Royal London Annual Report and Accounts 2014

Royal London is Contents Strategic report

STRENGTH mutual the largest (inside flap) About us life insurance and 01 2014 at a glance 02 Our approach to business STRENGTH 03 Our strategic goals pensions company 04 Chairman’s statement 06 Group Chief Executive’s statement 09 Group performance

IN NUMBERS in the UK 10 Principal risks and uncertainties IN NUMBERS 13 Business overview 14 Intermediary 16 Consumer Annual Report and Accounts 2014 The big challenge of 2014 was to manage a 18 Wealth period of unprecedented regulatory change. 20 Our corporate responsibility Royal London also engaged in the most 22 Group Finance Director’s review 31 Forward-looking statements comprehensive rebranding exercise in its 31 Strategic report sign-off 150-year history, absorbed significant acquisitions Corporate governance and launched a range of exciting new products. 33 Introduction 34 Board of Directors 36 Directors’ report for the year ended 31 December 2014 38 Corporate Governance statement 43 Board Committees 49 Risk management and internal control 51 The Group’s governance structures 52 2014 Directors’ remuneration report 71 Auditors’ report

Financial statements

Royal London Group Annual Report and Accounts 2014 78 Consolidated statement of comprehensive income 79 Balance sheets 80 Statements of cash flows 81 Notes to the financial statements

European embedded value 183 EEV supplementary information 184 EEV auditors’ report 185 Consolidated income statement – EEV basis 186 Consolidated balance sheet - EEV basis

Notice of Annual General Meeting 195 Notice of Annual General Meeting 196 Commentary on the resolutions

Do you find the language Additional information of finance baffling? 197 Glossary back cover Financial calendar It’s one of our bugbears at Royal London – jargon that gets in the way of meaning. back cover Contact offices So you’ll see in our imagery that we take a wry view of some of the terms you’ve told us confuse you, as well as giving their actual meanings.

To find out more, see our Finglish dictionary at www.royallondon.com/financialguidance/finglish www.royallondon.com Royal London is Contents Strategic report

Financial statements

Royal London Group Annual Report and Accounts 2014 78 Consolidated statement of comprehensive income 79 Balance sheets 80 Statements of cash flows 81 Notes to the financial statements

European embedded value 183 EEV supplementary information 184 EEV auditors’ report 185 Consolidated income statement – EEV basis 186 Consolidated balance sheet - EEV basis

Notice of Annual General Meeting 195 Notice of Annual General Meeting 196 Commentary on the resolutions

To find out more, see our Finglish dictionary at www.royallondon.com/financialguidance/ www.royallondon.com finglish About us 2015 Financial calendar

Delivering value for our customers and members. Quintessentially British Because we have no shareholders, we can concentrate Founded on the principles on delivering excellent returns for customers and members. of self-reliance and community Date Event

31 March Financial results for 2014 and investor conference call

12 May Interim management statement and first quarter new business figures About Royal London Group Some key numbers 3,000 5.3m 10 June Annual General Meeting

We employ approximately 3,000 The Group has c5.3 million 18 August Interim financial results and second quarter new business figures and investor conference call Not many companies have been people across the UK and Ireland policyholders, who benefit from around for 150 years; of those who work in our three divisions and offerings ranging from 4 November Interim management statement and third quarter new business figures that have, few, if any, have been Group functions pensions and insurance to fund as little known as Royal London. management expertise The reason, of course, was that 30 November RL Finance Bonds No 2 plc Subordinated debt interest payment date £ we did our business through a m collection of separate brands that 15 December RL Finance Bonds plc Subordinated debt interest payment date 60 were themselves household names, such as Scottish Life and Scottish Profit share allocation Provident. In 2014, we started to 0.6m £466m for 2014 after tax change this model, in the firm belief that your Group should be worth Royal London is a mutual with Since 2007 we have allocated more than the sum of its parts. more than half a million members £466m to our qualifying with- Contact offices who share in our success profits policyholders, ensuring that The Royal London Mutual Insurance Society Limited About our brand they have felt the benefits of our strong performance Registered in England and Wales Founded as a Friendly Society in 1861, Royal London has No. 99064 grown to become the UK’s largest mutual life, pensions and investment company. We are committed to delivering Rupert Pennant-Rea www.royallondon.com the best value for customers and putting members first. £ bn Chairman’s statement 82.3 Bath Manchester Trimbridge House Royal London House page 04 Trim Street Alderley Road We are the largest life and pensions Bath Wilmslow Our divisions mutual in the UK, with £82.3bn BA1 1HB Cheshire SK9 1PF Group funds under management London Intermediary 55 Gracechurch Street Reading We work with independent financial advisers to London Reading Bridge House bring our excellent protection and pensions products EC3V 0RL Kings Meadow Road to their clients. Reading Edinburgh Berkshire £ m 1 Thistle Street RG1 8LS Consumer 195 Edinburgh For those unable to access financial advisers, EH2 1DG Republic of Ireland our newest division offers products directly Caledonian House to customers. EEV profit before tax from Glasgow 47 St Stephen’s Green continuing operations 301 St Vincent Street Dublin 2 Glasgow Wealth G2 5PB Royal London Asset Management is one of the UK’s leading wealth management companies. We currently £4.8bn 534 tonnes manage more than £82bn in funds for clients attracted by our consistently strong performance. We wrote £4.8bn new life and We reduced the amount of carbon pensions business in 2014, produced by our operations by £ calculated on the present value 534 tonnes during the year, thanks to m of new business premiums a continued focus on our energy use 356 (PVNBP), an increase of 39% on the previous year IFRS result before tax from continuing operations Designed and produced by Wardour, London About us 2015 Financial calendar

31 March Financial results for 2014 and investor conference call

12 May Interim management statement and first quarter new business figures About Royal London Group Some key numbers 3,000 5.3m 10 June Annual General Meeting

2014 at a glance STRATEGIC REPORT

Sharing profits. We are a mutual, which means that at Royal London we share our profits with our qualifying with-profits policyholders and are free to invest in new products and services to benefit our customers. GOVERNANCE

Continuing EEV operating profit Bonuses added to before tax and exceptional items* with-profits policies £225m £228m £196m £220m £231m £282m £318m £285m IACA TTMNSERPA MEDDVLENTC FAM&RSLTOSADDITIONAL INFORMATION NOTICE OF AGM & RESOLUTIONS EUROPEAN EMBEDDED VALUE FINANCIAL STATEMENTS

2011 2012 2013 2014 2011 2012 2013 2014

*2014 exceptional item being the £61m charge relating to the pensions charge cap.

Profit share Royal London with-profits fund (after tax) investment performance £88m £88m £81m £60m 6.0% 8.6% 10.6% 10.9%

2011 2012 2013 2014 2011 2012 2013 2014 02 Royal London Group Annual Report and Accounts 2014

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

How we manage and grow our members’ investments

Intermediary Distribution of most of our pensions and protection products

Reinvestment

Members Profits not invested back Wealth Managing Royal London into the business are invested assets and those of in financial markets after third-party organisations allocation to qualifying with-profits policyholders

Consumer Tailored products for consumers not currently Investment served by intermediaries To improve our service to customers, we invest in Third-party systems and training investors Organisations rely on our expertise to manage their funds

Cashow Annual Report and Accounts 2014 Royal London Group 03 STRATEGIC REPORT

Our strategic goals are: [[To become the most trusted and recommended provider of life insurance and investment products in the eyes of our customers. [[To raise consumer awareness of Royal London and drive increased new business through our

Intermediary, Consumer and Wealth divisions. GOVERNANCE

How we are achieving our strategic goals

Royal London is increasingly highly regarded by customers and their advisers because of the quality

Building trust ADDITIONAL INFORMATION NOTICE OF AGM & RESOLUTIONS EUROPEAN EMBEDDED VALUE FINANCIAL STATEMENTS of our products, our investment 1. performance track record and our service. It is these three things that Building trust remains a difficult services are clearly explained, that they have driven our rising sales. task, with the financial crisis of 2008 represent quality and value, and that continuing to cast a long shadow, but we continue to provide excellent we are doing our best to restore our customer service. As the largest mutual customers’ confidence in us. insurer in the UK, we can boost that value by offering eligible members a Whilst we may not be able to alter the share in the profits of Royal London, Phil Loney reputation of an industry, we can and do along with a great deal of information to Group Chief Executive’s statement work to ensure that all our products and help them make the most of their money.

page 06 Raising Delivering 2. awareness 3. value and service To raise awareness of our business with The goals outlined above and the focus consumers, we decided to bring almost on service and product development all all of our businesses under a single require investment from Royal London. brand name, Royal London, and started It is vital to spend such money efficiently offering products directly to consumers. and we review processes and streamline A national advertising and marketing our operations to ensure we deliver good campaign supports this plan. value for money to our members.

Building our brand We are in the middle of an ambitious programme to bring our IT systems up to date. So now, whether you’re on a computer, tablet or mobile phone, accessing www.royallondon.com is quick, simple and easy 04 Royal London Group Annual Report and Accounts 2014

Mutual fund (n)

Sounds like: Saving up to buy a Ferrari with a friend

Is actually: A collective investment scheme that pools money from many investors to purchase securities

Chairman’s statement

At a time of big changes in both Royal London and the wider life and pensions industry, your company made encouraging financial progress last year.

