FRIENDS PROVIDENT LIFE ASSURANCE LIMITED

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					FRIENDS PROVIDENT LIFE ASSURANCE
           LIMITED

        Principles and Practices of
          Financial Management
                    For
               Conventional
           With Profits Business




             29 July 2011
Friends Provident Life Assurance Limited – Principles and Practices of Financial Management




Table of Contents


1             INTRODUCTION ........................................................................................ 3

2             OVERVIEW ................................................................................................ 6

3             PRINCIPLES ............................................................................................ 12

4             TARGETING PAYOUTS .......................................................................... 16

5             BONUS POLICY AND SMOOTHING ....................................................... 22

6             SURRENDER VALUES............................................................................ 26

7             INVESTMENT STRATEGY ...................................................................... 27

8             EXPOSURE TO BUSINESS RISK AND NEW BUSINESS ...................... 32

9             CHARGES, EXPENSES AND TAXATION ............................................... 34

10            MANAGEMENT OF THE ESTATE ........................................................... 35

11            AMENDMENT TO THE PRINCIPLES AND PRACTICES ........................ 37

12            GLOSSARY OF ABBREVIATIONS ......................................................... 39




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1       INTRODUCTION
1.1      Does this PPFM relate to your policy?

The Friends Life Group (the Group), owned by Resolution Limited, includes business written
by Friends Provident Life and Pensions Limited (FPLP) and, since September 2010, also
includes the companies formerly known as AXA Sun Life plc and Sun Life Assurance
Society plc following their acquisition by Resolution. There are separate documents setting
out Principles and Practices of Financial Management (PPFM), for each of the with profits
funds within the Group.

This document sets out the PPFM for conventional with profits business written in what is
now Friends Provident Life Assurance Limited (FPLAL). The name of the company that
appears on the original documentation of a FPLAL contract will include one of the following:
The Lincoln Life Assurance Company Limited, Dominion-Lincoln Assurance Limited,
Schroder Life Assurance Limited, NM Schroder Life Assurance Limited, The National
Mutual Life Association of Australasia Limited, NM Life Assurance Limited, FP Life
Assurance Limited and Friends Provident Life Assurance Limited. If you took out a unitised
with profits (UWP) policy with FPLAL, then refer to the second document below if it was
taken out before 9 July 2001 or to the third document below if it was taken out after 9 July
2001.

A second document, Friends Provident Life and Pensions Limited (FPLP) pre
demutualisation PPFM, relates mainly to with profits business originally written by Friends'
Provident Life Office (FPLO) before it demutualised on 9 July 2001, which was transferred to
FPLP when FPLO demutualised. It also applies to UWP business written by NM Life
Assurance Limited before 9 July 2001.

A third document, FPLP post demutualisation PPFM, sets out the PPFM for with profits
business written on or after 9 July 2001 by FPLP, Friends Provident Pensions Limited (FPP)
and FPLAL, where (in each case) the investment element is reassured into the FPLP With
Profits Fund.

Two further documents set out the PPFM for business written within Friends Life Company
Limited (FLC - formerly AXA Sun Life plc) and Friends Life Assurance Society Limited
(FLAS - formerly Sun Life Assurance Society plc).



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1.2      What is a PPFM?

The Conduct of Business sourcebook of the Financial Services Authority (FSA) requires
firms to establish and maintain Principles and Practices of Financial Management to govern
the conduct of their with profits business.

This document sets out the PPFM that FPLAL applies in managing its conventional with
profits business. It plays an important role in the governance of with profits business and in
ensuring that customers are treated fairly.

The PPFM are not intended to alter the rights and obligations FPLAL has under any policy
documents it has issued to policyholders.

1.3     Principles

Principles are statements that reflect the general approach adopted in managing with profits
business. They are not expected to change often. If the Directors decide that a Principle
should be changed, the procedures that will be followed are set out in section 11.1.

1.4     Practices

Practices are statements of specific methods employed in managing with profits business.
They reflect the current approaches given the particular circumstances and economic
conditions affecting with profits business. Practices are likely to be revised in response to
changes in the regulatory, business and economic environment and as new methods and
techniques are developed in the life and pensions industry. The procedures for changing
Practices are set out in section 11.2.

1.5     Regulatory definitions

The FSA has specific definitions of various words (e.g. Asset Share) in its rules and guidance,
which change from time to time as regulations are amended or updated. For the avoidance of
doubt, definitions in this document may differ from those used by the FSA. This does not
affect our compliance with FSA rules or guidance.




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1.6     Designation of sections in this PPFM

Sections 1, 2 and 12 of this document are background material and are, therefore, neither
Principles nor Practices for the purpose of the FSA’s rules. Section 2 gives an overview of
fund structures, governance arrangements, apportionment of surplus, payout values and types
of with profits policies and bonuses. Section 12 contains a glossary of abbreviations used in
this document.

Section 3 sets out the Principles. Sections 4 to 11 state the current Practices relating to the
management of the with profits business covered by this document.

1.7     With Profits Summary and Supplementary Information

A summary of the PPFM is available in a With Profits Summary document available from our
website at www.friendslife.co.uk/withprofits. With Profits Summary Supplementary
Information pages are also available from the website and these include up-to-date
information in respect of the Closed Fund (see Section 2.1) not included in this PPFM such as
the level of the Equity Backing Ratio (see Section 7.4).




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2       OVERVIEW
2.1      Company Information

FPLAL is a wholly owned subsidiary of the FPLP Shareholder Fund.

Friends Provident Holdings (UK) Limited, a subsidiary of Resolution Limited, acquired
control of the Friends Provident group, including FPLP and its subsidiaries (FPLAL and FPP,
shown in the chart in Section 2.2.1) on 5 November 2009. Friends Provident Holdings (UK)
Limited was renamed Friends Life Group plc from 1 July 2011.

From 15 September 2010, following the acquisition by Resolution of the majority of the AXA
UK Life Business, AXA Sun Life plc and Sun Life Assurance Society plc became part of the
Friends Provident Group. From March 2011 these companies were renamed Friends Life
Company Limited (FLC) and Friends Life Assurance Society Limited (FLAS) respectively
and ownership was transferred so they became subsidiaries of FPLP. From that time the
Group also began marketing under the name Friends Life.

National Mutual Life Association of Australasia Limited (NMLA) restructured its United
Kingdom operations in 1988. As a result of this, the conventional with profits business
written by what was then NM Schroder Life Assurance Limited (NMSLAL) was allocated to
a with profits fund closed to new business (the Closed Fund) and a new conventional with
profits fund (the With-Profits Business Fund) opened. NMLA’s UK business, which was
almost all non profit business, was transferred into NMSLAL, which was renamed N M Life
Assurance Limited after the restructuring.

