Teachers Provident Society Limited Liverpool Victoria Friendly Society Limited

Transcription

1 Limited Liverpool Victoria Friendly Society Limited Report of the Independent Actuary on the terms of the Proposed Transfer of Engagements Prepared by: JL McKenzie, FFA

2 TABLE OF CONTENTS 1. INTRODUCTION... 4 INSTRUCTIONS... 4 PURPOSE OF THE REPORT... 4 SCOPE... 4 REGULATORY AND PROFESSIONAL GUIDANCE... 5 QUALIFICATIONS AND DISCLOSURES... 5 RELIANCES AND LIMITATIONS BACKGROUND TO TEACHERS PROVIDENT SOCIETY... 7 HISTORY... 7 CONSTITUTION AND GOVERNANCE... 7 ORGANISATION AND STRUCTURE... 7 PRODUCTS... 8 MARKET AND DISTRIBUTION... 9 FINANCIAL AND ACTUARIAL MANAGEMENT FINANCIAL MANAGEMENT OF LINKED BUSINESS FINANCIAL MANAGEMENT OF WITH-PROFITS BUSINESS THE RUN-OFF PLAN GOVERNANCE OF WITH-PROFITS BUSINESS CAPITAL REQUIREMENTS AND MANAGEMENT FINANCIAL POSITION PILLAR RISKS INHERENT IN TPS BUSINESS MODEL MARKET RISK INSURANCE RISK OPERATIONAL RISK CREDIT RISK RISKS ASSOCIATED WITH THE TPS STAFF PENSION SCHEME SOLVENCY II BACKGROUND TO LIVERPOOL VICTORIA FRIENDLY SOCIETY HISTORY CONSTITUTION AND GOVERNANCE ORGANISATION AND STRUCTURE MARKET AND DISTRIBUTION PRODUCTS CAPITAL AND RISK MANAGEMENT SUBORDINATED DEBT FINANCIAL AND ACTUARIAL MANAGEMENT FINANCIAL MANAGEMENT OF UNIT LINKED BUSINESS FINANCIAL MANAGEMENT OF WITH-PROFITS BUSINESS GOVERNANCE OF WITH-PROFITS BUSINESS FINANCIAL POSITION PILLAR FINANCIAL POSITION PILLAR RISKS INHERENT IN LVFS BUSINESS MODEL MARKET RISK INSURANCE RISK OPERATIONAL RISK RISKS FROM LVFS SUBSIDIARIES SOLVENCY II OUTLINE OF THE SCHEME RATIONALE FOR THE SCHEME DETAILED DESCRIPTION OF THE SCHEME EFFECTIVE DATE FUND STRUCTURE OF LVFS Liverpool Victoria Friendly Society Page 2 of 79

3 TRANSFER OF ASSETS, LIABILITIES AND POLICIES AND THEIR ALLOCATION TO FUNDS ADMINISTRATIVE, INVESTMENT AND REINSURANCE ARRANGEMENTS MANAGEMENT OF THE TA FUND CHARGES TO BE APPLIED TO THE TA FUND GOVERNANCE OF THE TA FUND MANAGEMENT OF LINKED BUSINESS MEMBER PAYMENTS AND SPECIAL BONUS THE TPS STAFF PENSION ARRANGEMENT ALTERATIONS TO THE SCHEME SCHEME COSTS MEMBERSHIP MEMBER APPROVAL AND COMMUNICATIONS SERVICING TPS AFTER THE EFFECTIVE DATE ASSESSMENT OF THE SCHEME APPROACH PRO-FORMA REPRESENTATION OF LVFS POST THE EFFECTIVE DATE SECURITY OF BENEFITS IMPACT OF THE SCHEME ON BENEFIT EXPECTATIONS MISCELLANEOUS ASPECTS OF THE SCHEME GOVERNANCE AND PROTECTIONS IMPOSED BY THE SCHEME ADMINISTRATION AND SERVICE STANDARDS (INCLUDING INVESTMENT MANAGEMENT) COMMUNICATIONS WITH POLICYHOLDERS MEMBERSHIP RIGHTS OTHER STAKEHOLDERS CONSEQUENCES OF THE SCHEME NOT PROCEEDING SUMMARY OF CONCLUSIONS APPENDIX 1 TERMS OF REFERENCE APPENDIX 2 PRINCIPAL DOCUMENTS REVIEWED APPENDIX 3 POLICY TYPES ISSUED BY TPS APPENDIX 4 SUMMARY OF TPS PPFM APPENDIX 5 SUMMARY OF LVFS PPFM (EXCLUDING FLEXIBLE GUARANTEE BOND) APPENDIX 6 LVFS GROUP STRUCTURE APPENDIX 7 GLOSSARY APPENDIX 8 COMPLIANCE WITH SUP Liverpool Victoria Friendly Society Page 3 of 79

4 1. INTRODUCTION Instructions 1.1. I have been instructed by Ltd, trading as Teachers Assurance, ( TPS ) and Liverpool Victoria Friendly Society Ltd. ( LVFS ) to report in the capacity of Independent Actuary pursuant to Section 88 of the Friendly Societies Act 1992 ( FSAct ) on the terms of the scheme for the proposed transfer of the long term insurance business of TPS to LVFS The scheme of transfer will be subject to consideration by the Prudential Regulation Authority ( PRA ) after consultation with the Financial Conduct Authority ( FCA ) In order to effect the complete transfer of the business from TPS to LVFS, separate schemes of transfer will be prepared in respect of business written in Guernsey and Jersey, for sanction under local legislation, to transfer the Guernsey business and Jersey business, respectively, from TPS to LVFS. The Guernsey Scheme and the Jersey Scheme will be identical in all material respects to the scheme of transfer to be considered in the UK but will be considered by the relevant Royal Court rather than the local insurance regulator for approval Throughout the remainder of this report, the term the Scheme is used to cover all the proposals included in the scheme of transfer, including any documents referred to therein relating to the proposed implementation and operation of the scheme of transfer. For this purpose, the Scheme also includes the schemes being prepared in respect of Guernsey and Jersey businesses. Purpose of the Report Scope 1.5. My appointment as the Independent Actuary has been approved by the PRA after consultation with the FCA. [The PRA, having consulted with the FCA, has also approved the form of my report ( the Scheme Report )]. My terms of reference are set out in Appendix 1. I have interpreted my instructions and terms of reference to require me to consider primarily the likely effects of the Scheme on the policyholders of LVFS and TPS but I have also considered the implications for other parties which may be affected by the transfer. I have also interpreted my instructions to require me to have a duty of care to the regulators in preference to TPS or LVFS In preparing the Scheme Report, I have had regard to the equity of the proposals amongst the various groups of policyholders (reflecting the varying nature of the contractual rights which policyholders have, the operation of their policies and the jurisdiction in which the contract was entered into), the security of benefits in each company both before and after the implementation of the Scheme, the policyholders reasonable expectations created by the past practices employed or statements made by LVFS and TPS and, more generally, that the proposals treat policyholders fairly. These factors are contrasted to the position which will apply within LVFS after the proposed transfer In assessing the impact of the Scheme on policyholders expectations and whether those policyholders are being treated fairly in the implementation of the Scheme, I have had regard to the reports of the Actuarial Function Holders ( AFH ) and the With-Profits Actuaries ( WPA ) of each of LVFS and TPS on the Scheme As far as I am aware, there are no matters which I have not taken into account in undertaking my assessment of the Scheme and in preparing the Scheme Report but which nonetheless should be drawn to the attention of policyholders in their consideration of the terms of the Scheme I have also reviewed and considered the contents of the document describing the proposals ( the Teachers Circular ) which will be despatched to policyholders of TPS. LVFS will issue a press release and advertise the information relating to the Scheme on its website. The LVFS members will not be mailed. An advanced draft of the Teachers Circular was available to me at the date of the Scheme Report The Scheme Report applies equally to the long term insurance business carried out in or from within Guernsey and Jersey and to business comprising policies issued to residents of Guernsey or Liverpool Victoria Friendly Society Page 4 of 79

5 governed by Guernsey law as it does to the long term insurance business written in the UK, and may therefore be used to satisfy the requirement for a report by an independent actuary on the terms of the local schemes in Guernsey (the Guernsey Scheme) and in Jersey (the Jersey Scheme). Regulatory and Professional Guidance The Scheme Report has been prepared under the terms of the guidance contained in the PRA s Supervisory Statement, SS14/15 With-Profits, Statement of Policy, The Prudential Regulation Authority s approach to insurance business transfers and in Section 18 of the Supervision Manual ( SUP18 ) contained in the FCA Handbook to cover scheme reports relating to transfers of long term insurance business. The UK actuarial profession does not currently issue a guidance note relating to the preparation of scheme reports on the transfer of insurance business. The Scheme Report has been subject to appropriate peer review in line with the requirements of the Institute and Faculty of Actuaries set out in APS-X In preparing the Scheme Report I have complied with the requirements of the Technical Actuarial Standard: Transformations ( Transformations TAS ). In addition, the Scheme Report complies with those elements of the Technical Actuarial Standards on Data, Modelling, Reporting and Insurance (TAS-D, TAS-M, TAS-R and TAS-I, respectively) which are applicable under the Transformations TAS. Qualifications and Disclosures I am a Fellow of the Institute and Faculty of Actuaries, which was established on 1 September 2010 by the merger of the Institute of Actuaries and the Faculty of Actuaries in Scotland, of which I have been a Fellow since I am a Principal of Milliman, Consultants and Actuaries, ( Milliman ) based in its London office. I have 40 years experience in the UK life insurance industry, including experience as an appointed actuary, actuarial function holder and with-profits actuary and have acted previously in the capacity of an independent expert under the terms of Financial Service and Markets Act 2000 ( FSMA ), and as an independent actuary under the Insurance Companies Act 1982, the legislation replaced by FSMA I have not undertaken any other assignments on behalf of LVFS or TPS or any other of their subsidiaries in the last 5 years. I am not a policyholder of LVFS or TPS or a customer of any of their subsidiaries. Reliances and Limitations In preparing the Scheme Report, the principal documents which I have reviewed in respect of LVFS and TPS are noted in Appendix I have been given free access to additional documentary evidence held by LVFS and TPS, as requested by me, to allow me to investigate all aspects of the Scheme. In addition, I have had access to and discussions with the management and their professional advisers to assist in the completion of the Scheme Report. I have relied on the accuracy of the information which has been provided to me, and have not verified it independently. I have considered, and am satisfied with, the reasonableness of this information from my own experience in the insurance industry The Scheme Report, and any extract or summary thereof, has been prepared particularly for the use of the bodies or persons listed below: The directors of LVFS and TPS; The PRA, FCA or any other governmental department or agency having responsibility for the regulation of insurance companies in the UK and, to the extent necessary, the insurance regulator of any EEA country who requests a copy of the Scheme Report; The Guernsey Financial Services Commission and the Royal Court in Guernsey; The Jersey Financial Services Commission and the Royal Court in Jersey; and, Liverpool Victoria Friendly Society Page 5 of 79

6 The professional advisers of any of the above Copies of the Scheme Report may be made available for inspection by policyholders, either in physical form or through TPS or LVFS website and may be provided to any person requesting the same in accordance with legal requirements. I will provide a summary of the Scheme Report for inclusion in the Teachers Circular Neither the Scheme Report nor any extract from it may be published without my specific written consent having been given, save as set out in In addition, no summary of the Scheme Report may be made without my express consent The Scheme Report has been prepared within the context of the assessment of the terms of the Scheme. No liability will be accepted for application of the Scheme Report for a purpose for which it was not intended or for the results of any misunderstanding by any user of any aspect of the Scheme Report. In particular, no liability will be accepted under the terms of the Contracts (Rights of Third Parties) Act Nothing contained in the Scheme Report should be taken as investment advice, either regarding LVFS or TPS products, the products of any of their subsidiaries or associates, or any financial instruments issued by them or their subsidiary companies I am available to assist any of the parties listed in 1.18 above in interpreting the Scheme Report. Liverpool Victoria Friendly Society Page 6 of 79

7 2. BACKGROUND TO TEACHERS PROVIDENT SOCIETY History 2.1. TPS was founded in 1877 by a teachers organisation (which became the current National Union of Teachers, NUT ) to provide benefits for those in the education profession. TPS is an incorporated friendly society under the FSAct and is authorised under the terms of FSMA to effect long term insurance business in Classes I, III and IV 1. For regulatory supervision purposes TPS has been designated a Category 4 firm by the PRA and a Category C3 firm by the FCA. Constitution and Governance 2.2. The constitution of TPS is set out in its Rules and Memorandum ( TPS Rules ). These set out how the management of TPS should be applied through its governing body, membership eligibility and voting rights, requirements on holding general meetings of TPS and the conduct of such meetings. The TPS Rules also described what the rights of members are on winding up TPS Governance of TPS is provided by its Committee of Management ( COM ) which is established under the terms of the TPS Rules As a friendly society, TPS is a mutual organisation owned by its members. Membership is granted to those holding an active policy issued by TPS. The membership consists mainly of those employed in education and their families, reflecting the initial intentions of its formation but also the close working relationship which TPS has maintained with the NUT, which has granted it a favoured provider status in allowing access to its members. Membership may also be granted to individuals in other categories approved by COM and in practice restrictions are not applied. In the case of joint policies, policyholders may nominate who is to be the member and in the absence of a nomination the first named policyholder is the member The principal benefit of membership of TPS is the ability to participate in the governance of TPS through the vote granted to members at a general meeting and to nominate individuals to stand for election to the COM. However, in the event of the dissolution of TPS, a sub-group of the membership would be eligible to share in the distribution of the residual capital of TPS at that time. Qualifying Policyholders are those who hold a Qualifying Policy, which is defined to be either a withprofits policy or a policy which was in force on 31 May In addition, the surrender values under a qualifying member s policies must exceed 1000 in total to receive a share of any distribution. Organisation and Structure 2.6. TPS maintains a single long term insurance fund ( LTF ), to which all of its assets are allocated. As a mutual organisation TPS has no shareholder fund TPS has a number of subsidiary companies which support its activities. All of the subsidiaries are allocated to the LTF. Figure 2.1: Corporate Structure of TPS Limited Exii Software Ltd Moneo Ltd Teachers Motor Ltd Sovereign Unit Trust Managers Ltd Teachers Assurance Company Ltd Teachers Financial Services Ltd Teachers Management Services Ltd Teachers Property Ltd 1 Classification of long term insurance business as set out in Part II of Schedule I to FSMA: I life and annuity, II marriage and birth, III - linked long term, IV permanent health, VI capital redemption contracts and VII pension fund management. Liverpool Victoria Friendly Society Page 7 of 79

8 2.8. Teachers Assurance Company Ltd ( TAC ) is a proprietary insurance company owned by TPS and is not a friendly society. TAC had also offered insurance products to those in education but its products were of a type which could not at that time be offered by a friendly society. The long term business of TAC was transferred to TPS in 1999 and TAC thereafter only transacted general insurance business. It currently transacts household contents and buildings insurance and is financially independent of TPS. Customers of TAC are not members of TPS (unless they also hold a contract issued by TPS) although those TAC policyholders transferred to TPS in 1999 are members of TPS Sovereign Unit Trust Managers Ltd ( SUTM ) is a unit trust management company. The unit trusts managed by SUTM may be held directly by the public. Direct customers of SUTM are not members of TPS unless they also hold a product issued by TPS. TPS has entered into an agreement with Threadneedle Investment Services Limited for the transfer of the funds under management by SUTM to Threadneedle. Under the agreement, Threadneedle will become responsible for the management and administration of the unit trust funds and the related individual contracts with SUTM customers. This sale is expected to be completed in the fourth quarter of Whilst this transfer of funds is subject to approval by SUTM unitholders, it is largely independent of the Scheme. Additionally, I understand that TPS does not invest in funds managed by SUTM and SUTM does not manage any of TPS assets Teachers Financial Services Ltd ( TFS ) is responsible for the distribution to TPS customers of products from third party insurers which TPS believes are more favourably provided to its customers via these arrangements than by TPS itself. Products currently offered by such arrangements include income protection insurance and term life insurance and critical illness cover Teachers Management Services Ltd ( TMS ) provides administration and management services to TPS and its subsidiaries (and is the employer of all the management and administrative staff). Service Agreements exist between the trading entities and TMS. The agreement with TPS does not include a profit element and may be terminated subject to 6 months notice without penalty Teachers Property Ltd ( TPL ) manages TPS property assets and owns TPS Head Office All of the other subsidiaries listed in Figure 2.1 are not currently trading. They are not considered further in this Scheme Report TPS outsources its investment management to third party asset managers, Blackrock Investment Management (UK) Ltd. and JP Morgan Asset Management (UK) Limited. The agreement with Blackrock was entered into in August 2012 and may be terminated without penalty after 5 years subject to 6 months notice having been given. JP Morgan manages the assets backing TPS annuity portfolio but this contract may be terminated by either party without notice and without penalty. Products TPS transacts both with-profits and non-profit business in the LTF. General business contracts are offered through TAC and investment products through SUTM as tax-incentivised Individual Savings Accounts ( ISA ) but also as direct unit trust investment, as part of the general product range offering but these are not directly relevant to the consideration of the Scheme and are not considered further in the Scheme Report All of the with-profits business in force relates to life insurance contracts in either conventional withprofits format (providing for long term financial guarantees from the policy outset) or unitised withprofits format (providing for accumulating guarantees when premiums are paid). The life products are mainly endowment or whole of life assurances payable by annual premiums or single premium investment bonds. Life business may be tax-exempt business (and is available only through friendly societies) or ordinary branch business which is subject to tax (and is directly comparable to life insurance contracts available from life insurance companies). Details of the policy types issued by TPS are given in Appendix 3. Liverpool Victoria Friendly Society Page 8 of 79

9 2.17. The key features of with-profits contracts relate to the risk borne by policyholders, the discretion which is available in the management of the with-profits business and the way in which this influences policyholder benefits TPS has in force three different forms of with-profits business: i. Conventional with-profits ( CWP ): The level of guarantees embedded is highest in these contracts since guarantees are based on expected premiums payable and bonuses added. Annual bonuses may be added which increase the level of guarantees and a final bonus may also be added if the value of the policy is deemed to be greater than the guaranteed value. Surrender values are not guaranteed; ii. iii. Unitised With profits ( UWP ): The level of guarantees embedded is much lower in these contracts (since they are based on the premiums actually paid plus bonuses added). The guarantees apply to capital values rather than future investment returns and generally only at specified dates or events. Annual bonuses may be added which will increase the level of guarantees and a final bonus may also be added on a claim if the unit value exceeds the guaranteed value. The face value of UWP units may be reduced by the application of a market value adjustment ( MVA ) for claims not on guaranteed terms (but this is only applicable to the Teachers Assurance Bond product); and, Unguaranteed UWP contracts: These contracts have no guaranteed terms and do not have an annual bonus or final bonus rate as the claim value is determined by reference to the value of the units purchased (in the same way as contracts in ii, above). These unguaranteed UWP contracts may have a mutuality bonus added which does not increase the guaranteed benefits but does increase the unit value The management of with-profits products is discussed at 2.35 et seq, but it is noted at this point that mutuality bonuses are only to be expected when the amount of non-profit surplus emerging is significant and that they are likely to be small if they are declared since they are derived from miscellaneous surplus which is not otherwise allocated. In practice, TPS does not expect that mutuality bonuses will arise in the future. A special mutuality bonus (as described in 2.50) may also apply to CWP and UWP contracts but may result in both guaranteed and unguaranteed increases to those contract types Non-profit business consists primarily of unit-linked annual premium pensions business and single premium life investment bonds for which premiums paid are invested in internal linked funds maintained by TPS and under which the benefits payable are general closely related to the value of the units allocated. A small amount of annual premium linked business is also written Benefits under linked contracts are primarily set by direct reference to the value of the assets in which the contracts are invested, and policyholders are generally able to choose which fund they invest in. There are no guarantees or options under the unit linked policies and all investment risk is borne by policyholders Non-profit business also consists of a significant amount of conventional pension annuities in payment, which has generally arisen from maturing unit-linked pension contracts. There is also a small amount of non-profit protection life insurance business in force. Market and Distribution TPS has historically worked closely with the NUT to access its target education professionals market but it has struggled to achieve an operating model in recent years which results in the cost effective acquisition of new business. The level of new business can be seen in the following table: Liverpool Victoria Friendly Society Page 9 of 79

10 With-profits policies 3,104 1,760 1,831 2,389 With-profits AP ( 000s) 1, ,383 With-profits SP ( 000s) 3, ,513 3,608 Non-profit policies Non-profit AP ( 000s) Non-profit SP ( 000s) 14,622 7,049 4,652 1,821 Total APE 000s 3,707 1,696 1,738 1,965 AP = Annual Premiums, SP = Single Premiums, APE = Annual Premium Equivalent Source: TPS Run-off Plan Up to 2012, TPS generated most of its new business through a home-based field consulting force which operated on an advised sales basis. The change in TPS fortunes in respect of new business production relates to the requirements of the regulatory changes arising from the Retail Distribution Review ( RDR ). With the impending introduction of the RDR on 1 January 2013, TPS considered what changes were needed to its new business proposition to comply with the new requirements. It concluded that there was no possibility to operate the field force cost effectively within the new regulatory framework. Consequently, the field force was disbanded early in TPS planned an internet and telephone based distribution model seeking non-advised sales. Such a plan would be supplemented by other initiatives drawing on tried and tested methods such as direct mailing (to the NUT membership) and new approaches such as e-commerce The impact of the reduced level of new business has fed through into the level of in-force business. The in-force business is set out in Table 2.1. Table 2.1: In-force Business as at 31 December Class of business No of policies Annual Premiums ( 000s) Mathematical reserves ( 000s) No of policies Annual Premiums ( 000s) Mathematical reserves ( 000s) CWP Endowment 9,510 3,018 62,072 15,214 4,698 80,000 UWP Endowment 23,696 12,623 72,794 22,445 11,694 59,942 CWP Whole of life 1, ,862 1, ,137 UWP SP Bonds 1,157-15, ,591 Pension annuities 12, ,483 12, ,874 Unit-Linked Life SP 7, ,108 7, ,902 Unit-Linked Life RP , ,429 Unit-Linked Pensions 7,993 2, ,474 8,456 2, ,723 Conventional non-profit 2, ,462 2, ,978 Total 66,115 18, ,260 71,647 19, ,576 *on a regulatory basis Source: TPS Run-off plan TPS has experimented with a number of approaches but having regard to the regulatory requirement that there should be no adverse effect on the interests of with-profits policyholders from transacting new business Comparison of the in-force business above shows that its composition is changing rapidly, with most business lines falling away, with CWP business, in particular reducing significantly. Although UWP Liverpool Victoria Friendly Society Page 10 of 79