Although parts of our business – particularly This solid performance came in a year when protection – have some way to go to match Royal London was changing its identity. their potential, both pensions and fund Not many companies have been around for management produced excellent results. 150 years; of those that have, few have been Sales of new pension business premiums were as little known as Royal London. The reason, up 39% on 2013; and our asset management of course, was that we did our business Rupert Pennant-Rea arm attracted almost £2bn of new money from through a collection of separate brands that Chairman third-party investors, which helped to boost were themselves household names, such as total assets under management by 12% Scottish Life and Scottish Provident. In 2014 to £82.3bn. You will find all the details in we started to change this model, in the firm our Group Finance Director’s review on belief that your Group should be worth more page 22, but the headline that matters is that than the sum of its parts. Externally, we are your Group is financially robust. promoting Royal London as a single company; Annual Report and Accounts 2014 Royal London Group 05 STRATEGIC REPORT

internally, we have reorganised to reflect If 2014 was reassuringly strong, with this new reality. The rebranding exercise EEV operating profits from continuing has already raised public awareness of operations up 12%, why then has your the Royal London name and what we do Board decided to cut the value of the

£2bn GOVERNANCE and we are particularly pleased that both Profit share that will be added to the The amount of new money that our Royal London and one-day cricket have policies of qualifying members from fund management arm received benefited from our first year sponsoring £81m post tax for 2013 to £60m for from third-party investors in the game. last year? The short answer is new 2014. It boosted Royal London’s total of funds under management to regulations, and in particular the 0.75% £82.3bn, 12% up year-on-year Image counts for nothing though, cap imposed by the Government on the unless backed by achievement. Some annual management fee that workplace of our progress in the year was driven pension providers can charge their by changes affecting the whole life customers. We estimate that cap will and pensions industry. In particular, cost the Group £61m in lost revenue in 1,400 the pensions world is going through future years, and at the half year we took ADDITIONAL INFORMATION NOTICE OF AGM & RESOLUTIONS EUROPEAN EMBEDDED VALUE FINANCIAL STATEMENTS its biggest changes in decades, a charge against profit to reflect this. The number of new schemes we not just the imminent end of compulsory Clearly our members holding gained as the introduction of auto- annuities but also the introduction of Royal London workplace pensions will enrolment boosted the workplace auto-enrolment in 2013 for company benefit from the resulting lower prices, pensions market pension schemes. In this new world, so the value is not lost to members. Royal London and many other firms The reduced Profit share is unwelcome, will essentially become vehicles for of course, but it is worth pointing out long-term saving and investment. that this smaller Profit share will still add roughly 1.15% to the asset shares In some ways it will be a simpler world. of qualifying policies and this comes But it is one that is already attracting on top of the good investment returns new competitors so customer experience earned by the fund. At a time of such will matter even more than it does now, low interest rates for savings, an 1.15% and the same will be true of investment additional yield is still quite attractive. performance. To prosper in that world, Royal London will have to To summarise: last year nicely strengthen its reputation as a trusted demonstrated that Royal London provider that delivers good results for operates in a world of constraints as its customers. We should be well-placed well as opportunity. You will find both to do just that. As a mutual we are features analysed fully in the rest of this not distracted by the demands and report, so let me conclude with a few short-term horizons of shareholders, remarks about the staff and the Board. so we can concentrate on the long-term interests of our members and other Change is never easy and the changes customers. The end of compulsory that Royal London is experiencing annuities should play to our strengths have demanded a lot of our staff. The in the longstanding income-drawdown directors – and I’m sure, the members market. The growth in workplace too – thank them for all they achieved pensions is also working to our in 2014. As for the Board, Kathryn advantage: last year we gained almost Matthews stood down at the end of the 1,400 new schemes and at the same time year and I thank her for her contribution; managed to increase the value of our Ian Dilks and Sally Bridgeland have just individual pensions business. arrived and we welcome them; and I pay tribute to my fellow directors for their commitment to Royal London. I hope you, our members and investors, will join us in looking ahead with confidence to more changes and more opportunities. 06 Royal London Group Annual Report and Accounts 2014

Auto-enrolment (n)

Sounds like: A membership scheme for cars

Is actually: A law requiring employers to enrol workers into a workplace pension scheme

Group Chief Executive’s statement

2014 was a successful year for Royal London – for many good reasons. The business performed well in almost every area. Importantly, we delivered significantly higher sales of most of our key products than we did in 2013.

This indicates that our customers, and their savings, we worry that a constant re-writing advisers, believe we are offering strong value of the rules risks undermining the industry’s for money. We are delighted that 140,000 ability to plan. This is an essential ingredient of new pension customers who joined during a sector such as pensions and savings, which has 2014 are now also members of Royal London. always had to consider the long term. We warmly welcome them to the Group. We also worry that many customers need the Phil Loney Royal London is increasingly highly regarded support of an impartial financial adviser to Group Chief Executive by customers and their advisers because of make the best financial decisions, but the cost the quality of our products, our investment of advice is prohibitive for many people. We performance track record and our service. continue to work hand in hand with financial It is these three things that have driven our advisers and to lobby the Government and rising sales. regulators to create a lower cost advice regime for the general public. Until this happens we There was a great deal of change during are working hard to provide good value for the year, both for Royal London and for money solutions for those customers who do the financial services industry in general. not have an impartial adviser to help them. Regulatory upheaval now seems to be a constant process. Whilst we welcome many of the Pensions and life assurance changes currently under way, such as allowing We are making a big contribution to the people greater control over their pension success of auto-enrolment, the pension scheme Annual Report and Accounts 2014 Royal London Group 07

in which employees are automatically not think was serving the public well. enrolled in a workplace pension. Our product is substantially better value STRATEGIC REPORT Our sales have doubled and we have and fairer than most in the market, and 140k put considerable resource into creating protects payouts even for customers who a high-quality offering that represents are unable to keep up payments, with a The number of new pension excellent value. That work has paid off. partial payout reflecting the proportion customers who signed up with us In 2014 thousands of medium-sized of premiums they have paid. in 2014, attracted by the value for and many larger businesses created money offered by our key products new pension schemes and the process Our Annuity Bureau, launched last continues with smaller businesses August, is a new service to help this year. customers who do not have the support of a financial adviser and wish to buy We are also in a strong position to provide a guaranteed income for life. Many of customers who have a financial adviser our competitors simply try to sell their

with the ability to draw an income from own annuity product to their customers, GOVERNANCE their pension fund when they retire, an but Royal London seeks to bring the area that will expand considerably this best deals in the market to customers year when savers are given greater freedom by operating a panel approach for both to manage their retirement savings. standard and enhanced annuities.

The life assurance market remained And our online Life Insurance product difficult, but we have taken action to provides an easy way of purchasing over improve our service and value for money the internet for those people who wish in the market. Last November, Scottish to buy direct rather than through a Life rebranded as Royal London and financial adviser. ADDITIONAL INFORMATION NOTICE OF AGM & RESOLUTIONS EUROPEAN EMBEDDED VALUE FINANCIAL STATEMENTS Caledonian Life followed in December, rebranding to Royal London Ireland. The success of these products will In 2015 our Bright Grey and Scottish become clear over time, but they are Provident businesses will combine to already winning very positive reviews become a single life assurance business and awards from consumer champions, operating under the Royal London including the Best Life Insurance title brand. I am pleased to say that the at the Personal Finance Awards. feedback so far has been very positive and after a rocky start, sales began to Asset management successes recover in the fourth quarter, ending Many investment managers can deliver the year on a positive note. spectacular results when stockmarkets 2014 AWARDS surge. Producing a consistently strong Innovation for consumers investment performance through At Royal London, 2014 was about challenging market conditions is more executing the strategy we set out in taxing and in 2014 our Wealth division 2012. Our aim is to become renowned Royal London Asset Management for providing the best outcomes and (RLAM) continued to deliver, winning service for customers. As a result, all a series of awards including Fixed three of our divisions delivered strong Income Manager of the Year at the overall performances. European Pensions awards. RLAM also continued to grow its new business Our Intermediary division concentrated among third-party clients. on further enhancing its existing products by significantly boosting the Over the past three years, The Royal cover available for the most claimed-for London Long-Term Fund outperformed conditions covered by our critical illness its benchmark, delivering returns of product. It also enhanced our income 31.72% compared with the benchmark drawdown and investment range to take return of 28.59%. The Scottish Life full advantage of new pension freedoms Pensions Fund and the Royal Liver announced in the Budget in 2014. With-Profits Fund delivered returns of AWARDS 2014 32.25% and 25.66% over three years,

Fixed Income Manager of the Year We also launched new services and simple against a benchmark return of 29.54% products which do not require the support and 29.51% respectively. of a financial adviser, which we believe are both different and better than those of our In addition to this, nine RLAM fund competitors. We specifically targeted areas managers held Citywire Fund Manager where consumers are not receiving the sort Ratings at the end of December and of value they deserve. RLAM itself won 13 industry awards for investment performance and Our Over 50s Life Cover is a good service quality. example of entering a market we did 08 Royal London Group Annual Report and Accounts 2014