In 1993 FPLO acquired control of NM Life Assurance Limited and subsequently renamed the
company FP Life Assurance Limited and then Friends Provident Life Assurance Limited
(FPLAL).

The arrangements approved as part of the restructuring in 1988 were amended with effect
from 1 January 1995 to merge the two conventional with profits funds in FPLAL. These now
form the Closed Fund within FPLAL’s Long Term Business Fund (LTBF). This document
details the PPFM for policies within the Closed Fund.

Apart from policies written as a result of options on existing policies, no new business has
been written in the Closed Fund since 1995.



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In addition to the Closed Fund, the Long Term Business Fund also contains the Unitised With
Profit Fund (UWP Fund) and Other Business Fund (OB Fund). The Scheme requires separate
accounts to be maintained in respect of these sub funds (Funds) of the Long Term Business
Fund.

The UWP business in FPLAL’s LTBF was wholly reassured to FPLP on 22 December 1995
and bonus rates follow those declared by FPLP. The PPFM for these policies are covered
in the FPLP pre demutualisation PPFM.

The OB Fund started writing new UWP business on 1 April 2004. The investment element of
this business is reassured to FPLP, with the OB Fund being liable for the other risks. The
PPFM for these policies are covered in the FPLP post demutualisation PPFM.

2.2      Structure of FPLAL
2.2.1 Fund Structure

FPLAL consists of a Long Term Business Fund and a Shareholder Fund. Within the Long
Term Business Fund there are three sub funds: the Closed Fund, the Unitised With Profits
Fund and the Other Business Fund.

The position of FPLAL within the Group structure together with a high-level outline of the
FPLAL funds, is shown in the following diagram:




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Each company has a Board of Directors, which is the ultimate governing body for the
company.

FPLAL started writing new business in the OB Fund at the beginning of 2004, after being
closed to new business for several years prior to this date.




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2.2.2 Apportionment of Surplus

Surplus from the Closed Fund is only distributable to its with profits policyholders. Closed
Fund with profits policyholders are not entitled to any surplus from the OB Fund or UWP
Fund. Surplus is distributed to with profits policyholders in the form of bonuses, which are
described in section 2.3 below.

The Board of Directors of FPLAL declares bonuses after taking advice from the Actuary and
considering the opinions of the With Profits Committee.

Ownership of the inherited estate of FPLAL was established in 1988. Working capital
(admissible assets in excess of statutory reserves as defined in the annual regulatory returns at
the time) was allocated to the Closed Fund in order to facilitate the management of the
smoothing process, and other aspects of managing the with profits business.

2.3      Types of Bonuses

Conventional with profits policies have a guaranteed amount of cash (Basic Sum Assured) to
which bonuses are added. The guaranteed amount is payable on a specified event or date
stated in the policy document and assuming all future premiums due are paid.

Bonuses are additions to the benefits payable on with profits policies and usually take one of
two forms: regular bonuses, which are added throughout the policy term, and final bonuses,
which (if payable) are only added at the date of a payout.

Closed Fund business is classified into bonus series, reflecting the origins of that business
(original With-Profits Business Fund pre June 1995 Scheme amendment or original Closed
Fund), tax treatment (life or pensions) and whether or not the policy is paid up. Each bonus
series has its own set of bonus rates.

Regular Bonuses

Regular bonus additions increase the level of guaranteed amounts payable on certain events
such as death, maturity or retirement. Regular bonuses are declared as a percentage of the
guaranteed amount and a percentage of the previously declared regular bonuses, and are
added yearly. A variation of regular bonus is interim bonus, which may be added at the date
of a payout and is an allowance for the accrual of regular bonus since the last addition.




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Final Bonuses

A final bonus may be payable in the event of a claim. If payable, final bonus broadly reflects
any excess of the target payout (see section 4.2) over the amount guaranteed to be payable on
the claim event or date, including previous additions of regular bonuses.

Final bonuses are determined at the time a claim arises. Final bonus is unlikely to be paid if,
for example, the guaranteed amount exceeds the target payout.

Final bonus is expressed as a percentage of the sum assured and total regular and interim
bonus added to the date of claim. Currently the rate applicable to a claim depends on the
duration of the policy at the date of claim. Final bonus is not explicitly paid on the surrender
of a conventional with profits policy. For these types of policy, the surrender value makes
some implicit allowance for final bonus.

For conventional with profits business managed with reference to a basic benefit (e.g. Basic
Sum Assured) there have been changes in the premium rates required to purchase the same
basic benefits from time to time. We may therefore adjust final bonus rates to ensure that
payout levels are consistent for policies paying the same premium that commenced
immediately before and after any premium rate change.

2.4      Amounts Payable On A Claim
2.4.1 Amounts payable at maturity or on retirement

Payouts in respect of most classes of conventional with profits policies (reference should be
made to the policy document for the exact terms) are calculated as the sum of the guaranteed
amount including the regular bonuses added during the term of the policy, together with any
interim and final bonus added at the date of claim.

Some with profits policies do not have a maturity date and benefits are payable only on death
or surrender.

2.4.2 Amounts payable on death

The method for calculating payouts on death depends on the contractual terms of each policy
and whether it is designed principally for savings or protection. Some pensions policies do
not pay out a benefit on death.

Typically one of the following methods is used to determine death benefits:

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(i)     The basic sum assured and bonuses added to date plus any interim and final bonus.

(ii)    A formula is applied, typically a return of premiums, possibly accumulated at a
        particular interest rate (this method is commonly used for conventional pensions
        policies).

(iii)   As (i) but subject to a minimum death benefit.

2.4.3 Amounts payable on surrender

Surrender values paid on conventional with profits policies, including pensions payable on
early and late retirement are, unless specified in the policy document, calculated in
accordance with bases determined by the Directors of FPLAL and reviewed periodically.

Payouts on surrender are not generally guaranteed in advance of an application to surrender.
The approach used for determining surrender values is described in section 6.

2.5      With Profits Governance

The Directors of FPLAL are responsible for managing the with profits business and setting
bonus rates. FPLAL has established procedures in order that the Directors can satisfy
themselves at regular intervals that the with profits business is being managed in accordance
with the PPFM.

A With Profits Committee was established with effect from March 2004 to consider the
interests of policyholders and provide advice to the Directors of FPLAL on the management
of with profits business. The Committee is chaired by an independent Director of Friends Life
Group plc and at least one member is independent of the Resolution group of companies.




