THE BAR - Royal London

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RAISING THE BAR

Annualwith Report and AccountsInformation 2015 Strategic Report Supplementary 2015

Royal London is the largest mutual life insurance and pensions company in the UK We enjoyed a highly successful 2015 with record levels of sales and increased profits across our business. Royal London also announced plans to share our profits with an additional 600,000 customers.

Some key numbers

277m

£

EEV profit before tax and ProfitShare

175m

£

IFRS result after tax (total transfer to unallocated divisible surplus)

70m

£ Concentrating on our customers and members. As a mutual we reinvest profits back into our business as we are not driven by shareholder dividend needs, which helps us improve products and services for customers and members.

9.1m

0.8m

The Group has 9.1 million policies across our offerings ranging from insurance to investments, pensions and other savings products

Royal London is a mutual with more than 0.8 million members who share in our success

£536m

£6.8bn

Since 2007 we have allocated £536m to our qualifying with-profits policyholders, ensuring that they benefit from our strong performance

We wrote £6.8bn of new life and pensions business in 2015, calculated on the present value of new business premiums (PVNBP), an increase of 40% on the previous year

ProfitShare allocation for 2015 after tax

40%

Increase in our life and pensions new business on the previous year, calculated on the present value of new business premiums basis

£

84.5bn

We are the largest life and pensions mutual in the UK, with £84.5bn Group funds under management

Performance at a glance

Contents

EEV operating profit before tax and exceptional items

Strategic Report

£225m

£228m

2011

2012

£196m

2013

£220m

£244m

2014

2015

Bonuses added to with-profits policies

£697m

£231m

2011

£282m

2012

£318m

2013

2014

20151

ProfitShare (after tax)

£88m

Performance at a glance Our approach to business Our strategic goals Chairman’s statement Group Chief Executive’s statement Group performance Risk management and internal control The Group’s risk governance structures Principal risks and uncertainties Longer-Term Viability Statement Strategic Report highlights Business overview 22 Intermediary 24 Consumer 26 Wealth 28 Our corporate responsibility Group Finance Director’s review Forward-looking statements Strategic Report sign-off

Corporate Governance

£285m

1 2015 total include bonuses within the Royal London (CIS) Sub-Fund following the Part V11 transfer in December 2014.

£88m

01 02 03 04 06 10 11 13 14 19 20 21 30 39 39

40 How we’re run 42 Board of Directors 44 Directors’ report for the year ended 31 December 2015 46 Corporate Governance statement 51 Board Committees 58 2015 Directors’ remuneration report 77 Auditors’ report Financial statements

£81m

£70m

£60m

84 85 86 87

Consolidated statement of comprehensive income Balance sheets Statements of cash flows Notes to the financial statements

European embedded value 2011

2012

2013

2014

2015

Royal London with-profits performance

6.7% 6.0%

8.6% 7.8%

2012 2013 Benchmark

2014

EEV supplementary information EEV auditors’ report Consolidated income statement – EEV basis Consolidated balance sheet – EEV basis

Notice of Annual General Meeting

11.1% 10.6% 10.9% 9.0%

198 199

4.1% 3.2%

2011 Actual

186 187 188 189

Notice of Annual General Meeting Commentary on the resolutions

Additional information 200 Glossary 205 Financial calendar

2015

01

Our approach to business is based on achieving long-term value for our members. We achieve this by growing our business in the pensions, protection and wealth management markets in the United Kingdom and Ireland and also by managing our assets to deliver long-term growth and stability of income.

How we manage and grow our members’ investments

Intermediary

Consumer

Distribution through IFAs of most of our pensions and protection products

Tailored products for consumers not served by intermediaries

Third-party investors Organisations rely on our expertise to manage their funds

Wealth

Managing Royal London assets and those of third-party organisations

estment inv

Re

Investment

To improve our service to customers, we invest in systems and training

Members

Profits not invested back into the business are invested in financial markets after allocation to qualifying with-profits and ProfitShare policyholders Cash flow

Royal London Group

STRATEGIC REPORT

Our strategic goals are: [[ To become the most trusted and recommended provider of life insurance and investment products in the eyes of our customers.

How we are achieving our strategic goals Building trust

Raising awareness

We work to ensure that all our products and services are clearly explained, that they represent quality and value, and that we continue to provide excellent customer service.

We continue to build awareness of the Royal London brand with consumers, having now brought almost all of our businesses under a single brand name. We continue to offer products directly to consumers, alongside our intermediated offering. A national advertising and sponsorship campaign supports our ambition in these areas. Delivering value and service To continue to improve our service and product development we must invest in the underlying technology. This enables us to streamline our operations to ensure we deliver good value for money. We continue to be recognised through industry awards for our services and products across the Group’s offerings.

European Embedded Value

As part of this we have extended ProfitShare to a wider range of customers and members, starting with those who have unit-linked pension policies. This change should not disadvantage qualifying with-profits policyholders, as we expect it to result in a larger and more successful Royal London that will in time produce more profit for sharing.

Financial Statements

Group Chief Executive’s statement

[[ To raise consumer awareness of Royal London and drive increased new business through our Intermediary, Consumer and Wealth divisions.

Governance

In October we announced plans to bring an additional 600,000 customers into our ProfitShare plan. We are the first pension provider to launch such a scheme, and we are delighted that so many people, including thousands who belong to workplace pension schemes, will share in the success of Royal London.

Notice of AGM & Resolutions Additional Information

03

CHAIRMAN’S STATEMENT From growing our profits to helping our customers get to grips with the new pension freedoms, we enjoyed a successful 2015 – and our strategy should ensure further success in the year ahead.

Royal London Group   Annual Report and Accounts 2015

STRATEGIC REPORT

05

Additional Information

ProfitShare for our members – up from £60m in 2014

In general, though, we see the new pension freedoms as positive for the Group and for all those who are responsible enough to save for the future. Being a mutual helps: by their very nature, pensions involve trust and far-sighted commitment, and Royal London has built up a reputation as a trusted provider working for the long-term interests of our customers. We maintain good working relations with our regulators and The other big change in 2015 is as yet largely notional, but has major implications for Royal the relevant government departments, but London’s future. We are extending the chance the relations that matter most are those with our members and other customers. Making to participate in ProfitShare to a wider range of customers and members, starting with those the business work day after day is the job of our approximately 3,000 staff. They had a who have unit-linked pension policies. This demanding year, and I want to thank them change should not disadvantage qualifying – and my fellow directors – for their skill and with-profits policyholders, as we expect it to dedication. We go forward with confidence. result in a larger and more successful Royal

Notice of AGM & Resolutions

£70m

So what was ‘pivotal’ about 2015? First, we substantially completed the rebranding of the Group, with the main divisions operating under the Royal London name and organised accordingly. We have spent time and money promoting Royal London and our purple pelican brand, and the results so far are encouraging: advisers, customers and potential customers like what they see and hear. The marketing programme included our second year as sponsors of one-day cricket, and the England team hit a suitably purple patch last summer.

Solvency II is just one example of how the Group is affected by legislative and regulatory changes beyond our control. Some require expensive responses, others open up opportunities – and the biggest of all at the moment are in the pensions field. Government reform of pensions has produced some disappointments which deter competition (notably the charge cap); and a few threats, such as possible changes to the tax treatment of pension saving.

European Embedded Value

In general, though, we see the new pension freedoms as positive for the Group and for all those who are responsible enough to save for the future. Being a mutual helps: by their very nature, pensions involve trust and far-sighted commitment, and Royal London has built up a reputation as a trusted provider working for the long-term interests of our customers.

Looking behind these headline figures, our Intermediary division (which includes both Pensions and Protection) produced sales growth of 38%, helped by the auto-enrolment programme for company pensions that the Government has promoted, and also by our strong position in the pension drawdown market. Our asset management business, Royal London Asset Management (RLAM) had another good year, with funds under management rising to £84.5bn. Royal London Platform Services, trading under the name of ‘Ascentric’, saw solid growth in gross sales and increased the amount of money it services. Our Consumer business, still in its infancy, is gradually establishing itself as a significant presence in its markets. You will find details of all these achievements elsewhere in this report.

The amount allocated to ProfitShare obviously depends on how much money Royal London makes, but it is also affected by the Group’s capital position and what it needs to invest. We are now governed by a new set of capital rules, called Solvency II, which typically require life and pension companies to increase the size of their capital cushions. Our preparations for Solvency II have also involved spending money to get our IT systems and procedures up to scratch. In fact, the Group is investing heavily to improve all of its IT infrastructure, which will help us to achieve lower operating costs and a better digital experience for customers in future. By the time this investment programme is complete, your Group will be even better placed to provide excellent service and a largely seamless transaction for customers.

Financial Statements

Rupert Pennant-Rea Chairman

It was also a successful year financially, with EEV operating profit before tax and exceptional items of £244m, up 11% on 2014 and Present Value of New Business Premiums (PVNBP) up 40% to £6,774m, double our PVNBP in 2011. This has allowed us to increase the ProfitShare for our members to £70m, up from £60m in 2014, which will add 1.4% to the underlying value of all qualifying policies.

London that will in time produce more profit for sharing. With-profits members should benefit from an enhanced annual bonus as a result of the proposals. When I report to you again in 12 months’ time, around 750,000 members will be eligible to benefit from our enhanced ProfitShare. Details of this change and what it means are discussed further, later in this report.

Governance

A pivotal year, full of change and opportunity: that seems the right way to summarise Royal London’s 2015, and it is probably how it will look to any future historian.

GROUP CHIEF EXECUTIVE’S STATEMENT Royal London is a very different organisation to most others in our field. We are owned by our members, and our sole purpose is to support them in achieving their aims. Over the past year we have found new ways to mark out our difference by offering more to our customers.

Royal London Group   Annual Report and Accounts 2015

STRATEGIC REPORT

600,000 2015 AWARDS

From the beginning of 2016, unit-linked pension and drawdown customers who joined after July 2001 will become eligible to receive ProfitShare. The first allocation will come in 2017, once the expanded scheme has been in place for a full year.

07

We enhanced the criteria on which people can claim and have focused on the benefits that customers most use and value. We also made improvements to our Helping Hand service. This provides support to customers recovering from illness or those who want to seek a second opinion on a medical condition.

Additional Information

Whilst the annual amount of ProfitShare per person may not seem large, its cumulative effect, with the benefit of any investment growth, can make a meaningful difference to a final pension pot, as well as to your standard of living post retirement.

A year ago we saw glimmers of a recovery in our Protection business after a difficult period of falling sales through intermediaries. A number of players exited the market, but we took the decision that this was an important market in which we could play a useful role. We invested in research to identify what customers wanted and developed our products to meet those needs.

Notice of AGM & Resolutions

Company of the Year

Greater choice Our Annuity Bureau is another example of how Royal London takes a different approach to our competitors. Rather than trying to sell our own branded annuities, the Bureau enables customers to find the best annuity from a range of high-quality providers. Choosing the right annuity can improve retirement income by up to 15%, so this service can provide real value to those customers for whom an annuity is the right solution. The Bureau is aimed at direct customers – those without access to a regulated financial adviser to do the shopping around on their behalf.

European Embedded Value

The number of customers becoming eligible for our ProfitShare arrangement.

ProfitShare In October we announced plans to bring an additional 600,000 customers into our ProfitShare arrangement. We are the first pension provider to launch such a scheme, and we are delighted that so many people, including thousands who belong to workplace pension schemes, will share in the success of Royal London. Most of these customers are already members of Royal London and their participation in our ProfitShare does not mean a reduction in payments for our members who hold qualifying Royal London with-profits policies, who should in fact receive an increase in their annual bonus allocation as a result of the expanded ProfitShare.

Pension freedoms announced in the 2014 Budget came into force in 2015 and we saw strong growth in both drawdown and personal pensions schemes. Drawdown is one of the preferred ways of managing money in retirement, and we have one of the best-regarded propositions in the market.

Financial Statements

The rise in profits and sales across our business in 2015 enabled us to increase our ProfitShare to qualifying members by 17% to £70m.

Pensions and life assurance We have continued to play a prominent part in auto-enrolment, the Government scheme in which employers are required to enrol workers in a workplace pension scheme. Around 100,000 people have joined Royal London through workplace pension schemes, making us one of the most successful participants in this market. Our role is to make the process as smooth as possible for employers, and to help them explain to their employees the enormous benefits of a workplace pension.

Governance

Phil Loney Group Chief Executive

Last year was a busy and successful one for Royal London. Big changes in the pensions and long-term savings business have largely been well received and have been positive for us. Because we tend not to shout about our achievements, it is easy to underestimate just how much we have grown over recent years. Sales have more than doubled in the last four years and the assets invested with us have almost doubled. We have increased the value of your business by generating £277m in EEV profit before tax and ProfitShare. We see opportunities for more growth in the future. Sales have risen by 40% over 2015, and we see opportunities in several markets for more growth in the future.

Group Chief Executive’s statement continued We also focused on paying claims faster. More than half of smaller bereavement claims are now paid out within five days. Our efforts were rewarded, helped by some recovery in the market itself. Intermediary protection sales rose by 49% on the previous year and new business profits also increased. In Ireland, where our business was formerly known as Caledonian Life, sales and profits also rose and we launched a new critical illness product that has proved very popular. In 2016 we plan to complete our product range by launching a new Whole of Life product. We continue to make good progress in our Irish business. With-profits policyholders In 2015 our investment performance for with-profits customers exceeded our benchmark. ProfitShare was up by 17% on the previous year. Qualifying with-profits policyholders may worry that the expansion of the ProfitShare scheme could come at their expense. This is not the case. Instead, we will increase the total amount we pay out to accommodate the new participants. In some cases our industry has treated with-profits policyholders as poor relations. We will continue to place a high priority on ensuring good returns for this core group of our members. Good value for consumers It is still early days for our Consumer division, but over the year we gained momentum and our products are becoming better known all the time. We are developing a reputation for good value. Our Over 50s Life Cover product saw sales increase through the year as people came to realise that it offers much better value for money than rivals. In January we launched our Funeral Benefit Plan, which enables people to ensure their funeral does not become a financial burden on those left behind. The plan, which came to us through the acquisition of The Co-operative Insurance Society Limited, is sold through leading funeral providers and has become a strong business line.

Asset management returns Financial markets are rarely quiet for long, but 2015 was a particularly volatile year. The slowdown in China, falling oil and commodity prices and continued low interest rates all had a significant impact on the markets. Against this difficult background, RLAM achieved good investment returns. A number of new funds were launched, including a new multi-asset fund for the Consumer division, the Cautious Managed Fund, and a fixed income fund – the Enhanced Cash Plus Fund. A great deal of thought has gone into helping customers deal with the low interest rate environment, and designing products to deal with that issue. An important theme for 2015 was preparing for an expansion into multiasset investment – that is, investing across a range of assets including shares, bonds, property and cash in a range of currencies and geographies. More products will emerge from this area.

At the Financial Adviser Life & Pensions Awards 2015 we won in four categories: Pension Provider of the Year, Individual Pension Provider, Group Pensions Provider, and Auto Enrolment Provider. Our RLAM business also won 10 awards throughout the year, including the five-star Service Award for Investments with the Financial Adviser. Building our brand As a brand, Royal London is becoming better known and more influential. We are building a strong brand and aim to be recognised and recommended across our audiences. We have taken the lead in talking about some of the key issues facing our industry, including raising awareness of how much people need to save if they are to enjoy a happy and financially stable retirement.

We have also taken the lead on opposing changes to the pensions system which we believe would be damaging to our customers, such as the idea of moving pensions on to an ISA basis rather than Royal London Platform Services (RLPS), the current basis of giving tax relief on which operates under the Ascentric brand contributions. In the latest budget the to underline its status as an independent Government has preserved the current platform service, is another area that tax relief approach for pensions whilst has benefited from the Government’s introducing a new lifetime ISA for the reforms of the pensions system. Sales rose under 40s. This will have an impact on by 14% as more and more people chose to the long-term savings market and could manage their money outside a traditional prove to be a significant development. pension fund. During the year we substantially RLPS has continued to invest heavily completed the programme of bringing in technology which will enable us to all our businesses under the Royal improve the capabilities of the platform London brand. We have developed brand to ensure it has the capacity for further communications based on the fact that growth and becomes the ‘quality act’ in Royal London has been around since its chosen markets. 1861 and therefore we know a thing or two about providing financial services. Awards success We’ve held on to the ethics and principles In 2015 Royal London won many that we were founded on and which awards for its products and services. come from an age when honesty, loyalty and a sense of community were We were named Company of the Year at commonplace values. the Money Marketing Financial Services Awards. In the Investment Life and In these fast-moving modern times, Pensions Awards we won Best Group it’s these traditional values that set Pension Provider and, for the fourth Royal London apart from other financial year in a row, were named Best Income institutions. We have continued our Drawdown provider. national television advertising campaign running our Pensions advert on prime time TV, sponsoring ITV London Weekday Weather and sponsoring

Royal London Group   Annual Report and Accounts 2015

STRATEGIC REPORT

14% 100,000

49%

These kinds of investments help us to keep our prices competitive for customers by keeping our costs down.

Our personal pensions business continues to be popular, and as people get older we expect to see more demand for drawdown. We have more ideas for Protection products for the future. In our Asset Management business the multi-asset product range is a key area for expansion. We have lots of plans for serving you even better in 2016, and look forward to putting them into practice.

Additional Information

09

The workplace pensions surge will not last forever. Auto-enrolment will extend to smaller employers in 2016 and 2017 and then will start to tail off. Whilst this will inevitably mean a slowdown in that area, we still see continued growth elsewhere.

Notice of AGM & Resolutions

Investing for the future We have not just been working on products and services for today; we have also been investing and developing capabilities for the future. We have developed new technologies behind our Protection businesses, which will make it cheaper and faster to make product improvements in future. The technology being developed in our Platform business could ultimately be used right across our long-term savings business.

We are growing quite rapidly so we need to ensure we invest in our underlying technology to ensure we continue to give good service and provide competitive products into the future. We have also invested in our finance and actuarial systems to ensure they were prepared for the introduction of Solvency II, the new regulatory regime for European insurers that came into effect in January 2016.

European Embedded Value

Rise in sales in our Protection business compared to the previous 12 months

People and culture We employ almost 3,000 people across the UK and the culture of our organisation is key to delivering great service to customers and to keep on sustaining innovation. Through our Spirit of Royal London Programme we have local events all around the country through which we help our people to embrace the values that Royal London believes in.

In doing so, these investments underpin our growth.

Financial Statements

Number of people who have joined Royal London through workplace pension schemes, making us one of the most successful participants in this market

Speaking of cricket, we’ve concluded the second year of our four-year sponsorship deal with the England and Wales Cricket Board for one-day cricket. Some of the new cricket activities for 2015 included our grassroots initiative encouraging children aged 11 and under to play soft ball cricket, the Royal London Gilbert Cup. This has more than 1,500 competitors and concludes with a grand final at Lord’s. We also launched a partnership with the Professional Cricketers’ Association (PCA) Benevolent Fund as they look to help current and former players in times of hardship. We developed a digital strategy focused around a new website and social media content based around cricket.

They also help us to offer more digital content, such as websites that allow customers and intermediaries to place new business with us with a minimum of form-filling bureaucracy.

Governance

Rise in gross sales for Royal London Platform Services, operating under the Ascentric brand

Channel 5 cricket highlights – all of which helps drive recognition of our brand.

Group performance Measuring our performance. We are always transparent about our performance, where we could have achieved more and what we hope to do in the future.

Performance description

2015 result

Profitability

£277m

EEV profit before tax and ProfitShare.1, 2, 3

Historic performance

£551m £320m

£259m

 7% 2012

Profitability IFRS result (total transfer to unallocated divisible surplus).3, 4

£175m

2013

£261m £134m

2012

Present value of new life and pensions business premiums.

£6,774m

 40% Group funds under management.

£84.5bn

 3% Capital Regulatory (Insurance Groups Directive) capital surplus.

Royal London Group   Annual Report and Accounts 2015

2014

2015

£4,826m £3,160m £3,464m

2013

£73.6bn

2014

£82.3bn

2015

£84.5bn

£49.8bn

2012 1 2014 includes an exceptional item being the £61m charge relating to the pensions charge cap. 2 2013 includes £150m one-off gain arising on the acquisition of the Co-operative life, pensions and asset management businesses. 3 2012 and 2013 results exclude Royal London 360°, which was disposed of during 2013. 4 2013 IFRS results include £125m one-off gain arising on the acquisition of the Co-operative life, pensions and asset management businesses. 2014 includes exceptional item being the £61m charge relating to the pensions charge cap.

2013

£175m

£6,774m

2012

Funds

2015

£379m

 31% New business

2014

£277m

2013

£3,535m £2,374m £2,749m

2014

2015

£3,390m £3,535m

 4% 2012

2013

2014

2015

STRATEGIC REPORT

Risk management and internal control The Board is responsible for the Group’s system of risk management and internal control, as well as for reviewing its effectiveness.

[[ promote a clear understanding of

the risks faced to allow the Group to balance risk, capital and return effectively, enhancing our decisionmaking capacity; [[ promote the preparation of reliable

published financial statements and selected financial data; and laws, regulations and internal policies. We have a formal governance structure of committees to manage risk, reporting to the Board, and this has been further improved in 2015. Risk management is an integral part of our corporate agenda and employees at all levels have risk management responsibilities.

Notice of AGM & Resolutions Additional Information

11

European Embedded Value

The Board has conducted a review of the effectiveness of the Group’s system of internal control during the year ended 31 December 2015, taking into account matters arising up to the The Board has established an ongoing date of approval of this Annual Report Our primary objective in undertaking process for identifying, evaluating and Accounts. The review covered all risk management is to ensure that the and managing the significant risks achievement of the Group’s performance material controls including business, faced by the Group. The management operational, financial, compliance and and objectives is not undermined by of each business unit and support risk management processes. It was unexpected events and that sufficient function is responsible for identifying, conducted on an ongoing basis, via capital is maintained. During 2015 evaluating, rating (in terms of probability the risk management system described reports submitted to the Board, the of occurrence and likely impact), below, in conjunction with the Individual Board Risk Committee and the Audit assigning responsibility for, reporting, Committee and also by reports prepared Capital Assessment (ICA), the Internal managing and mitigating all risks as part of the year-end process. Model, our risk register and the Own relevant to its area of business. This Risk and Solvency Assessment (ORSA), includes the design and operation of Three lines of defence has been used to help identify, mitigate, suitable internal controls. monitor and quantify significant risks to Our governance structures for risk management are based on the ‘three lines which we are exposed. Our system of risk management and of defence’ model. Primary responsibility internal control comprises the system for risk management lies with the This approach enables the early of governance, risk appetite, risk business units and specialist operational identification of risks and, through an policies, internal control and monitoring assessment of likelihood and impact, we process functions. A second line of activities, and the internal environment defence is provided by specialist functions seek to understand fully the dimensions including the Group’s philosophy, that undertake monitoring, challenge of the exposures the Group faces. In culture and behaviours. and policy setting, such as the Group’s response to unacceptable exposures, independent Risk and Compliance targeted action plans are put in Taken together these elements are function. The third line of defence is place. Regular reporting on risks and designed to: provided by Group Internal Audit, which mitigating actions is undertaken by provides independent assurance. individual business units through the Executive Risk Committee to the [[ facilitate the effective and efficient In practice, executive management has Board Risk Committee. operation of the Group by enabling us delegated the day-to-day responsibility to respond appropriately to significant for establishing and implementing We have made a considerable effort strategic, business, operational, appropriate systems and controls and for to ensure that there is a strong risk financial, regulatory and other risks managing the risks which impact upon management culture in all important that could impact upon the delivery of their respective areas of responsibility. decision-making processes and that our objectives;

Financial Statements

[[ facilitate compliance with applicable

the risk management system is well embedded across all Royal London business areas. During 2015, Royal London continued to strengthen its risk management system in relation to risks to end customers or conduct risk. We consistently seek good customer outcomes in everything we do and have no appetite for knowingly treating customers unfairly. In 2015, as part of a continuous improvement approach to the management of risk, all areas of the Group have been set objectives to further strengthen risk management processes and culture.

Governance

The system is designed to manage, rather than eliminate, the risks of failure to achieve business objectives and can provide only reasonable, and not absolute, assurance against material misstatement or loss. The system has been in place throughout the period under review and accords with the UK Corporate Governance Code. The Board is very conscious of the importance of the Group’s internal controls and attaches high priority to developing them in line with good practice. The Board is aware that from time to time, due to the size and scale of the Group, issues could arise that impact the reputation of the Group and its operations. In the event of such risk materialising, the Board will ensure that necessary actions are taken to address them.

Risk management and internal control continued Business unit managers identify, assess and record material risks, including information on their likelihood and severity and the mitigating controls or actions planned.

is materially out of line with the market or who appears to have poor quality assets backing its capital strength.

Capital We will maintain a strong and credible capital position with good quality assets. Maintaining a strong and credible capital position even in extreme but foreseeable circumstances is a key target for our sustainability as advisers and potential policyholders may be wary of placing business with a company whose strength

The Board ensures that policies are regularly reviewed to reflect the changing commercial and regulatory environment as well as the Group’s organisational structure.

Solvency II The EU-wide Solvency II regime, which is intended to strengthen the integration of risk and capital management and to harmonise the capital requirements across European insurers, was implemented on 1 January 2016.

Liquidity We will be sufficiently liquid to retain This risk management system allows us customer and member confidence even to assess our overall risk exposure and in extreme but foreseeable circumstances. to create a map of major risk exposures Maintaining sufficient liquid assets even The regime allows insurers to use a along with associated actions. This map in these circumstances is a key target for standard formula for determining their is continually monitored and refreshed the Group’s sustainability. regulatory capital requirements or to and evidence of control effectiveness is use their own Internal Model, which regularly reported. Performance will require approval from the regulator. We will deliver quality earnings and Building on our existing strong capital These processes are supported by the attractive growth with well managed modelling and control capabilities, it is Risk and Compliance function which is volatility. We have a number of principles our intention to use our own Internal independent of the business and reports that relate to long-term returns to Model. The Internal Model is central to the Chief Executive via the Chief Risk customers and policyholders and meeting to the business and it will enable us to Officer. Group Risk and Compliance their reasonable expectations. This covers make more effective decisions by fully provides specialist knowledge, review, not only shorter-term volatility, but also integrating risk and capital management. challenge and quality assurance, as well volatility around expected longer-term We have been working on the as the co-ordination of reporting to value and returns. development and implementation of appropriate committees and the Board. Insurance risk the Internal Model and a Solvency II Group risk appetite framework We will apply strong insurance risk standard formula approach has been Our risk appetite framework consists of management disciplines for new and used since 1 January 2016 whilst Internal three components: existing business. This can be done in Model approval is sought. In addition, a variety of ways, such as only taking during this period we will continue on risks that we feel we have sufficient to use our own capital modelling and [[ the risk strategy, together with risk expertise to manage, or taking on control capabilities. preferences, defines the types of risks specific types of insurance risk in order we aim to take or avoid in the pursuit to improve our overall financial position. Principal risks and uncertainties of our business objectives and sets Managing risk is fundamental to our the boundaries within which our risk Operational activities in order to generate returns appetites will operate; We will operate strong controls over for policyholders. our business environment. Operational [[ the risk appetite statements explain risk appetite is designed to protect both We have processes in place to identify how much risk we are prepared to policyholders and the Group whilst and manage risks, which include be exposed to in relation to each risk delivering sustainable growth. assessing scenarios and reverse category outlined in the risk strategy stress tests. and why; and Operational risks are managed by evaluating key exposures, monitoring Our approach to risk management is [[ the risk metrics help to measure the risks on an ongoing basis and taking set out earlier in this statement. The amount of risk we are exposed to action to mitigate risks where needed. Board believes the principal risks and against risk appetite. Each metric has uncertainties facing the Group are as inbuilt threshold limits designed to Group risk policies set out on pages 14 to 18 with the actions provide an early warning of when we taken to manage and mitigate them. are approaching our risk appetite limits. Our risk policies are the high-level standards and requirements that determine the way risks are managed The Board has approved risk appetite and controlled. statements as follows:

Royal London Group   Annual Report and Accounts 2015

STRATEGIC REPORT

The Group’s risk governance structures Responsibilities of the Board

Governance

Board The Board approves and has oversight of the plans and structures in place to ensure Royal London achieves its strategic objectives within the risk appetite framework.

Financial Statements

Board Risk Committee The role of the Committee is to ensure that the interests of the members and customers of Royal London are properly protected through the application of effective risk and capital management systems.

Capital Management Committee

Executive Risk Committee

The Committee’s role is to advise and support the Board regarding the Group’s capital position. It also ensures the Group has in place the necessary processes to identify, manage and report on market, credit and liquidity risks in accordance with the Group’s Risk Appetite statements and parameters set out by the Board.

Solvency II Steering Committee

Internal Model Governance Committee

The role of the Committee is to oversee customer outcomes in relation to our customer strategy. It provides challenge over business practices relevant to our strategic customer objectives and conduct regulatory requirements.

The role of the Committee is to provide leadership and direction to the Solvency II programme to ensure successful delivery. This includes reporting and escalation to the Group Executive Committee as appropriate and ensuring compliance with other business as usual processes and committees.

The role of the Committee is to review, challenge and approve the overall design, implementation and performance of the Internal Model including its scope and application.

13

Additional Information

Customer Standards Committee

Notice of AGM & Resolutions

The role of the Committee is to monitor the risk management processes, and to ensure that appropriate action is taken to manage risk.

European Embedded Value

Responsibilities of management to risk

Principal risks and uncertainties Managing risk is fundamental to the Group’s activities in order to generate returns for policyholders. We have a system in place to identify, manage, monitor and report risks, supported by risk tools and processes such as contingency planning, escalation of events, assessing scenarios and reverse stress tests. The Board confirms the principal risks and uncertainties facing the Group are as set out on the following pages, along with the actions taken to mitigate and manage them. The Board has carried out a robust assessment and monitors principal risks and uncertainties on a quarterly basis, with an annual review undertaken. Our approach to risk management, including the process of assessing and reviewing these risks, is set out on pages 11 and 12. Our risk profile is stable and generally changes only gradually from year to year. This, combined with the fact that most, if not all, of the principal risks and uncertainties set out last year are still of concern means that the principal risks and uncertainties remain broadly unchanged from the previous year. What has changed, however, is the progress we have made in mitigating and managing risk. The economy and Royal London’s key markets Principal risk and uncertainty

Risk mitigation and management

The economic environment continues to be uncertain

Using our forward-looking risk profile with regular monitoring of exposures to, and possible concentrations by, risk class, allows us to evaluate scenarios where we may be exposed to asset values and liability values moving differently and have a good understanding of the impacts this has on our risk profile.

Like other insurance groups, our business is subject to inherent risks arising from general and sector-specific economic conditions in the markets in which it operates, particularly in the UK, where our earnings are predominantly generated. Fluctuations in the value of both assets and liabilities can arise from volatility in the global capital markets, the economy of the UK and the global economy generally. This may have a materially adverse effect on the Group where such a market change impacts differently on the value of assets from the effect on liabilities. A change in economic trends and consumer behaviours can affect our performance Volatility in the economy and investment markets and the continuing prospects for low growth rates in the UK can affect consumers’ disposable incomes and appetite for our products and services. Changing socio-economic trends (customers wanting to deal direct, transactions through mobile applications, data security etc.) present opportunities and challenges to our business model.

Royal London Group   Annual Report and Accounts 2015

Through regular monitoring and discussion at executive and Board level, decisions are made to mitigate risks where these do not align to our business strategy and/or risk preferences.

We regularly undertake reviews to ensure we are developing strategies and operational capabilities to take account of current and future changes in markets and consumer behaviours. We monitor our product range and market position regularly through analysis of policyholder experience and business volumes. This helps us to re-price products dynamically and develop new ones in response to changes in demand.

STRATEGIC REPORT

Changing regulation

Principal risk and uncertainty

Risk mitigation and management

Uncertainty in changes to the regulatory framework resulting from Solvency II

In line with PRA recommendations, we have continued to develop our Internal Model and our risk and capital management systems, monitoring closely the potential impacts on its capital requirements and ProfitShare.

Solvency II implementation occurred on 1 January 2016. Whilst the high-level regulation is understood, important elements of the low-level detail are still undecided. This gives rise to the possibility that we will be required to hold greater levels of capital than previously required.

Our conduct risk framework is in place, together with an associated proposition development and review process designed with the aim to achieve fair outcomes and experiences for our customers. We continue to be represented on several industry bodies including Association of British Insurers (ABI) senior committees.

The political environment Risk mitigation and management

Changes to financial services markets may arise from the political environment

As the environment changes we continually evaluate how our markets are evolving and look to develop propositions to meet the needs of end customers and distributors. To support this we undertake regular monitoring of our performance and the external political and environmental landscape.

The political environment may give rise to changes that alter the viability of our propositions in the markets in which we operate. It will take time for the implications of the Government’s pension changes, like the charge cap levels, the introduction of independent governance committees for the workplace pensions and the new pension freedoms measures that began on 6 April 2015, to be embedded and fully understood. Changes to Government could affect our markets (e.g. pension charge capping being tightened or extended to further product types). Possible UK exit from the European Union creates uncertainty over the prospects for the insurance and investment markets The impact on markets is likely to be a marked rise in uncertainty resulting in a shock to economic confidence, pressure on sterling and the UK credit rating, and increased inflation.

This has been considered as an additional principal risk and uncertainty at the end of 2015.

In addition, we undertake a role in lobbying on political and legislative issues in the best interest of our customers. The UK’s exit from the EU is not expected to have a detrimental impact on Royal London’s strategy and model as it is mainly centred on the UK. However, we recognise the potential impact on our Ireland business and any implications with regard to Scotland’s independence. Risks related to the market will be mitigated through our normal market risk monitoring and activity. We will maintain a watching brief on developments relating to UK exit as they occur, particularly in relation to regulation and legislation, and will prepare appropriate responses.

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Additional Information

There is further uncertainty over the impact this may have on regulation and legislation.

We also undertake scenario testing of external factors that could detrimentally impact our business model.

Notice of AGM & Resolutions

Principal risk and uncertainty

European Embedded Value

Unprecedented levels of change in legislation and heightened regulatory activity could adversely impact our ability to implement and deliver changes as well as our reputational, operational and financial position. The conduct and prudential environment is still developing and this could impact how we develop and distribute new propositions, as well as how we administer and deal with contracts sold in the past. It is possible that regulatory thematic industry-wide reviews from the regulator may have a significant impact on the Group.

Meeting the expectations of customers and our regulators is at the forefront of everything we do. To that end we actively engage with regulators on an ongoing basis. We continue to monitor developments, for example the Markets in Financial Instruments Directive (MiFID), on our Royal London operation.

Financial Statements

Changes in the legislative and regulatory landscape may alter the design and marketing of propositions

We will be seeking Internal Model approval in due course. Until that time, we remain exposed to the risk that our capital position will be subject to capital add-ons which may misstate our true capital position in the market, leading to reputational damage. This risk is mitigated by close dialogue with the regulator on the level of the capital add-on that has been approved, and ongoing monitoring of its appropriateness. We also have the risk that the Internal Model may not be approved by the regulator.

Governance

We have prepared and mobilised for Solvency II implementation in 2016. Work carried out during 2015, combined with further clarity from the Prudential Regulation Authority (PRA), has removed some of the uncertainty and reduced the likelihood of this risk relating to the regulatory framework.

Principal risks and uncertainties continued

Maintaining our financial strength Principal risk and uncertainty

Risk mitigation and management

An increase in our funding commitments for defined benefit pension schemes may impact on our financial position

Overall, the schemes are reasonably well funded; however, the Board recognises this position could change and continues to closely monitor funding levels and work with the Trustee Boards to assess opportunities to reduce volatility and risk.

Our main risks in managing our defined benefit pension schemes arise from inflation, interest rates and longevity, and from risks associated with the schemes’ investment strategies. Any adverse movements in these factors could increase future funding costs and could impact our financial position. An additional risk factor is a possible Solvency II approach regulation being imposed.

During 2015, we notified Trustees of our intention to close the main Group defined benefit scheme to future accrual from 1 April 2016. This will reduce the funding commitment to that scheme.

We are exposed to the risk of failure or default of one or more of our counterparties

We seek to manage exposure to any one counterparty or third-party. We actively monitor and report against limits in respect of investments.

As part of our business, we invest in debt securities and other assets in order to meet our obligations to policyholders. As a result of this activity exposures can arise to issuers of debt and other financial instruments. Our day-to-day activities also mean we have exposures to banking, insurance and reinsurance counterparties as well as third-party providers of IT and administration services.

Contracts with third parties and suppliers are governed by strict service level agreements, which are monitored and discussed at regular account management meetings.

If our assumptions are subsequently proven to be wrong then adjustments may impact on our financial position

In the event that actual claims experience is less favourable than envisaged, our reinsurance arrangements will provide significant mitigation. Additionally, we use our experience to assess and set prices for known risks and to ensure that reserves are appropriate. The calculation of reserves is underpinned by stress and scenario testing which assesses the appropriateness of key assumptions to a combination of extreme events, including financial and economic conditions, investment performance and product-specific matters.

Our business involves the underwriting of risks where the ultimate liability is dependent on long-term trends in factors such as mortality, lapse rates, interest rates and counterparty defaults. We take a prudent approach when calculating capital requirements. However, extreme movements can take place. Such events could arise from, for example, medical science advances and movements in financial markets or in the broader economic environment. It may be necessary to review assumptions if this did happen, potentially impacting our financial position.

The Capital Management Committee reviews large exposures that approach or exceed risk appetite, and reviews the actions being taken to manage the exposures.

Organisational delivery Principal risk and uncertainty

Risk mitigation and management

Delivery may be impaired by the high level of change across the Group

Our strategic and operational plans are regularly reviewed by the Board. These take account of our resources and the scale and diversity of change currently under way and planned for the future.

The Group has grown in recent years, and we have completed internal change programmes in line with this growth in order to continually improve our capabilities and the experience of our customers. There is a remote risk that the continued growth plans, combined with the significant amount of external change in markets, regulation and legislation, result in possible future inefficient or ineffective organisational delivery, with consequential operational loss and/or reputational damage.

Royal London Group   Annual Report and Accounts 2015

Specific change reporting takes place at project, programme, portfolio and strategic execution level, utilising a dashboard of measures to ensure that appropriate risk-based decisions are made, and that resources are allocated in an efficient and sustainable manner. The portfolio is also constructed initially to take account of the anticipated level of resourcing available.

STRATEGIC REPORT

Material outsourcers and supplier relationships Risk mitigation and management

Outsourced services may not meet regulatory or service requirements

We have a framework for the governance and oversight of material outsourcer and supplier arrangements. It includes the requirement for executive approval prior to commencing such arrangements together with policies and processes for the oversight and escalation of risks and issues to the attention of the appropriate risk committees.

In line with other large financial services organisations, we have a number of material relationships with outsourcers and service providers. Whilst processing or specialist work is undertaken by these organisations, we remain fully responsible for the oversight, management and performance of the outsourced activity. There is a risk that we would be unable to meet our regulatory obligations following the failure of, or a significant degradation in, service received from a service provider.

We closely manage outsourcer and supplier relationships on an ongoing basis. As a minimum, the governance arrangements require that our customers do not face an increased level of risk due to an outsourced arrangement.

Principal risk and uncertainty

Risk mitigation and management

Brand transition

Significant progress has been achieved under the transition plan into the new single brand. We have incorporated governance and processes that ensure we maintain existing strengths and relationships with our customers.

Legacy products Principal risk and uncertainty

Risk mitigation and management

Legacy remediation

We have increased the resource allocated to managing our legacy books and rolling out a more comprehensive product review process.

We have a number of legacy products in which clients are still invested. There is a risk that we may be requested to review and remediate legacy books in force, in line with the overall impact for the industry.

Work has commenced on reviewing and undertaking a gap analysis following the release of the Financial Conduct Authority (FCA) findings on the industry-wide review of the treatment of longstanding customers.

Additional Information

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Notice of AGM & Resolutions

This has been considered as an additional principal risk and uncertainty in 2015.

Positive work has been undertaken in product and proposition review and in clearly identifying and structuring our approach to dealing with a range of remedial actions for our legacy book.

European Embedded Value

Metrics are in place to monitor brands across the Group, including our Intermediary division, where the remaining brand transition continues in its Protection business. A quarterly brand tracking survey measures consumer awareness and sentiment. Regular adviser surveys are undertaken to keep track of brand and proposition awareness as well as the likelihood of recommending us.

Financial Statements

Brand transition

In moving to a single strong brand we are aware there is an inherent risk of diluting or damaging established strong reputations and customer relationships.

Governance

Principal risk and uncertainty

Principal risks and uncertainties continued Removed principal risk and uncertainty since prior report The uncertainty in relation to establishing an appropriate response to the regulator’s concerns surrounding the declining volumes of with-profits business has now been removed, and this has been replaced with a risk regarding the implementation and delivery of the operational aspects of this initiative. A project is in place to deliver this and all aspects are currently on track. Principal risk and uncertainty

Risk mitigation and management

Potential constraints on the mutual with-profits sector may impact our ability to grow or write new business

We believe that the writing of profitable new business is advantageous for our financial strength and consequently beneficial for policyholders. As the largest mutual insurer in the UK, we view this issue as being of critical importance for a positive resolution.

In 2012 the Financial Services Authority (FSA) issued a policy statement on with-profits funds and a consultation paper on mutuals managing such business. A related policy statement from the FCA in March 2014 has taken account of matters arising through the consultation process. This gave rise to the possibility that mutual insurers could, in the future, be constrained in their use of surplus assets from with-profits business to fund strategic initiatives such as acquisitions or supporting the writing of new business.

We have been in discussion with the FCA/FSA since 2007 with a view to addressing the implications of declining volumes of with-profits business. This uncertainty has now been removed for Royal London following the receipt of non-objections from both the PRA and FCA relating to the introduction of ProfitShare accounts. ProfitShare accounts widen the share of profits from the Group from with-profits business only to include more policy types from 1 January 2016. A project is in place to deliver the implementation and delivery of the operational aspects of this initiative and full and robust governance and tracking of progress is in place.

Royal London Group   Annual Report and Accounts 2015

STRATEGIC REPORT

Longer-Term Viability Statement

The Group’s current strategy has been in place for several years and our strategic goals detailed on page 3 remain at the core of everything we do.

[[ Base scenario – global growth remains

• adverse distribution developments

affecting the Group’s market share; [[ Strong scenario – strong economic

recovery with growth that is faster than expected and an increase in interest rates. As part of the prudent management of the long-term business of the Group, its management carry out and assess various long-term financial projections. However, there is inherent uncertainty involved in these projections, which increases as the term of the projections increases. Whilst the directors have no reason to believe that the Group will not be viable over a longer period, the period over which the directors consider it possible to form a reasonable expectation as to the Group’s longer-term viability is the five-year period to December 2020. This period has been selected because the Group’s medium-term business planning process sets out its strategy and assumptions on a five-year time horizon; and the latest business plans, which include in-depth analysis of its risk profile, liquidity, and profit and capital projections, cover the period until December 2020. Assessment of viability Although the strategic plan reflects the directors’ best estimate of the future prospects of the business, they have also tested the potential impact of a number of scenarios over and above those included in the plan, which represent ‘severe but plausible’ scenarios that the Group could experience. These scenarios encompass: [[ a range of sensitivity analyses and stress

tests over key economic, insurance and operational risks, for example a 1 in 200 adverse impact from financial markets or a significant medical science advance; and [[ stressing of the business plan

for adverse scenarios impacting profitability, liquidity and/or solvency, including:

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• infrastructure weaknesses negatively

impacting the Group’s ability to support strategic ambitions, including weakness caused by high volumes of new business; and • an extreme market downturn

resulting in a severe reduction in the Group’s solvency. Each scenario is designed to be severe but plausible, and take full account of the availability and likely effectiveness of the potential mitigating actions management could take to avoid or reduce the impact in the circumstances. In considering the likely effectiveness of such actions, the conclusion of the Board’s regular monitoring and review of risk and internal control systems, discussed on pages 11 and 12, are taken into account. Reverse stress tests have also been conducted which identify scenarios which may lead to the failure of the business model; the combinations of events required to cause failure of the model are so extremely severe and remote that they are not considered to affect the directors’ expectations of the Group’s longer-term viability. Viability Statement Based on their robust assessment of the principal risks and uncertainties facing the Group and the stress-testing-based assessment of the Group’s prospects, which have been described on this page, the directors confirm that they have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the period to December 2020. Going concern The directors also considered it appropriate to prepare the financial statements on a going concern basis, as explained on page 44 in the Corporate Governance section.

Additional Information

below its pre-2008 average but with inflationary pressures leading to rises in interest rates;

legislative developments;

Notice of AGM & Resolutions

The assessment process The Group’s prospects are assessed primarily through its strategic planning process which is led by the Group Chief Executive and involves all relevant functions. The Board fully participates in this process and undertakes a robust review and challenge of the strategy and assumptions, in particular through the use of stress and scenario testing; the scenarios being summarised as follows:

• adverse regulatory and

European Embedded Value

Decisions relating to major new projects and investments, for example developing our IT infrastructure, are made with a low-risk appetite and are subject to escalating approval levels. The focus placed on developing our IT infrastructure takes advantage of opportunities to bring an enhanced digital experience to customers, lower our operating cost base and at the same time respond to regulatory changes such as Solvency II and pension freedoms.

western economies and China, recession in the UK and sharp falls in equities; and

Financial Statements

The Board continues to take a conservative approach to the Group’s strategy and the focus is on building trust with our customers, raising awareness of our brand and delivering value to our members, whilst meeting the expectation of regulators and other stakeholders in a changing capital regime.

[[ Adverse scenario – slowdown in

Governance

Assessment of prospects The context for the assessment Our business model and strategy are integral to understanding the Group’s prospects, and details can be found on pages 2 and 3. The nature of the Group’s business model is long-term – indeed we were founded over 150 years ago – and the Board’s strategy is subject to the ongoing monitoring and development described on this page.

Strategic Report highlights

Intermediary We have started work on improving the service we can give customers to help them navigate the complex world of pensions, investment and financial planning. To find out more, turn to p22.

Consumer We worked to improve the process that customers experience at the point their policy matures, providing as much guidance and education as possible to ensure they could make informed choices. To find out more, turn to p24.

Wealth We launched several new products across our cash and fixed interest teams. In general, these have been focused predominantly on expanding our short duration strategies which are well positioned to offer investors protection against any potential upcoming interest rate rise. To find out more, turn to p26.

Our corporate responsibility We are delighted to be the first customer-owned life, pensions and investment provider to enable customers to share in our profits through the launch of ProfitShare for pension customers. To find out more, turn to p28. Royal London Group   Annual Report and Accounts 2015

2015 was a busy and successful year for Royal London. Big changes in the pensions and long-term savings business have largely been well received and have been positive for us as a business.

Governance

Financial Statements

Notice of AGM & Resolutions

Additional Information

21

European Embedded Value

SETTING THE PACE

STRATEGIC REPORT

Business overview

Intermediary Our intermediary business delivered an exceptional performance in a fast-moving market. Against a challenging market backdrop, our Intermediary division traded strongly in 2015 delivering excellent new business results. Pensions has seen success through continued market-leading service, leading to significantly increased loyalty from Financial Advisers. Business volumes have been boosted by markets fuelled by auto-enrolment and pension freedoms and the propositions we have developed to serve those opportunities and customers’ needs. UK Protection has benefited from the action taken to improve the quality of the protection proposition. This included improving the customer experience by online new business processes and underwriting via the Underwrite Me development. The proposition has been further strengthened through improved Critical Illness definitions, enhancing our Helping Hand support service with the second medical opinion service and targeted pricing improvements. The improved business results and leadership changes have given UK Protection a huge boost and momentum continues to build. Our Intermediary division won five-star awards in both Protection (Bright Grey) and Pensions for our customer service, something we are particularly proud of in a year when many struggled to maintain such high standards as us.

Pensions Group Pensions Auto-enrolment has been a huge success for our industry. By the end of 2015, 5.2 million UK employees will have been automatically enrolled into a pension scheme. Winning new auto-enrolment schemes was a key priority for us, with 45,000 small and medium-sized enterprises due to go through auto-enrolment in 2015. Whilst a number of pension providers downgraded their proposition to provide a more self-service approach, we stayed true to our values and put our expert people at the centre of our process, even for smaller schemes. This full-service

Royal London Group   Annual Report and Accounts 2015

approach has proved highly popular in the market, and as a result we helped to set up more than 4,000 group pension schemes in 2015, creating 100,000 new members who now have a group pension with Royal London. To meet the demands of 2016, when around 470,000 employers are due to stage, we have increased resources that will enable us to implement more than double the number of schemes supported this year. Individual Pensions Our Individual Pensions business has continued to thrive as a result of the increased flexibility customers have in how they access their pension. Income Release continues to be the market-leading simplified drawdown proposition for advised clients with new business up 67% on the same period in 2014. We received unprecedented customer calls immediately after the new pension freedoms were made available. Despite this, research carried out by Harris Interactive on our behalf shows that overall call experience and customer satisfaction has been rated very highly. Although we have no desire to offer regulated financial advice, we’ll never leave customers without the support they need. We’ll always take action to help them achieve financial security in their later years. This especially applies post pension freedoms. Our ambition is to provide customers with helpful information on things that affect them throughout the lifetime of their pension. This includes encouraging them to take independent financial advice at every opportunity.

We received unprecedented call volumes in the period immediately after the new pension freedoms were made available to policyholders. It is particularly pleasing that the experience received by our customers was an extremely positive one.

67% The increase in new business generated by our Income Release product in 2015 compared to the previous year

 4,000 The number of pension schemes we helped to set up in 2015

2015 AWARDS

STRATEGIC REPORT

In tune with our members We were on song in 2015, winning a trunkful of awards including Life Insurer of the Year and Best Pension Provider.

Protection

Governance

In 2015 we worked to restore our position in the market by improving our products and the way we engage with our customers and advisers. Sales responded well to the changes. Our full-year results show UK Protection sales were up from £338m in 2014 to £502m in 2015, which represents a 49% increase, and applications levels were above 2014 levels. This growth has been driven by a focus on three basic principles: [[ being easy to do business with;

[[ nurturing long-term relationships with

our advisers. The launch of an innovative new online ‘quote & apply’ service will make the process of applying for protection products quicker and simpler, saving advisers’ time and money. This means fewer and better targeted underwriting questions with more flexibility where either the adviser or client can complete the application online.

Royal London Ireland had its first year trading under the new name after rebranding from Caledonian Life in 2014. The rebrand was well received and, combined with the product and service improvements, contributed to a strong year for the business. Sales rose by 13% to £50m.

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Additional Information

The changes to products and services are part of an ongoing programme which will continue into 2016 and beyond. In the past, the protection market has tended to focus on matching or improving on competitors’ products. We are moving the focus away from the competition and back to the customer – creating products that offer direct solutions to customers’ needs at reasonable prices.

Notice of AGM & Resolutions

Ensuring we are building sustainable business relationships with our advisers has meant that we have improved several areas of proposition and service in 2015. We’ve reviewed and rewritten our expert underwriting rules and introduced a more competitive philosophy. We’ve rationalised and re-priced our product range. We’ve also addressed legacy issues on our portal platforms.

European Embedded Value

We have improved our critical illness definitions to enhance coverage for our customers. We have focused on the five conditions that account for over 90% of our claims.

Financial Statements

[[ providing cover that matters; and

Consumer 2015 was the first full year of operation for the new direct part of our Consumer division, which focuses on customers who want to deal directly with Royal London rather than through a financial adviser. It is now growing fast and is an important part of our strategy for future growth. New Protection products Our two Protection products, Over 50s Life Cover and Level Term Assurance, began to be sold in earnest last year after trials and soft marketing in 2014. We are pleased that both products won Defaqto five-star ratings in 2015, providing a valuable independent endorsement for the quality they deliver to customers. Further endorsements were received from customers and the regulator. This critical acclaim and our new marketing capabilities have helped drive sales, which rose by 385%. These products are being sold through a range of channels, including television and press advertising, direct mail and increasingly through digital media channels. We were also keen to sell to existing Royal London customers, and take-up so far has been strong. A substantial proportion of sales are now completed online or on mobile phones, and a great deal of work went into creating a simple, accessible digital-purchase process. By the end of 2015 around 27% of customers bought these products online using a computer, tablet or mobile phone. A further 12-15% used digital channels as part of the process, such as for research or comparison. A life insurance product can now be bought on a mobile device in a straightforward five-step process, an achievement that many of our competitors have struggled to emulate. Existing customers The Consumer division also looks after our non-advised customers and 2015 was a year that saw significant regulatory change and the introduction of improved products and services for these customers. Pension freedoms Responding to the new pension freedoms that came into effect in April 2015 was one of the year’s biggest challenges. We developed a range of new products to allow customers to take advantage of the newly liberalised system, enabling them to have access to their retirement pot at age 55 – 10 years earlier than previously allowed.

Royal London Group   Annual Report and Accounts 2015

In May, we launched the Retirement Account. This enables customers to take withdrawals from their pension pots whilst retaining the largest portion of their fund under management with Royal London. The product was created in collaboration with Royal London Platform Services (RLPS), which provided the technology platform, and Royal London Asset Management (RLAM), which created a fund specifically designed to meet the needs of this group of customers. Many were Royal London customers of many years’ standing, with relatively modest pension pots. As a result, their requirement was for a cautiously managed fund that provided good value for money. We also worked to improve the process that customers experience at the point of maturity, providing as much guidance and education as possible to ensure they could make informed choices. The Retirement Account’s popularity exceeded expectations and interest in the product range remains strong. Annuity Bureau Our Annuity Bureau offers the opportunity for a significantly better retirement income to most customers by providing a range of annuity options from a panel of leading providers. Whilst demand for annuities in general has reduced as pension freedoms have given customers a greater choice, they remain an important part of the range of investment options and the right choice for many customers.

We worked to improve the process that customers experience at the point of maturity, providing as much guidance and education as possible to ensure customers could make informed choices.

55 The age at which customers can access their retirement pot under new pension freedoms

STRATEGIC REPORT

One step ahead

We developed a range of new products to allow our customers to take advantage of new pension freedoms.

Governance

Financial Statements

European Embedded Value

Notice of AGM & Resolutions

Additional Information

25

Wealth Royal London’s Wealth division enjoyed significant growth in 2015. The division is made up of two investment-related businesses. Royal London Asset Management (RLAM) manages assets on behalf of internal and external customers, whilst Royal London Platform Services (RLPS) is an independent wrap platform service that trades under the name Ascentric. It enables advisers to manage their clients’ long-term savings and investments. RLAM In a volatile year for financial markets, RLAM has performed well, both in delivering returns for clients and in winning new business. As at 31 December 2015, we had £84.5bn under management, a growth of 3% on the previous year. Retail sales were the main driver of new business growth. We launched several new products across our cash and fixed interest teams. These have been focused predominantly on expanding our short duration strategies which are well positioned to offer investors protection against any potential upcoming interest rate rise. We also announced the appointment of Trevor Greetham, our Head of Multi Asset in April. This newly created role and the team of multi-asset specialists built since Trevor’s appointment is aimed at expanding RLAM’s investment expertise. The planned launch of a new range of multi-asset funds in 2016 will introduce funds with the potential to smooth returns in ever-changing market conditions. All seven of our large mixed asset funds outperformed their benchmarks during the year.

focus on investing for income has been a real strength, as this continues to be a growing trend among investors. Returns for Royal London policyholders Royal London policyholders are by far RLAM’s largest single client group, making up around three quarters of funds under management. Therefore, good performance in this area is critical to our success. Our long-term investment performance was above the benchmark, delivering a return of 48% over five years across the Royal London with-profits fund (the Royal London LongTerm Fund). We have now outperformed the benchmark for seven years out of the last 10 years. Products The RL Absolute Return Government Bond Fund celebrated its one-year anniversary in November, having achieved its objective of delivering positive performance over 12 months. This fund establishes our expertise in managing absolute return funds ahead of plans to add further products within this area.

RLAM’s strength in fixed income was recognised as we were named top-ranking bond fund manager by FundCalibre in Investment backdrop December. Other accolades for the team The global economy continued to grow in included the award for Fixed Income Manager 2015, helped by government interventions of the Year from Professional Pensions. This with quantitative easing, but the slowdown in recognition is complemented by some further China pulled performance down and growth additions to our bond fund range, including was muted. The collapse in oil prices was good the launch of the RL Investment Grade Short for growth prospects in advanced economies, Dated Credit Fund and the RL Global Bond benefiting the consumer and those industries Opportunities Fund in December. The former influenced by increased consumer spending. is aimed principally at our institutional clients seeking to access our credit expertise with Deflationary trends continued with falling an ethical overlay, whilst the latter builds commodity prices. We are preparing for a upon the success of the RL Sterling Extra low-growth, low-inflation environment with Yield Bond Fund, offering investors global lower investment returns. exposure. These developments are aimed at ensuring our bond fund offering remains We remain poised for an interest rate rise and competitive and resilient as market conditions any impact on market volatility that this may remain uncertain. have. In this low-growth environment, our

Royal London Group   Annual Report and Accounts 2015

£84.5bn The amount that RLAM had under management as at 31 December 2015

2015 AWARDS

STRATEGIC REPORT

RLAM worked with the Pensions division to enhance the range of investment options available to their clients. We are also working with them to refine the Governed investment proposition.

Ascentric has also worked with other parts of Royal London, including providing support and technology to the Consumer division’s Retirement Account. A project is under way to replace Ascentric’s back-office technology with a new, state-of-the-art system. Jon Taylor, former CEO of Royal London (CIS) Ltd, became Managing Director of Ascentric in January 2015. Hugo Thorman retired as Chairman in June 2015, having made an invaluable contribution to the business during his time as Managing Director and then Chairman.

European Embedded Value Notice of AGM & Resolutions

External sales Retail sales through financial advisers and wealth managers were key to driving growth for RLAM in 2015. We forged new distribution relationships, something we will seek to further develop into 2016, as well as maintaining the strong relationships established by the wholesale sales team. The institutional market was negatively impacted by a number of trends. For instance, the decline of defined benefit pension schemes saw an increase in the number of group personal pension schemes. However, RLAM made some progress, bringing in new local government clients and winning new mandates from existing clients.

RLPS (Ascentric) Royal London’s wrap platform, which enables advisers to manage their clients’ long-term savings, is branded separately as Ascentric to underline its independence. Ascentric continued growing strongly through the year and has maintained its market share in this expanding business area. Assets under administration increased by 13% to exceed the £10bn mark. During the year it agreed a third strategic alliance with Partnership, the provider of non-standard annuities for those with medical and lifestyle conditions.

RLAM collaborated with other parts of Royal London to launch the RL Cautious Managed Fund for the Consumer division. This is designed to meet the needs of those taking advantage of the new pension freedoms.

Financial Statements

RLAM collaborated with other parts of Royal London to deliver new products by helping to launch a new multi-asset fund, the RL Cautious Managed Fund, for the Consumer division. This is designed to meet the needs of those taking advantage of the new pension freedoms, and has been well received as a low-risk fund for those who do not wish to buy an annuity.

enabling us to meet new regulatory requirements, such as the EU’s second Markets in Financial Instruments Directive (MiFID II), which comes into force in 2018.

Governance

The RL Enhanced Cash Plus Fund was launched in May. This fund is managed according to the same process as the RL Cash Plus Fund, offering those investors with an appetite for an increase in risk the potential for an increased yield.

People and systems The final stages of integrating the asset management business from The Co-operative Group, acquired in 2013, were completed during the year. TCAM, as the business was known, is now fully assimilated and our Sustainable Funds Team relocated to our London office in February 2016.

27

Additional Information

An overhaul of our data systems began during the year and will continue in 2016. This is designed to give us a platform on which we can build products and services for the future, as well as

Our corporate responsibility We have long acknowledged that responsible business makes good financial sense. Our approach concentrates on the way we behave and interact with our employees and our communities, and the products we offer our customers. For us, responsibility is simply who we are. Responsible business At Royal London we want our customers to think of us as a company they can trust and recommend, but in order to be this company, we need to deliver the outcomes that matter most to our customers. We have created our Customer Value Statements model to show what these outcomes are. During 2015, we carried out extensive research to complete the development of this model by improving our understanding of what matters most to our customers. In 2016, we are launching a new measurement programme to gather customer feedback on how we are performing against each element of our Customer Value Statements model. This will tell us the areas customers want us to focus on improving, and drive our activity. We are committed to helping raise the understanding and importance of key financial issues among consumers. During 2015 we ran two key campaigns: Pensions Through the Ages, to raise awareness of how much people have to save to enjoy the standard of living they aspire to in retirement; and the Royal London National Funeral Cost Index, highlighting the wide disparity and unfairness in the cost of funerals across the UK. We continually seek to identify opportunities to enhance our product and service offering. In September 2015, our protection business enhanced its critical illness cover, which also incorporated the requirements of the ABI’s Statement of Best Practice for critical illness. For example, Royal London has now added spinal stroke to its full payment definitions and upgraded the Parkinson’s disease definitions to ABI+. In our consumer business, both term assurance and Over 50s products now have five-star ratings and provide market-leading value and ease of purchase.

