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Shareholder transfers

M

Mbotha

Member
Hi

When bonuses are declared, are shareholder transfers moved immediately out of the WP fund (and into the shareholder fund) or do these funds get allocated to the estate first (and then transferred out at a later stage)?

Sorry for the silly question but I've seen a few questions that seem to indicate both are possible (?).
 
Hello

My gut answer is that shareholder transfers to the shareholder fund happen immediately. However, with WP differences in practice, I'm reluctant to say this with 100% certainty! (For example, it's possible to imagine the precise wording in respect of shareholder transfers in a particular situation being along the lines "shareholder transfers from the WP fund to the shareholder fund of up to X ...." which might suggest that the remainder of the shareholder funds could stay in the WP fund)

Can you give an example of a question that seems to indicate both are possible?

Thanks
Lynn
 
Lynn Birchall said:
Can you give an example of a question that seems to indicate both are possible?
Click to expand...
Hi Lynn

Ch12 pg 34 states: "For WP funds, own funds are adjusted for consolidation purposes so that they comprise only the value of shareholder transfers...". This seems to suggest that (in some cases?) shareholder transfers are kept within the WP funds?
 
Mbotha said:
Hi Lynn

Ch12 pg 34 states: "For WP funds, own funds are adjusted for consolidation purposes so that they comprise only the value of shareholder transfers...". This seems to suggest that (in some cases?) shareholder transfers are kept within the WP funds?
Click to expand...

If anyone has any thoughts on this, I'd really appreciate it.

Thanks!
 
Mbotha said:
Hi Lynn

Ch12 pg 34 states: "For WP funds, own funds are adjusted for consolidation purposes so that they comprise only the value of shareholder transfers...". This seems to suggest that (in some cases?) shareholder transfers are kept within the WP funds?
Click to expand...

I think this quote from Chapter 12 is actually talking about a slightly different issue. So, I'm sticking with my initial response that shareholder transfers to the shareholder fund happen at the point there is a bonus declaration :-)

The part of Chapter 12 you refer to is talking about drawing up a consolidated Solvency II balance sheet. The "value of shareholder transfers" item here is the value of future shareholder transfers in respect of future bonus declarations. These get a mention on page 7 of Chapter 12: although these future transfers are not a liability, there are a part of the own funds the ownership of which has been allocated to the shareholders.

Hope this helps
Lynn
 
Lynn Birchall said:
The part of Chapter 12 you refer to is talking about drawing up a consolidated Solvency II balance sheet. The "value of shareholder transfers" item here is the value of future shareholder transfers in respect of future bonus declarations. These get a mention on page 7 of Chapter 12: although these future transfers are not a liability, there are a part of the own funds the ownership of which has been allocated to the shareholders.
Click to expand...

Hi Lynn

Sorry to come back to this but during my recap, I managed to confuse myself again (wrt the above vs the inherited estate). My thinking is as follows (in the context of proprietaries):
  • Some/all of the inherited estate within a WP fund is notionally viewed to belong to shareholders. However, this is a controversial issue due to the capital support it provides to policyholders - and so the ownership of this estate actually needs to be determined taking all things into account.
  • As your post mentions above, from a regulatory perspective, own funds (in a WP fund) only comprise the value of future shareholder transfers and so their ownership is allocated to shareholders.
  • I know that the definitions of the inherited estate (realistic assets less realistic liabilities) and own funds are different but in some sense, there is overlap in what they represent.
    • So doesn't this mean that the above points or somewhat contradictory? I.e. We're saying that the ownership of the inherited estate is uncertain but that own funds (which broadly represent some proportion of the inherited estate) belong to shareholders.
I may be missing something here?
 
Mbotha said:
  • As your post mentions above, from a regulatory perspective, own funds (in a WP fund) only comprise the value of future shareholder transfers and so their ownership is allocated to shareholders.
Click to expand...
We need to be a little careful here as this isn't actually what Lynn's post says. The value of future shareholder transfers is a separately identified part of own funds within the Solvency II balance sheet (as per pages 7/8 of Chapter 12). The rest of own funds within a 90/10 with-profits fund (which as you are say are equivalent in concept to the estate) are broadly speaking 90% p/h and 10% s/h, but that precise ownership split is not established until the point at which the estate is distributed. That should reassure you that your basic understanding is fine?