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3         PRINCIPLES

In managing the Closed Fund, FPLAL applies a number of Principles. Principles are
statements that reflect the general approach adopted in managing the with profits business.
They are not expected to change often. These Principles, which will be considered when
applying the Practices set out in this document, are as follows:

Overriding Principles

1. FPLAL will manage the Closed Fund in accordance with all legal and regulatory
    requirements. This will include managing the Closed Fund in accordance with the
    Scheme (as amended in June 1995) and observing all contractual terms set out in policy
    documents;

2. In the event of any conflict between the terms of the Scheme and this document, the terms
    of the Scheme shall prevail;

3. FPLAL will manage the Closed Fund in a sound and prudent manner and with due regard
    to the interests of its policyholders and with a view to treating all policyholders fairly;

4. FPLAL will aim to manage the Closed Fund in order to ensure that all guaranteed benefits
    can be paid as they fall due. FPLAL will aim to achieve a fair distribution of all of the
    Closed Fund assets (including working capital) attributable to the Closed Fund with
    profits policies, over the remaining lifetime of those policies;

5. If the number of in force Closed Fund policies falls below 5,000 then FPLAL may, but
    will no longer be obliged to, maintain the Closed Fund as a separate Fund. If the number
    of in force Closed Fund policies falls below 500 then FPLAL will cease to maintain the
    Closed Fund as a separate Fund. If FPLAL ceases to maintain a separate Closed Fund in
    either circumstance then any existing surplus calculated on a basis which is realistic
    having regard to the current and likely future financial and any other relevant
    circumstances shall be distributed by way of cash or regular bonus or benefit increases to
    the then remaining Closed Fund with profits policyholders in such manner as the FPLAL
    Board may determine, on the advice of the Actuary and the With Profits Committee. The
    assets and liabilities of the Closed Fund would then be allocated to the Other Business
    Fund and existing with profits policies will cease to carry any further right to participate
    in profits.

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Distribution of surplus

6. Distributions of surplus will be determined by the Directors of FPLAL after taking into
    account the advice of the Actuary and after consideration by the With Profits Committee.
    In giving this advice the Actuary will take into account:

       The need to ensure that the Long Term Business Fund in aggregate is able to meet the
        statutory liabilities of FPLAL;
       The current and possible future capital needs of the Closed Fund;
       The investment strategy of the Closed Fund;
       The bonus policy as set out in section 5; and
       The need for an appropriate level of security for Closed Fund policyholders' benefits.

7. Surplus arising in the Closed Fund will only be distributed to Closed Fund with profits
    policyholders;

8. Shareholders are entitled to all of the surplus from the Other Business Fund;

9. So long as the Unitised With Profit Fund is wholly reassured to FPLP, surplus and
    distributions for the policies in this Fund will be determined by the FPLAL Board of
    Directors having regard to the decisions reached in FPLP;

Amount payable under a with profits policy

10. FPLAL will use appropriate models, methods and techniques in order to manage the
    Closed Fund and determine payouts;

11. For most classes of with profits business, payouts will be determined having regard to
    Asset Shares to endeavour to ensure that fairness is maintained between different groups
    and generations of policies;

12. For classes of business where Asset Share does not represent an equitable guide to
    payouts, or where it is not calculated, payouts will be determined using other methods.
    Approximations should not materially affect resulting payouts or bonuses compared to the
    result of more precise methods which could practicably have been used at a reasonable
    cost;




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Approach used to set bonus rates

13. Bonus rates and surrender value bases will be kept under regular review in order to
    manage the conventional with profits policies in line with the Principles detailed in this
    section and to maintain equity between policyholders of different generations and bonus
    series and between those leaving the Closed Fund and those remaining;

14. Regular bonuses will be added when appropriate to provide policyholders with additional
    guaranteed benefits. When necessary, the Directors will restrict regular bonus rates for
    particular bonus series in order to protect the solvency of the Closed Fund or to ensure the
    maintenance of a reasonable balance between the guaranteed benefits and final bonuses
    payable at maturity or on retirement. As required by the Scheme, regular bonus rates for
    former With-Profits Business Fund policyholders are 80% of the corresponding regular
    bonus rates for the original Closed Fund with profits policyholders;

15. Final bonus rates will be determined for each bonus series in order broadly to reflect any
    excess of the target payout over the amount already guaranteed by the addition of regular
    and interim bonuses;

Approach to smoothing

16. FPLAL will aim to smooth payouts on maturity and surrender to provide the stability
    characteristic of a with profits policy;

17. The smoothing process will be managed in order that the cost of smoothing to the Closed
    Fund is broadly neutral over the long term;

Surrender Values

18. Surrender value bases for conventional with profits business will be set in order to
    achieve a target percentage of Asset Share (as described in section 6) averaged across all
    policies within each class;

Investment Strategy

19. As required by the Scheme, FPLAL will use all reasonable endeavours to pursue an
    investment policy in relation to the assets of the Closed Fund which is in the best interests
    of the policyholders subject to normal considerations of prudence with the objective of
    obtaining the best return available commensurate with an acceptable degree of risk having
    regard to the nature and term of the liabilities to such policy holders and the prevailing

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    investment environment. The Actuary and the Board of Directors of FPLAL will certify
    annually that the then current investment policy accords with this Principle;

20. FPLAL may instruct its investment manager to use derivatives as part of an investment
    strategy to help manage risk or to aid efficient portfolio management. FPLAL uses a
    range of counterparties in order to limit exposure to any one counterparty;

21. Assets that would not normally be traded are not expected to be held in the Closed Fund;

Business risk and new business

22. The exposure of the Closed Fund to historic business risks (including compensation risk)
    is limited to business within the Closed Fund;

23. It is not the intention of the Directors to take on further business risks to which the Closed
    Fund with profits policies will be exposed;

24. No new business is to be written in the Closed Fund and its assets cannot be used to
    support any new business written in FPLAL;

Expense charges and Taxation

25. The Scheme requires the Actuary to certify that the following expenses charged to the
    Closed Fund are fair and reasonable:

    -   The investment management expenses including a portion of the overhead expenses
        of FPLAL as a whole attributable to investment management. In forming this opinion,
        the size of the Fund, the categories of asset in which the Fund is invested and the
        investment management expenses incurred by FPLAL as whole should be taken into
        account;

    -   Expenses for renewal, maintenance, claims, surrender and lapses, including overhead
        expenses of FPLAL subject to a maximum. In forming this opinion, the number of
        policies in the Closed Fund should be taken into account;

26. The tax charge (or credit), excluding Value Added Tax to the Closed Fund will be
    calculated on the basis that the Closed Fund is a United Kingdom mutual life assurance
    company subject to taxation in the United Kingdom.




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4        TARGETING PAYOUTS
4.1      Introduction

For most classes of with profits business payouts will be determined having regard to Asset
Shares (see section 4.2) to endeavour to ensure that fairness is maintained between different
groups and generations of policies. For classes of business where Asset Share does not
represent an equitable guide to payouts or where it is not calculated, payouts will be
determined using other methods.

Any approximate methods used to determine the value of payouts should be consistent with
the Principles. Approximations should not materially affect resulting payouts or bonuses
compared to the result of more precise methods which could practicably have been used at a
reasonable cost. Approximate methods may be used for minor lines of business and when
insufficient data precludes the use of more precise methods.

