1 Following its reclassification to held for sale during 2016, operating results exclude the contribution of the Korea life business. The 2015 comparative results have been similarly adjusted.
5 IFRS profit after tax reflects the combined effects of operating results, negative short-term investment variances, (loss)/profit on the sale of Korea life business and the total tax charge for the year.
9 Excluding 2015 special dividend of 10.00 pence per share. 10 Further information on actual and constant exchange rates basis is set out in note A1 of the IFRS financial statements.
A well balanced business creating value for customers and shareholders I am pleased to introduce Prudential’s 2016 Annual Report. The Company has once again produced a strong set of results over a year of great change and challenge. Mike Wells has made substantial progress in his first full year as Group Chief Executive and, while economic and political events across the globe bring uncertainty to our operating environment, we will continue to focus on building a sustainable business by providing our customers around the world with quality products and services.
Global context 2016 was a year that saw volatile markets in China, the UK’s decision to leave the European Union and a change of administration in the US.
Against that backdrop, Prudential has demonstrated that we have the right strategy, management team, geographic mix and business diversity to succeed. Our robust governance and decision-making processes have enabled us to react swiftly to the unexpected and unpredictable. With strong customer propositions in the UK, Asia and the US, our business is well balanced and well placed to thrive.
Customers have been at the heart of Prudential for 168 years. It is by serving all our customers well that we are able to generate strong returns for our shareholders, provide rewarding roles for our people and invest in our local communities. Alongside acknowledging these benefits, the Board also ensures it engages with our regulators and wider civil society to promote the interests of our customers more broadly.
The Board has decided to increase the full-year ordinary dividend by 12 per cent to 43.5 pence per share, reflecting our strong 2016 financial performance and our confidence in the future prospects of the Group. In line with this, the Directors have approved a second interim ordinary dividend of 30.57 pence per share (2015: 26.47 pence per share). In 2015, a special dividend of 10 pence per share was also awarded.
Governance In order to keep the promises we make to our customers Prudential needs to be well run, which means it must display robust governance in supporting an outstanding executive team. While this has long been the focus of our Board, policymakers have continued to highlight the importance of effective governance. We welcomed Anne Richards as Chief Executive of M&G in June 2016. The Chair of our Audit Committee, Ann Godbehere, is in her ninth year of service, and hence will not stand for re-election at this year’s AGM. Ann has been a valuable asset to the Board and we are most grateful for her contribution and wise counsel. We are delighted that David Law will be taking over as Audit Committee Chair from the next AGM.
The stability we have created at Board level has enabled us to continue to strengthen our governance framework – for example, by building closer relationships between our material subsidiary boards and the plc Board, with regular communication established between the newly appointed material subsidiary board, Risk and Audit Committee Chairs and their Group counterparts.
Regulators and policymakers remain important stakeholders for Prudential, and have a legitimate interest in how we treat our customers and run our business. Prudential engages regularly with our regulators around the world and we place great importance on having an effective relationship with those who supervise us and our markets. Our customers’ interests are best served when we work constructively with our regulators.
Our communities The most obvious benefits that result from Prudential’s activities are the peace of mind we bring to our customers and the long-term capital we provide to companies and governments. It is, however, also in our customers’ and shareholders’ interests for Prudential to be a responsible business which invests in and gives back to our local communities, alongside the jobs, growth and tax revenue we provide.
In conclusion, while the events of 2016 caused some uncertainty in our operating environment around the world, Prudential’s performance has been strong. It is a testament to the commitment and calibre of our people and the quality of the products and services we provide to customers that we were able to achieve these results. As I look to the future, I am confident that our people, our customer proposition and our culture will enable us to continue to grow.
Prudential Malaysia The PRUkasih programme offers financial aid to the urban poor, covering the basic needs of food and shelter and providing social protection for families. Prudential volunteers are actively involved in manning information booths, undertaking door-to-door visits and assisting with financial literacy sessions. Over 8,000 children have benefited from the education sessions, and over 20,600 families from 12 communities have had access to PRUkasih’s unique protection plan. By 2018, the programme aims to equip 50,000 children with money management skills.
Strong performance based on long-term opportunities I am pleased to report significant progress in 2016, reflecting our successful strategy and the growing capabilities of the Group.
Prudential exists to de-risk people’s lives. Saving for a child’s education, protecting people against the financial cost of ill-health or the death of a family’s primary income earner, turning hard-earned savings into secure retirement income – across all these areas we help to remove uncertainty from life’s biggest financial events.
New business profit1,3 increased by 11 per cent2,4 to £3,088 million (up 24 per cent on an actual exchange rate basis), driven by growth of 22 per cent2 in Asia and 33 per cent4 in our UK retail business. In the US, a 13 per cent reduction in new business profit mainly reflected lower industry volumes due to the sector-wide disruption that followed the announcement in April 2016 of the Department of Labor’s fiduciary reform, the implementation of which is presently uncertain under the Trump administration.
Group IFRS operating profit6 based on longer-term investment returns was 2 per cent2 lower at £4,256 million (up 7 per cent on an actual exchange rate basis). Our businesses in Asia and the US generated growth of 15 per cent2 and 7 per cent respectively, while the contribution from our UK-based businesses reduced by 23 per cent. Here, as expected, the overall result was impacted by the effect of negative fund flows at M&G, our deliberate withdrawal from the UK bulk annuity market as returns ceased to be attractive and a lower contribution from UK capital optimisation actions. The result also includes a provision for the cost of undertaking a review in the UK of past non-advised annuity sales practices and related potential redress.
Prudential’s growing in-force business continues to support our overall cash generation. Free surplus generation3,7 rose by 10 per cent2 to £3,588 million (up 18 per cent on an actual exchange rate basis). Cash remittances to the Group were also higher at £1,718 million, supporting the 12 per cent increase in the 2016 full year ordinary dividend to 43.5 pence per share. Since 2012 Prudential has made total payments to shareholders of £4.6 billion, highlighting the underlying growth and cash-generative nature of the business.
During 2016, we have strengthened our position as a diversified global Group, delivering long-term value to customers and shareholders.
In Asia, we are developing our operations, through the quality of our business and
through our scale. Underpinning the outlook for Asia earnings, our new regular-premium income is up 20 per cent to £3,359 million and life in-force weighted premium income is up 20 per cent to £9.1 billion. In addition, our Asian asset manager, Eastspring Investments, has grown, with overall assets under management reaching £117.9 billion at the year end, a new high.
In the US we are well positioned to navigate a period of significant regulatory change, including the currently scheduled introduction of the Department of Labor’s fiduciary duty rule. The product innovation that is in train to address the new regulatory requirements, coupled with our sectorleading IT and servicing capabilities, enables us to access sizeable retirement asset pools that were previously not open
In the UK, where we are seeing a large amount of change in the marketplace along with the introduction of new capital rules, we are also adapting well. PruFund sales growth continues to outperform the market, and our retail sales are now higher than before the Retail Distribution Review. During this period of change we remain focused on delivering high-quality products to meet our customers’ evolving needs. The FCA’s thematic review of non-advised annuity sales practices showed that, in a portion of annuity sales that the UK business made since July 2008, it was not adequately explained to customers that they may have been eligible for an enhanced annuity. We are continuing to work to ensure we put things right.
Also in the UK, at M&G, we are focused on careful management of costs and improving performance. In 2016, assets managed by M&G on behalf of external clients increased by 8 per cent to £137 billion, with internal assets taking the total to £265 billion (2015: £246 billion).
We have made good progress towards our 2017 objectives, which we announced in December 2013. Asia life and asset management pre-tax operating profit has grown at a compound annual rate of 17 per cent over the period 2012 to 2016. We are therefore on track to meet the objective of growing this measure at a compound annual rate of at least 15 per cent over the period 2012 to 2017. In 2016, Asia delivered underlying free surplus generation of £859 million, demonstrating that we are on course to meet the objective of £900 million to £1.1 billion for full-year 2017. Collectively the Group has so far delivered underlying free surplus generation from the beginning of 2014 to 2016 of £9.2 billion, close to our objective for the period 2014 to the end of 2017 of at least £10 billion.
In Asia we aim to meet the savings, accumulation, health and protection needs of the fast-growing and increasingly affluent middle class. As this group of people grows, so does their demand for goods and services. As an example, three-quarters of China’s total population is forecast to be defined as middle income by 2030. The growing purchasing power of this section of the society is evident today. To illustrate, 60 million people left China for leisure travel purposes in 2011, but by last year this had doubled to 120 million and by 2020 is expected to top 200 million. Similarly last year Asian consumers bought around half of all the cars sold in the world, up from an average of less than 20 per cent during the 1990s.
The region’s consumer spending growth is remarkable, but what is closest to the hearts of people in Asia, as anywhere else, is providing a secure and more prosperous future for their loved ones. This is creating a powerful – and largely unmet – demand for the products we provide. Asia has low insurance penetration, high out-of-pocket healthcare spend and rapidly growing private wealth. The working age population in the region is predicted to rise by 178 million by 2030. Mutual fund penetration rates are currently just 12 per cent in Asia, compared with 75 per cent in Europe and 96 per cent in the US, and there is a significant mortality protection gap.
We are a leading pan-regional franchise in Asia, we hold top-three positions in nine of our 12 life markets in the region, and we are the number one Asian retail asset manager10. We have the presence, scale, distribution and product capabilities to tap into the growing needs of our Asian customers.
The US is the largest11 retirement savings market in the world, and over the next 20 years Americans will be retiring at a rate of 10,000 per day12. At the same time, private defined-benefit pension plans are disappearing and government plans are underfunded, life expectancy at age 65 has increased significantly, and individual investors struggle to capture returns and are exposed to volatile equity markets. The confluence of these trends is precipitating an expansion of the retirement market and a flight to quality that is aligned with Jackson’s capabilities.
In the UK, an ageing population that does not have enough saved for the future is driving increasing demand for savings and retirement income products, and this demand has been reinforced by the pensions freedom changes. This is creating significant opportunities for our UK businesses that both Prudential UK and M&G are addressing through their long-term savings solutions and investment strategies.
In the US, Jackson launched its first fee-based variable annuity, designed to meet the need for products compatible with the Department of Labor’s fiduciary duty rule. In the UK retail market we introduced the Prudential Retirement Account, an online account-based plan that offers both accumulation and decumulation for customers near retirement and has proved extremely popular. M&G added a number of new funds, including its Global Target Return Fund and Absolute Return Bond Fund, helping customers deal with market volatility.
In the UK, the number of our adviser firms has grown by 37 per cent since 2013, and
We are also using the Group’s scale to improve our risk management capabilities, including investing in new technology. In 2016 this included commencing implementation of Aladdin, a global risk and portfolio management platform for our
Standing, left to right: Tim Rolfe, Julian Adams, Al-Noor Ramji, John Foley, Anne Richards, Jonathan Oliver, Raghu Hariharan, Alan Porter. Seated, left to right: Barry Stowe, Penny James, Mike Wells, Nic Nicandrou, Tony Wilkey.
2 Following its reclassification to held for sale during 2016, operating results exclude the contribution of the Korea life business. The 2015 comparative results have been similarly adjusted.
4 Excluding UK bulk annuities as Prudential has withdrawn from this market.
5 Jackson analysis based on Morningstar fund performance information as at 4Q YTD 2016, ranked by sales as of end Q3 2016. ©2017 Morningstar Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete, or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. Morningstar www.AnnuityIntel.com.
6 IFRS operating profit is management’s primary measure of profitability and provides an underlying operating result based on longer-term investment returns and excludes non-operating items. Further information on its definition and reconciliation to profit for the period is set out in note B1 of the IFRS financial statements.
7 Underlying free surplus generated comprises underlying free surplus generated from the Group’s long-term business (net of investment in new business) and that generated from asset management operations. Further information is set out in notes 9 of the EEV basis results.
Our outlook Our growth prospects are based on clear long-term opportunities in the three markets we are targeting. There are historic demographic shifts taking place in these economies, and we are focused on ensuring that our capabilities develop in line with the evolving needs and preferences of our customers.
02 Strategic report 10 At a glance 10 Our strategy 10 What we offer 11 Where we operate 12 Our business model 14 Our distribution 16 Our performance 18 Our businesses and their performance 18 Asia 24 United States 28 United Kingdom and Europe – Insurance and investments 33 United Kingdom and Europe – Asset management 37 Chief Financial Officer’s report on the 2016 financial performance 50 Group Chief Risk Officer’s report of the risks facing our business and how these are managed 62 Corporate responsibility review
What we offer We focus on long-term opportunities in each of our geographical markets, understanding the needs of local customers and offering innovative products to meet those needs.
We provide our customers with savings products and financial protection against ill-health, loss of income and other adverse events, helping them to de-risk their lives.
We provide a range of opportunities across asset classes, generating valuable returns for our customers through a long-term approach to investment.
Asia Significant protection gap and investment needs of the middle class
Together with capturing the scale and diversification benefits of our global presence, we aim to generate attractive returns, enabling us to provide financial security to our customers, invest in growth opportunities and meet our customers’ high expectations.
Where we operate We identify markets where the needs we meet are underserved. Our business is organised into four geographic regions, with a focus on Asia, the US and the UK, where we see structural demand for our products. In recent years we have expanded into Africa, taking advantage of the emerging demand for our products in the region.
Leading pan-regional franchise Premier retirement income player 93% £118bn 8x £120bn of APE sales are regular premium total funds under management premium growth since 1995 of separate account assets, grown 3x since 2010
Prudential UK & Europe Prudential is a leading provider of savings and retirement income products in the UK. Our particular strength lies in investments that help customers meet their long-term goals, while also protecting them against short-term market fluctuations. We provide long-term savings solutions for UK customers, meeting people’s needs through our core strengths in with-profits and retirement, underpinned by our expertise in areas such as longevity, risk management and multi-asset investment.
Notes 1 ABI mixed investment 20 per cent to 60 per cent shares, total return; performance from 2 Represents financial assets and investment properties in with-profits funds.
Creating shared value Our trusted brands and strong distribution channels enable us to understand the growing needs of our customers for long-term savings and financial security, and to design innovative products that meet those needs. By helping to build better lives and stronger communities and to fuel the growth cycle, we create long-term value for both our customers and our shareholders.
We generate value by selectively taking exposures to risks that are adequately rewarded and that can be appropriately quantified and managed. Balance sheet strength and proactive risk management enable us to make good our promises to our customers and create long-term value for our stakeholders.
We focus on strategic investment in long-term opportunities and capabilities to drive future growth and value for our stakeholders. We invest to improve relationships with our customers and distributors, to create innovative products, to improve our operating platforms, and to capture new opportunities and build new relationships.
New business profit £3,088m +11%1 on 2015 (CER) +24% on 2015 (AER)
Societies Supporting societies where we operate, through investment in business and infrastructure, tax revenues and community support activities.
Solvency II as at 1 January 2016. 3 Estimated. Before allowing for second interim ordinary dividend. 4 The Group Solvency II surplus represents the shareholder capital position excluding the contribution to
Prudential UK Diversified distribution model underpinned by strong brand 37% growth in adviser firms from 2013 (post-RDR)
M&G Preferred distribution partnerships with both global and local financial institutions
+500,000 agents regional strategic and a variety of local bank partnerships
Eastspring Investments is present in major Asia markets and has distribution offices in US and Europe 1 Market Metrics – Variable Annuity Sales, Staffing and Productivity Report Q3 2016.
2 The Cerulli Report adviser metrics 2015 and Jackson research. 3 ©2017 Morningstar Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete, or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. Morningstar www.AnnuityIntel.com Sales by Contract and by Distribution Channel full year 2003-2015.
— Group IFRS operating profit in 2016 is 2 per cent lower on a constant exchange rate basis (+7 per cent on an actual exchange rate basis), compared with 2015, reflecting resilient performance in our life businesses, with Asia up 15 per cent (28 per cent on an actual exchange rate basis), and the US up 8 per cent (21 per cent on an actual exchange rate basis), mitigating the lower profit from the UK, down 32 per cent.
EEV new business profit3,4,5,6 £m Life insurance products are, by their nature, long-term and generate profit over a number of years. Embedded value reporting provides investors with a measure of the future profit streams of the Group. EEV new business profit reflects the value of future profit streams which are not fully captured in the year of sale under IFRS reporting.
— Underlying free surplus in 2016 increased by 10 per cent, on a constant exchange rate basis (18 per cent on an actual exchange rate basis), compared with 2015, driven by growth of the in-force portfolio, and continued disciplined allocation of free surplus to new business opportunities.
basis except where otherwise stated. Comparative results on a constant exchange rate (CER) basis are also shown in financial tables in the Chief Financial Officers’ report on our 2016 financial performance. CAGR is Compound Annual Growth Rate.
2 IFRS operating profit is management’s primary measure of profitability and provides an underlying operating result based on longer-term investment returns and excludes non-operating items. Further information on its definition and reconciliation to profit for the period is set out in note B1 of the IFRS financial statements.
5 The 2016 EEV basis results for UK insurance operations have been prepared on a basis that reflects the Solvency II regime, effective from 1 January 2016. The 2015 comparative results for UK insurance reflects the Solvency I basis.
6 Excluding UK bulk annuities as Prudential has withdrawn from this market. 7 Free surplus generation represents ‘underlying free surplus’ based on operating movements, including the general insurance commission earned during the period and excludes market movement, foreign exchange, capital movements, shareholders’ other income and expenditure and centrally arising restructuring and Solvency II implementation costs. Further information is set out in note 11 of the EEV basis results.
12 Following the announcement of the proposed sale of the Korea life business in November 2016, amounts for all years exclude the results of the Korea life business, as this sale is expected to complete in 2017. The 2017 Asia objectives have been adjusted accordingly.
13 The Group Solvency II surplus represents the shareholder capital position excluding the contribution to Own Funds and the Solvency Capital Requirement from ring-fenced with-profits funds and staff pension schemes in surplus. The estimated solvency position includes the impact of recalculated transitionals at the valuation date, which has reduced the Group shareholder surplus from £12.9 billion to £12.5 billion. The formal Quantitative Reporting Templates (Solvency II regulatory templates) will include transitional measures without this recalculation.
Group Solvency II capital surplus9,10,13 £bn Replacing the IGD capital regime, from 1 January 2016, Prudential is subject to the risk sensitive solvency framework required under European Solvency II Directives (Solvency II) as implemented by the Prudential Regulation Authority in the UK. The Solvency II surplus represents the aggregated capital (own funds) held by the Group less solvency capital requirements.
Key Expressed at Dec 2013 FX rates Comparative stated at reported currency basis
The—provision—of—personal—financial—security— is—one—of—the—hallmarks—of—a—successful— society.—Governments—in—the—region— appreciate—this—but—typically—only—have— appetites—to—provide—rudimentary—levels—of— state-sponsored—healthcare—and—other— social—services.—Consequently—they—are— keen—for—individuals—to—take—responsibility— for—their—own—financial—well-being,—address— the—health—and—protection—gaps—and— establish—savings—plans—towards—their— financial—security.
www.prudential.co.uk� Annual�Report�2016 Prudential plc 19 02 Strategic report against—the—potentially—devastating—impact— of—health-related—incidents—on—a—family’s— finances.—Critical—illness—and—medical—riders— are—popular—additions—to—life—insurance— policies—in—the—region.
