Principles and Practices of Financial Management (PPFM)

Transcription

1 Principes and Practices of Financia Management (PPFM) for Aviva Life & Pensions UK Limited Stakehoder With-Profits Sub-Fund Version 17 Retirement Investments Insurance Heath

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3 Contents Page Section 1: Introduction 4 Section 2: The amount payabe under a with-profits poicy 7 Section 3: Investment strategy 13 Section 4: Business risk 16 Section 5: Charges and expenses 18 Section 6: Management of the inherited estate 19 Section 7: Voumes of new business and arrangements on stopping taking new business 20 Section 8: Equity between the Sub-Fund and sharehoders 21 Appendix A: Gossary 22 Appendix B: Background 25 Appendix C: Aviva Life & Pensions UK Limited Fund structure chart 27 Appendix D: Origina issuing companies 28 3

4 Section 1: Introduction The Introduction and any statements at the start of subsequent sections of this document, together with the appendices, are provided by way of background information and do not form part of the Principes or Practices. 1.1 Company information Aviva Life & Pensions UK Limited ( the Company ) (previousy known as Norwich Union Life & Pensions Limited) is owned by Aviva Life Hodings UK Limited, whose utimate hoding company, Aviva pc, is incorporated in Engand. Further information on the company names and background is provided in Appendix B. Products are sod throughout the United Kingdom under the Aviva brand. 1.2 What business is covered by this document? As a resut of past Court transfers of insurance business, Aviva Life & Pensions UK Limited contains poicies originay issued by a number of other insurance companies. The structure chart in Appendix C shows the composition of funds under Aviva Life & Pensions UK Limited. This document covers with-profits business in the Stakehoder With-Profits Sub-Fund of Aviva Life & Pensions UK Limited (the Sub-Fund ). The most common names that exist on what are now poicies of the Stakehoder With-Profits Sub-Fund are Commercia Union Life Assurance Company, CGNU Life Assurance Limited and Norwich Union Life (RBS) Ltd. Other names wi be reevant to poicies in our other with-profits sub-funds. Appendix D contains a fu ist of a the origina issuing companies, which wi enabe poicyhoders to identify whether this document appies to their poicy or whether they shoud refer to the document for one of the other sub-funds. 1.3 Purpose of PPFM What is a PPFM? A PPFM is a document that sets out the Principes and Practices that a company foows when managing its with-profits business. The PPFM for this Sub-Fund has been approved by the Board of Directors of Aviva Life & Pensions UK Limited ( the Board ). The Board wi report each year on whether each with-profits sub-fund has been managed in accordance with the PPFM. What are Principes? The with-profits Principes are enduring statements of overarching standards foowed by a company when managing a with-profits sub-fund bearing in mind its duties to with-profits poicyhoders in both the current and future economic environments, its need to be fair to a poicyhoders, and compy with any reevant egisation and poicy terms and conditions. What are Practices? The with-profits Practices provide more detai on the current approach taken by a company when managing a with-profits sub-fund. Changes to Principes and Practices If we propose to make a materia change to any Principe in this PPFM we wi inform poicyhoders with a with-profits poicy in the Sub-Fund in writing at east three months in advance, uness we consider that advanced notice is not necessary and the FCA (one of our reguators) has agreed. Any proposed change to a Principe woud be decided by the Board, having considered the views of the With-Profits Committee and having taken appropriate actuaria advice, incuding from the With-Profits Actuary. Any proposed change to a Practice woud be decided by the Board, having considered the views of the With-Profits Committee and having taken appropriate actuaria advice, incuding from the With-Profits Actuary. Detais of a changes to Principes and Practices wi be dispayed on the Company s website aviva.co.uk/ppfm as soon as possibe after they are impemented. A ink to the website page wi aso be incuded in annua statements. 4

5 Regardess of any such changes we wi review this document at east yeary to ensure that it continues to accuratey refect the Principes and Practices we appy. We woud ony change a Principe or a Practice when we consider the change to be justified by the need to: respond to changes in the business or economic environment; protect the interests of poicyhoders, for exampe to improve the fairness of a Principe; change a Practice to better achieve a Principe; correct an error or omission in the PPFM; or improve the carity or presentation of the PPFM. Whenever the PPFM is changed we wi: document the changes and keep the previous versions of the document for at east five years; and ensure that any amendments to the Principes and Practices are compiant with a ega and reguatory requirements. 1.4 Governance arrangements surrounding the PPFM It is the responsibiity of the Board to ensure that the Company manages the Sub-Fund in ine with the Principes and Practices set out in this document. In ine with reguatory requirements, the Company has put in pace the foowing governance arrangements to offer assurance that PPFM have been adhered to: The Board wi produce a With-Profits Poicyhoder Report annuay that incudes information on compiance with the PPFM and the way the firm has exercised discretion and addressed any competing or conficting rights and expectations. This wi be made avaiabe to poicyhoders on the website aviva.co.uk/ppfm and on request. A With-Profits Actuary has been appointed to advise the Board on how it appies its discretion in managing with-profits poicies. The With-Profits Actuary wi report annuay to the Board, and a summary wi be avaiabe for with-profits poicyhoders as an Annex to the above annua report. A With-Profits Committee, with a majority of independent members, has been formed to provide independent oversight and chaenge to the Company to ensure that fairness and with-profits customers interests are appropriatey considered in the Company s governance structures and decision making processes. The committee has been formed under FCA Conduct of Business Sourcebook requirements, and more detais incuding its membership and terms of reference can be found on our website at aviva.co.uk/ wpcommittee. The With-Profits Committee may aso report annuay to with-profits poicyhoders if it considers it appropriate. This woud be made avaiabe to poicyhoders as an Annex to the With-Profits Poicyhoder Report mentioned above. 1.5 Court Scheme The management of Aviva Life & Pensions UK Limited is aso governed by a Scheme approved by the High Court of Engand and Waes in 2017, known as the Scheme. In the event of any confict between the terms of the Scheme and this document, the terms of the Scheme wi take precedence. If we wish to change a Principe or Practice in this document, and it is directy reated to a provision in the Scheme, then the Scheme woud first need to be changed, which woud normay require court approva. The PPFM and the Scheme are not intended to ater the rights and obigations we have under any poicy documents issued to poicyhoders. 1.6 Gossary Appendix A defines the key words and phrases used within this report. The foowing section aso gives some background information on types of with-profits poicies, and types of bonus. 1.7 Background information on with-profits poicies With-profits poicies typicay provide benefits at certain contractua dates specified in the poicy. The contractua date is typicay the end of the poicy term, caed the maturity date for endowment poicies or the retirement date for pensions poicies. For other poicies such as with-profits bonds, the poicy may specify particuar contractua dates, for exampe the 5

