Phoenix Life Limited Phoenix 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 PWP June 2018 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, from the Phoenix Life Limited Board, we give details of how we have complied with the PPFM during 2017 for our Phoenix 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 Phoenix 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 Phoenix 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 Phoenix With-Profits Fund consists of former Phoenix Life & Pensions Limited Long Term Fund policies; both with-profits, and some non-profit, policies. Phoenix Life & Pensions Limited was previously known as Royal Life Limited. The Phoenix 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. Report to policyholders 2017 - PLL PWP June 2018 Page 2 of 11
The Phoenix 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 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 three main types. These are: traditional with-profits; unitised with-profits bonds; and other 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 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. 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. Report to policyholders 2017 - PLL PWP June 2018 Page 3 of 11
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 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. Where a policy is surrendered close to maturity and the asset share is less than the guaranteed amount, the payout may be in excess of the target range 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. Report to policyholders 2017 - PLL PWP June 2018 Page 4 of 11
Annual bonus rates For traditional life policies we increased the annual bonus rates in 2017 to be added in 2018. For traditional pension policies the annual bonus rates were maintained. Buy As You Earn pension scheme policies annual bonus rates remain zero, The following table shows the declared annual bonuses as a percentage of sum assured (SA) and attaching bonus (RB) for traditional with-profits policies for 2017. Type of traditional with-profits policy and bonus series 2017 Declared from 1 January 2018 %SA %RB UK life (excluding Uniflex) 3.50% 3.50% Uniflex 3.50% 3.50% UK pensions 2.50% 2.50% Eire life 3.50% 3.50% Eire pensions 2.50% 2.50% Buy As You Earn pension schemes 0.00% 0.00% For Profit Plus Fund policies we declare annual bonus rates in advance and the rates from January 2018 are the same as the rates from January 2017. For other unitised with-profits policies we declare annual bonus rates in advance and the rates from March 2018 have increased compared to the rates from March 2017 for some policies and been maintained for the others. The annual bonuses are shown in the table below. Type of unitised with-profits policy and bonus series Annual bonus % applied as increase in unit price from March 2017 Bond started between 29 Sep 1997 and 31 Jul 2000 3.50% Bond started after 31 Jul 2000 3.00% Lifestyle Bond 2.00% Living Pensions Growth Protector Fund 4.00% Pensions Solutions 5.50% from January 2017 Profit Plus Fund 0.10% For unitised with-profits bonds starting before 1997, we declare annual bonuses prior to their monthly anniversaries and the rates we declared in 2017 varied between 5.25% and 7.25%. The Board is satisfied that the approach taken in determining annual bonuses during the year was in line with the PPFM. Report to policyholders 2017 - PLL PWP June 2018 Page 5 of 11
Final bonus rates For unitised with-profits bonds and Pensions Solution policies, we normally changed final bonus rates each month during 2017. For other policies, we changed final bonuses on 1 January 2017 and 1 July 2017. We also reviewed final bonus rates to apply 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. For unitised with-profits bonds started before 1997, we do not add any final bonus. For these policies we set annual bonuses with the aim that over time they fully reflect any share of the profits arising. 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. Smoothing 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 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 unitised with-profits bonds and Pensions Solution policies where we normally change final bonuses each month we look at the investment return averaged over three years to determine how we should smooth any changes. 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. Surrender values include an allowance for Report to policyholders 2017 - PLL PWP June 2018 Page 6 of 11
final bonus and 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 changed market value reductions at the same time we changed final bonus rates. For unitised with-profits bonds and Pensions Solutions Policies we normally changed them each month and for other policies we changed them on 1 January 2017, 1 July 2017 and 1 January 2018. In the Board s opinion, the method used to determine surrender values has been in line with the PPFM. Investment strategy During 2017, we invested 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 held different mixes of assets for different groups of with-profits policies. For policies with guaranteed benefits that are high compared to the underlying policy value, we held fewer higher risk investments. For policies where the guaranteed benefits are particularly high, we held solely lower risk investments. For policies that have exposure to higher risk investments, we reduced the proportion of these higher risk investments as the policies got closer to maturity. The proportions of higher risk investments are generally unchanged, other than arising from the reductions in the proportion as policies get closer to maturity or from reductions where a fall in the underlying policy value caused the guaranteed benefit to be particularly high relative to the underlying policy value. During 2017 we invested a small portion of the assets in alternative assets such as hedge funds, private equity and emerging market debt. The 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. Report to policyholders 2017 - PLL PWP June 2018 Page 7 of 11
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. We charged the fund for any tax arising from the distribution of profits from the fund to the shareholders, other than on pensions business. 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 and these vary according to the type of policy held. These guarantees include guaranteed annuity options. We may make a charge to the underlying value of policies to cover the expected costs of providing these guarantees. We reduced the ongoing charges for the cost of guarantees to nil in 2013 for all policies. Charges will only be reintroduced if they are needed to enable the fund to meet its liabilities. We will keep you informed should this be necessary. 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. Some of this surplus money is used to protect the fund against unexpected shocks, for example a fall in the value of the fund s investments. However, the remainder can be released and used to increase the amounts we pay out to policyholders. Report to policyholders 2017 - PLL PWP June 2018 Page 8 of 11
It has been decided that some of this surplus money 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 2017 and also from January 2018. Date applicable Policy values increased by up to 01/01/2018 30/06/2018 28.3% 01/07/2017 31/12/2017 29.1% 01/01/2017 30/06/2017 32.0% 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 surplus money in the fund continually changes and is affected by a range of factors. If your policy doesn t mature for several years it s likely the amount of excess assets and uplift percentage shown on any projections you receive will change many times before the maturity date of your policy. In the Board s opinion, both the method 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 and Profit Plus Fund policies this was equal to one ninth of the value of bonuses we distributed to with-profits policyholders. For other policies this was equal to five ninety fifths of the value of bonuses we distributed to with-profits policyholders. For pension policies, we reduced the amount received by shareholders to allow for the associated tax. We charged the fund for any tax arising from the distribution of profits from the fund to the shareholders. The shareholders' share of distributed profits for 2017 was 15.3m. The policyholders share of distributed profits for 2017 was 150.4m. 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 PWP June 2018 Page 9 of 11
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 Phoenix 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 PWP June 2018 Page 10 of 11
Report to with-profits policyholders by the With-Profits Actuary of the Phoenix Life Limited Phoenix 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 Phoenix 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 Phoenix 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 PWP June 2018 Page 11 of 11