SCOTTISH EQUITABLE PLC. Report of the. Chief Actuary

SCOTTISH EQUITABLE PLC Report of the Chief Actuary on the proposed transfer of business from Scottish Equitable plc to Rothesay Life plc pursuant to Part VII of the Financial Services and Markets Act 2000 James Crispin FFA Chief Actuary (Scottish Equitable) February 2017 Page 1 of 42

Contents 1. SUMMARY... 3 2. INTRODUCTION... 6 3. OVERVIEW OF SE... 9 4. SE RISK MANAGEMENT... 17 5. OVERVIEW OF ROTHESAY... 19 6. OUTLINE OF THE SCHEME... 21 7. SE FINANCIAL POSITION BEFORE AND AFTER TRANSFER... 24 8. ROTHESAY FINANCIAL POSITION BEFORE AND AFTER THE TRANSFER.. 30 9. EFFECT OF THE SCHEME ON TRANSFERRING SE POLICYHOLDERS... 32 10. EFFECT OF THE SCHEME ON NON-TRANSFERRING SE POLICYHOLDERS. 35 11. CONCLUSION... 38 Page 2 of 42

REPORT OF THE CHIEF ACTUARY 1. SUMMARY Purpose 1.1. I am the Chief Actuary of Scottish Equitable plc ( SE ) and the purpose of my report to the SE Board is to review the impact on policyholders in SE of the proposed transfer (the Transfer ) of certain non-profit annuity policies which are currently liabilities of the Non-Profit Sub-Fund ( NPSF ) and With-Profits Sub-Fund ( WPSF ) of SE to Rothesay Life plc ( Rothesay ). Scope of the Scheme 1.2. On 11 April 2016, SE entered into a transaction with Rothesay to sell part of its annuity portfolio. 1.3. Reinsurance agreements were put in place with Rothesay under which the future risks and obligations relating to a specific group of immediate and deferred annuity liabilities of the NPSF and WPSF of SE were fully reinsured to Rothesay, with the investment assets backing these liabilities being transferred from SE to Rothesay. 1.4. Under the agreements, approximately 187,000 policies were reinsured from SE to Rothesay, with approximately 173,000 written in the NPSF and approximately 14,000 written in the WPSF. 1.5. At the same time, SE entered into a separate agreement with Rothesay in which each party agreed it would use reasonable endeavours to effect the transfer of those annuities to Rothesay, pursuant to a court approved insurance business scheme of transfer under Part VII of the Financial Services and Markets Act 2000 ( FSMA ). The proposed Scheme Effective Date ( SED ) is 30 June 2017. 1.6. In addition to the Transfer considered in this document, SE also plans to transfer an additional portfolio of annuity business to Legal and General Assurance Society Limited ( LGAS ) under a separate scheme within a short period after the Rothesay Scheme. 1.7. The annuity policies in scope for transfer to Rothesay are the non-profit annuities written in the SE NPSF and WPSF excluding those NPSF annuities sold externally on the open market, predominantly written between 2006 and December 2015 (with the annuities sold externally on the open market forming the portfolio to be transferred to LGAS). As these are all non-profit policies, the benefits are contractually fixed, and there is no entitlement to bonuses. The Scheme will transfer the liabilities, rights, and responsibilities of the transferring policies from SE to Rothesay. The policyholders in question will therefore cease to be policyholders of SE and will become policyholders of Rothesay, with the same contractual benefits. As mentioned above, the investment assets backing the liabilities have already transferred under the reinsurance agreements with Rothesay. Page 3 of 42

Key features of the Scheme 1.8. I have considered the impact of the Transfer of business on transferring and nontransferring policyholders and in my view, the key features to note are: Ref Outline of key features of the Transfer Practical aspects affecting the operation of policies and benefits due to policyholders (i) (ii) (iii) (iv) (v) (vi) The contractual policy terms, conditions and charges are unchanged. Following implementation of the Scheme, Rothesay will assume responsibility for administering the policies. Based on information provided by Rothesay on their intentions, I am not aware of any reason to expect the quality of administration for any transferring policyholder to deteriorate as a consequence of the Scheme. The annuities transferring from the WPSF are non-profit policies and do not share in the with-profits estate so there is no change in contractual benefits from transferring out of the WPSF. There will be no material changes to the principles or practices by which the SE WPSF is managed or governed, including for the sake of clarity, no change in the eligibility for participation in distributions from the WPSF. Scottish Equitable Policyholders Trust Limited ( SEPT ) will continue to provide independent oversight in relation to the management of the SE WPSF in accordance with its agreed terms of reference. The existing scheme of transfer, which established the post-demutualisation structure of SE, the 1993 Scottish Equitable Life Assurance Society Scheme ( SELAS Scheme ), is unchanged by the Scheme and will continue to have effect following the implementation of the Scheme to the extent relevant. There is no materially adverse tax impact expected on policyholder benefits. SE is working with Rothesay to ensure as far as possible that the transfer does not affect transferring individual policyholders tax codes as this could result in short term fluctuations to net of tax annuity payments, though not to the total amount of annuity received over the tax year. I will provide an update on this aspect in my Supplementary Report. Aspects relating to financial strength and risk (i) (ii) For the transferring policyholders; based on information provided in the report prepared by the Chief Actuary of Rothesay, the post-transfer financial position of Rothesay is such that regulatory requirements are expected to be more than covered. Moreover, my understanding is that Rothesay will continue to be subject to the current Rothesay capital and risk appetite management policies after the transfer. At the point of assessment used in this report, Rothesay s financial position provides a similar level of protection to SE s, with Rothesay s framework for the ongoing maintenance of financial strength being broadly similar to that of SE. For the non-transferring policyholders the post-transfer financial position of SE is such that regulatory requirements are expected to be more than covered. Moreover, SE will be subject to the same capital and risk appetite management policies as existed pre-transfer. As the framework for ongoing maintenance of financial strength is unchanged there is no change to ongoing security. Conclusions on the Transfer 1.9. I have considered the potential impact of the Scheme on the security and benefit expectations of the policyholders in SE prior to the Transfer, both transferring and non-transferring policyholders. Based on this consideration and taking into account the key features of the Transfer outlined above (and the discussion of these and other matters contained in the remainder of this report), it is my view that: Page 4 of 42