We are also delighted to be the first customer-owned life, pensions and investment provider to enable customers to share in our profits through the launch of ProfitShare for pension customers from January 2016. We are one of the UK’s leading asset managers, with Royal London Asset Management (RLAM) managing over £84.5bn of assets. Being a mutual means responsible investment of these assets is very important to us. Following the integration of The Cooperative’s life and savings business, we adopted a detailed responsible investment policy for RLAM to reflect our new integrated approach to responsible investing. The policy is overseen by RLAM’s responsible investment team, which brings in-depth knowledge of environmental, social and governance (ESG) matters. RLAM is a signatory to the Principles for Responsible Investment (PRI). For the latest period for which signatories are assessed, RLAM received ‘A’ grades in five of the six areas assessed and ‘B’ in the other. We have started the integration of ESG issues into our fixed income investments focusing on two sectors – water utilities and housing associations. Corporate governance is one of our core priorities, as we see it as fundamental to protecting long-term member value of the companies we invest in. In 2015 we were more vocal in our concerns about certain companies that we felt were putting value at risk by defying basic governance principles. We also continued to engage with companies privately about issues such as executive pay, board composition, succession planning and corporate strategy, thus further cementing our reputation as a good steward of our customers’ savings and investments.

Royal London Group   Annual Report and Accounts 2015

We keep our clients and members informed on progress through our quarterly report, Responsibility Matters. In 2015 we also published opinion and analysis pieces on topics ranging from climate change, executive pay and culture in banking to the living wage. Further, our suite of award-winning Sustainable funds continued their strong performance in 2015 with all of them outperforming their respective peer groups. As a key player in the UK property investment market, we are committed to reducing the impact of our property portfolio through environmental good practice and its application to acquisition, development and management activities. Our people We are committed to recruiting, developing, promoting and training employees on the basis of individual competencies and performance, respecting and valuing a diverse workplace. To help our people realise their potential and reach their own ambitions and goals, we encourage and are committed to providing training and development opportunities. In 2015 there was a significant investment in building leadership capability. During the year, more than 400 employees participated in a variety of leadership workshops. Aligned to employees’ development plans, we continue to evolve a learning model that places emphasis on learning through experience (on the job) and learning from others, whilst supporting more formal delivery methods. Engagement with our employees is important, and we seek to gain their feedback through our annual employee opinion survey. 85% of our employees participated in the survey in 2015, an increase on the previous year. Through our employee forums, known as Pods,

STRATEGIC REPORT

We value a diverse workforce and as an equal opportunities employer we offer career prospects without discrimination. We are currently refreshing our diversity strategy and will provide an update on progress in next year’s Annual Report.

Meanwhile, as well as paying all applicable UK taxes, Phil Loney, our Group Chief Executive, donates 15% of his pre-tax salary and 25% of the pre-tax value of all STIP and LTIS payments to charity. Our environment We continually strive to reduce our direct environmental impacts, focusing specifically on reducing our impact in relation to climate change, waste management and water consumption. We have achieved a year-on-year reduction in our CO2 emissions, which also helps to reduce cost implications under the Carbon Reduction Commitment Taxation scheme. We also continue to identify opportunities to manage our buildings more effectively and in 2015 upgraded all office uplighter systems in our largest office in Wilmslow to LED panels. This is giving us a direct saving on electricity used of approximately £5,000 per month.

Notice of AGM & Resolutions

View the Corporate Responsibility section on our website for more details.

29

Additional Information

Since April 2013 we have been working with Bloodwise, the UK’s specialist blood cancer charity. Together with our employees, we have raised over £200,000 for the charity. With our support, Bloodwise can continue to invest in life-saving research, including its Trials Acceleration Programme, which has revolutionised the way clinical trials are run in the UK, bringing new drugs to blood cancer patients faster than ever before. In 2015 we also enabled 22 families to visit Disneyland Paris, where they were able to have a much needed break from the challenges of living with blood cancer. We also support our employees in giving back to charity, enabling them to take up to two days annually to volunteer in their local communities and match their fundraising efforts up to £250 per person annually.

In our first year of our grassroots programme to find the cricket stars of the future, we engaged more than 1,500 children across 18 counties in the Gilbert Cup. In addition, our continued support for the Professional Cricketers Association has enabled more help to be given to more people during 2015.

Corporate governance is one of our core priorities, as we see it as fundamental to protecting long-term member value. In 2015 we were more vocal in our concerns about certain companies that we felt were putting value at risk by defying basic governance principles.

European Embedded Value

Our community We recognise our responsibilities to support the communities where we live and work.

In 2015, Royal London became the appointed Pelican Partner to the Royal Parks Foundation for the next three years. The partnership is designed to help conserve the presence of London’s most regal birds. In September, we partnered with the Royal Zoological Society of Scotland (RZSS) to be the first sponsor of the new ‘Pelican Walkthrough’ that opened at RZSS Edinburgh Zoo in the summer.

Financial Statements

We care for the health and well-being of our employees and through our Employee Assistance Programme we offer 24-hour, confidential support covering a range of issues, whether home or work-related issues, challenging situations or medical concerns. A new Employee Health Gateway is being launched in 2016, which will include a review of our Occupational Health Service to ensure further alignment with Royal London’s commitment to support employees back to work.

Further, we also offer employees the opportunity to support the charities that matter to them through payroll giving. Governance

we have been able to engage our employees across the businesses in the development of our values and culture programme. This resulted in the launch of the Spirit of Royal London, which starts to embed the systems, symbols and behaviours aligned to our customer centric culture.

GROUP FINANCE DIRECTOR’S REVIEW The strong platform we’ve built over a number of years, along with our ability to adapt to changing markets, helped us to grow our profits and expand our product offering in 2015.

Royal London Group   Annual Report and Accounts 2015

STRATEGIC REPORT

I appreciate that the world of financial services is a complex one and can make things difficult to understand, so I’ve done my best to be as clear as possible in my review. Any financial jargon that I cannot avoid is explained in the Glossary on pages 200 to 204.

Solvency II Last year was a busy one for Royal London not only in terms of attracting new business, but also in preparing for the new Solvency II regime that came into effect on 1 January 2016. Our Solvency II projects made tremendous progress in 2015 to ensure we had everything in place to report under the directive. For the last time, capital reporting for the period covered in this Annual Report comes under the Solvency I regime.

31

Additional Information

Operational efficiency We also made significant progress with our finance transformation programme. This not only enabled us to meet all the Financial summary requirements of Solvency II, but will We measure profitability using the European Embedded Value (EEV) basis. help us ensure we’re better equipped Our EEV operating profit before tax and to meet the needs of the business over the coming years. This programme exceptional items grew by 11% in 2015 represents an important investment for to £244m. The excellent performance Royal London and places us in good of our pensions business played a big stead to drive value across our business part in this growth, whilst the record at a sustainable cost as we strive to level of new business we wrote last year contributed to more than half our profits. realise our strategic ambitions to grow the business. The EEV profit before tax and Across the Group, there was a sharp ProfitShare was £277m (compared with focus on keeping costs under control £259m in 2014), a result largely driven and ensuring we run our business by the operating profit result above and effectively. A good example of this economic variances. ProfitShare, as was our decision to simplify our highlighted already by our Chairman and Group Chief Executive, increased by management reporting structure by 17% to £70m – great news for the Group reducing the number of layers involved. We also decided to introduce a new and our members. procurement system. Both moves will help us focus our attention on the right Key developments in 2015 activities and manage our cost base to Our dedication to forward-planning ensure we continue to generate value allowed us to adapt our products and for our policyholders. services to the two external events that were the key drivers of new business in

Notice of AGM & Resolutions

Our EEV operating profit before tax and exceptional items compared with £220m in 2014

We’ll continue to develop our products in 2016 and beyond to help our customers to grow the savings and protection they need for the future.

European Embedded Value

£244m

These successes enabled us to build on the growth of the previous three years. They also demonstrated that our strategy, which we continue to deliver against, is working. Both our Chairman and Group Chief Executive have highlighted earlier in this Annual Report how impressive our new business performance has been, with our sales revenues doubling since we embarked on our strategy. In this review I will explain the main factors behind our strong performance last year.

Financial Statements

Whatever value we generate in the years ahead, the changes we made to our ProfitShare scheme recently will ensure that more of our members benefit.

2015: pension freedoms and auto-enrolment. We attracted £1,301m in funds into our Income Release drawdown proposition and provided workplace pensions to around 100,000 employees across 4,000 pension schemes in the UK. Meanwhile, in Protection we saw recovery, both in the market overall and in our own performance, with improved products and service-boosting sales.

Governance

Tim Harris Group Finance Director

I’m delighted to be able to report on another successful year for Royal London. As a customer-centric business that always puts our members first, we are well positioned to capitalise on market opportunities. In particular, we are succeeding in helping customers get to grips with auto-enrolment workplace pension schemes and make the most of the new pension freedoms introduced in April 2015.

Group Finance Director’s review continued Additional provisions for remediation Our operating profit results include provisions incorporating some expenditure on remediation. Our Independent Governance Committee (IGC) issued its first annual report for 2015 on 3 March 2016. This is an independent report into the value for money provided by Royal London’s workplace pensions and is a new requirement of the Financial Conduct Authority (FCA). We have provided for the actions recommended in this report which are expected to cost in excess of £15m. Mutual benefits Whatever value we generate in the years ahead, the changes we made to our ProfitShare scheme recently will ensure that more of our members benefit. With ProfitShare, we’re using our status as a mutual to allow customers to share in our success – and last year we announced plans to significantly expand the number of customers who will benefit from our scheme. Our growth over recent years has attracted many new customers, but many of these new customers don’t have with-profits policies and therefore haven’t qualified to share in our profits. That’s all set to change, as we’re broadening the base of those eligible to take part in ProfitShare. This will allow far more of our members – in effect part-owners of Royal London – to share in our success. It’s important to note, however, that this is not being done at the expense of existing with-profits customers, who will continue to receive New business results1

payouts and ProfitShare allocations determined in the same way as before. The expansion of ProfitShare will allow our customers to get even more out of a scheme that has proved to be a big hit with members and has helped us secure our future as a mutual. Over the past decade we have allocated more than £530m to our eligible with-profits policyholders – and we remain as committed as ever to basing our business model on our mutual status, so our customers can profit from our growth and have their say in how we run our business. Bonuses increased significantly in 2015 as outlined later in this report. We’re also dedicated to meeting our responsibility to ensure we give our customers and members good value, high-quality products and services. Planning for financial security in the future is an issue that’s important to all of us, and at Royal London we’re determined to play our full part in enabling new and existing members and customers to realise their savings goals. In doing so, we must also generate a positive financial return to secure our own position as a stable and successful organisation with a long-term future. With this in mind, we completed a £350m subordinated debt issue in 2015, enabling us to maintain and enhance our strong capital position. New business results We won a lot of new business during 2015. Sales grew by 40% to £6,774m,

New business contribution

whilst our life and pensions business saw contributions from new business increase by 107% to £135.6m. Meanwhile, RLAM enjoyed a strong year against a difficult economic backdrop. New business results by division Intermediary New business contribution for pensions in Intermediary, our largest division, grew by 94% to £107.9m, with the division boosted by new business volumes. The contribution from our Protection Intermediary new business rose by 86% to £42.3m and continued to build momentum during the year. The impressive result was achieved whilst growing margins. Across both pensions and protection, margins on new business improved by 50% and 25% respectively, compared with 2014. Consumer Consumer is our newest and smallest division but is growing fast as we begin to sell our products not only through financial advisers but direct to consumers as well. New business volumes grew exponentially by 385% to £165m, reflecting strong growth in the direct to consumer and funeral plan business lines. To ensure we build on this growth, we’ve continued to invest in developing our direct marketing capabilities and building a full online presence that will strengthen our direct offering. To help us achieve our growth plans, we are continuing to maintain a tight control on costs as the division develops.

PVNBP

New business margin

2015 £m

2014 £m

2015 £m

2014 £m

2015 %

2014 %

Pensions Protection

107.9 42.3

55.6 22.7

6,107 502

4,454 338

1.8 8.4

1.2 6.7

Consumer

(14.6)

(12.9)

165

34

(8.8)

(37.9)

Life and pensions business

135.6

65.4

6,774

4,826

2.0

1.4

22.2

29.9

3,146

3,755

0.7

0.8

157.8

95.3

9,920

8,581

1.6

1.1

Intermediary

RLAM Total

1 New business contribution in the table above has been grossed up for tax at 20% (2014 21%). We have done this to help compare our results with the results of shareholder-owned life insurance companies, which typically pay at 20% (2014 21%).

Royal London Group   Annual Report and Accounts 2015

STRATEGIC REPORT

Financial review

[[ £21m strategic development costs

EEV operating profit Our EEV operating profit before tax and exceptional items rose by 11% during the year to £244m (2014 £220m), thanks to our strong new business gains as outlined earlier. We also saw the benefits of our Operating Efficiency projects in improved cost controls across the business, which means that our future costs will decrease. Our EEV operating profit includes: [[ £137m profits from new business

[[ £74m benefits from operating

assumption variances (2014 £12m); [[ £3m from experience variances, a fall

of 95% (2014 £56m); and

2011

£3,160m £3,464m

2012

2013

2014

2015

Our 2015 operating profit was £252m (2014 £131m). The table overleaf reconciles our operating profit to the IFRS total transfer to UDS. The most notable change from 2014 in the reconciliation is the difference in investment returns following more difficult market conditions during 2015.

EEV operating profit before tax and exceptional items*

£228m

2011

2012

£196m

2013

£220m

2014

£244m

2015

*All results exclude Royal London 360° which was disposed of during 2013.

33

Additional Information

£225m

Notice of AGM & Resolutions

Transfer to UDS Our 2015 total transfer to UDS was £175m (2014 £134m), an increase of 31% which reflects the strong performance seen in EEV operating profit. On an IFRS basis, operating profit is broadly similar to our EEV operating profit, with the main differences being the amortisation of certain intangible assets that are recognised in the IFRS result but not EEV and the embedded value profits of our asset management business, which are recognised under EEV operating profit but not in our IFRS operating profit.

£6,774m £4,826m

£2,893m

IFRS results Whilst IFRS and EEV results broadly follow each other, there are key differences outlined below which contribute to the differences in respective results. As a mutual, the transfer to the unallocated divisible surplus (UDS) from continuing operations is a key measure in determining the level of profits available to share with our members.

European Embedded Value

Growth in new life and pensions business premiums PVNBP

EEV profit before tax after reflecting the impact of economic variances Profit before tax was £203m, an increase of 4% compared with 2014 (£195m). Many of the factors outlined earlier in this report contributed to the result. Additionally, payments to our members through ProfitShare increased by £10m to £74m before tax (£70m after tax).

Financial Statements

written during the year, an increase of 61% as compared with last year (2014 £85m);

(2014 £31m) relating to investment for the future across a number of projects including the rebranding of the Group.

Governance

Wealth Royal London Asset Management performed well in a year of turbulent market conditions. Gross new business inflows were £3.1bn, slightly down on the more buoyant period in 2014 (£3.8bn), but still a strong performance. Wholesale net inflows were £795m, predominantly going into the UK Equity and Fixed Income Credit funds. Changes to our business mix and a higher proportion of wholesale business meant that new business contribution of £22.2m was achieved, down 26% on 2014 (£29.9m). The Ascentric wrap platform saw sales increase by 14% to £2.5bn, thanks to the growing use of the platform among financial advisors, whilst our white-label business expanded through the creation of an Enhanced Retirement Account product in conjunction with Partnership.

Group Finance Director’s review continued IFRS balance sheet Our balance sheet remains robust with an increase in net assets of almost £1bn matching policyholder liabilities arising from our new business results. Our total investment portfolio, including investment property, increased by 1% to £65,165m and was the main reason for the growth in our total assets. Our financial investment portfolio of £60,129m remains well balanced across a number of financial instruments, with the majority (35%) sitting in equity securities and fixed income assets. The main change in our liability positions over the course of 2015 arose in insurance and investment contract liabilities, which is a result of increased new business as well as other economic and demographic factors. Movement in staff pension scheme surplus The Royal London Group Pension Scheme (RLGPS) had a surplus of £71m at the end of 2015, an increase of £23m on the previous year. This increase was mainly due to a rise in the rate used to discount the scheme liabilities, which reflects an increase in the yields available on high-quality corporate bonds, as well as lower than expected levels of inflation during 2015.

We also operate two schemes for ex-Royal Liver employees. The surpluses from these schemes are included as part of the valuation of the closed Royal Liver Sub-Fund and therefore do not count towards the surplus position of the Royal London Open Fund. The combined Royal Liver scheme surplus as at 31 December 2015 was £106m (2014 £80m). The Group continues to work closely with the Trustee Board to assess options for reducing the Schemes’ exposure to market volatility. During the year we consulted to close RLGPS, our defined benefit pension scheme, to future accrual of benefits from 31 March, 2016. This was an important step in managing our costs and the capital requirements, and we will start to see the benefits next year. All employees will be eligible to join the Royal London Group Personal Pension (RLGPP), the defined contribution scheme to which many of our employees already belong. We have also agreed to improve the terms of this scheme, increasing the potential employer contributions and reducing the annual management charge.

Reconciliation of operating profit to IFRS total transfer to UDS 2015 £m

2014 £m

252

192

-

(61)

252

131

15

336

Pension schemes costs recognised on profit

(10)

(8)

Finance costs

(44)

(43)

ProfitShare

(70)

(60)

IFRS profit before tax

143

356

Tax charge

18

207

Other comprehensive income

50

(15)

175

134

Operating profit before exceptional items Exceptional items (Pension Charge Cap) Operating profit Adjusting for the following items: Investment return variances and economic assumption changes

Total transfer to unallocated divisible surplus

Royal London Group   Annual Report and Accounts 2015

Presentation of our results As a mutual business, our Group financial results presented in this Annual Report and Accounts represent the full movement in the year in the value of the Royal London Open Fund. Our reported profit does not include the profits of closed sub-funds, since we retain the surpluses of closed funds for the benefit of withprofits policyholders who are invested in those funds. This differs from the way that shareholder-owned life insurance companies present their results. For these companies, the profit or loss for the year is only that attributed to the company’s shareholders and is generally restricted to 10% of the distributable surplus in the with-profits fund and all the surplus from the non-profit business. Amounts attributable to policyholders are retained separately and are not included in reported profit.

40% The proportion by which sales grew in 2015

£697m The amount we added in bonuses to with-profits policies in 2015

STRATEGIC REPORT

Rating agencies Our financial strength and stability as a business are important both in maintaining the confidence of our members and customers, and in enabling us to run Royal London efficiently. These are also the qualities that ratings agencies look for when they analyse our financial health. Standard & Poor’s and Moody’s, two of the best-known agencies, have issued ratings on Royal London for a number of years.

Our preparations for Solvency II have gone well and, as a Group, we are well positioned Our Standard & Poor’s rating is A and our to cope with the increased reporting that this will necessitate. More importantly, we Moody’s rating is A2, with both ratings remaining unchanged in 2015. have the capital strength to support these

Excess regulatory capital

Regulatory capital 2014 £m

Total available regulatory capital1

14,283

13,366

Capital requirement

(1,222)

(1,341)

Additional with-profits requirements2

(9,526)

(8,635)

3,535

3,390

 4%

£2,749m

£3,390m

£3,535m

£2,374m £1,906m

2011

Realistic capital

Realistic working capital (before closed fund transfer commitments)1

7,181

6,459

Closed fund transfer commitments2

(3,585)

(3,052)

3,596

3,407

-

(15)

3,596

3,392

Excess realistic capital

2014

2015

1 Includes Tier 2 capital. 2 Closed fund transfer commitments represent the realistic working capital of the closed sub-funds, which is retained for the benefit of policyholders in those funds.

 6% £2,097m

2011

35

£2,496m

2012

£3,392m

£3,596m

£3,074m

2013

2014

2015

Additional Information

2014 £m

Risk capital margin

2013

Excess realistic capital

2015 £m

Total working capital

2012

Notice of AGM & Resolutions

1 Includes Tier 2 capital. 2 The additional with-profits requirements represent the regulatory surpluses in the closed funds. These are held for the benefit of the policyholders invested in them and therefore do not count towards the Royal London Open Fund excess regulatory capital.

European Embedded Value

2015 £m

Excess regulatory capital

requirements. Solvency II, the European Union directive that will now regulate how we manage and report risk and capital, transforms the way in which we report our capital. Look out for further detail on this in our future press releases.

Financial Statements

As ever, we worked hard last year to ensure compliance with regulatory requirements for financial reporting. As in 2014, our capital reporting for 2015 is under Solvency I measures. We also followed the Insurance Groups Directive (IGD), which is one of two Prudential Regulatory Authority (PRA) Pillar 1 reporting bases and requires us to detail our solvency position. Our IGD capital surplus increased by 4% during the year to £3,535m as a result of our strong business performance. The second basis is the realistic basis which underpins our IFRS and EEV valuations. Realistic working capital rose by 6% to £3,596m.

Issuing debt is a common way of raising additional capital and it is particularly effective for companies that do not have shareholders. We raise debt in order to support our general business and commercial activities. In November, we raised £350m in a debt issue of 13-year subordinated notes. The notes carry a coupon of 6.125% and were issued at par. The issue was heavily oversubscribed, indicating strong investor support. In December we went on to redeem in full our subordinated notes originally issued in 2015 at the first reset date. Maintaining our debt programme ensures that our capital position remains strong.

Governance

Capital strength Maintaining our strong capital position and managing this effectively is a key priority for us – it ensures we can provide our members with financial security and allows us to continue to grow the business.

Group Finance Director’s review continued Returning value to our members and policyholders We have returned good value to our with-profits policyholders in 2015 through:

With-profits investment performance Royal London with-profits performance

their policies, despite difficult economic conditions; [[ the payouts that were made to

10.9% 11.1%

10.6%

[[ positive investment returns on

8.6% 6.0%

6.7%

9.0%

7.8%

maturing policies during the year, which compare well with our industry; and

4.1%

3.2%

[[ ProfitShare, which increased from

last year to a 1.4% enhancement to the qualifying policies’ asset shares (£70m in total after tax). Investment returns RLAM, which invests assets on behalf of our customers, performed well in volatile and sometimes difficult market conditions. These challenging conditions were reflected in the performance of the FTSE 100, the share index for the largest companies quoted on the London Stock Exchange, which fell by 4.7% to 6,242 during the year. Our performance is measured against benchmarks that look at returns from different types of asset in the market, such as property, equities and bonds. Each of our funds has different benchmarks that reflect their mix of assets. This helps us to ensure we are comparing like with like to assess our asset management performance. During the year our investments backing the asset shares of the Royal London Open Fund, our largest fund, achieved a return of 4.1%, which was down on 2014 (10.9%) but ahead of the benchmark at 3.2%. The first chart shows the fund’s performance over the past six years and our outperformance as compared with the benchmark in three of those years. The second chart illustrates the performance of the different types of investment in asset classes that underpin the fund. During 2015, we were ahead of the benchmark across all asset classes, with the exception of overseas equities, where we were 0.5% behind the benchmark.

Royal London Group   Annual Report and Accounts 2015

2011 Actual

2012

2013

2014

2015

Benchmark

Royal London with-profits performance by asset class in 2015

21.7%

15.3% 13.8%

6.1% 6.6% 1.8%

1.0%

UK equities Actual

1.0% Overseas equities

Property

Benchmark

All of the life funds managed by RLAM outperformed their benchmarks in 2015 and indeed have done for the last three-year period.

Private equity

0.5%

1.2% 0.0%

Government bonds

0.5%

UK corporate

STRATEGIC REPORT

The value of ProfitShare in 2015 – an increase of 17% on the previous year

The increase in EEV operating profit last year

2014 £m

Annual

77

73

Interim

17

12

Final

603

200

Total

697

285

The increase in bonuses is primarily driven by the CIS fund being £386m (2014 £15m) of the total amounts, following the Part VII transfer of CIS at the end of 2014. We manage our with-profits funds and set bonus rates with the aim of being fair to all policyholders invested in the funds. When we decide bonus rates, we need to consider the policyholders who will remain in the fund as well as those whose policies mature or become claims. We also need to maintain the strength of the funds and protect the long-term interests of current and future policyholders and members.

Additional Information

37

Notice of AGM & Resolutions

Annual bonus rates for 2015 remained unchanged at 0.5% for Royal London conventional with-profits life policies and have been increased for Royal London accumulating with-profits pension policies, from 2.0% to 2.5%. The annual bonus rates for Royal London unitised with-profits policies also increased for most lines of business, including the With-Profits ISA, WithProfits Bond, and Regular Savings Plan.

European Embedded Value

11%

2015 £m

Unit-linked investment returns All of the Governed Portfolios have outperformed their benchmarks over one year, three years and since launch to the end of December 2015. This has been helped by strong relative performance from the underlying components of the portfolios. Over the last three-year period the portfolios have outperformed benchmark by 3.71% on average.

Financial Statements

£70m

With-profits policyholder bonuses We added £697m of bonuses (2014 £285m) to with-profits policies in 2015 as follows:

Governance

RLAM, which invests assets on behalf of our customers, performed well in volatile and sometimes difficult market conditions.

Group Finance Director’s review continued ProfitShare As outlined earlier, we announced plans last year to expand the number of members eligible for ProfitShare to include more than 600,000 customers with unit-linked retirement policies. In the past only with-profits policyholders have benefited. This change will take effect in 2016, and further details are outlined in the Group Chief Executive’s Review on pages 6 to 9 and elsewhere in this report. As outlined earlier ProfitShare, formerly known as the Mutual Dividend, increased by 17% to £70m in 2015. The improved payout reflects the strong performance of the business in 2015, but also takes into account other factors, including the introduction in January 2016 of Solvency II, the new European regulatory regime. We apply ProfitShare by enhancing the asset shares of relevant policies. This year, the enhancement amounts to 1.40% of each policyholder’s assets, an increase from 1.15% paid out in 2014. Compared with the extremely low rates of interest currently paid on most bank deposits, the 1.40% ProfitShare represents a meaningful addition to our members’ savings.

How we’re taxed Royal London is subject to various taxes including corporate taxes, employment taxes on salaries, and indirect taxes such as VAT. The corporation tax that the Group pays is a proxy for policyholder tax liabilities, paid on behalf of certain life assurance policyholders. For these life policies, tax is charged on taxable income less expenses relating to policies. This tax is paid directly to HMRC by the Group as corporation tax on behalf of policyholders. For pension policies, the returns to the policyholder accumulate without incurring tax. This is part of the UK Government’s strategy of incentivising saving for retirement. The tax is paid directly by the pension policyholder when they receive their pension. The majority of our business is based in the UK and therefore most of the tax we pay relates to UK taxes. In 2015, the total UK tax contribution of the Group was £444m (2014 £246m). A summary chart of the total contribution of the Group for 2015 is shown below.

£3m

Tax During the past couple of years, tax has become a topic of contention across a number of industries. At Royal London, we believe in transparency and manage our tax affairs in accordance with the tax strategy outlined. Tax strategy We strive to pay the right amount of tax and, a fair amount of tax with a balance between all our stakeholders, ensuring that our policyholders are all being treated fairly.

£69m £215m

£66m £70m

Transaction taxes Corporation tax Employment taxes VAT Tax deducted at source Other taxes

We are open and transparent in our approach to taxation at all times and behave responsibly and proactively in our dealings with relevant tax authorities.

Royal London Group   Annual Report and Accounts 2015

£21m

The strong performance we delivered in 2015 demonstrated that Royal London is a robust business that’s capable of rising to the occasion and meeting the needs of a changing market.

STRATEGIC REPORT

And reassuringly, our capital position has remained robust as we begin to operate under the new regulatory regime of Solvency II.

[[ market-related risks, such as fluctuations in

interest rates; [[ the policies and actions of governmental and

regulatory authorities; [[ the impact of competition; and [[ the timing, impact and other uncertainties

of future mergers or combinations within relevant industries. As a result, Royal London’s actual future financial condition, performance and results may differ materially from the plans, goals and expectations set out in our forward-looking statements. We undertake no obligation to update the forwardlooking statements contained in this document or any other forward-looking statement it may make. Strategic Report The 2015 Strategic Report, from pages 2 to 39, was approved by the Board of Directors on 30 March 2016.

European Embedded Value

What’s more, we see scope for continued growth in 2016. We believe our strength and stability as a business will enable us to deliver on that promise, whilst at the same time welcoming hundreds of thousands more Royal London customers to share in our success through our ProfitShare scheme.

[[ UK economic and business conditions;

Financial Statements

Conclusion The strong performance we delivered in 2015 demonstrated that Royal London is a robust business that’s capable of rising to the occasion and meeting the needs of a changing market. Our financial results were impressive, showing an increase in EEV operating profit of 11%, along with a 17% rise in ProfitShare for eligible policyholders. We were also thrilled with our new business results.

Forward-looking statements This Strategic Report contains forward-looking statements with respect to certain of Royal London’s plans, its current goals and expectations relating to its future financial position. By their nature, forward-looking statements involve risk and uncertainty because they relate to future events and circumstances which are beyond our control. These include:

Governance

The Group’s total tax contribution is made up of the taxes borne and collected by the Group over the period. Taxes borne are the taxes incurred by the Group in the period that impact on the results of the Group. Taxes collected are those administered by Royal London Group on behalf of Government and collected from others for onward payment to HMRC. In 2015, taxes of £139m (2014 £93m) were borne by the Group and the Group collected £305m (2014 £153m) of taxes on behalf of the UK Government. The large increase in taxes collected is a result of policyholders taking advantage of the increased flexibility in accessing pension savings provided by the new pension freedoms.

By order of the Board

Simon Mitchley Company Secretary For and on behalf of Royal London Management Services Limited 30 March 2016

Additional Information

39

Notice of AGM & Resolutions

Tim Harris Group Finance Director

Corporate Governance

HOW WE’RE RUN How companies are run has become over-complicated in recent years, but at Royal London we take a simple approach that allows us to focus on what matters.

Royal London Group   Annual Report and Accounts 2015

Strategic Report

41

As the Code makes clear, the Board has ultimate responsibility for the health of the Group and is answerable to its owners. That is why Royal London’s members elect the directors, and at each AGM you decide whether or not you want us to continue. Staff, directors, owners: if all play their proper part, the result will be a well-run company.

Additional Information

However, the business of Corporate Governance (with a capital C and a capital G) usually refers to what happens at the top of the company – senior management and the Board. This is the stuff of annual reports, and I hope you will find in these pages a full account of Royal London’s governance.

The Code is intended for listed companies, and particularly the larger ones. As a mutual, Royal London is not obliged to follow the Code, but the Board has long agreed that we should do so as far as possible. We report on a specially annotated form of the Code for mutual companies. What you will find in this report comes close to satisfying all the requirements of the Code, a practice we intend to continue.

Notice of AGM & Resolutions

A good company is run well at every level, of course. The day-to-day tasks at Royal London are the responsibility of all our staff. They design the Group’s products – pension schemes, protection policies and investment funds – and then sell them, manage them and provide a service for customers at each stage of a product’s life. In a vital sense, they are involved in corporate governance all the time.

Over the past 20 years, what constitutes good governance has been brought together and formalised, most recently in the UK Corporate Governance Code. The Code is produced by the Financial Reporting Council, a quango with more reach and power than is generally recognised. Last revised in 2014, the Code runs to 36 pages and in almost every clause the word ‘should’ appears at least twice. These recommendations are not obligatory, but companies that don’t comply with the Code have to explain why not.

European Embedded Value

The Board has ultimate responsibility for the health of the Group and is answerable to its owners. That is why Royal London’s members elect the directors, and at each AGM you decide whether or not you want us to continue.

Royal London being a mutual, our position is different. All our owners are customers too, which in some ways makes the governance issue simpler. As we say elsewhere in this report, we are now able to offer the benefits of ownership to a wider range of customers. This means that, over time, our customers and our owners will increasingly be one and the same people. By contrast, proprietary companies often face a dilemma: they may need to spend more time and money to do what is best for their customers, but that might delay the rewards for impatient shareholders. For a mutual, this tension between shortterm pressures and long-term benefits does crop up from time to time, but it is certainly easier to handle.

The Board delegates big chunks of these tasks to various sub-committees: Audit, Investment, Nomination, Remuneration, Risk, and a With-Profits Committee especially for the with-profits policyholders. This range is standard for other insurance companies doing more or less what we do, as is the fact that all committees are chaired by non-executive directors. I’d encourage you to read all their reports: you don’t have to be a Corporate Governance anorak to find them useful.

Financial Statements

Rupert Pennant-Rea Chairman

What does that mean? The simplified answer comes in two parts: the firm should be run for the benefit of (a) customers and (b) owners. If the firm is producing things that customers want and doing so at least as efficiently as its competitors, then it will be profitable and its owners will benefit too.

In broad terms, the job of the Board comes in four main parts: to set the Group’s strategic course; to oversee its operations and finances; to check that the Group sticks to the law and regulations; and to make sure its senior management are the right people for the job and properly incentivised to do it well.

GOVERNANCE

How companies are run, in plain English, has been a subject of debate over the past 10-15 years. Corporate Governance is the term now widely used, and in its name a small industry of consultants, lawyers, academics and regulators has emerged. Whatever their merits, there is no substitute for a company board that tries to ensure a firm is well run.

Board of Directors

Rupert Pennant-Rea Chairman

Phil Loney Group Chief Executive

Rupert Pennant-Rea was appointed to the Board on 13 December 2012 and was appointed Chairman after the AGM in 2013. Rupert has extensive financial services industry experience. He was chairman of Henderson Group for eight years and stepped down at its AGM in May 2013. He was deputy governor of the Bank of England from 1993 to 1995, prior to which he spent 16 years with The Economist, where he was editor from 1986 to 1993. He was appointed nonexecutive chairman of the Economist Group in July 2009. His other directorships include PGI Group Limited and Times Newspapers Holdings Limited.

Phil Loney was appointed to the Board on 1 October 2011, coinciding with his appointment as Chief Executive of the Group. He previously spent eight years at Lloyds Banking Group, most recently as managing director of the Life, Pensions and Investments business. Prior to joining Lloyds Banking Group, Phil held senior management positions with AXA, Norwich Union, CGU and Lloyds Abbey Life amongst others. He is a director of the Association of British Insurers.

Tim Harris Group Finance Director

Andrew Carter Executive Director

Jon Macdonald Group Risk Director

Tim Harris was appointed to the Board as Group Finance Director on 19 May 2014. Prior to joining Royal London, Tim was chief finance officer for Torus Insurance and held a number of senior executive positions at Aviva Plc, most recently deputy group chief financial officer, and served on the boards of Aviva Ireland and Aviva France. He was also a partner in the Global Capital Markets practice at PricewaterhouseCoopers LLP. Tim is a Fellow of the Institute of Chartered Accountants (ICAEW) and a Chartered Insurance Practitioner, and serves on the Insurance Committee of the Financial Services faculty of the ICAEW.

Andrew Carter was a director from January 2007 to 31 December 2015. He joined Royal London Asset Management in September 2001 as Chief Investment Officer and was promoted to Chief Executive Officer in September 2003. In 2012 he was made Chief Executive Officer of Royal London Wealth. Andrew has extensive asset management experience of the major asset classes, beginning his career in investment management in 1983 with Provident Life. Prior to joining Royal London, he held a number of investment management positions at Gartmore from 1987 to 2001.

Jon Macdonald was appointed to the Board on 14 December 2012 having joined the Group in November 2012 as Group Risk Director. He was previously Group Chief Risk Officer for RSA. He has held a number of senior risk and capital management roles at Prudential, PricewaterhouseCoopers LLP, Aviva Plc, Fox-Pitt Kelton, Swiss Re and Zurich and is a Fellow of the Institute of Actuaries.

Royal London Group   Annual Report and Accounts 2015

Strategic Report

Duncan Ferguson was appointed to the Board on 1 April 2010. He is Senior Independent Director and Chairman of the With-Profits Committee. He also sits on the Nomination, Board Risk and Audit Committees. He was Senior Partner of Bacon & Woodrow, then B&W Deloitte, from 1994 to 2003, and a non-executive director of Henderson Group until December 2013. Duncan was a non-executive director of Halifax from 1994 until it merged with Bank of Scotland in 2001 and then of HBOS Financial Services until 2007. He was President of the Institute of Actuaries from 1996 to 1998.

Tracey Graham Non-Executive Director

Andrew Palmer Non-Executive Director

David Weymouth Non-Executive Director

Tracey Graham was appointed to the Board on 10 March 2013. She is Chairman of the Remuneration Committee and sits on the Audit and Nomination Committees. She was chief executive of Talaris Limited, an international cash management business, from 2005 to 2010 and led the management buyout of that business from De La Rue. Prior to that, she was president of Sequoia Voting Systems and customer services director at AXA, and held a number of senior positions at HSBC. Tracey is currently a non-executive director of Link Scheme Limited, Ibstock plc and Acal plc. Tracey is also Vice Chairman of the Nonsuch and Wallington Eduction Trust.

Andrew Palmer was appointed to the Board on 1 April 2011. Andrew is Chairman of the Audit Committee and sits on the Remuneration, Board Risk and Nomination Committees. He was group finance director of Legal & General Group plc where he also held a number of financial and operational roles in the asset management, insurance and international businesses. He is a non-executive director of Direct Line Insurance Group, a trustee and honorary treasurer of Cancer Research UK, and a member of the Financial Reporting Review Panel of the Financial Reporting Council.

David Weymouth was appointed to the Board on 1 July 2012. He chairs the Board Risk Committee and sits on the Nomination and Audit Committees. His 27 year career at Barclays encompassed a wide variety of leadership roles, including Operations Technology and Risk, most recently Global Chief Information Officer. He subsequently consulted to a number of blue chip and government organisations. He was on the Executive Committee of RSA Insurance Group plc and was Group Chief Risk Officer, until his retirement in May 2015. He is currently a non-executive director and Chairman of the Risk Committee at Mizuho International Holdings plc, the Risk Committee at the Financial Services Compensation Scheme and the Audit Committee at Bank of Ireland (UK) plc. He joined the board of Fidelity UK as a non-executive director in October 2015.

43

Additional Information

Ian Dilks was appointed to the Board on 14 November 2014. He is a member of the Nomination, Investment and Audit Committees. Ian spent his entire career at PricewaterhouseCoopers LLP, joining the firm (which was then Coopers & Lybrand) in 1974, becoming a partner in 1986. He rose to become a member of the global financial services leadership team and global insurance leader. He also led their IFRS conversion businesses in the UK. In his final role at PricewaterhouseCoopers LLP he had responsibility for the regulatory affairs of the global network. He is currently Chairman of the NHS Litigation Authority.

Notice of AGM & Resolutions

Sally Bridgeland was appointed to the Board on 14 January 2015. She is a member of the Nomination and Remuneration Committees and Chairman of the Investment Committee. Sally spent 20 years at AON Hewitt followed by seven years as chief executive officer of the BP Pension Fund. Sally is currently an independent trustee on the boards of Lloyds Bank Group pension funds, a Trustee Member of NEST Corporation and a member of the Trust Investment Committee at innovation charity Nesta. She is Senior Warden of the Worshipful Company of Actuaries and a non-executive director of Impax Asset Management Group plc.

European Embedded Value

Duncan Ferguson Senior Independent Director

Financial Statements

Ian Dilks Non-Executive Director

GOVERNANCE

Sally Bridgeland Non-Executive Director

Directors’ report for the year ended 31 December 2015 The directors present their report for the year ended 31 December 2015. The Directors’ report should be read together with the Strategic Report and the Corporate Governance statement, which are incorporated in this Directors’ report by reference. The purpose of the Strategic Report is to provide a fair, balanced and comprehensive view of the development and performance of the Group’s business, its financial performance during the year and likely developments. It also reports on the Group’s ongoing strategy and business model.

Dividend The Company is limited by guarantee without share capital and therefore no dividend is payable. A description of how value is returned to members is provided on page 36. Annual General Meeting The Annual General Meeting (AGM) of the Company will be held at 10.30 a.m. on Thursday 9 June 2016, at The Kia Oval, Kennington, London SE11 5SS. The Notice convening the meeting, together with guidance on the AGM, is sent to all members.

The Corporate Governance statement reports on the Company’s compliance with the UK Corporate Governance Code 2014: An Annotated Version for Mutual Insurers (the code) published in April 2015 and includes information about any principal risks and uncertainties associated with the business. Directors Details of the current directors are Principal activities set out on pages 42 and 43. All of the The Group comprises The Royal London directors have held office throughout Mutual Insurance Society Limited the year except Sally Bridgeland who and its subsidiaries. The Group is was appointed on 14 January 2015. structured into a number of businesses Andrew Carter resigned as a director as set out in the Strategic Report. The on 31 December 2015. principal activity of the Company is the transaction of long-term insurance In accordance with the Code, all business covering life and pensions. A list continuing directors retire and offer of the Company’s subsidiaries is set out in themselves for reappointment each year. note 21 to the financial statements. The details of the executive directors’ service contracts are set out in the Going concern Directors’ remuneration report on After making enquiries, the directors pages 58 to 76. None of the directors are satisfied that the Company and has, or had, an interest in the equity the Group have adequate resources to shares of any Group undertaking. continue to operate as a going concern for the foreseeable future and have Directors’ indemnities prepared the financial statements on that The directors have the benefit of a basis. There are no material uncertainties qualifying third party indemnity to our ability to adopt the going concern provision (as defined in section 234 basis of accounting. of the Companies Act 2006). The Company also maintains directors’ and Our Longer-Term Viability Statement is officers’ liability insurance in respect of set out on page 19. itself and its directors.

Royal London Group   Annual Report and Accounts 2015

Directors’ conflicts In accordance with the articles of association the Board is authorised to approve conflicts or potential conflicts of directors’ interests. The Board has reviewed the interests of the directors and their connected persons and has authorised any interests which conflicted or potentially conflicted with the interests of the Company. On an ongoing basis the Board periodically reviews conflict authorisations to determine whether the authorisation given should continue, be added to, or be revoked by the Board. Financial instruments The Group makes extensive use of financial instruments in the ordinary course of its business. Details of the risk management objectives and policies of the Group in relation to its financial instruments and information on the risk exposures arising from those instruments are set out in note 43 to the financial statements. Employees Details of the Group’s employment policies are shown on pages 28 to 29. Risk management The Group has procedures in place to identify, monitor and evaluate the significant risks it faces. The Group’s risk management objectives and policies are set out on pages 11 to 12 and in note 43 on pages 167 to 181 of the financial statements.

Strategic Report

Auditors A resolution for the reappointment of PricewaterhouseCoopers LLP as auditors of the Group will be proposed at the AGM. The directors who held office at the date of approval of this Directors’ report confirm that: [[ so far as they are each aware, there is no

relevant audit information of which the Group’s auditors are unaware; and ought to have been taken as a director to be aware of any relevant audit information and to establish that the Group’s auditors are aware of that information. This confirmation is given and should be interpreted in accordance with the provisions of section 418 of the Companies Act 2006.

Strategic Report For the purposes of the UK Companies Act 2006, the Directors’ report for the year ended 31 December 2015 comprises pages 44 to 45 of the Corporate Governance report and the Directors’ responsibility statements on page 49.

Location in Annual Report

Risk management and Internal Controls

Strategic Report, pages 11 and 12

The Group’s Governance structures

Strategic Report, page 13

Principal Risks and Uncertainties

Strategic Report, pages 14 to 18

Longer-Term Viability Statement

Strategic Report, page 19

In addition, the information in the following table is also incorporated into the Directors’ report: Location in Annual Report

Disclosure of information to the auditor

Corporate Governance statement, page 45

Future development of business of the Group

Group Chief Executive’s statement, pages 6 to 9

Employee involvement

Corporate Responsibility statement, pages 28 and 29

By order of the Board

45

Additional Information

Simon Mitchley For and on behalf of Royal London Management Services Limited Company Secretary 30 March 2016

Notice of AGM & Resolutions

Information

European Embedded Value

Further information on our audit tendering policy is provided on page 52.

Information

Financial Statements

[[ each director has taken all steps that

As it is entitled to do by the Companies Act 2006, the Board has chosen to set out in the Strategic Report (pages 2 to 39) those matters required to be disclosed in the Directors’ report which it considers to be of strategic importance to the Group, as follows:

GOVERNANCE

The Group has procedures in place to identify, monitor and evaluate the significant risks it faces.

Political donations No political donations were made in the year ended 31 December 2015 (2014 £nil).

Corporate Governance statement The Board is committed to high standards of corporate governance which it believes are critical to business integrity, performance and maintaining member confidence. In this report, the term ‘period under review’ means the period from 1 January 2015 to the date of this report.

[[ internal control system;

These reserved decisions include:

[[ organisational structure; and

[[ those relating to the acquisition or

The UK Corporate Governance Code

[[ remuneration (including

disposal of any business or major asset; pension) policies.

The Board considers that throughout the The Board also: period under review it has applied the relevant principles and complied with the [[ reviews the most significant risks relevant provisions of the UK Corporate affecting the Group and the Governance Code 2014: An Annotated action being taken to manage or Version for Mutual Insurers, published mitigate them; in April 2015 (the ‘Code’). [[ appoints directors and makes and approves certain senior appointments Members including the Group Chief Executive, the executives who report directly to As a mutual, the Company has no him, the senior actuarial appointments, shareholders and is owned by its the Group Risk Director, Group Head Members. This means that the focus of Regulatory Risk and Compliance of the Company is to provide longand the Company Secretary; term benefit to those Members. The Company has extended its ProfitShare participation so that more Members can [[ determines the responsibilities of the share in the success of the Company. Group Chief Executive and approves any delegation of his responsibilities to executive directors, heads of business The Board units or support functions; The Board is given the powers to manage the Company’s business by [[ declares annual and final bonuses the Members. One of the main roles of (and the basis for payment of benefits the Board is to focus on the strategic on early termination, including objectives of the Royal London Group, market value adjustment factors) on to ensure that it is appropriately managed with-profits policies issued by any and that it achieves these objectives. Group company; Role The Board meets regularly to determine the Group’s strategy, to review the Group’s operating and financial performance, to set the Group’s risk appetite and to provide oversight that the Group is adequately resourced and effectively controlled. The Board determines the Group’s:

[[ approves contracts entered into by

the Company or subsidiary which are deemed material in the context of the Group’s strategy, size or level of risk; [[ approves methods and assumptions

for determining long-term business liabilities; [[ approves the Annual Report and

[[ values, standards and ethics;

Accounts and the significant regulatory returns;

[[ strategy and objectives and approves an

annual business plan and budget and monitors the Group’s performance in achieving them; [[ risk appetite;

[[ approves the Principles and Practices

of Financial Management for the with-profits funds; and [[ reserves to itself certain decisions.

Royal London Group   Annual Report and Accounts 2015

[[ setting up of a new business or joint

venture or the merging of any part of the Group’s business with a third-party; [[ making or guaranteeing a significant

loan; and [[ significant investments and transactions

not at arm’s length.

Strategic Report

Allocation of Board agenda time

5%

The Group completed an internal Board effectiveness review for the year ending 2015, with the next external review scheduled for the year ending 2016. The review in 2015 included aspects of Board governance, to confirm the Board and Committees have:

23%

21% 8%

[[ fulfilled their responsibilities under

GOVERNANCE

3%

22%

18%

Financial Assurance Customers and members Future strategy Capital planning Oversight of key projects Other matters

their terms of reference; The Board’s policy is to appoint and retain non-executive directors who can apply their wider knowledge and experience to their understanding of the Royal London Group, and to review and refresh regularly the skills and experience the Board requires.

Composition and balance The Board currently comprises the Chairman, six independent nonexecutive and three executive directors. One of the non-executive directors, Duncan Ferguson, is the Senior Independent Director. The biographies of all the directors appear on pages 42 and 43, together with summaries of their experience and qualifications and a note of their other significant commitments. Membership of the Board’s committees is set out in this statement.

Board effectiveness The Board conducts a formal and rigorous evaluation of its performance, the performance of its directors and the performance of its committees every year, with an external review every three years. The process is led by the Chairman and supported by the Company Secretary.

47

[[ received management information

and papers that are sufficient and timely, focusing on key issues throughout the year; and [[ exhibited the right behaviours.

Upon completion of the review, it was concluded that the Board and the Committees operated effectively in 2015, and that every director contributed effectively to this outcome. The review did identify some specific changes and areas for improvement. These included providing greater clarity on the work the Committees carried out on behalf of the Board. All matters arising from the evaluation have been assigned an action plan and will be regularly reviewed by the Board. The Board considers that each non-executive director, including the Chairman, displayed the commitment required to discharge the role properly and was independent. The Chairman meets from time to time with the non-executive directors in the absence of the executive directors. By way of a Board development plan, the directors have continued to update their skills and knowledge, both within the Group and outside. Presentations have been given on key issues and developments within the industry. The directors are kept informed of relevant regulatory and corporate governance developments as they arise through senior managers and external advisers.

Additional Information

The process for appointing new directors is conducted by the Nomination Committee and a description of its duties is set out in its report.

[[ been working effectively and efficiently;

Notice of AGM & Resolutions

Allocation of time The chart above provides an illustration of the time allocated to matters considered by the Board during the year.

and experience;

European Embedded Value

The Nomination Committee is responsible for succession planning for The roles of the Chairman and Group directors and other senior executives Chief Executive are separate and there to ensure that an appropriate balance is a clear division of responsibilities of skills and experience is maintained between the two roles. The Chairman and that there is progressive refreshing is primarily responsible for leading the of the Board. As part of the process for Board, ensuring its effectiveness and the appointment of new directors, the setting its agenda. The Group Chief Nomination Committee, on behalf of Executive is responsible for the day-tothe Board, considers the diversity of the day management of the Group’s business. Board, including gender. The aim is All directors have access to the advice that the Board as a whole should have an and services of the Company Secretary appropriate balance of skills, experience, who is responsible for ensuring that independence and knowledge to Board procedures are complied with. enable each director and the Board as In addition, all directors have access a whole to discharge their duties and to independent professional advice responsibilities effectively. Each director at the Group’s expense where they must be able to devote sufficient time to consider it necessary in the discharge the role in order to discharge his or her of their duties. responsibilities effectively.

[[ the right balance of skills, knowledge

Financial Statements

Those matters that are not specifically reserved for the Board are delegated to the Group Chief Executive, who has in place a clear and appropriate apportionment of responsibilities amongst executive directors and senior managers in order that the business of the Group can be effectively managed and reported on.

Corporate Governance statement continued Induction and development Induction As provided by the Code, the Chairman is responsible for ensuring that a full, formal and tailored induction is provided to all new directors and he is assisted by the Company Secretary in facilitating the induction. A tailored induction programme is provided for all newlyelected non-executive directors and it is designed to enhance the directors’ knowledge and understanding of the Group’s businesses, operations and regulatory environment. The induction programme provided is specific to each new director, with consideration given to their experience, background and level of knowledge of the Group’s business. The induction usually includes meetings with management and external stakeholders, visits to business units and presentations on the regulatory framework applicable to the Group.

[[ Financial analysis and controls • financial reporting and external

audit; and • internal controls. [[ Governance oversight and controls [[ Remuneration policy [[ Regulatory framework and

requirements [[ ProfitShare accounts

Essential information covering the following is also provided in a Director Induction Pack: [[ Directors’ duties [[ The Group’s business [[ Board issues: memorandum and articles

The following is an example of the induction programme for a non-executive director: [[ Introduction • Royal London structure; and • introduction to business areas

and functions. [[ Market knowledge • Group products – pensions,

with-profits policies, platforms, and investment management. [[ Business strategy and model • business model; • operations; • risk and strategy; and • IFAs and customers. [[ Risk management and control • Solvency II

of association; minutes of recent Board meetings; Board Committees’ terms of reference [[ Internal policies

The induction programme has been reviewed following the appointment of directors in 2014 and 2015 and was found to be fit for purpose. Development The Chairman has the responsibility to review and agree with each director their training and development needs and the Company Secretary has primary responsibility for co-ordinating the ongoing training and development of all directors. The continuing development of the directors entails regular updates on the Group’s businesses and industry-related matters as well as any changes in the regulatory environment. We have also introduced mandatory training for the non-executive directors, as currently required for all employees. This covers areas such as the Senior Insurance Managers Regime, Fighting Financial Crime, Data Protection and Treating Customers Fairly.

Royal London Group   Annual Report and Accounts 2015

The directors are responsible for safeguarding the assets of the Company and the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

Strategic Report

During the year the directors received briefings on the following topics: Governance: the Board completed four days of training on Solvency II matters in preparation for the implementation of Solvency II; [[ At Retirement Market; [[ Derivatives; [[ Direct to Consumer; [[ Senior Insurance Managers

[[ Culture.

Succession and diversity It is the responsibility of the Board to ensure that plans are in place for appointments to the Board that will maintain an appropriate balance of skills and experience. The Nomination Committee provides advice to the Board on succession planning.

[[ select suitable accounting policies and

[[ the Group financial statements, which

have been prepared in accordance with IFRS as adopted by the EU, give a true and fair view of the assets, liabilities, financial position, cash flow and profit of the Group; [[ the Strategic Report on pages 2

estimates that are reasonable and prudent; [[ state whether applicable IFRS as

adopted by the EU have been followed, subject to any material departures disclosed and explained in the financial statements; [[ prepare the financial statements on

[[ make a longer-term viability statement,

that they have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over a defined period.

49

uncertainties that the Group faces together with details of the Group’s risk governance structure are provided on pages 13 to 18; and [[ the Annual Report and Accounts,

taken as a whole, is fair, balanced and understandable and provides the information necessary for members to assess the Group’s position, performance, business model and strategy.

Additional Information

The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Group’s transactions and disclose, with reasonable accuracy at any time, the financial position of the Company and the Group and enable them to ensure that the financial statements and the Directors’ remuneration report comply with the Companies Act 2006.

[[ a description of the principal risks and

Notice of AGM & Resolutions

the going concern basis unless it is inappropriate to presume that the Group will continue in business; and

to 39 includes a fair review of the development and performance of the business and the position of the Group;

European Embedded Value

Institutional shareholder The Group, through Royal London Asset Management Limited (RLAM), firmly believes in the use of best practices by the companies in which it invests and its approach is set out in the corporate responsibility statement on pages 28 to 29.

Each of the directors, whose names and functions are shown on pages 42 and 43, confirms that, to the best of their knowledge:

then apply them consistently; [[ make judgements and accounting

The Board is committed to ensuring a diverse pool of candidates is considered for any vacancies that may arise and that they are filled by the most qualified candidates based on merit, having regard to the benefits of diversity, including gender.

The directors are responsible for safeguarding the assets of the Company and the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. They are also responsible for the maintenance and integrity of the Group’s website.

Financial Statements

Regime; and

Company law requires the directors to prepare financial statements for each financial year. Under that law the directors have elected to prepare the Company and Group financial statements in accordance with IFRS as adopted by the European Union (EU). Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and the Group and of the profit or loss and cash flow of the Group for that period. In preparing those financial statements, the directors are required to:

It should be noted that legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

GOVERNANCE

[[ Solvency II and Internal Model

Directors’ responsibilities The directors are responsible for preparing the Annual Report and Accounts, the Directors’ remuneration report and the financial statements in accordance with applicable law and regulations.

Corporate Governance statement continued Attendance of Board and Board Committee meetings The table below shows the number of meetings each director attended and the maximum number they could have attended.

Total number of scheduled meetings in 2015

Board

Audit Committee

Board Risk Committee

Investment Committee

Nomination Committee

Remuneration Committee

With-Profits Committee

Independent Governance Committee

10

12*

9

4

2*

11*

8*

5*

* A number of meetings are held to deal with matters arising between scheduled meetings, typically relating to Solvency II or other regulatory matters. The number of additional meetings in 2015 were: Audit (3), Nomination (1), Remuneration (1), With-Profits Committee (2), Independent Governance Committee (1).

Attendance Member

Board

Audit Committee

Board Risk Committee

Investment Committee

Nomination Committee

Remuneration Committee

With-Profits Committee

Independent Governance Committee

Sally Bridgeland (appointed to the Board 14 January 2015)

10

-

-

4

2

-

-

-

8

-

-

-

-

-

-

-

10

11

-

3

2

-

-

-

10

8

9

-

2

-

8

-

Tracey Graham

10

9

-

-

2

11

-

-

Tim Harris

10

-

-

4

-

-

7

-

Phil Loney

9

-

-

-

-

-

-

-

Jon Macdonald

9

-

-

4

-

-

-

5

Andrew Palmer

10

12

9

-

2

11

-

-

Rupert Pennant-Rea

10

-

-

-

2

11

-

-

David Weymouth

10

10

9

-

1

-

-

-

Andrew Carter Ian Dilks Duncan Ferguson

(i) The table shows attendance for those Committees the individual is a member of. (ii) Non-Executive Directors may also attend Committee meetings of which they are not a member, which collectively totalled 23 meetings in 2015.

Royal London Group   Annual Report and Accounts 2015

Strategic Report

Board Committees The Board has established the following Committees:

[[ Board Risk Committee; [[ Investment Committee; [[ With-Profits Committee; [[ Nomination Committee; [[ Remuneration Committee; and

The terms of reference of all Board Committees are published on the Group’s website in the Corporate Governance section.

The qualifications of each member of the Committee are included in the biographies of the directors on pages 42 and 43. The responsibilities of the Committee include:

findings (including those contained in management letters) and management’s response to them; [[ making recommendations to the

Board in relation to the appointment of the external auditors, to be put to the members for their approval in general meetings; [[ recommending to the Board the

remuneration and terms of engagement of the external auditors; [[ reviewing and monitoring the external

auditors’ independence, objectivity, expertise and resources and the effectiveness of the audit process; [[ monitoring the engagement of the

external auditors to supply non-audit services; and [[ review of regulatory compliance

and governance.

view of all aspects of proposed financial reporting by the Group; [[ reviewing accounting policies and the

determination of actuarial liabilities;

Some executive directors and some members of senior management including the Group Audit Director and the external auditors attend meetings of the Audit Committee and some members of senior management submit reports to the Committee.

the exercise of judgement; [[ reviewing the effectiveness of the

Internal Audit function; [[ reviewing, on an ongoing basis, reports

from the Internal Audit function; [[ approving the annual Internal Audit

plan and ongoing resources;

The Code states that the Board should satisfy itself that at least one member of the Committee has recent and relevant financial experience. The Board takes the view that more than one member of the Committee has recent and relevant financial experience. The Board also views the Committee as a whole for this test and has concluded that the Committee does have the relevant skills and financial experience necessary.

Notice of AGM & Resolutions

[[ reviewing accounting matters requiring

European Embedded Value

The Committee reports to the Board on the above matters, identifying [[ monitoring the integrity of the financial any issues which it considers require statements and formal announcements action or improvement and makes recommendations to the Board. relating to financial performance; [[ reporting to the Board the Committee’s

Financial Statements

[[ Independent Governance Committee.

A joint Board Risk and Audit Committee was held on one occasion on 15 December 2015. This ensures that the two committees are operating effectively together on areas of common responsibility and where either of the committees is required to collaborate on, or assume responsibility for, a review conducted by the other.

[[ reviewing the external auditors’

GOVERNANCE

[[ Audit Committee;

Report of the Audit Committee On behalf of the Audit Committee (the Committee) I am pleased to present the Committee’s report for 2015. The membership of the Audit Committee comprises Andrew Palmer (Chairman), Ian Dilks, Duncan Ferguson, Tracey Graham and David Weymouth. The respective chairs of this Committee and the Board Risk Committee attend meetings of the other committee as members.

[[ monitoring and reviewing the

51

Additional Information

effectiveness of the Group’s internal controls;

Corporate Governance statement continued During the year the Committee particularly focused on the following areas. 1. Financial reporting matters The Committee reviewed the Group’s annual and half-year IFRS and EEV reporting. In doing so, the Committee considered the accounting policies adopted by the Group, the impact of any emerging technical accounting issues and the significant reporting and valuation judgements made by management. This included assessing the process for the valuation of investments by the directors, the key actuarial assumptions underpinning the insurance liabilities and any material contingent assets and liabilities. The Committee discussed and reviewed the results and the presentation of them in the Annual Report and Accounts, press releases and the going concern and Longer-Term Viability Statement. 2. Control environment The Committee reviewed the effectiveness of the control environment across the Group throughout 2015. This included reviewing reports from management on major control issues being managed in the year, and the assessment of the effectiveness and consistency of the Group’s processes. The Committee concluded that the control environment of the Group was generally effective throughout the year and that any matters arising were being appropriately dealt with. 3. Internal Audit The Committee oversaw the activities of the Internal Audit function. It received summary reports on the results of all audits performed and monitored management’s responses to issues identified and the timeliness of their resolution. The Committee reviewed and provided input into the risk-based internal audit plans for 2016. The Committee held a number of meetings with the Group Audit Director without the executives present.

