Joining the Oddfellows Family – Questions & Answers

There are several important reasons why the Board is proposing a merger:

- Our growth strategy was designed to strengthen KU financially by increasing our reserves and to generate material operating surpluses, but over the last 5 years, we have been unable to build the required scale to achieve this aim.

- Our decision to develop and offer Child Trust Fund (CTF) accounts in 2005 provided KU with greater scale and a significant contribution to our expenses over the last 15 years. However, CTF accounts started to mature in September 2020 and it is expected that our assets and income will decline significantly as a result over the next 10 years, which will represent a considerable threat to the long-term sustainability of the Society.

- The Society has a relatively weak capital position. This forced us to sell equities in volatile markets in 2019, and the impact of COVID-19 on financial markets has put the Society under further strain this year, resulting in the Society selling all but a small proportion of its equities in early 2020. This will impair the Society’s ability to generate meaningful investment returns and bonuses for our Members in future.

In summary, the Board now believes that we have insufficient financial resources to continue to try to prudently grow the business beyond the short term and so our strategy and cost base is unsustainable. If we were to remain independent this would require us to take significant actions, for example closing to new business, dramatically reducing the Society’s expenses and setting bonus rates to zero over the short to medium term. Overall, the Board believes that remaining independent would be detrimental to Member value.

There were several other strategic options considered by the Board:

To build scale by acquiring books of business or smaller Societies: In 2019 the Society had entered into advanced discussions and made a formal offer around acquiring a substantial book of business, which would have significantly increased our scale and our future outlook. However, negotiations faltered when the other party decided to retain that book of business due to other strategic priorities. Our subsequent analysis demonstrated there were no other viable acquisition options, and also highlighted that acquiring a smaller Society would not have provided Member value or changed the strategic outlook for the Society.

To merge with a Society of similar size: This was explored in detail – again reaching advanced stage discussions with another party, but our analysis indicated it would not have offered the same level of Member value in the future as a merger with a larger partner. In particular, it would not have provided the same level of scale and financial strength, or have removed the risk of expense overruns and writing unprofitable new business.

To close to new business & “run-off” the KU book: Following analysis, it is projected that this option would likely lead to significant solvency issues, necessitate material ongoing cost reductions and poor Member outcomes, with low or zero bonus prospects and Market Value Reductions (MVRs) maintained in at least the short term.

With great regret, after considerable detailed assessment of viable strategic options and efforts to grow KU by alternative means, the Board decided that a merger with a larger Society would best protect and enhance Members’ interests.

Oddfellows was the unanimous Board choice of larger partner for our merger, driven by the following reasoning:

- Financial Strength & Business Model Viability: Oddfellows is financially robust and has significant reserves with the unique backing of its Fraternal fund. It has also successfully released new products in the last 2 years and has a plan to accelerate its new business acquisition. We believe that it, therefore, has sufficient scale, financial strength and plausible growth expectations to give it a viable strategy for a long-term future.

- Prospects for Better Member Financial Outcomes: Oddfellows’ financial robustness will reduce the requirement for high capital coverage in the KU fund, and so capital can be put to better use for Members to improve the investment asset allocation. It is anticipated that our MVRs could be removed following the transfer assuming markets do not deteriorate further. This cannot be envisaged currently with KU operating independently.

- Member Driven: Oddfellows values are very much aligned to KU, with its traditional heritage, mutual ethos and Member-based values, demonstrated by its open Member communications, excellent servicing and fraternal benefits. It was formed in 1810, and in fact, Kingston Unity was formed from Oddfellows in 1840.

- Retained KU influence: A merger with Oddfellows, who cannot yet be considered a large player in Financial Services, allows Members to retain greater involvement and influence as delegates, alongside 3 Non-Executive Directors (NEDs) and some staff members.

- Merger Experience: Oddfellows has successfully merged with 4 smaller Friendly Societies in the past 13 years giving us confidence both in the likely success of this merger and the pedigree to attract other mergers, particularly given the attractiveness of its robust solvency position to other potential merger partners.

The Board identified the following as some of the benefits Members would see:

- Continued Membership of a traditional, branch-based Society i.e. Voting rights and the option to become involved again in branch activities.

- Continuation of your policies with no changes to term and conditions.

- The KU fund will be ring-fenced – all surpluses at time of transfer and future operating surpluses will be for the exclusive benefit of KU With Profits Members.

- The solvency position of the fund should be strengthened by fixed expenses for 5 years and the generation of year-on-year operating surpluses due to lower operating costs. This, coupled with the Fraternal fund backing, will allow greater flexibility with investment allocation and provide greater resilience to market events, allowing a longer view to be taken.

- Enhanced prospects of better financial outcomes i.e. Increased likelihood of higher levels of bonuses in future, with the intention to remove Market Value Reductions (MVRs) on transfer.

