme 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 other changes relevant to this report are the proposed RAIB Sub-Fund Consolidation, and the UFOB Sub-Fund Scheme and SL Fund Scheme which are described in Section 2.

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

 Tontine smoothing4

The removal of the need for the UFIB Additional Account to cover the capital requirements of the UFIB Sub- Fund would allow:

o An earlier consolidation of the UFIB Sub-Fund into the RL Open Fund; and

o The application of the Offer Uplift across all policyholders’ asset shares and the amount allocated to asset shares when future contractual premiums are paid.

Both of these 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 UFIB Additional Account to its policyholders are currently uncertain. Upon consolidation a known percentage (the Offer Uplift percentage) would be applied to Included Policies’ asset shares in return for giving up entitlement to uncertain future distributions from the UFIB Additional Account.

4 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 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.

 The spreading of project costs

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

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 UFIB Sub-Fund into the RL Open Fund would allow the earlier realisation of diversification benefits5 between the risks of the two funds, resulting in a lower overall capital requirement.

 Expense synergies from the wider legacy business Simplification Programme

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

MY ROLE AS THE INDEPENDENT EXPERT

1.29 I have been appointed by RLMIS to report in the capacity of Independent Expert 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 the 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.

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, RLMIS’s 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”).

5 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.

 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 COVID-19 PANDEMIC

1.37 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.

1.38 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.

1.39 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.

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

MY CONCLUSIONS ON THE SCHEME

1.41 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.

1.42 Based on the position at the date of this Report I am satisfied that if the proposed UFIB 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.

1.43 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.

 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 treatment of uncontactable policyholders; and

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

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

1.45 I am satisfied that these conclusions would hold whether or not the UFOB Sub-Fund Scheme and the SL Fund Scheme were to be implemented.

1.46 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 UFIB Sub-Fund 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

1.47 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.

1.48 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 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 RLMIS’s 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 estates6 of the UFOB Sub-Fund 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 UFIB Sub-Fund as the “UFIB Additional Account”.

2.12 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 UFIB Sub-Fund, as well as the United Friendly Ordinary Branch Sub-Fund (“UFOB 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.

2.13 Under Solvency II, the UFIB Sub-Fund and the UFOB 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.

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

THE RAIB SUB-FUND CONSOLIDATION

2.15 The 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.

2.16 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 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.

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

2.18 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.

6 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.

THE CURRENT FUND STRUCTURE OF RLMIS

2.19 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.

2.20 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.

2.21 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 UFIB Sub-Fund;

 The UFOB Sub-Fund;

 The Scottish Life Fund (the “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”).

2.22 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

2.23 The policies directly affected by the Scheme are all policies of the UFIB Sub-Fund.

MEMBERSHIP OF RLMIS

2.24 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.

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

2.26 Policyholders whose policies have been transferred to RLMIS through previous acquisitions and subsequent schemes of transfer have not gained membership. The policies in the UFIB 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.

2.27 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.

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

THE UFIB SUB-FUND

The business of the UFIB Sub-Fund

2.29 The UFIB Sub-Fund is comprised solely of Industrial Branch (“IB”) business. This business was sold through IB channels with premiums typically paid to a collector who called at policyholders’ homes. Premiums are no longer paid by policyholders in this way; they have been updated to be paid by standing order, direct debit or via the Post Office.

2.30 The business in the UFIB Sub-Fund is predominantly conventional with-profits (“CWP”) whole of life policies alongside a small number of CWP endowment policies.

2.31 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 (“PPFM”) applicable to the business in the UFIB Sub-Fund (the “RL Long Term Fund PPFM”) is clear that these policies are currently treated as with-profits policies.

2.32 Holders of whole of life policies in the UFIB Sub-Fund are contracted to pay premiums until the last policy anniversary before the policyholder’s 85th birthday, after which point the policies become “fully free paid”. Once fully free paid, no further premiums are due, but the policy remains as with-profits with full benefits payable on death.

2.33 Policies in the UFIB Sub-Fund can also, at the instigation of the policyholder, be made “paid up”. This means that the policyholder ceases paying premiums (prior to the last policy anniversary before the policyholder’s 85th birthday in the case of whole of life policies) in return for a lower benefit amount.

2.34 Approximately 17% of the policies of the UFIB Sub-Fund are fully free paid and 55% are paid-up, and the remaining 28% are premium-paying.

2.35 A significant proportion of the with-profits policies in the UFIB Sub-Fund include periodic payments. These are cash amounts that are paid out to the policyholder at the end of every 5 years provided that the policyholder has paid all of their contractual premiums and are applicable to some of the whole of life and some of the endowment policies. The cash amounts were defined in the original terms and conditions for particular ages and premium levels.

2.36 Furthermore, historically some of the policies in the UFIB Sub-Fund were entitled to take loans from RLMIS. These loans ceased to be issued in 2003. As at 31 December 2020, there are approximately £0.7 million of loans attaching to policies held in the UFIB Sub-Fund.

2.37 Table 2.3 below shows the breakdown of the types and number of policies in the UFIB Sub-Fund, as at 20 January 2021.

TABLE 2.3 BREAKDOWN OF THE NUMBER OF POLICIES IN THE UFIB SUB-FUND AT 20 JANUARY 2021 Number of Product type policies Whole of life 467,137 Whole of life with periodic payments 271,211 Endowment 610 Total 738,958

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

2.38 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 RLMS.

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

2.40 For the purposes of charging the expenses to asset shares, the total maintenance expense is split into two parts:  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

 The second part is reflected as a charge to asset shares in proportion to the premium payable under the policy.

2.41 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 UFIB Sub-Fund as, if average third party provider rates were to be observed to be lower than those charged by the RLMS, the actual charges applied to the UFIB 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.

2.42 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 UFIB Sub-Fund policies should be moved to an external provider.

2.43 Recent analysis carried out by RLMIS indicates that the administration rates charged by RLMS are broadly in line with third party rates for the policies in the UFIB Sub-Fund.

2.44 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. 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.

2.45 Historically, exceptional costs, i.e. one-off or infrequent project costs, have been allocated between the RL Open Fund and the RLMIS Closed Funds (including the UFIB Sub-Fund) in line with a suitable metric chosen by RLMIS management, such as the best estimate liability or the policy counts of the different funds.

2.46 Under the provisions of the UAG Scheme, 100% of the amount of a given exceptional cost that would have been allocated to with-profits policies in the UFIB Sub-Fund in the absence of the UAG Scheme is charged immediately to the UFIB Additional Account. This charge reduces the amount of money in the UFIB Additional Account available to pay asset share enhancements and uplifts to claim values, and so overall reduces pay-outs on the with-profits policies in the UFIB Sub-Fund.

The UFIB Sunset Clause

2.47 Under the terms of the UAG Scheme, RLMIS is required to allocate the UFIB 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 UFIB Sub- Fund when their total asset share falls below £100 million. In this Report, I refer to this £100 million threshold as the “Sunset Clause Threshold”.

2.48 Under current best-estimate projections, the UFIB Sub-Fund is expected to reach its Sunset Clause Threshold in 2043.

2.49 If the total asset share were to reach the Sunset Clause Threshold, the UAG Scheme requires that the UFIB Additional Account should be allocated to the asset shares of the with-profits policies in a manner approved by the “RL Appointed Actuary”7. 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.

2.50 Furthermore, as the UFIB 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 UFIB Sub- Fund as a separate sub-fund for reporting and communication purposes, and it would be consolidated into the RL Open Fund.

2.51 There is no provision under the UAG Scheme around who should bear the costs of the actions taken upon reaching the Sunset Clause Threshold, and in particular there is no indication in UAG Scheme as to which (if any) costs would be borne by policyholders in the UFIB Sub-Fund. It is the view of RLMIS’s management that in practice some of the costs associated with fund consolidation upon reaching the Sunset Clause Threshold would be charged to the UFIB 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. The RLMIS management therefore considers the costs of fund consolidation to be exceptional, meaning these should be met by the UFIB Sub-Fund.

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

2.52 Since 2006, RLMIS has been distributing the UFIB Additional Account to its policyholders 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 back down to target level over a short period of years, in line with the capital management framework, set out in more detail in paragraph 2.95.

2.53 In 2022, the uplift expected to be paid on claim values on the with-profits business of the UFIB Sub-Fund is 8.8% (the “BAU uplift”). The BAU uplift in 2021 was 7.6%.

2.54 Within the UFIB 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 additional account, i.e. the strength of the capital position of the UFIB Sub-Fund, is taken into account when deciding the extent of smoothing of pay-outs.

2.55 RLMIS currently maintains eight annual bonus scales8 for policies in the UFIB Sub-Fund. Policies in the UFIB Sub- Fund are not eligible to receive annual bonuses if they are made paid-up9, although they remain as with-profits and so still receive final bonuses.

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

2.57 Owing to the historical nature of the UFIB Sub-Fund, the UAG Scheme prescribes that the declaration of annual and final bonuses leads to a corresponding transfer of funds from the UFIB 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.

2.58 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 UFIB Sub-Fund and other relevant sub-funds based

7 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”. 8 A bonus scale is a set of bonuses (either annual or final) applied to a group of policies with similar characteristics. 9 A policy is made “paid-up” when the policyholder stops paying premiums before the end of the contracted premium paying term.

on the level of future bonuses estimated to be supportable based on the asset shares of the policies of these sub- funds.

The risk profile of the UFIB Sub-Fund

2.59 As described above, the UFIB Sub-Fund is comprised of with-profits whole of life policies alongside a smaller number of with-profits endowments. The risk profile of the UFIB Sub-Fund is dominated by market risk10 in relation to with-profits guarantees.

2.60 Table 2.4 below shows a percentage breakdown of the UFIB Sub-Fund’s post-diversification Solvency Capital Requirement (“SCR”), based on RLMIS’s internal view of its financial position, at 31 December 2020.

TABLE 2.4 PERCENTAGE BREAKDOWN OF THE UFIB SUB-FUND’S POST-DIVERSIFICATION SCR AT 31 DECEMBER 2020 Percentage breakdown of Risk category11 Internal SCR (post- diversification) Market 93% Expense Level 4% Persistency 0% Mortality 0% Longevity 0% Operational 4% Total 100 %(*)

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

2.61 Table 2.4 demonstrates that non-market risks are comparatively trivial for the UFIB Sub-Fund, with the most significant being expense risk.

THE RL OPEN FUND

Introduction

2.62 All new policies issued by RLMIS, with the exception of increments or options on 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”) 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.

2.63 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

2.64 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 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.

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

10 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. 11 The risk categories included here are explained in Appendix B to this Report.

TABLE 2.5 PERCENTAGE BREAKDOWN POST-DIVERSIFICATION COMPONENTS OF THE RL OPEN FUND’S SCR AT 31 DECEMBER 2020 Percentage breakdown of Internal Risk category12 SCR (post-diversification) Market 53% Expense Level 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.

2.66 Market risk is a key risk in the RL Open Fund, although proportionally to a lesser extent than for the UFIB Sub- Fund and is predominantly in relation to equity risk. Equity risk in the RL Open Fund arises in relation to the value of 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.

2.67 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 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.

2.68 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.

THE OTHER FUNDS OF RLMIS

The UFOB Sub-Fund

2.69 As described above, the UFOB Sub-Fund contains the liabilities of some of the business of UAG that was transferred to RLMIS pursuant to the UAG Scheme.

2.70 The UFOB Fund principally comprises Ordinary Branch (“OB”)13 CWP pensions business with a small number of CWP endowments and whole of life business.

2.71 The CWP pension business consists of individual personal pension policies. 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.

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

 Approximately 148,000 policies14;

 Assets of £2.9 billion;

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

12 The risk categories included here are explained in Appendix B. 13 In the past, this term was used to distinguish these policies from IB policies, with the latter being sold through IB channels with premiums typically paid to a collector who called at policyholders’ homes. 14 UFOB Sub-Fund policy count is as at 31 December 2020.

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

 A standalone Internal SCR Cover of 556%.

The UFOB Sub-Fund Scheme

2.73 RLMIS intends to consolidate the business of the UFOB Sub-Fund into the RL Open Fund under a scheme of arrangement. This consolidation is expected to happen on 31 December 2021, concurrent with the UFIB Sub-Fund Scheme.

2.74 This process enables RLMIS to distribute the Additional Account of the UFOB Sub-Fund (less any deductions deemed to be appropriate) to its with-profits policyholders as well as consolidate the business into the RL Open Fund ahead of the sub-funds projected sunset clause.

2.75 This process is referred to in this report as the “UFOB Sub-Fund Scheme”.

The SL Fund

2.76 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.

2.77 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.

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

 Approximately 76,000 policies15;

 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

2.79 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 UFOB 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.

2.80 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 UFIB Sub-Fund in this Report.

15 SL Fund policy count is as at 31 December 2020.

The PLAL WPF

2.81 Phoenix Life Assurance Limited (“PLAL”)16 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.

2.82 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.

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

The Royal Liver WPF

2.84 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.

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

2.86 The Royal Liver WPF comprises a mixture of:

 UWP business (principally pensions business);

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

 Non-profit life and pensions business; and

 Unit-linked life and pensions business.

2.87 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 into effect to reinsure some of the transferred contracts back to RLMIS.

The RLCIS Fund

2.88 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.

2.89 The RLCIS Fund comprises a mixture 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

2.90 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

16 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.

inter-fund agreements between the RL Open Fund and the RLMIS Closed Funds whereby capital support can be provided between funds if required.

2.91 The RL Long Term Fund PPFM 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 (besides the UFIB Sub-Fund and the UFOB 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.

2.92 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

2.93 As described above, 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.

2.94 The RLMIS Capital Framework sets out the capital target for each of the in-scope funds. For the UFIB Sub-Fund, as well as for the RL Open Fund, the capital target is set out as being able to withstand a 1-in-20 year event17 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 RLMIS’s 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”).

2.95 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.

17 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.

 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.

2.96 As set out above, the RLMIS Capital Framework includes “red” and “amber” categories for situations in which a fund is either over- 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 also undesirable for the fund to be over-capitalised as this could indicate an overly 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.

2.97 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 or engaging in de-risking strategies.

FINANCIAL CONDITION

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

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

2.100 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”).

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

2.102 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 a Pillar 2 basis. For completeness, I have also provided the Pillar 1 financial information in Appendix A to this Report.

2.103 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.

2.104 Table 2.6 below shows the Solvency II Pillar 2 financial position of the UFIB 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 already been implemented as at 31 March 2021.

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

£million UFIB Sub-Fund RL Open Fund

Assets (A) 1,057 72,394 Liabilities (B) 949 68,650 Of which asset shares 886 6,572 Of which Cost of Bonus Transfers 56 (158) Available capital before adjustments (C = A - B) 108 3,745 Risk margin (D) 5 950 TMTP (E) - 663 Sub-debt (F) - 1,560 Internal Own Funds (G = C - D + E + F) 103 5,018 Internal SCR (H) 25 2,626 Excess capital (G - H) 77 2,392 Internal SCR Cover (G / H) 407% 191%

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

 The UFIB Sub-Fund had excess capital of £77 million and an Internal SCR Cover of 407%. This corresponds to Upper Red status under the RLMIS Capital Framework, despite RLMIS making additional estate distributions in 2020 with the intention of reducing the capital cover from Upper Red status as at 31 March 2021. RLMIS is continuing to make additional estate distributions in order to reduce the Internal SCR Cover in line with the RLMIS Capital Framework.

 The RL Open Fund had excess capital of £2,392 million and an Internal SCR Cover of 191%. This corresponds to Light Green status under the RLMIS Capital Framework.

INVESTMENT STRATEGY

2.106 As at 31 December 2020, the asset share equity backing ratio (the “EBR”)18 for the UFIB Sub-Fund was 57%.

2.107 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%).

2.108 The UFIB Additional Account is invested in cash and gilts, i.e. it is invested with an EBR of 0%.

WITH-PROFITS BUSINESS GOVERNANCE

2.109 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. There are also other supervisory committees in respect of some of the RLMIS Closed Funds not in scope of the Scheme that is the subject of this Report.

2.110 There is a PPFM in place for the RL Open Fund, the RL Long Term Fund PPFM, which also includes the principles and practices in respect of the UFIB Sub-Fund, as well as the UFOB Sub-Fund. There are separate PPFMs for each of the other four closed ring-fenced funds of RLMIS. The PPFMs set out how the with-profits business within each of the funds will be managed.

2.111 The UAG Scheme contains a number of principles of financial management (“PFMs”) which govern the financial management of the business of the UFIB Sub-Fund, as well as the UFOB Sub-Fund, and cover a number of areas including bonus policy, surrender values and credit/charges to asset shares should an exceptional event occur.

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

The PFMs also govern the maintenance of an additional account for each of these funds and the Sunset Clause Threshold (as described in paragraph 2.47).

2.112 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

2.113 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 to with-profits policies in the RL Open Fund, the SL Fund (to the extent these are invested in the RL Open Fund) and the UFOB Sub-Fund, and to unit-linked policies written by RLMIS with an inception date from 2001, as well as to certain business in RLI DAC via a reinsurance mechanism with RLMIS. It is allocated by means of discretionary enhancements to asset share, or an allocation of additional units for unit-linked policies.

2.114 The small block of with-profits policies that were previously in the RAOB Fund (before it was collapsed into the RL Open Fund in 2006) receive a higher rate of ProfitShare than the other eligible lines of business for historical reasons. Unit-linked policyholders currently receive one eighth of the rate of distribution that is applied to with- profits policies in the RL Open Fund.

2.115 With-profits policies in the UFOB Sub-Fund receive ProfitShare owing to the terms of the UAG Scheme by which they were first transferred to RLMIS. They receive a lower amount of ProfitShare than other eligible lines of business.

2.116 Policies in the UFIB Sub-Fund do not receive ProfitShare.

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

INTRODUCTION

3.1 Under the Scheme, RLMIS proposes to make an offer (the “Offer”) to all policyholders holding policies in the UFIB Sub-Fund.