(i) (ii) (iii) (iv) Taking into account the assets and liabilities transferred to Rothesay, the security of transferring SE policyholder benefits will not be materially adversely impacted as a result of the Scheme. Taking into account the assets and liabilities transferred, the security of the non- transferring SE policyholder benefits will not be materially adversely impacted as a result of the Scheme. The capital and risk appetite policies of SE and of Rothesay provide a similar level of protection, which in turn provides further comfort that the security of transferring and non-transferring SE policyholder benefits will not be materially adversely impacted as a result of the Scheme. The Scheme will not result in material changes to the benefit expectations of any SE with-profits, non-profit or unit-linked policyholders. 1.10. I therefore conclude that the Scheme will not result in a materially adverse impact on the security of transferring and non-transferring SE policyholders or their benefit expectations compared to the status quo. 1.11. I am also satisfied that there will be no material change to the servicing that nontransferring SE policyholders will receive as a result of the Scheme and, based on a comparison of key applicable service standards between Rothesay and SE, expect transferring SE policyholders to enjoy a commensurate level of service post- Transfer. 1.12. Further, I am satisfied that the proposed communications plan is appropriate and has paid due regard to the interests of policyholders and the need to treat them fairly. 1.13. Taking all of the above into account, I am satisfied that the obligations to treat customers fairly will not be materially adversely affected by the Transfer. It is therefore my conclusion that the Transfer may proceed. 1.14. My conclusions above would remain the same whether or not the LGAS scheme is implemented. Page 5 of 42

2. INTRODUCTION 2.1. On 11 April 2016, SE entered into a transaction with Rothesay to sell part of its annuity portfolio. Reinsurance agreements were put in place with Rothesay, with effect from 1 April 2016, under which the future risks and obligations relating to a specific group of immediate and deferred annuity liabilities of the NPSF and WPSF of SE were fully reinsured to Rothesay, with the investment assets backing these liabilities being transferred from SE to Rothesay. The reinsurance was put in place on a fully collateralised basis. 2.2. At the same time, SE entered into a separate agreement with Rothesay in which each party agreed it would use reasonable endeavours to effect the transfer of those annuities to Rothesay, pursuant to an insurance business transfer scheme under Part VII of FSMA. The proposed Scheme Effective Date ( SED ) is 30 June 2017. 2.3. In addition to the Transfer considered in this document, SE plans to transfer an additional portfolio of annuity business to LGAS under a separate scheme within a short period after the Rothesay Scheme. 2.4. The annuity business in scope to transfer to Rothesay comprises all of the nonprofit annuities written in the SE NPSF and WPSF excluding those annuities sold externally on the open market, predominantly written between 2006 and December 2015 (see 6.4 for further detail). The annuities sold externally on the open market form the portfolio to be transferred to LGAS. 2.5. The annuity business in scope comprises approximately 187,000 policies, with approximately 173,000 written in the NPSF and approximately 14,000 written in the WPSF. 2.6. In this report I consider the Transfer from the perspective of the transferring and non-transferring policyholders (whether invested directly or by way of reinsurance) of SE and whether the Transfer has any materially adverse impact on these policyholders. 2.7. This report is written for the Scottish Equitable plc Board ( SE Board ) in my capacity as Chief Actuary ( CA ) for SE, and should be read in conjunction with the Scheme, the With-Profits Actuary ( WPA ) report and the report by the Independent Expert ( IE ). Option to add further policies 2.8. Under the deal with Rothesay, there is an option for SE to add annuity policies which were in-force at end 2015 (but which were not initially identified as part of the reinsurance work) to the reinsurance arrangement. Further to this, SE have the option to add new annuity policies written in 2016 by the NPSF to the reinsurance arrangements currently in place. Following implementation of this further reinsurance in respect of these policies, they would then form part of the block of business to be transferred under the Scheme. 2.9. If the option deed is executed it is expected that the additional liabilities transferred as part of this arrangement will total c. 200m, with the decision to execute the option to be made later in Q1 2017. The addition of this further block of liabilities is not expected to materially affect the impact, financial or otherwise, of the Transfer under the Scheme. My Supplementary Report to the SE Board, which will set out any relevant updates to the content of this report immediately Page 6 of 42

