Scott Robertson Michael Eakins December 2003

1. Principles and Practices of Financial Management (PPFM) Younger Members Convention Scott Robertson Michael Eakins December 2003

2. Agenda • Headlines • Background • PPFM – definitions and aims • PPFM – content • Principles and Practices • PPFM Issues • Governance of PPFMs • Disclosure • Implications of PPFM

3. Main Headlines • A document stating how a firm runs its with-profits fund • Publicly available from 31st 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

4. 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

5. 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

6. 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

7. 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

8. PPFM Content Payouts Equity Investment Strategy PPFM New Business Business Risks Inherited Estate Charges & Expenses

9. PPFM Content Payouts Equity Investment Strategy PPFM New Business Business Risks Inherited Estate Charges & Expenses

10. PPFM Content Payouts Equity Investment Strategy PPFM New Business Business Risks Inherited Estate Charges & Expenses

11. PPFM Content Payouts Equity Investment Strategy PPFM New Business Business Risks Inherited Estate Charges & Expenses

12. PPFM Content Payouts Equity Investment Strategy PPFM New Business Business Risks Inherited Estate Charges & Expenses

13. PPFM Content Payouts Equity Investment Strategy PPFM New Business Business Risks Inherited Estate Charges & Expenses

14. PPFM Content Payouts Equity Investment Strategy PPFM New Business Business Risks Inherited Estate Charges & Expenses

15. Some Examples

16. PPFM Issues • New PRE? • The format of the PPFM • Multiple PPFM’s • Level of detail? • How much warning? • User friendliness

17. Governance of PPFM With Profit Actuary Board Key Stakeholders Audit of Realistic Balance Sheet With Profit Committee or Independent Person

18. Governance of PPFMs Board of Directors Roles • 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. 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?

19. Governance of PPFMs With Profits Committee / Independent Person Structure • Options available for governance structure: • Establishing a committee of the Board • Retaining an independent expert to report to the Board • Commissioning a report from a Non-Executive Director Roles • 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. Issues • Firms with several with profits funds – will one WPC suffice? • Membership • Competence • Attractiveness of role • Internal or external appointments • Significant expense?

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

21. Governance – What does it mean for actuaries? With Profit Actuary Roles and Responsibilities • 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 Issues • Who does WPA report to? • Access to the Board. How to ensure WPA is fully abreast of business developments? • Attractiveness of role – outsourcing?

22. Governance – What does it mean for actuaries? Head of Actuarial Function Roles • 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 Outstanding Questions • Clear lines of distinction with WPA? • Combine role with Finance Director? • Should Head of Actuarial Function have a place on the Board? • Shareholder Champion?

23. 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

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

25. 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

26. Implications of PPFMs on Decision Making With-ProfitActuary Subject to Peer Review Board With-Profit Committee IndependentJudgement Head of ActuarialFunction Subject to IndependentActuarialReview

27. Implications of PPFMs on Capital Requirements PPFMs InternalCapitalAssessment

28. FSA Timetable

29. Questions … For further information: Scott Robertsonsrobertson@uk.ey.com020 7951 4592 Michael Eakinsmeakins@uk.ey.com020 7951 8236