Protection of interests provided by legally binding agreements, KU fund ring-fencing, endorsement by our external Chief Actuary and With Profits Actuary, and the continued positions of 3 KU Non-Executive Directors (NEDs) with Oddfellows. The reports from our Chief Actuary and With Profits Actuary have been reviewed by an independent actuary as an additional level of prudence to be confident that the merger will give rise to better Member outcomes than our expectation if we remain independent. These reports will be made available to Members in advance of the SGM.

Very much so. However, we do not believe it desirable for this to be focused on a single meeting – particularly one held via videoconference. We believe that the quality of engagement decreases significantly as the length of the meeting increases. That is why we have provided significantly more information and insight to Members than is required by law, and have already held two 1.5 hour sessions on this important matter – 1 after the AGM and 1 after the first SGM, and have offered a further session ahead of the second SGM if Delegates feel that will be helpful to assist in decision making.

It is important that the Board establishes a clear agenda for a General Meeting of the Society, so Delegates are clear on the timings on the day. We are also concerned that a longer programmed meeting could dissuade Members – who would otherwise be keen to attend – from doing so. The Chairman can and will use his discretion to extend this critical meeting if necessary and if there is consensus that Delegates have substantive outstanding questions. If such an extension were material in length, it is likely that the Chairman would seek the approval of the Delegates in attendance to do so.

None of the feedback we have received from either of our Regulators, (the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA)), has suggested that insufficient information has been provided to Members or Delegates. In fact, when the Regulator approves the merger they will be approving all aspects of how the matter has been communicated to Members and Delegates. It may be helpful to set out the process of engagement with our Regulators to give some more context.

No merger of Friendly Societies can proceed without the approval of both Regulators. Prior to approval, which was received on 23rd October, they will have satisfied themselves that the merger is in our Members’ interests, that all eligible Members have had an opportunity to participate in the decision-making process and that the prescribed information has been clearly provided to Delegates to allow them to make an informed decision. They will have independently reviewed and scrutinised the proposed transfer instruments, our Member and Delegate communication plan, and much of the correspondence. The Board believes that we have provided clear and comprehensive information across multiple different formats and sessions to a level which substantially exceeds that which is required by law for the reasons you state. Our Regulators have provided constructive feedback on technical aspects of some of the content and reports and has suggested that we reiterate certain matters in all correspondence for the avoidance of doubt, all of which we have adopted. This is what the Chairman was referring to – making sure that points of clarification were made in the public documents referred to below as well as other communications.

The Regulators also need to approve: (i) the content of a statement we are required to make to Members prescribed in Schedule 15 of the Friendly Societies Act 1992 (Schedule 15 Statement), which includes a comparison of KU to Oddfellows and commentary on the key benefits of the transfer to KU Members; and (ii) the scope of KU’s Chief Actuary’s and With Profits Actuary’s reports, which comment on what is in the interests of our Members as a whole and our With Profits policyholders respectively.

These are all public documents that came under close technical scrutiny by the Regulators. Due to the multilevel decision making process at the PRA and FCA (and challenges with doing this with Covid-related working
restrictions) some delay to our original timeline resulted, but these approvals have now been received. These reports and the Schedule 15 Statement have been circulated to SGM Delegates in advance of the SGM, currently planned for Saturday, 14 November, and so all the required information, and more, will have been made available before the SGM.

If there is demand from Members, there will be the opportunity to discuss the documents prior to the SGM with the Board and our Chief Actuary. The Board are arranging this for 6 November, subject to confirmation from Delegates that this would be desirable.

In terms of other information about the rationale for the proposed merger, we would also draw attention to our 2017, 2018 and 2019 Annual Report and Accounts, and the corresponding AGMs which all articulate the challenges faced by the Society, as well as other Q&A questions which address these issues. If Members can attend the SGM, the presentation from the Board at the start will also repeat the logic behind the Board’s recommendation, as was outlined at the recent AGM.

Delegates that attend and vote on matters at a General Meeting of the Society are there to represent the Membership as a whole, and are asked to consider the information presented to them and vote on a resolution in the best interests of the Society’s Members.

The Board does not believe that being a Member of Oddfellows would prejudice a Delegate’s voting on the special resolution in itself but would help them make a more informed decision by knowing both Societies

At the most recent Annual General Meetings of the Society the Board has repeated the message that the Society needs to grow substantially over the short to medium term to provide a sustainable future. Whilst this message has been balanced with the positive activities undertaken by the Society to address this issue and create Member value, by enhancing our people, systems and controls, we have consistently highlighted our need to grow.

While the timeframe to approve the special resolution to Transfer to Oddfellows may seem to have been presented quite quickly for some Members, the Board has been actively seeking merger and acquisition opportunities from late 2018. Once it was clear there was limited opportunities, especially those within the Society’s reach, the Board agreed to seek a merger partner in late 2019. The Board saw no advantage for our Members in delaying any proposal, once we had been able to conduct a full and robust tender process, as this would have lowered the attractiveness of the Society to a potential partner.

The Board voted in a majority of 8-1 to seek a Transfer when presented with a range of alternative strategies that had been thoroughly analysed. Having decided by majority that this was the best course of action the Board was then unanimous in selecting Oddfellows as the best merger candidate.

