By helping to take the financial risk out of life’s big decisions, Prudential creates long-term value for our customers, our shareholders and the communities we serve.
The Directors’ Report of Prudential plc for the year ended 31 December 2016 is set out on pages 2 to 7, 76 to 108 and 364 to 406, and includes the sections of the Annual Report referred to in these pages.
Net cash remittances from business units 1,718 1,625 6% n/a 2016 £bn 2015 £bn
3 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.
6 Includes adjustment for opening EEV shareholders’ funds of negative £0.5 billion for the impact of Solvency II as at 1 January 2016.
Most importantly, it is during times of great uncertainty that Prudential adds most value for our customers. We look to provide financial peace of mind to customers, whatever the external environment. Our expertise in reducing risk allows customers to plan for the future with confidence; whether by protecting them against ill health in Asia, helping them save for retirement in the UK or managing their retirement income in the United States. The capital we generate from these activities then allows us to invest in companies across the globe, driving economic activity and growth. All of this is possible because the Board is focused on building a sustainable business. This focus ensures we are able to keep the vital promises that we have made to our customers.
Our shareholders and stakeholders A well governed company engages regularly and effectively with its shareholders. At Prudential, we have an active programme of engagement. It is important to us that we hear the views of our investors and have an open and constructive dialogue with them. As Chairman, I have found this regular engagement particularly helpful and receiving shareholders’ input has ensured high-quality and well informed Board discussions.
Our people In each of our markets we have teams focused on delivering for our customers. It is the diligence, creativity and hard work of these teams that enable Prudential to succeed. Their contribution is vital and it is the responsibility of the Board to consider their interests in every decision we make. Our people ensure we can continue to respond to the changing external environment and in 2016, their resilience and enthusiasm were critical to our achieving the excellent set of results we have reported. Their commitment to our customers provides me with great confidence for the future.
We are proud of our work in financial education, disaster preparedness and social inclusion. The Cha-Ching programme that we launched in Asia in 2011 is now the first truly global financial education programme. Cha-Ching has now been launched in Poland, the UK and Africa and will shortly launch in the US. The Prudence Foundation’s Safe Steps 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 – with a potential reach of 200 million people. In the UK, over the past four years, Prudential RideLondon has raised £41 million for charity and become one of the largest fundraising events in the country. In 2016 alone, more than 740 charities benefited from riders’ fundraising.
I am particularly proud of the direct contribution made by our people to the communities in which they live and participate. In 2016, Prudential colleagues volunteered over 80,000 hours of their time. I support this personally via our flagship international volunteering programme, the Chairman’s Challenge. 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 to 8,011 in 2016, benefiting 92,720 individuals across the world.
Gan Leong Hin, CEO of Prudential Assurance Malaysia Berhad, says, ‘Financial protection and education are very close to our hearts. We have first-hand experience of seeing how devastating the impact can be on the lives of families living without financial security when something unfortunate happens to the main breadwinners. That is what led us to create PRUkasih. We are also committed to promoting financial literacy and inculcating the right values to raise our next generation in becoming financially literate. This is in line with our mission of providing financial freedom and peace of mind to all Malaysians.’
Our global scale, close understanding of our markets and constant drive to improve are continuing to create shared value for our customers and our shareholders.
This was another year of innovation, as we continue to improve and personalise our products to ensure they are tailored to the diverse financial needs of our customers. At the same time, we remain focused on the expansion of our distinctive distribution platforms, allowing us to reach new customers and better serve existing ones. Meanwhile, we continue to develop the investment capabilities of our asset management businesses and to invest in the systems and people to manage the risks we assume on behalf of our customers. We are also sowing the seeds for our future growth by investing in new markets.
Group performance Prudential has delivered a strong financial performance in 2016, led by growth in Asia. In a year that has seen continued low interest rates, market volatility and dramatic political change, our results continue to benefit from the scale and diversity of the Group’s global platform, the disciplined execution of our strategy and the strength of the opportunities in our target markets.
Our operational agility and broad business mix mean we are able to continually flex our approach in response to local market conditions and opportunities without compromising our overall near-term financial performance. These characteristics have recently been particularly evident in our businesses in Asia, which continue to drive the growth of the Group and in 2016 achieved doubledigit increases across all of our major metrics. This was despite pricing and product actions to protect profitability of some market segments where returns were no longer sufficiently attractive given the low-interest-rate environment. We always seek the appropriate balance between value and volume.
The Group continues to operate with a strong capital position, ending the year with a Solvency II cover ratio9 of 201 per cent8. Over the period, IFRS shareholders’ funds increased by 13 per cent to £14.7 billion after taking into account profit after tax of £1,921 million (2015: £2,579 million on an actual exchange rate basis) and other movements including positive foreign exchange movements of £1.2 billion. EEV shareholders’ funds increased by 22 per cent to £39.0 billion, equivalent to 1,510 pence per share.
Thanh Tam and Thi Tam have held policies with Prudential Vietnam since 2004, protecting their son, Thanh Tai, and his education, their parents and their home. The premiums are low, but the policies hold very special value for the family, both financially and emotionally.
Diversification advantage IFRS operating profit*6 by business and currency, full year 2016
Our broad diversification by geography, products and distribution channels remains a primary source of strength and resilience for the Group’s earnings.
*Segmental earnings of key businesses and excludes Prudential Capital and other income and expenditure.
Group Chief Executive’s report – Mike Wells Continued to Jackson. The demographic shift occurring in the US is a significant long-term driver of demand for the types of products that we offer. In 2016, through this period of disruption, Jackson’s separate account assets relating to its variable annuity business, and the main driver of earnings, increased by 11 per cent to US$148.8 billion.
Our strategy We have a clear, consistent strategy focused on three parts of the world where the needs of customers for the products we provide are not fully met.
Our capabilities We believe we have a great strategy, but any strategy is only as good as its implementation. We are executing our strategy with discipline and continually developing our capabilities.
Across our markets, we are constantly innovating to improve the way we do business. During 2016, we added a number of new products and services to the successful range we offer around the world. In Asia, to take just two examples, Prudential Singapore became the first insurer in its market to launch an online community portal, where customers can share ideas and suggestions to help us improve our products and services, and Prudential Hong Kong gave customers access to an innovative DNA-based health and nutrition programme, demonstrating how we are building our capabilities to partner with customers to help improve their long-term health and well-being. We also expanded our reach in the region during 2016, by launching a new operation in Laos.
Our distribution capability is another of our key strengths. In 2016, we made good progress in improving our distribution platform throughout our markets. In Asia, productivity within our network of agents improved, with average case sizes rising by 30 per cent14. The total number of agents across all our Asian markets is more than 500,000. We also continued to leverage the strength of our relationships with our bank partners, which has allowed us to ensure the appropriate balance between value and volume. We have access to more than 10,000 active bank branches through a total of three regional, five strategic and a variety of local partnerships. In the US, our variable annuity wholesale distribution platform is now more than 60 per cent larger13 than that of our nearest competitor, and our wholesaler productivity is 24 per cent greater13.
Prudential Financial Planning, our UK advisory business, has grown to become a top-10 UK advisory business, from its inception in 2012. In 2016 M&G, whose products are now registered in 23 jurisdictions around the world, established a new SICAV fund range in Luxembourg as a platform for future international distribution. At the same time, we entered Zambia, our fourth market in Africa. In less than three years, we have built our African business to the point where it has 1,750 agents, is active in 181 bank branches and has over 160,000 customers, with a further 1.5 million micro-insurance customers through partnerships with mobile phone operators and micro-finance institutions.
Our proven investment performance track record is another vital part of our capability. Across our asset management businesses we offer a range of funds that give investors the opportunity to benefit from a long-term, diversified approach, helping to deliver sustainable investment performance regardless of short-term market fluctuations. M&G has a long-standing track record of superior investment performance, with 85 per cent15 of retail assets under management above median over the tenure of the fund manager. Likewise, the proportion of Eastspring’s funds outperforming the median on a three-year period basis was 65 per cent16. In the UK, over the last 10 years our highly regarded PruFund investment option has delivered growth of 75 per cent, compared with a total return of 39 per cent for a benchmark ABI mixed investment fund. In the US, the number of funds within Jackson’s living benefit variable annuity product that delivered a three-year annualised return, over the period 2014 to 2016, of over 7 per cent was twice the number of funds within the top 12 peer products combined 5.
Prudential’s Group Executive Committee Mike Wells is advised and assisted by the Group Executive Committee, which comprises the heads of our four business units and a team of functional specialists. The members of the Group Executive Committee and their roles are set out on page 405.
3 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 reflect the Solvency I basis.
11 Cerulli Associates – Advisor Metrics 2016. 12 Social Security Administration, Annual Performance Plan for
FY 2012 and Revised Final Performance Plan for FY 2011. 13 Market Metrics – Variable Annuity Sales, Staffing and
Productivity Report: Q3 2016. 14 Excluding India. 15 Investment performance is to 31 December 2016 and reflects 33 retail funds, representing 85 per cent of M&G retail funds under management, which have delivered top or upper quartile performance over fund manager tenure which is an average of six years. Quartile rankings are based on returns which are net of fees.
16 Blended score representing 50 per cent by number of funds and 50 per cent assets under management outperforming benchmark or in top two quartiles over three-year period.
asset management businesses, which will help to simplify reporting systems and support future growth.
We have demonstrated our ability to manage through times of economic uncertainty and market volatility, conditions that appear likely to prevail for some time. Our strategy is clear, the demand from customers for our products is strong and our execution is good and getting better. We are well positioned to continue to deliver value for both our customers and our shareholders.
We aim to capture three long-term opportunities across our key geographical markets: — serving the protection and investment needs of the growing middle class in Asia; — providing asset accumulation and retirement income products to US baby boomers; and
— meeting the savings and retirement needs of an ageing British population.
Jackson Jackson provides retirement savings and income strategies aimed at the large number of people approaching retirement in the United States. Jackson’s pursuit of excellence in product innovation and distinctive distribution capabilities have helped us forge a solid reputation for meeting the needs of customers. Jackson’s variable annuities offer a distinctive retirement solution designed to provide a variety of investment choices to help customers pursue their financial goals.
M&G M&G Investments is an international asset manager with more than 85 years’ experience of investing on behalf of individuals and institutions. Our goal is to help our customers prosper by securing long-term returns from their savings. For individual investors, we offer funds across diverse geographies, asset classes and investment strategies, aimed at growing their long-term savings or producing regular income. For institutional investors, we offer investment strategies to meet their clients’ long-term needs for capital growth or income.
Well recognised brand with strong track record Long-term and conviction-led approach £118bn +75% 15 £137bn invested assets in with-profits funds2
PruFund investment performance growth since 2006 (vs +39% in ABI sector comparative)1 locations across Europe and Asia external funds under management
Africa We entered Africa in 2014 to offer products to new customers in one of the fastest-growing regions in the world. We aim to provide products that meet their needs towards saving for future expenses, such as education for their children, and to de-risk their financial lives.
Customers are at the heart of our strategy. We proactively listen to both new and existing customers to understand and respond to their changing needs. This allows us to propose financial solutions customised for different groups, whether that is young and middle-aged people or those in retirement.
We offer solutions for customers as they face the biggest financial challenges of their lives. We consistently develop our product portfolio, designing it around our customers’ needs and providing them with peace of mind, whether that be in relation to saving for retirement or insuring against risks of illness, death or critical life events.
Distribution plays a key role in our ability to reach, attract and retain customers in different parts of the world. Building out and diversifying our distribution capabilities helps ensure that we fully capitalise on the opportunities available to us in each of our markets.
Our businesses and their performance page 28 Group Chief Risk Officer’s report page 50
IFRS operating profit £4,256m –2%1 on 2015 (CER) +7% on 2015 (AER)
The Group has a number of key performance indicators internally to measure financial performance. Read more on page 16
Employees Providing an environment with equal opportunities, career potential and rewards enables us to attract and retain high-quality individuals to deliver our strategy.
Notes 1 Excluding UK bulk annuities as Prudential has withdrawn from this market. 2 Includes adjustment for opening EEV shareholders’ funds of negative £0.5 billion for the impact of
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.
Jackson Strength and flexibility of our distribution network give us a distinctive advantage 62% larger wholesale distribution1 than nearest competitor 24% greater wholesaler productivity than nearest competitor1 broker dealers’ selling agreements covering +238,000 (77%) of total US advisers2
#1 selling variable annuity contract3 in the independent channel since 2003
+2,700 adviser firms dealing with Prudential c300 Prudential Financial Planning partners
Measuring our performance To create sustainable economic value for our shareholders we focus on delivering growth and cash while maintaining appropriate capital. We aim to demonstrate how we generate profits under different accounting bases, reflecting the returns we generate on capital invested, and highlight the cash generation of our business.
IFRS operating profit based on longer-term investment returns2,3 £m The Group’s business involves entering into long-term contracts with customers, and hence the Group manages its associated assets and liabilities over a longer-term time horizon. This enables the Group to manage a degree of short-term market volatility. Therefore IFRS operating profit based on longer-term investment returns gives a more relevant measure of the performance of the business. Other items are excluded from IFRS operating profit to allow more relevant period-on-period comparisons of the trading operations of the Group, for example the effects of material corporate transactions are excluded.
— EEV new business profit in 2016 increased by 11 per cent on a constant exchange rate basis (24 per cent on an actual exchange rate basis), compared with 2015, driven by higher, new business sale volumes and pricing and product actions to increase profitably.
EEV operating profit3,4,5 £m EEV operating profit is provided as an additional measure of profitability. This measure includes EEV new business profit, the change in the value of Group’s long-term in-force business, and profit from our asset management and other businesses. As with IFRS, EEV operating profit reflects the underlying results based on longer-term investment returns.
— Group EEV operating profit in 2016 increased by 3 per cent on a constant exchange rate basis (14 per cent on an actual exchange rate basis), compared with 2015, driven by higher new business profits and higher contributions from the in-force business.
Group free surplus generation3,5,7 £m Free surplus generation is used to measure the internal cash generation of our business units. For insurance operations it represents amounts maturing from the in-force business during the period less investment in new business and excludes other non-operating items. For asset management it equates to post-tax IFRS operating profit for the year.
Notes: 1 The comparative results shown above have been prepared using actual exchange rates (AER)
3 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.
8 Cash remitted to the Group forms part of the net cash flows of the holding company. A full holding company cash flow is set out in note II (a) of Additional IFRS financial information. This differs from the IFRS Consolidated Statement of Cash Flows which includes all cash flows relating to both policyholders and shareholders’ funds. The holding company cash flow is therefore a more meaningful indicator of the Group’s central liquidity.
9 Estimated before allowing for second interim ordinary dividend. 10 Excludes surplus in ring-fenced policyholder funds. The methodology and assumptions used in calculating the Group Solvency II capital results are set out in note II (c) of the additional financial information.
11 The objectives assume exchange rates at December 2013 and economic assumptions made by Prudential in calculating the EEV basis supplementary information for the half year ended 30 June 2013, and are based on regulatory and solvency regimes applicable across the Group at the time the objectives were set. The objectives assume that the existing EEV, IFRS and free surplus methodology at December 2013 will be applicable over the period.
Business unit remittances8 £m Remittances measure the cash transferred from business units to the Group. Cash flows across the Group reflect our aim of achieving a balance between ensuring sufficient net remittances from business units to cover the dividend (after corporate costs) and the use of cash for reinvestment in profitable opportunities available to the Group.
— Business unit remittances increased by 6 per cent in 2016, compared with 2015, with significant contributions from each of our four major business units.
— The high quality and recurring nature of our operating capital generation, beneficial effects of debt issued and disciplined approach to managing balance sheet risks is reflected in the solvency capital surplus, which increased to 12.5 billion at 31 December 2016.
We are making good progress towards the objectives we announced in December 2013: Asia objectives12
Asia underlying free surplus, £m Asia underlying free surplus generation7 of £0.9 billion to £1.1 billion in 2017.
Group cumulative underlying free surplus, £m Cumulative Group underlying free surplus generation of at least £10 billion over the four year period from 2014 to end-2017.
Our businesses and their performance 2016 performance highlights —— Continued—delivery—across—key— value—creation—metrics:—new— business—profit—up—22—per—cent*,— IFRS—operating—profit—up—15—per—cent*— and—free—surplus—generation—up— 15—per—cent*
Asia’s—economic—transformation—started—in— the—1980s—and—the—momentum—remains— strong.—Although—growth—rates—on—a— period-by-period—basis—can—fluctuate—due—to— the—influence—of—macroeconomic—and— geopolitical—factors,—the—unprecedented— increases—in—personal—wealth—enjoyed—by— the—growing—number—of—Asian—families—will— continue—into—the—foreseeable—future.— Between—2010—and—2020—it—is—estimated—that— there—will—be—over—700—million—people—who— will—have—risen—from—rural—subsistence—to— more—affluent—lifestyles.—Family—profiles—are— changing—too.—Being—able—to—finance— children’s—education—is—a—realistic—goal,—life— expectancies—are—lengthening—dramatically,— the—incidence—of—chronic—diseases—is— increasing—significantly—and—traditional— family—and—community—support—networks— are—breaking—down.—All—these—factors—can— place—significant—stress—on—a—family’s— finances.
Prudential—has—been—operating—in—Asia—for— over—90—years—and—since—1994—has—built— high-performing—businesses—with—a—product— portfolio—centred—on—regular—savings—and— protection,—multi-channel—distribution,— award-winning—customer—services—and—a— widely—recognised—brand.—Eastspring— Investments—is—a—leading—asset—manager—in— Asia—and—provides—our—clients—with—access—to— investment—management—expertise—across—a— broad—range—of—asset—classes.
Although—there—are—common—elements—such— as—our—focus—on—regular—premium,—protection— and—capital-efficient—products,—each—market— in—our—portfolio—has—unique—characteristics— and—we—adapt—our—participation—strategies— accordingly.—For—example,—in—Vietnam—and— Indonesia,—life—insurance—awareness—and— penetration—rates—are—very—low—and—our— priority—is—building—nationwide—distribution— scale—that—reaches—potential—customers—and— provides—them—with—their—first,—relatively— simple—life—insurance—cover.—
The opportunities for growth in our sector are well understood and remain compelling, but delivering value for customers and shareholders over the long term requires focus and discipline. Prudential Corporation Asia has a number of advantages, including scale and diversification in geography, distribution and products, together with a well respected brand.
