Phoenix Life Limited Scottish Mutual With-Profits Fund Annual report to with-profits policyholders by the Board of Phoenix Life Limited for the period 1 January 2015 to 31 December 2015 Report to policyholders 2015 - PLL SMWP June 2016 Page 1 of 11
Purpose We set out how we manage the Phoenix Life Limited with-profits funds in our Principles and Practices of Financial Management (PPFM). The interests of with-profits policyholders are protected by the PPFM. In this report we give details of how we have complied with the PPFM during 2015 for our Scottish Mutual With-Profits Fund ('the fund'). This report should be read with the PPFM. Our PPFM is available on our website at www.phoenixlife.co.uk, or you can ask us for a copy. We also have a shorter, simplified guide called 'How we manage the Phoenix Life Limited Scottish Mutual With-Profits Fund' which you can access in the same way. The Board of Phoenix Life Limited can make choices, or exercise discretion in a number of areas, such as setting bonuses, policy payouts and surrender values, and in addressing any competing or conflicting rights of policyholders and shareholders. This report deals with how Phoenix Life Limited has exercised its discretion in these areas. Summary It is the opinion of the Board that Phoenix Life Limited, including the Scottish Mutual With-Profits Fund, was managed in line with the PPFM over 2015. The Board is also of the view that the decisions made in managing the Scottish Mutual With-Profits Fund were appropriate and treated with-profits policyholders fairly. In preparing this report the Board took advice from the With-Profits Actuary and the With-Profits Actuary s report is attached at the end of this report. Background The Phoenix Life Limited Scottish Mutual With-Profits Fund consists of former Scottish Mutual Assurance Limited With Profits Sub-Fund policies. The Scottish Mutual With-Profits Fund is part of Phoenix Life Limited, along with nine other with-profits funds and a non-profit fund. We manage each with-profits fund in accordance with the relevant sections of our PPFM. The with-profits bonuses, policy returns and payouts for each with-profits fund reflect the financial position of that fund. The performance of each with-profits fund reflects the historic performance of the original with-profits funds and companies up to their respective transfer to Phoenix Life Limited, and then their performance within Phoenix Life Limited since that time. The Scottish Mutual With-Profits Fund is run as a separate ring fenced fund within Phoenix Life Limited but with the additional security that comes from being part of a large well capitalised company. In extreme circumstances one fund may have to provide financial assistance to another. However there are internal arrangements to ensure that Phoenix Life Limited holds assets in excess of the requirements of our regulator and, Report to policyholders 2015 - PLL SMWP June 2016 Page 2 of 11
because of this, it is extremely unlikely that a with-profits policy in one fund will be affected by losses from another fund. We have produced separate reports for our other with-profits funds. The with-profits policies fall into two main types. These are: traditional with-profits; and unitised with-profits. Independent review The company formally consulted with, and took into account the opinions of the With- Profits Actuary and the With-Profits Committee (a committee that is independent by virtue of its majority of independent members) regarding all material changes during 2015. This included consultation on the changes to bonus rates, surrender values and estate management. Compliance with the PPFM during 2015 The guiding principles and practices apply to all the with-profits funds and in the event of conflict with other principles take priority. The PPFM guiding principles cover : Legal requirements, that is, Phoenix Life Limited and its with-profits funds are managed in line with Phoenix Life Limited s then current understanding of all legal and regulatory requirements. Basic fund concepts, that is, each with-profits fund is operated as a stand-alone fund. Fair treatment, that is, Phoenix Life Limited aims to treat its with-profits policyholders fairly. The guiding principles are presented here at a high level rather than in the full detail of the PPFM. In the Board s opinion, the guiding principles were applied in accordance with the PPFM. The following sections expand on the principles and practices followed in managing the Scottish Mutual With-Profits Fund. There are also sections on changes to the PPFM and communications to with-profits policyholders during the year. Amounts payable under a with-profits policy We aim to pay all policyholders their fair share of the profits that the fund has earned over the time they have held their policy. We pay the share of profits in the form of annual and final bonuses. When deciding what is a fair share we consider the Report to policyholders 2015 - PLL SMWP June 2016 Page 3 of 11