prior to the planned SED in June 2017, will include an updated assessment of the financial impact of the Transfer, allowing for any additional business added to the arrangement as described above. Status and disclosure 2.10. I am a Fellow of the Institute & Faculty of Actuaries, having qualified in 1996, and hold a Chief Actuary (Life) Practising Certificate issued by the Institute & Faculty of Actuaries. I have over 25 years of experience working in the UK life assurance industry, including 5 years of working for SE, becoming Actuarial Function Holder in 2014, and then Chief Actuary when the new EU Solvency II framework came into effect on 1 January 2016. 2.11. I am an employee of Aegon UK Corporate Services Ltd ( AUKCS ), an Aegon UK Group service company which provides services to SE. SE is a significant part of the Group to which the service company provides services. 2.12. Details of any Aegon interests: As an employee of AUKCS I am subject to a similar pay and benefits structure as Identified Staff in the organisation. I have no individual performance incentives directly related to the success or otherwise of this Part VII transfer. As part of the 2014 and 2015 bonus schemes 50% of bonuses were awarded as Aegon NV shares vesting in May 2018 and May 2019 respectively. Similarly 50% of any 2016 bonus award will be in shares vesting in May 2020. I have an ISA with Aegon as a customer of Aegon Investment Solutions Ltd. I have a Group Personal Pension Policy with SE as part of the company s Staff Pension Arrangements. 2.13. I consider myself to be free from conflict that would prevent me from assessing the impact of the Scheme on policyholder benefits and the security of those benefits. Other advice and opinions 2.14. Mr Nick Dumbreck of Milliman LLP has been retained in the capacity of Independent Expert and has been approved as such by the PRA. In finalising my report, I have read a draft of his report on the terms of the Scheme and considered his conclusions. A copy of this Chief Actuary s report has also been provided to Mr Dumbreck. 2.15. In addition, I have read and considered the report of the With-Profits Actuary, Mr Alan McBride, assessing the impact of the Scheme on with-profits policyholders of Scottish Equitable. A copy of this Chief Actuary s report has also been provided to Mr McBride. Definitions and abbreviations 2.16. A list of the defined terms and abbreviations used in this report is included in Annex A. Defined terms used but not defined in this report have the same meaning as those used in the Scheme document and the IE s Report unless otherwise highlighted. Page 7 of 42

Compliance with Technical Actuarial Standards 2.17. This report has been prepared in accordance with, and complies with, the Technical Actuarial Standards on Insurance, Data, Modelling, Transformations, and Reporting issued by the Financial Reporting Council. Review of actuarial work 2.18. With effect from 1 July 2015 Actuaries are required to comply with the requirements of APS X2: review of Actuarial Work. In this regard therefore, this document has been reviewed by a suitably qualified actuary employed by AUKCS. Structure of report 2.19. This report is structured as follows: - Sections 3-4 provide an overview of SE and its risk and capital policy; - Section 5 provides key points noted about Rothesay and its risk and capital policy; - Section 6 outlines the proposed Scheme; - Section 7 considers the financial position and risk profiles of SE before and after the Transfer; - Section 8 considers the financial position and risk profiles of Rothesay before and after the Transfer; - Section 9 summarises the effect of the Scheme on transferring SE policyholders; - Section 10 summarises the effect of the Scheme on non-transferring SE policyholders; - Section 11 sets out my conclusions; - Annex A lists the defined terms and abbreviations used in this report; and - Annex B explains the various solvency calculation bases and how these are assessed in this report. Page 8 of 42

3. OVERVIEW OF SE 3.1. This section provides some information on the history and origins of SE to provide context for the discussion of the impact of the Scheme that is contained in later sections. 3.2. It also summarises information on the current reinsurance arrangements and existing capital structure of SE. Background 3.3. Scottish Equitable traces its origins back to 1831 with the formation of the Scottish Equitable Life Assurance Society ( SELAS ). SE was incorporated in Scotland on 14 May 1993 as a public limited company with registered number SC144517. Under a joint venture agreement between SELAS and Aegon International B.V. dated 20 April 1993 (as amended by letters of agreement dated 21 May 1993 and 8 September 1993, and an amendment agreement dated 26 November 2010) transferring the long-term business of SELAS to SE, it was agreed to capitalise and operate SE with a view to the long-term business of SELAS transferring to SE. On 31 December 1993, the long-term business of SELAS was transferred to SE (as part of the demutualisation process) pursuant to a scheme under the Insurance Companies Act 1982 (the SELAS Scheme). SE is now a wholly owned subsidiary of AEGON N.V. With the exception of one share owned by Aegon UK plc ( AUK ), the entire issued share capital of SE is owned by Scottish Equitable Holdings Limited. In turn, with the exception of one share owned by Scottish Equitable Policyholders Trust Ltd (SEPT), all of the issued share capital of Scottish Equitable Holdings Limited is held by AUK, an indirect wholly owned subsidiary of AEGON N.V. SE and the Aegon Group 3.4. SE and its parent company, AUK, are part of the Aegon Group which is headquartered in the Netherlands. The diagram below shows a simplified summary of the Aegon Group structure, with SE shown in the context of the wider group structure. Page 9 of 42

Summary of the business 3.5. SE consists of a long-term fund ( LTF ) (comprising a With Profits Sub-Fund (WPSF), a Non-Profit Sub-Fund (NPSF)) and a Shareholder fund ( SHF ). Within this structure, the following features are noteworthy: the WPSF comprises conventional with-profits policies, the investment element of unitised with-profits policies and all immediate and deferred annuity policies in force at the SELAS Scheme effective date; the NPSF comprises all other policies including unit-linked business, protection and employee benefits and post-demutualisation annuities the division of the LTF between the WPSF and NPSF exists for internal accounting purposes, enabling respective policyholder entitlements to be established; profits (and losses) on assets and liabilities notionally allocated to the WPSF are for the benefit of with-profits policyholders; profits (and losses) on assets and liabilities notionally allocated to the NPSF are for the benefit of the shareholder; and assets in the NPSF and SHF are available to support WPSF solvency should there be insufficient assets within the WPSF to meet its liabilities and vice versa. In line with the requirements of the SELAS Scheme the WPSF is managed with the intention that such support from the NPSF and SHF should not be required, and vice versa. 3.6. Following the implementation of the new Solvency II regulations (see Annex B), the requirement to maintain a separate LTF has been removed and this is now only maintained for management purposes. The WPSF is a ring-fenced fund under Solvency II. 3.7. The business of SE consists of: Page 10 of 42