Growth rate vs 2015 constant exchange rates 1— Indonesia—— 26%— ➜6%
performance—of—Prudential—Corporation— Asia—remains—relatively—stable—and— predictable—over—time—–—we—are—on—track—to— deliver—the—five-year—performance— objectives—announced—in—2013—–—the— individual—components—are—likely—to—flex— period—by—period.—For—example,—we—have— recently—seen—strong—demand—from— customers—in—mainland—China—for—our— participating—and—critical—illness—products—in— Hong—Kong,—while—in—Indonesia—the— emerging—middle—class—is—under—pressure— from—systemic—challenges—in—the—economy— and—so—demand—for—our—regular-premium,— protection-orientated—life—insurance—has—
Although the protection component remains relatively consistent in the mix, reflecting our focus on this core customer need, the products within this category continue to evolve. For example, in Hong Kong we recently added a new feature that covers customers in the event of multiple diagnoses of cancer.
Tied agency remains the most popular distribution channel in the region. For Prudential Corporation Asia, this produced 65 per cent of APE sales in 2016. At 31 December we had more than 500,000 agents, up 10 per cent on the previous year. Excluding India, the productivity of our active agents increased by 31 per cent.
Eastspring Investments Our regional asset management division, Eastspring Investments, is one of the region’s largest asset managers7, with a presence in 10 major Asian markets as well as distribution offices in the US and Europe. It has £117.9 billion in assets under management, managing funds across a range of asset classes, including equities and fixed income, distributed through bank partners, brokers and online platforms.
Eastspring has a stable and steadily growing core of funds under management from Prudential Corporation Asia’s life businesses, including the majority of its unit-linked funds. Its Asian focus and performance track record have also enabled it to secure sizeable institutional mandates, both in Asia and more broadly. The retail arm includes the attractive Japanese, Korean and Taiwanese markets. In Japan, our Asia Oceania High Dividend Equity Fund, with funds under management of £3.2 billion, is one of the largest in its sector.
Insurance penetration calculated as premiums in per cent of GDP. Asia penetration calculated on a weighted population basis.
2 World Health Organisation – Global Health Observatory data repository (2013). Out of pocket as a percentage of Total Health Expenditure Asia calculated as average out of pocket.
3 United Nations, Department of Economic and Social Affairs. Population Division (2015) World Population Prospects The 2015 Revision, DVD Edition 15.
8 Based on latest market data available. Laos penetration is based on Swiss Re 2016 Sigma Report – Insuring the Frontier Markets.
9 FUM reported based on the country where the funds are managed.
However,—these—Americans—face—unique— challenges—in—planning—for—life—after—work.—— For—many—members—of—this—generation,—a— financially—secure—retirement—is—at—risk—due—to— insufficient—accumulation—of—savings—during— their—working—years—and—the—current— combination—of—low—yields—and—market— volatility.—Employer-based—pensions—are— disappearing—and—government—plans—are— underfunded.—Social—security—was—never— intended—to—be—a—primary—retirement—solution— and—today—its—long-term—funding—status—is—in— question.—Additionally,—the—life—expectancy— of—an—average—retiree—has—significantly— increased,—lengthening—the—number—of—years— for—which—retirement—funding—is—required.—
Through—its—distribution—partners,—Jackson— provides—products,—including—variable,—fixed— and—fixed—index—annuities,—which—offer— Americans—the—strategies—they—need.—A— variable—annuity—with—investment—freedom— represents—an—attractive—option—for—retirees,— providing—both—access—to—equity—market— appreciation—in—a—tax-deferred—wrapper—and— guaranteed—lifetime—income.—However,— penetration—of—variable—annuity—sales—into— the—retirement—market—remains—low,— accounting—for—less—than—15—per—cent—of—total— US—retirement—assets.
Customers and products Jackson—has—a—proven—track—record—in—this— market—with—its—market-leading—flagship— variable—annuity—product,—Perspective.— Jackson’s—success—has—been—built—on—its— quick-to-market—product—innovation,—as— demonstrated—by—the—development—and— launch—of—Elite—Access,—our—first—investmentonly —variable—annuity,—in—2012.—By—the—first— quarter—of—2013,—sales—of—Elite—Access— ranked—in—the—top—108—of—all—variable—annuity— contract—sales—in—the—US,—a—position—it—still— holds8.—Further—demonstrating—Jackson’s—
www.prudential.co.uk� Annual�Report�2016 Prudential plc 27 02 Strategic report representatives, financial institutions and tax and accounting professionals, through access to industry-leading mutual fund/ asset management companies, insurance carriers and thousands of brokerage products. The strength of this network and the market insight it offers, combined with Jackson’s proven manufacturing capabilities, provide a distinct advantage as we continue to navigate the ever-changing regulatory landscape.
Regulatory landscape Since the financial crisis in 2008, the industry has continued to manage through an ever-changing regulatory landscape. In April 2016, the US Department of Labor (DoL) released a final version of its Fiduciary Duty Rule (Rules), with initial application starting in April 2017 and full implementation required by January 2018. The Rules would, as currently written, subject many advisers who work with qualified retirement plans and Individual Retirement Accounts to the fiduciary requirements of the Employee Retirement Income Security Act, including obligations to avoid conflicts of interest. Those conflict of interest rules are incompatible with many compensation structures that have historically been permissible. However, with the change in the US administration and the release of various Executive Orders, the final form of the Rules remains unclear.
Regardless of the outcome of the Rules, the regulatory disruption has challenged the industry to review the ways in which investment advice is provided to American investors. Manufacturers will need to have the ability to provide product and system adaptations in order to support the success of various distribution partners in their delivery of invaluable retirement strategies that investors need.
Investment for growth From disruption, opportunities can appear. With the tens of trillions of dollars of adviser-distributed assets across distribution platforms that have not historically been a focus, such as the hybrid registered investment adviser channel, there is significant opportunity to reach even more American retirees and serve their needs with annuity products going forward. The industry will need to remain flexible and cost-effective in making changes to products, systems and processes. We continue to ensure that we understand and make the necessary adjustments to support the needs and demands of American retirees into the future.
Jackson and NPH have begun to implement changes necessary to meet the requirements of the Rules. Jackson will continue to evaluate its product offerings in order to meet the long-term needs of investors in search of effective retirement strategies. Additionally, Jackson remains committed to supporting its distribution partners throughout this industry transition.
Notes 1 US Census Bureau Population division 2014 estimate of population. 2 2013 Federal Reserve Board’s triennial Survey of
FY 2012 and Revised Final Performance Plan for FY 2011. 6 © 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. Total Sales by Contract 3Q YTD 2016. Jackson’s Perspective II for base states ranks #1 and Elite Access for base states ranks #9 for Total VA Sales out of 864 VA contracts with reported sales to Morningstar’s quarterly sales survey as of 3Q YTD 2016.
7 Investment News – April 2016. 8 © 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. Elite Access for base states ranked #10 and #9 for Total VA Sales by Contract at 1Q 2013 and 3Q 2016 respectively.
9 Market Metrics – Variable Annuity Sales, Staffing and Productivity Report: Q3 2016.
Over 70 per cent of liquid assets in the UK are owned and controlled by the over 50s and this demographic is expected to grow by 2.1 million between 2016 and 2030. More people, with more savings, will live longer. This provides significant new opportunities for Prudential as the demand for risk-managed investments to fund retirement is predicted to rise accordingly.
To meet these opportunities, our product and distribution profile has evolved by increasing the range of product options to mirror the flexibilities of the pensions
Serving the savings and retirement needs of the ageing population in the UK
— Market-leading distribution capability focused on intermediary advisers, an in-house direct advice service − Prudential Financial Planning − and a direct-to-customer telephone franchise
— Biggest winner at the Investment Life & Pensions MoneyFacts Awards in 2016, with top awards for the Best Investment Service, Best Investment Bond Provider and Best Online Service
‘Pensions freedom’ era – growing demand for risk-managed investments to fund retirement
Structural growth underpinned by: risk transfer from corporates and state to individuals demographics – growing number of retirees and increased life expectancy means more saving
Understanding our markets 1.3% pa growth in population aged 50+ >70% of liquid assets held by those aged 50+ 2/3rds fall in defined benefits scheme membership
Customers and products The Prudential brand benefits from a heritage that stretches back 168 years and a franchise that is based on long-term thinking, longevity experience, marketleading multi-asset investment capability and financial strength – the core attributes that customers continue to seek in the pension freedoms era.
— Continually investing in customer service improvement, acknowledged by two Five Star ratings received for the sixth consecutive year in the Life & Pensions and Investment categories of the Financial Adviser Service Awards.
Product range enhanced, including extended access to our market-leading range of PruFund investments.
PruFund growth since 2006 5* ratings for excellent service 2,700+ adviser firms dealing with Prudential UK
www.prudential.co.uk� Annual�Report�2016 Prudential plc 31 02 Strategic report that provides customers with the flexibility to save for their retirement, provide an income in retirement and facilitate access to their fund as they save. At its core is PruFund, our unique customer proposition managed by the Prudential Portfolio Management Group, our award-winning and market-leading multi-asset management team. From a single fund when launched in 2004, PruFund today comprises six risk-rated funds, offers global investment diversification across 25 different asset classes and delivers smoothing through the strength of the Prudential with-profits fund.
The success of PruFund and its popularity among financial advisers and customers is evidenced in investments worth £24.7 billion in funds under management at the end of 2016.
At the heart of the intermediary model is ‘the power of three’, a combination of regional account manager, telephone account manager and sales support, all working together as a regional sales unit team. There are 65 regional sales units across the UK, giving 100 per cent nationwide coverage, and each having account managers qualified to at least the same standards as the professional advisers they deal with. This model gives third-party financial advisers the support they need, how and when they need it, through dedicated points of contact either in the field or by phone. This approach delivered an 11 per cent compound increase since 2013 in advisory firms recommending Prudential products to their clients. Sales through our intermediary business have also doubled since 2013.
Prudential Financial Planning reinforces Prudential’s industry reputation as an innovator and has been central to the continued sales growth achieved by the business in 2016. From its inception in 2012, and against a background of industry-wide retrenchment, Prudential Financial Planning is now a top-10 UK advisory business, with close to 300 partners advising more than 50,000 clients.
Our direct-to-consumer customer telephony team is central to our ambitions to grow our direct-to-customers business and in 2016 we strengthened its capability ahead of a range of forthcoming proposition and service developments.
RDR PF1 1. PF = 2014 budget announcement of pensions freedom.
Prudential UK & Europe ‘On both occasions when our Prudential Financial Planning Partner visited us, we found the meetings to be very informative, helpful and most importantly honest. He carefully advised and helped us to select the products that best suited our individual needs.
— Institutional external funds under management growth of 11 per cent
The European asset management market is already the second-largest in the world, with net assets of £8.2 trillion, while the UK – M&G’s core market – is the secondlargest national market, with £1.2 trillion, and is a global centre of excellence for investment management.
As the appetite for long-term savings products grows, demand for alternative investment strategies and solutions, such as direct lending and long-term investment in infrastructure equity, is expected to grow. M&G is well placed to benefit from this trend, given its expertise across a diverse range of assets, a record of innovation and strong distribution relationships.
Economic pessimism, political risk and central bank quantitative easing saw many government bonds offering negative real yields in the first half of 2016. There was a significant shift mid-year in investor sentiment, as assets flowed away from bonds and bond proxies back towards equities, particularly financial, energy and materials stocks. This trend accelerated following the US election, and the possibility of looser US fiscal policy boosting economic growth in 2017: over ¤22 billion was withdrawn from fixed income funds by European investors in November alone. An exception was the inflation-linked bond sector, which attracted net flows of over ¤10 billion in 2016 as investors sought protection from the inflationary impact of higher growth expectations in 2017.
Customers Throughout our 85-year history, M&G has maintained its purpose: to help our customers prosper by putting their long-term savings to work. Our customers have always been at the heart of what we do.
Today we manage the savings of millions of people in the UK, Europe and the rest of the world. These include direct or intermediated investors in our open-ended investment funds, members of pension schemes or other long-term savings schemes who invest through financial institutions, and Jackson and Prudential policyholders, including the Prudential UK with-profits fund.
Products M&G has a range of 59 open-ended funds domiciled in the UK and is developing a similar range of funds domiciled in Luxembourg. We aim to offer customers attractive long-term investment returns from a broad choice of products across diverse geographies, asset classes and strategies. Some of our products offer solutions to very specific investor needs. The M&G Episode Income Fund, for example, aims to deliver high and rising levels of income from a diverse range of different assets, which is important to
‘My savings and investments have given me the security to manage life’s ups and downs, pressures and expenditures. You never know what challenges life may bring you. The job you have today may not be there tomorrow and, even in retirement, you don’t always know how long you’ll have to support yourself and your family. Saving for the future is part of my
www.prudential.co.uk� Annual�Report�2016 Prudential plc 35 02 Strategic report many investors at a time of historically low interest rates and negative bond yields. We also manage segregated mandates on behalf of pension schemes, wealth funds and other institutional investors, as well as a number of alternative investment strategies.
Equities: throughout our long history, we have favoured a stock selection approach, building portfolios from the bottom up. We are known for our long-term investment views, which give us credibility and influence when representing the views and interests of our end investors to company management.
Fixed income: M&G is one of Europe’s largest fixed income investors, with one of the biggest, most experienced in-house credit research teams. Our end investors benefit from our expertise in the full range of fixed income investments, ranging from sovereign debt to private loans. Among our best-known and most successful strategies are the M&G Optimal Income Fund, which celebrated the 10th anniversary of its UK launch in 2016, and the M&G Alpha Opportunities Fund.
Real estate: M&G invests in, and manages, property around the globe. Our £26 billion portfolio covers the three commercial sectors of retail, office and industrial. We have a growing franchise in UK Residential Property. M&G Real Estate’s core Asia property fund celebrated its 10th anniversary in 2016 and is one of the largest and most diversified Asia property portfolios. There are now investments of more than US$1.7 billion in the Asia Property Fund.
M&G operates a range of UK-domiciled retail funds, which are now distributed in 23 jurisdictions across Europe and Asia. In the institutional market, M&G provides a range of strategies that help pension funds, sovereign wealth funds and other large institutional investors match liabilities and achieve growth targets.
£64.2 billion retail funds under management £264.9 billion total funds under management £64.2 billion retail funds under management £264.9 billion total funds under management
Investment for growth M&G�is�investing�in�technology�and� operational�infrastructure�so�we�can� take�full�advantage�of�the�opportunities� in�the�fast-evolving�distribution�and� regulatory�landscape�in�which�we�operate.� In�2016,�we�began�implementation�of� Aladdin,�a�new�global�risk�and�portfolio� management�platform,�which�is�being� adopted�across�the�Prudential�Group’s� asset�management�businesses.�This�will� significantly�advance�our�data�capabilities� and�operational�efficiency.�
The year-on-year trends of the three ‘growth and cash’ measures are also positive when expressed on a constant exchange rate basis, except for IFRS operating profit, where we have seen a marginal fall due to the effect of one-off impacts in our UK Life operations.
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. This underlines the scale and quality of our regional franchise, characterised by the high proportion of recurring income and bias for protection business that is uncoupled from market effects. In our insurance and asset management businesses in the UK and US, we have continued to build our earnings base with growth in assets managed on behalf of our customers.
2016 has seen sterling weakening against most global currencies, which is positive for the translation of results from our sizeable non-sterling operations. However, to aid understanding of the underlying progress in these businesses, we continue to express and comment on the performance trends of our Asia and US operations on a constant currency basis.
The key financial highlights in 2016 were as follows: — New business profit1 was 11 per cent2,3 higher at £3,088 million (up 24 per cent on an actual exchange rate basis), primarily as a result of higher volumes with APE sales up 8 per cent2,3. Growth was strongest in Asia, where new business profit increased 22 per cent on a 19 per cent uplift in APE sales and improvements in country and channel mix. The contribution to new business profit from Jackson declined by 13 per cent, reflecting lower variable annuity sales volumes. UK life retail new business profit grew by 33 per cent, driven by strong consumer demand for products offering access to our PruFund investment option, which resulted in a 33 per cent increase in retail APE sales. There was no bulk annuity new business profit as we withdrew from this market in 2016.
— Full year ordinary dividend increased by 12 per cent to 43.5 pence per share, reflecting our strong 2016 performance and our confidence in the future prospects of our Group.
Global investment market movements during 2016 were dominated by the sharp drop in long-term yields over the first threequarters, and the subsequent recovery into the end of the year prompted by more favourable growth expectations in the US. Equity market performance was notably stronger in the second half of the year, contributing to a generally positive movement for 2016 overall in the countries in which we operate. Over the full year, the US S&P 500 index was up 10 per cent, the
UK FTSE 100 index up 12 per cent and the MSCI Asia ex-Japan index up 5 per cent. We have taken steps to reduce the investment market sensitivity of our earnings and balance sheet, but remain significant long-term holders of financial assets to back the commitments that we have made to our customers. Short-term fluctuations in both these assets and related liabilities are reported outside the operating result, which is based on long-term investment return assumptions. These short- term fluctuations were overall negative in 2016, primarily as a result of movements in the value of derivatives used by Jackson to protect the economics of its business from adverse market shocks. As a result, total IFRS post tax profit was £1,921 million
Non-operating items: (Loss)/Profit attaching to held for sale Korea business (227) 56 n/a 62 n/a
IFRS operating profit based on longer-term investment returns Total IFRS operating profit declined by 2 per cent3 (7 per cent increase on an actual exchange rate basis) in 2016 to £4,256 million, with increases in Asia and the US offset by anticipated declines in the contribution from our UK businesses.
— Asia total operating profit of £1,644 million was 15 per cent3 higher than the previous year (28 per cent on an actual exchange rate basis), with strong growth in both life insurance and asset management through Eastspring Investments.
— US total operating profit at £2,048 million increased by 7 per cent (20 per cent increase on an actual exchange rate basis), driven by higher fee income from growth in Jackson’s separate account asset base and lower amortisation of deferred acquisition costs, which together exceeded the anticipated reduction in spread income.
IFRS operating profit in our life insurance operations in Asia was 15 per cent3 higher at £1,503 million (up 28 per cent on an actual exchange rate basis), reflecting our ability to translate top-line growth into shareholder value. The performance is underpinned by the recurring premium income nature of our in-force book and the highly diverse nature of our earnings by geography and by source. Insurance income was up 24 per cent, reflecting our continued focus on health and protection business. At a country level, we have seen double-digit growth in six markets, led by
Hong Kong (up 40 per cent), China (up 83 per cent) and growth of 15 per cent or more from Malaysia, Thailand, Vietnam and Taiwan. These markets have more than compensated for the impact of lower earnings growth in Indonesia and Singapore, following deliberate actions taken to improve the quality of new business flows.
UK life IFRS operating profit declined by 32 per cent to £799 million (2015: £1,167 million). Within this total, the contribution from our core in-force with-profits and annuity business was £601 million (2015: £644 million), including an unchanged transfer to shareholders from the with-profits funds of £269 million. The balance of the result reflects the contribution from other activities which are either non-core or are not expected to recur to the same extent going forward.
