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Scott Robertson Michael EakinsDecember 2003

Principles and Practices of Financial Management (PPFM)

Younger Members Convention

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Agenda

• Headlines

• Background

• PPFM – definitions and aims

• PPFM – content

• Principles and Practices

• PPFM Issues

• Governance of PPFMs

• Disclosure

• Implications of PPFM

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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

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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

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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

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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

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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

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PPFM Content

Equity

New Business

Inherited Estate

Charges &Expenses

BusinessRisks

InvestmentStrategy

Payouts

PPFM

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PPFM Content

Equity

New Business

Inherited Estate

Charges &Expenses

BusinessRisks

InvestmentStrategy

Payouts

PPFM

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PPFM Content

Equity

New Business

Inherited Estate

Charges &Expenses

BusinessRisks

InvestmentStrategy

Payouts

PPFM

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PPFM Content

Equity

New Business

Inherited Estate

Charges &Expenses

BusinessRisks

InvestmentStrategy

Payouts

PPFM

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PPFM Content

Equity

New Business

Inherited Estate

Charges &Expenses

BusinessRisks

InvestmentStrategy

Payouts

PPFM

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PPFM Content

Equity

New Business

Inherited Estate

Charges &Expenses

BusinessRisks

InvestmentStrategy

Payouts

PPFM

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PPFM Content

Equity

New Business

Inherited Estate

Charges &Expenses

BusinessRisks

InvestmentStrategy

Payouts

PPFM

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Some Examples

Area Principles Practices

Payouts Describe the aims of setting annual bonus rates

The maximum change to annual bonus rates permitted in any one year.

Payouts Describe 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

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PPFM Issues

New PRE?

The format of the PPFM

Multiple PPFM’s

Level of detail?

How much warning?

User friendliness

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Governance of PPFM

Board

Key Stakeholders

With Profit Committee

or Independent

Person

Audit of Realistic Balance Sheet

With Profit Actuary

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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

Bo

ard o

f Directo

rs

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?

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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

Pro

fits Co

mm

ittee / Ind

epen

den

t P

erson

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

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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

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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

Pro

fit Actu

ary

Who does WPA report to?

Access to the Board. How to ensure WPA is fully abreast of business developments?

Attractiveness of role – outsourcing?Issues

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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 A

ctuarial F

un

ction

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

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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

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Firm’s Report on With-Profit Fund

Firm’s Report on With-Profit Fund

WPA Report on compliance with PPFM

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

3-month warning of change to principles

Notify of change to practices in annual statement

Notify of change to practices in annual statement

Annual Disclosure of Compliance with PPFM

Ad hoc Disclosure of Changes to PPFM

New Disclosure

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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

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Implications of PPFMs on Decision Making

With-Profit

Actuary

Head of ActuarialFunction

Board With-Profit Committee

Subject to

Peer Review

Subject to Independent

ActuarialReview

IndependentJudgement

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Implications of PPFMs on Capital Requirements

PPFMs InternalCapital

Assessment

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FSA Timetable

Q1 2004

Q2 2004

Q3 2004

Q4 2004

PPFM

Governance structure for PPFM

Realistic Balance Sheets

PSB

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Questions …

For further information:

Scott Robertsonsrobertson@uk.ey.com020 7951 4592

Michael Eakinsmeakins@uk.ey.com020 7951 8236