Principles and Practices – Britannic Industrial Branch Fund The Principles and Practices given in sections 4 to 14 together with the Guiding

% Traditional with-profits life and pensions

10. Principles and Practices – Britannic Industrial Branch Fund The Principles and Practices given in sections 4 to 14 together with the Guiding

Principles and Practices form the Principles and Practices of Financial Management for the Britannic Industrial Branch Fund. Sections 10.1 to 10.3 give background information specific to the Britannic Industrial Branch Fund. Subsequently in this section the use of the term ‘the fund’ generally means the Britannic Industrial Branch Fund.

10.1 Fund History

The Britannic Industrial Branch Fund comprises the business that was transferred to Phoenix Life Limited under the 2006 Scheme from the Industrial Branch Fund of Britannic Assurance (BA).

Britannic Assurance’s origins dated back to 1866 when it was founded in Birmingham as the British Workman’s Mutual Assurance Company Limited. Its business spread rapidly throughout Lancashire, Yorkshire and the rest of the United Kingdom. In 1905 it began to trade as Britannic Assurance.

Britannic Assurance wrote both general insurance and long-term insurance business. The latter included life assurance business, general annuity business, pensions business and permanent health insurance business. The majority of the business was transacted in the United Kingdom, however small amounts of business were transacted in the Channel Islands, Isle of Man and Eire.

In 1997, following detailed investigations into the historical development and financial strength of Britannic Assurance’s long-term fund, the structure of the long-term fund was changed to clarify the future interests of policyholders and shareholders. The restructure was reviewed by an independent actuary and the Department of Trade and Industry, the then regulator of insurance business in the United Kingdom.

Before the restructure the long-term fund of Britannic Assurance comprised an Industrial Branch Fund and an Ordinary Branch Fund, which both contained with-profits and non-profit business. Under the restructure:

 Two non-profit funds, the Ordinary Branch Life Non Profit Fund and the Ordinary Branch Pensions Non Profit Fund, were established. Some of the Ordinary Branch non-profit business was transferred into these new funds.

Shareholders are entitled to all distributable surplus arising in these funds.

 The Ordinary Branch With Profits Fund was established. All of the Ordinary Branch with-profits business was allocated to this fund, together with the Ordinary Branch non-profit business that was not transferred to either the Ordinary Branch Life Non Profit Fund or the Ordinary Branch Pensions Non Profit Fund. In respect of the Ordinary Branch With Profits Fund, not less than 90% of the surplus distributed each year was allocated to with-profits

policyholders, with the balance available for transfer to the Britannic Assurance Shareholder Fund.

 In respect of the Industrial Branch Fund, not less than 90% of the surplus distributed each year was allocated to with-profits policyholders, with the balance available for transfer to the Britannic Assurance Shareholder Fund.

In addition:

 Certain assets were transferred to the Ordinary Branch Life Non Profit Fund and the Ordinary Branch Pensions Non Profit Fund. These assets were referred to as the Shareholders’ Retained Capital, which was not available for distribution to policyholders and could, subject to certain restrictions, be distributed to shareholders. It was available to support the solvency of the long-term fund of Britannic Assurance.

 A Buffer Reserve was established, being an amount of assets attributable to the Industrial Branch Fund that could be used to support the liabilities arising in the Ordinary Branch With Profits Fund as well.

 A special bonus was declared.

In March 2003 Britannic Assurance withdrew from actively writing new business.

All business transferred from Britannic Assurance is administered by PGMS.

Under the 2006 Scheme the Buffer Reserve referred above became the Buffer Reserve in Phoenix Life Limited referred to in paragraph 3.3.4 and section 10.12.

10.2 Types of Business

The Britannic Industrial Branch Fund comprises:

 Industrial Assurance Business – Business sold under the Industrial Assurances Act 1923 before 1 December 2001.

 Home Service Business – Business sold since 1 December 2001 where premiums were initially received in cash by collectors at intervals more frequent than once every two months. This business would have previously been sold under the Industrial Assurances Act 1923.

Most of this business is now currently paid by means other than the home collection of cash.