underlying value of representative specimen policies (sometimes called the 'asset share') as a guide. Where the underlying policy value is bigger than the benefits already guaranteed by the policy then, subject to smoothing, we aim to add bonuses so that the amount we pay in total is equal to the underlying policy value. The underlying value of policies reflects the premiums paid and the investment performance of the fund over the lifetime of the policies, after allowing for factors such as our costs, the tax we have to pay, the shareholders' share of profits, charges for death benefits, charges for guarantees and other profits and losses. This was the approach we used over 2015. In the Board s opinion, the methodology used to calculate the underlying value of policies and the discretion applied to the methods used to determine payouts on all policies during 2015 has been in line with the PPFM. Annual bonus rates We generally declared nil annual bonus rates for 2015 in March 2016 (as we did for 2014 in March 2015). Type of business 2015 Declared Annual bonuses as a % of sum assured and attaching bonus UK life assurances 0% Special pension endowments 0% Individual pension 0% Annual bonuses as a % of benefits and vesting Group deferred annuity / pension 0% Group cash policies 0% Policy anniversaries from 6 April 2016 to 5 April 2017 With-profits annuity 5.00% For unitised business, annual bonus is declared in advance and applied from 1 April for life and pension series and from 1 March for International series. We were able to increase the annual bonus for some unitised with-profits business. The following table shows the declared annual bonuses as a percentage increase in unit price from 1 April 2016 (1 March 2016) and from 1 April 2015 (1 March 2015). Type of business From 1 April 2016 From 1 April 2015 Life series I & II 3.00% 3.00% Life series III 4.50% 4.00% Life series IV 3.50% 2.00% Report to policyholders 2015 - PLL SMWP June 2016 Page 4 of 11
Type of business From 1 April 2016 From 1 April 2015 Pension series I & II - accumulation units 4.00% 4.00% Pension series I & II - initial units 0.00% 0.00% Pension series III - accumulation units 4.50% 4.50% Pension series III - initial units 0.00% 0.00% Pension series VII 6.00% 6.00% From 1 March 2016 From 1 March 2015 International series - sterling 3.50% 3.50% International series - US dollar 3.00% 2.50% International series - euro 3.50% 2.00% Our policy continues to be to aim to build up final bonus rates to a target level before we consider reintroducing or increasing annual bonus rates. We continue to believe that this is the best and fairest way for all our policyholders to benefit from the returns of the fund. The Board is satisfied that the approach taken in determining annual bonuses during the year was in line with the PPFM. Final bonus rates We changed final bonus rates on 1 January 2015 and 1 July 2015. We also reviewed final bonus rates to apply from 1 January 2016. For some policies where the value of guaranteed benefits already exceeded the underlying policy value, we did not add any final bonus. With-profits annuities and group deferred cash and group pension policies do not receive any final bonus. They receive their share of distributed profits as annual bonuses only. The Board is satisfied that the changes to final bonus rates resulted in changes to payouts that were consistent with the PPFM and were consistent with treating customers fairly. Report to policyholders 2015 - PLL SMWP June 2016 Page 5 of 11
Smoothing During 2015 when we changed bonus rates, we compared the resulting maturity or retirement payout with the payouts if bonus rates were not changed and generally limited the changes in maturity or retirement payouts, to not more than 7.5% at each six monthly review. Similarly we generally limited changes in surrender values to not more than 10% at each six monthly review. These limits were applied after allowing for the effect of any change in the level of estate distribution. For some policies where payout ratios were significantly out of line with 100% of the underlying policy value, we allowed larger differences. For group deferred cash and group pension policies we smooth the actual investment return when reviewing annual bonuses. For with-profits annuities we smooth the annual bonus rates. The Board is satisfied that the movements in final bonuses and maturity payouts in 2015, were necessary to keep payouts reasonably in line with the underlying value of policies, to ensure fairness between groups of policyholders and to protect the financial position of the fund, and were in line with the PPFM. Surrender values For traditional life business, during 2015, we set surrender values with the aim of paying 100% of the underlying value of representative specimen policies. For traditional pension policies, early transfer values were based on adjusting the cash option that would be available at normal retirement to allow for the early payment and for the non-payment of any future premiums. Surrender values include an allowance for final bonus and these final bonus allowances were revised from 1 January 2015, 1 July 2015 and 1 January 2016 in line with changes in final bonus rates. For unitised with-profits business, we based surrender values on the value of the with-profits units and final bonus, subject to the potential application