Making life better We provide protection and savings opportunities to our customers, social and economic benefits to the communities in which we operate, jobs and opportunities to our employees, and long‑term value for our investors.
We invest customers’ savings in a way that reflects their personal needs and risk tolerance, and provide financial protection to customers for adverse events.
We focus on customers’ protection and savings needs, providing products that give them financial security
We generate valuable returns for our customers through good investment performance.
We create financial benefits for our investors, and deliver economic and social benefits for our customers, employees and the societies in which we operate
Find out more on page 15 Find out more on page 14 Find out more on page 16 www.prudential.co.uk
) basis results 7 A dditional inform ation www.prudential.co.uk Annual Report 2015 Prudential plc 01
Prudential has delivered a strong performance in 2015. We continue to grow across our key metrics despite the macroeconomic uncertainty and the challenges presented by low long-term interest rates.
The fundamentals of the Group remain compelling, our opportunities are intact and we are in an enviable position to benefit from the attractive structural and demographic opportunities in Asia, the US and the UK. The disciplined execution of our strategy, underpinned by the cash generating nature of our business, positions us well to be able to continue to deliver high-quality products and services to our 24 million customers and long-term profitable growth to our shareholders.
Report Disclosures 04 Directors’ remuneration report 101–130 102 Annual statement from the
Global headwinds to macroeconomic growth are nothing new for Prudential. We have charted choppy waters many times throughout our 167-year history. No doubt we will do so again in the decades to come. We remain well positioned across our markets and product ranges.
At the heart of that contribution is the financial peace of mind that we help to provide to our customers across our insurance and fund management businesses. This peace of mind remains the focus of Prudential’s purpose as a business and is a vital pre-condition for us to meet our other aims and obligations. Our history is a long one because the customer has always been at its centre.
The last year has been a time of change in the management at Prudential. Succession planning is one of the most important duties for any Chairman and Board. I have stated before the importance I place on continuing to develop and strengthen the Prudential Board and I am delighted to be able to report that we have continued that process.
‘As ever, our performance is rooted in the quality of the products and services which our first-rate staff and agents provide to our customers.’
Our award-winning Cha-Ching series of financial education cartoons continues to be an enormous success in Asia and is now being rolled out elsewhere. The Safe Steps disaster preparedness public service broadcasts created by the Prudence Foundation in collaboration with National Geographic have been highly effective, and we are examining how we can best build on that success.
In the UK, we were pleased to be able to renew our support for Prudential RideLondon. In the three years since we began our relationship, this festival of cycling has raised more than £29 million for charity. We hope to be able to improve on this figure in the years ahead.
The 2015 Chairman’s Challenge programme – which allows colleagues from around the Group to give their time and skills to support our charity partners – broke previous records. Over 7,000 volunteers gave up their time to benefit more than 174,000 people, working with charities including Plan International, Help Age International and Junior Achievement.
The quality of a company’s corporate governance is a strong indicator of how well placed it is to succeed. There can be no sustainable commercial success without it. It will continue to be a focus for us.
A well governed company engages regularly and effectively with its shareholders. We have an active programme of engagement. It is important to us that we hear the views of our investors and we find it useful to have an open and constructive dialogue with them. I know that I have found this very helpful.
The strength of the Group’s execution capabilities, combined with our leading market positions, growing in-force book and excellent diversification by geography, currency, product and distribution enable us to create value for our customers while generating sustainable earnings and cash for our shareholders.
Our Group IFRS operating profit based on longer-term investment returns increased by 22 per cent in 2015 to £4,007 million. On an actual exchange rate basis, the Group’s IFRS operating profit grew by 26 per cent.
— Asia life and asset management operating profit of £1,324 million grew by 17 per cent, reflecting the growing recurring income from our life in-force book (up 14 per cent to £7.2 billion2) and higher assets under management in Eastspring Investments. The recurring premium focus underpins our earnings growth in the region and is key to the resilience of our financial performance across the cycle.
— UK life IFRS operating profit of £1,167 million grew by 60 per cent4, and included £339 million arising in the second half of 2015 from specific management actions taken to position the balance sheet more efficiently under the new Solvency II regime.
‘The strength of the Group’s execution capabilities, combined with our leading market positions, growing in-force book and excellent diversification enable us to create value for our customers while generating sustainable earnings and cash for our shareholders.’
Asia Asia has delivered strong financial results in 2015 across all of our key metrics, demonstrating the resilient performance of our well diversified and increasingly large in-force business portfolio. IFRS operating profit of £1,324 million was up 17 per cent (16 per cent on an actual exchange rate basis), free surplus generation grew by 16 per cent to £673 million (14 per cent on actual exchange rate basis) and net cash remittances of £467 million were up 17 per cent.
Our life business strategy is centred on Asia’s rapidly growing life insurance markets with a focus on regular premium, protection-orientated policies distributed primarily through high-quality agency and bank partners. We have over 14 million customers across the region, one of the largest and most productive agency sales forces, a well established bancassurance franchise and leadership positions in nine out of 12 markets. Despite our strong progress over the last decade, insurance penetration in the markets in which we operate remains low and the demand for savings, health and protection products from a growing middle class continues to be high. Our scale and scope in the region, combined with proven operational expertise, enables us to execute on strategic growth opportunities, invest in building the business through the economic cycle and remain flexible to resist market pressure for products we consider to be less attractive. This approach will, from time to time, lead to fluctuations in APE sales at a country level but allows us to conserve value without compromising the overall regional delivery.
Our balance sheet continues to be defensively positioned and our Solvency II outcome, following approval by the Prudential Regulation Authority of our internal model in December 2015, underscores the strength and resilience of the Group’s capital position.
In Singapore, we continue to lead the market for regular premium products with a market share of 23 per cent7 and the largest agency force in the industry. During 2015, we have focused on growing regular premium agency-sourced protection sales, which has enhanced the mix of business and contributed to a 7 per cent increase in new business profit through this channel. Reflecting our proactive de-emphasis of universal life sales, and the effect of cessation of
In 2015 new business APE sales increased by 26 per cent, driven by 30 per cent growth in regular premium new business (which contributes 93 per cent of our APE sales), offsetting the 8 per cent reduction in single premiums, which are more susceptible to softer economic conditions. Our sales performance continues to benefit from our broad-based multi-channel distribution platform, new product launches and continued actions to improve both distribution scale and productivity. Agency APE sales were 29 per cent higher across the region, reflecting continued investment in agency manpower and an improvement in average agent productivity of 25 per cent. Our core bank partnerships continue to make good progress, led by Standard Chartered Bank, where APE sales rose by 16 per cent. New business profit was up 28 per cent at £1,490 million and outpaced the APE sales growth of 26 per cent.
In Hong Kong, APE sales grew 74 per cent, driven by increases in agency headcount and productivity and also from our successful inroads into Hong Kong’s broker network. During 2015, we have also seen acceleration in demand from Mainland China-based customers, with around 70 per cent of this business having an annual premium below US$5,000. We remain well placed to satisfy the growing demand for savings and protection products from both domestic and Mainland China customers.
Asia objectives 1. Asia IFRS operating profit Asia life and asset management pre-tax IFRS operating profit to grow at a compound annual rate of at least 15 per cent over the period 2012–2017 (2012: £924 million6)
2. Asia underlying free surplus Asia underlying free surplus generation3 of £0.9 billion to £1.1 billion in 2017 (2012: £484 million)
Note * 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.
) basis results 7 A dditional inform ation www.prudential.co.uk Annual Report 2015 Prudential plc 07 with the expectation of some changes to the rule, but the basic framework of the original proposal is presumed to remain intact. Given Jackson’s proven record of product innovation, best-in-class infrastructure, access to competitive intelligence and integration of product design with distribution, we believe we are well positioned to respond, adapt and take advantage of any market disruptions.
Total variable annuity APE sales of £1,512 million in 2015 remained flat compared to 2014, reflecting Jackson’s continued focus on proactively managing sales of products with living benefits to maintain an appropriate balance of revenue streams and match our annual risk appetite. The proportion of variable annuity sales without living benefits remains significant at 33 per cent of total variable annuity APE sales, broadly in line with last year. Elite Access continues to be the undisputed leader in the investment-only variable annuity market with APE sales of £314 million (2014: £335 million), with the proportion of business from non-qualified accounts representing 69 per cent of the total (up from 66 per cent in 2014). With £9.6 billion in assets since its launch in March 2012, Elite Access not only reflects Jackson’s strength in commercialising a low-cost, no-guarantee product but also in navigating a demand shift from qualified to non-qualified accounts. In relation to variable annuities with living benefit guarantees, during 2015 we introduced a broader range of living benefit features to policyholders, creating additional product capacity to meet the underlying customer demand. Overall, Jackson’s statutory separate account assets increased by 5 per cent, from £86.5 billion in 2014 to £91.0 billion in 2015 (up 11 per cent on an actual exchange rate basis), reflecting positive business flows.
Jackson’s strategy is unchanged, serving the 75 million US baby boomers as they enter retirement. We continue to price new business on a conservative basis, targeting value over volume, and the economics of our business remain very attractive. Our hedging remains focused on optimising the economics of our exposures over time while maintaining a strong balance sheet. Our hedging programme continued to perform well throughout 2015 and under the recent volatility experienced in the markets. Our credit book is in good shape and we have continued to take actions to improve further its quality, increasing our treasury position and reducing our high-yield energy exposure. With this strategy, Jackson has been able to deliver
Indonesia continues to generate material levels of new business value for our Asia business, and the recurring regular premium nature of our in-force portfolio has driven a 21 per cent increase in IFRS operating profit. Our sales performance reflects both softer market conditions and the impact of deliberate, proactive actions to further improve the quality of our distribution. While this might affect shorter-term sales progression, it conserves value and positions us well to capitalise on the eventual upturn. Market conditions for new business sales remain challenging, with suppressed consumer sentiment making it harder to close sales, reflected in APE sales 11 per cent lower at £326 million. However, average agency case sizes increased by 9 per cent in 2015. We remain confident about our long-term prospects in Indonesia given the low insurance penetration levels and we are continuing to invest in building our agency force nationwide.
In Malaysia, we have seen continued success from our strategy to increase our penetration of the Bumi sector, where we are the largest provider with a 43 per cent share of the Takaful market. In addition to growing the agency force by 13 per cent, we have increased our activity in bancassurance with APE sales from this channel up 68 per cent. Overall APE sales increased by 17 per cent in the year.
Our joint venture with ICICI Bank in India remains the leader in the private sector with a market share of 12 per cent and APE sales growth of 21 per cent. In Taiwan and Korea, we remain selective in our participation and as a result we are content to tolerate fluctuations in new business volumes. Both businesses have generated a higher level of IFRS operating profit.
Prudential plc Annual Report 2015 www.prudential.co.uk08 our approach to bulk transactions in the UK continued to be one of disciplined participation, focusing on those opportunities where we can bring both significant value to our customers and meet our shareholder return requirements. The implementation of Solvency II has increased significantly the capital intensity of annuity business and this will significantly reduce our appetite to transact bulk business going forward.
Our strategy in the UK and Europe remains to leverage our investment expertise, distribution scale and well established brand in order to deliver capital-light profitable growth in retail investment products, while managing our in-force business to generate long-term earnings and cash.
Our businesses and their performance – United Kingdom – Insurance and investments page 28
UK and Europe Our UK business delivered strong growth in IFRS operating profit, new business profit and free surplus generation. We continue to execute successfully our UK strategy, focusing on our core strength of investment-based retail offerings, selective participation in the wholesale business segment and active management of our in-force book. Life IFRS operating profit was 60 per cent4 higher at £1,167 million and includes £339 million from the positive impact of specific management actions undertaken in the second half to position the balance sheet more efficiently under the new Solvency II regime, which are not expected to recur going forward. Cash remitted to the Group increased to £331 million (2014: £325 million).
Onshore bonds APE sales of £258 million increased by 11 per cent and offshore bonds APE sales of £75 million rose by 21 per cent over the previous year. Reflecting increased demand for our wider range of retirement solutions post-pension reforms, income drawdown APE sales have almost trebled to £102 million and individual pensions APE sales have more than doubled to £150 million compared to 2014. We continue to diversify our product portfolio in response to the expanding market for flexible retirement income and pensions products.
Based on the Insurance Groups Directive solvency measure, our surplus position9 at 31 December 2015 was estimated at £5.5 billion (31 December 2014: £4.7 billion10), equivalent to a cover of 2.5 times.
In July 2013, Prudential plc was listed by the Financial Stability Board as one of nine companies to be designated as a Global Systemically Important Insurer, a classification that was reaffirmed in November 2015. Prudential is monitoring the development and potential impact of the related framework of policy measures and is engaging closely with the Prudential Regulation Authority on the implications of this designation.
M&G’s disciplined approach to cost management is reflected in a small improvement in the cost-income ratio to 57 per cent (2014: 58 per cent), despite the impact of lower revenues from reductions in the level of average assets managed.
Our businesses and their performance – United Kingdom – Asset management page 32
We continue to take a disciplined approach to capital management and have implemented a number of measures over the last few years to enable us to make our capital work more efficiently for the Group. Our Solvency II outcome, following approval by the Prudential Regulation of 2010 to £246.1 billion at the end of 2015, reflecting M&G’s continued focus towards innovation and asset class diversification.
Mike Wells with Prudential’s Group Executive Committee Standing, left to right: Alan Porter, Jonathan Oliver, John Foley, Michael McLintock, Al-Noor Ramji, Julian Adams, Tim Rolfe. Seated, left to right: Barry Stowe, Penny James, Mike Wells, Nic Nicandrou, Tony Wilkey. Further details on page 371.
5 Annual premium equivalent (APE) sales comprise regular premium sales plus one-tenth of single premium insurance sales.
6 Asia 2012 IFRS operating profit of £924 million is based on the retrospective application of new and amended accounting standards as at 31 December 2013, and excludes the 2012 one-off gain of £51 million from the sale of the Group’s holding in China Life Insurance Company of Taiwan.
8 The methodology and assumptions used in calculating the Group Solvency II capital results are set out in note II (c) of Additional unaudited financial information. The Group Solvency II capital ratio is based on outputs from the Group’s Solvency II internal model, approved by the Prudential Regulation Authority in December 2015.
The disciplined execution of our strategy, underpinned by the recurring income and cash-generating nature of our business, positions us well to continue to deliver sustainable, long-term profitable value to both our customers and shareholders.
The strength of our 2015 results demonstrates the successful execution of our strategy and our distinctive ability to deliver profitable growth across the cycle. Asia remains at the heart of the Group and our progress this year is underlined by the strong growth that we have delivered across sales, earnings and cash from the region. This has been well complemented by our disciplined progress in our more mature markets of the US and the UK.
The current significant macroeconomic uncertainty and market instability is resulting in a more unpredictable near-term outlook for global growth prospects. While this creates a headwind for our fee-based businesses, our progress continues to remain underpinned by the structural demand for regular premium savings and protection products in Asia. Through proactive management of our product mix and balance sheet and the growing scale of stable, recurring income from our in-force portfolio, the Group has the flexibility and resilience to adapt to changes in the market and deliver robust earnings and shareholder value.
The Group’s strategy remains centred on the long-term opportunity of servicing an increasingly self-reliant middle class through the provision of savings globally and health and protection in Asia. We have premium franchises in our chosen markets of Asia, the US and the UK, with significant structural competitive advantages to deliver effectively conservative products to protect our consumers’ health and wealth and provide absolute and good relative returns to our shareholders.
In Asia, the growing savings and protection needs of a rapidly emerging and increasingly wealthy population underpin our long-term, structural growth prospects in the region. The high-quality, recurring nature of our income and the scale and diversity of our pan-regional platform position us well to smooth out the inevitable country-level fluctuations to deliver value across the cycle.
In the US, our business is focused on the provision of products for the savings and income needs of the baby boomers entering retirement. While the proposed Department of Labor regulations are likely to reduce the access to valuable retirement products and services to the American middle class, our competitive advantages of superior product performance, low costs and strong commercialisation skills align the business well to meet these growing needs in the new landscape. We are in the advanced stages of executing our contingency plans, which are designed to underpin our future prospects for both earnings and cash.
In 2015 Prudential RideLondon, the world’s biggest festival of cycling, was a great success, raising more than £12 million for charity. Find out more on page 64.
14 Our strategy 15 How our business works 16 Measuring our performance 18 Our businesses and their performance
2015 financial performance 49 Group Chief Risk Officer’s report on the risks facing
Prudential plc is an international financial services group serving around 24 million insurance customers and with £509 billion of assets under management. We are listed on stock exchanges in London, Hong Kong, Singapore and New York.
Jackson Founded over 50 years ago, Jackson is one of the largest life insurance companies in the US, providing retirement savings and income solutions aimed at the 75 million baby boomers. Jackson’s pursuit of excellence in product innovation and distinctive distribution capabilities have helped it forge a solid reputation for meeting customer needs. Jackson has a long and successful record of providing advisers with the products, tools and support to design effective retirement solutions for their clients.
Well recognised brand with strong track record £104bn funds under management in with-profits funds3 £16bn+ PruFund funds under management2
Our businesses and their performance – UK – Insurance and investments page 28
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M&G M&G has been investing money for individual and institutional clients for over 80 years. M&G has grown to be one of Europe’s largest retail and institutional fund managers by developing its expertise in active investment. M&G has a conviction-led and long-term approach to investment, developing a deep understanding of the companies and organisations in whose equities, bonds or property it invests.
Well recognised brand with strong track record 2nd largest retail fund manager in the UK4 £246bn+ funds under management2
Prudential Corporation Asia Prudential Corporation Asia has leading insurance and asset management operations across 14 markets in Asia and serves the emerging middle class families of the region’s outperforming economies. Prudential has been operating in Asia for over 90 years and has built high performing businesses with effective multichannel distribution, a product portfolio centred on regular savings and protection, award-winning customer services and a widely recognised brand.
Top 3 position in nine out of 12 life markets £89bn+ funds under management2
Notes 1 Source: Morningstar Annuity Research Center. 3Q2015. 2 As of 31 December 2015.