Customers With—more—than—14.6—million—life—customers— in—Asia,—Prudential—has—one—of—the—largest— pan-regional—insurance—customer—bases,— with—a—retention—rate—of—over—90—per—cent.— To—illustrate—the—scale—of—our—growth—and— effectiveness—of—our—execution,—during—2016— renewal—premium—collected—from—our— existing—customers—increased—by—20—per—cent— to—£9.1—billion—and—we—paid—claims—of—nearly— £5—billion—to—our—customers.
Yona’s story Prudential Indonesia ‘I realised how crucial it is to be insured when I was diagnosed with a cerebral abscess last year. I needed to have surgery and spent one-and-a-half months in intensive care at the hospital, so I’m thankful that I was covered by my Prudential hospitalisation rider. Today, I’m grateful to have my health back again and feel blessed that I’ll soon be able to welcome into the world my own little bundle of joy.’
Products Our life product suite has three main categories: participating, linked and protection.
For the savings component of our insurance policies, we have seen softer demand for unit-linked products, given the recent volatility in capital markets, and correspondingly increased demand for participating products and their smoothed returns. The markets do have strong demand for products with high levels of guaranteed return but, although these can generate significant APE sales volumes, we only participate in this sector in a very controlled way. We maintain our balance sheet discipline and are unconcerned by any temporary erosion in market share.
Distribution Prudential Corporation Asia is well positioned in terms of our scale and diversity of distribution. Each market is unique and our overarching regional distribution strategy reflects our comprehensive approach to building pan-regional distribution capabilities, underpinned by effective platforms, comprehensive product solutions and the highest level of customer experience.
The scale, reach and quality of our life insurance distribution are evidenced by our productivity, persistency and customer satisfaction across the region. At the core of our distribution model is face-to-face interaction with customers, which delivers high-quality, needs-based advice. Supporting this approach is our continuous investment in enhancing customer experiences, such as the PRUcustomer friend customer servicing model in Indonesia and the PRU for you online community in Hong Kong.
Bancassurance is our other main distribution channel, generating 25 per cent of APE sales for Prudential Corporation Asia in 2016. Prudential Corporation Asia works with a number of partner banks, including international groups such as Standard Chartered Bank, regionals such as UOB, domestic banks such as Thailand’s Thanachart Bank and the retail banks of our partners CITIC in China and ICICI in India.
Investing for growth Prudential’s platform is well established and we continue to invest in growing the business through expansion into new markets such as Laos and opening up in new cities in existing markets such as China, Indonesia and the Philippines. We are also investing in expanding our agency network in the region and we are enhancing our operating capabilities, particularly leveraging new technologies.
4 Working age population 15-64 years. 5 Source: BCG Global Wealth 2015 Winning the growth game.
7 Source: Asia asset management September 2016 (ranked according to participating regional players only). Based on assets sourced from the region, excluding Japan, Australia and New Zealand as at June 2016.
Jackson continues its long-term disciplined approach to our business, with a sharp focus on delivering products and services that meet the needs of our stakeholders. This discipline has historically enabled us to navigate market disruption, producing positive outcomes amid adversity. The looming retirement crisis for an undersaved generation of retirees, combined with significant regulatory change and political uncertainty, presents an opportunity to redefine the retirement marketplace. Jackson is well positioned to articulate the issues and provide leadership in addressing them, with a focus on creating value for consumers and shareholders.
As a result of the DoL regulatory initiative and the uncertainties regarding the application and implementation of the Rules, the annuity industry saw material impacts on sales in 2016. Sales in the variable annuity industry as of the third quarter of 2016 at US$79 billion10 were down 22 per cent compared with the same period last year. Conversely, sales of fixed index (US$47 billion)10 and fixed annuity (US$45 billion)10 products were higher as of the third quarter of 2016 at 22 per cent and 28 per cent respectively, compared with the same period last year. In recent years, some competitors have begun to offer fixed index annuities with benefits that resemble those of variable annuities, leading to a shift in sales away from variable annuities to fixed index annuities. However, this trend has an uncertain future due to the unexpected inclusion of fixed index annuities within the current rules on par with the treatment of variable annuities. Total annuity industry sales were down approximately 2 per cent10 as of the third quarter of 2016.
Jackson’s competitive strengths are even more critical during periods of disruption. Our best-in-class distribution team, our agility and success in launching well designed products, the continued success through many economic cycles of our risk management and hedging programmes and our effective technology platforms and award-winning customer service will provide Americans with the retirement strategies they so desperately need, and will enable us to be positioned to capture additional growth during times of transition and into the future.
Consumer Finances. 3 US Department of Health and Human Services, ‘Health,
10 LIMRA/Secure Retirement Institute, US Individual Annuity Participants Report 3Q YTD 2016.
11 Guarantees are backed by the claims-paying ability of Jackson National Life Insurance Company.
Barry Stowe Chairman and Chief Executive Officer North American Business Unit
The fundamentals underpinning the UK’s retirement market are changing. Risk and responsibility for retirement provision continue to transfer away from the state and corporates to individuals. As customers adjust to the reforms introduced by pensions freedom in 2015, the new flexible arrangements to control their own pensions have been accompanied by significant complexity, which is adding to the burden of personal responsibility to secure an income in retirement. Investment risk, longevity risk and inflation risk are the risks to be mitigated by today’s retirement saver.
2016 performance highlights — Retail new business sales and new business profit both up 33 per cent
— Launch of the Prudential Retirement Account – an online account-based pension saving and retirement plan
— Two Five Star ratings for excellent service2, achieved for the sixth consecutive year
www.prudential.co.uk� Annual�Report�2016 Prudential plc 29 02 Strategic report freedom era. There has been a shift away from a reliance on capital-intensive annuity business to a focus on bond, ISA, pension and income drawdown products across a range of tax-efficient solutions.
Customer expectations are higher than ever. Increased life expectancy in retirement has put increased demands on long-term product performance, and technology is revolutionising the ways in
The Prudential brand resonates strongly with customers and advisers navigating through recent retirement market reforms. When combined with an enviable product and distribution capability, the emerging retirement savings marketplace presents an opportunity that few others are capable of serving better than Prudential.
Helen’s story Prudential UK & Europe ‘Thanks to my adviser, I can sleep easy at night knowing that I should be able to achieve my future plans because of the financial security my investments with Prudential should provide. Our annual review meeting is really important because it lets me know if my investments are on track, takes account of any changes in my financial circumstances and gives me a chance to check if there is anything else I can do to get the best from my savings. I chose the PruFund because I don’t really like the fluctuations of shares, but getting better returns compared with a bank savings account is very important to me and the with-profits fund has given me that steady secure growth. ‘I know Prudential will help secure my financial future because I have known them all my life.’
Our businesses and their performance Continued which company and customer interact. In this changing environment, our brand franchise is strong, resonating with retirement savers.
We continue to focus on meeting these customers’ needs through: — Extending our product range and servicing capability to help customers take full advantage of the flexibility introduced to the retirement saving marketplace through pension freedoms; — Extending availability of our investment and retirement solutions by maintaining strong relationships with financial adviser intermediaries, accelerating the growth of our Prudential Financial Planning advisory business and through investing in our direct-to-consumer channels, including telephone and online services; — Enhancing access to our market-leading PruFund proposition across a range of investment and tax wrappers; and
Strong brand franchise with clear focus on providing retirement saving and income solutions that meet customers’ needs in the pensions freedom era.
Multi-channel distribution model based on strong relationships with intermediaries and customers. 11 per cent (CAGR) increase in advisers recommending Prudential since 2013. Prudential Financial Planning is now advising over 50,000 customers.
Significant investment in product, service and technology to maintain the growth momentum created by recent structural changes in the retirement market.
c300 Prudential Financial Planning partners increase in 2016 sales generated through Prudential Financial Planning
In corporate pensions, we continue to focus on securing new scheme members and supporting existing members to meet their retirement goals. In the public sector, where Prudential is the market leader, providing schemes for 74 of the 99 local authorities in the UK, our focus is on additional voluntary contribution plans.
Having identified a number of alternative capital deployment opportunities within the Group and following the introduction of Solvency II we did not write any bulk annuity business in 2016. We have now withdrawn from this market. Our appetite for individual annuity business has also diminished and we took steps to curtail retail sales by establishing an annuity panel arrangement with a number of firms to provide annuities to our retiring customers. This new service will be phased in over the course of 2017.
Distribution The foundations of every strong brand are trust and confidence, common denominators in Prudential’s multi-channel distribution capability. The model is centred on the core intermediary channel and direct-to-consumer channels, including Prudential Financial Planning.
The roll-out of our business in Poland continued in 2016, with sales increasing by 86 per cent in local currency terms. Significant milestones during the year included increasing the number of financial planning consultants to 721, entering the multi-agency market and securing three affinity distribution deals with Polish telecommunications companies.
In addition to enhancing access to our market-leading PruFund proposition, we continue to innovate by bringing new and exciting products to the market, such as the Prudential Retirement Account, for our customers who want to use the pensions freedom provisions to their fullest.
We have also focused on deepening our already-strong relationships with independent financial advisers. An important part of our service offering is the ongoing hands-on support for intermediary advisers from our regional sales units, technical helpline and business development and consultancy team. Our adviser webinars attracted more than 10,000 attendees in 2016 while we also hosted 58 adviser seminars across the UK, covering a range of topical and technical subjects, to help these advisers deal with a changing regulatory landscape.
We will also accelerate the growth of Prudential Financial Planning, which currently has close to 300 advisers delivering face-to-face advice in customers’ homes and has introduced a telephone advice service to reflect the additional ways in which customers want to receive financial advice.
Notes 1 ABI mixed investment 20 per cent to 60 per cent shares, total return; performance from 29 December 2006 to 30 December 2016.
2 Ratings in the Life and pensions and Investment categories of the Financial Advisers Service Awards.
‘We know for a fact that we would never have received the customer care and attention from most other organisations, as we are so remote here in the Western Isles, so it was truly a breath of fresh air to do business with Prudential.’
Serving retail and institutional investors through a conviction-led and long-term approach 2016 performance highlights — External funds under management up 8 per cent to £137 billion
— Implementation of new global risk and portfolio management platform underway
The world’s population is ageing: by 2020, there will be more people aged 65 and above than children under five, according to the US Census Bureau. The United Nations estimates that this trend will continue, with over 15 per cent of the global population being aged over 65 by 2050. This demographic shift coincides with changes in retirement planning as governments and employers shift more responsibility to individuals, resulting in growing demand for asset management services.
Funds, excluding money market funds, in the UK ended 2016 strongly, with net inflows double those of the next-largest European market during the last two months of 2016. Total net sales of Investment Association-registered UK mutual funds were £13 billion during 2016, down from £22 billion in the previous year. In Europe, net sales were ¤213 billion, down from ¤498 billion in the previous year.
Prudential plc Annual Report 2016 www.prudential.co.uk34 2016 was a year of political and economic turmoil which prompted many of our customers to reassess their investment portfolios. As performance of our openended funds recovered in the second half of the year, we saw a much improved trend in flows in the fourth quarter, while appetite remained strong from institutional customers for our alternative investment strategies. Overall, the diversity of our asset classes, strategies and client base has allowed us once more to deliver value for money for our customers and a sizeable cash contribution to the Group.
DNA, which is why investing with a company like M&G is important to me. I know that looking after customers’ money is part of their DNA too.’
Alternative assets: M&G is a leading investor in a diverse range of private and illiquid assets such as commercial real estate debt, infrastructure debt and equity and direct lending, collectively known as alternatives. These are attractive options for institutional investors looking to match long-term liabilities with long-term returns, either at fixed or floating rates. They are also a key source of funding for public and private infrastructure projects and businesses that might otherwise struggle to access competitive financing.
M&G is making significant investment in technology, operating model and portfolio management platforms to advance our operational efficiencies and data capabilities.
Range of 59 open-ended funds across diverse geographies, asset classes and investment strategies 14 funds have assets under management of >£1 billion
We believe our active approach to investment – selecting investments on a conviction basis rather than following a market index – produces superior returns for our customers over the longer term. We offer our customers the ability to invest in a diverse range of assets: not only equities and fixed income but also unlisted investments such as property and private equity.
Chief Financial Officer’s report on the 2016 financial performance – Nic Nicandrou
Showcasing the resilience of our earnings, cash and capital The Group’s performance has once again been led by Asia, with double digit growth across new business profit, IFRS operating profit and free surplus generation for the seventh year in a row.
I am particularly pleased to be able to report that Prudential’s financial performance in 2016 has showcased the resilience of our earnings, cash and capital. While these are qualities I have mentioned in previous reports, the external events of 2016 have seen them tested repeatedly across our businesses during a year of significant uncertainty, market volatility and unexpected political and regulatory events. By remaining focused on our strategy and on disciplined execution, our business withstood the effect of these events and successfully adapted to changes in market conditions, regulatory intervention and shifts in consumer preference, to deliver a strong operating performance in 2016 and an improved capital position.
Prudential’s financial attributes and multiple, diverse levers of growth have enabled the Group to absorb not only the areas of earnings pressure known at the beginning of the year, but also the fluctuations of both equity markets and yields. New business profit, IFRS operating profit and free surplus generation, the three financial measures that we use to track delivery of our ‘growth and cash’ agenda, have all increased in 2016 when expressed on an actual exchange rate basis. This achievement demonstrates the benefits of our scale and the strength of our business model which is well diversified by geography, currency and source of earnings. The 2016 results also highlight the earnings power of our growing in-force book of business and our ability to add large new business volumes which are an important store of future value.
— IFRS operating profit based on longer-term investment returns (IFRS operating profit) was 2 per cent3 lower at £4,256 million (up 7 per cent on an actual exchange rate basis). IFRS operating profit from our Asia life insurance and asset management businesses grew by 15 per cent3 to £1,644 million, reflecting continued business momentum. In the US, Jackson’s total IFRS operating profit increased by 7 per cent, mainly due to growth in fee income on higher asset balances, which outweighed the anticipated reduction in spread earnings. In the UK, total IFRS operating profit was 31 per cent lower than the prior year, as a result of significantly reduced profits from annuity new business following our withdrawal from the bulk annuity market, the lower contribution from actions to support solvency and a provision for the cost of undertaking a review of past nonadvised annuity sales practices and related potential redress. M&G’s operating profit was 4 per cent lower, reflecting the earnings impact of the recent period of net fund outflows.
— Underlying free surplus generation1,4, our preferred measure of cash generation from our life and asset management businesses, increased by 10 per cent3 to £3,588 million (up 18 per cent on an actual exchange rate basis), after financing new business growth. The increase reflects a higher contribution from our growing in-force book of business, as we continue to focus on high-return new business with fast payback periods and includes the benefit from capital actions in the UK and the US.
— Group shareholders’ Solvency II capital surplus7 was estimated at £12.5 billion at 31 December 2016, equivalent to a cover ratio of 201 per cent6 (1 January 2016: £9.7 billion, 193 per cent). The improvement in the period primarily reflects the continuing strength of the Group’s operating capital generation in excess of growing dividend payments to shareholders, and also includes the benefit of debt issued in the year.
(2015: £2,579 million on an actual exchange rate basis) and total EEV post-tax profit was £4,516 million (2015: £3,951 million on an actual exchange rate basis).
Reflecting the combined effects of improved operating results on an actual exchange rate basis, negative short-term investment fluctuations and positive currency movements of £1.2 billion, IFRS shareholders’ equity was 13 per cent higher at £14.7 billion. Similarly, EEV basis shareholders’ equity was up 22 per cent5 at £39.0 billion. As at 31 December 2016, the Group’s Solvency II capital surplus7 was £12.5 billion, equivalent to a cover ratio of 201 per cent6 (1 January 2016: £9.7 billion, 193 per cent).
Long-term business: Long-term business operating profit3 4,354 4,029 8 4,378 (1)
Asset management business: Total operating profit based on longer-term investment returns before tax3 4,256 3,969 7 4,333 (2)
Profit before tax attributable to shareholders 2,275 3,148 (28) 3,437 (34)
Tax charge attributable to shareholders’ returns (354) (569) 38 (621) 43
Profit for the year attributable to shareholders 1,921 2,579 (26) 2,816 (32)
Basic earnings per share based on operating profit after tax 131.3 124.6 5 136.0 (3) Basic earnings per share based on total profit after tax 75.0 101.0 (26) 110.1 (32)
— UK total operating profit was 31 per cent lower at £828 million. This decline reflects lower profit from new annuity business, down from £123 million to £41 million in 2016 as we scale down our participation in the annuity market, a lower contribution from management actions to support solvency, down from £400 million to £332 million, and the establishment of a £175 million provision for the cost of undertaking a review of past nonadvised annuity sales practices and related potential redress.
At the beginning of the year, we expected that earnings would contract in a few discrete areas of the business: at M&G, due to the impact of outflows on funds under management and the corresponding fee income; in Jackson’s spread business portfolio as a result of persistently low interest rates; and in our UK life business given our withdrawal from the bulk annuity market. These identified effects have emerged largely as expected. However, our focus on cost control and the effective management of our in-force book of business have mitigated the overall impact of these anticipated adverse effects. Earnings have also benefited from continued growth in the premium base in Asia and the level of aggregate assets managed by our life and asset management operations across the Group, which together underpin the longer-term earnings progression of our business.
Life insurance operations: Taken together, IFRS operating profit from our life insurance operations in Asia, the US and the UK was 1 per cent3 lower at £4,354 million (8 per cent increase on an actual exchange rate basis).
In the US, life IFRS operating profit was 8 per cent higher at £2,052 million (up 21 per cent on an actual exchange rate basis), reflecting the resilient performance of Jackson’s franchise in an environment of market volatility and sector-wide disruption following the announcement of the Department of Labor’s fiduciary duty rule in April 2016. Average separate account balances increased by 5 per cent, resulting in a 3 per cent rise in fee income, while the result also benefited from scale efficiencies. As expected, lower yields in the year have impacted spread income, which decreased by 5 per cent.
Profit from new annuity business reduced from £123 million in 2015 to £41 million, as we scaled down our participation in the annuity market. In response to the volatile investment market environment during 2016, we took a number of asset and liability actions to improve the solvency position of our UK life operations and further mitigate market risk, generating combined profits of £332 million (2015: £400 million). Of this amount, £197 million related to profit from longevity reinsurance transactions (2015: £231 million) and £135 million (2015: £169 million) from the effect of repositioning the fixed income asset portfolio. In response to the findings of the FCA’s thematic review of nonadvised annuity sales practices, the UK business will review internally vesting annuities sold without advice after 1 July 2008. Reflecting this, the UK life 2016 result includes a provision of £175 million for the cost of this review and related potential redress. The provision does not include potential insurance recoveries of up to £175 million.