Unit-linked individual pensions policies sold mainly through intermediary sales channels; Unit-linked whole of life policies sold mainly through intermediary sales channels; Traditional with-profits policies; Conventional pension annuity policies in deferment and payment; and Protection policies providing cover against death, critical illness, and sickness. Some unit-linked pensions and whole of life policies invest either partly or entirely in the WPSF and thereby participate in the profits and losses of the WPSF. This is known as unitised with-profits business. Page 11 of 42

3.8. SE currently writes significant volumes of new (unit-linked and protection) business through intermediary channels. In addition SE has traditionally written annuity business in respect of vesting pension policies. Form 47 of the 31 December 2015 PRA Annual Return shows that in 2015 SE wrote the following amounts and types of new business: Type of business New regular premiums ( m) New single premiums ( m) Annuities - 224.6 Unitised individual pensions 20.7 492.3 Unitised group pensions 347.5 976.0 Protection 29.1 - Other Miscellaneous - 6.7 Total SE 397.4 1,699.6 The majority of annuity new business written originates from existing SE policies with an attaching Guaranteed Minimum Pension or Guaranteed Annuity Rate option. As part of SE s intended strategy to cease writing new annuity business, any future annuity new business is expected be written by a third party outside of SE. From September 2016, for an initial term of five years, an annuity introduction service with Legal & General commenced. During the period of this agreement Legal & General will write annuities that SE would otherwise have written under its obligations on existing policies that have a Guaranteed Minimum Pension or Guaranteed Annuity Rate applying. 3.9. Under the SELAS demutualisation scheme of 1993, certain provisions were specified to protect the future interests of policyholders who held policies at the time of the demutualisation. This scheme established the SE WPSF as a separate sub-fund in the SE LTF and assigned to it conventional with-profits policies, the investment element of unitised with-profits policies, and all immediate and deferred annuity policies in force at the SELAS scheme effective date. The SE WPSF has been maintained in accordance with the provisions of the SELAS scheme (and other protections) and now contains business written both before and after demutualisation. The business was predominantly sold in the UK. 3.10. The WPSF stopped writing new business with guarantees and rights to participate in estate and annuity profits and losses in 2002. New investment from unit-linked policies into New Generation With-Profits (NGWP), a number of ring-fenced subfunds within the WPSF with no investment guarantees, continued to be permitted until 2013 when the WPSF was fully closed to all new business and formally entered run-off. Ongoing regular premiums commenced prior to 30 April 2015 continue to be accepted into some sections of the WPSF. 3.11. With-profits bonuses are set in line with the fund s published Principles and Practices of Financial Management ( PPFM ). Investment policy and amounts credited and debited to the WPSF are also determined in line with the published PPFM (which itself recognises the SELAS Scheme provisions). It is important to note that the annuity policies within the WPSF which are being transferred to Rothesay are not participating with-profits policies, meaning they are not entitled to any bonuses or any other form of profit distribution from the estate of the WPSF, and as such will not be disadvantaged in this respect as a result of the Transfer. 3.12. As the guarantor, AUK is liable for funding deficits in the AUK Staff Retirement and Death Benefit Scheme which closed to future benefit accrual in 2013 having stopped admitting new members in 2003. SE is the principal holding of the AUK and therefore funds its share of the Pension Scheme. SE s share of the Pension Page 12 of 42

Scheme deficit is recognised in the SII Balance Sheet for SE in line with the guidance from the PRA. Page 13 of 42

3.13. Below is a summary of the in-force business of SE as shown in the 31 December 2015 PRA Annual Return based on Solvency I. This shows the impact of the reinsurances already in place for SE at 31 December 2015 (see 3.15 below) before the Rothesay and LGAS (see 3.19 below) reinsurance arrangements and related treaties were entered into. Type of business Number of Policies 1 Gross of reinsurance reserves ( m) Net of reinsurance reserves ( m) WPSF LIFE UK 9,703 274 273 WPSF PENSIONS UK 104,650 5,095 5,060 WPSF OVERSEAS - - - Sub-Total - WPSF 114,353 5,369 5,333 NPSF LIFE UK - Linked 25,947 1,339 1,328 NPSF PENSIONS UK - Linked 1,681,364 41,232 37,100 NPSF OVERSEAS - Linked - 83 83 Sub-Total NPSF - Linked 1,707,311 42,654 38,510 NPSF LIFE UK - Non-Linked 384,153 379-42 NPSF PENSIONS UK - Non-Linked 444,882 8,833 8,770 NPSF OVERSEAS - Non-Linked - - - Sub-Total - NPSF - Non-Linked 829,035 9,212 8,728 Total SE 2,650,699 57,235 52,571 1: Note that post the publication of the PRA returns, an overstatement of the reported policy count for NPSF Deferred annuity non-profit business was identified. As a result, the number of policies shown in the table for NPSF PENSIONS UK - Non-Linked, and the Total SE figure, are overstated by c. 197k. There is no impact on the reported reserves. 3.14. SE s risk profile is a mix of market, insurance (i.e. longevity, mortality, and morbidity) and business (i.e. expense and persistency) risk. SE s risk profile and how it changes under the Scheme is discussed further in Section 7. Reinsurance arrangements 3.15. There are currently a number of internal and external reinsurance arrangements in place relating to SE s policies. The tables below summarise the main arrangements. External annuity reinsurance accepted by SE Reinsured from ReAssure Limited (formerly Guardian Assurance Limited) Nature of cover At 30 June 2016, reinsured best estimate liabilities under this arrangement were c. 0.9bn covering a portfolio of immediate annuities in payment. Page 14 of 42

