Reliance Mutual needs Policyholders’ Votes
In February 2012, the Chairman of Reliance Mutual (“Reliance Mutual” or the “Society”) wrote to policyholders to advise them that the Society would soon be asking them to vote on the way Reliance Mutual is run.
The Society is now ready to proceed with the formal vote and voting packs were issued on the 27th April 2012 to eligible policyholders. These voting packs give the necessary information so that policyholders can decide how to vote.
It is important that policyholders have their say in the way the Society is run, so policyholders are encouraged to use their vote.
A Scheme of Arrangement
Reliance Mutual proposes to enter a Scheme of Arrangement with its policyholders (the “Scheme”). The Scheme will be proposed to policyholders in accordance with provisions in the Companies Act 2006, which will therefore give legal authority to our policyholders’ wishes, if they vote in favour of the Scheme. The Scheme clarifies the way the Society operates and changes the entitlements of some groups of policyholders, particularly the with profits policyholders in the main sub fund, the Reliance Mutual With Profits Sub Fund (“RM WPSF”). Because policyholders’ rights are affected, the Scheme has to be sanctioned by the High Court. The Court can only sanction a Scheme if the policyholders vote in favour of it. In order that policyholders can vote, meetings of policyholders (the “Scheme Meetings”) will be held on 31st May 2012.
VOTING OPTIONS
Voting can be undertaken in three principal ways:
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Online before 10am on 29 May 2012;
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By Post, using the Proxy Voting Form
(postal votes must be received before 10am on 29 May 2012);
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In Person at the Scheme Meetings on 31 May 2012
To vote online, eligible policyholders can click on the voting button above. Policyholders will need the following information to vote online; which can be found in the middle of the Proxy Voting Form in the box entitled Online Vote:
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Voter Reference Number (VRN)
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Personal Identification Number (PIN)
What the Scheme aims to achieve
The Scheme has the following objectives:
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To enable the Society to explain the rationale for the strategy it adopted in 2001, and to allow the Society to continue that strategy in future. The Society expects to deliver a better future outcome for all policyholders with this strategy, than if it adopts the alternative run-off and distribution strategy – the likely outcome of a clear rejection of the Scheme by policyholders.
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To introduce a more formal structure to the Society that will enable the Society to treat the interests of all the different groups of policyholders fairly. In particular, the proposed structure will clarify and safeguard the interests of the shrinking group of with profits policyholders in RM WPSF.
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To enable the board of Reliance Mutual (the “Board”) to give more certainty of expectations to the with profits policyholders in RM WPSF, as the maturity or claim date of their policies approaches. This will increasingly limit the risks to which they are exposed, as far as is reasonable, in a more transparent way.
Why a Scheme of Arrangement is needed
In recent years, there has been a debate between mutual insurers, like Reliance Mutual, and the Financial Services Authority (“FSA”) as to how ‘with profits’ policyholders receive a fair share of the assets of the business when their policies pay out.
Details of the background to this debate are given in the Policyholders’ Guide (available by selecting the appropriate link at the bottom of this page). The debate has affected all mutual life insurance companies, but the issues relevant to Reliance Mutual are:
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Reliance Mutual ceased offering new with profits policies in 1999. At that point the Board, in good faith, adopted a strategy of continuing non profit business and acquiring other insurance businesses. The aim was to spread operating costs and bring benefits to all policyholders through greater security for all, and improved bonuses to with profits policyholders.
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The strategy followed since 2001 has been successful, and the various new ventures undertaken have built up a substantial economic value. The Society needs to have an appropriate structure that will enable it to distribute a fair share of this value to the remaining with profits policyholders in RM WPSF.
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As part of this strategy, the Society started distributing surpluses arising from its non-profit and unit-linked business written prior to 2000 in the form of substantial additions to final bonuses on with profits policies. Thus with profits policyholders were rewarded for the risks they had accepted in providing the capital necessary to write this business.