3.2 As outlined in Section 2, all of the policies in the UFIB Sub-Fund are with-profits policies.

ELIGIBLE POLICIES/POLICYHOLDERS AND INCLUDED POLICIES/POLICYHOLDERS

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

3.4 More precisely, an Eligible Policy is a with-profits policies allocated to the UFIB Sub-Fund which:

 Will not have reached its scheduled maturity date prior to 31 December 2021;

 Has not been claimed in full (or come into payment in full) either on maturity, surrender or death, in each case in accordance with the terms of the policy, as at 31 March 2021 (the “Calculation Date”) and nor as at the date of the Scheme Meeting (see below); and

 Has not ceased to be entitled to receive benefits in accordance with its terms as at the Calculation Date and nor as at the date of the Scheme Meeting (see below).

The “Scheme Meeting” is a meeting convened by the High Court for the purpose of considering and, if thought fit, approving, (with or without modification) this Scheme.

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

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

 Have not reached their scheduled maturity date;

 Have not been claimed in full (or come into payment in full) on maturity, surrender 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.

THE BACKGROUND TO THE OFFER

3.7 As described in Section 2:

 Under the terms of the UAG Scheme:

o Certain business of United Friendly Assurance Company was transferred into the RL Open Fund and is ring-fenced (as the UFIB Sub-Fund) under Solvency II; and

o The capital requirements of the UFIB Sub-Fund are currently covered by the assets in the UFIB Additional Account.

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

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

3.8 The speed at which the UFIB Additional Account can be distributed to with-profits policyholders is constrained by the requirement to cover the capital requirements (including the 1-in-20 year buffer above these requirements held in line with the RLMIS Capital Framework).

3.9 For the avoidance of doubt, the UFIB Additional Account that can be distributed to with-profits policyholders in the UFIB 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 UFOB 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

3.10 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 (9.7%) would be applied to the asset shares of Included Policies. This compares to the expected uplift on claim values in 2022 for with-profits policies of the UFIB Sub-Fund of 8.8%.

 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 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.

 Following the application of the Offer Uplift, the UFIB Additional Account will cease to exist, and Included Policies will not receive any future distributions from any other inherited estates.

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

 At the same time as the application of the Offer Uplift, the “Special Reversionary Bonus” would be declared on 31 December 2021 to be applied to policies on 1 January 2022.

The declaration of the Special Reversionary Bonus would increase the guaranteed benefits (sum assured plus attaching annual bonuses declared to date) for all Included Policies. The Special Reversionary Bonus was calculated at 31 March 2021 and would increase guaranteed benefits by 29.0%.

3.11 The Offer Uplift percentage of 9.7% included in the voting packs that will be sent to policyholders was calculated based on the Solvency II balance sheet for the UFIB Sub-Fund as at 31 March 2021. The Offer Uplift percentage will be fixed until the Implementation Date of the UFIB Sub-Fund Scheme, which is expected to be 31 December 2021. There will be no recalculation of the Offer Uplift percentage at any point.

3.12 It should be noted that:

 The guaranteed benefits of almost all Eligible Policies are currently significantly below the level of the policies’ respective asset shares and this would remain the case after the declaration of the Special Reversionary Bonus.

 The small size of the group of Eligible Policies for which guaranteed benefits are greater than asset shares means that, for bonus-setting purposes, all such Eligible Policies are pooled with a much larger number of other Eligible Policies whose guaranteed benefits are below the level of asset shares.

Therefore, even for Eligible Policies whose guaranteed benefits are above their asset shares, bonuses are declared based on a pool of policies whose benefits are largely below the level asset shares.

3.13 This means that, other than in the case of a large fall in the value of assets backing the policies’ asset shares, it is the policies’ asset shares that would determine the pay-outs under the policies rather than the guaranteed benefits

and it is therefore the application of the Offer Uplift percentage arising from the Scheme, rather than the Special Reversionary Bonus, that would, in almost all circumstances, determine the impact of the implementation of the Scheme on pay-outs on Included Policies.

3.14 Beyond the Offer Uplift and the Special Reversionary Bonus described above, there would be no wider changes to the terms and conditions of any policies as a result of the implementation of the Scheme. In particular:

 The Included Policies would remain with-profits policies following the application of the Offer Uplift and the consolidation of the business of the UFIB Sub-Fund into the RL Open Fund; and

 The application of the Offer Uplift would not affect any additional policy benefits, including the periodic payments described in Section 2. The periodic payment benefits arising from the payment of these premiums will be unchanged as a result of the Scheme.

THE PROPOSED SCHEME

3.15 The Offer would be formally made using a Scheme of Arrangement (the “UFIB Sub-Fund Scheme”) which is the Scheme that is the subject of this report.

3.16 If the proposed Scheme were to be implemented, then on the Implementation Date:

 The Scheme Contribution would be paid to the RL Open Fund by the UFIB Sub-Fund.

The Scheme Contribution is the sum of:

o The Closed Fund Contribution (the “CFC”), which is described in paragraphs 3.32 to 3.46;

o The Project Costs Allowance, which is described in paragraphs 3.47 to 3.62; and

o The Premium Uplift Contribution, which is described in paragraphs 3.64 to 3.67.

 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.

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 UFIB Additional Account at the Implementation Date after the deduction of the Scheme Contribution described above.

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

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

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

o The assets backing the portion of the Best Estimate Liability (“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 UFIB Sub-Fund business would be provided from the resources of the RL Open Fund (which would include the CFC paid to the RL Open Fund from the UFIB Additional Account).

3.17 The Scheme is taking place as part of a planned programme of other changes across RLMIS with the objectives of rationalising and simplifying RLMIS’s 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.

THE OPTIONS FOR ELIGIBLE POLICYHOLDERS UNDER THE OFFER

3.18 Under the Offer Eligible Policyholders would have two basic 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 were in-force at 31 December 2021, including those who had 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 were in-force at 31 December 2021 as above, including those who had not responded to the Offer.

3.19 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

3.20 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.

3.21 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 MOTIVATIONS FOR THE PROPOSED SCHEME

3.22 The main motivations provided by RLMIS in respect of the proposed Scheme are as follows:

o An immediate distribution of the UFIB Additional Account (less the Scheme Contribution described below) to those Included Policyholders; and

o The avoidance of the development of a tontine.

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

This would lead to a reduction in the costs of reporting, accounting, administration, and audit which would:

o Directly benefit the UFIB Sub-Fund policyholders through reduced charges to asset shares;

o Increase the financial strength of the RLMIS Open Fund and thereby provide benefits to the wider group of RLMIS policyholders through the additional security provided; and,

o For those that receive ProfitShare, provide an additional benefit through the benefits expected via ProfitShare.

3.23 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 RLMIS’s 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.

3.24 It is 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.

3.25 Other relevant parts of the Simplification Programme are:

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

 The UFOB Sub-Fund Scheme; and

 The SL Fund Scheme

as described in Section 2.

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

3.27 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 3.25) of this Report.

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

 Tontine smoothing

As the UFIB Sub-Fund runs off and its capital requirements reduce it is expected that distributions from the UFIB 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 UFIB Additional Account to meet the capital requirements of the UFIB Sub- Fund and the consolidation of the UFIB Sub-Fund into the RL Open Fund (together with the application of the Offer Uplift percentage 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 UFIB Additional Account to its policyholders are currently uncertain in terms of both amount and timing. If the Scheme were to be implemented, the UFIB Additional Account (less

appropriate deductions) 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 UFIB 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 could be shared with policies currently in the UFIB Sub-Fund through reductions to the costs charged to asset shares.

3.29 The declaration of the Special Reversionary Bonus would take place on 31 December 2021 to be applied to policies on 1 January 2022. This Special Reversionary Bonus has been included as part of the proposals as a result of research carried out by RLMIS into the opinions of Eligible Policyholders which concluded that while the policyholders place value in the upside potential associated with with-profits policies, they also value the security provided by guaranteed benefits.

3.30 The Special Reversionary Bonus seeks to address this by increasing the level of guaranteed benefits relative to asset shares, but without compromising the ability to take investment risk in the choice of assets backing Included Policies’ asset shares.

THE SCHEME CONTRIBUTION

Introduction

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

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

 The Project Costs Allowance; and

 The Premium Uplift Contribution.

The CFC

Introduction

3.32 If the Scheme were to be implemented, then a payment (the CFC) would be made from the UFIB Additional Account to the RL Open Fund to compensate the RL Open Fund for taking on coverage of the capital requirements of the UFIB Sub-Fund.

3.33 The CFC therefore comprises a ‘cost of capital’ amount to compensate the RL Open Fund.

The calculation of the CFC

Introduction

3.34 If the Scheme were to be implemented, the assets of the RL Open Fund would be used to meet the capital requirements of the policies currently in the UFIB 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.

3.35 Taking on the capital requirements of the UFIB 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 UFIB Sub-Fund into the RL Open Fund and declaring the Special Reversionary Bonus, allowing for additional diversification benefits as described below;

 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 UFIB Sub-Fund business).

3.36 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 could expect to achieve on other investments.

3.37 The balance sheet strain used for the purposes of the CFC calculation would be adjusted relative to that set out in paragraph 3.35 in three areas, specifically:

1. Market risk would be removed:

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

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

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

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

2. The CFC payment would be offset against the balance sheet strain:

In practice, the RL Open Fund’s balance sheet strain will be lower than that set out in paragraph 3.35, given that the RL Open Fund will receive the CFC payment itself, and therefore the strain to its financial position from the implementation of the Scheme will be reduced by the receipt of that payment. RLMIS therefore proposes to reflect this effect in the net balance sheet strain it assumes in the calculation of the CFC, which will result in a lower CFC than would otherwise be payable.

3. The diversification benefits from consolidation would be shared between the UFIB Sub-Fund and the RL Open Fund:

If the UFIB Sub-Fund were to be merged into the RL Open Fund, the risks of the business and assets of these two funds would be pooled, thus leading to a greater diversification of risk and additional resilience to adverse scenarios for the RL Open Fund.

Under the Solvency II regime, this diversification would be reflected through a capital requirement for the post- consolidation RL Open Fund that would be lower than the sum of the capital requirements of the funds as currently determined separately.

The overall diversification benefit would be shared equally between the RL Open Fund and the UFIB Sub- Fund and this would be done implicitly through the calculation of the CFC by adjusting the net balance sheet strain to reflect the desired split of diversification benefits.

Based on current estimates, the overall benefits to the funds from this diversification would be a £10 million benefit to the post-consolidation RL Open Fund (as a result of the consolidation of the UFIB Sub-Fund only, although assuming the other in-scope RLMIS Closed Funds are also consolidated) and a reduction in the CFC of £0.7 million.

The ‘cost of capital’ rate

3.38 In the CFC calculation, an assumed cost of capital rate will be multiplied by the expected net balance sheet strain (as described above) resulting from the Scheme each future year (projected until the end of the charging period described below). These future costs will then be discounted back (at the risk-free rate) to 31 December 2021 to give the CFC.

3.39 RLMIS has set the cost of capital rate at 9.0% as it believes that 9.0% p.a. is a reasonable estimate of the return in excess of risk-free yields it could achieve on other investments,

3.40 This figure has been derived by reference to various sources, including RLMIS’s internal target for return-seeking ventures (adjusted for the fact that project costs are, in the case of the Scheme, being dealt with outside of the CFC), an analysis of leading UK life insurers’ average ‘returns on equity’ (“ROEs”) in recent years and an analysis of RLMIS’s historical target and achieved internal rates of return on new business.

3.41 I understand from RLMIS that the 9.0% p.a. cost of capital rate has not been adjusted for tax as RLMIS does not expect the CFC payment to be taxable. Should any unexpected tax liability arise, this would be met from the RL Open Fund estate.

The charging period

3.42 As described in paragraph 2.48, in the absence of the Scheme, the UFIB Sub-Fund is expected to reach its Sunset Clause Threshold in 2043. At this time, the additional account (less the provision for outstanding tax liabilities at that time) will be allocated to the asset shares of the with-profits policies in the sub-fund and the sub-fund will be consolidated into the RL Open Fund.

3.43 The UAG Scheme does not contain extensive detail on the procedure to follow once the Sunset Clause Threshold is reached, and in particular it is silent on whether the Sunset Clause would permit a “cost of capital” payment to be made to the RL Open Fund.

3.44 It is proposed that the ‘cost of capital’ amount payable by the UFIB Sub-Fund to the RL Open Fund as part of the CFC should reflect the net balance sheet strain up to, and not beyond, the expected point of natural closure, i.e. when the fund reaches its Sunset Clause Threshold. This means that the UFIB Sub-Fund is not required to compensate the RL Open Fund for taking on its capital requirements beyond the expected trigger date of its Sunset Clause Threshold.

3.45 As described in paragraph 3.11, the Offer Uplift has been fixed in percentage terms as 9.7% based on RLMIS’s financial position as at 31 March 2021. This means that the RL Open Fund is, in effect, taking on the risks of the UFIB Sub-Fund in advance of the implementation of the Scheme, and therefore the charging period for the CFC should start from 31 March 2021, noting that the CFC will not be paid unless and until the UFIB Sub-Fund Scheme

is implemented. However, for the UFIB Sub-Fund there is no additional amount added to the CFC to cover the nine month period between 31 March 2021 and 31 December 2021.

The amount of the CFC

3.46 If the Scheme is implemented, the CFC payable from the UFIB Additional Account to the RL Open Fund, calculated as described above, is currently expected to be £3.4 million.

The Project Costs Allowance

The Aggregate Project Costs Allowance

3.47 As set out in Section 2 the Scheme would be part of the wider Simplification Programme, which includes other similar consolidations of RLMIS Closed Funds into the RL Open Fund.

3.48 The fund consolidation (and associated minor product changes) elements of the Simplification Programme (the “Fund Consolidations”), which may include the consolidation of others of the RLMIS Closed Funds in addition to those listed in paragraph 3.25, 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.

3.49 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.

3.50 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).

3.51 The Aggregate Project Costs Allowance 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.

3.52 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

3.53 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.

3.54 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 UFIB Additional Account (with reference to the total asset shares plus the UFIB Additional Account) would be increased by an amount intended to represent an “Indemnity Premium”.

3.55 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.

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

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

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

The allocation of the Aggregate Project Costs Allowance

3.59 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.

3.60 The Project Costs Allowance that would be deducted from the UFIB 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 UFIB Sub-Fund asset shares and the UFIB 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 UFIB Sub-Fund

3.61 This results in a Project Costs Allowance for the UFIB Sub-Fund of £6.1 million, of which £0.3 million is the UFIB Sub-Fund’s share of the Indemnity Premium.

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

The total Project Costs Allowance for the UFIB Sub-Fund

3.63 Overall, the Indemnity Premium attributable to the UFIB Sub-Fund is expected to be £0.3 million and this would be added to the expected cost allocation for the UFIB Sub-Fund of £5.8 million to give a total Project Cost Allowance for the UFIB Sub-Fund of £6.1 million.

The Premium Uplift Contribution

3.64 The Offer would involve an immediate distribution of the UFIB Additional Account (less the Scheme Contribution) to Included Policies. This distribution would take the form of the Offer 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 contractual premiums are paid.

3.65 In respect of future contractual premiums, the additional uplift to asset shares would take place as and when the premiums were to be paid and credited to asset shares for those Included Policies paying contractual regular premiums (i.e. the policy has not been made paid-up and the policyholder has not reached the fully free paid age).

3.66 The portion of the UFIB Additional Account that would be held back to cover the Offer Uplift in respect of these 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 Included Policies.

3.67 For the avoidance of doubt, the application of the Offer Uplift to the amount allocated to asset share when future premiums are paid would not result in an increase to the premiums paid by Included Policyholders.

EXHAUSTING THE UFIB ADDITIONAL ACCOUNT

3.68 As set out in paragraph 3.11, the Offer Uplift percentage of 9.7% that was calculated as at 31 March 2021 will be fixed until the Implementation Date of the UFIB 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).

3.69 As a result of this guarantee, the value of the assets backing the UFIB 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 UFIB Sub-Fund to make good any shortfall in the UFIB Additional Account; or

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

3.70 RLMIS would process this payment immediately before the implementation of the Scheme such that, at the Implementation Date, the value of the UFIB 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.

3.71 While it is expected that, in almost all scenarios, any surplus in the UFIB 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.

3.72 Therefore, RLMIS proposes that, if the RLMIS WPA were to determine that fluctuations in the value of the UFIB 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 UFIB Sub-Fund policies.

3.73 In particular, in the event of an excessive profit accruing to the RL Open Fund as a result of the arrangement described in paragraph 3.69, such steps may include a special distribution of some element of that excess to Included Policies following the implementation of the Scheme.

THE SPECIAL REVERSIONARY BONUS

3.74 If the proposed Scheme were to be implemented, then a Special Reversionary Bonus would be declared on 31 December 2021 and applied to the guaranteed benefits of all Included Policies on 1 January 2022. The Special Reversionary Bonus was calculated on 31 March 2021 and would be 29.0% so that, upon its declaration, the Special Reversionary Bonus would increase guaranteed benefits for all Included Policies by 29.0%.

3.75 As described in paragraph 3.12, the Special Reversionary Bonus would not affect pay-outs for policies that claim immediately upon its application on 1 January 2022, and by and large it is the size of the Offer Uplift that would drive the impact of the Scheme on pay-outs for Included Policies rather than the Special Reversionary Bonus. However, as the Special Reversionary Bonus would increase the level of guarantees under the Included Policies it would increase the level of protection for Included Policies against sustained periods of negative investment returns.

3.76 The Special Reversionary Bonus level was chosen in order to strike a balance between ensuring that:

 Included Policies would have the potential for significant upside (i.e. the bonus is not so large that the policy effectively becomes non-profit);

 The guaranteed minimum benefit would continue to provide an appropriate level of protection; and

 The Special Reversionary Bonus would not result in a material increase to the size of the CFC or a material increase to the cost of guarantees for the UFIB policies, and therefore would not lead to a significant reduction in the amount of the UFIB Additional Account that would be distributed under the Scheme.

THE APPORTIONMENT OF THE COSTS IF THE SCHEME WERE NOT TO BE IMPLEMENTED

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

THE OPERATION OF WITH-PROFITS POLICIES FOLLOWING THE SCHEME

3.78 The RL Open Fund Estate would support the management of the Included Policies following the implementation of the Scheme, including 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.

