Phoenix Life Limited SPI With-Profits Fund

Transcription

1 Phoenix Life Limited SPI With-Profits Fund Annual report to with-profits policyholders by the Board of Phoenix Life Limited for the period 1 January 2015 to 31 December 2015 Report to policyholders PLL SPI June 2016 Page 1 of 12

2 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 for 2015 for our SPI With-Profits Fund ('the fund'). This report should be read with the PPFM. Our PPFM is available on our website at or you can ask us for a copy. We also have a shorter, simplified guide called 'How we manage the Phoenix Life Limited SPI With-Profits Fund' and which you can access in the same way. The Board of Phoenix Life Limited can make choices, or exercise discretion in a number of areas, such as setting bonuses, policy payouts and surrender values, and in addressing any competing or conflicting rights of policyholders and shareholders. This report deals with how Phoenix Life Limited has exercised its discretion in these areas, including where the With-Profits Committee has responsibility for setting the investment and bonus policy. Summary It is the opinion of the Board that Phoenix Life Limited, including the SPI With-Profits Fund, was managed in line with the PPFM over The Board is also of the view that the decisions made in managing the SPI 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 SPI With-Profits Fund consists of former Scottish Provident Limited SPI Fund policies. The SPI 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 accordance with the relevant sections of our PPFM. The with-profits bonuses, policy returns and payouts for each with-profits fund reflect the financial position of that fund. The performance of each with-profits fund reflects the historic performance of the original with-profits funds and companies up to their respective transfer to Phoenix Life Limited, and then their performance within Phoenix Life Limited since that time. The SPI 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 Report to policyholders PLL SPI June 2016 Page 2 of 12

3 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 two main types. These are: traditional with-profits; and unitised with-profits. Independent review When the Scottish Provident Institution demutualised in 2001 and the with-profits business was transferred to the Scottish Provident Limited SPI Fund, the SPI Fund Supervisory Committee was set up to look after the interests of the with-profits policyholders. Following on from the 2009 Scheme funds merger, the Phoenix Life Limited With-Profits and SPI With-Profits Fund Supervisory Committee ( the With-Profits Committee ) retained the key powers attributable to the former Scottish Provident Limited SPI Fund Supervisory Committee. The With-Profits Committee is independent by virtue of its majority of independent members. The With-Profits Committee decides on the investments and bonuses of the SPI With-Profits Fund. The company and the With-Profits Committee formally consulted with, and took into account, the opinions of the With-Profits Actuary regarding all material changes during This included consultation on the changes to bonus rates, surrender values and estate management. Compliance with the PPFM during 2015 The guiding principles and practices apply to all the with-profits funds and in the event of conflict with other principles take priority. The PPFM guiding principles cover: Legal requirements, that is, Phoenix Life Limited and its with-profits funds are managed in line with Phoenix Life Limited s then current understanding of all legal and regulatory requirements. Basic fund concepts, that is, each with-profits fund is operated as a stand-alone fund. Fair treatment, that is, Phoenix Life Limited aims to treat its with-profits policyholders fairly. The guiding principles are presented here at a high level rather than in the full detail of the PPFM. In the Board s opinion, the guiding principles were applied in accordance with the PPFM. Report to policyholders PLL SPI June 2016 Page 3 of 12

4 The following sections expand on the principles and practices followed in managing the SPI With-Profits Fund. There are also sections on changes to the PPFM and communications to with-profits policyholders during the year. Amounts payable under a with-profits policy We aim to pay all policyholders their fair share of the profits that the fund has earned over the time they have held their policy. We pay the share of profits in the form of annual and final bonuses. When deciding what is a fair share we consider the underlying value of representative specimen policies (sometimes called the 'asset share') as a guide. Where the underlying policy value is bigger than the benefits already guaranteed by the policy then, subject to smoothing, we aim to add bonuses so that the amount we pay in total is equal to the underlying policy value. The underlying value of policies reflects the premiums paid and the investment performance of the fund over the lifetime of the policies, after allowing for factors such as our costs, the tax we have to pay, the shareholders' share of profits, charges for death benefits, charges for guarantees and other profits and losses. This was the approach we used over In the Board s opinion, the methodology used to calculate the underlying value of policies and the discretion applied to the methods used to determine payouts on all policies during 2015 has been in line with the PPFM. Annual bonus rates For traditional UK life with-profits policies and traditional with-profits Irish Executive type pension policies we were able to increase annual bonus rates in 2015 to be added to policies in January 2016 as part of the 2015 year end valuation of the fund. For traditional UK pension with-profits policies and all other traditional Irish with-profits policies we were able to maintain the annual bonus rates. Report to policyholders PLL SPI June 2016 Page 4 of 12