This is traditional life assurance business.

The rights of former British Legal Closed Fund policyholders are the same as those for former Britannic Assurance policyholders and the bonus rates applying are the same as those for former Britannic Assurance policies which entered in 1926.

For policies issued from April 1979 to March 1984 that are eligible for Life

Assurance Premium Relief, the sum assured reflected the rate of relief applicable during that time. Where the premium paid by the policyholder has not been increased to reflect the reductions in the rate of relief since the policy started, a shortfall deduction is made at the time of claim to reflect this.

For policies issued before April 1979 that are eligible for Life Assurance Premium Relief, the increased sum assured benefit is increased each year to reflect the relief received for that year. This increased sum assured benefit is not eligible for bonuses, but the rate of annual bonus added to the basic sum assured includes an allowance to reflect this.

For policies issued before decimalisation in 1971 where the premium did not convert exactly, a decimalisation adjustment is made at the time of claim to reflect this.

10.3 Capital Support to the Fund

The fund does not currently rely on any capital support from the Non-Profit Fund or Shareholder Fund. The capital policy is described in section 3.8. The practices relating to receipt of support are detailed in section 5.2.

Principle

10.4 Amounts Payable Under a With-Profits Policy

The aim of the methods employed in determining the amounts payable under a with-profits policy is the fair treatment of all with-with-profits policyholders consistent with guiding principles.

The main guide used for determining the amounts payable under a with-profits policy is asset share calculations and the amounts payable will allow for a policy’s fair share of any surplus distributed, which may be in the form of annual or final bonuses.

The degree of approximation used in the application of these methods aims to be consistent with the overall fair treatment of all with-profits policyholders.

Asset share methodology and processes will be regularly reviewed by the Board and may change. This may include changes to the historical aspects of the calculations as a result of a variety of factors, including changes in regulations, improvements in the degree of approximations, maintaining equity between classes and groups of policyholders and significant changes in the financial condition of Phoenix Life Limited.

Policyholders have no entitlement to receive the asset shares, if any, used to determine the bonuses for their policies.

Different bonuses are declared for different classes of with-profits business, reflecting tax, type of with-profits business and product features. New bonus classes would be required if a new type of product were developed. An existing class would normally only be split in exceptional circumstances. Within classes, bonuses may be further differentiated by series.

Bonus policy can be affected by a variety of factors including the financial and solvency position of Phoenix Life Limited, the financial strength of the fund, the expected cost of guarantees, actual and expected investment returns and expenses, the likelihood of changes in the level of provisions and the constraints which

increases in guaranteed benefits may place on the fund, particularly in relation to investment strategy. These factors, together with the aim to retain flexibility in the operation of the fund, constrain annual and final bonus declarations and the smoothing policy. These constraints also apply in changing economic conditions.

Bonuses can only be declared if there is surplus available for distribution.

Practices

Asset Share Methodology

10.4.1 The basic method for asset shares calculations for traditional with-profits business uses actual investment returns net of tax and the actual underlying experience.

Asset shares are not smoothed. In particular the investment returns and experience elements contributing to asset shares are not smoothed, other than that inherent in the processes used in the derivation of the assumptions, or in

10.4.2 The following table describes the elements credited or charged to asset shares for traditional with-profits business.

Element Description of Allowance

(a) Premiums Premiums paid under the policy – note (a) (b) Investment return Growth Fund return – note (b)

Actual allocated – note (c) (d) Initial expenses Actual allocated – note (d) (e) Renewal expenses Actual allocated – note (e) (f) Other expenses Not charged – note (f) (g) Tax on investment

return

Actual allocated – note (g) (h) Tax relief on expenses

Actual allocated – note (h) (i) Mortality & morbidity

costs

Based on underlying experience – note (i)

(j) Early terminations Profits and losses based on underlying surrender and lapse experience are credited – note (j)

(k) Paid-up policies Approximate effect allowed for by increasing the rate of early terminations in (j) above

(l) Partial and regular withdrawals

Not applicable (m) Surrenders at

protected dates

Not applicable (n) Annuity payments Not applicable (o) Charges for the cost of (r) Tax on distributions to

shareholders

Not charged (s) Profit and losses from

other business

No profits or losses are credited

(t) Estate distribution or charge

Distributions from or charges to the estate as determined – note (t)

(u) Exceptional items Not applicable Notes

(a) Premiums

The premiums allow for the effect of Life Assurance Premium Relief and the benefits correspondingly so, including any increased sum assured and shortfall deductions.