3.79 The way in which pay-outs on maturity and death claims are smoothed from one year to the next will remain as described in paragraph 2.54. However, there will be a change to this approach in the first year following implementation of the Scheme, so that the current smoothing approach is applied to the pay-out before the addition of the Offer Uplift used to distribute the UFIB Additional Account. This will prevent the distributions under the Scheme being reduced owing to the effect of smoothing, which will ensure that Included Policyholders who exit during the first year following implementation of the Scheme receive the full distribution presented under the Offer.

3.80 If the Scheme were to be implemented, the Included Policies would not be entitled to any distributions from the RL Open Fund Estate including ProfitShare. Upon consolidation of the UFIB Sub-Fund into the RL Open Fund, the UFIB 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.

3.81 The implementation of the Scheme would not directly result in any changes to the process for setting annual or final bonuses for Included Policies.

3.82 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 Special Reversionary Bonus described above will provide a one-off increase to the guaranteed benefits under Included Policies. This will trigger a physical transfer of assets equal to one ninth of the value of the Special Reversionary Bonus from the UFIB Sub-Fund to the RL Open Fund.

 Under the current fund structure, only the portion of the expected 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 2.58).

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

The uplift to asset shares of Included Policies arising as a result of the Scheme therefore enable the additional future Cost of Bonus Transfers to be recognised in the RL Open Fund’s Solvency II balance sheet.

 The overall Cost of Bonus Transfers payable from the UFIB Sub-Fund to the RL Open Fund will be reduced to the extent that the UFIB Additional Account is reduced by the CFC and Project Costs Allowance, 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

3.83 In line with the UAG Scheme, currently any costs deemed to be exceptional costs affecting the UFIB Sub-Fund are charged to the UFIB Additional Account. If the Scheme were to be implemented, the UFIB Additional Account

would be exhausted by the application of the Offer Uplift to asset shares and so would no longer be available to meet future exceptional costs. Instead, the amount that would have been charged to the UFIB 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 former UFIB Sub-Fund policies, 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 former UFIB Sub-Fund policies 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.

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.

MEMBERSHIP RIGHTS FOLLOWING THE SCHEME

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

 The policyholders of the UFIB Sub-Fund are not members of RLMIS 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

3.85 If the UFIB Sub-Fund Scheme were to be implemented then the UFIB Sub-Fund would be consolidated into the RL Open Fund and the assets backing the asset shares 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 business in the RL Open Fund, with the exception of the groups of policies with significant guarantees for which the backing assets have been separately assigned, as described in Section 2.

3.86 As at 31 December 2020, the EBR for the asset shares in the UFIB Sub-Fund was 57%, and the EBR for the asset shares in the RL Open Fund was 63%.

3.87 The UFIB Additional Account is currently invested in cash and gilts. If the UFIB Sub-Fund Scheme were to be implemented then, following consolidation of the UFIB 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 the Included Policies.

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

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

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

 Market falls and increases to expenses flow through into the asset shares of UFIB Sub-Fund policies. To the extent that these are material, such falls 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 UFIB Additional Account would be used to meet the excess of pay-outs over asset shares. The UFIB Sub-Fund’s capital requirement reflects the fact 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 UFIB Additional Account in a severe adverse scenario.

3.90 Following the implementation of the Scheme, Included Policies would be exposed to risks associated with their policies in the following way:

 Market falls and increases to expenses would continue to flow through into the uplifted asset shares of Included Policies following the implementation of the Scheme. To the extent that these are material, such falls will flow through into pay-outs on these policies 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 RL Open Fund’s estate would be used to meet the excess of pay-outs over asset shares.

The RL Open Fund’s capital requirement would reflect the ability of asset shares to absorb losses until they fall below guaranteed benefits, and therefore would only include the component of losses that would currently be met by the UFIB Additional Account in a severe adverse scenario. The CFC paid as part of Scheme Contribution from the UFIB Additional Account to the RL Open Fund under the Scheme would compensate the RL Open Fund for the additional risk and capital requirement it is taking on in this regard.

3.91 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 UFIB Additional Account to the RL Open Fund Estate, with the CFC representing the compensation to the RL Open Fund for agreeing to take on this risk and the associated capital requirements. 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.

THE IMPACT OF THE SCHEME ON THE UAG SCHEME

3.92 If the Scheme were to be implemented (and the UFOB Sub-Fund Scheme were also to be implemented), the UAG Scheme would be terminated and would cease to govern the operation of the relevant aspects of the UFIB Sub- Fund and the UFOB Sub-Fund. I cover the impact of the termination of the UAG Scheme in Section 19.

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 that will be quoted in the Voting Pack has been calculated based on the financial condition of the UFIB Sub-Fund as at the Calculation Date (31 March 2021).

This uplift percentage will be fixed until the Implementation Date of the UFIB Sub-Fund Scheme, 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 5.11) 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.

If RLMIS has not received an Eligible Policyholder’s vote within four weeks of mailing their Voting Pack, a Reminder Mailing (see paragraph 5.12) 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 for the UFIB 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 UFIB Sub-Fund Scheme by the High Court is 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 UFIB Sub-Fund Scheme, then the Implementation Date of the Scheme (see paragraph 4.30) is expected to be 31 December 2021 but this can be delayed by RLMIS no later than 31 March 2021.

The Confirmation Mailing (see paragraph 5.13) will be sent to Included Policyholders following the Implementation Date.

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, what the appropriate composition of the meetings is.

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 will take into account any representations that policyholders may make, particularly in relation to the proposals around voting classes for the Scheme Meeting.

4.5 The High Court will also consider and be asked to approve RLMIS’s 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 5.11). 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 UFIB 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 UFIB Sub-Fund Scheme with a single voting class.

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 UFIB Sub-Fund Scheme proposals relate to the outstanding terms of the policies.

4.15 The particular issue is that holders of policies with short remaining terms are projected to receive a higher distribution of the UFIB 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 from the Calculation Date until their contractual end point for premiums, (i.e. to the selected retirement age for pension policies and to the fully paid age for life policies).

4.20 For whole of life policies, the amount payable on a claim is defined to be the death value19 of the policy as at the Calculation Date. For endowment policies it is defined to be the cash-in value20 of the policy as at the Calculation Date.

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 result of the Policyholder Vote

4.22 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.

4.23 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 UFIB Sub-Fund would not be consolidated into the RL Open Fund.

4.24 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.

4.25 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.

4.26 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

4.27 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 UFIB Sub-Fund Scheme is expected to take place on 25 and 26 November 2021.

4.28 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.

19 The death value of a policy is the payment that would be made if the policyholder died on the Calculation Date. 20 The cash-in value is the payment that would be made if the policyholder elected to surrender the policy as at the Calculation Date.

 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.

4.29 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

4.30 The Implementation Date for the Scheme is expected to be 31 December 2021. This is the date on which, provided that the High Court has sanctioned the Scheme:

 The Offer Uplift of 9.7% would be applied to the asset shares of Included Policies; and

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

5. The communications strategy for the proposed Scheme

OVERVIEW

5.1 RLMIS’s 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 2019 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 UFIB 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 UFIB Sub-Fund).

5.4 The stated objectives of RLMIS’s 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 RLMIS’s 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”, which 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 “Voting Pack”, to be sent over an eight week period commencing 19 July 2021, after the Convening Hearing for the Scheme, and which will be issued a minimum of eight weeks in advance of the Scheme Meeting.

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 many 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 RLMIS’s with- profits fund structure, what it means to be part of a mutual and the connection to RLMIS’s values;

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 ability for the policyholder to opt-out of the process;

o Context around RLMIS’s simplification journey 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 RLMIS’s 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 policyholder;

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 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.

5.9 RLMIS did not provide any formal illustrations at the Appetite Mailing stage. The majority of Eligible Policyholders have not received any illustrations of their projected policy value, only routine updates on guaranteed benefits (if any routine updates are provided at all). The Appetite Mailing therefore provided an opportunity to inform Eligible Policyholders of the mechanics of their with-profits policy and the current approach to distributing the estate. This approach intended to avoid overloading Eligible Policyholders, of which a large number are potentially vulnerable policyholders, with extensive technical information at an early stage.

5.10 The Appetite Mailing also informed Eligible Policyholders that they should expect to receive the Voting Pack if a sufficient number of Eligible Policyholders are supportive of the Scheme and the High Court agrees to convene the Scheme Meeting at the Convening Hearing.

5.11 The Voting Pack will contain:

 A covering letter that refers policyholders to the Policyholder Circular for more substantive information on the Scheme, and 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 sections in the Policyholder Circular that provide a 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 on 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 the policyholder, including information on:

o The background to the Scheme and the terms of the Scheme;

o How the policyholder’s policy currently works, including the distribution of the estate;

o The effect of the Scheme on the UFIB 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 of information on the policyholder vote that will contain:

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 of 9.7% and an explanation of the illustration.

THE REMINDER MAILING

5.12 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 the policyholder. 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 will be bound by the Offer.

THE CONFIRMATION MAILING

5.13 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) and guaranteed benefits.

OTHER SOURCES OF INFORMATION

5.14 Eligible Policyholders will 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 RLMIS’s WPA and Chief Actuary;

 RLMIS's Annual Report and Accounts; and

 The proposed updates to the RL Long Term Fund PPFM (which includes the principles and practices in respect of the UFIB 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 20.8%, with a positive response (indicating the policyholder is generally supportive of the proposals) of 79.4% by count and 79.4% by Vote Value (as at 21 May 2021). These results provide a margin over the Offer Acceptance Thresholds, giving a good 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 Financial Conduct Authority (“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

 Been 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 Given the advanced age of many of the policyholders in the UFIB Sub-Fund, RLMIS considers that a significant proportion of the Eligible Policyholders could be classified as vulnerable policyholders. RLMIS’s communication strategy is therefore focused on ensuring these potentially vulnerable policyholders feel supported through the Offer process.

5.25 In addition to standards already established as part of RLMIS’s 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 to date, and will ensure in the future, that 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 UFIB 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 correspondence21.

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.

 Address unknown: Policyholders for whom RLMIS systems do not hold an address record, largely owing to a historical issue arising prior to the transfer of the UAG business to RLMIS in 2000. As the UFIB Sub-Fund contains IB business, it presents significant challenges to tracing exercises because of its heritage. For example, practices for IB business have historically included door to door collections, paper files and logbooks, and record keeping was not held centrally.

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 UFIB 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 UFIB Sub-Fund) by 16 June 2021.

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

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 UFIB 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 UFIB Sub-Fund) by 16 June 2021.

5.36 To complement this tracing activity, RLMIS has also used external media advertising as a further means of re- engaging uncontactable policyholders. This media advertising took place during the final quarter of 2020 ahead of the Appetite Mailing dispatch (see paragraph 5.6).

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

5.38 Based on policy data as at 16 June 2021, the uncontactable percentage for UFIB Sub-Fund Eligible Policyholders is around 63% (of c. 532,000 Eligible Policyholders).

ADVICE AND GUIDANCE

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

5.40 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 UFIB 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, a decision form, and a summary of this Report.

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, and 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 and I have not considered the full range of strategic options that might have been available to RLMIS in relation to the UFIB 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 me satisfied that the implementation of the Scheme would be fair and reasonable to the policyholders of RLMIS (the “Fairness Tests”).

6.9 The Fairness Tests 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.

6.10 These are covered in turn in more detail below.

The Security of Policyholder Benefits Test

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

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

 Policyholders of the UFIB 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 UFIB Sub-Fund), whose benefits in those funds would remain unchanged.

6.13 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

6.14 This test examines 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

 Standards of servicing, administration, management, and governance.

6.15 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.

6.16 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 asset shares of 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 UFIB Additional Account as a uniform percentage uplift to each Included Policy.

6.17 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 UFIB Sub-Fund to the RL Open Fund;

 The impact of the Special Reversionary Bonus;

 The fairness of the allocation of the costs associated with Project Skye between the RL Open Fund and the RLMIS Closed Funds;

 Any other 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.

6.18 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

6.19 The objective of this test is to consider whether the conclusions formed in light of the results of the Security of Policyholder Benefits Test and the Policyholder Outcomes Test would be different under different circumstances and scenarios, and hence whether the proposals remain fair and reasonable under a range of circumstances and scenarios.

The Policyholder Communications Test

6.20 The objective of this test is to consider 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 vote.

6.21 This includes consideration of the adequacy of RLMIS’s 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.

The Policyholder Vote Test

6.22 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

6.23 The objective of this test is to consider 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

6.24 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, for example, 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.

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

THE UFOB SUB-FUND SCHEME AND THE SL FUND SCHEME

6.26 As described in Section 2, RLMIS intends to carry out the UFOB Sub-Fund Scheme and the SL Fund Scheme, and it is currently intended that the UFOB Sub-Fund Scheme and the SL Fund Scheme would be effective on the same date as the Implementation Date for this UFIB Sub-Fund Scheme (expected to be 31 December 2021).

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

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

EXCLUSIONS FROM THE CONSIDERATIONS OF THE INDEPENDENT EXPERT

6.29 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, the expected Implementation Date of the Scheme.

6.30 I have not considered the effects of the Scheme on policyholders entering into contracts after 31 December 2021 or those leaving before that date.

MY ASSESSMENT OF THE EFFECT OF THE PROPOSED SCHEME

6.31 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.

6.32 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.

6.33 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

6.34 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.

6.35 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.

6.36 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”).

6.37 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.

6.38 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 due diligence report produced by Pinsent Masons in relation to the proposed Scheme.

6.39 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.

6.40 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

6.41 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.

6.42 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.

6.43 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

6.44 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 UFIB 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 sheet for the UFIB 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 CFC, the diversification benefits, and the Premium Uplift Contribution.

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

6.46 RLMIS’s 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.

6.47 Both the Pillar 1 and Pillar 2 bases are now closely aligned as they both use the RLMIS Internal Model. The key difference between the financial positions on each basis is that the Pillar 2 basis includes an allowance for provisions that are recognised under RLMIS’s European Embedded Value22 reporting metric, whereas Pillar 1 does not. For the avoidance of doubt, both bases allow for the TMTP.

6.48 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 is not materially changed without adherence to these internal checking controls and, for major changes, re-approval from the PRA. RLMIS has adhered to these processes and controls.

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.

22 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, and Embedded Value figures are typically published as supplementary information in an insurer’s report and accounts. European Embedded Value refers to a particular form of Embedded Value reporting based on principles issued by the European Insurance CFO Forum.

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 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.

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. The RLMIS Tactical 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 that 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 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 3.85 to 3.87) and allowing for the Offer Uplift itself and the Special Reversionary Bonus as these change the cost of guarantees (and so the value of the UFIB 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 assumptions used to calculate the BEL for the purposes of determining the value of the UFIB 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.

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, the CFC, and the Premium Uplift Contribution payable from the UFIB Additional Account to the RL Open Fund (calculated as at 31 March 2021);

 The calculation of the projected remaining UFIB 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, the CFC, and the Premium Uplift Contribution;

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

o The consolidation of the policies of the UFIB 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 UFIB 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:

 Eligible Policyholders in the UFIB Sub-Fund;  Policyholders with policies in the RL Open Fund; and  Policyholders with benefits in the other RLMIS Closed Funds (i.e. the RLMIS Closed Funds excluding the UFIB Sub-Fund), whose benefits in those funds would remain unchanged.

7.2 My analysis and conclusions in this section have been formed assuming that the UFOB Sub-Fund Scheme and the SL Fund Scheme have not been implemented.

7.3 In Section 19 I consider the implications for the UFIB Sub-Fund Scheme of the implementation of those other schemes.

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

Introduction

7.4 Currently, RLMIS’s policyholders derive security for their guaranteed benefits from:

 The assets held to cover, in respect of the fund in which the policyholder’s policy is held:

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 (as described in paragraph 2.94); and

 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 2.91).

7.5 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.

7.6 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 UFIB Sub-Fund, who would all be policyholders of the RL Open Fund if the Scheme is implemented; and

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

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

Introduction

7.7 If the Scheme were to be implemented, the UFIB 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 UFIB 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 UFIB Sub-Fund.

7.8 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 position against 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; and

 In the case of the UFIB Sub-Fund, whether the RL Open Fund is subject to a materially weaker capital framework (under the RLMIS Capital Framework) relative to the capital framework to which the UFIB Sub- Fund is currently subject.

The effect of the proposed Scheme on the financial strength of the RL Open Fund and the UFIB Sub-Fund

7.9 Table 7.1 below shows the pre-Scheme financial position of the RL Open Fund and the UFIB Sub-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.

7.10 It also shows the pro forma post-Scheme financial position of the RL Open Fund on a Solvency II Pillar 2 basis as if the Scheme had 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 UFIB Sub-Fund RL Open Fund RL Open Fund Assets (A) 1,057 72,394 73,439 Liabilities (B) 949 68,650 69,688 Of which asset shares 886 6,572 7,543 Of which Cost of Bonus Transfers 56 (158) (102) Available capital before adjustments (C = A - B) 108 3,745 3,751 Risk margin (D) 5 950 947 TMTP (E) - 663 655 Sub-debt (F) - 1,560 1,560 Internal Own Funds (G = C - D + E + F) 103 5,018 5,019 Internal SCR (H) 25 2,626 2,641 Excess capital (G - H) 77 2,392 2,379 Internal SCR Cover (G / H) 407% 191% 190%

7.11 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 £1 million.

 A decrease in the RL Open Fund’s excess capital of £13 million.

 A decrease in the RL Open Fund’s Internal SCR Cover of 1.0 percentage point from 191% to 190%.

7.12 The figures in paragraph 7.11 above describe 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 the impact of the Scheme fully, it is reasonable to consider the impact of the Scheme on the combined position of the RL Open Fund and the UFIB Sub-Fund, i.e. comparing the pre-Scheme financial position of the RL Open Fund and the UFIB Sub-Fund in total with the pro forma post-Scheme financial position of the RL Open Fund following fund consolidation.

7.13 This expected financial impact of the Scheme can be broken down as:

 A reduction of £11.5 million in the combined assets of the RL Open Fund and the UFIB Sub-Fund

This reflects the expected project costs (RLMIS’s estimate of the costs of implementing the Scheme) as well as the system migration costs as part of the wider Simplification Programme23.

 An increase of £90 million in the combined liabilities of the RL Open Fund and the UFIB Sub-Fund

This reflects:

o An increase of £90 million as a result of the application of the Offer Uplift to the asset shares of Included Policies under the Offer to exhaust the UFIB Additional Account.