5 The following table shows the declared annual bonuses as a percentage of sum assured (SA) and attaching bonus (RB) for traditional with-profits policies from 1 January 2016 and 1 January Type of business 2015 Declared 2014 Declared from 1 January 2016 from 1 January 2015 % SA %RB % SA %RB UK life assurances 3.00% 3.00% 2.50% 2.50% UK Self Employed Deferred Annuity (SEDA) pension 0.00% 0.00% 0.00% 0.00% UK Executive -Type pension 0.00% 0.00% 0.00% 0.00% Irish life assurances 3.00% 3.00% 3.00% 3.00% Irish SEDA pension 0.00% 0.00% 0.00% 0.00% Irish Executive-Type pension 2.00% 2.00% 1.50% 1.50% For unitised policies, annual bonuses are declared in advance from 1 April each year. We increased the annual bonuses for all policies except for some of the older unitised with-profits policies which have a guaranteed minimum rate of annual bonus. The following table shows the declared annual bonuses for unitised with-profits policies from 1 April 2016 and 1 April Type of business from 1 April 2016 from 1 April 2015 Annual bonus % applied as increase in unit price UK life series I (3% guaranteed) 5.50% 5.00% UK life series II 5.50% 5.50% UK pension series I (4% guaranteed) 4.00% 4.00% UK pension series II 5.50% 5.50% Irish life series 5.00% 3.50% Irish pension series I (4% guaranteed) 4.00% 4.00% Irish pension series II 5.00% 4.00% Irish pension series III 5.00% 4.00% For deposit administration policies we were also able to add an annual bonus The Board is satisfied that the approach taken in determining annual bonuses during the year was in line with the PPFM. Final bonus rates We changed final bonuses on 1 January 2015 and 1 July We also reviewed final bonus rates to apply from 1 January Report to policyholders PLL SPI June 2016 Page 5 of 12

6 For some policies where the value of guaranteed benefits already exceeded the underlying policy value, we did not add any final bonus. Deposit administration policies do not receive any final bonus. 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 2015 when we changed bonus rates, we compared the resulting maturity or retirement payout with the payouts if bonus rates were not changed and generally limited the changes in maturity or retirement payouts, to not more than 7.5% at each six monthly review. Similarly we generally limited changes in surrender values to not more than 10% at each six monthly review. These limits were applied after allowing for the effect of any change in the level of estate distribution. For some policies where payout ratios were significantly out of line with 100% of the underlying policy value, we allowed larger differences. For deposit administration policies, we aim to smooth the changes in annual bonus rates, where possible. The Board is satisfied that the movements in final bonuses and maturity payouts in 2015, were necessary to keep payouts reasonably in line with the underlying value of policies, to ensure fairness between groups of policyholders and to protect the financial position of the fund, and were in line with the PPFM. Surrender values For traditional business, during 2015, we set surrender values with the aim of paying 100% of the underlying value of representative specimen policies. Surrender values include an allowance for final bonus and these final bonus allowances were revised from 1 January 2015, 1 July 2015 and 1 January 2016 in line with changes in final bonus rates. For unitised with-profits business, we based surrender values on the value of the with-profits units and final bonus, subject to the potential application of a market value reduction (MVR). If the underlying policy value was less than the value of the with-profits units, then no final bonus was added and we applied a market value reduction which reduced the value of the with-profits units, so that the surrender value reflected the underlying policy value. We apply market value reductions to ensure fairness to all with-profits policyholders, so that surrender values are not unfairly higher than the policies' share of the underlying value of the fund s assets. Report to policyholders PLL SPI June 2016 Page 6 of 12