The Society is required by law to present Delegates attending the Special General Meeting, to vote on the Special Resolution, with a Schedule 15 Statement 14 days in advance of that general meeting. The Schedule 15 Statement compares the financial position of both Societies and provides information on the key aspects of the Transfer, as prescribed by the Friendly Society’s Act 1992.

In addition to the Schedule 15 Statement, the Society will issue the KU With Profits Actuary and KU Chief Actuary Reports to Delegates attending the Special General Meeting. The actuarial reports show the views of KU’s Chief and With Profits Actuary on the proposed Transfer.

The Schedule 15 Statement and Actuarial Reports will also be added to the website for the Membership as a whole to review.

All the aforementioned documents were issued to Delegates by Friday, 30th October.

Due to the confidential nature of such an offer and the legally binding confidentiality agreements in place, we are unable to disclose the identity of other party. We can say, though, that it was a book of Child Trust Funds, which although in itself would provide its own retention challenges, was of sufficient scale to provide medium-term financial robustness to give more time for our sales and marketing strategy to bear fruit and to improve our economies of scale in running off our own CTF policies.

Sheffield Mutual does indeed appear to have done well in terms of writing new business and paying out higher bonus rates than Kingston Unity in recent years. There are many reasons why one business strategy may be more successful than another, and many other factors which go into determining ‘success’ than these two performance indicators. However, we will make some observations on these indicators below which we hope will be helpful but do stress that we do not have detailed knowledge of their strategy. Moreover, we also note that despite the similar size the two organisations are different in many respects, and have faced very different challenges in recent years, be they governance, capital constraints, regulatory or otherwise.

Sales and Distribution Strategy

Sheffield Mutual appears to have focused its sales and distribution efforts in recent years on the ‘direct to consumer’ channel, with some recent progress in the ‘advised’ channel. By contrast, over the same period Kingston Unity focused its sales and distribution efforts on the ‘introducer’ and ‘advised’ channels and had only begun to move into the ‘direct to consumer’ channel in the last few years. Despite early signs of success in 2017 and 2018 for Kingston Unity’s strategy, the prevailing economic, regulatory and competitive environment was such that our strategy did not yield the new business we had forecast whereas Sheffield Mutual’s appears to have had more success.

Asset Allocation

Sheffield Mutual has held a higher proportion of ‘risk’ assets, such as equities and commercial property, than us. We did not have the capital to sustain the same high proportions of assets in ‘risk’ assets which has resulted in a reduced capacity to maintain bonuses which both reward Members’ loyalty and attract prospective new Members. It would also appear that Kingston Unity may have had a materially different appetite to investment and solvency risk over the period, but again this is complex area which we do not have the information to comment on authoritatively.

With the benefit of hindsight and different initial capital strength, the Board may have made different decisions. However, what it can be confident of going forward is that the proposal to merge with Oddfellows will release real value to Members both in terms of long-term bonus expectations and greater security in being part of a larger, more financially robust society with similar values to those of Kingston Unity.

There are 2 main contributing factors to our costs increasing in recent years. Firstly, Regulations since the financial crisis in 2008 (including the introduction of Solvency II in 2016) have become increasingly burdensome and costly. It is important for the Society to be well run and professional so that we can meet or exceed regulatory requirements, managing Members’ money and all risks appropriately. Secondly, we strongly believed that we had to grow to provide a sustainable future. To achieve both these corporate goals, we had to invest in the right people, systems and processes. Ultimately, the growth strategy did not succeed in the expected and planned timeframe but we still believe that investments in systems and people were required to support a modern financial services company in any event.

On cost management generally, the Society has always been run with a small team on a nimble budget, with all team members being required to adopt a ‘hands on approach’ to help us look after our 100,000 Members. Like many smaller Societies, the regulatory requirements of Solvency II have seen the Society’s overall running costs increase significantly. Notwithstanding this, we believe that our ratio of total expenses to policies under management compares very favourably with other similar organisations as was evidenced in our strategic review of our sector when looking for potential merger partners.

The Society’s Board has aimed to generate an operational surplus year on year, attempting to add to Member value directly in this way within the constraints of our available budget. The Board has been able to renegotiate or change provider to reduce several significant costs, such as our actuarial and external audit fees to help manage our yearly budget. Whilst there has been a deficit in 2019, the previous 3 years had produced a small surplus and so the Society has generally been able to meet this aim, while investing in our infrastructure, systems and people.

