The Integrated Prudential Sourcebook

							 Principles and Practices of Financial
 Management (PPFM)



 Younger Members Convention




Scott Robertson
Michael Eakins
December 2003

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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




                                                           !+#
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



                           Payouts
                                          Investment
             Equity                         Strategy



                               PPFM
         New                                  Business
        Business                               Risks


                   Inherited          Charges &
                     Estate           Expenses




                                                         !+#
PPFM Content



                           Payouts
                                          Investment
             Equity                         Strategy



                               PPFM
         New                                  Business
        Business                               Risks


                   Inherited          Charges &
                     Estate           Expenses




                                                         !+#
PPFM Content



                           Payouts
                                          Investment
             Equity                         Strategy



                               PPFM
         New                                  Business
        Business                               Risks


                   Inherited          Charges &
                     Estate           Expenses




                                                         !+#
PPFM Content



                           Payouts
                                          Investment
             Equity                         Strategy



                               PPFM
         New                                  Business
        Business                               Risks


                   Inherited          Charges &
                     Estate           Expenses




                                                         !+#
PPFM Content



                           Payouts
                                          Investment
             Equity                         Strategy



                               PPFM
         New                                  Business
        Business                               Risks


                   Inherited          Charges &
                     Estate           Expenses




                                                         !+#
PPFM Content



                           Payouts
                                          Investment
             Equity                         Strategy



                               PPFM
         New                                  Business
        Business                               Risks


                   Inherited          Charges &
                     Estate           Expenses




                                                         !+#
PPFM Content



                           Payouts
                                          Investment
             Equity                         Strategy



                               PPFM
         New                                  Business
        Business                               Risks


                   Inherited          Charges &
                     Estate           Expenses




                                                         !+#
Some Examples

 Area        Principles                            Practices


 Payouts     Describe the aims of setting annual   The maximum change to annual bonus
             bonus rates                           rates permitted in any one year.


 Payouts     Describe the aims of the fund’s       Indicate the maximum cost of smoothing
             smoothing policy                      a firm is prepared to tolerate


 Inherited   Describe the purpose of the           Describe the costs the Inherited Estate
 Estate      Inherited Estate                      currently meets


 New         Describe the firms policy in the      State the minimum amount of new
 Business    event of closure to new business      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



                                     With Profit
        Board                         Actuary




                       Key Stakeholders

         With Profit
                                          Audit of
         Committee
                                          Realistic
             or
                                          Balance
        Independent
                                           Sheet
           Person




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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.
Board of Directors




                     Roles
                               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.

                               Life office controls and processes.
                               Level of training and expertise required.
                     Issues         A step change in Board education required?
                               Who provides appropriate advice to the Board?




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          Governance of PPFMs
                                                   Options available for governance structure:
With Profits Committee / Independent



                                                   1.   Establishing a committee of the Board
                                       Structure   2.   Retaining an independent expert to report to the Board
                                                   3.   Commissioning a report from a Non-Executive Director


                                                    Provide an independent assessment of of the firm’s compliance with
                                                     the PPFM
               Person




                                        Roles       Independent judgement in how any competing or conflicting rights
                                                     have been resolved.

                                                    Firms with several with profits funds – will one WPC suffice?
                                                    Membership
                                                        Competence
                                        Issues          Attractiveness of role
                                                    Internal or external appointments
                                                    Significant expense?




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Governance – What does it mean for actuaries?


                         Appointed Actuary




 Head Of Actuarial Function                   With Profit Actuary
         (HOAF)                                     (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
                        Roles and          obligations.
With Profit Actuary




                      Responsibilities    May need to accept some of the miscellaneous
                                           duties associated with the Appointed Actuary role
                                           – eg Schemes of Arrangement


                                          Who does WPA report to?
                                          Access to the Board. How to ensure WPA is fully
                                           abreast of business developments?
                          Issues
                                          Attractiveness of role – outsourcing?




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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.
Head of Actuarial Function




                                                      Monitor the financial condition of the of the firm
                                    Roles              and advise on capital needs to support the
                                                       business




                                                      Clear lines of distinction with WPA?
                                                      Combine role with Finance Director?
                                                      Should Head of Actuarial Function have a place
                             Outstanding Questions     on the Board?
                                                      Shareholder Champion?




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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




                                              !+#
New Disclosure

      Ad hoc Disclosure     Annual Disclosure
      of Changes to         of Compliance with
      PPFM                  PPFM

      3-month warning of     Firm’s Report on
                             With-Profit Fund
      change to
      principles            WPA Report on
                            compliance with
      Notify of change to   PPFM
      practices in annual
      statement             WPC / Independent

                            Report on compliance
                            with PPFM




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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-
   Subject      Profit
      to
 Peer Review
               Actuary



                           Board   Independent   With-Profit
                                   Judgement     Committee




  Subject to   Head of
 Independent   Actuarial
   Actuarial   Function
    Review




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Implications of PPFMs on Capital Requirements




      PPFMs                         Internal
                                     Capital
                                  Assessment




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FSA Timetable


                           Q1     Q2     Q3     Q4
                           2004   2004   2004   2004

PPFM

Governance structure for
PPFM

Realistic Balance Sheets


PSB




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Questions …


For further information:


Scott Robertson
srobertson@uk.ey.com
020 7951 4592
Michael Eakins
meakins@uk.ey.com
020 7951 8236




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