Types of insurance: transfers of annuities
Annuities provide a pension in retirement. Typically a policyholder pays contributions to a pension plan for a number of years, which are invested by a life insurance provider in order to create a fund from which the annuities are purchased. The annuity can be bought from the pension provider who invested the contributions or another pension provider utilising the fund created. Some pension providers allow the purchase of the annuity to be deferred. The annuity once purchased, may also provide an income for a spouse or other dependants on the death of a policyholder. The income paid out under the annuity is calculated by the insurer and the risk to them is that they have insufficient funds to make the payouts. Therefore, they invest the funds contributed by the policyholder and create a portfolio of assets in order to meet their obligations under the annuity contracts, and to make a profit for themselves.
A pension annuity business, that is the on-going management of the assets and administration of payouts to policyholders, may be transferred between life insurance providers and can include both annuities that are paying out and those that are still to mature. The transfer of the pension annuity business also includes the funds and assets that the insurer holds to cover the projected liabilities in terms of annuities to be paid. The assets may be valued conservatively or may exceed the value of the projected liabilities.
Where there is a transfer of a bundle of assets such as annuity contracts, funds and tangible assets, customer lists, etc, without other elements of the insurer’s business, such as staff or goodwill there may be a transfer of part of a business that falls to be treated as a TOGC under SI 95/1268 as part of an undertaking capable of carrying on an independent economic activity.
It is usual, where a business is being transferred, for the transferor to receive a payment from the transferee in consideration for the business. However, in the transfer of a pension annuities business the transferee acquires the annuity contracts and the assets. There is no payment made to the transferor in respect of the transfer. The transferor may dispose of all or part of their annuity business in this manner in order to reduce their exposure or risk by divesting themselves of the liabilities under the annuities business. Conversely, the transferee may be more amenable to the risk and may see potential for future profits, especially where the value of transferred assets is equal to or exceeds the projected liabilities under the annuities.
Article 19 of the principal VAT Directive 2006/112 (formerly Article 5(8) of the 6th Directive) envisages that a transfer of assets for no consideration can be a TOGC. The annuity contracts are in effect obligations to make payments to the policyholders and the assets are the investments that produce an income to meet those obligations. When the business is transferred the risk or obligation under the annuity contracts passes from one insurer to the other. Therefore the transfer of annuity contracts and assets, for no consideration can be treated as a TOGC under SI 95/1268.
The transfer of investment funds or assets is not consideration for any supply by the transferee, even in circumstances where the funds or assets are greater than the projected liabilities under the annuity contracts. Unless the transferee is required to supply anything to the transferor, under the contract for the transfer, the surplus assets are treated as part of the investment fund that has been transferred.
The transferred assets may include property, and as explained in Notice 700/9 paragraph 2.4 a property rental business can form part of a TOGC.
Under FSMA 2000, Section 105, the insurers have to obtain permission from the Courts in order for a transfer to take place. While permission is being sought the annuity contracts are novated to the transferee, although the transferor remains nominally responsible and continues to have a legal relationship with the policyholders until the transfer is officially sanctioned. The risk during the transfer period is that the transferor is still obliged to make payouts to the policyholders under the annuity contracts. Therefore the transferor enters into an insurance contract with the transferee, which means that any payouts made to policyholders by the transferor are effectively reimbursed by the transferee. The insurance contract is a separate arrangement between the two insurers and exists separately from the contract for the transfer of the business. Therefore, any premium payment made by the transferor to the transferee under the insurance contract does not form part of the transfer of assets, but is consideration for a separate supply by the transferee.