4. External audit The Committee monitored the operation of the Group’s external audit, including receiving reports from the external auditors on their audit plan, the key audit risks, their progress during the year, significant findings arising from their audit and reviewing the audit fee. Auditor objectivity and independence were safeguarded through the authorisation of non-audit services by either the Committee or the Chairman of the Audit Committee, depending on fee thresholds. 5. Solvency II reporting The Committee received regular updates on the Solvency II programme including governance structure, Solvency II reporting and Day One readiness. In October 2014 the Prudential Regulation Authority (PRA) instructed firms to have their December 2014 balance sheet, submitted on a Solvency II basis, audited. These filings were submitted on 31 March 2015 (step 1) and 30 June 2015 (step 2). In November 2015 Royal London submitted its third quarter Quantitative Reporting Templates (QRTs) and submitted this filing on 23 November 2015.

Non-audit services provided by the external auditor The Committee received regular updates on the level of all non-audit work performed. The fees paid or invoiced for non-audit services in 2015 were £1,709k, which was 27.7% of the total fees paid to the auditors in 2015. In determining if the appointment of PricewaterhouseCoopers LLP for non-audit work is appropriate, consideration is given to the skills and experience, the impact on independence and the safeguards in place. The overall level of fees relative to the audit fee is also considered. The non-audit services performed by the external auditors in 2015 included the following: [[ audit related and other

The Group Audit Director reports to the Chairman of the Audit Committee and has a dotted line to the Group Chief Executive.

assurance services: • Solvency II – including balance sheet

Royal London Group   Annual Report and Accounts 2015

audit and review of methodology;

• ICA limited assurance review; and • assurance work related to debt

issuance during the year. [[ HR Services: • review of the Royal London

Group Pension Scheme (RLGPS) arrangements; and • review of the Royal London

Asset Management Remuneration Strategy.

Objectivity and independence of the external auditors The Committee is satisfied as to the continued independence and objectivity of the auditors, PricewaterhouseCoopers LLP. An evaluation of the effectiveness of the external auditors was reviewed by the Committee, which was prepared by Internal Audit using input from across the Group, and which concluded the external auditors were effective. In addition, the Committee conducted private meetings with the external auditors to discuss and review key issues, without management being present.

Policy on external audit tendering The Committee keeps under review the ongoing legislative proposals on audit tendering and rotation from the EU and the Competition and Markets Authority, as well as the Financial Reporting Council, and will implement the proposals when they come into force. PricewaterhouseCoopers LLP has been the Group’s auditor since 2000, which was the last time an audit tender was carried out. The Committee will continue to consider annually the need to go to tender for audit quality or independence reasons. Subject to the outcome of this process continuing to be satisfactory, it is currently expected that PricewaterhouseCoopers LLP will remain in office and a resolution to reappoint PricewaterhouseCoopers LLP for the 2016 audit will therefore be proposed at the 2016 AGM.

Strategic Report

Significant matters considered by the Audit Committee in 2015 This table highlights some significant matters considered by the Audit Committee in 2015 and the actions taken.

Review of effectiveness of the external auditor

The Committee considered the feedback received across the Group on the 2014 external audit process and the comments made were noted.

Long-term business liability valuations – methodology and assumption recommendations

The Committee considers The Royal London Mutual Insurance Society Limited (RLMIS) and Royal London (CIS) Limited’s long-term business regulatory liability valuations as at 31 December 2014 and accepted the Valuation Report of the Actuarial Function Holder, for the year ended 31 December 2014, including the changes to methods and assumptions.

Valuation of investments including an assessment of the process for valuing difficult to value investments

The Committee considered the Group’s Investment Valuations as at 31 December 2014 and 30 June 2015. The Committee considered the process by which the Group was valuing all its financial assets including difficult to value investments. The Committee has reviewed the Investment Valuation Report requested by the PRA.

Presentation on key accounting and actuarial judgements and assumptions

The Committee was briefed on the key accounting and actuarial judgements and assumptions and the most notable areas of the 2015 Group accounts involving judgements. It also reviewed the proposed approach, specifically any changes since the previous year, and it recommended to the Board the proposed approach for key accounting/actuarial judgements and the assumptions.

Solvency II reporting filings with the PRA

The Committee reviewed the governance arrangements of the various returns to be filed with the PRA for Solvency II.

Oversight of the project to update the Group’s financial and actuarial reporting systems and processes

The Committee received an update on: [[ the governance, including proposed reporting to the Board Committees; [[ the scope of the workstreams and the transition states the organisation will undergo as the new solutions and working practices become effective;

[[ a review of the new systems. The Committee considered regular reports from the Group Audit Director on the effectiveness of the Group’s control environment, including that provided by the outsource provider, Capita.

Allocation of agenda time

European Embedded Value

[[ the progress and arrangements for each external audit; and

Internal control

Financial Statements

Action taken by the Committee

GOVERNANCE

Matters considered

The chart provides an illustration of the approximate percentage of total time spent by the Committee on various matters during 2015.

25%

26%

Notice of AGM & Resolutions

15%

Financial reporting External audit Internal audit and control environment Solvency II reporting and Day One readiness Other matters

14% 20%

53

Additional Information

Andrew Palmer Chairman of the Audit Committee

Corporate Governance statement continued Report of the Nomination Committee

Report of the Board Risk Committee

Regulatory Risk and Compliance and the Group Audit Director attend meetings regularly by invitation.

On behalf of the Nomination Committee I am pleased to present the Committee’s report for 2015.

On behalf of the Board Risk Committee I am pleased to present the Committee’s report for 2015.

The current membership of the Nomination Committee comprises Rupert PennantRea (Chairman), Sally Bridgeland, Ian Dilks, Duncan Ferguson, Tracey Graham, Andrew Palmer and David Weymouth.

The membership of the Board Risk Committee comprises David Weymouth (Chairman), Duncan Ferguson and Andrew Palmer.

A joint Board Risk and Audit Committee was held on one occasion on 15 December 2015. This ensures that the two committees are operating effectively together on areas of common responsibility and where either of the committees is required to collaborate on, or assume responsibility for, a review conducted by the other.

The responsibilities of the Nomination Committee include: [[ reviewing the structure, size and

composition (including the skills, knowledge and experience) of the Board and making recommendations to the Board with regard to any changes; [[ nominating for Board approval candidates to fill vacancies on the Board and its committees; [[ succession planning, taking into account in particular the challenges and opportunities facing the Group and the skills and expertise needed on the Board in the future; and [[ keeping under review the leadership needs of the organisation, both executive and non-executive, with a view to ensuring the continued ability of the organisation to compete effectively in the marketplace. During the year the Committee considered the reappointment of the Group’s directors. When reviewing the Board structure the Committee considered the expertise and skills of our Board, our Group’s Strategy and diversity, including gender. Following the review it was recommended that all directors be put forward for re-election at the 2016 AGM. An Independent Governance Committee was created in April 2015, for which the Committee considered the appointment of the external members. An external search firm identified a diverse list of potential candidates and the members were selected, following a rigorous selection process. The Board Chairman’s other significant commitments and any changes to them are highlighted in the biography section on pages 42 and 43.

Rupert Pennant-Rea Chairman of the Nomination Committee

The responsibilities of the Board Risk Committee include: [[ reviewing and recommending to

the Group Board the assignment of risk management responsibilities; [[ reviewing and challenging risk information received, including whether key risks are managed to an acceptable level and cost; [[ providing oversight and advice to the Board on the current risk exposures of the Group by reviewing and recommending to the Board actions on significant risk issues, trends, practices, litigation and loss events that have implications for the Group; [[ monitoring the effectiveness of the Group’s overall risk and capital management frameworks through ongoing review and independent assurance; [[ reviewing and challenging the stresses and scenarios undertaken, including reverse stress tests; [[ reviewing and recommending to the Board the Group’s risk appetite and ensuring it is aligned with the strategy of the Group; [[ reviewing and approving the Group’s main policies in relation to strategic, financial and operational risks, including the process for identifying and assessing emerging business and environmental risks and the management of these risks by the Group; [[ ensuring that the Group conducts appropriate review and due diligence of potential acquisitions; and [[ an annual review of results to ensure profits are aligned with risk appetite for remuneration purposes. The Committee reports to the Board on all of the matters detailed above, identifying any matters in respect of which it considers that action or improvement is needed and makes recommendations to the Board. The Group Risk Director attends meetings of the Board Risk Committee. The executive directors and certain members of senior management, such as the Group Head of

Royal London Group   Annual Report and Accounts 2015

During the year the Committee particularly focused on the following areas: [[ Solvency II programme including

Day One readiness;

[[ Risk management system; [[ Own Risk and Solvency

Assessment (ORSA);

[[ Review and approval of main

Group policies;

[[ Business risk review; [[ Conduct risk; [[ Capital management; and [[ IT security.

The chart below provides an illustration of the approximate percentage of total time spent by the Committee on various matters during 2015.

20% 38%

13% 8%

21%

Solvency II programme Risk management system Business model risks, business risk review and review of Group policies Operational excellence and conduct risk Others

David Weymouth Chairman of the Board Risk Committee

Strategic Report

Report of the Investment Committee

[[ assisting the Board in discharging its

27% 49%

[[ supporting the Board in developing

their investment strategy including review of the use of asset classes such as hedge funds and private equity; [[ reviewing RLAM’s development of new approaches to multi-asset funds, cash and bond investment; [[ reviewing the statement of Investment Philosophy in a number of emerging areas to aid the Committee and Board in their investment decisionmaking process; [[ reviewing asset managers’ performance and suitability to manage the Group’s investment mandates, including review of quarterly market and economic data and investment performance of key funds; [[ reviewing and recommending for Board approval of property and private equity transactions above delegated authorities; and [[ overseeing investment-related regulatory matters and implementation of best practice guidance. The chart on this page provides an illustration of the percentage of time spent by the Investment Committee on various matters during 2015.

Sally Bridgeland Chairman of the Investment Committee

Additional Information

55

Oversight and escalation items Investment strategy Risk, governance and oversight matters Other matters

Notice of AGM & Resolutions

responsibilities in respect of investment matters, including investment strategy; [[ undertaking, on behalf of the Board, oversight of the physical investment assets of The Royal London Mutual Insurance Society Limited, including investment performance; [[ reviewing for recommendation to the Board the Investment Philosophy taking into account regulatory, industry and competitor investment developments; [[ reviewing for recommendation to the Board the suitability of new investment classes and approaches for Group funds as proposed by the Executive; [[ reviewing the governance of the relationships between Group and all investment managers, including periodic, risk-based confirmation that the Investment Management Agreements governing such relationships are current and fit for purpose; and

13%

European Embedded Value

The responsibilities of the Investment Committee include:

During the year, as part of its normal duties, the Committee focused on:

11%

Financial Statements

The membership of the Investment Committee comprises both executive and non-executive directors/members. Current members of the Investment Committee comprise Sally Bridgeland (Chair), Ian Dilks, Julius Pursaill, Tim Harris and Jon Macdonald. In addition, Andrew Carter (CEO, Wealth), Piers Hillier (Chief Investment Officer, RLAM), Stephen Wilson (With-Profits Actuary to 31 December 2015), Brian Murray (With-Profits Actuary from 1 January 2016) and Rachel Elwell (Investment Office and Staff Pensions Director) attend Committee meetings.

investment performance and operational effectiveness of investment managers and agreeing action on any material issues affecting investment operations, risk and performance.

GOVERNANCE

On behalf of the Investment Committee I am pleased to present the Committee’s report for 2015. This is my first report as Chairman. I joined the Board and Committee in January 2015 and was appointed as the Committee Chairman on 1 July 2015, and would very much like to take the opportunity to thank Kathryn Matthews for the work that she has done in developing and leading the Investment Committee. We all wish her the best for the future.

[[ receiving reports from the Executive on

Corporate Governance statement continued Report of the With-Profits Committee On behalf of the With-Profits Committee I am pleased to present the Committee’s report for 2015. The With-Profits Committee was established in 2012. The membership of the Committee comprises Duncan Ferguson, Tim Harris and four independent members. The independent members are Nick Dumbreck, Jim Gallagher, Julius Pursaill and Bridget Rosewell. Nick Dumbreck was previously the With-Profits Actuary for the CIS Life funds and Bridget Rosewell was a member of the CIS With-Profits Committee and they joined the Committee when the CIS Fund became part of Royal London. The With-Profits Actuary is the principal adviser to the Committee and both he and the Group’s Actuarial Function Holder attend Committee meetings. The Committee’s role is to consider the interests of all policyholders in the Royal London Group with an entitlement to share in the profits of the Group and exercise independent judgement in advising the Board on the achievement of the fair treatment of those policyholders. This includes providing independent opinion and oversight on matters that affect with-profits policyholders.

[[ any other matter in which it

might reasonably be expected that the Committee should have an involvement.

During the year the Committee focused on: [[ extending the benefits of membership

by launching ProfitShare accounts; [[ the ProfitShare and bonus rates to be declared for 2015; [[ investment performance and investment strategy of the various with-profits funds; [[ the surrender value bases applied to the various blocks of with-profits business; [[ the financial and capital management of the with-profits funds including the impact of Solvency II; [[ the quality of the service provided to with-profits policyholders, having regard to complaints and other measures; [[ the interaction of Group strategy with the interests of the with-profits policyholders; and [[ the effectiveness of the With-Profits Actuary. The chart on this page provides an illustration of the approximate percentage of total time spent by the Committee on various matters during 2015.

The Committee’s role is to assess, report on and provide clear advice on: [[ the way each with-profits fund

is managed; [[ compliance with each with-profits fund’s Principles and Practices of Financial Management (PPFM); [[ whether the interests of with-profits policyholders, and the respective interests of groups of with-profits policyholders, are fairly reflected. This includes considering the treatment of any conflicts of interest that may arise between different groups of with-profits policyholders, between with-profits policyholders and the Group and between with-profits policyholders and the members of the Group; and

Duncan Ferguson Chairman of the With-Profits Committee

Royal London Group   Annual Report and Accounts 2015

20%

16%

24%

17% 11%

12%

‘Growing the cake’ - Investment Strategy and Results Extending the benefits of membership by launching ProfitShare Accounts ‘Sharing the cake fairly’ – Bonus Rates and Surrender Values Customer experience – Policyholder Communications, Complaints and Service Policyholder security – Capital Management including transition to Solvency II Governance, Regulation and Compliance

Strategic Report

Report of the Independent Governance Committee

The Independent Governance Committee was established in April 2015 and comprises two Company members and three independent members. The independent members are Phil Green (Chairman), Peter Dorward, and David Gulland. The Company members are Isobel Langton and Jon Macdonald.

Committee has sufficient expertise, experience and independence to act in relevant policyholders’ interests; [[ the name of each independent member of the Committee and confirmation that the Committee considers these members to be independent; and [[ the arrangements put in place by the Group to ensure that the views of relevant policyholders are directly represented to the Committee. In order to report on these items the Committee has focused its activities on the following:

15% 8%

7% 42%

19% 7% 2%

Financial Statements

Induction and training Value for money Review of continuation plans Transaction costs Understanding customer requirements Investment matters Governance and other general matters

European Embedded Value Notice of AGM & Resolutions Additional Information

[[ establishing principles with which to The Committee was formed in response assess the value for money delivered by to the FCA’s directive on independent all of Royal London’s relevant workplace governance for workplace pensions. The pension contracts; Committee assesses the ongoing value [ [ assessment of Royal London’s relevant for money of relevant workplace pension workplace pension contracts (including schemes offered by Royal London; reports legacy contracts and individual and escalates issues which are identified Phil Green continuation plans) and consideration of and remain unresolved; and prepares an Chairman of the Independent proposals and an implementation plan annual report on its activities and the Governance Committee prepared by Royal London to change value for money offered by the relevant contract terms or improve Royal London’s pension schemes. The Committee’s report workplace proposition as a result of on the value for money delivered by the assessment; Royal London’s schemes will be published [[ induction and training of the independent separately to this Annual Report and members on Royal London’s workplace Accounts and made available on the pensions business, procedures and Group’s website by 5 April 2016. governance structure; [[ review of the investments and default The Committee is required to perform investment strategies offered; its duties in accordance with FCA Rules [[ understanding customer requirements; and relating to Independent Governance Committees and in particular, the [[ transaction costs. Committee must act at all times solely in the interests of relevant workplace The Committee met five times during pension policyholders. 2015, as well as holding two full induction days. The chart provides The FCA guidance for Independent an illustration of the approximate Governance Committees forms the basis percentage of time spent by the of the Committee’s activities. Broadly Committee on various matters during the Committee reviews and where 2015. As this was the Committee’s first necessary reports on the following: year of operation, the Committee has also spent considerable time outside of [[ the Committee’s opinion on the value meetings discussing these issues. This for money delivered by relevant schemes, additional time is not captured in the particularly against those items listed in time analysis. the FCA COBS Rules; [[ how the Committee has considered relevant policyholders’ interests; [[ any concerns raised by the Committee with the Board and the response received to those concerns;

57

GOVERNANCE

On behalf of the Independent Governance Committee I am pleased to present the Committee’s report for 2015.

[[ whether the membership of the

2015 Directors’ remuneration report Annual statement from the Remuneration Committee chairman Dear Member, On behalf of the Board I am pleased to present the Remuneration Committee report for 2015. The remuneration report is split into two parts: the Directors’ remuneration policy which, sets out how the Group remunerates directors, and the Annual report on remuneration, which explains the link between executive remuneration and Group performance, detailing what payments and awards have been made to directors during the year. Royal London is committed to being transparent with its members. The majority of our disclosures are in line with the remuneration reporting requirements applicable to listed companies and we aim to meet as many of them as is practical. Your Board believes that these transparent remuneration disclosures will help members better understand how our remuneration strategy supports the Group’s strategy and ultimately our members’ interests.

good customer outcomes. As a mutual organisation competing for talent against publicly listed and privately held financial institutions, we need to carefully balance competitive pay, motivational incentives to drive performance, and appropriate management of risk. The remuneration policy continues to have three main aims: [[ to align executives’ interests with those

of our members and customers;

measures. The Committee rigorously reviewed the scorecard results against the Group’s wider performance, in particular the continued strong growth in our Pensions business which has resulted from placing ourselves in an excellent position to respond to changes in pension regulation including the new pension freedoms. The Committee also sought input from the Audit Committee regarding the quality of earnings and from the Risk Committee regarding risk appetite performance before agreeing a final award of 162%.

[[ to support the delivery of the Group

strategy, whilst ensuring adherence to the Group’s risk appetite; and [[ to ensure remuneration is competitive

for our markets to help the Group attract and retain talent. The Remuneration Committee’s role is to ensure that the Group’s remuneration structure is fully aligned with these three main aims. We do so by:

The Committee has reviewed both the directors’ remuneration policy and the remuneration policy for all Group employees and is satisfied that an appropriate reward structure exists to attract and retain the talent the Group requires to deliver good customer outcomes, which are the key to the continued success of the Group. Details of other activities undertaken by the Committee during 2015 are provided in the Annual report on remuneration.

[[ ensuring remuneration is driven by the

Over recent years, the remuneration landscape within financial services has been characterised by both increasing regulation and public scrutiny, and the same can be said of 2015. The Committee has kept itself abreast of evolving legislation, including the European Banking Authority (EBA) consultation on the remuneration provisions of the Capital Requirements Directive (CRD IV) as communicated at the last AGM. This year the focus of the Committee has been preparation for the Solvency II requirements which were implemented from 1 January 2016; the Committee receiving specific training on this during 2015. The Committee fully understands its obligations in respect of the appropriate balance between risk and reward and overseeing the development of the Group’s remuneration policies and practices. Within this environment, Royal London must continue to attract and retain talented people who can ensure we have the best products and services and deliver sustainably high levels of performance for our members, delivering

Group strategy as determined by the medium-term (five-year) and annual business plans, which guide the Board’s selection of a number of financial and non-financial measures and targets; [[ conducting regular market reviews

to ensure that remuneration remains aligned to the market in which we operate; and [[ commissioning a risk review of each

This year we will be asking for an advisory vote only on the Annual report on remuneration, as the remuneration policy approved by members in 2014 remained unchanged. The Annual report on remuneration is set out on pages 66 to 76 of this report. The Remuneration Committee and the Board recommend that you vote for the resolution on the Annual report on remuneration.

of our remuneration arrangements in advance of Committee approval. The main elements of the reward package are salary, a Short-Term Incentive Plan Tracey Graham (referred to as the ‘STIP’) linked to the achievement of the annual business plan, Chairman of the Remuneration Committee a Long-Term Incentive Scheme (the ‘LTIS’) linked to the achievement of the five-year business plan and marketrelated benefits and pension provision. The Board’s assessment of performance is captured and summarised in the Group’s scorecard of financial and non-financial measures. I am pleased to say that the Group performed strongly against these

Royal London Group   Annual Report and Accounts 2015

Strategic Report

Directors’ remuneration policy

Align executives’ interests with those of our members and other customers

Performance-related incentive arrangements will be designed to align the interests of executives with those of members and other customers.

Support delivery of Group strategy whilst ensuring adherence to the Group’s risk appetite

Performance-related incentive arrangements will be designed to reinforce the achievement of Group strategy. The remuneration policy will have regard to the remuneration codes of all relevant regulators, including the Prudential Regulation Authority and Financial Conduct Authority, as well as institutional investor guidance on remuneration governance best practice.

When assessing performance, the Committee will take into account not just the measures and targets in the balanced scorecard, but also wider views of Group performance, quality of earnings and the sustainability of performance before finalising awards. Total remuneration will be appropriately competitive to support the recruitment, retention and motivation of talented people, and to help the Group compete effectively with leading UK life insurers and other financial services companies with which it competes for talent.

Financial Statements

The Committee will ensure that risk-taking outside of the Group’s risk appetite is not rewarded and will have absolute discretion to amend incentive amounts prior to payment to ensure they are appropriate.

Align with relevant market practice

GOVERNANCE

Key principles of remuneration policy To achieve the aims of the remuneration policy as set out in the Chairman’s introduction, the Remuneration Committee has agreed the following principles:

The tables overleaf set out separately the remuneration policy for executive directors and non-executive directors, as approved at the AGM in 2014. No material changes have been made to the approved policy. European Embedded Value

The Policy that was voted on and approved by 92% of members in 2014 can be found at royallondon.com/about/annual-reports/2014-annual-reports

Notice of AGM & Resolutions Additional Information

59

2015 Directors’ remuneration report continued Future remuneration policy table – executive directors Purpose and link to strategy

Operation

Maximum opportunity

Performance measures

Base salary

Support the recruitment, retention and motivation of talented people.

Salaries are reviewed annually by considering the role and its pay positioning against the median of appropriate comparator groups. The primary benchmarking comparator group is the top 12 UK life insurers with whom we compete for talent and business. The Committee also takes into account any changes in responsibilities since the salary was last reviewed, individual performance, Group performance, and the outcome of the salary review for the broader Royal London employee population.

Increases for executive directors will normally be in line with those for the broader Royal London employee population who achieved the same performance rating and have a similar pay positioning relative to market.

Subject to annual review of individual contribution and Group performance.

Short-Term Incentive Plan (STIP)1

Focus participants on the in-year results that need to be achieved to meet Royal London’s annual financial and non-financial objectives in the context of the agreed Group strategy.

Performance is assessed against a balanced scorecard of one-year measures, with vesting outcomes subject to a discretionary override by the Committee (which may decrease or increase the award) to ensure that awards fairly reflect underlying performance. Payment of at least one-third of any amount earned under the STIP is deferred for three years and is adjusted for the change in the value of Royal London to its members2 over the period. Unvested deferred STIP awards are subject to malus.3 An additional project-related STIP may be offered in exceptional circumstances at Committee discretion.

Maximum STIP opportunity of up to 150% of salary. Target STIP opportunity of up to 75% of salary. No payment is made for threshold performance.

Performance is assessed against a scorecard covering five areas of performance which are reviewed each year. For 2016 the measures and weights are: Financial Performance (45%), Best Customer Propositions (20%), Our People (10%), Assurance (15%) and Building the Future (10%). The weighting for each category and the selection of sub-measures or tasks within each category may be tailored each year to reflect business priorities, although the weighting on financial measures will be no less than 30%.4

Help align executives with the long-term interests of members and other customers.

Vesting of awards is based on performance over three years against the Group’s key longterm performance measures. To align further with members’ long-term interests, release of any award is further deferred as follows:

The maximum potential opportunity is 187.5% of salary. No award is payable for delivering an ‘on plan’ level of performance.

Long-Term Incentive Scheme (LTIS)

[[ 50% vests after three years; [[ 25% vests after four years; and [[ 25% after five years from the date of grant. Vesting outcomes are subject to a discretionary override by the Committee (which may decrease or increase the award) to ensure that overall awards fairly reflect underlying performance and are also subject to clawback from 2014. Deferred payments are also subject to malus.3 Further, the value of an award is adjusted for the change in the value of Royal London to its members.2 The vesting calculation is reviewed by Internal Audit.

Royal London Group   Annual Report and Accounts 2015

Project-related STIP awards may be in addition to the maximum STIP.

The key long-term performance measures for 2015 are: Operating Profit (55%), Investment Performance (25%), Customer Experience (10%) and Quality of Proposition (10%). LTIS awards of up to 150% can be adjusted by a multiplier of +/- 25% based on the cumulative ProfitShare over the three years. Specific performance measures and weightings for each LTIS cycle will be described in the Annual report on remuneration in the year of grant and the year of vesting.

Strategic Report

Applies to only one executive director (CEO, Wealth)5

Maximum opportunity

Performance measures

Provide strong alignment of participants with RLAM long-term performance.

Vesting of awards is based on investment performance and profit growth over three years.

Maximum opportunity of up to 150% of salary per annum, with 34% of maximum payable for achieving the target level of performance. No payment is made for below-target performance.

Key long-term performance measures for RLAM, split 70% on investment performance and 30% on revenue growth over three years.

To support the recruitment, retention and motivation of talented people.

Benefits are reviewed from time to time to ensure they remain competitive in the relevant talent markets. Currently they include life insurance, private medical insurance, medical screening and a discretionary living-away-from-home allowance and either a company car or a cash allowance in lieu of a car. Executive directors may participate in the Group’s flexible benefit scheme.

Vesting outcomes are subject to a discretionary override based on the Committee’s assessment of underlying performance and are also subject to clawback from 2014.

Varies by individual and level.

Specific performance measures and weightings for each RLAM LTIP cycle will be described in the Annual report on remuneration in the year of grant and the year of vesting. Financial Statements

Benefits

Operation

GOVERNANCE

RLAM Long-Term Incentive Plan (RLAM LTIP)

Purpose and link to strategy

Executive directors may be eligible to receive relocation support based on the requirements of their role as determined by the Group. To support the recruitment, retention and motivation of talented people.

There are two schemes currently operating. The Defined Contribution Scheme applies to newly-appointed executive directors who are not members of the Defined Benefit Scheme. Directors may elect to receive all or part of the Group contribution to the Defined Contribution Scheme as a cash allowance.

Up to 25% of salary.

We also operate a Defined Benefit Scheme7. The main terms applying to the final salary pensions accrued since April 2011 under this scheme are:

Up to 1/45th of final salary for each year worked.

[[ payable from age 60;

[[ increase in payment in line with inflation, up to a maximum of 2.5% each year; and [[ maximum increase in accrual of 2.5% per annum (anything accrued prior to April 2011 is not capped).

Additional Information

61

Notice of AGM & Resolutions

[[ spouse’s pension (55% of the director’s pension) payable on death of the director;

European Embedded Value

Pension6

2015 Directors’ remuneration report continued Future remuneration policy table – non-executive directors (NEDs)

Annual fee

Purpose and link to strategy

Operation

Maximum opportunity

Performance measures

Sufficient to attract and retain directors of the highest calibre and reflecting the responsibilities and time commitment required.

Fees are reviewed annually against nonexecutive director fees at companies of a similar size, with particular reference to financial services and the UK life insurance sector.

Fees will be targeted to be broadly within 20% of fees at companies of a similar size, with particular reference to UK life insurers and financial services companies.

Continued good contribution.

All directors abstain on determination of their own remuneration. The remuneration of the Group Chairman and the non-executive directors is determined by the Board as a whole. The Chairman and non-executive directors are not eligible to participate in incentive schemes and their service is not pensionable.

Fees for chairing committees

To reflect the additional time commitment that chairing a committee requires.

Fees for chairing committees are reviewed in the same way as the annual fee, as set out above.

Same approach as set out above for annual fee.

Continued good contribution.

Additional fees

To ensure that the governance framework remains flexible.

The non-executive directors may be paid an additional fee for projects that the Board considers are over and above their normal duties. Such additional fees are paid on a per diem rate, based on the additional time commitment required.

Same approach as set out above for annual fee.

Continued good contribution.

1 To be eligible to receive any payment, participants must be in employment and not be under notice prior to the date payment is due in accordance with the Plan Rules. In exceptional circumstances, the Committee may make higher awards, or select different performance measures or waive deferrals, where it considers this to be in the best interests of members. 2 Deferred STIP and LTIS awards are converted into EEV units whose value is based on the Royal London Group European Embedded Value (EEV). The Royal London ProfitShare (formerly known as Mutual Dividend) allocated during the period is notionally added back to the unit value. Prior to 2014, the value of units was calculated using Royal London’s Appraisal Value. The Committee considers EEV to be a simpler and more objective measure of Royal London’s value, which is easier to benchmark against other life insurers. 3 Malus may be applied at the discretion of the Committee for reasons such as, but not limited to, misconduct, material financial restatement, or behaviour that could lead to significant reputational damage. 4 To avoid any conflict with control function independence, the control function STIP is based on the performance of the function, and the Group financial element is minimal (10% of the overall rating). Of the executive directors, this arrangement only applies to Jon Macdonald. 5 The RLAM LTIP is in addition to the LTIS. 6 Historically, employees who had reached the HMRC lifetime allowance limit were invited to accrue an equivalent replacement benefit under an Unfunded Unapproved Retirement Benefit Scheme. This arrangement has been closed to new members and Andrew Carter is the only executive director who continues to participate in this scheme. 7 Following a review of Royal London’s longer-term reward strategy including pension and protection benefits, it entered into a consultation with members in October 2015. The proposal is to close the current scheme to future accrual from 1 April 2016. The outcome of the consultation and impact on executive directors will be disclosed in the Directors’ remuneration report for 2016.

Deferral Deferral is a key principle of the remuneration policy for Executive Directors. When an award is deferred, the cash amount is converted into EEV units8 that change in value in line with the value of Royal London to its members, and these EEV units cannot vest (be converted back into cash and paid) until the end of the deferral period. The change in value of EEV units supports alignment of executive director interests with those of our members. 8 In the past the value of Royal London was based upon Appraisal Value (AV) and executives were awarded AV units.

Royal London Group   Annual Report and Accounts 2015

Additional fees for non-executive directors in exceptional circumstances A basic level of time commitment is expected from each Non-Executive Director to carry out their duties as set out in their letter of appointment. Where additional duties are required, non-executive directors may receive payment of additional fees on a per diem basis for any time commitment over and above the normal expectation. For example, the acquisition of the life, pensions and asset management business of the Co-operative Group in 2013 required additional governance and oversight of the business acquired, and its integration into the Group required additional time to be committed by some non-executive directors.

Strategic Report

Performance measure selection and approach to target setting: 2016 STIP

In addition, a capital strength multiplier is applied, reflecting the potential ProfitShare capacity over the performance period. The long-term awards are deferred through EEV units that change in value based on the Group’s EEV. The Committee has discretion to add or remove performance measures. Scope for Committee discretion As outlined in the policy table, the Committee has discretion to override formulaic outcomes for the STIP, LTIS and RLAM LTIP, either positively or negatively. The Committee intends to use its discretion only when it is necessary to ensure that actual awards fairly reflect the underlying business performance that has been delivered for members. Any discretion would be applied within the maximum award limits of the relevant plan. 1 In the case of the CEO of Wealth Andrew Carter, 73% of the STIP is based on measures specific to RLAM performance. 2 Andrew Carter receives a smaller Group LTIS, but also participates in the RLAM LTIP linked 70% to RLAM investment performance and 30% to RLAM revenue growth.

Performance measure selection and approach to target setting: 2016 LTIS

45% 10% 20%

Financials Best customer propositions Our people Assurance Building the future

25%

55%

10%

Additional Information

63

Financial performance Customer Experience Investment performance Quality of proposition

Notice of AGM & Resolutions

10%

10% 15%

European Embedded Value

Performance measure selection and approach to target setting Performance targets are set for each incentive plan measure, reflecting the expected level of performance, as defined in the Group’s Medium-Term Plan (MTP). For the STIP, minimum and maximum levels of bonus payout are set around the plan. The threshold payout level is set with regard to the prior year’s achievement. On-target performance equates to a performance equal to plan and the maximum payout level is

The Committee adopts a similar approach when setting targets for the Group LTIS and RLAM LTIP, with targets based on the Group budget for year one of the performance period, and on the Group’s MTP for years two and three. Further details on measures used in our incentives are provided below. The current measures and weightings used for the LTIS are also outlined. 2

Financial Statements

Remuneration under previous policies Any awards made prior to the implementation of the remuneration policy detailed in this report will be honoured. These include the Group deferred STIP, LTIS, LTIP and RLAM LTIP awards from prior years. The value of outstanding awards is shown in the Annual report on remuneration on page 74.

set at a level which might be achieved only once in every five years. A balanced scorecard is used to provide a holistic view of our overall Group performance. To do this, our business performance has been divided into the five sections shown below. For 2016 the STIP comprises these five measures, with the relative proportion of each measure shown.1

GOVERNANCE

Remuneration policy for all employees The remuneration policy for Royal London employees is the same as for executive directors, although levels of remuneration differ and the majority of employees do not participate in the LTIS or RLAM LTIP. For all employees and directors, remuneration is set with reference to the specific requirements of the individual role and pay levels in the relevant talent markets. The Committee does not consult directly with employees specifically on remuneration policy for directors, but is mindful of pay and employment conditions elsewhere in the Group when doing so, and when considering potential payments under the policy. The Committee receives detailed information from management regarding the annual pay review for all employees and also reviews the Group Chief Executive’s recommendations for salary and STIP for his direct reports. It also reviews all awards to be made under long-term incentive plans including the LTIS and RLAM LTIP.

2015 Directors’ remuneration report continued Approach to the recruitment of executive directors The Nomination Committee of the Board appoints directors who are the most appropriate for each position. The Committee’s approach to determining remuneration for new executive directors is to pay sufficient to recruit the individual, giving careful consideration to internal and external market pay levels, as well as previous remuneration. The following limits are placed on remuneration awarded to new executive directors: [[ the maximum STIP award will not exceed 150% of salary; [[ the maximum combined LTIS and RLAM LTIP opportunity

on recruitment will not exceed 300% of salary; and

given time to acquire units, with 50% of any LTIS and deferred STIP (net of tax) vesting deferred in units until the holding requirement is satisfied. The Committee reviews these guidelines periodically to ensure they are appropriate for Royal London, taking into account market practice. Pay scenario charts The charts opposite illustrate the potential total pay opportunity for each executive director for the 2016 performance year, based on different scenarios. Scenario

Salary, pension and benefits

[[ pension and benefits will be as outlined in the Policy table.

Where a newly-recruited executive forfeits incentives from their previous employer, Royal London may make compensatory awards, typically using one-off additional STIP, LTIS (and LTIP in RLAM), or EEV unit awards to offset any losses. Such awards will be made on no more than an equal fair value basis, taking into account performance measures, time horizon and other aspects of the award that has been forfeited. Depending on the value of the award forfeited, the normal maximum plan limits may need to be exceeded on a one-off basis. In the event of an internal promotion to the Board, any prior contractual obligations and incentive awards to the new executive director may be honoured. The approach to setting remuneration for newly-appointed Non-Executive Directors is aligned with the approach taken for the annual review of fees as stated in the Future remuneration policy table and takes into account market-competitive fee levels and the fees paid to the existing NEDs. Ownership guideline The Group CEO and other executive directors are required to hold either AV or EEV units earned under the short- and long-term incentive plans and build up a minimum holding over a period of three to five years. This means that the value of a participant’s holding changes in line with the value of Royal London to its members. The Committee believes that ownership of EEV units reinforces the principles underlying the Group’s remuneration policy and further aligns the interests of executives with those of members. The current holding requirements by each director are detailed in the Annual report on remuneration. The requirement to hold units was introduced in 2011. Only units that have vested (and are no longer conditional on performance) under Royal London incentive schemes count towards the guideline. Executive directors are therefore

Royal London Group   Annual Report and Accounts 2015

Fixed On plan performance (achieves targets) Maximum performance (significantly exceeds targets)

Received in line with contractual entitlement.

STIP outcome (% of max)

LTIS outcome (% of max)

0

0

50

01

100

100

1 34% for RLAM LTIP

Fixed elements of pay (salary, pension and benefits) are positioned to ensure the total package is appropriate for the individual and role. The short and long-term incentives are designed to align executives with the interests of members and customers and reinforce the short and long-term success of Royal London. Actual variable pay outcomes can vary between 0% and 100% of maximum depending on actual performance delivered, resulting in a higher or lower split between fixed and variable pay. This is illustrated in the charts opposite. Service contracts All new executive director service contracts will require 12 months’ notice to the Group, and will also require that the director mitigate any pay in lieu of notice. Details of the service contracts for the current executive directors are provided in the Annual report on remuneration. The Chairman and Non-Executive Directors have letters of appointment with the Group. Letters of appointment do not contain provisions for loss of office payments, or any additional remuneration other than the fees set out in this policy.

Strategic Report

Pay scenarios Andrew Carter

£1,949k

n STIP (including deferral) n Fixed

48% £930k

20%

28%

£461k

30%

100%

50%

24%

Fixed

On-plan

Maximum

n LTIS n STIP (including deferral)

£1,857k

n Fixed

43% £791k

28%

33%

100%

67%

29%

Fixed

On-plan

Maximum

Phil Loney n LTIS n STIP (including deferral)

£3,473k

n Fixed

40% £989k

£1,541k 36%

32%

64%

28%

Fixed

On-plan

Maximum

Jon Macdonald

£1,117k

n LTIS

External appointments Subject to approval of the Board, executive directors may accept external non-executive director appointments. The executive director may retain any fees that they receive from these appointments. None of the executive directors currently hold a paid external appointment. Details of any external directorships will be disclosed in the Annual report on remuneration for the relevant year. Consideration of members’ views In determining remuneration policy, the Committee endeavours to take into account the views that members express at the AGM, following the Remuneration Committee Chairman’s presentation. Members of the Committee are also available to speak with members on an individual basis at the AGM.

n STIP (including deferral) n Fixed

34% £550k

£367k

33%

Notice of AGM & Resolutions

100%

Under certain circumstances, it may be in members’ interests for the Group to enter into a legally binding agreement with an executive director when their employment is terminated. In these circumstances, the Group may reimburse reasonable legal fees that have been incurred by the executive director.

European Embedded Value

£532k

Financial Statements

Tim Harris

In the event an executive leaves for reasons of death, injury, disability, change of control of the Group, or any other reason which the Committee in its absolute discretion permits, any outstanding awards under applicable short and long-term incentive plans will be pro-rated for time and performance. For all other leavers, outstanding short and long-term incentive awards will lapse. The Committee retains discretion to alter these provisions as permitted by the relevant plan rules on a case-by-case basis following a review of circumstances and to ensure fairness for members and participants. Salary, pension and benefits will normally be paid up to the date of termination of employment. In certain circumstances, payment of salary (this may also include pension and benefits) in respect of the notice period may be made as a single payment in lieu of notice. Salary, pension and benefits included in any termination payments will be in line with the remuneration policy.

GOVERNANCE

n LTIS/RLAM LTIP

Exit payment policy The Group’s approach to any payments in the event of termination is to take account of the individual circumstances, including the reason for termination, any contractual obligations and applicable incentive plan and pension scheme rules. Executive directors’ contracts do not include any specific compensation for severance as a result of a change of control.

33%

67%

33%

Fixed

On-plan

Maximum

Note: This excludes buy out awards that were made on joining Royal London.

65

Additional Information

100%

2015 Directors’ remuneration report continued Annual report on remuneration Activities of the Remuneration Committee during 2015 During the year the Committee met 11 times and the table below sets out the principal activities of the Committee during 2015. Area

Activity

Directors’ remuneration policy

The Committee reviewed the Directors’ remuneration policy and agreed that no changes were required for 2016.

Incentive scheme targets

The Committee agreed the targets for the 2015 STIP, the 2015 LTIS and the 2015 RLAM LTIP.

Salary review

As part of the annual salary review, the Committee benchmarked salaries relative to the competitive market for each role within its remit, taking into consideration the performance of the executives.

Incentive scheme outcomes

The Committee reviewed STIP, LTIS and RLAM LTIP outcomes for 2015 in the context of overall Group performance and risk appetite.

LTIS measures

The Committee kept the performance conditions in the Group’s LTIS under review to ensure that they continued to align with the Group’s overall purpose and strategy, which includes maximising value for the Group’s members and customers.

Standardisation of benefits

The Committee continued an ongoing programme to standardise benefits where possible across the Group.

Administering Executive Director Holding Condition

The Committee reviewed the holding conditions and agreed that these would be expressed in pounds sterling as a percentage of salary, rather than as a minimum number of units.

Regulatory changes

The Committee considered the impact of new regulations from the PRA and FCA, including Solvency II and the Senior Insurance Managers Regime and considered how these should be adopted by the Group.

RLAM remuneration policy

The Committee reviewed the initial findings of a review of RLAM remuneration policy, which remains ongoing.

Committee advisors

The Committee reviewed its advisors during the year and reappointed Kepler, a brand of Mercer.

Exercise of discretion by the Committee Having considered the outcome of the scorecard and the overall performance of the Group, the Committee believed that the result delivered by the scorecard accurately reflects our strong performance and did not see a need to exercise any further discretion on this occasion.

Royal London Group   Annual Report and Accounts 2015

Strategic Report

Executive director remuneration in 2015 – audited The table below sets out the single figure for total remuneration for each executive director. Tim Harris

Phil Loney

Jon Macdonald

2014 (£000)

2015 (£000)

2014 (£000)

2015 (£000)

2014 (£000)

2015 (£000)

2014 (£000)

362

354

417

255

651

634

299

292

15

15

15

9

69

75

15

15

-

-

83

51

163

151

13

13

Pension benefits

181

144

-

-

-

5

29

31

TOTAL

558

513

515

315

883

865

356

351

STIP

348

389

462

325

984

904

267

312

TOTAL remuneration for performance year

906

902

977

640

1,867

1,769

623

663

Long-term incentives vesting

890

747

-

-

1,269

1,090

265

218

1,796

1,649

977

640

3,136

2,859

888

881

Salary Benefits Pension supplement

Total remuneration

Salary The salaries shown for executive directors are prior to participation in any benefit-related Salary Sacrifice arrangements.

Defined benefit pension This was calculated as 20 times the increase in accrued pension in the year, net of inflation and employee contributions.

Pensions supplement Jon Macdonald, Phil Loney and Tim Harris received cash supplements in lieu of pension of 15%, 25% and 20% of salary respectively. Jon Macdonald invested part of his supplement into the Group’s Defined Contribution Scheme.

Additional Information

67

Notice of AGM & Resolutions

Benefits Benefits include life insurance, private medical insurance, medical screening and company car (or cash allowance in lieu of a car). Phil Loney receives a transport and overnight expenses allowance to fund travel between his home and place of work, it is currently £46,000 per annum and is reviewed in April each year to ensure it has been set at the correct level.

Other – payment to leavers No payments other than those disclosed under the ‘Loss of office payments’ on page 70, the ‘Interest in deferred bonus awards’ and the ‘Interest in exercisable long-term incentive awards’ on page 74 were made to past directors.

European Embedded Value

Note: Salaries are shown gross of any Salary Sacrifice element and the pension benefits for Jon Macdonald and Phil Loney do not include employee contributions made by Salary Sacrifice. STIP values are the full value awarded for the performance year including amounts still subject to time-based conditions. The Long-Term Incentives values are based on the estimated value of awards exercisable (after a three-year performance period) at the reporting date and exclude any estimated value of awards deferred to future years (but include awards restricted by holding conditions).

Financial Statements

2015 (£000)

GOVERNANCE

Andrew Carter

2015 Directors’ remuneration report continued 2015 STIP outcome – audited The maximum STIP opportunity levels, performance ratings and overall STIP outcomes for the executive directors in respect of 2015 are shown in the table on the right.

Max award (as % of salary)

Outcome (as % of salary)

Andrew Carter

150

96

Tim Harris

120

110

Phil Loney

150

150

Jon Macdonald

120

89

2015 STIP performance was assessed against the following measures: Measure and weighting

Threshold

Target

Maximum

Financials

40%

Customers and Members

15%

Our people

15%

Assurance

15%

Building the future

15%

Actual performance 84% of Andrew Carter’s 2015 STIP award was assessed against RLAM specific measures: Measure and weighting

Threshold

Target

Maximum

RLAM performance

100%

Actual performance In publishing the relative STIP performance outcomes to targets, the Board aims to provide members with a clear understanding of how performance outcomes are rewarded for under the STIP whilst protecting the commercial sensitivity of the underlying metrics. Individual awards were calculated with reference to the overall scorecard outcomes, the maximum opportunity level, and the individual’s performance rating.

Royal London Group   Annual Report and Accounts 2015

One-third of STIP payments are deferred for three years. The value of the deferred element varies over the deferral period in line with the value of Royal London to its members (plus any ProfitShare allocated during the period). The STIP figures shown in the single figure table include the deferred element of the payment. Further details of outstanding deferred STIP awards are provided on page 74.

Strategic Report

Scheme

Andrew Carter

Initial award (as % of salary)

Vesting (as % of salary)

LTIS

80

37

RLAM LTIP

150

150

Phil Loney

LTIS

150

70

Jon Macdonald

LTIS

100

47

GOVERNANCE

Long-term incentives vesting in 2015 – audited The table on the right details the percentage of long-term incentive awards granted in 2013 which vested at 31 December 2015.

The performance measures and estimated outcomes for the 2013 LTIS are as follows: Measure and weighting

Threshold

Target

Maximum

Financial Statements

Growth in value of Royal London relative to peers

50%

Investment returns of Royal London With-Profits fund

20%

Growth in value of Royal London in absolute terms

15%

Growth in new business European Embedded Value

15%

Cumulative ProfitShare

Multiplier

Actual performance

The performance measures and outcomes for the 2013 RLAM LTIP were as follows: Threshold

Target

Maximum

Investment performance

70%

Revenue growth

30%

Notice of AGM & Resolutions

Measure and weighting

Actual performance

2013 LTIS and RLAM LTIP awards vest at the end of the three-year performance period, with vested awards paid 50% after three years, 25% after four years, and 25% after five years from the date of grant. All long-term incentive award outcomes are reviewed by internal audit.

69

Additional Information

In publishing the relative LTIS and RLAM LTIP performance outcomes to targets, the Board aims to provide members with a clear understanding of performance outcomes rewarded under the LTIS and RLAM LTIP, whilst protecting the commercial sensitivity of the underlying metrics.

2015 Directors’ remuneration report continued Loss of office payments – audited Details of loss of office payments made in 2015, and any outstanding loss of office payments, are provided in the table below. Name

Details of loss of office payments

John Deane

No additional payments were made to John Deane other than those in accordance with the terms disclosed in the 2012 Directors’ remuneration report.

Stephen Shone

No additional payments were made to Stephen Shone other than those in accordance with the terms disclosed in the 2013 Directors’ remuneration report.

Mike Yardley

No additional payments were made to Mike Yardley other than those in accordance with the terms disclosed in the 2011 Directors’ remuneration report.

Executive director pensions – audited Until his resignation, Andrew Carter was the only executive director who participated in the Group’s Defined Benefit pension scheme. Details of his pension rights under the scheme as at 31 December 2015 are outlined in the table below. Pension rights as at 31 December 2015 (£000) Andrew Carter

110

The main terms applying to his final salary pension accrued since 30 November 2001 are: [[ payable from normal retirement age of 60; [[ spouse’s pension of 55% of the director’s pension, payable on

death of the director; Payments to past directors - audited No payments other than those disclosed under the ‘Loss of office [[ pensions in payment increase in line with RPI (up to a payments’ above, the ‘Interest in Deferred Bonus Awards’ and the maximum of 7.5% each year) in relation to pension accrued ‘Interest in excercisable long-term incentive awards’ on page 74. before 1 April 2011 and in line with CPI (up to a maximum of 2.5% each year) in relation to pension accrued from 1 April 2011; [[ pensionable salary increases are capped at a maximum of

2.5% each year in respect of service from 1 April 2011; and [[ no additional benefit is receivable in the event of

early retirement. Non-executive director remuneration in 2015 – audited The non-executive directors received the following remuneration: Annual fee (£000)

Committee chairmanship fee (£000)

Additional fee1 (£000)

Total (£000)

2015

2014

2015

2014

2015

2014

2015

2014

Sally Bridgeland

54

-

8

-

-

-

62

--

Ian Dilks

56

7

-

-

-

-

56

7

Duncan Ferguson

56

55

30

33

11

23

97

111

Tracey Graham

56

54

20

20

11

-

87

74

-

55

18

15

-

-

18

70

56

55

20

20

11

23

87

98

226

220

-

-

-

-

226

220

56

55

22

17

11

6

89

78

Kathryn Matthews Andrew Palmer Rupert Pennant-Rea David Weymouth

1 Additional fees were paid to NEDs in relation to extra responsibilities and time commitment relating to Solvency II were over and above the time commitment required in their letter of appointment. 2 Kathryn Matthews resigned as a director on 31 December 2015 and remained as Chair of the Investment Committee until 30 June 2015 when Sally Bridgeland become Chair of the Investment Committee. 3 Duncan Ferguson receives a fee for his role as the Senior Independent Director and this is included in the disclosure of his Committee chairmanship fee.

Royal London Group   Annual Report and Accounts 2015

Strategic Report

2009 Group Chief Executive

Total single figure (£000s)

Phil Loney

2010

The comparator group of life insurers for Royal London comprises Aviva, Legal & General, Old Mutual, Prudential, Friends Life, Standard Life and St. James’s Place. These represent the companies with which Royal London most directly competes. We will continue to review this group of life insurers to ensure that they are the most relevant peer group to compare to.

2011

2012

Restated 2013

2014

2015

1,403

1,703

2,614

2,859

3,136

Bonus vesting as a % of maximum

-

-

93

85

93

95

100

LTIS vesting as a % of maximum

-

-

-

-

71

39

37

2009

2010

2011

2012

2013

2014

2015

1,385

2,343

4,420

-

-

-

-

82

94

92

-

-

-

-

-

-

-

-

2013 restated to reflect the percentage of Royal London units which vested.

Total single figure (£000s)

Mike Yardley

Bonus vesting as a % of maximum LTIS vesting as a % of maximum

No maximum award limit. Value at vesting included in total single figure stated above.

Percentage change in Royal London EEV since 2008 versus life insurance comparator group* 160 140

● Royal London Group ● Comparator group

120

European Embedded Value

-

Financial Statements

-

Group Chief Executive

GOVERNANCE

Group Chief Executive’s remuneration compared to Royal London growth The table and chart below shows the Group Chief Executive’s single remuneration figure compared to EEV growth over the past six years. It should be noted that Phil Loney joined the Group on 1 October 2011 and the remuneration shown before that date is that of Mike Yardley who resigned on 30 September 2011.

100 80

40 20 0

2008

2009

2010

2011

2012

2013

2014

2015

Note: The 31 December 2015 comparator group percentage change is estimated based on information publicly available. * EEV for Royal London and the comparator group includes cumulative dividends paid since 31 December 2008.

In addition, our ‘Stepforward’ programme enables our people to undertake voluntary work in and around our communities, and the Group has set a target to raise £100,000 for our national charity partner Leukaemia & Lymphoma Research over two years. In addition to supporting social responsibility at a corporate level, we actively encourage it at an individual level, enabling our people to donate tax effectively through ‘Give As You Earn’ schemes. These schemes have contributed significant donations to charity.

71

Additional Information

Supporting social responsibility At Royal London, we believe social responsibility is at the centre of making mutuality meaningful. Phil Loney, Group CEO, leads by example. As well as paying all applicable UK taxes, Phil donates 15% of his pre-tax salary and 25% of the pre-tax value of all STIP and LTIS payments to charity. In light of the Group CEO’s pay rise for 2016 onwards, as determined by the Remuneration Committee, Phil will increase charitable donations made from his salary from 15% to 25%.

Notice of AGM & Resolutions

60

2015 Directors’ remuneration report continued Group CEO remuneration compared to other employees During the year Phil Loney’s remuneration increased by 6.4% compared to 2014, whereas the average employee’s remuneration increased by 5.4%. Change in remuneration % change in base salary 2014 to 2015

% of target STIP earned

3.0 4.5

Chief Executive All employees

% change in STIP 2014 to 2015

% change in total remuneration 2014 to 2015

200

8.8

6.4

190

17.5

5.4

Note: ‘% of target STIP earned’ is not the level of bonus earned. For example, if an employee has a target bonus of 10% of salary and an average rating they would have received 16.2% of salary (10% x 162%). ‘% of target STIP earned’ analysis includes all participants in the 2015 STIP, not just those employed at 31 December 2015. Total remuneration includes salary, allowances, benefits and STIP (excludes long-term incentives and pension which are deemed too volatile to make meaningful comparisons).

Employee performance has a significant impact on the annual STIP received by employees in any given year. The Committee therefore considers employees who received the same performance rating as the Group CEO for 2015 as the most meaningful group with which to compare the change in Group CEO remuneration. In 2015, for those employees with the same performance rating as the CEO, total remuneration increased by 14.5%. Implementation of remuneration policy in 2015 As part of the annual executive directors’ remuneration review the following matters are taken into account:

[[ the performance of Royal London Group and its business

units; and [[ the annual review of remuneration for all employees in the

[[ the overall Group cap on increase in salary bill; [[ an external review of executive reward; [[ the current remuneration package, experience, achievements

Royal London Group. The following section sets out how remuneration policy will be implemented in 2016, including details of salary increases and short- and long-term incentive awards.

and individual performance; Salaries Salaries for executive directors were reviewed in accordance with the remuneration policy. The following table sets out the annual salaries payable to each director from 1 April 2016.

Andrew Carter Tim Harris Phil Loney Jon Macdonald

2016 (£000)

2015 (£000)

Increase (%)

372

364

2.2

431

419

2.9

736

656

12.2

306

300

2.0

Following a thorough and independent benchmarking exercise undertaken in 2016 to compare the remuneration of the Group Chief Executive with both the current remuneration and five-year trend of comparator group roles, the Committee approved a 12.2% increase to realign both salary and total compensation with the correct market level. STIP opportunities for 2016 In line with remuneration policy, STIP opportunities and performance measures for the executive directors in respect of 2016 performance are as follows: Maximum (as % of salary) Andrew Carter

150

Tim Harris

120

Phil Loney

150

Jon Macdonald

120

Performance measure selection and approach to target setting: 2016 STIP

10% 15% 45%

Financials Best customer propositions Our people Assurance Building the future

10% 20%15%

In the case of the CEO of Wealth, Andrew Carter, 73% of the STIP is based on measures specific to RLAM performance. Further detail on targets set for each measure will be provided in the Directors’ remuneration report for 2016, subject to commercial sensitivity.

Royal London Group   Annual Report and Accounts 2015

Strategic Report

Long-term incentive awards granted in 2016 The following long-term incentive awards will be granted to executive directors in 2016, in accordance with the remuneration policy. Face value (as % of salary)

% vesting for plan performance

LTIS

80

0

RLAM LTIP

150

34

Tim Harris

LTIS

150

0

Phil Loney

LTIS

150

0

Jon Macdonald

LTIS

100

0

Performance measures for LTIS awards granted in 2016 are shown in the chart below.

Financial performance Customer Experience Investment performance Quality of proposition

10% 25%

31 December 2018

Pension and benefits Pension and benefits will be implemented in line with the stated remuneration policy in 2016. Non-executive director fees for 2016 The annual base fee for non-executive directors in 2016 is £58,100. Additional fees are payable for Committee chairmanship as follows: [[ Board Risk Committee: £22,000;

Financial Statements

Performance measure selection and approach to target setting: 2016 LTIS

End of performance period

GOVERNANCE

Andrew Carter

Scheme

[[ Investment Committee: £15,000;

55%

[[ With-Profits Committee: £20,000;

10%

[[ Remuneration Committee: £20,000.

In addition, a capital strength multiplier is determined and applied by the Committee at the end of the performance period. The multiplier reflects the potential ProfitShare capacity over the performance period. The RLAM LTIP is linked 70% to RLAM investment performance and 30% to RLAM revenue growth.

In addition, non-executive directors may receive additional fees in respect of time commitment over and above that normally required, as described in the remuneration policy. Following a thorough and independent benchmarking exercise undertaken in 2016 to compare the annual fee for the Group Chairman with both the current remuneration and five-year trend of comparator group roles, the Committee approved an 8.65% increase to realign with the correct market level.

Units held by executive directors The table below sets out the value of units held by executive directors as at 31 December 2015 and their individual holding requirements. Value of units held at 31 Dec 2015 (£000)

Andrew Carter

291

632

Tim Harris

629

108

Phil Loney

1,312

1,800

300

537

Jon Macdonald

Note: Current holding requirements are stated as a percentage of salary. Total share interests include all long-term incentives which have satisfied their performance conditions and are value based on their starting unit price. RLAM LTIP awards are not subject to holding conditions.

73

Additional Information

Holding requirement (£000)

Notice of AGM & Resolutions

Actual targets set for each measure will be disclosed in the Directors’ remuneration report for 2018, unless the Committee considers them too commercially sensitive to disclose.

The annual fee for the Group Chairman is £245,000 and the annual fee for the Senior Independent Director is £13,500.

European Embedded Value

[[ Audit Committee: £20,000; and

2015 Directors’ remuneration report continued Outstanding awards under incentive schemes – audited The following tables provide details of outstanding awards under incentive schemes, including deferred STIP and other deferred bonus awards. Interest in deferred bonus awards Value of non-exercisable awards as at 31.12.2014 (£000)

Paid in 2015 (£000)

Deferred in 2015 (£000)

Change in value of non-exercisable awards during 2015 (£000)

Value of non-exercisable awards as at 31.12.2015 (£000) 471

Andrew Carter

667

356

129

31

John Deane

429

337

-

3

95

Tim Harris

-

-

108

11

119

Phil Loney

986

164

301

85

1,208

Jon Macdonald

269

-

104

29

402

Stephen Shone

826

526

-

16

316

Mike Yardley

500

500

-

-

-

Notes: The value of all non-excercisable awards is estimated based on information available at the reporting date.

Interest in exercisable long-term incentive awards Value of exercisable awards as at 31.12.20141 (£000)

Transfer from non-exercisable awards (£000)

Change in value of exercisable awards during 2015 (£000)

Paid in 2015 (£000)

Value of exercisable awards as at 31.12.2015 (£000)

Andrew Carter

911

890

(1)

(911)

890

John Deane1

240

255

(2)

(238)

255

1,936

1,269

(5)

(1,931)

1,269

Jon Macdonald

330

335

-

(401)

265

Stephen Shone

603

523

-

(603)

523

Phil Loney

Notes: The value of exercisable awards is estimated based on information available at the reporting date and includes awards subject to holding conditions. 1 The awards for John Deane have been recalculated due to incorrect pro rating being applied on leaving. In addition a correcting payment of £92,129 was made in June 2015 relating to the 2011 LTIS.

In addition to the previously noted exercisable awards, the following values have been estimated in respect of plans which have not reached their third anniversary or date of exercise. Non-exercisable as at 31.12.2015 Total value as at 31.12.20141 (£000)

Andrew Carter5

Transfer to exercisable awards2 (£000)

Change in value of nonexercisable awards during 2015 (£000)

Value of nonexercisable awards subject to time3 (£000)

Value of nonexercisable awards subject to time and performance4 (£000)

Total value as at 31.12.2015 (£000)

1,645

(890)

826

196

1,385

John Deane6

240

(255)

15

-

-

1,581 -

Tim Harris

330

-

423

-

753

753

Phil Loney

2,057

(1,269)

1,028

656

1,160

1,816

Jon Macdonald

585

(335)

309

205

354

559

Stephen Shone

603

(523)

44

124

-

124

Notes: The value of non-exercisable awards is estimated based on information available at the reporting date. Included in this amount are buyout awards for Jon Macdonald that were made on joining Royal London and disclosed in the Directors’ remuneration report for the year in which he joined. 1 This disclosure shows the face value of non-exercisable long-term incentive awards as at the start and end of the year. 2 This is the value of long-term incentive awards that became exercisable in 2015 and are no longer subject to performance or time-based conditions. 3 This is the value of long-term incentive awards that are no longer subject to performance, but may not be exercised until a future date. 4 This is the value of long-term incentive awards that are subject to further performance, i.e. the performance period has not yet ended. 5 Andrew Carter’s RLAM LTIP has been restated to be the full amount of the award, which is not yet exercisable and subject to performance in accordance with note 1. 6 The awards for John Deane have been recalculated due to incorrect pro rating being applied on leaving. In addition a correcting payment of £92,129 was made in June 2015 relating to the 2011 LTIS.

