The Financial Times has reported concerns about pensions invested by Rothesay Life in the ground rent portfolio of Vincent Tchenguiz.
Rothesay Life has loans of some £1.7bn to the Tchenguiz interests, which are secured against ground rents that are paid annually by residential leaseholders.
UK regulator under fire over £12bn annuity deal
The UK’s Prudential Regulation Authority has come under fire for playing “fast and loose” with pensions over its willingness to nod through transfers of savings from long-established insurers to newer specialist rivals. A group of pensions experts and policyholders has written to Sam Woods, the watchdog’s chief executive, questioning its handling of a recent case involving Prudential, the UK insurance company.
These investments have come under scrutiny after criticisms by the Leasehold Knowledge Partnership and others that pensions regulator the Prudential Regulation Authority nodded through transfers of savings from long-established insurers to newer concerns like Rothesay Life.
Prudential, the UK insurance company, was seeking to transfer £12 billion of annuities to Rothesay Life, but the high court blocked the move in August in what the FT terms a “shock judgement”.
The FT reports:
“The judge concluded that savers who had picked Prudential because of its reputation and financial strength should not be forced to switch to a firm that did not have “an established reputation in the business”.
“This was despite the PRA’s recommendation that the transfer be allowed to proceed.”
Rothesay Life was set up in 2007 by Goldman Sachs and it now belongs to US private equity giant Blackstone, Singaporean sovereign wealth fund GIC and MassMutual, a US insurer.
The Leasehold Knowledge Partnership has long been concerned at pension exposure to ground rents: a concern seemingly now shared by the high court, which has to sanction pension transfers to protect saver’s interests.
Prudential and Rothesay Life say they will appeal the decision.
The Leasehold Knowledge Partnership also expressed concern to the PRA that it downplayed the “weak financial position” of Rothesay Life relative to Prudential by neglecting to flag its heavy dependence on “artificial capital”.
Insurers bolster their capital by a practice known as “Matching Adjustment, which means investment in higher yielding assets than “safe” 30-year UK government bonds and similar, which are core to pensions.
All insurers use Matching Adjustment to some degree.
Prudential had solvency capital of £35.7 billion at end 2018, says the FT, of which £2.1 billion “was created by matching adjustment”.
In contrast, Rothesay Life “reported capital of only £3.9bn of which £4.6bn is matching adjustment, leaving its true capital position as negative £0.7bn”, according to LKP.
Matching Adjustments are when insurers invest the funds from which they will pay annuities in higher-yielding assets These can include some “safe” instruments such as 30 year UK government bonds, but generally encompass assets such as corporate bonds and loans linked to property values.
The FT reports that the PRA says Matching Adjustment serves a useful purpose by giving incentives to “buy-and-hold” investors to hold on to higher-yielding assets. But the practice of taking profits early has been criticised by numerous financial experts, including David Miles, a former member of the Bank of England’s Monetary Policy Committee, who called it “nonsense and a dangerous road to go down”, the FT reports.
LKP trustee Dean Buckner, a former regulator at the Prudential Regulatory Authority, said the PRA was acting “on the side of powerful vested interests”. By not disclosing the full risk of Rothesay’s assets it was “playing fast and loose with the hard-earned life savings of ordinary working people”.
Rothesay Life strongly contests these claims, arguing that they contain “multiple significant factual inaccuracies and errors”.
These include “basing [the] analysis on the wrong Prudential company [the group and not the demerged M&G entity], and asserting that our owners have taken dividends out of the company”.
“Rothesay Life is one of the best capitalised insurers amongst its peers and has significant backing from its shareholders, who in the last month injected £700m of new capital in order to fund further growth of the business,” the firm said.
“Policyholders can gain comfort from the high level of security offered by the PRA’s regulatory capital regime as well as its support from strong and committed shareholders.”
Rothesay Life has also said that it will not profit from leasehold forfeiture windfalls when a lease is forfeited, usually owing to a money dispute concerning ground rent or service charges. Freeholders can gain the entirety of the asset even when relatively small debts are involved.
As here:
Dennis Jackson at Plantation Wharf: An £800,000 forfeiture over-turned by LKP
Kevin Dowd, a professor of finance at Durham university, who was also a signatory to the LKP letter, said:
“Private equity firms are making a lot of money from a flawed business model that could have calamitous consequences down the road.”
Michael Epstein
For many years pension funds including Prudential saw ground rent portfolios as an unexciting but secure way of investing.
Is it not the case that Vincent Tchenguiz tore up the investment rule book with his way of valuing the ground rent portfolios in that instead of the ground rent value per se he included in his valuations the added income his portfolio could produce?
So now added to the valuations we have insurance commissions, fees for permissions sellers packs late payment charges and a whole host of other revenue streams.
Unusually at the time he managed to negotiate loans over 150 year terms.
Of course for this to work, Tchenguiz needed one key ingredient?
He had to have a connected property management company who could carry out his plan for him. The property management company would earn him the money, and in return the property management company would get the management contracts.?
Peverel/Firstport was born!
To rescue Peverel/Firstport from administration back in 2011 it necessitated the splitting away from the Tchenguiz Family Trust Group. This delayed the administration as it proved very complex so to do.
After the SFO compensation case failed to net the result Tchenguiz was after and knowing that his freeholding companies were no longer connected to his managing agents and thus being deprived of much needed income within hours the Tchenguiz portfolio was in default of their loan agreements. Step forward Rothesay Life who invested over an 85 year term..
Already freeholders such a Fairhold(part of TFT) have qualified their accounts to say that “Were forthcoming suggested legislation to be enacted making it easier and cheaper to enfranchise it would place their business in great difficulty as they may not be able to service their loans.”
So is there not a real danger to pension funds invested with Rothesay Life for example if the portfolio valuations are a tad “Imaginative?”