Asia life US life UK life Market and other movements 31 Dec11
Asia life11 US life UK life Market and other movements 31 Dec
US life Asia lifeUK life Market and other movements Reclassification of Korea life business held for sale
Focusing on the business supported by shareholder capital, which generates over 90 per cent of the life profit, in 2016 net flows into our businesses were overall positive at £3.6 billion, reflecting our focus on both retaining our existing customers and attracting new business to drive long-term value creation. The weakening of sterling during the year contributed a total £32.4 billion positive foreign exchange movement which, together with favourable investment and other movements, led to a £46.2 billion increase in policyholder liabilities, with much of this arising in the second half of the year.
The 18 per cent increase in policyholder liabilities in our with-profits business to £143.1 billion (2015: £121.0 billion), reflects the growing popularity with consumers seeking protection from the impact of volatile market conditions. In the course of 2016, net liability flows increased to £4.8 billion across our Asian and UK operations. As returns from these funds are smoothed and shared with customers, the emergence of shareholder profit is more gradual. This business, nevertheless, remains an important source of future shareholder value.
Fee income Insurance margin Spread income Other income UK one-off items
Life expenses (net of DAC adjustments and margin on revenues) Growth vs FY15
Asset management: Movements in asset management operating profit are also primarily influenced by changes in the scale of these businesses, as measured by funds managed on behalf of external institutional and retail customers and our internal life insurance operations. In 2016, IFRS operating profit from our asset management businesses was marginally lower at £589 million (2015: £602 million on a constant exchange rate basis), primarily due to the impact of negative net flows in M&G.
M&G’s IFRS operating profit declined by 4 per cent to £425 million (2015: £442 million), reflecting the impact on revenues of lower average assets under management during the year, following the net outflows experienced since the second quarter of 2015. As these net outflows were primarily from the higher margin retail business, they had a disproportionately adverse impact on earnings. The same dynamics have seen the cost-income ratio move up 2 percentage points to 59 per cent.
Despite continued outflows in 2016, external assets under management at 31 December 2016 were 8 per cent higher than a year ago at £136.8 billion, benefitting from positive investment market movements, particularly in the second half of the year and a return to positive net flows for retail business in the fourth quarter of £942 million. Including the assets managed for internal life operations, M&G’s total assets under management rose to £264.9 billion (2015: £246.1 billion).
Our Asia-based asset manager, Eastspring Investments, increased IFRS operating profit by 10 per cent (up 23 per cent on an actual exchange rate basis) to £141 million, reflecting the positive effect on average assets under management of favourable market movements and £2.2 billion net inflows in the second half of the year. Although a shift in the mix of assets away from higher-margin equity funds has moderated the overall revenue margin, scale efficiencies have resulted in an improvement in the cost-income ratio to 56 per cent (2015: 58 per cent). External assets under management at 31 December 2016 increased to £38.0 billion (31 December 2015: £30.3 billion). Including money market funds and the assets managed for internal life operations,
IFRS non-operating items consist of short-term fluctuations, the results attaching to the held for sale life business in Korea and other non-operating items.
IFRS short-term investment fluctuations IFRS operating profit is based on longerterm investment return assumptions. The difference between actual investment returns recorded in the income statement and the assumed longer-term returns is reported within short-term fluctuations in investment returns. In 2016, the total short-term fluctuations in investment returns relating to the life operations were negative £1,482 million and comprised negative £225 million for Asia, negative £1,455 million in the US and positive £198 million in the UK.
The Asia negative £225 million short-term fluctuations principally reflected the net impact of changes in interest rates and equity markets across the region.
The negative short-term fluctuations in investment returns for other operations of negative £196 million (2015: negative £61 million) include unrealised value movements on financial instruments.
IFRS effective tax rates In 2016, the effective tax rate on IFRS operating profit based on longer-term investment returns was 21 per cent, (2015: 20 per cent), reflecting a larger contribution to operating profit from Jackson which attracts a higher rate of tax.
The 2016 effective tax rate on the total IFRS profit was 16 per cent (2015: 18 per cent), reflecting a smaller contribution to the total profit from Jackson which attracts higher rate of tax.
The main driver of the Group’s effective tax rate is the relative mix of the profits between countries with higher tax rates (such as the US, Indonesia, and Malaysia), and countries with lower tax rates (such as Hong Kong, Singapore and the UK). The UK has enacted legislation to reduce the corporation tax rate in stages from 20 per cent to 17 per cent from 1 April 2020. The effect of reductions to 17 per cent is reflected in the full year 2016 results. Following the US elections, there is the prospect of significant tax reform occurring in the US, which potentially could reduce the US corporate income tax rate from the current 35 per cent. A number of Asian countries, most notably Indonesia, have indicated they are considering reducing corporation tax rates, but no legislative proposals have been announced to date.
We do not expect that changes being introduced in the UK and other countries to implement recommendations made by the OECD’s base erosion and profit shifting project to reform the international tax regime to have any significant impact on the Group.
Publication of tax strategy In 2017, a new UK requirement for large UK businesses to publish their tax strategy will take effect. Prudential’s tax strategy, together with further details of the tax payments made in 2016, will be available on the Group’s website before 30 June 2017.
In Asia new business profit was 22 per cent3 higher at £2,030 million, outpacing new business APE sales in the region which increased by 19 per cent3 to £3,599 million (up 37 per cent and 33 per cent respectively on an actual exchange rate basis). APE sales progression has been strongest in the agency channel, up 23 per cent, as we continue to drive improvements in productivity and invest in recruitment initiatives to underpin future sales prospects. The fourth quarter saw an acceleration in the positive trends observed earlier in the year; overall APE increased to over £1 billion for the first time in a discrete quarter, with eight of our markets in the region growing by 20 per cent or more. Despite the strength of this growth our focus on quality is undiminished, with regular premiums on long-term contracts accounting for over 93 per cent of APE sales and a continuing high proportion of new business from health and protection coverage (62 per cent of new business profit). This favourable mix provides a high level of recurring income and an earnings profile that is significantly less correlated to investment markets.
Our businesses in China and Hong Kong have performed well in 2016, with APE sales increasing by 31 per cent and 40 per cent, respectively, and demonstrating the extent of the opportunity in these markets. In Hong Kong, we continue to generate business from both Mainland China residents and local customers, with a strong bias for regular premiums (94 per cent of APE sales)
In Indonesia, trading conditions remain challenging, and in such an environment we have retained our more cautious approach to new business, resulting in a 25 per cent reduction in APE sales. However, sales performance in the fourth quarter was more encouraging with a more modest period-on-period decline in APE sales of 3 per cent and a return to growth in the month of December. In Malaysia, APE sales were up 8 per cent, driven by improvements in the conventional agency channel and increased contributions from our bancassurance partners. In Singapore, where APE sales were up 1 per cent in 2016, new business performance has improved through the year which saw APE sales in the second half increase by 12 per cent relative to the equivalent period last year, driven by increased agent activation and a recovery in bancassurance sales.
The 22 per cent increase in new business profit primarily reflects the effect of higher APE sales volumes (up 19 per cent) and positive effects from changes in country mix and channel mix.
In the US, uncertainty following the announcement of the Department of Labor’s fiduciary duty rule on the distribution of retirement market products has contributed to a marked decline of 22 per cent16 in industry sales of variable annuities. Jackson’s APE sales from all our variable annuity products were also lower as a result, down 25 per cent. Notwithstanding this reduction in sales, net inflows into Jackson’s separate account asset balances, which drive fee-based earnings on variable annuity business, remained positive at £4.4 billion. More favourable market conditions in the institutional product market provided Jackson with the opportunity to write APE sales of £184 million compared to £138 million in 2015.
Jackson’s new business profit of £790 million declined by 13 per cent overall, although this represents a smaller decrease than the reduction in sales volumes, demonstrating the benefit of improved business mix and a modest uplift from higher interest rates. The economics on new business in variable annuities remain extremely attractive, with high internal rates of return and short payback periods.
Chief Financial Officer’s report on the 2016 financial performance – Nic Nicandrou Continued
This metric is based on the capital regimes which apply locally in the various jurisdictions in which our life businesses operate. The introduction of Solvency II with effect from 1 January 2016 has altered the regime locally applied to our UK life business, so the 2016 UK life free surplus figures reflect this change. The 2015 UK life comparatives are unchanged as they reflect the regime that applied at that time.
We invested £903 million of the free surplus generated1 during the period in writing new business (2015: £792 million, including bulk annuities) equivalent to an increase of 14 per cent.
Asia remains the primary destination for reinvestment of capital given its higher margin organic growth opportunities. Investment of free surplus in new business was 12 per cent3 higher at £476 million, which is lower than the 19 per cent3 growth in APE sales, mainly due to positive mix effects. We continue to generate internal rates of return in excess of 20 per cent, with an average payback period of three years.
The new business investment1 in the UK was £129 million (2015: £65 million), although comparisons are distorted by the application of different capital regimes in the two periods, with investment in 2016 including a significantly higher strain for new non-profit annuities under the new Solvency II regime, despite the much reduced sales. Following our decision in June 2016 to stop writing annuity business in the open market and our action in early February 2017 to direct internal vestings to a panel of providers, UK new business strain is expected to reduce significantly in 2017.
FY15 special dividend FY15 second interim dividend and FY16 first interim dividend
Actual exchange rate Constant exchange rate 2016 pence 2015 pence Change % 2015 pence Change %
Basic earnings per share based on post-tax operating profit3 214.7 189.6 13 209.9 2 Basic earnings per share based on post-tax total profit 176.4 154.8 14 170.2 4
EEV operating profit On an EEV basis, Group post-tax operating profit based1 on longer-term investment return increased by 3 per cent3 (up 14 per cent on an actual exchange rate basis) to £5,497 million in 2016. Prudential adopts an active basis of setting the future return assumptions used to calculate the Group’s EEV basis operating profit. These assumptions are therefore based on the 31 December 2016 long-term interest rates which were lower in our key markets of the UK, Indonesia and Singapore, and higher in other markets including US, Hong Kong and Malaysia. The impact of these movements in the full year results broadly offset.
Capital position With effect from 1 January 2016, the Group is required to adopt Solvency II as its consolidated capital regime. This was developed by the EU in order to harmonise the various regimes previously applied across EU member states. As the regime was primarily designed with European life products in mind, it is a poor fit with Prudential’s business given the predominantly non-EU footprint of the Group. The one year value at risk nature of the Solvency II test, which has its roots in banking regulation where risk positions can be priced and readily traded, runs counter to the multi-year nature of life insurance business, where the illiquid nature of liabilities renders such potential market solutions theoretical and not grounded in established sector practices. It also means that solvency capital will be highly volatile.
Analysis of movement in Group shareholder Solvency II surplus20 2016 £bn 2015 £bn
The high quality and recurring nature of our operating capital generation and our disciplined approach to managing balance sheet risk enabled us to enter the new Solvency II regime on 1 January 2016 with a strong Group shareholders’ capital surplus of £9.7 billion. These factors also provided meaningful protection against the significant adverse market-driven effects on this metric in the first half of 2016. Reflecting the improvement in long-term yields during the last three months of the year, combined with strong operating capital generation and the beneficial effects of debt issued, the Group shareholders’ Solvency II capital surplus was estimated at £12.5 billion at 31 December 2016, equivalent to a cover ratio of 201 per cent6,7 (1 January 2016: 193 per cent).
Local statutory capital All of our subsidiaries continue to hold appropriate capital levels on a local regulatory basis. In the UK, at 31 December 2016 the Prudential Assurance Company Limited and its subsidiaries had an estimated Solvency II shareholder surplus21 of £4.6 billion (equivalent to a cover ratio of 163 per cent) and a with-profits surplus22 of £3.7 billion (equivalent to a cover ratio of 179 per cent). In the US, the combination of a high start of year capital level coupled with strong operational capital formation in the year and specific actions taken to strengthen further Jackson’s local statutory capital position led to an increase in its Risk Based Capital ratio to 485 per cent (2015: 481 per cent).
Financing and liquidity Our financing and central liquidity position remained strong throughout the year. Our central cash resources amounted to £2.6 billion at 31 December 2016 (31 December 2015: £2.2 billion). Total core structural borrowings increased by £1.8 billion to £6.8 billion following the issue of US$1 billion (£800 million at 31 December 2016) 5.25 per cent tier 2 perpetual subordinated debt in June 2016, US$725 million (£580 million at 31 December 2016) 4.38 per cent tier 2 perpetual subordinated debt in September 2016 and the impact of currency movements.
Prudential’s holding company currently has access to £2.6 billion of syndicated and bilateral committed revolving credit facilities provided by 19 major international banks, expiring in 2021 and 2022. Apart from small drawdowns to test the process, these facilities have never been drawn, and there were no amounts outstanding at 31 December 2016. The medium-term note programme, the SEC registered shelf programme, the commercial paper programme and the committed revolving credit facilities are all available for general corporate purposes and to support the liquidity needs of Prudential’s holding company and are intended to maintain a strong and flexible funding capacity.
Profit after tax for the year 1,921 2,579 4,516 3,951 Exchange movements, net of related tax 1,161 118 4,211 244 Unrealised gains and losses on Jackson fixed income securities classified as available for sale23 31 (629) – –
Market to market value movements on Jackson assets backing surplus and required capital – – (11) (76)
www.prudential.co.uk� Annual�Report�2016 Prudential plc 49 02 Strategic report increased the statutory capital requirements. Factoring these and other consequential methodology changes in the EEV calculations of the UK life business produced a net charge of £473 million, equivalent to 5 per cent of the UK’s embedded value (just over 1 per cent of the Group’s embedded value at the start of the year). For our operations in Asia and the US, there is no impact on the EEV results since Solvency II does not act as the local constraint on the ability to distribute capital to the Group.
The Group’s EEV basis shareholders’ funds also increased by 22 per cent5 to £39.0 billion (31 December 2015: £31.9 billion on an actual exchange rate basis), equivalent of 1,510 pence per share, up from 1,240 pence per share5 at 31 December 2015.
Sale of Korea life insurance business In November 2016 we announced the sale of our Korea life insurance business, PCA Life Insurance Co., Ltd. to Mirae Asset Life Insurance Co., Ltd., for KRW170 billion (equivalent to £114 million at 31 December 2016 closing exchange rate) cash consideration. The completion of this sale is subject to regulatory approval. Consistent with the classification of the business as held for sale, the IFRS and EEV carrying values have been set to £105 million, representing the estimated proceeds, net of related expenses of £9 million. The IFRS loss of £227 million and EEV loss of £410 million comprises the 2016 reduction on writing down the carrying value of the business to the agreed sale proceeds (net of costs) together with its profits for the year. The comparative profits for the year have been similarly reclassified as non-operating for consistency of presentation.
2 Excluding UK bulk annuities as Prudential has withdrawn from this market.
3 Following its reclassification to held for sale during 2016, operating results exclude the results of the Korea life business. The 2015 comparative results have been similarly adjusted.
5 Includes adjustment for opening EEV shareholders’ funds of negative £0.5 billion for the impact of Solvency II as at 1 January 2016.
8 Refer to note B1.1 in IFRS financial statements for the breakdown of other income and expenditure and other non-operating items.
9 Includes Group’s proportionate share of the liabilities and associated flows of the insurance joint ventures and associates in Asia.
11 Following its reclassification to held for sale during 2016, the shareholder-backed policyholder liabilities for Korea exclude the value of policyholder liabilities held at 1 January 2016 and 2016 net liability flows for Korea life business.
12 For basis of preparation see note I (a) of Additional unaudited IFRS financial information.
15 Net inflows exclude Asia Money Market Fund (MMF) inflows of £403 million (2015: net inflows £1,065 million). External funds under management exclude Asia MMF balances of £7,714 million (2015: £6,006 million).
16 LIMRA/Secure Retirement Institute, US Individual Annuity Participants Report 3Q YTD 2016.
17 The 2015 comparative includes an adjustment to opening free surplus representing the impact of Solvency II at 1 January 2016, together with the effect of a reclassification between long-term business and other operations, as discussed in note 9(v) of the EEV basis results.
18 Net cash remitted by business units are included in the Holding company cash flow, which is disclosed in detail in note II(a) of Additional unaudited IFRS financial information.
22 The with-profits Solvency II surplus represents the contribution to Own Funds and the Solvency Capital Requirement from ring fenced funds. The estimated solvency position includes the impact of recalculated transitionals at the valuation date.
24 Operating profit after tax and non-controlling interests as percentage of opening shareholders’ funds.
Group Chief Risk Officer’s report of the risks facing our business and how these are managed – Penny James
Even in such a year, we have maintained a strong and sustained focus on planning for the possibility of, and ultimately managing, the market volatility and macroeconomic uncertainty arising from these events. Our Risk Management Framework and risk appetite have allowed us to control successfully our risk exposure throughout the year. Our strong governance, processes and controls enable us to deal with the uncertainty ahead in order to continue helping our customers achieve their long-term financial goals.
For our shareholders, we generate value by selectively taking exposure to risks that are adequately rewarded and that can be appropriately quantified and managed. We retain risks within a clearly defined risk appetite, where we believe doing so contributes to value creation and the Group is able to withstand the impact of an adverse outcome. For our retained risks, we ensure that we have the necessary capabilities, expertise, processes and controls to manage appropriately the exposure.
In my report, I seek to explain the main risks inherent in our business and how we manage these evolving risks, with the aim of ensuring we maintain an appropriate risk profile.
Risk governance, culture and our risk management cycle Prudential defines ‘risk’ as the uncertainty that we face in successfully implementing our strategies and objectives. This includes all internal or external events, acts or omissions that have the potential to threaten the success and survival of the Group. As such, material risks will be retained selectively where we think there is value to do so, and where it is consistent with the Group’s risk appetite and philosophy towards risk taking.
The following section provides more detail on our risk governance, culture and risk management process.
Risk governance Our risk governance comprises the organisational structures, reporting relationships, delegation of authority, roles and responsibilities, and risk policies that the Group head office and the business units establish to make decisions and control their activities on risk-related matters. This encompasses individuals, Group-wide functions and committees involved in the management of risk.
The Framework requires that all our businesses and functions establish processes for identifying, evaluating and managing the key risks faced by the Group – the ‘Risk Management Cycle’ (see below) and is based on the concept of the ‘three lines of defence’, comprising risk taking and management, risk control and oversight, and independent assurance. A major part of the Risk Management Cycle is the annual assessment of the Group’s risks which are considered key. These key risks range from risks associated with the economic, market, political and regulatory environment; those that we assume when writing our insurance products and by virtue of the investments we hold; and those that are inherent in our business model and its operation. This is used to inform risk reporting to the risk committees and the Board for the year.