11 business has shown a modest increase over 2014, the cost of acquiring that business has remained high. Table 2.2 below demonstrates the rapid rate of decline in the in-force business which has occurred as result of the fall off in new business being written and this has put pressure on the level of unit costs in recent years: Table 2.2: Average maintenance unit costs million Acquisition expenses 3,149 3,106 3,848 3,579 Maintenance expenses 3,380 3,694 4,156 3,702 Other expenses 741 1, ,020 Total expenses 7,269 8,426 8,108 10,301 Average maintenance unit costs ( ) Source: TPS Run-off Plan TPS COM took the view that the potential scale of the investment required and the timescales to achieve satisfactory (distributable) returns would result in a high risk plan. The COM concluded that the interests of existing with-profits policyholders would not be best served by developing these plans. TPS continued to write small amounts of new business during 2014 through its current arrangements whilst it considered further the options available to it for the long-term. It announced its closure to new with-profits business on 18 December 2014 on agreeing the arrangements with LVFS for its future management but since a planned mailshot to customers was already underway, the actual effective closure date was 18 January Financial and Actuarial Management The financial and actuarial management of a life insurance company has to satisfy a diverse range of demands: The company must satisfy its regulatory capital requirements established on a statutory basis (the Pillar 1 requirement); The company must have regard to the risks inherent in its business model, have risk management processes in place to manage those risks appropriately and maintain a level of capital to mitigate the effects of those risks (the Pillar 2 or Individual Capital Assessment ( ICA ) capital requirement); The company may have additional internal capital management targets and requirements reflecting its own risk appetite; and, The company has to manage its business having regard to the commitments and representations it may have given to policyholders and generally having regard to the requirement to treat customers fairly ( TCF ) as set out in the FCA s Statement of Principles ( PRIN ) in PRIN 6. The concept of TCF embraces and extends the need to recognise policyholders reasonable expectations ( PRE ) The key features which I believe should be considered in addressing TCF and PRE are: Security of benefits: this is the expectation that benefits will be paid as they fall due; and, Fair treatment: this must be assessed in the context of the effects which actions may have on different classes or generations of policyholders or on shareholders and should have regard to contractual terms and the way in which the contracts have been promoted and managed in the past Before considering the financial condition of TPS, I consider the way in which the main classes of business are managed as this has a direct impact on the overall financial management of TPS. Liverpool Victoria Friendly Society Page 11 of 79

12 Financial Management of Linked Business There is no universally standard approach to managing or setting unit prices for linked business. Many firms reserve the right to exercise discretion in setting unit prices. However, this is typically in the context of agreed, documented procedures that cover the approach applied in different conditions and under different fund positions TPS maintains established unit pricing methodologies for each of the distinct linked business categories (principally reflecting the tax status of the contract). These practices maintain the historical terms and conditions including, inter alia, the approach to valuing underlying assets, changes to the pricing basis depending upon whether the fund is expanding or contracting and the frequency of cashing in surplus units. Financial Management of With-Profits Business As noted in 2.30, the financial management must have regard to TCF and PRE and this has greater application in respect of with-profits business where the discretionary powers are much more extensive. To some extent, PRE will have been formulated by the communications given to the customers both at the point of sale and subsequently, or by other statements of practice Key to shaping and governing PRE and codifying the approach to treating customers fairly is the detailed description of how management of the with-profits business is undertaken. This is detailed in the statement of Principles and Practices of Financial Management ( PPFM ) which with-profits companies must maintain and make available to policyholders In the PPFM, Principles are overarching statements of the intended terms for the management of with-profits business and these are unlikely to change very frequently. If changes (other than minor editorial changes to improve clarity) are required, policyholders must be notified three months before the changes take effect. The statement of the Practices reflects the application of the Principles currently adopted by the company. Practices may be expected to change more frequently than Principles reflecting changing circumstances. Changes to the Practices must be consistent with the Principles but do not require pre-notification to policyholders. During the ordinary course of management of with-profits funds, changes may be needed to the PPFM to reflect changes to the structure of the fund or how the fund is intended to be managed going forward The key principles set out in TPS PPFM address the following topics: The amount payable under a policy; Setting annual bonus rates; Setting final bonus rates; The approach to smoothing; Investment strategy; Business risk; Allocation of expenses; and, Management of the inherited estate The PPFM previously also set out the approach to accepting new business but this is no longer relevant since TPS has closed to new business The Principles and Practices are summarised in Appendix 4. For the current purpose, a more limited discussion of the key aspects of the PPFM suffices The principal element in determining payouts for all types of with-profits contract issued by TPS is the calculation of the asset share. The asset share is an accumulation of the premiums paid under a contract with investment returns but after deducting the expenses allocated to the policy, the cost of death benefits, the cost of guarantees, the cost of capital and smoothing (if permitted). TPS also allows for profits or losses arising from policy terminations and from certain business risks (largely relating to the transaction of long term insurance business (e.g., transacting non-profit business), from the maintenance of existing business or from exceptional expenses occurring). Liverpool Victoria Friendly Society Page 12 of 79

13 2.42. Investment strategy is a major element in the performance of with-profits policies and TPS aims to invest its assets in a diversified portfolio to maximise long term returns, consistent with the investment strategy communicated to policyholders. However, the strategy must have regard to the nature of the liabilities and the need to meet guarantees and to maintain an adequate level of capital in line with the risk appetite set by the COM. In practice, this means that TPS will aim to maintain an exposure to real assets such as equities and property to benefit from the higher long term expected returns with the proportion so invested being constrained by financial position of TPS, if necessary The current long term target asset allocation shown in the PPFM is: Asset Type Target Allocation (% of With-profits assets) UK equities 35.0 Overseas equities 17.5 Property 7.5 UK Government interest bearing securities 17.5 Other interest bearing securities 17.5 Deposits and cash Investments may include assets which are not likely to be traded readily because they are used for business purposes ( strategic assets ). TPS does maintain some strategic assets in the shape of its head office property (held in TPL), and its trading subsidiary companies of SUTM and TAC. However, it is noted that the disposal of SUTM s business to Threadneedle has been agreed and SUTM is expected to cease to trade during 2015, but will remain a legal entity in order to fulfil its legal obligations as ISA fund manager. After that time, TAC will be the only trading entity, but, in practice, TAC will only offer renewal terms to its policyholders for a short period after the Effective Date while the necessary administration systems are put in place to permit the renewal to be an LV policy and it will be placed into run-off (administering the tail of claims). The retention of strategic assets is reviewed annually to ensure that their existence (and scale) does not have adverse effects on the with-profits policyholders The expenses incurred in managing TPS are analysed and may be allocated to asset shares or be met by the inherited estate (at the discretion of the COM). The analysis conducted identifies the unit costs of administering or acquiring business. While the inherited estate may meet some costs (particularly larger one-off costs that are not expected to recur but which it may be unfair to charge to current year asset shares), the level of expenses incurred and the volumes of business in force are determinants of the costs allocated to the asset shares and therefore it is important that these are kept in step and in line with long term expectations if policyholder returns are to be maintained. In practice unit costs charged to asset shares have been capped since 2012 at the level determined in 2012 plus an allowance for the change in the Retail Prices Index. While this cap was originally intended to be a temporary measure to apply until 2015, COM has decided to extend its application indefinitely. This will be a challenge for a closed fund since the expenses of management may include a significant proportion of fixed expenses that do not reduce readily as the volume of in-force business declines Payouts are determined by reference to the asset share and are subject to smoothing. Asset shares also play a role in setting annual bonuses since these are set with the aim of maintaining a margin between the value of the guaranteed benefits and the value of the asset share Generally, the annual bonuses will result in an increase to the level of guaranteed benefits under CWP and UWP contracts but as noted in 2.18, some UWP contracts issued by TPS only enjoy the mutuality bonus which does not increase the guaranteed benefits. It is noted that mutuality bonuses are only to be expected when the amount of non-profit surplus is significant and that they are likely to be small if they are declared and may be zero since they are derived from miscellaneous surplus arising in the LTF which is not already allocated elsewhere in the bonus process. However, in 2014 Liverpool Victoria Friendly Society Page 13 of 79

14 as a result of a re-assessment of the financial management of non-profit business, a significant oneoff adjustment was made which did result in a significant amount of surplus arising from non-profit business. This resulted in a mutuality bonus being added to all with-profits asset shares but no additional guarantees were added to any with-profits policies and the benefit will only emerge in the eventual claim value For unitised with-profits contracts, there is no final bonus scale as such since the final bonus for each policy is determined individually by direct reference to the underlying smoothed asset share (for regular premium contracts) and the unsmoothed asset share (otherwise) The level of the inherited estate is reviewed annually to determine that it has not become excessive having regard to the capital needs of TPS in-force business and business plans. If it is determined that excess surplus exists then action is taken to reduce it. This reduction may be achieved by enhancing asset shares or claims payments but may also result in an increased risk appetite being adopted by means of an increased exposure to risky assets (although TPS has not applied this in practice) In practice when excess surplus has been identified, TPS has distributed it by means of a special mutuality bonus. The means of distribution has been to increase all asset shares by the amount of surplus allocated, to increase the guarantees under CWP contracts by declaring an annual bonus in respect of a portion of the surplus allocated to them and to generally increase guarantees under UWP contracts by the value of the enhancement to asset share (since the enhancement is treated as an increase to the premiums paid and there is an underpin of a return of premium applying to these policies). Recent amounts distributed and the form of the additions to the policy are shown in the following table. Year Amount million Form of distribution % in additional reversionary bonuses for CWP policies. 100% enhancement to asset share for CWP and UWP % in additional reversionary bonuses for CWP policies. 100% enhancement to asset share for CWP and UWP % in additional reversionary bonuses for CWP policies. 100% enhancement to asset share for CWP and UWP % in additional reversionary bonuses for CWP policies. 100% enhancement to asset share for CWP and UWP % in additional reversionary bonuses for CWP policies. 100% enhancement to asset share for CWP and UWP The Run-off Plan Since TPS has closed to new with-profits business, it is required by the COBS rules to produce a Run-off Plan. The format of the Run-off Plan is prescribed and is intended to highlight the principal challenges that confront a with-profits firm going into run-off, e.g., managing elements of the business so that they reduce in line with the in-force business. The main elements to be considered are the expense base (which may show diseconomies of scale); the allocation of the incurred costs between lines of business and the estate; managing the risk profile of the firm so that the capital requirements. reduce over time; ensuring that residual risks do not weigh unduly on any particular Liverpool Victoria Friendly Society Page 14 of 79

15 group of policyholders in the future if the mix of in-force with-profits types changes; and to ensure the equitable distribution of capital to with-profits policyholders (reflecting all of these elements) The impact of the Run-off Plan will only be established in the light of emerging experience and for the purpose of the Scheme Report, discussion on this is deferred to Section 5 where I consider the effect of the Scheme on TPS policyholders. However, since certain key criteria are described in the Run-off Plan which would act as a guide to the future management of the with-profits business (whether the Scheme is implemented or not), it is appropriate to note these here The Run-off Plan establishes a continuity link with the past management of TPS by setting out how the estate has been managed. In particular, the TPS estate has, in accordance with the PPFM, been managed: for the purpose of safeguarding the solvency of TPS; with the aim of treating policyholders fairly and equitably relative to their reasonable expectations; to provide investment freedom; to meet regulatory capital requirements; to support smoothing of payouts to with-profits policyholders when appropriate; and, to provide capital for TPS and its subsidiary companies Recognising these aims but seeking to avoid imposing further constraints, the Run-off Plan sets out a risk appetite target for the available capital to be at least 125% of the Pillar 2 capital requirement (which will be replaced by the Solvency Capital Requirement, SCR, when Solvency II comes into force). The available capital is currently significantly in excess of this target and the Run-off Plan anticipates that distributions of the estate to with-profits policyholders will occur to reduce capital to the long term risk appetite position The distribution of the estate will be achieved by means of supplements to asset shares (without a corresponding increase in guarantees, unless consistency with prior practice would require such an increase) by applying the following principles: (a) financial projections will be carried out at least once a year targeting a SCR cover of 125% at the end of 2026 to determine the asset share enhancement rate for the current year. If the actual Pillar 2 cover is below 125% at the calculation date then no permanent enhancement is to be made; (b) if the cover for SCR in (a) above is below 110% then either previous supplements to asset shares (of policies then in force) funded from the estate will be clawed back until it is above 125% and/or the investment strategy will be changed to remove/reduce the need to do so The intention of the projections in 2.55 (a) is to determine a uniform rate that would apply in the future but it is recognised that the use of a uniform rate may not be possible whilst satisfying the 125% capital target since future profits may not emerge smoothly has been chosen as the ultimate date since there is expected to be very little with-profits business remaining in force by that date The process by which the distribution of the estate will be achieved in TPS is slightly different from the process which had applied when adding special mutuality bonuses previously (see 2.50) since distributions will be treated as supplements to asset shares rather than as enhancements. The distinction may be subtle but the reasons for the adoption of this process are well founded to meet the following criteria: The guarantees under each with-profits policy should not be increased as a result of the distribution (unless consistency with prior practice would require such an increase): supplementing all asset shares would result in an increase in the guarantees attaching to unitised with-profits policies (see 2.50); The value of the supplementary amount (if any) will be tracked and be allocated investment income at the same rate as applies to asset shares and will be paid as an addition to the claim amount determined using the PPFM: this means that the extant supplementary amount will be paid as a separate benefit amount and, in particular, that if the guaranteed Liverpool Victoria Friendly Society Page 15 of 79

16 claim value for any with-profits policy is in the money, the supplementary amount attaching to it will not be franked against the cost of the guarantee (which would be the case if applying enhancements to asset shares); and, Prior to a claim arising under a policy, the supplementary amount may be clawed back (in whole or in part) in circumstances where the financial position of TPS becomes unsatisfactory in the future (relative to the risk appetite described in 2.55 (b)), as one of the permitted management actions to restore the financial position: the separate identification of the supplementary amount ensures that in the event that this management action had to be invoked, it can be easily applied and in a way which ensures that the impact is applied uniformly and without unintended reductions to normal asset shares Since the in-force business of TPS will reduce rapidly, consideration will be given to the immediate distribution of a portion of the estate to supplement in-force asset shares. The shape of such an allocation has been considered and TPS has determined that the most appropriate and equitable formula (reflecting past management approach and experience) is one which uses a uniform rate of enhancement multiplied by the duration in force (subject to a maximum of 20 years). The amount of the distribution would be limited such that the cover for Pillar 2 capital requirement or SCR did not fall below 150% after the distribution. The uniform rate would be set having regard to this constraint Since there is inevitably a delay between closure to new business and completing the necessary analysis to determine the amount of an initial distribution (which is unlikely to be made before 2016), it may be inequitable for involuntary with-profits claimants (i.e., claims by death or maturity) not to receive some of the benefit of estate distribution. TPS has decided that, if an initial distribution is made, then involuntary claimants should receive a retrospective payment equal to the enhancement they would have received had the calculation been done at an earlier date It is intended that the way in which the business is managed will be broadly as it was before closure but recognising the constraints outlined above will result in different outcomes. Governance of with-profits business Firms operating a with-profits fund must implement scrutiny arrangements to assess compliance with the PPFMs and, more generally, that with-profit policyholders have been treated fairly. The arrangements should allow for an unbiased and sufficiently independent assessment to be undertaken. The regulations permit a number of models for this arrangement TPS has adopted a With-Profits Committee ( WPC ) whose role is to provide this judgement. The WPC is comprised of two non-executive directors of TPS and a third member who is independent of TPS (and who is suitably experienced in the management of with-profits business). The WPC is supported by the TPS WPA, who is an external consulting actuary. The WPA provides further scrutiny and advises on how the with-profits business should be managed to ensure fairness and equitable treatment for with-profits policyholders. The WPC also provides regular guidance to the Board The TPS Board produces an annual report to with-profits policyholders on compliance with the PPFM, including a statement from the WPA The Board, the WPC and the WPA have all concluded that the with-profits business has been managed in line with the PPFM. Capital Requirements and Management Incorporated friendly societies are subject to the regulatory requirements set out in the PRA Rulebook in INSPRU and GENPRU for firms conducting insurance business The approach to determining the financial position requires an actuarial investigation to be conducted to determine the value of the liabilities and capital requirements. There are several components to this valuation. The basic regulatory valuation arises from the requirements of the EU Insurance Directives and represents a prudent assessment of the value of the liabilities ( mathematical reserves ) and related capital requirements, which are determined by the application of defined factors to the net value of the mathematical reserves and sums insured at risk, Liverpool Victoria Friendly Society Page 16 of 79

17 compared to the market value of the assets held. However, this approach (generally referred to as Pillar 1 Peak 1 or the regulatory basis ) is not risk-based Firms writing with-profits business may conduct 2 the Pillar 1 Peak 1 valuation without including any allowance for future bonus which may become payable on the with-profits policies. To assess the financial position of such firms, a second valuation (the Pillar 1 Peak 2 or realistic basis valuation) is conducted which considers the value of the with-profits benefit reserve (broadly speaking the aggregate value of the asset shares, as described above) and adjustments reflecting the future management of the with-profits business as being representative of the liability to withprofits policyholders. The capital requirement on the Pillar 1 Peak 2 basis is set by determining the Risk Capital Margin which is set by considering the change in the value of the assets required to meet the liabilities after a specified stress test. If the excess of the value of the with-profits assets over the realistic basis value of the liabilities and Risk Capital Margin is lower than the excess capital measured on a Regulatory Basis, a further capital requirement must be established to reduce the excess capital to the level measured on the realistic basis. This further capital requirement is referred to as the With-Profits Insurance Capital Component ( WPICC ). This capital adjustment aligns the capital requirements with the way in which with-profits business is managed in line with the PPFM There is also a requirement to undertake a fully risk based assessment of the adequacy of the available capital to meet extreme events. This assessment requires firms to consider all of the risks to which they are exposed and the impact on the balance sheet over a 1 year period if a 1-in 200- year event occurred. This is the Individual Capital Assessment ( ICA or Pillar 2 ). The capital required is calculated for each risk component and then aggregated after allowing for the likelihood of risks occurring at the same time or not. The interaction of the risks in this process allows for diversification of the risks so that the actual capital requirement is much lower than the simple aggregated amount The ICA report is submitted privately to the PRA which reviews the content and may issue guidance to the firm to adjust the value placed on its assets or to hold a higher amount of capital to address any weaknesses that it believes may exist in either the methodology adopted, the calibration of the extreme events identified or the procedures for aggregating the capital requirement. Individual Capital Guidance ( ICG ) is normally expressed as a percentage (greater than or equal to 100%) of the amount of capital calculated by the firm but may be specified as an absolute amount The Pillar 2 capital requirement, any ICG given by the PRA and the reason for its application may not be disclosed publicly. This means that I am unable to disclose the ICA position in detailed terms in the Scheme Report. Financial Position Pillar My consideration of the financial condition addresses primarily the published Pillar 1 statutory figures. I have also considered in general terms the risks borne by TPS which are addressed in its Pillar 2 analysis and I have had regard to the results in forming my opinions The following sections consider the published Pillar 1 position as at the end of 2014 which is described in Table 2.3 below: 2 Firms that have had more than 500 million of with profits liabilities at any time since 2004 must apply the Pillar 1 Peak 2 realistic basis methodology. Smaller firms may choose to adopt it but if they do they cannot switch back to the regulatory approach without the consent of the regulator Liverpool Victoria Friendly Society Page 17 of 79

18 Table 2.3: Pillar 1 Solvency Position as at 31 December 2014 m 2013 m Regulatory value of assets Mathematical reserves Available Capital Resources Long Term Insurance Capital Requirement ( LTICR ) Capital Requirements of Regulated Related Undertakings Minimum Capital Requirement ( MCR ) With-Profits Insurance Capital Component ( WPICC ) Enhanced Capital Requirement ( ECR ) Capital Resources Requirement ( CRR ) Excess of available capital resources over MCR Capital Cover Ratio ( CCR ) 566% 391% Source: Regulatory Returns Table 2.3 demonstrates the strength of TPS as it has comfortably covered its statutory Pillar 1 capital requirement; in recent years (and I have been informed that this has been the case for at least the last twenty years). This presentation includes both available assets and the capital requirement for TAC, the regulated general insurance subsidiary of TPS The CRR is a combination of the LTICR and the WPICC. Whilst it is not a risk based method, the parameters vary according to the nature of the risk measure. In particular, linked business attracts a very low CRR element since the risks are largely borne by the policyholders, and the CRR elements relate to the insured risks of mortality and expenses The WPICC can be a more volatile element of the balance sheet as it is an equalising element between the two Pillar 1 bases. The WPICC is part of the CRR but since it in effect relates to the discretionary powers of TPS to add bonus in the future, the WPICC remains available as risk absorbing capital. It should be noted that with the closure of TPS to new business in 2015, the WPICC will increase to include all of the excess capital in line with the presentational treatment required by the PRA and the cover ratio will reduce to 100%. However, this does not indicate financial weakness in TPS post-closure As noted in 2.73, the Pillar 1 position includes TPS subsidiaries. These subsidiaries do not have a material impact on the Pillar 1 position as can be seen from the net balance sheet contributions as 31 December 2014 (which is not materially different from the prior year): Liverpool Victoria Friendly Society Page 18 of 79

