Phoenix Life Limited Alba With-Profits Fund Annual report to with-profits policyholders by the Board of Phoenix Life Limited for the period 1 January 2017 to 31 December 2017 Report to policyholders 2017 - PLL AWP June 2018 Page 1 of 12
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, from the Phoenix Life Limited Board we give details of how we have complied with the PPFM during 2017 for our Alba 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. 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 Alba With-Profits Fund, was managed in line with the PPFM over 2017. The Board is also of the view that the decisions made in managing the Alba 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 Alba With-Profits Fund consists of former Alba Life Ordinary Long Term Fund policies. The Alba With-Profits Fund is part of Phoenix Life Limited, along with nine other withprofits funds and a non-profit fund. We manage each with-profits fund in line 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 Alba 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, because of Report to policyholders 2017 - PLL AWP June 2018 Page 2 of 12
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 policies in the former Alba Life Ordinary Long Term Fund originate from: former FS Assurance / Britannia Life Limited (FS / BLL); former Britannia Life Assurance / Crusader Insurance (BLA / Crusader); and former Life Association of Scotland (LAS), including both with-profits and non-profit business. The with-profits policies in the fund fall into two broad groupings. These are fully participating business which fully participates in profits and losses of the fund and investment smoothing business which only shares in the profits and losses arising from investment returns after allowing for smoothing. Fully participating business comprises: traditional with-profits, including deferred annuity contracts; unitised with-profits (started before 1 January 1994); deposit administration (not former FS / BLL); and controlled funding arrangements (not former BLA / Crusader). Investment smoothing business comprises: unitised with-profits (started from 1 January 1994); Unitised Capital Guaranteed Fund; deposit administration (former FS / BLL); controlled funding arrangements (former BLA / Crusader). former BLA / Crusader With-Profits Performance Fund and With-Profits Pension Fund; and former BLA / Crusader Growth Bonus Series H. 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 2017. This included consultation on the changes to bonus rates, surrender values and estate management. Compliance with the PPFM during 2017 The guiding principles and practices apply to all the with-profits funds and in the event of conflict with other principles take priority. Report to policyholders 2017 - PLL AWP June 2018 Page 3 of 12
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 line with the PPFM. 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 either in the form of bonuses or interest rates. When deciding what is a fair share we consider the underlying value (sometimes called the 'asset share') of representative specimen policies as a guide. We aim to pay 100% of the underlying policy value, plus any uplift described under Estate management. 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 2017. For policies where the guaranteed benefits are bigger than the underlying policy value we will be paying out more than 100% of the underlying policy value. It is unlikely that any further bonuses will be added to these policies. Sometimes we may pay out less than the underlying policy value for individual policies, for instance because we calculate bonuses using an average approach for groups of policies. Except where the payment of a guaranteed benefit results in a higher amount, and except where the amount cannot reasonably be compared with a calculated underlying policy value we aim to maintain the payout ratios for the specimen policies we use within a target range of 80% to 120% of the underlying policy value. We believe this range is appropriate to accommodate market movement in the assets backing the funds. We changed our final bonus scales twice during 2017 in order to move our payouts closer to our 100% target and to keep the majority of payouts within the target range for the specimen policies. Report to policyholders 2017 - PLL AWP June 2018 Page 4 of 12
A change was made during 2017 to the way in which we calculate final bonus rates on a small block of former BLA deferred annuity contracts. We now calculate bonus rates by comparing the underlying value to the guaranteed cash benefit under the policies rather than the current value of the guaranteed pension benefit. This change had the effect of increasing final bonus rates for some long-term policies and took effect from 1 January 2018. A review of prior years claims affected by this change is being undertaken in 2018 to identify if any such policies received pay-outs that were below our fair target range and top-up payments will be made where appropriate. The PPFM has been updated to clarify this change In the Board s opinion, the method used to calculate the underlying value of policies and the discretion applied to the methods used to determine payouts on all policies during 2017 has been in line with the PPFM. Annual and final bonus rates The different product types investing in the fund receive their share of the profits earned in the fund in different forms of bonus. The form of bonus varies by type of product. Traditional with-profits and unitised with-profits