Risk appetite, limits and triggers The extent to which we are willing to take risk in the pursuit of our objective to create shareholder value is defined by a number of risk appetite statements, operationalised through measures such as limits, triggers and indicators. The Group risk appetite is approved by the Board and is set with reference to economic and regulatory capital, liquidity and earnings volatility. The Group risk appetite is aimed at ensuring that we take an appropriate level of aggregate risk and covers all risks to shareholders, including those from participating and third party business. We have no appetite for material losses (direct or indirect) suffered as a result of failing to develop, implement and monitor appropriate controls to manage operational risks. Group limits operate within the risk appetite to constrain the material risks, while triggers and indicators provide further constraint and ensure escalation. The Group Chief Risk Officer determines the action to be taken upon any breaches.
Earnings volatility The objectives of the aggregate risk limits seek to ensure that: — The volatility of earnings is consistent with the expectations of stakeholders; — The Group has adequate earnings (and cash flows) to service debt, expected dividends and to withstand unexpected shocks; and
The two measures used at the Group level are Solvency II capital requirements and internal economic capital requirements. In addition, capital requirements are monitored on local statutory bases.
There are core risk policies for credit, market, insurance, liquidity and operational risks and a number of internal control policies covering internal model risk, underwriting, dealing controls and tax risk management. They form part of the Group Governance Manual, which was developed to make a key contribution to the sound system of internal control that we maintain in line with the UK Corporate Governance Code and the Hong Kong Code on Corporate Governance Practices. Group Head Office and business units must confirm that they have implemented the necessary controls to evidence compliance with the Group Governance Manual on an annual basis.
Risk standards The Group-wide Operating Standards provide supporting detail to the higher level risk policies. In many cases they define the minimum requirements for compliance with Solvency II regulations which in some areas are highly prescriptive. The standards are more detailed than policies.
Our risk culture Culture is a strategic priority of the Board who recognise the importance of good culture in the way that we do business. Risk culture is a subset of broader organisational culture, which shapes the organisationwide values that we use to prioritise risk management behaviours and practices.
An evaluation of risk culture is part of the Risk Management Framework and in particular seeks to identify evidence that: — Senior management in business units articulate the need for good risk management as a way to realise long-term value and continuously support this through their actions.
Risk identification Group-wide risk identification takes place throughout the year, and includes processes such as our Own Risk and Solvency Assessment (ORSA) and the horizon-scanning performed as part of our emerging risk management process.
On an annual basis, a top-down identification of the Group’s key risks is performed which considers those risks that have the greatest potential to impact the Group’s operating results and financial condition. A bottom-up process of risk identification is performed by the business units who identify, assess and document risks, with appropriate coordination and challenge from the risk functions.
The Group ORSA report pulls together the analysis performed by a number of risk and capital management processes, which are embedded across the Group, and provides quantitative and qualitative assessments of the Group’s risk profile, risk management and solvency needs on a forward-looking basis. The scope of the report covers the full known risk universe of the Group.
In accordance with provision C.2.1 of the UK Code, the Directors have performed a robust assessment of the principal risks facing the Company, through the Group ORSA report and the risk assessments done as part of the business planning review, including how they are managed and mitigated.
Risk processes that support the management and controlling of risk exposures include: — Risk appetite and limits — Financial incidents procedures — Large risk approval process — Global counterparty limit framework
R is k id en tif ication Risk measurem ent and assessm ent
The risk profile is a key output from the risk identification and risk measurement processes, and is used as a basis for setting Group-wide limits, management information, assessment of solvency needs, and determining appropriate stress and scenario testing. The risk identification processes support the creation of our annual set of key risks, which are then given enhanced management and reporting focus.
Risk management and control The control procedures and systems established within the Group are designed to manage reasonably the risk of failing to meet business objectives and are detailed in the Group risk policies. This can of course only provide reasonable and not absolute assurance against material misstatement or loss. They focus on aligning the levels of risk taking with the achievement of business objectives.
The methods and risk management tools we employ to mitigate each of our major categories of risks are detailed in section 4 below.
Summary risks The table below is a summary of the key risks facing the Group, which can be grouped into those which apply to us because of the global environment in which we operate, and those which arise as a result of the business that we operate – including risks arising from our investments, the nature of our products and from our business operations.
Geopolitical risk The geopolitical environment is increasingly uncertain with political upheaval in the UK, the US and the Eurozone. Uncertainty in these regions, combined with conflict in the Middle East and increasing tensions in east Asia underline that geopolitical risks are truly global and their potential impacts are wide-ranging; for example through increased regulatory risk. The geopolitical and economic environments are increasingly closely linked, and changes in the political arena may have direct or indirect impacts on our Group.
Risks from our investments Risks from our products Risks from our business operations
Global economic conditions – see above – have a large impact on those risks from our investments.
The assets backing the UK and Jackson’s annuity business mean credit risk is a significant focus for the Group.
Liquidity risk Is the risk of not having sufficient liquid assets to meet our obligations as they fall, and incorporates the risk arising from funds composed of illiquid assets. It results from a mismatch between the liquidity profile of assets and liabilities.
The processes that determine the price of our products and reporting the results of our long-term business operations require us to make a number of assumptions. Where experience deviates from these assumptions our profitability may be impacted.
For the UK and Jackson, the most significant insurance risk is longevity risk driven by their annuity businesses.
Operational risks As a Group, we are dependent on the appropriate and secure processing of a large number of transactions by our people, IT infrastructure and outsourcing partners, which exposes us to operational risks and reputational risks.
Information security risk is a significant consideration within operational risk, including both the risk of malicious attack on our systems as well as risks relating to data security and integrity and network disruption. The size of Prudential’s IT infrastructure and network, our move toward digitisation and the increasing number of high-profile cyber security incidents across industries means that this will continue to be an area of high focus.
Regulatory risk We also operate under the ever-evolving requirements set out by diverse regulatory and legal regimes (including tax), as well as utilising a significant number of third parties to distribute products and to support business operations; all of which add to the complexity of the operating model if not properly managed.
Both Jackson and the UK operate in highly regulated markets. Regulatory reforms could materially impact our businesses, and regulatory focus continues to be high.
Further risk information In reading the sections below, it is useful to understand that there are some risks that our policyholders assume by virtue of the nature of their products, and some risks that the Company and its shareholders assume. Examples of the latter include those risks arising from assets held directly by and for the Company, or the risk that policyholder funds are exhausted. This report is focused mainly on risks to the shareholder, but will include those which arise indirectly through our policyholder exposures.
— Given the geographical diversity of our business, foreign exchange risk.
In Asia, our shareholder exposure to equity price movements results from unit-linked products, where our fee income is linked to the market value of the funds under management. Further exposure arises from with-profits businesses where bonuses declared are broadly based on historical and current rates of return on equity.
Interest rate risk (Audited) While long-term interest rates in advanced economies have broadly increased since mid-2016, they remain close to historical lows. Some products that we offer are sensitive to movements in interest rates. We have already taken a number of actions to reduce the risk to the in-force business, as well as re-pricing and restructuring new business offerings in response to these historically low interest rates. Nevertheless, we still retain some sensitivity to interest rate movements.
In Asia, our exposure to interest rate risk arises from the guarantees of some non unit-linked investment products. This exposure exists because it may not be possible to hold assets which will provide cash payments to us which match exactly those payments we in turn need to make to policyholders – this is known as an asset and liability mismatch and although it is small and appropriately managed, it cannot be eliminated.
Jackson is exposed to interest rate risk in its fixed, fixed index and variable annuity books. Movements in interest rates can impact on the cost of guarantees in these products, in particular the cost of guarantees may increase when interest rates fall. We actively monitor the level of sales of variable annuity products with guaranteed living benefits, and together with the risk limits we have in place this helps us to ensure that we are comfortable with the interest rate and market risks we incur as a result. The Jackson hedging programme in place includes hybrid derivatives to protect us from a combined fall in interest rates and equity markets since Jackson is exposed to the combination of these market movements.
Foreign exchange risk (Audited) The geographical diversity of our businesses means that we have some exposure to the risk of exchange rate fluctuations. Our operations in the US and Asia, which represent a large proportion of our operating profit and shareholders’ funds, generally write policies and invest in assets in local currencies. Although this limits the effect of exchange rate
Prudential plc Annual Report 2016 www.prudential.co.uk56 movements on local operating results, it can lead to fluctuations in our Group financial statements when results are reported in UK sterling.
We retain revenues locally to support the growth of our business and capital is held in the local currency of the business to meet local regulatory and market requirements. We accept the foreign exchange risk this can produce when reporting our Group balance sheet and income statement. In cases where a surplus arises in an overseas operation which is to be used to support Group capital, or where a significant cash payment is due from an overseas subsidiary to the Group, this foreign exchange exposure is hedged where we believe it is economically favourable to do so. Generally, we do not have appetite for significant direct shareholder exposure to foreign exchange risks in currencies outside local territories, but we do have some controlled appetite for this on fee income and on non-sterling investments within the with-profits fund. Where foreign exchange risk arises outside our appetite, currency borrowings, swaps and other derivatives are used to manage our exposure.
— Close monitoring or restrictions on investments that may be of concern.
Debt and loan portfolio (Audited) Our UK business is mainly exposed to credit risk on fixed income assets in the shareholder-backed portfolio. At 31 December 2016, this portfolio contained fixed income assets worth £38.6 billion. Credit risk arising from a further £55.2 billion of fixed income assets is largely borne by the with-profits fund, to which the shareholder is not directly exposed although under extreme circumstances shareholder support may be required if the fund is unable to meet payments as they fall due.
Financial 19.63% Government 18.71% Real estate 8.52% Utilities 8.34% Consumer, non-cyclical 8.23% Mortgage securities 3.85% Industrial 4.69% Energy 4.41% Communications 3.61% Consumer, cyclical 2.56% Asset-backed securities 3.32% Other 14.13%
Credit risk also arises in the general account of the Jackson business, where £40.7 billion of fixed income assets are held to support shareholder liabilities including those from our fixed annuities, fixed index annuities and life insurance products.
The shareholder-owned debt and loan portfolio of the Group’s asset management business of £2.3 billion as at 31 December 2016 mostly belongs to our Prudential Capital (PruCap) operations.
Certain sectors have been under pressure during 2016, including the European banking sector. Most of the focus on the latter was around UK banks due to Brexit concerns, Italian banks and certain banks at risk of fines for the mis-selling of mortgage securities leading up to the 2008 financial crisis. We subject these sectors to ongoing monitoring and regular management information reporting to the Group’s risk committees. Certain sectors are also subject to our watch list and early warning indicator monitoring processes.
The exposures held by the shareholderbacked business and with-profits funds in sovereign debt securities at 31 December 2016 are given in Note C3.2(f) of the Group’s IFRS financial statements.
Where appropriate, we reduce our exposure, buy credit protection or use additional collateral arrangements to manage our levels of counterparty credit risk.
At December 2016, shareholder exposures by rating and sector are shown below: — 96 per cent of the shareholder portfolio is investment grade rated. In particular, 53 per cent of the portfolio is rated A- and above; and
— The Group’s shareholder portfolio is well diversified: no individual sector makes up more than 10 per cent of the total portfolio (excluding the financial and sovereign sectors).
Liquidity risk Our liquidity risk arises from the need to have sufficient liquid assets to meet policyholder and third-party payments as they fall due. This incorporates the risk arising from funds composed of illiquid assets and results from a mismatch between the liquidity profile of assets and liabilities. Liquidity risk may arise, for example, where external capital is unavailable at sustainable cost, increased liquid assets are required to be held as collateral under derivative transactions or redemption requests are made against Prudential issued illiquid funds.
We have significant internal sources of liquidity, which are sufficient to meet all of our expected cash requirements for at least 12 months from the date the financial statements are approved, without having to resort to external sources of funding. In total, the Group has £2.6 billion of undrawn committed facilities that we can make use of, expiring in 2020. We have access to further liquidity by way of the debt capital markets, and also have in place an unlimited commercial paper programme and have maintained a consistent presence as an issuer in this market for the last decade.
Liquidity uses and sources are assessed at a Group and business unit level under both base case and stressed assumptions. We calculate a Liquidity Coverage Ratio (LCR) under stress scenarios as one measure of our liquidity risk, and this ratio and the liquidity resources available to us are regularly monitored and are assessed to be sufficient.
— The access we enjoy to external sources of finance through committed credit facilities.
Risks from our products Insurance risk Insurance risk makes up a significant proportion of our overall risk exposure. The profitability of our businesses depends on a mix of factors including levels of, and trends in, mortality (policyholders dying), morbidity (policyholders becoming ill) and persistency (customers lapsing their policies), and increases in the costs of claims, including the level of medical expenses increases over and above price inflation (claim inflation).
We manage and mitigate our insurance risk using the following: — Our insurance and underwriting risk policies; — The risk appetite statements, limits and triggers we have in place; — Using longevity, morbidity and persistency assumptions that reflect recent experience and expectation of future trends, and industry data and expert judgement where appropriate; — We use reinsurance to mitigate longevity and morbidity risks; — Morbidity risk is also mitigated by appropriate underwriting when policies are issued and claims are received;
Longevity risk is an important element of our insurance risks for which we need to hold a large amount of capital under Solvency II regulations. Longevity reinsurance is a key tool for us in managing our risk. The enhanced pensions freedoms introduced in the UK during 2015 greatly reduced the demand for retail annuities and further liberalisation is anticipated. Although we have scaled down our participation in the annuity market by reducing new business acquisition, given our significant annuity portfolio the assumptions we make about future rates of improvement in mortality rates remain key to the measurement of our insurance liabilities and to our assessment of any reinsurance transactions.
Our persistency assumptions similarly reflect a combination of recent past experience for each relevant line of business and expert judgement, especially where a lack of relevant and credible experience data exists. Any expected change in future persistency is also reflected in the assumption. Persistency risk is mitigated by appropriate training and sales processes and managed locally post-sale through regular experience monitoring and the identification of common characteristics of business with high lapse rates. Where appropriate, we make allowance for the relationship (either assumed or historically observed), between persistency and investment returns and account for the resulting additional risk. Modelling this dynamic policyholder behaviour is particularly important when assessing the likely take-up rate of options embedded within certain products. The effect of persistency on our financial results can vary but mostly depends on the value of the product features and market conditions.
An important element of operational risk relates to compliance with changing regulatory requirements. The high rate of global regulatory change, in an already complex regulatory landscape, increases the risk of non-compliance due to a failure to identify, correctly interpret, implement and/or monitor regulations. Legislative developments over recent years, together with enhanced regulatory oversight and increased capability to issue sanctions, have resulted in a complex regulatory environment that may lead to breaches of varying magnitude if the Group’s businessas -usual operations are not compliant. As well as prudential regulation, we focus on conduct regulation, including regulations related to anti-money laundering, bribery and corruption, and sales practices. We have a particular focus on these regulations in newer/emerging markets.
— The risk of inadequate or inappropriate controls, governance structures or communication channels in place to support the desired culture and ensure that the business is managed in line with the core business values, within the established risk appetite and in alignment with external stakeholder expectations.
— A Recovery Plan covering corporate and risk governance for managing risks in a distressed environment, a range of recovery options, and scenarios to assess the effectiveness of these recovery options
There are a number of ongoing policy initiatives and regulatory developments that are having, and will continue to have, an impact on the way Prudential is supervised. These include addressing Financial Conduct Authority (FCA) reviews, ongoing engagement with the Prudential Regulation Authority (PRA), and the work of the Financial Stability Board (FSB) and standard-setting institutions such as the International Association of Insurance Supervisors (IAIS). Decisions taken by regulators, including those related to solvency requirements and capital allocation may have an impact on our business.
A consultation on the ICS was concluded in 2016 and the IAIS intends to publish an interim version of ICS in 2017. Further field testing, consultations and private reporting to group-wide supervisors on the interim version of the ICS are expected over the coming years. It is currently planned to be adopted as part of ComFrame by the IAIS in late 2019.
Given this, cyber security is seen as a key risk for the Group. Our current threat assessment is that, while we are not individually viewed as a compelling target for a direct cyber-attack, we are at risk of suffering attacks as a member of the global financial services industry, with potentially significant impact on business continuity, our customer relationship and our brand reputation.
The Cyber Defence Plan consists of a number of work-streams, including developing our ability to deal with incidents; alignment with our digital transformation strategy; and increasing cyber oversight and assurance to the Board.
Protecting our customers remains core to our business, and the successful delivery of the Cyber Defence Plan will reinforce our capabilities to continue doing so in cyberspace as we transition to a digital business.
Period of assessment The Directors performed the assessment by reference to the three-year period to December 2019. Three years is considered an appropriate period as it represents the period covered by the detailed business plan that is prepared annually on a rolling three-year basis. In approving the business plan the Director’s review the Group’s projected performance with regards to profitability, cash generation and capital position, together with the parent company’s liquidity over this three-year period. As well as implementing the Group’s strategic objectives, this projection involves setting a number of economic and other assumptions that are inherently volatile over a much longer reporting period. Such assumptions include foreign exchange rates, interest rates, economic growth rates and the impact on the business environment for events such as the exit of the United Kingdom from the European Union.
Note 1 Excludes Group’s proportionate share in joint ventures and unit-linked assets and holdings of consolidated unit trust and similar funds.
To evaluate the Group’s resilience to significant deteriorations in market and credit conditions and other shock events, these risks are grouped together into severe but plausible scenarios which are then applied to the assumptions underlying the business plan. For example, the impacts of scenarios assuming a disorderly transition to a more normalised interest rate environment and an international recession were considered in the preparation of the most recent business plan, together with the impact on Group liquidity of a scenario assuming the closure of short-term debt markets for three months. In addition, the Group conducts an annual reverse stress test which gives the Directors an understanding of the maximum resilience of the Group to extremely severe adverse scenarios.
In considering these scenarios the impacts of mitigating management actions designed to maintain or restore key capital, liquidity and solvency metrics to the Group’s approved risk appetite are considered. In the scenarios tested, sufficient actions were available to management to maintain the viability of the Group over the three year period under assessment.
Conclusion on viability Based on this assessment, the Directors have a reasonable expectation that the Company and the Group will be able to continue in operation and meet their liabilities as they fall due over the threeyear plan period to December 2019.
Serving our customers Prudential has been meeting people’s needs for 168 years and today provides long-term savings and protection products to around 24 million customers in markets on four continents, enabling them to look to the future with confidence.
Prudential Singapore became the first insurer in Singapore to launch an online community portal for customers to share ideas and to provide direct feedback on products and services. Through Pru-for-you, regular dialogue with customers allows the business to better understand their needs and in turn, create an offering that is tailored to their financial and lifestyle requirements.
US Prudential’s US operation, Jackson, provides retirement income strategies aimed at the 75 million baby boomers in the US. Jackson offers a diverse range of variable, fixed and fixed-index annuity products, designed with a variety of custom options to fit different financial goals.
It is 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.