19 Capital Net asset value Group company Requirements TAC 2.0m 7.4m SUTM 0.4m 8.9m TFS 0.0m 0.8m TMS 0.0m 9.0m Others 0.0m 0.2m TOTAL 2.4m 26.2m Source: TPS data The planned disposal of the business of SUTM (which is expected to complete during 2015) will reduce the capital requirements which must be held but will also increase the quantum of the capital resources in TPS. Risks inherent in TPS business model Whilst the Pillar 1 presentation provides a degree of comfort in the financial position of TPS, it does not address the nature of the risks inherent in the business model. The Pillar 2 assessment does address the capital needs of the firm from a variety of different risk exposure perspectives. As noted in 2.69, the Pillar 2 assessment is provided to the PRA privately and its content may not be published. I have considered the detail of the report and have considered the nature of the risks and their relative contribution to the risk profile of TPS. The following sections consider the risks qualitatively and the effect which they have on TPS and its policyholders The approach to determining the Pillar 2 capital requirement applies stress tests to each of the risk exposures and measures the impact on the specific features of the assets and liabilities of TPS business. The stresses represent an extreme event expected to occur on a 1 in 200 basis. In setting the assumptions, TPS has had regard to the stress tests which are likely to underpin the standard formula method which will apply under the new Solvency II regime. (Solvency II is discussed further in section 2.94 to ) Although no quantitative analysis may be provided here, I have considered the results of the last full Pillar 2 assessment undertaken (as at 31 December 2013) and I can confirm that TPS comfortably covers its capital requirements under the Pillar 2 tests. I have also considered the major sources of risk which contribute to the Pillar 2 capital requirements. The following chart demonstrates the relative importance of the major risk categories before allowing for diversification (which is a measure of how likely or unlikely different risk events occur together). Liverpool Victoria Friendly Society Page 19 of 79

20 Figure 2.3: Pillar 2 as at 31 December Risk capital distribution by source Operational risk Expenses Equity & Property Life Insurance General Insurance Currency Credit Interest Rate Source: TPS ICA Report Market Risk Market risk arises from the movement in asset values not being matched by the movement in liability values. This covers market value falls (of equity and property assets), interest rate or currency movements which will change the value of fixed interest assets. The principal way in which this affects TPS is through the impact on the cost of guaranteed benefits in with-profits contracts and non-profit contracts. It will also reveal the extent to which the nature and term of the assets is appropriate for those guarantees, particularly for annuity benefits in payment As can be seen from the chart, the market risk is the largest single contribution to the risk capital. A significant element of this arises from the high target exposure to equity and property which TPS targets for with-profits business (as noted in 2.43). However, there is also a material contribution from currency risks since TPS has chosen to implement an investment strategy which uses nonsterling assets (through investment in a collective investment scheme) with the aim of enhancing policyholder returns but also diversifying the geographic risks In addition, the value of future management charges to be deducted from linked funds is directly affected by falls in the value of assets in those funds. Any surplus assets held in linked funds will be affected by the fall in unit prices, however, regular monitoring and encashment of surplus units controls this exposure to minimal levels TPS is able to provide for this risk because it is well capitalised but it manages market risk through investment strategies and the monitoring of those strategies to ensure they remain appropriate to meet the benefit requirements of the different blocks of business (as described in the PPFM). Insurance Risk Life Insurance risk covers, the effects of mortality and persistency (i.e., policies terminating by the voluntary actions of policyholders). Of these risks, the persistency and expense risks make up the major contribution. The nature of the persistency risk varies for the different blocks of business in force. For with-profits business it is a decrease in lapse rates that is more onerous as this means more policies with valuable guarantees stay in force. However, for the linked business, an increase in lapse results in loss in profits from lower future management charges received. TPS also takes into consideration the impact that increased persistency will have on the expected expense overruns. With fewer policies in force, the overhead cost burden will have a greater effect on unit Liverpool Victoria Friendly Society Page 20 of 79

21 costs which as has been noted previously are already being stressed by the reducing in-force business Expense risk is the second largest component within the insurance risk category. This covers the risk that maintenance expenses are higher than expected from elements of the outsourcing arrangements that are not contractually fixed (although it is noted that the principal outsourcing arrangement is internal in that it is with TMS) Mortality makes a relatively low contribution to the risk capital but there is a greater impact from longevity (the risk that policyholders live longer than expected). TPS has not actively written pension annuity business but when deferred pension contracts mature, these may result in pensions in payment. TPS has mitigated this risk by reinsuring longevity risk through a swap arrangement with a reinsurance company under which TPS pays fixed amounts to the reinsurer and the reinsurer meets the actual payments required to policyholders For completeness, it is noted that TPS general insurance business conducted by TAC does not bring a material risk exposure (before diversification) to TPS. This is due to the overall scale of TAC but also the nature of the risks underwritten by it. Operational Risk Operational risk arises from the risk that failure of people, processes, systems or external events results in financial loss. These risks largely relate to the historical conduct of business but also identify the risks inherent in managing a business arising from disruptions to the operational capacity (e.g., loss of key staff, natural hazards of flood and fire). These are mitigated by sound management practices. Credit Risk Within this category TPS covers the risk to its business from counterparty default, in particular as a result of TPS exposure to reinsurers, the impact from credit spreads increasing or becoming more uncertain, and from the concentration of holding bonds with a restricted number of counterparties The majority of capital held in respect of this category is due to the impact of credit spreads on TPS bond holdings backing its pensions in payment. This risk is managed by having in place minimum counterparty rating requirements in respect of such investments and also limits on total exposures to individual counterparties. Risks associated with the TPS Staff Pension Scheme TPS maintains an approved pension arrangement for its staff. Although the arrangement is closed to new entrants, existing active members still accrue additional salary-related benefits and TPS is therefore required to make regular contributions to meet the cost of the increased benefits. Further benefit accrual is expected to cease as at 31 December TPS may also have to make additional contributions to ensure an appropriate funding level for the arrangement in respect of past accruals of benefits. In recent years, the arrangement has been well funded having shown a modest surplus over liabilities in 2014, although I understand that the falls in fixed interest yields since late 2014 may have reversed this so that a small deficit may now exist TPS is thus exposed to risks related to the maintenance of this arrangement, principally longevity risk (that pensioners live longer than expected), and market risk and/ or credit risk arising from the investments held by the pension arrangement. TPS holds an appropriate amount of capital in the Pillar 2 assessment to meet these risks which is reflected in the risk distribution implied by the piechart in Figure 2.3. Solvency II The current solvency regime for European insurers is known as Solvency I. However, a new risk based regime, referred to as Solvency II, which will be relevant to insurance and reinsurance companies throughout the European Union, will come into effect on 1 January Solvency II will require significant changes to be made to the way in which insurance companies are managed and will introduce a radically different approach to reserving and capital requirements from the current Liverpool Victoria Friendly Society Page 21 of 79

22 regime. The new regime has many similarities to the current Pillar 2 regime which is applied in the UK (as a supplementary regime to Solvency I requirements) but also differs in a number of ways from the UK model The rationale underlying Solvency II is that the technical provisions held by a firm should be sufficient for a third party to take on the liability on transfer. The third party would be expected to provide capital to meet the SCR and be compensated for doing so. The cost of this capital is provided for by the creation of a risk margin in the technical provisions of each firm. This aims to achieve the continuing security of policy benefits in the event that a firm is unable to maintain its Solvency II capital requirements There have been significant delays in specifying the detail of Solvency II and final versions of many of the Implementing requirements have only been adopted in This has prevented many insurance undertakings from preparing firm estimates of their capital position. In addition, although Solvency II is intended to be a maximum harmonisation Directive, certain elements, including a number of transitional measures that may be applied to assist companies as they move from Solvency I to Solvency II, may be modified by local regulators and are subject to approval by them. The PRA has issued a number of policy statements to address the application of a number of these elements in the UK but it may be expected there will be an ongoing dialogue between insurers and the PRA as the nuances and intricacies of the new regulations are uncovered in their practical application. The PRA has been conducting a data collection exercise involving many firms to assess the current state of financial readiness and additionally has received applications from firms seeking to use certain transitional reliefs or adjustments permitted under the Solvency II rules. Feedback on this process has not been published by the PRA as at the date of the Scheme Report Companies may choose whether to develop an internal model to meet the requirements of Solvency II or to determine their capital requirements by applying a standard formula, which requires capital to be assessed using a wide array of detailed specified stress tests Insurance firms using the standard formula must demonstrate that in doing so the risk stresses used are an appropriate treatment for them. The internal model differs from the standard formula in permitting insurers to set the capital requirements by reference to the bespoke assessment of their risks. The internal model is subject to regulatory approval and requires high standards of process and control in its management of the business. However this outcome is intended to have a higher standard of risk control (qualitative, quantitative and management) and it provides a degree of certainty on the capital a firm is required to hold In the absence of the current transfer proposals, TPS would have implemented a standard formula approach as its long term model and will do so from 1 January 2016 up to the Effective Date of Scheme I have considered TPS Solvency II submission provided to the PRA on a best endeavours basis on 1 July 2015 which sets out its capital requirements and solvency position as at 31 December 2014 using the standard formula. As noted above, some uncertainties on the application of the new regime remain, but these estimates indicate that if TPS continued as a standalone entity, it would satisfy its solvency requirements under the standard formula approach in the new regime comfortably. I also note that TPS intends to seek approval for transitional relief and the volatility adjustments permitted under Solvency II. The estimated benefit of obtaining these approvals is expected to be trivial and this gives a greater degree of certainty on TPS likely financial position under Solvency II In my opinion, TPS should be able to satisfy its statutory requirements under Solvency II comfortably. Liverpool Victoria Friendly Society Page 22 of 79

23 3. BACKGROUND TO LIVERPOOL VICTORIA FRIENDLY SOCIETY History 3.1. LVFS was founded in Liverpool in LVFS is an incorporated friendly society under the FSAct and is authorised under the terms of FSMA to undertake long term insurance business in Classes I, III and IV. LVFS has been designated a Category 2 firm by the PRA and a Category C2 firm by the FCA LVFS is one of the largest friendly societies in the UK with over 5.7 million customers, of whom over 1 million are members, and 6,000 employees. It writes life, pensions and general insurance products (either directly or through subsidiary companies) and at the end of 2014 was a leading market provider of income protection, enhanced annuities and the third largest provider of motor insurance in the UK. LVFS trades under the brand name LV= across its product range. Constitution and Governance 3.3. The constitution of LVFS is set out in its Rules ( LVFS Rules ) approved at its AGM in 2014 and registered by the FCA. These set out how the management of LVFS should be applied through its governing body, membership eligibility, registration and voting rights, requirements on notice and holding general meetings of LVFS and the conduct of such meetings. LVFS Rules also describe what the rights of members are on dissolution, on winding up and to the distribution of surplus assets of LVFS Governance of LVFS is provided by its Board of Directors ( Board ) which is established under the terms of LVFS Rules As a friendly society, LVFS is a mutual organisation owned by its members. Membership is granted to any person who, singly or jointly, holds a financial services policy which is designated a membership product. Holders of policies issued by any of LVFS subsidiary companies (which are described further in 3.9 to 3.18) are not members. Membership may be extended to persons holding policies transferred to LVFS The principal benefit of membership of LVFS is the ability to participate in the governance of LVFS through the vote granted to members at general meetings. Members who are with-profits policyholders have an interest in surplus arising, but this is limited to the surplus arising in the relevant sub-fund in which their policy is invested At present, members holding with-profits policies invested in the LVFS with-profits fund are also eligible for Mutual Bonus, an allocation of profits made from taking business risks. Mutual Bonus is discussed in more detail in 3.58 to LVFS raised 350 million of subordinated debt in 2013, so whilst, as a friendly society it does not have any shareholders it does have bondholders. Further details regarding the terms of the issuance of this subordinated debt are given in 3.46 to Organisation and Structure 3.9. LVFS has a number of subsidiary companies which support its activities. A simplified diagram of the group corporate structure is given below in Figure 3.1 and indicates that the group s operating structure is consistent with its key business activities. A more detailed diagram of the group structure is given in Appendix 6. Liverpool Victoria Friendly Society Page 23 of 79

24 Figure 3.1: Corporate Structure of LVFS Liverpool Victoria Friendly Society Limited LV Life Services Limited LV Protection Limited LV Capital plc Liverpool Victoria Life Company Limited LV Equity Release Limited Liverpool Victoria General Insurance Group Limited NM Pensions Trustees Limited Liverpool Victoria Insurance Company Limited Highway Insurance group Highway Insurance Company Limited LV Protection Limited ( LVPL ) is an insurance company, (until 2010, it was an insurance broker) wholly owned by LVFS, which writes unemployment insurance with effect from 1 January It received a capital injection from LVFS on that date to raise its capital resources to the level required to allow LVPL to operate as an insurance company. It has been capitalised as an insurance company since that date Liverpool Victoria Life Company Limited ( LVLC ) is a proprietary insurance company wholly owned by LVFS and is not a friendly society. LVFS acquired LVLC (then called Permanent Insurance Company Limited) in Much of the life business within LVLC was transferred to LVFS in two tranches in 2008 and LVLC comprises a small portfolio of non-linked non-profit business and, although it does not actively seek new business, I understand that it may be used as the vehicle for the transfer of appropriate portfolios of business in the future LV Capital plc ( LV Capital ) is the intermediate holding company for Liverpool Victoria General Insurance Group ( LVGIG ) of companies. The general insurance business is underwritten by Liverpool Victoria Insurance Company Limited ( LVIC ) and Highway Insurance Company Limited ( HICO ), which are the principal trading entities in LVGIG. As at 31 December 2014, LV Capital had two loans from LVFS, a 130 million unsecured loan repayable in 2015 and a 170 million unsecured superior loan note repayable in LV Equity Release Limited ( LVER ) specialises in the provision of equity release lifetime mortgages ( ERLM ) mainly using capital provided by LVFS from its annuity business. There are internal limits setting out the maximum ERLM business which may be written, based on a proportion of the inforce annuity reserves which the equity release mortgages back. The majority of the risk related to the property risk and early redemption risk inherent in equity release mortgages has been passed to LVFS. New business volumes have been steadily increasing over the last three years at 105 Liverpool Victoria Friendly Society Page 24 of 79

25 million, 93 million and 89 million for 2014, 2013 and 2012 respectively. The fair value of the business in force is estimated to be 0.7 million as at 31 December LVER is regulated by both the PRA and FCA and as such is required to hold minimum solvency capital in accordance with these regulators guidelines NM Pensions Trustees Limited ( NMPTL ) acts as the corporate trustee to the LV= Personal Pension Scheme and administrator of the self-invested personal pension ( SIPP ) product of the LV= Personal Pension Scheme. NMPTL is regulated by the FCA and as such is required to hold minimum solvency capital in accordance with regulatory guidelines Liverpool Victoria Life Services Limited ( LVLS ) acts as an administrator for a number of small selfadministered pension schemes ( SSAS ). It has a formal service agreement with NM Pensions Trustee Ltd which carries out the administration of these schemes LVLS is a regulated entity and as such is required to hold minimum solvency capital in accordance with FCA guidelines Liverpool Victoria Asset Management ( LVAM ) is a dormant company whose business was transferred to Threadneedle Asset Managers Ltd in Since then LVFS has outsourced most of its investment management to Threadneedle via a series of investment management agreements ( IMA ) with five of the LVFS subsidiaries. These IMAs may be terminated without penalty after 7 years subject to 6 months notice having been given by LVFS LVFS maintains two with-profits funds, the long term insurance fund (the Main Fund ) and the RNPFN Fund the latter is a ring-fenced fund consisting of with-profits, non-profit and unit linked business resulting from its acquisition of the Royal National Pension Fund for Nurses (by means of a Court approved Scheme under the Insurance Companies Act from RNPFN to LVLC in 2001 and a subsequent Part VII transfer from LVLC to LVFS in 2008). RNPFN is closed to new business apart from new non-profit business arising from the vesting of annuity benefits under maturing pension contracts within this sub fund. Market and Distribution LVFS currently operates through two Major Business Units ( MBUs ) of Life and Heritage and General Insurance Business. On a day to day management basis, these are further split into three Strategic Business Units ( SBUs ), Life, Heritage and GI. Operationally, the Life and Heritage SBU focus on three areas of new business: protection business; the retirement solutions market; and, the Heritage with-profits products Together LVER, LVLS, NMPTL and LVFS provide the LV= branded retirement solutions product offering, which include SIPPs, pension consolidation and drawdown and equity release products LVFS distributes its life insurance business by means of a multi-channel distribution strategy and aims to grow its customer base with marketing activities focused on those niche areas where analysis indicates it has a competitive edge. The distribution model comprises a range of intermediary networks, panel positions, portals, corporate partners and direct distribution The majority of business (both retirement and protection sales) is sold through independent financial advisors ( IFA ). IFA sales, particularly the larger networks and panel distributors, accounted for over 75% of regular premium business and nearly all of the single premium business sold during Direct business distribution, via corporate partners and LVFS in-house sales team, Liverpool Victoria Financial Advice Services Limited ( LVFAS ), is an important channel for the sale of the protection business LVFS also applies a multi-product multi-channel model to distribute its general insurance business. Direct business distribution is used to sell personal lines motor insurance and then leverage these policyholders to sell other personal lines products. Both personal and commercial lines are also sold through broker channels. Liverpool Victoria Friendly Society Page 25 of 79

26 Products LVFS writes both with-profits and non-profit business in the Main Fund All new life and pension business is written directly into the Main Fund. LVFS provides protection and retirement solutions through the Life and Heritage MBU. The protection offering takes the form of life protection business such as term assurance, income protection and critical illness business and the retirement solutions comprises primarily pensions business of enhanced and impaired annuities. LVFS also writes with-profits new business, primarily in the form of regular premium savings plans and single premium bonds but also some with-profits annuities. With-profits business makes up in the region of 18% of the new business levels and remains an important component of the new business written, although other lines of business tend to dominate General insurance contracts are offered through LVGIG and its insurance subsidiaries LVIC and HICO. LVFS transacts both personal and commercial lines of general insurance business through LVGIG. This is primarily motor insurance but also includes home, travel and SME business insurance LVGIG has a number of non-regulated subsidiaries, including LV Assistance Services Limited, LV Repair Services Limited, LV Insurance Management Limited and Highway Corporate Capital Limited. The key activity of these companies is the provision of services and there is no requirement to hold capital for these companies. Main Fund Most of the with-profits in-force business relates to life or pension contracts, either in conventional with-profits format or unitised with-profits format. The conventional life products are mainly endowment or whole of life products and a considerable amount of historic industrial business remains in force. The unitised with-profits life products are primarily with-profits growth and income bonds and regular premium endowment savings plans (both tax exempt and taxable products). The pension products are regular premium deferred annuity and single premium annuity products and a unitised with-profits personal pension plan The key features of with-profits contracts written by LVFS are described below. Conventional with-profits ( CWP ): The level of guarantees embedded is generally higher in these contracts since guarantees are based on expected premiums payable and bonuses added. Annual bonuses may be added which increase the level of guarantees and a final bonus may also be added if the value of the policy is deemed to be greater than the guaranteed value. Surrender values are not guaranteed; Unitised With profits ( UWP ): The level of guarantees embedded is generally lower in these contracts (since they are based on the premiums actually paid plus bonuses added). The guarantees apply to capital values rather than future investment returns and generally only at specified dates or events. Annual bonuses may be added which will increase the level of guarantees and a final bonus may also be added on a claim if the unit value exceeds the guaranteed value. The face value of UWP units may be reduced by the application of a market value adjustment ( MVA ) for claims not on guaranteed terms; and, New-Style UWP contracts: These contracts do not have an annual bonus or final bonus rate as the claim value is determined by reference to the value of the units purchased Non-profit business consists of both life and pensions business. Non-profit life contracts comprise primarily protection products and reflect LVFS focus on this area. The business includes predominantly non-linked (but with some index-linked versions of) level and decreasing term assurances, accelerated and standalone critical illness ( CI ) and income protection ( IP ) business. The CI and IP business is predominantly written on guaranteed premium terms, but products with reviewable premium rates have also been written. Non-profit pensions business consists mainly of single premium CPA annuity business, written on both standard and impaired terms and the unit linked Trustee Investment Plan. Liverpool Victoria Friendly Society Page 26 of 79

27 3.32. The business that was issued with reviewable premiums will permit LVFS to adjust premiums if it is deemed that the mortality and/or morbidity assumptions are no longer appropriate. This option will not be available to LVFS for those products written on guaranteed premium rates. Table 3.1: Analysis of New Business written by LVFS during s Regular Premium Business Single Premium Business Product Description Number of policyholders Amount of Premiums Number of policyholders Amount of Premiums UK Life Non-linked, non-profit savings 22,336 6,863 Non-linked, non-profit protection 65,472 23, Non-linked, non-profit annuity 100 1,229 UWP, WL & EA Bonds & ISA , ,528 Index-linked protection 7,888 4,004 UK Pensions With-profits annuity ,110 Non-profit annuity 7, ,775 UWP - individual pension increments Unit-linked individual pensions ,823 Trustee Investment Plan 1,444 5,831 6, ,533 Index-linked annuity Total 97,962 41,212 17, , In March 2014 the government set out new legislation relating to defined contribution pensions which came into effect on 6 April Under these new arrangements, from the age of 55, policyholders with a defined contribution pension product have much greater access to the pension savings they have accumulated LVFS currently offers a wide range of retirement solution products, but expects a greater focus on other options now the pension freedom reforms have come into effect and once LVFS has formed a greater understanding of the likely demand regarding the future pensions market. The new business figures for 2014, given in Table 3.1 above, indicate a modest reduction in non-profit annuity business during the year, but an overall increase in both regular and single premium business written Investment management of most of the funds is outsourced to Threadneedle, and is carried out with respect to defined objectives and benchmarks (as set and regularly monitored by the Board). ER loans are administered internally and Commercial Mortgage Loans are administered by a third party, Langham Hall Details of the gross reserves for the LVFS business as at 31 December 2014 are set out in Table 3.2 below. Table 3.2: Summary of Gross Reserves as at 31 December 2014 (including RNPFN) UK Life UK Pensions Overseas Total Product Description '000 '000 '000 '000 Conventional with-profits 665,768 1,421,581 2,087,349 Accumulating with-profits 1,020, ,475 1,610 1,359,049 Non-linked non-profit 371,198 3,312,436 1,209 3,684,843 Unit-linked 129,724 1,437,857 1,567,581 Index linked 95,706 38, ,057 Source: PRA returns as at 31 December 2014 Total 2,283,360 6,546,700 2,819 8,832,879 Liverpool Victoria Friendly Society Page 27 of 79