7 We changed market value reductions at the same time we changed final bonus rates. In addition, we normally reviewed market value reductions each month and changed them if necessary. In the Board s opinion, the methodology used to determine surrender values has been in line with the PPFM. Investment strategy During 2015, 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 had the following asset mix for UK traditional with-profits policies on 31 December Asset type Life policies Pension and deposit administration policies Company shares (equities) 37% 22% Property 8% 5% Other growth assets 4% 3% Total growth assets 49% 30% Fixed interest stocks - issued by the UK 30% 45% government (gilts) Fixed interest stocks - other (including 19% 24% corporate bonds) Cash 2% 1% Total fixed interest and cash assets 51% 70% Total assets 100% 100% For UK unitised with-profits policies, the asset mix on 31 December 2015 was: Asset type Life series I Life series II Pension series I Pension series II Company shares (equities) 46% 46% 22% 46% Property 9% 9% 5% 9% Other growth assets 4% 4% 3% 4% Total growth assets 60% 60% 30% 60% Fixed interest stocks - issued 22% 22% 45% 22% by the UK government (gilts) Fixed interest stocks - other 16% 16% 24% 16% (including corporate bonds) Cash 3% 3% 1% 3% Total fixed interest and 40% 40% 70% 40% cash assets Total assets 100% 100% 100% 100% Report to policyholders PLL SPI June 2016 Page 7 of 12

8 We had the following asset mix for euro denominated traditional with-profits policies on 31 December Asset type Life policies Pension and deposit administration policies Company shares (equities) 31% 18% Property 8% 5% Other growth assets 8% 5% Total growth assets 47% 28% Fixed interest stocks - issued by the euro 28% 43% governments Fixed interest stocks - other (including 20% 25% corporate bonds) Cash 5% 4% Total fixed interest and cash assets 53% 72% Total assets 100% 100% For euro denominated unitised with-profits policies, the asset mix on 31 December 2015 was: Asset type Life policies Pension series I policies Pension series II and series III policies Company shares (equities) 38% 18% 38% Property 9% 5% 9% Other 9% 5% 9% Total growth assets 56% 28% 56% Fixed interest stocks - issued 21% 43% 21% by the euro governments Fixed interest stocks - other 17% 25% 17% (including corporate bonds) Cash 6% 4% 6% Total fixed interest and 44% 72% 44% cash assets Total assets 100% 100% 100% The fund also contains investments which back the cost of guarantees, the cost of smoothing, and the estate. The Board is satisfied that the approach taken in following the investment strategy during the year was in line with the PPFM. Business risks There were no significant changes to the risks the fund was exposed to during the year. Report to policyholders PLL SPI June 2016 Page 8 of 12

9 There was an annual review by the Board of existing business risk exposure. In the opinion of the Board, appropriate measures were taken to limit the with-profits business exposure to risk to amounts which are fair. The Board is satisfied that it has managed its business risks in line with the PPFM. Expenses and charges The way charges and expenses were set was unchanged during the year. The Board is satisfied that the allocation of expenses and the charges deducted were in line with the PPFM. We allocated a share of the provisional amount of tax we incurred to the fund, in line with the PPFM. We calculated this by treating the fund as though it was our only fund. Once we have agreed our tax charge with HM Revenue & Customs (HMRC), we will review the amount of tax we have allocated to the fund to ensure it is fair. We made an appropriate allocation of tax to the underlying value of with-profits policies in the fund. In May 2011 the Irish Finance (No2) Act 2011 introduced a new, temporary levy on pension funds established in Ireland. Previously, the levy took the form of a 0.6% tax on the value of pension funds. For 2014 it was increased to 0.75% then reduced to 0.15% in The levy was applied each year to the value of the fund on the last working day of June. The levy ended in 2015 and will not apply in For Irish pension policies, we made allowance for the levy when we calculated bonus rates and surrender values for the with-profits policies, and these were generally lower as a result. During 2015, expense charges made to the fund, including those relating to investments, were levied in line with the requirements of the 2009 Scheme for all policies. The policies in the fund provide a number of guarantees. We do not currently make any charges for the cost of guarantees although such charges have been made in the past. The cost of guarantees is currently borne by the estate. At the end of 2015 a payment was made to Pearl Group Management Services (PGMS) to obtain protection from certain future costs of regulatory change (excluding changes already known) and to obtain protection against future increases to the core service charges, other than for agreed rates of inflationary increases. Estate management The fund currently has an estate which provides money to support the running of the fund. The estate is the excess assets that are not needed to support the fund s current Report to policyholders PLL SPI June 2016 Page 9 of 12