The premiums allow for the effects of decimalisation and the benefits correspondingly allow for decimalisation adjustments.

(b) Investment return

The investment return element allocated to asset shares is based on the Growth Fund as described in section 10.9.

The investment returns are expressed as a percentage return to be applied.

These investment returns are before any deduction for investment expenses which are allowed for separately.

Actual investment expenses are charged, based on those allocated in respect of the Growth Fund in accordance with sections 5.2 and 10.11, subject to a small reduction.

The investment expenses are expressed as a percentage charge to be applied to the assets.

(d) Initial expenses

No new business is being written in the fund other than to honour policy options.

Where new policies are written for this reason, initial expenses are generally based on previous initial expenses inflated at RPI+2% per annum and including allowance for commissions.

In 2007, the Board reviewed the costs allocated to asset shares. The Board concluded, having received the advice of the With-Profits Committee, that in order to protect policyholders from the effects of disproportionately high distribution costs, initial expenses charged to asset shares from 1997 should be restricted to be less than the costs actually incurred in those years. The restriction was assessed to reduce the impact of expenses to be more consistent with that applying for earlier years of entry.

(e) Renewal expenses

Renewal expenses are based on PGMS charges and an uplift to cover direct costs. These are all per policy expenses, allocated in accordance with sections 5.2 and 10.11.

(f) Other expenses

Significant future project, additional added activity and other one-off costs will only be charged to asset shares following approval by the Board.

Any other adjustments to the expenses charged to the fund are not charged to asset shares.

(g) Tax on investment return

The tax on investment income allows for the different treatment of franked and unfranked income and also unrecoverable foreign tax. The tax on investment gains, whether realised or unrealised, includes an element of discounting representing the deferral of the actual payment. The element of discounting is

(h) Tax relief on expenses

Tax relief due on the actual expenses charged is allowed for. Where the tax relief in respect of acquisition expenses is spread, this is allowed for. The rates of tax relief are based on those underlying the tax allocated to the fund in accordance with section 5.2.

(i) Mortality and morbidity costs

The allowance based on the underlying experience is approximated by applying a percentage of a standard published mortality table. The percentage applied varies by calendar year and is based on the results of mortality investigations for the fund as carried out from time to time. There are no morbidity costs associated with this business.

(j) Early terminations

The profits and losses arising from surrenders currently accumulate in the estate.

The surrender profits/losses on with-profits business may be applied to asset shares by an addition to or deduction from the rate of investment return applied in the year in which the profit or loss arises or may be accumulated in the estate and applied as part of a distribution of the estate in a later year.

(o) Charges for the cost of guarantees

The cost of guarantees is currently not charged to asset shares and the cost has been borne by the estate. Should the cost increase leading to an erosion of the estate, or should the estate no longer be able to bear the cost, a charge may be introduced to asset shares in future. See section 10.12.

(q) Distributions to shareholders

The cost of distributions to shareholders resulting from the cost of bonus allocated to policies is charged to asset shares. The cost of bonus is as described

subsequently in section 10.14, using the basis applicable at the time.

(t) Estate distribution or charge

Asset shares may be increased by distributions from the estate or reduced by charges to the estate. However, these estate distributions are not guaranteed.

See section 10.12.

Asset shares are enhanced to reflect the cost of the 1997 special bonus.

However, the enhancement is approximate.

10.4.3 Asset shares are calculated for representative specimen policies when setting bonus rates and setting surrender value bases for non-protected exits. Specimen policies are chosen to represent the business and include a range of policy terms and years of entry. The primary emphasis in selecting specimen policies is the size of premium or sum assured. There is however a degree of averaging, particularly for those terms where there are relatively few policies.