3 Excluding Scottish Amicable Insurance Fund. 4 By total UK Assets under management.
Our clear and consistent strategy utilises our capabilities, footprint and scale to serve the global savings and Asian protection needs of an increasingly self-reliant middle class to create long-term value for our customers and our shareholders. We focus on three markets, Asia, the US and the UK, where we see continued growing demand for our products.
To capture these opportunities we: Focus on customers and distribution Our customers are at the heart of the decisions we make. We focus on understanding our customers’ needs and requirements in each of our chosen markets as we believe that in order to do well for our shareholders we must first serve our customers.
Distribution plays a key role in our ability to reach, attract and retain these valued customers across our regions. Building out and diversifying our distribution capabilities helps ensure that we fully capitalise on the opportunities available to us in each of our regions.
The US baby boomer generation is the wealthiest demographic in the global economy. Over the next 20 years they will be retiring at a rate of 10,000 per day, creating significant demand for solutions to best help retirees with their retirement challenges.
We provide protection and savings opportunities to our customers, social and economic benefits to the communities in which we operate, jobs and opportunities to our employees and long-term value for our investors. By offering security, pooling savings and making investments, we help to drive the cycle of growth.
We create financial benefits for our investors and deliver economic and social benefits for our customers, our employees and the societies in which we operate
Employees Providing an environment with equal opportunities, career potential and rewards enabling us to attract and retain high-quality individuals to deliver our strategy
Societies Supporting societies where we operate, through investment in business and infrastructure, tax revenues and community support activities 24m life customers total shareholder return1 achieved since 2010 employees worldwide £4.8bn total investment2 in the economy
Notes 1 Total shareholder return represents the growth in the value of a share plus the value of dividends paid, assuming that the dividends are reinvested in the
Generate value for shareholders through fee and other income for managing customers’ savings and through insurance underwriting profits on financial protection products
Shareholders Generate value for shareholders through fee income from managing customers’ investments
Customers We focus on customers’ protection and savings needs, providing products that give them financial security
To create sustainable economic value for our shareholders we focus on delivering growth and cash while maintaining appropriate capital
EEV new business profit3 £m Life insurance products are, by their nature, long term and generate profit over a significant number of years. Embedded value reporting provides investors with a measure of the future profits streams of the Group. EEV new business profit reflects the value of future profit streams which are not fully captured in the year of sale under IFRS reporting.
EEV operating profit3 £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 the 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 free surplus generation4 £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 period.
Business unit remittances £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.
+9% — Business unit remittances increased by 10 per cent in 2015, compared to 2014, with significant contributions from each of our four major business units.
— Our estimated IGD capital surplus at the end of 2015 before allowing for dividends5 covered the capital requirements 2.5 times.
Chief Financial Officer’s report on our 2015 financial performance page 36 2017 objectives8
6 Excludes subordinated debt issues that qualify as capital. 7 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 Additional unaudited financial information. The Group Solvency II capital ratio is based on outputs from the Group’s Solvency II internal model, approved by Prudential Regulation Authority in December 2015.
8 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.
9 Constant exchange rate results translated using exchange rates as at December 2013.
11 Asia 2012 IFRS operating profit of £924 million is based on the retrospective application of new and amended accounting standards, and excludes the one-off gain of £51 million from the sale of the Group’s holdings in China Life Insurance Company in Taiwan.
— Performance is on track to deliver the 2017 financial objectives
— Agency headcount up 13 per cent; APE per active agent up 25 per cent
— More than 25 per cent of APE sales comes from products launched in past 24 months
Asia Serving the savings, health and protection needs of the growing and increasingly affluent Asian middle class
Given the low penetration rates of insurance and investment products we see considerable growth opportunities over the long term.
Favourable demographic and economic trends Asia (excluding Japan) is leading the world in terms of GDP growth. In the period 2014 to 2020, it is expected to generate around US$7.0 trillion2 of new GDP, more than the US and the other advanced economies combined.
‘Asian families have very clear financial protection gaps and savings needs but these are significantly underserved by the industry.
We have a responsibility to do a much better job of reaching these people and providing them with appropriate products and advice.’
Asia population 3,302m Prudential customers 14m Prudential agents 500,000+ Prudential bancassurance branches
Excellent bancassurance platform — APE has grown 2.7 times since acquisition of Thanachart Life in 2013
Rapidly scaling up distribution — Almost tripled agency size in less than three years
— Expanding across country — Improving efficiency – 80 per cent of policies now processed ‘straight through’
— Largest agency in the industry — Most productive bancassurance relationships
— 43 per cent7 market share of Takaful (Sharia compliant) life business.
— Conventional and Takaful options — Value-add services such as PRUHospital Friends
What we do and how we do it Although Prudential has been operating in Asia for over 90 years, we began building our regional business in earnest in 1994 with the establishment of Prudential Corporation Asia. Since then, Prudential Corporation Asia has entered new markets, added considerable agency scale and launched bank distribution, developed product capabilities – particularly unit-linked with protection – and built a customer-centric brand anchored on the tag line ‘Always Listening, Always Understanding’.
Market participation Each market is unique and our overarching regional strategy is very specifically tailored to the opportunities that reflect the many differences in each country, including its stage of economic development, cultural preferences, regulation, the competitive landscape and our own risk appetite.
Life insurance distribution Prudential Corporation Asia is well positioned in terms of its scale and diversity of distribution. Over 500,000 agents produce around 60 per cent of sales, with the remainder mainly coming from bancassurance that includes exclusive agreements with Standard Chartered Bank, UOB and Thanachart. At the core of our distribution model is face-to-face interaction with customers that delivers high-quality, needs-based advice.
Products Our product portfolio is tailored to suit the savings and protection needs of customers in each market.
For example, in markets such as Indonesia and Malaysia there is a high demand for regular premium unit-linked policies that provide coverage for hospital and surgical and critical illnesses, combined with savings for items such as children’s education. In Hong Kong, there is high demand for participating products where the smoothed investment returns are particularly appealing as part of a broader financial plan.
Traditionally, Asians would have relied on their children to provide for them in their retirement but with family sizes decreasing people are increasingly making their own financial provisions and life insurance policies are a popular part of a retirement plan.
Regulators across the region are generally keen to promote the growth of the life insurance industry as they appreciate the social utility of providing financial security to individuals, and the way insurers can channel unproductive cash savings into long-term investments in the economy. However, they are imposing higher standards on the industry and monitoring compliance more actively, with increasing focus on the quality of advice distributors provide and the suitability of the products offered. Although assessments of solvency can vary considerably market by market, there is increasing convergence on risk-based calculations.
Source: Based on Swiss Re report and includes Hong Kong, India, Indonesia, Korea, Malaysia, Philippines, Singapore, Taiwan, Thailand and Vietnam; BCG wealth 2015.
) basis results 7 A dditional inform ation www.prudential.co.uk Annual Report 2015 Prudential plc 23
7 Source: based on Insurance Services Malaysia Berhad data as at 31 December 2015.
Innovations in service are also important to customer satisfaction. Some are technology based, such as e-submissions (up 35 per cent in 2015) and automated underwriting, but a key component is also innovation with the ‘human touch’ such as Singapore’s PRUhealthcare assist.
Asset management Eastspring Investments, Prudential’s asset management business in Asia, manages investments for Prudential’s Asia, UK and US life companies and also has a broad base of third-party retail and institutional clients.
The asset mix is well balanced with 50 per cent equities, 43 per cent fixed income and 7 per cent money market. Around 54 per cent of funds have outperformed their benchmarks over a three-year period. Eastspring Investments has been building expertise in infrastructure, negotiated credit and quantitative investment capabilities.
During 2015, Prudential extended its highly successful children’s financial literacy programme, ‘Cha-Ching’ and launched the second stage of the SafeSteps programme, focusing on road safety with ambassador Michele Yeoh. For more information on these and other initiatives, see the Corporate responsibility review on page 57.
‘Last year, my father got hospitalised. We were devastated, not only emotionally but also financially, that my siblings and I had to chip in to make ends meet. To make things worse, I also needed money for my son’s tuition fee as the start of classes was fast approaching. We would have been in deep financial trouble if not for PRULink Exact Protector (PEP) 10, my life insurance with Pru Life. I was hesitant to get one at first, but these kinds of unforeseen events prove life insurance to be a vital investment for everyone – through the withdrawals PEP 10 allowed me to make, my father’s hospitalisation and my son’s tuition fee were both covered. Now, my dad is happily recovering, my son is enjoying learning at school, and I’m incredibly grateful to have gotten claims when I needed them the most.’
— Cash remittance increased by 13 per cent to a record level of £470 million
— Continued strong returns on shareholder capital across all key financial metrics
) basis results 7 A dditional inform ation www.prudential.co.uk Annual Report 2015 Prudential plc 25
Regulatory landscape In addition to the uneven economic conditions in 2015, the insurance industry continues to deal with an evolving regulatory landscape and a multitude of initiatives. Many of these initiatives began in response to the financial crisis over eight years ago and were focused on the broader financial services industry. Within the insurance industry, we continue to see changes in supervisory structures, new global group supervision and capital standards and a focus on the reduction of ‘systemic risk’.
Competitive landscape We continue to see significant changes across the competitive landscape as well. Sales in the annuity industry were down approximately 2 per cent5 comparing third quarter year-to-date 2015 (latest available data) against third quarter year-to-date and total industry variable annuity sales were down approximately 4 per cent5. These results partially reflect the headwinds the industry faced in 2015, including market volatility and unknown regulatory outcomes.
The number of retirees entering this stage of their life are triggering a shift from savings accumulation to retirement income generation of more than US$10 trillion3.
US economic environment Despite a noticeable deceleration in consumer spending and a contraction in business investment in the fourth quarter, the US economy continued its trend of modest annual growth. While some sectors were disappointing, notably manufacturing, the US economy created 2.7 million new jobs4, pushed unemployment down to 5.0 per cent and showed continued improvement in the housing market.
‘Jackson continues its long-term disciplined approach to our business, with a sharp focus on aligning the needs of our stakeholders. This disciplined approach has enabled us to manage successfully volatile macroeconomic conditions, and drive consistently positive outcomes even in the midst of unsteady financial markets.
Jackson’s mission is important. We provide financial security to our customers with products and services designed to support them into and through retirement. Our strategy remains focused on providing a strong proposition to our customers and value creation for our shareholders.’
A s i a Significant protection gap and investment needs of the middle class
The strength of our product development capabilities continues to support the diversification of our product mix, with the sale of variable annuities with living benefit guarantees remaining in line with our risk appetite in 2015. As expected, in the current historically low interest rate environment, variable annuities continue to outsell fixed rate products. While sales of fixed annuities have been lower in recent years, fixed index annuities increased 15 per cent from 2014. These products still make up a significant portion of our balance sheet and earnings.
Jackson stopped selling traditional life insurance products in 2012; however, we continue to look for opportunistic ‘bolt-on’ acquisitions to further diversify our earnings and balance sheet risks. In the past, these disciplined acquisitions have shaped Jackson’s earnings while helping to diversify Jackson’s overall risk profile.
capabilities and asset liability management expertise to offer prudently priced annuity products aligned with our risk appetite.
Our relentless pursuit of excellence has earned us a leading position in the industry.
Creative product development Jackson develops and distributes products that address the retirement needs of our customers through various market cycles. These products include variable annuities, fixed annuities and fixed index annuities.
Among the main attractions of a variable annuity product is the optional lifetime guarantee, where customers can access a stream of payments with downside protection while still being able to invest in a broad range of assets, as well as the benefit of tax deferral on the investment growth within the product. The breadth of our product offering, strength of our distribution relationships and our ability to maintain financial stability through the crisis and remain as a consistent presence within the market, has resulted in Jackson being the number one5 writer of variable annuities in the US.
Despite positive demographic trends and the needs of retirees, these competitive activities, market volatility and regulatory headwinds have impacted the industry, and further market share adjustments have resulted as customers and distributors seek insurers like Jackson that offer consistency, stability and financial strength.
Grandparents Joanne and Charlie (68 and 69) are both semi-retired, and live in the Dallas-Fort Worth area. They own a Jackson annuity contract.
‘After weathering the storm in 2000 and watching our portfolio take another hit during the crisis in 2008, Charlie and I decided that we couldn’t go through that agony for a third time. After listening to our story, our wonderful financial professional, being the excellent teacher that he is, introduced us to annuities, explaining that these products offered guaranteed income for life, the opportunity for growth over our lifetime, and that our children could even benefit from the products as our heirs. It’s very clear that our financial professional cares about us, so we took his advice, and honestly we could not be happier. Our annuity has worked exactly as he described it, and Charlie and I agree that it’s the very best product for us.’
) basis results 7 A dditional inform ation www.prudential.co.uk Annual Report 2015 Prudential plc 27
Disciplined risk management Jackson operates within a well-defined risk framework aligned with the overall Prudential Group risk appetite. The type and number of products we sell remains balanced. Our conservative and disciplined economic approach to pricing is designed to achieve both adequate returns on our products and sufficient resources to support our hedging programme.
3 US Census Bureau. 4 Bureau of Labor Statistics, US Department of Labor. 5 LIMRA/Secure Retirement Institute, US
Our wholesalers provide extensive training to these advisers. In 2015, we led the industry with the highest level of sales efficiency, with gross sales per wholesaler 32 per cent higher than the nearest competitor.
National Planning Holdings, an affiliate of Jackson, is the sixth7 largest independent broker-dealer network in the US. Leveraging the collective strength of the four broker-dealers within the network, National Planning Holdings is able to meet the specific needs of three key distribution channels: independent representatives, financial institutions, and tax and accounting professionals. We offer registered representatives and investment advisers access to industry-leading mutual fund/asset management companies, insurance carriers, and to thousands of brokerage products. National Planning Holdings provides significant benefits for Jackson by offering Jackson products and providing market intelligence.
The strength and flexibility of this network will give us distinct advantages as we continue to manage through the pending US Department of Labor fiduciary proposal which, as it is drafted today, will have a direct impact on the distribution of annuities in the future.
— Implementation of ‘pension freedom’ drives product innovation to meet changing face of UK retirement market
Wholesale Retail *Adjusted to exclude results of PruHealth and PruProtect 753*
* Representing Solvency II own funds of the UK with-profits funds
A period of fundamental change and opportunity The UK is the world’s fifth largest retail investment market. Wealth is concentrated in the 50+ age group, with the younger generation of savers being typically less well-funded. In our target over-50 demographic, the population growth rate is almost double the growth rate of the UK population as a whole, and while the introduction of pension freedom reforms in April 2015 has fundamentally changed the way in which individuals can access their savings to help fund their income in retirement, the need to accumulate savings remains unchanged. These radical changes, when combined with our trusted brand and product capabilities, provide new and significant opportunities for the profitable and capital efficient growth of our business in the UK.
The new regulatory rule book When compared to 2012, the UK pensions industry today is almost unrecognisable. Three years of unprecedented regulatory change has resulted in a structural marketplace shift in how customers view retirement, with consumers being given greater flexibility to access their pension savings in retirement. Customers are engaging more frequently with their providers and the demand for financial advice and guidance is increasing. Those companies that are well known, financially strong and create products and services to match the pension freedom needs and expectations of customers will prosper.
— Consistently committing to customer service improvement, which was recognised at the 2015 Financial Adviser Service Awards where we received the accolade of Company of the Year for the first time, while also retaining our two Five Star ratings in the Life & Pensions and Investment categories for the fifth consecutive year.
— Significant ongoing value to be managed — Opportunity to improve customer service and retention
— Investment record; asset side scale — Complementary intermediary and owned distribution; retail brand
) basis results 7 A dditional inform ation www.prudential.co.uk Annual Report 2015 Prudential plc 31 our most significant route to market in the UK with sales growth of 52 per cent over the same period in 2014 being achieved by our intermediary sales teams. Sales generated by Prudential Financial Planning increased by 77 per cent. The expertise and capability within our Retail Voice telephony team is ideally suited to supporting developments of our direct to consumer franchise and is complementary to the services of Prudential Financial Planning.
Our business in Poland has established a strong customer franchise, growing steadily since launching in 2013. Headquartered in Warsaw, the business now has 18 branches across the country and 597 financial planning consultants. Its success demonstrates our ability to build a new business franchise by applying our existing product and distribution expertise to a new market.
Prudential UK & Europe has well established franchise in its chosen markets which continues to drive strong growth and ongoing product demand among customers. The business is focused on delivering retail growth and the optimisation of in-force business. It will continue to develop retirement solutions based on the market-leading and differentiated PruFund range. Developments will be underpinned by the latest technology including the introduction of a new policy administration system to support the launch of a retirement account specifically designed for the post-pension freedom marketplace.
Our competitive strength in these areas combined with our product suite continues to attract new customers seeking protection from the impact of volatile market conditions.
In Corporate Pensions, we continue to focus on securing new members and incremental business from our current portfolio of customers and on additional voluntary contribution plans within the public sector, where Prudential is the market leader, providing schemes for 73 of the 101 public sector authorities in the UK.
Our approach to bulk annuity transactions in the UK continues to be one of disciplined participation, focusing on those opportunities where we can bring both significant value to our customers and meet our shareholder return requirements. In 2015 we completed four transactions at the higher end of the market, generating sales in excess of £1.5 billion.
Notes 1 The 2014 EEV results of the Group are presented on a post-tax basis and, accordingly, prior years’ results are shown on a comparable basis.
2 Financial Adviser Services Awards. 3 Moneyfacts Life and Pensions Awards 2015. 4 Any investors should note that the value of investments, and the income from them, will fluctuate, which will cause fund prices to fall as well as rise and they may not get back the original amount they invested. The customers’ circumstances and views are specific to them and should not be taken as a recommendation, advice or forecast.