Group Chief Executive’s statement continued

Winning awards The rebrand has been a far bigger exercise Our Profit share is only one way that Asset management was not the only than simply creating a distinctive and we seek to reward our qualifying area of Royal London to have a good memorable new look. We are in the midst with-profits policyholders. As a mutual, awards season. We were delighted to be of a two-year process to bring Bright we believe we have a responsibility named 2014 Company of the Year in the Grey and Scottish Provident into a single to produce products and services that Financial Adviser Service Awards, the Royal London branded intermediary- come top in terms of quality and value. flagship service awards for our industry. focused broad-based protection business We also want to help customers and Both Scottish Life and Bright Grey were with enhanced service and better pricing. members navigate the complex world of awarded the coveted five-star rating This will be completed in 2015. money and decode its terminology. Our reserved for the best service providers. website has financial education tools and Scottish Life also won the award for Integration of Co-operative assets a financial planner free to all, whilst our Best Income Drawdown Provider at the We did not make any further acquisitions ‘Finglish’ glossary explains what those Moneyfacts Awards and was voted best in 2014, but instead concentrated on the baffling terms really mean. Look out for for service. We take pride in retiring the successful integration of the Co-operative the photographs throughout this report, Scottish Life brand when it is at the top Insurance Society Limited (CIS) and its which refer to the glossary. of its game for service delivery. It gives subsidiaries and The Co-operative Asset us a great launch pad for promoting our Management Limited (TCAM) into the The market and regulation intermediary pensions business as Royal Group. We made great progress during the The huge changes in the pensions London going forward. In the same year. We were able to move 136 excellent and savings industry provide us with awards Scottish Provident was named people, including highly valued actuarial, opportunities, but we are concerned Best Critical Illness Provider. marketing, asset management and finance that many people find it hard to afford staff, from CIS to our Wilmslow office. the financial advice necessary for their Whilst we work hard to deliver great We delivered the synergies and cost future financial well-being. Whilst customer service, we are very aware that savings promised when we signed the deal the Government’s guidance guarantee there will be occasions when we fall short. and as reported last year, this has created is welcome, a 40-minute conversation Our aim in such cases is to acknowledge significant value for the Group. over the telephone will not be able to our failures and correct them swiftly. encompass the complexities of 40 years This is not something the financial As ever with such acquisitions, it takes of saving. We want to play our part, services industry has been good at in the time and a great deal of work to bring the along with government and regulators, past, but it is an area where, as a mutual, two organisations together successfully, in encouraging new, low-cost financial we can distinguish ourselves from the but CIS is now a sub-fund of Royal advice models and help advisers make competition by serving our customers London and good progress is being their services available to our customers better. We are seeking to achieve this by, made with the final elements, such as in a way that they can afford. We hope for example, ensuring that we meet the the transfer of computer systems. We the next UK government will develop needs of our more vulnerable customers, have created a stable home for CIS’s a national strategy to build the financial such as the elderly or those who do not policyholders, giving the CIS fund greater literacy of our society and make financial have extensive financial knowledge. cost certainty than it would have received advice more readily available for all. if it had remained within the Co-op Bank. Royal London brand People In our last Annual Report and Accounts Once the CIS integration is complete we We have once again asked a great deal we showed you the new Royal London would consider other acquisitions that fit of our 3,000 people at Royal London. We branding and told you about our plans to with our strategy as opportunities arise. are a service business so the engagement bring all the Group’s businesses together Our aim is to give better value to such of our people, their belief in what we are under that single, distinctive brand. customers by offering good service and doing and the culture of our business is This process is well under way and both investment performance at lower cost vital to delivering a good service. Our Scottish Life and Caledonian Life have and thereby also earn a profit for Royal employee engagement scores in 2014 were already successfully rebranded. For the London’s members. the highest they have ever been and our first time in 10 years Royal London staff’s willingness to recommend us as a advertised on national television and on Benefits to with-profits policyholders great place to work is at a high point. High billboards around the country. Along We are allocating a Profit share of levels of employee engagement are key in with the corporate advertising, the launch £60m net of tax for 2014. This is a lower delivering excellent customer service. of our direct to consumer products, figure than we would have liked, as our the Over 50s and online Life Insurance, Chairman has explained in his report. Outlook we are advertising direct to consumers for Our robust operating profit performance The positive outcome for 2014 indicates the first time in many years. helped offset the negative impact of the that our strategy is beginning to create workplace pensions charge cap on our more opportunities for 2015 across all Our research suggests that awareness of profitability. However, it is important to three of our main business areas. We look the Royal London brand increased by remember that members with a Royal forward to making the most of these by 30% overall, with the most significant London workplace pension will benefit delivering the best quality and value for increase being among those aged 30–59. from the lower prices available under the money for our customers. We remain charge cap. ready to respond to changes as they come along, but are optimistic about the future. Annual Report and Accounts 2014 Royal London Group 09

Group performance STRATEGIC REPORT

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

Performance description 2014 result Historic performance

Profitability £320m £551m £259m EEV profit from continuing operations before tax and Profit share.1 £259m GOVERNANCE

1 2013 EEV results include £150m one-off pre-tax  gain arising on the acquisition of the Co-operative 53% life, pensions and asset management businesses. 2014 exceptional item being the £61m charge relating to the pensions charge cap. 2012 2013 2014

Profitability £454m £526m £416m IFRS result from continuing operations ADDITIONAL INFORMATION NOTICE OF AGM & RESOLUTIONS EUROPEAN EMBEDDED VALUE FINANCIAL STATEMENTS before tax and Profit share.2 £416m

2 2013 IFRS results include £125m one-off gain arising on the acquisition of the Co-operative life,  % pensions and asset management businesses. 2014 21 exceptional item being the £61m charge relating to the pensions charge cap. 2012 2013 2014

New Business £3,160m £3,464m £4,826m Present value of continuing new life and pensions business premiums. £4,826m  39% 2012 2013 2014

Funds £49.8bn £73.6bn £82.3bn Group funds under management. £82.3bn  12% 2012 2013 2014

Capital £2,374m £2,749m £3,390m Regulatory (Insurance Groups Directive) capital surplus. £3,390m  23% 2012 2013 2014 10 Royal London Group Annual Report and Accounts 2014

Principal risks and uncertainties

Managing risk is fundamental to the Group’s activities in order to generate returns for policyholders. The Group has processes in place to identify and manage risks, which include assessing scenarios and reverse stress tests.

The Group’s approach to risk management is set out on pages 49 and 50. The Board believes the principal risks and uncertainties facing the Group are as set out on the following pages with the actions taken to manage and mitigate them.

The economy and Royal London’s key markets

Principal risk and uncertainty Risk mitigation and management The economic environment continues to be uncertain Through development of our forward looking risk profile, Like other insurance groups, the Group’s business is subject to inherent and with regular monitoring of exposures to and possible risks arising from general and sector-specific economic conditions concentrations by risk class, the Group is able to evaluate in the markets in which it operates, particularly in the UK, where the scenarios where we may be exposed to asset values and liability Group’s earnings are predominantly generated. values moving differently and we have a good understanding of the impacts this has on our risk profile. Fluctuations in the value of both assets and liabilities can arise from Through constant evaluation and discussion at executive and volatility in the global capital markets, the economy of the UK and the Board level, decisions are made to mitigate risks where these do global economy generally. This may have a materially adverse effect on not align to our business strategy and/or risk preferences. the Group where such a market change impacts differently on the value of assets from the effect on liabilities. A change in economic trends and consumer behaviours can The Group regularly undertakes reviews to ensure we are affect the Group’s performance developing strategies and operational capabilities to take account of current and future changes in markets and Volatility in the economy and investment markets and the continuing consumer behaviours. prospects for low growth rates in the UK can affect consumers’ disposable incomes and appetite for the Group’s products and services. The Group monitors its product range and market position regularly through analysis of policyholder experience and business Changing socio-economic trends (customers wanting to deal direct, volumes. This helps the Group to re-price its products dynamically transactions through mobile applications, data security etc.) present and develop new ones in response to changes in demand. opportunities and challenges to our business model.

Changing regulation and taxation

Principal risk and uncertainty Risk mitigation and management Uncertainty in changes to the regulatory framework resulting In line with Prudential Regulation Authority (PRA) from Solvency II recommendations to Internal Model firms, the Group has Full Solvency II implementation is scheduled for January 2016. been re-planning its work on the Internal Model over a longer Whilst the high level regulation is understood, important elements time-frame whilst continuing to enhance its risk and capital of the low level detail are still undecided. This gives rise to the management systems. possibility that the Group will be required to hold greater levels The Group continues to enhance its risk and capital of capital than previously required. management systems and to monitor closely the potential impacts on its capital requirements, Profit share and the associated degree of uncertainty in the projections. The Group will continue to engage closely with the PRA in order to gain further clarification of the remaining areas of uncertainty in the application of the Solvency II requirements. Changes in the legislative and regulatory landscape may alter Meeting the expectations of customers and our regulators is at the Group’s design and marketing of its propositions the forefront of everything we do. To that end the Group actively engages with regulators on an on-going basis. Unprecedented levels of change in legislation and heightened regulatory activity could adversely impact the Group’s reputational, A conduct risk framework has been developed, together with an operational and financial position. The conduct and prudential associated proposition development and review process designed environment is still developing and this could impact how the to achieve fair outcomes and experiences for our customers. Group develops and distributes new propositions, as well as how The Group continues to be represented on several industry it administers and deals with contracts sold in the past. bodies including Association of British Insurers (ABI) It is possible that future regulatory thematic industry-wide reviews senior committees. from the regulator may have a significant impact on the Group. Annual Report and Accounts 2014 Royal London Group 11 STRATEGIC REPORT

Changing regulation and taxation continued

Principal risk and uncertainty Risk mitigation and management Potential constraints on the mutual with-profits sector may The Group believes that the writing of profitable new impact our ability to grow or write new business business is advantageous for its financial strength and consequently beneficial for policyholders. As the largest In 2012 the Financial Services Authority (FSA) issued a policy mutual insurer in the UK, the Group views this issue statement on with-profits funds and a consultation paper on mutuals as being of critical importance for a positive resolution. managing such business. A related policy statement from the Financial The Group is confident of its ability to maintain a Conduct Authority (FCA) in March 2014 has taken account of proactive dialogue with the FCA to deliver the benefits matters arising through the consultation process. This gave rise to the identified from a strong mutual insurance sector. GOVERNANCE possibility that mutual insurers could, in the future, be constrained in their use of surplus assets from with-profits business to fund Whilst aiming for a positive resolution, the Group strategic initiatives such as acquisitions or supporting the writing of continues to assess the impact of this risk on its new business. ability to write new business and does not believe that any of the potential outcomes could endanger ongoing solvency.

The political environment IACA TTMNSERPA MEDDVLENTC FAM&RSLTOSADDITIONAL INFORMATION NOTICE OF AGM & RESOLUTIONS EUROPEAN EMBEDDED VALUE FINANCIAL STATEMENTS Principal risk and uncertainty Risk mitigation and management Changes to financial services markets may arise from the As the environment changes we will continue to political environment evaluate how our markets are evolving and to develop The political environment may give rise to changes that alter the propositions to meet the needs of end customers and viability of the Group’s propositions in the markets in which it distributors. To support this we undertake regular has chosen to operate. It will take time for the implications for the monitoring of the Group’s performance and the pensions market of governmental decisions on pension charge cap external political and environmental landscape. levels, the introduction of independent governance committees for The Group also undertakes scenario testing of workplace pensions and the new pension freedom measures that will external factors that could detrimentally impact begin in April 2015 to embed and be fully understood. Further changes our business model. in the political environment that may occur as a result of the May 2015 UK general election or adjustments to the political landscape of the European Union could also lead to government decisions that affect the Group’s markets (e.g. pension charge capping being tightened or extended to further product types).