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The alternative strategy would have been to cease seeking new business and to run off the existing business, distributing surpluses as they arose to with profits policyholders.
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The FSA accepts that the strategy adopted by Reliance Mutual since 2001 is likely to have resulted in an outcome that would have been no worse for with profits policyholders than the alternative run off and distribution strategy.
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One of the consequences of the strategy that the Society has adopted since 2001 is that the mix of business in the main sub fund of the Society has changed. Out of some 223,000 policyholders currently in this fund, only 14,000 hold with profits policies, and the proportion of with profits policies continues to decline as more new non-profit policies are taken on.
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The Board has also been conscious that decisions taken in the early part of the last decade on the Society’s strategy, and their potential impact, were not explained to policyholders at the time.
The Board believes that the structure of the Society now needs to be altered in order to clarify and safeguard the interests of all policyholders for the future. The Society believes that the way to do this is through a scheme of arrangement, as outlined above. This mechanism gives policyholders the opportunity to have their say in how the Society is run, by voting on the proposals.
The FSA fully supports the holding of this vote by policyholders on the future strategy for Reliance Mutual.
How the Scheme achieves its aims
The Board believes that its current strategy of continuing to write new non-profit business and to seek acquisitions of insurance business from other companies has benefited all policyholders, compared with the alternative run off and distribution strategy.
For with profits policyholders in RM WPSF in particular, the financial benefits from these new business initiatives have generated a good return compared with the risks that existing policyholders have taken on. These returns have enabled the Society to add greater bonuses to with profits policies than would otherwise have been the case. The Board believes that those policyholders whose policies have paid out over the past 10 years have benefited materially through increased bonuses.
The benefits of the current strategy do not only accrue to RM WPSF with profits policyholders. All policyholders benefit from membership of an active, growing Society. A growing organisation can control its costs through economies of scale. In turn, controlled costs add to the financial strength of the Society, which benefits all policyholders. A larger Society can continue to maintain high-quality customer service standards, which is unlikely to be possible with an ever-declining business owing to the increasing pressure on expenses.
Continuing the strategy that the Society has been following for the past ten years will mean that the size of the with profits business in RM WPSF as a proportion of the size of that sub fund will continue to decline rapidly. The Board proposes to be more explicit about how it separates the past profits so that with profits policyholders have an identified share of profits that will provide future bonuses for them. The balance of the profits will provide protection to all policyholders and enable the Society to bring in new members, which will benefit all policyholders, as described above. If the balance of profits not allocated to with profits policyholders exceeds the Society’s requirements in the opinion of the Board, it will return any excess profits to all policyholders, although the Society does not expect this position to arise in the foreseeable future.
The proposed Scheme achieves its aims by splitting RM WPSF into two new sub funds. The existing with profits policies in RM WPSF will be transferred into a new sub fund, WPSF1. This sub fund will be allocated sufficient capital so that policyholders can expect to receive at least the same policy benefits in terms of bonuses as they might have expected to receive if the Scheme was not approved and Reliance Mutual simply ran off the existing business. No new policies will be written in WPSF1, and the Society believes there are no existing policies that have the option to increase cover or take out a new policy in WPSF1. Policyholders in WPSF1 will be insulated from the risks associated with new business written after the Scheme is effective. However if more new business than expected is written elsewhere in the Society, the associated lower costs will be passed on to policyholders in WPSF1 and these should improve their bonus prospects.
WPSF1, along with the other with profits sub funds, will be managed in accordance with the Society’s published Principles and Practices of Financial Management (the “PPFM”). If the Scheme is approved, the PPFM will be amended to take into account the changed structure of the Society. The Principles and Practices for the ongoing management of WPSF1 have been designed to provide increasing certainty for policyholders as the maturity or claim date of their policies approaches, through the investment policy followed. When conditions allow it, the Board will seek to guarantee part of the bonus that is currently declared in non-guaranteed form. This increased certainty will further limit risks to policyholders in WPSF1.