— £460,167 donated by employees through payroll giving across the Group
Jackson is committed to providing education, service support and digital tools to increase the ease of doing business. The Center for Financial Insight is a resource designed to help investors and employees gain a better understanding of important financial and investing topics. The mission of the Center is to raise the overall level of financial education and confidence in the US by providing useful content framed in a way that is relevant, consumable and engaging for the modern customer.
UK and Europe Following reform of the UK’s pension and retirement income system in 2015 Prudential has continued to develop both products and processes to meet an evolving set of customer expectations and requirements that increasingly include having to manage and take responsibility for their own savings and the associated risks of longevity, inflation and investment.
Most notably in 2016, we responded to changes in the market following the introduction of pension freedoms by launching the Prudential Retirement Account – an online account based plan that provides customers with the flexibility to save for their retirement, provide an income in retirement and facilitate access to their fund as they save.
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 teams.
In 2016, Prudential hosted a series of national seminars covering over 20 locations nationwide, and a structured WebEx programme covered a range of topical and technical subjects, to help these advisers deal with the changing regulatory landscape. Our financial planning business, Prudential Financial Planning, also grew significantly in 2016, increasing its number of advisers to 288.
Indonesia head to Taman Mataram in south Jakarta. Every Saturday for four weeks, the volunteers worked with Prestasi Junior Indonesia and the local community to regenerate an under-utilised park into a green community space incorporating fun activities and a financial education theme.
Rob Gardiner, Management Advisor Prestasi Junior Indonesia said, ‘The 2016 Chairman’s Challenge was just what the name suggests – a very challenging undertaking. The initiative required both Prestasi Junior
Prudential UK & Europe’s success in the Financial Adviser Service Awards continued in 2016, with the retention of the coveted Five Star ratings in the Life and Pensions and Investments categories for the sixth consecutive year. Prudential was the biggest winner at the Investment Life & Pensions MoneyFacts Awards in 2016, scooping the top awards for the Best Investment Service, Best Investment Bond Provider and Best Online Service, once again achieving incredible success at one of the most sought-after awards in our industry.
Reflecting this approach, M&G is a signatory to the UN Principles for Responsible Investment (UNPRI), an international network of investors working together to promote responsible investment practices.
M&G provides market insights to clients, intermediaries and direct investors through a number of channels, including a programme of roadshows and events and multiple digital platforms. To better reflect the diversity of our customer base, during 2016 we significantly increased the size of our M&G Client Council, the panel of our direct investors that helps us design products, services and communications to better meet their needs. Members of our Client Council played a key role in the early stage of product concept testing for our two newest retail funds: the M&G Absolute Return Bond Fund and the M&G Global Target Return Fund, which we launched just before the end of the year.
Education and life skills Cha-Ching – the first global financial education programme We have a long-standing commitment to financial literacy and Cha-Ching is our flagship financial education programme. Launched in Asia in partnership with the Cartoon Network in 2011, it is a multimedia programme built around threeminute animated music videos aimed at children aged seven to 12. Developed with Cartoon Network and Dr Alice Wilder, an award-winning children’s education specialist, the programme helps children learn the fundamental money management concepts of earn, save, spend and donate. The programme has gained international recognition for promoting financial literacy and has won several industry awards. Over the past few years it has grown to become one of the top-rated children’s television programmes in Asia. Cha-Ching is now available in 10 languages and reaches 54.3 million households a day across Asia through the Cartoon Network. The Cha-Ching School Contact Programme brings Cha-Ching directly to schoolchildren across Asia and has reached more than 200,000 schoolchildren in nine Asian countries to date.
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Corporate responsibility review Continued when disasters strike. In 2015, Prudence Foundation launched its second Safe Steps programme, Safe Steps Road Safety, in partnership with National Geographic Channel and the Fédération Internationale de L’Automobile and endorsed by the International Federation of the Red Cross.
The programme has been well received and a number of partnerships across Asia have spread the campaign, including free-to-air channels, radio stations and cinema. Through these partnerships, Safe Steps currently has a potential reach of 200 million people a day in Asia.
Emergency fund relief Prudential has also been a Group-level supporter of Save the Children since 2010 and is one of the Children’s Emergency Fund’s major supporters. This allows us to act swiftly when disasters occur in any of our markets and provides an instant, effective fundraising mechanism for employees when needed. In 2016 more than 98 allocations from the Fund were made to more than 46 countries and we will continue to support this partnership in 2017.
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Colleague engagement Successful volunteering programme – Chairman’s Challenge Many of our employees play an active role in their communities through volunteering, charitable donations and fundraising. In the UK, the US and Asia we offer our employees the opportunity to support charities through payroll giving.
Each volunteering project focuses on one or more of our CR priorities and allows us to support both large, well established charities and innovative, smaller-scale activities with volunteers as well as financial support. Prudential donates £150 to our charity partners for every employee who registers for the programme. Charity partners use this money to seed-fund charitable projects for Prudential volunteers. Each year employees across the Group are involved in the voting process to decide on the most innovative projects, which receive extra funding towards their charitable objectives.
Volunteering across the Group As well as volunteering efforts on behalf of the Chairman’s Challenge, employees around the Group volunteered on a huge range of other charitable projects, from providing relief following disasters to mentoring schoolchildren, supporting the elderly and skills-sharing. In 2016, employees across the Group volunteered in their communities on a range of projects, providing a total of 83,284 hours of volunteering, up from 51,979 hours in 2015. This includes the Chairman’s Challenge hours. We recognise that employee volunteering brings benefit not only to the charities but also to the development of our people, and we actively encourage colleagues to participate in our programmes.
Charitable donations We calculate our community investment spend using the internationally recognised London Benchmarking Group (LBG) standard. This includes cash donations to registered charitable organisations, as well as a cash equivalent for in-kind contributions.
The cash contribution to charitable organisations from our UK and EU operations is broken down as follows: education £2,667,000; social, welfare and environment £2,036,000; cultural £142,000; and staff volunteering £88,000.
The balance includes in-kind donations and is prepared in accordance with LBG guidelines. This included more than 10,675
‘My friend Beatrice was married when she finished class eight because her parents did not have the money for fees and she now has a child. I know I was also very close to sharing the same story. That is why words can’t possibly explain how grateful I am to Prudential, because now I know my dreams will come to life.’
Corporate responsibility review Continued employees (including 8,011 who volunteered for the Chairman’s Challenge) who dedicated more than 83,284 hours of volunteer service in their communities. Furthermore, over £460,000 was donated across the Group by our employees through our payroll giving scheme.
Political donations It is the Group’s policy neither to make donations to political parties nor to incur political expenditure, within the meaning of those expressions as defined in the UK Political Parties, Elections and Referendums Act 2000. The Group did not make any such donations or incur any such expenditure in 2016.
Valuing our people At Prudential we encourage an inclusive working environment where we develop our talent, reward great performance and recognise our differences in order to continue to deliver outstanding results for our customers, shareholders and communities. This is achieved through our continued focus on diversity and inclusion, talent development and performance and reward.
Diversity and inclusion Prudential believes that diversity of experience, thought and background is vital to success, both today and in the future. The Board has therefore decided to make diversity and inclusion one of the strategic objectives for Prudential and appointed Penny James, Group Chief Risk Officer, to act as executive sponsor for diversity and inclusion.
The Board monitors progress on diversity and inclusion through quarterly updates and the annual talent review process.
For example, in 2016, PCA rolled out the PRU+YOU programme to help colleagues to achieve personal well-being goals and promote family-friendly practices. Our North America business has expanded the existing College Relations initiative with the addition of partnerships with Morehouse College, Spelman College and Clark Atlanta University in order to support diversity of ethnicity at entry level. The apprenticeship programme offered within our UK insurance business continued to demonstrate its success and has recruited its fourth cohort. M&G further improved the nationality, academic and social diversity of its graduate schemes and for the first time ensured 50 per cent women on investments schemes. Group Head Office has increased its focus on gender diversity through development of talented women, with 46 per cent female participation in available talent programmes. Africa’s scholarship programme has supported the education of 628 children in Ghana and Kenya.
We have further developed affinity networks: M&G Pride for LGBT employees and allies, and the UK-based Prudential Women’s Network.
Talent development People development is essential to deliver our strategy. The quality of leadership across the Group is fundamental to the future growth and success of the business and we therefore review our talent annually, and offer a range of programmes that enable our people to continue to grow and develop. The majority of our programmes are managed by our business units, while Group Human Resources focuses on tailored programmes for senior leaders across the organisation, succession planning for senior roles and development of our leadership talent pipeline. We invest in succession planning for our leaders and critical specialists, and segment our talent to identify short-, medium- and long-term successors. We support them with the appropriate development and career planning, to ensure that we maintain an appropriate balance of internal progression and external hires.
Individually tailored development offerings are provided for our most senior executives so they are well prepared to deliver the long-term ambitions of the Group. In 2016, more than 143 senior high-potential individuals participated in our Group-wide leadership development programmes ‘Impact’ and ‘Agility’. These programmes have been developed in partnership and co-delivered with world-leading academic institutions.
Employee engagement An array of initiatives are in place within our different businesses to drive employee engagement. Depending on the business this engagement can start as soon as a new employee joins us, with an induction programme to learn about the history and strategy of the Group. Throughout the employee’s career, additional opportunities may include being offered a number of high impact training sessions as well as workshops on resilience, managing energy and enhancing productivity.
Performance and reward Our reward packages are designed to attract, motivate and retain high-calibre people across all levels. Each individual contributes to the success of the Group and should be rewarded accordingly.
We have processes in place to measure and report on our global greenhouse gas (GHG) emissions, together with waste and water data for the 12 months, October through to September. In 2016, we increased our absolute GHG emissions from our occupied estate and companyowned vehicles by 1 per cent to 72,568 TCO2-e (2015: 71, 704 TCO2-e). The
East offices in Hong Kong through LED lighting, daylight sensors, energy and water-efficient appliances and a green ‘living’ wall in reception.
Michele’s story Jackson, US Michele Fedewa, Jackson’s Strategic Support programme manager, has championed the adoption of recycling and composting programmes as part of Jackson Smartcycle in its Lansing offices.
We have also reported on a number of Scope 3 emissions as a matter of best practice. These are emissions arising as a consequence of the activities of the company, but occur from sources not owned or controlled by the company. For the purpose of 2016 report, these Scope 3 emissions include: business travel booked from the UK, global water consumption (occupied and investment properties) and waste. The waste reporting covers, all investment properties with operational control, UK and US occupied properties. We do not currently collect waste data for our occupied buildings in Asia and continental Europe. We are continuously working with our business units to review the extent of our Scope 3 reporting and increase where practicable.
Assessment parameters Baseline year: 1 October 2014 to 30 September 2015 Reporting year: 1 October 2015 to 30 September 2016
Consistency with the financial statements The reporting period (1 October 2015 to 30 September 2016) does not correspond with the Directors’ Report period (1 January 2016 to 31 December 2016). The reporting period was brought forward by three months to improve the availability of invoice data (which often lags by one month or more after the usage period) and reduce the reliance on estimated data. Prudential owns assets, which are held on its balance sheet in the financial statements, over which it does not have operational control. These are excluded from the data below. Assets not included on the balance sheet but held under an operating lease and where we have operational control are included.
Assessment methodology The Greenhouse Gas Protocol Corporate Accounting and Reporting Standard 2004.
In 2016 Prudential reviewed its reporting methodology for Scope 2 (electricity) emissions in recognition of the release of the revised GHG Protocol Scope 2 Guidance that requires both location and market-based reporting. As the Group operates in a number of mature and emerging markets, the availability of market-based factors that met the necessary quality criteria was deemed insufficient for reporting, and as such our 2016 reporting continues to use the location-based factors already available.
Intensity ratio Kilograms of Carbon Dioxide Equivalent per metre squared (net lettable area).
Normalised Scope 1 and 2 (kg CO2-e/sq.m)1 Occupied Estate 123 132 135 139
Total Scope 1 and 2 (kg CO2-e/sq.m) 38 42 28 31
Total Scope 1, 2 and 3 (tonnes CO2-e) Occupied Estate 83,821 84,768 80,105 81,332
Total Scope 1,2 and 3 (tonnes CO2-e) 112,739 122,722 130,109 137,313
Total Scope 1, 2 and 3 (kg CO2-e/sq.m)1 43 47 30 33
Due to the changing size and nature of the investment portfolio, absolute and normalised comparisons between years are not comparative. Net lettable area is reported for all properties held within the reporting period. In line with best practice, environmental data is collected for properties at acquisition and at date of divestment therefore comparisons for absolute change and normalised change are not directly comparative.
Local governance We believe that CR is best managed on the ground by our people running the businesses. In M&G, Jackson and Prudential UK there are governance committees in place – with senior management representation – that agree strategy and spend. In Asia, the Prudence Foundation has been established as a unified charitable platform to align and maximise the impact of community efforts across the region. The Prudence Foundation is governed by a statutory Board of Directors, under which a Board of Trustees operates as a decision-making forum, directing the management of the programmes in collaboration with our local markets, and ensuring that we maximise the value of our spend to local communities.
Code of Business Conduct Consideration of environmental, social and community matters is integrated in our Code of Business Conduct. Our code is reviewed by the Board on an annual basis. Refer to page 69 for more information.
irectors’ rem uneration report 05 Financial statem ents 06 European Em bedded V alue (EEV
Governance 76 Chairman’s introduction 77 Board of Directors 82 How we operate 82 Board roles and governance 84 Board decision making 86 Board effectiveness 88 Diversity 88 Shareholder engagement 89 Further information on Directors 90 Risk management and internal control 92 Committee reports 106 Statutory and regulatory disclosures 107 Additional information 108 Index to principal Directors’ report disclosures
Good governance ensures decisions are made in the interests of the business and take into account the views of stakeholders, including our employees and our customers. Our strategy aims to achieve just this by ensuring we have a responsive governance framework that supports and challenges our executives’ decision making.
Driving that culture means that, when we meet as a Board, I ensure that there is open debate and constructive and effective challenge of the issues under discussion. We test issues rigorously and we have a robust decision-making process. I am pleased to say that we have strong contribution from all Board members and challenge from our Non-executive Directors, and the diversity of experience in our Boardroom comes through in the discussions. This ensures our decisions are balanced and all the risks are considered.
Culture of the Group While the Board can ensure good decision making at an executive level, it is important that the same approach is taken throughout the organisation. The best way to achieve this is to ensure that we have a culture where managers at every level are accountable, stakeholder views are taken seriously and colleagues feel free to challenge decision making. We firmly believe the Board determines culture and the Board aims to exhibit the behaviour we expect from all.
Stakeholders I also oversee the balance of Board consideration between the interests of our shareholders, customers, employees and our other key stakeholders. An important part of this is the active shareholder engagement that we participate in every year. We were pleased to welcome 186 shareholders to our Annual General Meeting in 2016 as well as holding frequent meetings with our institutional investors. The quality of our people is a key driver of our success. At Prudential, we create an environment in which our people find value and meaning in their work, and create shared value for our customers, shareholders and communities. The financial peace of mind that we help to provide to our customers remains the focus of Prudential’s purpose as a business.
Paul Manduca Chairman Appointment: October 2010 Chairman: July 2012 Committees: Nomination and Governance (Chair) Age: 65
Relevant skills and experience Paul has held a number of senior leadership roles. Notable appointments include serving as Chairman of the Association of Investment Companies (1991 to 1993), acting as founding CEO of Threadneedle Asset Management Limited (1994 to 1999), directorships of Eagle Star and Allied Dunbar, holding the offices of European CEO of Deutsche Asset Management (2002 to 2005), global CEO of Rothschild Asset Management (1999 to 2002), Chairman of Bridgewell Group plc and a director of Henderson Smaller Companies Investment Trust plc. Other previous appointments include the chairmanship of Aon UK Limited and JPM European Smaller Companies Investment Trust Plc.
From September 2005 until March 2011, Paul was a non-executive director of Wm Morrison Supermarkets Plc, including as Senior Independent Director, Audit Committee Chairman and Remuneration Committee Chairman. He was also a non-executive director and Audit Committee Chairman of KazMunaiGas Exploration & Production until the end of September 2012.
Other appointments Paul is a member of the Securities Institute and Chairman of Henderson Diversified Income Limited and of the Templeton Emerging Markets Investment Trust (TEMIT). Paul is also Chairman of TheCityUK’s Advisory Council.
Michael Wells Group Chief Executive Appointment: January 2011 Group Chief Executive: June 2015 Age: 56
Relevant skills and experience Mike joined Jackson in 1995 and became Chief Operating Officer and ViceChairman of Jackson in 2003. In 2011, he was appointed President and Chief Executive Officer of Jackson, and joined the Board of Prudential.
Nicolaos Nicandrou ACA Chief Financial Officer Appointment: October 2009 Age: 51
Relevant skills and experience Nic started his career at PricewaterhouseCoopers. Before joining Prudential, he worked at Aviva, where he held a number of senior finance roles, including Norwich Union Life Finance Director and Board Member, Aviva Group
Financial Control Director, Aviva Group Financial Management and Reporting Director and CGNU Group Financial Reporting Director.
Prudential in 2011 as the Director of Group Finance, a position she held until her appointment to the Board in 2015. During that time, she was leading on the implementation of Solvency II.
Other appointments Penny serves as a non-executive director of Admiral Group plc and is a member of Admiral’s Audit and Nomination Committees.
John Foley Chief Executive of Prudential UK & Europe Appointment: January 2016 Age: 60
Managers in 2003. Anne was Chief Investment Officer and Head of the EMEA region for Aberdeen Asset Management PLC, positions she held until February 2016.
Other appointments Anne is Chair of the Court of Edinburgh University and the CERN & Society Foundation, and a member of the Financial Conduct Authority Practitioner Panel.
Barry Stowe Chairman and Chief Executive Officer of the North American Business Unit Appointment: November 2006 Age: 59
Relevant skills and experience Barry joined Prudential in October 2006 and was the Chief Executive of Prudential Corporation Asia until June 2015, leading Prudential’s Asian business through a period of major growth and development. Before joining Prudential, Barry was President, Accident & Health Worldwide for AIG Life Companies. He joined AIG in 1995 after having held senior positions at Pan-American Life and Willis in the United States.
Other appointments Barry is a member of the Board of Directors of the International Insurance Society.
Relevant skills and experience Tony joined Prudential in 2006 as Chief Executive of Prudential Corporation Asia’s network of life insurance operations in Asia across 12 markets, a position he held until his appointment to the Board. Before joining Prudential, he served as Chief Operating Officer of American International Assurance (AIA), based in Hong Kong, overseeing AIA’s life companies in South-east Asia.
Credit Suisse, a Vice Chairman of Credit Suisse First Boston (CSFB) Europe and Head of the UK Investment Banking Department. He was twice seconded to the role of Director General of the Takeover Panel. Philip also served on the board of Northern Rock plc and as Chairman of the Shareholder Executive.
