The High Court judgment on the PAC Rothesay transfer is here. I won’t comment for now, except to say it was a complete joke, even by the standards of such things.
Transfer window
Just noticed an article in the latest Eye about the PAC-Rothesay transfer. The Court Hearing is slated for 8 November.
Includes this:
Concerned Prudential policyholders say this puts them at greater risk, not least because they have a higher age profile (believed to be largely 75 -plus). Without applying the matching adjustment, an analysis in InsuranceERM magazine exposed recently, Rothesay is one of only two out of 14 life insurers in the UK that would be insolvent. So if anything goes wrong in the relatively short term, or the rosy view of Rothesay’s portfolio proves over-optimistic, they’re in trouble.
The policyholders also say the independent expert, Nick Dumbreck of risk management advisory firm Milliman LLC, hasn’t listened to their concerns adequately, including on the critical point of matching adjustment.
Milliman advises on a number of pension transfers, and the current dispute is effectively a test case for the business of selling portfolios regardless of the wishes of policyholders. If the Pru and Rothesay lose, it could kibosh the practice.
In da house
An interesting set of questions here from Baroness Bowles of Berkhamsted about a possible conflict of interest in advice to the UK Endorsement Board.
Question[s] for Department for Business, Energy and Industrial Strategy Baroness Bowles of Berkhamsted Liberal Democrat, Life peer.
Asked 14 October 2021
Due for answer in 13 days (by 28 October 2021)
To ask Her Majesty’s Government why the UK Endorsement Board is not using in-house counsel to instruct barristers for public interest legal advice; and why they are instead using Katherine Coates.
To ask Her Majesty’s Government what assessment, if any, the UK Endorsement Board have made of any potential conflict of interest of instructing Martin Moore QC to work on the endorsement of accounting standards either (1) directly, or (2) indirectly.
To ask Her Majesty’s Government whether the UK Endorsement Board has sought the advice of Martin Moore QC in the course of seeking endorsement of for its accounting standards either (1) directly, or (2) indirectly through Michael Todd QC.
To ask Her Majesty’s Government whether they will place copies of the tender documentation of the UK Endorsement Board for the procurement of legal advice and legal opinions in the Library of the House.
What could all that be about?
Letter to IASB
The UK Shareholders letter to the IASB is now published here, in response to the Board’s public consultation on its activities and its work plan for the next five years.
Naturally we argue that discount rates should loom large in the Board’s forthcoming work.
In the Appendix, we reject the Board’s argument that we should discount liabilities by more than the risk free rate, their thinking being that a liquid bond has an embedded option to sell the bond at market, an illiquid bond does not contain that option, ergo the illiquid bond should be cheaper.
Their thinking is utterly fallacious, for the reasons given in the Appendix. Perhaps I shouldn’t call it ‘thinking’. Wittgenstein “Thought can never be of anything illogical, since, if it were, we should have to think illogically” (Tractatus 3.03).
Other comment letters are listed here.
It’s official: the MA is complete crap after all
Gareth Truran speaks at some conference.
Over the last year, the PRA has highlighted publicly on a number of occasions the risk that the MA specification may not have kept up with the changing nature of the market. The MA should only include the component of asset spreads that reflects compensation for risks to which firms are not exposed by virtue of being long-term investors. But it is possible that some of the returns which are currently treated as an illiquidity premium might, in fact, reflect compensation for variability around future credit losses. If so, in adverse scenarios, these profits might not materialise. Firms might be forced into recovery actions such as fire-sales of illiquid assets to manage solvency and meet policyholder commitments, reducing their ability to support sustainable long-term investment in the economy. As firms have invested in recent years in a much wider range of assets with different risk characteristics, the basis risk between these assets and the assets originally used to calibrate the MA has also increased.
So we think we need to look again at this issue, to be confident that the MA regime can safely support our ability to widen MA eligibility, encourage further expansion into new and innovative asset classes, and streamline our upfront review of firms’ MA applications.
Oh yes!
Meanwhile back at t’mill
A technical paper here on the UKEB website suggests more trouble brewing around discount rates.
As usual it’s hard to tell, given the impenetrable language used by accountants, but I suspect the problem is the so-called Contractual Service Margin (CSM). This is a mechanism that weirdly takes away the effect of excess discount rates like Matching Adjustment (or rather, the statutory equivalent of Matching Adjustment), forcing a firm to release day one MA gains over time. How this practice differs from just discounting by riskfree is a mystery to me.
The paper says “Profit recognition will be significantly slower than under current practice, mainly due to the absence of gains on initial recognition (sometimes referred to as ‘day 1 gains’),” then continues, ominously:
Data on the likely transitional impact from this change across the industry is not available to us, but the expectation is for material reductions in equity. The scale of the impact will depend in part on the transition approach adopted …
Unfortunately the rest of the paragraph makes almost no sense.
No it’s an error
Nom de Plume writes:
Just to make sure I have understood correctly, it is not that the independent expert has made an error, but that he used a number you don’t agree with i.e. if you didn’t subtract the £3bn transitional relief you would then get the 41% number.
If that is the case, why not say you don’t agree with the idea of transitional relief rather than call it a serious error.
No, it’s an error. Transitional relief is another form of fake asset, just like Matching Adjustment. If you take away the £7bn odd Matching adjustment ‘benefit’ from Rothesay’s book, their available capital amounts to pretty much zero. Clearly you can’t say that to policyholders, or they would object in their thousands. So Rothesay assumed that they would get back some of the lost MA in the form of transitional relief, i.e. having lost one fake asset the PRA would give some of it back in the form of another fake asset.
I can see no reason why that would happen, and in any case, as I pointed out in the previous post, TMTP is even more fake than MA, because you have to pay it back over 10 years. As well as the value of the fake asset, you have to include the present value of a series of fake cashflows over the amortising period. Thus zero minus zero equals zero, by my arithmetic.
Just Group flogs off more ERMs
Phoenix Group acquires £300m equity release portfolio from Just Group. “Consolidates Phoenix’s position among the largest equity release funders. Equity release is an important option for people planning their finances later in life” blah blah. Add that to the £334 million they sold off to Rothesay, and that’s a substantial part of their portfolio. Also, as we commented here, the deal will probably cause more losses for Just, as they lose the MA ‘benefit’.
Error? What error?
‘Nom De Plume’ writes “I am not sure what the serious error you are referring to in respect of Rothesay’s SCR ratio is. Rothesay’s SFCR contains the very same 41% number. (Page 50)”.
It does indeed contain the very same number. But why would ‘the very same number’ not also be in error? Rothesay say (ibid) that “Without the matching adjustment, the BEL would increase by £7.8bn, although this would be offset by an increase in transitional solvency relief leaving Own Funds £3.0bn lower “. But the present value of transitional relief, which has to be paid back in 10 years, is precisely zero.
Moreover the Independent Expert’s report does not assume any increase in ‘transitional relief’ for Prudential, but rather gives the unadjusted figures, which compounds the error, or should I say deception.
Without the ‘benefit’ of MA, which the Expert in his correspondence with me has acknowledged to be a benefit only to existing shareholders, Rothesay is technically insolvent.