Principles and Practices of Financial Management (PPFM)

Transcription

1 Principes and Practices of Financia Management (PPFM) for Aviva Life & Pensions UK Limited Od With-Profits Sub-Fund and New With-Profits Sub-Fund (Aviva Life & Pensions UK Limited Od WPSF and New WPSF) Version 10 Retirement Investments Insurance Heath 1

2 Contents Page Section 1: Introduction 3 Section 2: The amount payabe under a with-profits poicy 6 Section 3: Investment strategy 18 Section 4: Business risk 24 Section 5: Charges and expenses 28 Section 6: Section 7: Management of the inherited estate and the Reattributed Inherited Estate Voumes of with-profits new business and arrangements on stopping taking with-profits new business Section 8: Equity between the Sub-Funds and sharehoders 40 Appendix A: Gossary 41 Appendix B: Background 47 Appendix C: Aviva Life & Pensions UK Limited Fund structure chart 49 Appendix D: Origina issuing companies 50 2

3 Aviva Life & Pensions UK Limited Od With-Profits Sub-Fund (Od WPSF) New With-Profits Sub-Fund (New WPSF) 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 Od With-Profits Sub-Fund ( the Od WPSF ) and the New With-Profits Sub-Fund ( the New WPSF ) of Aviva Life & Pensions UK Limited. On the whoe the Od WPSF and the New WPSF are managed as if they constitute a singe sub-fund. As such references to Sub-Fund in this document wi be to both the Od WPSF and the New WPSF uness otherwise specified. The most common names that exist on what are now poicies of the Od and New With-Profits Sub-Funds are Aviva Life & Pensions Limited, Genera Accident Life Assurance Limited, Yorkshire-Genera Life Assurance Company Limited, The Genera Life Assurance Company, Yorkshire Insurance Company Limited, Scottish Insurance Corporation Limited, N&P Life Assurance Limited, Commercia Union Life Assurance Company, North British and Mercantie Insurance Company Limited, London and Scottish Corporation Limited, CGU Life Assurance Limited, 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 these Sub-Funds 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-Funds 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. 3

4 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. 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-Funds 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 the 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 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 4

5 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. 5

6 Section 2: The amount payabe under a with-profits poicy Amount Payabe 2.1 Principes The Board wi adopt consistent poicies for the management of the with-profits business of the Od WPSF and the New WPSF, as if they constituted a singe Sub-Fund ( the Sub-Fund ) so as to ensure that for equivaent poicies in the Od WPSF and the New WPSF the same bonus rates are decared (other than the Additiona Benefit decaration under the Scheme in respect of certain eected poicies or any bonuses that represent a distribution of the inherited estate of the Od WPSF) The amount paid on maturity or death for a poicy in the Sub-Fund wi be the initia guaranteed benefits, pus bonuses constituting an equitabe share of the surpus avaiabe for distribution earned by the Sub-Fund over the period of investment, pus for the New WPSF any Additiona Benefit, 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 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 For the With-Profits Annuity, the amount of each annuity payment may incude bonuses in addition to the guaranteed benefits. Where payabe, these bonuses constitute an equitabe share of the surpus avaiabe for distribution earned by the Sub-Fund over the period of investment pus for the New WPSF any Additiona Benefit. Annuity payments wi be paid in accordance with the poicy conditions Common bonus rates are used for appropriate groupings of poicies refecting an eement of cross subsidy and pooing of risks for poicies with simiar characteristics. A singe group may contain poicies of different type, age, year of entry, size and premium history In order to provide an eement of stabiity in the returns to poicyhoders, 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 surrender vaues and, in the case of unitised with-profits poicies, other non-contractua canceation of units. In between such reviews smoothing appies as described in the practices As decided by the Board, having regard to the advice of the With-Profits Actuary and review by the With-Profits Committee: 2.2 Practices Different systems and different methodoogies may be used for the purposes of determining bonuses or payouts for different types of business. 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. Assumptions and parameters used post 1 October 2009 wi be the same for equivaent poicies in the New WPSF and the Od WPSF Where practicabe, asset share cacuations for specimen poicies are used as a guide to determine bonus rates and the amounts payabe to with-profits poicyhoders. The asset share methodoogy is described in sections 2.3 and 2.4. The Board determines the appropriate eve 6