6 10th poicy anniversary. The benefits are aso, typicay, guaranteed on the death of the poicyhoder. Benefits may be taken at other times, but the payout received in this case is not usuay guaranteed in any way. Bonuses may be added to increase the vaue of the benefits of the poicy. There are typicay two forms of bonus: reguar bonuses, which are added throughout the poicy term, athough at certain times the reguar bonus may be zero; and fina bonuses, which may be added whenever the poicy benefits are taken. Again, the fina bonus may be zero. There are two types of with profits poicies: Conventiona with profits ( CWP ) poicies typicay provide a guaranteed amount of money on a set date or dates ( the contractua date(s) ) and/or on death, provided that a the premiums are paid when due. The reguar bonuses added from time to time increase the vaue of the initia guarantee set out in the poicy. A fina bonus may be added on the contractua date. Poicies may be ended eary, but the proceeds are then not usuay guaranteed. Unitised with profits ( UWP ) poicies are different. Typicay, each premium paid buys a number of units. Reguar bonus may be added either by increasing the price of the units hed and/or by adding extra units to the poicy. Units may be cashed in at any time and a fina bonus may be added. However, if the units are cashed in at any time that is not one of the contractua dates, a deduction caed a Market Vaue Reduction ( MVR ) may be made from their vaue. Not a poicies receive the same bonus rates. For the purposes of setting bonuses, poicies are grouped, mainy by type of poicy. A poicies in the group, known as a bonus series, wi receive the same rate of reguar bonus. The fina bonus rates that appy to the group wi typicay depend on the year the benefits were purchased. 6

7 Section 2: The amount payabe under a with-profits poicy Amount payabe 2.1 Principes The amount paid on the originay seected retirement date or death for a poicy in the Sub-Fund wi be the initia guaranteed benefits, pus bonuses constituting an equitabe share of the distributabe surpus earned by the Sub-Fund over the period of investment, subject to the terms of the poicy conditions which take precedence. Where a poicy is eigibe for a surrender vaue, the amount paid on surrender or retirement at dates other than the originay seected retirement date wi have regard to the initia guaranteed benefits and bonuses, and the desire to avoid surrenders causing a strain on the Sub-Fund remaining for continuing poicyhoders. Common bonus rates are used for appropriate groupings of poicies refecting an eement of crosssubsidy and pooing of risks for poicies with simiar characteristics. A singe group may contain poicies of different age, year of entry, size and premium history. In order to provide an eement of stabiity in the returns to poicyhoders at the originay seected retirement date, smoothing is appied by spreading profits and osses from one year to the next. It is intended that the ong-term cost of smoothing is broady neutra across generations of poicyhoders. No such year-on-year smoothing is appied when reviewing non-contractua canceation of units. In between such reviews smoothing appies as described in the practices. With the approva of the Board foowing the recommendation of the With-Profits Actuary: The systems and methods used to determine bonuses or payouts may be changed from time to time, as a resut of changes in circumstances incuding systems upgrades, or to improve the management of the bonus process. Approximate methods may be used where necessary, or if deemed appropriate: where approximations are not expected to significanty affect the resuting bonuses or payouts, or where the historica data required to perform precise cacuations is no onger avaiabe or is difficut or costy to access. In this case the cacuations wi be carried out as accuratey as is reasonaby possibe in the With-Profits Actuary s opinion. Historica assumptions and parameters used may be updated to support a change to the systems or to improve further the accuracy of the cacuations. 7

