principles and practices of financial management. - Legal & General

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PRINCIPLES AND PRACTICES OF FINANCIAL MANAGEMENT – REPORT ON COMPLIANCE FOR 20094New business terms and volumesPricing terms for new business written in the With Profits Fund were subject to prior approval at theGroup Insurance Risk Committee. In the judgement of that committee, the terms struck an appropriatebalance between profitability (including required support from the Inherited Estate), value for money forcustomers, and capital requirements.Apportionment of expensesExpense apportionment between the With Profits Fund and the remainder of the Long Term Fund,and between different products, continued to follow the established approach.Judgements as to the level of support from the Inherited Estate for existing business, for example bylimiting the amount of transfer to shareholders or expenses deducted from policies when determininglevels of benefits, were taken by the Society Board in advance of the main bonus investigationexercise. In general, decisions relating to these matters were made at the product launch date (or dateof subsequent review) by the Group Insurance Risk Committee, but certain decisions, such as thetreatment of exceptional expenses, were made later.Investment management arrangementsOn 1 July 2007 changes to the Society’s investment management arrangements were introduced.With effect from this date the fees payable to Legal & General Investment Management Limited wereincreased, moving from a cost recovery basis to a scale of charges set by reference to typical marketfees for the investment services provided. Following these changes the Society gained the discretion,in certain circumstances, to seek investment management services from companies outside the Group.These arrangements remained in place during 2009.Changes to reviewable terms under policiesCertain with profits policies contain terms which can be reviewed at the discretion of the Society.These terms are periodically reviewed in light of prevailing conditions. No such changes were madeduring the period.Changes to the PPFMNo changes were made to the PPFM during 2009.Policyholder communicationsPolicyholders received a statement setting out details of the bonuses added to their investmentsfollowing the 19 February 2009 bonus declaration. They also received information on investmentperformance during 2009, the asset mix applicable to their investment and how investmentperformance affects bonus rates and surrender values.COMPLIANCE WITH THE PPFMIn the opinion of the Society Board it has complied with its PPFM over the period 1 January 2009to 31 December 2009, and as at the 18 February 2010 bonus declaration.Reasons for reaching this conclusion are presented in detail below.The amount payable under a with profits policyThe bonus reports presented to the Society Board provided evidence that the bonus methodology wasbased around the stated aims, and followed the approach set out in the PPFM. The proposed futureinvestment assumptions, together with material changes to other assumptions, were presented tothe Society Board for approval. The bonus rates declared demonstrated clear differentiation betweenproduct types and vintages.Investigations presented to the Society Board analysed the finances of the With Profits Fund usinga number of approaches.Regular reports on surrender values and Market Value Reduction Factors were provided to the GroupInsurance Risk Committee throughout the period.The Society’s PPFM contains target ranges for payout ratios on with profits policies. For the majorityof policies the target range for benefits at contractual points is 80% to 120% and for benefits notat contractual points is 75% to 120% of asset share. Analysis of maturity and surrender claims hasconfirmed that the Society complied with its policy on target ranges during 2009.
PRINCIPLES AND PRACTICES OF FINANCIAL MANAGEMENT – REPORT ON COMPLIANCE FOR 20095Investment policyChanges made to investment policy during the year were designed to ensure that the With Profits Fundcontinued to be managed in a manner consistent with the overriding principle that its assets should besufficient to meet its liabilities, whilst maintaining a balance between risk and return for policyholdersand the With Profits Fund as a whole.Asset allocation, counterparty exposure, liquidity (including forecasts) and performance, together withdeviations from benchmarks, were monitored monthly.Business riskThe methodology followed in bonus investigation and surrender value work took account of non-investmentexperience within the With Profits Fund, such as surrender, expense and mortality profits or losses. The workcarried out to investigate non-investment experience grouped together similar policies.Charges and expensesThe calculation of investment management expenses is set out in the Investment Management Agreementbetween Legal & General Investment Management Limited and the Society. A revised approach to theassessment of these charges was introduced with effect from 1 July 2007 and the new approach wasincluded in the 29 June 2007 PPFM.Apportionment of other expenses was subject to external audit.A framework for assessing the level of deductions from asset shares in respect of guarantees and optionswas introduced in the 29 June 2005 PPFM.Financial conditions as at 31 December 2008 meant that a charge for guarantees and options of 0.75% of assetshares was justified under the approach previously communicated to policyholders. However, the assessmentof the guarantee charge and the Society Board decision to take the charge was made after the 2008 bonusdeclaration and so no adjustment was made to bonus rates at this declaration. Surrender values followingthe Board decision were, however, adjusted to allow for the impact of this charge and expected futureguarantee charges.Financial conditions as at 31 December 2009 meant that a refund of 0.4% of asset shares was appropriateunder the approach previously communicated to policyholders. However, the assessment of the guaranteecharge and the Society Board decision to make the refund was made after the 2009 bonus declaration andso no adjustment was made to bonus rates at this declaration. Surrender values following the Society Boarddecision were, however, adjusted to allow for the impact of this refund.Management of the Inherited EstateThe Board had regard to the current and projected financial position of the With Profits Fund in its financialmanagement.The financial effect of writing new business on the With Profits Fund, including any potential support fromthe Inherited Estate for expenses or costs of shareholder transfer or tax, was reported to the Society Board.Volumes of new business and arrangements on stopping taking new businessThe Society’s planning process in relation to new business had regard to insurance market conditions.No specific volume limitations were placed on with profits new business, though with profits new businessvolumes were regularly monitored.The Society remained open to new with profits business throughout the period.Equity between the With Profits Fund and shareholdersAudited accounts provided evidence of the separate treatment of the With Profits Fund. The auditedcalculation of distributed surplus and shareholder transfer from the With Profits Fund was consistentwith the PPFM.Contractual Minimum Addition (CMA)CMA was calculated and applied in line with the formulae set out in the PPFM.COMPETING OR CONFLICTING RIGHTS, INTERESTS AND EXPECTATIONSShareholders and with profits policyholdersTax and expensesIt is financially advantageous to shareholders, but disadvantageous for with profits policyholders, for taxand expenses to be apportioned to the With Profits Fund, rather than other parts of the Long Term Fund.The Society has an established practice of charging to the With Profits Fund an amount of tax calculated
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