28 RNPFN Fund The RNPFN Fund is a ring-fenced fund. It comprises both life and pensions business, mainly written in the UK but also includes a very small amount of overseas business. Around 50% of the reserves relate to the pensions business, which comprises regular premium conventional with-profits deferred annuities and single premium non-profit compulsory pension annuities. The life insurance contracts are primarily regular premium conventional with-profits endowment assurances, withprofits deferred annuity products and non-profit compulsory purchase annuities. Unit-linked products are also written with a small exposure to unitised whole of life business Details of the gross reserves for the RNPFN Fund business by product class as at 31 December 2014 are set out in Table 3.3. Table 3.3: RNPFN Fund - Summary of Gross Reserves as at 31 December 2014 UK Life UK Pensions Overseas Total Product Description '000 '000 '000 '000 Conventional with-profits 266, , ,281 Accumulating with-profits 33,370 33,370 Non-linked non-profit 29, ,236 1, ,871 Unit-linked 126, ,268 Total 455, ,259 1,209 1,033,790 Source: PRA returns as at 31 December 2014 Capital and Risk Management LVFS capital management policy under Solvency I is to retain sufficient capital to meet the following key objectives: To ensure financial stability; To enable LVFS group strategy to be developed; To give confidence to consumers and other stakeholders who have a relationship with the Group; and, To comply with capital requirements imposed by the UK regulator, the PRA The capital management policy is reviewed annually and monitored against certain benchmarks to ensure that there is sufficient capital within LVFS. In the event that the capital position becomes threatened there are a number of management actions that can be implemented LVFS maintains a capital support facility for the RNPFN Fund, whereby it is required to provide capital support to the RNPFN Fund if the fund fails to meet its capital resource requirements on a Pillar 1 Peak 1 basis. This support is limited and decreases in line with the run-off of the RNPFN s with-profits business. While undrawn a support charge of 1% p.a. of the available capital support (the maximum aggregate capital support less any contingent loan capital already drawn down) shall be payable by RNPFN to LVFS each year. The maximum aggregate capital support amounted to 64.8 million as at 31 December 2014, reduced from its original figure of 100 million. The RNPFN Fund has never drawn on the capital support facility LVFS also has an agreement to provide a capital buffer support facility to LVGIG of 20 million to cover any regulatory capital shortfalls within this business. Reinsurance LVFS has in place a number of external reinsurance treaties. Its protection business is reinsured with Gen Re, Hannover Life Re, Munich Re, Pacific Re, RGA and Swiss Re. Liverpool Victoria Friendly Society Page 28 of 79

29 3.44. LVFS also has in place two annuity mortality swap treaties. The longevity risk for the RNPFN annuity business is 100% reinsured with Hannover Re, on a guaranteed mortality basis, (reserves of 25.2 million and premiums of 24.4 million). This covers all business in-force as at 1 January 2008 and any new annuities set up in the RNPFN Fund thereafter. A treaty with RGA provides a mortality swap with 60% of all LVFS non-profit life impaired annuity business and standard annuity business, on a guaranteed mortality basis (reserves of 42.6 million) In addition, LVFS executed a longevity hedge with Swiss Re in 2012 to insure against longevity risk relating to its Employee Pension Scheme. The longevity hedge not only covers the longevity risk relating to those pensions in payment as at 31 December 2011 (over 5000 pensioners), but also for deferred pensioners over the age of 55. The agreement is supported by a collateral arrangement, and the party in the loss position will post collateral, this is expected to be LVFS in the early years. Subordinated Debt In May 2013, LVFS issued 350 million of tier 2 subordinated debt with a fixed rate of interest of 6.5% p.a. payable up to May 2023 and at the Reset Rate, (being the then 5 year gilt rate plus the initial margin plus the set-up margin) thereafter The debt may be redeemed before 2043 on the first call date, May 2023, or any interest payment date (due in May of each year) thereafter. It is regarded as lower tier 2 capital for the purposes of Solvency I Interest payments of million will rank ahead of the Mutual Bonus (described in section 3.58 to 3.60) but behind normal policyholder annual bonus. Furthermore, in the event that LVFS defers payment of interest due on the debt then it is not permitted to declare any Mutual Bonus to its members The impact of the issue is to improve the solvency and liquidity position of LVFS, but also means that whilst LVFS as a friendly society is owned by its members, it also has bondholders. The rights and claims of these bondholders rank after the policyholders in the event of LVFS winding-up. Financial and Actuarial Management I have set out the regulatory requirements for the financial and actuarial management of a business conducting life insurance in sections 2.30 to 2.32 above, and they apply equally to LVFS Before considering the financial condition of LVFS, I consider the way in which the main classes of business are managed as this has a direct impact on the overall financial management of LVFS. Financial Management of Unit Linked Business There is no universally standard approach to managing or setting unit prices for linked business. Many firms reserve the right to exercise discretion in setting unit prices. However, this is typically in the context of agreed, documented procedures that cover the approach applied in different conditions and under different fund positions LVFS maintains established unit pricing methodologies for each of the distinct linked business categories (principally reflecting the tax status of the contract). These practices maintain the historical terms and conditions including, inter alia, the approach to valuing underlying assets, the maintenance of different types of units, changes to the pricing basis depending upon whether the fund is expanding or contracting and the frequency of cashing in surplus units The charges imposed on some unit linked policies may be subject to review by LVFS. Although the charges are reviewed regularly, I understand that LVFS has not imposed any changes to the charges actually applied to unit-linked policies during However, LVFS believes that it has applied procedures such that it has maintained the right to impose increased charges in the future, if necessary. Liverpool Victoria Friendly Society Page 29 of 79

30 Financial Management of With-Profits Business LVFS has three PPFMs as follows: WP business within the Main Fund (excluding Flexible Guarantee Bond); Flexible Guarantee Bond Business; and, RNPFN Fund The key principles set out in LVFS PPFMs address the following topics: The amount payable under a policy; Setting annual bonus rates; Setting final bonus rates; The approach to smoothing; Investment strategy; Business risk; Allocation of expenses; Management of the inherited estate; and, Volumes of new business and arrangements on stopping taking new business The Principles and Practices are summarised in Appendix 5. For the current purpose, a more limited discussion of the key aspects of the PPFM suffices. The summary which follows and the fuller summary in Appendix 5 are my interpretation for the purpose of assessing the Scheme and it is not intended to alter the content or application of the PPFM by LVFS. PPFM excluding FGB The principal element in determining payouts for all types of with-profits contract issued by LVFS is the calculation of the asset share. The asset share is an accumulation of the premiums paid under a contract with investment returns but after deducting the expenses allocated to the policy, the cost of death benefits, the cost of guarantees (if permitted). LVFS also allows for profits arising from certain business risks. This is reflected in the Mutual Bonus LVFS has declared a Mutual Bonus since The Mutual Bonus is a mechanism through which LVFS can distribute profits from business risks and the level and form of this bonus is determined by the Board after due consideration of the performance of LVFS trading businesses and LVFS capital position The Mutual Bonus is payable to those with-profits policyholders invested in the Main Fund, it is not payable to the with-profits policyholders within the RNPFN Fund. The Mutual Bonus is not guaranteed and is within the discretion of the LVFS Board. A mutual bonus of 1% p.a., allocated via the final bonus, is targeted; this amounted to 24 million in Investment strategy is a major element in the performance of with-profits policies and LVFS aims to invest its assets in a diversified portfolio to maximise long term returns, consistent with the investment strategy communicated to policyholders. However, the strategy must have regard to the nature of the liabilities and the need to meet guarantees and to maintain an adequate level of capital in line with the risk appetite set by the Board. In practice, this means that LVFS will aim to optimise the return to its with-profits members whilst having due regard to the financial position of LVFS, and its aim to match the guarantee liabilities more closely under certain contracts such as With-Profits Pension policies, if necessary. LVFS holds a different investment mix of assets in the inherited estate to that backing the policy asset shares The current asset allocation provided on the website for the main with-profits fund backing the policy asset shares is given in Table 3.4 below: Liverpool Victoria Friendly Society Page 30 of 79

31 Table 3.4: Investment mix for the main with-profits fund Asset Type Target Allocation (% of with-profits assets) Equities 49.5 Property 9.1 Fixed interest securities 39.9 Deposits and cash Investments may include assets which are not likely to be traded readily because they are used for business purposes ( strategic assets ). Only the GI Business is recognised as a strategic asset. LVFS does also maintain some assets that would not normally be traded such as its trading subsidiary companies of LVIC, HICO, LVLC, LVER, NMPTL and LVLS, and contingent support arrangements within the LV group. The retention of assets that are not normally traded is reviewed annually to ensure that their existence (and scale) does not have adverse effects on the with-profits policyholders. LVFS does not impose a fixed limit on the scale of its investments in assets that are not normally traded, but seeks the formal approval of the Board before investing in any new or novel investment instruments. Strategic assets are not used to back policy liabilities directly but are allocated to the estate The charges LVFS applies to unitised with-profits life and deferred annuity policies are in line with those set out in the policy conditions. Expenses charged to the asset shares for CWP business (other than with-profits annuities) are determined so as to reasonably reflect the underlying experience of LVFS. These expenses include the acquisition, administration costs, investment and claims costs relating to the with-profits policies and are in line with the costs borne by LVFS in respect of such policies. Any differences between expenses charged and incurred are met by the inherited estate. LVFS reserves the right to change the manner in which it applies charges or apportions its actual expenses in light of new information or changes in economic conditions Payouts are determined by reference to the asset share and are subject to smoothing. Investment returns are smoothed over a retrospective five-year period for conventional endowment with-profits policies and over a retrospective two-year period for unitised with-profits respectively. Asset shares also play a role in setting annual bonuses since these are set with the aim of maintaining a margin between the value of the guaranteed benefits and the value of the asset share. For CWP whole-oflife policies, smoothing is applied by limiting the change in the payout at a single review of final bonus rates rather than by smoothing the investment returns used to calculate asset shares. The current approach for CWP policies is that for similar policies of the same original term maturing in successive years, payouts do not change by more than 20% from one year to the next, excluding amounts added in respect of Mutual Bonus Generally, the annual bonuses will result in an increase to the level of guaranteed benefits under a with-profits contract. However, annual bonus rates may be reduced in the future if it appears that asset shares are unlikely to be sufficient to meet the cost of existing potential guaranteed benefits For UWP contracts, the annual bonus rate is set at broadly 50% of the expected future investment returns, reduced for taxation charges and these may be reviewed more frequently than annually if required. There is no final bonus scale as such since the final bonus for each policy is determined individually by direct reference to the underlying smoothed asset share The level of the inherited estate is reviewed annually to determine that it has not become excessive having regard to the capital needs of its in-force business and its business plans. If it is determined that excess surplus exists then action is taken to reduce it LVFS only accepts new business on the basis that it is written on terms such that it is likely to have no adverse effect on the in-force with-profits business. Each year the Board sets the maximum volumes of new business that may be written to preserve the financial strength of LVFS. Liverpool Victoria Friendly Society Page 31 of 79

32 PPFM Flexible Guarantee Bond The FGB has its own PPFM but these do not differ materially from the main PPFM discussed above. The differences reflect more the need to address the specific features of this contract Amounts payable to policyholders are based on asset shares. No annual or final bonus are added, instead the value of the units allocated to the policy at outset is accumulated in line with the asset share through the unit price. Market Value Reductions will only be applied to reflect movements in the value of assets held by the fund The charges applied are those set out in the policy conditions or key features documents. However, the basis on which LVFS applies charges to or apportions its actual expenses may be changed in light of new information and changes in economic conditions. RNPFN Fund PPFM The RNPFN Fund is a closed with-profits fund managed to its own resources and with a planned equitable distribution of the inherited estate over the lifetime of the remaining eligible with-profits policies therein Eligible policies are those that were in force on 10 July The investment return applied to asset shares is that achieved by the RNPFN Fund on the assets allocated to back the asset shares. The investment policy is determined as if RNPFN were a single entity but with due regard to the capital support facility from LVFS. The investment policy is set as if the Maximum Aggregate Capital Support, as defined by the Scheme, at any time was included in the RNPFN Fund For CWP and maintenance expenses under UWP bonds, the charges applied are equal to the expenses charged to the RNPFN Fund, (which are determined in accordance with the RNPFN Scheme) apart from ONE ISA policies and the remaining UWP policies where the maintenance expenses are equal to the charges set out in the policy conditions No charge is applied for the cost of guarantees or for the use of capital in its asset share calculations in the RNPFN Fund, other than costs implicit in the charges on UWP policies. Appropriate deductions are made from asset shares to cover the mortality costs Final bonuses are reviewed at least annually with regard to asset shares, smoothing and the size of the inherited estate and the current and projected financial strength of the RNPFN with due allowance for the capital support available pursuant to the Scheme. It is noted that the capital support is not intended to be distributed to policyholders. Governance of with-profits business Firms operating a with-profits fund must implement scrutiny arrangements to assess compliance with the PPFMs and, more generally, that with-profit policyholders have been treated fairly. The arrangements should allow for an unbiased and sufficiently independent assessment to be undertaken. The regulations permit a number of models for this arrangement LVFS has adopted a With-Profits Committee ( WPC ) whose role is to provide this judgement. The WPC is comprised of two non-executive directors of LVFS, the managing director of LVFS retirement solutions business and two independent persons, one of whom is the chair (and who is suitably experienced in the management of with-profits business). The WPC is supported by the LVFS WPA, who is an employee of LVFS. The WPA provides further scrutiny and advises on how the with-profits business should be managed to ensure fairness and equitable treatment for withprofits policyholders. The WPC also provides regular guidance to the Board on these matters The LVFS Board produces an annual report to with-profits policyholders on compliance with the PPFM, including a statement from the WPA The Board, the WPC and the WPA have all concluded that the Society materially complied with the obligations set out in its PPFM during Liverpool Victoria Friendly Society Page 32 of 79

33 Financial Position Pillar I have described the regulatory capital requirements applicable to incorporated friendly societies in sections 2.65 to 2.70 above LVFS reports its statutory financial position to the PRA under the Pillar 1 Peak 1 regime and Pillar 1 Peak 2. However, it is also required to report privately to the PRA under the Pillar 2 regime on its own assessment of the risks borne by the company and the capital required to meet those risks. My consideration of the financial condition addresses primarily the published Pillar 1 statutory figures but also I have considered in general terms the risks borne by the company and which are considered in the Pillar 2 analysis and have had regard to the results of these calculations. The following sections consider the reported Pillar 1 position as at 31 December 2013 and 31 December The financial position of Main Fund as at 31 December 2014 and 2013 is shown in Table 3.5 and the analysed financial position of LVFS as at 31 December 2014 is shown in Table 3.6. Table 3.5: Main Fund - Pillar 1 Solvency Position as at 31 December million Admissible assets 9,264 7,906 Mathematical Reserves 7,467 6,151 Current liabilities Total Liabilities 8,198 6,798 Peak 1 capital resources 1,066 1,108 Subordinated debt Capital resources (A) 1,413 1,454 LTICR WPICC Capital requirement for regulated related undertakings Capital requirement (B) CRR Cover Ratio (A/B) 195% 198% Source: AFH Valuation Report 2013 and 2014 Liverpool Victoria Friendly Society Page 33 of 79

34 Table 3.6: LVFS & RNPFN Fund Pillar 1 Solvency Position as at 31 December 2014 million Main Fund RNPFN TOTAL Admissible assets 9,264 1,275 10,539 Mathematical Reserves 7,467 1,004 8,471 Current liabilities Total Liabilities 8,198 1,027 9,225 Peak 1 capital resources 1, ,314 Subordinated debt Capital resources (A) 1, ,660 LTICR WPICC Capital requirement for related undertakings Capital requirement (B) CRR cover ratio (A/B) 195% 100% 171% Tables 3.5 and 3.6 demonstrate that LVFS comfortably covered its regulatory capital requirement of 724 million, as at 31 December 2014 and that both the quantum of capital resources and the cover for the CRR were broadly unchanged from 31 December This presentation includes contributions to both capital resources and capital requirements relating to the subsidiary companies The capital resources shown in Tables 3.5 and 3.6 include the value of the subordinated debt raised in The terms of the debt allow it to be included as lower Tier 2 capital since its repayment is subordinated in the solvency position of LVFS. The effect of the subordinated debt in 2012 immediately improved the CRR cover (which had been 140% as at 31 December 2012). In this presentation of solvency, the subordinated debt provides additional comfort As noted in 3.85, the capital resources also include an allowance for LVFS subsidiary companies. This presentation does not assess whether the capital would be available to LVFS in the event of a stress arising (since the stress may also impact the subsidiary and the capital may not be releasable). However, I note that LVGIG has begun to pay dividends on a regular basis to LVFS which means that there is a regular flow of capital into LVFS and capital is not being retained in the subsidiaries The CRR is a combination of the LTICR and the WPICC. Whilst it is not a risk based method, the parameters vary according to the nature of the risk measure. In particular, linked business attracts a very low CRR element since the risks are largely borne by the policyholders, and the CRR elements relate to market risk and the insured risks of longevity, mortality, morbidity and expenses The WPICC is part of the CRR but since it in effect relates to the discretionary powers of LVFS to add bonus in the future, the WPICC remains available as risk absorbing capital in the Main Fund and the RNPFN Fund in respect of business in these funds. Financial Position Pillar 2 Risks inherent in LVFS business model Whilst the Pillar 1 presentation provides a degree of comfort in the financial position of LVFS, it does not address the nature of the risks inherent in the business model. The Pillar 2 assessment does address the capital needs of the firm from a variety of different risk exposure perspectives. As noted in 2.69, the Pillar 2 assessment is provided to the PRA privately and its content may not be Liverpool Victoria Friendly Society Page 34 of 79

35 published. I have considered the detail of the report and have considered the nature of the risks and their relative contribution to the risk profile of LVFS. The following sections consider the risks qualitatively and the effect which they have on LVFS and its policyholders The approach to determining the Pillar 2 capital requirement applies certain stress tests to each of the risk exposures and measures the impact on the assets and liabilities of LVFS business. The stresses represent an extreme event expected to occur on a 1 in 200 basis over a 1 year timeline. These stresses and associated aggregation of risk assumptions, to allow for diversification of risk, have been derived internally by LVFS using its own methodology for both the life and the general insurance business. The Pillar 2 assessment has been based on the ICA+ regime, using LVFS proposed, but unapproved, Solvency II internal model, which is viewed as an enhancement to the standard ICA submission. Solvency II is discussed further at below I note that included in the capital resources within the ICA assessment is an allowance for the value of the LV Capital plc subsidiary and the subordinated debt issued in May The value of the GI Business is determined as its distressed net asset value capped at its value as at 31 December As such, there is no allowance for any GI stresses in the charts contained in Figure Although no quantitative analysis may be provided here, I have considered the results of the Pillar 2 assessment. I have considered the major sources of risk which contribute to the Pillar 2 capital requirements, both before and after allowing for diversification (which is a measure of how likely or unlikely different risk events occur together). The following charts demonstrate the relative importance of the major risk categories both before and after allowing for diversification. Figure 3.2: Pillar 2 as at 31 December Risk capital distribution by source Source: ICA Results Summary_201312_Board_Final Liverpool Victoria Friendly Society Page 35 of 79

36 Market Risk Market risk arises from the movement in asset values not being matched by the movement in liability values. This covers market value falls (of equity and property assets), interest rate movements or widening of corporate bond credit spreads which will change the value of fixed interest assets. The principal manner in which this affects LVFS is the impact on corporate bond holdings of widening credit spreads and/or migration of investments from one credit rating to another. These corporate bonds are used to back the annuity business. Its high investment exposure to equity and property holdings both in relation to the Heritage business and the equity release portfolio is reflected in the large contribution made by equity and property to the undiversified market risk LVFS has a variety of derivative instruments used to mitigate market risk. Instruments used include options, futures, forwards, interest rate and cash-flow swaps. It also mitigates the interest rate risk with the use of asset and liability matching techniques. During 2014, LVFS implemented a framework to permit its Group Asset Liability Committee ( Group ALCO ) to manage Group-level aggregate market risk exposures within a defined tolerance in a more structured manner. Insurance Risk The insurance risk category covers longevity, persistency, mortality and morbidity risks. The largest of these components for LVFS, at about 40% of the undiversified insurance risk, is in respect of the longevity risk. This is to be expected given the nature of LVFS business and the focus on at retirement products. LVFS mitigates some of the longevity risk through its mortality swap reinsurance agreements % of LVFS undiversified insurance risk relates to persistency risk following the introduction of the mass lapse test within this category for the 2013 assessment Morbidity and mortality risk account for in the region of 10% of the undiversified insurance risk. This is to be expected and reflects LVFS focus on protection business. For those blocks of business that include reviewable premiums, LVFS is able to mitigate the impact of worse morbidity experience than expected by amending the premiums charged to policyholders. For those blocks of business where the premiums are guaranteed, the ability to mitigate worsening mortality experience is limited to a certain extent. In addition, LVFS cedes much of the protection mortality risk to a number of reinsurers. Operational Risk Operational risks represent the impact of failed processes and procedures and may include the effects of past operations, e.g., compensation or fines in respect of mis-selling practices. Risks from LVFS Subsidiaries As noted in 3.1, LVFS has a number of subsidiaries which help deliver its strategy. These are standalone companies and would not automatically release capital if required by LVFS LVFS subsidiary businesses make a contribution to the Pillar 1 and Pillar 2 capital resources. As such the LVFS capital solvency position is exposed to a certain extent to the risks to which the GI business is exposed. These include changes in the overall profitability of the GI business due to the cyclical nature of the market, market risks relating to corporate bond and equity holdings, and insurance risks (e.g., emerging risks such as those associated with periodical payment orders ( PPO )) There are two ways in which the GI business strategic asset may be recognised within the Pillar 2 calculations, on a Reporting Basis and a Net Asset Value Basis. Currently, the ICA submission to the PRA is calculated using the Reporting Basis The Reporting Basis treats the GI business as a subsidiary owned by LVFS, where the distressed enterprise value 3 of the GI business (capped at its level of 472 million as at 31 December 2010, as 3 An estimate of the market value of the GI subsidiaries in stressed conditions. Liverpool Victoria Friendly Society Page 36 of 79