4.2      Asset Share Methodology
4.2.1 Asset Shares

Asset Shares are calculated on a specimen policy basis from assumptions derived from the
actual experience of the Closed Fund. Asset Shares are accumulated as:

       premiums paid;

       plus investment return (can be negative) earned on the underlying investments,
        calculated as described in section 4.3.1;

       less a deduction for the costs of selling and administering the policy;

       less the cost of death or other risk benefits;

       less an adjustment in respect of taxation as appropriate for the class of business.

Prior to 1993, Asset Shares were not used to help manage the Closed Fund. Experience prior
to this date is based on the experience of similar policies in FPLP’s With Profits Fund.




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4.2.2    Estimated Realistic Solvency Position of the Closed Fund

For the purposes of determining target payouts, the estimated realistic solvency position of
the Closed Fund is determined by comparing the estimated realistic value of the assets with
the estimated realistic value of the liabilities.

The estimate of the realistic value of the assets takes into account:

       the market value of traded investments and an estimate of the realisable value for
        other investments;

       an estimate of the present value of the future surplus from non participating business
        in the Closed Fund; and

       a realistic estimate of the present value of any retentions arising on surrender.

The estimated realistic value of the liabilities takes into account:

       the statutory value of the liabilities for non participating business in the Closed Fund
        together with the corresponding solvency and resilience capital; plus

       an estimate of Asset Shares for with profits business, or where this is inappropriate or
        unavailable, the equivalent value calculated using a bonus reserve valuation or similar
        appropriate technique; plus

       the expected future cost of providing policyholder benefits in excess of the liabilities
        above, including the realistic value of meeting policyholders’ guarantees and options;
        plus

       the estimated cost of smoothing; plus

       the estimated realistic provisions for other miscellaneous and non insurance liabilities.

If the estimated realistic value of the assets is less than the estimated realistic value of the
liabilities (together with an appropriate allowance for the estimated Risk Capital Margin
(RCM) and any further capital margin necessary to ensure a sufficient degree of security for
continuing policyholders) then the target payout will be less than 100% of Asset Share.

If the estimated realistic value of the assets exceeds the estimated realistic value of the
liabilities (together with an appropriate allowance for the RCM and any further capital margin


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necessary to ensure a sufficient degree of security for continuing policyholders) then the
target payout will be more than 100% of Asset Share.

Target payouts at maturity are set to aim to achieve a fair distribution of 100% of the Closed
Fund assets (including working capital) attributable to the Closed Fund with profits
policyholders, over the remaining lifetime of those policies. The latest published level of
target payout as a percentage of Asset Share is available from the With Profits Summary
Supplementary Information page on our website at www.friendslife.co.uk/withprofits.

4.3      Asset Share Assumptions
4.3.1 Investment Return Credited to Asset Shares

FPLAL maintains separate and distinct records of the assets in the Closed Fund.

Since 1 January 2006 the investment return credited to Asset Shares each year is calculated as
the total investment income and capital gains or losses earned during the year on the pool of
assets allocated to back Asset Shares (including any excess of target payouts over Asset
Shares) for with profits business and any excess working capital (see section 7.2). The return
is expressed as a percentage of the notionally allocated assets.

Between 1993 and 31 December 2005 the investment returns for Asset Shares were based on
a common pool of assets backing all Closed Fund liabilities. Investment returns prior to 1993
are based on the same returns that FPLP used to determine Asset Share.

4.3.2 Expenses charged to Asset Shares

The Scheme sets out maximum expenses (with annual increases linked to the Retail Price
Index) that FPLAL can charge to the Closed Fund. It requires the Actuary to certify that the
total investment management, renewal, maintenance, claims and surrender expenses charged
to the Closed Fund are fair and reasonable.

Expense deductions from Asset Share for periods after 1993 are based on the actual expenses
and commission attributable to business in the Closed Fund, subject to the maximum
specified by the Scheme. Expense deductions from Asset Share prior to 1993 are based on the
deductions made by FPLP for the purpose of determining Asset Share (subject to the
maximum specified in the Scheme).




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4.3.3 Cost of other risk benefits

An adjustment is made to Asset Shares to reflect the cost of providing death and any other
risk benefits to the conventional with profits policyholders, where these benefits are in excess
of Asset Share. The adjustment is assessed annually on a per policy basis by calculating the
difference between the value of the risk benefit and the Asset Share for that policy and
multiplying this by the probability that the risk event might have occurred. This probability is
assessed from the average experience of the policies within that class of business.

For policies where death benefits are less than Asset Share, the adjustment is positive and is
added when accumulating the Asset Shares.

4.3.4 Treatment of taxation in Asset Share calculations

Within the Asset Share calculations, tax rates are applied to investment income, capital gains
and expenses in each year to reflect the rates of taxation that apply to each type of business.

4.4        Target Payouts

Target payouts on maturity or contractual retirement for policies that are principally designed
for savings are determined as in section 4.2 above.

Currently target payouts on surrender are based on 100% of those applicable on maturity and
contractual retirement.

From time to time we will aim to differ from target payouts as a result of smoothing (see
section 5).

The targets are derived for groupings of individual policies (by policy term and the premium
status of the policy (single, regular or paid-up) within bonus series) and not on an individual
policy-by-policy basis. Sample policies, representative of the grouping, are used in the
targeting process.

Scales of final bonus are set to produce payouts equal to the targets for each grouping. Rates
of final bonus are rounded. Where guarantees exceed target payouts rates of final bonus will
be zero.

Actual payouts for individual policies may therefore deviate from target payouts because
guaranteed payouts exceed targets, as a result of rounding in the rate of final bonus, to the
extent that a policy differs from the representative policy and, for the impact of smoothing.

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Our current practice when setting bonus rates and surrender scales, for those policies
managed by reference to sample Asset Shares (i.e. excluding Conventional Whole of Life
policies), is to aim to ensure that the overwhelming majority of individual maturity and
surrender values do not deviate by more than 20% from 100% of Target Payout (see section
4.2). Compliance with the maximum 20% deviation objective is measured by reference to
representative sample policies and over: (i) all Closed Fund with profits maturities and (ii) all
Closed Fund with profits surrenders, excluding Conventional Whole of Life policies.

Policies where a contractual guarantee requires a higher payment than 100% of Target Payout
are excluded when monitoring compliance with the upper 20% deviation objective.

As described in section 2.4.2, benefits on death vary across different classes of business and
are determined by the contractual terms of the policy. No direct payout targets are
determined. For conventional whole life policies, principally designed to provide a cash sum
on death, Asset Share is inappropriate as a measure of target payout. For these policies bonus
scales are the same as those for equivalent savings plans.

Some conventional with profits savings policies that have been altered at the policyholder’s
request do not directly use Asset Share to determine payout values. For these policies, the
basic sum assured or basic annuity are adjusted at the time of alteration, and future bonuses
are then declared based on the rates applicable to unaltered policies.