— 5 per cent growth in institutional business to £65 billion under management
— Recognised for its investment expertise with awards across nearly all its asset categories in 2015, including Investment Manager of the Year at the European Pension Awards
Serving both retail and institutional investors’ needs through a conviction-led and long-term approach to investing
) basis results 7 A dditional inform ation www.prudential.co.uk Annual Report 2015 Prudential plc 33
In Europe, investors shifted away from fixed income and equities towards mixed asset funds and cash, accompanied by a significant increase in funds flowing to exchange traded funds. Net sales of UK-domiciled mutual funds were £17.0 billion3 during 2015, with annual net outflows of £4.7 billion3 from the fixed income asset class by itself, although property and money market funds held up well.
M&G has been managing money on behalf of third-party investors for more than 80 years. We believe our active approach to investment – selecting investments on a conviction basis rather than following a market index – produces superior returns for our customers over the longer term. We offer our customers the ability to invest in a diverse range of assets; not only equities and fixed income but also unlisted investments such as property, direct lending, infrastructure and private equity. M&G is one of the UK’s largest real estate investors, with a property portfolio of £23.4 billion at 31 December 2015, and is the third largest private debt lender in the world.
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. Some of these strategies were developed originally for Prudential’s insurance funds.
The European asset management market is the second largest in the world with net assets of ¤12.6 trillion2. Demand for asset management services is expected to continue to grow as governments and employers increasingly pass the responsibility for retirement planning and other long-term savings to individuals. Asset managers with records of strong investment returns and a high level of client service are in a good position to attract flows of new money.
The UK asset management industry, M&G’s core market, is the second largest national market in the world with £870.7 billion3 of assets and is a global centre of excellence for investment management and a major source of long-term funding for the UK economy.
M&G manages money on behalf of retail and institutional investors, and Prudential UK’s funds.
Market backdrop over the past year The global economy in 2015 was dominated by three factors: fears of an economic slowdown in China, which led to the Chinese stock market crash in August; the continued decline in global commodity prices; and a strong US dollar. While commodity-exporting emerging markets and currencies suffered during 2015, the US dollar strengthened in anticipation of a rise in the federal funds rate, further bolstered by investors seeking a safe haven during heightened geopolitical tensions. Despite signs of economic recovery in developed countries, 2015 saw heightened market volatility across most asset classes and regions.
‘After a period of exceptional growth M&G had a more challenging year, with retail redemptions due in part to continuation of a market-wide change in investor sentiment away from fixed-income. Our track record of innovation in institutional business combined with asset class diversification helped deliver capital efficient profits and cash generation for the Group.’
M&G manages the investments of individuals, institutions and the UK policyholders of Prudential funds. Its aim is to help these customers to meet their financial goals through long-term active investment management across a diversified range of asset classes.
Innovation and independence of thought are prized at M&G in the belief that these are the factors that lead to superior, sustainable returns for its clients over the longer term. A record of strong investment returns attracts clients and assets, and the resulting management fees continue to generate strong cash flows for Prudential’s shareholders.
Our businesses and their performance continued we also have specialist real estate teams in Paris, Frankfurt, Luxembourg, Singapore, Seoul and Tokyo in addition to those in London.
M&G has a strong investment brand, built over decades and based on a reputation for honesty, innovation and a commitment to building long-term wealth for our investors. We aim to put our customers at the heart of everything we do and seek to be a trusted partner for all of our clients.
Our institutional fixed income clients include some of the UK’s largest pension
Ian retired at 55, and now has more time to spend doing what matters to him and his wife Sue, which includes managing their money.
‘My job now is to get the best possible return on our savings and investments and I like to keep up to date with the latest financial developments and look for good investment opportunities. Diversification is key to my investment strategy and the wide range of funds available from M&G allows me to achieve this.’
Multi-asset: M&G’s Multi-Asset team, the Macro Investment Business, is responsible for the management of a range of funds for retail investors and segregated accounts for institutional clients. The team applies a top-down ‘macro’ approach, with a strong valuation framework, which can be applied across markets and regions in many market conditions.
A history of innovation Since launching the UK’s first open-ended fund in 1931, we have brought a succession of new investment strategies to the retail and institutional markets. In combination with this tradition of innovative investment thinking, M&G has a proven ability to convert ideas into products that meet our clients’ needs and attract significant fund flows. It is these two qualities in combination that make M&G distinctive.
M&G saw healthy inflows to its ranges of retail multi-asset funds in 2015, as investors sought flexibility and stability in times of low yields and economic and political uncertainty. During the year, M&G launched a third fund in its popular European multi-asset range, the M&G Prudent Allocation Fund.
4 Lipper FMI FundFile, 31 December 2015, based on Europe ex. UK and International region. M&G data sourced internally.
5 Private Debt Investor figures based on amount of capital raised over the last five years for discrete private debt strategies.
6 Any investors should note that the value of investments, and the income from them, will fluctuate, which will cause fund prices to fall as well as rise and they may not get back the original amount they invested. The customers’ circumstances and views are specific to them and should not be taken as a recommendation, advice or forecast.
Diversification M&G has pursued business diversification across: — Asset class: expertise across equities, fixed income, real estate and multi-asset strategies; — Client type: retail customers and institutional clients including pension funds, sovereign wealth funds, and Prudential’s own long-term insurance funds; — Investment strategy: over 60 pooled retail funds covering domestic, global and emerging market strategies, 14 of which have funds under management of over £1 billion, up from 13 in 2014. Institutional clients benefit from a wide-range of pooled and/or segregated fixed income, equity and real estate strategies; and
Bu si n es s u n its generation Free surplus In-force
Currency values in the countries in which we operate have also fluctuated in the course of 2015. As a significant proportion of our earnings and capital are US dollar denominated, the weaker sterling benefited our reported results, shareholders’ equity and solvency. However, for the purposes of evaluating the financial performance of our businesses outside the UK, unless otherwise stated, we continue to present growth rates before the impact of currency movements, as this gives a more meaningful assessment of underlying performance trends.
This performance was broad-based with strong contributions from our principal business operations. The Group’s financial performance and its resilience increasingly benefits from ongoing improvement in the quality of our income delivered through stronger growth in non-interest-sensitive sources and from the balance of profit and cash across different geographies, currencies, products and distribution channels. Prudential’s balance sheet remains conservatively positioned, our Group solvency under the Insurance Groups Directive (IGD) is robust and our Solvency II outcome, following approval by the Prudential Regulation Authority of our internal model in December 2015, underscores the strength and resilience of the Group’s capital position.
— Group profit before tax attributable to shareholders on an IFRS basis increased 19 per cent to £3,148 million, including the financial impact of short-term movements in investment values and other items reported outside the operating result.
— Underlying free surplus generation1 (net of investment in new business) rose by 15 per cent to £3,050 million.
— On the European Embedded Value (EEV) basis of reporting performance, new business profit increased 20 per cent2 to £2,617 million, contributing to EEV operating profit of £4,881 million, up 16 per cent.
— EEV basis shareholders’ funds at 31 December 2015 increased to £32.4 billion, 11 per cent higher than the previous year end on an actual exchange rate basis.
Measuring our performance page 16 £4,007m IFRS operating profit increase on 2014
Asset management business: Results of the sold PruHealth and PruProtect business – 23 (100) 23 (100)
Total operating profit based on longer-term investment returns 4,007 3,186 26 3,290 22
Short-term fluctuations in investment returns: Other non-operating items3 (122) 2 n/a (4) n/a
Profit before tax attributable to shareholders 3,148 2,614 20 2,636 19 Tax charge attributable to shareholders’ returns (569) (398) (43) (396) (44)
Basic earnings per share based on operating profit after tax 125.8 96.6 30 99.5 26 Basic earnings per share based on total profit after tax 101.0 86.9 16 87.9 15
Note B1: Analysis of performance by segment page 155 and Note B6: Earnings per share page 177
IFRS operating profit Total IFRS operating profit increased by 22 per cent to £4,007 million in 2015, driven by improved performance in our life operations in Asia, the US and the UK.
— Asia total operating profit of £1,324 million was 17 per cent higher than the previous year (16 per cent on an actual exchange rate basis), with strong growth in both life insurance and Eastspring Investments, our Asia-based asset management business.
— UK total operating profit was 59 per cent2 higher at £1,195 million, driven by our focused approach on active management of our in-force portfolio and the positive impact of specific management actions taken to position the balance sheet more efficiently under the new Solvency II regime.
— M&G operating profit (excluding Prudential Capital) at £442 million was in line with 2014, with action on costs mitigating the impact of lower revenues following a 7 per cent reduction in funds managed at end 2015.
) basis results 7 A dditional inform ation www.prudential.co.uk Annual Report 2015 Prudential plc 39 partly due to the impact of large investment only corporate pension schemes transfers combined with annuity payments that are no longer offset by new business inflows following the reduction in retail annuity sales. Positive foreign currency translation effects together with favourable investment market and other movements have contributed a further £3.8 billion to the increase in policyholder liabilities since the start of the year.
from spread income decreased by 3 per cent (increase 2 per cent on an actual exchange rate basis), primarily due to the effect of lower achieved yields in the US and a declining contribution from UK annuities. The fact that insurance margin and fee income generated a higher and growing proportion of our income represents a healthy evolution in the liabilities of £7.6 billion in 2015 driven by our US and Asia businesses. Net flows into our US business were £8.5 billion in 2015, reflecting continued success in attracting new variable annuity business. The consistency of our net flows into Asia is underpinned by our focus on recurring premium new business and strong customer retention. Across this business net liability flows continue to be positive at £1.9 billion. Net outflows in the UK are exchange rate basis) reflecting our strategic emphasis on growing our offering of risk products such as health and protection in Asia. Fee income was up 10 per cent (17 per cent on an actual exchange rate basis) primarily reflecting the growth in the level of assets that we manage on behalf of our customers, primarily in the US. In contrast, the contribution to our profits
Focusing on the business supported by shareholder capital, which generates the majority of the life profit, in the course of 2015 policyholder liabilities increased from £208.2 billion at the start of the year to £219.6 billion at 31 December 2015. The consistent addition of high-quality profitable new business and proactive management of the existing in-force portfolio underpins this increase, resulting in positive net flows4,5 into policyholder
In 2015, we maintained our preference for higher-quality sources of income such as insurance margin and fee income. We favour insurance margin because it is relatively insensitive to the equity and interest rate cycle and prefer fee income to spread income because it is more capital-efficient. Insurance margin was up 20 per cent (24 per cent on an actual
Note C4: Policyholder liabilities and unallocated surplus of with-profits funds page 219
Margin on revenues 1,911 1,721 1,708 Expenses: Expected return on shareholder assets 225 215 216
Chief Financial Officer’s report on our 2015 financial performance continued in 2014 to £86.9 billion in 2015, equating to an increase of 11 per cent on a constant exchange rate basis (20 per cent on an actual exchange rate basis), driven by sizeable variable annuity net premium inflows. Contribution from insurance margin also increased by 10 per cent. Lower yields impacted the spread income which decreased by 6 per cent on a constant exchange rate basis.
Note 1c: Analysis of asset management operating profit based on longer-term investment returns page 339
) basis results 7 A dditional inform ation www.prudential.co.uk Annual Report 2015 Prudential plc 41 which are fair valued, is asymmetrical to the movement in the guarantee liabilities, which are not fair valued in all cases. Jackson designs its hedge programme to protect the economics of the business from large movements in investment markets and therefore accepts variability in the accounting results. The negative short-term fluctuations of £424 million in 2015 were primarily attributable to the net value movement in the year of the hedge instruments held to manage market exposures.
IFRS effective tax rates In 2015, the effective tax rate on IFRS operating profit based on longer-term investment returns was 20 per cent (2014: 23 per cent). The reduction is due to lower corporate tax rates in certain jurisdictions and a higher benefit from non-recurring tax credits, specifically in Jackson.
IFRS short-term 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 2015 the total short-term fluctuations in investment returns relating to the life operations were negative £663 million, comprising negative £119 million for Asia, negative £424 million in the US and negative £120 million in the UK.
In Asia, the negative short-term fluctuations of £119 million reflected net unrealised losses on fixed income securities, primarily due to rises in bond yields.
Short-term fluctuations in the US mainly reflect the net value movement on the guarantees offered by Jackson and the associated derivatives held to manage market exposures. Under IFRS accounting, the movement in the valuation of derivatives,
Asset management: in 2015, our asset management businesses in the UK and Asia collectively increased their contribution to IFRS operating profit compared to the previous year. Similar to the trend observed in our life operations, asset management operating profit primarily reflects the scale of these businesses, as measured by funds managed on behalf of external institutional and retail customers and our internal life insurance operations.
Chief Financial Officer’s report on our 2015 financial performance continued it is obliged to collect from employees, customers and third parties which include sales taxes, employee and annuitant payroll taxes.
Free surplus generation is the financial metric we use to measure the internal cash generation of our business operations.
Corporation taxes include amounts paid on taxable profits which, in certain countries such as the UK, include policyholder investment returns on certain life insurance products. Other taxes include property taxes, withholding taxes, employer payroll taxes and irrecoverable indirect taxes. Taxes collected are other taxes that Prudential remits to tax authorities which £3,050m underlying free surplus generation increase on 2014
In Asia, growth in the in-force life portfolio, and a 28 per cent increase in post-tax profit from Eastspring Investments, contributed to free surplus generation of £1,086 million, up 17 per cent. In the US, free surplus generation before new business increased by 11 per cent, also reflecting business growth. In the UK, the 37 per cent increase to £900 million reflects a higher underlying contribution from the in-force business and a contribution of £223 million for the specific management actions taken in the second half of the year to position the balance sheet more efficiently under the new Solvency II regime.
We invested £745 million of the free surplus generated during the year in writing new business (2014: £618 million on a constant exchange rate basis) equivalent to a reinvestment rate9 of 20 per cent, which is in line with recent periods. Asia remained the primary destination of our new business investment, 17 per cent higher at £413 million, lower than the 26 per cent increase in APE sales reflecting changes to product mix. In the US, new business investment increased to £267 million, mainly due to an increase in the proportion of variable annuity
Net cash remitted by business units: Net cash remitted by business units 1,625 1,482 10
Asset management business: Results of the sold PruHealth and PruProtect businesses – 11 (100) 11 (100)
Post-tax operating profit based on longer-term investment returns 4,881 4,096 19 4,220 16
Basic earnings per share based on post-tax operating profit 191.2 160.7 19 165.6 15 Basic earnings per share based on post-tax total profit 154.8 170.4 (9) 174.8 (11)
EEV operating profit On an EEV basis, Group post-tax operating profit based on longer-term investment returns was 16 per cent higher (19 per cent on an actual exchange rate basis) at £4,881 million in 2015. The increase is primarily due to higher new business profit from the Group’s life businesses, which increased by 20 per cent (24 per cent on an actual exchange rate) to £2,617 million and profit from the in-force life business, which increased by 13 per cent (16 per cent on an actual exchange rate basis) to £2,375 million. This reflects on-going business growth and higher profits from the better than expected management of the in-force business, with positive experience and assumptions changes of £666 million (2014: £648 million).
In Asia, EEV life operating profit was 22 per cent higher at £2,321 million, with in-force profit up 13 per cent to £831 million, benefiting from increased scale across all our operations. Asia new business profit was 28 per cent higher at £1,490 million, reflecting volume growth from the continued build-out of our distribution platform.
) basis results 7 A dditional inform ation www.prudential.co.uk Annual Report 2015 Prudential plc 45 that we expect to generate from our existing book of business. This is partly offset by the effect of interest rate rises in Asia, which impact EEV negatively, as the present value future Asia health and protection profits are discounted at higher rates.
Capital position We continue to operate with a strong solvency position, while maintaining high levels of liquidity and capital generation. This is testament to our capital discipline, the effectiveness of our hedging activities, our low direct Eurozone exposure, the minimal level of credit impairments and the natural offsets in our portfolio of businesses. The estimated Group Solvency II capital surplus13,14 at 31 December 2015 is £9.7 billion, equivalent to a ratio of 193 per cent.
The table below shows the impact of moving from our previously reported economic capital basis to the Solvency II-approved internal model basis and the capital generation in 2015.
Effect of changes in economic assumptions The small overall interest rate rises in the UK and US have had a beneficial impact on the level of future assumed earnings
Economic capital surplus as at 1 January 9.7 Operating experience 2.4 Non-operating experience (including market movements) (0.6)
Methodology and calibration changes Changes to own funds (net of transitionals) and solvency capital Requirement calibration strengthening (0.2) Effect of partial derecognition of Asia Solvency II surplus (1.4)
— Other capital movements: comprising an increase in capital from subordinated debt issuance, positive foreign currency translation effects offset by a reduction in surplus from payment of the 2014 final and 2015 first interim dividend.
The methodology and calibration changes arose as part of the internal model approval process and related to: — A £0.2 billion reduction in surplus due to an increase in the Solvency capital requirement from strengthening of internal model calibrations, mainly relating to longevity risk, operational risk, credit risk and correlations, and a corresponding increase in the risk margin, which is partially offset by UK transitionals; and
Solvency II as a measure of regulatory capital is more volatile than under the previous Solvency I regime. At 31 December 2015, the estimated sensitivity of the Group Solvency II capital surplus to significant changes in market conditions is as set out below: — An instantaneous 20 per cent fall in equity markets would reduce surplus by £1.0 billion and reduce the solvency ratio to 186 per cent; — A 40 per cent fall in equity markets (comprising an instantaneous 20 per cent fall followed by a further 20 per cent fall over a four-week period) would reduce surplus by £1.8 billion and reduce the solvency ratio to 179 per cent; £32.4bn EEV shareholders’ funds equivalent to 1,258p per share
— A 50 basis points reduction in interest rates (subject to a floor of zero and allowing for transitional recalculation) would reduce surplus by £1.1 billion and reduce the solvency ratio to 179 per cent; — A 100 basis points increase in interest rates (allowing for transitional recalculation) would increase surplus by £1.1 billion and increase the solvency ratio to 210 per cent; and
) basis results 7 A dditional inform ation www.prudential.co.uk Annual Report 2015 Prudential plc 47
and short-term investments, as a proportion of IFRS shareholders’ funds plus net debt) was 18 per cent, compared to 19 per cent at 31 December 2014. Prudential plc has strong debt ratings from Standard & Poor’s, Moody’s and Fitch. Prudential plc’s long-term senior debt is rated A+, A2 and A from Standard & Poor’s, Moody’s and Fitch, while short-term ratings are A-1, P-1 and F1 respectively. The Prudential Assurance Company Limited was downgraded by Moody’s in September 2015 from Aa2 to Aa3. All ratings on Prudential and its subsidiaries are on stable outlook.
