What is the impact of Brexit on our Proposal?
- The relevance of Brexit to our Proposal for UK With-Profits Policyholders, relates to the impact that it has had and could have on interest rates and equity and corporate bond market volatility. Interest rates, in particular, impact the value of the With-Profits assets and therefore the amount available to distribute to policyholders through the uplift in the proposed Scheme of Arrangement. Equity and corporate bond market volatility is more likely to impact the value of unit-linked funds post Implementation Date
- These impacts may be more pronounced in a “hard” Brexit i.e. one where there is no “deal”, compared to a scenario where a deal does occur. Should a deal be agreed, we expect the UK’s relationship with the EU would continue relatively unchanged for a period.
What have Equitable done to protect policyholders from these risks?
- The Equitable has taken steps to protect the assets in the With-Profits Fund from market volatility in the period until the Scheme is implemented. Financial instruments, known as derivatives, have been purchased and are being managed carefully to ensure that assets, and therefore the proposed uplift, would be protected against changes in interest rates.
The derivatives have achieved what we set out to do: to keep asset values, and consequently uplifts, at a high level, against a backdrop of big swings in interest rates. As a result, the uplift available to add to policies may be higher than that used in the illustrations sent to policyholders, but is unlikely to be materially lower.
- Some policyholders may be concerned that, after the
Implementation Date, their Unit-Linked Fund
will be exposed to market volatility and reduce in value. Equitable considered this risk and designed into the Proposal a number of important features to enable this risk to be managed.
- From the Implementation Date,
will be invested in the Secure Cash Investment. This is a fund which has been designed to ensure that it does not decrease in value from the Implementation Date although there is a risk that it may not keep pace with inflation.
- If policyholders are concerned that market volatility could affect the value of their investments, they can choose Unit-Linked Funds with different levels of risk and reward. A worry about market volatility might not come from specific concerns about what is going on in the market at the time; it might also be shaped by a policyholder’s plans and when they intend to take their benefits. The Investment Choice Pack contains details of the range of Unit-Linked Funds available to choose from. Policyholders can decide to transition into a fund over a period of one, three or six months.
- In designing the Scheme, the Equitable created six fairness tests, two of which are most relevant here:
- If the new Unit-Linked Funds enjoy no growth, policies would still have a higher value after five years than the guaranteed value of the previous With-Profits Policy.
- If the new Unit-Linked Funds enjoyed growth after charges of only 1.5% every year, policies would still have a value in excess of the guaranteed value of the previous With-Profits Policy:
- after 10 years from the Implementation Date or
- the date that benefits are expected to be taken, if earlier.
The Proposal passes these tests
Why isn’t the Equitable delaying the Proposal until after Brexit?
The Equitable does not believe that any delay is necessary because of the steps it has taken, as outlined above, including the protections that the optionality in the investment choices provides to policyholders.
There is no certainty that Brexit, hard or soft, will occur on October 31st. There has already been one deferral of the UK leaving the EU from the original date of March 29th.
Any delay in implementing the Proposal would cost extra money, resulting in less capital to return to policyholders. This is because, among other factors, the derivatives that provide the protection would need to be re-set.