8 2.2 Practices Asset share cacuations for specimen poicies are used as a guide to determine bonus rates and the amounts payabe to with-profits poicyhoders. Asset share methodoogy is described in sections 2.3 and 2.4. The Board determines the appropriate eve and timing of distributions to poicyhoders. The aim in the ong term in determining fina bonus is to return to with-profits poicies as a group, on average 100% of asset shares. The amounts payabe in any year, or to any particuar poicyhoder may be more or ess than 100%, due to the effects of smoothing, guarantees, and grouping of poicies. Current practice in determining bonus rates is to target an average payment on maturity for each group of poicies equa to asset share, subject to the smoothing process. Maturity and surrender payouts for a group of poicies shoud normay fa in the range 80% to 120% of asset shares. Payouts may, however, ie outside of this range foowing exceptiona stock market conditions. In these circumstances the Company woud aim to bring the average payout back in ine with 100% of asset share over a maximum 5 year period subject to meeting guarantees aready buit up. Bonus rates are smoothed so that the fu extent of changes in the market vaue of assets in the Sub-Fund is not aways immediatey refected in caim payments. The aim of the current smoothing poicy is such that poicy payout changes are compared between consecutive years and normay imited to no more than 15% on the same poicy. The aim is that in norma circumstances the cost of smoothing wi be broady neutra over the ong-term period. There is no specific overa imit to the accumuated cost or surpus of smoothing beyond the principe of maintaining reguatory sovency at an acceptabe eve. The Sub-Fund was estabished with no free reserves (i.e. the excess of the vaue of assets over the vaue of iabiities) and an account for smoothing and guarantees is being buit up from the accumuation of an aocation from the asset shares. This aocation is currenty 0.25% per annum. The account buids up over time and aows the Company to operate the crucia features of with-profits investment, i.e. smoothing out the peaks and troughs in the vaues of underying assets and providing the guarantees on retirement and death. The 0.25% aocation remains within the Sub-Fund and therefore for the soe benefit of stakehoder with-profits investors. The purpose of the smoothing account is to cushion the Sub-Fund from investment voatiity and enabe the smoothing poicy to be carried out. The size of the account reative to the smoothing poicy wi be reviewed periodicay by the Board, on the advice of the With-Profits Actuary. If it is considered too sma, either an increase to the aocation above 0.25% per annum, or a weakening of the smoothing poicy wi be considered. If it is considered too arge, this coud be addressed either by a reduction in the aocation or a strengthening of the smoothing poicy. Any excess (or shortfa) of payouts over asset share are aocated from or to the smoothing account. The smoothing account wi not be aowed to grow arger than is required to fufi its function as described above. Certain sub-funds of Aviva Life & Pensions UK Limited may provide financia support to the Stakehoder With- Profits Sub-Fund. The support woud be in respect of stakehoder business reassured to the sub-fund by way of a contingent oan where a deficit arises in the Stakehoder With-Profits Sub-Fund. Smoothing is managed principay on a singe premium basis (i.e. caim vaues are considered separatey for each year of unit purchase). The caim vaue of reguar premium poicies is the tota of caim vaues for premiums invested in each caendar year. 8

9 The fina bonus rate used for non-contractua unit canceations is the same as that used for contractua and death caims of the same duration. Such caim vaues may however be reduced by the appication of a Market Vaue Reduction (MVR) as described in sections 2.7 and 2.8. Subject to poicy conditions we may aso aow for any required deductions to protect the interests of remaining poicyhoders. At present we do not make any deductions but may do so in future to the extent permitted within the Conduct of Business Sourcebook rues. Supporting documentation of systems, methods, assumptions and parameters is maintained and is subject to forma change contro procedures. Any changes to systems, methods, assumptions or parameters are documented and are subject to forma change contro procedures with appropriate eves of authorisation. In particuar, minor changes in assumptions woud normay be authorised by the With-Profits Actuary. More significant changes in assumptions and changes in methodoogy and parameters woud be agreed with the With-Profits Actuary and woud be subject to the forma approva of the Board and subject to With-Profits Committee review. The same assumptions and parameters are appied across different generations of poicies where in the opinion of the Board the experience of the different groups is fet to be reasonaby homogeneous or where the experience of different groups is not separatey avaiabe. Asset share methodoogy 2.3 Principes Asset shares are used as a guide to determine the amounts payabe under a poicy and refect the sources of profit or oss to the Sub-Fund. 2.4 Practices Asset shares are cacuated for specimen poicies or groups of poicies from assumptions derived from the actua experience of the Sub-Fund. The experience may be measured across different generations or types of poicy if it is considered appropriate by the Board, foowing the recommendation of the With-Profits Actuary. The parameters and assumptions used are reviewed each year and changed where appropriate. Any changes are documented and are subject to forma change contro procedures with approva of the With-Profits Actuary. For with-profits stakehoder business, the tota asset share for a poicy is the sum of the asset shares for a units aocated to that poicy. The asset share for units aocated at a given time is: initia investment + an aocation of investment return an aowance (currenty 0.25% per annum) of the vaue of the Sub-Fund which is directed into the smoothing account. Expenses are taken by way of an expicit Annua Management Charge (AMC) deducted by way of unit canceation. The AMC is expressed as a percentage of the asset share and is set at a simiar eve to the AMC for poicies investing in unit-inked funds. The AMC can be changed in ine with poicy conditions. This approach is described in more detai beow. Units are aocated when premiums are paid and may be canceed to cover expense charges, partia surrenders and charges for risk benefits. Investment return The investment return used in the asset share cacuations is based on the actua asset mix of the separate Stakehoder With-Profits Sub-Fund. A separate asset poo is not maintained for stakehoder business. Instead, investment return is aocated to the Sub-Fund from the Aviva Life & Pensions UK Limited Od and New With-Profits Sub-Funds. Currenty, the return aocated to the Sub-Fund is equa to the return aocated to other with-profits business in the Aviva Life & Pensions UK Limited Od and New With-Profits Sub-Funds. Actua annua returns, net of permitted deaing cost reductions have been used to determine the investment return used in asset share cacuations. The Company retains the fexibiity to adopt a different asset mix for stakehoder business and stakehoder business of different generations. 9