This is the available capital before adjustments of £108 million in the UFIB Sub-Fund, less the CFC (based on conditions at 31 March 2021) of £3.4 million, the Project Costs Allowance of £6.1 million,

23 The costs associated with the wider Simplification Programme are charged to the UFIB Sub-Fund outside of the terms of the Scheme and are therefore technically not part of the impact of the Scheme (although the fact that they are expected to be incurred will have an impact on the size of the Offer). Excluding these costs from the Scheme impact in Table 7.1 would have a small positive impact on the post-Scheme SCR coverage ratio of the RL Open Fund.

the Premium Uplift Contribution of £3.7 million and costs of £5.1 million administration system changes taking place outside of the Scheme24.

The total uplift to asset shares as a result of the Scheme is £84 million rather than the £90 million calculated above, as a result of an adjustment of £5 million to allow for an increase to the pre- Scheme guarantee costs. This comprises a £6 million increase to guarantee costs as a result of the Special Reversionary Bonus, less a £1 million decrease in the with-profits guarantees due to the application of the Offer Uplift.

It should be noted that the figures above are based on the total asset shares of Eligible Policies (£886 million) and the amount that could have been added to these asset shares if the Scheme had been implemented on 31 March 2021 (£84 million). This is an uplift to asset shares of 9.5%, which is slightly lower than the Offer Uplift percentage (9.7%) 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 3.82, the application of the Offer Uplift to the asset shares of Included Policies enable the future Cost of Bonus Transfers attributable to the UFIB Additional Account to be allowed for in the Solvency II balance sheet, which in isolation (i.e. without fund consolidation) would result in an increase in the liability for the Cost of Bonus Transfers in the UFIB Sub-Fund.

However, following consolidation of the UFIB Sub-Fund into the RL Open Fund, these Cost of Bonus Transfers will no longer necessitate a reallocation of assets between funds. The Cost of Bonus Transfers attributable to the UFIB Sub-Fund would therefore not be held as a negative liability of the RL Open Fund.

 A reduction of £8 million in the combined Risk Margin for the RL Open Fund and the UFIB Sub-Fund

This is as a result of the reduction in the combined Internal SCR, as described below.

 A reduction of £10 million in the combined Internal SCR for the RL Open Fund and the UFIB Sub-Fund

This is a result of the diversification benefits generated and the release of unused management actions by consolidating the sub-fund into the RL Open Fund.

The overall effect is a reduction in the combined excess capital for the RL Open Fund and the UFIB Sub- Fund of £91 million.

7.14 I have also reviewed the financial position of the RL Open Fund and the UFIB 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.

7.15 As described in Section 2, the key difference between the financial positions on each basis is that the Pillar 2 basis includes an allowance for provisions that are recognised under RLMIS’s European Embedded Value25 reporting metric, whereas Pillar 1 does not. The implementation of the Scheme would result in a reduction in combined excess capital of £91 million on a Pillar 1 basis (£91 million under Pillar 2).

24 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. 25 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, and Embedded Value figures are typically published as supplementary information in an insurer’s report and accounts. European Embedded Value refers to a particular form of Embedded Value reporting based on principles issued by the European Insurance CFO Forum.

7.16 Based on figures as at 31 March 2021 shown in Table 7.1, if the Scheme had been implemented on this date then:

 There would have been a small decrease in the RL Open Fund’s Internal SCR Cover;

 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)26; 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.

7.17 Based on the financial information as at 31 March 2021, the current Internal SCR Cover of the UFIB Sub-Fund prior to the implementation of the Scheme was 407% as at 31 March 2021, and, if the UFIB Sub-Fund Scheme had been implemented on this date it is expected that the RL Open Fund’s Internal SCR Cover would have been 190%.

7.18 The relatively high current Internal SCR Cover arises principally because the SCR of the UFIB Sub-Fund is small in absolute terms, rather than because the UFIB Sub-Fund’s available capital is very high. The Internal SCR Cover of 190% (the projected position for the post-Scheme RL Open Fund) 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 UFIB 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.

7.19 The RLMIS Capital Framework is currently applied consistently to the RL Open Fund and the UFIB Sub-Fund, and these funds have the same capital target as described above. The RL Open Fund’s capital target is therefore currently of similar strength to that of the UFIB 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 UFIB Sub-Fund would be unchanged by the implementation of the Scheme.

The risk that the transferred assets are insufficient to cover the transferring liabilities

7.20 If the Scheme were to be implemented, assets would be transferred into the RL Open Fund to 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.

7.21 The amount of assets so calculated would be a ‘best estimate’ of the expected outgoing cashflows from the Included Policies and therefore would be expected to have an equal likelihood of being too large or too small in the future.

7.22 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 business of the UFIB 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.

26 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.

7.23 It should be noted that:

 In the absence of the implementation of the Scheme, any such shortfall would be met by the assets of the UFIB Additional Account;

 As can be seen from the table above, the UFIB Sub-Fund is small (at approximately 1% by assets as at 31 March 2021) compared to the RL Open Fund; 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.

7.24 I am therefore satisfied that although there is a risk of the transferred assets not being sufficient to cover the eventual cashflows 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 UFIB Sub-Fund.

The change to the risk profile of the UFIB Sub-Fund and RL Open Fund arising from the Scheme

TABLE 7.2 PERCENTAGE BREAKDOWN OF THE UFIB SUB-FUND’S POST-DIVERSIFICATION SCR AT 31 DECEMBER 2020

Percentage breakdown of Internal SCR (post-diversification)

Risk category UFIB Sub-Fund RL Open Fund Market 93% 53% Expense Level 4% 8% Persistency 0% 21% Mortality 0% 0% Longevity 0% 5% Operational 4% 8% Other 4%

Total 100 %(*) 100 %(*)

(*) Sum is not equal to 100% due to rounding in the presentation shown above.

7.25 As shown in Table 7.2, the risk profile of the RL Open Fund is currently different to that of the UFIB Sub-Fund:

 The UFIB Sub-Fund’s risk profile is dominated by market risks;

 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.

7.26 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 UFIB 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.

 Policyholders of the UFIB Sub-Fund

From the perspective of policyholders with policies in the UFIB Sub-Fund, their policies would not share in the experience of the RL Open Fund’s policies more widely, and therefore the wider risk exposure of the RL Open Fund will only affect Included Policies to the extent that it results in an extreme deterioration in the financial strength of the RL Open Fund such that its estate becomes unable to provide the support required to meet the guaranteed benefits of Included Policies.

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 UFIB 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 provide an equivalent level of security for the Included Policies.

It should also be noted that the UFIB Sub-Fund is already, in effect, exposed to the risks of the RL Open Fund owing to the fact that the RL Open Fund would be required to provide capital support to the RLMIS Closed Funds in certain extreme circumstances.

7.27 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 materially adversely affect the security of benefits of the policies of the RL Open Fund or the policies of the UFIB Sub-Fund.

7.28 It should be noted that the UFOB Sub-Fund Scheme and the SL Fund Scheme that are proposed to take place at the same time as the UFIB Sub-Fund Scheme as part of the wider Simplification Programme could result in other business or sub-funds being consolidated into the RL Open Fund and could result a change to the profile of risks to which the policies of the RL Open Fund (including the Included Policies).

7.29 The UFOB Sub-Fund Scheme and the SL Fund Scheme will 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 will include consideration of the impact of the proposals on the RL Open Fund.

Conclusion for policyholders of the RL Open Fund and the UFIB Sub-Fund.

7.30 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 UFIB Sub-Fund.

Policyholders of the other RLMIS Closed Funds

7.31 Following the implementation of the Scheme, there would be no change in the assets and capital support arrangements providing security for the guaranteed benefits of the policyholders of the other RLMIS Closed Funds that are not within the scope of the Scheme.

7.32 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.

7.33 As noted in paragraph 7.16, based on figures at 31 March 2021, the implementation of the Scheme would have resulted in a small decrease in the RL Open Fund’s Internal SCR Cover, although the RL Open Fund would have remained within the target range of the RLMIS Capital Framework.

7.34 Furthermore, the UFIB 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.

7.35 The implementation of the Scheme would therefore not materially reduce the strength of the capital support arrangements whereby the estate of the RL Open Fund is available in extreme circumstances to provide capital support to the RLMIS Closed Funds should this be required.

7.36 Furthermore, the implementation of the Scheme would have no impact on the financial strength of the other RLMIS Closed Funds. Therefore, the Scheme would have no material effect on the security of guaranteed benefits of the policyholders of the other RLMIS Closed Funds.

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 is designed to demonstrate that if the Scheme were to be implemented there would not be a material adverse effect 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.

Therefore, the following groups of policyholders have been considered separately:

 Eligible Policyholders in the UFIB Sub-Fund;

 Policyholders of the RL Open Fund; and

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

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 Included Policyholders – 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 UFIB 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 UFOB Sub-Fund Scheme and the SL Fund Scheme have not been implemented.

8.5 In Section 19 I consider the implications for the UFIB Sub-Fund Scheme of the implementation of those other schemes.

9. The Policyholder Outcomes Test – the reasonable benefit expectations of the Included Policyholders

THE CURRENT REASONABLE BENEFIT EXPECTATIONS OF INCLUDED POLICYHOLDERS

9.1 The current reasonable benefit expectations of the Included Policyholders should be that they receive:

 Their guaranteed benefits (the sum assured plus any attaching annual bonuses declared to date); plus

 Future bonuses that are yet to be declared:

o Annual bonuses that will increase their guaranteed sum assured; plus

o A final bonus payable when they claim.

9.2 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 additional account distribution that has taken place to date.

9.3 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 UFIB Additional Account.

9.4 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 UFIB 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

9.5 If the Scheme were to be implemented each Included Policy would receive an uplift to its asset share calculated by applying the Offer Uplift percentage to that asset share. The Offer Uplift percentage would be the same for all Included Policies.

9.6 The Offer Uplift percentage has been set such that, across all Included Policies and taking into account the Scheme Contribution, the UFIB Additional Account would be expected to be exhausted.

9.7 Included Policies would receive no further estate distribution via asset share enhancements or uplift to claim values beyond those that result from the Scheme. Included Policies would not be entitled to any distributions from the RL Open Fund Estate, including through ProfitShare.

9.8 Included Policies would also receive a Special Reversionary Bonus in the form of a one-off addition to guaranteed benefits.

9.9 If the Scheme were to be implemented, the benefit expectations of Included Policyholders would be that they receive:

 Their guaranteed benefits (the sum assured plus any attaching annual bonuses declared to date) and the Special Reversionary Bonus declared under the Offer; plus

 Future bonuses that are yet to be declared:

o Annual bonuses that would increase their guaranteed sum assured; plus

o A final bonus payable when they claim.

9.10 In relation to their final bonus, Included Policyholders’ reasonable expectations would be that the final bonus should reflect the asset share underlying their policy including:

 The uplift granted as part of the Scheme; and

 Any historical enhancements to asset share in respect of the distribution of the additional account.

9.11 There would be no reasonable expectation of future enhancements or a further uplift at the point of claim.

9.12 Therefore, when considering the effects of the Scheme on the benefit expectations of the Included Policyholders, given the benefit expectations set out above 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 UFIB Additional Account in the absence of the Scheme; and

o The application of the Offer Uplift percentage 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 increase to guaranteed benefits as a result of the Special Reversionary Bonus.

 The smoothing of pay-out values on the Included Policies.

 The future annual and final bonuses that would be declared on the Included Policies.

 The Cost of Bonus Transfers in respect of bonuses on the Included Policies that are payable to the RL Open Fund.

9.13 I cover these points in turn below.

THE ENHANCEMENTS TO THE ASSET SHARES OF THE INCLUDED POLICIES

Introduction

9.14 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 (9.7%) 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 UFIB Additional Account.

If the Scheme were to be implemented it is proposed that the UFIB 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 UFIB 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;

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 would result in a different allocation of the UFIB Additional Account across the Included Policies than would have been the case under the pattern of UFIB Additional Account distribution in the absence of the Scheme. This means that some groups of policies would receive a higher allocation of the UFIB Additional Account as a result of the Scheme, and some will 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 UFIB Additional Account in proportion to asset share.

9.15 I cover these in turn below.

The method of distribution of the UFIB Additional Account

9.16 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 UFIB Additional Account (less the Scheme Contribution).

9.17 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.

9.18 RLMIS has been distributing the UFIB 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 UFIB Additional Account under the UFIB 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 UFIB Additional Account.

9.19 Currently, the future distributions from the UFIB Additional Account to the policyholders of the UFIB Sub-Fund are uncertain in terms of both amount and timing. If the UFIB Sub-Fund Scheme were to be implemented, the UFIB 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.

9.20 I am satisfied that the proposed method of distribution under the Scheme (i.e. as a fixed percentage uplift to asset shares) would be consistent with current distribution practice for the UFIB Sub-Fund in the absence of the Scheme and so I am satisfied that the proposed distribution format under the Scheme would be a fair and reasonable one, and would be consistent with Included Policyholders’ expectations in respect of their benefits.

The size of the UFIB Additional Account available to be distributed under the Offer

9.21 The UFIB Additional Account is equal to (broadly speaking) the assets of UFIB Sub-Fund less the liabilities (including the BEL) of the UFIB Sub-Fund. The BEL is valued using assumptions about the future, informed by experience data and expert judgement. The size of the UFIB Additional Account therefore depends on these assumptions.

9.22 In the normal course of managing the UFIB Sub-Fund, as the liabilities run-off, these assumptions would be adjusted (for example to reflect changing experience) so that the amount of the UFIB Additional Account available for distribution to with-profits policyholders in the UFIB Sub-Fund will vary with experience over time.

9.23 If the Scheme were to be implemented, the value of the UFIB 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 UFIB 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 UFIB Additional Account or would be required to make up any shortfall because of overvaluation of the UFIB Additional Account.

9.24 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 assumptions used to calculate the BEL for the purposes of determining the value of UFIB 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 RLMIS’s best estimate view of future outcomes.

9.25 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.

9.26 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 UFIB Sub-Fund for distribution to the other with-profits policyholders in the UFIB Sub-Fund. An allowance for some proportion of the unclaimed assets to be included in the value of the UFIB Additional Account would increase the Offer Uplift percentage proposed to Eligible Policyholders under the Scheme.

9.27 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 UFIB Sub-Fund, as part of its ongoing centralised tracing process.

9.28 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.

9.29 For the UFIB Sub-Fund, there remains a significant volume of uncontactable policyholders following the tracing activities undertaken by RLMIS. RLMIS’s claims experience for the type of business in the UFIB Sub-Fund is that a reasonable proportion of these uncontactable policyholders (or their dependents) will not re-establish contact with RLMIS to make a claim on their policies. Therefore, an adjustment has been made to the BEL for the UFIB Sub-Fund (about 10% of the BEL) to allow for the expectation that a proportion of these policies would not be claimed in the future. This adjustment was made as part of BAU processes before commencing the Scheme and so some of the unclaimed assets have already been distributed to policyholders through historical distributions of the UFIB Additional Account. The release of unclaimed assets over time has reduced the BEL by around £100 million.

9.30 I am satisfied that the assumptions made in respect of uncontactable policyholder and future unclaimed assets are reasonable.

9.31 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.

9.32 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.

9.33 Overall, I am satisfied that the size of the UFIB Additional Account used to determine the Offer Uplift percentage for the UFIB 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 UFIB Sub-Fund to the RL Open Fund

9.34 If the Scheme were to be implemented, then the UFIB Sub-Fund policies would be consolidated into the RL Open Fund and the RL Open Fund would be responsible for coverage of the capital requirements of the UFIB Sub-Fund policies. This would enable an immediate distribution of the UFIB Additional Account (less the Scheme Contribution) to the with-profits policyholders in the UFIB Sub-Fund.

9.35 There is clearly a cost (or opportunity cost) associated with the restrictions associated with holding assets to provide coverage of the capital requirements in respect of the UFIB Sub-Fund policies and so it is reasonable to expect a payment to be made to the RL Open Fund for this. To not make such a payment would be a detriment to the policies of the RL Open Fund.

9.36 This payment is called the CFC and is intended to compensate the RL Open Fund for covering the future capital requirements of the UFIB Sub-Fund policies and thereby providing the Included Policies with access to the expected benefits under the Scheme.

9.37 As described in Section 3, the CFC is to 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 UFIB Sub-Fund business, and in particular the risks associated with the investments held by the UFIB Sub-Fund and the risk that they are insufficient to meet the UFIB Sub-Fund’s liabilities to its policyholders.

9.38 RLMIS has concluded that it would not be appropriate for the RL Open Fund to be compensated by the UFIB Sub- Fund for the components of the balance sheet strain that relate to this market risk, 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.

9.39 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. RLMIS believes that 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.

9.40 The cost of capital rate will be a rate consistent with the rate of return that the RL Open Fund would expect to achieve on other investments. The CFC payable would then be calculated as the sum of:

 The present value of its net balance sheet strain relative to the 1-in-20 year target for each year between 31 March 2021 and the expected point of natural closure (upon meeting the Sunset Clause Threshold);

Multiplied by

 The cost of capital rate p.a.

9.41 In my view it is fair and reasonable that the RL Open Fund should receive a payment for covering the non-market risk components of the capital requirements in respect of the policies of the UFIB Sub-Fund policies (subject to its amount being appropriately determined, which is discussed below). This is because:

 Covering the capital requirement of a new group of policies would tie up, and put at risk, capital it could otherwise use to take rewarded risks and so would lead to an opportunity cost to the RL Open Fund.

 Although, in line with the UAG Scheme it is likely that a CFC would not be payable upon the reaching of the UFIB Sub-Fund’s Sunset Clause Threshold, it should be noted that:

o The Sunset Clause Threshold of the UFIB Sub-Fund was set at a level where the cost to the RL Open Fund of meeting the capital requirements of the UFIB Sub-Fund at that point would be expected to be immaterial; and

o The proposed approach to the CFC only requires the UFIB Sub-Fund to compensate the RL Open Fund for meeting its capital requirement up until the expected point of the breach of the Sunset Clause Threshold, and therefore the CFC does not require the UFIB Sub-Fund to pay for something that it would not be paying for if the Sunset Clause were to be triggered naturally.