We track the progress that we make in growing our life insurance business by reference to the scale of our obligations to our customers, which are referred to in the financial statements as policyholder liabilities. Each year these increase as we write new business and collect regular premiums from existing customers and decrease as we pay claims and policies mature. The overall scale of these policyholder liabilities is relevant in the evaluation of our profit potential in that it reflects, for example, our ability to earn fees on the unit-linked element and indicates the scale of the insurance element, another key source of profitability for the Group.
Analysis of long-term insurance business IFRS operating profit by driver3,10 £m (% vs 2015)
www.prudential.co.uk� Annual�Report�2016 Prudential plc 41 02 Strategic report income to spread income because it is more capital-efficient. In line with this approach, on a constant exchange rate basis, insurance margin has increased by 7 per cent (up 19 per cent on an actual exchange rate basis) and fee income by 3 per cent (up 15 per cent on an actual exchange rate basis), while spread income decreased by 8 per cent (up 2 per cent on an actual exchange rate basis).
Asset management external net flows and external funds under management13,14 £m 1 Jan
Eastspring Investment’s total assets under management rose to a record £117.9 billion (2015: £89.1 billion).
Short-term investment fluctuations represent the most significant component of non-operating items and are discussed further below.
Other non-operating items of negative £76 million mainly represent the amortisation of acquisition accounting adjustments arising principally on the acquisition of the REALIC business in 2012 (2015: negative £76 million on an actual exchange rate basis). Additionally, 2015 non-operating items included a loss of £46 million from the recycling of exchange losses on the sale of the Japan business.
In the US, Jackson provides certain guarantees on its annuity products, the value of which would typically rise when equity markets fall and long-term interest rates decline. Jackson charges fees for these guarantees which are in turn used to purchase downside protection in the form of options and futures to mitigate the effect of equity market falls, and swaps and swaptions to cushion the impact of drops in long-term interest rates. Under IFRS, accounting for the movement in the valuation of these derivatives, which are all fair valued, is asymmetrical to the movement in guarantee liabilities, which are not fair valued in all cases. Jackson designs its hedge programme to protect the economics of the business from large movements in investment markets and accepts the variability in accounting results. The negative short-term fluctuations of £1,455 million in the year mainly reflect the effect of the increase in equity markets on net value movements on the guarantees and associated derivatives with the S&P 500 index closing at 10 per cent higher than at the start of the year. While the resulting negative mark-to-market movements on these hedging instruments are recorded in 2016, the related increases in fee income that arise from the higher asset values managed, will be recognised and reported in future years.
The UK non-operating profit of positive £198 million mainly reflects gains on bonds backing annuity capital and shareholders’ funds following the 70 basis points fall in 15-year UK gilt yields in 2016.
New business performance Life EEV new business profit1 and APE new business sales (APE sales)
Total Group excluding bulk annuities2,3 6,320 3,088 5,315 2,492 19 24 5,844 2,774 8 11
Life insurance new business profit1 was up 11 per cent2,3 (24 per cent on an actual exchange rate basis) to £3,088 million, reflecting the net outcome from strong growth in Asia and in UK retail business and reduced contribution from our US operations.
Life insurance new business APE sales increased by 8 per cent2,3 (19 per cent on an actual exchange rate basis) to £6,320 million led by Asia and the UK.
and an increasing contribution from health and protection business (up 43 per cent). 2016 saw increased intervention by the Chinese authorities in relation to capital controls and we continue to monitor developments, which to date have not had a meaningful impact on our business in Hong Kong. In China, we have pivoted the business towards higher quality regular premium business driven by our increased scale in the agency channel, and sales of single premiums have reduced as we de-emphasised further new spread-based business across the region in 2016.
In our UK life business, our strategy of extending customer access to PruFund’s with-profits investment option via additional product wrappers continues to drive growth in retail APE sales, which increased 33 per cent to £1,160 million. In the current low interest rate environment, consumers are attracted to PruFund’s smoothed multi-asset fund returns and the financial security attaching to its strong capitalisation. We have seen notable success with the build out of PruFund through individual pensions (up 104 per cent), income drawdown (up 62 per cent) and ISAs (up 70 per cent), although our more established PruFund investment bonds also increased 21 per cent. Reflecting this strong performance, total PruFund assets under management of £24.7 billion as at 31 December 2016 were 50 per cent higher than at the start of the year.
UK’s retail new business profit of £268 million increased by 33 per cent reflecting the increased sales volume and positive effects from changes in product mix.
Free surplus generation Free surplus generation is the financial metric we use to measure the internal cash generation of our business operations. For life insurance operations it represents amounts maturing from the in-force business during the year, net of amounts reinvested in writing new business. For asset management it equates to post-tax IFRS profit for the period.
Solvency II does not directly impact the way capital is generated locally in the US and in our Asian life operations, so there is no change in the way free surplus is calculated for these businesses.
In 2016 underlying free surplus generation, after investment in new business, increased by 10 per cent2 to £3,588 million.
Underlying free surplus generated from in-force life business and asset management3 4,491 3,761 19 4,068 10
The 10 per cent3 increase in free surplus generated1 by our life insurance and asset management businesses to £4,491 million (up 19 per cent3 on an actual exchange rate basis) reflects our growing scale and the highly capital-generative nature of our business model. In 2016, a key contributor to this growth has been derived from the positive momentum of Asia’s in-force life insurance portfolio, which provides an important underpin to this metric and helps absorb cyclicality elsewhere in the Group. We drive this metric by targeting markets and products that have low-strain, high-return and fast payback profiles and by delivering both good service and value to improve customer retention. Our ability to generate both growth and cash is a distinctive feature of Prudential. The closing value of free surplus in our life and asset management operations was £6.6 billion at 31 December 2016, after financing reinvestment in new business and funding cash remittances from the business units to Group.
In Asia, growth in the in-force life portfolio, combined with post-tax asset management profits from Eastspring Investments, contributed to free surplus generation of £1,335 million, up 14 per cent. In the US, in-force free surplus generation increased 15 per cent, reflecting higher expected returns and a benefit of £236 million from contingent financing of specific US statutory reserves, which strengthened Jackson’s local statutory capital position. In the UK, free surplus generation1 was 3 per cent higher at £930 million, including a net contribution of £206 million (2015: £275 million) from management actions taken in the year to improve solvency, net of the provision for the cost of undertaking a review of past non-advised annuity sales practices and related potential redress.
Net cash remitted by business units: Prudential Capital 45 55 Other UK 147 30
Asia 516 US 420 UK 300 M&G 290 PruCap 45 Other UK 147
Cash remitted to the corporate centre in 2016 amounted to £1,718 million, driven by higher remittances from Asia (up 21 per cent, after adjusting for £42 million of proceeds in 2015 from the sale of our Japan life business). Jackson made sizeable remittances of £420 million, albeit lower than last year when more supportive markets enhanced capital formation. The remittance from UK Life of £300 million was in line with 2015, while the remittance from M&G of £290 million was lower than last year reflecting lower levels of post-tax earnings in the year. Actions completed in the period, including internal restructuring that has enabled us to access central resources previously held at intermediary holding and other companies, contributed a further £147 million.
Cash remitted to the Group in 2016 was used to meet central costs of £416 million (2015: £354 million), pay the 2015 second interim ordinary, 2015 special and 2016 first interim dividends and finance the final up-front payment for the renewal of the distribution agreement with Standard Chartered Bank. These movements combined with the net proceeds of debt raised in the year and other corporate cash flows led to holding company cash increasing from £2,173 million to £2,626 million over 2016.
Post-tax operating profit based on longer-term investment returns Long-term business: Long-term business post-tax operating profit3 5,688 4,951 15 5,458 4
Asset management business: Post-tax operating profit based on longer-term investment returns3 5,497 4,840 14 5,359 3
Non-operating items: (Loss)/Profit attaching to held for sale Korea business (410) 39 n/a 42 n/a
Post-tax profit for the year attributable to shareholders 4,516 3,951 14 4,344 4
The EEV operating profit includes new business profit1 from the Group’s life business, which increased by 11 per cent3 (up 24 per cent on an actual exchange rate basis) to £3,088 million and in-force life business profit1 of £2,600 million, which was 1 per cent3 higher than prior year (up 11 per cent on an actual exchange rate basis). Experience and assumptions changes were positive at £706 million (2015: £741 million), reflecting our ongoing focus on managing the in-force book for value.
While Solvency II does not fully recognise the economic capital strength of the Group, we implemented it in 2016 having received internal model approval from the Prudential Regulation Authority in December 2015.
Subordinated debt issuance 1.2 0.6 Foreign currency translation impacts 1.6 0.2 Dividends paid (1.3) (1.0)
In July 2013, Prudential plc was listed by the Financial Stability Board as one of nine companies to be designated as a Global Systemically Important Insurer, a classification that was reaffirmed in November 2016. Prudential is monitoring the development and potential impact of the related framework of policy measures and is engaging closely with the Prudential Regulation Authority on the implications of this designation.
Debt portfolio The Group continues to maintain a high-quality defensively positioned debt portfolio. Shareholders’ exposure to credit is concentrated in the UK annuity portfolio and the US general account, mainly attributable to Jackson’s fixed annuity portfolio. The credit exposure is well diversified, with investment grade securities representing 96 per cent of our UK portfolio and 98 per cent of our US portfolio at end-2016. During 2016, default losses were minimal and reported impairments of £35 million across these two portfolios were in line with those in 2015.
* Net core structural borrowings as proportion of IFRS shareholders’ funds plus net debt.
Effect of implementation of Solvency II at 1 January 2016 (473)
In 2016, UK sterling weakened relative to the US dollar and various Asian currencies. With approximately 49 per cent of the Group’s IFRS net assets (71 per cent of the Group’s EEV net assets) denominated in non-sterling currencies this generated a positive foreign exchange movement on net assets in the period.
This movement, together with profit after tax, movement in other comprehensive income and dividends paid, has led to the Group’s IFRS shareholders’ funds at 31 December 2016 increasing by 13 per cent to £14.7 billion (31 December 2015: £13.0 billion on an actual exchange rate basis).
The introduction of Solvency II at the start of 2016 changed the capital dynamics of our UK life operations which are directly impacted by this change. In overview, it permitted the inclusion of future profits in the available capital of the business but
Entrance into Zambia In June 2016 we completed the acquisition of Professional Life Assurance of Zambia, increasing Prudential’s insurance business footprint in Africa to four markets. Across Ghana, Kenya, Uganda and now Zambia we are gradually laying the foundations for what we hope will become a meaningful component of the Group in the years to come. Our current focus in these businesses is on growing our distribution; at 31 December we had 1,750 agents and were active in 181 branches of our four local bank partners (three exclusive) across these businesses.
Dividend During 2016 the Group’s dividend policy was updated. The Board will maintain its focus on delivering a growing ordinary dividend. In line with this policy, Prudential aims to grow the ordinary dividend by 5 per cent per annum. The potential for additional distributions will continue to be determined after taking into account the Group’s financial flexibility across a broad range of financial metrics and our assessment of opportunities to generate attractive returns by investing in specific areas of the business.
Notes 1 The 2016 EEV basis results for UK insurance operations have been prepared on a basis that reflect the Solvency II regime, effective from 1 January 2016. The 2015 comparative results for UK insurance operations reflect the Solvency I basis.
4 Free surplus represents ‘underlying free surplus’ based on operating movements, including the general insurance commission earned during the year and excludes market movements, foreign exchange, capital movements, shareholders’ other income and expenditure and centrally arising restructuring and Solvency II implementation costs.
13 Includes Group’s proportionate share in PPM South Africa and the Asia asset management joint ventures.
19 Refer to the EEV basis supplementary information – Post-tax operating profit based on longer-term investment returns and Post-tax summarised consolidated income statement, for the breakdown of other income and expenditure, and other non-operating items.
20 The methodology and assumptions used in calculating the Solvency II capital results are set out in note II (c) of Additional unaudited financial information.
21 The UK Solvency II surplus represents the shareholder capital position excluding the contribution to Own Funds and the Solvency Capital Requirement from ring fenced with-profits funds and staff pension scheme in surplus. The estimated solvency position includes the impact of recalculated transitionals at the valuation date.
Introduction 2016 has been a year of extraordinary global change, starting with market turbulence in China, followed by the UK’s vote to leave the EU and ending with the election of a new president in the US.
Risks from o u r in v e stm en ts
Ri sk s fr o m o u r b u si n es s op er atio ns
In addition to the risk committees mentioned, there are various executive risk forums to ensure risk issues are shared and considered across the Group. These are led by the Group Executive Risk Committee which is supported by a number of specific committees including in relation to security and information security where specialist skills are required.
Risk Management Framework The Group’s Risk Management Framework has been developed to monitor and manage the risk of the business at all levels and is owned by the Board. The aggregate Group exposure to the key risk drivers is monitored and managed by the Group Risk function whose responsibility it is to review, assess and report on the Group’s risk exposure and solvency position from the Group economic, regulatory and ratings perspectives.
The Group Risk function is responsible for reviewing the scope and operation of these measures at least annually, to determine that they remain relevant. The Board approves all changes made to the Group’s Risk Appetite Framework. We define and monitor aggregate risk limits based on financial and non-financial stresses for our earnings volatility, liquidity and capital requirements.
— Employees understand and care about their role in managing risk – they are aware of and openly discuss risk as part of the way they perform their role; and
Key aspects of risk culture are also communicated through the Code of Conduct and the policies in the Group Governance Manual, including the commitments to the fair treatment of our customers and staff. The approach to the management of risk is also a key part of the evaluation of the remuneration of executives. Risk culture is an evolving topic across the financial services industry and we will be continuing work to evaluate and embed a strong risk culture through 2017.
Risk reports provide monthly updates to the Group Executive Risk Committee, Group Risk Committee and Board on exposure against Board-approved risk appetite statements and limits.
Material risks which are modelled are included in capital models, including E-Cap.
Risk identification covers Group-wide: — Top down risk identification — Bottom up risk identification — Emerging risk identification
Reverse stress testing, which requires us to work backwards from an assumed point of business model failure, is another tool that helps us to identify the key risks and scenarios that may materially impact the Group.
Our emerging risk management process identifies potentially material risks which have a high degree of uncertainty around timing, magnitude and propensity to evolve. The Group holds emerging risk sessions over the year to identify emerging risks which includes input from local subject matter and industry experts. We maintain contacts with thought leaders and peers to benchmark and refine our process.
Risk monitoring and reporting The identification of the Group’s key risks informs the management information received by the Group risk committees and the Board. Risk reporting of key exposures against appetite is also included, as well as ongoing developments in other key and emerging risks.
Digital disruption The emergence of advance technologies such as artificial intelligence and block chain is providing an impetus for companies to rethink their existing operating models and how they interact with their customers. Prudential is embracing the opportunities presented by digitalisation and is closely monitoring any risks which arise.
Our fund investment performance is a fundamental part of our business in providing appropriate returns for our customers and shareholders, and so is an important area of focus.
Credit risk Is the potential for reduced value of our investments due to the uncertainty around investment returns arising from the potential for defaults of our investment counterparties.
Invested credit risk arises from our asset portfolio. We increase sector focus where necessary.
Market risk Is the potential for reduced value of our investments resulting from the volatility of asset prices as driven by fluctuations in equity prices, interest rates, foreign exchange rates and property prices. In our Asia business, our main market risks arise from the value of fees from our fee-earning products.
In the US, Jackson’s fixed and variable annuity books are exposed to a variety of market risks due to the assets backing these policies.
In the UK, exposure relates to the valuation of the proportion of the with-profits fund’s future profits which is transferred to the shareholders (future transfers), which is dependent on equity, property and bond values.
M&G invests in a broad range of asset classes and its income is subject to the price volatility of global financial and currency markets.
Insurance risks The nature of the products offered by the Group exposes it to insurance risks, which are a significant part of our overall risk profile.
The insurance risks that we are exposed to by virtue of our products include longevity risk (policyholders living longer than expected); mortality risk (policyholders with life protection dying); morbidity risk (policyholders with health protection becoming ill) and persistency risk (customers lapsing their policies).
Across our business units, persistency and morbidity risks are among the largest insurance risks for our Asia business given our strong focus on health protection products in the region.
The number of regulatory changes under way across Asia, in particular those focusing on consumer protection means that regulatory change in the region is also considered a key risk.
Given our global business, we earn our profits and hold assets in various currencies. The translation of those into our reporting currency exposes us to movements in foreign exchange rates.
Our main investment risk exposure arises from the portion of the profits from the UK with-profits fund to which we are entitled to receive; the value of the future fees from our fee-earning products in our Asia business; and from the asset returns backing Jackson’s variable annuities business.
Our interest rate risk is driven in the UK by our need to match our assets and liabilities; from the guarantees of some non unitlinked investment products in Asia; and the cost of guarantees in Jackson’s fixed, fixed index and variable annuity business. The methods that we use to manage and mitigate our market risks include the following: — Our market risk policy; — Risk appetite statements, limits and triggers that we have in place; — The monitoring and oversight of market risks through the regular reporting of management information; — Our asset and liability management programmes; — Use of derivative programmes, including, for example, interest rate swaps, options and hybrid options for interest rate risk; — Regular deep dive assessments; and
Investment risk (Audited) In the UK business, our main investment risk arises from the assets held in the with-profits funds. Although this is mainly held by our policyholders, a proportion of the fund’s profit (one tenth) is transferred to us and so our investment exposure relates to the future valuation of that proportion (future transfers). This investment risk is driven mainly by equities in the fund, although there is some risk associated with other investments such as property and bonds. Some hedging to protect from a reduction in the value of these future transfers against falls in equity prices is performed outside the fund using derivatives. The with-profits funds’ large Solvency II own funds – estimated at £8.4 billion as at 31 December 2016 (31 December 2015: £7.6 billion) – helps to protect against market fluctuations and helps the fund to maintain appropriate solvency levels. The with-profits funds’ Solvency II own funds are partially protected against falls in equity markets through an active hedging programme within the fund.
In Jackson, investment risk arises from the assets backing customer policies. In the case of spread-based business, including fixed annuities, these assets are generally bonds, and shareholder exposure comes from the minimum returns needed to meet the guaranteed rates that we offer to policyholders. For our variable annuity business, these assets include both equities and bonds. In this case, the main risk to the shareholder comes from the guaranteed benefits that can be included as part of these products. Our exposure to this kind of situation is reduced by using a derivative hedging programme, as well as through the use of reinsurance to pass on the risk to third-party reinsurers.
Interest rate risk arises in our UK business from the need to match cash payments to meet annuity obligations with the cash we receive from our investments. To minimise the impact on our profit, we aim to match the duration (a measure of interest rate sensitivity) of assets and liabilities as closely as possible and the position is monitored regularly. Under the Solvency II regulatory regime, additional interest rate risk results from the way the balance sheet is constructed, such as the requirement for us to include a risk margin. The UK business continually assesses the need for any derivatives in managing its interest rate sensitivity. The with-profits business is exposed to interest rate risk because of underlying guarantees in some of its products. Such risk is largely borne by the with-profits fund itself but shareholder support may be required in extreme circumstances where the fund has insufficient resources to support the risk.