4.5      Controls and Documentation

FPLAL maintains appropriate systems in order to determine payouts for with profits policies.
These systems may be developed or replaced from time to time but FPLAL ensures that this
does not affect its ability to comply with the PPFM.

FPLAL would consider changing the methodology applied in respect of future years if new
techniques were developed.

Historic Asset Share assumptions are not generally reviewed or updated. However, FPLAL
would consider making a change if a material error were discovered that led to inequity
between classes of policyholder.

High level descriptions of methodology and systems have been produced. More detailed
descriptions of parts of the process to determine payout levels are typically documented
within spreadsheets used in the process.

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For each review an electronic sub directory and a folder for paper files is created which are
used to record assumptions, backing calculations, notes and correspondence relevant to the
review.

The process for changing assumptions and methodology used to support with profits business
and the associated documentation is detailed in section 11.2.




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5       BONUS POLICY AND SMOOTHING
5.1     Introduction

Distributions of surplus to policyholders and shareholders will be determined by the Directors
of FPLAL after taking into account the advice of the Actuary and the With Profits
Committee. In giving this advice the Actuary will take into account:

       The need to ensure that the Long Term Business Fund in aggregate is able to meet the
        statutory liabilities of FPLAL;
       The current and possible future capital needs of the Closed Fund;
       The investment strategy of the Closed Fund;
       The bonus policy as set out below; and
       The need for an appropriate level of security for Closed Fund policyholders' benefits.


Bonus rates and surrender value bases will be kept under regular review in order to manage
the conventional with profits policies in line with the Principles detailed in section 3 and to
maintain fairness between policyholders of different generations and bonus series and
between those leaving the Closed Fund and those remaining.


Regular bonuses will be added when appropriate to provide policyholders with additional
guaranteed benefits. When necessary, the Directors will restrict regular bonus rates for
particular bonus series in order to protect the solvency of the Closed Fund or to ensure the
maintenance of a reasonable balance between the guaranteed benefits and final bonuses
payable at maturity or on retirement.

Final bonus rates will be determined for each bonus series in order broadly to reflect any
excess of the target payouts over the amount already guaranteed by the addition of regular
and interim bonuses.

FPLAL will aim to smooth payouts on maturity and surrender to provide the stability
characteristic of a with profits policy.

Smoothing of payouts applies in a number of ways: by paying more or less than the Target
Payout (see last two paragraphs of section 4.2.2) in order to reduce the volatility of payouts,
by holding bonus rates unchanged between declarations, by grouping policies together and



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basing bonus rates for that group with reference to a sample policy and by having a smoothed
scale of final bonus rates.

The smoothing process will be managed in order that the cost of smoothing to the Closed
Fund is broadly neutral over the long term.

5.2     Regular Bonus Rates

Regular bonus rates are reviewed at least once each year. The rates declared do not normally
change by more than 1.5 percentage points from the equivalent rate declared approximately a
year previously (declarations are not always made at precisely the same time of the year).

Each bonus series has its own regular bonus rate. For the main life and pensions premium
paying bonus series a supportable regular bonus rate is calculated, to help determine the rates
of regular bonus to be declared. This is the level future bonus rate, if any, that would provide
an adequate margin for final bonus, consistent with the current investment policy. For the
purposes of the calculation an adequate margin for final bonus is 2% per annum of the basic
amount plus total regular bonus additions. This reflects future investment expectations as well
as the current level of bonus guarantees. The rate chosen for declaration is not always the
supportable rate, as other important factors need to be taken into account, such as the impact
on the Realistic Balance Sheet (RBS) or the desire to move towards this rate over several
declarations.

The consistency between the rates for different series in other respects is also taken into
account. For example FPLAL may wish to maintain consistent differentials between different
bonus series representing regular premium or paid up business.

The Scheme requires regular bonus rates for policies originating in the With-Profits Business
Fund to be 80% of the corresponding rates declared for policies originating in the Closed
Fund.

Interim bonus rates are declared at each bonus declaration and are generally, but not always,
set equal to the regular bonus rate declared at that time. However, interim bonus rates are not
guaranteed and could be changed at any time.




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5.3      Smoothing

FPLAL will normally aim to set bonus rates at each declaration at a level that will result in
maturity payouts equal to the target payout on average. This is subject to guarantees and
smoothing. The current smoothing practice is:

   to aim to ensure that the overwhelming majority of individual maturity and surrender
    values do not deviate by more than 20% from 100% of Target Payout (see section 4.2);

   not normally to change payouts at maturity for policies of similar types and terms by more
    than 20% compared to payouts following the corresponding declaration approximately one
    year previously;

   the maximum rate of change could be slightly less than 20% where a 20% change would
    result in actual and target payouts differing by less than 10%.


The effect of this smoothing process is that smoothing is expected to be broadly neutral over
the long term. There is likely to be a small long term smoothing cost, which is anticipated in
the estimated RBS. To the extent that it differs from expectations it will result in a profit or
loss to the RBS, which will cause future target payouts to be slightly higher or lower than
they would otherwise have been.

5.4     Final Bonus Rates

The final bonus rates payable at maturity or contractual retirement on conventional with
profits policies are reviewed at least twice each year. Final bonus rates are generally
investigated after any proposed changes to regular and interim bonuses have been determined.

At each declaration the strategy is determined. Issues considered would typically include:

       The target percentage of Asset Share determined by means of the investigation
        described in section 4.2.2;

       The maximum 20% deviation of individual claim values from Target Payout;

       The maximum change in payout parameters to apply where less than 20% (see section
        5.3);

       The anticipated future market conditions and in particular market conditions between
        the current review date and the next review date.
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Asset Shares and payouts (based on the proposed rates of regular and interim bonuses) are
calculated for a representative sample of policies. The ratios of payouts to Asset Share are
compared. Revised final bonus rates are then determined to meet the smoothing strategy in
respect of the sample policies, subject to rounding. The scale is then extended to other policy
terms, normally by interpolation.

5.5     Policies outside the main lines of business

Conventional with profits whole of life policies receive final bonus rates paid on death based
on those paid at the maturity of conventional with profits endowment policies with the same
duration in force.

5.6     Approximations Used In Determining Bonus Rates

The effect of approximations is intended to be neutral, both within each class or generation of
policyholders and in the aggregate.

In the majority of cases, the most significant approximations for conventional with profits
policies are the use of sample policies to represent the whole population, and interpolating
between five year terms to derive bonus rates for intermediate durations.

Final bonus rates for paid up policies are based on the rates for premium paying policies.




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6       SURRENDER VALUES
6.1         Introduction

Surrender value bases for conventional with profits business will be set in order to achieve a
target percentage of Asset Share averaged across all policies within each class.