Maintaining our financial strength

Principal risk and uncertainty Risk mitigation and management An increase in the Group’s funding commitments for its defined Overall, the schemes are reasonably well funded; benefit pension schemes may impact on its financial position however, the Board recognises this position could The Group’s main risks in managing its defined benefit pension change and continues to closely monitor funding schemes arise from inflation, interest rates and longevity, and from levels and work with the Trustee Boards to assess risks associated with the fund’s investment strategies. Any adverse opportunities to reduce volatility and the risk to movements in these factors could increase future funding costs and the Group. could impact our financial position. An additional risk factor is a possible Solvency II approach regulation being imposed. The Group is exposed to the risk of failure or default of one or The Group seeks to manage its exposure to any one more of its counterparties counterparty or third party. It actively monitors and reports against limits in respect of its investments. As part of its business, the Group invests in debt securities and other Contracts with third parties and suppliers are assets in order to meet its obligations to policyholders. As a result of governed by strict service level agreements which this activity exposures can arise to issuers of debt and other financial are monitored and discussed at regular account instruments. The Group’s day-to-day activities also mean that it has management meetings. exposures to banking, insurance and reinsurance counterparties as well as third-party providers of IT and administration services. 12 Royal London Group Annual Report and Accounts 2014

Principal risks and uncertainties continued

Maintaining our financial strength continued

Principal risk and uncertainty Risk mitigation and management If the Group’s assumptions are subsequently proven to be In the event that actual claims experience is less favourable wrong then adjustments may impact on its financial position than envisaged, the Group’s reinsurance arrangements will provide significant mitigation. Additionally, the Group uses The Group’s business involves the underwriting of risks where the its experience to assess and set its prices for known risks and ultimate liability is dependent on long-term trends in factors such to make sure that reserves are appropriate. The calculation of as mortality, lapse rates, interest rates and counterparty defaults. reserves is underpinned by stress and scenario testing which The Group takes a prudent approach when calculating capital assesses the appropriateness of key assumptions to a combination requirements. However, extreme movements can take place. Such of extreme events, including financial and economic conditions, events could arise from, for example, medical science advances investment performance and product-specific matters. and movements in financial markets or in the broader economic environment. The Group may need to review assumptions if this did happen, potentially impacting its financial position.

Organisational delivery

Principal risk and uncertainty Risk mitigation and management Delivery may be impaired by the high level of change across The Group’s strategic and operational plans are regularly the Group reviewed by the Board. These take account of the Group’s resources and the scale and diversity of change currently under The Group has grown in recent years, and it has also completed way and planned for the future. internal change programmes to continually improve its capabilities and the experience of its customers. There is a remote risk that the Specific change reporting takes place at project, programme, Group’s continued growth plans, combined with the significant amount portfolio and strategic execution level utilising a dashboard of of external change in markets, regulation and legislation, result in measures to ensure appropriate risk-based decisions are made and possible future inefficient or ineffective organisational delivery, with resources are allocated in an efficient and sustainable manner. consequential operational loss and/or reputational damage.

Material outsourcers and supplier relationships

Principal risk and uncertainty Risk mitigation and management Outsourced services may not meet regulatory or service The Group has a framework for the governance and oversight requirements of material outsourcer and supplier arrangements. It includes the requirement for executive approval prior to commencing In line with other large financial services organisations, the Group such arrangements together with policies and processes for the has a number of material relationships with outsourcers and service oversight and escalation of risks and issues to the attention of the providers. Whilst processing or specialist work is undertaken by these appropriate risk committees. organisations, the Group remains fully responsible for the oversight, management and performance of the outsourced activity. There is The business closely manages outsourcer and supplier a risk that we would be unable to meet our regulatory obligations relationships on an ongoing basis. As a minimum the governance following the failure of or a significant degradation in service received arrangements require that the Group’s customers do not face an from a service provider. increased level of risk due to an outsourced arrangement.

Brand transition

Principal risk and uncertainty Risk mitigation and management Brand transition The transition plan to move to the new single brand incorporates governance and processes that ensure we maintain existing In moving to a single strong brand the Group is aware there is an strengths and relationships with our customers. inherent risk of diluting or damaging established strong reputations and customer relationships. Annual Report and Accounts 2014 Royal London Group 13

Business overview STRATEGIC REPORT MAINTAINING OUR STRENGTH GOVERNANCE IACA TTMNSERPA MEDDVLENTC FAM&RSLTOSADDITIONAL INFORMATION NOTICE OF AGM & RESOLUTIONS EUROPEAN EMBEDDED VALUE FINANCIAL STATEMENTS 14 Royal London Group Annual Report and Accounts 2014

Intermediary

Our Intermediary business performed strongly in 2014. Auto-enrolment provided a boost to our pensions business and we acquired new protection customers in a tough market.

As well as successfully rebranding Scottish We are proud of our achievements and will 2014 AWARDS Life, our intermediary pensions business, continue to work hard for our customers, as Royal London, we achieved record levels with the aim of delivering great results. of new business which saw us welcome nearly 30,000 new personal pension customers. Pensions We also supported 1,400 employers through 2014 was a year of significant change in auto-enrolment, with 110,000 plans being the pensions industry. We are proud to created as a result. have played such a leading role in bringing workplace pensions to thousands of customers Our protection businesses also ended the year who have never saved into a pension before. strongly and we are already seeing increased confidence in our proposition as a result of Our auto-enrolment proposition has been the service and underwriting enhancements extremely well received, with our market share we have made. increasing to 8.3% by the end of the third quarter. Despite the huge increase in business Despite the difficult market conditions, we’ve continued to provide an excellent service we introduced nearly 50,000 new protection to our customers. customers to Royal London and paid £227m in claims during the whole of 2014. The key to our success is a people-led approach built on sound principles of talking We were named 2014 Company of the Year to employers. at the Financial Adviser Service Awards, our first as Royal London. And both Bright Grey Our commitment to providing a great service and Scottish Life won five-star ratings for has allowed us to set out very clear guidelines excellent service, with Scottish Life awarded on how to set up an auto-enrolment this rating for the sixth year running. scheme successfully.

Growth in Intermediary business – Present value of new business premiums (PVNBP) £2,899m £3,432m £4,792m

2012 2013 2014 Annual Report and Accounts 2014 Royal London Group 15 STRATEGIC REPORT

We are pleased with the low opt-out Protection (Ireland) rates employers have experienced. Part Caledonian Life rebranded to Royal of this is attributable to our ability to London Ireland in December. We also deliver clear and timely communications launched a new Income Protection

110,000 GOVERNANCE to members. product, revamped our Specified Serious The number of new plans Illness product and launched three new Royal London created for Our strong performance in personal websites – consumer, broker, and a new the 1,400 employers that pensions was undoubtedly boosted by business and underwriting system. we supported through the auto-enrolment process the promise of greater freedoms for people`s pension pots announced by As well as these major new developments, the Chancellor in his April 2014 Budget it has been another successful year with statement. We are fully committed to new business up 15% on 2013. helping our customers understand these freedoms and we recognise that engaging One brand £227m with them at the right time as they During the year, we started to bring all ADDITIONAL INFORMATION NOTICE OF AGM & RESOLUTIONS EUROPEAN EMBEDDED VALUE FINANCIAL STATEMENTS approach retirement is critical. of our Intermediary businesses together The amount we paid out in claims under the Royal London brand. during the whole year of 2014 Protection (UK) We aim to build on the momentum Scottish Life and our Irish protection achieved in the UK protection market business, Caledonian Life, have both at the end of 2014. successfully rebranded to Royal London. Our UK protection businesses, Bright We believe there’s a real need for the Grey and Scottish Provident, will follow cover that protection products provide, suit in 2015. whether it’s a lump sum pay-out for critical illness, income protection or a Our vision is to build one trusted life policy. However, the industry has brand, committed to delivering the best made it difficult for customers and customer experience and outcomes. advisers to navigate the market by creating several complex products. Customer service Maintaining and improving our During 2014, we carried out extensive customer service was a core objective research and analysis to help us identify for 2014 and the many awards we have how we can better serve our customers won show we have made good progress. by improving our products and We have improved our online service so customer service. customers can access information quickly and easily and will ensure they continue In 2015, we will continue to focus on to benefit from our expertise by giving differentiating Royal London more them access to the right people. clearly from our competitors. We will achieve this by improving our support Working with advisers for advisers and providing simpler, 2014 was also a year of great change for bolder products that deliver the features financial advisers. We are passionate our customers want. We are also working about the value of impartial advice and with reinsurers to consider how we can we will continue to work with advisers Our strong performance in personal grow the protection market. so they can deliver good financial advice pensions was undoubtedly boosted and help our customers achieve the best by the promise of greater freedoms possible outcomes. for people’s pension pots announced by the Chancellor in his April 2014 Budget statement. We are fully committed to helping our customers understand these freedoms. 16 Royal London Group Annual Report and Accounts 2014

Maturities (n)

Sounds like: A collection of older people

Is actually: Financial instruments that are repaid with interest after a fixed term

Consumer

In 2014 we firmly established our new Consumer 2014 AWARDS division, which enables us to deal directly with customers with simple needs who may not be able to afford financial advice.