Staffing Costs
Improving the breadth and depth of knowledge and skills of our staff over the last 5 years has been of critical importance in enabling us to meet the ongoing and emerging regulatory requirements, manage a range of operational risks and provide the Society with the best chance of achieving our growth strategy. So, whilst staffing costs have increased modestly, we believe that the additional budget allocated to recruiting, training and retaining key skills has been a necessary and prudent step to enhancing Member experience and market to potential Members in new ways. Moreover, a breakdown of total staff costs since incorporation in 2016 is provided below which shows staff costs increasing at little more than CPI over the period:

- 2016 - £527,920

- 2017 - £465,564

- 2018 - £565,308

- 2019 - £584,208

IT Infrastructure Costs

In addition to building a platform for new business, the investment in IT infrastructure was also necessary to provide us with a modern, scalable and resilient administration system. This has delivered several key benefits to KU notwithstanding the disappointing sales performance:

1. Significant improvement to resilience and information security and data privacy governance.

2. Allowed KU to confidently enter into negotiations of acquiring a substantial book of business, which
without KU would not have been considered.

3. Without the improvements to our systems and infrastructure the Society would not have been able to maintain service levels through the Covid-19 Pandemic.

4. A well-run and modern platform strengthened the Board’s hand considerably in merger discussions.

5. Provided CTF maturity-processing capabilities which will make it more efficient and improve business retention.

The ongoing operational costs charged to the KU Fund will be ‘fixed’ to a specific rate card for a period of 5 years, with some other variable fees such as Investment Management expenses being charged directly to the KU Fund. Once the rate card expires the KU Fund will then be charged on a full variable cost basis, including a fair proportionate share in any shared services across Oddfellows’ book of Long Term Business (LTB) used by the KU

The Board felt that the certainty of a fixed charge for five years would be in Member’s best interests and would also allow any surplus assets to be clearly identified for our Members as part of the Transfer proceedings. However, as mentioned, one of the benefits for the KU Fund when it moves onto a full variable cost basis, is that it could benefit from a reduction in the shared services costs. This could be achieved if Oddfellows were successful in acquiring other friendly societies or books of business that further allow for economies of scale. Whilst moving onto a full variable cost basis could potentially increase the overall cost attributed to each policy, Oddfellows Board has a duty of care to all Members to manage costs appropriately. Fund. It is possible that costs could increase then, but if Oddfellows have successfully grown the business, we would expect the KU fund to benefit from the further economies of scale, and for costs to reduce.

At the point when the KU Fund is no longer of sufficient scale to justify being a standalone fund, the KU Fund is likely to be made non-profit and be merged into Oddfellows existing LTB non profit fund. This would only be done if the Oddfellows Board believed it would be in Member’s interests and in full consultation with both its own independent With Profits governance arrangements and our regulators. At this point all existing surpluses would be distributed to the KU fund policyholders. It is likely the KU Fund would be considered for cessation by the Oddfellows Board when it reaches any one of the following milestones: i) With Profit Policies fall below 5,000 accounts; ii) the KU Fund falls below £20 million in size; or iii) 10 years has elapsed since the Effective Date of the Transfer.

In recent years Oddfellows have successfully implemented the transfers of engagements of the following societies:

• The transfer of the Druids Sheffield Friendly Society (DSFS), with assets of approximately £50million, was completed in April 2015. Oddfellows were aware that the Druids Fund was over exposed in residential property. Their approach could have been to realign the investment portfolio immediately after the merger but this may have resulted in a ‘fire’ sale of the properties which would have been to the detriment of the Druids With-Profit policyholders. Instead, Oddfellows has supported the Druids Fund by reducing the exposure to residential property on a gradual basis which includes using part of that property exposure to back their own Guaranteed Investment Bond. The Druids Fund still exists as a standalone fund and is still open for new business.

• The transfer of the Schoolteachers Friendly Society (SFS), with assets of approximately £70million, was completed in March 2011. Since the transfer Oddfellows have improved the solvency position and increased the bonuses. Oddfellows was aware that the Schoolteachers Fund was overexposed in cash deposits. Oddfellows understood that this was to protect the overall solvency of the Fund because of market fluctuations. Oddfellows approach could have been to realign the investment portfolio immediately after the merger, but this may have created unnecessary risk to the Schoolteachers With-Profit policyholders. Instead, Oddfellows realigned the investment strategy and portfolio over time and matched against the liabilities and achieved a greater yield for the Schoolteachers Members and increased bonuses. The Schoolteachers Fund still exists as a standalone fund.

• The transfer of the Nottingham Friendly Society (NFS), with assets of £21million, was completed in December 2009. At the time of the transfer the NFS fund was in distress, all bonuses had been suspended and a Market Value Adjustment (MVA) had been introduced. Oddfellows improved the financial position of the fund, reintroduced terminal bonus and removed the MVA. Following regulatory approval the Nottingham Fund was merged into the Oddfellows Non-Profit Fund in December 2019.

• The transfer of the Ideal Benefits Society (Ideal), with assets of £31million, was completed in July 2007. In 2017 the surplus in the fund was returned to the Ideal With-Profit policyholders by way of an uplift in benefits and, following regulatory approval, the Ideal Fund was merged into the Oddfellows Non-Profit Fund in November 2017.