37 agreed with the Board and the PRA) is brought in as an addition to available capital. In the Reporting Basis there is no explicit allowance for the GI risks when calculating the capital requirements and so the pre and post diversified capital requirements are unchanged by the impact of the GI business, which solely acts to increase the amount of capital available to meet these capital requirements. The relative capital requirements under the Reporting Basis is given in section 3.93 above The Net Asset Value Basis treats the GI business in a manner similar to that of a composite insurer where both life and non-life business are written. This is more akin to the likely treatment under Solvency II. The available capital for both the life and the GI business are combined. The capital requirements are then determined allowing for each of the individual GI risks (including their interaction with the risks within LVFS). The relative capital requirements under the Net Asset Value Basis are given in Figure 3.3 below The Net Asset Value Basis has been applied as the more appropriate representation of the risks underlying the business entities and is the more onerous of the two bases. Figure 3.3: Pillar 2 as at 31 December Risk capital distribution by source including GI Liverpool Victoria Friendly Society Page 37 of 79

38 Under COBS R, the Board is required to confirm that holding certain strategic investments has no adverse effect on the interests of its with-profits policyholders. During 2013, the Board concluded that LVFS holding in its general insurance subsidiaries still met the COBS R criteria, but that this may not be the case in the future, and so the position of the general insurance subsidiaries within the group is to be kept under careful review LVLC comprises a small portfolio of business of non-linked non-profit business, which is in run-off. The company is well capitalised with a capital coverage ratio of 433% on a Pillar 1 basis as at 31 December I do not consider there to be any material risks to the overall solvency of LVFS resulting from the LVLC subsidiary LV Banking business closed in 2010 however remaining obligation and liabilities of 5.1 million relating to potential payment protection insurance ( PPI ) compensation claims were transferred to LVFS. LVFS believes the risk of there being a requirement to increase the provision for ( PPI ) misselling cases to be remote, and I accept this to be a reasonable proposition LVFS maintains two defined benefit staff pension schemes, the LVFS staff pension scheme and the Ockham pension scheme which were closed to future accrual on 1 July As such, LVFS is exposed to additional longevity and interest rate risk and the requirement to provide further contributions to these pension schemes should a funding deficit arise LVFS mitigates its exposure to longevity risk from the LVFS pension scheme through a longevity hedge, but remains exposed to longevity risk since the hedge does not cover all of the scheme members. Interest rate risk is managed within the LVFS ALM framework. As at 31 December 2014, a surplus of 10 million existed in the base funding position of these pension schemes. Solvency II LVFS will also need to comply with Solvency II, the new risk based regime with effect from 1 January 2016, which was outlined in 2.94 to I understand that LVFS is well advanced in its planning for the implementation of Solvency II, and, in particular, that it has identified the steps needed to implement successfully the requirements of Solvency II Pillar 1 regarding the establishment of technical provisions and capital requirements. However, LVFS continues to analyse the requirements and is refining the assumptions that underpin the calculation of the best estimate liabilities in the technical provisions to ensure these reflect emerging experience in a capital efficient manner. Liverpool Victoria Friendly Society Page 38 of 79

39 LVFS intends to apply the Standard Formula in assessing its Solvency Capital Requirement ( SCR ) from 1 January The Standard Formula specifies the methodology for determining the SCR. However, in common with many other UK life insurers, LVFS has concluded that the Standard Formula will be unduly onerous and constraining upon its business activities if it does not make use of some of the adjustments permitted in the Solvency II methodology LVFS has made an application to the PRA in July 2015 for the use of the transitional arrangement in respect of technical provisions. This transitional arrangement permits the impact of the increase in technical provisions when moving from a Solvency I to a Solvency II calculation environment to be phased in over 16 years. This will have an immediate beneficial effect on the solvency position of LVFS as at 1 January 2016, if the application is approved by the PRA, by increasing the available capital resources under Solvency II. However, the capital benefit which is gained via this measure will reduce each year as the impact of the transitional arrangement unwinds: the future cash flows from the business will be required to cover the reduction LVFS has also made an application to the PRA in July 2015 to use the Volatility Adjustment ( VA ) for annuity and with-profits lines of business with effect from 1 January The use of the VA, if approved by the PRA, will result in the modification of the basic risk free rate used in the calculation of the technical provisions. The reduction in the technical provisions by this means will interact with the benefit obtained from the use of transitional arrangement referred to in 3.115, such that the initial amount which will be used under the transitional arrangements will be reduced by the same amount as obtained by the use of the VA. However, the benefit from the use of the VA does not reduce in the way that the transitional arrangement does (although the amount of the benefit will vary as the VA itself will be reset quarterly by the regulator). The benefit from the use of the VA is therefore longer lasting Consideration of an application by the PRA could take up to 6 months under the terms of Solvency II, although I understand that the PRA is aiming to apply a much shorter timescale to allow firms to manage the implementation process with greater certainty. As at the date of the Scheme Report, no detailed feedback has been provided by the PRA. However, I must form a view as to whether the application materially meets the requirements of the PRA to achieve approval and also the quantum of the benefit which LVFS will derive on approval I have considered the submission which has been prepared on a best endeavours basis and I believe that it has been prepared in line with the guidance issued by the PRA. On the basis of this review, I consider it likely that LVFS will be granted approval to use the transitional arrangement and the VA materially to the extent sought On the basis of LVFS obtaining approval to use both measures and to the extent that it is granted the quantum of benefit anticipated, in my opinion, LVFS would be expected to satisfy its capital requirements determined on a group basis (which recognises the impact of the subsidiary insurance companies on a fully stressed Solvency II basis). For completeness, I note that if the approval for transitional relief is not obtained or is severely restricted, LVFS will be unlikely to be able to meet its solvency capital requirement and would be subject to regulatory oversight while it prepared a recovery plan, as required under Solvency II As noted in 3.118, LVFS has prepared its applications on a best endeavours basis. In particular, the approach adopted by LVFS has been consistent with its approach in the current Pillar 2 regime. This is a valid starting point and is in line with the general intentions of the PRA guidance. LVFS has recognised that a different interpretation of the relevant Solvency II rules may result in a reduction in the available capital resources to cover the SCR LVFS has investigated options open to it in the event that the available capital resources are reduced after discussion with the PRA. These options include management actions which may be exercisable by LVFS in the normal course of its business. These include re-assessing the risk exposures and capital requirements related to some asset holdings, reinsurance arrangements and also the management of options in insurance liabilities. At the date of the Scheme Report, LVFS has instigated the required governance procedures to ensure that these actions can be successfully implemented to the extent necessary by 31 December The expected effect of these actions will generally improve the capital position but will also counteract the impact of any adverse interpretation of the Solvency II rules. Liverpool Victoria Friendly Society Page 39 of 79

40 LVFS has investigated further actions which may be applied, if necessary. LVFS has identified that the risks in the GI business could be mitigated by entering into reinsurance arrangements. LVFS has not used reinsurance to any material extent in the GI business but a significant capital improvement could be gained from doing so. Use of reinsurance in this way will reduce future earnings from the GI business but the expected reduction would be small relative to the capital advantage. I have been informed by LVFS that it is currently conducting due diligence on an appropriate reinsurance arrangement that it expects to be able to implement as at 31 December 2015, if required, to ensure that the available capital resources satisfy its internal capital standard. I place a material reliance on this arrangement being implemented appropriately if required to meet LVFS chosen capital standard LVFS has also identified that the investment portfolio backing the GI business could be de-risked with a capital benefit arising, but offset by reduced future earnings within the GI business and therefore the capability of the GI business to add value to LVFS. This management action is capable of being implemented readily in moderately stressed conditions and I would not consider it essential that it be applied immediately (all else being equal) The effect of the transitional arrangement reduces over time and the business must assess how it will fund the increase required in its capital base. In the case of a mutual such as LVFS, this will largely be achieved from profits arising, but could also be from external capital raising in similar fashion to the subordinated debt already raised. Although the funding from future cash flow is likely to be sufficient to replace the reductions in capital resources resulting from the transitional arrangement noted above, this could be impacted by the implementation of the management actions identified above. If the profitability of the GI business, in particular is maintained, the funding of the transitional arrangement run-off from cash-flow should be achievable LVFS intends to seek approval for the use of the matching adjustment for part of its annuity business (which will not be backed by equity release loans). It intends to apply for the matching adjustment by the end of 2015, but approval to use it may only be forthcoming in mid-2016 (in line with Solvency II approval schedules). Although LVFS must develop the necessary operational framework and demonstrate that it will be able to satisfy the monitoring tests which relate to the use of the matching adjustment, I see no reason for LVFS being unable to do so. If approval is obtained, it will benefit LVFS Solvency II capital position materially LVFS intends to develop and seek approval for a full internal model to apply from January 2017, which would produce further capital improvement. This will also require the PRA s approval In this Scheme Report, I have placed no reliance on LVFS obtaining approval for the matching adjustment, nor on the intended development of the full internal model in completing my review. LVFS has not yet established an appropriate capital policy to be used in conjunction with an internal model In my opinion, subject to the approvals noted in and being granted by the PRA, materially as requested, LVFS should be able to meet its new target capital standard at 1 January However, in the interim period prior to obtaining approval for the use of the matching adjustment in 2016 and its internal model in 2017, its business plans could remain vulnerable in moderate stress events. Liverpool Victoria Friendly Society Page 40 of 79

41 4. OUTLINE OF THE SCHEME Rationale for the Scheme 4.1. The rationale for the Scheme is that it provides an effective long term solution to managing the declining long term business in TPS and facilitates the distribution of its capital equitably to TPS Qualifying Policyholders. LVFS is expected to benefit from the Scheme by virtue of the wider business base over which to spread costs and also access to a wider marketing population. Detailed Description of the Scheme 4.2. Defined terms used in this section follow the definitions set out in the Scheme. Effective Date 4.3. The Effective Date is the time and date upon which the Scheme will be implemented and is expected to be 00:01 on 1 April Fund Structure of LVFS 4.4. LVFS will create a new sub-fund, the Teachers Assurance Fund ( TA Fund ) in its Main Fund on the Effective Date. The TA Fund will be for the exclusive benefit of with-profits policyholders transferred to the TA Fund by the Scheme (i.e., the surplus in the TA Fund will be allocated only to the withprofits Transferred Policies). Conversely, the Scheme does not give the TA Fund, or the with-profits policyholders allocated to it on the Effective Date, any rights to share in the profits or capital of any other fund maintained by LVFS 4.5. The terms of the Scheme will not prevent LVFS from creating other sub-funds in its Main Fund in the future or from establishing and maintaining other long term business funds, including writing, acquiring or reinsuring business into its long term business fund or sub-funds. Transfer of Assets, Liabilities and Policies and their Allocation to Funds 4.6. All of the business of TPS will be transferred to LVFS on the Effective Date (the Transferred Business ) At the Effective Date, the assets, liabilities and policies of TPS (respectively Transferred Assets, Transferred Liabilities and Transferred Policies ) will be transferred to LVFS and allocated to the TA Fund Immediately following the Effective Date, the Transferred Non-profit Business allocated to the TA Fund will be re-allocated to the Main Fund. For this purpose, all non-profit policies and related liabilities will be re-allocated along with assets to the value of the Pillar 1 Peak 1 reserves on the Effective Date. In practice, an anticipated value (expected to be 400 million, approximately) will be transferred initially and the amount updated to the position at the Effective Date shortly thereafter. Relevant reinsurance contracts and assets will also be re-allocated In addition, immediately following the Effective Date, ownership of TAC, TMS, TFS and TPL (the Designated Subsidiaries ) and Goodwill 4 arising from the transaction will be transferred to the Main Fund from the TA Fund Concurrently with the re-allocation of the non-profit business, the Designated Subsidiaries and Goodwill to the Main Fund, LVFS will transfer an amount in cleared funds (the Contribution ) into the TA Fund. The amount of the Contribution will be the value of the expected future profits arising from the in-force non-profit business re-allocated to the Main Fund, plus the net asset value of the Designated Subsidiaries, plus an agreed amount of Goodwill. For this purpose, the net asset value of the Designated Subsidiaries excludes any value ascribed to TPS from its pension arrangements. 4 Goodwill relates to TPS s new business functions, infrastructure, product design, brand and ongoing franchise arrangements (to which a value of 4.3 million has been ascribed). Liverpool Victoria Friendly Society Page 41 of 79

42 In practice, an anticipated value (expected to be 24.4 million, approximately) will be transferred initially and the amount trued-up shortly thereafter. Administrative, Investment and Reinsurance Arrangements TPS s administration agreement with TMS will be transferred to LVFS under the terms of the Scheme. The administration of the Transferred Policies will be provided initially using the systems and processes employed by TMS but it is intended that this will transition onto LVFS systems and processes as soon as it is practical to do so after the Effective Date. There will be no material changes to the service level standards Reinsurance arrangements maintained by TPS with third parties on the Effective Date will be transferred to LVFS under the terms of the Scheme The IMA with Blackrock and JP Morgan (to the extent that these remain in force at the Effective Date) will transfer to LVFS and Blackrock and JP Morgan (as the case may be) will provide investment services to the TA Fund until the termination of the agreement in 2018 or earlier in accordance with the contract terms). Management of the TA Fund The TA Fund will be maintained as a separate fund with accounting records sufficient to identify the assets and liabilities attributable to it and related cash-flows No new business will be transacted by the TA Fund but policyholders may pay additional regular premiums if entitled to do so under the terms of a Transferred Policy The TA Fund must be maintained until at least the eleventh anniversary of the Effective Date. Thereafter, LVFS may cease to maintain the TA Fund but must cease to maintain it when the TA Fund becomes less than 20 million In ceasing to maintain the TA Fund, the business of the TA Fund will be transferred to the Main Fund but LVFS must ensure that any inherited estate so transferred remains available exclusively for distribution to the Transferred With-Profits Policies or is otherwise attributed to them on terms that will not have a materially adverse effect for them The TA Fund will consist of with-profits business only and LVFS will maintain a separate set of PPFM in respect of it (the TA Fund PPFM ) The TA Fund PPFM will be consistent with the PPFM of TPS in all material respects except to the extent required to reflect the transfer of the entire business of TPS to LVFS and its closure to new business. The TA Fund PPFM shall contain the following principles (the "Core Principles"): a) the TA Fund, including its investment and bonus policy, shall be managed in a sound and prudent manner, having regard to the interests and reasonable expectations of the TA Fund policyholders. In determining the interests and reasonable expectations of the TA Fund policyholders, the LVFS Board shall have regard to the management of TPS prior to the Effective Date, to the terms of the Scheme, the statements made in the Teachers Circular and in the reports made by the TPS AFH, the TPS WPA and the Independent Actuary on the Scheme; b) the TA Fund shall be managed without regard to the financial position, performance and experience of the rest of the LVFS Long-Term Insurance Fund or any other LVFS Group Company or any assets and liabilities thereof and shall have no exposure to profits and losses arising from experience or business activities unrelated to the TA Fund. The business of the LVFS Long-Term Insurance Fund other than the TA Fund shall be managed without regard to the financial position, performance and experience of the TA Fund or any assets or liabilities thereof and shall have no exposure to profits and losses arising from experience or business allocated to the TA Fund. Without prejudice to the generality of the foregoing, the inherited estate of the TA Fund shall only be used to support the business of LVFS which is not allocated to the TA Fund or of any other LVFS Group Company on terms other than arm's length terms (as reasonably determined by the LVFS Board) in circumstances where this is required by law or regulation; and Liverpool Victoria Friendly Society Page 42 of 79

43 c) the TA Fund will be managed with the objective of distributing all the assets of the TA Fund (including the inherited estate of the TA Fund) in as equitable manner as possible over the remaining lifetime of the Transferred With-Profits Policies allocated to the TA Fund The Core Principles shall only be amended with the approval of the Insurance Regulators (i.e., the PRA and the FCA, or their successors) and of the LVFS With-Profits Committee A Run-off Plan has been developed and submitted to the PRA as a framework for distributing the inherited estate consistently with these Core Principles. Charges to be applied to the TA Fund Taxation The TA Fund s liability to tax will be determined, so far as is practicable, as if the TA Fund was a standalone friendly society. The TA Fund is not to be unreasonably disadvantaged by any agreement reached between any tax authority and LVFS that also relates to other business of LVFS (other than the TA Fund). Charges for administration Administration expenses will be charged to the TA Fund. For the first year after the Effective Date, the TA Fund will be charged the actual expenses incurred by LVFS in providing the services but subject to an Aggregate Amount of million increased by the change in the Retail Prices Index ( RPI ) plus 1% pa from 31 December 2013 to the Effective Date. ( million represents the cost incurred by TPS in managing its with-profits business in 2013.) From the start of the second year through to the end of the eleventh year, following the Effective Date, the TA Fund will be charged a monthly amount for each policy in force. The fixed fee will be the monthly equivalent of 35 pa increased by the change in RPI plus 1% pa from 18 December 2014 to the month prior to the relevant charging month At the end of the sixth year, if the charges then being applied to the TA Fund are more than 200% of the unit costs then being applied to equivalent LVFS with-profits contracts, then LVFS will consider taking action to reduce the fees applied to the TA Fund. After the eleventh year, the TA Fund will be charged the actual costs incurred in providing the administration services (allowing for any unrecoverable VAT). The amount charged will be subject to consultation with the LVFS WPC Investment management fees (related to the Blackrock agreement or any successor arrangement) and dealing expenses will be applied on an incurred basis. An appropriate allowance for unrecoverable VAT may be made. Other charges to the TA Fund The TA Fund will remain responsible for contributions required to be made to the Teachers Group Pension Scheme The TA Fund will also be responsible for certain redundancy costs (up to limits specified in the Scheme) The TA Fund will also be responsible for fines or compensation payments imposed by the regulators where these relate to events occurring prior to the Effective Date. Governance of the TA Fund The governance arrangements for the TA Fund will be incorporated into LVFS existing arrangements but will be subject to the following additional provisions under the terms of the Scheme: One member of the LVFS WPC from the Effective Date will be an individual nominated by the TPS COM (the Teachers Nominee ). The position of the Teachers Nominee on the WPC will be maintained as long as the TA Fund is maintained. The Teachers Nominee will be independent of LVFS and may only be removed by the LVFS Board in circumstances set out in the Scheme. Liverpool Victoria Friendly Society Page 43 of 79

44 Amended Terms of Reference will be prepared for the WPC and take effect from the Effective Date. These will not require the Teachers Nominee to be present for meetings to be quorate. In the event that the Teachers Nominee has been removed, the LVFS WPA will appoint an individual to be the Teachers Nominee on an interim basis until a permanent replacement is appointed. The WPA, having consulted with the WPC, will recommend the permanent replacement to the LVFS Board who will approve the appointment unless it believes that the individual would not be independent or any of the factors which permit removal of the Teachers Nominee were likely to apply The LVFS Board will be required to provide a certificate to the LVFS WPC annually prior to the submission of the regulatory returns to the regulator. The certificate will set out whether, having regard to relevant actuarial advice and the advice of the WPC, the LVFS Board considers that the provisions of the Scheme have been met in the previous financial year (or if not satisfied, the reasons) The LVFS WPA will also be required to provide a certificate annually to the LVFS Board and the LVFS WPC, as to whether in his opinion any provisions of the Scheme which would require actuarial advice to be sought have been complied with The WPA will also be required to report to the LVFS Board and LVFS WPC if at any time he believes that the TA Fund is being operated in a way that would prevent his providing the certificate Both the Board certificate and the WPA certificate will be available to the regulators on request The costs and expenses of the Teachers Nominee (including any costs related to external advice required by the Teachers Nominee) may be allocated to the TA Fund. Where external advice is required in respect of the TA Fund, an equitable proportion of the cost may, subject to prior consultation with the WPC, be allocated to the TA Fund. Management of Linked Business LVFS will establish, in its Main Fund, internal linked funds identical to those internal linked funds maintained by TPS prior to the Effective Date. These linked funds in LVFS will receive the transferred linked funds from TPS. Units allocated to policies linked to the transferred funds will be replaced with identical units in the new LVFS funds. The value of the units allocated will be unchanged by the implementation of the Scheme (but for the avoidance of doubt, may still be subject to any change in asset value which may occur between pricing dates) LVFS will establish appropriate unit pricing systems to recognise the different unit series in force, their tax status and charging structures LVFS may close, amalgamate or divide any of the internal linked funds available to Transferred Policies, subject to any contractual constraints imposed by the terms of the Transferred Policies. In the event that a Transferred Policy is affected by the re-organisation of the internal funds, units in another suitable fund (as designated by LVFS), will be allocated with the same value as the affected units. There will be no charge for this switch. Additionally, in such circumstances, LVFS will allow a free switch of the affected units into any other fund which is available to the Transferred Policy type in lieu of the designated linked fund, provided this is effected within 12 months after the relevant change. Member Payments and Special Bonus A payment of 250 will be made from the TA Fund to each Qualifying Member of TPS as soon as practicable after the Effective Date to compensate for loss of membership rights in TPS. The aggregate amount of the payment to be made will not exceed 15 million For the purpose of establishing eligibility for the Member Payment, a Qualifying Member is anyone who: was a member on 18 December 2014, or Liverpool Victoria Friendly Society Page 44 of 79