Royal London Group   Annual Report and Accounts 2015

Strategic Report

Service contracts The main terms of executive director service contracts are provided in the table below. Other executive director terms

Duration

Continuous term to retirement age.

Continuous term to retirement age.

Notice period

12 months by the Group.

12 months by the Group.

12 months by the CEO.

Up to 12 months by the executive director.

Pay in lieu of notice

Pay in lieu of notice (salary and contractual benefits) if employment is terminated by the Group for reasons other than misconduct.

Pay in lieu of notice (salary and contractual benefits) if employment is terminated by the Group for reasons other than misconduct.

Other allowances

Group reimburses reasonable travel and overnight expenses in connection with work-related travel to and from home to place of work.

Not applicable.

The main terms of non-executive directors’ letters of appointment are provided in the table below. Notice period

Sally Bridgeland

10 November 2014

3 months

Ian Dilks

17 September 2014

3 months

Duncan Ferguson

31 March 2010

3 months

Tracey Graham

19 December 2012

3 months

Andrew Palmer

25 March 2011

3 months

Rupert Pennant-Rea

4 September 2012

3 months

David Weymouth

24 April 2012

3 months

Remuneration Committee meetings in 2015 The Remuneration Committee met 11 times in 2015. During 2015, the members of the Committee were as follows: [[ Tracey Graham (Chairman)

[[ Andrew Palmer

Additional Information

75

Notice of AGM & Resolutions

[[ Rupert Pennant-Rea

The Committee received support and advice from external advisers during the year. From time to time it undertakes due diligence to ensure that the advice it receives is independent. The table below provides details of the external advisers to the Committee and the respective fees paid to them in 2015. Fees are charged based on the scope and requirements of the work as agreed with the Committee or Royal London Group as a whole.

European Embedded Value

Date of letter of appointment

Financial Statements

All executive director service contracts require the mitigation of any pay in lieu of notice.

GOVERNANCE

Group CEO terms

2015 Directors’ remuneration report continued 

Nature of advice provided to the Remuneration Committee

Kepler, a brand of Mercer

Pinsent Masons

PricewaterhouseCoopers

Total fees (£000)

Independent advice on all aspects of remuneration of the executive directors and senior executives. Provides support on other aspects of Group remuneration for the Committee.

Nature of advice provided to other parts of the Royal London Group

Appointed by

164 None.

Legal support with regard to the operation of the Group’s incentive plans and matters pertaining to the terms of appointment of directors. Agreed upon procedures on RLAM incentive schemes.

Appointed by the Remuneration Committee. Kepler’s parent company, Mercer, provides unrelated services to the Group in the areas of fund management performance tracking and provision of advice to the pension Trustees. However, the Committee is satisfied that Kepler, in providing remuneration advice to the Committee, did not have any connection with the Group that impaired its independence. Advisers to the Group on HR matters.

13 General legal advice.

87 Audit, tax and non-audit services.

Appointed by the Committee but auditors to the Group.

Distribution statement The illustration below shows the increase in EEV profit before tax and ProfitShare, EEV operating profit, ProfitShare and total employee pay expenditure in 2015. EEV profit before tax and ProfitShare

£259m

2014

EEV operating profit before exceptional items

£277m

£220m

2015

2014

ProfitShare (net of tax)

Total employee pay expenditure

£244m

2015

£60m

£70m

2014

2015

£190m

£203m

2014

2015

Consideration of members’ views The voting outcome on the Directors’ remuneration report at the 2014 and 2015 AGMs is shown in the table below. Members expressed no adverse views on executive remuneration at the AGM. DRR for year

Number of votes cast for

Percentage of votes cast for (%)

Number of votes against

Percentage of votes cast against (%)

Total votes cast

Number of votes withheld

15,732

96.7

536

3.3

16,268

315

14,943

95.1

771

4.9

15,714

424

2015 2014

By order of the Board

Tracey Graham Chairman of the Remuneration Committee

Royal London Group   Annual Report and Accounts 2015

Strategic Report

Auditors’ report Independent auditors’ report to the members of The Royal London Mutual Insurance Society Limited

Our opinion In our opinion: [[ the Royal London Mutual Insurance

[[ the Group financial statements have

been properly prepared in accordance with International Financial Reporting Standards (‘IFRSs’) as adopted by the European Union;

The financial reporting framework that has been applied in the preparation of the financial statements is applicable law and IFRSs as adopted by the European Union and, as regards the Parent company financial statements, as applied in accordance with the provisions of the Companies Act 2006. Our audit approach Materiality Overall Group materiality: £85m which represents 2.6% of Unallocated Divisible Surplus (“UDS”).

• guaranteed annuity option (GAO)

take-up rate assumptions; • persistency assumptions; and • expense assumptions.

77

We designed our audit by determining materiality and assessing the risks of material misstatement in the financial statements. In particular, we looked at where the directors made subjective judgements, for example in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain. As in all of our audits we also addressed the risk of management override of internal controls, including evaluating whether there was evidence of bias by the directors that represented a risk of material misstatement due to fraud. The risks of material misstatement that had the greatest effect on our audit, including the allocation of our resources and effort, are identified as ‘areas of focus’ in the tables on pages 78 to 80. We have also set out how we tailored our audit to address these specific areas in order to provide an opinion on the financial statements as a whole, and any comments we make on the results of our procedures should be read in this context. This is not a complete list of all risks identified by our audit.

Additional Information

which include a summary of significant accounting policies and other explanatory information.

The scope of our audit and our areas of focus We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) (“ISAs (UK & Ireland)”).

Notice of AGM & Resolutions

[[ the notes to the financial statements,

[[ valuation of complex investments.

European Embedded Value

Audit scope The Group is structured along four statements have been properly prepared core segments being Intermediary, Consumer, Wealth and ‘Central and in accordance with IFRSs as adopted by the European Union and as applied Other items’. The Intermediary segment is further sub-divided into the individual in accordance with the provisions of ‘brands’ that have been acquired by the Companies Act 2006; and Royal London which, together with the subsidiary entities within the Wealth [[ the financial statements have been and Central and Other items segments, prepared in accordance with the each represented a reporting unit for requirements of the Companies the purposes of our scoping assessment. Act 2006. Seven of the 13 reporting units were audited by the Group audit team. The What we have audited reporting units where we performed The financial statements, included audit work accounted for 96.3% of the within the Annual Report, comprise: transfer to UDS and 99.5% of the total [[ the Group and Parent company balance asset balance. Overall we concluded that this gave us the evidence we needed for sheets as at 31 December 2015; our opinion on the financial statements as a whole. [[ the Consolidated statement of comprehensive income for the year Areas of focus then ended; Our areas of focus during the audit were: [[ the Group and Parent company statements of cash flows for the year [[ the valuation of insurance contract then ended; and liabilities, focussing particularly on: [[ the Parent company financial

[[ pension scheme liability valuation; and

Financial Statements

Society Limited’s Group financial statements and Parent company financial statements (the ‘financial statements’) give a true and fair view of the state of the Group’s and of the Parent company’s affairs as at 31 December 2015 and of the Group’s result and the Group’s and the Parent company’s cash flows for the year then ended;

Certain required disclosures have been presented elsewhere in the Annual Report, rather than in the notes to the financial statements. These are crossreferenced from the financial statements and are identified as audited.

GOVERNANCE

Report on the financial statements

Auditors’ report continued Area of focus

How our audit addressed the area of focus

Valuation of insurance contract liabilities Refer to page 87 (Accounting policies) and page 129 (note 25) for further information GAO take up rates GAOs impact the valuation of insurance contract liabilities within the Group financial statements. The Group financial statements include liabilities of £1.8bn as at 31 December 2015 (see note 44 to the financial statements for more information) relating to management’s estimate of the future cost of GAOs. GAOs provide policyholders with the option to take out annuities at a guaranteed minimum rate upon retirement. We applied particular focus on GAOs because the liabilities are sensitive to changes in assumptions, including the proportion of eligible policyholders taking the GAO (the ‘GAO take up rate’). The Group makes its assumptions about the GAO take up rate using ‘experience analysis’ based on historical data about policyholder behaviour. As a consequence of the Finance Act 2014, individuals now also have greater choice at retirement about access to their pension savings. Since April 2015 policyholders with larger policies have been able to take the whole of the fund as cash, in the way that holders of smaller policies already can. Estimating the long-term GAO assumption is further complicated by the potential introduction in April 2017 of legislation that would allow a policyholder to sell their annuity to a third party, which under current economic circumstances would be expected to increase the GAO take up rate. This may mean that policyholder behaviour changes in the future and is an important judgement affecting the calculation of the liabilities.

Using PwC actuarial specialists, we obtained evidence over key inputs and assumptions as follows: [[ we tested the historic data being used in management’s experience analysis and found no material exceptions; [[ we examined management’s analysis and rationale on whether recent short-term changes to the GAO take up rate provided sufficient and robust evidence of a change to the long-term trend; [[ we focused particularly on the size of the policies that have vested over the past two years, using audited data from the policy administration systems to re-perform management’s GAO take-up percentage calculation; [[ to get comfortable with the GAO take up rate assumptions used by management, we compared management’s assumptions against the actual month by month movement in GAO take up trends between April 2014 and March 2016, considering any one-off changes that may have been caused by an increase in policyholders eligible to take their funds as cash. We also compared this data to experience data prior to April 2014 to assess long-term changes in policyholder behaviour; [[ we assessed management’s judgement in setting the take up rate assumption when assessing the importance of the differing GAO take up rate experience over the past two years as the Finance Act 2014 has been embedded, together with an assessment of changes to upcoming legislation (for example in the second-hand annuity market) which may change the take up rate in the future; [[ we assessed the sensitivity on reserves from applying different take up rates and assessed how this information was used to inform the judgements made when choosing the final assumptions; and [[ finally, we compared the GAO take up rate assumptions with those adopted by other insurers using our in-house industry benchmarking data. This is an inherently subjective area, but we found that management’s approach to determining the GAO take up rate assumptions for use in the valuation model was supported by the evidence we obtained.

Royal London Group   Annual Report and Accounts 2015

Strategic Report

Area of focus Persistency assumptions

The Group has material intangible assets, in particular the PVIF, being the value of the projected future profits arising from the income from servicing policies. We focused on persistency because this is a significant assumption for the value of future income from servicing policies and therefore valuation of the PVIF intangible, being the assumption relating to retention of policies over time.

Persistency assumptions are driven by past experience (the experience investigations), and assumptions about future changes to policyholder behaviour which are difficult to predict and therefore there is judgement applied when setting an appropriate basis.

[[ past events in the data we tested and whether these events better reflect the likely future experience when considering weighting the experience observed; and [[ the validity of the analysis performed on the data by management and their conclusions drawn. We understood the relevant factors being taken into account by management and compared their view with our understanding of the impact on the wider market and on the experience data that management had observed from the persistency in previous time periods. Using our understanding of the expected impact of regulatory changes we tested management’s assumptions including: [[ recalculating the experience observed across a sample of policies selected from the total reserve analysis. This recalculation was performed with no material exceptions; and [[ observing persistency experience and analysing the experience for lines of business that may be affected by policyholder behaviours as a result of legislative or regulatory changes. We found no material issues as a result of this testing. We also compared the persistency assumptions with those adopted by other insurers using our in-house industry benchmarking data. This is an inherently subjective area. Based on the results of our testing, we found that the assumptions were supportable based on the evidence we obtained. We obtained evidence over key inputs and assumptions as follows:

The Group financial statements include liabilities for the estimated future expenses that would be incurred in continuing to maintain the existing policies to maturity. These expense liabilities are included within the insurance and investment contract liabilities. See note 27 to the financial statements for more information.

[[ we tested the completeness of the expenses used in the calculation of the expense liabilities through reconciling the total expenses recorded within the accounting records of the Group, to the total expenses input into the ABC model and found them to be materially consistent;

The expense assumptions are calculated using an Activity Based Costing (ABC) model. The significant assumptions and judgements in this model are the overall costs in the future and cost allocations between products which have different expected durations and therefore different expected product lifetime costs. The most significant area of risk with expense reserving lies in the methodology used to categorise expenses between one-off, acquisition and maintenance, of which only the latter is used in the expense reserving calculation. Any change in methodology applied could have a significant impact on the quantum of the expense reserve.

[[ we tested the total number of policies used in setting expense assumptions by corroborating these to the Group policy numbers used in the financial statements with no material exceptions; [[ we assessed significant judgements made in setting the assumptions such as the split between acquisition and maintenance costs, the oneoff project costs, and the allocation of costs to different products. This was performed by agreeing a sample of costs to supporting evidence, and tracing the allocation of each cost within the sample through the model, to verify that the final allocation was appropriate. We found these judgements to be reasonable;

Notice of AGM & Resolutions

Expense assumptions

European Embedded Value

Persistency can be impacted by a range of factors including changes to regulation for products sold by the Group such as the Finance Act 2014. We focused on whether management have made appropriate assumptions against this background.

With respect to the experience investigations, we assessed:

Financial Statements

When valuing future cash flows, an assumption needs to be made regarding how many policies will be in force in future time periods. Lapses are a key element of future policies in-force and thus a key assumption when valuing the total quantum of insurance contract liabilities.

We tested the accuracy of the data being used in management’s experience analysis by checking that the historical data used to calculate the previously observed persistency rates (‘the source of experience’) is consistent with the data used in the valuation. We also performed controls testing over the extraction and calculation of the policyholder retention from the data. We found no material exceptions from this testing.

GOVERNANCE

Persistency impacts the value of the Group insurance contract liabilities and Group intangible assets. The Group financial statements include intangible assets relating to management’s estimate of the Present Value of acquired In-force Business (PVIF), which total £186m across the Group as at 31 December 2015. See note 28 to the financial statements for more information. Insurance contract liabilities total £36.2bn across the Group as at 31 December 2015. See note 25 to the financial statements for more information.

How our audit addressed the area of focus

[[ we recalculated the per policy expense across a sample of policies. This recalculation was performed with no material exceptions; and

79

Additional Information

[[ we compared the resulting expense assumptions to the expenses incurred over the prior 12 months, along with any known expected increases, in order to satisfy ourselves that the assumptions were sufficient in aggregate and we found the results comparable.

Auditors’ report continued Area of focus

How our audit addressed the area of focus

Pension scheme liability valuation See note 1 to the financial statements for the directors’ disclosures of the related accounting policies, judgements and estimates and note 38 for detailed pension disclosures. The Group has a defined benefit pension plan net surplus of £71m (2014 £48m), comprising assets of £2,274m and liabilities of £2,203m. The valuation of the pension liability requires significant levels of judgement and technical expertise in choosing appropriate assumptions. Changes in assumptions about inflation, discount rates, and mortality can have a material impact on the calculation of the liability.

We tested the reliability of the data used to determine the pension scheme valuation by: [[ testing the completeness and accuracy of the scheme data used by the pension administrator by agreeing a sample of member records back to source documentation and found no material exceptions. We evaluated management’s assumptions in relation to the valuation of the liabilities in the pension plan as follows: [[ we assessed the appropriateness of the discount rate, Retail Price Index/Consumer Price Index (inflation) spread and life expectancy of both pensioners and non-pensioners. We found them to be consistent with the prior year and within an acceptable range using an internally developed range of acceptable assumptions for valuing pension liabilities, based on our view of various economic indicators; and [[ we compared the key assumptions used against those used by other companies and found the assumptions to be broadly consistent.

Valuation of complex investments See note 1 to the financial statements for the directors’ disclosures of the related accounting policies and use of estimates. Note 16 provides further information and quantification on judgements and estimates specific to the investment risks. Valuation of complex investments

We performed testing for directly held property as follows. We:

The Group holds investments in property, private equity and hedge funds. We focused on this area because these asset classes are complex in nature and there is subjectivity in their valuation due to limited or no observable market prices.

[[ obtained valuation reports from management’s valuation experts and assessed their independence and competency;

The valuation of investment property is obtained through valuation reports from management’s valuation experts. The valuation of private equity and hedge funds is obtained through independent valuation confirmations from the fund manager.

[[ assessed the assumptions and methodology used by management’s valuation experts by using internal PwC valuation specialists to check these were appropriate. We found the assumptions were supported by the audit evidence obtained; and [[ agreed a sample of inputs used by management’s valuation experts to source documentation. We found that the inputs and assumptions used to value the investment property were supported by audit evidence obtained and in line with industry practice. We performed detailed testing for private equity and hedge funds as follows. We: [[ obtained independent confirmations for 47% of the fair value as at 31 December 2015 directly from fund managers; [[ considered the fund managers’ bases of valuation for these funds and assessed the appropriateness of the valuation methods used; [[ for a sample of funds, compared the unaudited quarterly statements with the last audited net asset value to obtain evidence over the accuracy of the reporting of the fund manager; [[ considered the appropriateness of the accounting policies applied by the funds; and [[ for a sample of funds, obtained post year-end valuations to obtain evidence of the valuations as at 31 December 2015. We found that, based on the testing performed, the valuations of private equity and hedge funds are appropriately stated.

Royal London Group   Annual Report and Accounts 2015

Strategic Report

Materiality The scope of our audit was influenced by our application of materiality. We set certain quantitative thresholds for materiality. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures on the individual financial statement line items and disclosures and in evaluating the effect of misstatements, both individually and on the financial statements as a whole. Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:

£85m (2014 £85m).

How we determined it

Our primary benchmark used to determine materiality was the unallocated divisible surplus. Our overall materiality represented 2.6% of the UDS (2014 2.7%).

Rationale for benchmark applied

We had regard to the UDS as disclosed in note 31 to the financial statements which represents the amount of surplus yet to be allocated to the members of the Company to whom this opinion is addressed. When analysing the facts and circumstances specific to Royal London, we used our professional judgement, considering the reasonableness of the overall materiality in relation to the Key Performance Indicator metrics reported by the Group including the operating profit, the ProfitShare and the IFRS result before tax.

Going concern The directors have voluntarily complied with Listing Rule 9.8.6(R)(3)(a) of the Financial Conduct Authority and provided a statement in relation to going concern, set out on page 44, required for companies with a premium listing on the London Stock Exchange.

The directors have requested that we review the statement as if the Parent company were a premium listed company. We have nothing to report having performed our review. The directors have voluntarily chosen to report how they have applied the UK Corporate Governance Code – An Annotated Version for Mutual Insurers (the ‘Code’). Under ISAs (UK & Ireland) we are required to report to you if we have anything material to add or to draw attention to in relation to the directors’ statement about whether they considered it appropriate to adopt the going concern basis in preparing the financial statements. We have nothing material to add or to draw attention to.

Additional Information

81

As noted in the directors’ statement, the directors have concluded that it is appropriate to adopt the going concern basis in preparing the financial statements. The going concern basis presumes that the Group and Parent company have adequate resources to remain in operation, and that the directors intend them to do so, for at least one year from the date the financial statements were signed. As part of our audit we have concluded that the directors’ use of the going concern basis is appropriate. However, because not all future events or conditions can be predicted, these statements are not a guarantee as to the Group’s and Parent company’s ability to continue as a going concern.

Notice of AGM & Resolutions

We agreed with the Audit Committee that we would report to them misstatements identified during our audit above £4.25m (2014 £4.25m) as well as misstatements below that amount that, in our view, warranted reporting for qualitative reasons.

European Embedded Value

Overall Group materiality

Financial Statements

For the Group’s seven individually financially significant reporting units a full scope audit was performed. Additional balances were selected to provide coverage across all material financial statement line items and to perform audit work over the areas of focus we identified and which we have set out above. Reporting units were each allocated an individual component materiality ranging from £30m to £70m. A reporting unit was deemed to be financially significant if it contained more In addition, individual balances within than 10% of the total Group insurance or other reporting units were also selected investment contract liabilities. Reporting as ‘in-scope’ based on size. units were also deemed to be significant if they contained balances relating to one Our audit scope allowed us to test 96.3% of the transfer to UDS and 99.5% of the of the areas of audit focus. total asset balance. Overall we concluded that this gave us the evidence we needed for our opinion on the financial statements as a whole.

GOVERNANCE

How we tailored the audit scope We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial statements as a whole, taking into account the structure of the Group, the accounting processes and controls, and the industry in which the Group operates.

Auditors’ report continued Other required reporting Consistency of other information Companies Act 2006 opinion In our opinion, the information given in the Strategic Report and the Directors’ report for the financial year for which the financial statements are prepared is consistent with the financial statements. ISAs (UK & Ireland) reporting As a result of the directors’ voluntary reporting on how they have applied the Code, under ISAs (UK & Ireland) we are required to report to you if, in our opinion: [[ Information in the Annual Report is:

We have no exceptions to report.

• materially inconsistent with the information in the audited financial statements; or • apparently materially incorrect based on, or materially inconsistent with, our knowledge of the Group and Parent company acquired in the course of performing our audit; or • otherwise misleading. [[ The statement given by the directors on page 49, in accordance with provision C.1.1 of the Code, that they consider the Annual Report taken as a whole to be fair, balanced and understandable and provides the information necessary for members to assess the Group’s and Parent company’s performance, business model and strategy is materially inconsistent with our knowledge of the Group and Parent company acquired in the course of performing our audit.

We have no exceptions to report.

[[ The section of the Annual Report on page 51, as required by provision C.3.8 of the Code, describing the work of the Audit Committee does not appropriately address matters communicated by us to the Audit Committee.

We have no exceptions to report.

The directors’ assessment of the prospects of the Group and of the principal risks that would threaten the solvency or liquidity of the Group As a result of the directors’ voluntary reporting on how they have applied the Code, under ISAs (UK & Ireland) we are required to report to you if we have anything material to add or to draw attention to in relation to: [[ The directors’ confirmation in the Annual Report that they have carried out a robust assessment of the principal risks facing the Group, including those that would threaten its business model, future performance, solvency or liquidity.

We have nothing material to add or to draw attention to.

[[ The disclosures in the Annual Report that describe those risks and explain how they are being managed or mitigated.

We have nothing material to add or to draw attention to.

[[ The directors’ explanation in the Annual Report as to how they have assessed the prospects of the Group, over what period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions.

We have nothing material to add or to draw attention to.

The directors have requested that we review the directors’ statement that they have carried out a robust assessment of the principal risks facing the Group and the directors’ statement in relation to the longer-term viability of the Group, set out on page 19. Our review was substantially less in scope than an audit and only consisted of making inquiries and considering the directors’ process supporting their statements; checking that the statements are in alignment with the relevant provisions of the Code; and considering whether the statements are consistent with the knowledge acquired by us in the course of performing our audit. We have nothing to report having performed our review.

Royal London Group   Annual Report and Accounts 2015

Strategic Report

[[ we have not received all the

information and explanations we require for our audit; or [[ adequate accounting records have not

been kept by the Parent company, or returns adequate for our audit have not been received from branches not visited by us; or [[ the Parent company financial

We have no exceptions to report arising from this responsibility.

Other voluntary reporting

Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and ISAs (UK & Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors. This report, including the opinions, has been prepared for and only for the Parent company’s members as a body in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.

83

financial statements. We primarily focus our work in these areas by assessing the directors’ judgements against available evidence, forming our own judgements, and evaluating the disclosures in the financial statements. We test and examine information, using sampling and other auditing techniques, to the extent we consider necessary to provide a reasonable basis for us to draw conclusions. We obtain audit evidence through testing the effectiveness of controls, substantive procedures or a combination of both. In addition, we read all the financial and non-financial information in the Annual Report to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.

Gavin Phillips (Senior Statutory Auditor) for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors London 30 March 2016 a. The maintenance and integrity of the Royal London Mutual Insurance Society Limited website is the responsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the website. b. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Additional Information

What an audit of financial statements involves An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial Matter on which we have agreed to report by exception statements are free from material misstatement, whether caused by fraud Corporate Governance statement The Parent company voluntarily prepares or error. This includes an assessment of: a Corporate Governance statement in accordance with the provisions of [[ whether the accounting policies are the Code. appropriate to the Group’s and the Parent company’s circumstances and have been consistently applied and adequately disclosed; In our opinion, the part of the Directors’ remuneration report to be audited has been properly prepared in accordance with the Companies Act 2006.

[[ the overall presentation of the

Notice of AGM & Resolutions

Opinion on additional disclosures Directors’ remuneration report The Parent company voluntarily prepares a Directors’ remuneration report in accordance with the provisions of the Companies Act 2006. The directors have requested that we audit the part of the Directors’ remuneration report specified by the Companies Act 2006 to be audited as if the Parent company were a quoted company.

Our responsibilities and those of the directors As explained more fully in the Directors’ responsibilities statement set out on page 49, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view.

accounting estimates made by the directors; and

European Embedded Value

Directors’ remuneration Under the Companies Act 2006 we are required to report to you if, in our opinion, certain disclosures of directors’ remuneration specified by law are not made. We have no exceptions to report arising from this responsibility.

Responsibilities for the financial statements and the audit

[[ the reasonableness of significant

Financial Statements

statements are not in agreement with the accounting records and returns.

The directors have requested that we review the parts of the Corporate Governance statement relating to the Parent company’s compliance with the 10 further provisions of the Code specified for auditor review by the Listing Rules of the Financial Conduct Authority as if the Parent company were a premium listed company. We have nothing to report having performed our review.

GOVERNANCE

Adequacy of accounting records and information and explanations received Under the Companies Act 2006 we are required to report to you if, in our opinion:

Consolidated statement of comprehensive income for the year ended 31 December 2015

Group Notes

2015 £m

3 (a)

1,194

2014 £m

Revenues Gross earned premiums Premiums ceded to reinsurers

(400)

Net earned premiums

794

1,218 (1,794) (576)

Fee income from investment and fund management contracts

4

255

243

Investment return

5

2,122

7,796

Other operating income

6

Total revenues

44

47

3,215

7,510

2,725

2,569

Policyholder benefits and claims Claims paid, before reinsurance

7 (a)

Reinsurance recoveries

7 (a)

Claims paid, after reinsurance

(470) 2,255

(432) 2,137

(Decrease)/increase in insurance contract liabilities, before reinsurance

(948)

3,749

Reinsurance ceded

160

(1,515)

(Decrease)/increase in insurance contract liabilities, after reinsurance

(788)

2,234

(Increase)/decrease in non-participating value of in-force business

(194)

3

Increase in investment contract liabilities

903

1,846

2,176

6,220

8, 9

477

486

Investment management expenses

11

238

190

Amortisation charges and impairment losses on acquired PVIF and other intangible assets

19

40

72

Investment return attributable to external unit holders

36

22

101

Other operating expenses

12

75

42

852

891

44

43

Total policyholder benefits and claims Operating expenses Administrative expenses

Total operating expenses Finance costs

13

Result before tax before transfer to unallocated divisible surplus Tax charge Transfer to the unallocated divisible surplus

143

356

14 (a)

18

207

31

125

149

-

-

Profit for the year Other comprehensive income: Items that will not be reclassified to profit or loss Remeasurements of defined benefit pension schemes

38

50

(15)

Transfer to/(from) the unallocated divisible surplus

31

50

(15)

Other comprehensive income for the period, net of tax

-

-

Total comprehensive income for the year

-

-

As a mutual company, all earnings are retained for the benefit of participating policyholders and are carried forward within the unallocated divisible surplus. Accordingly, there is no total comprehensive income for the year shown in the statement of comprehensive income.

Balance sheets

as at 31 December 2015 Group

Parent company

Notes

2015 £m

2014 £m

2015 £m

2014 £m

Property, plant and equipment

17

42

46

-

-

Investment property

18

5,036

4,727

4,936

4,633

250

250

232

232

30

34

21

24

Acquired PVIF on insurance contracts

156

177

150

171

Deferred acquisition costs on investment contracts

344

425

344

425

ASSETS

Intangible assets Goodwill Acquired PVIF on investment contracts

52

45

30

41

Total intangible assets

19

832

931

777

893

Reinsurers’ share of insurance contract liabilities

25

5,302

5,462

5,302

5,462

Pension scheme asset

38

177

128

177

128

19

-

22

-

Other intangible assets

Current tax asset Financial investments

20

60,129

59,492

42,629

44,231

Investments in Group entities

21

-

-

15,321

12,894

Trade and other receivables

23

546

412

383

285

Cash and cash equivalents

24

2,823

2,736

2,209

2,259

74,906

73,934

71,756

70,785

28,874

29,607

28,949

29,682

Total assets LIABILITIES Participating insurance contract liabilities

25

Participating investment contract liabilities

29

2,326

2,308

2,326

2,308

Unallocated divisible surplus

31

3,314

3,139

3,359

3,183

Non-participating value of in-force business

28

(1,526) 32,988

(1,332) 33,722

(1,332)

(1,526) 33,108

33,841

Non-participating insurance contract liabilities

25

7,291

7,506

7,290

7,504

Non-participating investment contract liabilities

29

24,982

22,691

24,982

22,691

32,273

30,197

32,272

30,195

Subordinated liabilities

32

743

640

743

640

Payables and other financial liabilities

33

5,156

5,544

5,107

5,486

Provisions

34

224

250

219

237

Other liabilities

35

286

316

220

244

Liability to external unit holders

36

3,145

3,122

-

-

Deferred tax liability

37

91

91

87

91

-

52

-

51

74,906

73,934

71,756

70,785

Current tax liability Total liabilities

The financial statements on pages 84 to 185 were approved by the Board of Directors and signed on its behalf on 30 March 2016.

Tim Harris Group Finance Director

85

Statements of cash flows

for the year ended 31 December 2015 Group Notes

2015 £m

Adjustments for non-cash items

42 (a)

1,760

Adjustments for non-operating items

42 (b)

Parent company 2014 £m

2015 £m

2014 £m

Cash flows from operating activities Transfer to the unallocated divisible surplus

175

Acquisition of investment property Net acquisition of financial investments

134 (1,036)

176 1,707

245 (2,711)

44

43

(211)

(277)

(211)

(264)

(1,432)

(414)

(1,530)

(1,777)

54

(8)

7

50

Proceeds from disposal of investment property

331

Changes in operating receivables

(134)

96

(98)

29

Changes in operating payables

(422)

1,646

(407)

4,918

Change in liability to external unit holders Net cash flows from operating activities before tax

23

636

134

882

Tax (paid)/received

(89)

Net cash flows from operating activities

45

(47) 835

331

-

-

(40)

497

(64)

1

(104)

498

Cash flows from investing activities Acquisition of property, plant and equipment

(6)

Acquisition of intangibles

(15)

(15) -

-

-

Acquisition of Group entities

42 (d)

-

Proceeds from disposal of Group entities

42 (d)

-

-

-

10

-

-

20

31

(10)

33

Dividends received from Group entities Net cash flows from investing activities

(21)

(180)

-

(195)

(30)

(8)

Cash flows from financing activities Proceeds on issue of debt

348

(Repayment of)/proceeds from other debt and finance lease liabilities

(246)

-

348

-

(246)

14

(44)

(43)

(43)

(41)

Net cash flows from financing activities

58

(43)

59

(27)

Net increase/(decrease) in cash and cash equivalents

82

597

2,730

2,133

2,253

1,749

2,812

2,730

2,198

2,253

Interest paid

Cash and cash equivalents at 1 January Cash and cash equivalents at 31 December

24

(55)

504

An integral part of the operations of the Group is the management of a portfolio of investment assets. Cash flows relating to the purchase and sale of these assets have been treated as operating cash flows for the purposes of the statements of cash flows. In the Parent company, Open Ended Investment Companies (OEICs) and other investment funds that are classified for financial reporting purposes as subsidiaries are also part of this operating portfolio of investment assets and hence cash flows in relation to these assets are also classified as operating cash flows for the Parent company statement of cash flows.

Notes to the financial statements for the year ended 31 December 2015

1. Accounting policies (a) Basis of preparation The financial statements of the Group and the Parent company (‘the financial statements’) have been prepared in accordance with International Financial Reporting Standards (IFRS) and Interpretations issued by the IFRS Interpretations Committee (IFRS IC) as adopted for use in the European Union. The financial statements have also been prepared in accordance with those parts of the Companies Act 2006 applicable to companies reporting under IFRS. The financial statements have been prepared on the historical cost basis as modified by the inclusion of certain assets and liabilities at fair value as permitted or required by IFRS. The accounting policies set out below are reviewed for appropriateness each year. These policies have been applied consistently to all periods presented in these financial statements, unless otherwise stated. All amounts in the financial statements are shown in pounds sterling, which is the presentational currency of the Group and the Parent company. Unless otherwise stated, amounts are shown in millions of pounds, rounded to the nearest million. New and amended standards adopted by the Group The following new and amended standards, none of which have had a material impact on the Group, have been adopted for the first time in these financial statements:  Amendments to IAS 19, ‘Defined benefit

Plans’ – Employee contributions.  Amendments to IFRSs Annual

Improvements to IFRSs 2010-2012 Cycle.  Amendments to IFRSs Annual

Improvements to IFRSs 2011-2013 Cycle. New and amended standards not yet effective The following new and amended standards, which have been issued but are not yet effective, have not been applied in these financial statements:  IFRS 9, ‘Financial Instruments’, final

version issued July 2014. This new standard was issued in several phases and will replace IAS 39, ‘Financial Instruments: Recognition and

Measurement’ when it becomes effective on 1 January 2018. IFRS 9 covers the classification and measurement of financial instruments, impairment and hedge accounting. The impact on the financial statements will continue to be assessed and the Group will also take into account the interaction between IFRS 9 and the requirements of the replacement for IFRS 4, when the latter is issued.  IFRS 15, ‘Revenue from contracts with

customers’, effective from 1 January 2018. This standard establishes a single comprehensive model for revenue arising from contracts with customers. The Group is considering how this standard will impact the reporting of investment contract revenue and has yet to complete its final assessment.  Amendments to IAS 1, ‘Disclosure

Initiative’, effective from 1 January 2016. These amendments may result in some minor changes to the financial statements disclosures. There are no other standards or interpretations that are not yet effective and that would be expected to have a material impact on the Group. (b) Basis of consolidation The Group financial statements incorporate the assets, liabilities and results of the Parent company and its subsidiaries. Subsidiaries are those entities (including OEICs and other investment funds) over which the Group has control. The Group controls an entity when it has power over it, is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. The Group considers all relevant facts and circumstances when determining whether control exists and makes a re-assessment whenever those facts and circumstances change. Profits or losses of subsidiaries sold or acquired during the period are included in the consolidated results up to the date that control ceases or from the date of gaining control. The Group applies the purchase method in accounting for business combinations. The cost of business combinations comprises the fair value of the consideration paid and of the liabilities incurred or assumed. For acquisitions completed prior to 2010,

87

the cost of business combinations also included any directly related expenses. For subsequent acquisitions, all acquisition costs are expensed as incurred. The value of deferred consideration payable on acquisition or receivable on disposal of a subsidiary is determined using discounted cash flow techniques. The excess of the cost of a business combination over the fair value of the identifiable net assets acquired is recorded as goodwill. If the cost of the business combination is less than the fair value of identifiable net assets acquired, the difference is recognised immediately in the statement of comprehensive income. The Group has chosen to apply predecessor accounting to transactions whereby the trade and assets of a Group entity or the entity itself are transferred to another entity within the Group, known as common control business combinations. The effect of predecessor accounting is that the assets and liabilities recognised by the acquiring entity in such a transaction are those used previously in the Group consolidated accounts. The financial statements produced by subsidiaries for inclusion in the Group financial statements are prepared using accounting policies consistent with those adopted by the Group. Intra-group transactions, balances and unrealised gains and losses on intra-group transactions are eliminated.

1. Accounting policies (continued) (c) Classification of contracts (b) Basis of consolidation (continued) The Group invests in investment funds, which themselves invest mainly in equities, bonds and cash and cash equivalents. Some of these funds are managed by Group companies and therefore in addition to investment income from its holding in the funds, the Group also receives management fees from external unit holders. Where the Group’s holding is greater than 50% it is presumed that it is exposed to variable returns from the fund and can use its power to influence those returns; in such cases the fund is consolidated. Conversely where the Group’s holding is less than 20% it is not considered to have significant influence over the fund and the fund is accounted for within financial investments at fair value. Holdings between 20% and 50% are assessed to determine whether the Group is deemed to have control; judgement is made around the concept of power and the factors taken into account include:  the Group’s level of combined interest in

the fund (from investment income and management fees);  any rights held by other parties and the

nature of those rights. Where the funds are consolidated, the interests of the other parties are included within liabilities and are presented as ‘Liability to external unit holders’. Holdings of investment funds of between 20% and 50%, which are not consolidated, are treated as associates. The Group also invests in certain private equity funds and property unit trusts, which are managed by external third-party administrators. The structure of each fund, the terms of the partnership agreement and the Group’s ownership percentage are all taken into consideration in determining whether the Group has control and therefore whether the fund/unit trust should be consolidated. Associates are entities over which the Group has significant influence but not control, generally accompanying an ownership interest of between 20% and 50%. The Group’s investments in associates are all investment funds and have been accounted for as financial assets held at fair value through profit or loss as permitted by IAS 28, ‘Investments in Associates and Joint Ventures’.

The Group classifies its products for accounting purposes as insurance, investment or investment with discretionary participation features. Insurance contracts are those contracts that transfer significant insurance risk. Contracts that do not transfer significant insurance risk are investment contracts. A discretionary participation feature is a contractual right held by a policyholder to receive additional payments as a supplement to guaranteed benefits:  that are likely to be a significant

proportion of the total contractual payments; and  whose amount or timing is contractually

at the discretion of the issuer and that is contractually based on: • the performance of a specified pool of

contracts, or a specified type of contract, or • realised and/or unrealised investment

returns on a specified pool of assets held by the issuer, or • the profit or loss of the company that

issues the contracts. Such contracts are more commonly known as ‘with-profits’ or as ‘participating’ contracts. Hybrid contracts are those where the policyholder can invest in and switch between both unit-linked (non-participating) and unitised with-profits (participating) investment mediums at the same time. Certain hybrid contract types are treated as if they were wholly non-participating investment contracts when accounting for premiums, claims and other revenue. (d) Revenue (i) Premiums Premiums received and reinsurance premiums paid relate to insurance and nonhybrid participating investment contracts. They are accounted for when due for payment except for recurring single premiums and premiums in respect of unitlinked business, which are accounted for when the related liabilities are created. (ii) Fee income from investment and fund management contracts Management fees arising from investment and fund management contracts are recorded in the statement of comprehensive income in the period in which the services are provided. Initial fees, which relate to the future provision of services are deferred and recognised in the statement of

comprehensive income over the anticipated period in which the services will be provided. Such deferred fee income is shown as a liability in the balance sheet. (iii) Investment return Investment return comprises the investment income and fair value gains and losses derived from assets held at fair value through profit or loss, rental income and fair value gains and losses derived from investment property and interest income derived from cash and cash equivalents. Investment income derived from assets held at fair value through profit or loss includes dividends and interest income. Dividends are recorded on the date on which the shares are declared ex-dividend. UK dividends are recorded net of the associated tax credits; overseas dividends are recorded gross, with the related withholding tax included within the tax expense as foreign tax. Interest income is recognised on an accruals basis. Rental income from investment property, net of any lease incentives received or paid, is recognised on a straight-line basis over the term of the lease. (iv) Commission income The Group acts as an introducer for certain third-party insurers. Commission income and profit commission received on the underwriting results of those insurers is recognised in the statement of comprehensive income as the related services are provided. (e) Claims Claims paid and reinsurance recoveries relate to insurance and non-hybrid participating investment contracts. For non-linked policies, maturity claims and annuities are accounted for when due for payment. Surrenders are accounted for when paid or, if earlier, on the date when the policy ceases to be included within the calculation of the related contract liabilities. Death claims and all other non-linked claims are accounted for when notified. For linked policies, claims are accounted for on cancellation of the associated units. Claims payable include related claims handling costs. Reinsurance recoveries are accounted for in the same period as the related claim.

1. Accounting policies (continued) Other plant and equipment consisting of (f) Tax expense Tax expense comprises current and deferred tax and is recognised in profit or loss except to the extent that it relates to items recognised directly in other comprehensive income, in which case it is recognised directly in other comprehensive income. Both current and deferred tax are calculated using tax rates enacted or substantively enacted at the balance sheet date. (i) Current tax Current tax is the expected tax payable on the taxable income for the year and any adjustment to tax payable in respect of previous years. (ii) Deferred tax Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities. The following temporary differences are not provided for:  the initial recognition of goodwill not

deductible for tax purposes; and  temporary differences arising on

investments in subsidiaries where the Group controls the timing of the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. (g) Property, plant and equipment Owner-occupied land and buildings are carried at fair value in the balance sheet. Fair value is determined annually by independent professional valuers, who are members of the Royal Institution of Chartered Surveyors, and is based on market evidence. An increase in fair value is recognised in other comprehensive income, except to the extent that it is the reversal of a previous revaluation decrease which was recognised in profit or loss. A decrease in fair value is recognised immediately in profit or loss, except to the extent that it reverses a previous revaluation surplus recognised in other comprehensive income.

computer equipment, office equipment and vehicles are stated at cost less accumulated depreciation and impairment losses. Cost comprises the fair value of the consideration paid to acquire the asset and includes directly related expenditure. Subsequent costs are included in an asset’s carrying value only to the extent that it is probable that there will be future economic benefits associated with the item and the cost of the item can be measured reliably. All other repairs and maintenance costs are charged to the statement of comprehensive income during the period in which they are incurred. Land is not depreciated. No depreciation is provided on owner-occupied buildings as such depreciation would be immaterial. Depreciation on other items of property, plant and equipment is charged to the statement of comprehensive income and is calculated so as to reduce the value of the assets to their estimated residual values on a straight-line basis over the estimated useful lives of the assets concerned, which range from three to eight years. The residual values and estimated useful lives are reviewed annually. Where an asset’s carrying amount exceeds its recoverable amount the carrying amount is written down immediately to the recoverable amount. Gains and losses on disposals are included in the statement of comprehensive income and are determined by comparing proceeds with carrying amounts. (h) Intangible assets (i) Goodwill Goodwill is tested annually for impairment and is stated at cost less accumulated impairment losses. Any gain or loss on subsequent disposal of a subsidiary will include any attributable goodwill remaining. (ii) Acquired PVIF The present value of acquired in-force business (PVIF) arises on the acquisition of portfolios of investment and insurance contracts, either directly or through the acquisition of a subsidiary. It represents the net present value of the expected pre-tax cash flows of the contracts which existed at the date of acquisition and is amortised over the remaining lifetime of those contracts. The amortisation is recognised in the statement of comprehensive income and is calculated on a systematic basis to reflect the pattern of emergence of profits from the

89

acquired contracts. Amortisation is stated net of any unwind of the discount rate. The estimated lifetime of the acquired contracts ranges from five to 35 years for life business and 17 to 40 years for pensions business. The value of the acquired PVIF is assessed annually for impairment and any impairment is recognised in full in the statement of comprehensive income in the year it is identified. (iii) Deferred acquisition costs Deferrable acquisition costs for nonparticipating and hybrid participating investment contracts are capitalised as an intangible asset, provided that it is considered probable that those costs are recoverable. Deferrable costs are restricted to directly related and incremental costs incurred for the acquisition of new contracts. This consists of commission only, including the value of future commission payable to third parties. All other acquisition costs are expensed as incurred. The deferred acquisition cost asset is amortised over the anticipated lifetime of the related contracts in the same pattern as the related services are provided. All acquisition costs on insurance and nonhybrid participating investment contracts are recognised as an expense in the statement of comprehensive income when incurred. (iv) Other intangible assets Other intangible assets include investment management rights, administration servicing rights and distribution agreements acquired as part of a business combination, computer software and deferred incremental acquisition costs directly related to the costs of acquiring new unit trust business. They are carried at cost less accumulated amortisation and impairment losses. The initial cost is determined as the fair value of the intangible asset at the date of acquisition. Where that fair value is not readily observable it is determined using a valuation technique such as discounted cash flow analysis. Other intangible assets are amortised on a straight-line basis over their useful lives, which range from three to 10 years. The useful lives are determined by considering relevant factors such as the remaining term of agreements, the normal lives of related products and the competitive position.

1. Accounting policies (continued) Financial assets that are designated (i) Reinsurance The Group seeks to reduce its exposure to potential losses by reinsuring certain levels of risk with reinsurance companies. Reinsurance contracts that meet the classification requirements for insurance contracts set out above are classified as reinsurance contracts held. Contracts that do not meet these classification requirements are classified as financial assets.

as FVTPL are:  financial assets held in the internal linked

(iii) Investments in Group entities Investments in Group entities within the Parent company financial statements are designated as FVTPL. Fair value for those entities which are not unit trusts, OEICs and other pooled funds is determined using the same valuation techniques as are used for unquoted investments, as described above.

funds of the Group backing unit-linked insurance and investment contract liabilities. The designation of these assets at FVTPL eliminates or significantly reduces a measurement or recognition inconsistency (sometimes referred to as an ‘accounting mismatch’) that would (k) Trade and other receivables otherwise arise from measuring assets or Trade and other receivables are initially liabilities or recognising the gains and recognised at fair value. Subsequently they Reinsurance assets represent short-term losses on them on different bases; or are measured at amortised cost using the payments due from reinsurers and longer financial assets managed and whose effective interest method. term receivables that are dependent on the performance is evaluated on a fair expected claims and benefits arising under value basis. (l) Finance leases the related reinsured insurance contracts. (i) Group acting as lessor They are measured on a consistent basis to Financial assets classified as FVTPL, Leases under which substantially all the the reinsured insurance contracts. including derivatives classified as held for risks and rewards of ownership are Reinsurance liabilities represent premiums trading, are initially recognised at the fair transferred by the lessor are classified as payable for reinsurance. value of the consideration paid. They are finance leases. subsequently measured at fair value with (j) Investments any resultant gain or loss recognised in the The Group leases certain freehold buildings (i) Investment property statement of comprehensive income. to third parties by way of finance lease. Investment property is property held for No amount is recognised for these buildings rental, capital growth or both, excluding Fair value for quoted investments in an within investment property. Instead an asset that occupied by the Group or the Parent active market is the bid price, which is recognised within trade and other company. Investment property includes management believe is representative of receivables that represents the Group’s net freehold and leasehold land and buildings. fair value. For investments in unit trusts, receivable from finance leases. This asset is initially stated at an amount equal to the Investment property is initially measured at OEICs and other pooled funds (including those classified as investments in Group present value of the minimum lease rentals cost. For freehold property, cost comprises receivable at the inception of the lease. the fair value of the consideration paid plus entities) it is the bid price quoted on the last day of the accounting period on which As lease rentals are received, these are split the associated transaction costs. For investments in such funds could be between an interest element, calculated on leasehold property, the cost is the lower of redeemed. If the market for a quoted an effective interest basis, which is credited the fair value of the property and the financial investment is not active or the to the statement of comprehensive income present value of the minimum lease investment is unquoted, the fair value is and a capital element, which reduces the payments at the inception of the lease. determined by using valuation techniques. finance lease receivable. For these investments, the fair value is All investment property is subsequently established by using quotations from (ii) Group acting as lessee carried at fair value in the balance sheet. independent third parties, such as brokers Leases under which substantially all the Fair value is determined annually by or pricing services, or by using internally risks and rewards of ownership are assumed independent professional valuers based on developed pricing models. Priority is given by the lessee are classified as finance leases. market evidence. Any gain or loss arising to publicly available prices from from a change in fair value is recognised in independent sources, when available, but Leasehold investment property is the statement of comprehensive income. overall, the source of pricing and/or accounted for as a finance lease. At the valuation technique is chosen with the commencement of the lease an asset is (ii) Financial investments objective of arriving at a fair value recognised within investment property at an All investment transactions are recognised measurement which reflects the price at amount equal to the lower of the fair value at trade date. which an orderly transaction would take of the property and the present value of the minimum lease payments. An equal liability All financial investments are classified upon place between market participants on the measurement date. Valuation techniques is established to represent the financing initial recognition as held at fair value element of the lease contract. As lease through profit or loss (FVTPL). The Group include the use of recent arm’s length transactions, reference to the current fair payments are made, these are split between does not classify any financial investments an interest element, calculated on an as ‘available for sale’ or as ‘held to maturity’. value of other instruments that are substantially the same, discounted cash flow effective interest basis, which is charged to The FVTPL category has two subanalysis and option pricing models making the statement of comprehensive income and categories: financial assets held for trading maximum use of market inputs from a capital element, which reduces the finance and those designated as FVTPL. All independent sources and relying as little as lease liability. derivative instruments are classified as possible on entity specific inputs. held for trading as required by IAS 39, ‘Financial Instruments: Recognition and Measurement’. All other financial investments are classified as designated as FVTPL.

1. Accounting policies (continued) A financial liability is de-recognised when (m) Operating lease payments Leases, where a significant portion of the risks and rewards of ownership is retained by the lessor, are classified as operating leases. Payments under operating leases, net of lease incentives received, are recognised in the statement of comprehensive income on a straight-line basis over the term of the lease. (n) Impairment Goodwill is tested for impairment annually. The carrying amounts of other intangible assets, property, plant and equipment and financial assets (other than those at FVTPL) are reviewed at each balance sheet date for any indication of impairment or whenever events or circumstances indicate that their carrying amount may not be recoverable. For non-financial assets, an impairment loss is recognised whenever the carrying amount exceeds the recoverable amount. The recoverable amount is the higher of the asset’s fair value less costs to sell and its value in use. For financial assets (other than those at FVTPL) an impairment loss is recognised if the present value of the estimated future cash flows arising from the asset is lower than the asset’s carrying value. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cashgenerating units). Impairment losses are recognised in the statement of comprehensive income. An impairment loss in respect of goodwill is never reversed. In respect of other nonfinancial assets, an impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. For financial assets (other than those at FVTPL) an impairment loss is reversed if there is a decrease in the impairment that can be related objectively to an event occurring after the impairment was recognised. An impairment loss is reversed only to the extent that after the reversal, the asset’s carrying amount is no greater than the amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. (o) De-recognition and offset of financial assets and financial liabilities A financial asset is de-recognised when the contractual rights to receive the cash flows from the asset have expired or where they have been transferred and the Group has also transferred substantially all of the risks and rewards of ownership.

determined annually in accordance with regulatory requirements. For participating contracts the liabilities are determined on a realistic basis in accordance with the former UK GAAP standard FRS 27 ‘Life All derivatives are accounted for on a contract-by-contract basis and are not offset Assurance’, which was adopted on transition to IFRS. As an exception to this, the in the balance sheet. participating liabilities within the closed funds are adjusted to ensure that any (p) Cash and cash equivalents difference between the surplus in those Cash and cash equivalents in the balance funds as measured on an IFRS basis and the sheet comprise cash balances, deposits held surplus as measured on a realistic basis is on call with banks and other short-term highly liquid investments with three months included within participating liabilities. or less to maturity from the date of The surpluses in the closed funds are acquisition. Cash and cash equivalents in the statement of cash flows are stated net of included within the participating contract liabilities because they are not available for bank overdrafts. distribution to other policyholders or for other business purposes. The closed funds (q) Insurance contracts and are the Refuge Assurance IB Sub-fund, the participating investment contracts United Friendly IB Sub-fund, the United Under IFRS 4, ‘Insurance Contracts’, Friendly OB Sub-fund, the Scottish Life insurance and participating investment Fund, the PLAL With-Profits Sub-fund, contract liabilities are valued using the Royal Liver Assurance Fund and the accounting policies consistent with those RL (CIS) with-profits funds. adopted prior to the transition to IFRS. the obligation specified in the contract is discharged or cancelled or expires.

(i) General insurance contracts All contracts of general insurance are classified as insurance. The Group does not write general insurance business. All of the general insurance business acquired as part of the CIS acquisition in 2013 was transferred out of the Group by way of a Part VII transfer with an effective date of 31 March 2014. General insurance claims incurred comprise claims paid during the year together with related claims handling costs and the change in the gross liability for claims in the period net of related recoveries. Claims outstanding comprise provisions representing the estimated ultimate cost of settling:  estimates on claims reported by the

balance sheet date (‘claims reported’); and

The participating liabilities include an assessment of any future options and guarantees included in this business on a market-consistent basis. The calculations also take into account bonus decisions, which are consistent with the Parent company’s Principles and Practices of Financial Management. In determining the realistic value of the participating liabilities the value of non-profit business written in the participating funds is accounted for as part of the calculation. The present value of future profits on this business is separately calculated and this value is deducted from the participating liabilities. For linked insurance contracts, the calculation of the liability is based upon the fund value at the valuation date plus a reserve where, on a prudent basis, it is estimated that future cash outflows cannot be covered by future cash inflows.

 expected additional cost in excess of

‘claims reported’ for all claims occurring A liability adequacy test is then carried out by the balance sheet date (‘claims incurred on long-term insurance liabilities to ensure but not reported’). that the carrying amount of the liabilities (less related intangible assets) is sufficient Aggregate claims provisions include in the light of current estimates of future attributable claims handling expenses. cash flows. When performing the liability Anticipated reinsurance recoveries are adequacy test, all contractual cash flows disclosed separately within assets under the are discounted and compared against the heading of ‘Reinsurers’ share of insurance carrying value of the liability. Where a contract liabilities’. shortfall is identified it is charged immediately to the statement of (ii) Long-term insurance and participating comprehensive income. investment contracts The long-term insurance and participating investment contract liabilities are

91

1. Accounting policies (continued) (u) Premiums received and claims paid (q) Insurance contracts and participating investment contracts (continued) The estimation techniques and assumptions are periodically reviewed, with any changes in estimates reflected in the statement of comprehensive income as they occur. The claims outstanding provision represents the estimated cost of settling claims reported by the balance sheet date. (r) Embedded derivatives The Group does not separately measure embedded derivatives that meet the definition of an insurance contract or embedded options to surrender insurance contracts for a fixed amount (or a fixed amount and an interest rate). All other embedded derivatives are separated and carried at fair value if they are not closely related to the host contract and they meet the definition of a derivative. (s) Unallocated divisible surplus The nature of benefits for participating contracts is such that the allocation of surpluses between participating policyholders is uncertain. The amount not allocated at the balance sheet date is classified within liabilities as the unallocated divisible surplus. (t) Non-participating investment contracts All the non-participating investment contracts issued by the Group are unitlinked. The financial liabilities for these contracts are designated at inception as at fair value through profit or loss. This classification has been used because it eliminates or significantly reduces a measurement or recognition inconsistency (sometimes referred to as an ‘accounting mismatch’) that would otherwise arise from measuring assets or liabilities or recognising the gains and losses on them on different bases. The fair value of a unit-linked financial liability is determined using the current unit values that reflect the fair values of the financial assets contained within the Group’s unitised investment funds linked to the financial liability, multiplied by the number of units attributed to the contract holder at the balance sheet date. If the investment contract is subject to a surrender option, the fair value of the financial liability is never less than the amount payable on surrender, discounted for the required notice period, where applicable.

on investment contracts For non-participating investment and hybrid participating investment contracts the amounts received as premiums are not included in the statement of comprehensive income but are accounted for as deposits received and are added to the value of investment contract liabilities in the balance sheet. Amounts repaid as claims on nonparticipating investment and hybrid participating investment contracts are not included in the statement of comprehensive income but are accounted for as a deduction from investment contract liabilities. (v) Subordinated debt Liabilities for subordinated debt are recognised initially at the fair value of the proceeds received, net of any discount and less attributable transaction costs. Subsequent to initial recognition, they are stated at amortised cost. The transaction costs and discount are amortised over the period to the earliest possible redemption date on an effective interest rate basis. The amortisation charge is included in the statement of comprehensive income within finance costs. An equivalent amount is added to the carrying value of the liability such that at the redemption date the value of the liability equals the redemption value. Interest costs are expensed as they are incurred. (w) Payables and other financial liabilities (i) Reinsurance arrangement The Group has a financial liability in respect of a reinsurance arrangement and holds an unquoted debt security which has cash flows which exactly match those of the reinsurance liability. Consequently both the debt security and the reinsurance liability are designated at FVTPL in order to avoid an accounting mismatch. Movements in the fair value of the liability are recognised within revenue in the statement of comprehensive income within premiums ceded to reinsurers. The matching movement in the fair value of the debt security is shown in the statement of comprehensive income within investment return. (ii) Other financial liabilities All other payables and financial liabilities are initially measured at fair value, being consideration received plus any directly attributable transaction costs. Subsequently measurement is at amortised cost using the effective interest method.

(x) Provisions A provision is recognised in the balance sheet when there is a present legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation. If the effect is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. No provision is established where a reliable estimate of the obligation cannot be made. A provision for onerous contracts is recognised when the expected benefits to be derived from a contract are less than the unavoidable costs of meeting the obligations under the contract. (y) Pension costs The Group operates three defined benefit schemes and a number of defined contribution arrangements. (i) Defined benefit schemes The defined benefit schemes provide benefits based on pensionable pay. The assets of the schemes are held in separate Trustee administered funds. The position of each scheme is assessed annually by an independent qualified actuary using the projected unit credit method. The pension scheme asset recognised in the balance sheet is the excess that is recoverable of the fair value of the plan assets in a scheme over the present value of that scheme’s liabilities. Deficits in the value of a scheme’s assets over its scheme liabilities are recognised in the balance sheet as a pension liability. ‘Current service cost’ and the ‘Net interest on the net defined benefit asset’ are included within ‘Administrative expenses’ on an incurred basis. ‘Past service costs’ arising on a plan amendment or curtailment are included immediately within ‘Administrative expenses’. Remeasurements are charged or credited to the unallocated divisible surplus in other comprehensive income in the period in which they arise. (ii) Defined contribution arrangements The Group operates a number of defined contribution arrangements for employees who are not active members of a group defined benefit scheme. The Group pays contractual contributions in respect of these arrangements and such contributions are recognised as an expense as the related employee services are provided.

1. Accounting policies (continued) (z) Foreign currency translation The primary economic environment in which the Group and the Parent company operate is the United Kingdom. Hence the functional currency of the Group and the Parent company is pounds sterling. Assets and liabilities denominated in foreign currencies are expressed in sterling at the exchange rate ruling on the balance sheet date. Revenue transactions for foreign operations are translated at average rates of exchange for the year. For all other operations, revenue transactions and those relating to the acquisition and realisation of investments have been translated into sterling at the rates of exchange ruling at the time of the respective transactions. Exchange differences arising from the translation of foreign operations are included within the statement of comprehensive income within other operating income or other operating expenses as appropriate. Any other exchange differences are dealt with in the statement of comprehensive income under the same heading as the underlying transactions are reported. (aa) Segmental reporting Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Group Board of Directors. (bb) Use of judgements, estimates and assumptions The preparation of financial statements requires management to make judgements in the process of applying the Group’s accounting policies. In selecting accounting policies where IFRS permits a choice of policy, the directors have applied judgement in determining the most appropriate policy as follows:  measurement model for certain assets.

IFRS allows a choice of measurement model for financial assets, investment property, property, plant and equipment and, in the Parent company balance sheet, investments in Group entities. This is typically a choice between a cost and a fair value model. The Group and Parent company have applied a fair value model to all these assets, with the exception of trade and other receivables and computers, office equipment and vehicles. The fair value model has been used in order to match asset valuations to the

valuation of the related policyholder liabilities;

2. Segmental information

The segmental disclosures required under IFRS are based on operating segments that  measurement model for non-participating reflect the level within the Group at which investment contracts. As set out in key strategic and resource allocation decisions note 1 (t) these liabilities have been are made and the way in which operating valued at fair value in order to match their performance is reported internally. valuation to the related assets;  valuation of financial assets in illiquid

markets. The Group closely monitors the valuation of assets in markets that have become less liquid. Determining whether a market is active requires the exercise of judgement and is determined based upon the facts and circumstances of the market for the instrument being measured. Where it is determined that there is no active market, fair value is established using a valuation technique as described in note 1 (j) (ii);  the classification of contracts as insurance

or investment on initial recognition; and  the determination of whether the Group

has control over an entity. This decision requires the consideration of a number of factors. As set out in note 1 (b) these include the Group’s ownership interest, any other rights it has over the entity and the rights of third parties. The preparation of financial statements also requires the use of estimates and assumptions that affect the amounts reported in the balance sheet and statement of comprehensive income and the disclosure of contingent assets and liabilities at the date of the financial statements. Although these estimates are based on management’s best knowledge of current circumstances and expectations of future events and actions, actual results may differ from those estimates, possibly significantly. This is particularly relevant to the following: Item

Classification of contracts as insurance or investment Deferred tax Intangible assets Fair values of investment property and financial investments Impairment Insurance contracts and participating investment contract liabilities Pension costs

Note

1 (c) 1 (f) (ii), 37 1 (h), 19 1 (j) 16,18, 20 1 (n)

1 (q), 25 to 30 1 (y), 38

93

The activities of each operating segment are described below. Intermediary  Pensions Royal London provides pensions and other retirement products to individuals and to employer pension schemes in the UK.  Protection

UK Protection provides protection products to individuals in the UK. Royal London Ireland provides protection products to individuals in the Republic of Ireland. Consumer Consumer administers the Group’s direct to customer business. Wealth The Wealth segment mainly comprises Royal London Asset Management, which is the fund management operation of the Group. It provides investment management services to the other entities within the Group and to external clients, including pension funds, local authorities, universities and charities as well as individuals. The segment also includes Ascentric, the Group’s wrap platform. Central items This segment comprises mainly centrally held items, such as Group functions. (a) Segment profit The profit measure used by the Group Board of Directors to monitor performance is European Embedded Value (EEV) operating profit before tax. Further detail on the EEV results is given within the EEV section on pages 186 to 197. The EEV operating profit by operating segment is shown in the following table, together with a reconciliation of the total EEV operating profit before tax to the IFRS result before tax. Revenues by segment are not given as this information is not provided to the Group Board of Directors and consequently there is no reconciliation of reportable segments’ revenues to the Group’s revenue. The tables in the geographical analysis present revenues split by the geographic region in which the underlying business was written.