Taking these non-operating movements into account, the Group’s IFRS shareholders’ funds at 31 December 2015 increased by 10 per cent to £13.0 billion (31 December 2014: £11.8 billion on an actual exchange rate basis).
In a period of currency volatility, UK sterling weakened relative to non-sterling currencies, in particular the US dollar. With approximately 54 per cent of the Group’s IFRS net assets (68 per cent of EEV net assets) denominated in non-sterling currencies, this generated a positive foreign exchange movement on net assets in the year. In addition, the increase in US 10-year treasury rate and higher spreads produced unrealised losses on fixed income securities held by Jackson that are accounted for as available-for-sale under IFRS.
Profit after tax for the year 2,579 2,216 3,951 4,343 Exchange movements, net of related tax 118 220 244 737 Unrealised gains and losses on Jackson fixed income securities classified as available for sale16 (629) 565 – –
IFRS consolidated statement of changes in equity page 135 and Note 9: reconciliation of movements in shareholders’ equity page 313
3 Refer to note B1.1 in IFRS financial statements for the breakdown of other income and expenditure, and other non-operating items.
6 For basis of preparation see note I (a) of Additional unaudited IFRS financial information.
9 Investment in new business as a percentage of underlying free surplus generated from in-force life business and asset management.
12 Refer to the EEV basis supplementary information – Post-tax operating profit based on longer-term investment returns and Post-tax summarised consolidated income statement, for the breakdown of other income and expenditure, and other non-operating items.
As announced at our investor conference in January 2016, we plan to discontinue publication of our first- and third-quarter interim management statements with immediate effect.
Although the Board has been able to approve a special dividend of 10 pence per share in 2015, the Group’s dividend policy remains unchanged. The Board will maintain its focus on delivering a growing ordinary dividend, which will continue to be determined after taking into account the Group’s financial flexibility and our assessment of opportunities to generate attractive returns by investing in specific areas of the business. The Board believes that in the medium term a dividend cover of around two times is appropriate.
‘We seek to retain only those risks consistent with our risk appetite with the aim of ensuring we deliver on our long-term commitments to our customers and shareholders.’
Prudential. As such, material risks will be retained only where this is consistent with the Group’s risk appetite framework and its philosophy towards risk-taking.
The Group’s risk framework has been developed to monitor and manage the risk of the business at all levels and is owned by the Board. The aggregate Group exposure to market, credit, insurance, liquidity and operational risks is monitored and managed by the Group Risk function whose responsibility it is to seek to ensure the maintenance of an adequate risk exposure and solvency position from the Group economic, regulatory and ratings perspectives.
In my report, I seek to explain the main risks inherent in our business and how we manage those risks, with the aim of ensuring we maintain an appropriate risk profile.
Prudential defines ‘risk’ as the uncertainty that Prudential faces in successfully implementing its strategies and objectives. This includes all internal or external events, acts or omissions that have the potential to threaten the success and survival of
Insurance risk The processes of determining the price of our products and reporting the results of our long-term business operations require us to make a number of assumptions.
In common with other life insurers, the profitability of our businesses depends on a mix of factors including mortality and morbidity levels and trends, persistency, and claim inflation.
I n s u r a n c e L i q uid it y
Risks from our business products e n v ir o n m en t
— Collateral arrangements in place for derivative transactions — Group Credit Risk Committee oversight of credit and counterparty credit risk and sector and/or name-specific reviews
The risk of loss for our business, or of adverse change in the value of insurance liabilities, resulting from changes in the level, trend, or volatility of a number of insurance risk drivers. This includes adverse mortality, longevity, morbidity, persistency and claim inflation.
— Insurance and Underwriting risk policies — Risk appetite statements, limits and triggers in place — Longevity, morbidity and persistency assumptions reflect recent experience and expectation of future trends; industry data and expert judgement are used, where appropriate
— Reinsurance is used to mitigate longevity and morbidity risks — Morbidity mitigated by appropriate underwriting when policies are issued and claims received
— Persistency mitigated through improving quality of sales processes and customer retention initiatives
Liquidity risk The risk of the Group being unable to generate sufficient cash resources to meet financial obligations as they fall due in business as usual and stress scenarios.
— Liquidity risk policy — Risk appetite statements, limits and triggers in place — Monitoring of liquidity risk through regular management information — Regular stress testing — Liquidity contingency plans established and sources identified — Ability to access the money and debt capital markets — Access to external sources of finance through committed credit facilities
The risk of loss (or unintended gain/ profit) arising from inadequate or failed internal processes, or from personnel and systems, or from external events (other than those external events covered under Business Environment Risk).
— Operational risk and Outsourcing and Third-Party supply policies — Corporate insurance programmes to limit the impact of operational risks
— Internal and external review of cyber security capability — Regular testing of elements of the disaster-recovery plan
— A Risk and Capital Plan that includes considerations of current strategies
Credit risk (Audited) We invest in fixed income assets in order to match policyholder liabilities and enter into reinsurance and derivative contracts to mitigate various types of risk. As a result, we are exposed to credit and counterparty credit risk across our business. We employ a number of risk management tools to manage credit risk, including limits defined on an issuer/counterparty basis as well as on average credit quality to seek to ensure the diversification of the portfolio and have in place collateral arrangements in derivative transactions. The Group Credit Risk Committee oversees credit and counterparty credit risk across the Group and conducts sector and/or name-specific reviews as required. In particular, in 2015, it has conducted sector reviews in the banking, commodities and energy sectors.
The debt portfolio of our Asia business totalled £28.3 billion at 31 December 2015. Of this, approximately 68 per cent was in unit-linked and with-profits funds with minimal shareholder risk. The remaining 32 per cent is shareholder exposure.
Credit risk arises in the general account of our US business, where £34.1 billion of fixed income assets back shareholder liabilities including those arising from fixed annuities, fixed index annuities and life insurance.
Market risk Investment risk (Audited) In Prudential UK, investment risk arising out of the assets in the with-profits fund impacts the shareholders’ interest in future transfers and is driven predominantly by equities in the fund as well as by other investments such as property and bonds. The value of the future transfers is partially protected against equity falls by hedging conducted outside the fund. The fund’s large inherited estate – estimated at £7.6 billion1 as at 31 December 2015 on a Solvency II basis – can absorb market fluctuations and protect the fund’s solvency. The inherited estate is partially protected against falls in equity markets through an active hedging programme within the fund.
In Asia, our shareholder exposure to equities arises from unit-linked products where revenue is linked to funds under management and on its with-profits businesses where bonuses declared are broadly based on historical and current rates of return on equity.
Jackson hedges the guarantees on its variable annuity book on an economic basis and, thus, accepts variability in its accounting results in the short term in order to achieve the appropriate economic result. In particular, under Prudential’s Group IFRS reporting, the measurement of the Jackson variable annuity guarantees is typically less sensitive to market movements than the corresponding hedging derivatives, which are held at market value. However, depending on the level of hedging conducted regarding a particular risk type, certain market movements can drive volatility in the economic result which may be either more or less significant under IFRS reporting. The Jackson IFRS shareholders’ equity and US statutory capital are also sensitive to the effects of policyholder behaviour on the valuation of guarantees.
Interest rate risk (Audited) Long-term rates remain close to historic lows. Products that we offer are sensitive to movements in interest rates. We have already taken a number of actions to de-risk the in-force business as well as re-price and restructure new business offerings in response to historically low interest rates. However, this remains an area of sensitivity and persistently low rates may impact policyholders’ savings patterns and behaviour.
Interest rate risk arises in our UK business from the need to match cash flows for annuity payments with those from investments; movements in interest rates may have an impact on profits where durations are not perfectly matched. As a result, we aim to match the duration of assets and liabilities as closely as possible and the position is monitored regularly. Under the European Union’s Solvency II Directive, additional interest rate exposure is created due to the nature of the construction of this balance sheet, such as the inclusion of the risk margin. The UK business continually assesses the need for any derivative overlays in managing this sensitivity. The with-profits business is exposed to interest rate risk as a result of underlying guarantees. Such risk is largely borne by the with-profits fund, but shareholder support may be required in extremis.
In Asia, exposure to interest rate risk arises from the guarantees of some non-unitlinked investment products. This exposure arises because it may not be possible to hold assets which will provide cash flows to match exactly those relating to policyholder liabilities. While this residual asset/liability mismatch risk can be 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 influence the cost of guarantees in such products, in particular the cost of guarantees may increase when interest rates fall.
Foreign exchange risk (Audited) We principally operate in Asia, the US and the UK. The geographical diversity of our businesses means that we are inevitably subject to the risk of exchange rate fluctuations. Our operations in the US and Asia, which represent a significant proportion of our operating profit and shareholders’ funds, generally write
The shareholder-owned debt and loan portfolio of the Group’s asset management operations of £2.2 billion as at 31 December 2015 is principally related to Prudential Capital operations. Prudential Capital generates revenue by providing bridging finance, managing investments and operating a securities-lending and cash-management business for the Prudential Group and our clients.
Certain sectors have seen specific pressure during 2015 and into early 2016. The Group’s credit exposure to the oil and gas sector represents approximately 4 per cent or £3.1 billion of the shareholder credit portfolio. Prolonged, depressed oil prices are expected to exert downward rating pressure within the sector, which is being monitored closely through Group risk processes and the Group Credit Risk Committee. The Group’s credit exposure to the metal and mining sector represents 1 per cent of the total shareholder debt portfolio (£78 billion). Similarly, this sector is subject to ongoing monitoring and regular management information reporting to the Group’s risk committees.
Group sovereign debt (Audited) Sovereign debt represented 17 per cent or £12.8 billion of the debt portfolio backing shareholder business at 31 December 2015 (31 December 2014: 15 per cent or £11.0 billion). 44 per cent of this was rated AAA and 94 per cent investment grade (31 December 2014: 43 per cent AAA, 95 per cent investment grade). At 31 December 2015, the Group’s shareholder-backed business’s holding in Eurozone sovereign debt2 was £546 million. 75 per cent of this was AAA rated (31 December 2014: 82 per cent AAA rated). We do not have any sovereign debt exposure to Greece.
Bank debt exposure and counterparty credit risk (Audited) Our bank exposure is a function of our core investment business, as well as of the hedging and other activities undertaken to manage our various financial risks. Given the importance of our relationship with our banks, exposure to the banking sector is a key focus of management information provided to the Group’s risk committees and the Board.
Where appropriate, we reduce our exposure, purchase credit protection or make use of additional collateral arrangements to control our levels of counterparty credit risk. At 31 December 2015, shareholder exposure to corporate debt by rating and sector is shown below: — 95 per cent of the shareholder portfolio is investment grade rated. In particular, 67 per cent of the portfolio is rated A- and above3.
— 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 utilities sectors).
Insurance risk (Audited) Insurance risk constitutes a sizeable proportion of the Group’s exposure; the profitability of our businesses depends on a mix of factors including mortality and morbidity levels and trends, persistency, investment performance and claim inflation.
Longevity risk (people’s propensity to live longer) is a significant contributor to our insurance risk exposure and is also capital intensive under the Solvency II regime. One tool used to manage this risk is reinsurance. During 2015, we completed deals on a number of tranches of bulk and retail annuity liabilities when terms were sufficiently attractive and aligned with our risk management framework. The recently enhanced pensions freedoms in the UK have greatly reduced the demand for retail annuities and further liberalisation is anticipated. However, given our significant UK annuity portfolio, the assumptions that we make about future rates of mortality improvement will remain key to the measurement of insurance liabilities and to the assessment of any subsequent reinsurance transactions.
Cyber security Cyber security is an increasingly important risk facing the Group. The risk is that a member of the Group could be the target of a cyber-related attack which could result in disruption to the key operations, make it difficult to recover critical services, damage assets, and compromise data (both corporate and customer). This is a global issue which is rising in prominence across the financial services industry. As a result of Prudential’s increasing market profile, the growing interest by customers to interact with their insurance provider and asset manager through the internet and social media, improved brand awareness and the classification of Prudential as a Global Systemically Important Insurer, there is an increased likelihood of Prudential being considered a target by cyber criminals. A number of industry, company-wide and local business unit-specific initiatives are underway in response to this risk.
Business environment and strategic risks (Unaudited) Global regulatory and political risk 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 reviews, on-going engagement with the Prudential Regulation Authority and includes the work of the Financial Stability Board and standardsetting institutions such as the International Association of Insurance Supervisors.
Operational risk (Unaudited) The Group does not actively seek to take operational risk to generate returns. Instead, it accepts a level of risk whereby the controls in place should prevent material losses, but should also not excessively restrict business activities. Direct and/or indirect financial losses are likely to arise if there is a failure to develop, implement and monitor appropriate controls.
This information also supports business decision-making and lessons-learned activities, the ongoing improvement of the control environment, and determination of the adequacy of our corporate insurance programme.
Our Group risk framework requires that all our businesses and functions establish processes for identifying, evaluating and managing the key risks faced by the Group. The framework is based on the concept of ‘three lines of defence’ comprising risk-taking and management, risk control and oversight and independent assurance.
The International Association of Insurance Supervisors is also developing a Common Framework (ComFrame) which is focused on the supervision of large and complex Internationally Active Insurance Groups. ComFrame will establish a set of common principles and standards designed to assist regulators in addressing risks that arise from insurance groups with operations in multiple jurisdictions. As part of this, work is underway to develop a global Insurance Capital Standard that would apply to Internationally Active Insurance Groups. Once the development of the Insurance Capital Standard has been concluded, it is intended to replace the Basic Capital Requirement as the minimum group capital requirement for Global Systemically Important Insurers. Further consultations on the Insurance Capital Standard are expected over the coming years and a version of the Insurance Capital Standard is expected to be adopted as part of ComFrame in late 2019.
European Commission will review elements of the Solvency II legislation from 2016 onwards including a review of the Long Term Guarantee measures by 1 January 2021.
The UK government has committed to holding a ‘remain/leave’ referendum on EU membership which will be held on 23 June 2016. The possible withdrawal of the UK from the EU would have political, legal and economic ramifications for both the UK and the EU, although these are expected to be more pronounced on the UK.
M anage and c on tr o lM o n itor and rep ort
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 — Own Risk and Solvency Assessment — Reverse Stress Testing
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Earnings volatility: The objectives of the aggregate risk limits seek to manage 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 to monitor the volatility of earnings are IFRS operating profit and EEV operating profit, although IFRS and EEV total profits are also considered.
Liquidity: The objective is to monitor that the Group is able to generate sufficient cash resources to meet financial obligations as they fall due in business as usual and stressed scenarios.
Capital requirements: The limits aim to manage that: — The Group meets its internal economic capital requirements; — The Group achieves its desired target rating to meet its business objectives; and
The two measures used to define the limits are Solvency II capital requirements and internal economic capital requirements. In addition, outside the UK, capital requirements are monitored on local statutory bases.
We use an internal economic capital assessment calibrated on a multi-term basis to monitor our capital requirements across the Group. This approach considers, by risk drivers, the timeframe over which each risk can threaten the ability of the Group to meet claims as they fall due, allowing for realistic diversification benefits. This assessment provides valuable insights into our risk profile and for continuing to maintain a strong capital position.
Insurers are also required to undertake Reverse Stress Testing, which requires firms to work backwards from an assumed point of business model failure, to identify the stress scenarios that could result in such adverse outcomes. Each firm must then consider whether the likelihood of these scenarios, taking into account likely management actions, is consistent with its risk appetite and, if not, must initiate actions to address any inconsistencies. The actions considered form a part of our Recovery Plan.
Risk measurement and assessment (Unaudited) All identified risks are assessed based on an appropriate methodology for that risk. All quantifiable risks which are material and mitigated by holding capital are modelled in the Group’s Internal Model, which is used to determine capital requirements under the Solvency II Pillar 1 and economic capital bases. Governance arrangements are in place to support the internal model. This includes independent validation and process and controls around model changes and limitations.
The management and control of risks are set out in the Group risk policies. These risk policies define: — The Group’s risk appetite in respect of material risks, and the framework under which the Group’s exposure to those risks is limited; — The processes to enable Group senior management to effect the measurement and management of the Group material risk profile in a consistent and coherent way; and
— The flows of management information required to support the measurement and management of the Group material risk profile and to meet the needs of external stakeholders.
Risk appetite has been set at a Group aggregate level and by risk type, and covers all risks to shareholders, including those from participating and third-party business. The qualitative statements are operationalised down to the local business units through measures such as limits, triggers and indicators, and cover the most significant exposures to the Group, particularly those that could impact the Group’s aggregate risk appetite metrics.
We define and monitor aggregate risk limits based on financial and non-financial stresses for our earnings volatility, liquidity and capital requirements as follows:
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 2018.
In particular, the Group and UK insurance subsidiaries are subject to the capital adequacy requirements of the European Union Solvency II regulatory basis as implemented by the Prudential Regulation Authority in the UK. Capital requirements for the Group’s other subsidiaries are also monitored on their local regulatory bases. In addition to these external capital metrics, the Group uses an internal economic capital assessment to monitor its capital requirements across the Group. Further details on the capital strength of the Group are provided on pages 45 and 46.
(Unaudited) The increasing regulatory focus on market participants instilling corporate cultures that support prudent management and outcomes for consumers is indelibly linked to what we do and how we do it. The ‘risk culture’ (as a subset of the broader business culture) is reflected in the values and behaviours the Group displays when managing risk. It therefore permeates throughout the Group’s Risk Framework and governance processes.
The Group promotes a responsible risk culture in three main ways: — By the leadership and behaviours demonstrated by management; — By building skills and capabilities to support risk management; and
Building skills and capabilities The Group works to build skills and capabilities in risk management, which are needed by both senior management and risk management specialists, while attempting to allocate scarce resources appropriately.
