!+# Scott Robertson Michael Eakins December 2003 Principles and Practices of Financial Management (PPFM) Younger Members Convention

!+# Agenda Headlines Background PPFM – definitions and aims PPFM – content Principles and Practices PPFM Issues Governance of PPFMs Disclosure Implications of PPFM

!+# Main Headlines  A document stating how a firm runs its with-profits fund  Publicly available from 31 st March 2004  Greater disclosure  Directors responsible for the compliance of the with-profits fund with the PPFM  With-Profit Actuary to publicly report to policyholders on compliance with PPFM  Independent review of PPFM

!+# Background FSA With-Profits Review  Policyholders have a poor understanding of the nature and the risks involved  Current level of disclosure inadequate and varies by firm  WP Firms apply a large degree of discretion  Firms may end up treating policyholders unfairly

!+# Background Recent History  Regular bonus rates slashed by up to 15% in 2003  WP funds close to new business  Funds increase MVR’s up to 25%  Investment shift from equity to bonds

!+# The aims of PPFMs  Require firms to treat customers fairly  Offer greater protection to consumers  Improve public confidence in the governance of with-profit firms

!+# Principles and Practices  Principles are enduring statements of how the firm manages the with-profits fund  Principles are not expected to change often  Practices are describe in detail how the firm runs the fund day to day  Practices are expected to change with economic and business environment

!+# PPFM Content Equity New Business Inherited Estate Charges & Expenses Business Risks Investment Strategy Payouts PPFM

!+# PPFM Content Equity New Business Inherited Estate Charges & Expenses Business Risks Investment Strategy Payouts PPFM

!+# PPFM Content Equity New Business Inherited Estate Charges & Expenses Business Risks Investment Strategy Payouts PPFM

!+# PPFM Content Equity New Business Inherited Estate Charges & Expenses Business Risks Investment Strategy Payouts PPFM

!+# PPFM Content Equity New Business Inherited Estate Charges & Expenses Business Risks Investment Strategy Payouts PPFM

!+# PPFM Content Equity New Business Inherited Estate Charges & Expenses Business Risks Investment Strategy Payouts PPFM

!+# PPFM Content Equity New Business Inherited Estate Charges & Expenses Business Risks Investment Strategy Payouts PPFM

!+# Some Examples AreaPrinciplesPractices PayoutsDescribe the aims of setting annual bonus rates The maximum change to annual bonus rates permitted in any one year. PayoutsDescribe the aims of the fund’s smoothing policy Indicate the maximum cost of smoothing a firm is prepared to tolerate Inherited Estate Describe the purpose of the Inherited Estate Describe the costs the Inherited Estate currently meets New Business Describe the firms policy in the event of closure to new business State the minimum amount of new business volume to justify remaining open to new business

!+# PPFM Issues  New PRE?  The format of the PPFM  Multiple PPFM’s  Level of detail?  How much warning?  User friendliness

!+# Governance of PPFM Board Key Stakeholders With Profit Committee or Independent Person Audit of Realistic Balance Sheet With Profit Actuary

!+# Governance of PPFMs  Provide annual report to the with profit policyholders on the compliance (or otherwise) of the management of the with profit fund with PPFM obligations.  The Board must state why they believe that the firm has complied with the obligations of the PPFM.  State how the firm has exercised any discretion in relation to the with profit business.  State how it has resolved any competing or conflicting rights between different policyholders and or shareholders. Roles Board of Directors Issues  Life office controls and processes.  Level of training and expertise required.  A step change in Board education required?  Who provides appropriate advice to the Board?

!+# Governance of PPFMs  Provide an independent assessment of of the firm’s compliance with the PPFM  Independent judgement in how any competing or conflicting rights have been resolved. Roles With Profits Committee / Independent Person  Firms with several with profits funds – will one WPC suffice?  Membership  Competence  Attractiveness of role  Internal or external appointments  Significant expense? Issues Options available for governance structure: 1.Establishing a committee of the Board 2.Retaining an independent expert to report to the Board 3.Commissioning a report from a Non-Executive Director Structure

!+# Governance – What does it mean for actuaries? Appointed Actuary Head Of Actuarial Function (HOAF) With Profit Actuary (WPA) Practicalities:  One individual can do both WPA and HOAF  WPA cannot sit on Board  No restriction on HOAF sitting on Board

!+# Governance – What does it mean for actuaries?  Bonus Recommendations.  PPFMs - annual report to the Board and Policyholders on compliance with PPFM obligations.  May need to accept some of the miscellaneous duties associated with the Appointed Actuary role – eg Schemes of Arrangement Roles and Responsibilities With Profit Actuary  Who does WPA report to?  Access to the Board. How to ensure WPA is fully abreast of business developments?  Attractiveness of role – outsourcing? Issues

!+# Governance – What does it mean for actuaries?  Advise the the Board on methodology and assumptions for actuarial valuation  Carry out the calculation of the liabilities.  Monitor the financial condition of the of the firm and advise on capital needs to support the business Roles Head of Actuarial Function  Clear lines of distinction with WPA?  Combine role with Finance Director?  Should Head of Actuarial Function have a place on the Board?  Shareholder Champion? Outstanding Questions

!+# Disclosure  PPFMs not required for non-profit funds  All With-Profit funds will be required to produce PPFMs  FSA have made it clear that current documentation (eg With Profit Guides) cannot be used as the PPFM  PPFMs will need to be available on request rather than automatically

!+# Firm’s Report on With-Profit Fund WPA Report on compliance with PPFM WPC / Independent Report on compliance with PPFM WPC / Independent Report on compliance with PPFM 3-month warning of change to principles Notify of change to practices in annual statement Annual Disclosure of Compliance with PPFM Ad hoc Disclosure of Changes to PPFM New Disclosure

!+# Implications of PPFMs for…  Regulatory Reporting  Sales of With-profit products  New with-profit products  Number of with-profit firms  Legal implications  Decision making process  Mutuals and 90:10 funds disclosing their estates

!+# Implications of PPFMs on Decision Making With- Profit Actuary Head of Actuarial Function BoardWith-Profit Committee Subject to Peer Review Subject to Independent Actuarial Review Independent Judgement

!+# Implications of PPFMs on Capital Requirements PPFMs Internal Capital Assessment

!+# FSA Timetable Q Q Q Q PPFM Governance structure for PPFM Realistic Balance Sheets PSB

!+# Questions … For further information: Scott Robertson Michael Eakins