of a market value reduction (MVR). If the underlying policy value was less than the value of the with-profits units, then no final bonus was added and we applied a market value reduction which reduced the value of the with-profits units, so that the surrender value reflected the underlying policy value. We apply market value reductions to ensure fairness to all with-profits policyholders, so that surrender values are not unfairly higher than the policies' share of the underlying value of the fund s assets. We changed market value reductions at the same time we changed final bonus rates. In addition, we normally reviewed market value reductions each month and changed them if necessary. In the Board s opinion, the methodology used to determine surrender values has been in line with the PPFM. Report to policyholders 2015 - PLL SMWP June 2016 Page 6 of 11
Investment strategy We invest the fund in a mix of higher risk assets such as company shares (equities) and property and lower risk assets such as fixed interest stocks (bonds or loans issued by governments or companies) and cash deposits. We had the following asset mix for traditional with-profits policies on 31 December 2015. Asset type Traditional life policies Traditional pension policies Traditional withprofits annuities Company shares (equities) 39% 23% 23% Property 6% 4% 4% Other growth assets 4% 3% 3% Growth assets 49% 30% 30% Fixed interest stocks - issued by the 21% 31% 31% UK government (gilts) Fixed interest stocks - other (including 27% 37% 37% corporate bonds) Cash 3% 2% 2% Fixed interest and cash assets 51% 70% 70% Total assets 100% 100% 100% The asset mix for traditional with-profits group pension policies and traditional withprofits annuity policies on 31 December 2015 was the same as the traditional pension policies asset mix in the table above. We had the following asset mix for unitised with-profits policies on 31 December 2015. Investment type Unitised with-profits policy with guaranteed minimum bonus rate Unitised with-profits policy without guaranteed minimum bonus rate Company shares (equities) 23% 48% Property 4% 7% Other growth assets 2% 4% Growth assets 29% 59% Fixed interest stocks - issued by the 32% 16% UK government (gilts) Fixed interest stocks - other (including 37% 21% corporate bonds) Cash 2% 4% Fixed interest and cash assets 71% 41% Total assets 100% 100% The above asset mix applies to the main with-profits business. For overseas life assurance business, sterling, euro and US dollar denominated policies different asset mixes apply. Report to policyholders 2015 - PLL SMWP June 2016 Page 7 of 11
The fund also contains investments which back the cost of guarantees, the cost of smoothing and the estate. The Board is satisfied that the approach taken in following the investment strategy during the year was in line with the PPFM. Business risks There were no significant changes to the risks the fund was exposed to during the year. There was an annual review by the Board of existing business risk exposure. In the opinion of the Board, appropriate measures were taken to limit the with-profits business exposure to risk to amounts which are fair. The Board is satisfied that it has managed its business risks in line with the PPFM. Expenses and charges The way charges and expenses were set was unchanged during the year. The Board is satisfied that the allocation of expenses and the charges deducted were in line with the PPFM. We allocated a share of the provisional amount of tax we incurred to the fund, in line with the PPFM. We calculated this by treating the fund as though it was our only fund. Once we have agreed our tax charge with HM Revenue & Customs (HMRC), we will review the amount of tax we have allocated to the fund to ensure it is fair. We made an appropriate allocation of tax to the underlying value of with-profits policies in the fund. The policies in the fund provide a number of guarantees. We do not currently make any charges for the cost of guarantees although such charges have been made in the past. The cost of guarantees is currently borne by the estate. The Board is satisfied that this apportionment of a fair share of the cost of guarantees is in line with the PPFM. At the end of 2015 a payment was made to Pearl Group Management Services (PGMS) to obtain protection from certain future costs of regulatory change (excluding changes already known). Estate management The fund currently has an estate which provides money to support the running of the fund. The estate is the excess assets that are not needed to support the fund s current Report to policyholders 2015 - PLL SMWP June 2016 Page 8 of 11