Oddfellows reopened for new business in 2017, launching their Unity Mutual brand. More information on Unity Mutual and the policies they offer can be found here:

www.unitymutual.co.uk

Whilst Oddfellows were closed to new business for a period of time, before reopening in 2017, they had been successful in acquiring and running a large book of insurance business during that time. This included the policies and assets from four Societies that joined them since 2007, including Druids Sheffield Friendly Society (joined 2015), Schoolteachers Friendly Society (joined 2011), Nottingham Friendly Society (joined 2009) and Ideal Benefits Society (joined 2007).

As has been the case with KU’s Board, Oddfellows’ Commercial Board, will, on an ongoing basis, review the investment strategy of the KU Fund to try to achieve returns for our Members in line with their expectations. This may see a change in the KU Fund’s asset allocation or investment managers in the future, but any change will be made with Members best interests at heart as has been done under KU’s management. As part of the agreement to transfer Oddfellows have agreed to manage the investment strategy of the KU Fund in line with our Members’ expectations, which they have successfully achieved with the other friendly societies funds that have joined Oddfellows.

The KU Fund will be ringfenced upon Transfer to Oddfellows and will remain so until the KU Fund is no longer of sufficient scale to justify being a standalone fund. At this point the KU Fund is likely to be made Non-Profit and be merged into Oddfellows existing Non-Profit fund. This would only be done if the Oddfellows Board believed it would be in Member’s interests and in full consultation with both its own independent With Profits governance arrangements and our regulators. At this point all existing surpluses would be distributed to the KU fund policyholders. It is likely the KU Fund would be considered for cessation by the Oddfellows Board when it reaches any one of the following milestones:
i) With Profits Policies fall below 5,000 accounts; ii) the KU Fund falls below £20 million in size; or iii) 10 years as elapsed since the Effective Date of the Transfer.

The Oddfellows Board, Chief Actuary and With Profits Actuary will continually assess the viability of the KU Fund and the KU Fund will be managed in accordance with the Instrument of Transfer which contains the conditions to be considered before the ring-fencing can be stopped. In all instances, Oddfellows has a regulatory responsibility to manage the KU Fund in the interests of the KU policyholders. At the appropriate time the Oddfellows Board, in conjunction with the Chief Actuary and With Profits Actuary will decide whether it is in the interests of the KU With-Profit policyholders to keep the KU Fund ring fenced as a standalone fund, merge the KU Fund with another of the Oddfellows With Profits Funds or to return any surplus to the KU With-Profit policyholders by way of uplifting the policy benefits, converting the With Profits policies to Non-Profit and merging it with the Oddfellows Non-Profit Fund. Once a decision has been made a business case is then presented to the Regulators to explain why Oddfellows believes the option chosen is in the KU policyholders best interests.

If the KU Fund is merged into another of the Oddfellows funds the associated costs to manage that fund will be shared equally by all the policies in that particular fund.

KU’s investment managers are LGT Vestra LLP for our equity and bond assets, and Ryden LLP for our commercial property assets. Oddfellows Commercial Board will have the discretion to change either manager following the Transfer and may do so if they believe it is in the best interests of our Members. However, it is expected that initially both managers will be maintained following the Transfer.

LGT Vestra is one of the Investment Managers that Oddfellows currently uses.

KU’s contract with LGT Vestra is on a rolling basis, which is the standard basis for such engagements, providing the Society with the option to cancel the contract at any point.

There are clear benefits in reducing operational costs by joining with a larger organisation, with economies of scale allowing for a significant reduction in staffing, management, governance, system, infrastructure and third party (such as actuarial and audit) costs.


As part of the proposed Transfer, costs charged to the fund will be mainly fixed to a Rate Card for the first 5 years, which will allow for a significant reduction in comparison to the cost of staying open as an independent Society. We expect total costs to reduce by approximately 40% compared to our current operational footprint, savings from which will go directly back into the With Profits fund for potential distribution. The rate card was agreed following detailed analysis of our costs and the expected savings achievable by Oddfellows in running the fund arising from the merger.

It has been agreed that the Wakefield office will remain open and the current KU Team will administer KU policies for at least 3 months, but more likely to be for 6 months, after the Effective Date of the Transfer. At that point the majority of the KU team will be made redundant, and KU policies will be administered from Oddfellows’ Manchester and Liverpool offices.

After the closure of the Wakefield office, as it is owned by the Society and is part of our commercial property assets in our With Profits fund, it will become available to lease or sell, depending on the needs of the With Profits fund at that time.

As part of the Transfer to Oddfellows they will acquire the trademarks, brand and image rights of KU. Therefore, it will be down to the Oddfellows Commercial Board if they choose to use the KU brand after the Effective Date. However, as all new business policies are currently available through Oddfellows’ Unity Mutualbrand, it is not expected that the KU name will be used for new business activity (at least in the short term).

All existing KU assets and policies, including your child’s Child Trust Fund, will be transferred to Oddfellows at the Effective Date with no changes to the terms and conditions, or the underlying asset classes in which it is invested.

The money will be protected and ring-fenced within the KU Fund managed by Oddfellows, but Kingston Unity will cease to exist as an independent entity at that time.