45 had submitted an application for a new with-profits policy before 18 January 2015 to replace an existing with-profits policy and who effected the policy within 90 days from the maturity date of that existing policy, or submitted an application for a with-profits policy prior to 18 January 2015 as a result of the Guaranteed Savings Plan promotion undertaken by TPS over the Christmas and New Year period 2014/2015, and entered into that contract In each case, to remain eligible, Qualifying Members must remain members of TPS on the Effective Date other than having ceased to be a member due an involuntary act, which is defined to be death or maturity of the contract No interest will accrue to members in respect of the Member Payment. In the event that a Member Payment remains unclaimed after 5 years it will be forfeited and credited to the TA Fund A Special Bonus will be allocated to with-profits Transferred Policies in force on the Effective Date (including, for the avoidance of doubt, those policies which have become claims by death or maturity between 18 December 2014 and the Effective Date). The cost of the Special Bonus will be met from the resources of the TA Fund For the purpose of the Member Payment and the Special Bonus, the definition of a Qualifying Member will not apply the requirement for the surrender value to be at least 1000, set out in TPS Rules which would apply on the dissolution of TPS. The TPS Staff Pension Arrangement Subject to the resolution of any concerns identified by LVFS prior to entering into the agreement with TPS, within two years of the Effective Date LVFS will propose terms for the merger of the TPS staff pension arrangement with the LVFS pension scheme. The terms of the merger will be determined on the basis of LVFS funding principles for its pension scheme The Teachers Nominee will be consulted on the proposed terms of merger. Subject to the agreement to the terms by the trustees of each scheme, LVFS will use its best endeavours to effect the merger within four years of the Effective Date. Alterations to the Scheme The Scheme provides that, at any time after the confirmation of the Scheme by the PRA, LVFS may apply to the PRA for consent to amend its terms, provided that any such application must be accompanied by a certificate from an independent actuary to the effect that, in his opinion, the amendment will not have a materially adverse effect upon the holders of Transferred Policies and the LVFS WPC has consented to the application. The Scheme also contains provisions that will enable certain types of amendment to be made without the consent of the PRA, subject to notice having been given to the PRA and certain other protections. These amendments include minor changes, corrections and changes necessary to ensure the Scheme operates appropriately following a regulatory change. Scheme Costs Each of TPS and LVFS will be responsible for their own costs incurred before the Effective Date in developing the Scheme and in circularising their policyholders and obtaining the relevant approvals from members in General Meeting My fee for preparing the Scheme Report will be met equally by TPS and LVFS Transfer Costs (relating to the resolution of objections raised to the transfer of any contracts or assets by the Scheme) incurred before the Effective Date will be met equally by TPS and LVFS. Transfer Costs incurred after the Effective Date will be met by LVFS and not recharged to the TA Fund. Liverpool Victoria Friendly Society Page 45 of 79

46 Membership TPS members will cease to be members of TPS on the Effective Date and will become members of LVFS instead. They will be eligible to participate fully as members of LVFS from the Effective Date but will not be eligible to share in the surplus of LVFS outside the TA Fund (and, in particular, will not be eligible for LVFS Mutual Bonus). Member Approval and Communications The approval of TPS members will be required for the Scheme to proceed and this will require a special general meeting of TPS to be held A Circular (the Teachers Circular ) will be produced and the intention is to send this along with a covering letter to all TPS policyholders. The Teachers Circular will include a summary of the Scheme Report, a Questions and Answers section, an overview of the process including timescales and where further information can be found The Notice relating to the Scheme will also be published in appropriate UK national daily newspapers A copy of the Scheme Report, the Teachers Circular and the Scheme will be available free of charge by writing to LVFS or TPS, from LVFS or TPS website or by phoning the helpline numbers included in the Notice. Servicing No immediate changes are expected to be made to the arrangements relating to the provision of administrative or investment management services for the TA Fund or the non-profit Transferred Business. In particular, the employees of TMS who provide administration to TPS immediately prior to the Effective Date will continue to do so immediately following the Effective Date The Scheme requires LVFS to ensure that the standards of service (administration and investment management) provided to Transferred Policies are no less favourable than that provided to LVFS policies. TPS after the Effective Date An application for TPS to be de-authorised will be submitted to the PRA prior to the transfer being confirmed by the PRA. Once the required approvals have been obtained from members, UK regulators and the Jersey and Guernsey Courts, TPS will be dissolved on the Effective Date by operation of law under section 86(5) of the FSAct, immediately following the transfer of all its engagements to LVFS. Liverpool Victoria Friendly Society Page 46 of 79

47 5. ASSESSMENT OF THE SCHEME Approach 5.1. In this section of the Scheme Report, I consider the operation of LVFS and the TA Fund after the Effective Date and how the implementation of the Scheme may affect different groups of policyholders. I consider the effects of the Scheme on policyholder interests under the headings of: Security of benefits; and, Reasonable benefit expectations I have had regard to the impact of the Scheme (and have considered no other alternative scheme) on different groups of policyholders. These are: The current LVFS policyholders in the LVFS Main Fund. The policyholders of the RNPFN Fund; and, The holders of TPS policies (i.e., the Transferred Policies) I have considered whether different generations or policy types from within the above groups need to be considered separately but have concluded that, apart from the with-profits and non-profit Transferred Policies, there are no material issues which require me to assess the interests of any sub-groups separately. My conclusions and assessments relate to each group of policyholders as a whole The impact of previous schemes, in terms of any special provisions that may apply to particular groups of policyholders, has been implicitly taken into account by virtue of the fact that any such provisions form part of the business-as-usual features of the business of the societies which I have considered I have had regard to the PRA Handbook and the FCA Handbook (in particular, Principle 6 of PRIN 2.1, to take into account the interests of customers and to treat them fairly, and the requirements of COBS 20) in conducting this assessment In preparing the Scheme Report I have actively considered whether it has been necessary for me to have obtained independent legal advice in relation to the Scheme or in respect of the operational arrangements of LVFS and/or TPS. I have concluded that there are no aspects of the Scheme, or how the societies operate, that necessitate my seeking independent legal advice I have had due consideration of the business carried out in or from Guernsey or Jersey and the likely effects of the Guernsey Scheme or the Jersey Scheme. My conclusions apply equally to the Guernsey and Jersey businesses as they do to the rest of the long term business of TPS I have noted that in the event of either the Guernsey Scheme or the Jersey Scheme not being implemented then the Scheme will also not be implemented. Pro-forma Representation of LVFS post the Effective Date 5.9. On the Effective Date, all of the business of TPS (including its subsidiary companies) will transfer to the new TA Fund created in LVFS. This means that at the point of transfer, the TA Fund will replicate TPS. Immediately after the transfer to LVFS has been completed, the transferred nonprofit business (policies and related assets and liabilities) and the Designated Subsidiaries will be transferred from the TA Fund to the LVFS Main Fund The assets to be transferred from the TA Fund to the Main Fund will have a value of 400 million which is estimated to be equal to the value of the non-profit reserves based on the Solvency 1 Peak 1 regulatory reserve established by TPS as at the Effective Date 5. Additionally, the Designated 5 Strictly the calculations referred to in this section will be established as at the year-end, 31 December 2015, rather than the Effective Date, 1 April For simplicity the distinction has been ignored throughout the assessment. Liverpool Victoria Friendly Society Page 47 of 79

48 Subsidiaries will transfer to the Main Fund from the TA Fund. In return, the Contribution (calculated as the value of future profits arising on the non-profit business reallocated to the Main Fund plus the value of the net assets of the Designated Subsidiaries, plus an agreed payment for Goodwill) will be transferred from the Main Fund into the TA Fund. The Contribution is expected to be 24.4.million, approximately. The value of the assets to be transferred to the Main Fund in support of the nonprofit business and the elements of the Contribution related to the value of the future profits from the non-profit business and the net assets in the Designated Subsidiaries will be updated after the Effective Date to reflect the position at the Effective Date. Adjusting payments will be made between the funds as appropriate. Both the estimates of 400 million and 24.4 million are based on the figures as at 31 December As a result of the transactions outlined in 5.10, the pro-forma financial position of LVFS under the current regulatory Pillar 1 regime had the Scheme become effective as at 31 December 2014 would have been as shown in table 5.1 below. Table 5.1: Pro-forma Financial Position of LVFS under Pillar 1 as at 31 December 2014 million Pre-implementation Post- implementation Main Fund RNPFN Fund Total Main Fund RNPFN Fund TA Fund Admissible assets 9,272 1,274 10,546 9,673 1, Mathematical Reserves 7,466 1,004 8,470 7,877 1, Current liabilities Total 11, Total Liabilities 8,206 1,027 9,233 8,617 1, ,821 Peak 1 capital resources 1, ,313 1, ,499 Subordinated debt Capital resources (A) 1, ,660 1, ,846 LTICR WPICC Capital requirement for subsidiaries Capital requirement (CRR) (B) ,154 CRR Cover Ratio, 195% 100% 171% 197% 100% 100% 160% Source: LVFS and TPS & PRA Returns Security of benefits Solvency 1 Pillar Table 5.1 demonstrates that under the current regulatory regime the Scheme would have minimal impact on LVFS overall. The cover for the CRR would have dropped from 171% to 160% but this does not reflect that the larger part of the increase in the CRR would arise from the enlarged WPICC required in the TA Fund in line with the planned distribution of its capital. As noted previously, the WPICC remains risk bearing capital A better measure of the impact of the Scheme on security is the change in the Main Fund position. The CRR amount for the Main Fund would have changed by a trivial amount of 10 million (less Liverpool Victoria Friendly Society Page 48 of 79

49 than 1% of its pre-implementation value). This is largely due to the fact that the scale of the nonprofit business transferring into the Main Fund is small relative to the existing business and has very small regulatory capital requirement. Additionally, the effect of the Contribution to be paid from the Main Fund to the TA Fund is broadly neutral since assets and future profits in relation to the transferred business would be received by the Main Fund. In this case, the WPICC also plays a part and the net movements in the Main Fund are absorbed by the change in the WPICC. As a consequence of this, little reliance should be placed on the fact that the CRR cover ratio would have increased post implementation. However, from the foregoing it is clear that the regulatory capital position of LVFS would be little affected by implementing the Scheme The with-profits Transferred Policies will depend on the strength of the TA Fund for their primary security since it will be established as a ring fenced fund. The TA Fund will provide a more secure position for with-profits Transferred Policies than applied in TPS since all of the risks associated with the non-profit business and the Designated Subsidiaries will have been removed and the Contribution will provide liquid assets that replace the investment made by TPS in the non-profit business and the Designated Subsidiaries. This can be demonstrated by comparing the Capital Resources in the TA Fund ( 194 million) to those in TPS ( 160 million). Since the regulatory presentation of a closed with-profits fund requires the WPICC to be increased so that the CRR equals the available assets, the CRR cover for the TA Fund will become 100% (in the same way that applies for the RNPFN Fund, see Table 5.1, and to TPS in any review of its regulatory position conducted after its closure to new with-profits business in January 2015)) In practice, implementing the Scheme will result in a slightly different regulatory position from that outlined in Table 5.1. This is due to transactions which will apply to the TA Fund immediately postimplementation. The Scheme proposes that a Member Payment will be made to TPS members shortly after the Effective Date and the expected amount of this is 14.1 million. It is also proposed that a Special Bonus will be added by means of a supplement to the asset shares of the with-profits Transferred Policies (and be paid retrospectively as a cash amount to certain policyholders who have left the fund since the date of signing of the agreement with LVFS, see 4.40). The Member Payment and the portion of the Special Bonus which will be paid as cash would reduce the amount of the Capital Resources in the TA Fund to 168 million, approximately. The TA Fund would therefore still be in a very healthy position after the payment of these amounts The total amount to be distributed by way of the Special Bonus is expected to be 73 million, approximately, including the cash element, but since the Special Bonus will not result in an increase in the guaranteed benefits, it is in effect already reflected in the WPICC and the mathematical reserves of the TA Fund will not increase. For the purpose of managing the solvency position of the TA Fund, the supplements to the asset shares may be clawed back from extant TA Fund with-profits policies in the event that the solvency position of the TA Fund deteriorates below the trigger level of 110% of its capital requirement The TA Fund will not receive capital support from the Main Fund in the ordinary course of events (and the Scheme makes no provision for this) but in extreme circumstances if the TA Fund was unable to meet its commitments, it would then rely on the Main Fund to provide for its security. I consider the likelihood of this risk ( burn-through risk ) materialising to be low given the level of available capital resources, the discretionary powers which will apply to the pace and quantum of capital distribution and the ability to claw back previously distributed capital amounts, such as those related to the Special Bonus, that have not already been paid out by way of enhanced claims The RNPFN Fund is unchanged by the Scheme (see Table 5.1) and its security as a ring fenced fund is unchanged. The RNPFN Fund will not be directly affected by the TA Fund but since it may depend on the Main Fund for capital support in certain circumstances (as set out in its PPFM), it is pertinent to consider whether the ability of the Main Fund to provide capital support when needed would be altered. This could occur if capital was required to support the TA Fund in extreme circumstances but as discussed in 5.14 to 5.17, the likelihood of burn-through risk from the TA Fund is remote Consequently, I do not consider that the TA Fund would impose an additional challenge on the security of policies in the Main Fund nor would it constrain the ability of the Main Fund to provide capital support to the RNPFN Fund in the way that it may be required to. Liverpool Victoria Friendly Society Page 49 of 79

50 Pillar I have been provided with pro-forma estimates of the Pillar 2 position in LVFS after the Effective Date and these confirm that LVFS would be able to satisfy its Pillar 2 requirements even after the occurrence of moderately severe stress after the Effective Date The Pillar 2 assessments of TPS and LVFS were discussed in Sections 2 and 3, respectively, and the risk profiles on the bases used for the submissions to the PRA considered. The pie-chart graphics demonstrate that the relative contributions to the overall risk profile of each of TPS and LVFS were similar and, on that basis, the Transferred Policies would not be exposed to materially different risks after the Effective Date. Conversely, LVFS policies (including RNPFN Fund Policies) would not be exposed to new risks, even allowing for the re-structuring of the Transferred Policies between the Main Fund and the TA Fund. However, the agreed Pillar 2 approach does not allow fully for the variability of the risks inherent in LVFS general insurance business and does not reflect the change in the net assets available to LVFS from the general insurance business subsidiaries in the event of a severe stress in that business. Since the approach to be adopted for insurance groups under Solvency II does allow for this feature, the effect of the general insurance business on a risk based view is considered as part of the comments under Solvency II below. Solvency II The Scheme will have minimal impact on LVFS under the new Solvency II regime The TA Fund which will be created will be subject to the ring-fenced fund rules which effectively treat it on a standalone basis. As discussed previously, the TA Fund will represent the with-profit business of TPS since the non-profit business will be allocated to the Main Fund: this should improve the capital position of the TA Fund relative to TPS since the capital requirements should be lower and the available capital slightly greater due to the receipt of the Contribution. I have already noted that TPS was expected to satisfy its Solvency II capital requirements by a comfortable margin and the TA Fund should also do so as a result. I do not consider that the TA Fund will adversely impact on the solvency of the Main Fund under Solvency II, nor will it impose any constraints on the management of the RNPFN Fund (which will also be a ring fenced fund for this purpose) The non-profit Transferred Policies will be allocated to the Main Fund but, given the low level of guarantees in these Transferred Policies and the relative scale of the business transferred, LVFS has estimated that there will be a trivial impact on the overall solvency position of LVFS. I believe that this is a reasonable view to take Finally, the financial position of LVFS under Solvency II was discussed at As noted there, it is expected that LVFS will be able to cover its Solvency II SCR but that this is dependent upon LVFS obtaining the desired approvals materially as requested (which I consider to be likely) and interpretations of the new rules from the PRA in determining the quantum. The cover for the SCR will also be improved by the available management actions, which may change LVFS risk capital requirement (by reducing the risks arising in the GI business) but would come at a cost of reducing future earnings from the GI business. I do not consider the actions proposed by LVFS to be out of the ordinary and believe that they are a valid response to meeting the requirements of the new regime. A combination of the approvals being sought initially and the management actions would allow LVFS to demonstrate compliance with the new regime comfortably The rationale underlying Solvency II is that the technical provisions held should be sufficient for a third party to take on the liability on transfer. The third party would be expected to provide capital to meet the SCR and be compensated for doing so. The cost of this capital is provided for by the creation of a risk margin in the technical provisions of each company. This aims to achieve the continuing security of policy benefits in the event that a company is unable to maintain its Solvency II capital requirements The cover for the SCR in LVFS is primarily derived from the Main Fund and it will be to this fund that non-profit Transferred Policies will be allocated. I consider that the security of the benefits of nonprofit Transferred Polices will remain at a satisfactory level The security of the with-profits Transferred Policies would only be threatened in circumstances where LVFS was sufficiently weak that the ring-fencing of the TA Fund failed and the surplus in the TA Fund was required to support LVFS generally. This is an extreme event (although in the circumstances described, the with-profits Transferred Policies would be unlikely to benefit from the Liverpool Victoria Friendly Society Page 50 of 79

51 distribution of the capital of the TA Fund as an enhancement to the current reasonable benefit expectations.) In the event that the requested approvals are not obtained or the quantum of relief allowed by the PRA is severely restricted, LVFS would be unable to meet its solvency capital requirements even after implementing the management actions outlined above and as, a consequence of this, I understand that the PRA would be unable to allow the transfer to proceed Despite the uncertainty over the initial conditions for LVFS, I can see no reason for the approvals not being granted by the PRA materially in the quantum requested, so that, in my opinion, LVFS will meet its solvency capital requirements and the security of the benefits of the Transferred Policies will remain at a satisfactory level after implementing the Scheme. Conclusion on the security of benefits In my opinion, subject to the requested approvals being obtained materially as requested from the PRA (which I consider to be likely), the benefits under Transferred Policies and LVFS policies (including policies allocated to the RNPFN Fund) will remain adequately protected on implementing the Scheme. Impact of the Scheme on Benefit Expectations I have reviewed the financial terms of the transaction in the round and, on this basis, I consider that balancing the financial benefit that accrues from the terms of the expense arrangement; the amount of the Contribution to be received (less the offsetting values that will be transferred to the Main Fund); and, the consequent improved capital position, the Scheme represents an attractive outcome for TPS members, and its with-profits policyholders, in particular The contractual terms of the Transferred Policies will be unaltered on the implementation of the Scheme so policyholders rights and interests will be preserved. Transferred Policies With-profits The starting position in the TA Fund, immediately after the non-profit business is removed to the Main Fund, will be that the guaranteed benefits of the with-profits Transferred Policies will be unchanged and the underlying asset shares will be unchanged. The transferred asset shares reflect the base expectations of these policyholders. The expectation of benefits depends on the evolution of the asset shares and this depends on the way the TA Fund will be managed in the future (and the extent to which this may be changed by the implementation of the Scheme) The main drivers of the benefits arising in the future which may be affected by the implementation of the Scheme will be: The investment strategy to be adopted; The expenses incurred in administering the Transferred Policies; and The ability to distribute the estate equitably in the run-off of the TA Fund The first two drivers noted in 5.33 will directly influence the asset share growth in the future while the third will directly enhance benefit payments The future management of the TA Fund will be in line with the Core Principles set out in the Scheme and more generally will be subject to the PPFM which will be adopted for the TA Fund. The Core Principles set out the link with the current PPFM for TPS, but amended to reflect the requirements of run-off. The Run-off Plan also sets out further elements of how the estate should be used. The Core Principles shall only be amended with the approval of the Insurance Regulators and of the LVFS With-Profits Committee. The main elements of these which influence the drivers in 5.34 are: Liverpool Victoria Friendly Society Page 51 of 79