10 Smoothing account aowance An aowance, currenty 0.25% per annum, of the vaue of the Sub-Fund wi be aocated from asset shares and directed into a smoothing account each year. The 0.25% aocation rate wi be reviewed periodicay. It may be increased (or decreased) if it is considered by the Board, on the advice of the With-Profits Actuary, that the size of the smoothing account reative to the smoothing phiosophy is too sma (or too arge). Bonus Phiosophy 2.5 Principes Reguar bonus rates are set with the aim of providing a progressive buid up of guaranteed benefits over the ifetime of the contract with an overarching aim of retaining sufficient profits to provide an appropriate margin for fina bonus. Reguar bonus rates may be changed to refect circumstances incuding past investment performance, changes in expected ongterm investment returns, and any guarantees in the contracts to which they appy. Reguar bonus rates wi be smoothed, to imit the changes in these rates from year to year. The reguar bonus rate coud be zero (subject to poicy conditions) if required. New bonus series may be created in a variety of circumstances, incuding in order to maintain equity between different poicy casses, poicies written under different premium rates, and different generations of poicyhoders. Fina bonus rates are set with the aim of distributing the baance of the distributabe surpus earned over the ifetime of the poicy, to the extent that such profits have not previousy been distributed by way of reguar or other bonus additions. Fina bonus rates are smoothed as described in sections 2.1 and 2.2. The Board may ater conditions for payment of fina bonuses or cease paying fina bonuses at any time without notice. Factors which might ead to a change incude changes in the financia circumstances of the Sub-Fund and anticipated future experience of an exceptiona nature. 2.6 Practices In determining an equitabe distribution of profits for the purposes of section 2.1, we wi consider: the need to ensure that the Sub-Fund is abe to meet its reguatory iabiities the current and projected capita needs of the Sub-Fund the investment strategy of the Sub-Fund the bonus phiosophy of the Sub-Fund the need for an appropriate eve of security for poicyhoders benefits the need to ensure that poicyhoders reasonabe benefit expectations are maintained. The paragraphs beow describe how bonus rates are currenty determined and smoothed in norma financia circumstances. The Company may change these arrangements when circumstances are not considered norma. Exampes of circumstances which woud not be considered norma incude a proonged period of depressed asset vaues, a heavy incidence of surrenders, or reguatory sovency issues. The amount of reguar bonus may depend on: the prospective fina bonus margin the profits earned in the Sub-Fund over recent years the investment return we expect in the ong term guarantees on a existing with-profits poicies in the Sub-Fund reguatory projected sovency eves, now and in the future the smoothing adjustment. Reguar bonus decarations take into account the rates which the Company expects to be abe to maintain over the terms of both existing and, where appropriate, new poicies within a bonus series. This is achieved by projecting current asset shares for specimen poicies each year for a range of future investment returns on the Sub-Fund, and choosing a target reguar bonus rate which aims for an adequate margin for fina bonus. The projections aow for potentia variations in the future 10

11 investment returns. Suitabe aowance wi be made to finance fina bonus, to reduce the risk of asset shares faing beow initia guaranteed benefits pus previousy decared bonuses. Part of the profits are shared out as reguar bonus. We aim to do this so that there is an appropriate baance paid as a(n additiona or) fina bonus, taking account of the overa strength of the Sub-Fund. No undue weighting is given to recent economic experience. Interim bonus rates, where appropriate, are determined having regard to the estimates of the eve of reguar bonus rates expected to be decared at the next decaration. In norma conditions, reguar bonus rates wi be reviewed twice a year. Athough changes are smoothed, there is no maximum amount by which reguar bonus rates woud ater. Fina bonus rates are set to achieve the overa aim of returning to maturing with-profits poicyhoders as a group, on average, 100% of asset shares in the ong term, given the reguar bonus rates determined as described in section 2.5 and 2.6. They are set so as to achieve the smoothing objectives described in section 2.2. Fina bonus rates are infuenced by the tota return on investments and so are reviewed in the ight of prevaiing financia conditions. In norma circumstances, the Company wi aim to imit the recovery of past smoothing costs to 5% of asset share. In norma conditions, fina bonus rates wi be reviewed at east twice a year. However, we may change fina bonus at any time during the year, particuary in changing financia conditions. We woud expect to change fina bonus rates when there is a sustained movement in asset shares of 15% or more since fina bonus rates had ast been set. Fina bonus rates are currenty based on year of unit purchase, for representative specimen poicies rather than the underying poicy asset share itsef uness there are arge discontinuities in which case we may use a time period shorter than one year. Fina bonus where appicabe is payabe on a canceations of units in the unitised with-profits funds and depends on the date of unit purchase. The fina bonus rate coud be zero. The bonuses described in this section aso appy to investments that have been atered in some way and/ or stopped payment of premiums. Market Vaue Reduction Introduction It is the responsibiity of the Board to ensure any current activity does not adversey affect ongoing poicyhoders and their rights. The use of a Market Vaue Reduction (MVR) is one of the key aspects in the protection of payouts for poicyhoders sti invested in the Sub-Fund. 2.7 Principes A Market Vaue Reduction (MVR) may be used whenever it is necessary to protect the Sub-Fund or other withprofits investors in the Sub-Fund from osses arising from unit canceations. An MVR may be used whenever there is a strain on the Sub-Fund. Appication of an MVR is based on a comparison of the asset share and the credited return indicated from the appication of reguar and fina bonuses. 2.8 Practices An MVR may be appied where the asset share is ess than that credited by way of bonuses to poicyhoders, subject to poicy conditions. The MVR is an adjustment to the vaue of units, incuding any fina bonus, and is intended to ensure the Sub-Fund doesn t incur a oss. The decision to appy MVRs and the appication and review process is activey managed. Poicyhoders appying for a settement vaue wi be informed if an MVR wi be appied. This gives them the option to defer the canceation of the units. The effect of an MVR is to reduce the fina bonus which is payabe on the canceation of units. If the MVR exceeds the fina bonus, then the effect is to reduce the amount payabe to a eve which is beow the face vaue of the units canceed. An MVR wi never appy on payment of a death benefit. 11