Yes, the Terms and Conditions of your current KU policies will not change. Therefore, you will be able to continue to submit medical claims following the Transfer.

Yes, the Terms and Conditions of your current KU policies will not change. Therefore, anyone currently receiving an income from a policy will continue to do so after the Effective Date.

No, the Terms and Conditions of your current KU policies will not. Therefore, the distribution of surplus assets for former branch schemes will continue to occur every three years.

All KU Members will be considered Insurance Members as in accordance with the Oddfellows rule book with corresponding Membership rights. In addition, former KU Members will have the right to attend the Oddfellows Annual Moveable Conference (AMC) as a KU Deputy and will be allocated one Deputy position for 500 adult members. KU Members will also have the option to join Oddfellows as a Fraternal Member (Standard or Benefit) for a discounted rate and get involved in their local Branch. If a KU Member does take out Fraternal Membership and stand as a Deputy for that Branch then they will not be eligible to stand as a Deputy for the KU Policyholders and vice versa… if they stand as a Deputy for the KU policyholders then they cannot also stand as a Deputy for the Branch.

On transfer you will become an Insurance Member of Oddfellows with voting rights automatically. You can then elect to enhance your membership with additional benefits for a cost if you choose to do so.

For up to six months after the Effective Date Oddfellows will offer the chance for KU Members to join Oddfellows
as a Standard or Benefit Member for £10, for the first year only, which usually costs £25 or £35. Standard or
Benefit Members benefit from being able to attend Oddfellows social events and gain access to a number of
care, advice and support benefits and if on the Benefit package, eligibility for discretionary dental and optical grants. Details on the benefits you get by being a Standard or Benefit Member of Oddfellows can be found here:

https://www.oddfellows.co.uk/join/membership/adult-member/

Members can then choose to renew their Membership with Oddfellows after the first year at the level they have joined on in Year 1. After 3 years on any one package then they have the option of switching to the other package.

As highlighted in the above question, for up to 6 months after the Effective Date KU Members will be above to join Oddfellows as a Standard or Benefit Member at a discounted rate of £10 in the first year.

The Oddfellows branch membership year is 12 months from the date you join as a Fraternal member.

Only KU Members that are not part of the Oddfellows branch network will benefit from the discounted rate of £10 for the first year. This is to allow KU Members that are not already part of Oddfellows the opportunity to engage with them to see if it is something they would like to continue with in the future.

Both options are open to the KU policyholders so there is no need to push. However, once chosen you would have to stay on whichever package for 3 years as already indicated and there would be no eligibility to claim dental and optical under the Benefits package until renewed for the 2nd year.

Oddfellows Branch network has continued to run many events over the year, despite the Covid-19 pandemic. A number of these events have been held ‘virtually’ to help restrict the spread of the virus, but a range of restricted physical events have also taken place using the Covid-19 secure guidelines. As activities have continued and additional benefits, such as the support and citizens advice helplines have been available, Oddfellows continue to believe the current membership rates offer excellent value for money.

You can see the latest upcoming events, and those in your region, but viewing Oddfellows website here: https://www.oddfellows.co.uk/events/

You can find your local Oddfellows branch using their website, here: www.oddfellows.co.uk/branch-finder

Oddfellows has 120 branches which are spread across the country, so we hope you can find a branch local to you.

In accordance with the Oddfellows rulebook, the fraternal funds may be used to support Oddfellows Long Term Business (LTB) Funds (which the KU Fund would be part of) if they were in significant distress and unable to meet their liabilities. This has never happened, nor is expected to happen. However, if this event did occur, Oddfellows centrally hold fraternal funds, which could be used immediately to support the Unity LTB funds. If further support is required, this would then require the Oddfellows branches to each contribute an additional amount to support the LTB funds. This is no different to how the other LTB funds are supported.

Successful growth of our With Profits fund between 2013-15 was predominately based on introduced business, supported by generous introducer fees and high bonus rates in a pre-solvency II capital environment. However, the level of fees were unsustainable to continue to write profitable new business and the investment environment took a turn for the worse, compounded by tighter capital constraints arising from the regulatory changes in Solvency II thus reducing the return of the With Profits fund. Therefore, in the following period, the Board made the decision to reduce introducer fees and pay lower levels of guaranteed bonuses, impacting new business volumes significantly. In addition, introduced business from “professional introducers” e.g. mortgage brokers, proved not to be as “sticky” as traditional business and a significant proportion of our newly acquired Members transferred to other providers after staying with KU for a relatively short period of time (~5 years). In comparison, our branch-introduced Members have stayed loyal to the Society over the longer term, but since branches were centralised in 2016 and tighter regulatory controls were placed on those introducing new business, there has only been a handful of Member introductions.

To change this trend and attract new business we attempted to open-up new, non-commission-based, distribution channels - advised and direct, around the beginning of 2017. The ‘advised’ channel ultimately proved not to be productive for us with fierce competition from the likes of Aviva and Prudential, and with the direct channel, despite good initial signs, it became clear that we had insufficient time and resources to make it successful in the short term. We also launched a new innovative online Junior ISA product around the same time.