6.2         Target Payouts and Smoothing

For conventional policies (where the policy document does not specify a guaranteed surrender
basis) surrender value formulae aim to pay out a target percentage of Asset Share on
surrender. The target is averaged across all policies within each class on surrender and is
currently 100% of the percentage currently applied to maturities of similar elapsed duration.

Policyholders with a guaranteed surrender basis should refer to their policy documents.

FPLAL will aim to smooth payouts on surrender. Due to fluctuations in underlying asset
values and hence Asset Shares, surrender values are likely to deviate from target payouts
during the periods between each review.

6.3         Conventional Policies

Surrender value bases for the main lines of conventional with profits policies are reviewed at
least once each year. Smaller lines have less frequent reviews.

At each review, sample policies are selected to represent a range of policies from the main
classes of conventional with profits policies. The sample policies represent policies with
different terms expired, different start and end dates, and various other policy characteristics.
Asset Shares and surrender payouts are calculated for the sample policies as at the
investigation date, based on the current surrender value basis and the rates of bonus currently
in force.

FPLAL would consider changing the surrender value basis if the results of the investigation
described above indicate that current surrender values differ significantly from the target
payouts on surrender for some or all of the sample policies.




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7       INVESTMENT STRATEGY
7.1      Introduction

The Scheme requires FPLAL to maintain a separate account for the Closed Fund assets.
Returns credited to Asset Share (see section 4.3.1) are based on the return achieved by those
assets notionally allocated to back Asset Shares.

As required by the Scheme, FPLAL will use all reasonable endeavours to pursue an
investment policy in relation to the assets of the Closed Fund which is in the best interests of
the policyholders subject to normal considerations of prudence with the objective of obtaining
the best return available commensurate with an acceptable degree of risk having regard to the
nature and term of the liabilities to such policy holders and the prevailing investment
environment. The Actuary and the Board of Directors of FPLAL will certify annually that the
then current investment policy accords with this objective.

In addition FPLAL will take into account:

       the current and projected financial position of the Closed Fund;

       advice from the investment manager for the FPLAL Funds;

       advice from the Actuary, and relevant committees of the FPLAL Board;

       the investment expectations of all classes of policyholder resulting from information
        provided to them; and

       the advantages of reducing overall volatility by investing in a wide range of assets.

The liabilities of the Closed Fund are grouped into three separate pools within the Closed
Fund and the investment strategy for each of these pools determined separately.

FPLAL may instruct its investment manager to use derivatives as part of an investment
strategy to help manage risk or to aid efficient portfolio management. FPLAL uses a range of
counterparties in order to limit exposure to any one counterparty.

Assets that would not normally be traded are not expected to be held in the Closed Fund.




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7.2       Allocation of Assets to Liability Classes

The assets of the Closed Fund are notionally allocated between the different classes of
business and liabilities in the Closed Fund. In the first stage of this process, FPLAL allocates
assets to the non participating policies equal to the statutory liabilities.

From the remainder of the assets FPLAL allocates assets equal to the realistic provision for
Guaranteed Liabilities and the Closed Fund Risk Capital requirements into a further asset
pool.

The remaining assets backing the Asset Shares for with profits business and any excess
working capital within the Closed Fund are not currently allocated further, although FPLAL
reserves the right to do this in future if this will better secure contractual obligations to
policyholders whilst treating customers fairly. The Asset Shares of with profits policyholders
are credited with the rate of return earned on these remaining assets.

Having allocated the assets as above, the assets are managed as separate asset pools by the
investment manager. FPLAL sets a specific target asset mix for each of these pools.
Performance against the target asset mix is currently reported upon quarterly. At least every
six months the above process is repeated with up to date asset and liability values.

7.3      Cash Flow and Matching

Cash flows are monitored at a high level and various cash flow projections (updated at least
annually) are available to help ensure the Fund maintains sufficient liquidity.

FPLAL currently operates a matching strategy for the assets whereby assets are selected
whose values broadly move in line with the values of the underlying liabilities following
changes in investment conditions.

7.4     Equity Backing Ratio

The proportion of assets backing Asset Shares invested in equity and property is known as the
Equity Backing Ratio (EBR). The latest EBR rates can be found in the With Profits
Summary Supplementary Information page on our website at
www.friendslife.co.uk/withprofits.




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To achieve the objective of obtaining the best return available commensurate with an
acceptable degree of risk having regard to the nature and term of the liabilities and the
prevailing investment environment, the Closed Fund will invest in equities and property.

The amount of equity and property content is monitored as the returns from a combined
equity and property portfolio are generally less volatile than from pure equity or property
portfolios, whilst still being more volatile than those from a portfolio of fixed interest
securities. The proportion of the assets invested in equity and property would be reduced if
necessary to ensure the solvency position of the fund was not compromised by an unsuitable
asset mix. The Closed Fund has been closed to new business for several years and as the
portfolio of policies matures it is to be expected that the proportion of equities and property in
the Fund will decline.

FPLAL uses results from periodic stochastic asset/liability modelling exercises to help
determine a benchmark investment mix.

The investment manager is required to manage the assets within specific limits around the
benchmark. The investment manager is also instructed to hold a wide range of investments
within each asset class for reasons of security and diversification. Fixed interest securities
must have a minimum BBB credit rating on purchase and the minimum rated stocks must not
exceed a stated percentage (currently 10%) of the fixed interest proportion. However, stocks
subject to a downgrade may cause these limits to be temporarily breached; these stocks are
put on a watch list and are not automatically sold.

7.5     Use of Derivatives

FPLAL may instruct its investment manager to consider the use of derivatives:

       as part of efficient portfolio management;
       to hedge against adverse currency movements for non sterling assets;
       to help match liabilities whose values are very sensitive to changes in market
        conditions; and
       at certain times in order to protect the solvency of the Closed Fund and the security of
        policyholders’ benefits.

Derivatives are not used without appropriate collateral arrangements to limit counterparty
risk.

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7.6      Asset Share Shorting

FPLAL may use an internal fund shorting strategy to help hedge against the impacts of
adverse market conditions. Shorting is most usefully (but not exclusively) applied to asset
classes (such as corporate bonds and property) where the availability of cost effective
derivatives to mitigate risk is limited.

Asset Share Shorting involves holding fewer physical assets in the Asset Share pool than
required to cover Asset Share liabilities, with this acting as a protection against falls in asset
values. For example, 10% shorting would imply Asset Share liabilities are covered directly
by assets equal to 90% of the liability. The remaining 10% is held outside the Asset Share
pool, but within the pool of assets backing the expected cost of basic benefit guarantees and
covered by low risk assets. The risk that the shorted assets perform better than the low risk
assets, causing a loss to the Fund, is offset by the basic benefit guarantee costs reducing in
these circumstances, generating a profit for the Fund.