12 For Stakehoder poicies, MVRs may be used to target payouts (after MVR) that represent 100% of the asset share ess any deductions required to protect the interests of remaining poicyhoders on average. At present we do not make any deductions but may do so in future to the extent permitted within the Conduct of Business Sourcebook rues. Payouts for individua poicies may fa within the range 90% to 110% of asset share, mainy as a resut of accommodating short term market fuctuation. We wi ook to rebaance MVR rates back to target payouts (after MVR) that represent 100% of asset share when there is a 5% movement in underying market indicators and some sign of stabiity at that new eve. For stakehoder pensions poicies invested in the Stakehoder With-Profits Sub-Fund, an MVR may be appied on a more frequent basis than under the Od and New With-Profits Sub-Funds of Aviva Life & Pensions UK Limited. This is because the Sub-Fund stands on its own and must be abe to support itsef without assistance from the inherited estates of the other with-profits sub-funds. MVRs are currenty determined by caendar month of unit purchase and the surrender vaue is the sum of the vaue (after aowance for fina bonus and MVR) of the units encashed. A surrender vaue may thereby incude units to which an MVR has been appied and units to which no MVR has been appied. It is most ikey that an MVR wi be needed foowing a arge or sustained fa in stock markets or after a period where investment returns are reguary beow the eve we had expected in setting bonus rates. We wi ook to reduce the MVR as markets improve or increase it if markets worsen. 12

13 Section 3: Investment strategy Introduction Information (which has previousy been made pubicy avaiabe) on the mix of assets and investment returns in recent years is given on the Aviva Life & Pensions UK Limited Stakehoder With-Profits Sub-Fund investment information sheet which is avaiabe on the website aviva.co.uk/ppfm. 3.1 Principes In accordance with the Stakehoder Pension Schemes Reguations 2000/2001, the Stakehoder With-Profits Sub-Fund operates as a separate sub-fund of Aviva Life & Pensions UK Limited. A separate asset poo is not maintained for stakehoder business, but investment return is aocated to the Sub-Fund from the Od and New With-Profits Sub-Funds of Aviva Life & Pensions UK Limited. The investment strategy aims to provide the highest ong-term returns (aowing for the effect of taxation) commensurate with acceptabe eves of sovency risk, having regard to: the nature and term of the with-profits iabiities and the management of cashfows the current and expected eve of guarantees reguatory sovency requirements and future possibe scenarios the size of the smoothing account and any freedom or restrictions in investment fexibiity that may provide advice from our Fund Managers short-term and ong-term anticipated returns in different asset casses voatiity of different asset casses. The monies of the Sub-Fund wi be invested in a range of assets where this reduces risk. Investment returns are benchmarked against appropriate indices, taking into consideration the eves of risk inherent in each asset cass and stock. Maximum and minimum exposures to, and performance benchmarks for different investment casses and/or individua investments wi be set from time to time in accordance with Sub-Fund objectives. Maximum exposures to investments in any one counterparty are specified. Intended hoding ranges in various asset casses may be changed in order to improve ong-term performance or to improve the ikeihood that the Sub- Fund can meet its guarantees. The investment strategy for the Sub-Fund wi be determined as part of the overa investment strategy for the Aviva Life & Pensions UK Limited Od & New With-Profits Sub-Funds as a whoe to give more freedom to the Sub-Fund whist maintaining the Principe outined in section 3.1. Investments may be made in derivatives or simiar instruments if they are appropriate to the objectives of the Sub-Fund. Such investments are subject to the appropriate interna governance procedures of the Company. The investment strategy of the Sub-Fund takes into account the nature and term of the iabiities, by considering appropriate assets for different generations of with-profits poicyhoders. No other investment constraints are paced on parts of the Sub-Fund, other than those detaied in the rest of this section which appy to the entire Sub-Fund. 3.2 Practices Aviva Investors Goba Services Limited is currenty the main appointed Discretionary Fund Manager ( the Fund Manager ) for the Sub-Fund excuding Commercia Mortgage assets managed by Aviva Commercia Finance Limited. An investment management agreement exists between the companies, which sets out investment strategy and guideines. The Board appoints committees to manage the reationship with the Fund Managers, set the strategic direction and review performance against benchmarks. Their activities incude agreeing the appointment of Fund Managers, investment management agreements, credit and counterparty imits and approving major, specia or strategic investment decisions. These committees are responsibe for determining the benchmark asset aocation strategy, setting risk appetite and reviewing both competitor activity and economic outook aongside expected returns on different asset casses (short term and ong term). 13