10 and future commitments. These excess assets provide a buffer to protect the fund so that it can expect to meet its commitments to policyholders even if adverse events occur. It has been decided that some of these excess assets can be used to increase the final bonuses by including an additional amount which we call an uplift. The table below shows the percentage uplift applicable during 2015 and also from January Date applicable Policy values increased by up to 01/01/ /06/ % 01/07/ /12/ % 01/01/ /06/ % It is however important to understand that even though an uplift is currently being applied, it can go up or down or may be removed entirely. The actual payout value you receive will reflect the uplift applying at your payout date. The amount of the excess assets in the fund continually changes and depends on things such as: the performance of investment markets; the level of policy claims; the expected lifespan of policyholders whose policies provide a retirement income; and other operational profits and losses. The continuous changes to the above factors mean that when we review the excess assets, usually every 6 months, the uplift amount we are able to apply may change, or may even be removed entirely. In the Board s opinion, both the methodology used to calculate the estate and the distribution of the estate have been in line with the PPFM. New business The fund is no longer actively seeking new business. The Board is satisfied that this is in line with the PPFM. Equity between the fund and shareholders Our shareholders received a share of the distributed profits in the fund. For traditional with-profits policies, this was equal to one ninth of the value of bonuses we distributed to with-profits policyholders. For unitised with-profits policies, the shareholders receive the annual management charges. The shareholders' share of distributed profits for 2015 was 8.8m. The policyholders share of distributed profits for 2015 was 104.9m. The Board is satisfied that the shareholders share of the distributed profits for 2015 is in line with the PPFM. Report to policyholders PLL SPI June 2016 Page 10 of 12

11 Where there are material transactions that involve both shareholder and with-profits policyholder interests these are considered by the appropriate governance committees including the With-Profits Committee before implementation. This will include any changes to commercial arrangements with PGMS, as well as the terms of any transactions between the with-profits fund and the Non-Profit Fund. PGMS is a company within the Phoenix group of companies (Phoenix Group), providing management and administration services to the with-profits fund. The Board is satisfied that this is in line with the PPFM. Changes to the PPFM during 2015 We include a description of the recent changes to the PPFM with any annual statement we issue to with-profits policyholders. Communications to with-profits policyholders During 2015, we provided with-profits policyholders with key information concerning annual bonuses and changes to the PPFM with their annual statement. The Phoenix Life website ( 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 SPI With-Profits Fund was, in all material respects, managed in line with the PPFM over The With-Profits Committee has reviewed this annual report to with-profits policyholders and does not wish to make any additional or separate reports. The Directors of Phoenix Life Limited June 2016 Report to policyholders PLL SPI June 2016 Page 11 of 12

12 Report to with-profits policyholders by the With-Profits Actuary of the Phoenix Life Limited SPI With-Profits Fund for the period 1 January 2015 to 31 December 2015 Purpose The Principles and Practices of Financial Management (PPFM) for Phoenix Life Limited ( the company ) is a detailed document which sets out how the company manages its with-profits business. The company has discretion in a number of areas, such as setting bonuses, policy payouts and surrender values, and in addressing any competing or conflicting rights of policyholders and shareholders. The purpose of my report to the company s with-profits policyholders of the SPI 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 Conclusion In my opinion, the company has taken the interests of the with-profits policyholders of the SPI With-Profits Fund into account in a reasonable and proportionate manner in exercising this discretion during My opinion is based on the information that the company provided to me during the year. In my opinion my report, when considered alongside the information in the company s own report to which my report is annexed, together with other information provided to policyholders in relation to 2015, complies with the Insurance, Reporting, Modelling and Data Technical Actuarial Standards issued by the Financial Reporting Council. Andrew Burke Fellow of the Institute of Actuaries With-Profits Actuary June 2016 Phoenix Life Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Phoenix Life Limited is registered in England No and have their registered office at: 1 Wythall Green Way, Wythall, Birmingham, B47 6WG. Report to policyholders PLL SPI June 2016 Page 12 of 12