Relevant skills and experience David was the Global Leader of PwC’s insurance practice, a Partner in PwC’s UK firm, and worked as the Lead Audit Partner for multi-national insurance companies until his retirement in 2015. David has also been responsible for PwC’s insurance and investment management assurance practice in London and the firm’s Scottish assurance division.
Other appointments David is a Director and Chief Executive of L&F Holdings Limited and its subsidiaries, the professional indemnity captive insurance group that serves the PwC network and its member firms.
Relevant skills and experience Kai spent 19 years at Bank of America and was based in Hong Kong in roles as Group Executive Vice President and Head of the Asia Wholesale Banking Group during 1990 to 1995. He spent 10 years working for Standard Chartered PLC in Singapore as Group Executive Director responsible for Asia Governance and Risk during 1998 to 2007. Kai was Chief Executive Officer of the Asia Pacific Region of Credit Suisse AG during 2008 to 2010. Kai previously served on the Board of Singapore Telecommunications Limited, Standard Chartered plc, Credit Suisse’s Executive Board, the Board of Tate and Lyle plc and Visa International’s Asia Pacific Advisory Board.
Other appointments Kai is the Chairman of Clifford Capital Pte. Ltd., a company supported by the Singapore government to facilitate the financing of long-term cross-border projects of Singapore-based companies. He is also a non-executive Director of Credit Suisse Group AG and a non-executive Director of PSA International Pte Ltd. Additionally, Kai is the Chairman of the Governing Board of the Duke-NUS Medical School. He serves on the Board of the Casino Regulatory Authority of Singapore. He is also Chairman of Prudential Corporation Asia Limited, a subsidiary of Prudential plc.
Anthony Nightingale CMG SBS JP Appointment: June 2013 Committees: Nomination and Governance, Remuneration (Chair) Age: 69
Relevant skills and experience Anthony spent his career in Asia, where he joined the Jardine Matheson Group in 1969, holding a number of senior positions before joining the Board of Jardine Matheson Holdings in 1994. He was Managing Director of the Jardine Matheson Group from 2006 to 2012.
Land Limited. Notable appointments include: Hong Kong representative to the APEC Business Advisory Council, Chairman of The Hong Kong-APEC Trade Policy Study Group, member of the Securities and Futures Commission Committee on Real Estate Investment Trusts, member of the UK-ASEAN Business Council Advisory Panel, and non-official member of the Commission on Strategic Development in Hong Kong.
Relevant skills and experience Lord Turner began his career with McKinsey & Co, advising companies across a range of industries. He has served as Director-General of the
Confederation of British Industry, Vice-Chairman of Merrill Lynch Europe, Chairman of the Pensions Commission and as a nonexecutive director of Standard Chartered Bank. Lord Turner was Chairman of the UK’s Financial Services Authority (FSA), a member of the international Financial Stability Board and a non-executive director of the Bank of England.
Other appointments Lord Turner has been a crossbench member of the House of Lords since 2005. Other appointments include OakNorth Bank, Chairman of the Institute for New Economic Thinking, Chair of the Energy Transition Commission, and Visiting Professor at both the London School of Economics and the Cass Business School.
The Board appointed John Foley as Executive Director and Chief Executive of Prudential UK & Europe in January 2016 and Anne Richards as Executive Director and Chief Executive, M&G in June 2016. Alistair Johnston retired as a Non-executive Director at the conclusion of the 2016 Annual General Meeting and Michael McLintock retired as an Executive Director and Chief Executive, M&G in June 2016. All Directors will stand for election or re-election at the 2017 Annual General Meeting except Ann Godbehere, who will have served for nine years since her election by shareholders in 2008. Proposals for elections and re-elections are supported by the annual review of the performance of each Director, which concluded that all Directors continue to perform effectively.
Prudential has dual primary listings in the UK and Hong Kong, and has therefore adopted a governance structure based on the UK Corporate Governance Code and the Hong Kong Corporate Governance Code.
Responsibility for governance lies with the Board. The descriptions below explain Board roles and how duties are fulfilled.
— Responsible for setting the Board’s agenda, ensuring the right focus and promoting constructive debate
— Leading the Board in determining appropriate corporate governance and business values
— Key contact point for the independent chairs of the Group’s material subsidiaries
— Representing the Company with external stakeholders and acting as key contact for shareholders and regulators to ensure effective communication on governance and strategy
— Paul works closely with the Group Chief Executive and the Company Secretary to ensure effective Board governance and operation. This included ensuring that Board meetings have the right focus, that enough time is allocated for the discussion of agenda items, in particular strategic issues, and that Directors receive timely and relevant information
— Paul plays a leading part in the identification of potential candidates for Board succession, working closely with the Group Chief Executive in the succession planning process for Executive Directors
— During the year, Paul met with the Non-executive Directors without the Executive Directors being present, on five occasions
— Leading the Executive Directors and other senior executives in the management of all aspects of the day-to-day business of the Group
— Mike sets policies, provides day-to-day leadership and makes decisions on matters affecting the operation, performance and strategy of the Group, seeking Board approval for matters reserved to the Board
— Mike chairs the Group Executive Committee (GEC), which comprises the Executive Directors and the Group functional heads. The Executive Committee supports Mike in the operational management of the Group, providing the expertise to fulfil the strategic objectives set by the Board
— Mike keeps in close contact with the Chairman and ensures he is briefed on key issues
— Responsible for leadership and governance of the Board’s principal Committees
— Responsible for setting the agenda for Committee meetings and reporting on the Committees’ activities to the Board
— Audit and Risk Committee Chairs act as key contact points for the independent chairs of the audit and risk committees of the Group’s material subsidiaries
— Ann Godbehere, the Audit Committee Chair, and Howard Davies, the Risk Committee Chair, commenced quarterly meetings with chairs of the audit and risk committees of the material subsidiaries during 2016 and provided updates to the Audit and Risk Committees respectively
— Being available to shareholders to address concerns not resolved through normal channels
— Philip kept in close contact with the Chairman throughout the year
— Philip held meetings in Q1 2017 with the Non-executive Directors to review the Chairman’s performance
— Philip holds meetings throughout the year with Nonexecutive Directors as needed, without management being present
— All Non-executive Directors serve on at least one of the principal Board Committees
– For monitoring management’s performance against strategic goals and ensuring appropriate resources are available to achieve these goals.
— The Board operates in accordance with relevant corporate governance codes and has established a number of principal committees comprising Non-executive Directors to ensure Board duties are appropriately allocated between members.
— Ensures that an effective framework for senior succession planning is in place
— Recommends appointments to the Board and its principal Committees and appointments of non-executive directors to the boards of material subsidiaries
Howard Davies — Leads on and oversees the Group’s overall risk appetite, risk tolerance and strategy
Anthony Nightingale — Recommends the Directors’ Remuneration Policy for approval by shareholders
— Approves the individual remuneration packages of the Chairman, the Executive Directors, other senior executives and the non-executive directors of material subsidiaries
See Nomination and Governance Committee report on pages 92 to 94
Terms of reference for the principal Committees can be accessed at www.prudential.co.uk Each Committee reviews its terms of reference at least annually and recommends changes to the Board for its approval.
Authority for the operational management of the Group’s businesses in order to implement Board strategy and decisions has been delegated to the Group Chief Executive for execution or further delegation by him. The Group Chief Executive is supported by the Group Executive Committee, which receives reports on performance and implementation of strategy for each business unit and discusses major projects and other activities related to the attainment of strategy. The members of the Group Executive Committee and their roles are set out on page 405. To manage the Group’s delegated authorities and to monitor material expenditure, the Group Chief Executive has established a Chief Executive’s Committee, which meets on a weekly basis. The Chief Executive of each business unit has responsibility for the management of that business unit.
The table below gives an overview of how the Board spent its time in 2016 and its key areas of focus.
In addition to the eight full meetings outlined above, two further meetings were held to approve the final full and half year financial reports.
Individual Directors’ attendance at meetings throughout the year is set out in the table below.
Alistair Johnston3 4/4 6/6 – – – 1 David Law 10 9/10 – – – 1
Lord Turner 9/10 – – – 7/8 1 * The Audit and Risk Committees held a joint meeting in addition to those listed, which was attended by all members from both Committees.
Notes 1 Michael McLintock retired as a Director on 6 June 2016. 2 Anne Richards was appointed as a Director on 7 June 2016. 3 Alistair Johnston retired as a Director from the conclusion of the Annual General Meeting held on 19 May 2016.
Board and Committee papers are usually provided one week in advance of a meeting. Where a Director is unable to attend a meeting, his or her views are canvassed in advance by the Chairman of that meeting where possible.
Board effectiveness Actions during 2016 arising from the 2015 review During the year, the action points identified in respect of the 2015 evaluation were addressed and the Board received an update on progress against those actions in September 2016 and February 2017. The key themes of the 2015 evaluation are set out below.
Governance of subsidiary boards – The 2015 Board evaluation recognised that, following the decision to appoint independent non-executive directors to certain of the Group’s larger subsidiaries, referred to as the material subsidiaries, more formal oversight of the governance arrangements for the material subsidiary boards would be required. In addition, a process for appointing the material subsidiary independent directors and the relationship between them and the
The Nomination and Governance Committee played a key part in the establishment and embedding of these governance processes. Regular progress updates were provided to the Board, which tracked alignment to regulatory expectations.
Board papers – On Board processes, the 2015 feedback highlighted the progress made during the year, in particular improvements in clarity of papers. This was another area of focus during 2016, with work undertaken to ensure that the right balance continued to be struck regarding the level of detail provided in papers, especially for technically complex matters. Concise papers assisted the Board in managing a growing agenda.
The performance during 2016 of the Non-executive Directors and the Group Chief Executive was evaluated by the Chairman in individual meetings. Philip Remnant, the Senior Independent Director, led the Non-executive Directors in a performance evaluation of the Chairman.
The following themes were identified as areas for focus in 2017: Subsidiary governance – The Board evaluation recognised that the appointment of independent non-executive chairs and directors to the Group’s material subsidiaries had been well executed, and a good governance framework established. The Board’s focus for 2017 would be on ensuring good subsidiary governance was maintained and best governance practices were shared between the material subsidiaries. Ensuring that reporting by the material subsidiaries to the Board and its Committees continued to be of a high standard would also be emphasised.
Remuneration – The Board evaluation noted the growing complexity of remuneration across all UK-listed companies and also the pace of changes in these areas as a result of focus by government and institutional investor groups over recent months. The Board will implement an annual training session for any Non-executive Directors not on the Remuneration Committee to discuss the Directors’ Remuneration Policy and the remuneration structures contained in it, as well as broader market practice information.
In 2016, the Board took time for particular focus on the Group’s US and Asian businesses. During visits to the US and Malaysia, the Board received updates on key products and distribution, risks and performance in the US and in the Asian businesses, including regulatory developments and their potential impact on future business. The Board’s overseas visits also allowed the Directors to meet with the local senior management teams.
— Asia financial performance, strategy and growth update, risk profile and risk function development, and HR planning
The Board was kept updated on key political and regulatory developments, including Solvency II implementation and reporting, the US Department of Labor fiduciary rule, the Senior Insurance Managers Regime, the UK regulator’s thematic review of annuity sales and the implementation of the Market Abuse Regulation. In addition, Directors were provided with updates at each Board meeting on other legal and regulatory changes and developments that could impact the industry or the Group.
Diversity Given the global reach of the Group’s operations, and our business strategy and long-term focus, the Board makes every effort to ensure it is able to recruit directors from different backgrounds, with diverse experience, perspective and skills. This diversity not only contributes towards Board effectiveness but is essential for successfully delivering the strategy of an international Group, as reflected in our Group Diversity and Inclusion Policy.
The Board is committed to recruiting the best available talent and appointing the most appropriate candidate for each role, while at the same time aiming for appropriate diversity on the Board. This approach informed the Nomination and Governance Committee’s ongoing activities carried out during 2016 in respect of succession planning for Executive and Non-executive Directors.
The Board does not endorse quotas as these may generate unintended consequences, but continues to commit to developing a robust and diverse talent pipeline and increasing representation of women in senior positions in the Group and on the Board. As part of this commitment, the Board may endorse relevant measurable objectives for increasing diversity. For example, in 2016 the Board decided to sign the HM Treasury Women in Finance Charter, with the aim to have in place at least 30 per cent women in senior management positions by the end of 2021.
In addition, a full programme of engagement with shareholders, potential investors and analysts, in the UK and overseas, is conducted each year by the Group Chief Executive and the Chief Financial Officer, led by the Director of Strategy and Capital Market Relations. As part of this, a conference for investors and analysts has been held on a regular basis since 2010, with in-depth business presentations and opportunities for attendees to meet with members of the Board and senior management through the course of the event. Most recently, the Group held a conference for investors in November 2016. The Group Chief Executive, Chief Financial Officer and investor relations team also attend major financial services conferences to present to and meet with the Company’s shareholders. In 2016, as part of the investor relations programme, over 360 meetings were held with approximately 800 individual institutional investors across the UK, in continental Europe, the US and Asia.
Details of the 2017 Annual General Meeting are available on www.Prudential.co.uk under ‘Investors’.
— Subject to review by the Nomination and Governance Committee and re-election by shareholders, it would be expected that Non-executive Directors serve a second term of three years.
— The Directors’ remuneration report sets out the terms of Executive Directors’ service contracts on page 132.
Independence — Prudential is one of the UK’s largest institutional investors. The Board does not believe that this compromises the independence of those Non-executive Directors who are on the boards of companies in which the Group has a shareholding. The Board also believes that such shareholdings should not preclude the Company from having the most appropriate and highest calibre Non-executive Directors.
— All the Non-executive Directors are considered independent for the purposes of the Company’s Hong Kong listing, and each Non-executive Director provides an annual confirmation of his or her independence as required under the HK Listing Rules. The Company has considered David Law’s position and has deemed him to be independent from 1 July 2016, being the date one year following his retirement from PwC, for the purposes of the HK Listing Rules and HK Code.
— There were no other material factors that were deemed to affect the Non-executive Directors’ independence.
— In relation to the provisions of the UK Corporate Governance Code and HK Listing Rules, the Board is satisfied that Ann Godbehere and David Law have recent and relevant financial experience.
— Suitable insurance cover is in place in respect of legal action against directors and senior managers of companies within the Group.
The Board is responsible for ensuring that an appropriate and effective system of internal control and risk management is in place across the Group. The framework of risk management and internal controls centres on clear delegated authorities to ensure Board oversight and control of important decisions. The framework is underpinned by the Group Code of Business Conduct, which sets out the ethical standards the Board requires of itself, employees, agents and others working in the Group. The framework is designed to manage rather than eliminate the risk of failure to achieve business objectives, and can only provide reasonable and not absolute assurance against material misstatement or loss.
Internal controls and processes, based on the provisions established in the Manual, are in place across the Group. These include controls for the preparation of financial reporting. The operation of these controls and processes facilitates the preparation of reliable financial reporting and the preparation of local and consolidated financial statements in accordance with the applicable accounting standards and requirements of the Sarbanes-Oxley Act. These controls include certifications by the Chief Executive and Chief Financial Officer of each business unit regarding the accuracy of information provided for use in preparation of the Group’s consolidated financial reporting and the assurance work carried out in respect of US reporting requirements.
The Board determines the nature and extent of the principal risks it is willing to take in achieving its strategic objectives. It has delegated authority to the Risk Committee to review and approve changes to the Group Risk Framework and risk policies and approve changes to risk limits within the overall Board approved risk appetite. The Risk Committee reviews compliance with the Group Risk Framework and risk policies through its regular activities detailed in the report on pages 103 to 105.
— Manages the business to ensure full compliance with the Group risk management framework as set out in the Manual, which includes the Group Risk Framework and risk policies as well as approvals requirements, among other requirements.
— Reviews and assesses the risk-taking activities of the first line of defence and where appropriate, challenges the actions being taken to manage and control risks and approves any significant changes to the controls in place.
— Provides independent assurance on the design, effectiveness and implementation of the overall system of internal control, including risk management and compliance.
CEC Chief Executive’s Committee GEC Group Executive Committee BSCMC Balance Sheet & Capital Management Committee GERC Group Executive Risk Committee TAC Technical Actuarial Committee
GCRC Group Credit Risk Committee ERAC Emerging Risk Assessment Committee GSC Group Security Committee GISC Group Information Security Committee STOC Solvency II Technical Oversight Committee
For the purposes of the effectiveness review, the Group has followed the FRC Guidance on Risk Management, Internal Control and Related Financial and Business Reporting. In line with this guidance, the certification provided above does not apply to certain material joint ventures where the Group does not exercise full management control. In these cases, the Group satisfies itself that suitable governance and risk management arrangements are in place to protect the Group’s interests. However, the relevant Group company which is party to the joint venture must, in respect of any services it provides in support of the joint venture, comply with the requirements of the Group’s internal governance framework.
The Board confirms that there is an ongoing process for identifying, evaluating and managing the significant risks faced by the Group, which has been in place throughout the period and up to the date of this report, and confirms that the system remains effective.
In 2016, we met on four occasions. Our focus was on ensuring we have suitable succession plans in place for the Board and senior executives. Particular emphasis this year was on succession planning for our Non-executive Directors given that Ann Godbehere is in her ninth year of service and will not stand for re-election at our next Annual General Meeting. Ann has been an asset to the Board and we are most grateful for her contribution, especially as Chair of our Audit Committee.
As part of our regular year-end related work at our February meeting, we reviewed the performance and independence of our Non-executive Directors, we confirmed that our Audit Committee has the required levels of financial expertise, we reviewed and confirmed conflicts of interest for all Board members and recommended all Nonexecutive Directors for re-election at the forthcoming Annual General Meeting, except Ann Godbehere.
Regular attendees — Group Chief Executive — Group Human Resources Director — Group General Counsel and Company Secretary
John Foley and Anne Richards were appointed during 2016. The work of the Committee in respect of those appointments, which was supported by Egon Zehnder as search consultant, is described in the Annual Report for 2015.
Russell Reynolds has no additional connection with Prudential. In addition to acting as search consultant for certain executive hires, Egon Zehnder also provides support for senior development assessments.
— Re-election of Directors As part of its ongoing work on Board succession planning, the Committee considered the terms of appointment for the Chairman, Committee Chairmen and Non-executive Directors taking into account time commitment and the general balance of skills, experience and knowledge on the Board, assessing length of service in their roles. Having reviewed the performance of relevant Non-executive Directors in office at the time, the Committee recommended to the Board that those Non-executive Directors should stand for re-election at the 2017 Annual General Meeting.
Conflicts of interest The Board has delegated authority to the Committee to consider, and authorise where necessary, any actual or potential conflicts of interest in accordance with relevant legislation, the provisions in the Company’s Articles and the procedures approved by the Board.