14 The Sub-Fund is not aocated assets that are inappropriate to stakehoder investment. The assets of the Sub-Fund are predominanty invested in equities, property, fixed-interest securities and cash. The Board sets investment performance targets for the Fund Manager: For asset category aocation (e.g. UK equities, property, fixed-interest securities), the foowing are set: performance targets reative to benchmark indices benchmarks and asset aocation ranges for a casses of assets. For stock seection within asset categories: performance targets have been set for a sector funds. For Pensions business, outperformance target ranges have been set against appropriate benchmark indices to contro the risk profie of the equity sector funds, a tracking error is set at a mutipe of the performance objective recognising the expected ski eves of the Fund Manager to contro the risk profie of the bond funds the duration and tracking error ranges are set using the same approach as for equity sector funds. Performance targets are based on the tota return (income pus capita gain). Currenty, there is no recourse to assets in the Sharehoder Fund in order to support the investment strategy of the Sub-Fund, as described in section 3.1. Investment return is aocated to the asset shares of the with-profits stakehoder business in a manner that is consistent with that for pensions business in the Od and New With-Profits Sub-Funds of Aviva Life & Pensions UK Limited. The smoothing account is credited with the return on the assets backing the smoothing account aowing for, where appropriate, the hedging of guarantees. Investment strategy is reviewed formay at east once per year cuminating in a report to the committee responsibe for investment strategy. Smaer reviews occur more frequenty to monitor, and where appropriate, take account of the experience of the Sub-Fund. Aocations between asset categories can be varied by the Fund Manager within tight constraints and the resut of this activity is reviewed monthy by a committee. For with-profits business, a suitabe proportion of equity type assets, known as the equity backing ratio (EBR) is maintained for asset shares within the Sub-Fund. This is cacuated to aow for the cost of guarantees on poicies within the Sub-Fund and takes into account the strength of the Sub-Fund and the size of the estate. It is intended to operate the Stakehoder With-Profits Sub-Fund with the same equity backing ratio as the Aviva Life & Pensions UK Limited Od & New With-Profits Sub-Funds. Currenty, the investment mix of the Sub-Funds is the same; however the Company wi retain the fexibiity to adopt a different investment mix for this business in the future shoud this be necessary given the circumstances of the Sub-Funds. The method currenty used to determine asset aocation ranges for broad asset casses (equity type and fixed interest) and duration ranges for fixed-interest assets is as foows: a Theoretica EBR is determined for aggregate asset shares. This is taken as an assessment of the maximum exposure to equity or property assets (incuding hedge funds, convertibe bonds and private equity type investments) that can currenty be supported given the guarantee costs of the Sub-Fund. the appropriateness of the benchmark EBR is reviewed by reference to the Theoretica EBR and is usuay subject to a toerance of 5%, athough the difference between the benchmark EBR and the Theoretica EBR may be permitted to increase to up to 10% where, given investment conditions and the outook at the time, this is considered ikey to be beneficia for the Sub-Fund. the benchmark EBR foats over short periods according to the performance of the underying assets or indices; however, it is reguary reset to the benchmark EBR unti a revised benchmark EBR is approved by the Board. 14

15 the Board decides changes to the benchmark EBR for asset shares and has discretion to depart from the Theoretica EBR. For instance it may take into account: Appropriate credit quaity of the investments of the Sub-Fund is maintained by prescribing benchmarks for the credit ratings in the investment management agreement. the asset distributions of other with-profits funds or companies its view of the outook for different categories of investment the projected trend of EBRs the desire to avoid frequent changes in the EBR, so that sma changes in the Theoretica EBR are ignored. Periodicay the spit of benchmarks for more specific equity and non-equity type asset cass benchmarks are reviewed to refect the strategic view of investment experts, subject to approva by the reevant committee. Asset aocation ranges to be specified to the Fund Manager are then determined based on the overa EBR as agreed by the investment committee. The use of derivatives in the Sub-Fund is set out in the investment management agreement and otherwise subject to approva through the appropriate interna governance procedures regarding the use of derivatives. These governance procedures seek to contro the risks in using such contracts, and therefore consider amongst other things: the types of exchange-traded and over-the-counter derivative contracts which may be used maximum gross exposures which may be hed in each derivative type. The tota exposure to an asset cass within the Sub-Fund aowing for derivatives must be within the benchmark asset aocation ranges specified for the Sub-Fund in the investment management agreement uness otherwise agreed by the reevant committee. Derivatives are used to hedge the financia exposures of poicyhoders and sharehoders. The uses of derivatives that are permitted are: efficient portfoio management The Sub-Fund invests predominanty in quoted investments in order to maintain the iquidity quaity at a high eve. The investment management agreement specifies imits on the eve of investment in unquoted securities. Cash and deposit-type investments are aso used to back current iabiities to provide a greater eve of iquidity within the Sub-Fund than woud otherwise be achieved by soey investing in onger-term assets. The fexibiity to use new investment instruments wi be baanced with the need to identify the risk inherent in them and to ensure that they wi be subject to adequate contros before their acquisition. No investments wi be made in new investment instruments uness a proposa has first been made and approved by the Board or the committee responsibe for investment strategy. As part of the investment management activities we may end some assets of the Sub-Fund to seected financia institutions to generate additiona fee income from the Sub-Fund. A revenue derived from this process is passed directy to the Sub-Fund ess any associated cost incurred. In certain circumstances, for exampe, if the institution encountered financia difficuties and was unabe to return ent assets, the Sub-Fund coud suffer a oss. We have, however, in pace a number of contros, such as aways obtaining security from each borrower as we as monitoring their credit ratings, in order to reduce the risk to the Sub-Fund. The Sub-Fund may invest in properties used by the Company to administer Sub-Fund business. Any such investments are on a commercia basis which aows for trading the assets if appropriate. The Sub-Fund does not make strategic investments in the equity or debt of companies in which Aviva pc or Aviva Life & Pensions UK Limited has a strategic connection or interest. reduction in investment risk. 15