and future commitments. These excess assets provide a buffer to protect the fund so that it can expect to meet its commitments to policyholders even if adverse events occur. It has been decided that some of these excess assets can be used to increase the final bonuses by including an additional amount which we call an uplift. The table below shows the percentage uplift applicable during 2015 and also from January 2016. Date applicable Policy values increased by up to 01/01/2016 30/06/2016 21.0% 01/07/2015 31/12/2015 21.0% 01/01/2015 30/06/2015 21.0% It is however important to understand that even though an uplift is currently being applied, it can go up or down or may be removed entirely. The actual payout value you receive will reflect the uplift applying at your payout date. The amount of the excess assets in the fund continually changes and depends on things such as: the performance of investment markets; the level of policy claims; the expected lifespan of policyholders whose policies provide a retirement income; and other operational profits and losses. The continuous changes to the above factors mean that when we review the excess assets, usually every 6 months, the uplift amount we are able to apply may change, or may even be removed entirely. In the Board s opinion, both the methodology used to calculate the estate and the distribution of the estate have been in line with the PPFM. New business The fund is no longer actively seeking new business. The Board is satisfied that this is in line with the PPFM. Equity between the fund and shareholders Our shareholders received a share of the distributed profits. For traditional with-profits policies sold after the Scottish Mutual Assurance Society demutualised on 1 January 1992, this was equal to one ninth of the value of bonuses we distributed to with-profits policyholders. For unitised with-profits policies, the shareholders receive the annual management charges. The shareholders' share of distributed profits for 2015 was 1.0m. The policyholders share of distributed profits for 2015 was 33.6m. The Board is satisfied that the shareholders share of the distributed profits for 2015 is in line with the PPFM. Report to policyholders 2015 - PLL SMWP June 2016 Page 9 of 11
Where there are material transactions that involve both shareholder and with-profits policyholder interests these are considered by the appropriate governance committees including the With-Profits Committee before implementation. This will include any changes to commercial arrangements with PGMS, as well as the terms of any transactions between the with-profits fund and the Non-Profit Fund. PGMS is a company within the Phoenix group of companies (Phoenix Group), providing management and administration services to the with-profits fund. The Board is satisfied that this is in line with the PPFM. Changes to the PPFM during 2015 We include a description of the recent changes to the PPFM with any annual statement we issue to with-profits policyholders. Communications to with-profits policyholders During 2015, we provided with-profits policyholders with key information concerning annual bonuses and changes to the PPFM with their annual statement. The Phoenix Life website (www.phoenixlife.co.uk) was updated to provide access to tailored content for each with-profits fund. Conclusion It is the opinion of the Board that Phoenix Life Limited including the Scottish Mutual With-Profits Fund was, in all material respects, managed in line with the PPFM over 2015. The With-Profits Committee has reviewed this annual report to with-profits policyholders and does not wish to make any additional or separate reports. The Directors of Phoenix Life Limited June 2016 Report to policyholders 2015 - PLL SMWP June 2016 Page 10 of 11
Report to with-profits policyholders by the With-Profits Actuary of the Phoenix Life Limited Scottish Mutual With- Profits Fund for the period 1 January 2015 to 31 December 2015 Purpose The Principles and Practices of Financial Management (PPFM) for Phoenix Life Limited ( the company ) is a detailed document which sets out how the company manages its with-profits business. The company has discretion in a number of areas, such as setting bonuses, policy payouts and surrender values, and in addressing any competing or conflicting rights of policyholders and shareholders. The purpose of my report to the company s with-profits policyholders of the Scottish Mutual With-Profits Fund is to give my opinion, as required by the rules of the Financial Conduct Authority, as to whether the company has taken the interests of these withprofits policyholders into account in a reasonable and proportionate manner in exercising this discretion during 2015. Conclusion In my opinion, the company has taken the interests of the with-profits policyholders of the Scottish Mutual With-Profits Fund into account in a reasonable and proportionate manner in exercising this discretion during 2015. My opinion is based on the information that the company provided to me during the year. In my opinion my report, when considered alongside the information in the company s own report to which my report is annexed, together with other information provided to policyholders in relation to 2015, complies with the Insurance, Reporting, Modelling and Data Technical Actuarial Standards issued by the Financial Reporting Council. Andrew Burke Fellow of the Institute of Actuaries With-Profits Actuary June 2016 Phoenix Life Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Phoenix Life Limited is registered in England No. 1016269 and have their registered office at: 1 Wythall Green Way, Wythall, Birmingham, B47 6WG. Report to policyholders 2015 - PLL SMWP June 2016 Page 11 of 11