In February 2016, the Committee considered the external appointments of all Directors and reviewed existing conflict authorisations, reaffirming or updating any terms or conditions attached to authorisations where required. No other conflict matters were brought to the Committee.
During the year, the Committee approved the appointments of the material subsidiary chairs (including Philip Remnant and Kai Nargolwala), reviewed the material subsidiary governance arrangements, approved the terms of reference for the material subsidiary boards and board chairs, and monitored the embedding of governance processes.
Dear Shareholder As Chairman of the Audit Committee, I am pleased to report on the Committee’s activities and areas of focus over the course of 2016.
The Committee met on 10 occasions during the year. The Committee works closely with the Risk 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 Risk Committee. In 2016, one joint meeting with the Risk Committee took place to discuss the Solvency II capital position as at 31 December 2015 and associated governance processes.
Regular attendees — Chairman of the Board — Group Chief Executive — Chief Financial Officer — Group Chief Risk Officer — Director of Group Finance — Group Regulatory and Government Relations Director
The Committee considered compliance with accounting standards and obligations under applicable laws, regulations and governance codes. Particular areas on which the Committee focused during the year included the fair, balanced and understandable requirement under the UK Corporate Governance Code, providing advice to the Board in respect of this requirement. This included consideration of any resulting changes to disclosures following the decision by the UK to leave the European Union in June. The Committee also focused on the guidance issued by the European Securities and Markets Authority on Alternative Performance Measures that was effective for the first time in 2016. The Committee reviewed and agreed the refinements to the Group’s disclosures as a result of that new guidance.
The Committee reviewed the key assumptions and judgements made in valuing the Group’s investments, insurance liabilities and deferred acquisition costs under IFRS, together with reports on the operation of internal controls to derive these amounts. It also reviewed the assumptions underpinning the Group’s European Embedded Value (EEV) metrics. The Committee considered information, including peer comparisons if relevant and available, on the following key assumptions: — Persistency, mortality, morbidity and expense assumptions within the Asia life businesses; — Economic and policyholder behaviour assumptions affecting the measurement of Jackson guaranteed liabilities and amortisation of deferred acquisition costs; and
— Mortality, expense and credit risk assumptions for the UK annuity business.
Solvency II results and associated governance processes were considered in a separate meeting held jointly with the Risk Committee.
For all the above areas, the Committee received input from management and the external auditor prior to reaching its conclusions.
In addition to these reporting matters, the Committee also received and considered regular updates from management on the status and implications for the Group of financial reporting developments, including updates on discussions by the International Accounting Standards Board on the development of the IFRS 17 Insurance Standard (known previously as “IFRS 4 Phase II”) and the permitted deferral of IFRS 9 by insurers.
The Group’s external auditor is KPMG LLP and oversight of the relationship with them is one of the Committee’s key responsibilities. The Committee approved KPMG’s terms of engagement for the statutory audit, and approved fees for both audit and non-audit services in accordance with the Group’s policy.
To assess the effectiveness of the auditor, the Committee reviewed the audit approach and strategy, and received an internal report on their performance.
The Committee has responsibility for monitoring auditor independence and objectivity and is supported in doing so by the Group’s Auditor Independence Policy (the Policy). The Policy is updated annually and approved by the Committee. It sets out the circumstances in which the external auditor may be permitted to undertake non-audit services and is based on four key principles which specify that the auditor should not: — Audit its own firm’s work; — Make management decisions for the Group; — Have a mutuality of financial interest with the Group; or
The Policy has two permissible service types: those that require specific approval by the Committee on an engagement basis and those that are pre-approved by the Committee with an annual monetary limit. In accordance with the Policy, the Committee approved these permissible services, classified as either audit or non-audit services, and monitored the usage of the annual limits on a quarterly basis. All non-audit services undertaken by KPMG were agreed prior to the commencement of work and were confirmed as permissible for the external auditor to undertake under the provisions of the SarbanesOxley Act. In November 2016, the Committee considered and approved revisions to the Policy with effect from 1 January 2017, to reflect final rules and guidance issued by the Financial Reporting Council, in connection with the implementation of broader European Union (EU) reforms to the audit market. The most significant change was to reduce the annual monetary limits for services that are pre-approved by the Committee.
In keeping with professional ethical standards, KPMG also confirmed their independence to the Committee and set out the supporting evidence for their conclusion in a report that was considered by the Committee prior to publication of the financial results.
Fees paid to the auditor The fees paid to KPMG for the year ended 31 December 2016 amounted to £16.2 million (2015: £16.6 million) of which £2.8 million (2015: £4.3 million) was payable in respect of non-audit services. Non-audit services accounted for 17 per cent of total fees payable (2015: 26 per cent).
Reappointment Based on the outcome of the effectiveness evaluation and all other considerations, the Committee recommended that KPMG be reappointed as the auditor. A resolution to this effect will be proposed to shareholders at the 2017 Annual General Meeting.
The Company has complied throughout the 2016 financial year with the provisions of The Statutory Audit Services for Large Companies Market Investigation (Mandatory Use of Competitive Tender Processes and Audit Committee Responsibilities) Order 2014 issued by the Competition and Markets Authority.
The Committee is responsible for approval of the internal audit programme and monitoring the effectiveness of the internal audit function.
The independent assurance provided by Group-wide Internal Audit (GwIA) formed a fundamental part of the Committee’s deliberations on the Group’s overall control environment. The Committee received regular updates on audits conducted and management’s progress in addressing audit findings. Each of the Group’s business units has an internal audit team, the heads of which report to the Director of Group-wide Internal Audit. The function also has a Quality Assurance Director, whose primary role is to monitor and evaluate adherence to industry practice guidelines and Group-wide adherence to GwIA’s own standards and methodology. Internal audit resources, plans, budgets and its work, including the function’s annual review of the control environment and risk, and control culture of the organisation, are overseen by both the Committee and the relevant business unit audit committee. The Director of GwIA reports functionally to the Chairman of the Committee and for management purposes to the Group Chief Executive, and also has direct access to the Chairman of the Board. In addition to formal Committee meetings, the Committee meets with the Director of GwIA in private to discuss matters relating to, for example, the effectiveness of the internal audit function, significant audit findings and the risk and control culture of the organisation.
Annual plan and focus for 2017 The Committee approved the half year update of the 2016 plan. It also considered and approved the Internal Audit Plan, resource and budget for 2017.
Internal audit effectiveness The Committee assesses the effectiveness through a combination of external effectiveness reviews, required every five years (last conducted in 2012), and an annual internal effectiveness review, performed by the GwIA Quality Assurance Director. In 2016, Deloitte assessed the overall GwIA annual planning approach and the quality of audit work and concluded that the function ‘is a welldeveloped group function that applies a number of leading practices on a consistent basis across the Prudential Group, including advanced data analytics capabilities and well embedded approaches for conducting audits’. In addition, an internal effectiveness review was conducted in 2016, in accordance with the professional practice standards of the Chartered Institute of Internal Auditors (CIIA). This review concluded that GwIA continues to comply with the requirements of internal audit policies, procedures and practices, and standards in all material respects relating to audit planning and execution, and continued to be aligned with its mandated objectives and maintained general conformance with the CIIA guidance for Effective Internal Audit in the Financial Services Sector. Having considered the findings of Deloitte’s review and the 2016 internal effectiveness review, the Committee concluded that GwIA had continued to operate in compliance with the requirements of GwIA policies, procedures and practice standards in all material respects and had remained aligned to mandated objectives during 2016.
The Committee approved the Group’s standard terms of reference for the material subsidiary and other business unit audit committees, which were updated to reflect changes in the Committee’s own responsibilities to align them with best practice, as well as the change in membership for the material subsidiaries. These were adopted by the business unit audit committees with minor variations to address local regulations or the particular requirements of the business.
Second line oversight – compliance, financial crime prevention, whistleblowing Regular reporting from Compliance
Regular updates were provided to the Committee by the Group Regulatory and Government Affairs Director and the Group Compliance Director. The reports kept the Committee apprised of key compliance activities, issues and controls, including progress against the 2016 Compliance Plan, the outcome of compliance monitoring activities across the Group and the effectiveness of business units compliance departments.
The Committee considered and approved the 2017 Group Compliance Plan. Areas of focus included strengthening the compliance framework, enhancing compliance monitoring arrangements and mitigation of key risks, including conflicts of interest, the fair treatment of customers and anti-money laundering and sanctions. Following the external review of the effectiveness of compliance monitoring, the Plan includes developing a more consistent approach to the planning, execution and reporting of compliance monitoring activity across the Group.
Financial crime prevention The Committee received the Money Laundering Prevention Officer’s report which assessed the operation and effectiveness of the Group’s systems and controls in relation to managing money laundering and sanctions risk. The Committee noted the regulatory developments relating to initiatives by the Financial Action Task Force and the 4th EU Anti-Money Laundering Directive.
The Committee considered the outcome of the annual review of the systems of internal control and risk management. The report considered all material controls, including financial, operational and compliance controls and reflected changes in the HK Code which became effective for financial years commencing on or after 1 January 2016. Having considered the review, the Committee made recommendations to the Board regarding the ongoing processes and effectiveness of the risk management and internal control systems in place.
The Group Governance Manual sets out the policies and processes by which the Group operates within its framework of internal governance, taking into account relevant statutory and regulatory matters. Used as a platform for mandating specific ways of working across the Group, each business unit attests annually to compliance with: — Mandatory requirements set out in Group-wide policies; — Matters requiring prior approval from those parties with delegated authority; and
The Committee reviewed the results of the Group Governance Manual annual content review to ensure its continued effectiveness and long-term value to the Group, and the results of the year end certification of compliance with Group Governance Manual requirements for the period ended 31 December 2016.
Dear Shareholder As Chairman of the Risk Committee, I am pleased to report on the Committee’s activities and focus during 2016.
Over 2016, we continued to focus on the key risks arising from the products we offer to our customers, the risks inherent in our investment portfolios, and the operational risks that arise from operating our businesses. We regularly reviewed the strength of our capital and liquidity positions, and the significant ongoing changes to the regulatory framework and environment. In addition, we closely monitored risks arising from the macroeconomic environment and regulatory developments such as the risks relating to prolonged low interest rates and the pace of regulatory developments across the globe.
Number of meetings in 2016: eight (in addition, a joint meeting was held with the Audit Committee)
Risk management Annually, business units must assess and certify their compliance with the Group Risk Framework and risk policies as part of the annual Group Governance Manual certification. The annual certification process for risk policies is facilitated by Group Risk and subject to oversight by the Risk Committee. In 2016, the Group Risk Framework and risk policies were subject to their annual review, with changes being approved by the Risk Committee.
The Group Cyber Risk Strategy was overseen by the Risk Committee in mid 2016. The Committee reviewed the Cyber Defence Plan, providing further detail around the implementation of the cyber strategy at the end of 2016. The Cyber Strategy and Defence Plan articulate the strategic outcomes and key deliverables relating to our cyber resilience.
The Financial Stability Board announced on 3 November 2015 that the Group continues to be designated as a Global Systemically Important Insurer. In 2016, the Group was required to update the 2015 Global Systemically Important Insurer deliverables – these include the Systemic Risk Management Plan, Recovery Plan and Liquidity Risk Management Plan. The Committee played a key part in considering and approving a number of these, including the Group’s Liquidity Risk Management Plan, Systemic Risk Management Plan and Recovery Plan.
Company law also requires the Board to approve the Strategic report. In addition, the UK Code requires the Directors’ statement to state that they consider the Annual Report and financial statements, taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company’s position and performance, business model and strategy.
The Directors who held office at the date of approval of this Directors’ report confirm that, so far as they are each aware, there is no relevant audit information of which the Company’s auditor is unaware; each Director has taken all the steps that he or she ought to have taken as a Director to make himself or herself aware of any relevant audit information and to establish that the Company’s auditor is aware of that information. This confirmation is given and should be interpreted in accordance with the provisions of Section 418 of the Companies Act 2006.
Going concern In accordance with the requirements of the guidance issued by the Financial Reporting Council in September 2014 ‘Guidance on Risk Management, Internal Control and Related Financial and Business Reporting’, after making sufficient enquiries the Directors have a reasonable expectation that the Company and the Group have adequate resources to continue their operations for a period of at least 12 months from the date that the financial statements are approved. In support of this expectation, the Company’s business activities, together with the factors likely to affect its future development, successful performance and position in the current economic climate, are set out in the Strategic report on pages 10 to 73. The risks facing the Group’s capital and liquidity positions and their sensitivities are referred to in the Strategic report on pages 50 to 61. The Group’s IFRS financial statements include the details of the Group’s borrowings in Note C6 on page 255, the market risk and liquidity analysis associated with the Group’s assets and liabilities can be found in Note C3.4(a) on pages 224 and 225, policyholder liability maturity profile by business units in Notes C4.1(b), (c) and (d) on pages 232, 234 and 236 respectively, cash flow details in the consolidated statement of cash flows and provisions and contingencies in Notes C11 and D2. The Directors therefore consider it appropriate to continue to adopt the going concern basis of accounting in preparing the financial statements for the year ended 31 December 2016.
Powers of the Board The Board may exercise all powers conferred on it by the Company’s Articles and the Companies Act 2006. This includes the powers of the Company to borrow money and to mortgage or charge any of its assets (subject to the limitations set out in the Companies Act 2006 and the Company’s Articles) and to give a guarantee, security or indemnity in respect of a debt or other obligation of the Company.
Securities dealing and inside information Prudential has adopted securities dealing rules relating to transactions by Directors on terms no less exacting than required by Appendix 10 to the HK Listing Rules and by relevant UK regulations (the UK Model Code was replaced by the Market Abuse Regulation with effect from 3 July 2016). The Directors have complied with this code of conduct throughout the period. Relevant controls are applied to the handling and dissemination of inside information which form part of the Group’s internal governance framework. As part of the framework, the Group has adopted an Inside Information Policy which includes guidance and procedures for the identification and escalation of inside information as well as appropriate controls on the disclosure of such information in line with regulatory requirements.
Compliance with corporate governance codes The Board confirms that the Company has complied with all principles and relevant provisions of both the UK and HK Corporate Governance Codes throughout the accounting year. An explanation of how the principles and provisions have been applied is set out in this report and in the Directors’ remuneration report on pages 109 to 157.
With respect to Code Provision B.1.2(d) of the HK Code, the responsibilities of the Remuneration Committee do not include making recommendations to the Board on the remuneration of the Non-executive Directors. In line with the principles of the UK Code, fees for the Non-executive Directors are determined by the Board.
In particular, in relation to Section 302 of the Sarbanes-Oxley Act 2002 which covers disclosure controls and procedures, a Disclosure Committee has been established, reporting to the Group Chief Executive, chaired by the Chief Financial Officer and comprising members of head office management. The work of the Disclosure Committee supports the Group Chief Executive and Chief Financial Officer in making the certifications regarding the effectiveness of the Group’s disclosure procedures.
Customers The five largest customers of the Group constituted in aggregate less than 30 per cent of its total sales for each of 2016 and 2015.
In addition, the risk factors set out on pages 392 to 397 and the additional unaudited financial information set out on pages 364 to 391, are incorporated by reference into the Directors’ report.
Directors’ remuneration report 110 Annual statement from the Chairman of the
This report has been prepared to comply with Schedule 8 of the Large and Mediumsized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013, as well as the Companies Act 2006 and other related regulations.
The following sections were subject to audit: Table of 2016 and 2015 Executive Director total remuneration ‘The Single Figure’ and related notes, salary information table in section entitled Remuneration in respect of performance in 2016, Pension entitlements, Long-term incentives awarded in 2016, Chairman and Non-executive Director remuneration in 2016, Statement of Directors’ shareholdings, Outstanding share options, Recruitment arrangements and Payments to past Directors and payments for loss of office.
Dear Shareholder I am pleased to present the Remuneration Committee’s report for the year to 31 December 2016.
By way of preface, I would like to share the context for the key decisions the Committee took during 2016, in particular, the decisions relating to remuneration arrangements in 2017 and how we rewarded the performance achieved in 2016.
Reward the delivery of the Group’s longer-term strategy It is proposed that a sustainability scorecard be used to determine vesting of 25 per cent of PLTIP awards made in 2017 and subsequent years. The scorecard rewards the longer-term generation of capital, the development of a more diverse senior leadership team and the achievement of the Group’s conduct expectations. These measures are aligned to the Group’s strategic priorities and corporate values, and achieving them will support the Group’s ability to deliver to its stakeholders during and beyond the three-year performance period.
To further strengthen the alignment between executives and shareholders, the value of shares which Executive Directors are asked to own will be increased as follows: — The Group Chief Executive will be asked to own shares worth at least 400 per cent of base salary (350 per cent at present); and
Many of the Executive Directors have shareholdings well in excess of the guidelines that they are asked to meet. For instance, on 31 December 2016, Mike Wells had a beneficial interest in shares with a value of over 700 per cent of his salary.
Performance against these key metrics exceeded the stretching targets established by the Board and the results achieved in recent years. The Group achieved these results while maintaining appropriate levels of capital and operating within the Group’s risk framework and appetites. The Committee believes that the bonuses it awarded to Executive Directors for 2016 appropriately reflect this performance.
Above stretch level A cash flow measure was used to determine 10 per cent of the Group financial bonus targets
— Competitive, to engage executives who are in demand in the global talent market and if required, support hiring the best external talent.
Reward must be: — Determined by delivery of the Group’s annual and longer-term business objectives; — Aligned with shareholder value creation; and
— Consistent with the Group’s risk appetite so that delivery of the business plan can be sustained.
The Group Chief Executive has a maximum bonus opportunity of 200% of salary. For other Executive Directors the maximum is 180% of salary or less 2016 bonuses were paid based on performance measures related to profit, cash flow and capital adequacy as well as personal/ functional objectives
Awards in 2016 were below the Plan limits: — Group Chief Executive: 400% of salary; — CEO, NABU: 460% of salary; — CEO, M&G: 150% of salary; and — Other PLTIP awards were 250%
Aligning 2017 pay to performance The Remuneration Committee awarded salary increases to the Executive Directors, other than the Chief Executive, M&G and the Group Chief Risk Officer, for 2017 of 2 per cent, which was below the salary increase budget for the wider workforce. The Chief Executive, M&G, was appointed during the year and therefore no increase in salary was proposed. The Remuneration Committee awarded a salary increase for 2017 of 5 per cent to the Group Chief Risk Officer to reflect her performance and contribution. When Penny was promoted to the Board in 2015 her salary was lower than that of her predecessor. No other changes have been made as we believe remuneration packages remain strongly aligned with performance over both the short and the long term.