We use a number of risk management tools to manage and mitigate this credit risk, including the following: — Our credit risk policy; — Risk appetite statements and limits that we have defined on issuers, counterparties and the average credit quality of the portfolio; — Collateral arrangements we have in place for derivative transactions; — The Group Credit Risk Committee’s oversight of credit and counterparty credit risk and sector and/or namespecific reviews. During 2016, it has conducted sector reviews in the banking (UK and Asia) and energy sectors; — Regular deep dive assessments; and
The value of our debt portfolio in our Asia business was £36.5 billion at 31 December 2016. The majority (69 per cent) of the portfolio is in unit-linked and with-profits funds and so exposure of the shareholder to this component is minimal. The remaining 31 per cent of the debt portfolio is held to back the shareholder business.
Group Chief Risk Officer’s report of the risks facing our business and how these are managed – Penny James Continued
AAA 7% AA 26% A 35% BBB 28% BB or below or non-rated assets 4%
Group sovereign debt (Audited) We also invest in bonds issued by national governments, that are traditionally seen as safer investments. This sovereign debt represented 19 per cent or £17.1 billion of the shareholder debt portfolio as at 31 December 2016 (31 December 2015: 17 per cent or £12.8 billion). 4 per cent of this was rated AAA and 92 per cent was considered investment grade (31 December 2015: 94 per cent investment grade). At 31 December 2016, the Group’s shareholder holding in Eurozone sovereign debt1 was £767 million. 75 per cent of this was rated AAA (31 December 2015: 75 per cent rated AAA). We do not have any sovereign debt investments in Greece.
The particular risks associated with holding sovereign debt are detailed further in our disclosures on risk factors.
Bank debt exposure and counterparty credit risk (Audited) Our exposure to banks is a key part of our core investment business, as well as being important for the hedging and other activities we undertake to manage our various financial risks. Given the importance of our relationship with our banks, exposure to the sector is a considered a key risk for the Group with an appropriate level of management information provided to the Group’s Risk Committees and the Board.
The exposures held by the shareholderbacked business and with-profits funds in bank debt securities at 31 December 2016 are given in Note C3.2(f) of the Group’s IFRS financial statements.
The key drivers of the Group’s insurance risks are persistency and morbidity risk in the Asia business; and longevity risk in the Jackson and Prudential UK & Europe businesses.
— Persistency risk is mitigated through the quality of sales processes and with initiatives to increase customer retention; — Medical expense inflation risk mitigated through product re-pricing; and
We continue to conduct research into longevity risk using both experience from our annuity portfolio and industry data. Although the general consensus in recent years is that people are living longer, there is considerable volatility in year-on-year longevity experience, which is why we need expert judgement in setting our longevity basis.
In Asia, we write significant volumes of health protection business, and so a key assumption for us is the rate of medical inflation, which is often in excess of general price inflation. There is a risk that the expenses of medical treatment increase more than we expect, so the medical claim cost passed on to us is higher than anticipated. Medical expense inflation risk is best mitigated by retaining the right to re-price our products each year and by having suitable overall claim limits within our policies, either limits per type of claim or in total across a policy.
We manage and mitigate our operational risk using the following: — Operational risk and outsourcing and third-party supply policies; — Corporate insurance programmes to limit the impact of operational risks; — Scenario analysis for operational risk capital requirements, which focus on extreme, yet plausible, events; — Internal and external review of cyber security capability; and
The performance of core activities places reliance on the IT infrastructure that supports day-to-day transaction processing. Our IT environment must also be secure and we must address an increasing cyber risk threat as our digital footprint increases – see separate Cyber risk section below. The risk that our IT infrastructure does not meet these requirements is a key area of focus, particularly the risk that legacy IT infrastructure supporting core activities/ processes affects business continuity or impacts on business growth.
As well as the above, other key areas of focus within operational risk include: — The risk of a significant failure of a third-party outsourcing partner impacting critical services; — The risk of trading or transaction errors having a material cost across Group; — The risk that errors within models and user-developed applications used by the Group result in incorrect or inappropriate transactions being instructed; — Departure of key persons or teams resulting in disruption to current and planned business activities; — The risk that key people, processes and systems are unable to operate (thus impacting on the on-going operation of the business) due to a significant
www.prudential.co.uk� Annual�Report�2016 Prudential plc 59 02 Strategic report unexpected external event; for example pandemic, terrorist attack, natural disaster, or political unrest; — The risk that a significant project fails or partially fails to meet its objectives, leading to financial loss; and
Global regulatory and political risk Our risk management and mitigation of regulatory and political risk includes the following: — A Risk and Capital Plan that includes considerations of current strategies; — Close monitoring and assessment of our business environment and strategic risks; — Board strategy sessions that consider risk themes; — A Systemic Risk Management Plan that details the Group’s strategy and Risk Management Framework; and
In June 2016, the UK voted to leave the EU. The potential outcome of the negotiations on UK withdrawal and any subsequent negotiations on trade and access to major trading markets, including the single EU market, is currently highly uncertain.
The ongoing uncertainty and likelihood of a lengthy negotiation period may increase volatility in the markets where we operate, creating the potential for a general downturn in economic activity and for further or prolonged falls in interest rates in some jurisdictions due to easing of monetary policy and investor sentiment. We have several UK-domiciled operations, including Prudential UK and M&G, and these may be impacted by a UK withdrawal from the EU. However, our diversification by geography, currency, product and distribution should reduce some of the potential impact. Contingency plans were developed ahead of the referendum by business units and operations that may be immediately impacted by a vote to withdraw the UK from the EU, and these plans have been enacted since the referendum result.
The EU’s Solvency II directive came into effect on 1 January 2016; however, the UK’s vote to leave the EU has the potential to result in changes to future applicability of the regime in the UK. In September 2016, following the Brexit vote, the UK Treasury published terms of reference of its consultation into Solvency II to consider the options for British insurers and to assess the impact of the regime on the competitiveness of the UK insurance industry, the needs of UK consumers and the wider UK business economy. The outcome is likely to be dependent on the overall Brexit agreement reached between the UK and EU. Separately, the European Commission has commenced a review of some elements of the application of the Solvency II legislation with a particular focus on the Solvency Capital Requirement calculated using the standard formula.
National and regional efforts to curb systemic risk and promote financial stability are also underway in certain jurisdictions in which Prudential operates, including the Dodd-Frank Wall Street Reform and Consumer Protection Act in the US, and other European Union legislation related to the financial services industry.
The IAIS’s Global Systematically Important Insurers (G-SII) regime form additional compliance considerations for us. Groups designated as a G-SIIs are subject to additional regulatory requirements, including enhanced group-wide supervision, effective resolution planning, development of a Systemic Risk Management Plan, a Recovery Plan and a Liquidity Risk Management Plan. Prudential’s designation as a G-SII was reaffirmed by the IAIS in November 2016, based on the updated methodology published in June 2016. Prudential is monitoring the development and potential impact of the policy measures and is continuing to engage with the PRA on the implications of the policy measures and Prudential’s designation as a G-SII. We continue to engage with the IAIS on developments in capital requirements for groups with G-SII designation.
The IAIS is also developing a Common Framework (ComFrame) which is focused on the supervision of Internationally Active Insurance Groups. ComFrame will establish a set of common principles and standards designed to assist regulators in addressing risks that arise from insurance groups with operations in multiple jurisdictions. As part of this, work is underway to develop a global Insurance Capital Standard that is intended to apply to Internationally Active Insurance Groups. Once the development of the Insurance Capital Standard (ICS) has been concluded, it is intended to replace the Basic Capital Requirement as the minimum group capital requirement for G-SIIs.
The IAIS’s Insurance Core Principles, which provide a globally-accepted framework for the supervision of the insurance sector and ComFrame evolution, are expected to create continued development in both prudential and conduct regulations over the next two to three years.
In the US, the Department of Labor proposal in April 2016 to introduce new fiduciary obligations for distributors of investment products to holders of regulated accounts, which could dramatically reshape the distribution of retirement products. Jackson’s strong relationships with distributors, history of product innovation and efficient operations should help mitigate any impacts.
The US National Association of Insurance Commissioners (NAIC) is currently conducting an industry consultation with the aim of reducing the complexity in the variable annuity statutory balance sheet and risk management. Following an industry quantitative impact study, changes have been proposed to the current framework; however, these are considered to be at an early stage of development. Jackson continues to be engaged in the consultation and testing process. The proposal is currently planned to be effective from 2018.
With the new US administration having taken office in January 2017, the potential uncertainty as to the timetable and status of these key US reforms has increased given preliminary indications from Washington. Our preparations to manage the impact of these reforms will continue until further clarification is provided.
In Asia, regulatory regimes are developing at different speeds, driven by a combination of global factors and local considerations. New requirements could be introduced in these and other regulatory regimes that challenge legal structures and current sales practices.
Cyber risk Cyber risk is an area of increased scrutiny for global regulators after a number of recent high profile attacks and data losses. The growing maturity and industrialisation of cyber-criminal capability, together with an increasing level of understanding of complex financial transactions by criminal groups are two reasons why risks to the financial services industry are increasing.
The Board receives periodic updates on cyber risk management throughout the year. The current Group-wide Cyber Risk Management Strategy and the associated Group-wide Coordinated Cyber Defence Plan were approved by the Board in 2016.
The Cyber Risk Management Strategy includes three core objectives: to develop a comprehensive situational awareness of our business in cyberspace; to proactively engage cyber attackers to minimise harm to our business and to enable the business to grow confidently and safely in cyberspace.
Group functions work with each of the business units to address cyber risks locally within the national and regional context of each business, following the strategic direction laid out in the Cyber Risk Management Strategy and managed through the execution of the Cyber Defence Plan.
The Group Information Security Committee, which consists of senior executives from each of the businesses and meets on a regular basis, governs the execution of the Cyber Defence Plan and reports on delivery and cyber risks to the Group Executive Risk Committee. Both committees also receive regular operational management information on the performance of controls.
Viability statement In accordance with provision C.2.2 of the UK code, the Directors have assessed the prospects of the Company and the Group for a period longer than the 12 months required by the going concern statement.
Although three years is regarded as an appropriate period for the assessment of the Group’s viability, the Directors regularly consider strategic matters that may affect the longer-term prospects of the Group. Further, the Group as a whole and each of its life assurance operations are subject to extensive regulation and supervision, which are designed primarily to reinforce the company’s management of its long-term solvency, liquidity and viability to ensure that it can continue to meet obligations to policyholders.
In particular, the Group and UK insurance subsidiaries are subject to the capital adequacy requirements of the European Union Solvency II regulatory basis as implemented by the Prudential Regulation Authority in the UK. Capital requirements for the Group’s other subsidiaries are also monitored on their local regulatory bases. In addition to these external capital metrics, the Group uses an internal economic capital assessment to monitor its capital requirements across the Group. Further details on the capital strength of the Group are provided on pages 47 and 48.
Assessment of risks over the period Assessment of the risks to achieving the projected performance remains an integral part of the planning process. The Group’s risk teams identify key risks to the delivery of the plan and set out mitigating actions where applicable. The Group’s business activities and the factors likely to affect its future development, successful performance and position in the current economic climate are set out on pages 4 to 36. The risks facing the Group’s capital and liquidity positions and their sensitivities are referred to on pages 50 to 60.
For the purposes of assessing the Group’s viability, the Directors further considered those risks where the impact of possible adverse external developments could be of such speed and severity to present a shock to the Group’s financial position. The risks further considered, from those detailed on page 54, are: market risk, credit risk, liquidity risk and regulatory risk.
The impact on the business of known areas of regulatory change whose financial implications can be reasonably quantified is also considered as part of the plan. As well as known areas of regulatory change the Group is exposed to the risk of sudden and unexpected changes in regulatory requirements at the Group and local level. The risk of regulatory change is mitigated by capital held by the Group and its subsidiaries in excess of Group and local regulatory requirements, the Group’s ability to generate significant capital annually through its operational delivery and the availability of compensating actions designed to restore key capital and solvency metrics.
Building stronger and more sustainable communities Through our Group-wide corporate responsibility programmes around the world, we help to build stronger and more sustainable communities, supporting our customers, our colleagues and the environment. This review gives an overview of our activities and progress in 2016. More detailed information is available online at www.prudential.co.uk/corporate-responsibility and in our first environment, social and governance (ESG) report to be published later in 2017.
Asia In Asia, the demand for savings and protection products continues to grow as people seek greater financial security and peace of mind. We continue to broaden our offering to help meet the distinct individual needs of our customers.
Prudential Hong Kong’s new Customer, Digital and Innovation Centre enables the business to embed customer insights into multiple business initiatives, including product, service and technology. The Centre is equipped with state-of-the-art focus group facilities, fully networked to allow for real-time user testing of our digital platforms. These include the myPrudential online portal where customers can manage their insurance policies, the PRUmobile app for on-the-go information and policy access, and the PRUone integrated sales and advisory platform.
There is increasing customer awareness of the impact of lifestyle choices on their well-being in many markets across Asia and 2016 marked Prudential Hong Kong’s first time to offer customers access to an innovative DNA-based nutrigenomic test. The health and protection promotion campaign included access to a nutrigenomic test, ‘myDNA’, offering individual DNA-based insights into how genetics affects an individual’s nutrition needs, dietary sensitivity and well-being. The offer also provided online access to nutrition experts through a mobile app for personalised recommendations. Our customers can personalise their approach to diet and nutrition according to their unique genome in order to achieve their health goals.
Since the re-launch of the site in July 2016, more than 70,000 unique visitors have visited the content on the Center, 55,000 of whom are new visitors to Jackson.com. In addition, the most viewed articles on the site are seeing average viewing times of up to five minutes, showing a sustained level of interest.
Our PruFund franchise provides a unique range of investment fund options for advisers and savers, across the risk spectrum. From ISA and bond, to pension and income drawdown, the range of six different funds continues to flourish, with assets under management reaching £24.7 billion in 2016.
The first week of the 2016 Chairman’s Challenge saw more than 200 employees from Prudential
A number of technology improvements were delivered in 2016, including the introduction of a fully flexible online application process for the popular Prudential ISA product. Additionally, improvements were made to the teleunderwriting service for the Prudential Investment Plan, reducing the amount of time advisers spend on administration and giving them more time with their clients.
Active voting is an integral part of the investment approach, both adding value and protecting our interests as shareholders. The M&G website provides an overview of voting history: www. mandg.com/en/corporate/about-mg/ investment-philosophy/voting-history/
Supporting local communities The inherent long-term social value of our business is complemented by investments in communities in each of the markets in which we operate. We provide support to charitable organisations through both funding and the experience and expertise of our employees.
Our investments in communities are designed to support the communities in which we operate and deepen engagement with colleagues. As such, our community investment programme is linked to our strategy and is focused around four principal areas: — Social inclusion; — Education and life skills; — Disaster preparedness; and
Now a Group-wide programme, ChaChing has been launched in Poland, the US, the UK and Africa. In the US, Jackson plans to distribute Cha-Ching with national educational partners and via social media to increase financial literacy with youth. In addition, partnering with Junior Achievement USA, Jackson plans to distribute a five-week teaching curriculum using the Cha-Ching topics and characters to help students engage with personal finance topics.
In the UK work will continue to roll out the Cha-Ching education website, which provides teachers with financial education resources built around the animated music videos, with supporting lesson plans and teacher’s guidance designed to improve the financial capability of Key Stage 2 pupils. The online educational resource will also support expansion across our African markets.
First Read – developing children’s skills The Prudence Foundation has funded and supported the First Read programme since 2013, partnering with Save the Children to focus on investing in early childhood care and development in Cambodia and the Philippines. First Read is a unique programme that helps parents to develop their children’s numeracy and literacy skills by providing books in the local language or dialect, and encouraging them to read, sing
Learning with Magic Bus in India In�India,�Prudential�UK�&�Europe’s� employees�work�in�partnership�with�Magic� Bus,�which�provides�children�from� marginalised�communities�with� opportunities�for�learning,�leading�and� earning�through�a�sport-focused�activity� curriculum,�mentorship�and�employability� programmes.�This�year�the�business�in� Mumbai�helped�1,826�students�in�rural� areas�take�more�interest�and�gain�more�by� introducing�a�mechanism�for�learning�by� seeing�and�doing�rather�than�just�learning� from�books.
Disaster readiness and relief Regional commitment to disaster preparedness with Safe Steps As�a�life�insurance�and�asset�management� company,�our�core�business�is�the�provision� of�protection,�security�and�risk�mitigation�to� individuals�and�families.�We�focus�on� disaster�relief�and�preparedness�in�our�Asia� markets,�as�Asia�Pacific�is�the�world’s�most� disaster-prone�region.�Prudence� Foundation�is�working�with�NGOs�and� governments�to�help�communities�better� prepare�for�such�disasters�before�they� strike,�as�well�as�providing�support�at�times� of�emergency�response�and�recovery.
Safe�Steps�National�Disasters�was�launched� in�2014,�and�is�a�first-of-its-kind�pan-Asian� public�service�initiative�to�enhance�disaster� preparedness�and�awareness�through�the� dissemination�of�educational�survival�tips� for�natural�disasters.�It�is�a�multi-platform� programme�including�on-air�video� messages,�an�informative�website�and� educational�collateral�that�can�be�shared� among�communities.�Core�to�the� programme�is�a�series�of�60-second� educational�videos�that�advise�individuals� and�households�on�what�they�should�do�
Safe Schools programme Prudence Foundation continues its support of the Safe Schools programme, partnering with Plan International and Save the Children in Cambodia, Indonesia, the Philippines, Thailand and Vietnam. The programme focuses on capacity-building for students, teachers and local community members on disaster preparedness, placing schools at the heart of building a culture of disaster preparedness within communities. The programme trains students and their teachers in key disaster management skills and supporting the organisation of disaster simulations and evacuation drills for students and their community. Since 2013, more than 70,000 students and 18,000 teachers have participated. In 2017, the Prudence Foundation will continue to support this programme and explore further partnerships to increase its scale.
As title sponsor, in 2016 we partnered with three charities – Teach First, Greenhouse Sports and the Invictus Games Foundation – to provide aspirational challenges for 62 young people and injured service personnel tackling Prudential RideLondon for the first time. We provided support including bikes, equipment and training as well as employability and coaching workshops. Over £500,000 was raised as a result of fundraising from Prudential rider places by our charity partners and our employees.
Prudential RideLondon has inspired many to take control of their health and wellbeing. A BBC2 documentary called Fixing Dad featured Geoff Whitington, who was encouraged and supported by his sons to regain his health and reverse his Type 2 diabetes through significant changes to his diet and lifestyle, including taking on the challenge of riding the Prudential RideLondon-Surrey 100. The Fixing Challenge will continue in 2017.