16 Section 4: Business risk Introduction The with-profits stakehoder poicyhoders are entited to a share of the distributabe surpus of the Stakehoder With-Profits Sub-Fund, as determined by the Board. The Stakehoder With-Profits Sub-Fund, and hence the stakehoder poicyhoders, do not share in the profits or osses for other business written by the Company and are not exposed to the genera business risk of misceaneous profits and osses that may arise from various sources. 4.1 Principes The Sub-Fund may write new with-profits stakehoder business either directy or through reinsurance accepted from other Aviva group companies. No non-profit business or non-stakehoder business is written in the Sub-Fund. The principes reating to the voumes of new business which may be accepted are described in section 7.1. In carrying out the cacuations described in that section the business risks of both new and existing business wi be taken into account. The Sub-Fund may make investments in accordance with appicabe ega and reguatory requirements. The Stakehoder With-Profits Sub-Fund does not provide financia support to other sub-funds of the Company. The Od and New With-Profits Sub-Funds may provide financia support to the Stakehoder With- Profits Sub-Fund where a deficit arises in that Sub- Fund. In such a case, the contribution wi be equa to the deficit. Contro of existing business risk is exercised through the Company s governance arrangements which incude reguar monitoring of a significant business risks. Processes are estabished to determine the impact of the various business risks, for exampe market, credit, iquidity, on the financia position of the Sub-Fund and where necessary to identify and impement appropriate mitigating actions. Compensation costs from a business risk wi be borne by the sharehoders. 4.2 Practices In genera, when considering whether to undertake a business risk the Company wi consider: existing business risks size of, and possibe impact on the Sub-Fund egisative restrictions on the Sub-Fund. Compensation costs arising from maadministration are paid by Aviva Life Services UK Limited in accordance with the Management Services Agreement subject to approva of the Board foowing the recommendation of the With- Profits Actuary. Under the terms of reinsurance arrangements, the Non-Profit Sub-Fund of Aviva Life & Pensions UK Limited currenty receives a the charges appied to the Stakehoder With-Profits Sub-Fund and meets a distribution, administration and investment management expenses. Profit or oss wi therefore arise in this company and genera business risk wi be borne by the sharehoders. Other than compensation costs in respect of maadministration, compensation costs from a business risk for Stakehoder wi be borne by the sharehoders, rather than as a charge to asset shares. The Od and New With-Profits Sub-Funds may provide financia support to the Stakehoder With-Profits Sub-Fund. The support woud be by way of a contingent oan where a deficit arises in the Stakehoder With-Profits Sub-Fund. The oan amount together with the return achieved during the period borrowed wi be repaid once it is no onger required to meet a deficit. No repayment woud be payabe in the event that such repayment woud amount to a deduction from scheme members rights in any way or contravene the Stakehoder Reguations. Currenty no support is required or being provided. Business risk may arise from the issue of capita instruments by Friends Life Hodings pc ( FLH ) and Aviva pc with the benefit of a subordinated guarantee from the Company or from the issue of capita 16

17 instruments by the Company to FLH. However, in both cases, this risk is substantiay mitigated because the Sub-Fund is managed (and the capita instruments are structured) so that discretionary benefits under with-profits insurance poicies are cacuated and paid, disregarding, insofar as is necessary for poicyhoders to be treated fairy, any iabiity the Company may have to make payments under the capita instruments or guarantees. Payments under these instruments are not subordinate to the Sovency Risk Appetite, and circumstances coud arise in which payments were required to be made in reation to the instruments which reduced excess capita in the Company beow the Sovency Risk Appetite (or which further reduced it if it was aready beow that eve). However, this risk is currenty mitigated by the strategy and panning business standard which woud be expected to require a pan for debt repayment, in particuar payments due within the next three years and a requirement for the With-Profits Actuary to report annuay to the With- Profits Committee on the impact of the Company s pans, incuding debt restructuring and repayment, on poicyhoder security. 17