The resultant remuneration packages for 2017 are set out in detail in the Annual report on remuneration and summarised below: Executive Director Role salary
John Foley Chief Executive, UK & Europe £765,000 180% 40% 250% Penny James Group Chief Risk Officer £637,000 160% 40% 250% Anne Richards1 Chief Executive, M&G £400,000 600% 40% 450% Nic Nicandrou Chief Financial Officer £726,000 175% 40% 250% Barry Stowe2 Chairman & CEO, NABU US$1,134,000 160% 40% 460% Mike Wells Group Chief Executive £1,103,000 200% 40% 400% Tony Wilkey Chief Executive, PCA HK$9,070,000 180% 40% 250%
2 The Chairman & CEO, NABU will also continue to have a 10 per cent share of the Jackson bonus pool. 40 per cent of this is deferred in shares.
The maximum paid will be the cost to the Company of providing benefits. The cost of benefits may vary from year to year but the Committee is mindful of achieving the best value from providers.
AIP awards for all Executive Directors are subject to the achievement of financial and personal objectives. Business unit chief executives either have measures of their business unit’s financial performance in the AIP or they may participate in a business unit specific bonus plan. For example, the Chairman and CEO, NABU currently participates in the Jackson Senior Management Bonus Pool as well as in the AIP.
In specific circumstances, the Committee also has the power to recover all (or part of) bonuses for a period after they are awarded to executives. These clawback powers apply to the cash and deferred elements of 2015 and subsequent bonuses made in respect of performance in 2015 and subsequent years.
The maximum vesting under this arrangement is 100 per cent of the original deferral plus accrued dividend shares.
Currently all Executive Directors participate in the Prudential Long Term Incentive Plan (PLTIP). The PLTIP has a three-year performance period. Vesting of outstanding awards is dependent on: — Relative total shareholder return (50 per cent of award); and
The performance measures attached to each award are dependent on the role of the executive and will be disclosed in the relevant Annual report on remuneration. The Chief Executive, M&G’s PLTIP awards are subject only to the TSR performance condition as the IFRS profit of M&G is a performance condition under the M&G Executive LTIP.
The Committee has the authority to apply a malus adjustment to all, or a portion of, an outstanding award in specific circumstances. For 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 guidelines for share ownership are as follows: — 350 per cent of salary for the Group Chief Executive; and
All Non-executive Directors receive a basic fee for their duties as a Board member. Additional fees are paid for added responsibilities such as chairmanship and membership of committees or acting as the Senior Independent Director. Fees are paid to Non-executive Directors in cash. Fees are reviewed annually by the Board with any changes effective from 1 July.
Shareholder views The Remuneration Committee and the Company undertake regular consultation with key institutional investors on the remuneration policy and its implementation. This engagement is led by the Remuneration Committee Chairman and is an integral part of the Company’s investor relations programme. The Committee is grateful to shareholders for their feedback and takes this into account when determining executive remuneration.
The Board has established Audit, Remuneration, Risk, Nomination and Governance Committees as principal standing committees of the Board. These committees form a key element of the Group governance framework.
The operation of the Remuneration Committee Members Anthony Nightingale (the Chairman of the Committee) Kai Nargolwala Philip Remnant
Role and responsibility The role and responsibilities of the Committee are set out in its terms of reference, which are reviewed by the Committee and approved by the Board on an annual basis, and which can be found on the Company’s website. The Committee’s role is to assist the Board in meeting its responsibilities regarding the determination, implementation and operation of the overall remuneration policy for the Group, including the remuneration of the Chairman and Executive Directors, as well as overseeing the remuneration arrangements of other staff within its purview.
The principal responsibilities of the Committee are: — Determining and recommending to the Board for approval, the framework and policy for the remuneration of the Chairman, Executive Directors and other members of the Group Executive Committee; — Approving the design of performance-related pay schemes operated for the Executive Directors and other members of the Group Executive Committee, and determining the targets and individual payouts under such schemes; — Reviewing the design and development of all share plans requiring approval by the Board and/or the Company’s shareholders; — Approving the share ownership guidelines for the Chairman and Executive Directors and other members of the Group Executive Committee, and monitoring compliance; — Reviewing and approving individual packages for the Executive Directors and other members of the Group Executive Committee, and the fees of the Chairman and the Non-executive Directors of the Group’s material subsidiaries; — Reviewing and approving packages to be offered to newly recruited Executive Directors and other members of the Group Executive Committee; — Reviewing and approving the structure and quantum of any severance package for Executive Directors and other members of the Group Executive Committee; — Ensuring the process for establishing remuneration policy is transparent and consistent with the Group’s risk framework and appetites, encouraging strong risk management and solvency management practices and taking account of remuneration practices across the Group; — Monitoring the remuneration and risk management implications of remuneration of senior executives across the Group, other selected roles and those with an opportunity to earn in excess of £1 million in a particular year; and
An annual review of the Committee’s effectiveness was carried out as part of the Board evaluation, as described in more detail on page 87. The Committee was found to be functioning effectively.
February 2016 Approve the 2015 Directors’ remuneration report; consider 2015 bonus awards for Executive Directors; consider vesting of the long-term incentive awards with a performance period ending on 31 December 2015; and approve 2016 long-term incentive awards, performance measures and plan documentation.
March 2016 Confirm 2015 annual bonuses and the vesting of long-term incentive awards with a performance period ending on 31 December 2015, in light of audited financial results.
Additionally, a number of resolutions in writing were approved by the Committee between these meetings relating to new Executive Directors’ remuneration arrangements and separation arrangements for an Executive Director who stepped down from the Board.
The Chairman and the Group Chief Executive attend meetings by invitation. The Committee also had the benefit of advice from: — Group Chief Risk Officer; — Chief Financial Officer; — Group Human Resources Director; and
The actual value of PLTIPs, based on the share price on the date awards are released, will be shown in the 2017 report. Tony Wilkey’s LTIP release includes an award which vested on 23 September 2016 (the share price on that date was £14.08) in addition to the awards which vest in 2017.
5 Barry Stowe’s bonus figure excludes a contribution of £11,738 from a profit sharing plan which has been made into a 401(k) retirement plan in respect of his role as Chairman & CEO, NABU. This is included under 2016 pension benefits.
6 To facilitate his move to the UK, Mike Wells’s benefits include relocation support including £330,680 to cover taxes due on stamp duty paid in 2015 and £339,624 to cover mortgage interest. In addition, an amount of £497,748 was paid by the Company to meet a payment on account for US tax on these benefits which, as the tax will be payable in the UK, under the UK and US double tax treaty this amount will ultimately be refunded.
Notes 1 Pierre-Olivier Bouée stepped down from the Board on 31 May 2015. The remuneration above was paid in respect of his service as an Executive Director.
2 Jackie Hunt stepped down from the Board on 3 November 2015. The remuneration shown above was paid in respect of her service as an Executive Director. 3 Penny James was appointed to the Board on 1 September 2015. The remuneration above was paid in respect of her service as an Executive Director, other than the LTIP releases which related to her previous role. 4 Nic Nicandrou’s 2015 benefits relate primarily to a legacy relocation clause in his contract agreed on his appointment and disclosed in the 2009 Directors’ remuneration report. The figure includes costs of £243,750 to cover stamp duty.
5 Barry Stowe’s 2015 benefits relate primarily to his expatriate status while he was located in Hong Kong in his previous role as Chief Executive, PCA, including costs of £139,405 for housing, £62,586 home leave and a £152,978 Executive Director Location Allowance. In addition, to facilitate his move back to the US, his benefits include relocation support including costs of £110,101 for relocation, shipping and tax return preparation. His bonus figure excludes a contribution of £10,404 from a profit sharing plan which has been made into a 401(k) retirement plan in respect of his role as Chairman & CEO, NABU. This is included under 2015 pension benefits.
8 Tony Wilkey was appointed to the Board on 1 June 2015. 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. Tony Wilkey’s 2015 benefits include costs of £140,134 for housing and a £214,169 Executive Director Location Allowance. 9 Barry Stowe and Tony Wilkey are paid in their local currency and exchange rate fluctuations will therefore impact the reported sterling value.
Tony Wilkey Chief Executive, PCA — Towers Watson Asian Insurance Survey
As reported last year, after careful consideration by the Committee, all Executive Directors received a salary increase of 1 per cent. The 2016 salary increase budgets for other employees across our business units were between 3 per cent and 6.5 per cent. No changes were made to Executives Directors’ maximum opportunities under either the annual incentive or the long-term incentive plans.
Notes 1 John Foley was appointed Chief Executive, UK and Europe on 19 January 2016. The annualised 2016 salary above was paid in respect of his service as Chief Executive, UK and Europe. 2 Penny James was appointed Group Chief Risk Officer on 1 September 2015. The annualised 2015 salary above was paid in respect of her service as Group Chief Risk Officer. 3 Michael McLintock stepped down from the Board on 6 June 2016. The annualised 2016 salary above was paid in respect of his service as Chief Executive, M&G and was pro-rated for the portion of the year for which he was an Executive Director.
4 Anne Richards was appointed Chief Executive, M&G on 7 June 2016. The annualised 2016 salary above was paid in respect of her service as Chief Executive, M&G. 5 Barry Stowe was appointed Chairman & CEO, NABU on 1 June 2015. The annualised 2015 salary above was paid in respect of his service as Chairman & CEO, NABU. 6 Mike Wells was appointed Group Chief Executive on 1 June 2015. The annualised 2015 salary above was paid in respect of his service as Group Chief Executive. 7 Tony Wilkey was appointed Chief Executive, PCA on 1 June 2015. The annualised 2015 salary above was paid in respect of his service as Chief Executive, PCA.
Notes 1 John Foley was appointed to the Board on 19 January 2016. The maximum bonus opportunity shown represents his annual opportunity as an Executive Director, which was pro-rated for the portion of the year for which he was an Executive Director. 2 Michael McLintock’s annual bonus opportunity in 2016 was the lower of 0.75 per cent of M&G’s IFRS profit and six times annual salary. M&G’s IFRS profit in 2016 was £414 million. Michael stepped down from the Board on 6 June 2016. The maximum bonus opportunity shown represents his annual opportunity as an Executive Director, which was pro-rated for the portion of the year for which he was an Executive Director.
3 Anne Richards’s annual bonus opportunity in 2016 was the lower of 0.75 per cent of M&G’s IFRS profit and six times annual salary. M&G’s IFRS profit in 2016 was £414million. Anne was appointed to the Board on 7 June 2016. The maximum bonus opportunity shown represents her annual opportunity as an Executive Director, which was pro-rated for the portion of the year for which she was an Executive Director.
The Committee also considered a report from the Group Chief Risk Officer which confirmed that these results were achieved within the Group’s and business units’ risk framework and appetite. The Group Chief Risk Officer also considered 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 Group Chief Risk Officer’s recommendations were taken into account by the Committee when determining AIP outcomes for Executive Directors.
The performance measures, their weightings and the achievement compared to the performance range, is illustrated below. The performance range (the levels of performance required for threshold, target and maximum bonuses to be paid) for the 2016 Group financial measures will be disclosed in the 2017 Directors’ remuneration report.
Personal performance As set out in our Directors’ remuneration policy, a proportion of the annual bonus for each Executive Director is based on the achievement of personal and, for the Group Chief Risk Officer, functional objectives. These objectives include: — The executive’s contribution to Group strategy as a member of the Board; — Specific goals related to the business or function for which they are responsible, such as developing product propositions for a new generation of savers and investors; and
Notes 1 At 31 December 2016 or on stepping down from the Board if earlier.
2 Michael McLintock stepped down from the Board on 6 June 2016. The bonus shown above was paid in respect of his service as an Executive Director. 3 Anne Richards was appointed to the Board on 7 June 2016. The bonus shown above was paid in respect of her service as an Executive Director. 4 In addition to the Annual Incentive Plan, Barry Stowe also participates in the Jackson bonus pool (see below).
Disclosure of targets and achievement for the 2015 Annual Incentive Plan
Achievement from Threshold to target Achievement from Plan to Maximum Achievement above Maximum
Prudential’s TSR performance during the performance period (1 January 2014 to 31 December 2016) was between the median and upper quartile of the peer group (ranked ninth). The portion of the awards related to TSR which therefore vested was 41.7 per cent.
Under the IFRS measure, 25 per cent of the award vests for meeting the threshold IFRS profit set at the start of the performance period increasing to full vesting for performance at or above the stretch level. The table below illustrates the cumulative performance achieved over 2014 to 2016 compared to the Group targets set in 2014: Group 2014-16 cumulative targets 2014-16 cumulative achievement Overall vestingThreshold Plan Maximum
M&G Executive Long-Term Incentive Plan The phantom share price at vesting for the 2014 M&G Executive Long-Term Incentive award is determined by the increase or decrease in M&G’s profitability over the three-year performance period with adjustments for the investment performance of its funds. M&G performance and the resulting phantom share price for Michael McLintock are shown below: Award 3-year profit growth of M&G 3-year investment performance 2016 phantom share price Value of awards vesting 2014 M&G Executive LTIP 7% Second quartile £1.60 £1,577,398
2016 LTIP vesting The Committee considered a report from the Group Chief Risk Officer which confirmed that the financial results were achieved within the Group’s and business units’ risk framework and appetite. On the basis of this report, and the performance of the Group and its business units described above, the Committee determined the vesting of each executive’s LTIP awards as set out below.
LTIP award vesting Number of shares/ADRs vesting2 Value of shares vesting1
Notes 1 The share price used to calculate the value of the LTIP awards with performance periods which ended on 31 December 2016 and vest in 2017 was the average share price/ADR price for the three months up to 31 December 2016, being £14.86/$37.02. 2 The number of shares vesting includes accrued dividend shares. 3 This does not include the vesting of Michael McLintock’s M&G Executive Long-Term Incentive Plan award, and has been pro-rated to reflect Michael’s service during the performance period. 4 Tony Wilkey’s awards include an award that vested on 23 September 2016 (the share price on that date was £14.08) in addition to the awards that vests in 2017.
Pension entitlements Pension provisions in 2016 were: Executive Director 2016 pension arrangement Life assurance provision
Barry Stowe Pension supplement of 25 per cent of salary, part of which is paid as a contribution to an approved US retirement plan.
Tony Wilkey Pension supplement in lieu of pension of 25 per cent of salary and a HK$18,000 payment to the Hong Kong Mandatory Provident Fund.
Performance graph and table The chart below illustrates the TSR performance of Prudential, the FTSE 100 and the peer group of international insurers used to benchmark the Company’s performance for the purposes of the PLTIP.
The information in the table below shows the total remuneration for the Group Chief Executive over the same period: Group Chief Executive M Tucker1 T Thiam T Thiam T Thiam T Thiam T Thiam T Thiam T Thiam2 M Wells M Wells
Group Chief Executive Single Figure of total remuneration 3,737 640 5,293 5,339 9,533 8,702 13,418 5,019 7,663 6,895
Notes 1 Mark Tucker left the Company on 30 September 2009. Tidjane Thiam became Group Chief Executive on 1 October 2009. The figures shown for Tidjane Thiam’s remuneration in 2009 relate only to his service as Group Chief Executive. 2 Tidjane Thiam left the Company on 31 May 2015. Mike Wells became Group Chief Executive on 1 June 2015. The figures shown for Mike Wells’s remuneration in 2015 relate only to his service as
Group Chief Executive +14.8% (32%) (33.3%) All UK employees +3.4% (6.2%) (2.8%)
Relative importance of spend on pay The table below sets out the amounts payable in respect of 2015 and 2016 on all employee pay and dividends: Percentage change
Note 1 All employee pay as taken from note B7 to the financial statements.
Long-term incentives awarded in 2016 2016 share-based long-term incentive awards The table below shows the awards made to Executive Directors in 2016 under share-based long-term incentive plans and the performance conditions attached to these awards: Executive Director Role
Penny James Group Chief Risk Officer 116,628 £1,514,998 25% 31 December 2018
Nic Nicandrou Chief Financial Officer 136,836 £1,777,500 25% 31 December 2018
Barry Stowe Chairman & CEO, NABU 137,050 £3,772,770 25% 31 December 2018
Tony Wilkey Chief Executive, PCA 153,742 £1,997,109 25% 31 December 2018
Mike Wells Group Chief Executive 332,870 £4,323,981 25% 31 December 2018 * Awards over shares were awarded to all Executive Directors other than Barry Stowe whose awards were over ADRs. † Awards for Executive Directors are calculated based on the average share price over the three dealing days prior to the grant date. Other than for Anne Richards, awards were granted on 1 April 2016 (based on a share price of £12.99 and an ADR price of US$37.29). ‡ The percentage of awards released for achieving maximum targets is 100 per cent.
Note 1 PLTIP awards made to the Chief Executive, M&G are subject only to the TSR performance condition. The IFRS profit of M&G is a performance condition under the M&G Executive LTIP. Anne
2016 cash long-term incentive awards In addition to her PLTIP award, in 2016 Anne Richards received a cash-settled award under the M&G Executive LTIP detailed below: Executive Director Role
Anne Richards Chief Executive, M&G 300% £1,200,000 See note 31 December 2018
Chairman and Non-executive Director remuneration in 2016 Chairman’s fees The Chairman’s fee was reviewed by the Committee during 2016 and increased by 3 per cent to £720,000 with effect from 1 July 2016 in order to reflect the expansion of the Chairman’s role to include oversight of the chairmen of the Group’s four material subsidiaries and inflation.
Non-executive Directors’ fees The Non-executive Directors’ fees were reviewed by the Board during 2016 and the basic fee was increased by 1 per cent to £95,000. Additionally, the fee for chairing the Audit Committee was increased by 7 per cent to £75,000 and the fee for chairing the Risk Committee was increased by 15 per cent to £75,000, to reflect the expanded scope of these roles which now includes more formal oversight of the material subsidiaries’ Audit and Risk Committees.
The resulting fees paid to the Chairman and Non-executive Directors are: £000s 2016 fees 2015 fees 2016 taxable benefits* 2015 taxable benefits*
Lord Turnbull4 – 70 – – – 70 * Benefits include the cost of providing the use of a car and driver, medical insurance and security arrangements. † 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
§ Based on the average closing share price for the six months to 31 December 2016 (£14.19). The Company and its Directors, Chief Executives and shareholders have been granted a partial exemption from the disclosure requirements under part XV of the Securities and Futures
Ordinance (SFO). As a result of this exemption, Directors, Chief Executives and shareholders do not have an obligation under the SFO to notify the Company of shareholding interests, and the Company is not required to maintain a register of Directors’ and Chief Executives’ interests under section 352 of the SFO, nor a register of interests of substantial shareholders under section 336 of the SFO. The Company is, however, required to file with the Hong Kong Stock Exchange any disclosure of interests notified to it in the United Kingdom.
Notes 1 John Foley was appointed to the Board on 19 January 2016.