 The Offer Uplift percentage has been fixed based on RLMIS’s financial position as at 31 March 2021, meaning the RL Open Fund is, in effect, taking on the risks of the UFIB Sub-Fund from 31 March 2021 and should be compensated for this. However, given the immaterial level of non-market risk in the UFIB Sub-Fund, this results in no additional amount being added to the CFC to cover the nine month period between 31 March 2021 and 31 December 2021.

9.42 I am satisfied that it is fair and reasonable for the UFIB Additional Account to pay for the cost incurred by the RL Open Fund in covering the non-market risk components of the capital requirements of the UFIB Sub-Fund policies.

The net balance sheet strain

9.43 By taking on the capital requirements of the UFIB Sub-Fund, there would be a net balance sheet strain for the RL Open Fund arising from:

 An increase in the Internal SCR of the RL Open Fund:

The SCR would increase due to the consolidation of the business of the UFIB Sub-Fund into the RL Open Fund and this would be partially offset by additional diversification benefits as described in Section 3;

 An increase in the monetary amount of the buffer above the Internal SCR required in accordance with the capital target under the RLMIS Capital Framework; and

 An increase in the risk margin due to the consolidation of the business of the UFIB Sub-Fund.

9.44 The cost of capital would be calculated for the years until the expected point of natural closure, i.e. at the Sunset Clause Threshold. Therefore, the CFC would include a charge for the net balance sheet strain, as adjusted by the items listed in paragraph 3.37, expected to be incurred by the RL Open Fund up until 2043.

9.45 The UAG Scheme does not contain detail on the procedure that should be followed if the Sunset Clause Threshold were to be reached, and in particular there is nothing on whether the Sunset Clause would permit a “cost of capital” payment to be made to the RL Open Fund. It therefore seems reasonable that the term for which a cost of capital is charged is limited to the period up until the Sunset Clause Threshold is reached.

9.46 As described in paragraph 3.45, the CFC includes the period from 31 March 2021 to 31 December 2021, as the Offer Uplift is being locked in based on RLMIS’s financial position as at 31 March 2021, and therefore the RL Open Fund is, in effect, taking on the risks of the UFIB Sub-Fund from that date.

9.47 I am satisfied that the various elements of the net balance sheet strain described above are reasonable for the following reasons:

 The Internal SCR and risk margin are calculated on a Solvency II Pillar 2 basis which is the basis RLMIS uses for its day-to-day management of the funds, and the basis on which it makes decisions in relation to the RL Open Fund and the UFIB Sub-Fund.

 Allowance for the 1-in-20 year buffer above the Internal SCR is in line with the RLMIS Capital Framework although this additional capital is not required to be held for regulatory purposes. This is consistent with the way in which the UFIB Sub-Fund is currently managed and the capital buffer that would be held in this sub- fund in the absence of the Scheme. It would also be typical when pricing a comparable arm’s length transaction with an external third party to include compensation for the cost of holding a capital buffer.

 Adjusting the balance sheet strain to remove the component of the capital requirements relating to market risk is reasonable as this risk could be materially removed by the RL Open Fund through hedging activities should it wish to do so.

 Allowing for the fact that the payment of the CFC itself will lessen the balance sheet strain means that the CFC will better reflect the actual impact of the Scheme.

9.48 I have discussed below the approach to diversification benefits described in paragraph 3.37.

9.49 The cost of capital approach used to determine an estimate of the opportunity cost of being unable to deploy the capital for return-seeking opportunities is a relatively common way to determine transaction price targets within the UK insurance industry, and it is the approach taken under Solvency II in the calculation of the Risk Margin. I am therefore satisfied that this is a reasonable approach for determining the size of the CFC.

The diversification benefits

9.50 As described in Section 3, it is proposed that the diversification benefits that will be achieved by combining the RL Open Fund with the UFIB Sub-Fund should be shared between the RL Open Fund and the UFIB Sub-Fund implicitly via the CFC calculation.

9.51 The allocation of this diversification benefit between the RL Open Fund and the UFIB Sub-Fund will affect the size of the CFC payable by the UFIB Sub-Fund.

9.52 It is proposed that, of the diversification benefits contributed by the UFIB Sub-Fund, 50% of this benefit should be allocated to the UFIB Sub-Fund through a reduced CFC (relative to the CFC that would have been charged if no credit had been given to the UFIB Sub-Fund for this diversification benefit), meaning that the remaining 50% of the diversification benefits would be to the benefit of the RL Open Fund.

9.53 Such a diversification benefit can only be achieved by combining more than one fund and it should be noted that:

 Neither the RL Open Fund nor the UFIB Sub-Fund are being forced to enter into this transaction, e.g. due to any financial difficulty; and

 While the RL Open Fund is significantly larger than the UFIB Sub-Fund:

o The RL Open Fund would have the potential to earn an extra return on capital available from the consolidation of the UFIB Sub-Fund; and

o It is the Eligible Policyholders of the UFIB Sub-Fund who would, through the Policyholder Vote, ultimately decide whether the Scheme should proceed.

9.54 Therefore, it is not unreasonable that the benefits from the transfer should be evenly split between the parties.

9.55 It is also relevant to consider how this division of diversification benefits might compare to what a third party would be prepared to pay in pricing an arm’s length transaction and although market practice varies around the way in which diversification benefits feed into quoted prices, it would be common for a risk-acquiring party operating in competitive markets to offer pricing on a “marginal” basis. This would involve the risk acquirer only charging the risk disposer for the marginal increase in the capital requirements of the risk acquirer. Since these would be after diversification, 100% of the diversification benefit would be implicitly allocated to the risk disposer. In the case of this Scheme, the risk disposer is the UFIB Sub-Fund and the risk acquirer is the RL Open Fund.

9.56 That said, it should be noted that:

 Market practice varies in relation to the treatment of diversification benefits.

 The risks of the UFIB Sub-Fund include risks that are not commonly transferred in commercial transactions.

Therefore, it is likely that any risk acquirer would take a more conservative approach to pricing such a transaction compared to risks that are transferred more frequently and therefore ask for a higher ‘price’ for the

risk. In this case a risk acquirer is likely to be mindful that if the risk were to crystallise then the diversification benefit could disappear.

9.57 Taking all of this together, I am satisfied that it is reasonable for the CFC for the UFIB Sub-Fund to reflect a 50:50 split of the diversification benefit between the UFIB Sub-Fund and the RL Open Fund.

The ‘cost of capital’ rate

9.58 The choice of a 9.0% p.a. net (of the risk-free rate) cost of capital rate has been derived by reference to various sources, including RLMIS’s internal target for return-seeking ventures (adjusted for the fact that project costs are, in the case of the Scheme, being dealt with outside of the CFC), an analysis of leading UK life insurers’ average ROEs in recent years and an analysis of RLMIS’s historical target and achieved internal rates of return on new business.

9.59 I am satisfied that the choice of 9.0% p.a. as the net cost of capital rate is reasonable for the following reasons:

 It is reasonable to charge a cost of capital rate that is broadly consistent with the return that a participant in an arm’s length transaction in the UK insurance market would charge.

 The 9.0% p.a. cost of capital rate is consistent with the internal target return on capital set by the RLMIS Board for return-seeking ventures, once the fact that project costs are dealt with outside of the CFC has been taken into account.

 A 9.0% p.a. cost of capital rate is consistent with the range of practice in relation to the target return required by participants in transactions that transfer UK insurance risks, for example reinsurance transactions or pension scheme buyouts.

 9.0% p.a. is within the range of ROE figures disclosed by UK life insurers as at 31 December 2020.

An analysis of the returns earned by other companies from their public disclosures is not straightforward as different companies have different approaches to what they include and what they exclude from such calculations. In addition, the ROEs in company documents are often historical and so reflect past economic circumstances and are likely to include some artificial effects that may introduce some differences relative to what an insurer might target as a return on capital in a transaction in the current environment.

9.60 It should be noted that, as only 50% of the diversification benefits of consolidation would be reflected in the CFC, the capital requirements in the CFC would be higher than if the full diversification benefit were allowed for. Therefore, in the calculation of the CFC, the cost of capital rate would be applied to higher capital requirements than the actual increase in capital requirements in the RL Open Fund that would result from the implementation of the Scheme.

9.61 This means that, if everything were to go as expected, the excess return on the actual net balance sheet strain experienced by the RL Open Fund would be higher than 9.0% p.a. I have addressed the reasonableness of this approach in the previous sub-section on the split of the diversification benefits.

9.62 The 9.0% net cost of capital rate has not been adjusted for tax, as I understand from RLMIS that the CFC would not be subject to tax.

9.63 I am satisfied that the choice of a 9.0% net (of the risk-free rate) cost of capital rate is reasonable.

Conclusion on the CFC payable by the UFIB Sub-Fund to the RL Open Fund

9.64 I am satisfied that the CFC payable by the UFIB Sub-Fund to the RL Open Fund has been calculated such that it can reasonably be considered as an arm’s length commercial transaction with a third party.

The Project Costs Allowance

Introduction

9.65 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.

9.66 I describe my analysis of these below.

The allocation of the expected cost of the Fund Consolidations part of the Simplification Programme

9.67 As described in paragraph 3.23, 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.

9.68 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.

9.69 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.

9.70 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 at that date (the Expected Future Costs), plus the Indemnity Premium.

9.71 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.

9.72 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 UFIB 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.

9.73 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 RLMIS’s 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.

9.74 For the UFIB Sub-Fund, this would result in an allocation of expected costs of £5.8 million (Past Costs and Future Expected Costs) plus an Indemnity Premium of £0.3 million. I am satisfied that this total allocation of £6.1 million of the Aggregate Project Costs Allowance and Indemnity Premium for the Fund Consolidations part of the Simplification Programme to the UFIB Sub-Fund is reasonable.

The overall estimate of the costs of the Fund Consolidations

9.75 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 RLMIS’s 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.

9.76 I have sought additional information from RLMIS in relation to some of the areas listed in paragraph 9.75, 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.

9.77 RLMIS has provided breakdowns of the expected costs of the most material items listed in paragraph 9.75, 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.

9.78 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.

9.79 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 UFIB 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.

9.80 As described in paragraph 9.74, it is proposed that the UFIB Sub-Fund’s allocation of the total costs (excluding the total Indemnity Premium) of £38.1 million is £5.8 million.

The Indemnity Premium

9.81 As set out in Section 3 (paragraphs 3.53 to 3.62) 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.

9.82 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.

9.83 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.

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

9.85 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.

9.86 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.

9.87 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.

9.88 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.

9.89 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.

9.90 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). As stated above in paragraph 9.83, 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.

9.91 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 UFIB Sub-Fund

9.92 Overall, the Indemnity Premium for the UFIB Sub-Fund would be £0.3 million and would be added to the cost allocation for the UFIB Sub-Fund of £5.8 million to give a total Project Costs Allowance for the UFIB Sub-Fund of £6.1 million.

9.93 I am satisfied that it is reasonable to allocate the Project Costs Allowance to the UFIB 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 UFIB Sub-Fund.

 The cost of fund consolidation of the UFIB Sub-Fund upon reaching its Sunset Clause Threshold (if that Sunset Clause Threshold were reached today) in isolation has been estimated at £6 million.

Therefore, the Project Costs Allowance proposed under the Scheme is in line with costs expected on reaching the Sunset Clause Threshold, albeit the Project Costs Allowance would be payable immediately rather than in 2043 (the expected date of reaching the Sunset Clause Threshold).

Furthermore, 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.

9.94 I am satisfied that it is reasonable to allocate the Project Costs Allowance of £6.1 million to the UFIB Sub-Fund.

Cost apportionment in the event of an abandoned Scheme

9.95 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 that point of designing, analysing and implementing the Scheme would be apportioned between the RL Open Fund Estate and the UFIB Additional Account as described in paragraph 3.77.

9.96 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.

9.97 I understand that any decision to apportion costs of an abandoned Scheme to the UFIB 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.

9.98 I am satisfied that the approach to apportioning the costs of an abandoned Scheme is reasonable.

The Premium Uplift Contribution

9.99 The Premium Uplift Contribution would comprise an estimated £3.7 million of the UFIB Additional Account that would be paid to the RL Open Fund so that the Offer Uplift as applied to Included Policies’ asset shares could also be applied to asset shares in respect of contractual future premiums payable by premium-paying Included Policies after the Implementation Date. This additional uplift would be paid by the RL Open Fund Estate.

9.100 The purpose of the Premium Uplift Contribution is to ensure that premium-paying Included Policies would not be materially adversely affected by the implementation of the proposed Scheme. In the absence of the Premium Uplift Contribution, it would be the case that such Included Policies would receive a lower additional account distribution than they would have in the absence of the Scheme. This arises because currently (before the implementation of the proposed Scheme), the UFIB Additional Account is being distributed partially through enhancements to pay- outs at the point of claim (i.e. when all premiums have been paid) and, if the Scheme were to be implemented the UFIB Additional Account would be distributed through an immediate, single enhancement to asset share which would not reflect premiums yet to be paid.

9.101 I am satisfied that it is reasonable to apply the Offer Uplift 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 UFIB additional account distribution and associated uncertainty before and after the Scheme

9.102 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 UFIB Additional Account (less the Scheme Contribution).

9.103 The Offer Uplift would be structured as a fixed percentage uplift for all Included Policies (set as 9.7% based on financial information as at 31 March 2021), together with the same percentage uplift to the amount allocated to asset share in respect of future premiums on premium-paying Included Policies as and when those premiums are credited to asset shares.

9.104 This approach will inevitably result in a different allocation of the UFIB Additional Account across the Included Policies than would have been the case under the future pattern of additional account distribution in the absence of the Scheme and this means that some groups of policies will receive a higher additional account allocation as a result of the Scheme and some will receive a lower allocation.

9.105 RLMIS has provided me with analysis comparing the Offer Uplift percentage with the pattern of UFIB Additional Account distribution in the absence of the Scheme over the run-off period for the UFIB Sub-Fund.

9.106 Figure 9.1 below shows this comparison. 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

9.107 The analysis underpinning 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 UFIB Additional Account starts at 8.8% for a policyholder exiting the UFIB Sub-Fund in 2022 (the first point in the comparison after the expected Implementation Date of the Scheme), increasing to around 13.2% by 2035.

 The Offer Uplift to asset shares, shown by the black dashed line in Figure 9.1, would be 9.7% for all UFIB Sub- Fund Included Policies.

 It is expected that the best estimate uplift in the absence of the Scheme would be greater than the Offer Uplift for claims arising in 2030 or later.

Therefore, those policyholders exiting the UFIB Sub-Fund from the start of 2030 onwards (around 44% of Included Policyholders) would expect, under current best estimate projections about the development of the UFIB Sub-Fund, to receive a greater distribution of the UFIB Additional Account in the absence of the Scheme.

That being said, the best estimate uplift in the absence of the Scheme is not guaranteed.

 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 around 10 percentage points more or less than the best estimate uplift, with this potential difference being increased in the more extreme scenarios.

In contrast, if the Scheme were to be implemented then the uniform uplift to asset shares under the Offer would be certain at 9.7% and, as shown in Figure 9.1, this Offer Uplift percentage of 9.7% sits towards the lower end of the range of expected pay-outs if the Scheme were not to proceed in later years, i.e. for those expected to remain invested in the UFIB Sub-Fund the longest. It should be noted that the Offer Uplift percentage (9.7%) was determined based on the financial information as at 31 March 2021 and is fixed until the Implementation Date (expected to be 31 December 2021).

9.108 As described in paragraph 9.3, Included Policyholders are likely to have a 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 UFIB Additional Account. However, this expectation will not extend to the precise pattern of best estimate uplifts in the absence of the Scheme. The question is therefore whether a uniform distribution to all Included Policies represents a fair distribution.

9.109 When considering the distribution of a with-profits fund estate, firms would typically 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 had borne the most risk for the longest period of time. This 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 UFIB Additional Account to date.

9.110 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 UFIB Sub-Fund that result in the expected pattern of UFIB 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 UFIB 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.

9.111 Additionally, it is useful to split the Included Policyholders into three broad categories:

 Category 1: The first 1/3rd of Included Policyholders who are expected to claim.

Included Policyholders who claim on their policies within a few years of the implementation (up to the end of 2025) of the Scheme. These are mostly expected to be the oldest policyholders who are expected to claim the soonest.

At the end of 2025 it is expected that 68.1% of policies would remain in force so approximately 31.9% (i.e. approximately the first 1/3rd of Included Policies) would have claimed in the period to the end of 2025.

 Category 2: The second 1/3rd of Included Policyholders who are expected to claim.

Included Policyholders who claim on their policies in the medium term, i.e. a significant period after the implementation of the Scheme but without being amongst the last group of policyholders to claim.

This can be seen to be the period from 2025 to the end of 2031 when it is expected that 34.8% of policies would remain.

 Category 3: The final 1/3rd of Included Policyholders who are expected to claim.

The group of Included Policyholders who are the last to claim (mostly expected to be the youngest policyholders who are expected to live the longest).

This can be seen to be those who are expected to claim after the end of 2031.

9.112 Figure 9.1 shows that:

 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;

 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 additional account that is allocated to their policy would be removed and therefore the possibility of being worse off would be offset by this increased certainty.

In my view it is reasonable to conclude that the Scheme would not have a material adverse effect on the reasonable expectations of this category of Included Policyholders due to the trade-off between potentially lower expected benefits and the reduced risk and uncertainty around the level of those benefits.

 Included Policyholders in Category 3 are expected, under a central projection, to be worse off as a result of the Scheme as, in the absence of the Scheme they would, under a central projection, benefit from a tontine effect.

However, there are three points to be made that mitigate this:

o The uncertainty in respect of the size and timing of distributions from the additional account is at its highest in the later years of the projections and the removal of this uncertainty would be an improved outcome for policyholders;

o 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 backed up by a recent ruling on a scheme of arrangement involving The Equitable Life Assurance Society where Zacaroli J 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.”

o 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) performed to date, 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 to asset share

9.113 Taking the information above into account, I am satisfied that the Offer Uplift percentage proposed under the Scheme is fair and reasonable, and in particular would not result in a material adverse impact on the benefit expectations of Included Policyholders.