The Royal London name has started to appear Royal London brand and a step in the right on television and in other advertising as we direction to support Royal London’s ambition appeal directly to customers with our products. to provide financial education to our members We intend to continue raising our profile as we and customers. seek new customers in this area of growth for us. Royal London Plus, which encompasses To build the new Consumer division we have customers with policies originating from brought together existing operations under the companies including Royal Liver, United consumer banner, launched new products and Friendly and Refuge Assurance, also became made those products available through a wider known simply as Royal London. STAR201 RATING4 S range of channels, such as via the internet as well as by telephone and by post. In 2013 we bought the Co-operative DECREASING LIFE COVER Insurance Society Limited (CIS) from the One brand Co-operative Banking Group. In 2014 we During the year we brought MoneyVista, transferred this life insurance business into a our financial planning and education business, new sub-fund within Royal London because it into the Consumer division and rebranded it as is more efficient for us to manage the business Royal London Money Manager. This formed this way. Aside from giving former CIS part of the overall strategy to bring the vast customers confidence that their policies are majority of the Group’s activities under the backed by a stable, financially secure business, Annual Report and Accounts 2014 Royal London Group 17 STRATEGIC REPORT

we intend to improve the customer Annuity Bureau service they receive to a consistent level Changes to the rules around annuities in order to help us to meet our aspiration announced in the April 2014 Budget to be the most recommended and trusted have given consumers greater flexibility

life insurer in the UK. In 2015 we will in what to do with their pension pot GOVERNANCE be incorporating former CIS customers in retirement. into the Royal London Group further, for example by including them in the Royal London had already been Group Customer Experience review led working on plans to improve the annuity by the Insights team. options we offer our existing customers and in the first half of 2014 we launched Award-winning new products an Annuity Bureau. The bureau is launched designed to help customers shop around As already detailed in our Group Chief and find the most competitive annuity Executive’s statement (see page 06), we rates as they approach retirement. ADDITIONAL INFORMATION NOTICE OF AGM & RESOLUTIONS EUROPEAN EMBEDDED VALUE FINANCIAL STATEMENTS To build the new Consumer division launched two new products in the third It is available to our 4 million direct we have brought together existing quarter of 2014, an Over 50s Life Cover customers and they can now compare operations under the consumer product and an online Life Insurance both standard and enhanced annuities banner, launched new products and made those products available product. Both have been recognised as from 10 leading annuity providers. through a wider range of channels, being innovative and customer friendly, Customers using the bureau are receiving such as via the internet as well as by and have won a number of awards since an improved income in retirement of telephone and by post. their launch, including the Defaqto between 10% and 40%. Fewer customers five-star award for the Over 50s cover. are choosing annuities now that We also won the award for Best Life the regulations have been changed, Insurance provider for our new Life but for many people annuities are a Insurance product at the 2014/15 good option and the bureau allows Personal Finance Awards, voted for customers to get the best value from by 11,000 customers. the products available.

Building these products involved extensive Developing channels research into the needs of customers and As well as new products, 2014 was also how best to meet them. For instance, the about helping customers to interact with Over 50s product is the only one in the Royal London in new ways. Customers market where, if a customer is halfway can now buy our products online using through their policy’s term, we will pay a computer, tablet or smart phone, or out a reduced benefit, even if the customer over the telephone. is no longer able to make their payments. In most cases, customers who stop making We have also improved access to payments lose all of their accumulated our financial education material value. Our product is different. online, and made it available to both 10–40% customers and the public. Our glossary Our Life Insurance is simple, quick of financial services terminology, Customers using the Annuity and easy to buy online, and totally something we call ‘Finglish’, was Bureau are receiving an transparent. The price we quote is the launched on our website in October, improved income in retirement price the customer will pay on every giving common-sense translations of of between 10% and 40% single occasion, in contrast to most financial services jargon. other similar products. The future We have been encouraged by the positive We are investigating a range of new response to our initial marketing of propositions, particularly in the 167% these new products, from both existing retirement and savings areas, and new customers. More extensive to complement the new products The amount by which new business marketing will begin in 2015. we have launched so far. in the protection consumer market is up (to £8m) on last year 18 Royal London Group Annual Report and Accounts 2014

Active investment (n)

Sounds like: An uncomfortable form of financial aerobics class

Is actually: Buying and selling shares in order to make a profit on a short-term basis

Wealth

Royal London’s Wealth division consists of two investment-related businesses. Royal London Asset Management (RLAM) manages assets on behalf of internal and external customers, with the aim of delivering strong investment returns. Royal London Platform Services (RLPS) is Royal London’s independent wrap platform service which trades as Ascentric and enables advisers to manage their clients’ long-term savings and investments.

RLAM propositions, the RL UK Equity Income At the end of 2014 RLAM had £82.3bn of Fund proved attractive, with strong sales AWARDS 2014 funds under management, a growth of 12% throughout 2014. Fixed Income Manager of the Year on last year. RLAM won several awards during 2014, particularly across its bond Investment backdrop products, including Fixed Income Manager Investment conditions were volatile of the Year in the European Pensions throughout 2014. Despite speculation about and Professional Pensions Awards. This a potential rate rise, interest rates remained recognition highlights RLAM’s strength in low and correspondingly, gilt yields fell during fixed interest, an important area of expertise the year. Weaker than expected global activity and one which proved attractive in the low- led to economic growth forecasts being interest-rate environment that prevailed in revised downwards. Stockmarkets responded 2014, with strong inflows into our credit with considerable volatility in the final few funds reflecting this. Among RLAM’s equity months of the year. Quantitative easing, the Annual Report and Accounts 2014 Royal London Group 19

mechanism by which governments have RLAM has developed a particularly Officer (CIO). We wish to thank Robert been pumping money into the financial strong market position in the charitable for his contribution to RLAM’s success STRATEGIC REPORT system, was announced by various sector as well as with universities, local over the past 10 years. central banks globally to be withdrawn, authorities and churches. This presence tapered and increased in differing is supported by RLAM’s products at the RLPS (Ascentric) measures, prompting market skittishness lower end of the risk spectrum and is RLPS is Royal London’s independent throughout the year. The build-up of complemented by the addition of a range wrap platform, and trades under geopolitical risks also generated some of sustainable funds introduced with the the Ascentric brand to underline nervousness in the second half of 2014. acquisition of The Co-operative Asset its independent approach. RLPS’s Against this low-growth, low-yield Management (TCAM). technology-based service enables financial backdrop, RLAM’s income-generating advisers to manage their clients’ long- products, in particular, fared well. In addition to strong inflows, RLAM term savings directly by choosing which saw limited outflows of funds, something funds to invest them in. Assets under Returns for Royal London members that afflicted many of its peers, and this administration (AuA) growth continued The funds of the Royal London Group meant that retention levels were good. in 2014, up 22% in line with the market. GOVERNANCE represent around 73.5% of the total Sales revenue from existing customers assets managed by RLAM. RLAM’s made an important contribution across This means focus during the year was strength in fixed income proved an asset both channels, as did sales from new on the ongoing project to replace the in these conditions, along with a strong direct sources. platform’s back-office technology with track record in UK equities. Some 44.1% delivery due in 2015. This back-office of RLAM’s funds were first quartile over Products upgrade will place RLPS amongst a the year. RLAM launched the RL Absolute select number of platforms using state- Return Government Bond Fund in of-the-art technology, providing the The Royal London Long-Term Fund November 2014. It is an important business with a number of enhancements delivered a return of 13.0% during the strategic step in broadening the fixed- and efficiencies. Operating in an ADDITIONAL INFORMATION NOTICE OF AGM & RESOLUTIONS EUROPEAN EMBEDDED VALUE FINANCIAL STATEMENTS year against a benchmark return of income product range, and enhances increasingly competitive marketplace, 13.1%. It outperformed its benchmark a now full-spectrum sovereign bond RLPS maintained its market share. over three years, delivering 31.72% offering. The proposition is unique against a benchmark return of 28.59%. within the industry at the moment and The retirement changes in the is aimed at investors seeking to benefit Chancellor’s 2014 Budget will have External sales from increased volatility in government a significant impact on the platform Once again, RLAM had a successful bond markets whilst maintaining steady, market. Platforms enable customers to year in attracting assets from customers absolute returns. move their money seamlessly between outside the Royal London Group. different wrappers and provide access Integration of TCAM and RLAM to a very broad range of investments. RLAM’s wholesale business generated During the year, the asset management Usage will increase as advisers look for some £2bn gross in new assets during business of the Co-operative, acquired solutions for their clients’ income needs. the year. These flows came from a range in 2014, was integrated into RLAM. RLPS has already seen a year-on-year of sources, including wealth managers TCAM, as the business was known, increase of 77% in drawdown business and discretionary fund managers, has now been fully assimilated. During since the budget announcement. Current financial advisers, multi-managers and the year, RLAM insourced some of the predictions are that from April, 70% of wrap platforms and other third parties. property and overseas equities funds that the funds which advisers would have Wholesale has been an important had previously been managed externally, historically placed in annuities will now growth area for RLAM, with products without affecting the investment go to drawdown. RLPS is well placed to within some of the best-selling sectors performance of these products. A team take advantage of this market opportunity, gaining significant market share. of 14 people from TCAM transferred and will be in the market with both to our Wilmslow office bringing, Flexi-Access Drawdown (FAD) and RLAM’s institutional business targets specifically, their expertise in sustainable Uncrystallised Fund Pension Lump Sum charities, pension schemes, corporations, investments and corporate governance. (UFPLS) options in April 2015. local authorities and insurers. Institutional business generated gross sales of £1.5bn. In October, Royal London’s Cash During the year, it was announced that Management business (RLCM) was Jon Taylor, former CEO of RL (CIS) transferred into RLAM. Previously a Ltd would become Managing Director subsidiary of the Royal London Group, of RLPS whilst Hugo Thorman, RLPS’s RLCM had worked closely with RLAM previous managing director, would since its acquisition in 2001. The transfer become Chairman of the company. Hugo 73.5% was executed successfully, with all of stepped into this role in January 2015. RLCM’s existing clients opting to move their contracts to RLAM. Platforms such as RLPS remain a growth The proportion of total assets area in the asset management industry, under RLAM management that are represented by Royal London Senior leadership team and are continuing to take overall market Group funds We announced in January 2014, that share within the long-term savings Piers Hillier would be taking over from market. RLPS is well positioned to Robert Talbut as Chief Investment continue benefiting from this change. 20 Royal London Group Annual Report and Accounts 2014

Our corporate responsibility

We want to ensure that responsible behaviour is integrated into the way we do business at Royal London.