7 and timing of distributions to poicyhoders. The bonus methodoogy has been estabished and refined over many years and wi be further refined as appropriate. For some sma bocks of business where asset shares are not avaiabe or are inappropriate as a measure, we may use a comparabe poicy as a proxy to determine payouts or take account of past practice The aim over the ong term in determining fina bonus is to return to maturing with-profits poicies, as a group, on average 100% of asset shares. The amounts payabe on maturity 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 140% of asset shares for conventiona with-profits and 80% to 120% of asset shares for unitised with-profits poicies. 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 for unitised with-profits poicies back in ine with 100% of asset share over a maximum 5 year period, subject to meeting guarantees aready buit up. For conventiona with-profits poicies, for which the effects of smoothing are greater, the Company woud aim to bring the average payout back in ine with 100% of asset share over the 10 year period after each bonus review, subject to meeting guarantees 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 changes in maturity payouts on comparabe conventiona with-profits poicies from year -to- year are normay imited to no more than 15%. The aim for unitised with-profits poicies is that poicy payout changes are compared between consecutive years and normay imited to no more than 15% per year on the same poicy. The aim is that the cost of smoothing wi be broady neutra over the ong-term. The bonus phiosophy practices provide more detai on the smoothing approach, see For unitised with-profits poicies, 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 For conventiona with-profits poicies, over the ong term the approach for non -guaranteed surrender vaues is to target an average payout of 100% of asset shares ess any deductions required at surrender to protect the interests of remaining poicyhoders, subject to poicy conditions. 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, and by the Scheme. For some poicies, e.g. whoe ife, standard actuaria formuae may be appied as the use of asset share may not be appropriate. Where avaiabe, the directy cacuated asset share for specimen poicies wi be used as a basis for cacuating the amounts payabe on surrender. Aternativey, a formuaic basis for surrender vaues may be used and factors may be appied to these vaues in order to achieve the asset share payout target on average. Individua poicies may receive more or ess than the average payout percentage of the group. The bases are reviewed when there is a 5% movement in underying market indicators from when the bases were ast changed and some sign of stabiity at that new eve. In addition there woud be a review when fina bonus rates are changed. At any one time we may pay more or ess than target due to changes in investment conditions Except for defined benefit pension schemes, a gide path approach is used to ensure that surrender vaues approach maturity vaues. The surrender basis and factors wi be modified so that the surrender payout bends into the expected maturity payout, over a period of up to 5 years The return in the eary years has regard to the actua premiums paid rather than being based soey on asset shares. Payouts may be bended in to bring them into ine with the surrender vaues described above Whist there are no forma smoothing practices on surrender equivaent to the 15% year on year change imit normay appied to maturities, we may choose to imit the maximum change in surrender vaues on a poicy as a resut of a review. 7

8 For unitised with-profits poicies, the fina bonus rate used for non-contractua unit canceations is the same as that used for maturity 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 and, in the case of surrenders, by the appication of any eary redemption charge specified in the poicy. Subject to poicy conditions, we may aso aow for any deductions required 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 by the Conduct of Business Sourcebook rues and the Scheme 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 decision of the Board foowing review by the With-Profits Committee The same assumptions and parameters are appied across different types of poicies and 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. Where appropriate, current practice is to appy a common scae of fina bonus rates to a ife unitised with-profits contracts within the same series (other than the unitised with-profits Income Fund where no fina bonus is payabe) and a common scae of fina bonus rates to a pensions unitised with-profits contracts within the same series (other than Stering Group Pan pension contracts where fina bonus is currenty expressed as a percentage of unit growth). For this purpose poicies transferred from CGNU Life and CULAC constitute different bonus series. Different rates appy where management charges are taken expicity, by unit deduction, to when management charges are taken impicity before determining the rates. Current practice is aso to appy the same fina bonus rates to conventiona whoe ife poicies as woud appy to endowment contracts effected the same year. A separate bonus rate is decared for the With-Profits Annuity In the case of certain mortgage endowment poicies subject to the Mortgage Endowment Promise, payouts may exceed the target percentages of asset shares described above. For such poicies, a top up payment in the form of an additiona fina bonus extra to that described in sections 2.5 and 2.6) may be payabe up to the maximum amount specified in poicyhoder maiings The Mortgage Endowment Promise appies to certain mortgage endowment poicies of CGNU Life and CULAC maturing since 1 January 2000 where we have written to poicyhoders advising them of their maximum promise amount subject to certain conditions. These were: future investment returns on the inherited estate shoud be sufficient to meet the top-up costs the poicy shoud not be sod to a third party poicyhoders shoud continue to pay premiums and not ater their poicies in any materia way. The promise does not ensure that the mortgage amount wi be paid if these conditions are met. The maximum top up amount payabe under the Promise is based on projections made in If the Company gets into a position where it doesn t think it can keep paying the fu promise the Company wi give at east three years advance warning that it cannot support a or part of these payments any more. As part of the terms of the Reattribution Scheme, we have agreed to waive our rights to withdraw or reduce the promise on the grounds of the first condition not being met. 8