THE EFFECT OF THE SCHEME ON THE EXPECTED RETURN AND VOLATILITY OF INVESTMENT RETURN FOR ASSET SHARES

9.114 If the proposed Scheme were to be implemented, the UFIB 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.

9.115 As at 31 December 2020, the EBR for the asset shares in the UFIB Sub-Fund was 57%, and the EBR for the asset shares in the RL Open Fund was 63%. 9.116 The UFIB Additional Account is currently invested in cash and gilts and therefore, if the UFIB 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 UFIB Additional Account would result in a decrease to the UFIB Sub-Fund asset share EBR from 57%.

9.117 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 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 UFIB Sub-Fund policies with those of the RL Open Fund.

9.118 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.

9.119 Given the close alignment of the investment strategy of the UFIB 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 actually 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.

9.120 This increase to the EBR of the assets backing the asset shares of the UFIB Sub-Fund policies 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.

9.121 I am satisfied that the post-Scheme asset share EBR (63%) would be in line with the expectations of UFIB Sub- Fund policyholders as set out in both the current and post-Scheme RL Long Term Fund PPFM.

9.122 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 EXPENSES THAT WOULD BE CHARGED TO ASSET SHARES

9.123 Following the implementation of the Scheme, RLMIS’s approach to expense charges for Included Policies will be unchanged relative to that described in paragraphs 2.39 and 2.44 i.e. actual costs of operating the legacy administration systems and of investment management plus a 15% margin will be charged to Included Policies’ asset shares.

9.124 However, one of the objectives of the wider programme of change referred to in Section 3 is a reduction in administration costs and that may lead to reductions in the expenses incurred in administering the policies in the UFIB Sub-Fund. As administration expenses for these policies are charged on an ‘actual cost’ basis plus a profit margin the charges to the asset shares of the Included Policies would reduce. This potential change is not part of the Scheme and so does not form part of my conclusions.

9.125 As described in paragraph 3.83, a consequence of distributing the UFIB Additional Account to the asset shares of the with-profits policies of the UFIB Sub-Fund is that it would no longer be available to meet future exceptional costs, i.e. one-off or infrequent project costs.

9.126 Currently, charges for exceptional costs would reduce pay-outs on the UFIB Sub-Fund with-profits policies by reducing the UFIB Additional Account available to pay enhancements to the asset shares or claim values of the UFIB Sub-Fund with-profits policies.

9.127 If the Scheme were to be implemented, these charges would similarly reduce pay-outs on the with-profits policies but by reducing asset shares directly. This charge to asset shares may be taken in one of two ways, as follows (and as described in paragraph 3.83):

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 UFIB 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 UFIB 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 for the calculation of the CFC, and the associated representations made by RLMIS in respect of the Scheme to its policyholders.

9.128 The first proposed approach of spreading the exceptional costs over the future run-off of the former UFIB 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 UFIB Sub-Fund with-profits policyholders under the current approach and is expected to be used in most circumstances.

9.129 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 UFIB Sub-Fund with-profits policies.

9.130 I consider the proposed approach to charging for exceptional costs following the implementation of the Scheme to be reasonable.

9.131 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 UFIB 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 UFIB Sub-Fund, and so I consider a risk- free rate to be appropriate to not unduly penalise those policyholders.

9.132 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

9.133 Currently, the additional account of the UFIB Sub-Fund meets the costs of smoothing the pay-outs. If the proposed Scheme were to be implemented these costs would be met by the RL Open Fund.

9.134 If the Scheme were to be implemented the only change to smoothing of pay-outs would be that in the first year following the implementation the smoothing approach would be applied to the claim value before the addition of the asset share uplift. 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.

9.135 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.

9.136 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 DECLARATION OF THE SPECIAL REVERSIONARY BONUS

9.137 As described in Section 3, under the Offer a one-off Special Reversionary Bonus would be declared on 31 December 2021 to be applied to policies on 1 January 2022 (just after the expected Implementation Date of the Scheme), which would increase the guaranteed benefits (sum assured plus attaching annual bonuses declared to date) for all Included Policies. The Special Reversionary Bonus would be 29.0% if the Scheme were to be implemented.

9.138 It should be noted that the declaration of the Special Reversionary Bonus is unlikely to affect pay-outs for the vast majority of Included Policies other than in a scenario in which investment returns for their asset shares are persistently and strongly negative.

9.139 RLMIS carried out some customer research that indicated that many customers valued the with-profits nature of their contracts because it enabled them to benefit from potential upside in positive market conditions and to maintain security through a level of guaranteed benefits. There was not a strong consensus in favour of significant change to the balance of upside potential and guaranteed benefits.

9.140 The declaration of the Special Reversionary Bonus reflects these findings as it to some degree closes the gap between guaranteed benefits and asset shares but only to an extent that is affordable from the perspective of the impact on Technical Provisions and SCR, and to the extent that it does not impose restrictions on a supportable level of EBR for Included Policies’ asset shares.

9.141 The net financial impact as at 31 March 2021 of the Special Reversionary Bonus and the Offer27 (assuming these had both been applied as at that date) would be to increase the liability related to guaranteed benefits on Eligible Policies by approximately £3 million. The impact of the Special Reversionary Bonus on the CFC is less than £0.1 million.

9.142 I am satisfied that the impacts of the Special Reversionary Bonus on the CFC and the cost of guarantees used to determine the residual UFIB Additional Account available for distribution under the Scheme are not material and so my conclusions on the CFC are unaffected.

9.143 Taking all of this together, I am satisfied that the declaration of a Special Reversionary Bonus and its proposed level strikes an appropriate balance between all of the considerations set out above and would not have a material adverse effect on the benefit expectations of policyholders.

THE EFFECT OF THE SCHEME ON FUTURE ANNUAL AND FINAL BONUSES TO BE DECLARED IN RESPECT OF INCLUDED POLICIES

9.144 As discussed above the implementation of the Scheme would lead to:

 An uplift to the asset shares as well as an uplift to asset shares when any contractual future premiums are paid on Included Policies to reflect the distribution of the additional account which, in the absence of the Scheme, would not occur until that policy claimed; and

 A Special Reversionary Bonus being declared for Included Policies.

9.145 I have concluded in paragraphs 9.113 and 9.144 that the Offer Uplift and Special Reversionary Bonus described above are fair and reasonable. Additionally, the 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.

9.146 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 THE COST OF BONUS TRANSFERS PAYABLE TO THE RL OPEN FUND

9.147 As described in paragraph 3.82:

27 The Special Reversionary Bonus increases the liability related to guarantees as it increases the level of guaranteed benefits. The Offer slightly decreases the liability related to guarantees as it increases policy asset shares which makes it less likely that the policy guarantees will be a biting constraint upon pay-out.

 The Special Reversionary Bonus would provide a one-off increase to the guaranteed benefits under Included Policies which would trigger a physical transfer of assets equal to one ninth of the cost of the Special Reversionary Bonus from the UFIB Sub-Fund to the RL Open Fund, accelerating the payment to the RL Open Fund.

 The application of the Offer Uplift to the asset shares of 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.  The overall Cost of Bonus Transfers payable from the UFIB Sub-Fund to the RL Open Fund would be reduced to the extent that the additional account is reduced by the Project Costs Allowance.

9.148 However, these impacts would not result in any material change to the Cost of Bonus Transfers to the RL Open Fund. Therefore, I am satisfied that the implementation of the proposed Scheme would not have a material adverse effect on the Cost of Bonus Transfers from the perspective of the Included Policyholders.

THE EFFECT OF THE SCHEME ON MEMBERSHIP AND ALLOCATION OF PROFITSHARE

9.149 If future experience in respect of asset returns, policyholder behaviour, mortality rates and Scheme costs were to be in line with what is expected, then additional surplus would be expected to emerge in the RL Open Fund.

9.150 This surplus emerges because the CFC payment and the indemnity premium (which is an excess over the best estimate of expenses expected to emerge) would increase the assets of the RL Open Fund Estate and would emerge over time as additional surplus in the RL Open Fund as the SCR of the UFIB Sub-Fund runs off and the costs of the Scheme are paid. This surplus would then be available to be reinvested in running the insurance business or distributed to those policies that are allocated ProfitShare.

9.151 The holders of policies in the UFIB Sub-Fund are not currently:

 Members of RLMIS: Policyholders whose policies have been transferred to RLMIS through previous acquisitions and subsequent schemes of transfer have not gained membership.

 Allocated ProfitShare.

9.152 If the Scheme were to be implemented there would not be any change to this for Included Policies and they would not be allocated the additional surplus described above. I am satisfied that this is fair and reasonable because:

 UFIB Sub-Fund policyholders are not currently members of RLMIS and are not currently entitled to distributions from the estate of the RL Open Fund. It would be unfair to the existing members of RLMIS (a subset of the existing RL Open Fund policyholders) for such membership to be granted and/or distributions to be made as a result of the Scheme.

 The CFC and Project Costs Allowance are paid to the RL Open Fund as compensation for risks that it is taking on. Therefore, whilst these payments would be expected to result in additional surplus emerging in the RL Open Fund, the RL Open Fund would be required to meet losses arising in relation to the consolidated UFIB Sub-Fund business (to the extent that such losses are not absorbed through lower bonuses to Included Policies) and in relation to the costs of the Scheme in the event that future experience is adverse.

Therefore in my view it is reasonable for the RL Open Fund to benefit from the non-manifestation of risks that it has run, and indeed this is the basis upon which the CFC and Project Costs Allowance were derived; should the intention have been that Included Policies would partially benefit from favourable experience then the CFC and Project Costs Allowance would have been higher.

SAFEGUARDS TO THE AMOUNTS DISTRIBUTED TO INCLUDED POLICYHOLDERS AS A RESULT OF THE SCHEME

9.153 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 policyholders as a result of the Scheme.

9.154 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 to Included Policyholders, so it is important that the likely level of these charges in the future is largely unaffected by the Scheme.

As described in paragraphs 2.39 and 2.44, administration expenses and investment management expenses are charged to the policies on an ‘actual cost plus a profit margin’ basis. For the UFIB 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.

As set out in paragraph 2.41, the overall unit cost for maintenance expenses, including the margin, is reviewed every three years to compare it to 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 UFIB Sub-Fund as, if average third party provider rates were to be observed to be lower than those charged by the RLMS, the actual charges applied to the UFIB Sub-Fund asset shares would be capped at the average third party rate. These periodic reviews would continue following the implementation of the Scheme.

 Exceptional costs charged to asset shares in the absence of the UFIB Additional Account.

Currently, charges for exceptional costs would be met by the UFIB Additional Account and thereby reduce pay-outs on the with-profits policies in the UFIB Sub-Fund.

If the Scheme were to be implemented, there would no longer be the UFIB 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 3.83 (the exact mechanism used would be determined to be appropriate at that time by the RLMIS Board, the WPC and the 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 paragraph 9.129:

o The first proposed approach would be consistent with the distribution of costs between generations of UFIB 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’.

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 UFIB 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.

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 UFIB policies are used as a guide to determine the pay-out when the policy is claimed. The actual pay-outs on UFIB 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 RLMIS’s WPA and WPC. The RL Long Term Fund PPFM (which includes the principles and practices in respect of the UFIB 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 UFIB 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 Offer Uplift granted as part of the Scheme. The proportion of the distribution of the UFIB 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 9.145, 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 RLMIS’s WPA and 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 were to depart 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 UFIB 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 deviation from the best estimate assumptions used in calculating the size of the UFIB 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 deviations from the assumptions made when calculating the size of the UFIB Additional Account are reasonable.

9.155 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.

CONCLUSION ON THE REASONABLE BENEFIT EXPECTATIONS OF THE INCLUDED POLICYHOLDERS

9.156 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.

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 UFIB 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 UFIB 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 UFIB 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 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 FINANCIAL STRENGTH OF THE RL OPEN FUND

The security of benefits under the RL Open Fund policies

10.4 As concluded in Section 7, the Scheme would have no 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 deduction, called the Scheme Contribution, would be made from the UFIB Additional Account, and paid to the RL Open Fund. The Scheme Contribution consists of the following:

 The CFC, which is intended to compensate the RL Open Fund for taking on the capital requirements of the UFIB Sub-Fund;

 The Project Costs Allowance which is in respect of the UFIB Sub-Fund’s contribution towards the total costs of the Fund Consolidations;  The Premium Uplift Contribution which would be offset by a liability in the RL Open Fund to uplift the amount allocated to asset share in respect of future premium payments on Included Policies by the same percentage as that applied to asset shares of the Included Policies under the Scheme.

10.6 I cover these in turn below.

The CFC

10.7 I have considered the appropriateness of the value of the CFC above, and I reached the conclusion in paragraph 9.64 that the CFC payable by the UFIB Sub-Fund to the RL Open Fund lies within the range of values for an equivalent arm’s length commercial transaction with a third party.

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 in relation to non-fixed costs incurred after the Calculation Date. In return for the Indemnity Premium, the RL Open Fund will 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 will accrue to the RL Open Fund.

10.9 As set out above in paragraphs 9.81 to 9.91, I am satisfied that it would be reasonable for the RL Open Fund to:

 Receive an Indemnity Premium from the UFIB 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 in paragraph 9.88, 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 Included Policies 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 £3.7 million, I do not consider 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 UFIB Sub-Fund

10.14 I have considered the impact of the Scheme on the Cost of Bonus Transfers in paragraph 9.147 and I noted the value of the RL Open Fund’s interest in the future Cost of Bonus Transfers will change for various reasons, some related to the timing of the recognition of the value of these transfers and some related to actual differences arising from the UFIB Additional Account being reduced by the Project Cost Allowance.

10.15 However, I note that:

 The changes to the timing of the recognition of the value of these Cost of Bonus Transfers results in a more realistic estimate of the future transfers; and

 The actual differences arise because commercial terms have been agreed separately between the RL Open Fund and the UFIB Sub-Fund to cover the RL Open Fund’s costs and capital requirements, and I am satisfied that these are reasonable amounts.

10.16 Therefore, I am satisfied that the implementation of the proposed Scheme would not have a material adverse effect on the Cost of Bonus Transfers from the perspective of the existing policyholders in the RL Open Fund.

THE EXPECTED RETURNS ON THE EXISTING POLICIES OF THE RL OPEN FUND

Introduction

10.17 The implementation of the UFIB 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 existing RL Open Fund policies (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 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 UFIB Sub-Fund or UFIB 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

10.18 As described above, if the Scheme were to be implemented, the UFIB Sub-Fund would be consolidated into the RL Open Fund and the assets backing the asset shares of the UFIB Included Policies would be pooled with the assets backing the asset shares of with-profits policies in the RL Open Fund. The UFIB Additional Account is currently invested in cash and gilts and these assets would be reassigned to the asset shares of the UFIB Included Policies as a result of the application of the Offer Uplift.

10.19 As at 31 December 2020, the EBR backing the asset shares of the UFIB Sub-Fund and the EBR backing the asset shares of the RL Open Fund were close at 57% and 63% respectively. Therefore, after the consolidation of the UFIB 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 UFIB Sub-Fund Scheme.

10.20 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.

10.21 The costs associated with this asset rebalancing would be spread across the asset shares of the RL Open Fund 10.22 The implementation of the Scheme would result in a modest increase in the EBR backing the asset shares of with- profits policies of the UFIB 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 UFIB Sub-Fund, and a higher EBR should, all else being equal, result in higher expected returns on assets backing asset shares.

10.23 I am satisfied that the pooling of assets would not have a material adverse effect on the reasonable benefit expectations of the existing policyholders of the RL Open Fund.

ProfitShare

10.24 The level of ProfitShare declared each year takes into account the financial strength of the RL Open Fund. 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 7.13. Table 7.1 shows that, if the Scheme had been implemented on 31 March 2021, it would have led to a small decrease in 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.

10.25 If the Scheme were to be implemented, there would be no change to:

 The rights of the RL Open Fund policies to any future distributions from the RL Open Fund;

 The policies that are allocated ProfitShare (as described in Section 2):

o Those policies of the RL Open Fund currently allocated ProfitShare would continue to receive this; and

o Those policies currently not allocated ProfitShare, such as those in the UFIB Sub-Fund, will not be allocated ProfitShare following the implementation of the Scheme, and so would not dilute the rights of the existing RL Open Fund policies to any future distributions of ProfitShare.

10.26 Furthermore, if the Scheme were to be implemented, additional profits should emerge through the payment from the UFIB Sub-Fund as well as efficiency savings from the fund consolidation. These additional profits would increase the expected future level of ProfitShare relative to the level in the absence of the Scheme.

10.27 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 currently receive it.

The change to the risk profile of the RL Open Fund arising from the Scheme

10.28 As shown in Tables 2.4 and 2.5, the risk profile of the RL Open Fund is somewhat different to that of the UFIB Sub- Fund. The RL Open Fund is significantly larger and is exposed to a more diverse range of risks than the UFIB Sub-Fund, including risks around policyholder behaviour such as persistency risk. By contrast, the UFIB Sub- Fund’s risk profile is dominated by market risks.

10.29 Given the small size of the UFIB Sub-Fund in relation to the RL Open Fund, its consolidation into the RL Open Fund will 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

10.30 Following the implementation of the Scheme, any exceptional costs attributable to the former UFIB 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 UFIB Sub-Fund with-profits policies. Given the relative sizes of the RL Open Fund and the UFIB 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, 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

10.31 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.

CONCLUSION FOR THE EFFECT OF THE SCHEME ON THE EXISTING POLICYHOLDERS OF THE RL OPEN FUND

10.32 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

11.1 The remaining policyholders of RLMIS are the policyholders with policies in the RLMIS Closed Funds other than the UFIB Sub-Fund.

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.

 The allocation of ProfitShare to certain policies of the other RLMIS Closed Funds nor would it result in future allocations of ProfitShare to any of the policies in the UFIB Sub-Fund.

Hence, I am satisfied that the implementation of the Scheme would not dilute the rights of those policies that currently receive ProfitShare distributions.

 The status of the RL Open Fund under the RLMIS Capital Framework (it would have remained ‘Green’), and so there would not have been any additional management actions taken such as varying the distribution of profits through ProfitShare.

11.3 Additionally, the implementation of the Scheme would not change:

 The terms and conditions 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 policies 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 policies of the other RLMIS Closed Funds.