We are developing a new Prudential RideLondon programme for 2017 in partnership with Teach First, which will use the event as a focal point to promote inclusion and help eradicate educational inequality. The new PruGOals programme will have national reach, working with more than 15 schools with an increased focus on well-being and mental health.
Employee fundraising Jackson employees are actively engaged in our commitment to communities by taking part in programmes such as the Jackson National Community Fund Advisory Committee and the employee-nominated matching programme. The Jackson National Community Fund supports charities that help the elderly and children through quarterly grants in communities where Jackson’s four largest offices are located. Jackson’s matching programme offers a two-to-one match on all employee donations made to approved charities. This programme ensures that causes important to employees are given charitable consideration and that Jackson’s support is received by responsible organisations where funding will create a significant impact.
The elderly in the community Prudential UK is a long-standing partner of Age UK, working to make a difference to the lives of the elderly. Building on the successful Planning for Later Life programme the business has launched a new programme – Later Life Links. This is focused on supporting older people in six communities across the UK to become more involved in their communities, through the provision of long-term companionship, advice and practical support.
Apprenticeships in the UK Youth unemployment is a huge social challenge. As one of the most respected brands in the UK, Prudential is taking a major role in helping to shape future job prospects for young people. Over the past three years we have recruited 178 young people to our apprenticeship programme, providing them with important work and
Support for disadvantaged communities M&G continues to care for and enable disadvantaged communities near to its offices and during 2016 more than 200 charities received support either by donation or as a result of employee volunteering. In 2016, M&G held its first City Giving Week, an onsite event which each day showcased and highlighted the services provided by charities that had received support. The Lord Mayor of the City of London attended M&G’s event as part of his initiative to promote the varied charitable activities undertaken by City businesses.
The programme continues to appeal to colleagues, with the number of volunteers signing up increasing year-on-year. From its launch in 2006, when 2,603 employees signed up, volunteer numbers have increased by 208 per cent. Last year, 8,011 colleagues around the world took part, volunteering over 27,000 hours to support 30 projects, benefiting over 92,000 individuals across the world.
In 2016, the Group spent £20 million supporting community activities. The direct cash donations to charitable organisations amounted to £16 million, of which approximately £5 million came from our UK and EU operations, which are principally our UK insurance operation and M&G. The remaining £11 million was contributed to charitable organisations by Jackson National Life Insurance Company, Prudential Corporation Asia and Prudential Africa.
Jackline’s story Prudential Scholarship programme, Kenya Jackline is the sixth of eight siblings. She lives in rural Oloitokitok, and is the first child in her family to go to school, which is something she is very proud of. She was fortunate to attend primary school, as Masai children are normally expected to take on herding and childcare responsibilities, but did not anticipate that it would be possible for her to continue her education, as her mother is the sole provider for the whole family.
Through the Prudential Scholarship programme with the Kenya Education Fund, Jackline now attends St. Clare Girls’ High School, where she has taken a keen interest in civil engineering and wants to continue her studies so that she is able to support her community and country by advancing infrastructure.
We aim to foster a working environment where individuals are empowered and differences recognised. We aspire that over time our senior management better represents the experiences and background of our customers and stakeholders.
We have a strategic, long-term approach to diversity and inclusion at Group level and in each business unit and we invest in targeted activity across 10 priority areas ranging from diversity and inclusionfocused development through support for various affinity groups, including, among others, ethnicity/nationality, gender, LGBT, disability, age, social mobility, parenting and care. Across our businesses, our commitment to diversity and inclusion is supported by initiatives such as reviews of pay and performance management consistency, providing training to staff and engaging with recruitment firms to mitigate unconscious bias, and awareness campaigns to diversify the pool of potential candidates.
As part of our broad diversity and inclusion agenda, we have publicly committed to having at least 30 per cent of women in senior management by the end of 2021 and we have signed the HM Treasury Women in Finance Charter. As an important step in this direction, we aim to achieve 27 per cent female representation in senior management by the end of 2019.
Whole company1 Includes the Chairman, all Directors and GEC members 1 Excludes PCA joint ventures.
We believe in supporting human rights and acting responsibly and with integrity. Our policies are guided by the principles of the UN’s Universal Declaration of Human Rights and the International Labour Organisation’s core labour standards. These are also incorporated into our Group Code of Business Conduct, which sets out the Group values and expected standards of behaviour for all employees, and in our Group Outsourcing and Third Party Supply Policy.
Within our businesses there are many examples of our continuing commitment to talent development. Prudential Corporation Asia develops CEOs with programmes such as cross-company experience, which are continually reviewed, incorporating new thinking and future capabilities as required. In the US, Jackson University provides a highly customisable approach for associates’
personal development and professional learning; and Prudential UK provides a fully differentiated management development offering, distinguishing the requirements of aspiring managers and experienced leaders. M&G Real Estate supports career development through a fund manager job-shadowing programme; and Group Head Office provides innovative programmes designed in partnership with top academic institutions, which offer leadership development and the opportunity to gain valuable experience through relevant business projects.
Some of our businesses hold regular employee open-forums with senior management, conduct yearly engagement surveys or organise away-days to discuss the business, our performance and internal management. Any highlighted issues are then used to improve the way in which we work. In addition, there are informal opportunities to meet senior managers and facilities to network with both peers and senior leaders across functions; and well-being programmes to support sustainable high performance. We also have policies to encourage and support volunteering for charitable causes. The success of our efforts has again been recognised internally and externally.
In addition, our businesses in the UK have a long-standing relationship with the union Unite.
We encourage volunteering through which our employees can support our communities and acquire new skills. See page 67 for further details.
There are recognition initiatives running across our businesses, such as the Prudential Stars awards at Group Head Office, which are made to individuals nominated by their colleagues for outstanding examples of execution, impact and engagement. We also believe in the importance of giving employees the opportunity to benefit from the Group’s success through share ownership, and operate employee share plans for employees in the UK and Asia. This includes PruSharePlus, which enables employees in Asia to share in the longerterm success of the business, and actively encourages share ownership and engagement.
Protecting the environment We carefully monitor our environmental impact and the management of environmental issues is an integral part of managing the total risks faced by our business.
Corporate responsibility review Continued increase was driven by growth in our business and increased data centre activity. When normalised against net lettable floor area, our GHG emissions efficiency metric improved by 7 per cent to 123 kgCO2-e/m2 in 2016 (2015: 132 kgCO2-e/m2) and 12 per cent over the past three years (2013: 139 kgCO2-e/m2) driven through our energy efficiency efforts focusing on the larger properties in the portfolio. This data refers to Scope 1 and 2 only.
We continue to deploy energy management strategies across our business. A new 100 per cent renewable energy contract for electricity purchased for our UK occupied property estate was introduced during the year, replacing an earlier low carbon energy contract. Our US business increased the Energy Star performance score for its Corporate Head Office in Lansing by 80 per cent over the year, placing it in the top 20 per cent of its type in the country energystar.gov/buildings/about-us following an earlier energy efficient re-fit. In Asia, we delivered our first LEED Gold certified refurbishment for our One Island
We maintained our sector positioning in key benchmarks, including the Carbon Disclosure Project, with a B rating in 2016 (level with our peers), and ClimateWise, the insurance sector climate initiative managed by the Cambridge Institute for Sustainability Leadership, maintaining our position of ninth out of 19 participants www.cisl.cam.ac.uk/business-action/ sustainable-finance/climatewise. Our performance in ClimateWise against six core principles is independently audited.
M&G Real Estate forms part of the M&G group of companies, the asset management arm of Prudential plc in the UK and Europe. Its approach to responsible property investment enables it to manage and respond to the growing range of environmental and social issues that can impact property values. It also helps M&G Real Estate to protect and enhance fund and asset performance for its clients. Responsible property investment is integrated within M&G Real Estate’s day-to-day investment practices. Carbon emissions from the investment portfolio of M&G Real Estate have halved over the past four years. It has achieved six Green Stars (2015: four Green Stars) in the 2016 Global Real Estate Sustainability Benchmark survey out of eight participating funds. M&G Real Estate’s progress can be found in its annual Responsible Property Investment report at www.mandg.co.uk/ institutions/realestate/responsibleinvesting /
We expect continued developments on environmental factors in the years ahead, including increasing disclosure of climate-related risks and opportunities for financial companies. The work of the Financial Stability Board in particular could be a major development in the transition to a low-carbon economy, with its guidance on strategy, risk management, metrics and reporting on climate risks www.fsb.org/2016/12/fsb-welcomestask -force-consultation-onrecommendations -for-climate-changedisclosure /
Prudential plc greenhouse gas emissions statement We have compiled our greenhouse gas emissions data in accordance with the Companies Act 2006 (Strategic and Directors’ Reports) Regulations 2013.
We have included full reporting for Scope 1 (direct emissions such as combustion of gas for heating fugitive emissions and emissions from owned vehicles) and Scope 21 (indirect emissions for consumption of electricity, heat or steam) emissions where operational control of the emissions of the sources concerned was demonstrated.
Boundary summary All entities and all facilities under operational control (including those owned) are included.
Total Scope 1 and 2 (tonnes CO2-e) 101,100 108,640 119,653 126,890
Normalised Scope 1, 2 and 3 (kg CO2-e/sq.m) Occupied Estate 142 157 154 157
Note 1 Comparative 2015 data for normalised emissions have been restated due to a methodology change for accounting for floor area. Please refer to the Basis of reporting at www.prudential.co.uk/responsibility/performance/greenhouse-gas-emissions for further detail.
Risk assessment For more information on the risks facing our business see page 50.
Procurement practices in Prudential UK have been successfully accredited with the Chartered Institute of Purchasing and Supply certification, an industry benchmark of recognised good practice. Prudential will publish its Modern Slavery statement later in the year.
Strategic report approval by the Board of Directors The strategic report set out on pages 9 to 73 is approved by the Board of Directors.
Dear Shareholder I am pleased to introduce our 2016 Governance report, in which we update you on our governance of Prudential during the year.
Board operations As Chairman, I have responsibility for ensuring the Board process operates effectively and that we establish an appropriate ethos and culture at Board level, which set the tone from the top around the Group.
Supporting our strategy I also ensure that our governance supports our strategy and the long-term success of Prudential. This year specifically, the Board has overseen major transactions in support of our strategy: the initial public offering of our Indian joint venture, ICICI Prudential Life; commencing the divestment of our Korean life business; the launch of a global risk and portfolio management platform for our asset management businesses; and growing our African business to include Zambia. Every major transaction, including those in the smaller parts of our business such as Africa, is brought to the Board. In each case, management and the Board worked closely together to ensure the right information was provided and key risks were robustly challenged.
Governance We keep our governance structures under constant review to ensure they suit the needs of our business and our stakeholders. This year we have increased the remit of the Nomination and Governance Committee to provide oversight of our material subsidiary boards. In 2015 we identified Prudential Corporation Asia Limited, The Prudential Assurance Company Limited, Jackson National Life Insurance Company (Jackson) and M&G Group Limited as material subsidiaries of our principal business units. Over the first half of 2016, we appointed independent non-executive directors to their boards, including board chairs and chairs of the subsidiary audit and risk committees. To support our new independent directors, we designed a reporting and governance framework. The focus in 2016 was on embedding this framework. Howard Davies, Ann Godbehere and I have established good communication links with our new material subsidiary chairs and material subsidiary risk and audit committee chairs. We continue to see benefits from the greater alignment of the governance within our subsidiary businesses.
Looking forward We have also focused further on the quality of our Environmental, Social and Governance Reporting in 2016 and I am pleased to announce that we will be publishing our first dedicated ESG report later this year. This report provides important information on our approach to managing the business in a sustainable fashion. It explains the actions to support this approach and the benefits we bring to our customers and stakeholders. We firmly believe this information, coupled with stakeholder engagement, improves the quality of the decisions we make.
Finally, I believe that good governance is based on the right level of oversight and challenge. I hope that reading the reports of my Committee Chairs that follow will demonstrate to you the work we have done this year to ensure that oversight and challenge are in place, and, more importantly, the tangible and positive impact it has had on our business. The methodology and results of our 2016 Board evaluation are also set out on page 87.
Mike began his career at the brokerage house Dean Witter, going on to become a managing director at Smith Barney Shearson.
Other appointments Nic is the Chairman of the European Insurance CFO Forum.
Penelope James ACA Group Chief Risk Officer Appointment: September 2015 Age: 47
Relevant skills and experience Penny qualified as a chartered accountant with Coopers & Lybrand Deloitte (now part of PwC) and then joined Zurich Financial Services, where she held a number of senior finance positions over 12 years. Before joining Prudential, Penny was Group Chief Financial Officer of Omega Insurance Holdings (formerly listed on the London Stock Exchange). Penny joined
Relevant skills and experience John spent over 20 years at Hill Samuel & Co, where he worked in every division of the bank, culminating in senior roles in risk, capital markets and treasury of the combined TSB and Hill Samuel Bank. He joined Prudential as Deputy Group Treasurer in 2000 and became Managing Director of Prudential Capital and Group Treasurer in 2001. During his career at Prudential, John has held the offices of Chief Executive of Prudential Capital,
Tony Wilkey Chief Executive, Prudential Corporation Asia Appointment: June 2015 Age: 57
The Hon. Philip Remnant CBE FCA Senior Independent Director Appointment: January 2013 Committees: Audit, Nomination and Governance, Remuneration Age: 62
Sir Howard Davies Appointment: October 2010 Committees: Audit, Nomination and Governance, Risk (Chair) Age: 66
Relevant skills and experience Sir Howard has a wealth of experience in the financial services industry, across the
Civil Service, consultancy, asset management, regulatory and academia. Sir Howard was previously Chairman of the Phoenix Group and an independent director of Morgan Stanley Inc.
Ann Godbehere FCPA FCGA Appointment: August 2007 Committees: Audit (Chair), Nomination and Governance, Risk Age: 61
Relevant skills and experience Ann began her career in 1976 with Sun Life of Canada.
Between 1996 and 2003, she held a number of CFO and CEO posts in different businesses within Swiss Re, including Chief Financial Officer of the Swiss Re Group. Ann also held directorships at Northern Rock, Atrium Underwriting Group Limited and Atrium Underwriters Limited, as well as Arden Holdings Limited.
Other appointments Ann is a non-executive director of British American Tobacco p.l.c., Rio Tinto plc, Rio Tinto Limited, UBS Group AG and UBS AG.
Kaikhushru Nargolwala FCA Appointment: January 2012 Committees: Remuneration, Risk Age: 66
Other appointments Anthony is a non-executive director of Jardine Matheson Holdings and a number of other Jardine Matheson group companies. Other directorships include Schindler Holding Limited, Vitasoy International Holdings Limited and Shui On
Relevant skills and experience Alice began her career as a qualified accountant at Ernst & Young. She joined the Financial Accounting Standards Board as a manager in 1991, overseeing the issuance of several significant insurance accounting standards. From 1993, she led teams of analysts specialising in propertycasualty insurance as a Managing Director at CIBS Oppenheimer, PaineWebber (now UBS) and Morgan
Other appointments Alice is a non-executive director of Bank of America Merrill Lynch International. She is also CEO and Chairman of WebTuner Corp.
— Responsible for making recommendations to the Nomination and Governance Committee for the appointment of Directors, and ensuring appropriate induction and ongoing development of Board members
— Paul focuses on promoting a culture of openness and debate among Directors, helping to build and maintain constructive relationships between the Executive and Non-executive Directors. When chairing Board meetings, Paul ensures that all views are heard and that the Nonexecutive Directors have an opportunity to challenge management constructively
— Externally, Paul has a regular programme of meetings with major shareholders throughout the year
Mike Wells — Responsible for the operational management of the Group, on behalf of the Board
— Establishing processes to ensure operations are compliant with regulatory requirements
— Leading the Non-executive Directors in conducting the Chairman’s annual evaluation
— In 2016, Philip offered meetings to Prudential’s key shareholders to provide them with an additional channel of communication
— Contributing to the development of proposals on Group strategy, offering input based on individual and collective experience
— Responsible for scrutinising the performance of management in meeting agreed goals and objectives
— The Non-executive Directors have engaged throughout the year with the Executive Directors and management, at Board and Committee meetings, as part of site visits, through training sessions and on an informal basis
— They contributed to the development of strategic options through one-to-one meetings with the Group Strategy team and participated in the annual Strategy Away Day
Board decision making — The Board is collectively responsible: – To shareholders for the long-term success of the Company and, in particular, for setting the Group’s strategy and risk appetite; – For providing leadership within a framework of effective controls; and
— When making decisions, the Board has due regard to the balance of interests between shareholders, employees, customers and community.
— The Group has established and regularly reviews a governance framework designed to promote appropriate behaviours across the Group to ensure prudent management and protection of the interests of shareholders, customers and other key stakeholders.
— As part of the governance framework, the Board has established a control framework to identify significant risks and apply appropriate measures to manage and mitigate them (described more fully on pages 90 and 91).
— The framework sets out the behaviours expected of the Group’s employees and requires all business units to seek delegated authority from the Board to carry out actions exceeding pre-determined limits or which could have a material effect on the Group.
— Specific key decisions have been reserved to the Board for decision. These include strategic decisions, determination of interim dividends and recommendation of final dividends to shareholders, approval of major transactions, approval of key financial reporting, approval of the overall risk appetite and capital and liquidity positions, and responsibility for the effectiveness of the system of internal control and risk management.
Paul Manduca — Ensures that the Board retains an appropriate balance of skills to support the strategic objectives of the Group
— Monitors the effectiveness and objectivity of internal and external auditors
— Approves the Group’s risk management framework and monitors its effectiveness
— Supports the Board and management in embedding and maintaining a supportive culture in relation to the management of risk
— Reviews the design and development of share plans requiring shareholder approval and approves and assesses performance targets where applicable
Key areas of focus – how the Board spent its time The Board met on 10 occasions during the year, which included meetings in Kuala Lumpur, Malaysia and Lansing, USA. At the overseas meetings, additional sessions were held outside of the formal Board meetings, to allow the Board to focus on the regional business operations and to spend time meeting local senior management. The Board also held a separate strategy event over two days during the year.
At a number of meetings, the Board considered, and where appropriate approved, major projects. These included Prudential Africa’s opening in Zambia, with its acquisition of Professional Life Assurance; the listing of ICICI Prudential Life Insurance Company Limited, Prudential’s Indian joint venture with ICICI Bank; commencement of the sale of Prudential’s life business in Korea and the implementation of a global risk and portfolio management platform for the Group’s asset management businesses, working with BlackRock.
Chairman and Chairs of the Group Audit and Risk Committees would need to be implemented.
Reviews of certain past transactions were undertaken by the Risk Committee and the outcome was considered by the Board during its strategy discussions in June.
The Board also discussed a full report of the Group’s past actions in Africa which allowed them to confirm the rationale behind the Group’s decision to invest in that region and the acquisitions made to date.
During the year, updates were issued to senior staff explaining the rationale for Board paper content guidelines, including a reminder of best practices and timelines. The review process for papers is designed to ensure all relevant aspects of Directors’ duties are addressed and consideration is given to risk, legal, regulatory and other appropriate stakeholder aspects.