52 The TA Fund is to be managed having regard to its own resources and without regard to the position of the other funds of LVFS. The investment strategy for the TA Fund should be determined reflecting the resources available (see the previous point) the risk appetite adopted for the TA Fund (which is initially expected to be in line with 125% cover for its capital requirements), and will have regard to an expectation that the assets backing with-profits business in TPS would have a bias to real assets (i.e., a relatively high EBR). Distribution of the estate should aim to achieve a uniform level percentage supplement to asset shares in the future (after the initial distribution) but the distribution should not result in the cover for the capital requirements falling below 125% after the distribution has been made. (For the avoidance of doubt, the uniform level percentage supplement may be reviewed from time to time, up or down, in line with emerging experience.) Investment Strategy Since the TA Fund is to be managed having regard only to its own resources, the investment strategy will be controlled by the level of the available capital resources and the need to stay in line with the adopted risk appetite. The improved financial position (as demonstrated in Table 5.1) will permit more flexibility in managing the TA Fund in line with its PPFM, e.g., a freer investment policy may be possible than would have applied in TPS which would potentially enhance benefits. I would not expect that it would be necessary in the foreseeable future to have to adopt a more cautious asset share investment strategy than had been adopted for TPS (all else being equal). In the longer term, the capital resources will reduce (as they are added to with-profits policies and these policies become claims) and it could be possible that a change in investment strategy may be required as a consequence. However, the likelihood of this occurring is mitigated by the requirement to aim for a measured approach to distribution, the requirement to satisfy the risk appetite post-distribution of capital and, in more extreme circumstances, the ability to invoke the management action to recover past distributions from the supplementary asset share amounts. Overall, I consider that the investment returns would be at least as good as would have applied in TPS in the absence of the Scheme as a stand-alone entity. Expense Arrangements The TA Fund will also be charged for its administration on a basis which will be attractive to it. For the first year after the Effective Date, the TA Fund will be allocated expenses incurred, which will be broadly in line with TPS current administration arrangements but for the following 10 years, it will be subject to a tariff arrangement based on a fixed amount per policy (subject only to inflationary increases) The deferral of the fixed tariff for one year is intended to allow for the integration of TPS into LVFS. The TA Fund has a degree of expense protection in that the total amount in the first year cannot exceed a fixed amount which has been set in line with the cost of running with-profits business in TPS in Given the rapid decline in the in-force business and the relative difficulty in managing fixed expenses down, it is likely that even if the cap bites, the amount will be lower than the position which would have applied in TPS The tariff level is lower than the current unit costs incurred on TPS current arrangements since the TA Fund will benefit from the scale of LVFS as a result of the Scheme. TPS is expected to diminish in size very quickly since there will be no new business, the tariff arrangement solves the problem of rapidly increasing unit costs which would arise if TPS remained a standalone entity. Although the fixed tariff only applies for 10 years and will then be replaced by an arrangement based on costs incurred in managing the business of the TA Fund, much of the with-profits Transferred Policies have a much shorter outstanding term than 10 years. Consequently, I would still expect the TA Fund to benefit from the scale of LVFS after 10 years. (In practice, the TA Fund may not exist after 11 years if it has merged with the Main Fund) The tariff will be reviewed after 6 years if the tariff fee charged to the TA Fund at that time exceeds 200% of the costs applied to comparable LVFS with-profits contracts. This review is aimed at maintaining fairness in level of charges applied. The requirement to review the tariff is potentially beneficial to Transferred Policies but I consider it unlikely that the review trigger will bite in practice since the cost reductions required by LVFS to achieve such a position would be considerable and, Liverpool Victoria Friendly Society Page 52 of 79

53 on balance, I consider that the LVFS in-force with-profits business is likely to suffer from some diseconomies of scale as it also reduces. In the event that a review was required and LVFS took action to reduce the TA Fund tariff fees (which it will not be required to do under the Scheme), the impact on the LVFS with-profits business would be minor given the pace of run-off of the TA Fund The current practice in TPS is that since the unit costs have been increasing rapidly, the amounts charged to asset share have been fixed at the level applied in 2012 (but subject to inflationary increases since then) and the intention had been to apply this cap indefinitely. Some of the fixed charges applied to asset shares currently may be lower than the amounts derived from the expense tariff in the Scheme. Such policies will not benefit directly from the expense arrangements as a result but the estate will meet the difference between the two amounts. However, overall the expense arrangement will be beneficial to the with-profits Transferred Policies since the reduced subsidy from the estate will improve the capital position (and be reflected in the investment strategy or increased distributions to policyholders in the future) The TA Fund may still be allocated exceptional costs which are incurred but these should be in line with costs which would have been incurred in TPS before the Effective Date (but to the extent they are shared with other parts of LVFS which may also be subject to these costs, the impact may be reduced potentially). The TA Fund will remain responsible for any compensation costs arising in relation to Transferred Policies whether these are with-profits or non-profit policies. Such compensation would have been met from the estate in the absence of the Scheme, so that there is no net impact from the TA Fund continuing to meet compensation costs for non-profit Transferred Policies which will be allocated to the Main Fund The terms of the Scheme are such that the TA Fund may be required to make payments to the TPS defined benefit staff pension arrangement. I understand that the pension scheme is reasonably well funded with a (currently) relatively small deficit having been identified in the light of recent falls in fixed interest yields (and a small surplus having been recorded previously). However, the costs to be borne by the TA Fund will be the same as would have been borne by TPS so that there is no change Subject to the trustees of the TPS staff pension arrangement agreeing, it is intended that terms to merge the TPS scheme with the LVFS pension scheme will be proposed within two years after the Effective Date, with the merger taking place within four years. Consideration of the terms of such a merger on the participants in these pension schemes is not within the scope of the Scheme Report. However, the merger of the pension schemes could impact on the expenses to be applied to the TA Fund. I understand that both schemes are similarly funded so that funding requirements may not be materially different for each scheme and therefore the merger may not be expected to impact significantly on the TA Fund or the with--profits Transferred Policies. The proposed terms of merger will be subject to consultation with the Teachers Nominee and I would anticipate that such consultation would pay particular attention to the future costs which would arise post-merger. I consider this to be an adequate protection for the TA Fund. Distribution Strategy The PPFM for the TA Fund addresses the intention to distribute the capital of the TA Fund to the with-profits Transferred Policies. The ability to achieve this will be enhanced by the implementation of the Scheme The net effect of the Scheme is that the TA Fund will the receive the Contribution in lieu of the illiquid asset represented by a stream of future profits from the non-profit business, will gain direct access to assets equal to the net assets of the Designated Subsidiaries (which currently have a value in TPS but may not have been readily accessible for distribution) and will no longer have to allocate capital to meet the required capital for TPS non-profit business or TAC General Insurance business. Additionally, lower unit costs under the tariff produce an immediate increase in the capital available due to the release of provisions made in line with TPS cost base and the expense arrangements give greater certainty to the longer term management of the cost base. The capital position of the TA Fund relative to TPS is therefore an increase in the available capital, an improvement in the availability of this capital and the removal of some barriers to its attribution to policyholders The effect of this improvement can be seen readily in specimen calculations undertaken to test distribution patterns. The Scheme anticipates a Special Bonus supplement to asset shares Liverpool Victoria Friendly Society Page 53 of 79

54 immediately after the Effective Date. The modelling which has been undertaken as at 31 December 2014 indicates that the proposed supplement to asset shares of 3% for each year that the policy has been in force (with a maximum of twenty years) would be supportable (and would satisfy the capital restriction that the residual position being in excess of 150% of capital requirements postdistribution). Applying the normal risk appetite criterion of 125% cover for required capital thereafter, it has been estimated that a level uniform annual supplement to asset shares of approximately 6% would be supported. By way of contrast, if the Scheme does not proceed and TPS was to be managed as standalone society, the initial and subsequent rates of supplement would be approximately half of the rates quoted. The benefits of the Scheme are therefore patent The proposed approach within the Scheme to the distribution of capital is to apply a significant initial distribution related to duration in force and policy size, followed by a level uniform rate of uplift. The approach is in line with methods adopted in other closed with-profits funds and I have not become aware of any factors which would make it inappropriate to apply it in the TA Fund It is proposed that the Special Bonus will be paid as a cash amount to holders of with-profits policies which became claims by way of death or maturity ( involuntary claims ) since the date of signing the agreement with LVFS. On the basis of the rate of Special Bonus outlined in 5.43, this would result in approximately 10 million being paid in cash, which would represent a material uplift to the claim values of the involuntary claims. There are many precedents to the treatment of involuntary claims in this way and I believe that it is reasonable to treat them pari passu with the in-force with-profits policyholders. Whilst the cost of this distribution is to be met by the estate, it will not materially affect the benefit expectations of the remaining in-force with-profits policyholders In similar fashion, the Member Payment will be made to all Qualifying Members (as holders of either with-profits or non-profit policies) and there are many precedents to all members receiving such a payment in similar circumstances to reflect the loss of membership rights. The amount proposed is in line with these precedents and, as with the cash element of the Special Bonus, the payment does not impact materially upon the benefit expectations of with-profits policyholders in the TA Fund. Taxation of the TA Fund The tax assumed to be attributable to the TA Fund will be calculated on the basis of it being a standalone mutual entity. This will mean that, broadly, the tax paid in respect of the with-profits business in the TA Fund will be the same as would have been paid in TPS. Since the actual tax computation for LVFS will be conducted at a higher level (for the whole of LVFS business) this may mean that the tax paid by LVFS in respect of the TA fund is different to the amount charged to it. I consider this feature (which may be positive or negative) to be appropriate It is not expected that the tax status of any Transferred Policies will be altered by the Scheme being implemented nor will there be a potential for an additional tax liability arising from policy related payments in the future as a result of the Scheme being implemented. However, the Member Payments made to TPS members may be subject to tax as [capital gains] in the hands of members. Maintenance of the TA Fund The TA Fund will decline very rapidly over the eleven years from the Effective Date and as it declines it will become more difficult to maintain the stability of outcomes that may be desirable due to random variations in experience and an inability to diversify risk with a smaller exposure of liabilities and assets. It is also the point at which the expense tariff arrangement will cease and the TA Fund will bear a proportionate share of the actual costs incurred. It is therefore appropriate that the Scheme contains provisions which permit LVFS to discontinue the TA Fund after eleven years. The Scheme does not specify the terms which will apply when the remaining Transferred Policies become part of the Main Fund (as do the associated assets of the TA Fund). However, the Scheme requires that the approach adopted will ensure that full allocation of the residual assets of the TA Fund to the remaining with-profits Transferred Policies but does not specify how this would be achieved. For the avoidance of doubt, I would expect that the approach adopted would have regard to the provision of capital to meet the capital requirements in respect of the Transferred Policies then remaining and, if necessary, the reasonable costs of providing that capital. The terms agreed will be subject to review under the with-profits governance (including independent oversight) arrangements of LVFS. Liverpool Victoria Friendly Society Page 54 of 79

55 5.55. The overall effect of the matters discussed in is that the current benefit expectations of the with-profits Transferred Policies will be maintained but future benefit expectations may be enhanced to the extent that increased capital will be available and its distribution may be achieved in an equitable fashion. Transferred Policies Non-profit The non-profit business principally comprises linked business and a block of annuity business written on fixed terms. The prime consideration for non-profit business is that the contractual benefits are paid when they fall due, and this is a function of the solvency positon which was considered in 5.12 to However, to the extent that the terms of the linked business may be subject to review or may depend on the management approach adopted (for linked business), it is necessary to consider how the business will be managed. LVFS will create internal linked funds in the Main Fund which will initially replicate the internal linked funds of TPS. Management and unit pricing will continue as currently applies in TPS. Since there will be no loss of value on the Effective Date the benefit expectations for linked policies will be unchanged on the implementation of the Scheme. Administration charges for the linked Transferred Policies are not reviewable After the Effective Date, it is possible that LVFS may wish to merge the linked funds related to the linked Transferred Policies with other internal linked funds it offers or to close the funds (although there are currently no plans to do so). The power to close or merge internal funds currently exists in TPS. The terms upon which reorganisations occur are subject to established procedures. It is preferable that the power to manage the range of funds in this way is recognised and it should be beneficial for policyholders to be invested in funds which may be both larger and still receiving cash inflows rather than in shrinking funds in which investment performance may be stilted. LVFS Policies With-profits The management of the Main Fund will not change on the implementation of the Scheme. The assets and liabilities will increase equally in respect of TPS non-profit business but it will have to fund the required capital in respect of this business. It will also have a slight loss of liquidity in its free assets after it makes the Contribution. Some of the loss of liquidity will be short term until the businesses of the Designated Subsidiaries can be reorganised and their capital released (but in the meantime the capital will be admissible in the Main Fund). These components are small in the context of the Main Fund and I do not consider that they will change the way in which the Main Fund PPFMs operate or to affect the benefit expectations of LVFS with-profits policyholders The benefits which accrue to the Main Fund from entering into the deal with TPS are longer term in allowing LVFS to protect itself against increasing unit costs from adverse changes in the scale of its business. LVFS has a strategy to acquire further blocks of business. RNPFN Fund Policies With-profits The RNPFN Fund policies are not directly affected by the Scheme since there are no changes to policies, assets or liabilities on the implementation of the Scheme. However, in managing the RNPFN Fund, the capital support provided to it by the Main Fund should be included in the capital used in determining investment policy for the RNPFN Fund. The quantum of the capital available to provide that support will change but the solvency of the Main Fund does not change materially on the implementation of the Scheme and I therefore conclude that the ability of the Main Fund to provide the capital support will not be compromised by the implementation of the Scheme Consequently, I do not consider that the implementation of the Scheme will affect the benefit expectations of RNPFN Fund policyholders. LVFS Policies Non-profit As noted in 5.55, benefit expectations for non-profit policies relate principally to the payment of benefits and therefore depend on continuing solvency. As I have discussed in 5.12 to 5.13, above, the solvency position of LVFS does not change significantly on the implementation of the Scheme and so the benefit expectations relating to LVFS non-profit policies are largely unaffected. Conclusion on benefit expectations In my opinion, the implementation of the Scheme will not adversely affect the current benefit expectations of holders of the Transferred Policies or of LVFS policies (including RNPFN Liverpool Victoria Friendly Society Page 55 of 79

56 Fund policies) and to the extent that the Scheme will allow the distribution of the capital of the TA Fund, the future benefit expectations of holders of with-profits Transferred Policies may be materially enhanced. Miscellaneous aspects of the Scheme Governance and protections imposed by the Scheme The Scheme imposes three protections which will apply after the Effective Date (in addition to the protections which apply through the application of the regulatory COBS Rules) The future management of the TA Fund is defined by the TA Fund PPFM. The PPFM can be altered in the future, subject to the requirements of the COBS Rules. The ability to amend the Principles in the PPFM will be limited by the fact that there are Core Principles embedded in the Scheme and these address the key issues for the management of the TA Fund. The effect of these on benefit expectations of with-profits Transferred Policies has already been considered in the Scheme Report The second protection required by the Scheme is that LVFS WPC will have a member nominated by the TPS COM (the Teachers Nominee ). This person will be independent. Although this person will have been nominated by TPS, the Teachers Nominee will not solely represent the interests of the with-profits Transferred Policies but will participate fully in the activities and considerations of the LVFS WPC, which will be guided by the various PPFM maintained, including the TA Fund PPFM and its Core Principles, but excluding the RNPFN Fund which has a separate WPC. I consider provisions for replacing the Teachers Nominee, to be appropriate The third protection is that the LVFS WPA (with responsibility for the TA Fund) will be required by the Scheme to provide the LVFS Board with a certificate annually that the TA Fund has been managed in accordance with the Scheme. This requirement is in addition to any requirements to advise the LVFS Board on the application of its discretion in accordance with the PPFM. The WPA will also have to advise the LVFS Board, at any time, if he considers that the TA Fund is not being managed in line with the Scheme. The scope of this protection is that the management of the TA Fund will be continually referred back to the original requirements set out in the Scheme rather than just the interpretation in the PPFM I consider that these protections provide adequate comfort (in addition to the regulatory requirements). Administration and service standards (including investment management) The administration of the Transferred Policies will be transferred to LVFS and the basic administration platform will continue to be the current TPS system immediately after the Effective Date. It is anticipated that there will be a transitional period when the TPS staff (employed by TMS) will provide the administration services but over time some TPS staff will be re-deployed into roles with LVFS which will then provide the services directly and administration will transition onto LVFS systems and processes. This arrangement should ensure that there is no immediate disruption of services on the Effective Date and that there should be an adequate time frame for the transfer of knowledge and skills, if necessary. It is likely that the service standards which currently apply to TPS policies will change to LVFS standards but I would not expect there to a material difference overall in the standard of service provided Investment management arrangements will not change because of the Scheme being implemented (although the business of SUTM will transfer to Threadneedle, which also provides investment services to LVFS, under a separate agreement before the Effective Date). Investment management agreements will be reviewed on expiry under LVFS normal contract review procedures. I do not expect a deterioration in investment services as a result of the Scheme being implemented Although it is intended that service level standards (e.g., response times on communications or time taken to make payments) for Transferred Policies will be aligned with LVFS standards, I do not consider the likely changes will result in significant improvements or deterioration in services. Liverpool Victoria Friendly Society Page 56 of 79

57 Communications with policyholders I have considered the Teachers Circular to be sent to TPS policyholders and consider that it fairly represents the terms of the Scheme and the reasons for its proposed adoption. It is not proposed that LVFS policyholders will be individually informed of the Scheme but that adverts will be placed in appropriate newspapers and that information will be posted on LVFS web-site. The approach adopted for LVFS has been justified on the grounds of the expense which would be incurred in notifying all of LVFS long term business policyholders and also the immateriality of the effects of the Scheme on the business of LVFS. I concur with this view and consider the proposed approach for communicating with LVFS policyholders reasonable. Membership Rights TPS members will give up their membership of TPS but will become members of LVFS. As I noted earlier, in normal circumstances, membership allows a measure of involvement in the direction of the society through the entitlement to vote at general meetings. TPS and LVFS use the same voting models (individual votes), and so there will be no change to the voting rights for members although clearly the former TPS members will form a small constituency in the much larger membership of LVFS. Conversely, although the membership rights of LVFS existing members will be diluted, the dilution will be slight TPS members (on becoming LVFS members) will have no rights to share in the surplus of the Main Fund or the RNPFN Fund. Similarly, LVFS members who are not allocated to the TA Fund (including those TPS members holding non-profit policies transferred to the Main Fund) will have no rights over the surplus of the TA Fund. Thus current interests in surplus in each of the funds will be unaltered by the Scheme The proposed Member Payment to all members of TPS will act as appropriate compensation for the loss of the membership interests in TPS. Conclusion on Miscellaneous aspects of the Scheme In my opinion, the Scheme has been developed having appropriate regard to the servicing requirements, information needs and financial interests of the holders of the Transferred Policies, including their rights as members, and contains appropriate protections to ensure these interests are preserved in the future. Other Stakeholders All of TPS contractual arrangements (including investment and reinsurance agreements) will transfer to LVFS without alteration so those parties will be unaffected by the Scheme The Scheme will result in an additional block of insurance business in LVFS which will benefit from the existence of the subordinated debt issued by LVFS. Conversely, the bondholders of the debt will have an interest in the impact that the new block of business will have on their investment. I have discussed the Solvency 1 position of LVFS in 5.9 to 5.21, above, where I concluded that the Scheme would have little impact on the financial position of LVFS, as a whole, or the Main Fund in particular. I have also discussed the impact of the Scheme on the Solvency II position in , and I have concluded, similarly, that the Scheme would have little impact on the security of benefits under the new regime. Consequently, I conclude that the interests of the bondholders will be unaffected by the implementation of the Scheme. Consequences of the Scheme not proceeding If the Scheme is not implemented then TPS will continue as a standalone mutual society. As a consequence, it will be exposed to diseconomies of scale in its management of expenses as discussed in this Scheme Report, and will not benefit from fixed charging basis of the Scheme nor will it enjoy the freeing up of its capital position which the Scheme would have produced by removing all of the risks not associated with the with-profits business. The amount of capital available for distribution and the pace at which it may be distributed will be significantly worse than if the Scheme is implemented. Liverpool Victoria Friendly Society Page 57 of 79

58 5.80. I would expect that TPS would have to seek a new transferee in due course but it is doubtful that the terms obtained would be as attractive as the current agreement since TPS will be a much smaller entity For the avoidance of doubt, TPS is not financially distressed and would not become so if the Scheme is not implemented. Liverpool Victoria Friendly Society Page 58 of 79

59 6. SUMMARY OF CONCLUSIONS 6.1. In my opinion, subject to the requested approvals being obtained from the PRA materially as requested (which I consider to be likely), the benefits under Transferred Policies and LVFS policies (including policies allocated to the RNPFN Fund) will remain adequately protected on implementing the Scheme; the implementation of the Scheme will not adversely affect the current benefit expectations of holders of the Transferred Policies or of LVFS policies (including RNPFN Fund policies) and to the extent that the Scheme will allow the distribution of the capital of the TA Fund, the future benefit expectations of holders of with-profits Transferred Policies may be materially enhanced; and, the Scheme has been developed having appropriate regard to the servicing requirements, information needs and financial interests of the holders of the Transferred Policies, including their rights as members, and contains appropriate protections to ensure these interests are preserved in the future In the light of the conclusions summarised above, and subject to the requested approvals being obtained from the PRA, in my opinion, the proposed transfer of the engagements of TPS to LVFS is in the interests of the members and long-term policyholders of both TPS and LVFS. JL McKenzie London Fellow of the Institute and Faculty of Actuaries 03 Liverpool Victoria Friendly Society Page 59 of 79

60 APPENDIX 1 TERMS OF REFERENCE Schedule 1 General Requirements 1. It is the Independent Actuary s duty to help on the matters within his expertise. This duty is paramount and overrides any obligation to the person from whom he has received instructions or by whom he is paid. 2. Evidence presented to the Regulators in the Scheme Report should be, and should be seen to be, the independent product of the Independent Actuary uninfluenced by the exigencies of the instructions of the Societies. 3. The Independent Actuary should provide independent assistance to the Regulators where appropriate, by way of objective unbiased opinion in relation to matters within his expertise. He should never assume the role of an advocate. 4. The Independent Actuary should not omit to consider material facts within his knowledge which could detract from his concluded opinion. 5. The Independent Actuary should make it clear when a particular question or issue falls outside his expertise. 6. If the Independent Actuary s opinion is not properly researched because he considers that insufficient data is available, then this must be stated with an indication that the opinion is no more than a provisional one. 7. In a case where the Independent Actuary who has prepared a Scheme Report could not assert that the Scheme Report contained the truth, the whole truth and nothing but the truth without some qualification, that qualification should be stated in the Scheme Report. 8. If the Independent Actuary changes his view on a material matter having read another expert s Scheme Report or for any other reason, such change of view should be communicated in writing without delay to the Regulators and the Societies. Liverpool Victoria Friendly Society Page 60 of 79