11.4 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 RLMIS’s policyholders

BACKGROUND

12.1 The implementation of the UFIB 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 UFIB 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 UFIB Sub-Fund Scheme, the RL Long Term Fund PPFM would be updated to reflect changes to the principles and practices for the UFIB Sub-Fund policies, principally in respect of removing references to the UFIB Additional Account and the UFIB 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 UFIB Sub-Fund that would be transferred to the RL Open Fund following the implementation of the UFIB Sub-Fund Scheme.

12.7 In relation to standards of administration and servicing, as described in Section 3, 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.

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 UFIB Sub-Fund inherited estate

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 UFIB Sub-Fund to the RL Open Fund; and

 The UFIB 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 both of the actions described in paragraph 13.3 involve a change to the current approach taken to managing the UFIB Sub-Fund’s inherited estate, it is relevant to consider whether these actions, individually or taken together, constitute a reattribution of the inherited estate of the UFIB Sub-Fund pursuant to COBS 20.

13.5 RLMIS has received advice from its legal advisers, Pinsent Masons, that the two actions described in paragraph 13.3 do not constitute a reattribution for the purposes of COBS 20 for the following (summarised) reasons:

 The CFC does not constitute a redefinition of with-profits policyholders’ rights, interests, and entitlements to the UFIB Sub-Fund’s inherited estate or the manner in which it may be used for the following reasons:

o The CFC is another mechanism used to implement actions that RLMIS might otherwise have taken to mitigate and manage the risks to which the UFIB Sub-Fund’s 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 RLMIS’s run-off plan for the UFIB 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 UFIB 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 UFIB 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 UFIB 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 UFIB Sub-Fund inherited estate.

13.8 From the perspective of fairness to Included Policyholders, I am less concerned with the question of whether the actions technically constitute a reattribution and more concerned that the process being followed by RLMIS is 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 UFIB Sunset Clause Threshold were to be met;

 RLMIS has appointed me to form a view on whether the Scheme more generally 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 size of the CFC is consistent with the terms that would be agreed with a third party in relation to a similar transaction;

 My conclusion that the Project Costs Allowance and Premium Uplift Contribution are reasonable; and

 The Scheme has been reviewed by RLMIS’s WPC and WPA.

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 policyholders of the UFIB Sub-Fund.

14. The Policyholder Outcomes Test – conclusion

14.1 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 Existing policyholders of the RL Open Fund; and

o Policyholders of the other RLMIS Closed Funds (i.e. the RLMIS Closed Funds excluding the UFIB Sub-Fund); or

 The standards of administration, servicing, management, and governance applying to:

o Included Policyholders;

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 UFIB 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 UFIB 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 rounded to the nearest percentage point (9.7%).

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 UFIB Sub-Fund as at 31 March 2021, projected forward to the expected Implementation Date of the UFIB 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 expected Implementation Date of 31 December 2021), and whether they would lead to a material adverse effect on outcomes for policyholders such as:

 For Included Policyholders of the UFIB 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 UFIB Sub-Fund.

15.5 My analysis and conclusions in this section have been formed assuming that the UFOB Sub-Fund Scheme and the SL Fund Scheme have not been implemented.

15.6 In Section 19, I consider the implications for the UFIB Sub-Fund Scheme of the implementation of those other schemes.

THE IMPACT OF CHANGING INVESTMENT CONDITIONS AND/OR A CHANGE IN THE RUN-OFF PATTERN

Introduction

15.7 As stated above, the Offer Uplift percentage that would be quoted in the Voting Packs was calculated based on the financial position of the UFIB 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 UFIB Additional Account might change by a different percentage than the Scheme Contribution or the assets backing the asset shares in the UFIB Sub-Fund.

15.9 In this scenario it could be the case that, if it were calculated at the Implementation Date, the UFIB Additional Account less the UFIB 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. If this were the case then, as set out above, there would be the risk that the Included Policies would receive a different Offer Uplift percentage than if it were calculated at the Implementation Date and that consequently either the Included Policies or the RL Open Fund Estate would suffer an adverse outcome.

15.10 If it were the case that the Included Policies received a lower percentage of their asset shares than would be implied by a recalculation of the Offer Uplift percentage at the Implementation Date then not all of the UFIB 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, lapses, maturities, 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 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 years28, the offer uplift percentage that would be calculated at the Implementation Date would be:

 0.5 percentage points higher (so an offer uplift percentage of 10.1%) following a 1-in-10 year fall in the value of equities;

 0.3 percentage points lower (so an offer uplift percentage of 9.3%) following a 1-in-10 year increase in the value of equities;

 0.6 percentage points higher (so an offer uplift percentage of 10.3%) following a 1-in-10 year increase in interest rates; and

 1.0 percentage point lower (so an offer uplift percentage of 8.7%) following a 1-in-10 year decrease in interest rates.

15.15 So, 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 10.3%, or a 0.6 percentage point increase to the asset shares of their Included Policies; and

 The maximum shortfall the RL Open Fund Estate would need to cover is 1.0% of the Included Policies’ asset shares at the Implementation Date, or approximately £8.9 million (0.2% of the RL Open Fund Estate based on its value at 31 March 2021). 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 UFIB Additional Account not to compensate the

28 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.

100

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 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 UFIB 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. For example, changes in policy run-off in this period could result from:

 Higher or lower mortality experience than assumed in best estimate assumptions over this period;

 A “disturbance” effect whereby policyholders are reminded of their policy by the Scheme mailing, resulting in an increased lapse rate than that assumed in the best estimate assumptions; or

 Conversely, 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.

15.18 The impact of these scenarios would be:

 If more Eligible Policies were to exit (through death or lapse) over this period than expected under RLMIS’s best estimate assumptions, fewer Eligible Policies would become Included Policies at the Implementation Date and so the amount required to uplift asset shares at this point would be lower than assumed in calculating the best estimate uplift.

This would be to the benefit of the RL Open Fund Estate as it would receive the excess funds of the UFIB Additional Account.

 If fewer Eligible Policies were to exit over this period than assumed in best estimate, 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.

This would be to the detriment of the RL Open Fund Estate as it would need to make up the excess funds not covered by value of the UFIB Additional Account.

 For the avoidance of doubt, the Included Policies of the UFIB Sub-Fund would continue to receive their locked- in Offer Uplift percentage of 9% and so would not benefit or lose out from any changes in policy run-off over this period.

15.19 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 7.6%, and so the impact of these adverse scenarios is limited to the excess of the Offer Uplift percentage over this BAU claim uplift (9.7% - 7.6% = 2.1%). That is:

 If there were to be a greater number of exits than that assumed in the best estimate scenario then there would be a contribution of 1.8% of the asset shares of the excess exits to the remaining UFIB Additional Account.

This would be transferred to the RL Open Fund Estate on the Implementation Date.

 If there were to be a lower number of exits than that assumed in the best estimate scenario then an additional 1.8% 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.

15.20 Analysis of these scenarios shows that a 1 percentage point increase or decrease in the policy run-off (for any reason) over the period between the Calculation Date and the Implementation Date (compared to best estimate assumptions) would result in a surplus or deficit in the UFIB Additional Account at the Implementation Date of less

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than 0.01% of Included Policies asset shares (or approximately £0.1 million or less than 0.005% of the RL Open Fund Estate based on its value at 31 March 2021).

15.21 I am satisfied that that the possibility of adverse changes in the expected run-off pattern of the UFIB Sub-Fund policies between the Calculation Date and the Implementation Date would not have a material adverse effect on policyholder outcomes.

The reduction in volatility provided by the Scheme

15.22 In the absence of the Scheme, Eligible Policyholders would be exposed to volatility in the value of the UFIB Additional Account as such volatility would affect the distributions of the UFIB 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.

15.23 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 UFIB 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 UFIB 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 UFIB Sub-Fund for the nine month period from the Calculation Date to the Implementation Date.

15.24 The existence of the guarantee would provide Eligible UFIB 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 UFIB 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.

15.25 Based on experience of previous schemes of arrangement in the UK industry, such certainty would be viewed as a positive policyholder outcome.

15.26 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.

15.27 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.

15.28 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

15.29 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 UFIB Sub-Fund between the Calculation Date (31 March 2021) of the uplift percentages that will be quoted in the Voting Packs and the Implementation Date of the Scheme (expected to be 31 December 2021).

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15.30 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 RLMIS’s 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 RLMIS’s 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 UFOB Sub-Fund Scheme and the SL Fund Scheme have not been implemented.

16.3 In Section 19, I consider the implications for the UFIB Sub-Fund Scheme of the implementation of those other schemes.

THE COMMUNICATIONS STRATEGY

16.4 I have reviewed RLMIS’s communications strategy, as described in Section 5 of this Report, and I am satisfied that it has had sufficient input both from subject matter experts across the business, RLMIS’s WPA and WPC, and external experts, including RLMIS’s legal advisers and a specialist design team. 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.

16.5 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;

 Changes to the RL Long Term Fund PPFM would be communicated to affected policyholders outside of the Scheme;

 As concluded in Section 7 and Section 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 policies of the RL Open Fund;

 A collapse of the funds into the RL Open Fund would have taken place eventually in any case under the terms of the UAG Scheme;

 There would be no 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 consistent with the approach taken for other similar schemes (both schemes of arrangement and schemes under Part VII of FSMA).

16.6 In addition to these methods, RLMIS executed an external media campaign during the fourth quarter of 2020 to encourage uncontactable policyholders to re-engage with RLMIS.

16.7 I have addressed RLMIS’s approach to uncontactable policyholders in Section 18 of this Report.

THE COMMUNICATIONS PACKS

16.8 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.

16.9 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.

16.10 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.

16.11 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

16.12 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 and guaranteed benefits.

16.13 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

16.14 The approach described in Section 5 to dealing with policyholder responses, enquiries and objections is reasonable on the basis that it is similar to the approach I have seen taken for other similar schemes of arrangement.

16.15 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:

 The volume of mailing packs sent out in relation to the Scheme; and

 The expected propensity of policyholders to seek information over the phone.

16.16 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.

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16.17 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 requirements will be able to adapt to any higher-than-expected demand.

16.18 Further to the above, I have reviewed working versions of the telephone helpline scripts, the guidance framework and the training materials provided to RLMIS’s customer services team.

SUPPORT FOR VULNERABLE POLICYHOLDERS

16.19 I have reviewed RLMIS’s arrangements to support vulnerable policyholders as described in Section 5.

16.20 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

16.21 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 UFIB 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 UFIB Sub-Fund, the cost of providing advice would be around three times the average uplift an Eligible Policy will receive under the Offer.

16.22 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.

16.23 I therefore consider that the costs of providing formal advice and guidance, which would be borne by the UFIB Sub- Fund, would be disproportionate to the additional benefits it would bring to Eligible Policyholders.

16.24 Therefore, I am satisfied that RLMIS’s proposal to not provide formal advice and guidance to Eligible Policyholders is reasonable.

CONCLUSION FOR THE POLICYHOLDER COMMUNICATIONS TEST

16.25 I am satisfied that:

 The information provided to Eligible Policyholders in respect of the Scheme, together with the time allowed to consider that information, is sufficient for Eligible Policyholders to make an informed decision regarding the Offer and the vote;

 RLMIS’s 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.

16.26 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 UFIB Sub-Fund Scheme.

17.3 RLMIS’s external legal advisers have carried out a due diligence exercise on the policies of the UFIB 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 UFIB Sub-Fund Scheme and concluded that the only areas that risk giving rise to class or fairness tensions under RLMIS’s proposals relate to the fact that, under the analysis shown in Sections 8 to 14, and under RLMIS’s central projection, holders of policies with short remaining terms are projected to receive a higher distribution of the UFIB 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 UFIB Additional Account in the absence of the Scheme.

17.5 In the case of the outcomes that could vary by remaining term, RLMIS’s 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 RLMIS’s 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 differing circumstances of policyholders in respect of their age and guarantees;

 The differences in the existing rights of Eligible Policyholders, including the right to receive periodic payments and / or have in the past been entitled to take loans from RLMIS;

 The differences in maturity dates (for endowment policies) and the policyholder’s age when their policy becomes fully free paid29 (for whole of life policies); and

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 The difference in premiums payable on Included Policies, where some policies are paid up or fully free paid while other policies will require premiums to continue following implementation of the Scheme.

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 in the UFIB Sub-Fund at the Calculation Date; plus

 The sum of future premiums on all of the policyholder’s Eligible Policies in the UFIB Sub-Fund from the Calculation Date until their contractual end-point, i.e. the fully free paid age for whole of life policies and maturity for endowment policies.

17.11 For whole of life policies, the amount payable on a claim is defined to be the death value of the policy as at the Calculation Date. For endowment policies it is defined to be the cash-in value of the policy as at the Calculation Date.

17.12 The Vote Value would not reflect the value of the additional benefits on some of the policies (i.e. periodic payments described in Section 2).

17.13 Using death benefits for whole of life policies and cash-in values for endowment policies would ensure consistency between the Eligible Policyholder’s interest in the UFIB Sub-Fund (as the Vote Value is summed across all of their Eligible Policies) and the basis underlying the Vote Value. Death benefits and cash-in values do not directly represent the benefit of the Scheme for each Eligible Policy as the uplift would be applied to asset share but the death / cash-in value of a policy should be a reasonable proxy for the asset share (as the uplift would be a single percentage applied across the UFIB Sub-Fund Included Policies) and is a value that should be understood and appreciated by policyholders.

17.14 Furthermore, including an allowance for future premiums in the Vote Value would reflect the additional interest that premium-paying Eligible Policyholders have in the Scheme. This additional interest arises because future premiums on Eligible Policies in the UFIB Sub-Fund will receive the uplift (of the same percentage as is applied to asset shares) as and when the premiums are paid, that will be credited to asset shares.

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.

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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 of the voting Eligible Policyholders approve the 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 in paragraphs 17.10 to 17.15 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.

OTHER CONSIDERATIONS

17.21 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.

17.22 I am satisfied that this is reasonable for the following reasons:

 The fact that an Eligible Policyholder has more than one policy in the UFIB 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 UFIB Sub- Fund; and

 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

17.23 I am satisfied that the proposed approach to the policyholder vote is fair and reasonable to all policyholders.

17.24 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 treatment of uncontactable policyholders; and

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

18.2 My analysis and conclusions in this section have been formed assuming that the UFOB Sub-Fund Scheme and the SL Fund Scheme have not been implemented.

18.3 In Section 19, I consider the implications for the UFIB Sub-Fund Scheme of the implementation of those other schemes.

THE APPROACH TO ELIGIBILITY FOR THE OFFER

18.4 The UFIB Sub-Fund policies are all with-profits policies and there are no other policy types (such as non-profit or unit-linked) in the fund. Therefore, with the exceptions listed below, all policies in the UFIB Sub-Fund will be eligible for the Offer and are Eligible Policies and all policyholders are Eligible Policyholders.

18.5 The with-profits policies of the UFIB Sub-Fund that will not be eligible for the Offer are:

 With-profits endowment policies with a maturity date prior to 31 December 2021; and

 With-profits policies that were cancelled shortly after commencement and so did not accrue any benefits, but which have attaching outstanding loans with RLMIS.

18.6 I am satisfied that the approach to eligibility for the Offer is reasonable.

THE TREATMENT OF UNCONTACTABLE POLICYHOLDERS

18.7 I have reviewed RLMIS’s 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 policyholders are reasonable.

18.8 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 and the findings from policyholder research conducted by RLMIS, 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.

 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 uncontactable policyholders would vote any differently to the Eligible Policyholders who elect to vote on the Scheme.

 RLMIS’s approach is consistent with that used for other similar schemes of arrangement.

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18.9 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

18.10 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”); or

 Vote against the Offer, either by post or at the Scheme Meeting (in person or by proxy).

would be bound by the Scheme if it is implemented.

18.11 In considering whether it is reasonable to bind non-respondents and those who vote against the Offer, I have considered alternatives to this approach, such as:

 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).

18.12 An alternative approach, such as those listed above, would allow for the possibility of a proportion of the policyholders in the UFIB Sub-Fund remaining in the UFIB Sub-Fund after the implementation of the Scheme. This would prevent the UFIB Sub-Fund from being consolidated into the RL Open Fund until the Sunset Clause Threshold were to be reached.

18.13 However, preventing fund consolidation would remove, or reduce, the expected benefits to RLMIS’s policyholders of the Scheme (as described in Section 3). In my opinion, these are therefore not practical options.

18.14 As I stated above for my consideration of the treatment of uncontactable policyholders, 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.

18.15 As described in Section 9 and as shown in Figure 9.1, the pattern of distributions of the additional account in the absence of the Scheme would be likely to be different from the way in which the additional account would be distributed under the Scheme.

18.16 In particular, Included Policies that exit early are likely to be the ones most likely to benefit from the implementation of the Scheme in terms of a comparison of their additional account allocation in the absence of the Scheme. By contrast, Included Policies that exit late are likely to 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).

18.17 In respect of Eligible Policyholders who do not vote on the Scheme, and in particular those policyholders classified as uncontactable, it is likely 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 including but not limited to their age) and in relation to this group, I note the following:

 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; and

 I have concluded in Section 14 that, in general, the impact of the Scheme on the pattern of distributions of the additional account does not constitute a material adverse change in the reasonable benefit expectations of Included Policyholders.

18.18 I am 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.

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18.19 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 may 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 will 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.

18.20 There is no reason to conclude that the benefits of the Scheme for non-respondents would be any different than for other Eligible Policyholders, and therefore no reason to conclude that respondents’ and non-respondents’ interests are not aligned.

18.21 Furthermore, I am satisfied that RLMIS has taken all 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.

18.22 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.

CONCLUSION FOR THE FAIR CONDUCT TEST

18.23 I am satisfied that the conduct of RLMIS in respect of the proposed Scheme is fair and reasonable to all policyholders.

18.24 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 RLMIS’s policyholders.

THE UFOB 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 UFOB Sub- Fund Scheme and the SL Fund Scheme under which the UFOB Sub-Fund and SL Fund would be consolidated into the RL Open Fund and the UFOB Additional Account and the SL Fund Estate would, after deduction of the appropriate Scheme Contribution, be distributed to the with-profits policies of the UFOB Sub-Fund and the SL Fund respectively.

19.3 The UFOB Sub-Fund Scheme and SL Fund Scheme would be presented to the High Court on the same day as the UFIB Sub-Fund Scheme and, if approved by the High Court, would become effective on the same day (31 December 2021) as the UFIB Sub-Fund Scheme.