policies receive their share of the profits in the form of annual and final bonuses. For traditional with-profits business, annual bonus is declared in arrears, however no annual bonuses have been declared since 2001. For unitised with-profits business, we declare annual bonuses in advance. For life policies we declared a rate of 1% for 2017 from 1 March 2017 and this was maintained from 1 March 2018. For pension series where no guaranteed annual bonus applies we declared a rate of 2% for 2017 from 1 March 2017 and this was maintained from 1 March 2018. No additional annual bonuses were added to pension series with a guaranteed annual bonus. The table below shows the annual bonuses for unitised policies applying from 1 March 2018. Type of business 2018 declared Life 1% Pensions (4% guarantee) 4% Pensions (0% guarantee) 2% During 2017, we changed final bonus rates on 1 January and 1 July. We also reviewed final bonus rates from 1 January 2018. For some policies where the value of guaranteed benefits already exceeded the underlying policy value, we did not add any final bonus. Unitised Capital Guaranteed Fund policies, With-Profits Performance Fund and With- Profits Pension Fund policies receive their share of the profits in the form of regular bonuses added daily to the unit price. Report to policyholders 2017 - PLL AWP June 2018 Page 5 of 12
We reviewed the bonus rates in March 2017 and also those to apply from March 2018. Deposit administration policies receive their share of the profits in the form of interest added to policyholders' accounts. We reviewed the rates of interest in March 2017 and also subsequently in March 2018, and we may review rates more frequently depending on the particular type of product. Controlled funding policies receive their share of the profits as: a percentage of the pension benefits purchased by the scheme to date; an additional contribution; or a reduction in the contribution payable. We reviewed the rates for 2017 in December 2017 and subsequently declared nil rates in March 2018 as part of the 2017 year end valuation. The Board is satisfied that the approach taken in determining annual bonuses and interest rates during the year was in line with the PPFM. The Board is also 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. Smoothing For all traditional policies and unitised with-profits policies during 2017 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 are applied before making any changes to payouts to allow for 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 other types of business, we generally smooth in changes in the bonus or interest rates declared by limiting the changes in rates to not more than 2% at each declaration. The Board is satisfied that the movements in final bonuses and maturity payouts in 2017 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 business, during 2017, we set surrender values with the aim of paying 100% of the underlying value of representative specimen policies plus any uplift described under Estate management. Where surrender values include an Report to policyholders 2017 - PLL AWP June 2018 Page 6 of 12
allowance for final bonus rates, these final bonus allowances were revised from 1 January 2017, 1 July 2017 and 1 January 2018 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 reviewed market value reductions from 1 January 2017, from 1 July 2017 and again from 1 January 2018. For Unitised Capital Guaranteed Fund, With-Profits Performance Fund and With- Profits Pension Fund policies we set surrender values based on the underlying policy value. If the underlying policy value was less than the value of the units then we applied a market value reduction so that the surrender value reflected the underlying policy value. We reviewed market value reductions in March 2017 (and subsequently from March 2018). For deposit administration policies, we set surrender value based either on the terms specified in the policy documentation or on the underlying policy value. If the underlying policy value was less than the value of the units then we applied a market value reduction so that the surrender value reflected the underlying policy value. We reviewed market value reductions in March 2017 (and subsequently from March 2018) or in each quarter, depending on the particular type of product. For some policies we use scheme specific market value reductions and we review these on an individual scheme basis at the time of surrender. For controlled funding arrangements, we set surrender values based either on the terms specified in the policy documentation or on the underlying policy value. In the Board s opinion, the method used to determine surrender values has been in line with the PPFM. Investment strategy During 2017, we mostly invested the fund in a mix of assets such as property, fixed interest stocks (bonds or loans issued by governments or companies) and cash deposits. We also started to gradually introduce some company shares (equities) into the investment mix for some policies. Report to policyholders 2017 - PLL AWP June 2018 Page 7 of 12