External annuity reinsurance ceded by SE Reinsured to Munich Re XL Re 1 XL Re 2 Pacific Life 1 Pacific Life 2 Nature of cover Reinsurance of longevity risk on annuities vested in SELAS prior to 1/1/94 (and allocated to the WPSF at demutualisation) and in force at 1/4/98. At 30 June 2016, reinsured best estimate liabilities under this arrangement were c. 0.5bn. Reinsurance of longevity risk on individual annuities vested in the NPSF between 1/1/94 and 31/12/00. At 30 June 2016, reinsured best estimate liabilities under this arrangement were c. 0.3bn. Reinsurance of longevity risk on individual annuities vested in the NPSF during 2001. At 30 June 2016, reinsured best estimate liabilities under this arrangement were c. 0.1bn. Reinsurance of longevity risk on individual annuities vested in the NPSF between January 2002 and December 2006. At 30 June 2016, reinsured best estimate liabilities under this arrangement were c. 1.8bn. Reinsurance of longevity risk on internal vested annuities in the NPSF between 1 January 2007 and 31 December 2010 age over 55 at vesting. At 30 June 2016, reinsured best estimate liabilities under this arrangement were c. 1.5bn. The following reinsurance arrangements were established as part of the agreement to sell the annuity portfolio in Q2 2016 and are not reflected in the 31 December 2015 PRA Annual Return. Pacific Life 3 Pacific Life 4 Hannover Rothesay Treaties LGAS Treaty Reinsurance of longevity risk on vested annuities arising from existing SE pension policies in the NPSF between 1 January 2011 and 31 December 2014. At 30 June 2016, reinsured best estimate liabilities under this arrangement were c. 1.3bn. Reinsurance of longevity risk on internal vested annuities in the NPSF between 1 January 2007 and 31 December 2010 age 55 or under at vesting. At 30 June 2016, reinsured best estimate liabilities under this arrangement were c. 0.3bn. Reinsurance of longevity risk on Group annuity business covering all in payment members and deferred members in the NPSF with dates of birth prior to 1966. At 30 June 2016, reinsured best estimate liabilities under this arrangement were c. 0.4bn. Four separate treaties with Rothesay fully reinsuring the business to be transferred under the Scheme. This includes all of the business covered by the annuity reinsurance treaties listed above. The arrangement covers the non-profit annuity liabilities of the NPSF and WPSF excluding those annuities sold externally on the open market written between 2006 and December 2015. The separate treaties have been set up to align with potential valuation treatments under Solvency II rules. There is no impact on SE of the risk transfer occurring under four treaties rather than a single treaty. Treaty with LGAS fully reinsuring annuities in payment sold externally on the open market, predominantly written between 2006 and December 2015. This relates to a separate scheme. 3.16. In addition to the treaties summarised in the table above, SE has a number of significant treaties with a variety of external reinsurers that cover various protection assurances and external unit-linked funds. There are a number of other minor treaties relating to reinsurances ceded by SE to external parties. SE also reinsures 100% of investment guarantees on variable annuity business to Aegon Ireland plc, a Dublin based subsidiary of Aegon N.V. These treaties do not relate to the Transfer. Page 15 of 42

Capital structure of SE 3.17. The capital of SE is entirely share capital. SE has made loans of 150m to AUK to support the purchase of Cofunds (see 3.22 below), 25m to Cofunds itself, and an internal group loan to Aegon International B.V. These loans are repayable in the period up to 2033 and are unaffected by the Transfer. There will be no change to the capital structure of SE as a result of the Scheme. Recent and planned initiatives 3.18. In addition to the transfer of business to Rothesay under the Scheme, a number of other recent and planned initiatives are worthy of mention. 3.19. In addition to the proposed transfer of annuity policies to Rothesay a separate transfer under Part VII of the FSMA of a further portfolio of annuity liabilities of the NPSF to LGAS is planned, with a scheme effective date within a short period after the Rothesay Scheme. Similar to the arrangement with Rothesay, the business which will be transferred was fully reinsured to LGAS with effect from 1 May 2016. The impact on the Scheme covered by this report of the LGAS transfer taking place or not taking place is considered in Section 7. 3.20. From 5 September 2016 an arrangement was put in place with LGAS in respect of the writing of new annuity business (see 3.8 above). The arrangement does not have a significant immediate impact on SE s solvency position and does not affect the assessment of the proposed Scheme as set out in this report. 3.21. In May 2016, an agreement was reached to acquire BlackRock Life Limited s ( BlackRock ) UK defined contribution platform, with a view to subsequently completing a transfer of the business into SE under Part VII of the FSMA. The transfer is planned to be carried out in H1 2018 after the implementation of this Scheme. Implementation of the BlackRock scheme will be considered in isolation and does not affect the conclusions set out in this report. 3.22. In August 2016, AUK agreed to purchase Cofunds Limited (an investment administration company) from Legal & General in a deal funded in part by a loan from SE. The purchase completed on 1 January 2017. The impact of this transaction on SE is not material in the context of assessing the impact of the proposed Scheme as set out in this report and the Cofunds transaction is not impacted by the Scheme. Page 16 of 42