[The point being made above is that when you consolidate (i.e. add up) own funds across funds in order to test solvency, only that (normally small) part of with-profits fund own funds that is the value of future shareholder transfers can be used to cover capital requirements in shareholder-owned funds. The remainder of with-profits fund own funds can, of course, be used to cover capital requirements within the with-profits fund.]
 
Hi Lindsay, I am a small bit confused with the above.

I understand that within a WP fund there will be regulatory capital requirements to be covered in excess of liabilities and these are met by the "inherited estate".. However when we look at a consolidated company balance sheet we only include PVST in the company balance sheet. My questions are:

1. In the "company" balance sheet do we include the full regulatory capital requirements from with profit funds? So from wp funds do we only contribute PVST to the asset side but large capital requirements to the liability side?
2. Does a company have to cover capital requirements at a "fund level" or does the calculation only matter at company level?
3. In a WP fund, are PVST included within the "Inherited estate" or in addition to the "inherited estate"?

Thanks so much!
 
A few things in response:
  • PVST doesn't 'contribute to the asset side' as such. In a Solvency II balance sheet it is simply a separately identified part of own funds. Own funds = assets - technical provisions. So let's say that in a WPF the value of assets held is 1,000 and TP = 700, so that own funds = 300. Let's say that PVST = 10. Then of that 300, 10 of it is recognised (in the Solvency II returns) as being PVST. In a 90/10 WP fund, the remaining 290 would (probably) effectively belong 90% to WP p/hs and 10% to shareholders. The PVST of 10 doesn't create extra assets, it's about identifying ownership of (part of) what is already there.
  • There isn't an officially recognised definition of 'estate', but typically it is considered to be the excess of assets over realistic liabilities. So we can consider the estate to be broadly equivalent to own funds in a WP fund.
  • The SCR has to be covered at overall company level, but as is described in that part of the course and as was mentioned above, only the PVST part of WP fund own funds can be used to cover capital requirements in shareholder-owned funds (& the remainder of WP fund own funds can, of course, be used to cover capital requirements within the WP fund). However, the Core Reading does not go into this level of detail, so you wouldn't be expected to know about it for the exam.
 
Hi Lindsay. Think I am broadly following you here... I think maybe if elaborate on your example it might help me confirm.

Company A has a WPF with Assets = 1000 TP = 700 and SCR = 200. Of the 300 of "estate" 10 of this can be denoted as PVST..

The company also has a large book of without profits business. So the company has to calculate a company level balance sheet. What is the WP funds contibution to this balance sheet. Is it 10 to the asset side and nothing to the liabilties? is this what we mean as "the value of future shareholder transfers can be used to cover capital requirements in shareholder-owned funds"
 
Let's say that Co A also has a NPF (Non-profit fund, 100% shareholder-owned) with Assets = 400 TP = 300 and standalone SCR = 105

Own funds in the WPF = 300 of which 290 can be used to cover the WPF SCR of 200.
Own funds in the NPF = 100 ... not quite enough to cover the NPF SCR of 105 on its own.

However, 100 (NPF OF) + 10 (PVST) = 110 can be used to cover the NPF SCR.

[Normally, though, the 10 wouldn't be needed and the NPF would have sufficient own funds to cover its own SCR]

Hopefully that has clicked?
 
Sounds good to me Lindsay!

I probably have a few more questions about the granularity at which SCR has to be reported/covered at but its likely beyond scope of SA2. I am happy to just realise that PVSHT in an WPF can be used to cover SCR in Shareholder funds. Thanks!
 
Great ... but I should caveat it this as being based on my very limited (non-practitioner) understanding, and am happy to be corrected by anyone who knows more about it!
 
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