19.4 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 UFOB Sub-Fund Scheme and SL Scheme have not been implemented and that the UFOB Sub-Fund and the SL Fund remain in the group of RLMIS Closed Funds.

19.5 The UFOB Sub-Fund Scheme and SL Fund Scheme are similar to the UFIB Sub-Fund Scheme covered in this Report in that they would involve the distribution of the UFOB Sub-Fund Additional Account and SL Fund Scheme Estate (after deduction of the relevant Scheme Contribution) to with-profits policies and the consolidation of the UFOB Sub-Fund and SL Fund into the RL Open Fund. The principal differences between this Scheme and the UFOB Sub-Fund Scheme and SL Scheme are:  The UFOB Sub-Fund and SL Fund have different mixes of business to the UFIB Sub-Fund, comprising principally OB CWP pensions in the UFOB Sub-Fund and principally CWP and UWP pension business in the SL Fund.

 The Scheme Contributions for the three schemes would, whilst calculated consistently, be made up of different values for the different components.

 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. This is not the case for the UFOB Sub-Fund and the SL Fund.

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 UFOB Sub-Fund Scheme and the SL Fund Scheme have been implemented.

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 UFOB Sub- Fund; and

 Approximately 10 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 There are separate schemes of arrangement under which the UFOB Sub-Fund Scheme and SL Fund Scheme will be implemented. I have been appointed as the Independent Expert for both of those processes and will be considering those processes and concluding on the fairness to policyholders in separate reports. Therefore this

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section does not reach a conclusion on the fairness and reasonableness of the UFOB Sub-Fund Scheme and the SL Fund Scheme but is focused on whether the implementation of the UFOB Sub-Fund Scheme and SL 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

19.10 As described in Section 7, based on financial information at 31 March 2021, the implementation of the Scheme would result in:  A decrease of 1.0 percentage points in the Internal SCR Cover ratio of the RL Open Fund, and so it would decrease to around 190%; 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.

19.11 In the event that one of the UFOB Sub-Fund Scheme and the SL Fund Scheme were also implemented, or both were implemented at the same time as the UFIB 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.

19.12 Therefore, the overall impact of the UFOB Sub-Fund Scheme or the SL Fund Scheme (or both together) alongside this UFIB 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 UFIB Sub-Fund Scheme in isolation. The RL Open Fund would have remained within the target range under the RLMIS Capital Framework.

19.13 This is relevant because it is the financial position of the RL Open Fund after the implementation of the UFIB Sub- Fund Scheme that will largely determine the financial strength available to support the guaranteed benefits of the UFIB Sub-Fund policies that are to be consolidated into the RL Open Fund under the Scheme, as well as the existing policies of the RL Open Fund.

19.14 The financial information as at 31 March 2021 shows further that the UFOB 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 UFIB Sub-Fund Scheme had been implemented on this date.

19.15 I am therefore satisfied that the implementation of the UFOB Sub-Fund Scheme, the SL Fund Scheme or both together, alongside this UFIB Sub-Fund Scheme would not have any effect on my conclusions under the Security of Policyholder Benefits Test in respect of the policies in the RL Open Fund, the UFIB Sub-Fund and the other RLMIS Closed Funds.

The other Fairness Tests

19.16 As described above, the impact of the implementation of the Scheme on the financial position of the RL Open Fund would be materially unchanged by the UFOB Sub-Fund Scheme or the SL Fund Scheme.

19.17 In respect of the RL Open Fund, the UFIB Sub-Fund, the UFOB Sub-Fund, the SL Fund and the other RLMIS Closed Funds, the UFOB Sub-Fund Scheme and the SL Fund Scheme would not 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;

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 The terms of the proposed Scheme;

 The approach to eligibility for the Offer;

 The Offer Uplift calculated that would be applied to the UFIB Sub-Fund policies under the Offer;

 RLMIS’s communications strategy in relation to the proposed 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 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.

Conclusion on the impact on the Scheme of the UFOB Sub-Fund Scheme and the SL Fund Scheme

19.18 I am satisfied that the implementation of the UFOB 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

19.19 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.

19.20 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

19.21 It is possible that one of the effects of the COVID-19 pandemic could be further financial market volatility such as that exhibited in February and March 2020, for example in the areas of interest rates, equity markets, property values and credit spreads30.

19.22 The principal impact of increased market volatility would be that the relative sizes of the UFIB Additional Account, the Scheme Contribution and the asset shares of the Eligible Policies of the UFIB Sub-Fund would be volatile, and therefore that the size of the UFIB Additional Account after deduction of the Scheme Contribution, as a proportion of asset shares, could vary over time.

19.23 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.

30 “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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19.24 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 UFIB Sub-Fund Scheme.

19.25 Therefore, I am satisfied that the risks from market volatility (due to COVID-19 or anything else) are mitigated and that the UFIB 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.

19.26 Additionally, to the extent that financial market volatility resulted in a significant fall in the value of Eligible Policies’ asset shares, this could reduce the extent to which the Special Reversionary Bonus remains supportable at the proposed level. If this took place after the point at which Eligible Policyholders had been informed about the Special Reversionary Bonus in the communications pack, RLMIS would have the option to:

 Delay the implementation of the Scheme;

 Reduce the level of the Special Reversionary Bonus to reflect the fall in asset shares; or

 Proceed with the Scheme with the previously communicated level of Special Reversionary Bonus.

19.27 However, I understand that the Special Reversionary Bonus would remain supportable even after a very significant fall in asset shares, and therefore it is highly unlikely that financial market volatility would result in changes relating to the Special Reversionary Bonus.

Operational disruption within RLMIS

19.28 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 RLMIS’s project team, or within other teams within RLMIS providing input into the Scheme.

19.29 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.

19.30 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

19.31 A resurgence of the pandemic could cause disruption amongst third parties that are important to the implementation of the Scheme. Such third parties 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.

19.32 In the event that the High Court suffered 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.

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19.33 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.

19.34 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.

19.35 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.

Wider societal impacts

19.36 A resurgence of the pandemic could result in tougher government restrictions on movement or a more severe economic downturn.

19.37 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.

19.38 In particular, given the relatively high average age of the Eligible Policyholders subject to this Scheme, RLMIS is likely to be particularly sensitive to such considerations and, depending on the severity of the scenario, 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

19.39 The future course of the pandemic 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.

19.40 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.

19.41 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

19.42 If the Scheme is sanctioned by the High Court (and subject to any subsequent amendment of the Scheme, as considered below), the Directors of RLMIS are 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.

19.43 This Scheme shall become effective when a copy of the High Court Order has been delivered for registration to the Registrar of Companies and shall be implemented on the Implementation Date. However, if the Implementation Date is delayed and does not occur before 31 March 2021, the Offer and the Scheme shall lapse and none of their terms shall take effect.

19.44 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

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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.

19.45 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.

19.46 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 SCHEME ON PREVIOUS SCHEMES

19.47 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.

19.48 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 RL Long Term Fund PPFM, 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.

19.49 I am satisfied that the termination of the UAG Scheme would not lead to a material adverse effect on the business currently in the UFIB Sub-Fund that would be transferred to the RL Open Fund following the implementation of the UFIB Sub-Fund Scheme.

19.50 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 TAX IMPLICATIONS OF THE SCHEME

19.51 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.

19.52 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. 19.53 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.

19.54 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.

HM REVENUE AND CUSTOMS CLEARANCES

19.55 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.

19.56 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

19.57 As described in paragraph 3.84, 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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19.58 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

 Some of the rights brought about by membership are largely procedural, such as the right to vote at RLMIS’s Annual General Meeting on matters such as the approval of RLMIS’s 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.

PPFM CHANGES

19.59 RLMIS has provided me with details of the changes that will need to be made as a result of the UFIB Sub-Fund Scheme (and as a result of the UFOB Sub-Fund Scheme, SL Fund Scheme and the RAIB Sub-Fund Consolidation) to the RL Long Term Fund PPFM, which governs the operation of the RL Open Fund, the UFIB Sub-Fund and the UFOB Sub-Fund, as well as certain other sub-funds of RLMIS.

19.60 These changes are required to reflect the changes that will be made to RLMIS’s fund structure and other changes as a consequence of the implementation of the UFIB Sub-Fund Scheme, the UFOB Sub-Fund Scheme, the SL Fund Scheme and the RAIB Sub-Fund Consolidation. Examples of changes relevant to these schemes include:  The removal of references to the additional accounts of the UFIB Sub-Fund, UFOB Sub-Fund and the RAIB Sub-Fund;

 The inclusion of references to the schemes and consequent implications for the management of the RL Open Fund;

 The reference to the one-off distribution of the UFIB Additional Account, the UFOB Additional Account and the SL Fund Estate upon consolidation into the RL Open Fund;

 An updated definition of the RLMIS Closed Funds; and

 An updated structure diagram.

19.61 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 made 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

19.62 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.

19.63 In January 2021, the PRA published a consultation paper (CP 1/21) 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).

19.64 In June 2021, the PRA published a Policy Statement (PS 12/21), 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.

19.65 This change is independent of RLMIS and of the UFIB Sub-Fund Scheme.

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19.66 On the basis of PS 12/21, 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.

SOME ALTERNATIVE COURSES OF ACTION TO THE SCHEME

19.67 RLMIS has considered a number of possible alternatives to the Scheme (and to subsequent proposed schemes of arrangement under Project Skye):  The internal reinsurance of the liabilities of the UFIB Sub-Fund to the RL Open Fund.

 The external reinsurance of the liabilities of the UFIB Sub-Fund.

 The sale of the business in the UFIB Sub-Fund.

 Take no action and allow the UFIB Sub-Fund to run-off.

19.68 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 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

19.69 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.

19.70 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.

19.71 However, as the UFIB Sub-Fund is not expected to meet its Sunset Clause Threshold until 2043, the Sunset Clause Threshold would have to be increased considerably from £100 million currently in order to facilitate an amendment to scheme process for the UFIB Sub-Fund.

19.72 I am satisfied that the Amendment to Scheme process would not be appropriate for the UFIB Sub-Fund.

Internal reinsurance

19.73 The internal reinsurance of the liabilities of the UFIB Sub-Fund to the RL Open Fund would achieve the transfer of risk from the UFIB Sub-Fund to the RL Open Fund but would not:

 Simplify RLMIS’s fund structure by reducing the number of RLMIS Closed Funds; or

 Provide benefits to policyholders in terms of reduced reporting and accounting overheads.

19.74 Furthermore, internal reinsurance would attract permanent ongoing overheads to manage the arrangement, with some portion of this being charged to the UFIB Sub-Fund.

19.75 For these reasons, I am satisfied that it is reasonable for RLMIS to pursue the Scheme rather than an internal reinsurance arrangement.

External reinsurance

19.76 The liabilities of the UFIB Sub-Fund could be reinsured to an external reinsurer. But as stated above in the case of internal reinsurance, this approach would not reduce the number of RLMIS Closed Funds and would not provide the benefits to policyholders in terms of reduced reporting and accounting overheads.

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19.77 It is also far from certain that an external reinsurer would have the appetite to take on all of the risks associated with IB with-profits business.

19.78 For these reasons, I am satisfied that it is reasonable for RLMIS to pursue the Scheme rather than an external reinsurance arrangement.

Sale of the business in the UFIB Sub-Fund

19.79 Analysis of historical transactions of insurance business undertaken by RLMIS indicates that if RLMIS were to sell the business in the UFIB Sub-Fund then it could expect to receive around 70% of the Value of In-Force business31.

19.80 A sale agreed on these terms would represent a considerable loss in value and would arguably not be in the interests of RLMIS’s 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.

19.81 Furthermore, selling the business in the UFIB Sub-Fund would not be aligned to RLMIS’s wider business strategy, which has been to acquire back books over time with any disposals being fairly minor.

19.82 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

19.83 RLMIS could maintain the status quo and allow the UFIB Sub-Fund to run-off until it reaches the Sunset Clause Threshold, at which point the fund would be consolidated into the RL Open Fund.

19.84 In the absence of the Scheme:

 The UFIB Sub-Fund would continue to be managed on a stand-alone basis, with the assets of the additional account covering the sub-fund’s own capital requirements (and buffer above this in line with the RLMIS Capital Framework) with no assumed diversification of risks between the UFIB Sub-Fund and the RL Open Fund (or any of the other RLMIS Closed Funds).

 The speed at which each additional account can be distributed to the with-profits policyholders in the UFIB Sub-Fund would continue to be constrained by the requirement for the additional account to cover these capital requirements.

 On reaching the Sunset Clause Threshold, the cost of implementing the fund consolidation into the RL Open Fund would be spread over a smaller number of policies, increasing the per-policy cost.

19.85 On the other hand, in the absence of the Scheme, the additional account would not be reduced by a Scheme Contribution payment to the RL Open Fund, meaning that, all else being equal, a larger overall amount would be available to distribute to with-profits policyholders in the UFIB Sub-Fund as a whole. The trade-off to this is that, in the absence of the Scheme, the UFIB Sub-Fund will bear the risk of adverse outcomes, which could result in an erosion of the additional account over time, which stands in contrast to the much greater level of certainty provided by the Scheme around the amount of the additional account that is available for distribution.

19.86 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 is desirable to distribute the additional account sooner rather than later to ensure that as many policyholders as possible are able to benefit from the distribution.

19.87 The “no action” option delays this distribution owing to the constraints imposed by the requirement to meet UFIB Sub-Fund’s capital requirements, and results in the costs of meeting those capital requirements, in effect, falling upon the older policyholders who are more likely to claim in the near future (as these policyholders will receive a lower estate distribution under the “no action” option as distributions are constrained until capital requirements are released). By contrast, the younger policyholders who are more likely to be a long way from making a claim and

31 The Value of In-Force business represents the discounted value of the profits expected to arise from the applicable in-force business.

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whose policies arguably impose the more onerous capital requirements on the UFIB Sub-Fund are the ones who are likely to benefit from the “no action” option through a higher estate distribution, albeit they are subject to greater uncertainty around this.

19.88 I am therefore satisfied that it is reasonable for RLMIS to pursue the Scheme rather than taking no action.

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20. My conclusions

20.1 This Report sets out my analysis of the proposals for the 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 UFIB 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 treatment of uncontactable policyholders; and

o 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 UFOB Sub-Fund Scheme and the SL Fund Scheme were to be implemented.

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 UFIB 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.

Oliver Gillespie 1 July 2021

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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 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.

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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;

 RLMIS’s WPC;

 The PRA and the FCA as the regulators of RLMIS;

 The insurance regulator of any EEA country who requests a copy of this Report; and

 The professional advisers of any of the above.

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 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 RL Open Fund and the UFIB Sub-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

Pre-Scheme Post-Scheme £m UFIB Sub-Fund RL Open Fund RL Open Fund Assets (A) 1,057 72,295 73,340 Liabilities (B) 949 68,567 69,605 Of which asset shares 886 6,572 7,543 Of which Cost of Bonus Transfers 56 (158) (102) Available capital before adjustments (C = A - B) 108 3,728 3,735 Risk margin (D) 5 922 919 TMTP (E) - 663 655 Sub-debt (F) - 1,560 1,560 Internal Own Funds (G = C - D + E + F) 103 5,029 5,030 Internal SCR (H) 25 2,477 2,492 Excess capital (G - H) 77 2,552 2,538 Internal SCR Cover (G / H) 407% 203% 202%

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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 consistent32 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

32 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, it is expected that most firms will 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.

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 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.

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. The policies within the scope of the Scheme are principally conventional with-profits (“CWP”) whole of life policies, along with a small number of CWP endowment 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 (“RPI”) 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

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 Unitised with-profits (“UWP”) 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 are typically guaranteed and insurers are not able to take them away. A final bonus may also be awarded at maturity.

B.29 UWP 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 UFIB 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.

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 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 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 WPC’s role 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).

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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 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 valuable 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:

 The Scheme document

 The report of the RLMIS Chief Actuary on the Scheme

 The Report of the RLMIS With-Profits Actuary on the Scheme

 Advice from Pinsent Masons to RLMIS33 in relation to:

 Voting class composition

 Reattribution

 Legal due diligence

 Legal advice from Freshfields on various aspects of the Scheme

 Proposals on the Special Reversionary Bonus

 External advice provided to RLMIS on the tax implications of the Scheme

 Responses from RLMIS to questions posed by me and my team in relation to the Scheme

 Board and committee papers, and other background documents, on the Scheme and the wider Simplification Programme

 RLMIS’s communications strategy document for the Scheme

 Draft versions of the Voting Pack and Appetite Mailing

 Documents around call centre capacity for queries on the Scheme

 RLMIS’s internally developed fairness criteria relating to the Scheme

 The “RLMIS Tactical Model” used to undertake working calculations in relation to the Scheme

 Progress update documents shared with the UK regulators during the development of the Scheme

 The UAG Scheme document and other previous scheme documents

 2009 amendment to the UAG Scheme

 Documents relating to RLMIS’s capital management framework

 Information on RLMIS’s financial results and underlying assumptions

 Background information on the RL Open Fund and the UFIB Sub-Fund

 Information on uncontactable policyholders and tracing activities

33 These documents were provided to me by Pinsent Masons, but they were produced solely for the benefit of RLMIS and I have no liability or recourse to Pinsent Masons in relation to them

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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

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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. 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 E EBR Equity Backing Ratio EEA European Economic Area EIOPA European Insurance and Occupational Pensions Authority F FCA Financial Conduct Authority FSMA Financial Services and Markets Act 2000 I IB Industrial Branch IFoA Institute and Faculty of Actuaries L LLP Limited Liability Partnership M MCR Minimum Capital Requirement O OB Ordinary Branch ORSA Own Risk and Solvency Assessment P PFM Principles of Financial Management PLAL Phoenix Life Assurance Limited PMAS Police Mutual Assurance Society Limited PPFM Principles and Practices of Financial Management PRA Prudential Regulation Authority Q Q&As Questions and Answers R RAG Red-Amber-Green

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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 RPI Retail Prices Index 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 UFOB United Friendly Ordinary Branch UWP Unitised With-Profits W WPA With-Profits Actuary WPC With-Profits Committee WPF With-Profits Fund

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