In accordance with provision C.2.2 of the UK code, the directors have assessed the prospects of the Company and the Group by reference to the three-year planning period to December 2018. The Group prepares a business plan annually covering a three-year period on a rolling basis. This plan covers projected performance with regards to profitability, cash generation, the capital position of the Group and the parent company’s liquidity over this three-year period. The Group’s risk appetite framework forms an integral part of the annual business plan. The financial performance, capital, and liquidity positions over the plan period are tested against the Group’s risk appetite statements which are set by the Board to ensure the ongoing viability of the Group. They are also subjected to other stress scenarios, such as substantial declines to interest rates and equity markets based on a macroeconomic assessment for each period, so as to evaluate the Group’s resilience to significant deteriorations in market conditions and other shock events. The impact on the business of known areas of regulatory change whose financial implications can be reasonably quantified is also considered as part of the plan.
2 Excludes Group’s proportionate share in joint ventures and unit-linked assets and holdings of consolidated unit trust and similar funds.
3 In the ‘Shareholder exposure by rating’, 75 per cent of non-rated assets are internally rated, privately held loans.
Performance highlights £21.7m total community investment 51,979 hours volunteered by employees across the Prudential Group donated by employees through payroll giving across the Group
‘Our businesses provide social and economic benefits to communities around the world. Through our corporate responsibility activities and using our resources and the skill and energy of our employees, we provide benefits to customers, communities and the environment.’
We aim to provide fair and transparent products that meet our customers’ needs
Meanwhile, Prudential Hong Kong’s Customer Day puts customers’ needs at the forefront. During the event, a facilitator asks customers about their experiences with Prudential, with customers sharing many insightful comments. Around 200 managers and senior management attended the inaugural Customer Day, interacting with customers to answer questions and gain further insight into what customers think and how they feel.
Prudential has been meeting people’s needs for more than 167 years and today we serve 24 million insurance customers across four continents.
Asia In Asia, we focus our efforts on helping our customers build better futures for themselves and their families, by helping to fill the savings and protection gap that exists in many countries in the region.
The extent of this gap is clear. In terms of protection, in Asia overall 42 per cent of healthcare spend is out-of-pocket, with this figure reaching 56 per cent in some markets, compared with 12 per cent in the US and 9 per cent in the UK.
M&G provides market insights to clients, intermediaries and others through a number of channels, including a programme of roadshows and events. The M&G Client Council, launched in 2014, offers customers who invest directly with M&G an opportunity to help shape our products and services, in line with their needs. These investors give feedback through online surveys and interviews throughout the year, and members are kept informed about the results with regular emails and updates on a dedicated website.
Jackson’s Elite Access is a variable annuity that enhances traditional investing through diverse investment options, access to portfolios previously unavailable to retail investors, and tax advantages that help customers seek opportunities and manage risk throughout the economic cycle. Elite Access is a logical extension of Jackson’s variable annuity investment freedom philosophy, which provides customers with a large set of investment options and the ability to tailor the portfolio to their investment risk appetite.
Jackson has a long history of providing premier service to the producers and clients who interact with the Company every day. As part of the Company’s ongoing commitment to exceeding best practices and delivering top-quality service, Jackson introduced the new Beyond World Class Service eLearning training module in 2015. The module poses everyday service scenarios to prepare and educate operations associates how to best answer producer and client service requests. The training has been designed to help employees better understand how and why the business measures the quality of performance through the eyes of external customers. It focuses on the impact of poorly-handled service issues and allows employees to practise identifying and reporting service experiences through real case studies.
The module presents an actor-driven, service-recovery scenario from the perspective of the producer, employee, customer service support and distribution teams. The two-part module showcases how service experiences impact Jackson’s business through real-life re-enactment, showing the employee how the service call has gone wrong, followed by practice scenarios. Scenarios are pulled directly from trending reports to help associates identify the issue, select an appropriate resolution and flag the experience to complete the exercise. This will ensure employees are trained in how best to meet producer and client expectations and understand how to handle an experience if they are dissatisfied.
In the past year the business made two significant enhancements that have broadened access to products. The Flexible Retirement Plan was enhanced to include the introduction of a Flexible Drawdown option in advance of April’s pension reforms. Further developments were introduced in September 2015, when a non-advised flexible drawdown plan, the Pension Choices Plan, was introduced for those clients who choose not to be advised. PruFund, the business’s flagship multi-asset investment range, was made available through an ISA wrapper for the first time in February 2015.
As part of Prudential UK & Europe’s commitment to placing the customer at the heart of everything they do, Prudential also began the rollout of the new MyPru online service, which allows UK customers to take greater control of their products online without having to make direct contact.
Reflecting this approach, M&G is a signatory to the UN Principles for Responsible Investment (UNPRI), an international
Each of our businesses manages its own intranet, providing all employees with access to regular updates, articles and internal and external news items relevant to the business and its geographical location. Each intranet also gets updated with material news from across the Group.
In 2015 we further nurtured two affinity networks: M&G Pride for LGBT employees and allies and the London-based Prudential Women’s Professional Network, each of which held several well-attended events.
1 Does not include announcements made after 31 December 2015: John Foley’s appointment to Executive Director and Anne Richards to replace Michael McLintock later in 2016.
Talent development We recognise that people are our key resource, that investment in their development is essential to deliver our strategy, and that the quality of leadership across the Group is fundamental to the future growth and success of the business. We review our talent annually and offer a range of programmes that enable our people to continue to grow and develop. The majority of these 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 and support them with the appropriate development and career planning, to ensure that we maintain an appropriate balance of internal progression and external hires.
As one of the most respected brands in the UK – according to Opinion Leader Brand Tracking we are the second most trusted insurance company in the UK – Prudential is taking a major role in helping to shape future job prospects for young people. Over the past two years the business has recruited 130 young people to join the
We establish long-term relationships with our charity partners to ensure that the projects we support are sustainable and we work closely with them to ensure that our programmes continuously improve.
We recognise and reward high performance while operating a fair and transparent system of reward. Reward is linked to the delivery of business goals and expected behaviours, and we ensure that rewards for our people are consistent with our values and do not incentivise inappropriate risk-taking. To enable this, employees are not only regularly assessed on ‘what’ they have achieved, but also on ‘how’ they did so.
For capacity building, we partner with Plan International and Save the Children to implement the Safe Schools programme in Indonesia, the Philippines, Thailand and Vietnam. Safe Schools focuses on placing schools at the heart of building a culture of disaster preparedness within communities. This is performed by training students and their teachers in key disaster management skills, and supporting the organisation of disaster simulations and evacuation drills for students and their community. Since we began in 2013, over 36,000 students have participated, together with more than 11,000 teachers.
As a National Champion of Business in the Community’s Business Class programme, Prudential UK & Europe works to set and promote the direction of the nationwide programme. It also partners with three schools, in London, Reading and Stirling, with over 320 employees having supported more than 3,400 children since 2013, including with pupils’ interview and presentation skills and building public speaking confidence.
In India, Prudential UK & Europe works in partnership with the NGO, Magic Bus, which provides children from marginalised communities with opportunities for learning and developing work-readiness skills. This is achieved via a sport-focused activity curriculum, mentorship and employability programmes. We have specifically supported a personal development programme for 500 children and an employability skills workshop for 150 children.
Disaster readiness and relief As a life insurance and asset management company, our core business is the provision of protection, security and risk mitigation to families. Over the past four decades, the Asia-Pacific region has experienced 75 per cent of the world’s natural disasters, resulting in a loss of nearly two million lives. The Prudence Foundation is working with NGOs to help communities better prepare for such disasters before they strike.
Volunteers helped transform the area into a cleaner, safer environment and facilitated local health clinics and financial education sessions.
) basis results 7 A dditional inform ation www.prudential.co.uk Annual Report 2015 Prudential plc 63 received donations, enabling positive and lasting changes to be made in the lives of thousands of people. Projects across a range of sectors gained benefits as a result. Academic achievement was encouraged through support given to schools and educational establishments. A number of social, welfare, children and youth programmes were funded – many of which addressed issues of social cohesion, feelings of isolation and lack of inclusion in community life. Medical facilities such as hospitals and hospices were also recipients of funding, as were projects related to the arts and environmental conservation.
Jackson has played a key role in building Beacon Field, Lansing’s only drop-in youth soccer field, which opened in September 2015. Use of the field is free and open to anyone. It includes synthetic turf and features two goals, kick boards and solar lights. The charitable priorities of the business are to serve children and senior citizens, and Jackson was keen to collaborate with other businesses to be part of a project to build a safe place for young children to play soccer in the heart of downtown Lansing. The project has enhanced a run-down part of Lansing and brought community, corporations and local businesses together to maximise benefits for the local community.
Prudential UK & Europe employee volunteers have continued to be involved in Call in Time, an Age UK telephone befriending programme that matches each volunteer with an older person who they speak to weekly. This year, 42 lonely and isolated older people have been supported by Prudential volunteers, with some volunteers having now been involved in the programme for more than six years.
Jakarta in 2013, Manila in 2014 and most recently in Hanoi in 2015, with close to 500 participants representing the various stakeholders.
The Jackson Board Corps programme is changing the way employees volunteer with charitable organisations. Since its launch in 2014, 40 Jackson employees have been trained to serve in leadership positions for non-profit organisations.
Jackson opened its new, environmentally responsible building in Lansing which provides capacity for more than 1,200 state-of-the-art workspaces, as well as conference facilities and other amenities.
The management of environmental issues is an integral part of managing the total risks faced by our business. Part of our strategy to mitigate against climate change includes: — Measuring, reporting and improving environmental performance of our global operations; and
We are also a member of ClimateWise, which is a voluntary leadership group driving an insurance industry response to the transition to a low-carbon, climate-resilient economy. As part of our membership we report, and are independently measured, against six core principles. During 2015 we were able to increase our score and ranked within the top 10 members. For more information the latest ClimateWise report can be found at: www.cisl.cam.ac.uk/publications/ sustainable-finance-publications/ a-climate-of-change registers for the programme. Charity partners use this money to seed-fund charitable projects for Prudential volunteers. Employees across the Group are involved in the voting process to decide the most innovative projects.
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 addition, 160 colleagues were on duty as volunteers to help make the event a success. The programme also featured two professional races involving some of the world’s best riders – the Prudential RideLondon Grand Prix women’s race around St James’s Park on the Saturday and the Prudential RideLondon Classic men’s professional race on the Sunday, which followed the same course as the amateur riders earlier in the day. All the weekend’s events featured prominently on national TV and radio and in the press.
Charitable donations We calculate our community investment spend using the internationally recognised London Benchmarking Group 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 £2,401,000; social, welfare and environment £3,097,000; cultural £227,000 and staff volunteering £109,000.
Assessment parameters Baseline year: 1 October 2014 - 30 September 2015 Assurance: Deloitte LLP has provided limited assurance over selected environmental metrics in accordance with the International Auditing and Assurance Standards Board’s (ISAE3000 (Revised)) international standard. Please refer to the 2015 Prudential corporate responsibility report for further detail.
Boundary summary All entities and all facilities under operational control (including those owned) were included
Intensity ratio Tonnes of Carbon Dioxide Equivalent per metre squared (Net Lettable Area)
Reducing our impact: property investment portfolio M&G Real Estate forms part of the M&G Group of Companies, the asset management arm of Prudential plc in the UK and Europe. Its approach to responsible property investment enables it to manage and respond to the growing range of environmental and social issues that can impact property values. It also helps M&G Real Estate to protect and enhance fund and asset performance for its clients.
Responsible property investment is integrated within M&G Real Estate’s day-to-day investment practices. It enables them to adapt and respond to the challenges and opportunities posed by various issues, such as rising energy and resource costs, greater legislative demands and stronger tenant and investor requirements.
M&G Real Estate’s focus on embedding responsible property investment principles into its investment activities has achieved some significant results. In the past year, M&G Real Estate has: — Reduced global energy consumption and carbon emissions by 3 per cent at properties held consistently for two years; — Achieved four Green Stars in the 2015 Global Real Estate Sustainability Benchmark survey in recognition of its market-leading performance; and
— Ensured that more than 640,000 m2 of floor space has environmental certification, providing independent verification of its performance.
M&G Real Estate’s progress can be found in its annual responsible property investment report at www.mandg.co.uk/ institutions/realestate/responsibleinvesting /
We have compiled our greenhouse gas emissions data in accordance with the Companies Act 2006 (Strategic and Directors’ Reports) Regulations 2013.
We have included full reporting for all Scope 1 (direct emissions such as combustion of gas for heating, fugitive emissions and emissions from owned vehicles) and 2 (indirect emissions for consumption of electricity, heat or steam) emissions where operational control of the emissions of the sources concerned was demonstrated. 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 the 2015 report these Scope 3 emissions include: water (new metric for 2015), waste generated in operations in the UK and US, and business travel booked from the UK. We are continuously working with our business units to review the extent of our Scope 3 reporting and increase where practicable.
Scope 1 Combustion of fuel and operation of facilities (Tonnes CO2-e)
Scope 1 and Scope 2 Emissions (Tonnes CO2-e) Occupied Estate 71,104 70,036 71,749
Normalised Scope 1 and 2 (kg CO2-e/m2) Occupied Estate 132 135 139
Scope 3 Waste generated (UK and US) (Tonnes CO2-e) Occupied Estate 77 201 166
Scope 1, 2 and 3 Total Scope 1, 2 and 3 Emissions (Tonnes CO2-e) Occupied Estate 84,768 80,105 81,332
Total Scope 1, 2 and 3 (Tonnes CO2-e) 122,722 130,109 137,313
Total Scope 1, 2 and 3 (kg CO2-e/m2) 28 30 33
Overall Scope 1 and 2 emissions in the global occupied estate have increased 1.53 per cent from 2014, and decreased 0.9 per cent from the 2013 baseline.
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Risk assessment For more information on the risks facing our business see page 49.
The strategic report set out on pages 11 to 67 is approved by the Board of Directors.
Volunteers from Prudential worked to regenerate vacant wasteland and promote healthy living in a low-income, densely populated area of South Jakarta. Find out more on page 62.
70 Chairman’s introduction 71 Board of Directors 76 How we operate 76 Board roles 77 Board decision making 79 Board balance and effectiveness 81 Shareholder engagement 82 Further information on Directors 84 Risk management and internal control 86 Committees 98 Statutory and regulatory disclosures 99 Compliance with corporate governance codes 99 Additional information 100 Index to principal Directors’ report disclosures
We adhere to the relevant principles and codes and also work to remain abreast of trends and developments in corporate governance. This is an ever-evolving field, which rightly attracts close scrutiny. I have an ongoing programme of engagement with our major investors and meet retail shareholders at the Annual General Meeting. I have been pleased with the feedback we have received on our progress.
Succession was understandably a key focus in 2015, but there were many other areas that commanded attention. Alongside the ongoing items of strategy and business performance, the Board and its committees also spent time on Solvency II and preparations for the G-SII regime.
Good corporate governance makes an indispensable contribution to the growth and long-term success of any business. Providing appropriate support, focused oversight and constructive challenge are critical elements of a well-functioning board. This means ensuring that our own processes, mechanisms and structures are best matched to the business and its strategy.
Alongside this, there is also the important role of the Board in establishing and promoting the culture and values of the Company. Prudential has a proud heritage which shapes how we conduct our business. Our role as custodians of that legacy is one that we take seriously.
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Relevant skills and experience Before joining Prudential, Nic 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. Nic started his career at PricewaterhouseCoopers where he worked in both London and Paris.
In December 2014, Nic was appointed Chairman of the European Insurance CFO Forum.
Relevant skills and experience Penny joined Prudential in 2011 as the Director of Group Finance, a position she held until her appointment to the Board. Before joining Prudential, Penny was Group Chief Financial Officer of Omega Insurance Holdings, a company formerly listed on the Main Market of the London Stock Exchange. She previously held a number of senior finance positions during her 12 years with Zurich Financial Services, most recently serving as Chief Financial Officer of the UK General Insurance Division.
Other appointments In January 2015, Penny was appointed as a non-executive director of Admiral Group plc and is a member of Admiral’s audit committee.
Relevant skills and experience Michael joined M&G in 1992. He also served on the board of Close Brothers as a non-executive director from 2001 to 2008.
Other appointments Michael has been a Trustee of the Grosvenor Estate since October 2008 and was appointed as a non-executive director of Grosvenor Group Limited in March 2012.
He has been a member of the Finance Committee of the MCC since October 2005. Michael was appointed to the Takeover Appeal Board on 1 March 2016.
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Relevant skills and experience Philip was a senior adviser at Credit Suisse until December 2013. Philip was previously a Vice Chairman of
Credit Suisse First Boston (CSFB) Europe and Head of the UK Investment Banking Department. Philip was seconded to the role of Director General of the Takeover Panel from 2001 to 2003, and again in 2010. He served on the Board of Northern Rock plc from 2008 to 2010, and from 2007 to 2012 was Chairman of the Shareholder Executive.
Relevant skills and experience Sir Howard has a wealth of experience in the financial services industry, across civil service, consultancy, asset management, regulatory and academia. Sir Howard was previously Chairman of the Phoenix Group and an independent director of Morgan Stanley Inc.
Relevant skills and experience Ann began her career in 1976 with Sun Life of Canada, joining Mercantile & General Reinsurance Group in 1981, where she held a number of management roles rising to Senior Vice President and Controller for life and health and property/casualty businesses in North America in 1995. Between 1996 and 2003 Ann held a number of CFO and CEO posts in different businesses within Swiss Re and from 2003 until February 2007, Ann was Chief Financial Officer of the Swiss Re Group. From its nationalisation in 2008 until January 2009, Ann was Interim Chief
Financial Officer and Executive Director of Northern Rock. She was also a director of Atrium Underwriting Group Limited and Atrium Underwriters Limited (until March 2014), as well as Arden Holdings Limited (until November 2014).
Alistair will retire from the Board with effect from the close of the Company’s 2016 Annual General Meeting on 19 May 2016.