Across the Royal London Group, corporate We aim to work with companies that have responsibility is focused on four main areas: good corporate responsibility credentials. the environment, the community, the Part of our criteria for partnership is that they marketplace and our people. demonstrate best practice – such as Mitie who manage the waste from our sites, TNT who We are absolutely delighted that With over £82bn of assets under management, deliver our mail and DataSpace who look after Royal London, a true partner for RLAM has a responsibility to use its our off-site file storage. English cricket, has chosen to offer generous support to the PCA investment strength to promote positive Benevolent Fund. With their help, corporate behaviour to the benefit (in terms of Community we will be able to offer more help long-term performance) of our clients and the Our community programme supports to more people, and for that we are wider community. The concept of sustainable the communities in which we work and very grateful. investment is a key part of our product live. Activities include a national charity offering and we take a proactive approach to partnership and a matched donation scheme. promoting best practice in the companies in We also offer people at Royal London the which we invest. chance to make regular tax-free donations to their favourite charitable causes through the RLAM is a responsible investor across all Give as You Earn scheme. Angus Porter our funds as we follow the six principles Chief Executive, established by the United Nations’ Principles In 2013 we started our partnership with Professional Cricketers’ Association for Responsible Investment (UNPRI) and we Leukaemia & Lymphoma Research (LLR) are evaluated against them every year. and over the past two years raised over £100,000, with fundraising activities and Environment events taking place all over the UK. Staff We strive to minimise our environmental have taken part in Group-wide quizzes and impact and have set up a number of initiatives raffles, as well as other fundraising activities. to reduce our carbon emissions, limit waste The money raised will be used to aid LLR and develop sustainable environmental in their mission to stop people dying of practices. There are four key areas of focus blood cancer. We will continue to work with for reducing our environmental impact. LLR throughout 2015 whilst we review our corporate responsibility strategy. [[ Switching off lights, PC monitors, printers and photocopiers when they are not needed. In November 2014, we announced Our environmental management system a new partnership to sponsor the Professional (EMS) tracks our energy consumption and Cricketers’ Association (PCA) Benevolent carbon footprint; Fund until the end of 2017. As a registered Royal London colleagues across the [[ Carbon offsetting for all business flights. charity, it sits at the heart of the PCA’s country have thrown themselves commitment to help current and former into a huge variety of fundraising Flight levies are added to bookings made via activities and events for Leukaemia Portman Travel, with the money raised sent players and their dependants in times of & Lymphoma Research. Their team to The Woodland Trust, a registered charity, hardship, and to readjust to their world spirit and dedication to the cause who plant sufficient trees to offset the carbon beyond the game. This partnership represents has already seen them raise an incredible £90,000 over almost two produced by these flights; an important development in our existing cricket sponsorship and reflects one of the core years, and they look set to smash [[ Increased recycling. By effectively sorting the their £100,000 target. All the business functions of Royal London: helping money they have raised will help us material we discard, we reduce the amount people plan for their financial future. in our mission to beat blood cancer of waste going to landfill by around 30% and – stopping people from dying and reduce the cost of removing our waste by the In 2015, we’ll be launching a new grassroots making patients’ lives better. same; and programme designed to find our cricket [[ Reducing the quantity of electrical and stars of the future. It will take the form of a electronic equipment waste going to landfill national eight-a-side tournament, encouraging and incineration and increasing its re-use, boys and girls under the age of 11 to recovery and recycling in accordance with participate in more club-level cricket during the Waste Electrical and Electronic the summer holidays. The national final will Rachel Norris Equipment Regulations. be played during the One-Day Cup final at Account Manager, Lord’s in front of thousands of fans. Leukaemia & Lymphoma Research Annual Report and Accounts 2014 Royal London Group 21 STRATEGIC REPORT

RLAM has built a strong relationship which helps customers and members by publishing our voting track record every with the East London Business providing them with a personal financial six months. We continue to invest time Association to help support the planning tool alongside 200 guides to and expertise in developing systems to community in which we work. Staff aid their understanding. manage our risks effectively and since share their skills with organisations the introduction of the Solvency II EU in the borough of Hackney, as well as Our fight against ‘Finglish’ –the directive we have updated our computer- supporting students, small businesses financial services English thatvery few based employee training programme and and others living and working there. understand – also continues. During made its completion part of the Group’s They also support St Joseph’s Hospice, 2014, we encouraged 3,000 of our people short-term incentive plan. We also a charity that provides care for anyone to join the mission and avoid financial produced a guide to Solvency II for all with serious and life-threatening jargon wherever possible. At Royal managers in our business. These actions GOVERNANCE conditions, both in the hospice and London we believe in the importance of were designed to ensure that everyone in patients’ homes. plain English: we want our customers to at Royal London understands the understand and engage with us. So we implications of the directive and the part Marketplace have started translating terms such as we all play in ensuring full compliance. Our products and services help people ‘augmentation’ and ‘decumulation’ into take responsibility for planning their clear and simple language – the Finglish Workplace financial affairs and we regularly monitor dictionary continues to grow! To help We want everybody who works at Royal them to ensure they offer good value. people get to grips with Finglish, we have London to feel pride and a sense of We take care to invest responsibly and launched a glossary on our website belonging to the company. As an equal manage our risks effectively, and we are (www.royallondon.com/financialguidance) opportunities employer we offer career ADDITIONAL INFORMATION NOTICE OF AGM & RESOLUTIONS EUROPEAN EMBEDDED VALUE FINANCIAL STATEMENTS committed to putting our customers and we will be expanding this to gather prospects without discrimination and first, making sure we continue to more submissions. As we continue to have established policies for recruitment, improve our products and services to bring the businesses under a single training and development and flexible meet their needs. Royal London brand, we hope, over time, working. Our people have the help to review all customer-facing documents they need to stay healthy and safe, are An estimated 33 million UK adults and remove unnecessary jargon. rewarded for their contribution and have do not currently use any form of the opportunity to give their feedback. professional advisory service to develop At Royal London we want our customers We were pleased that 84% of our people an understanding of their financial to think of us as a company they can responded to our annual employee position. We continue to seek to trust and recommend, but in order to engagement survey in 2014 and we improve financial education through be this company, we need to deliver our achieved our highest score yet. the Royal London Money Manager customer values. By analysing research, The results tell us our people feel: we have identified the 10 areas that matter the most to the customer – these [[ they are treated with respect; are our ‘customer value statements’. [[ they are able to suggest ideas to We have shared these with the FCA as improve things; and a demonstration of our commitment to putting the customer at the heart of the [[ Royal London treats customers business; by meeting expectations in fairly and is committed to delivering each area, we will deliver an excellent customer satisfaction. experience. Our customer value statements also help us understand We are keen to make sure our reward the risks we face if we don’t deliver programme is extensive and varied. Please pass on our thanks to all a fair outcome. For example, without Alongside a competitive remuneration your colleagues at RLAM who easy-to-understand communication, package, bonus scheme and benefits have been fundraising for us there is a risk that our customers won’t including holidays, pension schemes and over the past year. Your support has been fantastic, whether it’s have the information they need to make private medical insurance, we recognise baking, taking part in a dress down the right decisions. the value of having some choice. Our or following the fortunes of the voluntary benefits include dental and X Factor hopefuls in your office We also review the governance travel insurance and the ‘Cycle 2 Work’ sweepstake! Thank you so much. arrangements of companies in which scheme. There is also a range of family- we invest. We look for, and encourage, friendly initiatives, including childcare good governance with the aim of vouchers and flexible working. So far improving the long-term returns to we have helped 480 people to improve members and to reduce the risk of poor their work-life balance. In addition, returns resulting from bad strategic we encourage all staff to take part in Helen Fleming decisions. In this reporting period, we volunteering days; they can apply for up Head of Corporate Fundraising, have continued to bring pressure to to two days of volunteering per year. St Joseph’s Hospice bear on companies through an active In 2014, these took place mostly at approach to corporate governance, schools and family centres. 22 Royal London Group Annual Report and Accounts 2014

Group Finance Director’s review REACHING NEW HEIGHTS Annual Report and Accounts 2014 Royal London Group 23

I am delighted to present the Royal

London Group results in my first STRATEGIC REPORT review as Group Finance Director.

I joined the Group in May 2014, taking Our closed sub-funds remained self- over from Kerr Luscombe, whom I would sufficient and required no support from like to thank for his support during the Royal London Open Fund. our handover period. A great deal was achieved during 2014 and in this review Returning value to our with- GOVERNANCE I explain the financial outcomes for the profits policyholders year in further detail. As a mutual, our We have returned good value to our financial priorities are to deliver good with-profits policyholders in 2014, financial returns to our members and through good investment returns on policyholders, whilst at the same time their policies and £285m of bonuses maintaining a strong and stable capital added to with-profits policies. We position for their ongoing security. also shared profits with qualifying Tim Harris In 2014 we have continued to perform policyholders by allocating £60m (after Group Finance Director well against these objectives. tax) through the discretionary Royal London Profit Share representing an ADDITIONAL INFORMATION NOTICE OF AGM & RESOLUTIONS EUROPEAN EMBEDDED VALUE FINANCIAL STATEMENTS Financial summary enhancement to qualifying with-profits We achieved a strong underlying policies of 1.15% (2013 1.7%). operating result in 2014, with strong new business in the Intermediary division and Key developments in 2014 continued successful performance by the Integrating CIS, its subsidiaries and Wealth division. We have also continued TCAM into Royal London was one of with the integration of CIS and its the year’s most important activities. In subsidiaries and TCAM operations December, the High Court approved the within our existing businesses and transfer of the assets and liabilities of the completed the Part VII transfer of the business known as Royal London (CIS) CIS insurance business to RLMIS. Limited. As a result Royal London paid As a mutual, our financial priorities the outstanding deferred consideration are to deliver good financial returns In 2014, our EEV operating profit from of £180m to the Co-operative Banking to our members and policyholders, continuing operations before exceptional Group. The assets and liabilities of whilst at the same time maintaining a strong and stable capital position items increased by 12% to £220m. This CIS were placed into a separate closed for their ongoing security. In 2014 excludes one-off items such as the gain sub-fund of Royal London called the we have continued to perform well arising on the acquisition of CIS in 2013 Royal London (CIS) Sub-Fund. against these objectives. and a charge of £61m in 2014 arising from the introduction of charge capping In addition to the transfer of RL (CIS) on defined contribution group pension Limited into a separate closed sub-fund schemes. As a result of these changes, of Royal London, we also undertook some of our members holding Royal a Part VII Transfer of the assets and London workplace pensions will pay liabilities of one of our subsidiaries, lower fees. The EEV result before tax of Royal London Pooled Pensions £195m (2013 £465m) reflects a reduction Company Limited, into the Royal in yields on government bonds to very London Open Fund. low levels at the end of 2014, the CIS business combination gain recognised in Another key development was the launch 2013, a decrease in the Royal London of the new direct-to-consumer offering, £60m Group Pension Scheme surplus and an with the first products rolled out in the increase in financing costs. latter part of the year. It is still early days The amount allocated to eligible and the direct-to-consumer business is with-profits policyholders Capital strength not yet making a significant impact on (after tax) through the Royal Our Insurance Groups Directive (IGD) our results, but we expect it to begin to London Profit Share regulatory capital surplus increased by increase its contribution to the Group 23% during the year to £3,390m as a result in 2015. result of strong business performance performance and improvements arising The result of this year’s performance from the Part VII Transfer of the CIS is that Royal London has produced business. Realistic working capital rose good returns for its policyholders and by 10% to £3,392m. strengthened its capital position. 24 Royal London Group Annual Report and Accounts 2014

