!+# scott robertson michael eakins december 2003 principles and practices of financial management...
TRANSCRIPT
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Scott Robertson Michael EakinsDecember 2003
Principles and Practices of Financial Management (PPFM)
Younger Members Convention
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Agenda
• Headlines
• Background
• PPFM – definitions and aims
• PPFM – content
• Principles and Practices
• PPFM Issues
• Governance of PPFMs
• Disclosure
• Implications of PPFM
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Main Headlines
A document stating how a firm runs its with-profits fund
Publicly available from 31st March 2004
Greater disclosure
Directors responsible for the compliance of the with-profits fund with the PPFM
With-Profit Actuary to publicly report to policyholders on compliance with PPFM
Independent review of PPFM
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Background
FSA With-Profits Review
Policyholders have a poor understanding of the nature and the risks involved
Current level of disclosure inadequate and varies by firm
WP Firms apply a large degree of discretion
Firms may end up treating policyholders unfairly
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Background
Recent History
Regular bonus rates slashed by up to 15% in 2003
WP funds close to new business
Funds increase MVR’s up to 25%
Investment shift from equity to bonds
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The aims of PPFMs
Require firms to treat customers fairly
Offer greater protection to consumers
Improve public confidence in the governance of with-profit firms
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Principles and Practices
Principles are enduring statements of how the firm manages the with-profits fund
Principles are not expected to change often
Practices are describe in detail how the firm runs the fund day to day
Practices are expected to change with economic and business environment
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PPFM Content
Equity
New Business
Inherited Estate
Charges &Expenses
BusinessRisks
InvestmentStrategy
Payouts
PPFM
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PPFM Content
Equity
New Business
Inherited Estate
Charges &Expenses
BusinessRisks
InvestmentStrategy
Payouts
PPFM
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PPFM Content
Equity
New Business
Inherited Estate
Charges &Expenses
BusinessRisks
InvestmentStrategy
Payouts
PPFM
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PPFM Content
Equity
New Business
Inherited Estate
Charges &Expenses
BusinessRisks
InvestmentStrategy
Payouts
PPFM
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PPFM Content
Equity
New Business
Inherited Estate
Charges &Expenses
BusinessRisks
InvestmentStrategy
Payouts
PPFM
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PPFM Content
Equity
New Business
Inherited Estate
Charges &Expenses
BusinessRisks
InvestmentStrategy
Payouts
PPFM
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PPFM Content
Equity
New Business
Inherited Estate
Charges &Expenses
BusinessRisks
InvestmentStrategy
Payouts
PPFM
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Some Examples
Area Principles Practices
Payouts Describe the aims of setting annual bonus rates
The maximum change to annual bonus rates permitted in any one year.
Payouts Describe the aims of the fund’s smoothing policy
Indicate the maximum cost of smoothing a firm is prepared to tolerate
Inherited Estate
Describe the purpose of the Inherited Estate
Describe the costs the Inherited Estate currently meets
New Business
Describe the firms policy in the event of closure to new business
State the minimum amount of new business volume to justify remaining open to new business
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PPFM Issues
New PRE?
The format of the PPFM
Multiple PPFM’s
Level of detail?
How much warning?
User friendliness
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Governance of PPFM
Board
Key Stakeholders
With Profit Committee
or Independent
Person
Audit of Realistic Balance Sheet
With Profit Actuary
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Governance of PPFMs
Provide annual report to the with profit policyholders on the compliance (or otherwise) of the management of the with profit fund with PPFM obligations.
The Board must state why they believe that the firm has complied with the obligations of the PPFM.
State how the firm has exercised any discretion in relation to the with profit business.
State how it has resolved any competing or conflicting rights between different policyholders and or shareholders.
Roles
Bo
ard o
f Directo
rs
Issues
Life office controls and processes.
Level of training and expertise required.
A step change in Board education required?
Who provides appropriate advice to the Board?
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Governance of PPFMs
Provide an independent assessment of of the firm’s compliance with the PPFM
Independent judgement in how any competing or conflicting rights have been resolved.
Roles
With
Pro
fits Co
mm
ittee / Ind
epen
den
t P
erson
Firms with several with profits funds – will one WPC suffice? Membership
Competence Attractiveness of role
Internal or external appointments Significant expense?
Issues
Options available for governance structure:
1. Establishing a committee of the Board
2. Retaining an independent expert to report to the Board
3. Commissioning a report from a Non-Executive Director
Structure
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Governance – What does it mean for actuaries?
Appointed Actuary
Head Of Actuarial Function(HOAF)
With Profit Actuary(WPA)
Practicalities: One individual can do both WPA and HOAF WPA cannot sit on Board No restriction on HOAF sitting on Board
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Governance – What does it mean for actuaries?
Bonus Recommendations.
PPFMs - annual report to the Board and Policyholders on compliance with PPFM obligations.
May need to accept some of the miscellaneous duties associated with the Appointed Actuary role – eg Schemes of Arrangement
Roles and Responsibilities
With
Pro
fit Actu
ary
Who does WPA report to?
Access to the Board. How to ensure WPA is fully abreast of business developments?
Attractiveness of role – outsourcing?Issues
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Governance – What does it mean for actuaries?
Advise the the Board on methodology and assumptions for actuarial valuation
Carry out the calculation of the liabilities.
Monitor the financial condition of the of the firm and advise on capital needs to support the business
Roles
Head
of A
ctuarial F
un
ction
Clear lines of distinction with WPA?
Combine role with Finance Director?
Should Head of Actuarial Function have a place on the Board?
Shareholder Champion?
Outstanding Questions
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Disclosure
PPFMs not required for non-profit funds
All With-Profit funds will be required to produce PPFMs
FSA have made it clear that current documentation (eg With Profit Guides) cannot be used as the PPFM
PPFMs will need to be available on request rather than automatically
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Firm’s Report on With-Profit Fund
Firm’s Report on With-Profit Fund
WPA Report on compliance with PPFM
WPA Report on compliance with PPFM
WPC / Independent
Report on compliance with PPFM
WPC / Independent
Report on compliance with PPFM
3-month warning of change to principles
3-month warning of change to principles
Notify of change to practices in annual statement
Notify of change to practices in annual statement
Annual Disclosure of Compliance with PPFM
Ad hoc Disclosure of Changes to PPFM
New Disclosure
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Implications of PPFMs for…
Regulatory Reporting
Sales of With-profit products
New with-profit products
Number of with-profit firms
Legal implications
Decision making process
Mutuals and 90:10 funds disclosing their estates
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Implications of PPFMs on Decision Making
With-Profit
Actuary
Head of ActuarialFunction
Board With-Profit Committee
Subject to
Peer Review
Subject to Independent
ActuarialReview
IndependentJudgement
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Implications of PPFMs on Capital Requirements
PPFMs InternalCapital
Assessment
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FSA Timetable
Q1 2004
Q2 2004
Q3 2004
Q4 2004
PPFM
Governance structure for PPFM
Realistic Balance Sheets
PSB
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Questions …
For further information:
Scott [email protected] 7951 4592
Michael [email protected] 7951 8236