The other part of RM WPSF will be a new sub fund, the Ordinary Sub Fund (“OSF”). This sub fund will contain the policies that are not with profits. It is within OSF where it is proposed to continue writing new policies. The Society also expects to continue acquiring businesses from other companies, which will be financed by OSF. Most of the profits from OSF will be re invested into the business, but if sufficient surplus has built up, this may be distributed to all policyholders of the Society, whether the policy is specifically with profits or not. The Society does not envisage being in a position to make such a distribution in the foreseeable future.
Who is affected by the Scheme?
Firstly it is important to state that, whether or not the Scheme is approved, it will not affect any payments that are being received if the Society is currently paying a pension, or the amount the Society will pay if it has notified that a policy is due to mature shortly.
Reliance Mutual believes that there are three classes of policyholders who may be affected by the Scheme, as follows:
Policyholders holding with profits policies issued by Reliance Mutual (or other companies acquired by it before 1980) that are currently in the sub fund RM WPSF;
Policyholders holding policies in RM WPSF that are not with profits policies; and
Policyholders holding policies originally written by other companies that were acquired by Reliance Mutual since 2003 and which are now in the sub funds WPSF2 to WPSF6.
Policyholders in Class (a) are most affected by the Scheme. Instead of being entitled to all the surplus assets arising in RM WPSF that the Directors decide to distribute, part of the assets of the sub fund will be used to support the future growth of the business. As mentioned above, WPSF1 will be allocated sufficient capital so that policyholders can expect to receive at least the same policy benefits in terms of bonuses as they might have expected to receive if the Scheme did not proceed and Reliance Mutual simply ran off the existing business. If the Scheme is approved, the Directors anticipate being able to increase the certainty of benefit expectations for this group of policyholders.
Policyholders in Class (b) and Class (c) above either have benefits that are guaranteed (in the case of Class (b)) or are unaffected because the sub funds WPSF2 to WPSF6 are unchanged (in the case of Class (c)). If the Scheme is approved, these policyholders will be entitled to any distribution or allocation of profits from OSF that the Directors might decide is appropriate, in addition to the normal policy benefits, although, as mentioned above, it is unlikely that such a distribution will be made in the foreseeable future. There are some additional minor changes that are commented on in the Policyholders’ Guide (which is available by selecting the appropriate link at the bottom of this page).
Independent Review
The Directors have appointed an Independent Actuary, Mr Nick Taylor, to report on the Scheme and how the proposals affect the different classes of policyholder listed above. His appointment as a suitably qualified independent expert has been approved by the Society’s regulator, the FSA. His full report is available upon request (or can be viewed by selecting the link at the bottom of this page), and his main conclusions are:
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that the security of the current policyholders of Reliance Mutual will not be materially affected by the Scheme;
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that the benefit expectations of the current policyholders of Reliance Mutual will not be adversely affected as a result of the Scheme, including the bonus prospects of Reliance Mutual’s with profits policies, which transfer to WPSF1, where there could well be an improvement in bonus prospects;
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that there may well be distributions of surplus from the OSF, not required for reinvesting in the business, to all policyholders, whether or not their policy is with profits, although not in the foreseeable future;
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that the selection of classes for voting, the method and assumptions adopted to value each policy, and the voting arrangements for the Scheme are appropriate;
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that the documents which will be sent to policyholders, together with those available on request, provide sufficient detail for policyholders to make up their mind whether or not to vote in favour of the Scheme;
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that the approach being taken to allocate the assets between WPSF1 and the OSF is appropriate and in accordance with the Scheme, the PPFM and Reliance Mutual’s investment guidelines;
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that the Scheme achieves its objectives (as set out in “What the Scheme aims to achieve” above);
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overall, that the Scheme is fair and reasonable to all Reliance Mutual policyholders and is in their best interests.
The Board agrees with and supports these conclusions.