Products and customers – The Board continued holding in-depth focus sessions on products and customers of the Group, primarily through Board visits to the business units. In 2016, these focus sessions took place when the Board visited its overseas operations, as more fully described below.
The review confirmed that the Board continued to operate effectively during the year and no major areas requiring improvement were highlighted.
Executive Directors are subject to regular review and the Group Chief Executive individually appraised the performance of each of the Executive Directors as part of the annual Group-wide performance evaluation of all staff.
Board agenda – The Board agreed to continue to ensure time spent at its meetings reflected the Group’s strategic and operational priorities. One of the primary ways to achieve constructive debate is to ensure pre-Board preparation is of a very high standard with papers continuing to be delivered on time with succinctly presented facts creating, where needed, a clear decision path. The Board also agreed to build on the work done in 2016 to further increase the Board’s focus on products and customers.
Senior employee focus – The Board evaluation noted the number of successful internal promotions over 2015 and 2016, and that management’s focus was now on rebuilding strength in the senior management teams around the Group below GEC level. In 2017, the Board will ensure it remains properly updated in this area and that it continues to have opportunities to meet senior management across all the Group’s businesses.
The Chairman is also responsible for ensuring that all Directors update their skills, knowledge and familiarity with the Group. Directors regularly receive reports on the Group’s businesses and the regulatory and industry-specific environments in which it operates. All Directors have the opportunity to discuss their development needs as part of the annual Board effectiveness review and Directors are asked to provide a record of training received externally on an annual basis.
– Overview of life insurance industry and comparative position in the marketplace
Lansing, USA — Regulatory update – impact of the Department of Labor’s fiduciary rule on Jackson and the industry
Committee members received updates at Committee meetings on areas of particular relevance to the respective Committees and were kept updated on ongoing developments in regulations, as well as the impact these have on the Group. The Risk Committee received in-depth information on a number of business areas and products in 2016, focusing on the particular risks arising and how these are managed. Some of those topics were also shared with the Audit Committee to ensure it was appropriately briefed to assess any impact on financial reporting and internal control. In 2016, the Audit Committee and Risk Committee held a joint session in which they were provided with an update on the impact of Solvency II on the 2015 results.
Shareholder engagement As a major institutional investor, the Board recognises the importance of maintaining an appropriate level of two-way communication with shareholders.
The Company holds an ongoing programme of regular contact with major shareholders, conducted by the Chairman, to discuss their views on the Company’s governance. The Senior Independent Director offers meetings to major shareholders as needed and other Non-executive Directors are available to meet with major shareholders on request.
Terms of appointment — Non-executive Directors are appointed for an initial term of three years.
— After six years, Non-executive Directors may be appointed for a further year, up to a maximum of three years in total. Reappointment is subject to rigorous review as well as re-election by shareholders at the Annual General Meeting.
— The Directors’ remuneration report sets out the terms of the Non-executive Directors’ letters of appointment on page 133.
— The independence of the Non-executive Directors is determined by reference to the UK Code and HK Listing Rules. Prudential is required to affirm annually the independence of all Non-executive Directors under the HK Listing Rules and the independence of its Audit Committee members under Sarbanes-Oxley legislation.
— For the purposes of the UK Code, throughout the year, all Non-executive Directors were considered by the Board to be independent in character and judgement and to have met the criteria for independence as set out in the UK Code.
— The Board has determined that Ann Godbehere and David Law qualify as audit committee financial experts under the requirements of Form 20-F and that both Ms Godbehere and Mr Law are independent within the meaning of Rule 10A-3 under the Exchange Act.
— The Board does not consider that Mr Law’s previous position at PwC affects his status as an independent Director for the purposes of the UK Code or in relation to his membership of the Audit Committee, under applicable Sarbanes-Oxley legislation.
— Subject to the provisions of the Companies Act 2006, the Company’s Articles permit the Directors and officers of the Company to be indemnified in respect of liabilities incurred as a result of their office.
— Qualifying third party indemnity provisions are also available for the benefit of the Directors of the Company and certain other such persons, including certain directors of other companies within the Group.
— Directors have the right to seek independent professional advice at the Group’s expense.
Significant contracts — At no time during the year did any Director hold a material interest in any contract of significance with the Company or any subsidiary undertaking.
Internal control The Group Governance Manual (the Manual) sets out the delegated authorities and establishes the requirements for subsidiaries to seek approvals from or report to Group Head Office. Group-wide standards are established through policies and other governance arrangements, which are also included in the Manual.
Risk management A key component of the Manual is the Group Risk Framework, which requires all business units to establish processes for identifying, evaluating and managing the risks facing the business.
— Takes and manages risk exposures in accordance with the risk appetite, mandate and limits set by the Board; — Identifies and reports the risks that the Group is exposed to, and those that are emerging; — Promptly escalates any limit breaches or any violations of risk management policies, mandates or instructions; — Identifies and promptly escalates significant emerging risk issues; and
The three lines of defence model is adopted at the Group level as follows: Key Board-level committees Executive personnel Exec/Management committees GHO functions Direct reporting line Regular communication and escalation
As part of the evaluation, the Chief Executive and Chief Financial Officer of each business unit, including Group Head Office, certify compliance with the Group’s governance policies and the risk management and internal control requirements. The Group Risk function facilitates a review of the matters identified by this certification process. This includes the assessment of any risk and control issues reported during the year, risk and control matters identified and reported by the other Group oversight functions and the findings from the reviews undertaken by Group-wide Internal Audit, which carries out risk-based audit plans across the Group. Issues arising from any external regulatory engagement are also taken into account.
Effectiveness of controls In accordance with provision C.2.3 of the UK Corporate Governance Code and provision C.2.1 of the HK Corporate Governance Code, the Board reviewed the effectiveness and performance of the system of risk management and internal control during 2016. This review covered all material controls, including financial, operational and compliance controls, risk management systems and the adequacy of the resources, qualifications and experience of staff of the Group’s accounting, internal audit and financial reporting functions. The review identified a number of areas for improvement and the necessary actions have been or are being taken.
Each Committee Chairman provides an update to the Board of each Committee meeting, supported by a short written summary of the Committee business considered.
Dear Shareholder As Chairman of the Nomination and Governance Committee, I am pleased to report on the Committee’s activities and areas of focus during 2016.
Our work on succession planning is based on an assessment of skills needed to fulfil our strategy and a rolling programme of progressively refreshing the skills on our Board. During 2016 and to date, we particularly focused on skills required to replace Ann’s expertise in the context of the overall balance of skills on the Board and the main markets in which we operate, now and in the medium term. We also reviewed the membership of the Board’s principal committees to ensure all committees continue to be appropriately composed, taking into account the time commitment required of each Nonexecutive Director role.
The Committee expanded its remit in 2016, following the appointment of independent non-executive directors to the boards of our material subsidiaries. During the year, we approved the appointment of independent chairs to the boards of these companies. As part of our new governance duties, we reviewed the governance framework for our material subsidiaries and terms of reference for their boards and chairs. Going forward, the Committee will review the performance of the nonexecutive directors of the material subsidiaries, starting in early 2017.
As Chairman of the Committee, I have responsibility for ensuring the Committee operates effectively. To ensure we do so and provide constructive challenge to management, I encourage open debate and contributions from all Committee members. An annual review of our effectiveness was carried out as part of the Board evaluation, described in more detail on page 87. The Committee was found to be functioning effectively.
During 2016, the Committee considered information about potential candidates who might be appointed to the Board as Non-executive Directors to keep the Board composition progressively refreshed in the future, assisted by Russell Reynolds as search consultant.
The Committee considered the term of appointment of Ann Godbehere, who has been a Nonexecutive Director since 2007 and Chairman of the Audit Committee since 2010. In line with corporate governance guidelines, Ms Godbehere does not intend to stand for re-election in 2017.
Philip Remnant completed his first term of three years following his initial appointment by shareholders at the 2013 Annual General Meeting. Following performance evaluation by the Committee and re-election by shareholders in 2016, he was invited to serve a further term of three years, expiring at the conclusion of the 2019 Annual General Meeting.
New external positions were reviewed during the year as they arose.
The Board considers that the procedure set out above for dealing with conflicts of interests has operated effectively.
In February, the Committee expanded its remit to include oversight of the material subsidiary governance and independent directors.
We maintained our focus during the year on monitoring the integrity of financial reporting and ensuring suitable accounting policies were adopted and applied consistently. We reviewed management’s annual process for setting assumptions underpinning the Group’s European Embedded Value (EEV) results and IFRS insurance liabilities and requested additional analysis and information where we felt this was required. Clarity of the Group’s external disclosures is an important consideration of the Committee and we assessed whether the financial report for 2016 was fair, balanced and understandable before making a recommendation to the Board. Additional consideration was given to the Group’s disclosure of alternative performance measures in light of new regulatory guidance and the Committee reviewed and agreed the resulting refinements to the Group’s disclosures. We also reviewed the Group’s external Solvency II disclosures following the formal introduction of the Solvency II framework for European insurers at the start of 2016.
We also refined our governance processes during the year to enhance the information the Committee receives on the activities of our business unit audit committees and to ensure key issues are escalated appropriately. I maintain regular contact with the audit committee chairs of our material subsidiaries and report to the Committee on the issues we discuss.
This will be my last report as Audit Committee Chairman and Non-executive Director. Having served nine years on the Board, I will not offer myself for re-election at the 2017 Annual General Meeting. It has been my pleasure to serve as chairman of Prudential’s Audit Committee and I am confident that I leave the Committee functioning well with a clear mandate of its priorities for the future. I would like to take this opportunity to thank my fellow committee members for their diligence and to thank everyone on the Prudential team who have supported me and the Committee over the years with such dedication and professionalism.
Committee members — Ann Godbehere (Chairman) — Howard Davies — Alistair Johnston (until May 2016) — David Law — Philip Remnant — Alice Schroeder
— Director of Group Compliance — Director of Group-wide Internal Audit
One of the Committee’s key responsibilities is to monitor the integrity of the financial statements.
The Committee assessed whether appropriate accounting policies had been adopted throughout the accounting period and whether management had made appropriate estimates and judgements over the recognition, measurement and presentation of the financial results. There were no new or altered accounting standards in 2016 that had a material effect on the Group’s financial statements. The Committee also reviewed the accounting for the planned disposal of the Korea life business, together with the presentation in the financial statements.
2016 saw the formal introduction of the Solvency II framework for European insurers. The Committee reviewed the Group’s external disclosures of its Solvency II position, together with the consistency of assumptions with those used for IFRS and EEV reporting where relevant. In addition, given the adoption of Solvency II as the local regulatory requirement for the UK business, it reviewed the impact of the change in local capital regime on the EEV results for the UK insurance operations.
The Committee also received information on the nature of goodwill and intangible asset values and the carrying value of investments in the Group’s balance sheet. It considered what factors might give rise to an impairment of the Group’s intangibles and whether those factors had arisen in the period. The Committee was satisfied that there was no impairment of the Group’s intangibles at 31 December 2016. Following the UK referendum in June, where the majority voted in favour of leaving the European Union, and the resulting suspension of trading by some property funds, the Committee reviewed the Group’s valuation basis for property investments and property funds at 30 June. The Committee satisfied itself that these and other investments were valued appropriately.
The Committee considered various analyses from management regarding Group and subsidiary capital and liquidity prior to recommending to the Board that it could conclude that the financial statements should continue to be prepared on the going-concern basis and the disclosures on the Group’s longer-term viability were both reasonable and appropriate. The Committee reflected on how the viability statement could be enhanced to give more insight on the conclusions reached and updates were made accordingly.
As part of its assessment of the description of performance within the Annual Report, the Committee considered judgemental aspects of the Group’s reporting across the Group’s IFRS and EEV metrics. This assessment included a review to ensure that the allocation of items between operating and non-operating profit was in accordance with the Group’s accounting policy. The Committee considered the impact of equity and interest rate movements on the IFRS results of the Group’s US business and after discussion, the Committee was satisfied that the presentation and disclosure of such impacts was appropriate and consistent with prior periods.
The Audit Committee also considered judgemental matters regarding provisions for certain open tax items including tax matters in litigation. The Committee received information on the Group’s annual risk rating meeting with HM Revenue & Customs. The Committee reviewed the Group’s preparations for new country-by-country reporting disclosure requirements to tax authorities, and the Group’s preparations for public disclosure of the Group’s tax strategy. The Committee was satisfied that management’s approach was reasonable in these areas.
External audit, review of effectiveness, non-audit services and auditor reappointment External audit effectiveness
The separate internal evaluation of the auditor was conducted using a questionnaire which was circulated to the Committee, the Chief Financial Officer and the Group’s senior financial leadership for completion. In total, 89 people provided input on the performance of the auditor.
The feedback provided was reviewed and compiled into a report for the Committee which covered areas such as the knowledge and expertise of the partners and team members, their understanding of the Group, the resourcing applied to the audit and continuity of the team, liaison with Group-wide Internal Audit and approach to resolution of issues, as well as factors such as their coordination across the Group’s multiple jurisdictions and quality of their written and oral communication. The degree of challenge and robustness of approach to the audit were key components of the evaluation.
In addition to the usual auditor effectiveness process, early in 2016 the Committee also considered KPMG’s response to a report issued by the Financial Reporting Council’s Audit Quality Review team following inspection of KPMG’s 2014 audit. The Committee discussed the actions undertaken by KPMG as part of their 2015 audit to address the matters raised. It agreed that any identified areas for further improvement had been addressed or had appropriate action plans in place.
— Be put in the role of advocate for the Group.
These revisions build on the previous year’s updates, where amendments to the Policy were made to ensure the schedule of prohibited non-audit services was in line with the EU reforms referenced above. These changes were effective throughout 2016.
A breakdown of the fees paid to KPMG can be found in Note B3.4 to the financial statements on page 193.
Audit tender The external audit was last put out to competitive re-tender in 1999 when the present auditor, KPMG, was appointed. Since 2005, the Committee has annually considered the need to re-tender the external audit service and it again considered this in May 2016, concluding that there was nothing in the performance of the auditor which required such a tender.
The Committee acknowledges the provisions contained in the UK Code in respect of audit tendering, along with European rules on mandatory audit rotation and audit tendering. In conformance with these requirements, the Company will be required to change audit firm no later than for the 2023 financial year end. The Committee also recognises that the industry is in a period of unprecedented change with the IASB expecting to issue a new insurance accounting standard in 2017, for implementation in 2021. The Committee currently believes any change of auditor should be scheduled to limit operational disruption during such a period of change and, as a consequence, is not currently planning to re-tender the audit before the adoption of IFRS 17. This remains subject to the Committee’s normal annual review.
The Committee is supported by the work carried out by the material subsidiary and other business unit audit committees and annually reviews the effectiveness of these committees in meeting their defined terms of reference. These audit committees provide oversight of the respective business units. During the year, membership of the committees for all material subsidiaries has been changed to comprise solely of independent non-executive directors. The minutes of all business unit audit committees were provided to the Committee and their meetings were attended by the external auditor, as well as senior management from the business unit (including the Business Unit Chief Executive, heads of Finance, Risk, Compliance and GwIA) and from Group Head Office. In addition, the Committee chairman meets in person or telephonically at least quarterly with the chairs of each of the material subsidiary audit committees.
The Committee’s assessment of these committees was supported by local teams from GwIA and considered whether each of the committees fulfilled the responsibilities documented in their terms of reference. Attendance rates by audit committee members and evidence of the audit committees’ coverage of key business unit issues, as well as the appropriate escalation of concerns to the Committee, formed part of the criteria used for the evaluation.
An external review of the Group’s anti-bribery and corruption programme was undertaken this year and the Committee noted the recommendations being taken forward by management.
Whistleblowing The Committee noted the launch of an enhanced, Group-wide whistleblowing programme (‘Speak Out’), reflecting UK regulatory changes and the Group’s geographic expansion. The programme captures and comprehensively records matters raised through the Group’s Confidential Reporting process. Throughout the year, the Committee has continued to receive regular updates on such matters and the actions taken to address them.
The role of the whistleblowing champion, for the purpose of the Senior Insurance Managers Regime, will be carried out by the chair of the UK business unit risk committee. At Group level, the Chair of the Audit Committee remains responsible for oversight of whistleblowing activities across the whole of the Group.
The Board’s statement regarding effectiveness of these systems can be found on page 91.
Committee effectiveness A review of the Committee’s activities was conducted against applicable regulation and codes of conduct. The results of this assessment were provided to the Committee alongside the outcome of the part of the annual Board evaluation relating to the Committee.
The committee met on eight occasions during the year. We work closely with the Audit Committee to ensure both Committees are updated on matters which impact on their responsibilities. Where a matter requires input from both Committees, joint meetings are held with the Audit Committee. In 2016, one joint meeting with the Audit Committee took place to discuss the Solvency II capital position as at 31 December 2015 and associated governance processes.
During 2016, we reviewed the Group’s risk policies and updated the Group’s risk appetite limits to reflect changes in the Group’s risk profile and the evolving regulatory and macroeconomic environments. We also reviewed the principal risks facing the Group and received regular updates on these through the course of the year. We receive regular reports from the Chief Risk Officers of our material subsidiaries.
During 2016, we oversaw the work required as a result of the Group’s continuing designation as a Global Systemically Important Insurer, including the development of the Systemic Risk Mitigation Plan, the Liquidity Risk Mitigation Plan and the Recovery Plan. We also considered the methodology underpinning and validation of our Solvency II internal model, oversaw the delivery of the Group’s major Model Change application to the PRA, and risks arising from the Solvency II regime.
We provided oversight of the Group’s planning for, and response to, the results in the Brexit referendum and US presidential election that have driven increased uncertainty in markets and the macroeconomic environment. We reviewed in depth the risk arising from our business, including examining the hedging programme in Jackson, and persistency and policyholder behaviour risks across the Group. Other areas of focus in 2016 included reviewing our cyber defence resilience and defence strategy, and reviewing the effectiveness of the risk management functions across the Group. We commissioned a number of ‘deep dive’ reviews to support these areas, and monitored the implementation of recommendations arising.
We also refined our governance processes during the year to enhance the information the Committee receives on the activities of our business unit risk committees and ensure key issues are escalated appropriately. I maintain regular contact with the risk committee chairs of our material subsidiaries and report to the Committee on issues we discuss.
Looking forward into 2017, the Committee will remain focused on monitoring the Group’s principal risks and those posed by regulatory developments and macroeconomic conditions. We approved the 2017 plans for the Risk function, and will continue to adapt our plan of work to respond to any changes in the business environment or the Group’s strategy.
How the Committee spent its time during 2016 The table below provides an overview of how the Committee spent its time in 2016.
Global Systemically Important Insurer: Liquidity Risk Management Plan, Systemic Risk Management Plan and Recovery Plan
Risk appetite As part of the Group’s business plan, risk appetite limits were reviewed and updated. The primary driver of the changes was the increased macroeconomic uncertainty and market volatility, while regulatory and business change continued.