4. SE RISK MANAGEMENT 4.1. SE maintains a risk management framework. This section provides a summary of the key features of this framework. SE Capital Management Policy 4.2. In order to protect the interests of policyholders, insurance business is subject to significant regulatory oversight. In particular, regulations set out requirements for how much capital an insurer should maintain to cover the risks associated with its liabilities. A summary of the current regulatory regime for UK insurers is provided in Section 7 and Annex B. 4.3. SE s Own Risk and Solvency Assessment ( ORSA ) has a primary purpose of providing a holistic, inter-connected view of the SE business strategy, the risks to which the business is exposed and its capital levels. The ORSA will support the SE Board in considering Is our strategy affordable? through consideration of the level of policyholder protection in the business. Policyholder protection is primarily driven through capital adequacy testing under normal and stress scenarios. 4.4. In addition to these regulatory capital requirements, extra capital is maintained by SE in accordance with the SE capital management policy approved by the SE Board and in line with the Aegon Group Capital Policy. This additional capital aims to protect SE from breaching its regulatory capital requirements following a range of adverse events considered as part of setting the target level of capital under the capital management policy. 4.5. Regulatory requirements oblige companies to hold sufficient Own Funds (which is the difference between the value of a company s assets and technical provisions) to cover 100% of their regulatory capital requirements. Under the SE capital management policy, a level of additional capital is targeted such that SE aims to cover between 130% and 150% of its regulatory capital requirement. 4.6. In addition to the overall capital management policy for SE, the WPSF aims to maintain sufficient assets to cover 100% of the regulatory capital requirements associated with the liabilities of the WPSF plus further assets sufficient to maintain an appropriate amount of working capital within the fund. 4.7. The position against the capital and risk appetite policy is subject to regular monitoring and is also shared with regulators (as part of a close and continuous monitoring relationship). 4.8. The SE capital management policy is reviewed at least annually by the SE Board. No change to the SE capital management policy is planned as a result of the Scheme. Section 7 shows that SE s solvency position after implementation of the Scheme remains at least sufficient to provide the protection required under the SE capital management policy as described above. 4.9. Overall, since regulatory requirements require insurers to maintain assets that are significantly greater than those expected to be needed to meet policyholder benefits and since the SE capital management policy requires further assets to be maintained such that these regulatory requirements can continue to be met after a reasonably adverse scenario, the SE capital management policy provides significant comfort that benefits for non-transferring policyholders will have the same level of security after implementation of the Scheme as before. Page 17 of 42

Other risk management policies/practices 4.10. In addition to the SE capital management policy, other ongoing governance processes include: Maintenance of Risk Appetite policies which set limits for the different types of risk exposures faced by the business. These limits define the amount of risk that the organisation is prepared to seek, accept, or tolerate and are aligned to Aegon UK strategy. As such, Risk Appetite is subject to a regular reporting cycle to the SE Board and regulators (as part of a close and continuous monitoring relationship). A three lines of defence model which provides a mechanism for the identification, quantification, prioritisation, and management of risk in accordance with SE policies and regulatory requirements. Under this model, the first line refers to the work and governance undertaken by management and senior management to manage risk. Separate second line assurance of risk and capital management is performed by the SE Risk function while the independent third line assurance is provided through SE Internal Audit. 4.11. I note that these and other aspects of SE risk management (which provide comfort that risks are identified, understood, and managed) are not being changed by the Scheme under consideration in this report. Page 18 of 42

5. OVERVIEW OF ROTHESAY 5.1. Rothesay Life Limited was established on 26 February 2007 as a wholly owned subsidiary of its ultimate parent company, The Goldman Sachs Group LP. 5.2. Rothesay Life Limited was deconsolidated from Goldman Sachs in December 2012. As part of this deconsolidation, its ownership was transferred to a UK holding company, Rothesay Holdco UK Limited. Rothesay Holdco UK Limited s largest shareholders are Goldman Sachs (32.7%), The Blackstone Group L.P. (26.5%), and Government of Singapore Investment Corp (26.5%). 5.3. Rothesay Life Limited was authorised by the FSA as a regulated insurance company (licensed to write long-term classes I, III, IV, and VII) on 12 July 2007. It was established to provide solutions in the UK defined benefit pension risk transfer market. 5.4. Rothesay completed its first transaction in February 2008 and has subsequently undertaken further transactions of varying size and structure, including conventional deferred and immediate bulk annuities, collateralised buy-ins, and longevity swaps. 5.5. Rothesay Life became a plc in March 2016. 5.6. Below is a summary of the in-force business of Rothesay as shown in the 31 December 2015 PRA Annual Return based on Solvency I: Type of business Gross of reinsurance reserves ( m) Net of reinsurance reserves ( m) WPF LIFE UK - - WPF PENSIONS UK - - WPF OVERSEAS - - Sub-Total - WPF - - NPF LIFE UK - Linked - - NPF PENSIONS UK - Linked 12,097 11,842 NPF OVERSEAS - Linked 16 16 Sub-Total NPF - Linked 12,113 11,858 NPF LIFE UK - Non-Unit-Linked - - NPF PENSIONS UK - Non-Unit-Linked 2,010 1,990 NPF OVERSEAS - Non-Unit-Linked 104 103 Sub-Total - NPF - Non-Unit-Linked 2,115 2,093 Total Rothesay 14,228 13,951 5.7. Comparing this table with that shown in 3.13 shows that pre-transfer, Rothesay operates in fewer business markets than SE. The c. 12bn of reserves relating to Linked business are primarily in respect of immediate and deferred annuities with payments linked to inflation indices. There is also c. 2bn of reserves in respect of fixed payment annuities. At end-december 2015 Rothesay has not written any with-profits business and does not have a with-profits fund. 5.8. The transfer of annuity policies under the reinsurance agreement between SE and Rothesay put in place in April 2016 represents around three times the NPF - Non- Unit-Linked gross of reinsurance reserves shown in the table. Page 19 of 42