61 Schedule 2 Scope of the work of the Independent Actuary in relation to the Scheme 1. The Scheme Report is to consider the terms of the Scheme generally and the effect which the Scheme will have on the holders of long term policies of the companies. 2. In particular the Scheme Report will consider the following specific matters: The impact of the Scheme on the security of the different groups and generations of policyholders of the companies involved in the Scheme; The likely effects of the Scheme on matters including investment management, new business strategy (including closure to new business), administration, expense levels and valuation bases, in so far as they affect: - Levels of service provided to transferring policyholders; and, - Reasonable benefit expectations of policyholders; A review of, and opinion on the fairness of, the terms that apply to any transfers of non-profit policies from with-profits funds to the extent that such transfers are included in the Scheme; A review of, and opinion on the fairness of, proposals to combine any with-profits funds to the extent that any such combinations are included in the Scheme (either as at the Effective Date or subsequently), and consideration of any further covenants or undertakings that may be required to ensure that each category of policyholder is treated fairly; The impact of any changes to membership rights proposed; Any representations and/or objections raised against the Scheme; The adequacy of the communications made to the Societies policyholders concerning the Scheme; A review of, and opinion on the fairness of, any mechanisms to be implemented at the same time as the Scheme, but not included in the Scheme, to provide financial support to any of the companies funds; and, A review of the capital management policy to be adopted by the companies following implementation of the Scheme. 3. My review and Scheme Report will address generally the way in which the Societies have conducted their long term business but taking into account the particular circumstances of each class of business to be transferred. It will deal, inter alia, with the following aspects: Rules and Memorandum, at least insofar as these affect the rights, expectations and interests of policyholders; The Principles and Practices of Financial Management ( PPFM ) documents of the Societies (pre and post the implementation of the Scheme); The terms of the policies issued by each of the companies; Promotional or marketing materials (including those documents issued under the Financial Services and Markets Act 2000 and previous compliance regimes) which would influence the reasonable expectations of policyholders; The existing and proposed internal working arrangements relating to the financial management of the long term business fund, including the operational and administrative arrangements which will apply to the policies to be transferred under the terms of the insurance scheme. This will include the status of implementation plans for Solvency II which will apply from 1 January 2016; Public and internal reports prepared in respect of the current and recent capital position of the Societies and the expected position on implementation of the Scheme (having regard to the current UK solvency regime and the new requirements of Solvency II); Liverpool Victoria Friendly Society Page 61 of 79

62 The terms and conditions expected to be imposed by the scheme to be presented to the Regulators, including the views expressed by the governing body or management of each of the Societies; and, The terms of the previous Schemes of transfer concerning the policyholders of the Societies. 4. The above list is not intended to be exclusive to any other aspects which may be identified during the completion of the project and which are considered to be relevant. 5. I shall not be directly involved in the formulation of the proposed transfer although I should expect to give guidance during the evolution of the detailed proposals on those issues which concern me, or which I consider unsatisfactory. Regulatory and Professional Guidance 1. The Scheme Report will be prepared in accordance with the requirements set out in section 18.4 of the Supervision section of the FCA / PRA Handbooks of Rules and Guidance. 2. The Scheme Report (and any Supplementary Report in relation to the Scheme) will comply with relevant Technical Actuarial Standards issued by the Financial Reporting Council and/or Guidance Notes promulgated by the Institute and Faculty of Actuaries. 3. If the Regulators require the form and content of the Scheme Report to include matters not set out in Schedule 2 of this Agreement, such matters will be deemed to be included in Schedule 2 for the purposes of this Agreement. In preparing the Scheme Report, the Independent Actuary will give due consideration to all material facts and take proper care to ensure that the Scheme Report will in its final form accurately represent his opinion, honestly held, on the matters set out in Schedule 2 and be limited to the matters of opinion which fall within his areas of expertise. 4. Pursuant to 3 above, the PRA have instructed that the Scheme Report should consider the requirement under s.12(b) of Schedule 15 to the 1992 Act that the transfer must be in the interests of members and that I should provide such an opinion (if that be the case). Liverpool Victoria Friendly Society Page 62 of 79

63 APPENDIX 2 PRINCIPAL DOCUMENTS REVIEWED LVFS: PRA Returns 2014 and 2013; Financial Statements 2014, 2013 and 2012 for LVFS and its subsidiaries; Actuarial Function Holder s Report on the valuation of LVFS and RNPFN as at 31 December 2014; Principles and Practices of Financial Management of With-Profits Businesses (Three versions); Actuarial Function Holder s Report on the Scheme; With-Profits Actuary s Report on the Scheme Individual Capital Assessment Report as at 31 December Solvency II Update presented to the Board, 20 May 2015; Application for Transitional Measures on Technical Provisions approval; Submission to the PRA on 1 July 2015 showing comparative figures under the IM, SF and ICA; Report and Accounts for the key subsidiary companies : LVER, LVLS, LV Capital, LVGIG, LVLC and LVPL; Correspondence with the regulator; Solvency II Update presented to the Board September 2015; With-Profits Committee papers on the subordinate debt raise; Report on the reasonableness assessment of the GI Business as a strategic asset; Details of the various hedging arrangements; and, Details of the various reinsurance arrangements. TPS: PRA Returns 2014 and 2013; Financial Statements 2014 and 2013; Rules and Memorandum; Principles and Practices of Financial Management of With-Profits Business ( PPFM ); Directors report of compliance with the PPFM; Actuarial Function Holder s Valuation Report as at 31 December 2014 and 2013; Individual Capital Assessment Report as at 31 December 2013; Submission to the PRA on 1 July 2015 showing comparative figures under the SF and ICA; The Run Off Scheme; Investment Strategy in Run-off Report; Actuarial Function Holder s Report on the Scheme; Liverpool Victoria Friendly Society Page 63 of 79

64 With-Profits Actuary s report on the Scheme; and, SGM Circular explanatory booklet; Liverpool Victoria Friendly Society Page 64 of 79

65 APPENDIX 3 POLICY TYPES ISSUED BY TPS Conventional with-profits policies. Tax Exempt S Bonus Series Tax Exempt Series 1 Taxable Series 1 Tax Exempt Series 2 & 2A Taxable Series 2 Policy Type Savings Growth Plan 2 High Yield Savings Plan Savings Growth Plan Retirement Savings Plan Tax Exempt Savings Plan Endowment With-Profit Retirement Savings Plan 2 Retirement Extra Savings Plan Child Tax Exempt The Friendly Savings Plan Special Saver 2001 Savings Plan Tax Exempt Savings Plan 1 Over 60 s Savings Plan Child Tax Exempt Savings Endowment Plan 1 Endowment - Expectations Endowment & Family Income Low Cost Endowment Special Low Cost Endowment Whole of Life Whole of Life With-Profit Covercare Whole of Life Whole of Life & Family Income Policies Issued Up to February 1996 Up to October 1996 October 1995 to June 2005BBB2 April 1996 to June Taxable Series 1 Tax Exempt Note 1 These types of policy were issued over more than one bonus series. Unitised With-Profits Policies Teachers Anniversary Bond Tax Exempt/Tax Free Savings Plan (Series 1) - policies issued from January 2005 Tax Exempt/Tax Free Savings Plan (Series 2) - policies issued from January 2007 Regular Savings Plan Guaranteed Savings Plan Guaranteed Growth Bond Guaranteed Individual Savings Account Guaranteed Growth NISA (formerly Guaranteed Growth ISA) Liverpool Victoria Friendly Society Page 65 of 79

66 APPENDIX 4 SUMMARY OF TPS PPFM Topic Key Principles Practices The amount payable under a policy The aim is to pay out an amount that: is consistent with maintaining the solvency of TPS and treating all policyholders fairly and equitably relative to their reasonable expectations includes any relevant guaranteed benefits represents an equitable distribution of surplus arising in the With-Profits Fund during the period that the policy has been in force follows the approach to smoothing of payouts The principal practice implementing these principles is the asset share which represents the accumulation of the premiums paid under a policy, increased by investment returns earned on the assets backing the policy but subject to deductions for expenses, tax and charges for the cost of cover, guarantees and options. Profits or losses arising on other business inforce may also be applied to the asset share. The current practice is for all with-profits policies to be allocated the same investment return (i.e., to be backed by a single pool of assets). Hypothecation of assets to different types of contract may be applied in the future if it improves the management of the business inforce. The asset share is used to guide payouts which would normally lie within limits centred on the asset share value. Setting Annual Bonus Rates The aim is to set an annual bonus rate for each bonus series that: reflects the surplus arising during the year increases the guaranteed benefits on applicable with-profits policies to reflect a proportion of actual and anticipated risk free investment returns on the With-Profits Fund leaves a margin between a policyholder s asset shares and guaranteed benefits; and ensures that the future solvency of TPS can be adequately maintained Annual bonus rates are set so that the guaranteed benefits under a policy do not represent an unduly large proportion of the asset share. Annual bonus rates are set with a view to being sustainable but are also subject to the constraint that they should not impose a threat to solvency. Annual bonus rates on CWP contracts will not normally change by more than 1.5% pa. Some UWP contracts do not have an annual bonus rate, while others have a mutuality bonus which does not increase the guaranteed benefits. The mutuality bonus is derived from miscellaneous profits arising. Liverpool Victoria Friendly Society Page 66 of 79

67 Setting Final Bonus Rates Final bonuses may be added to terminating policies to ensure that the payouts represent a fair return reflecting the experience of the With-Profits Fund whilst the policy has been in-force. Final bonus rates are calculated by comparing the guaranteed benefits and the asset share for representative policies at specimen durations. Final bonus rates at other durations are set by reference to these rates. The rates will reflect smoothing. Final bonus rates are reviewed at least annually, currently quarterly. There is generally no final bonus scale applicable to UWP as payouts are determined on a policy by policy basis related to the asset share. Approach to Smoothing The aim of smoothing the amounts payable under applicable with-profits policies is to ensure that: the amounts paid out on individual policies in adjoining periods of time reduce the effect of short term fluctuations experienced in investment returns and other sources of profit or loss, all types of with-profits policy, allowing for the types of claim that may arise, are treated in a fair, equitable and consistent manner, in the long term the overall effect of smoothing is expected to be neutral to the on-going financial position of TPS, the smoothed amounts paid out do not have a materially adverse effect on the solvency position of TPS. The method used to apply smoothing may vary by product type. The aim is to restrict the change in the payouts for similar CWP policies maturing in adjacent years to not more than 10% but in exceptional circumstances this limit may be dropped in order that all policyholders may be treated fairly and equitably. Smoothing does not normally apply in determining surrender values. Smoothing for UWP contracts is applied by considering the smoothed asset share over a 24 month period before the date of claim. There is no limit on the change in the level payment. If the claim is not as at a contractual date, a Market Value Reduction ( MVR ) may apply to reduce the guaranteed benefits to value of the asset share if permitted by contractual terms. Liverpool Victoria Friendly Society Page 67 of 79

68 Investment Strategy The aim of the investment strategy for withprofits business is to invest in a diversified portfolio of investments to maximise long term returns subject to: the strategy being consistent with that communicated to policyholders from time to time the need to invest to meet all guarantees given to policyholders, and an aim of maintaining a level of capital in TPS in line with the risk appetite set by the COM The investment strategy is determined having regard to the level of guarantees, asset shares and the overall level of solvency of TPS. This will determine the ability of the fund to bear the risks of investment in real assets (equity and property) or to invest in fixed interest assets. The asset mix is monitored and may change from time to time. The current target mix is published and displays currently a moderately biased exposure to real assets. New types of assets will be considered and utilised only after appropriate governance sign off. Business Risk In deciding on the business risks to accept, the COM will take the advice of the WPC and AFH and will aim to ensure that: the existing policyholders bonus expectations will not be adversely affected the return for taking the risk is consistent with appropriate alternative investments TPS has the capital to undertake the risk the risk furthers the wider business aims of TPS TPS maintains suitable systems and controls for managing the risks Certain assets held by TPS are of a nature that they are not ordinarily traded. These assets include the subsidiary companies and the property used by TPS as its head office. These strategic assets are reviewed annually to ensure that they remain satisfactory investments. Business risks arise as a matter of course due to the operation of the business processes. These are actively monitored and profits and losses tracked. Profits or losses for most business risks are allocated to the inherited estate unless they are significant when they may be allocated to asset shares. Liverpool Victoria Friendly Society Page 68 of 79

69 Expenses The aim in applying charges and expenses to with- profits policies is to: ensure that the charges and expenses are a fair allocation of such charges and expenses between the various companies within TPS ensure that the amounts of each charge and expense reflect the accounting policies and practices of TPS where relevant ensure that each with-profits policy bears its fair share of each type of charge and expense, subject to any constraints imposed by policy conditions, bonus series or TPS rulebook. Administration service for TPS and its subsidiaries are provided by a related service company. Expenses incurred by the service company are allocated annually, after review, in line with the services provided to each entity. There is no profit margin included. There is a further attribution of allocated expenses of TPS to the in-force business lines form which the charges to asset shares are determined. Asset share charges are described as a fixed amount per policy plus a percentage of the value of the asset share. At the discretion of the COM, exceptional costs may be allocated to the inherited estate rather than to asset shares. Investment management expenses are charged directly as a percentage of the value of asset shares. Liverpool Victoria Friendly Society Page 69 of 79

70 Management of the Inherited Estate The inherited estate is the excess of TPS assets over its liabilities and will be: managed for the purpose of maintaining solvency managed with the aim of treating the policyholders fairly and equitably relative to their reasonable expectations used to provide investment freedom used to meet regulatory capital requirements used to support the smoothing of payouts to with-profits policyholders when appropriate; used to provide capital for TPS and its subsidiary companies unfettered by any constraints arising from past transfers of business to TPS The inherited estate is used: to bear the rewards or losses of undertaking certain business risks of TPS, including its subsidiary companies to meet the costs of compensation claims and other exceptional costs as determined by the COM to meet the costs of expenses, guarantees and options greater or less than those assumed in the pricing and/or assessment of the liabilities of the business to fund the amounts paid out to policyholders that are over or under the aggregate value of the asset shares to enable the investment strategy to assume a higher risk and reward profile, by maintaining a higher asset allocation in equities or lower credit rated bonds Whilst in the past and currently the investment strategy for the inherited estate and the withprofits liabilities has been the same there is no requirement for this to be the case. If the estate is deemed by the COM to have more capital than required, then that part of the estate that is determined to represent excess assets may be distributed to existing withprofits policyholders. The timing and nature of a distribution is at the discretion of the COM. Liverpool Victoria Friendly Society Page 70 of 79

71 APPENDIX 5 SUMMARY OF LVFS PPFM (EXCLUDING FLEXIBLE GUARANTEE BOND) Topic Key Principles Practices The amount payable under a policy The aim is to pay out an amount that: is consistent with treating all policyholders fairly and equitably relative to their reasonable expectations includes any relevant guaranteed benefits is a fair return on policyholders investments follows the approach to smoothing of payouts [current methods are set out in various documents and any material changes will be approved by the Board.] The principal practice implementing these principles is the asset share which represents the accumulation of the premiums paid under a policy, increased by investment returns earned on the assets backing the policy but subject to deductions for expenses, tax and charges for the cost of cover, guarantees and options. (These assumptions will vary by business and product type to reflect a reasonable estimate of the actual experience.) Profits or losses arising on other business in-force may also be applied to the asset share. The current practice is for most of the with-profits policies to be allocated the same investment return (i.e., to be backed by a single pool of assets). Hypothecation of assets to different types of contract may be applied in the future if it improves the management of the business in-force. Some products require a different underlying investment mix to reflect different product features. Actual payouts are based on specimen current and projected asset shares for sample policies, for similar products, generations of business. The asset share is used to guide payouts which would normally lie within limits centred on the asset share value (80% -120%). The asset share may be enhanced from the allocation of miscellaneous surplus, such as the Mutual Bonus. Such surpluses are not permanent additions and may be reduced or removed if the Board considers appropriate given the current financial strength of LVFS. Liverpool Victoria Friendly Society Page 71 of 79

72 Setting Annual Bonus Rates The aim is to set an annual bonus rate for each bonus series that: is set at a prudent level with due regard to the current and projected financial strength of LVFS reflects the market conditions and underlying investment conditions introduces new bonus series where the Board deems it appropriate Annual bonus rates are set with regard to current and prospective gilt yields and so that the guaranteed benefits under a policy do not represent an unduly large proportion of the asset share. Annual bonus rates are set with a view to being sustainable but are also subject to the constraint that they should not impose a threat to solvency. Annual bonus rates for IB and conventional Pensions business are normally lower to reflect the higher expense levels and guarantees inherent in these products. Annual bonus rates may also vary by calendar year of entry. Annual bonus rates will not normally change by more than 50% of their previous level or 0.5% if greater. Rather than receiving annual and final bonuses, the income is varied through the declared investment return for the Pension Income Plus Annuity policies. Setting Final Bonus Rates Final bonuses may be added to terminating policies to ensure that the payouts represent a fair return reflecting the experience of the With-Profits Fund whilst the policy has been in-force Final bonuses are reviewed annually with due regard to the current and projected strength of LVFS and are subject to smoothing Interim bonus rates are set at the same time as annual bonuses but LVFS reserves the right to change these before the next annual review if appropriate. Final bonus rates are calculated by comparing the guaranteed benefits and the asset share for representative policies at specimen durations. Final bonus rates at other durations are set by reference to these rates. The rates will reflect smoothing. Final bonus rates are reviewed at least annually, currently quarterly. There is generally no final bonus scale applicable to Flexible Whole Life Plans or Pension Income Plus Annuity policies. LVFS does not apply a MVR at the same time a final bonus applies and vice-versa. Liverpool Victoria Friendly Society Page 72 of 79

73 Approach to Smoothing The aim of smoothing the amounts payable under applicable with-profits policies is to ensure that: the amounts paid out on individual policies in adjoining periods of time reduce the effect of short term fluctuations experienced in investment returns and other sources of profit or loss, all types of with-profits policy, allowing for the types of claim that may arise, are treated in a fair, equitable and consistent manner, in the long term the overall effect of smoothing is expected to be neutral to the on-going financial position of LVFS, the smoothed amounts paid out do not have a materially adverse effect on the solvency position of TPS. The method used to apply smoothing may vary by product type. The aim is to restrict the change in the payouts for similar CWP policies to no more than 20% year on year, excluding amounts added in respect of Mutual Bonus. LVFS smooths the investment returns by taking the geometric average of the actual investment returns over the last 5 years for most CWP business. For CWP WOL smoothing is applied by limiting the change in payout. Smoothing for UWP contracts is applied by considering the geometric average of the monthly investment returns over the previous 24 month period before the date of claim. There is no limit on the change in the level payment. If permitted with the policy documentation, a Market Value Reduction ( MVR ) may apply to reduce the guaranteed benefits to value of the asset share. Investment Strategy The aim of the investment strategy for withprofits business is to invest in a diversified portfolio of investments to maximise long term returns and to optimise the return to with-profit members subject to: the strategy being consistent with that communicated to policyholders from time to time the need to invest to meet all guarantees given to policyholders, and an aim of maintaining a level of capital in LVFS in line with the risk appetite set by the Board LVFS may use derivatives and other instruments for the purpose of efficient portfolio management or to hedge specific liabilities, but not for speculation. The investment strategy is determined having regard to the level of guarantees, asset shares and the overall level of solvency of LVFS. This will determine the ability of the fund to bear the risks of investment in real assets (equity and property) or to invest in fixed interest assets. The asset mix is monitored and may change from time to time. The current target mix is published. LVFS aims to closely match the guaranteed liabilities under certain contracts such as Withprofits pension policies. New types of assets will be considered and utilised only after appropriate approval by the Board. Liverpool Victoria Friendly Society Page 73 of 79

74 The exposure to single counterparties is limited in each class to manage the degree to which a counterparty default would affect the investment return on the fund. Certain assets held by LVFS are of a nature that they are not ordinarily traded. These assets include the subsidiary companies, contingent support arrangements between other companies in the LVFS group. These strategic assets are reviewed annually to ensure that they remain satisfactory investments. Business Risk In deciding on the business risks to accept, the Board will only take on such risks if the expected benefits are no worse than from alternative arrangements. LVFS maintains suitable systems and controls for managing the risks which is monitored at least annually. Business risks arise as a matter of course due to the operation of the business processes. These are actively monitored and profits and losses tracked. Losses may be offset against profits for most business risks and are allocated to the inherited estate. Since 2011 profits from business risks are allocated through the declaration of the Mutual Bonus. Expenses The aim in applying charges and expenses to with- profits policies is to: ensure that the charges and expenses are a fair allocation of such charges and expenses between the various companies within TPS ensure that each with-profits policy bears its fair share of each type of charge and expense, subject to any constraints imposed by policy conditions, bonus series or LVFS rulebook. LVFS may vary the level of a charge which is not guaranteed, subject to TCF considerations. Expenses applied to CWP business include acquisition and maintenance (including claims) costs. LVFS out-sources a range of administration services which are regularly monitored against agreed Service Levels. In particular, it outsources the investment management and is able to terminate this agreement with immediate effect if the manager fails to meet agreed criteria. Liverpool Victoria Friendly Society Page 74 of 79

75 Management of the Inherited Estate The inherited estate is the excess of LVFS assets over its liabilities and will be: managed for the purpose of maintaining solvency and providing statutory capital to meet reserving requirements managed with the aim of treating the policyholders fairly and equitably relative to their reasonable expectations used to provide investment freedom used to meet regulatory capital requirements used to support the smoothing of payouts to with-profits policyholders when appropriate; used for financing new business and financing acquisitions and providing working capital for operational projects The inherited estate is used as described in the principles. If the estate is deemed by the Board to have more capital than required, then that part of the estate that is determined to represent excess assets which may be distributed to existing with-profits policyholders. The timing and nature of a distribution is at the discretion of the Board. There is no division of the inherited estate between any classes of business. There are currently no constraints on the Board s freedom to deal with the inherited estate. New Business Arrangements New business is only written in the withprofits fund if the Board is satisfied that this is likely to have no adverse effect on the interests of the existing with-profits. The current and projected financial strength is monitored annually and used to set the maximum amount of volumes of new business for key classes. In the event that LVFS ceased writing significant amounts of new business the Board would seek to distribute the inherited estate in an equitable manner over the remaining lifetime of the with-profits policies. LVFS does not currently set a minimum level of new with-profits business necessary to justify it staying open to new business. Liverpool Victoria Friendly Society Page 75 of 79

76 APPENDIX 6 LVFS GROUP STRUCTURE Liverpool Victoria Friendly Society Page 76 of 79