9 Asset share Methodoogy 2.3 Principes Where asset shares are used as a guide to determine the amounts payabe under a poicy they wi refect the reevant sources of profit or oss to the Sub-Fund appicabe to with-profits poicies. Equivaent poicies in the Od WPSF and the New WPSF wi be treated the same. Major sources of profit or oss are described in section 2.4. The same investment return wi be credited to the asset shares of equivaent poicies, irrespective of the proportions in which they are aocated or reassured to the Od WPSF and the New WPSF, which wi be based on the investment return of assets backing the asset shares of poicies (or the reevant group of poicies) in the Od WPSF and the New WPSF. The same expenses and charges wi be charged to the asset shares of equivaent poicies in the Od WPSF and the New WPSF Where a poicy being proposed for adoption in the management of the with-profits business woud resut in a materia benefit to sharehoders (excuding any poicy the adoption of which the Board considers necessary in order to treat customers fairy) which sharehoder benefit, in the reasonabe opinion of the Board, woud not have resuted from the adoption of the action had the Reattribution Scheme not been impemented, the consent of the With-Profits Committee wi be required to adopt the poicy The Board, on the advice of the With-Profits Committee and the With-Profits Actuary, may change the approach to the determination of asset shares (incuding aocation of investment returns and charges for expenses and guarantees) as it considers appropriate but this may not be done for Transferred Poicies except with the approva of the With-Profits Committee. 2.4 Practices Where asset shares are cacuated, simiar types of product may be grouped together. They 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 poicies if it is considered appropriate by the Board, having regard to the advice of the With-Profits Actuary and review by the With-Profits Committee Where a poicy being proposed for adoption in the management of the with-profits business woud resut in a materia benefit to sharehoders (excuding any poicy the adoption of which the Board considers necessary in order to treat customers fairy) which sharehoder benefit, in the reasonabe opinion of the Board, woud not have resuted from the adoption of the action had the Reattribution Scheme not been impemented, the consent of the With-Profits Committee wi be required to adopt the poicy The approach is not used for atered poicies; for these the bonus rates wi foow those of simiar unatered poicies The parameters and assumptions used from 1 October 2009 are reviewed each year and may be changed where appropriate. Any changes are documented and are subject to forma change contro procedures with approva of the With-Profits Actuary and the review of the With-Profits Committee. The historic assumptions used to determine asset shares as at 1 October 2009 wi not be changed except that adjustments may be made to the asset shares if there have been any factua errors or errors in cacuation which have resuted in materia misstatement of the Aggregate Asset Shares on 1 October 2009 as foows: where the error has resuted in a materia understatement of asset shares the error wi be corrected. Any such correction in the New WPSF wi be funded by the RIEESA, and in the Od WPSF, by the inherited estate in that Sub-Fund where the error has resuted in a materia overstatement of asset shares for poicies aocated to the New WPSF any correction wi be imited to the aggregate amount of any corrections of understatements in the New WPSF where the error resuted in a materia overstatement of asset shares for poicies aocated to the Od WPSF, the asset shares wi be corrected to the extent that overstatements on equivaent poicies in the New WPSF have been corrected For poicies transferred to the Od WPSF, any future distribution of the inherited estate aocated to the Od WPSF woud normay give rise to an augmentation to asset share. 9