18 Section 5: Charges and expenses 5.1 Principes The With-Profits Actuary is required to agree that any charges aocated to the Sub-Fund are reasonabe and equa to the charges made in ine with the poicy conditions. 5.2 Practices Poicyhoders are charged for expenses by the deduction of an annua management fee, which is passed to the sharehoders of Aviva Life & Pensions UK Limited (see section 4.2). The maximum eve of the charge is determined by reevant reguations for Stakehoder Pensions, or as stated in the poicy conditions. The tota charges received wi not necessariy equa the actua tota expenses incurred in running the business. Actua expenses are assessed for interna purposes, to determine the profit or oss to the companies invoved. The impact of any such profit or oss does not affect the payout on any investment in the Stakehoder With-Profits Sub-Fund. 18

19 Section 6: Management of the inherited estate Introduction The Stakehoder With-Profits Sub-Fund was estabished with no free reserves. The poicyhoders of stakehoder with-profits pensions business, which is written in this Sub-Fund, have no ownership rights over the inherited estates of the other with-profits sub-funds of Aviva Life & Pensions UK Limited. The uses of the inherited estate, as described in the PPFM for Aviva Life & Pensions UK Limited Od & New With-Profits Sub-Funds do not appy to the Stakehoder With-Profits Sub-Fund. The Stakehoder With-Profits Sub-Fund shoud not expect support from the inherited estates of the other with-profits sub-funds of Aviva Life & Pensions UK Limited. In exceptiona circumstances, the inherited estates may provide financia support to the Sub-Fund, as described in section 4.1. This section describes the management of the smoothing account, which is used for some of the same purposes for stakehoder business as the inherited estate is used for other with-profits business. 6.1 Principes The smoothing account of the Aviva Life & Pensions UK Limited Stakehoder With-Profits Sub-Fund is hed and managed independenty of other with-profits sub-funds within the Aviva group. The smoothing account wi be managed in accordance with any appicabe ega and reguatory requirements, incuding the Company s duty to maintain adequate financia resources and to take reasonabe care to organise and contro its affairs responsiby and effectivey. Bonus rates and investment poicy wi be managed in order to keep the smoothing account at a eve which, in the opinion of the Board (on the advice of the With- Profits Actuary), is appropriate for the eve of risk run by the business. An aocation may be made from asset shares to maintain the smoothing account at an appropriate eve. 6.2 Practices As we as the genera uses described in the Principes above, the smoothing account is currenty used to pay the cost of any approximations in the cacuations. The smoothing account is credited with the return on the assets backing the smoothing account, aowing for, where appropriate, the hedging of guarantees. The account wi be managed in ine with the Principes above. Our Practice is to have sufficient monies in the smoothing account to meet the expected cost (on maturity of a poicy) of providing smoothing and meeting the cost of any guarantees over and above that met by asset share incuding costs arising from payouts at MVR free points. As described in section 2.2, the smoothing account is being buit up from the accumuation of an aocation from asset shares. Currenty the aocation is set at 0.25% per annum. The aocation may be increased or reduced in the future as required, as considered appropriate by the Board, on the advice of the With- Profits Actuary. The smoothing account may be used, at the Board s discretion to: provide investment fexibiity by enabing a higher proportion of the investment in potentiay higher reward but higher risk assets than woud otherwise be the case provide a cushion of additiona security against unexpected adverse events permit fexibiity in the smoothing of maturity and surrender payouts for with-profits poicies meet the cost of guarantees where these exceed the poicy vaue indicated by asset share. 19

20 Section 7: Voumes of new business and arrangements on stopping taking new business Introduction New stakehoder business is written through the Aviva Life & Pensions UK Limited Non-Profit Sub-Fund, with the with-profits eement internay reassured to the Aviva Life & Pensions UK Limited Stakehoder With-Profits Sub-Fund. Any business which has previousy been reinsured and the ongoing suitabiity of reinsurance is reviewed on a reguar basis. 7.1 Principes The Company wi set panned voumes of new stakehoder business by determining a eve and mix of new business which meets the Company s business objectives and which is unikey to have a materia adverse effect on the interests of the existing poicyhoders. 7.2 Practices Voumes of new business are currenty ow by historic standards and so there is no forma process to imit the voume of new business. Shoud voumes increase, a process to assess the maximum eve of new business into the Sub-Fund wi be introduced. The Company does not set a specific minimum proportion or scae of new with-profits business to justify the Sub-Fund staying open to new business. Decisions on the future of the Sub-Fund wi be taken in the ight of the circumstances at the time. The Company may choose to cease to write new stakehoder business either because of ack of demand or unacceptabe terms to secure new business. On ceasing to write significant voumes of new business, the Company wi assess whether any action is required in respect of the smoothing account. If the cosure to new business is temporary no such action may be required. If circumstances arose where it was fet appropriate to permanenty cose the Company to new with-profits stakehoder business, the smoothing account woud be retained within the Sub-Fund, in fu, for the benefit of stakehoder investors to act as a cushion against future adverse experience. In this situation, the bonus rates, poicy payouts and the smoothing account deduction woud be managed in order to run-off the smoothing account over the ifetime of the remaining poicyhoders. There woud be no entitement of sharehoders or non-stakehoder investors to a distribution of the smoothing account. 20