Phoenix Life Limited Britannic 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 BWP 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 Britannic 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 Britannic 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 Britannic 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 Britannic With-Profits Fund consists of former Britannic Assurance Ordinary Branch With Profits Fund policies (including both with-profits and non-profit policies) and former Century Life With Profit Fund with-profits policies. The Britannic With-Profits Fund is part of Phoenix Life Limited, along with nine other with-profits funds and a non-profit fund. We manage each with-profits fund in 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 Britannic With-Profits Fund is effectively run as a separate ring fenced fund within Phoenix Life Limited although it shares the Buffer Reserve with the Britannic Industrial Branch Fund, and both funds benefit from any estate distributions made from the Buffer Reserve. The Buffer Reserve may be used to support either or both funds, and as part of Phoenix Life Limited the fund has the additional security that comes from being part of Report to policyholders 2017 - PLL BWP June 2018 Page 2 of 12
a large well capitalised company. In extreme circumstances one fund in the company 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. Because of this, it is extremely unlikely that a with-profits policy in one fund will be affected by losses from another fund, with the exception of losses in the Britannic Industrial Branch Fund which may reduce the estate distribution to Britannic With-Profits Fund available from the Buffer Reserve. We have produced separate reports for our other with-profits funds. The former Britannic Assurance policies fall into three main types. These are: traditional with-profits; unitised with-profits; and smoothed return. The former Century Life policies are traditional with-profits and are split into three main groups depending on which company originally sold the policy. These are: National Employers Life (referred to as ex-nel); Sentinel Life (referred to as ex-sentinel); and Prosperity Life (referred to as ex-pla). 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 (other than in respect of the shareholders entitlement to a share of the cost of bonuses as indicated in the Principles for each fund and the Buffer reserve for the Britannic With-Profits Fund and Britannic Industrial Branch Fund). Fair treatment, that is, Phoenix Life Limited aims to treat its with-profits policyholders fairly. Report to policyholders 2017 - PLL BWP June 2018 Page 3 of 12
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 annual and final bonuses, or smoothed returns. 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 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. 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 bonus rates For traditional and most unitised with-profits policies, annual bonuses are declared in arrears and we added annual bonuses for 2017 (or for the year to 31 March 2018 for some former Century Life policies) in April 2018. Report to policyholders 2017 - PLL BWP June 2018 Page 4 of 12
For most policies we maintained the same rates as those for 2016 however, we increased annual bonuses for some unitised with-profits policies. For former Britannic Assurance traditional with-profits business the amount of annual bonus added depends on how long you have held your policy and on the amount of basic sum assured. The following table shows examples of the declared annual bonuses per 1000 sum assured from 1 April 2017. Years in force 2017 declared annual bonus per 1,000 sum assured Life policies Retirement annuity policies 15 4.5 6.0 20 6.0 8.0 25 7.5 10.5 30 10.5 13.5 For former Britannic Assurance unitised with-profits business, the following table shows the declared annual bonuses as a percentage of with-profits and attaching bonus units for 2016 and 2017. Type of business Annual bonus as a % of with-profits and attaching bonus units 2017 Declared 2016 Declared Pensions 2.50% 2.50% Life Regular premium 1.00% 0.00% Life Single premium 3.00% 3.00% For former Britannic Assurance with-profits ISA business, we declared annual bonuses in advance at a rate of 3.00% per annum of with-profits and bonus units to apply from 1 January 2017 and again from 1 January 2018. For former Britannic Assurance smoothed return business, the smoothed returns declared during 2017 were derived from the actual investment returns netted down for tax, adjusted only for smoothing. For former Century Life policies, the following table shows the annual bonus rates for the year to 31 March 2018 (31 December 2017 for ex PLA policies). Type of business 2017 declared annual bonuses as a % of sum assured and attaching bonus % Sum Assured % Attaching Bonus Ex NEL simple 6.00% 0.00% Ex NEL 6.00% 6.00% compound Ex Sentinel 4.75% 0.00% simple Ex Sentinel 1.00% 1.00% compound Ex PLA life 1.35% 2.00% Report to policyholders 2017 - PLL BWP June 2018 Page 5 of 12