2. Segmental information (continued) (a) Segment profit (continued) Group 2015 £m

2014 £m

112

78

28

63

7

6

Intermediary  Pensions  UK Protection  Royal London Ireland

Consumer

20

(11)

Wealth

61

42

Central items

16

42

244

220

EEV operating profit before tax and exceptional items Exceptional cost arising from regulatory change

-

Total EEV operating profit before tax

244

(61) 159

Amortisation of intangibles

3

(11)

Valuation differences between EEV and IFRS

5

(17)

Investment return variances

(17)

479

Economic assumption changes

32

(143)

Pension schemes’ costs recognised in profit

(10)

(8)

Financing costs

(44)

(43)

ProfitShare

(70)

(60)

IFRS result before tax

143

356

(b) Geographical analysis Group – 2015 UK £m

International £m

Total £m

Net earned premiums

757

37

794

Fee income from investment and fund management contracts

255

-

255

2,101

21

2,122

44

-

44

3,157

58

3,215

Revenues

Investment return Other operating income Total revenues

Group – 2014 UK £m

International £m

Total £m

Revenues Net earned premiums

(616)

Fee income from investment and fund management contracts

243

-

243

7,677

119

7,796

46

1

47

7,350

160

7,510

Investment return Other operating income Total revenues

40

(576)

(c) Major customers The directors consider the Group and Parent company’s external customers to be the individual policyholders. As such, the Group and Parent company are not reliant on any individual customer.

3. Premiums (a) Gross earned premiums Group 2015 £m

2014 £m

804

840

24

24

828

864

359

351

7

3

366

354

1,194

1,218

Regular premiums  Insurance contracts  Participating investment contracts

Single premiums  Insurance contracts  Participating investment contracts

(b) Premiums received on investment contracts As set out in note 1(u) the Group does not account for the amounts received as premiums in relation to non-participating and hybrid participating investment contracts as premium income in the statement of comprehensive income. These amounts are accounted for as deposits received and are added to the value of investment contract liabilities in the balance sheet. The amounts received by the Group during the year were £4,347m (2014 £3,513m) in respect of non-participating contracts and £9m (2014 £9m) in respect of hybrid participating contracts.

4. Fee income from investment and fund management contracts Group 2015 £m

2014 £m

124

121

11

14

4

5

139

140

Investment contract fees receivable  Annual management charges applied to linked funds  Policy administration fees  Bid/offer spread and other charges

Fund management fees receivable Change in deferred fee income

95

92

76

231

216

24

27

255

243

5. Investment return Group

Investment income from financial investments held at fair value through profit or loss

2015 £m

2014 £m

1,639

1,561 5,567

Fair value (losses)/gains from financial investments held at fair value through profit or loss

(185)

Rental income from investment property

254

243

Fair value gains from investment property

439

441

Interest income from cash and cash equivalents

13

11

Net foreign exchange loss

(38)

(27)

2,122

7,796

The fair value gains from financial investments held at fair value through profit or loss (FVTPL) and the fair value gains from investment property include both the net fair value gain and loss on the revaluation of assets held at the balance sheet date and the gains and losses realised on assets disposed of during the year. The fair value gains from financial investments held at FVTPL include a gain of £45m (2014 loss of £477m) in respect of an unquoted debt security held under a reinsurance arrangement (see note 33). Included within fair value gains from financial investments held at FVTPL are fair value losses of £510m (2014 gains of £1,189m) arising on assets held for trading.

6. Other operating income Group 2015 £m

2014 £m

Commission income

14

17

Other

30

30

44

47

7. Claims (a) Claims paid Group 2015 £m

2014 £m

2,531

2,410

194

159

2,725

2,569

Claims paid, before reinsurance  Insurance contracts  Participating investment contracts

Reinsurance recoveries  Insurance contracts

(470)

(432)

Claims paid, after reinsurance  Insurance contracts  Participating investment contracts

2,061

1,978

194

159

2,255

2,137

(b) Claims on investment contracts As set out in note 1(u) the Group does not account for the amounts paid out as claims in relation to non-participating and hybrid participating investment contracts as a claim expense in the statement of comprehensive income. These amounts are accounted for as deposits repaid and are deducted from the value of investment contract liabilities in the balance sheet. The amounts repaid by the Group during the year totalled £2,747m (2014 £1,605m) in respect of non-participating investment contracts and £63m (2014 £56m) in respect of hybrid participating investment contracts.

8. Administrative expenses by type Group 2015 £m

2014 £m

 Expenses

132

139

 Commission

109

78

Acquisition costs

Movement in deferred acquisition costs on investment contracts (note 19)  Additions

(15)

(22)

 Amortisation and impairment charges

96

55

322

250

 Operational expenses

135

131

 Renewal commission

37

38

 Restructuring expenses

-

3

 IT systems development expenses

-

3

Maintenance costs

7

 Movement in provision for future commission (note 34)

(64)

 Pension scheme cost (note 38)

10

12

118

194

Other administrative expenses, including long-term incentive plans

97

37

42

477

486

9. Administrative expenses by nature Group

Staff costs

2015 £m

2014 £m

158

163

81

33

109

78

37

38

5

4

Information systems maintenance and rent

33

32

Property costs

13

14

Regulatory, professional and administration fees

72

103

Movement in provision for future commission (note 34)

(64)

Other expenses

33

14

477

486

Movement in deferred acquisition costs on investment contracts (note 19) Acquisition commission Renewal commission Depreciation of property, plant and equipment (note 17)

7

Auditors’ remuneration, net of VAT Group 2015 £000

2014 £000

2,202

1,787

724

831

1,530

285

49

-

 Tax advisory services

169

312

 Other assurance services

999

149

Fees payable to PwC for the audit of the Parent company and consolidated financial statements Fees payable to PwC for other services:  Audit of the company’s subsidiaries  Audit related assurance services  Tax compliance services

 Other non-audit services

Total

492

106

6,165

3,470

The appointment of auditors to the Group’s pension schemes and the fees paid in respect of those audits are agreed by the Trustee of the scheme who acts independently from the management of the Group. Fees in respect of the Royal London Group Pension Scheme – Audit

43

45

Fees in respect of the Royal Liver Assurance Superannuation Fund – Audit

16

13

Fees in respect of the Royal Liver Assurance Limited Superannuation Fund (ROl) – Audit

16

13

Total

75

71

10. Staff costs (a) Analysis of staff costs Group

Wages and salaries Social security contributions Other pension costs – defined contribution arrangements Other pension costs – defined benefit schemes (note 38) Termination benefits

2015 £m

2014 £m

171

151

14

16

6

6

10

12

2

5

203

190

Number

Number

The average number of persons (including executive directors) employed by the Group during the year was: Sales and sales support Administration

387

345

2,743

2,456

3,130

2,801

The total staff costs of £203m (2014 £190m) are included in the statement of comprehensive income within administration expenses (2015 £158m, 2014 £163m), within investment management expenses (2015 £26m, 2014 £27m) and within other operating expenses (2015 £19m, 2014 £nil). (b) Directors’ emoluments Group 2015 £m

2014 £m

Total emoluments

7

6

Long-term incentives vesting in the year

2

2

Full details of the directors’ emoluments are included in the Directors’ remuneration report on pages 58 to 76. The information included therein, together with the table above, encompasses that required by the Companies Act 2006. (c) Key management compensation payable Compensation payable to key management, including executive directors, is shown in the table below. The number of key management for the year, including executive and non-executive directors, was 30 for the Group and 26 for the Parent company (2014 29 for the Group and 24 for the Parent company). Group

Parent company

2015 £m

2014 £m

2015 £m

2014 £m

14

11

10

9

8

9

5

7

22

20

15

16

Salaries, short-term incentive plans and other benefits Change in amounts payable under long-term incentive plans

The Group’s policy for determining key management remuneration, including executive directors, is for total remuneration to be at the median of the UK financial services market. Bonus plans are designed to encourage and reward increases in the value of the business for the benefit of members. The total amount receivable by key management, including executive directors, under long-term incentive plans was £7m as at 31 December 2015 (2014 £6m). The amount of long-term incentive plans exercised by key management during the year was £8m (2014 £6m).

99

11. Investment management expenses Group 2015 £m

2014 £m

Property expenses

33

29

Other transaction costs

40

16

Costs of in-house investment management operations – staff costs

26

27

Costs of in-house investment management operations – other

39

31

Distributions to external unit holders from consolidated funds

70

61

Other

30

26

238

190

12. Other operating expenses Group 2015 £m

2014 £m

Operating interest payable

2

2

Provisions

2

-

Foreign currency translation

2

7

Other project costs – staff costs

19

-

Other project costs – other

50

33

75

42

13. Finance costs Group 2015 £m

2014 £m

42

40

2

3

44

43

Finance costs comprise interest payable arising from:  Subordinated liabilities  Other

14. Tax charge (a) Tax charge in the statement of comprehensive income Group 2015 £m

2014 £m

 Current year

13

87

 Adjustments in respect of prior periods

(14)

Tax has been provided as follows: UK corporation tax charge (2) 85

(1)

Foreign tax partially relieved against UK corporation tax Deferred tax (note 37)

19

16

-

106

18

207

(b) Reconciliation of the effective tax rate Tax on the Group’s result before tax differs from the theoretical amount that would arise using the weighted average tax rate applicable to the profits of the consolidated companies as follows: Group 2015 £m

2014 £m

143

356

Tax calculated at the standard rate of corporate tax in the UK

28

71

Accounting profit not subject to policyholder tax

(28)

Policyholder tax on long-term insurance business

18

207

Tax charge for the year

18

207

Result before tax before transfer to unallocated divisible surplus

(71)

UK corporation tax in the statement of comprehensive income has been calculated at a rate of 20% (2014 20%) on the taxable profits in respect of insurance business of the long-term fund and at 20.25% (2014 21.25%) on the taxable profits of the subsidiaries of the long-term fund. The Finance No.2 Act 2015 reduced the rate of corporation tax to 19% effective from 1 April 2017 and to 18% from 1 April 2020. The impact of this reduction in tax rate, which is applicable to the subsidiaries of the long-term fund’s calculation of deferred tax assets and liabilities at the reporting date, is reflected in the deferred tax charge above.

15. Parent company statement of comprehensive income The Parent company has taken advantage of the exemption under section 408 of the Companies Act 2006 not to include a parent company statement of comprehensive income. The Parent company is a mutual company and consequently the profit for the year is reported as £nil after a transfer to or from the unallocated divisible surplus.

101

16. Fair value measurement (a) Fair value of the Group and Parent company’s assets and liabilities that are measured at fair value on a recurring basis Some of the Group and Parent company’s assets and liabilities are measured at fair value at the end of each reporting period. The following table gives information about how the fair values of these assets and liabilities are determined.

Asset/liability

Valuation techniques and key inputs

2015

2014

Fair value Fair value Parent Fair value Group company hierarchy £m £m level

Fair value Group £m

Fair value Parent company £m

Fair value hierarchy level

Owner-occupied land and buildings

Fair value is determined using both income capitalisation and market comparison valuation methods.

27

-

3

25

-

3

Investment property

Fair value is determined using both income capitalisation and market comparison valuation methods.

5,036

4,936

3

4,727

4,633

3

59

59

2

70

70

2

2,267

2,267

2

2,250

2,250

2

171

171

2

250

250

2

Derivatives – equity options

Mark to model technique using expected dividend yields and market-implied volatility.

Derivatives – interest rate swaps

Mark to model technique using market swap rates.

Derivatives – interest rate swaptions

Mark to model technique using forward swap rates and interest rate volatility.

Derivatives – currency forwards

Mark to model technique using expected foreign exchange rates.

18

10

2

3

1

2

Derivatives – total return swaps

Mark to model technique using market swap rates.

30

30

2

550

550

2

Equity securities – quoted

Quoted prices in an active market. 20,742

7,094

1

19,024

7,287

1

Equity securities – quoted

Quoted prices, but insufficient trading activity to confirm market is active.

18

13

2

28

19

2

Equity securities - quoted Quoted prices, but shares have been delisted or there are pending corporate actions.

2

-

3

-

-

N/A

12

12

2

180

15

2

Equity securities – unquoted

Fair value is derived using observable market prices.

Equity securities – unquoted

Fair value is based on the net asset value (NAV) of the entity.

-

-

N/A

33

33

3

Equity securities – The NAV provided by the third-party unquoted – private equity administrator adjusted for any cash flows occurring after the NAV date and before the reporting period end.

220

184

3

146

146

3

Equity securities – The NAV provided by the external unquoted – property funds fund managers.

206

206

3

180

180

3

13,495

12,916

1

14,146

13,267

1

1,281

1,113

2

1,725

1,444

2

11,336

9,182

2

11,108

9,537

2

6

2

1

31

-

1

13

11

3

6

6

3

5

5

3

9

9

3

Government bonds – UK treasuries

Debt Management Office (DMO) price (average of prices used in actual transactions).

Government bonds – other

Quoted prices provided by third-party pricing sources.

Other quoted debt and fixed income securities

Quoted prices provided by third-party pricing sources, using consensus pricing.

Other quoted debt and fixed income securities

Quoted prices in an active market.

Other quoted debt and fixed income securities

Mark to model technique using a gross redemption yield.

Loans secured by policies Carrying value.

16. Fair value measurement (continued) (a) Fair value of the Group and Parent company’s assets and liabilities that are measured at fair value on a recurring basis (continued) 2014

2015

Asset/liability

Valuation techniques and key inputs

Other unquoted debt and fixed income securities Other unquoted debt and fixed income securities Unit trusts and other pooled investments – quoted

Prices provided by third-party pricing sources, using consensus pricing.

Unit trusts and other pooled investments – quoted

Quoted prices, but insufficient trading activity to confirm market is active.

Unit trusts and other pooled investments – unquoted

The NAV provided by external fund manager.

Investment in Group entities – shares Investment in Group entities – loans

Net present value of future projected cash flows. Carrying value.

Investment in Group entities – investment funds

Quoted prices in an active market.

Investment in Group entities – investment funds

The NAV provided by external fund manager.

Non-participating investment contract liabilities

Determined by the fair value of the net assets of the underlying unitised investment funds.

Liability to external unit holders Reinsurance liability

Quoted prices in an active market.

Derivative liabilities Provision for future commission

Fair value Fair value Parent Group company £m £m

Fair value hierarchy level

Fair value Group £m

Fair value Parent company £m

Fair value hierarchy level

2,788

2,788

2

2,815

2,815

2

3

3

3

-

-

N/A

4,915

4,899

1

4,631

4,557

1

172

172

2

234

234

2

400

320

3

487

487

3

-

543

3

-

470

3

-

29

3

-

29

3

-

14,699

1

-

12,233

1

-

50

3

-

162

3

Mark to model technique using a gross redemption yield. Quoted prices in an active market.

(24,982) (24,982) (3,145)

Discounted cash flows are used to derive the fair value. As described above for each type of derivative. Present value of future projected cash flows.

-

2

(22,691)

1

(3,122)

(22,691)

2

-

1

(2,773)

(2,773)

2

(2,799)

(2,799)

2

(1,460)

(1,445)

2

(2,064)

(2,057)

2

(148)

(148)

3

(212)

(212)

3

The Group and Parent company’s policy is to recognise transfers into and transfers out of fair value hierarchy levels at the end of the reporting period. £101m has been transferred from level 2 to level 1 as a quoted price in an active market was available as at 31 December 2015 (2014 £111m was transferred from level 2 to level 1). There are no fair value measurements in the balance sheet on a non-recurring basis. (b) Fair value of the Group and Parent company’s assets and liabilities that are not measured at fair value on a recurring basis (but fair values are disclosed) Group and Parent company 2014

2015

Asset/liability

Valuation techniques and key inputs

Subordinated liabilities Quoted market price.

103

Fair value £m

Fair value hierarchy level

Fair value £m

Fair value hierarchy level

768

1

682

1

16. Fair value measurement (continued) (c) Fair value hierarchy Assets and liabilities held at fair value have been classified using a fair value hierarchy that reflects the significance of the inputs used in making the fair value measurement. The position assigned to the asset or liability in the fair value hierarchy has to be determined by the lowest level of any input to its valuation that is considered to be significant to the valuation of the asset or liability in its entirety. The hierarchy only reflects the methodology used to derive the asset’s or liability’s fair value. The three levels of the hierarchy are as follows: Level 1 – Quoted prices in active markets Inputs to level 1 fair values are quoted prices (unadjusted) in active markets for identical assets or liabilities. An active market is one in which transactions occur with sufficient frequency and at sufficient volumes to provide pricing information on an ongoing basis. Level 2 – Inputs other than quoted prices included within level 1 that are observable Inputs to level 2 fair values are those other than quoted prices included within level 1, which are observable for the asset or liability, either directly as prices or indirectly, i.e. derived from prices. Level 2 inputs include:  quoted prices for identical assets in markets that are not active;  quoted prices for similar assets in active markets; and  inputs to valuation models that are observable for the asset. For example, interest rates and yield curves observable at commonly quoted

intervals, volatilities and swap rates. Level 3 – Inputs not based on observable data Inputs to level 3 fair values are unobservable inputs for the asset or liability. Unobservable inputs are typically used where observable inputs are not available. The Group and Parent company’s assets and liabilities classified into the three levels of the fair value hierarchy are shown in the following tables. Group – 2015 Level 1 £m

Level 2 £m

Level 3 £m

Total £m

Assets Owner-occupied land and buildings (note 17)

-

-

27

27

Investment property (note 18)

-

-

5,036

5,036

-

2,545

-

2,545

Financial investments: Derivative assets Equity securities  Quoted

20,742

18

2

20,762

-

12

426

438

13,495

1,281

-

14,776

 Other quoted

6

11,336

13

11,355

 Loans secured by policies

-

-

5

5

 Other unquoted

-

2,788

3

2,791

 Unquoted

Debt and fixed income securities  Government bonds

Other investments  Unit trusts and other pooled investments

4,915

172

400

5,487

39,158

18,152

849

58,159

 Deposits with credit institutions

-

-

-

1,970

Total financial investments (note 20)

39,158

18,152

849

60,129

Total assets at fair value

39,158

18,152

5,912

65,192

Liabilities Non-participating investment contract liabilities (note 29)

-

Reinsurance liability (note 33) Derivative liabilities (note 33) Provision for future commission (note 34)

(24,982)

-

-

(2,773)

-

(2,773)

-

(1,460)

-

(1,460)

-

Liability to external unit holders (note 36)

(3,145)

Total liabilities at fair value

(3,145)

(29,215)

(148) (148)

(24,982)

(148) (3,145) (32,508)

16. Fair value measurement (continued) (c) Fair value hierarchy (continued) Group – 2014 Level 1 £m

Level 2 £m

Level 3 £m

Total £m

Owner-occupied land and buildings (note 17)

-

-

25

25

Investment property (note 18)

-

-

4,727

4,727

-

3,123

-

3,123

19,024

28

-

19,052

-

180

359

539

Assets

Financial investments: Derivative assets Equity securities  Quoted  Unquoted

Debt and fixed income securities  Government bonds  Other quoted

14,146

1,725

-

15,871

31

11,108

6

11,145

 Loans secured by policies

-

-

9

9

 Other unquoted

-

2,815

-

2,815

4,631

234

487

5,352

37,832

19,213

861

57,906

 Deposits with credit institutions

-

-

-

1,586

Total financial investments (note 20)

37,832

19,213

861

59,492

Total assets at fair value

37,832

19,213

5,613

64,244

Other investments  Unit trusts and other pooled investments

Liabilities Non-participating investment contract liabilities (note 29)

-

(22,691)

-

(22,691)

Reinsurance liability (note 33)

-

(2,799)

-

(2,799)

Derivative liabilities (note 33)

-

(2,064)

-

(2,064)

Provision for future commission (note 34)

-

Liability to external unit holders (note 36)

(3,122)

Total liabilities at fair value

(3,122)

105

(27,554)

(212) (212)

(212) (3,122) (30,888)

16. Fair value measurement (continued) (c) Fair value hierarchy (continued) Parent company – 2015 Level 1 £m

Level 2 £m

Level 3 £m

Total £m

-

-

4,936

4,936

-

2,537

-

2,537

7,094

13

-

7,107

-

12

390

402

12,916

1,113

-

14,029

 Other quoted

2

9,182

11

9,195

 Loans secured by policies

-

-

5

5

 Other unquoted

-

2,788

3

2,791

4,899

172

320

5,391

Assets Investment property (note 18) Financial investments: Derivative assets Equity securities  Quoted  Unquoted

Debt and fixed income securities  Government bonds

Other investments  Unit trusts and other pooled investments

24,911

15,817

729

41,457

 Deposits with credit institutions

-

-

-

1,172

Total financial investments (note 20)

24,911

15,817

729

42,629

Investments in Group entities (note 21)

14,699

-

622

15,321

Total assets at fair value

39,610

15,817

6,287

62,886

Liabilities Non-participating investment contract liabilities (note 29)

-

Provision for future commission (note 34)

-

Reinsurance liability (note 33)

-

(2,773)

-

(2,773)

Derivative liabilities (note 33)

-

(1,445)

-

(1,445)

Total liabilities at fair value

-

(29,200)

(24,982) -

(148)

(148)

(24,982) (148)

(29,348)

16. Fair value measurement (continued) (c) Fair value hierarchy (continued) Parent company – 2014 Level 1 £m

Level 2 £m

Level 3 £m

Total £m

-

-

4,633

4,633

-

3,121

-

3,121

Assets Investment property (note 18) Financial investments: Derivative assets Equity securities 7,287

19

-

7,306

-

15

359

374

13,267

1,444

-

14,711

 Other quoted

-

9,537

6

9,543

 Loans secured by policies

-

-

9

9

 Other unquoted

-

2,815

-

2,815

4,557

234

487

5,278

 Quoted  Unquoted  Debt and fixed income securities  Government bonds

Other investments  Unit trusts and other pooled investments

25,111

17,185

861

43,157

 Deposits with credit institutions

-

-

-

1,074

Total financial investments (note 20)

25,111

17,185

861

44,231

Investments in Group entities (note 21)

12,233

-

661

12,894

Total assets at fair value

37,344

17,185

6,155

61,758

Liabilities Non-participating investment contract liabilities (note 29)

-

Provision for future commission (note 34)

-

(22,691)

Reinsurance liability (note 33)

-

(2,799)

-

(2,799)

Derivative liability (note 33)

-

(2,057)

-

(2,057)

Total liabilities at fair value

-

(27,547)

-

-

(22,691)

(212)

(212)

(212)

(27,759)

(d) Level 3 assets and liabilities For the majority of level 3 investments, the Group and Parent company do not use internal models to value the investments but rather obtain valuations from external parties. The Group and Parent company review the appropriateness of these valuations on the following basis:  for investment and owner-occupied property, the valuations are obtained from external valuers and are assessed on an individual

property basis. The principal assumptions will differ depending on the valuation technique employed and sensitivities are determined by flexing the key inputs listed in the table below using knowledge of the investment property market;  private equity fund valuations are provided by the respective managers of the underlying funds and are assessed on an individual

investment basis, with an adjustment made for significant movements between the date of the valuation and the end of the reporting period. Sensitivities are determined by comparison to the private equity market; and  corporate bonds are predominantly valued using single broker indicative quotes obtained from third-party pricing sources. Sensitivities

are determined by flexing the single quoted prices provided using a sensitivity to yield movements.

107

16. Fair value measurement (continued) (d) Level 3 assets and liabilities (continued) The fair value measurements for level 3 investments are reviewed by the RLAM Investment Committee and the Group Investment Performance Committee and approved by the Audit Committee at the half year and year end for inclusion in the financial statements. The Group Investment Performance Committee is responsible for agreeing the valuation basis for any investment assets or liabilities where a market price is not readily available, as well as agreeing any changes to the valuation principles applicable to all investment assets and liabilities. Changes in the assumptions used to calculate the level 3 valuations to reasonably possible alternative assumptions would have the following impact on the Royal London Group IFRS result before tax for the year. Only changes in assets held by the Royal London Open Fund would impact the Group’s profit for the year, as changes in the closed funds are offset by an opposite movement in investment and insurance contract liabilities and therefore are not included below.  for level 3 private equity investments a 10% increase or decrease in the value of the underlying funds at 31 December 2015 would result

in a £3.1m increase or decrease in profit before tax or total assets or liabilities;  for level 3 corporate bonds, increasing assumed yields at 31 December 2015 by 100bps would result in a decrease in profit before tax

and the fair value of the corporate bonds of £0.3m. Decreasing assumed yields at 31 December 2015 by 100bps would result in an increase in profit after tax and the fair value of the corporate bonds of £0.3m;  for investments in Group entities (where the net present value of future projected cash flows is used) a 100bps increase or decrease in

risk-free interest rates would result in a £11.2m increase or decrease in profit before tax and fair value of investment in Group entities; and  for the provision for future commission, a 10% increase or decrease in the value of the underlying funds at 31 December 2015 would

result in a £8.7m increase or decrease in the provision for future commission and a 10% increase or decrease in future surrender rates would result in a £10.6m increase or decrease in the provision. Information about fair value measurements using significant unobservable inputs: Asset/liability

Valuation technique

Unobservable input

Range (weighted average)

Income capitalisation

4.68%-10.42% (5.08%)

Market comparison

Equivalent yield Estimated rental value per square foot Price per acre

Equity securities – unquoted – private equity and property funds

Adjusted net asset value

Adjustment to net asset value

n/a

Debt and fixed income securities

Single broker quotes

Unadjusted single broker quotes n/a

Loans secured by policies

Carrying value

Adjustment to carrying value

n/a

Unit trusts and other pooled investments

Adjusted net asset value

Adjustment to net asset value

n/a

Investments in Group entities – shares

Net present value of future projected cash flows

Fees (bps) p.a. Expenses (bps) p.a. Investment return (%) p.a. Surrender rate (%) p.a. Funds under management end 2015 (£m) Tax

10.0-48.2 (24.3) 6.3-11.0 (7.5) 2.0 14.9-35.0 (19.9)

Owner-occupied property and investment property

£3.65-£100 (£41.91) £2,000-£1,750,000

21,194 At enacted rates of corporation tax

Investments in Group entities – loans

Carrying value

Carrying value

n/a

Provision for future commission

Present value of future projected cash flows

Fund based renewal commission rated (%) p.a. Investment return (%) p.a. Surrender rate (%) p.a. Value of underlying funds at end 2015 (£m)

0.01-1.00 (0.53) 2.40 (2.40) 0-13.8 (6.3) 4,041

16. Fair value measurement (continued) (d) Level 3 assets and liabilities (continued) Movement during the year in the level 3 assets and liabilities: Group – 2015

At 1 January Purchases

Financial investments £m

Owneroccupied property £m

Investment property £m

Total £m

861

25

4,727

5,613

58

-

211

269

Sales

(320)

-

(261)

(581)

Net gains and (losses) recognised in profit or loss

204

2

359

565

46

-

-

46

At 31 December

849

27

5,036

5,912

‘Net gains and (losses) recognised in profit or loss’ that relate to assets still held at the balance sheet date

112

2

359

473

Financial investments £m

Owneroccupied property £m

Investment property £m

Total £m

911

24

4,074

5,009

15

-

274

289

Transfers into level 3

Group – 2014

At 1 January Purchases Sales

(219)

-

Net gains and (losses) recognised in profit or loss

167

1

(275) 603

4

-

-

4

(17)

-

-

(17)

Transfers into level 3 Transfers out of level 3

(56) 435

At 31 December

861

25

4,727

5,613

‘Net gains and (losses) recognised in profit or loss’ that relate to assets still held at the balance sheet date

122

1

425

548

109

16. Fair value measurement (continued) (d) Level 3 assets and liabilities (continued) Parent company – 2015 Financial investments £m

Investment property £m

Investments in Group entities £m

Total £m

861

4,633

661

6,155

57

211

40

308

Sales

(320)

(261)

(113)

(694)

Net gains and (losses) recognised in profit or loss

124

353

34

511

7

-

-

7

At 31 December

729

4,936

622

6,287

‘Net gains and (losses) recognised in profit or loss’ that relate to assets still held at the balance sheet date

113

353

At 1 January Purchases

Transfers into level 3

34

500

Parent company – 2014

At 1 January Purchases

Financial investments £m

Investment property £m

Investments in Group entities £m

Total £m

357

2,503

509

3,369

14

262

8

284

Sales

(160)

Part VII transfer in

592

1,564

69

354

1

-

-

1

(12)

-

-

(12)

661

Net gains and (losses) recognised in profit or loss Transfers into level 3 Transfers out of level 3

(50)

At 31 December

861

4,633

‘Net gains and (losses) recognised in profit or loss’ that relate to assets still held at the balance sheet date

122

356

(10) 329 (175)

(175)

(220) 2,485 248

6,155 303

The ‘Net gains and (losses) recognised in profit and loss’ shown above are included within the statement of comprehensive income within ‘Investment return’. The Group and Parent company’s policy is to recognise transfers into and out of level 3 at the end of the reporting period. The movement in the provision for future commission is shown in note 34.

17. Property, plant and equipment Group – 2015 Owneroccupied land and buildings £m

Computers, office equipment and vehicles £m

Total £m

43

98

141

Additions

-

6

6

Revaluation gains

2

-

2

Transfers to intangible assets

-

(7)

(7)

Cost or valuation At 1 January

At 31 December

45

97

(18)

(77)

142

Accumulated depreciation and impairment losses At 1 January Depreciation charge

-

(95)

(5)

(5)

(18)

(82)

(100)

At 1 January

25

21

46

At 31 December

27

15

42

At 31 December Net book value

Group – 2014 Owneroccupied land and buildings £m

Computers, office equipment and vehicles £m

Total £m

43

83

126

-

15

15

43

98

141

(19)

(73)

(92)

Cost or valuation At 1 January Additions At 31 December Accumulated depreciation and impairment losses At 1 January Depreciation charge

-

(4)

(4)

Reversal of impairment losses

1

-

1

(18)

(77)

(95)

At 1 January

24

10

34

At 31 December

25

21

46

At 31 December Net book value

For the purposes of the disclosure required by IAS 1, ‘Presentation of Financial Statements’, all property, plant and equipment held by the Group is classified as being held for more than 12 months from the balance sheet date. The Parent company did not hold any property, plant and equipment at the balance sheet date or at the previous balance sheet date. Owner-occupied land and buildings shown above are held on a freehold basis. If the owner-occupied land and buildings were stated on a historical cost basis, the amounts would be as follows: Group 2015 £m

2014 £m

Cost

35

35

Accumulated depreciation and impairment losses

(18)

(18)

Net book value

17

17

111

18. Investment property Group

Parent company

2015 £m

2014 £m

2015 £m

2014 £m

4,727

4,074

4,633

2,503

Fair value At 1 January Additions 41

72

41

59

 Acquisition of new properties

170

205

170

205

Disposals

(261)

Net gain from fair value adjustments

365

 Capitalised expenditure on existing properties

(51) 427

(45)

(261)

347

358

(6)

-

(5)

Part VII transfer

-

-

-

1,564

At 31 December

5,036

4,727

4,936

4,633

254

243

252

154

33

29

32

17

Foreign exchange losses

Rental income from investment property Direct operating expenses arising from investment property

-

For the purposes of the disclosure required by IAS 1, the amount of investment property at the balance sheet date that is classified as being held for more than 12 months is £4,953m for the Group (2014 £4,717m) and £4,853m for the Parent company (2014 £4,623m). The fair value of investment property above includes £489m (2014 £548m) for the Group and £489m (2014 £548m) for the Parent company held under finance leases. The total direct expenses above relating to properties that did not generate income are £11m (2014 £13m) for the Group and £11m (2014 £13m) for the Parent company. Investment property is revalued to fair value annually with an effective date of 31 December. The fair values are determined by a registered independent valuer having an appropriate recognised professional qualification and recent experience in the location and category of the property being valued. The principal valuers used were CBRE Limited, Cushman & Wakefield, and Knight Frank LLP. Fair value is determined using market and income approaches (note 16 (d)). In estimating the fair value of properties, the highest and best use of the properties is their current use. There has been no change to the valuation technique during the year. The net gain from fair value adjustments shown above represents the net fair value gain on the revaluation of properties held at the balance sheet date and does not include gains or losses realised on properties disposed of during the year. Investment properties are leased to third parties under operating leases. Under the terms of certain leases, the company is required to repair and maintain the related properties. At the balance sheet date the future minimum lease payments receivable under non-cancellable leases are shown in the following table. For the purposes of this table, the minimum lease period has been taken as the period to the first possible date that the lease can be terminated by the lessee. These total future minimum lease payments receivable can be analysed as follows: Group

Not later than one year Later than one year and not later than five years Later than five years

Parent company

2015 £m

2014 £m

2015 £m

2014 £m

220

227

218

226

682

698

678

694

1,270

1,261

1,270

1,258

2,172

2,186

2,166

2,178

Group

Freehold Leasehold

Parent company

2015 £m

2014 £m

2015 £m

2014 £m

1,858

1,815

1,852

1,807

314

371

314

371

2,172

2,186

2,166

2,178

19. Intangible assets The following tables show the movements in the intangible assets of the Group and the Parent company. Group – 2015

Cost At 1 January Additions Transfers from tangible assets At 31 December

Goodwill £m

Acquired PVIF on investment contracts £m

Acquired PVIF on insurance contracts £m

Deferred acquisition costs on investment contracts £m

Other intangible assets £m

Total £m

250

421

1,013

838

215

2,737

-

-

-

15

15

30

-

-

-

-

7

7

250

421

1,013

853

237

2,774

(1,806)

Accumulated amortisation and impairment losses At 1 January Amortisation charge Impairment losses

-

(387)

(836)

(413)

(170)

-

(3)

(11)

(53)

(15)

-

(1)

(10)

(43)

At 31 December

-

(391)

(857)

(509)

(185)

(82)

-

(54) (1,942)

Net book value At 1 January

250

34

177

425

45

931

At 31 December

250

30

156

344

52

832

The net book value of intangible assets at 31 December 2015 can be analysed between amounts expected to be amortised (goodwill subject to annual impairment review): Within 12 months In more than 12 months

-

10

29

49

13

101

250

20

127

295

39

731

250

30

156

344

52

832

Group – 2014

Goodwill £m

Acquired PVIF on investment contracts £m

Acquired PVIF on insurance contracts £m

Deferred acquisition costs on investment contracts £m

Other intangible assets £m

Total £m

Cost At 1 January Additions

250

421

1,013

816

215

2,715

-

-

-

22

-

22

At 31 December

250

421

1,013

838

215

2,737

(791)

(358)

(146)

(1,674)

(55)

(24)

(105)

Accumulated amortisation and impairment losses At 1 January Amortisation charge Impairment losses

-

(379)

-

(8)

(18)

-

-

(27)

At 31 December

-

-

-

(27)

(387)

(836)

(413)

(170)

(1,806)

Net book value At 1 January

250

42

222

458

69

1,041

At 31 December

250

34

177

425

45

931

The net book value of intangible assets at 31 December 2014 can be analysed between amounts expected to be amortised (goodwill subject to annual impairment review): Within 12 months In more than 12 months

-

2

12

52

15

81

250

32

165

373

30

850

250

34

177

425

45

931

113

19. Intangible assets (continued) Parent company – 2015

Goodwill £m

Acquired PVIF on investment contracts £m

Acquired PVIF on insurance contracts £m

Deferred acquisition costs on investment contracts £m

Other intangible assets £m

Total £m

232

410

1,003

838

138

2,621

-

-

-

15

-

15

232

410

1,003

853

138

2,636

Cost At 1 January Additions At 31 December Accumulated amortisation and impairment losses At 1 January

-

(386)

(832)

Amortisation charge

-

(1)

Impairment losses

-

(2)

At 31 December

-

(413)

(97)

(12)

(53)

(11)

(9)

(43)

(389)

(853)

(509)

(108)

(1,728) (77)

-

(54) (1,859)

Net book value At 1 January

232

24

171

425

41

893

At 31 December

232

21

150

344

30

777

The net book value of intangible assets at 31 December 2015 can be analysed between amounts expected to be amortised (goodwill subject to annual impairment review): Within 12 months In more than 12 months

-

10

23

49

11

93

232

11

127

295

19

684

232

21

150

344

30

777

Parent company – 2014

Goodwill £m

Acquired PVIF on investment contracts £m

Acquired PVIF on insurance contracts £m

Deferred acquisition costs on investment contracts £m

Other intangible assets £m

Total £m

232

410

891

816

138

2,487

Part VII transfer

-

-

112

-

-

112

Other additions

-

-

-

22

-

22

232

410

1,003

838

138

2,621

Cost At 1 January

At 31 December Accumulated amortisation and impairment losses At 1 January

-

(377)

(787)

(358)

(86)

(1,608)

Amortisation charge

-

(9)

(18)

(55)

(11)

(93)

Impairment losses

-

-

(27)

At 31 December

-

-

-

(386)

(832)

(413)

(97)

(27) (1,728)

Net book value At 1 January

232

33

104

458

52

879

At 31 December

232

24

171

425

41

893

The net book value of intangible assets at 31 December 2014 can be analysed between amounts expected to be amortised (goodwill subject to annual impairment review): Within 12 months In more than 12 months

-

2

11

52

12

77

232

22

160

373

29

816

232

24

171

425

41

893

19. Intangible assets (continued) The impairment losses in both Group and Parent company include £43m relating to a reclassification from the provision for renewal commission to DAC and £11m in acquired PVIF resulting from changes in persistency and expense assumptions on ex-Royal Liver business and changes to vesting assumptions on ex-RL (CIS) deferred annuity business. 2014 included £26m for both the Group and Parent company resulting from a reclassification from acquired PVIF to non-participating insurance contract liabilities, as a result of the Part VII transfer. (a) Goodwill Goodwill is the only intangible asset that has an indefinite useful life. The carrying value of £250m comprises £119m relating to the acquisition of the former Resolution businesses and assets in 2008 (2014 £119m), £110m (2014 £110m) in respect of the acquisition of Scottish Life in 2001, £3m (2014 £3m) in relation to a cash management business and £18m (2014 £18m) relating to the acquisition of Investment Funds Direct Group Limited and Investment Sciences Limited. Goodwill is tested for impairment annually. The impairment test involves comparing the carrying value of the goodwill to its recoverable amount on a cash-generating unit basis. The recoverable amount of the goodwill has been determined using a value-in-use calculation. This is determined as the present value of the expected profits arising from the future new business written by the relevant business unit. The key assumptions used for the value-in-use calculations are as follows:  expected profits from future new business are based on the medium-term plan approved by the Board of Directors, which covers a five-

year period, and as such reflects the best estimate of future profits based on both historical experience and expected growth rates. Some of the assumptions that underlie the budgeted expected profits include customer numbers, premium rate and fee income changes, claims inflation and commission rates;  growth rates – cash flows beyond that period have been assumed to grow at a steady rate of between 2.5% and 3% per annum

(2014 2.5% to 3% per annum); and  discount rates – most of the cash flows have been discounted using a risk-adjusted discount rate of 6.1% (2014 6.1%).

The recoverable amount exceeds the carrying amount of the goodwill and a reasonably possible change in a key assumption will not cause the carrying value of the goodwill to exceed its recoverable amount. (b) Other intangible assets Other intangible assets consist of distribution channel relationships, software and incremental acquisition costs directly related to acquiring new unit trust management business. They are being amortised over their expected useful lives of between three and 10 years.

115

20. Financial investments Group 2015 £m

Parent company 2014 £m

2014 £m

2015 £m

Financial investments held at fair value through profit or loss (FVTPL)  Classified as held for trading  Designated as FVTPL

2,545

3,123

2,537

3,121

57,584

56,369

40,092

41,110

60,129

59,492

42,629

44,231

For the purposes of the disclosure required by IAS 1, it has been assumed that financial investments will be realised in order to settle the claims expected to arise during the 12 months following the balance sheet date. On this basis, the amount of financial investments at the balance sheet date that are classified as being held for more than 12 months is £55,186m for the Group (2014 £55,420m) and £37,687m for the Parent company (2014 £40,161m). The Parent company includes within its investment portfolio a significant holding in OEICs and other investment funds managed by subsidiary companies. Those funds over which the Parent company has control are classified as subsidiaries (‘consolidated funds’). The Parent company’s investment in these consolidated funds is shown in note 21 and is not included in the Parent company figures below. On consolidation, the underlying investments of the consolidated funds are included within the appropriate investment line in the balance sheet and are therefore included in the Group figures shown below. (a) Financial investments classified as held for trading Group

Parent company

2015 £m

2014 £m

2015 £m

2014 £m

2,545

3,123

2,537

3,121

Derivatives (note 20 (d))  Unquoted

(b) Financial investments designated as FVTPL Group

Parent company

2015 £m

2014 £m

2015 £m

2014 £m

20,762

19,052

7,107

7,306

Equity securities  Quoted  Unquoted

438

539

402

374

21,200

19,591

7,509

7,680

Debt and fixed income securities  Government bonds

14,776

15,871

14,029

14,711

 Other quoted

11,355

11,145

9,195

9,543

5

9

5

9

 Deposits with credit institutions

1,970

1,586

1,172

1,074

 Other unquoted

2,791

2,815

2,791

2,815

30,897

31,426

27,192

28,152

5,487

5,352

5,391

5,278

57,584

56,369

40,092

41,110

 Loans secured by policies

Other investments  Unit trusts and other pooled investments

Total financial investments designated as FVTPL

Included in the figures for Government bonds above are corporate bonds, issued by companies and guaranteed by their respective governments, of £144m for the Group (2014 £215m) and £137m for the Parent company (2014 £209m). Included in the Group and Parent company figure for unquoted debt securities above is £2,773m (Group 2014 £2,799m) in respect of a loan note held in respect of a reinsurance rearrangement (see note 33).

20. Financial investments (continued) (c) Derivative financial instruments The Group and Parent company utilise derivative instruments to hedge market risk (see note 43), for efficient portfolio management and for the matching of liabilities to policyholders. Derivatives are either ‘exchange-traded’ (regulated by an exchange), which have a quoted market price, or ‘over-the-counter’ (individually negotiated between the parties to the contract), which are unquoted. The Group is exposed to credit risk on the carrying value of derivatives in the same way as it is exposed to credit risk on other financial investments. To mitigate this risk, a portion of the fair value of the derivatives held by the Group at any point in time is matched by collateral and cash margin received from the counterparty to the transaction. Cash margin is collateral in the form of cash. Initial cash margin is exchanged at the outset of the contract. Variation margin is exchanged during the life of the contract in response to changes in the value of the derivative. Further details are given in note 20(e). The remaining credit risk is managed within the Group’s risk management framework, which is discussed further in note 43. The Group and Parent company utilise the following derivatives: Options and warrants Options are contracts under which the seller grants the buyer the right, but not the obligation, to buy or to sell a specific amount of a financial instrument at a pre-determined price, at or by a set date, or during a set period. The Group uses equity options to manage its exposure to fluctuations in equity markets and to back certain products which include a guaranteed investment return based on equity values. Warrants give the holder the right to purchase a particular equity at a specified price. Futures A futures contract is an agreement to buy or sell a given quantity of a financial instrument, at a specified future date at a pre-determined price. The Group uses futures to manage its exposure to fluctuations in equity markets. Interest rate swaps An interest rate swap is a contract under which interest payments at a fixed interest rate are exchanged for interest payments at a variable interest rate (or vice versa) based on an agreed principal amount. Only the net interest payments are exchanged. No exchange of principal takes place. Swaptions Swaptions are options to enter into an interest rate swap at a future date, and are used to limit exposure to fluctuations in interest rates over the long term. Total return swaps A total return swap is a contract under which one party makes payments based on a set rate, fixed or variable, whilst the other party makes payments based on the return of an underlying item. Swaptions, interest rate swaps and total return swaps are used to mitigate the interest rate risk inherent in guaranteed annuity rates granted by the Group. Credit default swaps A credit default swap is a contract under which the purchaser pays a periodic premium in exchange for a contingent payment in the event of a credit default occurring in an agreed underlying asset. The Group uses credit default swaps to manage the credit exposure of its fixed rate financial assets. Currency forwards A currency forward is a contract to exchange an agreed amount of currency at a specified exchange rate and on a specified date. The Group uses currency forwards to reduce exposure to movements in exchange rates.

117

20. Financial investments (continued) (d) Fair value of derivative instruments held Group 2014

2015 Contract/ notional amount £m

Fair values Assets £m

Liabilities £m

Contract/ notional amount £m

Fair values Assets £m

Liabilities £m

605

59

(13)

619

70

(8)

23,335

2,267

(1,424)

18,659

2,250

(1,947)

Interest rate swaptions

7,797

171

-

8,105

250

Total return swaps

3,043

30

(1)

6,039

550

Equity options and warrants Interest rate swaps

Credit default swaps Currency forwards

5

-

1,545

18

(22)

2,545

(1,460)

Total derivative assets/(liabilities)

-

(94)

5

-

1,703

3

(15)

-

3,123

(2,064)

Parent company 2014

2015 Contract/ notional amount £m

Fair values Assets £m

Liabilities £m

Contract/ notional amount £m

Fair values Assets £m

Liabilities £m

604

59

(13)

619

70

(8)

23,335

2,267

(1,424)

18,659

2,250

(1,946)

Interest rate swaptions

7,797

171

-

8,105

250

Total return swaps

3,043

30

(1)

6,039

550

Equity options and warrants Interest rate swaps

Credit default swaps Currency forwards Total derivative assets/(liabilities)

5

-

585

10

(7)

-

2,537

(1,445)

(94)

5

-

-

695

1

(9)

3,121

(2,057)

In addition to the above, the Group and Parent company make use of futures contracts. At 31 December 2015, the Group and Parent company had entered into equity futures trades giving exposure to equities with a notional value of Group £593m (2014 £457m) and Parent company £440m (2014 £309m) and into gilt futures trades giving exposure to gilts with a notional value of £246m for both Group and Parent company (2014 £245m). The equity and gilt futures had no market value at that date because all variation margin on these contracts is settled on a daily basis. The Group paid initial cash margin of £38m (2014 £26m) and Parent company £29m (2014 £19m) in respect of these trades, which is included within ‘trade and other receivables’. The net variation margin payable at 31 December 2015 by the Group was £2m and by the Parent company was £3m (2014 £2m for both Group and Parent company), being the amount due for the movement on the last business day of 2015, which was settled on the first business day in 2016. Variation margin receivable is included within ‘trade and other receivables’ and variation margin payable is included within ‘payables and other financial liabilities’. (e) Collateral and other arrangements (i) Stock loan agreements The Group and Parent company have entered into a number of stock lending transactions that transfer legal title to third parties, but not the exposure to the income and market value movements arising from those assets. As a result, the Group and Parent company retain the risks and rewards of ownership and the assets continue to be recognised in full on the Group and Parent company balance sheets. There are no restrictions arising from the transfers. The assets transferred under these agreements are secured by the receipt of collateral. The level of collateral held is monitored regularly and adjusted as necessary to manage exposure to credit risk. The collateral received was in the form of UK, US, Japanese and European Government bonds and quoted equities. There were no borrower defaults in the year (2014 none).

20. Financial investments (continued) (e) Collateral and other arrangements (continued) (i) Stock loan agreements (continued) The following table shows the assets within the Group and Parent company balance sheets that have been transferred under stock loan agreements and the related collateral received. Group

Parent company

2015 £m

2014 £m

2015 £m

2014 £m

629 50

592

98

117

71

45

68

482

548

330

458

1,161

1,211

473

643

1,209

1,273

488

669

Stock loan agreements  Listed equities  Corporate bonds  Government bonds

Collateral received

(ii) Other collateral received Collateral was also received in respect of derivatives. Non-cash collateral was £769m for both the Group and the Parent company (2014 £684m). The collateral received was in the form of UK Government bonds and European sovereign debt. It may be sold or re-pledged in the absence of default. No collateral was sold or re-pledged in the year (2014 £nil) and there were no defaults in the year (2014 none). Cash margin was £380m (2014 £288m) for both the Group and the Parent company. Cash margin received is included within ‘cash and cash equivalents’, with an offsetting liability included within ‘payables and other financial liabilities’. The market value of derivatives in respect of which collateral and cash margin were received was £1,125m for both the Group and the Parent company (2014 £1,168m). Collateral of £2,768m was received for both the Group and the Parent company (2014 £2,795m) in respect of an unlisted debt security. The collateral received was in the form of UK Government bonds, other fixed income debt securities, floating rate notes and cash. The market value of the debt security in respect of which the collateral was received was £2,773m (2014 £2,799m). Collateral of £658m (2014 £642m) was received for the Group and Parent company in respect of reverse repo deposits. (iii) Assets pledged as collateral The Group and Parent company pledged £57m (2014 Group and Parent company £95m) of assets as collateral in respect of derivative contracts. The corresponding derivative liability is included within ‘payables and other financial liabilities’ and amounted to £25m (2014 £102m). In addition, the Group and Parent company paid £379m (2014 £3m) of initial and variation cash margin in respect of derivatives. There was no collateral pledged in the year in respect of repo liabilities (2014 none).

119

20. Financial investments (continued) (f) Sovereign debt exposures Included within the Group and Parent company’s government bonds are the following exposures to sovereign debt shown by country: Group

Parent company

2015 £m

2014 £m

2015 £m

2014 £m

13,495

14,146

12,916

13,267

Germany

131

233

124

200

France

125

107

121

104

Ireland

-

2

-

1

Italy

24

39

19

30

Spain

15

10

10

8

Belgium

31

34

30

34

Austria

25

26

25

26

Finland

8

25

8

23

UK

37

28

35

28

Other Europe

149

143

143

133

USA

163

368

97

255

6

21

3

13

Japan

87

90

48

56

Rest of World

33

39

29

33

14,329

15,311

13,608

14,211

The Netherlands

Canada

Total

The Group’s exposure to the sovereign debt of Greece, Ireland, Italy, Portugal and Spain represents less than 1% (2014 less than 1%) of the total investment portfolio.

21. Investments in Group entities The Parent company’s investments in Group entities comprise: Parent company

Shares Loans OEICs and other investment funds

2015 £m

2014 £m

543

470

29

29

14,749

12,395

15,321

12,894

Investments in Group entities are carried in the balance sheet at fair value. For the purposes of the disclosure required by IAS 1, all of the investments in Group entities held at the balance sheet date are classified as being held for more than 12 months. The OEICs and other investment funds represent the Parent company’s investment in funds which are managed by subsidiaries of the Group and over which the Group has control.

21. Investments in Group entities (continued) (a) Subsidiaries The Parent company has the following subsidiaries, all of which are incorporated in the United Kingdom, with the exception of Commercial Properties (UK) Unit Trust, Royal London Asset Management C.I. Limited and Royal London Custody Services C.I. Limited, which are incorporated on the Channel Islands, RL Pension Trustees (ROI) Limited, Royal Liver Trustee Services Ireland Limited and GRE Part 7 Limited, which are incorporated in the Republic of Ireland, Euro Luxembourg SA, which is incorporated in Luxembourg and ISL Software (India) Private Limited, which is incorporated in India. All subsidiary undertakings are included in the consolidation. % holding Name

Operational subsidiaries:  Royal London Asset Management Limited  Royal London Unit Trust Managers Limited  RL Marketing (CIS) Limited  Royal London Savings Limited  RL Finance Bonds plc  RL Finance Bonds No.2 plc  RL Finance Bonds No.3 plc  RLUM Limited  Royal London Management Services Limited  Hornby Road Investments Limited  Wrap IFA Services Limited  Investment Funds Direct Group Limited  Investment Funds Direct Holdings Limited  Investment Funds Direct Limited  ISL Software (India) Private Limited

2015

2014

Nature of business

100.0

100.0

Investment management

100.0

100.0

Unit trust management

100.0

100.0

ISA management

100.0

100.0

ISA management

100.0

100.0

Finance company

100.0

100.0

Finance company

100.0

-

Finance company

100.0

100.0

Unit trust management

100.0

100.0

Service company

100.0

100.0

Property company

100.0

100.0

Holding company

100.0

100.0

Holding company

100.0

100.0

Holding company

100.0

100.0

Wrap platform management

100.0

100.0

Software development

 RL Corporate Pension Services Limited

100.0

100.0

Pensions administration & consultancy services

 Royal London Asset Management C.I. Limited

100.0

100.0

Investment management

 Royal London Custody Services C.I. Limited

100.0

100.0

Custodian

 The Royal London General Insurance Company Limited

100.0

100.0

General insurance

 S.L. (Davenport Green) Limited

100.0

100.0

Property company

 Royal London Marketing Limited

100.0

100.0

Intermediary

100.0

100.0

Nominee company

100.0

100.0

Nominee company

100.0

100.0

Nominee company

100.0

100.0

Nominee company

100.0

100.0

Nominee company

100.0

100.0

Nominee company

100.0

100.0

Nominee company

100.0

100.0

Nominee company

100.0

100.0

Trustee company

100.0

100.0

Trustee company

100.0

100.0

Trustee company

100.0

100.0

Trustee company

100.0

100.0

Trustee company

100.0

100.0

Trustee company

100.0

100.0

Trustee company

100.0

100.0

Trustee company

Nominee companies:  Fundsdirect Isa Nominees Limited  Fundsdirect Nominees Limited  IFDL Personal Pensions Limited (previously Fundsdirect Pep Nominees Limited)  Iceni Nominees (No 3) Limited  Iceni Nominees (No 4) Limited  RL Marketing ISA Nominees Limited  RLAM (Nominees) Limited  RLS Nominees Limited Trustee companies:  R.L. Pensions Trustees Limited  R.L.M. Staff Pension Trust Limited  RL Pension Trustees (ROI) Limited  RLGPS Trustee Limited  Royal Liver Pension Trustee Services Limited  Royal Liver Trustee Services Ireland Limited  Royal Liver Trustees Limited  Royal London Trustee Services Limited

121

21. Investments in Group entities (continued) (a) Subsidiaries (continued) % holding 2015

2014

Nature of business

 Commercial Properties (UK) Unit Trust

99.9

99.9

Property unit trust

 The Royal London Sterling Credit Fund

52.9

51.4

OEIC

 The Royal London UK Mid Cap Growth Fund

64.7

64.8

OEIC

 The Royal London UK Opportunities Fund

97.2

96.8

OEIC

Name

Unit trusts, OEICs and other investment funds reported as subsidiaries under IFRS:

 The Royal London European Opportunities Fund (previously 99.9

99.7

OEIC

 The Royal London Japan Tracker Fund

92.4

90.1

OEIC

 The Royal London FTSE 350 Tracker Fund

84.1

81.7

OEIC

 The Royal London US Tracker Fund

87.9

85.3

OEIC

 The Royal London All Share Tracker Fund

71.9

78.6

OEIC

 The Royal London Index Linked Fund

74.1

73.2

OEIC

 The Royal London UK Growth Fund

91.8

90.0

OEIC

 The Royal London European Growth Fund

93.7

90.8

OEIC

 The Royal London UK Equity Fund

92.2

90.8

OEIC

 The Royal London Asia ex Japan Tracker Fund

87.5

90.2

OEIC

 The Royal London UK Smaller Companies Fund

97.2

99.0

OEIC

 The Royal London Cash Plus Fund

52.1

37.3

OEIC

 The Royal London Enhanced Cash Plus Fund

100.0

N/A

OEIC

 The Royal London Investment Grade SD Credit Fund

100.0

N/A

OEIC

 The Royal London Global Bond Opportunities Fund

100.0

N/A

OEIC

 The Royal London European Corporate Bond Fund

99.9

99.7

OEIC

 The Royal London Europe ex UK Tracker Fund

99.6

99.9

OEIC

 The Royal London International Government Bonds Fund

80.6

80.1

OEIC

 The Royal London Short Duration Gilt Fund1

N/A

41.5

OEIC

 The Royal London UK Government Bond Fund2

N/A

47.3

OEIC

 The Royal London Short Duration Global High Yield Fund

52.8

67.3

OEIC

 The Royal London Global High Yield Bond Fund

97.8

97.8

OEIC

 The Royal London Global Index Linked Fund2

N/A

43.5

OEIC

 The Royal London Short-term Money Market Fund

96.6

34.1

OEIC

 The Royal London Short Duration Credit Fund

46.4

53.2

OEIC

 The Royal London Absolute Return Government Bond Fund

89.1

100.0

OEIC

 The Royal London Sustainable Managed Income Trust

98.6

98.7

Unit trust

 The Royal London Sustainable Managed Growth Trust

80.7

87.1

Unit trust

 The Royal London US Growth Trust

57.9

57.1

Unit trust

 The Royal London European Growth Trust

38.0

36.3

Unit trust

 Goldman Sachs Multi-Strategy Portfolio COIS Limited

100.0

100.0

Investment fund

 The Royal London Property Trust

100.0

100.0

Property trust

The Royal London European Income Fund)

1 This fund is not accounted for as a subsidiary in 2015 as the Group’s holding has reduced to 11.9% as at 31 December 2015. 2 These funds are accounted for as associates in 2015 as shown in note 21 (b).

21. Investments in Group entities (continued) (a) Subsidiaries (continued) % holding Name

Non-trading companies:  Investment Sciences Limited  Brightgrey Limited  Canterbury Life Assurance Company Limited  Capitol Way Commercial No 1 Limited  Capitol Way Commercial No 2 Limited  Capitol Way Estate Management Limited  Capitol Way Estate No 1 Limited  Capitol Way Estate No 2 Limited  Euro-Luxembourg SA  GRE Part 7 Limited  Leyburn Developments Limited  The Lion Insurance Company Limited  Nodessa File (One) Limited  Nodessa File (Two) Limited  RL Schedule 2C Holdings Limited  R.A.Securities Limited  Refuge Assurance Limited  Refuge Investments Limited  Refuge Life Assurance Consultants Limited  Refuge Portfolio Managers Limited  RL LA Limited  RL Money Manager Limited  RL NPB Services Limited  RLM Finance Bonds Plc  RLM Finance Plc  Royal Liver (IFA Holdings) Plc  Royal Liver Asset Managers Limited  Royal Liver Management Services Limited  Royal London 360 Holdings Limited  Royal London Asset Management (CIS) Limited  Royal London Cash Management Limited  Royal London (CIS) Limited  Royal London Homebuy Limited  Royal London Pooled Pensions Company Limited  Scottish Life (Coventry) Property Limited  Scottish Life Administration Services Limited  The Scottish Life Assurance Company  Scottish Life Finance Limited  Southpoint General Partner Limited  St Andrew Estates Limited  The Scottish Life Guarantee Company Limited  United Assurance Group Limited  United Friendly Group Limited  United Friendly Insurance Limited  United Friendly Life Assurance Limited  United Friendly Staff Pension Fund Limited

2015

2014

Nature of business

100.0

100.0

Non-trading

100.0

100.0

Non-trading

100.0

100.0

Non-trading

100.0

100.0

Non-trading

100.0

100.0

Non-trading

100.0

N/A

Non-trading

100.0

100.0

Non-trading

100.0

100.0

Non-trading

100.0

100.0

Non-trading

100.0

100.0

Non-trading

100.0

100.0

Non-trading

100.0

100.0

Non-trading

100.0

100.0

Non-trading

100.0

100.0

Non-trading

100.0

100.0

Non-trading

100.0

100.0

Non-trading

100.0

100.0

Non-trading

100.0

100.0

Non-trading

100.0

100.0

Non-trading

100.0

100.0

Non-trading

100.0

100.0

Non-trading

100.0

100.0

Non-trading

100.0

100.0

Non-trading

100.0

100.0

Non-trading

100.0

100.0

Non-trading

100.0

100.0

Non-trading

100.0

100.0

Non-trading

100.0

100.0

Non-trading

100.0

100.0

Non-trading

100.0

100.0

Non-trading

100.0

100.0

Non-trading

100.0

100.0

Non-trading

100.0

100.0

Non-trading

100.0

100.0

Non-trading

100.0

100.0

Non-trading

100.0

100.0

Non-trading

100.0

100.0

Non-trading

100.0

100.0

Non-trading

50.0

50.0

Non-trading

100.0

100.0

Non-trading

100.0

100.0

Non-trading

100.0

100.0

Non-trading

100.0

100.0

Non-trading

100.0

100.0

Non-trading

100.0

100.0

Non-trading

100.0

100.0

Non-trading

123

21. Investments in Group entities (continued) (b) Interests in associates All of the Group’s associates are investment funds accounted for as financial assets held at fair value through profit or loss and are all incorporated in England. At 31 December 2015, the following funds have been recognised as associates: Group’s % holding 2015

2014

 Royal London Corporate Bond Monthly Fund (previously CIS Corporate Bond Income Trust)

32.3

29.8

 Royal London UK Growth Trust (previously CIS UK Growth Trust)

23.6

22.9

 Royal London Property Fund

21.2

22.8

Name of investment fund

24.4

N/A

 Royal London UK Government Bond Fund3

29.8

N/A

 Royal London Sterling Extra Yield Bond Fund

20.3

17.8

 Royal London Corporate Bond Fund

N/A

20.3

Royal London Royal London UK Sterling Extra Government Yield Bond Bond Fund Fund

Total

 Royal London Global Index Linked Fund

3

3

Summarised financial information for associates: (i) Summarised balance sheet 2015 Royal London Corporate Bond Monthly Royal London Fund UK Growth (previously Trust CIS Corporate (previously Bond Income CIS UK Royal London Trust) Growth Trust) Property Fund £m

£m

£m

Royal London Global Index Linked Fund £m

£m

£m

£m

Current assets Cash and cash equivalents

1

8

29

-

2

26

66

Other current assets

6

3

3

1

7

129

149

Total current assets

7

11

32

1

9

155

215

Financial liabilities

-

-

5

-

4

-

9

Other current liabilities

1

2

-

1

2

106

112

Total current liabilities

1

2

5

1

6

106

121

Current liabilities

Non-current assets

326

1,125

353

70

363

1,041

3,278

Total net assets

332

1,134

380

70

366

1,090

3,372

3 Royal London Corporate Bond Fund is not accounted for as an associate in 2015, as the Group’s holding in this fund has fallen below 20%. Royal London Global Index Linked Fund and Royal London UK Government Bond Fund were accounted for as subsidiaries in 2014, see note 21 (a).