In the latter part of 2018, we recognised that we would need to grow by acquisition to complement our new business strategy. In 2019 we had an agreement in principle to this end and began detailed work to effect the acquisition but ultimately it proved unsuccessful.

The Board monitored the growth strategy monthly, with several in-depth reviews being undertaken over the last few years on our distribution and product strategy. Entering into 2019 the Society had three main distribution channels: (1) Direct; (2) Introduced; and (3) Adviser. It should also be noted that following the 2018 strategy review the Board included an objective in 2019 to consider merger and acquisition opportunities.

The Direct Channel had seen positive signs of gaining momentum over 2017 to 2018, with Premium’s increasing significantly in percentage terms, albeit at relatively modest levels. The success was mainly attributed to existing Members choosing to take advantage of the special offers to invest further monies with the Society. In 2019, despite the continued support of our existing Members, direct premium levels fell and the Society struggled to attract new Members. Whilst the Society had been successful in removing some barriers for new Members to join, such as improving our online functionality and application process, improving the quality of literature and updating our brand, the Society’s proposition struggled to be competitive in the wider market. The lack of a well-known brand, a small marketing budget, the complexity of With Profits policies and the levels of bonuses we were able to pay, all contribute to potential new Members choosing to invest elsewhere.

The Introduced Channel, which has always been our main channel for new business historically, had performed reasonably well over 2017 and 2018. However, in 2019 sales also dropped with a lower number of introducers choosing to promote the Society’s policies. Despite the Society’s best efforts to re-launch the channel during the year to encourage more introducers to sign up and promote the Society’s policies, very few new introducers registered – in large part due to the increased level of compliance controls required - leading to a fall in new business.

The Adviser Channel, which the Board felt had excellent potential if successful, had seen modest sales in 2018 from a standing start in 2017, and had developed good in-roads into a large broker’s platform. However, after a continued focus on the channel in 2019, it was clear that our overall proposition was not competitive enough to attract advisers to use our policies. Following review this channel was closed in August 2019, removing the associated resource and expenditure.

The decline in the outlook of our growth strategy and failure to achieve our set targets led the Board to review our growth strategy in the latter part of 2019, resulting in our decision to accelerate our merger and acquisition strategy.

COVID-19 has had a significant negative impact on the global investment markets, which in turn has led to a decline in the overall asset levels of the Society, especially in those assets like our Child Trust Fund (CTF) accounts that are linked to the UK stock market. Overall, the With Profits fund has weathered the current environment well, with our options strategy helping protect asset levels. However, the overall drop in asset levels will impact the level of income that the Society will generate for 2020 and it is now expected that this will lead us to have a reasonably large operational deficit for the year.

Operationally we have seen a smooth transition from office working to home-based working, with minimal impact to service levels. Member activity levels, including new business premiums and claims, have been very low during the year. This is expected to result in a fairly neutral net position for the money coming in and going out of the Society for the year. Whilst this will reverse the trend seen in previous three years where there have been significant levels of claims above premiums, leading to a net outflow of money from the Society, new business levels are expected to be lower than 2019.

KU has struggled over the last few years to be competitive in the wider marketplace with its overall proposition and products, which has in turn impacted new business sales.

Oddfellows, due to their scale and backing of the fraternal business, through its Unity Mutual brand is able to launch new and competitive products into the wider market. Whilst this must be complemented by cost-effective promotion, brand activity and smooth application processes, it gives Oddfellows a strong starting position to build on.

It must also be noted that Oddfellows have a good opportunity to encourage its large fraternal Membership to hold an insurance policy with Unity Mutual, whilst they will also have the chance to encourage their large amount of Child Trust Fund (CTF) policyholders to continue to invest with Oddfellows. The economies of scale with marketing to these larger cohorts give opportunities for targeted cross-selling that did not exist with KU.

All adult Members of Kingston Unity received notice of the Special General Meeting (SGM) on 17th October and its purpose by post during July. Additionally, the SGM notice was placed in The Times and on our own website. NB: Since this question was raised and responded to at the AGM it has become evident that the regulators will not have given their approval of all transfer formalities prior in sufficient time for us to follow due process and debate and vote on the matter at the planned SGM on 17th October even if the proposed rule change is registered. As a result, this scheduled meeting will be used as a further Q&A session for members, and notice will be given for a new SGM immediately thereafter. We apologise for this.

No, not in the short term. If the motion to transfer to Oddfellows is rejected, we will almost certainly close to new business, be forced to dramatically cut costs and will have to demonstrate to the Regulators that even if we fall below the “Solvency Capital Requirement”, as we could well do, we have a plan to resolve the situation. Ultimately if we are unable to maintain adequate capital coverage then the Regulator could indeed take control of the situation.

No there is no such dependency. Once the transfer takes place you automatically become a member of Oddfellows. Branch/Fraternal membership is optional and in the first year will be at a discounted rate for KU Members.