7.7      Secured Funding

Secured funding entails receiving payment from other institutions in return for effectively
lending assets to them. Collateral is required for security which minimises any risk involved.
In most cases assets are sold – but under a sale and repurchase agreement whereby they will
be bought back at the same price on an agreed date. Secured funding trades form a small part
of our overall strategy.

7.8      Controls

The Closed Fund has its own investment mandate, detailing the fund and giving specific
instructions to the investment manager. The mandate and any changes to be made to it are
authorised by two designated executive managers and agreed by the Investment Manager.

An investment committee (Investment Oversight Committee, IOC) appointed by the Board of
Friends Life Group plc (FLG plc) monitors performance, strategy and compliance with the
investment mandates for all of the Group’s insurance subsidiaries. The IOC meets quarterly.

An Executive Investment Committee (EIC) has been established and authorised by the IOC; it
has delegated authority from the Board of FLG plc. The EIC can determine the investment
strategy, agree changes to mandates and approve the use of new investment instruments
together with the circumstances in which they may be used, within the risk appetite approved

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by the Board of FLG plc and in accordance with the investment policies approved by the
IOC. The EIC meets monthly.




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8 EXPOSURE TO BUSINESS RISK AND NEW BUSINESS
8.1      Introduction

The exposure of the Closed Fund to historic business risks (including compensation risk) is
limited to business within the Closed Fund.

It is not the intention of the Directors to take on further business risks to which the Closed
Fund with profits policies will be exposed.

No new business is to be written in the Closed Fund and its assets cannot be used to support
any new business written in FPLAL.

8.2      Business Risks

Sections 2.2 and 2.3 explain the structure of the Closed Fund and the with profits policies.
Under this structure the with profits policies are exposed to a number of risks relating to the
operation of the policies within the Closed Fund.

A number of reassurance agreements exist between FPLAL, FPLP and FPP. Solvency
problems with FPLP or FPLAL as an entity could adversely affect the size and timing of
payment of FPLAL’s with profits policyholder benefits.

Management of all risks is monitored through governance arrangements set up by the Board.
Processes to manage and monitor the impact of the main risks have been set up and when
necessary mitigating actions are taken.

The benchmarks for assessing and reviewing business risk are the impact on the statutory
balance sheet and the estimated impact on the Realistic Balance Sheet.

No business risk arises from the issue of Tier 1 and Tier 2 capital instruments issued by the
Group and with the benefit of a subordinated guarantee of FPLP. These include the STICS
(Step-up Tier one Insurance Capital Securities) issued in 2003 and 2005 and Lower Tier 2
debt issued in 2009. Likewise, no business risk arises from the issue by FPLP to Friends
Provident Group plc of Step-up Tier one Insurance Capital Securities (originally issued to
Friends Provident plc in 2005). This is because the Closed Fund is managed (and the capital
instruments are structured) so that discretionary benefits under with profits insurance
contracts are calculated and paid, disregarding, insofar as it is necessary for policyholders to



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be treated fairly, any liability the firm may have to make payments under the capital
instruments.

The table below sets out the most significant of these business risks alongside the action that
has been taken to mitigate these risks:

 TABLE 8.1

 Business Risks and Mitigating Action Taken to Reduce Their Impact

 Business risk                                       Action taken to reduce impact

 1a) Guarantees built up by regular bonus            Limiting the build up of these guarantees by
 additions.                                          reducing regular bonus rates.

                                                     Potentially using derivative contracts and
                                                     Asset Share Shorting (see section 7.6) to
                                                     minimise the prospect of guarantee costs and
                                                     the value of assets backing them diverging
                                                     due to market movements.


 1b) Guarantees associated with with profits         Explicit reserve set up for contingency.
 policies, i.e. the guaranteed annuity rates         Monitoring and investment strategy to limit the
 attaching to some policies and other                exposure to changes in market conditions.
 contractual guarantees attaching to most
 policies.


 2) Other miscellaneous business risks               Explicit accountabilities allocated to key staff
 impacting the with profits business, in             to monitor and manage risks. Expense risk
 particular: Investment, Expense, Mortality,         capped by terms of the Scheme.
 Taxation and Regulatory risk.


 3) Variances in the value of non profit             Only about 10% of the Closed Fund liabilities
 business within the Closed Fund.                    are non profit. Reassurance to help protect
                                                     against adverse mortality experience.
                                                     Investment strategy to limit the exposure to
                                                     changes in market conditions.


 4) Potential compensation claims in respect of      Fund has been closed to new business for
 allegations of misselling.                          several years. Ensuring management actions,
                                                     where appropriate are consistent with sales
                                                     literature. Appropriate reserving for potential
                                                     risk.

The risks above all influence the amount and timing of the surplus that emerges in the Closed
Fund. Target payouts will reflect the impact of the above business risks.

The business risks outlined above are borne uniformly across all with profits Closed Fund
policies.
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9       CHARGES, EXPENSES AND TAXATION

The Scheme requires the Actuary to certify that the following expenses charged to the Closed
Fund are fair and reasonable:

   The investment management expenses including a portion of the overhead expenses of
    FPLAL as a whole attributable to investment management. In forming this opinion, the
    size of the Fund, the categories of asset in which the Fund is invested and the investment
    management expenses incurred by FPLAL as a whole should be taken into account.

   Expenses for renewal, maintenance, claims, surrender and lapses, including overhead
    expenses of FPLAL. In forming this opinion, the number of policies in the Closed Fund
    should be taken into account.

The Scheme also defines maximum renewal, maintenance, claims, surrender and lapse
expenses (that increase in line with the Retail Price Index) that may be charged to the Closed
Fund.

The tax charge (or credit), excluding Valued Added Tax, to the Closed Fund will be
calculated on the basis that the Closed Fund is a United Kingdom mutual life assurance
company subject to taxation in the United Kingdom. Hence there is no charge to the Closed
Fund or to Asset Shares in respect of tax payable as a result of transfers from the OBF to
shareholders.

Outsourcing arrangements are reviewed regularly and are renegotiated as appropriate. The
most significant arrangement is for investment management services with F&C Asset
Management plc. This arrangement can be terminated on twelve months’ notice. Investment
management expenses are charged to Asset Share.




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10        MANAGEMENT OF THE ESTATE
10.1      Introduction

Assets and liabilities were allocated to each Fund within the Long Term Business Fund in
1988 as a result of the Scheme. Capital was allocated to the Closed Fund in order to facilitate
the management of the with profits business. This was intended to be sufficient in all but
exceptional circumstances. No further working capital is expected to be provided, except in
exceptional circumstances, to the Closed Fund from any other Fund of the Long Term
Business Fund or the Shareholder Fund.

FPLAL will aim to achieve a fair distribution of all of the Closed Fund assets (including
working capital) attributable to the Closed Fund with profits policies, over the remaining
lifetime of those policies.