Recent and planned initiatives 5.9. During April 2015, December 2015 and June 2016, three tranches of annuity business transacted by Zurich Assurance Limited ( ZAL ) were reinsured by Rothesay. The transaction was conducted as three funded reinsurance trades covering c 1.2bn of in payment pension liabilities. 5.10. All ZAL liabilities reinsured with Rothesay will be transferred to Rothesay through a Part VII transfer, which is expected to have an effective date in June 2017. Page 20 of 42

6. OUTLINE OF THE SCHEME Background to the Scheme 6.1. On 11 April 2016, SE entered into an agreement with Rothesay. As part of this deal, four reinsurance arrangements were put in place with Rothesay, with effect from 1 April 2016, under which the future risks and liabilities on a specified group of immediate and deferred annuity liabilities of the NPSF and WPSF of SE were fully reinsured to Rothesay. At the same time, SE entered into a separate agreement with Rothesay in which each party agreed it would use reasonable endeavours to effect the transfer of those annuities to Rothesay pursuant to a scheme under Part VII of FSMA. 6.2. The Transfer and the transfer to LGAS form part of AUK s strategy to divest its annuity business and focus on its platform and protection businesses in the United Kingdom. The main objective of the transaction from the perspective of SE is to free up capital in both the WPSF and NPSF currently held against annuity liabilities. 6.3. The main objective of the transaction from the perspective of the SE WPSF relates to the overall management of the sub-fund as it runs off. The non-profit immediate and deferred annuity book (and the assets backing them) represents an asset of the fund. The combination of the reinsurance and proposed Transfer ensure that the value of this asset (plus the associated capital requirements released as a result of the reinsurance and proposed Transfer) can be fairly distributed to participating policyholders before the participating with-profits policies have run off. As well as releasing value for distribution to customers the removal of these liabilities from the fund removes the risk that future losses will be made on the book of business and that such losses adversely impact on participating policyholder payouts. 6.4. Annuities included in the reinsurance agreements with Rothesay consist of the following non-profit policies: Certain pension annuities in payment which are liabilities of the NPSF. The specific sub-set comprises policies for which longevity reinsurance arrangements were already in place plus business originating internally from vesting SE policies; Life annuities in payment which are liabilities of the NPSF; Pensions annuities in payment which are liabilities of the WPSF; Life annuities in payment which are liabilities of the WPSF; Group buyout deferred annuities, which are liabilities of the NPSF; Group buyout deferred annuities, which are liabilities of the WPSF; Group buy-in deferred annuities, which are liabilities of the NPSF; and Group buy-in deferred annuities, which are liabilities of the WPSF. 6.5. The following annuities have been excluded: annuities where the policyholder is believed to have died prior to 1 April 2016 (i.e. suspended policies and suspected deaths). Page 21 of 42

6.6. Certain assets and liabilities related to the Transferred Business are excluded from the Scheme, including excluded mis-selling liabilities. These excluded assets and excluded liabilities will remain with SE. Any mis-selling liabilities which crystallise on or before 1 April 2031 will remain liabilities of SE (and the parties have agreed certain risk sharing and claims handling arrangements in relation to these liabilities). Mis-selling liabilities which crystallise after 1 April 2031 will transfer pursuant to the Scheme and will become liabilities of Rothesay. 6.7. If the Transfer does not take place, it is SE s current intention that the reinsurance arrangement will remain in place and hence the policies will remain reinsured to Rothesay. No detriment would arise to transferring policyholders if this were to happen. While this would be unlikely to result in material detriment to policyholders, SE would remain exposed to the risks and expenses of the reinsurance arrangements, and therefore policyholder security would be marginally poorer than if the business was transferred. 6.8. Note that policyholder security will remain greater than if the reinsurance to Rothesay had not been put in place as the reinsurance itself increased the financial strength of SE and therefore policyholder security. Overview of the business transferring 6.9. The Scheme is expected to transfer the specified immediate and deferred annuities of the NPSF and WPSF of SE to Rothesay on 30 June 2017 (the Scheme Effective Date ). The annuities which will transfer are those annuities reinsured to Rothesay under the reinsurance arrangements described in 6.1, which are in-force as at the Transfer Date. This will include any additional policies added to the reinsurance arrangement prior to the Transfer Date under the mechanism described in Section 2.8. The policy numbers of the affected annuities will be listed in schedules provided by SE to Rothesay on or before the Scheme Effective Date. 6.10. The liabilities in respect of transferring policies will transfer from SE to Rothesay. As mentioned above, assets backing the liabilities have already been transferred alongside the liabilities from SE to Rothesay under the reinsurance agreement. 6.11. Following implementation of the Scheme, Rothesay will assume responsibility for administering the policies. Impact on SE policies 6.12. The policies in SE which are not transferring to Rothesay under the Scheme, namely the remaining policies within the NPSF and WPSF (including any annuities which are not reinsured to Rothesay) will remain in the same funds as now and no changes are being proposed to their terms and conditions under the Scheme. The annuity policies currently reinsured to LGAS are planned to be transferred to LGAS under a separate scheme within a short period after the Rothesay Scheme. Further, there will be no change to the operation of the WPSF (other than the absence of the transferred business) nor the NPSF and these will continue to operate as discrete sub-funds of the long term fund. 6.13. The transferring SE policies will become policies of Rothesay and SE will have no further liability for them. The contractual terms and conditions of the transferring policies will not change as a result of the Scheme. Rothesay has its own capital policy which provides similar protection to the SE capital management policy (see Section 8 for further details). 6.14. Those costs associated with the Scheme that are attributable to SE will be met Page 22 of 42