21. Investments in Group entities (continued) (b) Interests in associates (continued) (i) Summarised balance sheet (continued) 2014 Royal London Corporate Bond Monthly Fund (previously CIS Corporate Bond Income Trust)

Royal London UK Growth Trust (previously CIS UK Royal London Growth Trust) Property Fund

Royal London Corporate Bond Fund

Total

£m

£m

£m

£m

£m

Cash and cash equivalents

1

18

3

11

33

Other current assets

7

3

12

17

39

Total current assets

8

21

15

28

72

Financial liabilities

1

2

5

5

13

Other current liabilities

-

-

-

3

3

Current assets

Current liabilities

1

2

5

8

16

Non-current assets

345

1,135

315

674

2,469

Total net assets

352

1,154

325

694

2,525

Royal London Royal London UK Sterling Extra Government Yield Bond Bond Fund Fund

Total

Total current liabilities

(ii) Summarised statement of comprehensive income 2015 Royal London Corporate Bond Monthly Royal London UK Growth Fund Trust (previously CIS Corporate (previously Bond Income CIS UK Royal London Trust) Growth Trust) Property Fund

Royal London Global Index Linked Fund

£m

£m

£m

£m

£m

£m

£m

Interest income

18

-

-

1

11

-

30

Net gains/(losses) on investments

(12)

41

17

7

44

Other income/(expense)

(18)

Net income

(12)

(4) 37

(1)

(8)

-

(1)

(14)

(1)

(38)

17

(1)

(11)

6

36

Royal London Corporate Bond Fund

Total

£m

£m

2014 Royal London Corporate Bond Monthly Fund (previously CIS Corporate Bond Income Trust) £m

Royal London UK Growth Trust (previously CIS UK Royal London Growth Trust) Property Fund £m

£m

Interest income

19

-

-

29

48

Net gains/(losses) on investments

20

(2)

24

44

86

Other income/(expense)

(19)

(5)

-

(31)

(55)

Net income

20

(7)

24

42

79

125

21. Investments in Group entities (continued) (c) Interests in other significant holdings The Group also invests in the following private equity funds, which represent an ownership interest of greater than 20%. These are all managed by external administrators and the Group has no involvement in the management, operation or decision making of the funds. As such, the presumption that significant influence exists is overcome and these investments have not been recognised as associates, but have been treated as investment funds within financial investments. % holding Name

SPL ARL Private Finance WP Global Mezzanine Private Equity Corealpha Private Equity Partners R.L. Private Equity Fund KKR CIS Global Investor L.P. Rising Star Growth Fund 2

2015

2014

Country of incorporation

99.4

99.4

Guernsey

38.5

38.5

US

29.8

28.0

US

44.2

44.2

UK

100.0

100.0

US

21.8

21.8

UK

(d) Interests in structured entities A structured entity is an entity that has been designed so that voting or similar rights are not the dominant factor in deciding who controls the entity, such as when voting rights relate to the administrative tasks only and the relevant activities are directed by means of contractual arrangements. The Group’s interests in structured entities are comprised of investments in a range of investment vehicles, principally pooled investment funds and unquoted equity securities, managed both internally and externally, and some investments in asset-backed securities. (i) Consolidated structured entities Where it has been determined that the Group has control over a structured entity it has been consolidated. The Group has not provided, nor has any intention of providing, financial or other support to any consolidated structured entity. (ii) Unconsolidated structured entities The Group also invests in unconsolidated structured entities. The Group has not provided, nor has any intention of providing, financial or other support to any unconsolidated structured entity. The following table shows the carrying value of the Group’s holdings in unconsolidated structured entities, all of which are reported within ‘financial investments’. 2015 £m

2014 £m

1,436

1,412

Private equity funds

220

172

Land investment pools

206

180

801

583

Debt and fixed income securities Asset-backed securities Unquoted equity securities

Unit trusts and other pooled investments Investment in associates Unit trusts

2,008

1,967

OEICs

1,413

1,388

Venture capital offshore funds

318

370

Other investment funds

944

1,042

7,346

7,114

Total

The Group’s maximum exposure to loss from those investments that are not managed by Group companies is the carrying value of the investment on the Group balance sheet.

21. Investments in Group entities (continued) (d) Interests in structured entities (continued) (iii) Other interests in unconsolidated structured entities The Group also has interests in structured entities through management fees received on those investments that the Group manages. The Group’s maximum exposure to loss from these investments is the carrying value on the Group balance sheet and future management fees. The Group’s holdings in these investments are included in the table above. The table below shows those assets under management in which the Group does not have a holding and the management fees earned during the year. 2014

2015 Assets under administration £m

Management fees £m

Assets under administration £m

Management fees £m

OEICs

6,009

24

5,143

19

Unit trusts

2,568

8

2,511

32

Total

8,577

32

7,654

51

Investment funds:

22. Prior year Part VII transfers On 30 December 2014 the entire long-term business and related assets and liabilities of the subsidiary companies, Royal London (CIS) and Royal London Pooled Pensions Company, were transferred to the Parent company by way of transfers made under Part VII of the Financial Services and Markets Act 2000. No consideration was paid for either transfer and the transfers resulted in no gain or loss for the Parent company. The Royal London (CIS) transfer resulted in £27,111m of assets and £27,111m of liabilities being transferred into the Parent company. The Royal London Pooled Pensions Company transfer resulted in £3,227m of assets and £3,227m of liabilities being transferred into the Parent company. As the Part VII transfers were between entities within the Group, there was no net impact on the Group balance sheet or the consolidated statement of comprehensive income. As set out in note 1 (b), transfers between entities within the Group are accounted for using predecessor accounting, with the effect that the assets and liabilities recognised by the acquiring entity are those used previously in the Group consolidated accounts. As a result the Parent company recognised £112m of acquired VIF relating to the transferred business. In addition, both the Group and Parent company derecognised £26m of acquired VIF which following the transfer is presented as a deduction from the non-participating insurance contract liabilities. On 31 March 2014 the entire general insurance business of Royal London (CIS) and the related assets and liabilities were transferred to CIS General Insurance Limited (CISGIL) under a Part VII transfer. This resulted in £86m of assets and £86m of liabilities being transferred.

127

23. Trade and other receivables Group

Parent company

2015 £m

2014 £m

2015 £m

2014 £m

Amounts due from customers

60

17

33

17

Receivables arising under reinsurance contracts

23

21

23

21

Investment income receivable

129

119

94

89

Amounts due from brokers

191

86

124

32

11

11

11

11

Finance lease receivables Amounts due from other Group entities Prepayments and accrued income Other receivables

Expected to be recovered within 12 months Expected to be recovered in more than 12 months

-

-

16

13

29

34

4

5

103

124

78

97

546

412

383

285

536

402

373

275

10

10

10

10

546

412

383

285

Trade and other receivables are carried in the balance sheet at amortised cost, which approximates fair value. Finance lease receivables The Group and the Parent company have leased to third parties a number of properties under long-term leases, which are classified as finance leases. The average term of the finance leases entered into is 44 years. Group and Parent company 2015 £m

2014 £m

Not later than one year

1

1

Later than one year and not later than five years

5

5

Later than five years

23

23

29

29

Less: future charges

(18)

(18)

Present value of receivables under finance leases

11

11

Not later than one year

1

1

Later than one year and not later than five years

4

4

Later than five years

6

6

11

11

Receivables under finance leases – minimum lease receipts:

Present value of receivables under finance leases:

24. Cash and cash equivalents Group

Parent company

2015 £m

2014 £m

2015 £m

2014 £m

Bank balances

1,117

1,408

642

949

Short-term bank deposits

1,591

1,325

1,452

1,307

115

3

115

3

2,823

2,736

2,209

2,259

Short-dated debt

The cash and cash equivalents for the purposes of the statements of cash flows are as follows: Group

Cash and cash equivalents Bank overdrafts (note 33) Cash and cash equivalents in the statements of cash flows

Parent company

2015 £m

2014 £m

2015 £m

2014 £m

2,823

2,736

2,209

2,259

(11) 2,812

(6) 2,730

(6)

(11)

2,253

2,198

25. Insurance contract liabilities and reinsurance assets Group

Parent company

2015 £m

2014 £m

2015 £m

2014 £m

28,874

29,607

28,949

29,682

Gross Total participating insurance contract liabilities Non-participating insurance contract liabilities 1

2

-

-

Long-term insurance contracts

7,290

7,504

7,290

7,504

Total non-participating insurance contract liabilities

7,291

7,506

7,290

7,504

36,165

37,113

36,239

37,186

General insurance contracts

Total insurance contract liabilities Reinsurers’ share of insurance contract liabilities

(1,350)

(1,466)

(1,350)

(1,466)

Long-term insurance contracts

(3,952)

(3,996)

(3,952)

(3,996)

Total non-participating insurance contract liabilities

(3,952)

(3,996)

(3,952)

(3,996)

Total reinsurers’ share of insurance contract liabilities

(5,302)

(5,462)

(5,302)

(5,462)

Total participating insurance contract liabilities Non-participating insurance contract liabilities

Net of reinsurance Total participating insurance contract liabilities

27,524

28,141

27,599

28,216

1

2

-

-

3,338

3,508

3,338

3,508

Non-participating insurance contract liabilities General insurance contracts Long-term insurance contracts Total non-participating insurance contract liabilities Total insurance contract liabilities, net of reinsurance

3,339

3,510

3,338

3,508

30,863

31,651

30,937

31,724

129

26. General insurance contracts (a) Change in general insurance liabilities and reinsurance assets (i) General insurance – claims and loss adjustment expenses Group 2014

2015

Reinsurers’ share £m

Gross £m

Reinsurers’ share £m

Net £m

Gross £m

Notified outstanding claims

-

-

-

60

(60)

-

Claims incurred but not reported

2

-

2

27

(27)

-

At 1 January

2

-

2

87

(87)

-

Claims paid during the year Increase/(decrease) in liabilities arising from prior year claims

-

-

-

(1)

1

-

(1)

-

(1)

-

-

-

Total recognised income and expense for the financial year

(1)

-

(1)

(1)

1

-

Part VII transfer

-

-

-

(86)

86

-

Notified outstanding claims

-

-

-

-

-

-

Claims incurred but not reported

1

-

1

2

-

2

At 31 December

1

-

1

2

-

2

Net £m

27. Long-term insurance contract liabilities and reinsurance assets The movement in long-term insurance contract liabilities and reinsurance assets in the year is shown in the following tables. Group – 2015 Long-term insurance contract Reinsurers’ share of long-term liabilities, gross of reinsurance insurance liabilities

At 1 January Expected changes during the year Expected closing position New business

Participating £m

Nonparticipating £m

29,607

7,504

(1,976)

(193)

27,631

7,311

124

202

Participating £m (1,466)

191

(1,275)

-

Nonparticipating £m (3,996)

104

Long-term insurance contract liabilities, net of reinsurance Participating £m

Nonparticipating £m

28,141

3,508

(1,785)

(89)

(3,892)

26,356

3,419

(193)

124

9

Experience variations Demographic

386

(14)

7

2

393

(12)

Economic

550

43

1

2

551

45

936

29

8

4

944

33

(62)

7

28

Changes in assumptions Demographic

(75)

Expense

(34)

36

-

-

Economic

93

(145)

7

130

100

(15)

103

9

Management actions Methodology

103 (43)

9

-

-

-

(1)

158

(68) (34)

(34) 36

(44)

-

57

(4)

-

(118)

44

(162)

13

-

(85)

-

139

(5)

(96)

4

43

(1)

139

(90)

(96)

(29)

43

(119)

(1,350)

(3,952)

27,524

Other movements Claims outstanding Other

At 31 December

28,874

7,290

131

(33)

3,338

27. Long-term insurance contract liabilities and reinsurance assets (continued) Group – 2014 Long-term insurance contract liabilities, gross of reinsurance

At 1 January Expected changes during the year Expected closing position New business

Participating £m

Nonparticipating £m

26,365

6,912

(1,830)

(110)

24,535

6,802

118

187

Reinsurers’ share of long-term insurance liabilities Participating £m (1,218) 136 (1,082)

Long-term insurance contract liabilities, net of reinsurance

Nonparticipating £m

Participating £m

Nonparticipating £m

(2,642)

25,147

4,270

84

(1,694)

(26)

(2,558)

23,453

4,244

-

(161)

118

26

-

(2)

Experience variations Demographic Economic

303

16

303

14

2,827

54

(17)

-

2,810

54

3,130

70

(17)

(2)

3,113

68

49

22

(29)

6

20

Changes in assumptions Demographic Expense Economic Management actions Methodology

(16) 58 1,697 113 (12)

(26) 460 (23)

(333)

-

1,364 113

-

(1,019)

2

(7) (1,282)

1,840

460

(309)

-

6

-

58

(227)

(10) 1,531

(26) 233 (1,019) (30) (822)

Other movements Claims outstanding Other

At 31 December

2

-

8

(16)

(21)

(58)

5

(74)

(16)

(16)

(15)

(58)

7

(74)

(8)

29,607

7,504

(1,466)

(3,996)

28,141

3,508

27. Long-term insurance contract liabilities and reinsurance assets (continued) Parent company – 2015 Long-term insurance contract Reinsurers’ share of long-term liabilities, gross of reinsurance insurance liabilities

At 1 January Expected changes during the year Expected closing position New business

Participating £m

Nonparticipating £m

29,682

7,504

(1,976)

(193)

27,706

7,311

124

202

Participating £m (1,466)

191

(1,275)

-

Nonparticipating £m (3,996)

104

Long-term insurance contract liabilities, net of reinsurance Participating £m

Nonparticipating £m

28,216

3,508

(1,785)

(89)

(3,892)

26,431

3,419

(193)

124

9

393

(12)

Experience variations Demographic

386

(14)

Economic

550

43

1

2

551

45

936

29

8

4

944

33

7

2

Changes in assumptions Demographic

(75)

(62)

7

28

(68)

(34)

Expense

(34)

36

-

-

(34)

36

93

(145)

Economic Management actions Methodology

103 (43)

7

130

100

(15)

9

-

-

103

9

-

(1)

-

44

(162)

13

158

(44)

-

57

(4)

Other movements Claims outstanding Other

At 31 December

-

(85)

(33)

-

(118)

139

(5)

(96)

4

43

(1)

139

(90)

(96)

(29)

43

(119)

(1,350)

(3,952)

27,599

28,949

7,290

-

133

3,338

27. Long-term insurance contract liabilities and reinsurance assets (continued) Parent company – 2014 Long-term insurance contract liabilities, gross of reinsurance

At 1 January Expected changes during the year Expected closing position New business

Reinsurers’ share of long-term insurance liabilities

Participating £m

Nonparticipating £m

Participating £m

11,268

3,388

-

(608)

-

(17)

(460)

(6)

Nonparticipating £m

Long-term insurance contract liabilities, net of reinsurance Participating £m

Nonparticipating £m

11,268

2,780

(460)

10,808

3,382

-

(625)

10,808

1

39

-

(101)

1

(23) 2,757 (62)

Experience variations Demographic Economic

43

17

-

(2)

43

15

670

58

-

-

670

58

713

75

-

(2)

713

73

(14)

Changes in assumptions Demographic

(14)

35

-

Expense

63

(27)

-

Economic

380

312

-

Management actions

100

-

-

(77) -

-

-

526

320

-

Part VII transfer-in

17,641

3,693

Claims outstanding

-

6

-

2

(7)

(11)

-

1

Methodology

(3)

-

-

(14)

21

63

(27)

380

235

100

-

(3)

-

(91)

526

229

(3,180)

16,175

513

-

8

(7)

(10)

Other movements

Other

At 31 December

(1,466)

17,634

3,688

(1,466)

(3,177)

16,168

511

29,682

7,504

(1,466)

(3,996)

28,216

3,508

For the purposes of the disclosure required by IAS 1, the amount of long-term insurance contract liabilities classified as due to be settled in more than 12 months from the balance sheet date is £32,954m for the Group (2014 £35,075m) and £33,029m for the Parent company (2014 £35,150m). The amount of the reinsurers’ share of long-term insurance liabilities classified as due to be recovered in more than 12 months from the balance sheet date is £4,735m (2014 £5,298m) for the Group and Parent company. The amounts presented above for the Parent company represent the liabilities of the open and closed sub-funds.

28. Non-participating value of in-force business The movement in the non-participating value of in-force business in the year is shown in the table below. Group

Parent company

2015 £m

2014 £m

2015 £m

2014 £m

1,332

1,335

1,332

1,169

211

264

195

137

At 1 January Non-participating value of in-force business included within participating contract liabilities Acquired PVIF Adjusted deferred acquisition costs arising on investment contracts

261

285

261

285

Deferred fee income on investment contracts

(194)

(216)

(194)

(216)

Total value of in-force business at 1 January Expected changes during the year Expected closing position New business

1,610 (120)

1,668 (139)

1,594 (119)

1,375 (131)

1,490

1,529

1,475

1,244

161

129

161

124

Experience variations Demographic

(14)

(14)

(12)

Economic

27

65

(7)

27

57

13

58

13

45

5

59

5

40

Changes in assumptions Demographic Expense

30

10

30

12

Economic

12

(77)

12

(16)

Management actions

11

(64)

11

-

Methodology

61

(37)

61

-

119

(109)

119

36

128

Other movements Part VII transfer-in Other

-

-

-

(6)

3

(6)

17

(6)

3

(6)

145

1,777

1,610

1,762

1,594

1,526

1,332

1,526

1,332

186

211

171

195

At 31 December Non-participating value of in-force business included within participating contract liabilities Acquired PVIF Adjusted deferred acquisition costs arising on investment contracts

236

261

236

261

Deferred fee income on investment contracts

(171)

(194)

(171)

(194)

Total value of in-force business at 31 December

1,777

135

1,610

1,762

1,594

28. Non-participating value of in-force business (continued) The adjusted deferred acquisition costs arising on investment contracts shown above are equal to the deferred acquisition costs arising on investment contracts shown in note 19 less the element of those deferred acquisition costs that relates to future commission. The deferred fee income on investment contracts shown on the previous page is equal to the deferred fee income shown in note 35. For the Group only, this is adjusted to remove deferred fee income in relation to fund management contracts of £2m at 31 December 2015 (2014 £3m). For the purposes of the disclosure required by IAS 1, the amount of the Group and Parent company balance of £1,526m (2014 £1,332m) of non-participating value of in-force business classified as due to be recovered in more than 12 months from the balance sheet date is £1,336m (2014 £1,166m).

29. Investment contract liabilities (a) Movement in investment contract liabilities The movement in investment contract liabilities in the year is shown in the tables below. Group 2014

2015

At 1 January Expected changes during the year Expected closing position New business

Participating £m

Nonparticipating £m

Participating £m

Nonparticipating £m

2,308

22,691

2,284

19,148

(79)

(1,388)

(121)

(733)

2,229

21,303

2,163

18,415

17

3,415

17

2,871

(295)

99

452

25

557

32

955

20

262

131

1,407

40

-

1

-

-

(2)

-

-

1

-

Experience variations Demographic Economic

(5)

Changes in assumptions Demographic Expense Economic

(2) 26

Management actions

8

-

3

-

Methodology

-

3

-

-

72

3

3

-

(12)

(1)

(6)

(2)

Other movements Other At 31 December

2,326

24,982

2,308

22,691

29. Investment contract liabilities (continued) (a) Movement in investment contract liabilities (continued) Parent company 2014

2015

At 1 January Expected changes during the year Expected closing position New business

Participating £m

Nonparticipating £m

Participating £m

Nonparticipating £m

2,308

22,691

1,980

16,254

(79)

(1,388)

(121)

(429)

2,229

21,303

1,859

15,825

17

3,415

17

2,316

103

253

Experience variations Demographic Economic

(5)

(295)

25

557

11

620

20

262

114

873

40

-

1

-

-

(2)

-

-

1

-

Changes in assumptions Demographic Expense Economic

(2) 26

Management actions

8

-

3

-

Methodology

-

3

-

-

72

3

3

-

-

318

3,679

Other movements Part VII transfer-in Other At 31 December

(12)

(1)

(12)

(1)

2,326

24,982

(3)

(2)

315

3,677

2,308

22,691

The participating investment contract liabilities include a discretionary element, determined by management from time to time, with regard to the returns earned on investments in the relevant with-profits fund. These liabilities have been calculated on a basis consistent with the valuation of insurance contracts. It is not considered practicable to provide a fair value for these liabilities. For the purposes of the disclosure required by IAS 1, the amount of investment contract liabilities classified as due to be settled in more than 12 months from the balance sheet date is £25,009m (2014 £22,801m) for the Group and Parent company. The amounts presented above represent the liabilities of the open and closed sub-funds.

137

30. Long-term insurance and investment contract liabilities and reinsurance assets – valuation assumptions (a) Assumptions The assumptions used to determine long-term insurance and investment contract liabilities are set by the Board of Directors based on advice given by the Actuarial Function Holder. These assumptions are updated at least at each reporting date to reflect latest estimates. The assumptions used can be summarised as follows. (i) Demographic Mortality and morbidity Mortality and morbidity risks are inherent in most lines of business. For protection business an increase in mortality and morbidity rates leads to increased claim levels and hence an increase in liabilities. For annuity business the risk is that policyholders live longer than expected. Reinsurance arrangements have been put in place to mitigate mortality and morbidity risks. The rates of mortality and morbidity are set in line with recent company experience, where it is available in sufficient volume to provide reliable results. Where company experience is not considered sufficient, bases have been set by reference to either industry experience or the terms on which the business is reinsured. A margin is included to provide for potential adverse variations in experience. For non-participating liabilities the margins are typically 8%, whilst for participating liabilities and the calculation of the non-profit value of in-force business the margins are typically 2%. The principal mortality assumptions are shown in the following table.

30. Long-term insurance and investment contract liabilities and reinsurance assets – valuation assumptions (continued) (a) Assumptions (continued) (i) Demographic (continued) Class of business

2015 mortality

2014 mortality

90.72% AMC00 and 117.72% AFC00

90.72% AMC00 and 117.72% AFC00

Ex-Scottish Life

59.40% AMC00 and 97.20% AFC00

59.40% AMC00 AND 97.20% AFC00

Ex-Royal Liver

112.32% AMC00 and 117.72% AFC00

112.32% AMC00 AND 117.72% AFC00

 male non-smokers

88.56% TMN00 sel

88.56% TMN00 sel

 male smokers

88.56% TMN00 sel

92.88% TMS00 sel

 female non-smokers

88.56% TMN00 sel

90.72% TFN00 sel

 female smokers

88.56% TMN00 sel

95.04% TFS00 sel

 male non-smokers

74.52% TMN00 sel

74.52% TMN00 sel

 male smokers

100.44% TMS00 sel

100.44% TMS00 sel

 female non-smokers

64.80% TFN00 sel

64.80% TFN00 sel

 female smokers

87.48% TFS00 sel

87.48% TFS00 sel

 traditional with-profits

66.96% AMC00

66.96% AMC00

 accumulating with-profits bond

87.40% AMC00

87.40% AMC00

Ex-Refuge Assurance OB non-linked

82.80% PPMD00 and 88.32% PPFD00

95.68% PPMD00 and 88.32% PPFD00

Ex-Scottish Life – individual

64.40% AMC00 and 67.16% AFC00

72.68% AMC00 and 71.76% AFC00

Ex-Scottish Life – group

66.24% AMC00 and 65.32% AFC00

71.76% AMC00 and 72.68% AFC00

100% PPMV00 CMI (2014) 2%pa1

100% PPMV00 CMI (2013) 2%pa2

87% PPFV00 CMI (2014) 2%pa1

87% PPFV00 CMI (2013) 2%pa2

Ordinary long-term assurances Royal London Mutual and Ex-United Assurance Group non-linked

RL Retail non-linked term assurances

Self Assurance term assurances

Ex-RL (CIS)

Pensions – deferred annuities in deferment

Pensions – immediate annuities and deferred annuities in payment Ex-Royal London Ex-Scottish Life

91% PPMV00 CMI (2014) 2%pa

91% PPMV00 CMI (2013) 2%pa2

83% PPFV00 CMI (2014) 2%pa1

83% PPFV00 CMI (2013) 2%pa2

1

Ex-RL (CIS)  Personal pensions in payment

115.37% PPMV00 CMI (2014) 2%pa1 107.90% PPFV00 CMI (2014) 2%pa

 Section 226 retirement annuity

96.28% RMV00 CMI (2014) 2%pa1 100.43% RFV00 CMI (2014) 2%pa

1

1

112.88% PPMV00 CMI (2012) 2%pa3 103.75% PPFV00 CMI (2012) 2%pa3 99.60% RMV00 CMI (2012) 2%pa3 105.41% RFV00 CMI (2012) 2%pa3

Industrial assurance Royal London Mutual

59.40% ELT16 (males)

82.08% ELT16 (males)

Ex-United Assurance Group

78.84% ELT16 (males)

82.08% ELT16 (males)

Ex-Royal Liver

64.80% ELT16 (males)

70.20% ELT15 (males)

 endowment

81.00% ELT16 (males)

81.00% ELT16 (males)

 whole life

70.20% ELT16 (males)

70.20% ELT16 (males)

Ex-RL (CIS)

1 The mortality basis is displayed as a percentage of base table mortality in 2000 projected in line with the 2014 CMI model mortality improvements and a percentage per annum long-term improvement rate. 2 The mortality basis is displayed as a percentage of the base table mortality in 2000 projected in line with the 2013 CMI model mortality improvements and a percentage per annum long-term improvement rate. 3 The mortality basis is displayed as a percentage of the base table mortality in 2000 projected in line with the 2012 CMI model mortality improvements and a percentage per annum long-term improvement rate.

139

30. Long-term insurance and investment contract liabilities and reinsurance assets – valuation assumptions (continued) (a) Assumptions (continued) (i) Demographic (continued) Persistency Persistency is the extent to which policies remain in force and are not for any reason lapsed, made paid-up, surrendered or transferred prior to maturity or expiry. The rates of persistency are set in line with recent company experience. Where appropriate these rates are adjusted to allow for expected future experience being different from past experience. The rates vary by product line, sales channel, duration in force and for some products by fund size. A margin is included to provide for potential adverse variations in experience. For non-participating liabilities the margins are typically 20% whilst for participating liabilities and the calculation of the non-profit value of in-force business the margins are typically 5%. (ii) Expenses For the main classes of business, maintenance expenses are set in accordance with management service agreements and for business transferred to the Parent company, in accordance with the appropriate scheme of transfer. Expenses for those classes of business not covered by either a management service agreement or a scheme of transfer are based on the actual expenses incurred. A margin is included to provide for potential adverse variations in experience. The margins for non-participating liabilities are typically 8%. For Ex-RL (CIS) fund business, a 2.8% margin is applied for non-participating liabilities. For participating liabilities and the calculation of the non-profit value of in-force business the margins are typically 2%. For Ex-RL (CIS) fund business, a 0.7% margin is applied for participating liabilities and the calculation of the non-profit value of in-force business. Excluding Ex-RL (CIS) fund business, expenses are assumed to inflate in line with the change in the Retail Price Index plus 1%. Expenses for Ex-RL (CIS) fund business are assumed to inflate by 3.6% for non-participating liabilities, and in line with the change in the Retail Price Index plus 0.6% for participating liabilities and the calculation of the non-profit value of in-force business.

30. Long-term insurance and investment contract liabilities and reinsurance assets – valuation assumptions (continued) (a) Assumptions (continued) (ii) Expenses (continued) The principal expense assumptions are shown in the following table. 2014

2015 Per policy £

Premium %

Reserve %

Per policy £

Premium %

Reserve %

14.97

5.40

0.1020

11.00

5.40

0.0970

Ex-RA OB WP pre 1998 life & pensions

9.90

4.32

0.0810

9.60

4.32

Ex-UF OB WP DWP pensions

0.00

0.1890

0.00

0.1910

Scottish Provident business

21.24

0.0650

19.13

0.0650

Bright Grey

14.62

0.0650

13.68

0.0650

RL Retail protection business

20.02

0.0650

19.30

0.0650

Class of business

Ordinary long-term RL OB WP life & pensions

0.0830

Ex-RL (CIS) OB Investments  premium paying

21.43

20.08

 single premium/paid up

18.35

17.22

 premium paying

20.06

18.79

 single premium/paid up

17.53

16.46

 OB annuities in payment

17.93

16.80

OB Protection

Pensions – deferred annuities Ex-Scottish Life – Individual RP

47.19

0.0810

43.63

0.0810

Ex-Scottish Life – Group RP

34.76

0.0810

37.63

0.0810

Ex-RL (CIS)  premium paying

18.26

17.11

 paid up

15.61

14.53

Industrial assurance 10.48

5.40

0.102

6.19

5.40

0.097

Ex-Refuge Assurance

7.48

2.70

0.066

7.27

2.70

0.066

Ex-Royal Liver

7.73

0.00

0.065

7.64

0.00

0.065

Ex-United Friendly

7.18

2.70

0.072

6.96

2.70

0.093

Royal London Mutual

Ex-RL (CIS)  premium paying

13.80

12.93

 paid up

11.68

11.00

141

30. Long-term insurance and investment contract liabilities and reinsurance assets – valuation assumptions (continued) (a) Assumptions (continued) (iii) Economic  Non-participating liabilities The valuation interest rate for any given product group is set by reference to the market value of, and yields on, assets chosen to support that product group. The valuation interest rates used reflect the allocation of assets to the various lines of business and margins consistent with the statutory solvency basis of valuation. A reduction in interest rates increases the liabilities.  Participating liabilities

The majority of the participating liabilities are calculated as the aggregate asset share for the business in force. This is a retrospective calculation based on actual experience. The values of financial options (including premium rate guarantees and guaranteed annuity options) and future deductions from asset shares are calculated using market-consistent techniques. Market consistency is achieved by running a large number of economically credible scenarios through a stochastic valuation model. Each scenario is discounted at a rate consistent with the individual simulation. The economic scenarios achieve market consistency by: • deriving the underlying risk-free rate from the forward gilt curve; and • calibrating equity and interest rate volatility to observed market data by duration and price, subject to interpolation/extrapolation

where traded security prices do not exist.  Non-participating value of in-force business

The non-participating value of in-force business has been calculated on a market-consistent basis. Future investment returns and discount rates are set by reference to risk-free yields. The valuation interest rates used for non-participating liabilities are shown in the following table. 2015 interest % per annum

2014 interest % per annum

Royal London fund business

3.200

3.400

Ex-Royal Liver fund business

2.250

2.250

Ex-Scottish Life fund business

1.600

1.900

Ex-RL (CIS) fund business

2.900

2.800

3.750

3.750

Class of business

Ordinary long-term non-linked life assurances

Pensions – deferred annuities Royal London fund – in deferment Royal London fund – in payment

(1)

(1)

Ex-Royal Liver fund – in deferment

2.250

2.250

Ex-Royal Liver fund – in payment

2.625

2.625

Ex-Scottish Life fund – in deferment

2.000

2.250

Ex-Scottish Life fund – in payment Ex-RL (CIS) fund business

(1)

(1)

3.625

3.250

Pensions – individual – in payment Royal London fund business

3.000

2.875

Ex-Royal Liver fund business

2.625

2.625

Ex-RL CIS fund business

3.125

2.750

Royal London fund business

3.200

3.400

Ex-Refuge Assurance fund business

3.600

3.800

Ex-Royal Liver fund business

2.250

2.250

Ex-United Friendly fund business

4.200

4.400

Ex-RL CIS fund business

2.900

2.800

Industrial assurance

1. Valuation interest rates determined using the forward gilt curve.

30. Long-term insurance and investment contract liabilities and reinsurance assets – valuation assumptions (continued) (b) Changes in assumptions The following tables show the impact of changes in the assumptions used to calculate insurance contract liabilities and reinsurance assets during the year. The tables demonstrate this effect by showing the 2015 year-end liabilities as if they had been calculated using the 2014 year-end assumptions. Group 2015 Impact of change in variable Liability using 2014 assumptions £m

Demographic £m

Expenses £m

Economic £m

Other £m

Liability using 2015 assumptions £m

93

60

28,874

Long-term insurance contract liabilities, gross 28,830

(75)

 Unit-linked

1,878

(31)

 Non-profit, other than annuities

1,010

16

 Non-profit annuities

4,290

(47)

Participating insurance contracts

(34)

Non-participating insurance contracts

 Claims outstanding

275

38 (2)

-

-

-

1,841

14

(6)

8

1,086

(153)

-

4,088

-

275

7,453

(62)

36

(145)

-

8

7,290

36,283

(137)

2

(52)

68

36,164

7

-

7

Reinsurers’ share of long-term insurance liabilities Participating insurance contracts

(1,362)

(2)

(1,350)

Non-participating insurance contracts  Non-profit, other than annuities  Non-profit annuities  Claims outstanding

(541)

(14)

-

5

-

(550)

(3,482)

42

-

125

-

(3,315)

(87)

-

-

-

-

(87)

(4,110)

28

-

130

-

(3,952)

(5,472)

35

-

137

(2)

(5,302)

Long-term insurance contract liabilities, net Participating insurance contracts

27,468

(68)

1,878

(31)

(34)

100

58

27,524

-

1,841

Non-participating insurance contracts  Unit-linked  Non-profit, other than annuities

469

2

 Non-profit annuities

808

(5)

 Claims outstanding

Non-participating value of in-force business

188

38 (2)

-

-

3,343

(34)

36

30,811

(102)

2 (30)

(1,407)

(5)

143

(6) 19

8

536

(28)

-

773

-

-

188

8

3,338

85

66

30,862

(12)

(72)

(15)

(1,526)

30. Long-term insurance and investment contract liabilities and reinsurance assets – valuation assumptions (continued) (b) Changes in assumptions (continued) Group 2014 Impact of change in variable Liability using 2013 assumptions £m

Demographic £m

Expenses £m

Economic £m

Other £m

Liability using 2014 assumptions £m

58

1,697

101

29,607

-

1,978

Long-term insurance contract liabilities, gross Participating insurance contracts

27,767

(16)

Non-participating insurance contracts  Unit-linked  Non-profit, other than annuities  Non-profit annuities  Claims outstanding

1,874

6

909

11

(15)

-

108

(33)

3,901

32

(11)

254

10

4,186

360

-

-

-

360

7,044

49

(26)

34,811

33

32

22

-

-

98

460 2,157

(23) 78

980

7,504 37,111

Reinsurers’ share of long-term insurance liabilities Participating insurance contracts

(1,158)

(333)

3

(1,466)

Non-participating insurance contracts  Non-profit, other than annuities  Non-profit annuities  Claims outstanding

(408)

(4)

-

(27)

(34)

(473)

(2,252)

(25)

-

(200)

(992)

(3,469)

(54)

-

-

-

-

(54)

(2,714)

(29)

-

(227)

(1,026)

(3,996)

(3,872)

(7)

-

(560)

(1,023)

(5,462)

Long-term insurance contract liabilities, net Participating insurance contracts

26,609

6

58

1,364

-

98

104

28,141

-

1,978

Non-participating insurance contracts  Unit-linked  Non-profit, other than annuities  Non-profit annuities  Claims outstanding

Non-participating value of in-force business

1,874

6

501

7

(15)

81

(67)

1,649

7

(11)

54

(982)

306

-

4,330

20

(26)

30,939

26

32

(59)

(10)

(1,457)

-

-

-

507 717 306

233

(1,049)

3,508

1,597

(945)

31,649

77

117

(1,332)

30. Long-term insurance and investment contract liabilities and reinsurance assets – valuation assumptions (continued) (b) Changes in assumptions (continued) Parent company 2015 Impact of change in variable Liability using 2014 assumptions £m

Demographic £m

Expenses £m

Economic £m

Other £m

Liability using 2015 assumptions £m

28,905

(75)

(34)

93

60

28,949

Long-term insurance contract liabilities, gross Participating insurance contracts Non-participating insurance contracts  Unit-linked

1,878

(31)

 Non-profit, other than annuities

1,010

16

 Non-profit annuities

4,290

(47)

 Claims outstanding

275

38 (2)

-

-

(6) 14 (153) -

-

1,841

8

1,086

-

4,088

-

275

7,453

(62)

36

(145)

8

7,290

36,358

(137)

2

(52)

68

36,239

7

-

7

(2)

(14)

-

5

-

(550)

42

-

125

-

(3,315)

Reinsurers’ share of long-term insurance liabilities Participating insurance contracts

(1,362)

(1,350)

Non-participating insurance contracts  Non-profit, other than annuities  Non-profit annuities  Claims outstanding

(541) (3,482) (87)

-

-

-

-

(87)

(4,110)

28

-

130

-

(3,952)

(5,472)

35

-

137

(2)

(5,302)

Long-term insurance contract liabilities, net Participating insurance contracts

27,543

(68)

1,878

(31)

(34)

100

58

27,599

Non-participating insurance contracts  Unit-linked

-

 Non-profit, other than annuities

469

2

 Non-profit annuities

808

(5)

(2)

 Claims outstanding

188

-

-

Non-participating value of in-force business

38

-

1,841

19

(6)

8

536

(28)

-

773

-

188

8

3,338 30,937

-

3,343

(34)

36

30,886

(102)

2

85

66

(30)

(12)

(72)

(1,407)

(5)

145

(15)

(1,526)

30. Long-term insurance and investment contract liabilities and reinsurance assets – valuation assumptions (continued) (b) Changes in assumptions (continued) Parent company 2014 Impact of change in variable Liability using 2013 assumptions £m

Demographic £m

Expenses £m

Economic £m

Other £m

Liability using 2014 assumptions £m

63

380

97

29,682

Long-term insurance contract liabilities, gross Participating insurance contracts

29,156

(14)

Non-participating insurance contracts  Unit-linked  Non-profit, other than annuities  Non-profit annuities  Claims outstanding

1,874

6

98

-

1,978

867

13

(15)

-

115

-

980

4,083

16

(12)

99

-

4,186

360

-

-

-

360

7,184

35

(27)

312

-

7,504

36,340

21

36

692

97

37,186

-

-

-

-

(441)

(8)

-

(24)

-

(473)

(3,410)

(6)

-

(53)

-

(3,469)

-

-

-

Reinsurers’ share of long-term insurance liabilities Participating insurance contracts

(1,466)

(1,466)

Non-participating insurance contracts  Non-profit, other than annuities  Non-profit annuities  Claims outstanding

-

(54)

(3,905)

(54)

(14)

-

(77)

-

-

(3,996)

(5,371)

(14)

-

(77)

-

(5,462)

(14)

63

Long-term insurance contract liabilities, net Participating insurance contracts

27,690

380

97

28,216

Non-participating insurance contracts 1,874

6

98

-

1,978

 Non-profit, other than annuities

426

5

(15)

91

-

507

 Non-profit annuities

673

10

(12)

46

-

717

 Claims outstanding

306

-

-

-

306

3,279

21

(27)

235

-

3,508

30,969

7

36

615

97

31,724

(40)

(12)

16

-

 Unit-linked

Non-participating value of in-force business

(1,296)

-

-

(1,332)

31. Unallocated divisible surplus The movement in the unallocated divisible surplus (UDS) during the year is shown in the table below. Group

At 1 January Transfer from profit or loss Transfer from/(to) other comprehensive income At 31 December

Parent company

2015 £m

2014 £m

2015 £m

2014 £m

3,139

3,005

3,183

2,938

125

149

126

260

50 3,314

(15) 3,139

(15)

50 3,359

3,183

The UDS represents a surplus for which the allocation between participating policyholders has yet to be determined. Therefore, for the purposes of the disclosure required by IAS 1, the whole of the UDS at the balance sheet date has been classified as a balance that will be settled after more than 12 months. The closing balance on the UDS for both the Group and Parent company includes amounts attributable to the Royal London fund only. The surpluses in the closed funds are included within the participating contract liabilities because they are not available for distribution to other policyholders or for other business purposes. The closed funds are the Refuge Assurance IB Sub-fund, the United Friendly IB Subfund, the United Friendly OB Sub-fund, the Scottish Life Fund, the PLAL With-Profits Fund, the Royal Liver Assurance Fund and the RL (CIS) with-profits funds.

32. Subordinated liabilities Group and Parent company Effective interest rate 2015 £m

2014 £m

2015 %

2014 %

-

245

-

6.30

Fixed Rate Reset Callable Guaranteed Subordinated Notes due 2043

395

395

6.20

6.30

Guaranteed Subordinated Notes due 2028

348

-

6.20

-

743

640

Perpetual Cumulative Step-up Subordinated Guaranteed Notes

All of the balance shown above is expected to be settled more than 12 months after the balance sheet date. Subordinated liabilities are carried in the balance sheet at amortised cost. Their fair value at 31 December 2015 was £768m (2014 682m). Perpetual Cumulative Step-up Subordinated Guaranteed Notes On 14 December 2005, RL Finance Bonds plc, a wholly owned subsidiary of the Parent company, issued the Perpetual Cumulative Step-up Subordinated Guaranteed Notes (the Perpetual Notes). The issue price of the Perpetual Notes was 99.676% of the principal amount of £400m. The discount of £1m and the directly related costs incurred to issue the Perpetual Notes of £4m were capitalised as part of the carrying value and were amortised on an effective interest basis over the period to the first possible redemption date. The Perpetual Notes were guaranteed by the Parent company. The proceeds of the issue were loaned to the Parent company on the same interest, repayment and subordination terms as those applicable to the Notes. The Perpetual Notes had no maturity date but the issuer had the option to redeem all of them at their principal amount on 15 December 2015 and at three-monthly intervals thereafter. Interest was payable on the Perpetual Notes at a fixed rate of 6.125% per annum for the period to 15 December 2015, payable annually in arrears on 15 December each year.

147

32. Subordinated liabilities (continued) On 29 November 2013, Perpetual Notes with a nominal value of £154m were purchased by way of a tender offer at a price equal to 101% of the nominal value. On 15 December 2015, all remaining Notes with a nominal value of £246m were redeemed at par and, as a result, the Parent company repaid a corresponding amount of the loan. Fixed Rate Reset Callable Guaranteed Subordinated Notes due 2043 On 29 November 2013, RL Finance Bonds No. 2 plc, a wholly owned subsidiary of the Parent company, issued the Fixed Rate Reset Callable Guaranteed Subordinated Notes due 2043 (the 2043 Notes). The issue price of the 2043 Notes was 99.316% of the principal amount of £400m. The discount of £3m and the directly related costs incurred to issue the 2043 Notes of £3m have been capitalised as part of the carrying value and are being amortised on an effective interest basis over the period to the first possible redemption date. The 2043 Notes are guaranteed by the Parent company. The proceeds of the issue were loaned to the Parent company on the same interest, repayment and subordination terms as those applicable to the 2043 Notes. The 2043 Notes mature on 30 November 2043. The issuer has the option to redeem all of the 2043 Notes at their principal amount on 30 November 2023 and on each interest payment date thereafter. Interest is payable on the Notes at a fixed rate of 6.125% per annum for the period to 30 November 2023, payable annually in arrears on 30 November each year. If the 2043 Notes are not redeemed on 30 November 2023 the interest rate will be re-set on that date and on the fifth anniversary of that date thereafter, at a rate equal to the five-year gilt rate plus 4.321%. Guaranteed Subordinated Notes due 2028 On 13 November 2015, RL Finance Bonds No. 3 plc, a wholly owned subsidiary of the Parent company, issued the Guaranteed Subordinated Notes due 2028 (the 2028 Notes). The 2028 Notes were issued at par (£350m). The costs directly related to the issue of the 2028 Notes of £2m have been capitalised as part of the carrying amount and are being amortised on an effective interest basis over the period to the fixed redemption date of 13 November 2028. The 2028 Notes are guaranteed by the Parent company. The proceeds of the issue were loaned to the Parent company on the same interest, repayment and subordination terms as those applicable to the 2028 Notes. The 2028 Notes mature on 13 November 2028, on which date the Issuer will redeem the Notes at their principal amount. Interest is payable on the Notes at a fixed rate of 6.125% per annum payable annually in arrears on each interest payment date.

33. Payables and other financial liabilities Group 2015 £m

Amounts due to customers Payables arising under reinsurance contracts Amounts due to brokers Finance lease obligations Collateral loans Derivative liabilities (note 20 (d))

Parent company 2014 £m

2015 £m

2014 £m

254

98

248

98

2,804

2,830

2,804

2,830

294

52

278

37

20

21

20

21

182

288

182

288

1,460

2,064

1,445

2,057

-

-

56

39

11

6

11

6

131

185

63

110

5,156

5,544

5,107

5,486

Expected to be settled within 12 months

2,193

2,509

2,144

2,451

Expected to be settled in more than 12 months

2,963

3,035

2,963

3,035

5,156

5,544

5,107

5,486

Amounts due to other Group entities Bank overdrafts (note 24) Other payables

33. Payables and other financial liabilities (continued) The payables arising under reinsurance contracts include a financial liability of £2,773m (2014 £2,799m) which is valued at fair value through profit or loss. The liability is owed to a major reinsurer under a reinsurance agreement to reinsure a proportion of the Group’s obligations in respect of deferred annuities and annuities in payment of the RL (CIS) with-profits fund. Under the reinsurance agreement, the RL (CIS) with-profits fund is contracted to pay premiums in accordance with a schedule of payments covering a period of up to 2066. At inception of the contract, which was before RL (CIS) was acquired by the Group, it recognised its premium obligation in full within the statement of comprehensive income by a charge representing the net present value of the contracted payments and continues to recognise a financial liability to the extent that the premium has yet to fall due for payment. At inception of the contract, it also purchased a debt security, cash flows from which will fund the discharge of the financial liability as amounts fall due for payment. The movement in the fair value of the liability in the year was a gain of £45m (2014 loss of £477m) which is included in premiums ceded to reinsurers. The reinsurance liability and the derivative liabilities are stated at fair value. All the remaining balances are carried in the balance sheet at amortised cost, which approximates to fair value. (a) Finance lease obligations Leased investment property is accounted for as if it had been acquired under a finance lease. At the commencement of the lease a liability is established to represent the financing element of the lease contract. As lease payments are made, these are split between an interest element, calculated on an effective interest basis, which is charged to the statement of comprehensive income and a capital element, which reduces the finance lease liability. The average term of finance leases entered into is 130 years for the Group (2014 197 years) and 130 years for the Parent company (2014 197 years). The interest rate inherent in the leases is fixed at the start of the lease. Group

Parent company

2015 £m

2014 £m

2015 £m

2014 £m

Not later than one year

1

1

1

1

Later than one year and not later than five years

6

6

6

6

Later than five years

183

243

183

243

190

250

190

250

Less: future charges

(170)

(229)

(170)

(229)

20

21

20

21

Not later than one year

1

1

1

1

Later than one year and not later than five years

5

4

5

4

14

16

14

16

20

21

20

21

Obligations under finance leases – minimum lease payments:

Present value of obligations under finance leases Present value of obligations under finance leases:

Later than five years

(b) Collateral loans Group 2015 £m

Parent company 2014 £m

2015 £m

2014 £m

Collateral loans – contractual maturity analysis: 2

-

2

-

46

106

46

106

134

182

134

182

182

288

182

288

Not later than one year Later than one year and not later than five years Later than five years

149

34. Provisions Group

Provision for future commission Other provisions

Expected to be settled within 12 months Expected to be settled in more than 12 months

Parent company

2015 £m

2014 £m

2015 £m

2014 £m

148

212

148

212

76

38

71

25

224

250

219

237

29

37

26

35

195

213

193

202

224

250

219

237

The provision for future commission relates to payments that the Group is contractually committed to make in future periods for investment contracts sold as at the balance sheet date. These payments are contingent on the related policies remaining in force. Other provisions comprise amounts in respect of the long-term incentive plan, an unfunded pension provision, the mortgage endowment review, Royal Liver past business review and surplus sales and administration offices which have been closed and for which the Group retains lease commitments. The movement in provisions during the year is shown in the following table. Group

Parent company Other provisions £m

Provision for future commission £m

Other provisions £m

212

38

212

25

Additional provisions

2

50

2

47

Transfer in

-

-

-

10

At 1 January 2015

Utilised during the year Unwind of the discount rate Change arising from commission restriction At 31 December 2015

Provision for future commission £m

(25)

(12)

(25)

(11)

2

-

2

-

(43)

-

(43)

-

148

76

148

71

35. Other liabilities Group

Parent company

2015 £m

2014 £m

2015 £m

2014 £m

173

197

171

194

Accrued expenses

64

69

-

-

Other

49

50

49

50

286

316

220

244

Expected to be settled within 12 months

136

147

72

75

Expected to be settled in more than 12 months

150

169

148

169

286

316

220

244

Deferred fee income

Deferred fee income is front-end fees received from investment contract holders as a prepayment for asset management and related services. These amounts are non-refundable and are released to income as the services are rendered. Other liabilities are carried in the balance sheet at amortised cost, which approximates to fair value.

36. Balances in respect of external unit holders (a) Investment return attributable to external unit holders The investment return attributable to external unit holders represents the portion of the investment return included within the Group statement of comprehensive income that relates to the consolidated funds that are owned by third parties. (b) Liability to external unit holders The liability to external unit holders represents the portion of the consolidated funds included within the Group balance sheet but which is owned by third parties. The balance is stated at fair value being the quoted bid price of the relevant fund on the last day of the accounting period on which investments in such funds could be redeemed. For the purposes of the disclosure required by IAS 1, none of the balance (2014 none) is classified as being expected to be settled in more than 12 months from the balance sheet date.

37. Deferred tax (asset)/liability (a) Net deferred tax balance The tables below show the movement in the net deferred tax balance in the year. The deferred tax assets and liabilities are considered to be non-current. Group – 2015 Recognised in the statement of comprehensive 1 Jan income £m £m

31 Dec £m

Deferred acquisition expenses

(61)

20

(41)

Excess of management expenses carried forward

(26)

(25)

(51)

Revaluation of investments

185

Other short-term timing differences

(7)

Net deferred tax liability

91

(2)

183

7

-

-

91

Group – 2014 Recognised in the statement of comprehensive 1 Jan income £m £m

Deferred acquisition expenses

(69)

Excess management expenses carried forward Revaluation of investments Other short-term timing differences Net deferred tax asset

151

31 Dec £m

69

-

(75)

75

-

90

(90)

-

(7)

7

-

(61)

61

-

37. Deferred tax (asset)/liability (continued) (a) Net deferred tax balance (continued) Group – 2014 Recognised in the statement of comprehensive 1 Jan income £m £m

Deferred acquisition expenses Excess management expenses carried forward Revaluation of investments Other short-term timing differences Net deferred tax liability

(15) 58 3 46

31 Dec £m

(46)

(61)

(26) 127

(26) 185

(10)

(7)

45

91

Parent company – 2015 Recognised in the statement of comprehensive 1 Jan income £m £m

31 Dec £m

Deferred acquisition expenses

(61)

20

(41)

Excess management expenses carried forward

(26)

(25)

(51)

Revaluation of investments

175

(4)

Other short-term timing differences

3

5

Net deferred tax liability

91

(4)

171 8 87

Parent company – 2014 Recognised in the statement of comprehensive 1 Jan income £m £m

Deferred acquisition expenses

(68)

7

Excess management expenses carried forward

(75)

49

Revaluation of investments

89

86

Other short-term timing differences Net deferred tax liability

5 (49)

31 Dec £m (61) (26) 175

(2) 140

The 2014 deferred tax charge in the Parent company included a charge of £62m relating to the Part VII transfer in of RL (CIS) (note 22). This is eliminated on consolidation in the Group numbers above. Deferred tax assets and liabilities are offset where there is a legally enforceable right to offset current tax assets against current tax liabilities and where the deferred taxes relate to the same fiscal authority. There are overall deferred tax liabilities in both years, within these liabilities deferred tax assets have been offset as they all meet the criteria above.

3 91

37. Deferred tax (asset)/liability (continued) (b) Unrecognised deferred tax balances (i) Unrecognised deferred tax assets Deferred tax assets arising from certain capital losses, excess management expenses, surplus trading losses and capital allowances are recognised to the extent that the realisation of the related tax benefit through future taxable profits is probable. The Group did not recognise deferred tax assets of £6m (2014 £6m), of which £5m (2014 £5m) related to the Parent company. These unused losses and allowances can be carried forward and utilised as long as the company in which they arose is active or trading. (ii) Unrecognised deferred tax liabilities Deferred tax liabilities arising from gains on subsidiary holdings have not been recognised by the Parent company as it controls the timing of any sale of a subsidiary and the repatriation of any dividend and it is not probable that a sale or repatriation will happen in the foreseeable future as the Group’s intention is that these investments will be held to provide long-term returns. The potential tax liability arising is less than £1m (2014 less than £1m). There are no other unrecognised deferred tax liabilities within the Group.

38. Pension schemes The Group provides pension benefits for its employees in order to support recruitment, retention and motivation of talented people. For all employees joining after 1 September 2005, this is via contributory, defined contribution arrangements which are benchmarked to ensure that the reward package overall is competitive. Where possible under local regulation, employees are auto-enrolled and the Group sees a correspondingly high take-up across employees. The Group pays contributions in respect of these arrangements and such contributions are recognised as an expense as the related employee services are provided. The expense recognised in 2015 is £6m (2014 £6m) and is reported within staff costs (note 10(a)). In addition to the above arrangements, the Group operates three funded defined benefit schemes, which are established under separate trusts. The assets of the schemes are held in separate Trustee administered funds and the funding position of each scheme is assessed annually by an independent qualified actuary using the projected unit credit method. The ability of the defined benefit pension schemes to meet the projected pension payments is maintained through investments and, where applicable, regular contributions from employees and the Group. Risk arises because the estimated market value of the pension fund assets might decline; or their investment returns might reduce; or the estimated value of the pension liabilities might increase. In these circumstances, the Group could be required to make additional contributions. The main defined benefit scheme is the Royal London Group Pension Scheme (‘RLGPS’). On 1 September 2005, RLGPS was closed to new entrants. As a result of the Royal Liver acquisition on 1 July 2011, the Group took responsibility for two further defined benefit pension schemes: the Royal Liver Assurance Limited Superannuation Fund (‘Royal Liver UK’) and the Royal Liver Assurance Limited (ROI) Superannuation Fund (‘Royal Liver ROI’). Royal Liver employees in these schemes stopped earning additional defined benefit pensions on 30 June 2011. In addition, the Group also operates a small, legacy unfunded unapproved arrangement for certain executives who joined before 1 September 2005, which provides mirror RLGPS benefits for accrual above that provided by RLGPS. This has £10m of liabilities, for which a provision is held in the Group’s balance sheet. The Group pays contractual contributions to RLGPS in line with a funding framework agreed with the RLGPS Trustee, which includes an agreement on the approach to be taken in the event of a funding deficit. As at the most recent triennial valuation dated 31 December 2013, RLGPS was in surplus and therefore the only contributions payable are in respect of the ongoing accrual of benefits and, if RLGPS has insufficient surplus, costs of any augmentations including the award of discretionary pension increases. During the year, there was a consultation on the closure of RLGPS to future accrual of benefits from 31 March 2016. All employees will be eligible to join the Royal London Group Personal Pension (RLGPP), the defined contribution scheme. The Royal Liver schemes are supported in the first instance by the Royal Liver Assurance fund. Only in the event of that fund having insufficient assets to meet the needs of the Royal Liver schemes would the Royal London Open Fund be required to provide support. This structure is supported via guarantees from the Parent company to the schemes’ Trustees. Both the Royal Liver schemes were in surplus at the most recent triennial valuation dated 31 December 2012. As these schemes are closed to future accrual, no contributions are currently payable.

153

38. Pension schemes (continued) (a) Amounts recognised in the balance sheet The amounts recognised in the balance sheet are as follows for the Group and Parent company: Total 2015 £m

RLGPS 2014 £m

2015 £m

Royal Liver UK 2014 £m

2015 £m

2014 £m

Royal Liver ROI 2015 £m

2014 £m

Fair value of plan assets

2,788

2,874

2,274

2,329

321

336

193

209

Pension scheme obligation

(2,611)

(2,719)

(2,203)

(2,281)

(248)

(259)

(160)

(179)

73

77

33

30

Pension scheme surplus Less: restriction of surplus Net pension scheme asset

177 177

155 (27) 128

71

48

-

-

-

71

48

73

(27) 50

-

-

33

30

It is anticipated that the Group and Parent company will make contributions of £2m to RLGPS in the year to 31 December 2016. No contributions are anticipated to be made to the Royal Liver pension schemes. In accordance with paragraph 64 of IAS 19, ‘Employee Benefits’ the value of the net pension scheme asset that can be recognised in the balance sheet is restricted to the present value of economic benefits available in the form of refunds from the scheme or reductions in future contributions. As defined under IFRIC 14, the Group believes that it has an unconditional right to a refund of surplus and thus the gross pension surplus can be recognised in full in all three schemes. For the Royal Liver UK scheme, the benefit is only available as a refund, as no additional defined pension benefits are being earned. Under UK tax legislation an income tax deduction of 35% is applied to a refund from a UK pension scheme, before it is passed to the employer. In the prior year, this tax deduction was shown as a restriction to the value of the net pension scheme asset that could be recognised for this scheme. In the current year, the expected actual manner of recovery of the surplus and the related tax effect has been reassessed and as a result the pension scheme asset has been shown in full, with the tax impact now included within deferred tax.

38. Pension schemes (continued) (b) Reconciliation of net pension scheme asset The movement in the net pension scheme asset during the year can be analysed as follows: Total

Present value of obligation £m

At 1 January 2014

(2,466)

Fair value of plan assets £m 2,634

Total pension scheme surplus/ Restriction on (deficit) surplus £m £m 168

(17)

Net pension scheme asset £m 151

Costs recognised in profit for the year: Current service cost

(8)

-

(8)

-

(8)

Administration costs

-

(4)

(4)

-

(4)

Interest (expense)/income Past service cost

(105)

112

7

(1)

6

(6)

-

(6)

-

(6)

(119)

108

(11)

(1)

(12)

Remeasurements recognised in OCI: Return on plan assets in excess of interest (expense)/income Changes in demographic assumptions Changes in financial assumptions Experience gains Changes in the effect of the asset ceiling

-

240

240

-

240

(39)

-

(39)

-

(39)

(234)

-

(234)

-

(234)

27

-

27

-

27

(246)

-

-

(9)

(9)

(6)

(9)

(15)

(13)

(2)

-

(2) 6

240

Other movements: Exchange differences

11

Employer contributions

-

6

6

-

Employee contributions

(2)

2

-

-

-

-

-

-

Benefit payments At 31 December 2014

103 (2,719)

(103) 2,874

155

(27)

128

Costs recognised in profit for the year: Current service cost

(9)

-

(9)

-

(9)

Administration costs

-

(3)

(3)

-

(3)

Interest (expense)/income Past service cost

(93)

97

4

-

4

(2)

-

(2)

-

(2)

(104)

94

(10)

-

(10)

(59)

(59)

-

(59)

Remeasurements recognised in OCI: Return on plan assets in excess of interest (expense)/income

-

-

-

-

-

Changes in financial assumptions

46

-

46

-

46

Experience gains

36

-

36

-

36

-

-

-

27

27

23

27

50

Changes in demographic assumptions

Changes in the effect of the asset ceiling

82

(59)

Exchange differences

9

(10)

Employer contributions

-

10

10

2

-

-

-

-

-

-

177

-

177

Other movements:

Employee contributions Benefit payments At 31 December 2015

(2) 123 (2,611)

(123) 2,788

(1)

-

(1)

-

10

The past service cost of £2m (2014 £6m) represents the increase in the pension scheme obligation due to the granting of discretionary pension increases to certain categories of scheme members. There have been no other plan amendments, curtailments or settlements in the year.