Group Finance Director’s review continued

Financial review Fund implementing the regulatory and a £61m exceptional cost in 2014 arising reporting requirements of Solvency II, from the 0.75% charge cap applied to EEV results and an increase in strategic development defined contribution pension schemes. The life insurance industry has a number costs, investments we believe are of ways of measuring profitability. important for our future competitiveness, Given its size, we have presented We believe the most meaningful and that we expect will deliver good this exceptional charge in our EEV measure currently available for Royal returns in the future. results as a separate line item below London is the European Embedded ‘continuing’ operating profit. Value (EEV) basis, and we focus our Our EEV operating profit includes: reporting around these numbers. Figures EEV profit before tax after reflecting based on the International Financial [[ £85m profits from continuing new the impact of economic variances Reporting Standards (IFRS) are also business written in the year, a 21% Profit before tax was down 58% to £195m included in this report. increase on last year (2013 £70m); on the previous year (2013 £465m). Key [[ £56m benefits from operating factors are those already described on EEV operating profit experience variances (2013 £29m); this page – the £61m exceptional cost EEV operating profit from continuing arising from charge capping on defined operations before exceptional items [[ £12m benefits from operating contribution group pension schemes increased by 12% to £220m (2013 assumption changes (2013 £48m), and the £150m exceptional gain in 2013 £196m). The increase is due to strong including the costs of Solvency II; from the acquisition of CIS, which new business performance and increased [[ £31m strategic development costs increased profitability in that year. A profitability from the Group’s existing (2013 £17m); and number of other factors also reduced the business. We also saw an improvement profit before tax result for 2014. They in the number of customers remaining [[ £42m charge from other items and include lower economic items due to the with the Group for longer than expected model changes (2013 £42m). impact of the fall in yields on government and we also incurred lower expenses bonds at the end of 2014, a decrease in than expected, because we improved Exceptional items the surplus of the Royal London Group our operating efficiency. The strong Total EEV operating profit decreased Pension Scheme (RLGPS) of £42m result was achieved despite a £51m by 48% to £159m due to a one-off and increased financing costs reflecting charge, representing costs we expect gain of £150m recognised in 2013 the impact of our subordinated debt to incur in the Royal London Open on the acquisition of CIS, and refinancing exercise in 2013.

EEV operating profit from continuing operations before exceptional items* £235m £225m £228m £196m £220m

2010 2011 2012 2013 2014 * All results exclude RL360°, which was disposed of during 2013. Annual Report and Accounts 2014 Royal London Group 25 STRATEGIC REPORT

New business results Life and pensions new business margin This means our investment returns On a like-for-like basis and calculated New business margins for Pensions were better than we expected at the on the present value of new business increased slightly from last year. start of the year. The results also include premiums (PVNBP), we saw our life and In Intermediary Protection 2014 £143m of negative economic assumption pensions new business increase by 39% margins benefited from increased new changes because we have downgraded on the previous year. business contribution which rose due our expectation of future investment to a lower discount of future revenues performance due to lower market interest Performance in our Pensions business as yields on govenment bonds fell rates at the end of 2014 compared to the was a significant factor in the overall in December 2014 compared with end of 2013. strong new business results, whilst December 2013. the Intermediary Protection business Movement in Group pension GOVERNANCE suffered from difficult market RLAM’s PVNBP was down 5% to scheme surplus conditions. Our Consumer business saw £3,755m, reflecting an exceptionally Our reported results for the year were improved new business results, mainly as high performance in 2013. impacted by the £42m reduction in the a result of the launch of our new direct- surplus of the RLGPS in 2014. The to-consumer range. The overall result Our new business results are shown in decrease is mainly due to a reduction in the was an increase on the previous year with the table below. rate used to discount the scheme liabilities, changes in new business sales for: which reflects a reduction in the yields Total life and pensions business PVNBP available on high-quality corporate bonds. [[ group pensions up by 83%; The chart below shows the significant IACA TTMNSERPA MEDDVLENTC FAM&RSLTOSADDITIONAL INFORMATION NOTICE OF AGM & RESOLUTIONS EUROPEAN EMBEDDED VALUE FINANCIAL STATEMENTS [[ individual pensions up by 25%; growth in the value of the Group’s new This was only partially offset by the life and pensions business premiums over investment returns on the scheme [[ drawdown up by 43%; the past five years. assets and lower expectations of future [[ intermediary protection down by 23%; inflation. The 2014 results also allow for and Impact of economic variances the triennial actuarial valuation which Our results for 2014 benefited from was completed in June 2014. The impact [[ consumer protection up by 167%. £325m positive experience variances. of allowing for the new valuation was a slight decrease in surplus mainly due to expectations that people will live longer. Growth in new life and pensions business premiums PVNBP We also operate two schemes for £2,775m £2,893m £3,160m £3,464m £4,826m ex Royal Liver employees. The surpluses of these schemes are included as part of the valuation of the closed Royal Liver Sub-Fund and therefore do not count towards the surplus position of the Royal London Open Fund. The combined Royal Liver scheme surplus as at 31 December 2014 was £80m (2013 £61m).

The Group continues to work closely with the Trustee Boards to assess options 2010 2011 2012 2013 2014 for reducing the schemes’ exposures to market volatility. New business results

New business PVNBP New business margin contribution1 2014 2013 2014 2013 2014 2013 £m £m £m £m % % Intermediary Pensions 55.6 26.7 4,454 2,996 1.2 0.9 Protection 22.7 20.0 338 436 6.7 4.6 Consumer (12.9) 0.9 34 32 (38.3) 2.8 Continuing life and pensions business 65.4 47.6 4,826 3,464 1.4 1.4 RLAM 29.9 30.7 3,755 3,933 0.8 0.8 Total continuing business 95.3 78.3 8,581 7,397 1.1 1.1 1 New business contribution in the table above has been grossed up for tax at 21% (2013 23%). We have done this to help compare our results with the results of shareholder-owned life insurance companies, which typically pay at 21% (2013 23%). 26 Royal London Group Annual Report and Accounts 2014

Group Finance Director’s review continued

IFRS results amortisation of certain intangible assets, The IFRS result from continuing which are recognised in the IFRS results Presentation of our results operations for 2014 was a profit of £416m but not in EEV, and the embedded value As a mutual business, our Group (before tax and before deducting the profits of our asset management business, financial results presented in Profit share of £60m) (2013 £526m). which are recognised in EEV operating this Annual Report and Accounts represent the full movement in As with the EEV results, the fall on profit but not in our Operating profit basis. the year in the value of the Royal last year is primarily due to an increase London Open Fund. Our reported in underlying operating profit offset Our 2014 Operating profit from profit does not include the profits by exceptional items, smaller positive continuing operations was £131m of closed sub-funds, since we economic variances, a decrease in (2013 £312m). retain the surpluses of closed funds for the benefit of with-profits the surplus of RLGPS and increased policyholders who are invested in financing costs. The table below reconciles our those funds. Operating profit to the IFRS total Operating profit transfer to unallocated divisible surplus. This differs from the way that We mainly focus on the EEV basis for shareholder-owned life insurance assessing our operating performance, IFRS balance sheet companies present their results. For these companies, the profit as we believe that this is the most Our IFRS unallocated divisible surplus or loss for the year is only that meaningful measure of our business. has increased to reflect the transfer of attributed to the company’s £134m in the year. Our balance sheet shareholders and is generally In order to present a better remains robust, and there were no restricted to 10% of the understanding of the underlying significant asset impairments in the year. distributable surplus in the with- profits fund and all the surplus from operating performance of the Group, the non-profit business. Amounts Operating profit excludes certain Our total investment portfolio, including attributable to policyholders are items which are outside management investment property, is £64,219m, an retained separately and are not control. In particular, it excludes the increase on 2013 of 14%, largely due to included in reported profit. impact of investment fluctuations, an increase in debt and fixed income. Our economic assumption changes and asset portfolio remains high quality, with movements in the pension scheme the majority of our bond investments surplus. It also excludes methodology in higher grade assets rated A or above. changes, for example changes to our Some 49% (2013 53%) of our asset future investment assumptions which, portfolio is in fixed income investments although under control of management, and cash. The Group’s exposure to are a direct response to investment sovereign debt from Portugal, Italy, market movements. Ireland, Greece and Spain amounted to 0.1% (2013 0.1%) of the total assets on the Our Operating profit (on an IFRS basis) balance sheet, thereby limiting our direct is broadly similar to our EEV operating exposure to potential adverse effects from profit, the main differences being the ongoing Eurozone uncertainties.