The Committee also agreed the characteristics of an effective risk function and conducted its first annual review of risk effectiveness in May.
The Committee considered the Own Risk and Solvency Assessment report based on the outcomes of the Group’s business plan, the results of the Group’s regular stress and scenario testing, and the current and projected risk and solvency positions prior to its approval by the Board.
The approval of the Solvency II Internal Model formalised the Group’s Model change process, which records, evaluates and reports changes to management and the regulator. The Major Model Change application was closely overseen by the Risk Committee throughout 2016 and approved before submission to the regulator.
Solvency II results and associated governance processes were considered in a separate meeting held jointly with the Audit Committee.
Reverse stress testing Stress and scenario testing is a key risk measurement and management tool for the Group. The Reverse Stress Test exercise was carried out to confirm the Group’s position as being significantly resilient to certain business failure scenarios. The report related to the Group’s year end 2016 position and was submitted to the PRA.
Compliance reporting The Committee received reporting on key compliance risks and mitigation activity, including customer risk, conflicts of interest, financial crime and the implementation of the Senior Insurance Managers Regime.
The Committee also reviewed and approved a number of regulatory compliance risk-related policies.
Financial reporting The Directors have a duty to report to shareholders on the performance and financial position of the Group and are responsible for preparing the financial statements on pages 160 to 318 and the supplementary information on pages 324 to 361. It is the responsibility of the auditor to form independent opinions, based on its audit of the financial statements and its audit of the EEV basis supplementary information, and to report its opinions to the Company’s shareholders and to the Company. Its opinions are given on pages 319 to 322 and page 362.
Company law requires the Directors to prepare financial statements for each financial year that give a true and fair view of the financial affairs of the Company and of the Group. The criteria applied in the preparation of the financial statements are set out in the statement of Directors’ responsibilities on page 318 and page 361.
The Strategic report provides, on pages 47 and 48, a description of the Group’s capital position, financing and liquidity. The risks facing the Group’s business and how these are managed are discussed in the audited sections of the Group Chief Risk Officer’s report on pages 50 to 60.
The UK Code can be viewed on the FRC’s website and the HK Code is available on the website of the HK Stock Exchange.
US regulation and legislation As a result of its listing on the New York Stock Exchange, the Company is required to comply with the relevant provisions of the Sarbanes-Oxley Act 2002 as they apply to foreign private issuers and has adopted procedures to ensure such compliance.
Directors in office during the year Board of Directors 77 to 81
Significant agreements impacted by a change of control Governance report 107
Future developments of the business of the Company Group Chief Executive’s report 4 to 7
Post-balance sheet events Note D3 of the Notes on the Group financial statements 283
Rules governing changes to the Articles of Association Shareholder information 402
Changes in borrowings Strategic report and Note C6 of the Notes on the Group financial statements.
Remuneration Committee 112 Our Executive Directors’ remuneration at a glance 114 Summary of the current Directors’ remuneration policy 118 Annual report on remuneration 135 New Directors’ remuneration policy 153 Supplementary information
Reviewing the Directors’ remuneration policy Ahead of the renewal of the Directors’ remuneration policy at the AGM in 2017, the Committee very carefully considered and debated a range of potential remuneration models. The Committee concluded that the current model continues to connect remuneration with the achievement of the Group’s ambitious goals to deliver further profitable growth in the coming years. On this basis, the Committee decided to retain the current remuneration model while making a number of improvements to ensure that it continues to be aligned with the Group’s remuneration principles, business priorities and evolving stakeholder expectations.
In a similar spirit of simplification, the Chief Executive, M&G will receive long-term incentive awards under a single incentive plan (the Prudential Long Term Incentive Plan, PLTIP) from 2017. In the past, the role holder has participated in two long-term incentive arrangements. The face value of the awards will remain unchanged.
The Committee continues to be mindful of its scope to use discretion to adjust bonus payments and/or PLTIP vesting levels if it is not satisfied that the underlying financial performance of the Company during the relevant performance periods justifies the payments arithmetically suggested by the achievement of the performance conditions.
Strengthen the connection between executives and other shareholders The Committee has decided to introduce a two-year holding period for PLTIP awards made in 2017 and subsequent years. This holding period will apply after the end of the three-year performance period, giving a five-year time horizon for these awards.
— Other Executive Directors will be asked to own shares worth at least 250 per cent of base salary (200 per cent at present).
Rewarding 2016 performance Prudential’s executive remuneration arrangements reward the achievement of Group, business and personal targets, provided that this performance is delivered within the Company’s risk framework and appetites, and that the conduct expectations of Prudential, our regulators and other stakeholders are met.
In rewarding performance, the Committee scrutinises the proposed bonus and LTIP performance targets, which are based on the business plans agreed by the Board, to ensure they are sufficiently challenging, and the Committee sets stretching performance ranges for each of the financial performance measures. The Committee believes that there is a high degree of stretch in both the business plans and the target ranges when factors such as the external economic, political and regulatory environment, across the Group’s businesses and geographies, are taken into account.
As set out in the Business review section earlier in this annual report, the Group delivered strong financial performance in 2016, notwithstanding the significant changes which took place in the markets in which it operates.
Performance in 2016 built on the strong results achieved in recent years, despite the external challenges faced by the Group during this time. Based on total shareholder return (TSR) and strong cumulative IFRS operating profit performance over the performance period, the Committee determined that between 41.7 and 70.8 per cent of the PLTIP awards made to Executive Directors in 2014 would vest (depending on the business unit). These
Anthony Nightingale, CMG SBS JP Chairman of the Remuneration Committee awards will be released to participants in April 2017.
As you will be aware, there have been three changes to Prudential’s team of Executive Directors during 2016. The remuneration decisions arising from these changes were disclosed in stock exchange and website announcements when they took place. Further information can be found in the Recruitment arrangements and Payments to past Directors sections of this report.
I trust that you will find this report a clear account of the way in which the Committee has implemented the Directors’ remuneration policy during 2016 and of the Committee’s proposed new Directors’ remuneration policy.
CAGR (excluding Korea and UK bulk annuity new business profits): +14%
Above stretch level EEV new business profit accounted for 5 per cent of Group financial bonus targets
Notes 1 As previously reported and includes the contribution from the Korea Life business for all years prior to 2016. 2 As previously reported and includes the contribution from the Korea Life business and UK bulk annuity new business profits for all years prior to 2016.
Our remuneration strategy and principles During 2016, our remuneration strategy remained unchanged from that previously approved by shareholders: Our current remuneration architecture
To attract and retain the high calibre executives required to lead and develop the Group
To reward executives for delivering our business plans and generating sustainable growth and returns for shareholders
Significant share ownership guidelines for all Executive Directors as follows: — 350% of salary for the Group Chief Executive; and — 200% of salary for other Executive Directors.
Notes 1 The Chief Executive, NABU also receives a 10% share of the Jackson bonus pool 2 The Chief Executive, M&G retains separate bonus and long-term incentive arrangements
Financial and personal/ functional objectives set with reference to business plans approved by the Board.
Aligned with long-term business strategy and delivery of shareholder value, with vesting subject to: — Relative TSR; and — Group or business unit IFRS profit.
What performance means for Executive Directors’ pay At Prudential, remuneration packages are designed to ensure a strong alignment between pay and performance. As you can see from the charts on page 111, sustained growth across all of our key performance metrics has delivered substantial value to our shareholders. This has been reflected in both the annual bonuses paid and the release of long-term incentive awards, as set out in the Annual report on remuneration.
In particular, the long-term incentives awarded to Executive Directors in 2014 had stretching performance conditions attached to vesting and were denominated in shares or ADRs. The value generated for shareholders through share price growth and dividends paid over the last three years is therefore reflected in the value of the LTIP releases.
The value of these performance-related elements of remuneration are added to the fixed packages provided to Executive Directors to calculate the 2016 ‘single figure’ of total remuneration. The total 2016 ‘single figure’ for the Group Chief Executive is lower than the total 2015 ‘single figure’, despite continuing strong business performance. This is chiefly a result of a lower level of vesting of the 2014 PLTIP award. Mike Wells’s 2016 ‘single figure’ is 30 per cent less than his 2015 ‘single figure’, notwithstanding his exceptional leadership and personal performance. The values for the current Executive Directors who were Directors during the year are outlined in the table below: Fixed pay Performance related
Barry Stowe Chairman & CEO, NABU3 £820,000 £251,000 £5,229,000 £1,168,000 – £7,468,000 £6,763,000 Mike Wells Group Chief Executive £1,081,000 £1,143,000 £2,151,000 £2,520,000 – £6,895,000 £9,894,000 Tony Wilkey Chief Executive, PCA4 £845,000 £1,041,000 £1,440,000 £918,000 – £4,244,000 £3,289,000
Notes 1 John Foley was appointed to the Board on 19 January 2016. The remuneration above was paid in respect of his service as an Executive Director, other than the LTIP releases which related to his previous role.
Notes 1 The bonus opportunity for the Chief Executive, M&G remains the lower of 0.75 per cent of M&G’s IFRS profit or six times salary. The Committee determined that Anne Richards should receive a 2017 PLTIP award with a face value of 450% of base salary, consistent with the combined face value of her previous LTI awards under the PLTIP (150% of salary) and M&G Executive LTIP (300% of salary). All future awards will be made under the PLTIP.
The pages that follow present a summary of the current Directors’ remuneration policy. The complete policy can be found on our website at: www.prudential.co.uk/investors/governance-and-policies/directors-remuneration-policy
Salary The Committee reviews salaries annually, considering factors such as: — Salary increases for all employees; — The performance and experience of the executive; — Group or business unit financial performance; — Internal relativities; and
Market data is also reviewed so that salaries remain in a competitive range relative to each Executive Director’s local market.
Benefits Executive Directors are offered benefits which reflect their individual circumstances and are competitive within their local market, including: — Health and wellness benefits; — Protection and security benefits; — Transport benefits; — Family and education benefits; — All employee share plans and savings plans; and
The financial measures used for the annual bonus will typically include profit, cash and capital adequacy. Jackson’s profitability and other key financial measures determine the value of the Jackson Senior Management Bonus Pool.
Executive Directors are required to defer a percentage (currently 40 per cent) of their total annual bonus into Prudential shares for three years. The release of awards is not subject to any further performance conditions.
The Committee has the authority to apply a malus adjustment to all, or a portion of, an outstanding deferred award in specific circumstances. From 2015 and future awards, the Committee also has the power to recover all, or a portion of, amounts already paid in specific circumstances and within a defined time frame (clawback).
The Chief Executive, M&G currently receives awards under this plan. The incumbent receives an annual award of phantom shares each with a notional starting share price of £1. The phantom share price at vesting is currently determined by M&G’s profitability, with profit and investment performance adjustments, over the three-year performance period. Awards are settled in cash.
Executives have five years from the implementation of these increased guidelines (or from the date of their appointment, if later) to build this level of ownership.
The full policy sets out the Committee’s powers in respect of Executive Directors joining or leaving the Board, where a change in performance conditions is appropriate or in the case of corporate transactions (such as a takeover, merger or rights issue). The policy also describes legacy long-term incentive plans under which some Executive Directors continue to hold awards.
Travel and expenses for Non-executive Directors are incurred in the normal course of business, for example, in relation to attendance at Board and Committee meetings. The costs associated with these are all met by the Company.
It is expected that Non-executive Directors will hold shares with a value equivalent to one times the annual basic fee (excluding additional fees for chairmanship and membership of any committees).
Non-executive Directors are expected to attain this level of share ownership within three years of their appointment.
The Chairman may be offered benefits including: — Health and wellness benefits; — Protection and security benefits; — Transport benefits; and
In setting the Directors’ remuneration policy, the Committee considers a range of factors including: Conditions elsewhere in the Group Across the Group, remuneration is reviewed regularly with the intention that all employees are paid appropriately in the context of their local market and given their individual skills, experience and performance. Each business unit’s salary increase budget is set with reference to local market conditions. The Remuneration Committee considers salary increase budgets in each business unit when determining the salaries of Executive Directors.
In 2016, the Committee met six times. Key activities at each meeting are shown in the table below: Meeting Key activities
September 2016 Review the dilution levels resulting from the Company’s share plans; review proposed new Directors’ remuneration architecture and policy; review proposed 2017 remuneration arrangements ahead of consultation with shareholders; approve the implementation of the remuneration requirements of Solvency II and approve the Remuneration Policy Statement; and review the Remuneration Committee’s terms of reference.
December 2016 Review the level of participation in the Company’s all-employee share plans; approve Group Executive Committee members’ 2017 salaries and incentive opportunities; consider the annual bonus and long-term incentive measures and targets to be used in 2017; review an initial draft of the 2016 Directors’ remuneration report; approve the Group Remuneration Policy; and approve the Committee’s 2017 work plan.
Individuals are never present when their own remuneration is discussed and the Committee is always careful to manage potential conflicts of interest when receiving views from Executive Directors or senior management about executive remuneration proposals.
During 2016, Deloitte LLP was the independent adviser to the Committee. Deloitte was appointed by the Committee in 2011 following a competitive tender process. As part of this process, the Committee considered the services that Deloitte provided to Prudential and its competitors as well as other potential conflicts of interest. Deloitte is a member of the Remuneration Consultants’ Group and voluntarily operates under their code of conduct when providing advice on executive remuneration in the UK. Deloitte regularly meets with the Chairman of the Committee without management present. The Committee is comfortable that the Deloitte engagement partner and team providing remuneration advice to the Committee do not have connections with Prudential that may impair their independence and objectivity. The total fees paid to Deloitte for the provision of independent advice to the Committee in 2016 were £48,050 charged on a time and materials basis. During 2016, Deloitte gave Prudential management advice on remuneration, as well as providing guidance on capital optimisation, digital and technology, taxation, internal audit, real estate, global mobility and other financial, risk and regulatory matters. Remuneration advice is provided by an entirely separate team within Deloitte.
During the year, the Company has complied with the appropriate provisions of the UK Corporate Governance Code regarding Directors’ remuneration.
* Benefits include (where provided) the cost of providing the use of a car and driver, medical insurance, security arrangements and relocation/expatriate benefits. † The deferred part of the bonus is subject to malus and clawback in accordance with the malus and clawback policies. ‡ In line with the regulations, the estimated value of PLTIP releases in 2016 has been calculated based on the average share/ADR price over the last three months of 2016 (£14.86/$37.02).
§ 2016 pension benefits include cash supplements for pension purposes and contributions into DC schemes as outlined on page 127. ¶ Each remuneration element is rounded to the nearest £1,000 and totals are the sum of these rounded figures. Total remuneration is calculated using the methodology prescribed by
Notes 1 John Foley was appointed to the Board on 19 January 2016. The remuneration above was paid in respect of his service as an Executive Director, other than the LTIP releases which related to his previous role. 2 Michael McLintock stepped down from the Board on 6 June 2016. The remuneration above was paid in respect of his service as an Executive Director. 3 Nic Nicandrou’s benefits relate primarily to relocation support under a legacy relocation clause in his contract, being £156,892 to cover taxes due on stamp duty paid in 2015. 4 Anne Richards was appointed to the Board on 7 June 2016. The remuneration above was paid in respect of her service as an Executive Director. In order to facilitate Anne’s appointment as Chief Executive, M&G , the Company agreed to replace the deferred bonus awards she forfeited on leaving Aberdeen Asset Management. The terms of the replacement award are designed to replicate those of the forfeited awards and further details are set out on page 129. In addition, to support Anne’s appointment as Chief Executive, M&G, the Company pays for accommodation in London and travel from Anne’s home in Edinburgh to London totalling £45,493.
7 Tony Wilkey’s benefits include costs of £260,917 for housing and a £413,663 Executive Director Location Allowance. The LTIP releases relate to his previous role, prior to his service as an Executive Director.
* Benefits include (where provided) the cost of providing the use of a car and driver, medical insurance, security arrangements and relocation/expatriate benefits. † The deferred part of the bonus is subject to malus and clawback in accordance with the malus and clawback policies. ‡ In line with the regulations, the estimated value of PLTIP releases in 2015 has been recalculated based on the actual share/ADR price on the date awards are released, being £13.25/$38.36. § 2015 pension benefits include cash supplements for pension purposes and contributions into DC schemes. ¶ Each remuneration element is rounded to the nearest £1,000 and totals are the sum of these rounded figures. Total remuneration is calculated using the methodology prescribed by
6 Tidjane Thiam stepped down from the Board on 31 May 2015. The remuneration shown above was paid in respect of his service as an Executive Director. 7 To facilitate his move to the UK, Mike Wells’s benefits include relocation support including an allowance of £200,000 for relocation and shipping, £177,890 for temporary accommodation, £513,750 to cover stamp duty and £56,604 to cover mortgage interest.
Remuneration in respect of performance in 2016 Base salary Executive Directors’ salaries were reviewed in 2015 with changes effective from 1 January 2016. When the Committee took these decisions it considered: — The salary increases awarded to other employees; — The performance and experience of each executive; — The relative size of each Director’s role; and
Salary increases for the wider workforce vary across our business units, reflecting local market conditions.
Annual bonus 2016 annual bonus opportunities Executive Directors’ bonus opportunities, the weighting of performance measures for 2016 and the proportion of annual bonuses deferred are set out below: Weighting of measures
John Foley1 180% 40% of total bonus 20% 60% 20% Penny James 160% 40% of total bonus 50% 30% 20% Michael McLintock2 600% 40% of total bonus 20% 60% 20% Nic Nicandrou 175% 40% of total bonus 80% – 20% Anne Richards3 600% 40% of total bonus 20% 60% 20% Barry Stowe4 160% 40% of total bonus 80% – 20% Mike Wells 200% 40% of total bonus 80% – 20% Tony Wilkey 180% 40% of total bonus 20% 60% 20%
4 Barry Stowe also receives 10 per cent of the Jackson bonus pool.
2016 AIP performance measures and achievement Target-setting process For the financial metrics of the AIP, the performance ranges are set by the Remuneration Committee prior to, or at the beginning of, the performance period based on the annual business plans approved by the Board. These reflect the ambitions of the Group and business units, in the context of anticipated market conditions.
As part of the implementation of Solvency II, a portion of Executive Directors’ 2016 bonuses was determined by the achievement of Solvency II surplus targets, which replaced the IGD capital surplus measure (part of the Solvency I framework). Otherwise no changes were made to the performance measures for the 2016 annual incentive plan.
Also as part of the implementation of Solvency II, the weightings of Penny James’s AIP performance targets (with effect from 2016) were changed so that 50 per cent related to financial targets, 30 per cent related to functional targets and 20 per cent related to personal targets.
Financial performance The Committee reviewed performance against the performance ranges at its meeting in February 2017; in all of the bonus performance metrics the Group’s 2016 results exceeded the performance required for maximum vesting, other than the Group Solvency II surplus measure, which was between target and maximum.
— Progress on major projects which in 2016 included the initial public offering of our Indian joint venture, ICICI Prudential Life, commencing the divestment of our Korean life business and growing our African business to include Zambia.