155

38. Pension schemes (continued) (b) Reconciliation of net pension scheme asset (continued) RLGPS

Present value of obligation £m

At 1 January 2014

(2,065)

Fair value of plan assets £m 2,155

Total pension scheme surplus/ Restriction on (deficit) surplus £m £m 90

-

Net pension scheme asset £m 90

Costs recognised in profit for the year: Current service cost

(8)

-

(8)

-

(8)

Administration costs

-

(3)

(3)

-

(3)

3

-

3

Interest (expense)/income Past service cost

(90)

93

(6)

-

(6)

-

(6)

(104)

90

(14)

-

(14)

Remeasurements recognised in OCI: Return on plan assets in excess of interest (expense)/income Changes in demographic assumptions Changes in financial assumptions Experience gains Changes in the effect of the asset ceiling

-

161

161

-

161

(39)

-

(39)

-

(39)

(179)

-

(179)

-

(179)

23

-

23

-

23

-

-

-

-

-

(195)

161

(34)

-

(34)

Other movements: Exchange differences

-

-

-

-

-

Employer contributions

-

6

6

-

6

Employee contributions

(2)

2

-

-

-

-

-

-

48

-

48

Benefit payments At 31 December 2014

85 (2,281)

(85) 2,329

Costs recognised in profit for the year: Current service cost

(9)

-

(9)

-

(9)

Administration costs

-

(2)

(2)

-

(2)

Interest (expense)/income Past service cost

(81)

81

-

-

-

(2)

-

(2)

-

(2)

(92)

79

(13)

-

(13)

(41)

(41)

-

(41)

Remeasurements recognised in OCI: Return on plan assets in excess of interest (expense)/income

-

Changes in demographic assumptions

-

-

-

-

-

Changes in financial assumptions

37

-

37

-

37

Experience gains

30

-

30

-

30

-

-

-

-

-

26

-

26

Changes in the effect of the asset ceiling

67

(41)

Other movements: Exchange differences

-

-

-

-

-

Employer contributions

-

10

10

-

10

Employee contributions Benefit payments At 31 December 2015

(2) 105 (2,203)

2 (105) 2,274

-

-

-

-

-

-

71

-

71

38. Pension schemes (continued) (b) Reconciliation of net pension scheme asset (continued) Royal Liver UK

Present value of obligation £m

At 1 January 2014

(241)

Fair value of plan assets £m 290

Total pension scheme surplus/ Restriction on (deficit) surplus £m £m 49

(17)

Net pension scheme asset £m 32

Costs recognised in profit for the year: Current service cost

-

-

-

-

-

Administration costs

-

(1)

(1)

-

(1)

3

(1)

2

Interest (expense)/income Past service cost

(10)

13

(10)

-

-

-

-

12

2

(1)

1

45

45

Remeasurements recognised in OCI: Return on plan assets in excess of interest (expense)/income Changes in demographic assumptions

-

-

-

-

-

(21)

-

(21)

Experience gains

2

-

2

-

2

Changes in the effect of the asset ceiling

-

-

-

(9)

(9)

45

26

(9)

Changes in financial assumptions

(19)

-

45 (21)

17

Other movements: Exchange differences

-

-

-

-

-

Employer contributions

-

-

-

-

-

Employee contributions

-

-

-

-

-

Benefit payments At 31 December 2014

11 (259)

(11) 336

77

(27)

50

Costs recognised in profit for the year: Current service cost

-

-

-

-

-

Administration costs

-

(1)

(1)

-

(1)

12

3

-

3

-

-

-

-

(9)

11

2

-

2

Return on plan assets in excess of interest (expense)/income

-

(14)

(14)

-

(14)

Changes in demographic assumptions

-

-

-

-

-

Changes in financial assumptions

4

-

4

-

4

Experience gains

4

-

4

-

4

Changes in the effect of the asset ceiling

-

-

-

27

27

(6)

27

21

Interest (expense)/income Past service cost

(9) -

Remeasurements recognised in OCI:

8

(14)

Other movements: Exchange differences

-

-

-

-

-

Employer contributions

-

-

-

-

-

Employee contributions Benefit payments At 31 December 2015

12 (248)

(12) 321

157

-

-

-

-

-

-

73

-

73

38. Pension schemes (continued) (b) Reconciliation of net pension scheme asset (continued) Royal Liver ROI

Present value of obligation £m

At 1 January 2014

(160)

Fair value of plan assets £m

Total pension scheme surplus/ Restriction on (deficit) surplus £m £m

Net pension scheme asset £m

189

29

-

29

Costs recognised in profit for the year: Current service cost

-

-

-

-

-

Administration costs

-

-

-

-

-

(5)

6

1

-

1

Interest (expense)/income Past service cost

-

-

-

-

-

(5)

6

1

-

1

34

34

-

34

-

-

Remeasurements recognised in OCI: Return on plan assets in excess of interest (expense)/income Changes in demographic assumptions Changes in financial assumptions

(34)

-

(34)

-

-

(34)

Experience gains

2

-

2

-

2

Changes in the effect of the asset ceiling

-

-

-

-

-

(32)

34

2

-

2

11

(13)

(2)

-

(2)

Other movements: Exchange differences Employer contributions

-

-

-

-

-

Employee contributions

-

-

-

-

-

Benefit payments At 31 December 2014

7 (179)

-

-

-

209

(7)

30

-

30

Costs recognised in profit for the year: Current service cost

-

-

-

-

-

Administration costs

-

-

-

-

-

(3)

4

1

-

1

-

-

-

-

-

(3)

4

1

-

1

Return on plan assets in excess of interest (expense)/income

-

(4)

(4)

-

(4)

Changes in demographic assumptions

-

-

-

-

-

Changes in financial assumptions

5

-

5

-

5

Experience gains

2

-

2

-

2

Changes in the effect of the asset ceiling

-

-

-

-

-

7

(4)

3

-

3

Exchange differences

9

(10)

Employer contributions

-

Interest (expense)/income Past service cost Remeasurements recognised in OCI:

Other movements: (1)

-

(1)

-

-

-

-

Employee contributions

-

-

-

-

-

Benefit payments

6

(6)

-

-

-

33

-

33

At 31 December 2015

(160)

193

38. Pension schemes (continued) (c) Analysis of plan assets Total 2014

2015 Quoted £m

Unquoted £m

Total £m

Quoted £m

Unquoted £m

Total £m

Fixed interest bonds

156

-

156

High-yield bonds

121

-

121

167

-

167

112

2

114

Index-linked bonds

691

-

691

Corporate bonds

788

7

795

771

-

771

819

7

826

Debt instruments:

Equities

575

-

575

683

-

683

Equity investment funds

131

67

198

-

62

62

Diversified growth collective investment scheme

-

12

12

-

12

12

Property

-

3

3

-

14

14

200

-

200

185

-

185

Property investment funds Derivative instruments: Foreign exchange forwards

-

(4)

(4)

-

-

-

Interest rate and inflation swaps

-

(7)

(7)

-

(5)

(5)

(3)

Total return swaps Cash and other receivables Fair value of plan assets

43

(43)

10

41

51

10

35

45

2,672

116

2,788

2,790

84

2,874

Unquoted £m

Total £m

-

(3)

-

RLGPS 2014

2015 Quoted £m

Unquoted £m

Total £m

Quoted £m

Debt instruments: 13

-

13

13

-

13

High-yield bonds

121

-

121

112

2

114

Index-linked bonds

577

-

577

644

-

644

Corporate bonds

Fixed interest bonds

618

7

625

655

7

662

Equities

575

-

575

683

-

683

Equity investment funds

131

-

131

-

-

-

Diversified growth collective investment scheme

-

-

-

-

-

-

Property

-

-

-

-

-

-

200

-

200

185

-

185

Property investment funds Derivative instruments: Foreign exchange forwards

-

(4)

(4)

-

-

-

Interest rate and inflation swaps

-

(5)

(5)

-

(3)

(3)

Total return swaps

-

(1)

(1)

-

-

-

Cash and other receivables Fair value of plan assets

10

32

42

10

21

31

2,245

29

2,274

2,302

27

2,329

159

38. Pension schemes (continued) (c) Analysis of plan assets (continued) Royal Liver UK 2014

2015 Unquoted £m

Total £m

Quoted £m

57

-

57

-

-

-

Quoted £m

Unquoted £m

Total £m

58

-

58

-

-

-

Debt instruments: Fixed interest bonds High-yield bonds Index-linked bonds

114

-

114

127

-

127

Corporate bonds

105

-

105

96

-

96

Equities

-

-

-

-

-

-

Equity investment funds

-

41

41

-

36

36

Diversified growth collective investment scheme

-

-

-

-

-

-

Property

-

2

2

-

12

12

Property investment funds

-

-

-

-

-

-

Derivative instruments: Foreign exchange forwards

-

-

-

-

-

-

Interest rate and inflation swaps

-

(1)

(1)

-

-

-

Total return swaps

-

(2)

(2)

13

(13)

-

-

5

5

-

7

7

276

45

321

294

42

336

Unquoted £m

Total £m

Cash and other receivables Fair value of plan assets

Royal Liver ROI 2014

2015 Quoted £m

Unquoted £m

Total £m

Quoted £m

Debt instruments: 86

-

86

96

-

96

High-yield bonds

-

-

-

-

-

-

Index-linked bonds

-

-

-

-

-

-

Fixed interest bonds

65

-

65

68

-

68

Equities

-

-

-

-

-

-

Equity investment funds

-

26

26

-

26

26

Diversified growth collective investment scheme

-

12

12

-

12

12

Property

-

1

1

-

2

2

Property investment funds

-

-

-

-

-

-

Foreign exchange forwards

-

-

-

-

-

-

Interest rate and inflation swaps

-

(1)

(1)

-

(2)

(2)

Total return swaps

-

-

-

30

(30)

Corporate bonds

Derivative instruments:

Cash and other receivables Fair value of plan assets

-

-

4

4

-

7

7

151

42

193

194

15

209

38. Pension schemes (continued) (d) Risks All three schemes are exposed to differing levels of interest rate, inflation, credit and market risk. The Group has agreed with the Trustee Boards of each pension scheme that, where appropriate, each scheme’s risks will be managed in line with the Group’s risk appetite. In particular, the schemes’ investment strategies are designed to minimise interest rate, inflation and market risk exposure where this is cost and capital effective. The schemes have active liability-driven investment strategies using a combination of corporate and sovereign debt and derivative instruments such as interest rate and inflation swaps. Approximately 60% of RLGPS assets and 80% of Royal Liver assets are invested in instruments that provide a match to the schemes’ projected cash flows thereby reducing the Group’s exposure to interest rate and inflation risk. The Group’s exposure to market risk is reduced by a combination of restricting the allocation to growth assets such as equities and by diversification both within the asset classes (e.g. geographically and across industry sectors) and across asset classes (e.g. allocations to property and to high-yield debt.) Credit risk is managed via a strategy of diversification across industry, issuer, credit rating and stock selection. The schemes, and therefore the Group, are also exposed to longevity risk. The Group believes that some of this risk exposure is partially mitigated via a natural hedge with the mortality risk inherent in the protection business written by the Group. Further information on the schemes’ risk management strategies can be found in the schemes’ annual reports and accounts which are available on the Group’s website. (e) Assumptions and sensitivity analysis The major assumptions used to calculate the pension scheme asset for both the Group and the Parent company are: 2014

2015 RLGPS %

UK %

ROI %

RLGPS %

UK %

ROI %

Discount rate

3.7

3.7

2.2

3.6

3.6

2.0

Price inflation (RPI)

3.0

3.0

N/A

3.0

3.0

N/A

Price inflation (CPI)

2.0

2.0

1.75

2.0

2.0

1.7

The salary growth assumption (only applicable to RLGPS) at 31 December 2015 was CPI +1.0% (2014 CPI +1.0%) but it does not have a significant impact on the defined benefit obligation and thus has not been included in the above table. The most significant non-financial assumption is the assumed rate of mortality. The table below shows the life expectancy assumptions used in the accounting assessments based on the life expectancy of a scheme member aged 60 (non-pensioner is assumed to be 45 now). A weighted average is shown for the UK schemes. Group and Parent company 2014

2015 UK

ROI

UK

ROI

Male

26

27

26

27

Female

29

29

28

29

Male

28

29

27

29

Female

30

30

30

30

Pensioner

Non-pensioner

161

38. Pension schemes (continued) (e) Assumptions and sensitivity analysis (continued) The sensitivity of the defined benefit obligations to changes in the principal assumptions is shown in the table below: Increase/(decrease) in defined benefit obligation Total £m

100 basis point increase in risk discount rates 5% proportionate decrease in mortality and morbidity

RLGPS £m

UK £m

ROI £m

(489)

(421)

(45)

(23)

37

31

3

3

100 basis point decrease in price inflation (RPI)

(283)

(257)

(26)

100 basis point decrease in inflation (CPI)

(297)

(257)

(26)

N/A (14)

This sensitivity analysis is based on a change in an assumption whilst holding all other assumptions constant. In practice, this is unlikely to occur, and changes in some of the assumptions may be correlated. When calculating the sensitivity of the defined benefit obligation to significant actuarial assumptions, the same method (present value of the defined benefit obligation calculated with the projected unit credit method at the end of the reporting period) has been applied as when calculating the pension liability recognised within the balance sheet. The information provided above shows the sensitivity of the schemes’ liabilities to changes in the key assumptions. Due to the assetliability matching strategies, the impact of changes in discount rates and inflation will also impact the schemes’ asset values, thereby mitigating the effect of such changes on the Group. (f) Maturity profile The weighted average duration of the defined benefit obligation is 17 years (2014 18 years).

39. Contingent liabilities Regulatory reviews During the year, the Group and Parent company continued to address issues from past inappropriate selling practices and other regulatory matters. The directors consider that they have made prudent provision for any liabilities arising across the Group and, as and when the circumstances calling for such provision arise, that the Group and Parent company have adequate reserves to meet all reasonably foreseeable eventualities.

40. Commitments (a) Capital expenditure The Group and Parent company have the following commitments to make capital purchases as at the balance sheet date: Group and Parent company

Investment property

2015 £m

2014 £m

79

42

40. Commitments (continued) (b) Investments in private equity funds The Group and Parent company have a portfolio of investments in private equity funds. The structure of these funds is such that the commitment is drawn down over the investment period. The total amount committed, net of drawdown, at the balance sheet date for the Group and Parent company is £159m (2014 £159m). (c) Operating lease commitments Operating lease payments represent rentals payable by the Group for land and buildings. The total future minimum lease payments due under these arrangements, net of any related sub-lease receipts, are shown in the following table. Group and Parent company 2015 £m

2014 £m

Not later than one year

1

2

Later than one year and not later than five years

2

3

Later than five years

2

1

5

6

(2)

(1)

3

5

Total future minimum lease payments under non-cancellable leases:

Less: total future minimum sub-lease payments under non-cancellable sub-leases expected to be received

41. Related party transactions The Parent company is the ultimate parent undertaking of the Group. The Group and Parent company carried out the following transactions with related parties. (a) Related party transactions of the Group Transactions between Group entities are eliminated on consolidation. The following are those transactions carried out by Group entities with those related parties that are outside the Group. (i) Subsidiaries’ transactions with OEICs and other investment funds The Group markets a portfolio of OEICs and other investment funds. A number of these funds are classified as subsidiaries for the purposes of financial reporting and hence are included within the Group. For those funds not consolidated within the Group the transactions during the year were as follows:

Management fees earned during the year

2015 £m

2014 £m

68

62

There were no amounts outstanding between the Group and the funds at the year end (2014 £nil). The total value of units held by the Parent company at 31 December 2015 in the funds that are not consolidated into the Group was £1,083m (2014 £1,015m). The acquisition and sale of units in the funds during the year were as follows: 2015 £m

2014 £m

Acquisition of funds

224

155

Proceeds from sale of funds

137

106

The subsidiaries of the Parent company are shown in note 21. Transactions between the Parent company and its subsidiaries and other related party transactions of the Parent company are shown below. (i) Administration and investment management services provided by subsidiaries Subsidiary companies perform the administration and investment management activities of the Parent company. The Parent company is charged fees for these services under management services agreements and for business transferred to the Parent company, in accordance with the appropriate scheme of transfer.

163

41. Related party transactions (continued) (b) Related party transactions of the Parent company The following table summarises the fees and recharges incurred by the Parent company during the year. Parent company 2015 £m

2014 £m

243

242

33

13

276

255

Administration fees Investment management fees

(ii) Financing transactions undertaken with subsidiaries The Parent company has provided loans to subsidiaries. As set out in note 32, three subsidiaries have issued subordinated liabilities, lending the proceeds to the Parent company on the same terms as the original debt issue. The following table summarises the interest income and expense incurred by the Parent company during the year in relation to these transactions. Parent company 2015 £m

2014 £m

3

3

(42)

(40)

Interest income on loans to subsidiaries Interest expense on subordinated liabilities (iii) Other income received from subsidiaries

Parent company 2015 £m

2014 £m

55

40

292

249

20

211

3

3

370

503

OEIC management fee rebates OEIC distributions Other dividends receivable from subsidiaries Rental income

The OEIC management fee rebates relate to the investment in Group OEICs made by certain unit-linked funds of the Parent company. The Parent company deducts an investment management fee from the unit-linked fund. The authorised corporate director of the OEICs, which is a subsidiary of the Parent company, deducts an investment management fee from the OEIC in which the unit-linked fund has invested. In order to avoid the unit-linked fund bearing both these investment management fees, the subsidiary company rebates the portion of its charge relating to the internal holding of OEICs to the unit-linked fund. OEIC distributions are those received from OEICs that are classified as subsidiaries for financial reporting purposes. (iv) Outstanding balances with Group entities at the year end At the year end, the following balances were outstanding with Group entities in relation to the transactions above. Parent company 2015 £m

2014 £m

Amounts due from Group entities

16

13

Loans to Group entities

29

29

45

42

(743)

(640)

Subordinated liabilities Amounts due to Group entities

The amounts due to and from Group entities are due on demand and are not secured.

(56)

(39)

(799)

(679)

41. Related party transactions (continued) (b) Related party transactions of the Parent company (continued) (v) Other transactions of the Parent company with related parties As part of its portfolio of investment assets, the Parent company has holdings in OEICs and other funds, managed by subsidiaries. The Parent company’s acquisitions and sales of these funds during the year were as follows: Parent company 2015 £m

2014 £m

Acquisition of funds

4,263

2,278

Proceeds from sale of funds

1,569

1,047

(vi) Transactions with key management personnel No director had transactions or arrangements with the Group that require disclosure, other than those given in the Directors’ remuneration report. Key management remuneration is disclosed in note 10.

42. Additional cash flow information (a) Adjustments for non-cash items Adjustments in the statements of cash flows for non-cash items comprise the following: Group

Tax charge/(credit)

Parent company

2015 £m

2014 £m

18

207

2015 £m

2014 £m 197

(12)

Depreciation of property, plant and equipment

5

4

-

4

Reversal of impairments on property, plant and equipment

-

(1)

-

-

Fair value gain on investment property Amortisation and impairment charges on acquired PVIF and other intangible assets Change in deferred acquisition costs Change in reinsurers’ share of insurance liabilities Change in pension scheme asset Fair value loss/(gain) on financial investments

(439)

(441)

(430)

40

77

35

81 160 (49) 185

Net foreign exchange gain on financial investments

38

Change in participating insurance contract liabilities

(733)

33 (1,515) 23 (5,567) 27 3,242

(47) 33

81 160

(4,854) 23

(49) 164

(1,976) 22

34 (733)

18,414

Change in participating investment contract liabilities

18

18

328

Change in non-participating value of in-force business

(194)

3

(194)

(163)

Change in non-participating insurance contract liabilities

(215)

507

(214)

Change in non-participating investment contract liabilities Change in provisions Non-cash transfer of investments Other non-cash items

2,291 (26)

24

(359)

3,543 2

2,291

4,116 6,437 5

(18)

36

(160)

36

544

(1,044)

538

(24,891)

-

1,760

(1,036)

1,707

(2,711)

The non-cash transfer of investments shown above relates to assets transferred in by external clients of £36m (2014 transferred out £160m). The other non-cash items in the Parent company in 2014 predominantly relate to the Part VII transfer in of RL (CIS) and RLPPC.

165

42. Additional cash flow information (continued) (b) Adjustments for non-operating items Adjustments in the statements of cash flows for non-operating items comprise the following: Group

Parent company

2015 £m

2014 £m

Fair value (gain)/loss on investments in Group entities

-

-

(31)

177

Dividends received from subsidiaries

-

-

(20)

(211)

44

43

43

41

44

43

(8)

7

Finance costs

2015 £m

2014 £m

The fair value (gain)/loss on investments in Group entities and the dividends received from subsidiaries shown above exclude amounts in relation to OEICs and other funds treated as subsidiaries for financial reporting purposes. (c) Dividends and interest Interest and dividend receipts and payments included in the statements of cash flows are as follows: Group

Parent company

2015 £m

2014 £m

2015 £m

2014 £m

608

520

526

355

-

-

20

31

608

520

546

386

1,021

1,037

912

496

 Operating cash flows

2

3

2

3

 Financing cash flows

44

43

43

41

46

46

45

44

Dividends received:  Operating cash flows (including Group OEICs)  Investing cash flows

Interest received:  Operating cash flows

Interest paid:

(d) Acquisition and disposal of Group entities The Parent company’s operating portfolio of investment assets includes OEICs and other investment funds that are classified for financial reporting purposes as subsidiaries. Cash flows in relation to these assets are classified as operating cash flows for the Parent company statement of cash flows. The amount included within ‘Net acquisition of financial investments’ relating to the acquisition and disposal of such funds was a net acquisition of £2,693m (2014 £1,231m). The figures for the acquisition and disposal of Group entities in the statements of cash flows can be analysed as follows:  the acquisition of Group entities figure of £180m in 2014 related to the cash settlement of the deferred consideration payable on the

acquisition of RL (CIS) and RLAM (CIS);  the acquisition of Group entities in the Parent company in 2015 of £30m relates to a capital contribution to Wrap IFA Services

Limited; in 2014 the total of £8m related to the purchase of the minority interest in Wrap IFA Services Limited of £4m and capital injections into subsidiaries totalling £4m; and  the Parent company proceeds of £10m in 2014 related to a share capital reduction in a subsidiary.

43. Risk management As a financial services provider, the Group’s business is the managed acceptance of risk. The Group has a set of risk preferences which define the types of risk the Group views as being desirable, neutral towards or undesirable and which form a core part of the Group’s risk management framework and control techniques. The Group seeks to manage its exposures to risk through its risk management framework ensuring that the residual risk exposures are within acceptable tolerances agreed by the Board. The risk management framework established within the Group is designed to manage, rather than eliminate, the risk of failure to meet business objectives as well as to ensure that the Group is well capitalised. The Corporate governance section of this Annual Report and Accounts includes a summary of the Group’s risk management and internal controls approach. The key control techniques for the major categories of risk exposure are summarised in the following sections. (a) Insurance risk Insurance risk arises from the uncertainty over the occurrence, amount and timing of claims payments arising under insurance contracts. The exposure of the Group depends to a significant extent on the value of claims to be paid in the future, relative to the assets accumulated to the date of claim. The amount of such future obligations is assessed by reference to assumptions with regard to future mortality or (if applicable) morbidity rates, persistency rates, expenses, investment returns, interest rates and tax rates. The main insurance risks can be summarised as follows:  mortality – the risk that the Group’s experience of life assurance customers is different from that expected. For life assurance the risk is

that more customers die than expected;  morbidity – the risk that more of the Group’s health insurance customers fall ill or become incapacitated than expected;  persistency – the risk that policies do not remain in force and are for any reason lapsed, made paid-up, surrendered or transferred prior

to maturity or expiry. For policies without guarantees, the risk is generally that fewer policies remain in force than expected. For those with guarantees, the risk is generally that more remain in force than expected;  annuitant longevity – the risk that the annuitant lives longer than assumed in the pricing and reserving basis used;  expenses – the risk that actual expenses are higher than those expected; and  option take-up – the risk that more customers than expected exercise options within their policies, in particular guaranteed annuity

options. In addition, it is necessary for the Group to make decisions which ensure an appropriate accumulation of assets relative to liabilities. These decisions include the allocation of investments between asset classes, the setting of with-profits policyholder bonus rates (some of which are guaranteed) and the setting of surrender terms. The primary responsibility for managing insurance risk falls to the Insurance Committee. This Committee has responsibility for the setting of policy and for monitoring the levels of risk arising from mortality, morbidity, persistency and expenses. The Committee also considers the Group’s reinsurance coverage. Insurance risks are managed through the following mechanisms:  the use of the policy framework, guidelines, limits and authority levels for concluding insurance contracts, assuming insurance risks and

handling insurance claims;  the use of the Group insurance risk policy to provide Group-wide guidelines around the identification, assessment, mitigation,

monitoring, reporting and control of insurance risks;  regular monitoring of actual exposures compared to agreed limits to ensure that the insurance risk accepted remains within risk

appetite;  the use of reinsurance to mitigate exposures in excess of risk appetite, to limit the Group’s exposure to large single claims and

catastrophes and to alleviate the impact of new business strain;  the diversification of business over several classes of insurance and over large numbers of individual risks to reduce variability in loss

experience; and  control over product development and pricing.

These techniques are supported by the use of actuarial models to calculate premiums and monitor claims patterns. Past experience and statistical methods are also used to determine appropriate assumptions for those models.

167

43. Risk management (continued) (a) Insurance risk (continued) Concentration risk The Group and Parent company write a diverse mix of business across a diverse group of people and have no material concentrations of risk by product type. However, as the Group and Parent company have written substantially all of their business in the UK, results are sensitive to demographic and economic changes arising in the UK. Concentrations of insurance risk are considered by the Insurance Committee to ensure that the risk is within the Group’s overall risk appetite. The Group seeks to mitigate the risk of excess concentrations of risk through the use of reinsurance, portfolio analysis and risk limits. Sensitivity analysis The following tables present the sensitivity of insurance and investment contract liabilities to the insurance risks set out above. Sensitivities are only shown in one direction as an equal and opposite movement in the variable for the majority of business would have an equal and opposite impact on the value of insurance and investment contract liabilities.  Mortality and morbidity

5% proportionate decrease in base mortality and morbidity rates. This sensitivity demonstrates the effect of a decrease in the rate of deaths and serious illness. The impact of such a change on the contract liabilities varies depending on the type of business written. For life assurance business a decrease in mortality rates will typically decrease the liabilities as there will be fewer payouts for early death. However, for those policies which contain a guaranteed annuity option the policy liability may increase as its value depends in part on the length of time over which the guaranteed rate will be paid. Likewise, for annuity business a decrease in mortality rates will increase the liability as the average period over which annuity payments have to be made will be extended.  Persistency

10% proportionate decrease in lapse rates. This sensitivity reflects a single, downward movement in lapse rates. This means that fewer policies are being surrendered or terminated early, with the result that more policies are assumed to remain in force.  Expenses

10% decrease in maintenance expenses – the ongoing cost of administering contracts. This sensitivity is applied to the projected level of expenses. There is no change to the assumed rate of future expense inflation. A reduction in expenses will reduce the value of the liabilities for most classes of business. For some unit-linked contracts where future charges cover expenses, however, the liability may be unaffected. The tables demonstrate the effect of a change in a key assumption whilst other assumptions remain unchanged. In practice, the assumptions may be interdependent. It should also be noted that the impact on the liabilities from changes in these assumptions may not be linear as implied by these results. Larger or smaller impacts should not be interpolated or extrapolated from these results.

43. Risk management (continued) (a) Insurance risk (continued) Group 2014

2015

Impact of change in variable

Impact of change in variable Liability as reported £m

Mortality and morbidity £m

28,874

26

Lapses £m

Liability as Expenses reported £m £m

Mortality and morbidity £m

Lapses £m

Expenses £m

29,607

31

12

11

Long-term insurance contract liabilities, gross Participating insurance contracts

5

10

Non-participating insurance contracts 2

(2)

1,978

34

(34)

980

64

-

(13)

4,186

-

-

360

 Unit-linked

1,841

 Non-profit, other than annuities

1,086

(142)

 Non-profit annuities

4,088 275

 Claims outstanding

7

-

8

3

(2)

28

(29)

66

-

(14)

-

-

(134)

-

7,290

(71)

36

(49)

7,504

(60)

31

(45)

36,164

(45)

41

(39)

37,111

(29)

43

(34)

27,524

2

11

28,141

6

7

8

3

(2)

Long-term insurance contract liabilities, net Participating insurance contracts

-

12

Non-participating insurance contracts  Unit-linked

1,841

7

2

(2)

1,978

 Non-profit, other than annuities

536

(21)

1

(34)

507

(23)

-

(29)

 Non-profit annuities

773

10

-

(7)

717

9

-

(7)

 Claims outstanding

188

-

-

-

306

-

-

-

3,338

(4)

3

(43)

3,508

30,862

(2)

3

(32)

31,649

(1,526)

(13)

(94)

(81)

2,326

(12)

(4)

(1)

-

-

22,691

(4)

(1)

24,999

Non-participating value of in-force business

(6) -

3

(38)

10

(26)

(1,332)

(12)

(78)

(69)

2,308

(14)

(3)

(3)

-

(1)

(3)

(4)

Investment contract liabilities Participating investment contracts Non-participating investment contracts

24,982 27,308

(12)

169

(14)

43. Risk management (continued) (a) Insurance risk (continued) Parent company 2014

2015

Impact of change in variable

Impact of change in variable Liability as reported £m

Mortality and morbidity £m

28,949

26

Lapses £m

Liability as Expenses reported £m £m

Mortality and morbidity £m

Lapses £m

Expenses £m

29,682

31

12

11

Long-term insurance contract liabilities, gross Participating insurance contracts

5

10

Non-participating insurance contracts 2

(2)

1,978

34

(34)

980

64

-

(13)

4,186

-

-

360

 Unit-linked

1,841

 Non-profit, other than annuities

1,086

(142)

 Non-profit annuities

4,088 275

 Claims outstanding

7

-

8

3

(2)

28

(29)

66

-

(14)

-

-

(134)

-

7,290

(71)

36

(49)

7,504

(60)

31

(45)

36,239

(45)

41

(39)

37,186

(29)

43

(34)

27,599

2

-

11

28,216

6

7

8

3

(2)

Long-term insurance contract liabilities, net Participating insurance contracts

12

Non-participating insurance contracts  Unit-linked

1,841

7

2

(2)

1,978

 Non-profit, other than annuities

536

(21)

1

(34)

507

(23)

-

(29)

 Non-profit annuities

773

10

-

(7)

717

9

-

(7)

 Claims outstanding

188

-

-

-

306

-

-

-

3,338

(4)

3

(43)

3,508

30,937

(2)

3

(32)

31,724

Non-participating value of in-force business

(6) -

3

(38)

10

(26)

(1,332)

(12)

(78)

(69)

2,308

(14)

(3)

(3)

-

(1)

(3)

(4)

(1,526)

(13)

(94)

(81)

2,326

(12)

(4)

(1)

-

-

22,691

(4)

(1)

24,999

Investment contract liabilities Participating investment contracts Non-participating investment contracts

24,982 27,308

(12)

(14)

43. Risk management (continued) (b) Market risk Market risk arises from the possibility that fluctuations in the values of or income from the Group’s assets or in interest rates or foreign currency exchange rates cause a divergence in the value of the Group’s assets and liabilities. The Group manages market risk within the risk management framework outlined above and in accordance with the relevant regulatory requirements. The principal techniques employed are the establishment of asset allocation and performance benchmarks consistent with the Group’s risk appetite and asset-liability matching. This balances the risks relating to the liabilities under the Group’s insurance and investment contracts against the risks inherent in its assets and the capital available. The Group has established approaches for matching assets and liabilities, including hedging customer options and, where cost effective, unrewarded risks. Where appropriate matching cannot be achieved, management actions are in place to manage the market risk resulting from the mismatch. The Group’s Capital Management Committee regularly monitors these processes. The Group is not exposed to market risk in respect of assets held to cover unit-linked liabilities as these risks are borne by the holders of the contracts concerned, except to the extent that income from the fund-based management charges levied on these contracts varies directly with the value of the underlying assets. Such assets are, however, prudently managed in order to meet customers’ risk and reward expectations. In addition, regulatory requirements prescribe the type and quality of assets that can be held to support these liabilities. The Group’s exposure to market risk arises principally from equity risk and property risk, interest rate risk, inflation risk, credit spread risk, swap spread risk and currency risk. (i) Equity risk and property risk Equity risk and property risk are the risks that the fair value or future cash flows of an asset or liability will fluctuate because of changes in market prices of equities or investment properties, other than those arising from interest rate or currency risks. Those changes may be caused by factors specific to the asset or liability, or its issuer, or by factors affecting all similar assets or liabilities. The Board sets the Group’s investment policy and strategy. Day-to-day responsibility for implementation is delegated to the Group’s investment management subsidiary with monitoring procedures in place. The investment management agreement in place between the Parent company and its asset management company specifies the limits for holdings in certain asset categories. Asset allocation and performance benchmarks are set, which ensure that each fund has an appropriate mix of assets and is not over or under-exposed to a particular asset category or specific investment. The Group’s Capital Management Committee and Investment Committee monitor the actual asset allocation and performance against benchmark. A sensitivity analysis to changes in the market prices of equities and property is included in section (vi). (ii) Interest rate risk Interest rate risk is the risk that the fair value or cash flows of a financial instrument will vary as market rates of interest vary. For the Group, interest rate risk arises from holding assets and liabilities – actual or notional – with different maturity or re-pricing dates, creating exposure to changes in the level of interest rates, whether real or notional. It mainly arises from the Group’s investments in debt and fixed income securities, which are exposed to changes in interest rates. It also arises in certain products sold by the Group, which include guarantees as they can lead to claim values being higher than the value of the backing assets where interest rates change. Exposure to interest rate risk is monitored using scenario testing, stress testing, Value-at-Risk analysis and asset and liability duration control. The Group manages interest rate risk using performance benchmarks with appropriate durations and, in some instances, using derivatives to achieve a closer cash flow match. The Parent company uses government securities with interest rate swap overlays to provide interest rate sensitivity matching. A sensitivity analysis to interest rate risk is included in section (vi). (iii) Inflation risk Inflation risk is the risk that inflation results in the value of the Group’s liabilities increasing by more than the value of its assets. It arises principally in the Group’s defined benefit pension scheme, where higher inflation would result in higher increases in deferred pensions and would be expected to be associated with higher increases in pensions in payment. The Group mitigates some inflation risk in its defined benefit pension schemes by the use of inflation swap derivatives. (iv) Credit spread risk and swap spread risk Credit spread risk is the risk that the difference between the yields on non-sovereign investment bonds and the yields on UK Government bonds increases from current levels, causing the value of the Group’s holdings of non-sovereign bonds to reduce by more than the value of the associated liabilities. Swap spread risk is similar to credit spread risk but arises in respect of the Group’s holdings of interest rate swaps. The Group manages its exposures to spread risks through its hedging strategy and regular review of its hedging arrangements.

171

43. Risk management (continued) (b) Market risk (continued) (v) Currency risk Currency risk is defined as the risk that the fair value or future cash flows of an asset or liability will change as a result of a change in foreign exchange rates. As the Group operates principally in the UK its assets and liabilities are mainly denominated in sterling. For investment assets, the Group’s investment management policies and procedures allow for a small exposure to overseas markets, via both equities and fixed interest securities. The resulting currency risk is managed by the use of exposure limits and authorisation controls operated within the Group’s risk management framework. The tables below demonstrate the extent to which the assets and liabilities of the Group and the Parent company are exposed to currency risk. Linked assets are not subject to currency risk as this risk is borne by the customers concerned. A sensitivity analysis of the Group and Parent company’s exposure to currency risk is included in section (vi). Group

Parent company

2015 £m

2014 £m

2015 £m

2014 £m

Non-linked assets denominated in GBP

45,122

45,880

42,077

42,776

Non-linked assets denominated in EUR

808

1,044

759

999

Non-linked assets denominated in USD

1,733

1,892

1,677

1,892

Non-linked assets denominated in JPY

169

159

169

159

Non-linked assets denominated in other currencies

251

290

251

290

48,083

49,265

44,933

46,116

26,823

24,669

26,823

24,669

74,906

73,934

71,756

70,785

47,038

48,027

43,888

44,878

Linked assets not subject to currency risk

Non-linked liabilities denominated in GBP Non-linked liabilities denominated in EUR Linked liabilities not subject to currency risk

1,045

1,238

1,045

1,238

48,083

49,265

44,933

46,116

26,823

24,669

26,823

24,669

74,906

73,934

71,756

70,785

At 31 December 2015, the Group and Parent company held currency forwards with a sterling notional value of £85m (2014 Group and Parent company £189m) in respect of the non-linked assets denominated in currencies other than sterling. These are included in the table above. (vi) Market risk sensitivity analysis The following table shows the impact on the unallocated divisible surplus (before tax) from changes in key market variables. Each sensitivity is performed with all other variables held constant. The sensitivity scenarios used are as follows. Interest rates 100 basis point per annum reduction and increase in market interest rates. For example, if current market rates are 4%, the impact of an immediate change to 3% and 5%. A reduction in interest rates increases the current market value of fixed interest assets but reduces future reinvestment rates. The value of liabilities is also increased when interest rates fall as the discount rate used in their calculation will be reduced. An increase in rates will have the opposite effect. Currency rates 10% increase and decrease in the rates of exchange between sterling and the overseas currencies to which the Group is exposed. An increase in the value of sterling relative to another currency will reduce the sterling value of assets and increase the sterling value of liabilities denominated in that currency. As the Group holds relatively few liabilities in overseas currencies, an increase in the value of sterling will reduce the unallocated divisible surplus.

43. Risk management (continued) (b) Market risk (continued) (vi) Market risk sensitivity analysis (continued) Equity/property capital values 10% increase and decrease in equity and property capital values at the valuation date, without a corresponding fall or rise in dividend or rental yield. This sensitivity shows the impact of a sudden change in the market value of assets. The value of liabilities will decrease when asset values fall, but other than for unit-linked business, the decrease will be less than the fall in asset values because of the presence of financial guarantees and options in the underlying contracts. Consequently, the unallocated divisible surplus will be reduced by a fall in asset values. Group Impact before tax on the UDS

2015 £m

Parent company 2014 £m (8)

2015 £m

Interest rates +100bp

28

Interest rates -100bp

(15)

(15)

(15)

(3)

(12)

2

10% increase in GBP/EUR exchange rate 10% decrease in GBP/EUR exchange rate

3

14

2014 £m (8)

28

(15) (8) 9

(2)

10% increase in GBP/USD exchange rate

(133)

(133)

(128)

(133)

10% decrease in GBP/USD exchange rate

163

163

157

163

10% increase in GBP/JPY exchange rate

(12)

(12)

(12)

(12)

10% decrease in GBP/JPY exchange rate

14

15

14

15

10% increase in GBP/other currencies exchange rates

(19)

(21)

(19)

(21)

10% decrease in GBP/other currencies exchange rates

20

23

20

23

Equity/property prices +10%

244

239

244

239

Equity/property prices -10%

(228)

(236)

(228)

(236)

Limitations of sensitivity analysis The above table demonstrates the effect of a change in a key assumption whilst other assumptions remain unchanged. In practice, there may be dependencies between the underlying risks. The Group’s assets and liabilities are actively managed. For example, the Group’s financial risk management strategy aims to manage the exposure to market fluctuations. As investment market conditions change, management actions could include selling investments, changing investment portfolio allocation, adjusting bonuses credited to with-profits policyholders and taking other protective action. It should also be noted that the impact on the unallocated divisible surplus from changes in these assumptions may not be linear as implied by these results. Larger or smaller impacts should not be interpolated or extrapolated from these results. (c) Credit risk Credit risk is defined as the risk of loss if another party fails to perform its obligations or fails to perform them in a timely fashion. Exposure to credit risk may arise in connection with a single transaction or an aggregation of transactions (not necessarily of the same type) with a single counterparty. The Group’s exposure to credit risk arises principally from its investment portfolio, from its holdings in bonds, derivatives and cash in particular and from reinsurance arrangements. The credit risk policy and procedures and the investment management agreements stipulate approved counterparties, permitted investments and exchanges, as well as detailing specific asset class exposure limits. The policy also required that asset holdings were within the regulatory limits in force during the year that restricted excessive concentrations with individual counterparties or with particular asset classes. For derivatives, the derivatives risk management policy also details legal, collateral and valuation requirements. Where possible, significant counterparty exposures, particularly in respect of stock lending and derivatives, are mitigated by the use of collateral. A comprehensive system of limits is in place in order to control exposure to credit risk. Limits exist on individual counterparties and on the overall quality of the Group’s bond portfolio. The one exception is exposure to the UK Government. Investment in government debt is a key part of the Group’s investment and asset and liability management strategies and it has been decided that no limit should be set. If the UK’s credit standing were to deteriorate significantly, however, this decision would be reviewed. Exposures to individual counterparties are monitored against the agreed limits by the Credit, Counterparty and Liquidity Risk Committee, which reports to the Group’s Capital Management Committee. For bond holdings, exposures are also monitored by industry sector and by credit rating.

173

43. Risk management (continued) (c) Credit risk (continued) The Group is also exposed to credit risk in respect of its reinsurance arrangements. The credit exposures for reinsurance contracts are monitored by the Group’s Capital Management and Insurance Committees as part of the overall credit risk policy. The following tables show the assets of the Group and Parent company that are subject to credit risk and a reconciliation to the balance sheet carrying values. The credit risk in respect of linked assets is borne by the holders of the contracts concerned except where investment is made in the funds of other life companies via reinsurance contracts. Group 2014

2015 Non-linked assets subject to credit risk £m

Linked Balance sheet assets carrying value £m £m

Non-linked assets subject to credit risk £m

Linked assets £m

Balance sheet carrying value £m

Financial investments (note 20) 20,814

10,083

30,897

21,587

9,839

31,426

 Derivatives

2,544

1

2,545

3,122

1

3,123

Cash and cash equivalents

1,450

1,373

2,823

1,546

1,190

2,736

Reinsurers’ share of insurance liabilities

5,302

-

5,302

5,462

-

5,462

341

205

546

251

161

412

30,451

11,662

42,113

31,968

11,191

43,159

 Debt and fixed income securities

Trade and other receivables

Parent company 2014

2015 Non-linked assets subject to credit risk £m

Linked Balance sheet assets carrying value £m £m

Non-linked assets subject to credit risk £m

Linked assets £m

Balance sheet carrying value £m

Financial investments (note 20) 20,747

6,445

27,192

21,529

6,623

28,152

 Derivatives

2,537

-

2,537

3,120

1

3,121

Cash and cash equivalents

1,249

960

2,209

1,386

873

2,259

Reinsurers’ share of insurance liabilities

5,302

-

5,302

5,462

-

5,462

280

103

383

182

103

285

30,115

7,508

37,623

31,679

7,600

39,279

 Debt and fixed income securities

Trade and other receivables

The following tables show an analysis of the credit quality of those assets that are subject to credit risk, using credit ratings issued by companies such as Standard & Poor’s, where these are available. AAA is the highest rating possible for assets exposed to credit risk. The credit ratings in respect of derivative financial investments are those of the counterparties to the derivative contracts. The debt and fixed income securities which have not been rated by an external agency are subject to internal analysis to provide an internal rating, the average of which at 31 December 2015 was BBB+. The internal rating process used by the Group is to assess credit risk within the context of the bond issuer’s financial position, the bond’s covenants and structure and the likely recovery should default occur. Three major sectors that are significant issuers of sterling denominated unrated bonds, namely social housing, investment trusts and property, are each asset rich. For these sectors, documented specific credit analysis is undertaken, which assesses the individual risks of bonds in the sector and relates the risk of loss to that implied by the rating bands of the rating agencies. The internal ratings produced are compared for consistency with formally rated, broadly equivalent stocks in the same sector and for consistency with the market pricing of the underlying bond. For stocks in other sectors, the background of the issuer and the bond characteristics are assessed within a framework similar, where possible, to credit rating agency methodology.

43. Risk management (continued) (c) Credit risk (continued) In order to reduce its exposure to credit risk the Group and Parent company invest primarily in higher graded assets, rated BBB or above. The Group and Parent company also make use of collateral arrangements in respect of their derivative exposures and stock lending activity, wherever possible. Further details of the collateral held are shown in note 20(e). Group – 2015 AAA £m

AA £m

A £m

BBB £m

BB/B £m

CC Not rated £m £m

Total £m

803

14,226

2,741

2,367

330

4

343

20,814

Assets subject to credit risk: Financial investments  Debt and fixed income securities  Derivatives

Cash and cash equivalents Reinsurers’ share of insurance liabilities Trade and other receivables

-

-

2,520

-

-

-

24

2,544

117

609

706

14

4

-

-

1,450

-

3,546

1,624

132

-

-

-

5,302

-

-

-

-

-

-

341

341

920

18,381

7,591

2,513

334

4

708

30,451

CC Not rated £m £m

Total £m

Group – 2014 AAA £m

AA £m

A £m

BBB £m

BB/B £m

453 -

15,516

2,930

2,167

193

1

327

21,587

-

3,008

113

-

-

1

3,122

Assets subject to credit risk: Financial investments  Debt and fixed income securities  Derivatives

Cash and cash equivalents Reinsurers’ share of insurance liabilities Trade and other receivables

22

910

601

-

13

-

-

1,546

-

4,458

1,004

-

-

-

-

5,462

-

-

-

-

-

-

251

251

475

20,884

7,543

2,280

206

1

579

31,968

CC Not rated £m £m

Total £m

Parent company – 2015 AAA £m

AA £m

A £m

BBB £m

BB/B £m

804

14,159

2,741

2,366

330

4

343

20,747

-

-

2,520

-

-

-

17

2,537

Assets subject to credit risk: Financial investments  Debt and fixed income securities  Derivatives

Cash and cash equivalents Reinsurers’ share of insurance liabilities Trade and other receivables

117

606

509

14

3

-

-

1,249

-

3,546

1,624

132

-

-

-

5,302

-

-

-

-

-

-

280

280

921

18,311

7,394

2,512

333

4

640

30,115

175

43. Risk management (continued) (c) Credit risk (continued) Parent company – 2014 AAA £m

AA £m

A £m

BBB £m

BB/B £m

453

15,458

2,930

2,167

193

CC Not rated £m £m

Total £m

Assets subject to credit risk: Financial investments  Debt and fixed income securities

1

327

21,529

-

-

3,007

113

-

-

-

3,120

22

893

466

-

5

-

-

1,386

Reinsurers’ share of insurance liabilities

-

4,458

1,004

-

-

-

-

5,462

Trade and other receivables

-

-

-

-

-

-

182

182

475

20,809

7,407

2,280

198

1

509

31,679

 Derivatives

Cash and cash equivalents

The following tables show the financial assets that are exposed to credit risk, analysing them between those that are neither past due nor impaired, those that are past due (by age band) but are not considered to be impaired and those that have been impaired. Group – 2015 Assets that are past due but not impaired Neither past due nor impaired £m

0–3 months £m

20,814

-

3–6 6 months– months 1 year £m £m

£m

Assets that have been impaired £m

Total £m

-

-

20,814

>1 year

Assets subject to credit risk: Financial investments  Debt and fixed income securities

-

-

 Derivatives

2,544

-

-

-

-

-

2,544

Reinsurers’ share of insurance liabilities

5,297

2

1

1

1

-

5,302

312

28

-

-

1

-

341

28,967

30

1

1

2

-

29,001

£m

Assets that have been impaired £m

Total £m

Trade and other receivables

Group – 2014 Assets that are past due but not impaired Neither past due nor impaired £m

0–3 months £m

3–6 6 months– months 1 year £m £m

>1 year

Assets subject to credit risk: Financial investments 21,587

-

-

-

-

-

21,587

 Derivatives

3,122

-

-

-

-

-

3,122

Reinsurers’ share of insurance liabilities

5,459

2

-

1

-

-

5,462

230

21

-

-

-

-

251

30,398

23

-

1

-

-

30,422

 Debt and fixed income securities

Trade and other receivables

43. Risk management (continued) (c) Credit risk (continued) Parent company – 2015 Assets that are past due but not impaired Neither past due nor impaired £m

0–3 months £m

3–6 6 months– months 1 year £m £m

£m

Assets that have been impaired £m

Total £m

˃1 year

Assets subject to credit risk: Financial investments  Debt and fixed income securities

20,747

-

-

-

-

-

20,747

 Derivatives

2,537

-

-

-

-

-

2,537

Reinsurers’ share of insurance liabilities

5,297

2

1

1

1

-

5,302

252

28

-

-

-

-

280

28,833

30

1

1

1

-

28,866

Assets that have been ˃1 year impaired £m £m

Total £m

Trade and other receivables

Parent company – 2014 Assets that are past due but not impaired Neither past due nor impaired £m

0–3 months £m

21,529

-

-

3–6 6 months– months 1 year £m £m

Assets subject to credit risk: Financial investments  Debt and fixed income securities

-

-

-

21,529

 Derivatives

3,120

-

-

-

-

-

3,120

Reinsurers’ share of insurance liabilities

5,459

2

-

1

-

-

5,462

161

21

-

-

-

-

182

30,269

23

-

1

-

-

30,293

Trade and other receivables

No collateral was held against assets that are past due or impaired (2014 £nil). There were no material financial assets that would have been past due or impaired had the terms of the instrument not been renegotiated. (d) Liquidity risk The Group defines liquidity risk as the risk that the Group, although solvent, either does not have sufficient financial resources available to enable it to meet its obligations as they fall due or can secure them only at excessive cost. The Group has limited exposure to liquidity risk due primarily to its financial strength and availability of liquid assets. However, the Group recognises that extreme liquidity issues could have a serious impact on the Group. The Group believes that its liquidity risk is managed effectively and that the Group has good capabilities in this area within its Group functions and its investment management subsidiary. The Group’s liquidity management process includes:  maintaining forecasts of cash requirements and adjusting investment management strategies as appropriate to meet these requirements,

both in the short and longer term;  holding sufficient assets in investments that are readily marketable in a sufficiently short time-frame to be able to settle liabilities as

these fall due. Where liabilities are backed by less marketable assets, for example, investment property unit-linked funds, contract terms permit the Group to delay settlement in order to provide the time to sell investments in an orderly fashion to provide the required funds should the need arise;  maintaining a contingency funding plan that covers the framework to enable ongoing monitoring of the Group’s capacity to meet its

short and medium-term liabilities. It also includes a clear management action plan providing an analysis of available financing options, regular and alternative sources of liquidity and an evaluation of a range of possible adverse scenarios;  appropriate matching of the maturities of assets and liabilities. The Group’s market risk policy covers asset liability management to

ensure the duration of liabilities is matched by assets; and a risk limit framework for Liquidity Coverage Ratios; and  reporting. Liquidity exposures are reported to the Credit, Counterparty and Liquidity Risk Committee, which reports to the Group’s

Capital Management Committee.

177

43. Risk management (continued) (d) Liquidity risk (continued) These processes are regularly reviewed and updated to ensure their continued effectiveness. The Group’s exposure to liquidity risk principally arises from its insurance and investment contracts. The following tables show a maturity analysis for the Group and Parent company’s insurance and investment contract liabilities. As permitted by IFRS 4, for insurance and participating investment contracts, this has been presented as the expected future cash outflows arising from the liabilities. The analysis for the non-participating investment contracts has been shown on the same basis for consistency. Had the analysis for these liabilities been presented on the basis of the earliest contractual maturity date (as required by IFRS 7) then the whole balance would have been included in the ‘0–5 years’ column, as customers can exercise surrender options at their discretion. In such a scenario the liability may be reduced by the application of surrender penalties. The tables also show a maturity analysis for the Group and Parent company’s derivative liabilities and the reinsurance liability held at FVTPL presented on a contractual cash flow basis. The longer-term matching of assets and liabilities is covered within market risk, note 43 (b). As a result of the policies and procedures in place for managing its exposure to liquidity risk, the Group considers the residual liquidity risk arising from its activities to be immaterial. Therefore, an analysis of the Group’s asset cash flows by contractual maturity is not considered necessary to evaluate the nature and extent of the Group’s liquidity risk. Group – 2015 Cash flows (undiscounted) Balance sheet carrying value £m

Participating insurance contract liabilities Participating investment contract liabilities Non-participating insurance contract liabilities Non-participating investment contract liabilities

0–5 years £m

5–10 years £m

10–15 years £m

15–20 years £m

˃20 years £m

Total £m

(28,874)

(8,546)

(6,691)

(6,696)

(5,312)

(3,723)

(30,968)

(2,326)

(771)

(585)

(486)

(360)

(591)

(2,793)

(7,291)

(998)

(775)

(698)

(541)

(765)

(3,777)

(24,982)

(7,462)

(6,676)

(5,811)

(4,579)

(6,958)

(31,486)

(63,473)

(17,777)

(14,727)

(13,691)

(10,792)

(12,037)

(69,024)

Derivative liabilities

(1,460)

(664)

(627)

(614)

(594)

(1,084)

(3,583)

Reinsurance liability

(2,773)

(437)

(573)

(654)

(636)

(1,740)

(4,040)

Group – 2014 Cash flows (undiscounted) Balance sheet carrying value £m

Participating insurance contract liabilities

0–5 years £m

5–10 years £m

10–15 years £m

15–20 years £m

˃20 years £m

Total £m

(29,607)

(8,896)

(7,295)

(7,042)

(6,355)

(4,942)

(34,530)

Participating investment contract liabilities

(2,308)

(732)

(563)

(485)

(373)

(667)

(2,820)

Non-participating insurance contract liabilities

(7,506)

(1,106)

(747)

(687)

(527)

(726)

(3,793)

(22,691)

(7,151)

(5,926)

(5,054)

(3,946)

(5,710)

(27,787)

(62,112)

(17,885)

(14,531)

(13,268)

(11,201)

(12,045)

(68,930)

Derivative liabilities

(2,064)

(901)

(879)

(872)

(842)

(1,415)

(4,909)

Reinsurance liability

(2,799)

(418)

(556)

(658)

(658)

(1,852)

(4,142)

Non-participating investment contract liabilities

43. Risk management (continued) (d) Liquidity risk (continued) Parent company – 2015 Cash flows (undiscounted) Balance sheet carrying value £m

Participating insurance contract liabilities Participating investment contract liabilities Non-participating insurance contract liabilities

0–5 years £m

5–10 years £m

10–15 years £m

15–20 years £m

˃20 years £m

Total £m

(28,949)

(8,573)

(6,711)

(6,717)

(5,328)

(3,733)

(31,062)

(2,326)

(771)

(585)

(486)

(360)

(591)

(2,793)

(7,290)

(997)

(775)

(698)

(541)

(765)

(3,776)

(24,982)

(7,462)

(6,676)

(5,811)

(4,579)

(6,958)

(31,486)

(63,547)

(17,803)

(14,747)

(13,712)

(10,808)

(12,047)

(69,117)

Derivative liabilities

(1,445)

(664)

(627)

(614)

(594)

(1,084)

(3,583)

Reinsurance liability

(2,773)

(437)

(573)

(654)

(636)

(1,740)

(4,040)

Non-participating investment contract liabilities

Parent company – 2014 Cash flows (undiscounted) Balance sheet carrying value £m

Participating insurance contract liabilities

0–5 years £m

5–10 years £m

10–15 years £m

15–20 years £m

˃20 years £m

Total £m

(29,682)

(8,918)

(7,315)

(7,061)

(6,373)

(4,955)

(34,622)

Participating investment contract liabilities

(2,308)

(732)

(563)

(485)

(373)

(667)

(2,820)

Non-participating insurance contract liabilities

(7,504)

(1,104)

(747)

(687)

(527)

(726)

(3,791)

(22,691)

(7,151)

(5,926)

(5,054)

(3,946)

(5,710)

(27,787)

(62,185)

(17,905)

(14,551)

(13,287)

(11,219)

(12,058)

(69,020)

Derivative liabilities

(2,057)

(901)

(879)

(872)

(842)

(1,415)

(4,909)

Reinsurance liability

(2,799)

(418)

(556)

(658)

(658)

(1,852)

(4,142)

Non-participating investment contract liabilities

(e) Pension schemes The Group maintains three defined benefit pension schemes for past and current employees. The ability of the pension schemes to meet the projected pension payments is maintained through investments and regular contributions from employees and the Group. Risk arises because the estimated market value of the pension fund assets might decline; or their investment returns might reduce; or the estimated value of the pension liabilities might increase. In these circumstances, the Group could be required to make additional contributions. Management of the assets of the pension schemes is the responsibility of each scheme’s Trustees, who also appoint the Scheme Actuaries to perform triennial valuations to assess the level of funding required to meet the scheme’s liabilities. The schemes’ main exposures are to equity, interest rate, inflation and longevity risk. For further information on pension scheme assets and liabilities, see note 38. The Group monitors its pension schemes’ exposure using a variety of metrics which are regularly reviewed by the Group’s Capital Management Committee and used in discussions with the Trustees, through whom any risk management activity must be conducted.

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43. Risk management (continued) (f) Operational risk Operational risk is defined as the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events. Operational risks include, but are not limited to, information technology, information security, human resources, change management, tax, legal, fraud and compliance. Senior management has primary responsibility for the management of operational risks through developing policies, procedures and controls across the different products, activities, processes and systems under their control and for the allocation of responsibilities. Details of risks on inherent (before controls) and residual (after controls) bases are maintained on risk registers, with each part of the business being responsible for identifying, assessing, managing and reporting on its operational risks and for implementing and maintaining controls in accordance with the Group’s operational risk methodology. In performing these assessments, account is taken of the Group’s risk appetite with greater significance being placed on those risks that fall outside these parameters. This is used as a basis for review and challenge by senior management, Risk Committees and the Board of Directors. Management attention is focused upon those controls identified as not working as effectively as desired and upon action plans which are put in place when any weakness is identified. In addition, the Group conducts a series of operational risk scenarios. These scenarios allow the Group to consider how effective controls will be should an extreme event occur and to make improvements where necessary. The scenarios also provide data that is used to calculate the capital held by the Group for operational risk. (g) Emerging risk All insurers may be impacted by risks that are potentially significant but are currently only just beginning to emerge. The Group has defined emerging risks as being newly developing or changing risks which are difficult to quantify or may be uncertain and which could have a major impact on an organisation. Typically the drivers for these risks are technological, economic, environmental or geo-political. The Group’s Emerging Risk Forum comprises members from across the Group who identify and assess emerging risks and possible mitigating actions. Information about emerging risks is provided to senior management and the Board and is used to inform decision making. (h) Risk governance An independent Risk and Compliance function provides challenge to the business on the effectiveness of the risk management practices being followed, on the risks identified, the strength of the controls in place and any actions being progressed. In many parts of the Group, governance and risk teams are embedded within business units supporting the process. The independent function provides advice and guidance on the impact of regulatory change and undertakes risk-based compliance monitoring reviews to assess the quality of business processes and controls, reporting the results of its findings to management and to the Board monthly. (i) Stress and scenario testing The Group conducts a range of sensitivity analysis and stress and scenario testing activity in order to help it understand its risk profile and assess and manage its risks. This is a key element of the Group’s risk management framework, as well as being a regulatory requirement. Stress and scenario testing in various forms is carried out on a regular basis as part of business as usual and in response to specific regulatory initiatives and can involve either:  straightforward stress tests/sensitivity analysis: analyses of the sensitivity of financial and operational metrics and the risk profile to

discrete changes in market values or demographic experience; or  scenarios that involve a combination of changes in economic parameters or that concentrate on specific operational, non-market and/or

market risks. The following outputs are produced as part of business as usual and include results from one or both of the tests described above:  Group Performance Reviews, produced monthly;  Capital Monitoring Reports, produced monthly for the Capital Management Committee;  Capital Management Plan, produced bi-annually;  Reports on the capital requirements of the Parent company, produced annually;  ICAAP results for regulated non-insurance firms (where applicable), produced annually; and  Medium-Term Plans, produced annually.