from shareholder funds. Policyholders and the WPSF will bear no part of the cost of the Scheme. Existing Scheme of Demutualisation and changes to PPFM 6.15. The implementation of the Scheme in respect of the Transfer to Rothesay will have no material impact on the non-transferring policyholders of SE covered by the SELAS Scheme (other than a marginal increase in policyholder security) and the ongoing operation of the WPSF or benefits and security of the transferring policyholders. 6.16. The annuity policyholders of SELAS whose policies were allocated to the WPSF on demutualisation are not participating policyholders and have no entitlement to distributions from the WPSF. These policyholders will therefore not lose any participation rights as a result of the transfer of their policies to Rothesay. 6.17. The PPFM for the SE WPSF will be updated to reflect the impact of the Scheme. Specifically the reference to participation in any profits/losses that arise on nonprofit business in the WPSF (for example certain annuities) will be updated following transfer of the non-profit annuity business out of the sub-fund. Some of the future profits/losses from the annuity business are realised as part of the proposed transfer and the preceding reinsurance treaty with Rothesay. Putting the reinsurance arrangement with Rothesay in place resulted in an immediate improvement in the WPSF Solvency II Surplus. The Transfer will lock in the benefit of this reinsurance and is expected to improve WPSF Solvency II Surplus by around a further 18m as shown in Section 7.18. Reinsurances 6.18. As summarised in Section 3, there are a number of external reinsurance arrangements in place. 6.19. Upon implementation of the Transfer, the reinsurance arrangement with Rothesay will be redundant and will fall away. 6.20. The longevity reinsurance arrangements that SE has in place covering the annuity policies transferring under the Scheme will be transferred to Rothesay under the Scheme. The longevity reinsurers have been made aware of the annuity sale and will be formally notified of the Transfer under the notifications plan. 6.21. SE s other current external reinsurance arrangements will remain post-transfer. 6.22. It is not expected that there will be changes to the terms of the reinsurance treaties that will remain in place with SE as a result of the Scheme. No new reinsurance treaties are being introduced as a result of the Scheme. Page 23 of 42

7. SE FINANCIAL POSITION BEFORE AND AFTER TRANSFER 7.1. This section contains information on the financial position of SE before and after the Transfer. This information is useful in providing some quantitative assessment of the impact of the Transfer on policyholder security. 7.2. It also contains information on the impact of the Transfer on the overall balance of risks policyholders are exposed to and covers particular matters relating to this that are of relevance to policyholders. This information is relevant in gaining further understanding of how policyholder security of benefits will be affected by the Transfer. Background on solvency assessments for UK companies 7.3. UK insurance companies are required, by regulation, to maintain a minimum level of capital resources to reduce the risk that they are unable to meet their future obligations to policyholders. 7.4. The new EU Solvency II framework came into effect on 1 January 2016. The Solvency II requirements require companies to apply to use an Internal Model or to adopt the Standard Formula to assess the amount of capital they hold, to ensure that it remains able to meet its liabilities to policyholders in all but the most extreme circumstances. 7.5. The College of Supervisors approved SE s use of a Partial Internal Model in December 2015. 7.6. In addition under SII firms have the option to apply to use a Matching Adjustment or a Volatility Adjustment to adjust the discount rate to value certain liabilities. 7.7. The PRA approved SE s use of the Matching Adjustment for its Immediate Annuity Business and the Volatility Adjustment for its With-Profits Investment Guarantees. 7.8. The SELAS scheme requires that the WPSF does not rely on financial support from the NPSF and vice versa. Separate solvency assessments are undertaken for each of the WPSF and NPSF (as well as SE as a whole). The risk tolerance framework for the WPSF requires that the WPSF aims to have sufficient assets to cover its technical provisions, its notional solvency capital requirement, and to maintain an appropriate amount of additional working capital within the fund. Solvency calculations 7.9. In order to assess whether or not the security of policyholder benefits is materially affected by the Scheme, it is useful to compare the solvency position of SE before and after the Transfer. 7.10. The excess of the Own Funds (which is the difference between the value of a company s assets and technical provisions) over and above the Solvency Capital Requirement ( SCR ) gives the Solvency II surplus and this surplus provides a useful indicator of the immediate impact of the Scheme on the level of security provided to policyholders. 7.11. The SE solvency assessment as at 30 June 2016 is shown in the tables below. I consider the positions at this date to be suitable for the purpose of assessing the impact on the Scheme on policyholder security. 7.12. The solvency position is estimated to have moved since 30 June 2016 due to the Page 24 of 42