10.4.4 Asset share models contain some approximations, but these approximations do not prejudice the overall fair treatment of with-profits policyholders. In particular the complications due to Life Assurance Premium Relief and decimalisation are subject to approximate methods. Whilst only minor approximations are employed in asset share calculations, no investigations are carried out on the level of approximation built into the resulting asset shares.

For whole life policies, bonuses and surrender value bases may be set with reference to those applicable for endowments.

10.4.5 Items not charged to asset shares, the effects of the approximations in the experience assumptions and the effects of other approximations in the methods employed feed through to the estate as described in section 10.12.

10.4.6 Asset share practices are documented.

Asset share and bonus policies are documented at a high level in various Board (and previously Britannic Assurance Board) reports and reports on asset share investigations that have been undertaken from time to time.

Detailed specifications relating to the asset share calculations and the bonus calculations only exist to a varying degree, but the coding within the models used in the processes are viewable and thus document the calculations.

Asset share assumptions are documented and this tends to include references to their source of derivation.

For each bonus review appropriate documentation is produced and provides an audit trail of the process, including sources of data, source and derivation of assumptions, backing calculations, notes and correspondence. This audit trail normally includes retaining electronic copies of the systems and calculations used for the review.

10.4.7 Asset share models, processes and documentation are subject to a continual process of development, improvement and refinement. Significant effects are reported to and considered by the Board.

10.4.8 Asset share practices are not guaranteed and may be changed in future.

Bonus Declarations

10.4.9 Bonus declarations are approved by the Board or committee of the Board or delegated to senior management and then retrospectively approved by the Board.

10.4.10 A single annual bonus scale covers all the with-profits business.

A single final bonus scale covers all the with-profits business.

10.4.11 Bonuses are reviewed regularly at least once a year.

Annual bonuses are reviewed annually and are declared in arrears in March / April of the following year to which the bonus relates.

Final bonuses, which are declared in advance, are reviewed at least twice a year, normally from 1 January and 1 July.

10.4.12 The timing of final bonus declarations may be varied.

10.4.13 Final bonuses are expected to, but are not guaranteed to, apply until the next planned review date. These bonuses may be reviewed at any time between normal planned review dates. Additional reviews would normally only be in response to exceptional investment market movements.

10.4.14 Final bonus reviews also consider the amount of final bonus paid on non-protected exits (surrenders).

10.4.15 Bonuses are declared out of surplus arising in the year or in anticipation of surplus arising. If there is no surplus or no expectation of surplus arising, no bonuses can be declared.

Principle

10.5 Annual Bonus Rates

The aim is to set annual bonuses at a prudent level, balancing the benefit to policyholders of increased guarantees, the aim for an element of final bonus, the flexibility of the operation of the fund and its ability to ensure the guarantees can be met in future. Annual bonuses may increase or decrease from declaration to declaration and may also be nil. Annual bonuses can only be declared if there is sufficient surplus available.

Practices

10.5.1 The Board makes decisions on annual bonus declarations taking into account a number of factors. These factors are set out in the following paragraphs.

10.5.2 For each class of business, the level of annual bonus is set so as to maintain a buffer for final bonus. The future claim payouts are estimated using realistic assumptions and the annual bonuses are set at such a level that if experience turns out to be in line with those assumptions, the overall amount of the payout paid in the form of final bonus will be in line with a target proportion. Under current investment conditions, the overall target is that 25% of the overall value of

payouts, calculated before any future augmentation provided by a release of the estate, will be in the form of final bonus. Given the aggregate nature of this target, for an individual policy, this final bonus buffer may be more or less than 25%. This overall target is itself subject to review and may be changed. If experience does not turn out to be in line with the assumptions then the 25% target might not be met.

Annual bonus rates will be adjusted to keep the overall level of projected final bonus broadly in line with the target. If necessary to remain on target, annual

In document Phoenix Life Limited. Principles and Practices of Financial Management (Page 177-200)