10 (A) For conventiona with-profits poicies (CWP) Asset shares for conventiona with-profits poicies are in genera, the accumuation of: premiums paid + an aocation of investment return + an aocation of misceaneous profits/ osses from the Sub-Fund where appropriate + an amount in respect of each tranche of Specia Bonus for quaifying poicies the costs of seing and administering the business the cost of death or other risk benefits an adjustment for taxation appropriate for the cass of business the sharehoders share of surpus distributed any contribution for the use of capita, provision of guarantees, gide path costs or smoothing. This approach is described in more detai beow. For With-Profits Annuities, gross annuity instaments are deducted from the asset shares as part of the accumuation. The Board, on the advice of the With-Profits Committee and the With-Profits Actuary, may appy additiona charges to asset share as it considers appropriate but this may not be done for Transferred Poicies except as permitted under the Scheme and with the approva of the With-Profits Committee. Investment return The investment return used in the asset share cacuations is based on the performance of the reevant investment poo. Separate investment poos are maintained for business denominated in different currencies. The majority of business is denominated in stering, but separate poos exist for business denominated in euros and US doars. The investment strategy for non-stering denominated business foows that of the stering denominated business. These investment poos (referred to as the Return Assets) are separatey managed. The investment return for a bock of business is based on the performance of its respective investment poo, as described above. No further hypothecation or notiona hypothecation of the assets for particuar casses of business or groups of poicies is currenty used though this may change if the Board considers that it woud be in the interests of with-profits poicyhoders to use different asset mixes to back the asset shares of different groups of poicies, subject to With-Profits Committee approva. Actua asset mixes have been used for each year since 1968 for CGNU Life egacy companies, and since 1985 for CULAC egacy companies. For CULAC egacy companies, prior to 1985 and for CGNU Life egacy companies prior to 1968, assumed asset mixes are used. Between October 1998 and 1 October 2009, the asset mix of the reevant poo of the combined CGNU Life egacy and CULAC egacy With-Profits Funds has been used. Since 1 October 2009, the asset mix of the reevant Return Assets investment poo is used. For dates prior to 1983 (CGNU Life egacy companies) or 1990 (CULAC), sector proportions and index performances were used to determine the investment return used in asset share cacuations. Since these dates, actua annua returns, net of deaing costs have been used. Aocation of misceaneous profits/osses Certain with-profits Transferred Poicies have participated in the past in profits arising from certain non-profit business of CGNU Life or CULAC. There wi be no further aocation in respect of non-profit business written prior to 1 October 2009, as a potentia vaue has been aocated. Profits or osses on surrender are aocated to the conventiona smoothing account as described in section Profits or osses resuting from conventiona poicies, e.g. whoe ife, that do not have an asset share are incuded in the asset share accumuation for endowment with-profits poicies. Asset shares for poicies may be adjusted by an additiona aocation (or deduction) refecting any other misceaneous profits (or osses) arising within the Sub-Fund, as described in section 4. No such profits or osses are currenty taken into account (see section 6.2). 2008/2009/2010 Specia Bonus For quaifying poicies, the asset share was enhanced with effect 1 January 2008, 1 January 2009 and 1 January 2010 in respect of the three tranches of the Specia Bonus. 10