Performance against these objectives was assessed by the Committee at its meeting in February 2017.
2016 Annual Incentive Plan payments On the basis of the strong performance of the Group and its business units, and the Committee’s assessment of each Executive Director’s personal performance, the Committee determined the following 2016 AIP payments: Executive Director Role 2016 salary1 Maximum 2016 AIP
John Foley Chief Executive, UK and Europe £750,000 180% 94.2% £1,271,000 Penny James Group Chief Risk Officer £606,000 160% 99.2% £962,000 Michael McLintock2 Chief Executive, M&G £398,000 600% 66% £920,000 Nic Nicandrou Chief Financial Officer £711,000 175% 99.3% £1,236,000 Anne Richards3 Chief Executive, M&G £400,000 600% 100% £1,368,000 Barry Stowe4 Chairman & CEO, NABU US$1,111,000 160% 99.3% US$1,765,000 Mike Wells Group Chief Executive £1,081,000 200% 99.5% £2,151,000 Tony Wilkey Chief Executive, PCA HK$8,890,000 180% 94.6% HK$15,138,000
2016 Jackson bonus pool In 2016, the Jackson bonus pool was determined by Jackson’s profitability, capital adequacy, remittances to Group, in-force experience, ECap solvency ratio and credit rating. Across all these measures Jackson delivered strong performance. As a result of this performance the Committee determined that Barry Stowe’s share of the bonus pool was US$5,318,000.
The level of performance required for threshold, target and maximum payment against the Group’s 2015 Annual Incentive Plan financial measures and the results achieved are set out below.
£297m£124m £2,871m £2,210m £2,160m £1,868m £3,319m £2,617m £2,264m £4,007m £3,050m £5,543m £15,643m
The Board believes that, due to the commercial sensitivity of the business unit targets, disclosing further details of these targets may damage the competitive position of the Group.
Update on performance against targets for awards made in 2015 and 2016 under the Prudential Long Term Incentive Plan
As at 31 December 2016, Prudential’s TSR performance during the periods 1 January 2015 to 31 December 2016 and 1 January 2016 to 31 December 2016 was ranked below median.
As at 31 December 2016, Prudential’s IFRS operating profit performance during the periods 1 January 2015 to 31 December 2016 and 1 January 2016 to 31 December 2016 was above the stretch targets for Group and all business units other than one which was between plan and the stretch target.
Remuneration in respect of performance periods ending in 2016 Long-term incentive plans with performance periods ending on 31 December 2016 Our long-term incentive plans have stretching performance conditions that are aligned to the strategic priorities of the Group. In deciding the portion of the awards to be released, the Committee considered actual financial results against these performance targets. The Committee also reviewed underlying Company performance to ensure vesting levels were appropriate. The Directors’ remuneration policy contains further details of the design of Prudential’s long-term incentive plans.
Prudential Long Term Incentive Plan (PLTIP) In 2014, all Executive Directors were granted awards under the PLTIP. The awards were subject to challenging targets. The weightings of these measures are detailed in the table below.
Michael McLintock 100% – Jackie Hunt 50% 50% (business unit target) Barry Stowe 50% 50% (business unit target) Mike Wells 50% 50% (business unit target) All other Executive Directors 50% 50% (Group)
Under the Group TSR measure, 25 per cent of the award vests for TSR at the median of the peer group increasing to full vesting for performance within the upper quartile. TSR is measured on a local currency basis since this has the benefit of simplicity and directness of comparison. The peer group for the awards is: Aegon Aflac AIA AIG Allianz Aviva AXA Generali Legal & General Manulife MetLife Munich Re Old Mutual Prudential Financial Standard Life Sun Life Financial Swiss Re Zurich Insurance Group
The Committee determined that the cumulative IFRS operating profit target established for the PLTIP should be expressed using exchange rates consistent with the reported disclosures. All the individual business units exceeded their stretch performance target and achieved 100% vesting, other than Asia which exceeded plan performance, but not the stretch target, and therefore vested at 95%. Details of business unit IFRS targets have not been disclosed as the Committee considers that these are commercially sensitive and disclosure of targets at such a granular level would put the Company at a disadvantage compared to its competitors. The Committee will keep this disclosure policy under review based on whether, in its view, disclosure would compromise the Company’s competitive position.
Prudential Corporation Asia Long-Term Incentive Plan Tony Wilkey received awards under the PCA Long-Term Incentive Plan before he was appointed to the Board, which vested during 2016. The PCA Long-Term Incentive Plan does not have performance conditions.
UK-based executives Pension contribution to defined contribution plan and/or pension supplement in lieu of pension of 25 per cent of salary.
Michael McLintock previously participated in a contributory defined benefit scheme that was open at the time he joined the Company. The scheme provided a target pension of two-thirds of final pensionable earnings on retirement for an employee with 30 years or more potential service who remained in service to normal retirement date. Michael is a deferred member of the scheme and his normal retirement date under the scheme is age 60. If Michael claims his deferred pension before this age it will be subject to an actuarial reduction and there are no additional benefits payable should he retire early. At the end of 2016, the transfer value of Michael’s entitlement was £1,505,483. This equates to an annual pension of £59,662 which will increase broadly in line with inflation in the period to Michael’s retirement at the normal retirement date.
John Foley previously participated in a non-contributory defined benefit scheme that was open at the time he joined the Company. The scheme provided an accrual of 1/60ths of final pensionable earnings for each year of pensionable service. John is a deferred member of this scheme and, on reaching the normal retirement date (of 60), John has elected to defer payment of his pension. At the end of 2016, the transfer value of John’s entitlement was £555,662. This equates to an annual pension of £19,937, based on current late retirement factors. The pension, once in payment, will be subject to statutory increases in line with the Consumer Prices Index.
Prudential TSR v FTSE 100 and peer group averages – total return, per cent over eight years to 31 December 2016 £100 Dec 2008 Dec 2009 Dec 2010 Dec 2011 Dec 2012 Dec 2016Dec 2015Dec 2014Dec 2013
Note The peer group average represents the average TSR performance of the peer group used for 2016 PLTIP awards (excluding companies not listed at the start of the period).
Other payments 308 – – – – – – – – –
Percentage change in remuneration The table below sets out how the change in remuneration for the Group Chief Executive between 2015 and 2016 compared to a wider employee comparator group: Salary Benefits Bonus
Anne Richards1 Chief Executive, M&G 45,906 £600,000 25% 31 December 2018
Group TSR performance will be measured on a ranked basis. 25 per cent of the award will vest for TSR performance at the median of the peer group increasing to full vesting for performance at the upper quartile. The peer group for 2016 awards is the same as for 2014 awards as detailed on page 125.
In December 2016, Anne exercised the first tranche of this replacement award. The gross value of the award exercised (which included dividend equivalents) was £939,140 and Anne used the net of tax value of £496,162 to buy 31,439 Prudential shares.
This buy-out award was made under rule 9.4.2 of the UKLA Listing Rules as the award could not be effected under any of the Company’s existing incentive plans. Anne is the sole participant in this arrangement and no further awards will be made to Anne under the arrangement.
Basic fee 94,000 95,000 Additional fees: Audit Committee Chairman 70,000 75,000 Audit Committee member 27,500 27,500 Remuneration Committee Chairman 60,000 60,000 Remuneration Committee member 27,500 27,500 Risk Committee Chairman 65,000 75,000 Risk Committee member 27,500 27,500 Nomination Committee member 10,000 10,000 Senior Independent Director 50,000 50,000
2 Kai Nargolwala also received an annual fee of £250,000 (payable in HK$) in respect of his non-executive chairmanship of Prudential Corporation Asia Limited with effect from 1 February 2016. 3 Philip Remnant also received an annual fee of £250,000 in respect of his non-executive chairmanship of M&G Group Limited with effect from 1 April 2016. 4 Lord Turnbull retired from the Board on 14 May 2015.
Statement of Directors’ shareholdings The interests of Directors in ordinary shares of the Company are set out below. ‘Beneficial interest’ includes shares owned outright, shares acquired under the Share Incentive Plan and deferred annual incentive awards, detailed in the ‘Supplementary information’ section. It is only these shares that count towards the share ownership guidelines.
Non-executive Directors * There were no changes of Directors’ interests in ordinary shares between 31 December 2016 and 13 March 2017 with the exception of the UK-based Executive Directors due to their participation in the monthly Share Incentive Plan (SIP). John Foley acquired a further 35 shares in the SIP, Nic Nicandrou acquired a further 35 shares in the SIP and Mike Wells acquired a further 35 shares in the SIP during this period.
† Further information on share awards subject to performance conditions are detailed in the ‘share-based long-term incentive awards’ section of the Supplementary information. ‡ Holding requirement of the Articles of Association (2,500 ordinary shares) must be obtained within one year of appointment to the Board. The increased guidelines for Executive
Directors were introduced with effect from January 2013. Executive Directors have five years from this date (or date of joining or role change, if later) to reach the enhanced guideline. The guideline for Non-executive Directors was introduced on 1 July 2011. Non-executive Directors have three years from their date of joining to reach the guideline. The Chairman has five years from the date of his role change to reach the guideline. Where applicable, all Directors are in compliance with the share ownership guideline.
2 Michael McLintock stepped down from the Board on 6 June 2016. 3 Anne Richards was appointed to the Board on 7 June 2016.
Disclosure of interests of Directors Outstanding share options The following table sets out the share options held by the Executive Directors in the UK Savings-Related Share Option Scheme (SAYE) as at the end of the period. Anne Richards holds share options under her buy-out arrangement, details of which are set out on page 129.
Notes 1 A gain of £49,028.33 was made by Directors in 2016 on the exercise of SAYE options. 2 No price was paid for the award of any option. 3 The highest and lowest closing share prices during 2016 were £16.49 and £10.87 respectively. 4 All exercise prices are shown to the nearest penny. 5 Michael McLintock participated in the plan during his time as an Executive Director. The column above marked ‘End of period’ reflects Michael McLintock’s position at his date of retirement.
Subject to the Group Chief Executive’s or the Chairman’s approval, Executive Directors are able to accept external appointments as non-executive directors of other organisations. Fees payable are retained by the Executive Directors.
Other Directors served on the boards of educational, charitable and cultural organisations without receiving a fee for these services.
Notes 1 John Foley was appointed to the Board on 19 January 2016. 2 Anne Richards was appointed to the Board on 7 June 2016.
Letters of appointment of the Chairman and Non-executive Directors The Directors’ remuneration policy contains further details on Non-executive Directors’ letters of appointment. Details of their individual appointments are outlined below: Chairman/Non-executive Director Appointment by the Board
Chairman Paul Manduca1 15 October 2010 AGM 2011 12 months AGM 2018 Non-executive Directors Philip Remnant 1 January 2013 AGM 2013 6 months AGM 2019 Howard Davies 15 October 2010 AGM 2011 6 months AGM 2017 Ann Godbehere2 2 August 2007 AGM 2008 6 months AGM 2017 David Law 15 September 2015 AGM 2016 6 months AGM 2019 Kai Nargolwala 1 January 2012 AGM 2012 6 months AGM 2018 Anthony Nightingale 1 June 2013 AGM 2014 6 months AGM 2017 Alice Schroeder 10 June 2013 AGM 2014 6 months AGM 2017 Lord Turner 15 September 2015 AGM 2016 6 months AGM 2019
Michael McLintock Michael McLintock stepped down from the Board on 6 June 2016. His remuneration arrangements were in line with the approved Directors’ remuneration policy, and disclosed in stock exchange announcements, and the remuneration he received in respect of his services as an Executive Director is set out in the 2016 Single Figure table.
Jackie Hunt As reported in the 2015 Directors’ remuneration report, Jackie Hunt stepped down from the Board on 3 November 2015 and her employment with the Group ended on 30 June 2016. During 2016, Jackie received £441,352 in respect of salary, benefits and pension benefits in accordance with her contract of employment. In addition, in consideration of agreeing to a confidentiality clause, Jackie received £1,000. In line with market practice, the Group paid the professional legal fees incurred by Jackie in respect of finalising her separation arrangements which amounted to £600 in 2016.
Former Executive Director Number of shares vesting1 Value of share vesting2
Statement of voting at general meeting At the 2014 Annual General Meeting, shareholders were asked to vote on the current Directors’ remuneration policy and at the 2016 Annual General Meeting, shareholders were asked to vote on the 2015 Directors’ remuneration report. Each of these resolutions received a significant vote in favour by shareholders and the Committee is grateful for this support and endorsement by our shareholders. The votes received were: Resolution Votes for % of votes cast Votes against % of votes cast Total votes cast Votes withheld
Base salary Paying salaries at a competitive level enables the Company to recruit and retain key executives.
Prudential’s policy is to offer all Executive Directors base salaries that are competitive within their local market.
While salaries are typically paid in the local currency of the country where the executive is based, the Committee may determine that the salary of an executive is set or paid in an alternative currency.
Prudential’s policy is for the Committee to have the discretion to offer Executive Directors benefits which reflect their individual circumstances and are competitive within their local market, including: — Health and wellness benefits; — Protection and security benefits; — Transport benefits; — Family and education benefits; — All employee share plans and savings plans; — Relocation and expatriate benefits; and
Prudential’s policy is to offer all Executive Directors a pension provision that is competitive and appropriate in the context of pension benefits for senior executives in the relevant local market.
Executive Directors are entitled to receive pension contributions or a cash supplement (or combination of the two) of up to 25 per cent of base salary.
The release of deferred bonus awards is not subject to any further performance conditions. Deferred bonus awards carry the right to receive an amount (in shares or cash) to reflect the dividends paid on the released shares, during the deferral period.
In assessing financial performance, the Committee determines the annual incentive payment for each Executive Director with reference to the performance achieved against performance ranges.
Jackson’s profitability and other key financial and risk management measures determine the value of the Jackson Senior Management Bonus Pool.
The weightings of the performance measures for 2017 for all Executive Directors, other than the Group Chief Risk Officer, are 80 per cent financial measures and 20 per cent personal measures. The Chairman and CEO, NABU also participates in the Jackson Senior Management Bonus pool. For the Group Chief Risk Officer, the performance measures for 2017 are entirely based on a combination of functional and personal measures. The Group Chief Risk Officer is responsible for ensuring that the Company’s risk exposures are within the Board approved risk framework and appetite, and to provide overall leadership to the Risk function.
The rules of the PLTIP were approved by shareholders in 2013. Subsequent to this, minor amendments have been made to the rules to incorporate clawback provisions and to provide for a two-year holding period to awards.
Holding period After the end of the three-year performance period, the shares are usually subject to an additional two-year holding period (except for buy out awards made under the PLTIP or in the case of the death of an executive).
The Company may sell such number of shares as is required to satisfy any tax liability that arises on vesting. The balance of shares will be subject to the two-year holding period.
Awards carry the right to receive an amount (in shares or cash) to reflect the dividends paid on the released shares, during the period between the awards being granted and the award vesting.
Opportunity The value of shares awarded under the PLTIP (in any given financial year) may not exceed 550 per cent of the executive’s annual basic salary.
Awards made in a particular year are usually significantly below this limit.
The levels of award made under the PLTIP in 2017 (as a percentage of base salary) are: Group Chief Executive 400%
The Committee does not envisage increasing the current award levels over the life of the policy and would consult with major shareholders before doing so. In addition, these current award levels would be disclosed in the relevant Annual report on remuneration.
Performance measures The performance conditions attached to PLTIP 2017 awards are: All Executive Directors except the Group Chief Risk Officer: — Relative TSR (25 per cent of award); — IFRS profit (50 per cent of award, Group or business unit as appropriate); and
— Balanced scorecard of sustainability measures (25 per cent of award).
— Balanced scorecard of sustainability measures (30 per cent of award).
The Committee may decide to attach different performance conditions and/or change the conditions’ weighting for future PLTIP awards. The performance conditions attached to each award are dependent on the role of the executive and will be disclosed in the relevant Annual report on remuneration.
Relative TSR is measured over three years. 25 per cent of this portion of each award will vest for achieving the threshold level of median, increasing to full vesting for meeting the stretch level of upper quartile. TSR is measured against a peer group of international insurers similar to Prudential in size, geographic footprint and products. This peer group was reviewed during 2016 to ensure the group remains a relevant comparator group. The peer group for each award is disclosed in the relevant Annual report on remuneration.
The Committee also considers a report from the Group Chief Risk Officer on whether the results were achieved within the Group’s and business units’ risk framework and appetite. The Group Chief Risk Officer also considers the effectiveness of risk management and internal controls, and specific actions taken to mitigate risks, particularly where these may be at the expense of profits or sales.
The Committee may adjust the formulaic outcome based on the performance targets to reflect the underlying performance of the Company.
The Committee has the discretion to amend the performance conditions attached to an award if circumstances relevant to the performance conditions have changed, and the Committee is satisfied that the amended measure will be a fairer measure of performance and no more or less demanding than the original condition. The Committee would seek to consult with major shareholders before revising performance conditions on outstanding awards under the PLTIP.
The Committee retains the ability to amend the performance conditions attached to an award and/ or set different performance measures (or to revise the weighting of measures) which apply to new or outstanding long-term incentive awards if events occur which cause the Committee to determine that circumstances relevant to the performance conditions have changed such that the measures described in this section are no longer appropriate and that amendment is required so that they achieve their original purpose, provided the Committee is satisfied that the amended measure will be a fairer measure of performance and no more or less demanding than the original condition. Examples of such events could include a change in strategy, a material acquisition and/ or divestment of a Group business, or a change in the share capital of the Company or a change in prevailing market conditions or to meet the requirements of the Company’s regulators. The Committee would seek to consult with major shareholders before revising performance conditions on outstanding awards under the PLTIP.
Executives have five years from the later of the date of their appointment or promotion, or the date of an increase in these guidelines, to build this level of ownership. Shares earned and deferred under the Annual Incentive Plan are included in calculating the Executive Director’s shareholding for these purposes. Unvested share awards under long-term incentive plans are not included but vested share awards under long-term incentive plans which are subject to the two-year holding period are included.
As detailed in the policy table, the Committee may apply clawback and/or a malus adjustment to variable pay in certain circumstances as set out below. The Committee can delay the release of awards pending the completion of an investigation which could lead to the application of malus or clawback.
Circumstances when the Committee may exercise its discretion to apply malus or clawback to an award
Malus (applies in respect of any annual bonus or long-term incentive award)
Where a business decision taken during the performance period by the business unit by which the participant was employed has resulted in a material breach of any law, regulation, code of practice or other instrument that applies to companies or individuals within the business unit.
Determining the performance measures The Committee selected the performance measures that currently apply to variable pay plans on the following basis: AIP The performance measures are selected to incentivise the delivery of the Group’s business plan, specifically to ensure that financial objectives are delivered while maintaining adequate levels of capital. Executives are also rewarded for the achievement of functional and/or personal objectives. These objectives include the executive’s contribution to Group strategy as a member of the Board, specific goals related to their functional and/or business unit role and achievement of the Group’s strategic priorities.