Relevant skills and experience Alistair was a partner of KPMG from 1986 to 2010. He joined KPMG (then Peat Marwick Mitchell) in 1973 and held a number of senior leadership positions. These included Vice Chairman of UK Financial Services and Head of UK Insurance Practice, International Managing Partner – Global Markets and UK Vice Chairman. Latterly he served as a Global Vice Chairman of KPMG
Alistair acted as a non-executive director of the Foreign & Commonwealth Office from 2005 to 2010 and chaired the audit committee until 2009.
Other appointments Alistair is a Visiting Professor at Cass Business School, a Trustee of the Design Museum in London and a Trustee of The Royal Academy of Arts.
Other appointments David is a Director of L&F Holdings Limited and Chief Executive of L&F Indemnity Limited, the professional indemnity captive insurance group that serves the PricewaterhouseCoopers network and its member firms.
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Relevant skills and experience Kai was a non-executive director of Singapore Telecommunications Limited until July 2015. He was also non-executive Chairman of Credit Suisse Asia Pacific until December 2011, having joined Credit Suisse in 2008 as a member of the Executive Board and CEO of the Asia Pacific region. From 1998 to 2007, Kai worked for Standard Chartered PLC where he was a Group Executive Director responsible for Asia Governance and Risk. Prior to that, he spent 19 years at Bank of America and from 1990 was based in Asia as Group Executive Vice President and Head of the Asia Wholesale Banking Group. From 2004 to 2007, he was a non-executive director at Tate & Lyle plc and at Visa International, where he served on the Asia Pacific Board.
Relevant skills and experience Anthony was Managing Director of the Jardine Matheson Group from 2006 to 2012. He joined that Group in 1969 and held a number of senior positions before joining the Board of Jardine Matheson Holdings in 1994.
Trade Policy Study Group. He is also a member of the Securities and Futures Commission Committee on Real Estate Investment Trusts, a council member of the Employers’ Federation of Hong Kong, a member of the UK-ASEAN Business Council Advisory Panel and a non-official member of the Commission on Strategic Development in Hong Kong.
In May 2003, Alice became a senior adviser at Morgan Stanley leaving in November 2009. Alice was an independent board member of the
Cetera Financial Group until April 2014. She is author of the official biography of Warren Buffett.
Other appointments Alice is a non-executive director of Bank of America Merrill Lynch International, CEO and Chairman of WebTuner Corp. and a member of WomenCorporateDirectors.
Other appointments Lord Turner has been a crossbench member of the House of Lords since 2005. He is also a non-executive director of OakNorth Bank, Chairman of the Institute for New Economic Thinking, a Visiting Professor at both the London School of Economics and the Cass Business School, and a Visiting Fellow at Nuffield College, Oxford University.
Paul Manduca The Chairman has overall responsibility for leadership of the Board and ensuring its overall effectiveness. He sets the Board’s agendas to ensure the Board has adequate time for discussion of all agenda items, in particular strategic issues. The Chairman promotes a culture of openness and debate, and fosters constructive relations between Executive and Non-executive Directors. The Chairman ensures directors receive relevant information in a timely fashion. Externally, the Chairman is a key contact for shareholders to discuss governance and strategy.
Philip Remnant The Senior Independent Director acts as a sounding board for the Chairman and is available to shareholders to address any concerns or issues not resolved through normal channels.
Paul Manduca, Howard Davies, Ann Godbehere, Anthony Nightingale The committee chairs are responsible for the leadership and governance of the Board’s principal committees and report matters of significance to the Board.
Changes to Board roles and membership During 2015, and in the year to date, Board roles and membership changed as follows: Board changes Role changes
— Tidjane Thiam stepped down as Group Chief Executive and Executive Director (May 2015).
— Penny James, previously Director of Group Finance, was appointed as Executive Director and Group Chief Risk Officer (September 2015).
— David Law and Lord Turner were appointed as Non-executive Directors (September 2015).
— Jackie Hunt’s departure as Chief Executive, Prudential UK & Europe was announced (October 2015) and Ms Hunt resigned as Executive Director (November 2015).
— John Foley, previously Group Investment Director, was appointed as Executive Director and Chief Executive of Prudential UK & Europe (January 2016).
— Mike Wells, previously President and Chief Executive Officer of Jackson National Life Insurance Company, became Group Chief Executive, continuing in his role as Executive Director (June 2015).
The Board has established a number of committees comprising Non-executive Directors in line with corporate governance guidelines, to ensure independent oversight and challenge and to assist the Board in operating effectively. The responsibilities of the principal committees are key components of the Group’s governance framework.
Paul Manduca The Nomination Committee ensures that the Board retains an appropriate balance of skills to support the strategic objectives of the Group and that an effective framework for senior succession planning is in place.
Howard Davies The Risk Committee oversees the Group’s overall risk appetite and risk tolerance, as well as the Group’s investment and risk management frameworks.
Powers of the Board The Board may exercise all powers conferred on it by the Company’s Articles of Association (the 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.
In the ordinary course, Board and Committee papers are provided one week in advance of each meeting and, where a Director was unable to attend a meeting, their views were canvassed in advance by the Chairman of that meeting.
Key areas of focus – how the Board spent its time
Group strategy Business unit reviews Business performance, financial reporting, operations projects and transactions
Executive Directors Tidjane Thiam1 4/4 – – – – 1 Mike Wells2 10 – – – – 1 Nic Nicandrou 10 – – – – 1 Pierre-Olivier Bouée3 4/4 – – – – 1 Jackie Hunt4 8/8 – – – – 1 Penny James5 3/3 – – – – n/a Michael McLintock 10 – – – – 1 Barry Stowe 10 – – – – 1 Tony Wilkey6 5/6 – – – – n/a
Notes: 1 Tidjane Thiam stepped down as an Executive Director and Group Chief Executive on 31 May 2015. 2 Mike Wells was appointed as Group Chief Executive on 1 June 2015. 3 Pierre-Olivier Bouée stepped down as an Executive Director on 31 May 2015. 4 Jackie Hunt resigned as an Executive Director on 3 November 2015. 5 Penny James was appointed as an Executive Director on 1 September 2015. 6 Tony Wilkey was appointed as an Executive Director on 1 June 2015. 7 David Law and Lord Turner were appointed as Non-executive Directors on 15 September 2015. 8 Anthony Nightingale was appointed as a member of the Nomination Committee on 14 May 2015. 9 Lord Turnbull stepped down as a Non-executive Director on 14 May 2015. 10 The Audit and Risk Committees held two meetings jointly during the year in addition to those listed above, which were attended by all members from both Committees.
Succession planning The Board continues to be actively engaged in succession planning for both executive and non-executive roles to ensure that Board composition is progressively refreshed and that the Board retains its effectiveness. The Board carries out its succession planning primarily through the Nomination Committee, as described more fully on page 87. The Board is kept fully apprised of the review process applied across all businesses which covers both executive director and senior management succession and development. The Board considers annually the outcome of the review and any actions arising from the review are implemented as part of the management development agenda. The Board confirms that Egon Zehnder supported the succession planning process, undertook external searches for candidates and evaluated internal candidates for both Board and non-Board roles. Aside from these activities, Egon Zehnder did not undertake any other significant work for Prudential.
Directors’ ongoing development Prudential offers each Director an induction programme on joining the Board and provides opportunities for ongoing development.
Executive Directors receive an induction tailored to their skills and experience.
In 2015, the Board took time for particular focus on the Group’s US and Asian businesses. During visits to the US and Asia, the Board received updates on key products and distribution in the US and in the Asian businesses, including an investor’s perspective. The Board’s overseas visits have allowed the directors to meet with the local senior management teams.
The performance evaluation of the Board and its principal Committees for 2015 was conducted internally at the end of 2015. The assessment was carried out by the Chairman and Group General Counsel and Company Secretary through a questionnaire. The findings were presented to the Board in February 2016 and an action plan agreed to address areas of focus identified by the evaluation.
The table below sets out the actions taken by the Board in 2015 in response to themes arising from the 2014 externally-facilitated evaluation.
In addition, the appointment of David Law to the Board and Audit Committee provides detailed expertise around the audit processes of global insurance groups, and the appointment of Lord Turner to the Board and Risk Committee adds extensive high-level experience of international regulation and financial services.
Consider ways of further increasing informal contact between Non-executive Directors and senior management, for example, inviting additional senior managers to attend committee meetings where appropriate and continuing to create opportunities for contact with local management during overseas visits.
As during previous overseas meetings, the Board met various senior management at Jackson and Prudential Corporation Asia as part of the overseas Board visits. These additional visits provided in-depth information and an opportunity for questions to be put directly to local management.
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Post action reviews The evaluation noted that the Board should continue to analyse past decisions closely, testing assumptions and projections made in the past.
As a major institutional investor, the Board recognises the importance of maintaining a high level of two-way communication with shareholders. The Company holds an ongoing programme of regular contact with major shareholders, conducted by the Chairman, Group Chief Executive, Chief Financial Officer and the Director of Strategy and Capital Market Relations. Shareholder feedback from these meetings and general market views, for example from analyst research reports, are communicated to the Board.
The Chairman and Senior Independent Director also held individual meetings with major shareholders, primarily to discuss governance and strategy.
The Annual General Meeting is an opportunity for further shareholder engagement, for the Chairman to explain the Company’s progress and along with other members of the Board, to answer any questions. All Directors then in office attended the 2015 Annual General Meeting.
Details of the 2016 Annual General Meeting are available on www.prudential.co.uk under ‘Investors’.
The Board will track its progress in addressing these themes at its meetings throughout the course of 2016 and report on actions taken in its next Annual Report.
— The Board, or members in a general meeting, may appoint a maximum of 20 directors as set out in the Company’s Articles.
— Non-executive Directors are appointed for an initial term of three years.
— Subject to review by the Nomination Committee and re-election by shareholders, it would be expected that they serve a second term of three years.
— For the purposes of the UK Code, throughout the year, all Non-executive Directors were considered by the Board to be independent in character and judgement, and to have met the criteria for independence as set out in the UK Code.
— The Board does not consider that Mr Law’s previous position at PwC affects his status as an independent Director for the purposes of the UK Code (or in relation to his membership of the Audit Committee, under applicable Sarbanes-Oxley legislation). Mr Law does not retain any ongoing involvement with PwC other than his pension entitlements and his current position as CEO of L&F Indemnity, the captive insurance group that serves the PricewaterhouseCoopers network (this group of companies has no involvement in the operation of PwC).
— In line with the UK Code, we would not expect our Executive Directors to hold more than one Non-executive Directorship in another FTSE 100 company nor chair such a company.
— Details of any fees retained from such appointments are included in the Directors’ remuneration report on page 101.
— Under these procedures, Directors are required to notify all directorships in companies which are not part of the Group, along with other positions which could result in a conflict or could give rise to a potential conflict, before they take on their additional positions.
— Authorisations of conflicts are reviewed annually prior to the publication of the Annual Report.
— Proposals for election and re-election are supported by the annual performance evaluation of each Director, which concluded that each Director continues to make an effective contribution.
— All Directors will retire from the Board at the 2016 Annual General Meeting.
— John Foley, Penny James, David Law, Lord Turner and Tony Wilkey will seek election for the first time.
— All other Directors, except Alistair Johnston, wish to seek re-election.
— Directors have the right to seek independent professional advice at the Group’s expense and copies of such advice are circulated to other Directors where applicable and appropriate.
— 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.
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 internal control and risk management 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 Group Governance Manual sets out the delegated authorities and establishes the requirements for subsidiaries to seek approvals from or report to Group Head Office. Group-wide standards are established through policies and other governance arrangements which are also included in the Group Governance Manual.
A key component of the Group Governance Manual is the Group Risk Framework, which requires all business units to establish processes for identifying, evaluating and managing the risks facing the business.
The Group’s risk governance arrangements, which support the Board, the Risk Committee and the Audit Committee, are based on the principles of the ‘three lines of defence’ model: risk-taking and management, risk control and oversight, and independent assurance.
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A formal evaluation of the systems of internal control and risk management is carried out at least annually. The report is considered by the Audit Committee and Risk Committee prior to the Board reaching a conclusion on the effectiveness of the systems in place. This evaluation takes place prior to the publication of the Annual Report.
These appointments demonstrate the quality of the Committee’s succession planning. The Committee ensured that the Board was able to appoint high-calibre candidates, keeping it well positioned to develop and implement our strategy of delivering long-term value.
At the request of the Board, and as agreed with the PRA, the Committee undertook preparatory work during 2015 in order to put in place independent chairs and directors on certain of the Group’s subsidiary boards. From February 2016, the duties of the Committee were extended to reflect new responsibilities in relation to the governance arrangements for such subsidiary boards and the independent chairs and directors.
Key responsibilities — Keeping under review the leadership needs of the Group and ensuring suitable Board successions plans are in place; — Reviewing the size, structure and composition of the Board including knowledge, experience, diversity, and making recommendations to the Board with regard to any changes; — Identifying and nominating candidates, based on merit and against objective criteria, for approval by the Board to fill any Board vacancies; — Regularly reviewing the independence of the Non-executive Directors; — Reviewing the time required from a Non-executive Director to fulfil the obligations of the position; — Recommending to the Board the re-appointment of any Non-executive Director at the conclusion of their specified term of office and making recommendations as to their re-election by shareholders; — Considering and authorising any actual or potential situational conflicts arising from either new or existing appointments.
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The Committee kept succession plans for executive and non-executive Board roles under continuous review.
An initial list of candidates was provided to the Committee and comments fed back to the Chairman. A shortlist was prepared and the Committee agreed that the Chairman would continue the search process. The Chairman coordinated the continued search, keeping the other Committee members closely involved in the process. This included conversations with potential candidates, who met the Chairman, the Group Chief Executive and other members of the Committee, including the Senior Independent Director and key management. The Board was kept regularly updated on progress.
Lord Turner has held a number of non-executive positions since 2000, which provided him with extensive involvement in audit, risk and remuneration committees across a range of industries. He has in-depth knowledge of financial services gained during his appointment as Chairman of the FSA (2008-2013) and as non-executive director of the Bank of England.
Ms Richards will join Prudential as successor to Mr McLintock as Chief Executive of M&G Investments. Mr McLintock announced in February 2016 his intention to retire from the Board. Ms Richards joins from Aberdeen Asset Management PLC, where she held the position of Chief Investment Officer and was responsible for operations in Europe, the Middle East and Africa. She has held senior roles at JP Morgan Investment Management, Mercury Asset Management and Edinburgh Fund Managers.
The Committee further considered the term of appointment of Ann Godbehere, who has been a Non-executive Director since 2007 and Chairman of the Audit Committee from 2010. In line with corporate governance guidelines, any reviews of Non-executive Director terms beyond six years are particularly rigorous. The Committee invited Ann to serve an additional year expiring at the conclusion of the 2016 Annual General Meeting.
Alistair Johnston and Kai Nargolwala completed their first term of three years following their initial appointment by shareholders at the 2012 Annual General Meeting. Following performance evaluation by the Committee and re-election by shareholders in 2015, both were invited to serve a further term of three years, expiring at the conclusion of the 2018 Annual General Meeting.
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.
At the request of the Board, and as agreed with the PRA, the Committee undertook preparatory work during 2015 in order to put in place independent chairs and directors on certain of the Group’s subsidiary boards. From February 2016, the duties of the Committee were extended to reflect the new responsibilities in relation to the governance arrangements for such subsidiary boards and the independent chairs and directors.
The Committee has been re-named the Nomination & Governance Committee to reflect these new duties.
The Committee considered and made recommendations to the Board regarding its terms of reference during the year. The terms of reference, which are reviewed annually, can be found on the Company’s website www.prudential.co.uk These recommendations included provisions setting out the Committee’s new duties in respect of independent directors of certain of the Group’s subsidiaries.
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— Ann Godbehere (Chairman) — Howard Davies — Alistair Johnston — David Law (from September 2015) — Philip Remnant — Alice Schroeder
— Director of Group Compliance — Director of Group-wide Internal Audit — External Audit Partner
Number of meetings in 2015: 10 In addition two joint meetings were held with the Risk Committee.
Key responsibilities — Monitoring the integrity of the Group’s Annual Report and Accounts and any other periodic financial reporting, reviewing the accounting policies adopted, decisions taken regarding major areas of judgement and the going concern assumption; — Reviewing and providing advice to the Board as to whether the Group’s Annual Report and Accounts are fair, balanced and understandable; — Keeping under review the framework and effectiveness of the Group’s systems of internal control and approving the statements to be included in financial reports concerning their effectiveness; — Assessing the performance, independence and objectivity of the external auditor, making recommendations to the Board regarding their appointment and approving their terms of engagement; — Reviewing the effectiveness and performance of the service provided by the internal audit function and approving the internal audit programme; — Considering the effectiveness of compliance arrangements across the Group and approving the annual compliance plan; — Reviewing procedures for managing allegations from whistleblowers and arrangements for employees to raise any concerns about possible financial reporting improprieties; — Reviewing the effectiveness of the Group Governance framework and any material approvals for deviations from the Group’s governance policies; — Approving the standard terms of reference for the Business Unit audit committees and annually reviewing their effectiveness.
As Chairman of the Audit Committee, I am pleased to report on the Committee’s activities and areas of focus during 2015.
As part of our business as usual activities, we have met regularly with the Group-wide Internal Audit Director and the External Audit Partner.
The Committee also focused on the accounting for material transactions, clarity of disclosures in financial reports, the going concern assumptions, and compliance with accounting standards and obligations under applicable laws, regulations and governance codes. As part of this focus, it reviewed the changes to the UK Corporate Governance Code with particular attention given to the Group’s planned disclosures on the required new statement discussing the longer-term viability of the Group. The Committee further considered the fair, balanced and understandable requirement under the UK Code, providing advice to the Board in respect of this requirement.
The Audit Committee also considered the nature of non-recurrent items and judgemental matters regarding provisions for certain open tax items. The Committee was satisfied that management’s approach was reasonable in these areas.