The approximate asset mixes for with-profits policies as at 31 December 2017 are shown below. Investment type Traditional with-profits life and pensions (former BLL Series B) Report to policyholders 2017 - PLL AWP June 2018 Page 8 of 12 Traditional with-profits pensions (other than former BLL Series B) Unitised withprofits business (started before 1 Jan 1994) Unitised withprofits business (started from 1 Jan 1994) Company shares 7% 0% 7% 7% Property 20% 0% 20% 20% Total growth assets 27% 0% 27% 27% Fixed interest stocks - issued by the UK government (gilts) 36% 49% 36% 36% Fixed interest stocks other (including corporate bonds) 37% 51% 37% 37% Cash 0% 0% 0% 0% Total fixed interest and cash assets 73% 100% 73% 73% Total assets 100% 100% 100% 100% Investment type Unitised Capital Guaranteed Fund Deposit administration - former FS/BLL Deposit administration - former Crusader Deposit administration - former LAS Laserplan Company shares 5% 5% 3% 0% Property 16% 16% 8% 0% Total growth assets 21% 21% 11% 0% Fixed interest stocks - issued by the UK government (gilts) 39% 39% 31% 49% Fixed interest stocks other (including corporate bonds) 40% 40% 33% 51% Cash 0% 0% 25% 0% Total fixed interest and cash assets 79% 79% 89% 100% Total assets 100% 100% 100% 100% Investment type Deposit administrationformer LAS (LTA) Controlled funding arrangementsformer Crusader (Growth Pension Fund) Controlled funding arrangementsformer FS/BLL and LAS With-Profits Performance Fund and With- Profits Pension Fund Company shares (equities) 3% 7% 1% 50% Property 8% 20% 4% 3% Total growth assets 11% 27% 5% 53% Fixed interest stocks - issued by the UK government (gilts) 44% 36% 47% 3% Fixed interest stocks other (including corporate bonds) 45% 37% 48% 4% Cash 0% 0% 0% 40% Total fixed interest and cash assets 89% 73% 95% 47% Total assets 100% 100% 100% 100%
The With-Profits Performance Fund and With-Profits Pension Fund policies are invested in appropriate former LAS internal linked funds of Phoenix Life Limited and these have investment in company shares (equities). The Alba With-Profits Fund also contains investments which back the non-profit business, 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. Estate management There is more money in the fund than we expect to pay out in claims, unless we uplift bonuses. We refer to this surplus money as the estate. In 2017 this surplus was retained in the fund to protect against unexpected future shocks, for example a fall in the value of the fund s investments. Report to policyholders 2017 - PLL AWP June 2018 Page 9 of 12
Shareholder support in the form of a loan of 26m was in place at the start of 2017, this decreased to 20m by the start of 2018. In the Board s opinion, the decision not to make any distribution of the estate in 2017 was 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 which is generally a percentage of the value of bonuses we distributed to with-profits policyholders. In respect of traditional with-profits policies, unitised with-profits policies and controlled funding arrangements, the shareholders received one ninth of the value of bonuses distributed to policies, excluding any guaranteed bonuses or annual bonuses in respect of unitised with-profits business written from 1 January 1994. In respect of Unitised Capital Guaranteed Fund policies and deposit administration (former FS / BLL) policies, the shareholders did not receive any share of the value of bonuses distributed to policies. In respect of deposit administration (other than former FS / BLL) policies, the shareholders received one ninth or one eighteenth of the value of bonuses distributed to policies, excluding any guaranteed bonuses, depending on the type of policy. In respect of the With-Profits Performance Fund and With-Profits Pension Fund policies, the shareholders did not receive any share of the value of bonuses distributed to policies. The shareholders' share of distributed profits for 2017 was 0.6m. The shareholder pays any tax that is generated as a result of this distribution to shareholders. The policyholders share of distributed profits for 2017 was 5.9m. The Board is satisfied that the shareholders share of the distributed profits for 2017 is in line with the PPFM. 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 Pearl Group Management Services (PGMS), as well as the terms of any transactions between the Report to policyholders 2017 - PLL AWP June 2018 Page 10 of 12
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 2017 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 2017, 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 Alba With-Profits Fund was, in all material respects, managed in line with the PPFM over 2017. 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 2018 Report to policyholders 2017 - PLL AWP June 2018 Page 11 of 12
Report to with-profits policyholders by the With-Profits Actuary of the Phoenix Life Limited Alba With-Profits Fund for the period 1 January 2017 to 31 December 2017 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 Alba 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 with-profits policyholders into account in a reasonable and proportionate manner in exercising this discretion during 2017. Conclusion In my opinion, the company has taken the interests of the with-profits policyholders of the Alba With-Profits Fund into account in a reasonable and proportionate manner in exercising this discretion during 2017. My opinion is based on the information that the company provided to me during the year. The Financial Reporting Council is responsible for issuing and maintaining Technical Actuarial Standards (TASs) that apply to certain types of actuarial work. 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 2017, complies with the Technical Actuarial Work (TAS 100) and Insurance Technical Standards (TAS 200). Andrew Burke Fellow of the Institute of Actuaries With-Profits Actuary June 2018 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 2017 - PLL AWP June 2018 Page 12 of 12