43. Risk management (continued) (i) Stress and scenario testing (continued) The stress testing performed, as detailed above, includes changes in market risk, credit risk, insurance risks and operational risks, as well as combinations of these risk types. Key assumptions are varied from their best estimate assumption and the outcome provides detail of the sensitivity of these assumptions and the resultant impact on various financial metrics. This informs the business of the key risks that need to be managed and monitored. Operational risk stresses and scenarios are completed to calculate the capital required for this risk. The stresses allow an assessment of the extreme impacts arising from a given risk by way of assessment of the frequency of occurrence and the distribution. A top-down approach is used for determining the Parent company’s capital requirements which involves the analysis of single, but potentially catastrophic, events/risks which cover all risks used for modelling the capital requirement. Various broad-based scenarios and reverse stress tests have been considered in the Group over the year, as well as business model analysis activity. These scenarios provide a top-down analysis of events that would affect the Group in a significant way. These events could be in relation to issues such as the markets the Group operates in, financial strength, long-term strategy and liquidity. The outcome of these scenarios informs the Group of any areas of potential weakness, so appropriate controls and mitigating actions can be put in place. Reverse stress tests are specifically used to identify the high impact stress events which may cause a firm’s business model to fail. Business continuity planning workshops take place to consider where the Group’s ability to carry out its business activities would be severely impacted. Participants include senior managers and key contacts from relevant business areas. The lessons learned in these workshops lead to improved business continuity plans and ensure the Group is better equipped to handle possible future events.

44. Capital management (a) Capital management policies and objectives The Group’s capital management objectives are:  to protect the Group’s financial strength, providing security to policyholders;  to ensure that the Group’s capital position is sufficient to enable it to invest in the development of the business in order to fulfil its

stated core strategic objectives as determined by the Board; and  to comply with the PRA’s capital requirements. The Group has not breached these requirements at any point in the current

or prior year. The capital position of the Group is monitored on a regular basis and reviewed formally by the Capital Management Committee. The Group’s capital requirements are forecast on a regular basis. Those forecasts are compared against the available capital and the Group’s required minimum internal rate of return. The internal rate of return forecast to be achieved on potential investments is also measured against minimum required benchmarks taking into account the risk associated with the investment. From 1 January 2016, the Group will be required to maintain and report its capital position under Solvency II. Under Solvency II, the Group is required to hold sufficient capital to withstand adverse outcomes from its key risks, e.g. that equity markets fall. This ‘Solvency Capital Requirement’ (SCR) is calibrated so that it is broadly equal to the adverse experience likely to occur once in every 200 years. The Group will remain solvent under these new requirements. The remainder of this note sets out the Group’s capital position under the regulatory requirements in force at 31 December 2015. In the period up to and including 31 December 2015, the PRA’s capital requirement was that the Group must hold capital in excess of the higher of two amounts – the Pillar 1 and Pillar 2 requirements. The Pillar 1 capital requirement was calculated as the higher of two prescribed tests, Peak 1 and Peak 2, which are outlined as follows:  Peak 1 – prudent valuation of the guarantees of the Group’s life funds; and  Peak 2 – a realistic, market-consistent valuation of the expected future cash flows of the Group’s life funds.

The Pillar 2 capital requirement was based on the Group’s Individual Capital Assessment which was reported privately to the PRA. It was broadly equivalent to the capital needed to cover adverse experience likely to occur once in every 200 years, based on the Group’s actual portfolio of risks having regard to the Group’s own risk controls. (b) Realistic balance sheet A summary realistic balance sheet is shown below, split between those funds within the Parent company currently open to new business and those that are closed. The closed funds are the Refuge Assurance IB Sub-fund, the United Friendly IB Sub-fund, the United Friendly OB Sub-fund, the Scottish Life Fund, the PLAL With-Profits Fund, the Royal Liver Assurance Fund and the RL (CIS) with-profits funds. The RL (CIS) with-profits funds were formed on the transfer of RL (CIS)’s long-term insurance business to the Parent company by way of a Part VII transfer on 30 December 2014. Realistic available capital for both the open and closed funds of the Parent company is determined in accordance with the PRA’s realistic balance sheet methodology. This can be broadly described as placing a market value on both the assets and participating liabilities,

181

44. Capital management (continued) (b) Realistic balance sheet (continued) including both benefits already guaranteed and future discretionary benefits. Additionally, the value of future profits on acquired in-force long-term business within the Parent company as well as on non-participating business issued by the Group may be included as an asset. Participating liabilities comprise asset shares, plus the costs of smoothing, plus the value of guarantees and options which have been granted to policyholders. The asset share represents the premiums received to date, together with investment return earned, less expenses and charges. There are two principal types of financial option and guarantee:  guaranteed lump sum payments due on specified dates.

These mainly comprise the sum assured together with annual bonuses added onto participating contracts. Although the Group invests in a broad spread of asset types, there is still a risk that assets held to back any individual policy (the asset share) may be depressed at the time that the guaranteed payment due at maturity falls to be paid. The potential cost of honouring these guarantees is quantified as part of the liability for participating contracts; and  guaranteed annuities.

These primarily arise in connection with pension business and occur in one of two forms: • a guaranteed income specified in the contract; and • guaranteed terms for converting lump sum maturity benefits into an income at maturity.

When calculating the participating liabilities, allowance has been made for actions that management would be expected to undertake on key assumptions, for example future bonus or investment policy in varying market conditions, in line with the PPFM. The costs of financial options and guarantees are measured using a market-consistent stochastic model. For the purpose of the capital statement, all excess assets associated with policies written within the closed funds of the Parent company, amounting to £3,585m (2014 £3,052m), are reported as liabilities because they are not available for distribution to other policyholders or for other business purposes. However, those excess assets are available to provide support to the relevant policies under stressed financial conditions before any call on the reported excess capital within the open funds of the Parent company need be made. 2014

2015 Open funds £m

Closed funds £m

Total Parent company £m

Open funds £m

Closed funds £m

Total Parent company £m

Total realistic participating assets

7,347

29,034

36,381

7,248

30,451

37,699

Value of in-force business on a realistic basis

2,135

374

2,509

1,956

320

2,276

Current liabilities and subordinated liabilities

(1,240)

(6,291)

(1,020)

Total realistic participating net assets

8,242

24,357

32,599

8,184

24,902

33,086

4,890

17,938

22,828

4,889

18,770

23,659

7

226

233

168

155

(5,051)

(5,869)

(6,889)

Realistic participating liabilities  Participating benefit reserve  Costs of smoothing

(13)

 Guarantees

215

788

1,003

227

888

1,115

 Options (guaranteed annuities)

164

1,613

1,777

232

2,028

2,260

(473)

(473)

(508)

(508)

65

680

745

85

504

589

Total realistic participating liabilities (before closed fund transfer commitments)

5,341

20,772

26,113

5,420

21,850

27,270

Total realistic available capital (before closed fund transfer commitments)

2,901

3,585

6,486

2,764

3,052

5,816

(3,585)

(3,585)

(3,052)

(3,052)

 Future charges for guarantees  Other

Closed fund transfer commitments Total realistic available capital

-

2,901

-

2,901

-

2,764

-

2,764

44. Capital management (continued) (c) Capital statement

Unallocated divisible surplus

2015 £m

2014 £m

3,314

3,139

Adjustments onto a regulatory basis  Inadmissible goodwill, other intangibles, pension schemes and deferred tax assets

(431)

(415)

 Other adjustments to the value of net assets

(176)

(161)

 Adjustments to liabilities on a regulatory basis

194

201

2,901

2,764

28,874

29,607

2,326

2,308

Total available capital resources Analysis of liabilities Participating insurance contract liabilities Participating investment contract liabilities Unallocated divisible surplus

3,314

3,139

Non-participating value of in-force business

(1,526)

(1,332)

32,988

33,722

 Unit-linked

1,841

1,978

 Other

5,450

5,528

24,982

22,691

32,273

30,197

65,261

63,919

Non-participating insurance contract liabilities

Non-participating investment contract liabilities  Unit-linked

Total long-term contract liabilities

The capital statement sets out the financial strength of the Group and provides a reconciliation of the unallocated divisible surplus to the available capital resources. The available capital resources are determined using PRA valuation rules. The asset valuation rules are based on IFRS, adjusted to exclude certain assets not admissible for regulatory purposes and for other specific valuation differences. The capital requirement for the Group is the Risk Capital Margin (RCM). This represents the level of capital that the Group is required to hold in a stress event. The RCM for the Parent company is £nil (2014 £15m) and is calculated assuming that persistency improves by 32.5% (2014 32.5%), that equity markets fall by 19.9% (2014 20.0%), property values fall by 12.5 % (2014 12.5%) and risk-free yields fall by 42 basis points (2014 38 basis points). Credit risk is allowed for by assuming an immediate and permanent widening in yield spreads on corporate bonds over risk-free rates, calculated on a stock-by-stock basis. During 2015, the Parent company transitioned from the realistic peak to the regulatory peak. On the regulatory basis, the Group and Parent company’s total available capital was £14,282m (2014 £13,366m), the capital resources requirement was £10,747m (2014 £9,976m) and the excess capital was £3,535m (2014 £3,390m).

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44. Capital management (continued) (d) Movement in available capital resources 2014

2015 Open funds £m

Closed funds £m

Total Parent company £m

Open funds £m

Closed funds £m

Total Parent company £m

2,764

-

2,764

2,454



2,454

-

3,052

3,052

-

972

972

2,764

3,052

5,816

2,454

972

3,426

Changes in assumptions

53

565

618

(104)

(382)

(486)

Investment performance

69

71

140

327

327

654

New business

79

-

79

23

-

23

Changes in management policy

(61)

(89)

(150)

(3)

(14)

(17)

At 1 January (after closed fund transfer commitments) Closed fund transfer commitments At 1 January (before closed fund transfer commitments)

Other movements Movement At 31 December (before closed fund transfer commitments)

(46)

(126)

(172)

110

2,261

2,371

137

533

670

310

2,080

2,390

2,901

3,585

6,486

2,764

3,052

5,816

(3,585)

(3,585)

(3,052)

(3,052)

Closed fund transfer commitments

-

At 31 December (after closed fund transfer commitments)

2,901

-

2,901

2,764

-

2,764 2014 RL (CIS) £m

At 1 January Changes in assumptions Investment performance Changes in management policy Other movements

1,445 (458) 1,354 (22) (49)

Part VII transfer

(2,270)

Movement

(1,445)

At 31 December

-

The table above shows key elements of the movement in available capital resources analysed by open and closed funds within the Parent company and separately for RL (CIS) until the Part VII transfer in 2014. The impact from assumption changes includes economic, persistency, mortality, expense and regulatory valuation assumption changes and their effects on the costs of guarantees, options and smoothing, the value of in-force business and the participating benefit reserve. The dominant effect arises from changes in demographic assumptions. The investment performance impact comprises the after-tax return on opening capital, including the value of in-force business, performance on assets backing liabilities in respect of guarantees, options and smoothing and other future policy-related liabilities, and the reduction in cost of guarantees caused by the higher than expected value of underlying asset shares. Value of new business is calculated on the basis used to value liabilities within the realistic balance sheet and is quoted net of development costs and tax. Changes in management policy reflect actions taken by the Board of Directors of the relevant entity which affect the value of liabilities set aside to meet future payments to with-profits policyholders. Other movements include experience profits over the year including those earned on the non-life subsidiary, the impact of acquisitions in the open and closed funds and opening adjustments to reflect improved modelling and residual items.

44. Capital management (continued) (d) Movement in available capital resources (continued) There were no significant changes in regulation or other similar external developments. (e) Sensitivity of capital The capital position of the Group is sensitive to changes in economic conditions and financial markets both through the impact on asset values and also the effect that changes in interest rates and investment returns may have on liability valuations. The liabilities are also sensitive to the other assumptions that have been used in their calculation, such as mortality and persistency. The Group’s approach to managing these risks is detailed in note 43. (i) Economic conditions and financial markets The liability valuation will include assumptions about interest rates and investment returns. An adverse change in either variable will increase liabilities and, to the extent that assets are impacted, this may increase or decrease the available capital. For example, a reduction in long-term interest rates would increase the amount of the Group’s liabilities and could therefore reduce its available capital, depending upon the extent to which the liabilities are matched by assets with similar anticipated cash flows. Currently, the available capital of the Group will increase if interest rates fall. Similarly, an adverse change in the markets for the Group’s investment assets could increase or decrease the available capital of the Group to the extent that equity falls cannot be reflected in reductions in payments to policyholders because of the presence of guarantees and options in the underlying contracts, and any change in assets within the working capital. Currently, a fall in equity/property values would reduce available capital for the Parent company. (ii) Assumptions The Group monitors actual experience in mortality, morbidity and persistency rates against the assumptions used, and applies that outcome to refine its long-term assumptions. Amounts paid will inevitably differ from estimates, particularly when the expected payments do not occur until well into the future. Liabilities are evaluated at least half yearly, allowing for changes in the assumptions used, as well as for the actual claims experience. If actual claims experience is less favourable than the underlying assumptions, or it is necessary to increase provisions in anticipation of a higher rate of future claims, then available capital will be reduced.

185

European Embedded Value supplementary information Statement of directors’ responsibilities in relation to the European Embedded Value basis supplementary information The directors of Royal London have chosen to prepare supplementary information in accordance with the European Embedded Value Principles (the EEV Principles) issued in May 2004 by the CFO Forum, as supplemented by the Additional Guidance on European Embedded Value Disclosures issued in October 2005. When compliance with the EEV Principles is stated, those principles require the directors to prepare supplementary information in accordance with the Embedded Value Methodology (EVM) contained in the EEV Principles and to disclose and explain any non-compliance with the EEV Guidance included in the EEV Principles. The directors have chosen not to adopt the Market Consistent Embedded Value Principles published by the CFO Forum in June 2008. In preparing the EEV supplementary information, the directors have:  prepared the supplementary information in accordance with the EEV Principles;  identified and described the business covered by the EVM;  applied the EVM consistently to the covered business;  determined assumptions on a realistic basis, having regard to past, current and expected future experience and to any relevant external

data and then applied them consistently;  made estimates that are reasonable and consistent; and  determined the basis on which business that is not covered business has been included in the supplementary information.

Independent auditors’ report to the directors of The Royal London Mutual Insurance Society Limited on the supplementary financial statements – European Embedded Value Basis We have audited the Supplementary Financial Statements – European Embedded Value Basis of The Royal London Mutual Insurance Society Limited (‘the Company’) for the year ended 31 December 2015 which comprise the Consolidated Income Statement – European Embedded Value Basis, Consolidated balance sheet – European Embedded Value Basis and the related notes (“the supplementary financial statements”) which have been prepared in accordance with the European Embedded Value (“EEV”) basis set out in Note (a) – Basis of Preparation and which should be read in conjunction with the Group’s financial statements. Respective responsibilities of directors and auditors As explained more fully in the Statement of directors’ responsibilities, the directors are responsible for preparing the supplementary financial statements in accordance with the EEV basis set out in Note (a) – Basis of preparation. Our responsibility is to audit and express an opinion on the supplementary financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors. This report, including the opinion, has been prepared for and only for the Company’s directors as a body in accordance with our letter of engagement dated 22 October 2015 and for no other purpose. We do not, in giving this opinion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. Scope of the audit of the supplementary financial statements An audit involves obtaining evidence about the amounts and disclosures in the supplementary financial statements sufficient to give reasonable assurance that the supplementary financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Group’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the supplementary financial statements. In addition, we read all the financial and non-financial information in the Annual Report to identify material inconsistencies with the audited supplementary financial statements. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. Opinion on the supplementary financial statements In our opinion, the supplementary financial statements for the year ended 31 December 2015 have been properly prepared in all material respects in accordance with the European Embedded Value basis set out in Note (a) – Basis of preparation. Emphasis of matter – Solvency II Without modifying our opinion on the EEV financial statements, we draw attention to the Basis of preparation as set out in Note (a) which explains that, as permitted by the additional guidance issued in October 2015 by the European Insurance CFO Forum, the financial statements have been prepared making no allowance for the impact of Solvency II regulatory requirements, other than allowing for the impact of Solvency II project costs.

PricewaterhouseCoopers LLP Chartered Accountants London 30 March 2016 Notes: (a) The supplementary financial statements are published on the website of the Royal London Group, www.royallondon.com. The maintenance and integrity of the Royal London Group website is the responsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the supplementary financial statements since they were initially presented on the website. (b) Legislation in the United Kingdom governing the preparation and dissemination of supplementary financial statements may differ from legislation in other jurisdictions.

187

Consolidated income statement – EEV basis for the year ended 31 December 2015

Notes

2015 £m

2014 £m

Contribution from new business

(g) (i)

137

85

Profit from existing business

(g) (ii) 76

91

3

56

74

12

27

42

Operating activities

 Expected return  Experience variances  Operating assumption changes

Expected return on opening net worth

(g) (iii)

Profit on uncovered business

(g) (iv)

7

7

Strategic development costs and other items

(g) (v)

(80)

(73)

Operating profit before tax and exceptional items Exceptional cost arising from regulatory change

244 (g)(vi)

Total operating profit before tax

244

220 (61) 159

Economic experience variances

(g) (vii)

21

325

Economic assumption changes

(g) (viii)

32

(143)

(g) (ix)

23

(42)

Financing costs

(g) (x)

(43)

(40)

ProfitShare

(g) (xi)

(74)

(64)

Movement in RLGPS pension scheme surplus

EEV profit before tax Attributed tax charge Total EEV profit after tax

203 (g) (xii)

(22) 181

195 (35) 160

Consolidated balance sheet – EEV basis as at 31 December 2015

2015 £m

2014 £m

Assets held in closed funds

31,631

32,927

Assets backing non-participating liabilities

24,084

21,938

7,528

7,576

1,715

1,781

734

687

Assets

Reinsurance assets Assets backing participating liabilities and net worth  UK equities  Overseas equities

852

776

 Approved fixed interest securities

2,201

2,313

 Other fixed interest securities

1,415

1,332

749

669

2,034

1,838

71

48

73,014

71,885

Liabilities in closed funds

31,631

32,927

Non-participating liabilities

24,084

21,938

7,528

7,576

Participating liabilities

5,363

5,438

Current liabilities

1,241

1,020

69,847

68,899

Net worth

1,062

1,100

Value of in-force business

2,034

1,838

71

48

3,167

2,986

2015 £m

2014 £m

2,066

1,881

 Land and buildings

 Other assets

Value of in-force business Pension scheme surplus (RLGPS) Total Liabilities

Reinsured liabilities

Total Embedded Value

Pension scheme surplus (RLGPS) Total

Value of in-force business – EEV basis as at 31 December 2015

Value of in-force business before allowance for burn-through and capital costs Burn-through cost Cost of capital Value of in-force business

(3)

(9)

(29)

(34)

2,034

189

1,838

(a) Basis of preparation The EEV results presented in this document have been prepared in accordance with the EEV Principles and the Additional Guidance issued in 2005 by the CFO Forum. They provide supplementary information for the year ended 31 December 2015 and should be read in conjunction with the Group’s IFRS results. These contain information regarding the Group’s financial statements prepared in accordance with IFRS issued by the International Accounting Standards Board and adopted for use in the European Union. The EEV results have also been prepared in accordance with the additional guidance for embedded value reporting in advance of the effective date of Solvency II issued by the CFO Forum in October 2015, which states that an allowance for Solvency II and its associated consequences is not required when complying with the EEV Principles for reporting periods ending before 30 June 2016. Consequently the EEV results presented include provision for the costs of implementing Solvency II but do not reflect any other impact that Solvency II may have on the Group’s EEV results. The EEV Principles and Guidance were designed for use by proprietary companies to assess the value of the firm to its shareholders. As a mutual, Royal London has no shareholders. Instead we regard our members as the nearest equivalent to shareholders and have interpreted the EEV Principles and Guidance accordingly. With-profits policies held by members do not generally contribute to the value of in-force business. However, the liabilities associated with these contracts are deducted from total assets to arrive at net worth. Hence, any movement in liabilities not matched by a corresponding movement in assets will change the net worth and flow through the income statement. The reported embedded value provides an estimate of Royal London’s value to its members. EEV operating profit follows the same principles, in terms of items to include and exclude, as IFRS operating profit with the exception of certain items which are recognised under IFRS but are excluded from EEV. This is a consequence of the basis of preparing the Group EEV results, which is by reference to the Realistic Balance Sheet (RBS). Some items recognised under IFRS are inadmissible in the RBS and are therefore not recognised in our EEV reporting. Most notably, operating profit includes amortisation of intangibles (and impairment if relevant) whereas in our EEV reporting, we exclude goodwill or other intangible assets arising on the acquisition of a subsidiary or business (other than Value of in-force business) because such items are not permitted to be recognised in the RBS. The RBS is produced at the level of the Parent company. In order to present the EEV balance sheet as a Group balance sheet, the RBS is grossed up to include the assets and liabilities of subsidiaries which are included in the RBS at the value of the Parent company’s net investment. A further presentation adjustment is made to the EEV balance sheet in respect of reinsurance. The RBS shows reinsured liabilities net of the related reinsurance asset. The EEV balance sheet is grossed up to show the reinsured liabilities and assets separately. (b) EEV methodology (i) Overview The EEV basis of reporting is designed to recognise the economic value of a new policy at the point it is written. The total profit recognised over the lifetime of a policy is the same as that recognised under the IFRS basis of reporting, but the timing of recognition is different. For the purposes of EEV reporting, the Group has adopted a market-consistent methodology. Within a market-consistent framework, assets and liabilities are valued in line with market prices and consistently with each other. In principle, each cash flow is valued using a discount rate consistent with that applied to such a cash flow in the capital markets. (ii) Covered business The EEV Principles require an insurance company to distinguish between covered and uncovered business according to whether the business is valued on EEV Principles. The covered business, in the case of Royal London, incorporates:  life and pensions business defined as long-term business by UK and overseas regulators; and  asset management business; both that derived from the life and pensions business and that arising from external clients (except that

arising from cash mandates, which is treated as uncovered). This business, which represents the vast majority of the Group’s total business, is valued on an EEV basis.

(iii) Embedded value The reported embedded value provides an estimate of the value of the covered business, including future cash flows expected from the existing business but excluding any value that may be generated from future new business. For covered business, it comprises the sum of the net worth calculated on an EEV basis and the value of the in-force business. For uncovered business, it comprises the IFRS net worth. The net worth is the market-consistent value of the net assets (excluding the value of in-force business and pension scheme surplus) over and above those required to manage the business in line with the published Principles and Practices of Financial Management (PPFM). It is based on the RBS working capital in those funds within the Group that are open to new business and allows for the value of the sub-debt on a market-consistent basis. The value of in-force business is the present value of the projected streams of future cash flows available from the existing business at the valuation date, on a best estimate basis allowing for risk, adjusted for the cost of holding the required capital. (iv) Allowance for risk The allowance for risk is a key feature of the EEV Principles. The table below summarises how each item of risk has been allowed for: Type of risk

EEV methodology

Market-related risks

Allowed for explicitly in the EEV calculations

Non-market risks which are symmetrical in terms of the impact on EEV

Allowed for within the estimates of future operating experience

Non-market risks which are asymmetrical in terms of the impact on EEV

Allowed for in the calculation of VIF and financial options by way of an additional margin in the estimates of future operating experience

Market risk The approach adopted to calculate the Market Consistent Embedded Value combines deterministic and stochastic techniques. Deterministic techniques have been used to value ‘non-option cash flows’; that is cash flows whose values vary linearly with market movements. Stochastic techniques have been used to value cash flows with an asymmetric effect on profit, such as investment guarantees on with-profits products. In principle, each cash flow is valued using the discount rate consistent with that applied to such a cash flow in the capital markets. For example, an equity cash flow is valued using an equity risk discount rate and a bond cash flow is valued using a bond risk discount rate. If a higher return is assumed for equities, the equity cash flow is discounted at this higher rate. In practice, it is not necessary to discount each cash flow at a different rate. For cash flows that are either independent or move linearly with the market, a method known as the ‘certainty equivalent approach’ will achieve the same results. Under this method all assets are assumed to earn the risk-free rate of return and all cash flows are discounted using the risk-free rate. This approach has been adopted to value the ‘non-option cash flows’ within a deterministic model. Non-market risk In general, the allowance for non-market risk is covered by the margin incorporated into the Group’s estimates of future operating experience assumptions. However, there are certain situations in which the impact of fluctuations in experience is asymmetric, namely that adverse experience can have a higher negative impact on value than the positive impact generated by favourable experience. In these cases, an additional margin over best estimate is incorporated into the experience assumptions. The methodology used to determine the appropriate allowance for non-market risk is based on the analyses undertaken as part of the development of the RBS and the Individual Capital Assessment. (c) Cost of capital The EEV Principles require capital allocated to the covered business to be split between required capital, the future distributions of which are restricted, and free surplus. We have defined the amount of required capital to be that necessary to meet the more onerous of the PRA Pillar 1 and Pillar 2 capital requirements, which for Royal London is currently Pillar 2. The EEV includes a deduction for the frictional cost of holding the required capital. Frictional costs, being the tangible costs of holding capital, have been allowed for on a market-consistent basis. These consist of the total taxation and investment expenses incurred on the required capital over the period it is anticipated to be required. They reflect the cost to a member of having an asset held within a mutual insurance company, rather than investing in the asset directly. No allowance has been made for any agency costs. These represent the potential markdown to value that members might apply because they do not have direct control over their capital. Any adjustment would be subjective and different members will have their own views of what adjustment, if any, should be made.

191

(d) Burn-through cost Under adverse conditions, the funds that remain open to new business may be required to make good any deficits that arise in the closed funds. The time value cost of this potential liability, known as the burn-through cost, is modelled stochastically, as it will only occur in adverse scenarios. The burn-through cost is calculated as the average value of the capital support required in a large number of market-consistent scenarios. Allowance has been made under the different scenarios for management actions, such as altered investment strategy, consistent with the PPFM. The stochastic models used to calculate this liability have been calibrated to market conditions at the valuation date. In addition, due to the asymmetric nature of this liability, an additional margin has been incorporated into the operating assumptions. (e) Expenses The EEV Guidance requires companies to perform an active review of expense assumptions, and include an appropriate allowance for corporate costs and service company costs. Corporate costs Corporate costs are those costs incurred at a corporate level that are not directly attributable to the covered businesses. To the extent that future corporate costs have not been anticipated within the EEV they are accounted for as they arise. Service company costs An in-house administration service company, which receives a fee in respect of each policy it administers, is responsible for the administration of the majority of Royal London’s policies. A similar arrangement exists for asset management services, although the fee is applied as a percentage of assets. The value of the in-force life and pensions business has been calculated using the service company (including asset management) fees. Costs within the in-house administration service company have been classified as either ongoing (including an element of development expenditure) or non-recurring costs. Non-recurring costs have not been anticipated within the EEV and instead are accounted for as they arise. The profits expected to arise from life and pensions business within the administration service company from activities related to the maintenance of existing business and within Royal London Asset Management (RLAM) in respect of investment management services have been capitalised within the EEV. These calculations result in the recognition of further value in the in-force business. £10m (2014 £15m) is recognised in respect of the administration service company and £87m (2014 £69m) is recognised in respect of RLAM’s investment management services. No allowance has been made for future productivity gains. (f) New business New covered business includes:  premiums from the sale of new contracts (including any contractual future increments on new contracts);  non-contractual increments (both regular and single premium) on existing policies; and  premiums relating to new entrants in Group pension schemes.

(g) Analysis of EEV profit (i) Contribution from new business The contribution from new business is calculated using economic assumptions at the end of the period. It is shown after the effect of required capital, calculated on the same basis as for in-force covered business. New business sales are expressed on the present value of new business premiums (PVNBP) basis. PVNBP is calculated as total single premium sales received in the year plus the discounted value, at point of sale, of regular premiums expected to be received over the term of the new contracts. The premium volumes and projection assumptions used to calculate the present value of regular premiums for each product are the same as those used to calculate the new business contribution, so the components of the new business margin are on a consistent basis. The new business contribution in the table below represents the new business contribution grossed up for tax at 20% (2014 21%). This is to aid comparability with proprietary companies which typically pay tax at the main corporation tax rate of 20% (2014 21%). The new business margin represents the ratio of the new business contribution to PVNBP.

2015

Present value of new business premiums £m

New business contribution £m

New business margin %

6,107

107.9

1.8

502

42.3

8.4

165

(14.6)

(8.8)

Intermediary Pensions Protection Consumer Continuing life and pensions business

6,774

135.6

2.0

Total life and pensions business

6,774

135.6

2.0

Wealth

3,146

22.2

0.7

Total

9,920

157.8

1.6

Present value of new business premiums £m

New business contribution £m

New business margin %

4,454

55.6

1.2

2014

Intermediary Pensions

338

Protection

34

Consumer

22.7

6.7

(12.9)

(37.9)

Continuing life and pensions business

4,826

65.4

1.4

Total life and pensions business

4,826

65.4

1.4

Wealth

3,755

29.9

0.8

Total

8,581

95.3

1.1

Pension volumes have increased by 37% with strong growth observed in both the individual and group markets. The increase in margin is largely attributed to a reduction in acquisition and maintenance unit costs resulting from the increase in volumes of business sold. Protection comprises Bright Grey and Scottish Provident (both now rebranded Royal London) and Royal London Ireland. Overall, volumes have increased by almost 50%, reflecting both an increase in the size of the protection market in general and changes to our proposition increasing our market share. Higher margins largely reflect lower acquisition unit costs. Consumer volumes have increased materially reflecting the launch of a new single premium product together with increased volumes on the regular premium protection products. Although still negative, the new business margin improved in 2015 and is expected to continue to improve as volumes increase. RLAM’s new business volumes from new asset management mandates were down 16% on 2014. Margins also reduced slightly.

193

(ii) Profit from existing business Profit from existing business comprises:  the expected return on the value of in-force business at the start of the period; plus  profits and losses caused by differences between actual experience for the period and that assumed in the embedded value calculations

at the start of the period; plus  the impact of any changes in the assumptions regarding future operating experience.

The decrease in the expected return reflects the decrease in the opening risk-free rate from 3.45% to 2.00%. The £74m impact of operating assumption changes primarily reflects lower GAO take-up assumptions on pension contracts and also changes to future expense assumptions. (iii) Expected return on opening net worth The expected return on opening net worth represents the expected investment return on the net worth over the period. (iv) Profit on uncovered business Profit on uncovered business has been valued on an IFRS basis, as used in the primary financial statements. A breakdown of the profit reported on uncovered business is shown in the table below: 2015 £m

2014 £m

General insurance commissions

5

6

Annuity and other commissions

3

3

-

(1)

Ascentric

-

(1)

Royal London Asset Management

(1)

-

Total

7

7

Royal London Financial Planner

(v) Strategic development costs and other items Strategic development costs represent investments that we believe are important for our future competitiveness and we expect will deliver good returns in the future. Other items represent a combination of:  corporate costs and other development costs, which are typically investments made to improve future EEV profits (for example, by

reducing ongoing expense levels or increasing new business volumes); and  other non-recurring items. As an example, this would include the impact of any changes in the way the business is modelled and

improvements to valuation techniques. A breakdown of these items is shown in the table below: 2015 £m

2014 £m

Strategic development costs

(21)

(31)

Corporate and other development costs

(78)

(70)

Modelling and other changes

19

28

Total

(80)

(73)

The ‘modelling and other changes’ component reflects a small number of modelling and methodology changes.

(vi) Exceptional cost arising from regulatory change In March 2014, the Department for Work and Pensions set out various proposals relating to defined contribution pension scheme charging following completion of their Better Workplace Pensions consultation. In the prior year we estimated that complying with these proposals would have a £(61)m impact on operating profit. (vii) Economic experience variances This shows the impact of actual investment returns relative to those expected. Economic experience variances have an impact on the value of in-force (VIF) business and on the net worth. The economic experience variance on the VIF arises from the change in policy values in which Royal London has an interest. The economic experience variance on the net worth represents the impact that investment returns, being different to those anticipated, have on:  the value of the opening net worth;  the value of financial options and guarantees (*); and  the value of the assets backing the financial options and guarantees (*).

(*) Excluding those movements due solely to changes in the yield curve, which have been netted off against the movement in the value of assets caused by the shift in the yield curve. The value of the second and third items above is generally far more significant for Royal London, as a mutual insurance company, than would be the case for an equivalent proprietary company, whose interest in the surplus in its with-profits funds is restricted typically to 10% of the distributable surplus. For assets held within the Royal London Fund, private equity investments returned in excess of 20%, property returned in excess of 15% and overseas equities returned in excess of 6%. Returns on other asset categories were flat during 2015. (viii) Economic assumption changes Long-term economic assumptions were revised to take into account the financial conditions at the end of the period including the impact of related management actions. The effect of these changes contributed £32m (2014 £(143)m) to the pre-tax result. Further details of the economic basis used are provided in section (h). (ix) Pension scheme surplus The principal scheme is the Royal London Group Pension Scheme, a final salary scheme that is closed to new entrants. On an International Accounting Standard (IAS) 19 basis, the scheme had a surplus of £71m at 31 December 2015 (December 2014 £48m). The surplus in the two pension schemes acquired as part of the Royal Liver transaction is part of the closed Liver Sub-fund and so is not included in the EEV income statement. (x) Financing costs Royal London has two tranches of subordinated debt in issue at 31 December 2015: £397m (after expenses) issued on 29 November 2013 and £348m (after expenses) issued on 13 November 2015, both of which carry a coupon of 6.125% per annum. The Group had previously issued subordinated debt with a nominal value of £400m in 2005. On 29 November 2013, debt with a nominal value of £154m was purchased by way of a tender offer at a price equal to 101% of the nominal value and the remaining nominal value of £246m was redeemed at par on 15 December 2015. The cost of servicing the debt over the year has increased to £43m (2014 £40m) due to the larger debt in issue and is included as a financing cost. (xi) ProfitShare In 2015, Royal London’s Board exercised its discretion to allocate a proportion of the profits to certain asset shares by crediting an investment return in excess of the rate earned on the underlying assets, thereby directly increasing the value of the liabilities set aside to meet future payments to relevant policyholders. This is the ‘ProfitShare’ of £70m referred to in the Chairman’s statement (£70m being the net of tax amount). In 2014, the corresponding figure was £60m. (xii) Attributed tax charge EEV profits are calculated net of tax and then grossed up at an appropriate tax rate. In general, this will be 5% (2014 6%), the expected long-term rate of tax payable by Royal London, although subsidiary companies may be subject to different rates of tax.

195

(h) EEV assumptions (i) Principal economic assumptions – deterministic Economic assumptions are reviewed actively and are based on the prevailing market yields on risk-free assets at the valuation date. With effect from 31 December 2014, the valuation of non-profit and unit-linked business uses risk-free yield and inflation curves. Indicative values are provided in the table below for comparison purposes:

Risk-free rate

2015 %

2014 %

2.40

2.20

Retail price inflation

3.00

3.00

Expense inflation

4.00

4.00

(ii) Principal economic assumptions – stochastic The value of financial options (including premium rate guarantees and guaranteed annuity options), smoothing costs and future deductions from asset shares are calculated using market-consistent techniques. Market consistency is achieved by running a large number of economically credible scenarios through a stochastic valuation model. Each scenario is discounted at a rate consistent with the individual simulation. The economic scenarios achieve market consistency by:  deriving the underlying risk-free rate from the forward gilt curve;  calibrating equity and interest rate volatility to observed market data by duration and price, subject to interpolation/extrapolation

where traded security prices do not exist. We attempt to achieve the best possible fit, although modelling restrictions prevent this from being perfect. The tables below show the implied volatilities used in the modelling by asset class: Term (years) 2015

5

10

15

20

30

15-year risk-free zero coupon bonds

12.5%

9.6%

7.1%

5.7%

6.2%

15-year AA-rated corporate bonds

13.9%

11.1%

8.8%

7.5%

7.8%

Equities

20.8%

22.2%

23.6%

25.2%

26.5%

5

10

15

20

30

15-year risk-free zero coupon bonds

10.9%

8.5%

6.6%

5.5%

5.6%

15-year AA-rated corporate bonds

12.3%

10.1%

8.5%

7.5%

7.4%

Equities

20.4%

21.7%

23.0%

24.3%

26.3%

Term (years) 2014

(iii) Expected returns in reporting period For the purposes of calculating the expected returns over the period, allowance is made for a risk premium as set out in the following table: 2015 %

2014 %

Risk premium – equities

2.50

2.50

Risk premium – property

2.00

2.00

All other assets are assumed to earn the risk-free rate.

(iv) Other assumptions Demographic assumptions are regularly reviewed having regard to past, current and expected future experience, and any other relevant data. These are generally set as best estimate with an appropriate margin for adverse deviations. (v) Sensitivity analyses The table below shows the sensitivity of the embedded value at 31 December 2015 and the 2015 contribution from new business to changes in assumptions:

Notes

Change in Change in new embedded business value contribution £m £m (42)

100 basis point reduction in risk-free rates 1

(6)

264

-

10% proportionate decrease in lapse and paid-up rates

118

34

10% proportionate decrease in expenses

142

33

-

3

10% increase in market values of equities and property

5% proportionate decrease in mortality and morbidity

(15)

50% increase in capital requirements

-

Notes: 1 The value of new business is assessed at the point of sale. Increases in the value of equities and property at this date have no impact on the value of new business. 2 The sensitivities in the table include the impact of stress testing the Royal London Group Pension Scheme.

(i) Reconciliation of the IFRS unallocated divisible surplus to the European Embedded Value

IFRS unallocated divisible surplus

2015 £m

2014 £m

3,314

3,139

Valuation differences between IFRS and EEV  Goodwill and intangible assets

(277)

 Deferred tax valuation differences

-

(273) 3

 Subordinated debt at market value

(25)

(42)

 Capital requirements of subsidiaries and other valuation differences

(18)

(46)

Add items only included on an embedded value basis  Valuation of asset management and service subsidiaries

Other valuation differences European Embedded Value

172

187

1

18

3,167

2,986

2015 £m

2014 £m

175

134

(j) Reconciliation of IFRS transfer to unallocated divisible surplus to EEV profit

IFRS transfer to unallocated divisible surplus Amortisation of intangible assets

(3)

11

Differences in valuation of subsidiaries

13

17

Change in realistic value of subordinated debt

17

(26)

Movement in valuation differences for deferred tax assets Other movements in valuation bases EEV profit for the year

(3)

24

(18)

-

181

197

160

Notice of Annual General Meeting Notice is hereby given that the 2016 Annual General Meeting of The Royal London Mutual Insurance Society Limited (the Group) will be held at 10.30am on Thursday 9 June 2016, at The Kia Oval, Kennington, London SE11 5SS to consider and, if thought fit, pass the following resolutions as ordinary resolutions: 1. That the audited Annual Report and Accounts with the related auditors’ report for the year ended 31 December 2015 be received. 2. That the Annual report on remuneration for the year ended 31 December 2015 be approved.

9. That Tim Harris be reappointed a director. 10. That Phil Loney be reappointed a director. 11. That Jon Macdonald be reappointed a director. 12. That Andrew Palmer be reappointed a director. 13. That Rupert Pennant-Rea be reappointed a director. 14. That David Weymouth be reappointed a director. By order of the Board

3. That PricewaterhouseCoopers LLP be reappointed as auditors to the Group until the conclusion of the next Annual General Meeting. 4. That the remuneration of PricewaterhouseCoopers LLP be fixed by the Audit Committee. 5. That Sally Bridgeland be reappointed a director.

Simon Mitchley For and on behalf of Royal London Management Services Limited Company Secretary 30 March 2016

6. That Ian Dilks be reappointed a director.

The Royal London Mutual Insurance Society Limited

7. That Duncan Ferguson be reappointed a director.

55 Gracechurch Street, London EC3V 0RL

8. That Tracey Graham be reappointed a director.

Registered in England and Wales, No. 99064

Royal London Group   Annual Report and Accounts 2015

Strategic Report

Commentary on the resolutions Resolutions 3 and 4

Annual Report and Accounts 2015 Following changes introduced by the Companies Act 2006 (the Act), the Group is not required to lay its accounts before a general meeting.

Appointment and remuneration of auditors At every general meeting at which accounts are presented to members, the Group is required to appoint auditors to serve from the end of the meeting until the next general meeting.

Resolution 2 seeks approval for the Annual report on remuneration.

Resolution 2 is an advisory vote.

199

ADDITIONAL INFORMATION

The Directors’ remuneration report appears on pages 58 to 76 of the Annual Report and Accounts.

Notice of AGM & Resolutions

the Group’s remuneration policy (Directors’ remuneration policy).

European Embedded Value

[[ a remuneration policy report describing

Financial Statements

The Board nonetheless considers it best practice to do so and will continue to present the Annual Report and Accounts PricewaterhouseCoopers LLP are to the Annual General Meeting (AGM). the Group’s existing auditors and it is proposed that they be reappointed, until the next general meeting. You are Resolution 2 asked to authorise their reappointment and to authorise the Audit Committee to Annual report on remuneration determine their remuneration. Following amendments to the Act, which became effective from 1 October 2013, new requirements were introduced Resolutions 5 to 14 to the content of the Directors’ remuneration report and the approval Reappointment of directors of the report. As Royal London is not a In accordance with The Association listed company it does not have to, and of Financial Mutuals’ Annotated UK in some ways cannot, comply with the Corporate Governance Code and to requirements of the Act. However, the increase accountability, all directors directors believe that the disclosure aids will retire at each AGM and stand members’ understanding and sets the for reappointment. Accordingly, all of level for good governance and so have your directors are retiring and offering voluntarily complied with the legislation themselves for reappointment at this where appropriate. AGM. The Board considers that each of the directors offering themselves for The Act now requires the following in re-election brings a wealth of valuable the Directors’ remuneration report: experience to the Board, enhancing its skill and knowledge base and should be reappointed. Biographical details of all [[ an annual statement by the Chairman directors are included on pages 42 and of the Remuneration Committee; 43 of the Annual Report and Accounts. [[ an annual report describing the Note: The terms and conditions of appointment of implementation of the Group’s non-executive directors are available for inspection at the Group’s registered office at 55 Gracechurch remuneration policy (the Annual Street, London EC3V 0RL during business hours report on remuneration) during the on any weekday (except public holidays) and will be available for inspection at the AGM. year under review; and

Governance

Resolution 1

Glossary A Association of British Insurers (ABI) The ABI represents the collective interests of the UK’s insurance industry.

Acquisition costs

The costs of acquiring and processing new business, including a share of overheads.

Adviser

Someone authorised by the FCA, who is qualified by experience and examination to provide financial advice.

Annuity

Burn-through cost

Under adverse conditions, the fund that remains open to new business may be required to make good any deficits that arise in the closed funds. This potential liability is known as the burn-through cost. It is modelled using stochastic techniques as it will only occur in adverse scenarios.

Business unit

A sub-division of the Group that focuses on a specific product offering, market or function. A business unit may be a statutory entity or part of one or more separate statutory entities.

An insurance policy that provides a regular income in exchange for a lump-sum payment.

C

Annuity Bureau

Capital markets

Launched in 2014, a Royal London service used to help customers who wish to buy a guaranteed income for life find the best rate for their individual circumstances.

Asset share

A policy’s asset share is calculated by accumulating the premiums paid, deducting all applicable expenses and tax, and adding its share of the investment returns achieved by the with-profits fund over the policy’s lifetime.

Assets under administration (AUA)

The total assets administered on behalf of individual customers and institutional clients. It includes those assets for which the Group provides investment management services, as well as those that the Group administers where the customer has selected an external third-party investment manager.

Auto-enrolment

The Government has introduced a new law designed to help people save more for their retirement. It requires all employers to enrol their workers into a workplace pension scheme if they are not already in one.

Available regulatory capital

The excess of admissible assets over liabilities, as measured following the PRA’s regulatory reporting requirements for UK life insurers.

B Bright Grey

Royal London business unit providing protection products in the UK through intermediaries, which was combined with Scottish Provident in 2015 as a single life assurance business under the Royal London brand.

Markets in which institutions and individuals trade financial securities such as long term debt and equity securities. These markets are also used by both the private and public sectors to raise funding from investors, typically for the longer term.

CFO Forum

A high level discussion group formed and attended by the Chief Financial Officers of major European insurance companies to discuss and harmonise reporting standards.

CIS

The Co-operative Insurance Society Limited purchased by the Group on 31 July 2013. On 1 August it was renamed Royal London (CIS) Limited.

Company

Critical illness cover

Cover that pays a lump sum if the insured person is diagnosed with a serious illness that meets the cover’s definition.

D Deferred acquisition costs (DAC)

The method of accounting whereby certain acquisition costs on long-term business are deferred and therefore appear as an asset. This leads to a smoothed recognition of acquisition costs instead of recognising the full amount in the year of acquisition.

Deferred fee income

The method of accounting whereby up-front policy charges are deferred and therefore appear as a liability. This leads to a smoothed recognition of these charges instead of recognising the full amount in the year of acquisition.

Defined benefit scheme

A type of occupational pension scheme, where the benefits are based on the employee’s salary and service.

Direct to consumer

Insurance business sold by the Group directly to end customers, rather than through advisers.

Discounting

The process of expressing a future cash transaction in terms of its present value using a discount rate which reflects the time value of money.

The Royal London Mutual Insurance Society Limited.

E

Consumer division

Economic assumptions

Our business division that sells life and pensions business directly to customers. Includes Royal London Money Manager, the financial planning and education business unit, brought into the Consumer division in 2014.

Consumer Price Index (CPI)

A measure of changes in the price level of a basket of consumer goods and services purchased by households.

Covered business

The business covered by the EEV methodology. This includes life and pensions business defined as long-term business by UK and overseas regulators and asset management business (excluding cash management).

Royal London Group   Annual Report and Accounts 2015

Assumptions of future interest rates, investment returns, inflation and tax. The impact of variances in these assumptions is treated as non-operating profit or loss under EEV.

European Embedded Value (EEV)

The EEV basis of reporting attempts to recognise the true economic value added over a period and is calculated according to guidelines issued by the CFO Forum. The total profit recognised over the lifetime of a policy is the same as that recognised under the IFRS basis of reporting but the timing of the recognition is different.

Strategic Report

European Union (EU) Markets in Financial Instruments Directive (MiFID II)

EEV operating profit

The profit on an EEV basis resulting from our primary business operations namely: life insurance and pensions; managing and administering investments; and acquiring and administering closed long-term insurance funds.

FTSE 100

This is the share index of the 100 largest companies by market capitalisation listed on the London Stock Exchange.

Funds under management (FUM)

G

Intermediary division

Excess realistic capital

Group

F Fair value

The amount for which an asset could be exchanged or a liability settled between knowledgeable, willing parties in an arm’s length transaction.

Financial Conduct Authority (FCA)

Financial options and guarantees For Royal London business, ‘financial options’ refers principally to guaranteed annuity options. ‘Guarantees’ refers to with-profits business where there are guarantees that part of the benefits will not reduce in value, or are subject to a minimum value.

The Financial Reporting Council is the UK’s independent regulator responsible for promoting high-quality corporate governance and reporting to foster investment.

Guaranteed annuities

These primarily arise in connection with pension business as either: [[ a guaranteed income specified in the policy; or

The processes, systems and calculations that together allow the Group to control the risks that it faces and quantify the capital needed to support those risks. It includes a calculation engine to quantify capital requirements, the Group’s risk management framework and its system of governance.

Internal rate of return (IRR)

[[ guaranteed terms for converting the pension fund of a policy into an income for life at the policy’s pension date.

The discount rate at which the present value of the after-tax cash flows we expect to earn over the lifetime of the business written is equal to the total capital invested to support the writing of that business.

I

International Financial Reporting Standards (IFRS)

Accounting standards issued by the International Accounting Standards Board (IASB).

Industrial Branch (IB)

Life insurance where (often relatively small) premiums were originally collected at the policyholder’s home.

K

Income drawdown

Key performance indicator (KPI)

Also known as pension-fund withdrawal or income withdrawal. Drawdown allows putting off buying an annuity to a maximum age of 75, giving an income directly from the pension fund in the meantime.

Independent financial adviser (IFA) Someone authorised by the FCA, qualified by experience and examination to provide financial advice, who is not working for any single product provider company.

An indicator used by a business to measure its development, performance or position.

M Maintenance expenses

Expenses related to the servicing of the in-force book of business, including investment and termination expenses and a share of overheads.

Market-consistent basis

A basis of valuation in which assets and liabilities are valued in line with market prices and consistently with each other. In principle, each cash flow is valued using a discount rate consistent with that applied to such a cash flow in the capital markets.

201

ADDITIONAL INFORMATION

Financial Reporting Council

The Royal London Group.

Internal Model

Notice of AGM & Resolutions

An independent conduct of business regulator, which ensures that business is conducted in such a way that advances the interests of all users of, and participants in, the UK financial sector.

A mix of assets held within each portfolio designed to match risk attitude and time to retirement to a suitable mix of assets and funds.

Our business division that sells life and pensions business through intermediaries, primarily independent financial advisers.

European Embedded Value

The excess of available regulatory capital over the regulatory capital required.

Insurance Groups Directive (IGD)

The IGD is a regulatory directive also in force for insurance groups’ requirement to submit details relating to their own solvency position and also the overall solvency position of the parent undertaking.

Governed portfolio range

Excess regulatory capital

An assessment of the capital required by the Group under the regulatory regime in force up to and including 31 December 2015, reported privately to the PRA. It is broadly equivalent to the capital needed to cover the Group’s actual portfolio of risks at a ‘one in two hundred year event’ risk level, having regard to the Group’s own risk controls.

The total of assets actively managed or administered by, or on behalf of, the Group, including funds managed by third parties.

Items that, in the directors’ view, are required to be separately disclosed by virtue of their nature or incidence to enable a full understanding of the Group’s financial performance.

The excess of realistic working capital over the risk capital margin.

Individual Capital Assessment (ICA)

Financial Statements

Exceptional items

FAD is a flexible retirement option introduced in April 2015 to allow a policyholder to take their pension fund how they want to at any time from age 55.

Governance

MiFID II is the EU legislation regulating firms providing services to clients linked to ‘financial instruments’ (shares, bonds, units in collective investment schemes and derivatives), and the venues where those instruments are traded.

Flexi-Access Drawdown (FAD)

Glossary continued Mortgage endowment

An insurance contract combining savings and protection elements designed to repay the principal of a loan or mortgage.

Mutual

A company owned by its members which is not listed on the stock market. A member of a mutual company can vote at its Annual General Meeting.

N Net worth

The excess of assets over liabilities on the EEV basis of reporting, where assets exclude PVIF and the pension scheme surplus.

New business contribution

Over-the-counter (OTC) derivatives Contracts which are traded (and privately negotiated) directly between two parties, without going through an exchange or other intemediary.

Own Risk and Solvency Assessment (ORSA)

The ORSA is defined as the entirety of the processes and procedures employed to identify, assess, monitor, manage and report the risks the Group faces or may face over the business planning period and to determine the own funds necessary to ensure that its overall solvency needs are met at all times over that period.

P

The expected present value on the EEV basis of reporting of all cash flows arising from new business.

Parent company

New business margin

Part VII Insurance Business Transfers

The new business contribution as a percentage of the present value of new business premiums.

Non-profit policy

Long-term savings and insurance products other than with-profits policies.

The Royal London Mutual Insurance Society Limited.

The court process that enables groups of insurance policies to be moved between insurers, under Part VII of the Financial Services and Markets Act 2000.

Open-ended investment company (OEIC)

Investment funds which pool together investors’ money and invest this in a broad range of shares and other assets. They are similar to unit trusts.

Operating assumptions

Assumptions in relation to future levels of mortality, morbidity, persistency and expenses. The impact of variances in these assumptions is included within operating profits under EEV.

Operating experience variances

The impact of actual mortality, morbidity, persistency and expense experience being different to that expected at the start of the period.

Operating profit

Operating profit is the profit resulting from our business operations. Our primary business operations are providing life assurance and pensions, managing and administering investments and acquiring and administering closed long-term insurance funds.

The new pension legislation introduced in Budget 2014 that has become known as ‘Freedom and choice’ introduced new ways by which pension savings can be accessed. Now, members of a defined contribution (DC) pension scheme have increased flexibility in the options available to them when taking their pension benefits.

Personal pension

A pension plan for an individual policyholder.

PLAL

Phoenix Life Assurance Limited. PLAL’s assets and liabilities were transferred into Royal London Group with effect from 29 December 2008.

Present value of in-force business (PVIF)

The present value of the projected future profits after tax arising from the business in-force at the valuation date.

Present value of new business premiums (PVNBP)

Participating

The PVNBP is the total of new single premium sales received in the year plus the discounted value, at the point of sale, of the regular premiums we expect to receive over the term of the new contracts sold in the year.

Payback period

Principles and Practices of Financial Management (PPFM)

Contracts which are with-profits in type.

O

Pension freedoms

The period required for the after-tax cash flows expected to arise on new business to be equal to the capital invested to support the writing of the business.

Pension

A means of providing income in retirement for an individual and possibly his/her dependants. Our pension products include personal and group pensions, stakeholder pensions and income drawdown.

Pension charge cap

In the April 2014 Budget the Government announced the introduction of a cap on member charges of 0.75% from April 2015 on the defaults available in defined contribution pension schemes used to comply with the auto-enrolment legislation.

Pension date

The date at which income can be taken from a pension either through a cash lump sum or investment in an annuity.

Royal London Group   Annual Report and Accounts 2015

A document detailing how we manage our with-profits funds.

ProfitShare

ProfitShare, previously referred to as the Mutual Dividend, is an allocation of part of the Group’s operating profits by means of a discretionary enhancement to asset shares of eligible policies.

Project Chrysalis

An ongoing FCA review of the application of conduct-of-business rules to mutual with-profits life insurers, in light of falling volumes of with-profits business.

Protection

A policy providing a cash sum or income on the death or critical illness of the life assured.

Prudential Regulation Authority (PRA)

Part of the Bank of England that is responsible for the authorisation, regulation and day-to-day supervision of all insurance firms that are subject to prudential regulation.

Strategic Report

Q Quantitative easing

Royal London Open Fund

Risk capital margin

Royal London Platform Services (trading as Ascentric)

A measure of inflation published monthly by the Office for National Statistics. It measures the change in the cost of a representative sample of retail goods and services.

R

The required capital amount as prescribed by the PRA’s realistic reporting approach.

Rating agencies

Risk-free rate

A rating agency (also called a credit rating agency) is a company that assigns credit ratings, which rate a debtor’s ability to pay back debt by making timely interest payments and the likelihood of default.

The Group’s balance sheet as calculated on the realistic reporting approach.

Realistic reporting approach

This is prescribed by the PRA and recognises the potential for future final bonus payments under with-profits business, the value of inforce business and the cost of future financial options and guarantees, which is calculated explicitly using stochastic techniques.

Realistic working capital

See definition of ‘working capital’.

A series of payments for an insurance contract, typically monthly or annually.

Regulatory capital required

The amount of capital that the PRA requires a UK life insurer to hold which is calculated using the European Union solvency requirements basis, also known as the Insurance Groups Directive requirement.

Regulatory reserving basis

Required capital

An amount that an insurer must set aside in addition to the value of the technical provisions to give additional comfort that an insurer will be able to meet policyholder liabilities as they fall due.

A major FSA regulatory reform programme, implemented on 31 December 2012, which changed the way investment and pension products are sold.

Royal London business unit responsible for managing the Group’s financial assets as well as funds for external clients, including multi-managers, pension funds for FTSE 250 companies, local authorities, universities, charities and individuals.

Royal London Asset Management Channel Islands (RLAM CI), Royal London Cash Management (RLCM)

Royal London’s two cash-management operations, which provide specialist cash-management services for a wide range of clients including charities, insurance companies, universities and plcs. These were transferred into RLAM during 2014.

Royal London (CIS) Limited, Royal London Asset Management (CIS) Limited

On 31 July 2013, the Group acquired the life assurance and asset-management business of the Co-operative Banking Group (CBG) by acquiring the entire issued share capital of the Co-operative Insurance Society Limited (CIS) and The Co-operative Asset Management Limited (TCAM). On 1 August 2013 CIS was renamed as Royal London (CIS) Limited (RL (CIS)) and TCAM was renamed Royal London Asset Management (CIS) Limited (RLAM (CIS)).

Royal London Group

The Royal London Mutual Insurance Society Limited and its subsidiaries.

Royal London Ireland

Royal London Pooled Pensions Company Limited (RLPPC)

A subsidiary of the Group previously providing managed fund facilities to pension schemes. RLPPC was transferred into the Royal London Open Fund during 2014.

Royal London Long-Term Fund

The long-term business fund of Royal London, comprising the Royal London Open Fund and a number of closed sub-funds from businesses acquired in the past.

S Sales

Sales represent PVNBP for life and pensions business.

Scottish Life

Royal London business unit providing pensions and retirement-planning products to the UK market and third-party administration services to external clients. Scottish Life was rebranded as Royal London during 2014.

Scottish Provident

Royal London business unit, providing protection products in the UK through intermediaries. Scottish Provident was rebranded as Royal London during 2015, when it was combined with Bright Grey.

Single premium

A single payment for an insurance contract.

Rebranded from Caledonian Life in 2014, the Royal London business unit providing protection products in the Republic of Ireland through intermediaries.

Solvency II

A major European Union directive which transforms how we manage and report risk and capital.

203

ADDITIONAL INFORMATION

Retail Distribution Review (RDR)

Royal London Asset Management (RLAM)

Royal London business unit responsible for managing the Group’s direct to consumer businesses. This includes customers who were transferred from Refuge Assurance, United Friendly, Phoenix Life Assurance Limited and Royal Liver. Royal London Plus became part of the Consumer division in 2014.

Notice of AGM & Resolutions

The basis of reserving for liabilities following the regulatory approach. This is prescribed by the PRA and is a prudent approach but does not recognise the potential for future final bonus payments under with-profits business.

Royal London business unit responsible for international business. This business was disposed of during 2013.

Royal London Plus

European Embedded Value

Regular premium

Royal London 360°

Royal London’s independent wrap platform services which trades as Ascentric, providing investment administration and consolidation services to long-term investors and financial advisers through its online wrap service.

Financial Statements

Realistic balance sheet (RBS)

The theoretical rate of return of an investment with no risk of financial loss.

The part of the Royal London Fund into which all of the Group’s new insurance business is written. Governance

Monetary policy used by a central bank to stimulate an economy when standard monetary policy has become ineffective.

Retail Price Index (RPI)

Glossary continued Stochastic techniques

Unitised with-profits policy

Subordinated debt

V

Valuation techniques that allow for the potential future variability in assumptions by the running of multiple possible scenarios.

In the event of bankruptcy, dissolution or winding-up, the payments arising from this debt rank after the claims of other creditors.

T TCAM

The Co-operative Asset Management Limited purchased by the Group on 31 July 2013. On 1 August it was renamed Royal London Asset Management (CIS) Limited.

Three lines of defence model

The three lines of defence model can be used as the primary means to demonstrate and structure roles, responsibilities and accountability for decision making, risk and control to achieve effective governance, risk management and assurance.

U

A policy for which the premiums buy units in a with-profits fund.

Value of in-force business (VIF)

See definition of ‘Present value of in-force business (PVIF)’.

W Wealth division

Our fund manager, Royal London Asset Management (RLAM), and Royal London Platform Services (RLPS).

With-profits policy

A policy which participates in the profits of a with-profits fund. This participation may be in the form of one or more of a cash bonus, an annual bonus or a bonus paid on the exit of the policy.

Working capital

The excess of assets over liabilities, as measured by the PRA’s realistic reporting approach.

UK Corporate Governance Code (‘the Code’)

Wrap platform

Uncrystallised Fund Pension Lump Sum (UFPLS)

Wrap provider

This sets out guidance in the form of principles and provisions on how companies should be directed and controlled to follow good governance practice.

Lump sum paid on the death, before the age of 75, of a member of a money purchase pension scheme, in respect of funds that have not been used to purchase an annuity or provide unsecured pension benefits.

A trading platform enabling investment funds, pensions, direct equity holdings and some life assurance contracts to be held in the same administrative account rather than as separate holdings.

An investment company, such as Ascentric, that offers investors the opportunity to consolidate their different investments under a single administrative account.

Unallocated divisible surplus

The amount of surplus which has not been allocated to policyholders at the balance sheet date.

Unit-linked policy

A policy for which the premiums buy units in a chosen investment fund.

Unit trust

A collective investment which invests in a range of assets such as equities, fixed interest investments and cash. A unit trust might be a general fund or specialise in a particular type of asset, for example property, or in a particular geographical area, for example South East Asia.

Royal London Group   Annual Report and Accounts 2015

Date Event 31 March 2016

Financial results for 2015 and investor conference call

12 May 2016

Interim management statement and first quarter new business figures

9 June 2016

Annual General Meeting

18 August 2016

Interim financial results and second quarter new business figures and investor conference call

4 November 2016

Interim management statement and third quarter new business figures

13 November 2016

RL Finance Bonds No 3 plc Subordinated debt interest payment date

30 November 2016

RL Finance Bonds No 2 plc Subordinated debt interest payment date

Contact offices

The Royal London Mutual Insurance Society Limited Registered in England and Wales No. 99064 royallondon.com

Bath Trimbridge House Trim Street Bath BA1 1HB London 55 Gracechurch Street London EC3V 0RL Edinburgh 1 Thistle Street Edinburgh EH2 1DG Glasgow 301 St Vincent Street Glasgow G2 5PB

Manchester Royal London House Alderley Road Wilmslow Cheshire SK9 1PF Reading Reading Bridge House Kings Meadow Road Reading Berkshire RG1 8LS Republic of Ireland 47-49 St Stephen’s Green Dublin 2

Designed and produced by Wardour, London

RL15ARA

royallondon.com

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