11 Cost of seing and administering the business For conventiona with-profits poicies the expenses of seing and administering the poicies are aowed for in the asset share cacuations. The expenses and charges are those of a type which were being deducted immediatey prior to 1 October Deveopment expenses charged to the Sub-Fund are normay not charged to asset shares. However where a deveopment is identified as ceary providing expected benefits to poicyhoders then a proportion of the cost may, subject to the agreement of the With-Profits Committee, be charged to asset shares. Since 1 October 1998, these expenses are based on the charges under various management agreements with other companies. The current management service agreement is described in section 5. Investment expenses charged to asset shares are based on the fee rates charged to the Sub-Fund under an investment management agreement (see section 3), or an approximation to the cost when no forma agreement was in pace. Actua commission is used for each poicy, where avaiabe. If not avaiabe then average commission eves for each cass of business over the reevant time period are assumed to appy for a poicies issued during the period. Reguatory fees, audit fees and mis-seing costs are not charged to asset share. Such costs are borne by the inherited estate of the Od WPSF or that part of the Reattributed Inherited Estate hed in the New WPSF as appropriate. Industry evies are not currenty charged to asset shares. The Board wi however review this practice from time to time in the ight of the size and/or frequency of such evies and it wi consider whether it is appropriate to change that practice so as to charge some or a of those evies to asset shares. In considering whether or not to make such charges the Board wi have regard to appropriate actuaria advice and the views of the With-Profits Committee. Other types of expenses or charges can ony be deducted from the asset share cacuation if the Board, having obtained appropriate actuaria advice and the approva of the With-Profits Committee, considers it is consistent with the poicyhoders interests. Cost of death or other risk benefits For conventiona with-profits business other than With-Profits Annuities, mortaity costs are charged to asset shares based on experience. For With-Profits Annuities, the annuity instaments deducted from the accumuation are based on the mortaity rates assumed in the premium rate with the difference between actua and expected amounts paid being charged to the Sub-Fund but not asset shares. The mortaity or other risk cost may be charged by way of a specific premium oading which woud be excuded from the premium ro up within asset shares. A charge is made at outset to asset shares for With-Profits Annuities in respect of the minimum foor guarantee. Adjustment for taxation Appropriate aowance for income and capita gains tax is made in the investment return, for ife business. On income: the prevaiing rate of poicyhoder tax is appied to the gross income yied. On capita gains: indexed gains are taxed at a poicyhoder tax rate aowing for the deferra of reaisation. Aowance is made for tax reief on expenses for ife business. The prevaiing rate of poicyhoder tax is appied to the gross expenses with aowance for any deferra of reief. Additiona tax associated with sharehoder transfers is met from the inherited estate of the Od WPSF or the assets in excess of Aggregate Asset Shares for the New WPSF. This practice is we estabished but subject to annua review by the Board having regard to the advice of the With-Profits Actuary and review by the With-Profits Committee. Cost of sharehoder transfer Sharehoders receive a share (currenty 10%) of the surpus distributed. This is charged to asset shares, based on the cost of new reguar and fina bonus each year, determined (where reevant) using the prevaiing vauation basis. Use of Capita An additiona charge to asset share may ony be appied to poicies issued since 1 October 2009 or to poicies issued before that date to which a charge was aready being appied at 1 October 2009, such as With-Profits Annuities at vesting. Such a charge wi be to refect the provision of capita, guarantees, and 11

12 (B) smoothing in the Sub-Fund, or to maintain the inherited estate or reguatory sovency of the current Sub-Fund at appropriate eves. Currenty, no charges are made. For unitised with-profits poicies (UWP) Asset shares for unitised with-profits poicies and deposit administration business issued prior to 1 October 2001 (other than former CGNU Life contracts written on a co insurance basis with Norwich Union Linked Life Assurance Limited (NULLA) prior to 1993 and individua pension business migrated to an expicit charge structure) are based on the accumuations described for conventiona with-profits. In the case of poicies transferred to Aviva Life & Pensions UK Limited on 1 October 2009, which are Additiona Benefit Poicies (as defined in the Reattribution Scheme) aocated to the New WPSF, an aocation in respect of the proportion of the reattribution of the inherited estates of CGNU Life and CULAC aocated to the RIEESA on the 1 October 2009 is incuded as part of the accumuation (the cash equivaent amount of the incentive payment, determined in accordance with the Reattribution Scheme). The deduction for administering the Bonds and Savings business is a restricted MSA charge from 1 January 2009 to 1 January In the case of group and individua persona pension contracts issued prior to 1 December 2000, the charge to asset shares in respect of seing and administering the business and the sharehoders share of decared profits is restricted to 1% per annum with effect from 6 Apri This restriction is permanent and wi not be reviewed. For UWP business written since October 2001 by CGNU Life and for co insurance business with NULLA prior to 1993 and individua pension business issued prior to October 2001 migrated to an expicit charge structure, and for new UWP business written since 1 October 2009 and aocated to the New WPSF 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 (ess any initia charge) + an aocation of investment return + an aocation of misceaneous profits/ osses from the Sub-Fund where appropriate + cash equivaent amount in respect of Transferred Poicies with Additiona Benefit + an amount in respect of each tranche of Specia Bonus for quaifying poicies some or a of the sharehoders share of decared profits an adjustment for taxation appropriate for the cass of business the annua management charge (where this is not taken by way of unit canceation) any deduction which may be made for industry evies any contribution which may be evied for the use of capita, provision of guarantees, gide path costs or smoothing. In the case of poicies transferred to Aviva Life & Pensions UK Limited and aocated to the New WPSF on 1 October 2009, the cash equivaent amount (determined in accordance with the Reattribution Scheme) corresponding to any additiona units aocated to the poicy as an Additiona Benefit in respect of the reattribution of a portion of the inherited estates of CGNU Life and CULAC are incuded as part of the accumuation. Where expenses and charges for risk or guarantees are taken by way of expicit charges, these are deducted by way of unit canceation, and so no further deduction needs to be made to the asset share of units. There wi be no other types of charges appied to for business written before 1 October 2009, except where agreed with the With-Profits Committee. For Infation Protected Guarantee Bonds issued from 12 February 2007, an additiona annua charge of 0.7% of the units appies for the first 10 years of the contract. This approach is described in more detai beow. Units are aocated when premiums are paid and may be canceed to cover contractua management and expense charges, partia surrenders and expicit charges for risk benefits or guarantees. In the case of contracts that were written on a co insurance basis with NULLA, investment expenses and the sharehoders share of surpus distributed are deducted as part of the accumuation. For group and individua persona pension contracts, however, the charge to asset shares in respect of seing and administering the business and the sharehoders share of surpus distributed is restricted to 1% per annum with effect from 6 Apri This is achieved by imiting the deduction in respect of the annua management charge where necessary. This restriction is permanent and wi not be reviewed. 12