As part of its assessment of the description of performance within the Annual Report and Accounts, the Committee considered judgemental aspects of the Group’s reporting across the Group’s IFRS and EEV metrics. This assessment included a review to ensure that the allocation of items between operating and non-operating profit was in accordance with the Group’s accounting policy. The Committee considered the impact of equity and interest rate movements on the IFRS results of the Group’s US business and, after discussion, the Committee was satisfied that the presentation and disclosure of such impacts was appropriate and consistent with prior periods.
Internal control In conjunction with the Risk Committee, 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 UK Code which became effective for financial years commencing on or after 1 October 2014.
External audit 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.
The Committee discussed the findings of this external report and the actions undertaken by KPMG to address the matters raised as part of the 2015 audit. It agreed that the audit was effective overall and that any identified areas for further improvement had been addressed or had appropriate action plans in place.
The internal evaluation was conducted using a questionnaire which was circulated to the Committee, the Chief Financial Officer and the Group’s senior financial leadership for completion. In total, 80 people provided input on the performance of the auditor.
The Committee Chairman invited other Group stakeholders to provide their views on the performance of the auditor, and KPMG was given the opportunity to respond to the findings in the report.
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 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 Sarbanes-Oxley Act.
During the year, the Committee considered updates to the policy required to reflect proposed changes to permissible non-audit services issued for consultation by the Financial Reporting Council, in connection with the implementation of broader EU reforms to the audit market. This will include adopting the schedule of prohibited non-audit services specified in the EU directive. The proposed changes will begin to be implemented during the 2016 reporting period in preparation for the required full implementation for 2017.
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 which was considered by the Committee prior to the publication of the financial results.
As explained above, following the introduction of the EU reforms and the adoption of these in the Company’s 2016 Auditor Independence Policy we do not expect significant use of KPMG for tax services from 2016.
In line with the Auditing Practices Board Ethical Statements and the Sarbanes-Oxley Act, a new lead audit partner is appointed every five years. A new lead audit partner was appointed in respect of the 2012 financial year who will be replaced post 2016 reporting.
At the half year, the Committee considered recommendations to refresh the Audit plan in response to changes in the Business Unit operating environments and an update to the Group’s top risks. The 2016 Plan was formulated based on a bottom-up risk assessment of audit needs mapped to the Group Risk Framework. It also considered a top-down challenge by GwIA Leadership Team of the extent of coverage of key themes, ensuring extensive coverage of Group Tier 1 and Tier 2 top risks as identified by the Group Risk Committee and delivering audit coverage of other key areas of risk within a tiered cycle of coverage (ie two- three- and four-year cycles).
Regular updates were provided to the Committee by the Group Regulatory and Government Affairs Director and the Director of Group Compliance. The reports kept the Committee apprised of communications with the principal UK regulators, international regulatory developments and compliance with the Group’s Compliance policies. The introduction of the new Senior Insurance Managers Regime (SIMR), the PRA’s workplan for Prudential and the US Department of Labor’s consultation on fiduciary duties were areas of focus for the Committee. Group Compliance led the development of the Group’s framework for the implementation of the new SIMR regime and kept the Committee updated on developments in this area.
The Committee considered and approved the 2016 Group Compliance Plan. Areas of focus included strengthening the compliance framework, a focus on key risk drivers which have caused compliance issues across the industry, including: conflicts of interest; culture, values and the fair treatment of customers; the articulation of compliance risk appetite; and the assessment and mitigation of key risks, including anti-money laundering and sanctions, continued proactive engagement with the PRA and FCA and a number of Business Unit-specific risk areas, which were cascaded down to the Business Units for implementation and oversight by the respective Business Unit audit committees.
Financial crime 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 the strengthening of the regimes in Asia ahead of various Financial Action Task Force reviews and the drive for transparency of beneficial ownership, led by the G20 and UK regulators.
Whistleblowing Regular updates were provided to the Committee on matters raised through the Group’s Confidential Reporting Lines and the actions taken in response to these. The role of the whistleblowing champion for the purpose of SIMR will be carried out by the Chair of the UK business unit risk committee. At Group level, the Chair of the Group Audit Committee remains responsible for oversight of whistleblowing activities across the whole of the Group.
The Group Governance Framework links together internal controls, authorisation requirements, Business Unit reporting and escalation, as well as the policies adopted by the Group. The Framework comprises a central repository of information, the Group Governance Manual, which contains these controls, plus a number of processes to ensure polices remain accurate and up to date. The Group Governance Manual is also used to promote awareness and educate colleagues across the Group about their obligations. Procedures to assess to what extent all Business Units in the Group meet these obligations are in place and the outcome is monitored by the Committee.
The Committee reviewed the outcomes of the Governance Quality Assurance reviews undertaken during 2015, the update on the annual Group Governance Manual content review and results of the year-end certification of compliance with the Group Governance Manual requirements for the period ended 31 December 2015.
The Committee reviewed compliance with various applicable regulations and codes of conduct. The results of this assessment were presented to the meeting in February 2016.
— Private meetings Periodically during the year, the Committee met with each of the external and internal auditors and with Group Security without the presence of management.
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Regular attendees — Chairman of the Board — Group Chief Executive — Chief Financial Officer — Group Chief Risk Officer — Group Regulatory and Government Affairs Director
Key responsibilities — Recommending the Group’s overall risk appetite to the Board for approval; — Reviewing the Group’s risk and investment frameworks and approving the policies forming part of the frameworks; — Reviewing the Group’s material risk exposures against the risk methodologies and management’s actions to monitor and control such exposures; — Reviewing the Group’s stress testing; — Reviewing the overall effectiveness of the Internal Model used for the purposes of the Solvency II regime and making recommendations to the Board as required in respect of changes to the Model; — Advising the Board on the risks inherent in strategic acquisitions and the business plan; — Advising the Remuneration Committee on risk weightings to be applied to performance objectives for Executive remuneration; — Monitoring the effectiveness of the Group Chief Risk Officer.
The Committee’s work has contributed to the Board’s understanding of the risks facing the business and shaping our risk appetite. During the year, the Committee oversaw a number of initiatives to strengthen further the Group’s processes and capabilities around reporting and managing risk.
The Committee also oversaw the work required as a result of the Group’s designation as a Global Systemically Important Insurer, including the development of the Systemic Risk Management Plan, the Liquidity Risk Management Plan and the Recovery Plan.
As part of our regular work schedule, we conducted an assessment of our stresstesting processes, again working closely with the Audit Committee on any areas of overlap. We monitored the operation of the three lines of defence system operating throughout the Group and received regular reports from the chief risk officers of the business units who attended our meetings, following up those reports as appropriate with detailed reviews of areas where concerns were reported.
During the year, we welcomed Lord Turner as a Committee member and Penny James as our Group Chief Risk Officer.
The Committee was provided with regular updates from the Group Treasury function as part of its oversight of liquidity management. It also received reports from Group-wide Internal Audit, minutes from the Group Executive Risk Committee and matters escalated by other Group-level risk management committees.
The Committee considered the Own Risk and Solvency Assessment report based on the outcomes of the Group’s 2015-17 Business Plan and the FY14 risk and solvency positions prior to its approval by the Board. The report was also considered in light of the results of the Group’s regular stress testing. The 2015 Own Risk and Solvency Assessment report enhanced the 2014 report through improved alignment with business planning and strategy processes and better linkage with the Group’s risk profile.
The Committee continued to oversee the submission of the Group’s Internal Model Approval Process application, including reviewing the methodology and assumptions in the model and receiving input from the independent model validation team and made recommendations to the Board in respect of its submission to the PRA. The Committee also considered and provided feedback on the overall governance process and the approach to the disclosures of the internal model outcome. This activity was undertaken working closely with the Audit Committee.
In light of its designation as a Global Systemically Important Insurer, the Company is required to annually agree a number of deliverables with its Crisis Management Group consisting of the Group’s principal regulators. 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.
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Reverse Stress Testing The Reverse Stress Test exercise was carried out to confirm the Group’s position as being significantly resilient to certain business failure scenarios. The report related to the Group’s year-end 2015 position and was submitted to the PRA.
In conjunction with the Audit Committee, the Committee reviewed the outcome of the annual review of the Group’s systems of internal control and risk management.
The effectiveness of the Committee was assessed as part of the overall performance evaluation of the Board. This assessment confirmed that the Committee continued to operate effectively during the year. More information on the Board evaluation can be found on page 80.
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.
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The Board confirms that it has complied with all relevant principles set out in the UK and HK Codes throughout the accounting period. 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 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 senior 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.
More than 7,000 employees volunteered through Prudential’s flagship international programme, the Chairman’s Challenge. Find out more on page 63.
Dear shareholder, I am pleased to present the Remuneration Committee’s report for the year to 31 December 2015.
This is my first report as Chairman of the Remuneration Committee since I took on the role in May 2015. I would like to thank my predecessor Andrew Turnbull, who served as a member of the Committee for nine years, acting as Chairman for four of those years, for his contribution and leadership of the Committee during this period.
I am pleased to say that this impressive financial performance has translated into significant returns to the Company’s shareholders, with £100 invested in Prudential on 1 January 2013 being worth £189 on 31 December 2015 through the combined effect of dividends paid and increases in the share price.
Based on this level of total shareholder return and strong cumulative IFRS operating profit performance over the same period, the Committee determined that the performance conditions attached to Prudential Long Term Incentive Plan (‘PLTIP’) awards made to Executive Directors in 2013 achieved between 97.5 per cent and 100 per cent vesting depending on business unit. These awards will be released to participants in May 2016.
Our Executive Directors are also Prudential shareholders, with a significant proportion of their remuneration delivered in the Company’s shares through both the annual and long-term incentive plans we operate. This alignment between the executive team and other shareholders is demonstrated by the fact that many of the Executive Directors have shareholdings well in excess of the guidelines that they are asked to meet. For instance, on 31 December 2015, Mike Wells had a beneficial interest in shares with a value of over 650 per cent of his salary, which is significantly higher than his share ownership guideline of 350 per cent of salary.
In making decisions about the remuneration arrangements for those joining and stepping down from the Board, the Committee worked within the Directors’ remuneration policy approved by shareholders and was mindful of: — The skills, knowledge and experience that each new Executive Director brought to the Board; — The need to support the relocation of executives where this is necessary to enable them to assume their roles; — Its commitment to honour legacy arrangements; and
— In relation to executives leaving the Board, the particular circumstances of the departure and the contribution the individual made to the Group.
remuneration in line with the Directors’ remuneration policy approved by shareholders at the 2014 AGM, and accordingly do not intend to ask shareholders to vote on the policy at the 2016 AGM. An enhancement to the policy since it was adopted in 2014 has been the inclusion of a recovery provision (clawback) in Executive Directors’ incentive arrangements from 2015, which was described in the 2014 Directors’ remuneration report. This provision allows incentives to be recovered after they are paid in certain circumstances.
In determining remuneration packages for 2016, the Remuneration Committee was mindful of the need to maintain restraint on base salary increases. The Executive Directors will receive an increase in base salary of 1 per cent with effect from 1 January 2016, which is below the salary increase budget for other employees.
As set out in the business review section earlier in this Annual Report, the Group’s financial performance in 2015 was very strong: Strategic priority Group performance £m 2015 bonus achievement
IFRS operating profit Prudential’s primary measure of profitability and a key driver of shareholder value 2,017
Performance against these key metrics exceeded the stretching targets established by the Board. The Group achieved these results while maintaining appropriate levels of capital and operating within the Group’s risk appetite and framework. The Committee believes that the bonuses it awarded to Executive Directors for 2015 appropriately reflect this excellent performance.
Our remuneration strategy remains unchanged from that previously approved by shareholders: To attract and retain the high-calibre executives required to lead and develop the Group
Reward must be: — Valued by executives; and — Competitive, to engage executives who are in demand in the global talent market, and, if required, support hiring the best external talent.
We have significant share ownership guidelines for all executives3 as follows: — 350% of salary for the Group Chief Executive; and — 200% of salary for other Executive Directors.
The Committee keeps the performance conditions under review to ensure that future awards remain aligned with strategy. 4
Penny James1 Group Chief Risk Officer £200,000 £71,000 £318,000 £410,000 £999,000 –
Nic Nicandrou Chief Financial Officer £703,000 £553,000 £1,224,000 £1,996,000 £4,476,000 £5,623,000 Barry Stowe Chairman & CEO, NABU3 £729,000 £746,000 £3,281,000 £2,072,000 £6,828,000 £5,984,000 Mike Wells Group Chief Executive £942,000 £1,439,000 £3,223,000 £4,427,000 £10,031,000 £12,393,000 Tony Wilkey2 Chief Executive, PCA4 £433,000 £511,000 £748,000 £1,740,000 £3,432,000 –
John Foley Chief Executive, UK & Europe £750,000 180% 40% 250% Penny James Group Chief Risk Officer £606,000 160% 40% 250% Michael McLintock1 Chief Executive, M&G £398,000 600% 40% 450% Nic Nicandrou Chief Financial Officer £711,000 175% 40% 250% Barry Stowe2 Chairman & CEO, NABU US$1,111,000 160% 40% 460% Mike Wells Group Chief Executive £1,081,000 200% 40% 400% Tony Wilkey Chief Executive, PCA HK$8,890,000 180% 40% 250%
Notes 1 The bonus opportunity for the Chief Executive, M&G remains the lower of 0.75 per cent of M&G’s IFRS profit or six times salary. He continues to receive awards under the Prudential LTIP and the M&G Executive LTIP, which are both included in the above LTI award. 2 The Chairman & CEO, NABU will also continue to have a 10 per cent share of the Jackson Senior Management Bonus Pool. 40 per cent of this is deferred in shares.
Market data is also reviewed so that salaries remain a competitive range relative to each Executive Director’s local market.
Benefits Executive Directors are offered benefits which reflect their individual circumstances and are competitive within their local market, including: — Health and wellness benefits; — Protection and security benefits; — Transport benefits; — Family and education benefits; — All-employee share plans and savings plans; and — Relocation and expatriate benefits.
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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 TSR (50 per cent of award); and — Group IFRS profit (50 per cent of award); or — Business unit IFRS profit (50 per cent of award).
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 guidelines for share ownership are as follows: — 350 per cent of salary for the Group Chief Executive; and — 200 per cent of salary for other Executive Directors.
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-executives in cash. Fees are reviewed annually by the Board with any changes effective from 1 July.
Travel and expenses for Non-executive Directors are incurred in the normal course of business, for example in relation to attendance at Board and committee meetings. The costs associated with these are all met by the Company.
The Chairman may be offered benefits including: — Health and wellness benefits; — Protection and security benefits; — Transport benefits; and — Relocation and expatriate benefits (where appropriate).
In setting the Directors’ remuneration policy, the Committee considers a range of factors including: Conditions elsewhere in the Group
Across the Group, remuneration is reviewed regularly with the intention that all employees are paid appropriately in the context of their local market and given their individual skills, experience and performance. Each business unit’s salary increase budget is set with reference to local market conditions. The Remuneration Committee considers salary increase budgets in each business unit when determining the salaries of Executive Directors.
Prudential does not consult with employees when setting the Directors’ remuneration policy. Prudential is a global organisation with employees, and agents in multiple business units and geographies. As such, there are practical challenges associated with consulting with employees directly on this matter. As many employees are also shareholders, they are able to participate in binding votes on the Directors’ remuneration policy and annual votes on the annual report on remuneration.
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.
Members Anthony Nightingale (Chairman from 14 May 2015, member since 1 June 2013) Kai Nargolwala Philip Remnant Lord Turnbull (Chairman and member until 14 May 2015)
In 2015, the Committee met seven times. Key activities at each meeting are shown in the table below: Meeting Key activities
February 2015 Approve the 2014 Directors’ remuneration report; consider 2014 bonus awards for Executive Directors; consider vesting of the long-term incentive awards with a performance period ending on 31 December 2014; approve 2015 long-term incentive awards, performance measures and plan documentation; and approve the introduction of clawback provisions.
March 2015 Confirm 2014 annual bonuses and the vesting of long-term incentive awards with a performance period ending on 31 December 2014, in light of audited financial results.
September 2015 Review the dilution levels resulting from the Company’s share plans; review total proposed 2016 remuneration of Executive Directors ahead of consultation with shareholders; and review the Remuneration Committee’s terms of reference.
During 2015, Deloitte LLP was the independent adviser to the Committee. Deloitte was appointed by the Committee in 2011 following a competitive tender process. As part of this process, the Committee considered the services that Deloitte provided to Prudential and its competitors as well as other potential conflicts of interests. Deloitte is a member of the Remuneration Consultants’ Group and voluntarily operate under their code of conduct when providing advice on executive remuneration in the UK. Deloitte regularly meet with the Chairman of the Committee without management present. The Committee is comfortable that the Deloitte engagement partner and team providing remuneration advice to the Committee do not have connections with Prudential that may impair their independence and objectivity. The total fees paid to Deloitte for the provision of independent advice to the Committee in 2015 were £77,700 charged on a time and materials basis. During 2015, Deloitte also gave Prudential management advice on remuneration, as well as providing guidance on Solvency II, taxation, internal audit, real estate and other financial, risk and regulatory matters. Remuneration advice is provided by an entirely separate team within Deloitte.
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Salary increases for the wider workforce vary across our business units, reflecting local market conditions; in 2015 salary budgets increased between 2.5 per cent and 5 per cent for the wider workforce.
To provide context for this review, information was also drawn from the following market reference points: Executive Role Benchmark(s) used to assess remuneration
As reported in last year’s report, after careful consideration the Committee decided to increase salaries by 3 per cent for all Executive Directors, other than the Chief Executive, Prudential Corporation Asia, whose salary was increased by 5 per cent to reflect the inflationary environment in Asia.
The Committee also approved changes to 2015 incentive opportunities for two Executive Directors: the Chief Executive, Prudential Corporation Asia’s maximum AIP and LTIP awards were increased to 180 per cent and 250 per cent of salary, respectively. This reflects the importance of Prudential Corporation Asia’s strategic initiatives which are crucial to the achievement of Group-wide objectives. The Chief Executive, Prudential UK & Europe’s maximum AIP and LTIP awards were increased to 175 per cent and 250 per cent of salary, respectively. This reflects the fact that the scope of the incumbent’s role had increased due to the Group’s expansion into Africa. Additionally, this reflects the ambition of the UK & Europe business as it relates to the Group’s growth and cash ambitions.
