Setting new standards - Friends Life

ANNUAL REVIEW
CHAIRMAN’S STATEMENT GROUP CHIEF EXECUTIVE’S REVIEW ABOUT THE FRIENDS PROVIDENT GROUP UK LIFE & PENSIONS
Provisions
The Group has made provision for liabilities in respect of defined pension scheme
deficits, review of past sales for potential mis-selling, future consideration in
respect of the acquisition of Lombard and other liabilities. In total the accounting
provisions amount to £215m (2005: £364m). In addition £40m (2005: £80m) of
provisions are included within actuarial liabilities. Details are set out below.
Pension schemes – The Group operates several defined benefit pension schemes
which are discussed in note 10 to the consolidated accounts.
The main scheme is the Friends Provident Pension Scheme to which the majority of the
Group’s UK Life & Pensions employees belong. This scheme will close to new entrants
in 2007 and had a deficit of £31m (2005: £19m) which is small in the context of assets
of £911m (2005: £888m). The F&C schemes (which are closed to new entrants) had a
deficit of £46m (2005: £48m) in the context of assets of £134m (2005: £116m).
Deficits in pension schemes
2006 +15% £77m
2005 £67m*
* After netting with managed fund pension fund
investment of £40m
The total pension scheme deficit presented in the IFRS accounts amounts to £77m
(2005: £107m). The 2005 figure excludes £40m of managed pension fund assets which
were treated as non transferable under IFRS. At 31 December 2006 there were no
non-transferable assets.
In addition the Group operates defined contribution schemes for F&C and FPI where
no provisions are necessary. Lombard does not operate a pension scheme.
Mis-selling provisions – Provisions have been established for the estimated likely cost
of redress, including administration costs, arising from the review of past sales. There is
some uncertainty involved in these provisions, which have been calculated on a best
estimate basis taking into account recent Group and industry experience.
Endowment review
2006 -66% £37m
2005 £109m
The total provision for mortgage endowment complaints has reduced from £109m to
£37m with £41m (2005: £58m) paid out in the year. In 2006 there was a release of
£31m of the provision with £3m being attributed to shareholders (as a non-recurring
item). The majority of the remaining mortgage endowment redress compensation is
expected to be settled within the next two years. The provision at 31 December 2006 is
split between an accounting provision of £20m (2005: £49m) and an actuarial provision
of £17m (2005: £60m).
A review of certain past sales by our direct salesforce (which is now closed) is being
undertaken, mainly in respect of inheritance tax planning policies. There has been no
change to the estimated total cost although the total provision has reduced from £33m
to £26m with £7m (2005: £7m) paid out in the year. The provision at 31 December 2006
is split between an accounting provision of £3m (2005: £13m) and an actuarial provision
of £23m (2005: £20m).
Review of past sales
2006 -21% £26m
2005 £33m
Future consideration for Lombard – The acquisition of Lombard in January 2005
allowed for future consideration (earn-out) based on Lombard achieving certain
performance thresholds for both new business profits and underlying embedded value.
The total earn-out has been estimated at €551m with €440m having been settled by
31 December 2006. The estimated final amount of €111m (£75m) has been provided
for at 31 December 2006 and will be settled in April 2007. The provision established at
31 December 2005 for future earn-out amounted to €213m (£146m) and included an
estimated final amount of €128m (£87m).
Future consideration for Lombard
2006 -49% £75m
2005 £146m
Other provisions – Other provisions total £40m (2005: £49m) and include: future costs
relating to vacant properties of £14m (2005: £18m), unclaimed shares following
demutualisation of £9m (2005: £9m) and sundry provisions of £17m (2005: £22m).
Other provisions
2006 -18% £40m
2005 £49m
38 Friends Provident Annual Report & Accounts 2006