13 Investment return Where we invest in assets managed by externa investment managers, additiona investment management costs may be incurred. Such costs are expected to be more than offset by additiona investment returns. See aso conventiona with-profits. Aocation of misceaneous profits/osses See conventiona with-profits. Profits or osses on surrender and mortaity are aocated to the unitised ife and unitised pensions smoothing accounts as described in section Cash Equivaent Amount For the purpose of determining asset share, the cash equivaent corresponding to any additiona units aocated to the poicy as an Additiona Benefit (as defined in the Reattribution Scheme) for Transferred Poicies aocated to the New WPSF sha be considered as an additiona singe premium invested and wi be subject to the same investment and charging considerations as the basic premiums, (other than in respect of initia commission and expenses). 2008/2009/2010 Specia Bonus For quaifying poicies, the asset share was enhanced with effect 1 January 2008, 1 January 2009 and 1 January 2010 in respect of the three tranches of the Specia Bonus. Cost of sharehoder transfer Sharehoders receive a share (currenty 10%) of the surpus distributed. For unitised with-profits business written prior to 1 October 2001, this is generay charged to asset shares, based on the cost of new reguar and fina bonus each year determined (where reevant) using the prevaent vauation basis. In the case of former CULAC unitised with-profits pension and deposit administration poicies written between 5 June 1995 and 30 September 1998, the sharehoders share of profits charged to asset shares is restricted. For the purpose of assessing the charge to asset shares, part of the reguar bonus decared after 1998 is deemed to consist of an interest eement (which woud not give rise to a sharehoder transfer) in ine with the assumptions made in product discosure. The baance of the actua sharehoder transfer is met by the inherited estate of the Od WPSF or assets in excess of Aggregate Asset Shares for the New WPSF as appropriate. This restriction is permanent and wi not be reviewed. For unitised with-profits business written by CGNU Life between 1 October 2000 and 30 September 2001, sharehoders continue to receive 10% of the profits decared, but the charge to asset shares is restricted, with the baance being met by the inherited estate of the Od WPSF or assets in excess of Aggregate Asset Shares for the New WPSF as appropriate. This restriction is permanent and wi not be reviewed. For unitised with-profits business written from 1 October 2001, the sharehoder transfer is within the annua management charge. Adjustment for taxation See conventiona with-profits. Annua management charge Where an Annua Management Charge (AMC) is taken into account as part of the accumuation as opposed to an expicit charge by way of unit canceation, the asset share for UWP poicies wi be reduced by the AMC after crediting after tax investment earnings. 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. Any change in AMC must be reasonabe in reation to changes in the Company s expenses be the same as the corresponding change in AMC for investments in the internay managed unit-inked funds of Aviva Life & Pensions UK Limited (excuding for this purpose those funds which provide investment guarantees). be subject to any further restrictions contained in the poicy in reation to changes in the AMC. Industry evies Subject to poicy conditions the asset shares may refect a deduction for industry evies in the circumstances described in (A) above for conventiona with-profits poicies. 13