Oddfellows use a delegate voting system. Oddfellows delegates are known as “Deputies” and their annual general meeting is known as the “Annual Moveable Conference” or AMC for short.

It is for the Oddfellows Board (Nominations Committee) to decide who should sit on the Board and then put that to their Deputies at the following Oddfellows Annual Moveable Conference (AMC) to vote on their election to the Board. The Non-Executive Direct (NED) selection process took place in August 2020 and based on their skills gaps they have decided to select Rob Edwards and David Grant to sit on their Commercial Board and Peter Darragh to sit on their Audit, Risk and Compliance Committee.

In general, as part of our due diligence process, we analysed the performance of four of their Insurance Business funds, which all have different investment mandates and underlying investment assets and strategies. This is because they all have different capital requirements and reasonable policy-holder expectations. We examined performance over several years and looked in more detail at 2018 (a difficult year for markets), and 2019, (a better year for markets). We found that investment management performance across their funds with due regard to their respective mandates and capital constraints were objectively satisfactory and met the respective policy-holders’ reasonable expectations. We have no reason to believe that KU policy-holders’ reasonable expectations will not be met similarly if the proposal to merge is accepted.

It is worth noting that Oddfellows has not had to operate as dynamic an investment strategy as KU as they have not had the same solvency pressure so there are significant differences in performances over short time horizons but overall their long-term investment approach has performed satisfactorily. Although difficult to compare any of Oddfellows’ funds like-for-like to the KU fund (or the discreet performance of the property element of any of them) the closest comparator performed similarly to KU’s With Profits fund over the medium term. It is also worth noting that KU’s main investment manager, Vestra, is already an investment manager on some Oddfellows funds and the intention is for them to continue to manage KU’s investment money which will give further continuity to KU members.

Moreover, it is worth noting that assuming the KU fund moves into run-off over the next few years properties would likely need to be liquidated to meet claims. Due to their illiquid nature it may be the case that full value would not be realised if KU were to become a forced seller. Oddfellows have expressed a readiness to transfer such assets into other funds at fair market value which highlights another attractive attribute of the merger proposal. Oddfellows has effectively done this for another sub-fund already and has cleverly used the transfer to underwrite a new compelling product proposition to the benefit of all members.

For completeness, the investment performance of Oddfellows unit-linked policies is entirely in line with expectations based on the index they track.

KU’s directly held commercial property portfolio is valued by an independent valuer annually. The last such valuation was in November 2019 and has not been repeated this year yet, however, our property advisor, Ryden LLP, is confident, based on transactions for similar properties which they have been involved in on either side of the first ‘COVID-19 spike’ that our portfolio has lost less than 10% of its 2019 year-end value. Compared to regular ‘investment grade’ property funds this represents strong performance. This is due in part to our mix of property type and tenant, with our industrial units holding their value very well and our lack of significant exposure to city-centre office space or prime retail, which have lost significant value. The other key factor underpinning this performance has been our proactive and constructive management of tenants. Rent support has been offered (where reasonable to do so), such as rent-free periods, payment holidays and allowing more regular payments to assist with cashflow which has resulted in continued high occupancy levels and our income holding up remarkably well. This has vindicated our decision to do the ‘right thing’ not only to benefit tenants and their employees but also to act in the best long-term interests of Members.

Surpluses will be ring-fenced exclusively for KU With Profits Members. The Oddfellows Commercial Board will decide on the Investment strategy to try to get the best returns and bonuses for Members. Oddfellows will also determine how and when to distribute surpluses as the With Profits book decline as policyholders leave over time. Fairness to all Members will be the key consideration. It is not expected that a special bonus distribution will be made upon the completion of the proposed transfer.

Yes, the Society must hold reserves to meet Solvency II regulations to best ensure we can meet our commitments to Members. Our reserves or “Own Funds”, the excess of our With Profits assets over our With Profits liabilities (the mandatory policy pay-outs to Members with guaranteed bonuses) are available for future distribution to With Profits Members over time. It is currently estimated that Own Funds at the time of transfer will be circa £5m.

The former branch tables and schemes are considered With Profits policies in the main (there are a very small number that aren’t), so any With Profits Members would benefit from their fair share of any With Profits surplus profits.

The Terms and Conditions of the Medical and Interest Accounts will not change, all policies will be taken across into Oddfellows on the same Terms and Conditions. They will operate in the same manner as the currently operate and will not be changed into any comparable Oddfellows versions.

Former KU Members will not form their own branch but will be encouraged to join the Oddfellows existing branch network depending on their location. However, former KU Members that don’t join an Oddfellows branch will be allocated a certain number of spaces at the Oddfellows Annual Movable Conference (AMC), at 1 Deputy for 500 former KU Members. Only former KU Members that are not Members of an Oddfellows Branch would be eligible to apply to become a KU Deputy (this is to stop Members having multiple ways to becoming an Oddfellows Deputy, which would be unfair to the rest of the membership).