Voting Arrangements
At the Scheme Meetings to be held on 31st May 2012, policyholders in each of the three Classes (a) to (c) above will vote separately. The policy numbers and the classes that apply to each policyholder are shown on the proxy voting form.
In order for the Scheme to be approved, each of the three classes needs to vote in favour of the Scheme. Furthermore each class needs to vote in favour by a majority in number representing not less than 75% by value of the policyholders in that class who vote. The way the value assigned to each policy is calculated is outlined in the Policyholders’ Guide.
If the Scheme is approved by each class of policyholders, and the Court sanctions the Scheme, it will become binding on the Society and all policyholders - even those who vote against it.
Administrative Arrangements
If policyholders have policies in more than one class, the Society will assume that they wish to vote in the same way in each of the class votes in which they participate, and will count their form in each vote that applies. However, if they wish to vote in different ways in the different class votes, they may do so by asking for an additional proxy voting form.
If policyholders own a policy jointly with someone else, this will be indicated by “YES” in the “Held Jointly” column after the policy number on the proxy voting form. Voting packs are only being sent to the joint policyholder whose name appears first on the Society’s register of policyholders. Either policyholder may vote; however, where the Society receives more than one vote in respect of a policy, only the vote of the first-named policyholder will be counted.
The Society has tried to ensure that policyholders with more than one policy have only been sent one copy of the voting pack mailing. If policyholders receive more than one copy of the voting pack they will need to complete and return each proxy voting form. In this case, policyholders should let the Society know so that it can ensure its records are correct.
Timescale
Set out below is the timescale relating to the policyholder votes at the Scheme Meetings and the sanctioning of the Scheme of Arrangement by the Court.
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Date |
Event |
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29th May 2012 |
Last day for receipt by Computershare Investor Services Plc of the proxy voting forms and web based votes |
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31st May 2012 |
Scheme Meetings and policyholder votes take place |
The dates given below are based on current expectations and may be subject to change. If any of the dates change, the Society will announce the revised dates on its website and will individually advise any policyholder who has indicated an intention to attend the Court hearing in person.
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Date |
Event |
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28th June 2012 |
Court hearing to sanction the Scheme of Arrangement |
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1st August 2012 |
Effective Date of the Scheme of Arrangement |
Recommendation for the Scheme
The Directors consider that approval of the Scheme will be the most effective method of ensuring the long term future of the Society and of securing the maximum benefits for policyholders. All the Directors are also policyholders (details of their interests are set out in the Policyholders’ Guide), and they will all be voting in favour of the Scheme. The Society therefore encourages all policyholders entitled to vote, to vote FOR the Scheme.
VOTING OPTIONS
Voting can be undertaken in three principal ways:
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Online before 10am on 29 May 2012;
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By Post, using the Proxy Voting Form
(postal votes must be received before 10am on 29 May 2012);
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In Person at the Scheme Meetings on 31 May 2012
To vote online, eligible policyholders can click on the voting button above. Policyholders will need the following information to vote online; which can be found in the middle of the Proxy Voting Form in the box entitled Online Vote:
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Voter Reference Number (VRN)
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Personal Identification Number (PIN)
Further Documentation Available
The following documents are available to view or to download by selecting the following links:
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Proposed Principles and Practices of Financial Management (PPFM)
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Latest Audited Accounts and Financial Statements of Reliance Mutual
Help and Information
If you have a policy or policies with Reliance Mutual, but have not received a voting pack by 4 May 2012, please contact the Scheme Hotline Team, who will be happy to help you.
Likewise, if you have any other question or query concerning Reliance Mutual and the Scheme of Arrangement vote, please contact the Scheme Hotline Team.
The Scheme Hotline Team can be contacted:
By telephone on 01892 773 385
By email to the Society at: svote2012@reliancemutual.co.uk
By writing to the Society at: Reliance Mutual Insurance Society Limited (MVP Team)
6 Vale Avenue, Tunbridge Wells, Kent TN1 1RG
Calls may be recorded for training or monitoring purposes.