14 Use of capita See conventiona with-profits. For the Infation Protected Guarantee Fund, poicies issued from 12 February 2007 have an additiona management charge of 0.7% each year of units attaching for the first 10 years to assist in meeting the cost of the guarantee. 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 ong-term 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 Different bonus rates may appy to different types of poicy, for exampe to refect significant differences in investment mix, guarantees and charges, premium rates, poicy types and issue series. 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. The same bonus rates wi appy to equivaent poicies in the New WPSF and the Od WPSF, except for additiona bonuses in respect of the Additiona Benefit appying to certain poicies aocated to the New WPSF, and any distribution of the inherited estate for poicies aocated to the Od WPSF In the case of former CGNU Life poicies, the reationship between reguar bonus rates under the various series of ife poicies issued prior to 1982 is subject to the provisions of the Scheme of Transfer sanctioned on 19 October 1970 in the High Court of Justice in Engand Fina bonus rates are set with the aim of distributing the baance of the surpus avaiabe for distribution earned over the ifetime of the poicy, to the extent that such surpus has not previousy been distributed by way of reguar or other bonus additions. Additiona Benefit aocations were not a distribution of surpus, but were funded by sharehoders. Accordingy, those aocations wi not reduce the rates of fina bonus payabe on reevant poicies. The additiona reguar bonus rate of 0.5% per annum appying to the former CGNU Life UWP Loyaty Funds (which are now the Aviva Life & Pensions UK Limited UWP Loyaty Funds) does not reduce the rates of fina bonus payabe on reevant poicies. Fina bonus rates are smoothed as described in sections 2.1 and 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 In addition, each year the Board wi, in accordance with the Scheme, carry out investigations for the Od WPSF to determine whether any part of the inherited estate of the Od WPSF shoud be distributed or otherwise appied to enhance poicyhoder benefits as described in section Practices In determining an equitabe distribution of surpus 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 after aowing for the capita support avaiabe from the RIEESA the current and projected capita needs of the Sub-Fund after aowing for the capita support avaiabe from the RIEESA 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 Risk Appetite Framework of the Sub-Fund the need to ensure that poicyhoders reasonabe benefit expectations are maintained and to treat poicyhoders fairy. The Sub-Fund wi not be managed soey to avoid the need for or the repayment of any capita support. 14

15 2.6.2 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, substantia business osses in the Sub-Fund, or reguatory sovency issues The amount of reguar bonus may depend on: the reevant profits earned in the Sub-Fund over recent years the investment return we expect in the ong term the prospective fina bonus margin guarantees on a existing with-profits poicies in the Sub-Fund projected reguatory sovency eves, now and in the future 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 based on best estimates. 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 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. Parts of the profits are shared out as reguar bonus. The aim is to pay between haf and two thirds of surpus avaiabe for distribution through reguar bonus over the term of the contract, taking account of the overa strength of the Sub-Fund. At any time we may pay more or ess depending upon actua experience 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 may 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 caendar year of entry (or year of unit purchase for unitised with-profits poicies) 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 caims arising on death, maturity, retirement and surrender under the terms of the contract for conventiona with-profits poicies. Fina bonus where appicabe is payabe on a canceations of units in the unitised withprofits funds and depends on the date of unit purchase. For the unitised with-profits Income Fund, any such bonus suppements the income paid in a particuar year. The fina bonus rate coud be zero Fina bonus for With-Profits Annuity payments is known as Top up bonus. Top up bonus, if decared, appies to a With-Profits Annuity payments during the period for which it is decared, and does not form a permanent addition to the annuity payments From time to time, specia bonuses have been decared on certain conventiona with-profits ife assurance and pensions poicies. These bonuses represent a consoidation of part of the fina bonus otherwise payabe on death and maturity caims. Specia bonuses are ess ikey to be a feature of the bonuses in the future as the eve of asset growth is expected to be ower. A specific specia bonus, being a distribution from the inherited estate of CGNU 15