10.2      Managing the working capital of the Closed Fund

The working capital of the Closed Fund is the balance of the assets after deducting from the
realistic value of assets the estimated realistic value of liabilities.

The working capital of the Closed Fund may increase or reduce over time as surplus arises
and is distributed within the Closed Fund.

The key mechanisms for managing the existing working capital are the investment and bonus
policy.

If the number of in force Closed Fund policies falls below 5,000 then FPLAL may, but will
no longer be obliged to, maintain the Closed Fund as a separate Fund. If the number of in
force Closed Fund policies falls below 500 then FPLAL will cease to maintain the Closed
Fund as a separate Fund. If FPLAL ceases to maintain a separate Closed Fund in either
circumstance, any existing surplus calculated on a basis which is realistic having regard to the
current and likely future financial and any other relevant circumstances shall be distributed by
way of cash or reversionary bonus or benefit increases to the then remaining Closed Fund
with profits policyholders in such manner as the FPLAL Board may determine, on the advice
of the Actuary and the With Profits Committee. The assets and liabilities of the Closed Fund
would then be allocated to the Other Business Fund and existing with profits policies will
cease to carry any future right to participate in profits.



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10.3     Shareholder Support

Shareholders are not required under the terms of the Scheme to provide any additional
support to the Closed Fund. The Closed Fund is expected to cover all regulatory capital
requirements from its own assets in respect of the business within the Closed Fund.

In extreme circumstances surplus assets in the Other Business Fund or Shareholder Fund of
FPLAL may be used from time to time to provide solvency cover for the Closed Fund.




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11        AMENDMENT TO THE PRINCIPLES AND PRACTICES
11.1      Amendment to the Principles

FPLAL may amend the Principles in this document, but only if the Actuary provides to the
FPLAL Board written confirmation of the following:

a) that the Principles that apply prior to the amendment lead to inequity between some
     classes or groups of policyholders within FPLAL or prevent the efficient management of
     FPLAL;

b) that the Principles as amended would reduce or remove the inequity in the treatment of all
     classes or groups of policyholder, or, as applicable, that any inefficiency would be
     reduced or removed; and

c) that the Principles as amended would have due regard to the reasonable expectations of
     the existing policyholders at that time.

If the Actuary believes any proposed amendment to the Principles will or may have a material
effect upon the rights or reasonable expectations of the holders of Closed Fund policies,
he/she shall give notice of such proposed amendment to the FSA and FPLAL shall not amend
the Principles unless the FSA has, before the expiration of the period of one month beginning
with the date on which it received such notice, notified FPLAL that it does not object to the
amendment, or that period has elapsed without the FSA having served on FPLAL a written
notice of objection.

The With Profits Committee of FPLAL will be consulted before any changes are made to
these Principles.

Policyholders will be provided with three months’ notice prior to the effective date of any
change in the Principles contained in this document.

11.2      Amendment to the Practices

This section covers changes to practices, methodology, controls, fund structures and material
assumptions.

To change Practices, the Actuary, after consultation with the With Profits Committee, should
set out in writing for the Board of FPLAL the Principles applying to the proposed changes,
stating why the changes are necessary, the extent to which they will affect policyholders, and

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express an opinion on whether they are consistent with the Principles set out in this
document.

Policyholders (and if appropriate the FSA) will be notified of changes to Practices. Details of
changes will be displayed on the company’s Internet web site within seven days after they are
implemented. Policyholders should be advised of the nature of any changes in their next
regular mailing due from Friends Provident.

11.3 Other Amendments

Parameters or assumptions not specified in the PPFM but relevant to the methods described in
the PPFM may be amended from time to time. The With Profits Committee will consider any
changes of significance. In all cases FPLAL will document how the amendment is consistent
with these Principles and Practices.

11.4 Compliance and Record keeping

The With Profits Committee of FPLAL will assist the Board in ensuring compliance with the
PPFM and the maintenance of governance arrangements to achieve this aim.

Whenever the PPFM is changed, FPLAL will:

    (a) document the changes and keep previous versions of the PPFM for at least six years;

    (b) ensure that any amendments to the Principles and Practices are subject to compliance
        with all legal and regulatory requirements;

    (c) ensure that revised procedures and systems are properly documented; and

    (d) ensure the implementation of the change(s) is properly managed with appropriate
        change controls.




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12       GLOSSARY OF ABBREVIATIONS
Abbreviation                    Definition
Actuary                         An actuary is a person with a professional qualification specialising in
                                financial risk and particularly insurance risk. The term 'Actuary' in the
                                PPFM relates to the actuary with overall responsibility for advising the
                                Board and With Profits Committee on how to apply the PPFM. This
                                actuary is the With Profits Actuary, a reserved role defined by
                                regulation.
Asset Share                     The accumulated value of premiums less expenses, cost of benefits
                                and tax at the investment return earned on investments (see Section
                                4.2.1).
EBR                             Equity Backing Ratio (see section 7.4). The percentage of equity and
                                property investments in the asset pool backing Asset Shares.
FP plc                          Friends Provident plc – The original holding company for the group
                                created at the demutualisation of FPLO in 2001. Now renamed Friends
                                Life FPL Limited, a subsidiary of Friends Life FPG Limited, a subsidiary
                                of Friends Life Group plc, which is itself a subsidiary of Resolution
                                Limited.
FP Group plc                    Friends Provident Group plc – A holding company created in 2009.
                                Now renamed Friends Life FPG Limited.
FPLAL                           Friends Provident Life Assurance Limited.
FPLO                            Friends’ Provident Life Office.
FPLP                            Friends Provident Life and Pensions Limited.
FPP                             Friends Provident Pensions Limited.
Friends Provident Holdings      A subsidiary of Resolution Limited which acquired control of the Friends
(UK) Limited                    Provident group, including FPLP and its subsidiaries, on 5 November
                                2009. Now renamed Friends Life Group plc.
FSA                             Financial Services Authority - The regulator of financial services.
The Group                       The Friends Life group of companies, in particular including FPLP,
                                FPLAL and FPP.
LTBF                            Long Term Business Fund.
OB Fund                         Other Business Fund.
NMLA                            National Mutual Life Association of Australasia Limited.
NMSLAL                          NM Schroder Life Assurance Limited.
PPFM                            Principles and Practices of Financial Management.
Resolution Limited              The owner of Friends Life Group plc and therefore currently the ultimate
                                holding company of the Friends Provident companies.
RBS                             Realistic Balance Sheet.
UWP                             Unitised With Profits – With profits business where premiums are used
                                to buy units, the value of which grows daily at the regular rate of bonus.
UWP Fund                        Unitised With Profits Fund.
With-Profits Business Fund      A Fund set up in 1988 and merged into the Closed Fund in 1995 (see
                                Section 2.1).




                                             29/7/2011

				
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