Penny James was appointed to the Board as Group Chief Risk Officer on 1 September 2015 with a salary of £600,000 and Tony Wilkey was appointed to the Board as Chief Executive, Prudential Corporation Asia on 1 June 2015 with a salary of HK$8,800,000. On his promotion to Group Chief Executive on 1 June 2015, Mike Wells’s salary was £1,070,000 and on appointment as Chairman & CEO, NABU, on 1 June 2015, Barry Stowe’s salary was US$1,100,000.
Annual bonus 2015 annual bonus opportunities Executive Directors’ bonus opportunities, the weighting of performance measures for 2015 and the proportion of annual bonuses deferred are set out below: Executive
Pierre-Olivier Bouée1 160% 40% of total bonus 50% – 50% Jackie Hunt2 175% 40% of total bonus 20% 60% 20% Penny James3 160% 40% of total bonus 50% – 50% Michael McLintock4 600% 40% of total bonus 20% 60% 20% Nic Nicandrou 175% 40% of total bonus 80% – 20% Barry Stowe5 160% 40% of total bonus 80% – 20% Tidjane Thiam6 200% 40% of total bonus 80% – 20% Mike Wells7 200% 40% of total bonus 80% – 20% Tony Wilkey8 180% 40% of total bonus 20% 60% 20%
Notes 1 Pierre-Olivier Bouée stepped down from the Board on 31 May 2015. The maximum bonus opportunity shown represents his annual opportunity as an Executive
7 Mike Wells was President & CEO, Jackson until 31 May 2015 and was appointed Group Chief Executive on 1 June 2015. The maximum opportunity shown represents his annual opportunity in his current role – this was pro-rated for the portion of the year he was in this role and he also receives a pro-rated AIP in respect of the portion of the year he was President & CEO, Jackson. In addition to the AIP, he received 10 per cent share of the Jackson Senior Management Bonus Pool pro-rated for the period he was in that role. This is determined by the financial performance of Jackson.
2015 AIP performance measures and achievement Financial performance The financial performance measures set for 2015 are shown below. Prior to the start of the year, the Committee set stretching performance ranges for each of these measures in line with the Group’s business plan targets. The Committee reviewed performance against these ranges at its meeting in February 2016; in all of our bonus performance metrics, other than the new measure of ECap surplus, the Group’s 2015 results exceeded its stretch plan targets.
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 appetite and framework. 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 and maximum bonuses to be paid) for the 2015 Group financial measures will be disclosed in the 2016 report.
Chief Executive, PCA HK$8,920,000 180% 95.9% HK$6,413,852 Tidjane Thiam3 Group Chief Executive £1,093,000 200% 77.3% £703,857 Mike Wells Group Chief Executive £1,070,000 200% 99.7% £1,244,214
President & CEO, JNL US$1,148,000 160% 99.7% US$762,846 Tony Wilkey Chief Executive, PCA HK$8,800,000 180% 95.9% HK$8,858,593 * At 31 December 2015 or stepping down from the Board if earlier.
Notes 1 Pierre-Olivier Bouée stepped down from the Board on 31 May 2015 and no bonus was paid. 2 Jackie Hunt stepped down from the Board on 3 November 2015. The bonus shown above was paid in respect of her service as an Executive Director. Please see the ‘Payments to past directors’ section for details.
4 Where individuals joined the Board during the year, or their roles changed during the year, the bonus paid reflected the time they spent as Executive Directors in their respective roles.
2015 Jackson bonus pool In 2015, the Jackson bonus pool was determined by Jackson’s profitability, capital adequacy, remittances to Group, in-force experience, ECap solvency ratio and credit rating. Across all of these measures Jackson delivered strong performance and exceeded prior year performance. As a result of this performance the Committee determined that Mike Wells’s share of the bonus pool would be US$2,261,250 and Barry Stowe’s share of the bonus pool would be US$3,165,750.
Disclosure of targets and achievement for the 2014 Annual Incentive Plan
Long-term incentive plans with performance periods ending on 31 December 2015 Our long-term incentive plans have stretching performance conditions which are aligned to the strategic priorities of the Group. In deciding the portion of the awards to be released, the Committee considered actual financial results against these performance targets. The Committee also reviewed underlying Company performance to ensure vesting levels were appropriate. The Directors' remuneration policy contains further details of the design of Prudential’s long-term incentive plans.
Prudential Long-Term Incentive Plan (PLTIP) and Group Performance Share Plan (GPSP) In 2013, all Executive Directors were made awards under the PLTIP or GPSP. The awards were subject to challenging targets. The weightings of these measures are detailed in the table below: Executive
Prudential’s TSR performance during the performance period (1 January 2013 to 31 December 2015) was in the upper quartile of the peer group above (ranked 5). The portion of the awards related to TSR therefore vested in full.
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 2013 to 2015 compared to the Group targets set in 2013: Group
2015 LTIP vesting On the basis of the performance of the Group and its business units, and the Committee’s assessment that the awards should vest, the vesting of each executive’s LTIP awards are set out below.
Executive Maximum value of award at full vesting1 Percentage of the
LTIP award vesting Number of shares vesting5 Value of shares vesting1
Notes 1 Other than for Tony Wilkey’s award which vested on 14 September 2015, the share price used to calculate the value of the LTIP awards which vest in 2016 was the average share price/ADR price for the three months up to 31 December 2015, being £15.12/£30.05.
Where a business decision taken during the performance period by the participant’s business unit at the time of the decision has resulted in a material breach of any law, regulation, code of practice or other instrument which applies to companies or individuals within the business unit.
There is a materially adverse restatement of the accounts for any year during the performance period of (i) the business unit in which the participant worked at any time in that year; and/or (ii) any member of the Group which is attributable to incorrect information about the affairs of that business unit.
Barry Stowe As Chief Executive, PCA: pension supplement in lieu of pension of 25 per cent of salary and a HK$15,000 payment to the Hong Kong Mandatory Provident Fund.
As Chairman & CEO, NABU: pension supplement of 25 per cent of salary, part of which is paid as a contribution to an approved US retirement plan.
Michael McLintock previously participated in a contributory defined benefit scheme which was open at the time he joined the Company. The scheme provided a target pension of two thirds of final pensionable earnings on retirement for an employee with 30 years or more potential service who remained in service to Normal Retirement Date. He is now a deferred member of the scheme. Mr McLintock’s Normal Retirement Date under the scheme is age 60, should he claim his deferred pension before this age it will be subject to an actuarial reduction. There are no additional benefits payable should Mr McLintock retire early.
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.
Notes 1 Pierre-Olivier Bouée was appointed to the Board on 1 April 2014. The remuneration above was paid in respect of his service as an Executive Director. 2 John Foley stepped down from the Board on 1 April 2014. The remuneration above was paid in respect of his service as an Executive Director. 3 Barry Stowe’s 2014 benefits relate primarily to his expatriate status, including costs of £217,393 for housing, £18,272 for children’s education, £76,319 for home leave and a £340,473 Executive Director Location Allowance.
4 Mike Wells’s bonus figure excludes a contribution of £9,469 from a profit sharing plan which has been made into a 401(k) retirement plan. This is included under 2014 pension benefits.
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.
Note The peer group average represents the average TSR performance of the peer group currently used for PLTIP awards (excluding companies not listed at the start of the period).
The information in the table below shows the total remuneration for the Group Chief Executive over the same period: Group Chief Executive M Tucker T Thiam T Thiam T Thiam T Thiam T Thiam T Thiam T Thiam M Wells
Other payments 308 – – – – – – – –
Group Chief Executive 1.75% 824.6% (8.2)% All UK employees 3.3% 17.1% 10%
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The table below sets out the amounts payable in respect of 2014 and 2015 on all employee pay and dividends: Percentage change
Pierre-Olivier Bouée Group Chief Risk Officer 96,119 £1,622,489 25% 31 Dec 17 50% 50% Penny James1 Group Chief Risk Officer 24,348 £410,994 25% 31 Dec 17 50% 50% Jackie Hunt Chief Executive,
Mike Wells3 President & CEO, JNL 104,611 £3,455,319 25% 31 Dec 17 50% 50%
* Awards over shares were awarded to all Executive Directors other than Barry Stowe and Mike Wells 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. Annual awards were granted on 31 March 2015 (using a share price of £16.88 and an ADR price of £33.03) and additional awards were granted on 1 June 2015 (using a share price of £16.33 and an ADR price of £32.91).
Notes 1 Penny James’ award was made before she was appointed to the Board.
2015 cash long-term incentive awards In addition to his PLTIP award, Michael McLintock receives an annual cash-settled award under the M&G Executive LTIP. In 2015, he received the following award: Executive Role
Michael McLintock Chief Executive, M&G 300% £1,182,000 See note 31 Dec 17
Non-executive Director fees An increase of around 1.5 per cent was made to the basic Non-executive Director fee with effect from 1 July 2015. As the fees for membership of the Audit, Remuneration and Risk Committees had remained unchanged since 2011, an increase of 10 per cent was made to the membership fee for these Committees. There have been no changes to the Committee Chair or Senior Independent Director fees. The revised fees are shown below: Annual fees
Basic fee 92,500 94,000 Additional fees: Audit Committee Chairman 70,000 70,000 Audit Committee member 25,000 27,500 Remuneration Committee Chairman 60,000 60,000 Remuneration Committee member 25,000 27,500 Risk Committee Chairman 65,000 65,000 Risk Committee member 25,000 27,500 Nomination Committee member 10,000 10,000 Senior Independent Director 50,000 50,000
† Further information on share awards subject to performance conditions are detailed in the ‘share-based long-term incentive awards’ section of the Supplementary information.
§ Based on the closing price on 31 December 2015 (£15.31). Where applicable, all directors are in compliance with the share ownership guideline. The Company and its directors, chief executives and shareholders have been granted a partial exemption from the disclosure requirements under part XV of the 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 Pierre-Olivier Bouée stepped down from the Board on 31 May 2015. Total interests in shares are shown as at this date. 2 Jackie Hunt stepped down from the Board on 3 November 2015. Total interests in shares are shown as at this date. 3 Penny James was appointed to the Board on 1 September 2015. Total interests in shares are shown from this date. 4 For the 1 January 2015 figure Barry Stowe’s beneficial interest in shares is made up of 142,144 ADRs (representing 284,288 ordinary shares), (8,513.73 of these ADRs are held within an investment account which secures premium financing for a life assurance policy). For the 31 December 2015 figure the beneficial interest in shares is made up of 123,328 ADRs (representing 246,656 ordinary shares).
10 Lord Turnbull stepped down from the Board on 14 May 2015. Total interests in shares are shown as at this date. 11 Lord Turner was appointed to the Board on 15 September 2015.
The following table sets out the share options held by the directors in the UK Savings-Related Share Option Scheme (SAYE) as at the end of the period. No other directors held shares in any other option scheme.
Pierre-Olivier Bouée 23 Sep 14 1,155 1,531 01 Dec 17 31 May 18 1,558 – – – – 1,558 – Jackie Hunt 23 Sep 14 1,155 1,531 01 Dec 17 31 May 18 1,558 – – – – – 1,558 Penny James 21 Sep 12 629 1,531 01 Dec 15 31 May 16 858 – – – – – 858 Penny James 22 Sep 15 1,111 1,531 01 Dec 18 31 May 19 – 1,620 – – – – 1,620 Michael McLintock 23 Sep 14 1,155 1,531 01 Dec 19 31 May 20 2,622 – – – – – 2,622 Nic Nicandrou 16 Sep 11 466 1,531 01 Dec 16 31 May 17 3,268 – – – – – 3,268 Nic Nicandrou 23 Sep 14 1,155 1,531 01 Dec 19 31 May 20 1,311 – – – – – 1,311 Tidjane Thiam 16 Sep 11 466 1,531 01 Dec 14 29 May 15 965 – 965 – – – – Tidjane Thiam 20 Sep 13 901 1,531 01 Dec 16 31 May 17 499 – – – – 499 – Tidjane Thiam 23 Sep 14 1,155 1,531 01 Dec 17 31 May 18 1,168 – – – – 1,168 – Mike Wells 22 Sep 15 1,111 1,531 01 Dec 18 31 May 19 – 1,620 – – – – 1,620
Executive Directors Pierre-Olivier Bouée1 6 August 2013 12 months 12 months – – Jackie Hunt2 25 April 2013 12 months 12 months Yes £25,833 Penny James3 13 August 2015 12 months 12 months Yes £22,333 Michael McLintock 21 November 2001 6 months 12 months Yes £70,000 Nic Nicandrou 26 April 2009 12 months 12 months – – Barry Stowe 18 October 2006 12 months 12 months – – Tidjane Thiam4 20 September 2007 12 months 12 months Yes £71,700 Mike Wells 21 May 2015 12 months 12 months – – Tony Wilkey3 1 June 2015 12 months 12 months – –
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Chairman Paul Manduca1 15 October 2010 AGM 2011 12 months AGM 2018 Non-executive Directors Philip Remnant 1 January 2013 AGM 2013 6 months AGM 2016 Howard Davies 15 October 2010 AGM 2011 6 months AGM 2017 Ann Godbehere2 2 August 2007 AGM 2008 6 months AGM 2016 Alistair Johnston3 1 January 2012 AGM 2012 6 months AGM 2018 David Law 15 September 2015 AGM 2016 6 months AGM 2019 Kai Nargolwala 1 January 2012 AGM 2012 6 months AGM 2018 Anthony Nightingale 1 June 2013 AGM 2014 6 months AGM 2017 Alice Schroeder 10 June 2013 AGM 2014 6 months AGM 2017 Lord Turner 15 September 2015 AGM 2016 6 months AGM 2019
Notes 1 Paul Manduca was appointed as Chairman on 2 July 2012. 2 Ann Godbehere was reappointed in 2015 for one year. 3 Alistair Johnston will retire from the Board at the Annual General Meeting on 19 May 2016.
Penny James and Tony Wilkey were promoted to the Board during the year. Their outstanding share awards under deferred bonus plans and long-term incentives awarded before their appointment to the Board will continue to vest on the normal timescale and subject to the original conditions.
In addition, each of Barry Stowe, Mike Wells and Tony Wilkey received an additional LTIP award following the changes to their roles as detailed in the ‘Long-term incentives awarded in 2015’ table.
During the year, the Committee considered the application of the Company's payments on loss-of-office policy. The objective was to ensure that the application of the policy was aligned to individual circumstances and ensure there was no reward for failure. The Committee's approach when exercising its discretion under the policy is to be mindful of the particular circumstance of the departure and the contribution the individual had made to the Group.
Pierre-Olivier Bouée Pierre-Olivier Bouée stepped down from the Board on 31 May 2015. Pierre-Olivier did not receive a loss-of-office payment. His remuneration arrangements were in line with the approved Directors' remuneration policy and disclosed in stock exchange announcements and the remuneration he received in respect of his services as an Executive Director is set out in the 2015 Single Figure table.
In addition, recognising her contribution to the Company's success, the Committee determined that Jackie should be awarded a bonus in respect of the 2015 performance year which was calculated in the usual way. Sixty per cent of this bonus will be paid in 2016 and 40 per cent will be deferred in shares for three years, subject to malus and clawback provisions.
Tidjane Thiam Tidjane Thiam stepped down from the Board on 31 May 2015. Tidjane did not receive a loss-of-office payment. His remuneration arrangements were in line with the approved Directors' remuneration policy and disclosed in stock exchange announcements and the remuneration he received in respect of his services as an Executive Director is set out in the 2015 Single Figure table.
In addition, recognising his contribution to the Company's success, the Committee determined that Tidjane should be awarded a bonus in respect of the 2015 performance year which was calculated in the usual way and pro-rated for service to 31 May 2015. Sixty per cent of this bonus will be paid in 2016 and 40 per cent will be deferred in shares for three years, subject to malus and clawback provisions.
The Committee also exercised its discretion in accordance with the approved Directors’ remuneration policy and determined that Tidjane should be allowed to retain his unvested PLTIP awards granted in 2013 and 2014. The 2013 and 2014 awards will vest in accordance with the original timetable, remain subject to malus provisions and were pro-rated for service. Tidjane did not receive a 2015 long-term incentive award.
Rob Devey Rob Devey’s employment with the Group ended on 31 October 2013. The 2013 Directors’ remuneration report provided details of the remuneration arrangements that would apply to Rob after his resignation. As set out in the section ‘Remuneration in respect of performance in 2015’ the performance conditions attached to Rob’s 2013 PLTIP awards were met in full and 100 per cent of these awards will be released in 2016. These awards were pro-rated for service (10 of 36 months) and the details of the release are set out below. This represents the last long-term incentive award which Rob had outstanding under the Company’s remuneration plans.
At the 2015 Annual General Meeting, shareholders were asked to vote on the 2014 Directors’ remuneration report.
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 have been made to executives’ maximum opportunities under either the annual incentive or the long-term incentive plans.
As part of the implementation of Solvency II, part of Executive Directors’ 2016 bonuses will be determined by the achievement of Solvency II surplus targets. This metric will replace the IGD capital surplus measure (part of the Solvency I framework). The Solvency II measure will operate alongside the economic capital targets introduced in 2015. Otherwise no changes are proposed to the performance measures for the 2016 annual incentive plan nor for the 2016 long-term incentive awards.
Also, as part of the implementation of Solvency II, the weightings of Penny James’s AIP performance targets (with effect from 2016) have been changed so that 50 per cent relate to financial targets, 30 per cent relate to functional targets and 20 per cent relate to personal targets.
John Foley was appointed Chief Executive of Prudential UK & Europe and Executive Director of Prudential plc with effect from 19 January 2016. His basic salary for 2016 will be £750,000. He will have a maximum AIP opportunity of 180 per cent of base salary, with 40 per cent of any bonus deferred into the Company’s shares. Long-term incentive awards will be 250 per cent of base salary. John’s service contract contains a notice provision under which either party may terminate upon 12 months’ notice.