The Board is satisfied that the approach taken in determining annual bonuses during the year was in line with the PPFM. Final bonus rates Final bonuses are normally reviewed twice a year with new rates applying from January and July. For former Britannic Assurance policies, we changed final bonus rates from 1 January 2017 and 1 July 2017 for traditional with-profits, and from the end of December 2016, and end of June 2017 for unitised with-profits business. For some policies where the value of guaranteed benefits already exceeded the underlying value, we did not add any final bonus. For former Century Life policies, we changed final bonus rates from 1 January 2017 and 1 July 2017. Ex-PLA policies do not receive final bonuses. We also reviewed final bonus rates to apply from the end of December 2017 / 1 January 2018, for both former Britannic Assurance and former Century Life policies. 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 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 smoothed return policies, we changed smoothed returns from 1 January 2017, 1 April 2017, 1 July 2017 and 1 October 2017. We also reviewed them with effect from 1 January 2018. The precise dates the changes became effective depended on the type of business. 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. Report to policyholders 2017 - PLL BWP June 2018 Page 6 of 12
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 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 and smoothed return business, we based surrender values on the value of the with-profits and bonus 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 and bonus units, then no final bonus was added and we applied a market value reduction which reduced the value of the with-profits and bonus 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. Market value reductions are calculated on an individual policy basis throughout the year, changing daily / weekly in line with changing investment conditions. In the Board s opinion, the method used to determine surrender values has been in line with the PPFM. Investment strategy We invest the fund in a mix of assets including growth assets such as company shares (equities), property, and hedge funds and also fixed interest stocks (bonds or loans issued by governments or companies) and cash deposits. The asset mix depends on whether policies are former Britannic Assurance or former Century Life. Also for former Britannic Assurance euro denominated policies there is a separate asset mix. Report to policyholders 2017 - PLL BWP June 2018 Page 7 of 12
We had the following asset mixes for with-profits policies on 31 December 2017. Asset type Former Britannic Assurance policies Former Century Life sterling euro policies Company shares (equities) 38% 54% 12% Property 8% 0% 2% Other growth assets 4% 0% 1% Total growth assets 50% 54% 15% Fixed interest stocks - issued by the 22% 0% 47% government (gilts or eurozone) Fixed interest stocks - other (including 26% 39% 37% corporate bonds) Cash 2% 7% 1% Total fixed interest and cash assets 50% 46% 85% Total assets 100% 100% 100% The mix of assets is broadly the same as that on 31 December 2016. 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. 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. Report to policyholders 2017 - PLL BWP June 2018 Page 8 of 12
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. 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. 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. These uplifts are wholly from the Buffer Reserve. Date applicable Policy values increased by up to 01/01/2018 30/06/2018 7.4% 01/07/2017 31/12/2017 6.9% 01/01/2017 30/06/2017 6.9% 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. Former Century Life policies and former Britannic Assurance smoothed return policies are not eligible for any estate distribution and no uplift is applied to these policies. 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 equal to one ninth of the value of bonuses we distributed to with-profits policyholders. We charged the fund for Report to policyholders 2017 - PLL BWP June 2018 Page 9 of 12
any tax arising from the distribution of profits from the fund to the shareholders, other than in respect of former Century ex-pla policies. The shareholders' share of distributed profits for 2017 was 12.2m. The policyholders share of distributed profits for 2017 was 110.0m. 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 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. Report to policyholders 2017 - PLL BWP June 2018 Page 10 of 12
Conclusion It is the opinion of the Board that Phoenix Life Limited including the Britannic 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 BWP June 2018 Page 11 of 12
Report to with-profits policyholders by the With-Profits Actuary of the Phoenix Life Limited Britannic 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 Britannic 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 Britannic 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). Kevin Arnott 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 BWP June 2018 Page 12 of 12