Reconciliation of Operating profit to IFRS total transfer to the unallocated £192m divisible surplus Operating profit (IFRS basis) 2014 2013 continuing operations before £m £m exceptional items Operating profit before business combinations 192 187 Gain arising on business combinations - 125 Charge Cap (61) - Operating profit 131 312 Adjusting for the following items: £416m

Investment return variances and economic IFRS result before tax and Profit assumption changes 336 244 share from continuing operations Net gain/loss on Group pension schemes recognised in result before tax (8) - Finance costs (43) (30) Profit share (60) (81) IFRS profit before tax 356 445 Tax charge /(credit) 207 73 Discontinued operations - (42) Other comprehensive income (15) 7 Total transfer to unallocated divisible surplus 134 337 Annual Report and Accounts 2014 Royal London Group 27 STRATEGIC REPORT

Capital strength Our capital position improved under all Our excess realistic capital increased due measures, even after deducting the Profit to the overall positive result for the year One of our key financial priorities is share, reflecting the overall positive and the recognition of an asset in the to manage our capital levels effectively, result for the year. Royal London Open Fund relating to in order to provide security and the the administration of the CIS sub-fund, freedom to pursue good financial returns Excess regulatory capital has increased as described above. for our policyholders and members. by 23%. The transfer of the assets and liabilities of RL (CIS) Limited into a We report the Group’s capital on the separate sub-fund of Royal London in two PRA Pillar 1 bases: December 2014 had a significant impact

on the regulatory capital position. GOVERNANCE [[ The regulatory (Insurance Groups Directive) basis; and As a result of the transfer Royal London [[ The PRA realistic balance sheet was able to recognise an asset of £200m (realistic) basis. The realistic capital in our regulatory capital that previously basis underpins our IFRS and EEV could not be recognised. valuations. IACA TTMNSERPA MEDDVLENTC FAM&RSLTOSADDITIONAL INFORMATION NOTICE OF AGM & RESOLUTIONS EUROPEAN EMBEDDED VALUE FINANCIAL STATEMENTS

Regulatory capital

2014 2013 Excess regulatory capital £m £m Total available regulatory capital1 13,366 9,103 Capital requirement (1,341) (1,229) +23% £3,390m Additional with-profits requirements2 (8,635) (5,125) £2,749m Excess regulatory capital 3,390 2,749 £2,374m 1 Includes tier 2 capital. £1,906m 2 The additional with-profits requirements represent the regulatory surpluses in the closed sub-funds. These are held for the benefit of the policyholders invested in them and therefore do not count towards £1,597m the Royal London Open Fund excess regulatory capital.

2010 2011 2012 2013 2014

Realistic capital

2014 2013 Excess realistic capital £m £m Realistic working capital (before closed fund transfer commitments)1 6,459 4,046 +10% £3,392m Closed fund transfer commitments2 (3,052) (972) £3,074m Total working capital 3,407 3,074 £2,496m Risk capital margin (15) 0 £2,097m £2,087m Excess realistic capital 3,392 3,074 1 Includes tier 2 capital. 2 Closed fund transfer commitments represent the realistic working capital of the closed sub-funds, which is retained for the benefit of policyholders in those funds.

2010 2011 2012 2013 2014 28 Royal London Group Annual Report and Accounts 2014

Group Finance Director’s review continued

Royal London with-profits investment performance Royal London with-profits performance RLAM invests assets on behalf of our customers and achieved good returns on 13.1% these during 2014. The FTSE 100 ended the year at 6,566, which was 3% below 11.9% its value of 6,749 at the end of 2013. 11.1% 10.6% 10.9% We measure RLAM’s performance against benchmarks constructed from 9.0% the performance of different types of 8.6% asset in the market. Each of our funds 7.8% has different benchmarks reflecting its asset mix. This helps us to ensure that 6.7% we are comparing like with like to assess 6.0% asset management performance.

In 2014, our investments backing the asset shares of the Royal London Open Fund achieved a return of 10.9%, which was an increase on 2013, but slightly behind benchmark. The chart top right shows the fund’s performance against benchmark for the past five years. 2010 2011 2012 2013 2014

The chart bottom right shows the Actual Benchmark performance of the different investments backing the asset shares of the Royal London Open Fund and compares these with their relevant benchmarks. Our Royal London with-profits performance by asset class 2014 investment returns were ahead of benchmark in property, UK equities 21.0% 20.7% and UK corporate bonds. As at 19.9% 31 December 2014 the different 19.6% investments backing the asset shares of the Royal London Open Fund were composed of 62% equities and property (2013 64%), 24% government bonds 14.2% (2013 23%), 13% corporate bonds 12.2% (2013 13%) and 1% other (2013 0%). 11.0% 10.0%

1.5% 1.2% RLAM invests assets on behalf of our members and achieved good returns on these during 2014. UK equities Overseas Property Government UK The FTSE 100 ended the year at 6,566, which was 3% below its equities bonds corporate value of 6,749 at the end of 2013. Actual Benchmark Annual Report and Accounts 2014 Royal London Group 29 STRATEGIC REPORT

Returning value to our members This reflects increases in many of our and policyholders bonus rates, but is lower in total because fewer policies matured in 2014, with £466m We have returned good value to our with- many endowments maturing in 2013. profits policyholders in 2014, through: We manage our with-profits funds and The total Profit share allocated by set bonus rates with the aim of being Royal London since 2007 [[ the investment returns achieved on fair to all policyholders invested in the their policies, which were slightly funds. When we decide bonus rates higher than those seen in 2013; we need to consider the policyholders [[ the payouts that were paid to maturing who will remain in the fund as well as policies during the year, which compare those whose policies mature or become GOVERNANCE 1.15% well with our industry; and claims. We also need to maintain the strength of the funds and protect the [ The enhancement to qualifying [ Royal London Profit Share, which long-term interests of current and future policies’ asset shares due to although reduced this year, still policyholders and members. 2014’s Profit share amounts to a 1.15% enhancement to the qualifying policies’ asset shares Annual bonus rates for 2014 remained (£60m in total). unchanged at 0.5% for Royal London conventional with-profits life policies With-profits policyholder bonuses and have been increased for Royal We added £285m of bonuses (2013 London accumulating with-profits ADDITIONAL INFORMATION NOTICE OF AGM & RESOLUTIONS EUROPEAN EMBEDDED VALUE FINANCIAL STATEMENTS £318m) to with-profits policies in 2014, pension policies, from 1.5% to 2.0%. as follows: The annual bonus rates for Royal London unitised with-profits policies 2014 2013 were increased from 2.0% to 2.5%, £m £m with the exception of Royal London Annual 73 52 with-profits insurance ISA (which was Interim 12 11 increased from 0.5% to 1.0%) and the UWP personal pension (which remained Final 200 255 unchanged at 1.35%). Total 285 318

FTSE (footsie) (n)

Sounds like: What you play under the table on a date

Is actually: An index of the average share prices of the largest 100 companies quoted on the London Stock Exchange 30 Royal London Group Annual Report and Accounts 2014

Group Finance Director’s review continued

Profit share Fund policies. We are showing this time From this year onwards, the mutual period because this is the policy duration dividend will be known as the Royal with the greatest volume of maturities London Profit Share. This is to in 2014. As the chart shows, we paid out avoid confusion with dividends paid higher returns than the active industry by publicly-quoted companies to average and also higher returns than their shareholders. Profit share more a number of shareholder-owned UK accurately reflects the nature of this insurers. We make the comparison discretionary allocation, which is with shareholder-owned insurers calculated on the basis of EEV operating because there are no other mutual profit and the Group’s capital strength. insurers in the UK market of a comparable size to Royal London. An We have allocated a Royal London equivalent chart would show a similar Profit Share to all eligible with-profits profile compared to our peers at 20 and policyholders, which shares the benefits 25 year maturities, although our payouts of our performance. Based on our are slightly below the industry average performance in 2014, this has enabled for these longer maturities. us to allocate a discretionary Profit share of £60m or £64m before tax (2013 £81m Payments to protection policyholders or £86m before tax). During the year, we paid £227m in claims to policyholders and their We have applied the Royal London families based on life and critical illness Profit Share by enhancing the asset policies (2013 £192m). Some 95% of shares of relevant policies. This claims were paid. represents an enhancement to the relevant policies’ asset shares of Unit-linked investment returns approximately 1.15% (2013 1.7%). Members holding pensions invested in our Governed Portfolio range enjoyed We started allocating the Profit share in returns in line with benchmark over 2007, and the total Profit share allocated 2014. Seven out of the nine portfolios to members since then amounts to £466m. were ahead of benchmark for the six-year period following launch. Over 2014, the Comparison of our payout with Governed Portfolio range accounted for other providers 83.9% of new business premiums into The chart below illustrates our typical our pension portfolio and Retirement payout for 15-year Royal London Open Solutions contracts.

Illustrative payout on 2014 maturity of a £50 a month 15-year with-profits endowment policy £12,530 £12,205 £11,913 £11,022 £11,072 £10,626

Royal Active Prudential Norwich Standard Scottish London industry Union Life Widows average

Source: ‘Money Management’ April 2014 Active industry average excludes providers which are distributing their remaining large estates to just a few policyholders. Annual Report and Accounts 2014 Royal London Group 31 STRATEGIC REPORT

Overview of other key finance activities Forward-looking statements This strategic report contains Solvency II forward-looking statements with respect to certain of Royal Solvency II is a major European Union We are committed to our mutual status. London’s plans, its current goals We’re owned by our members and we want our directive that will transform how we and expectations relating to its members to benefit from our successes. Over the manage and report risk and capital. It future financial position. By their past decade we have given £466m in Profit share nature, forward-looking statements will be implemented from January 2016, back to our eligible with-profits policyholders. and we have a significant programme involve risk and uncertainty because under way to ensure that we are well they relate to future events and circumstances which are beyond GOVERNANCE positioned to deal with the additional Royal London’s control. requirements. The final details of Solvency II requirements are still not These include, among others: clear. Whilst we do not anticipate To ensure this we have agreed with our [[ UK economic and business material impact on policyholder bonuses regulators that an independent expert conditions; or Royal London Profit Share, this should review our proposals to ensure that [[ market-related risks, such as will depend on how the regulations are our plans are fair. Our Board will consider fluctuations in interest rates; [ finalised and interpreted by the industry the independent expert’s views later this [ the policies and actions of governmental and regulatory and our regulators. However, we will year and decide whether we can proceed authorities; continue working to ensure we can with what we believe is an exciting and [ [ the impact of competition; and ADDITIONAL INFORMATION NOTICE OF AGM & RESOLUTIONS EUROPEAN EMBEDDED VALUE FINANCIAL STATEMENTS maintain or manage our risks whilst innovative strategy. We’ve made good [[ the timing, impact and other meeting our commitments to customers. progress but there is still a lot to do and we uncertainties of future hope to say more about this later this year. mergers or combinations Ratings agencies within relevant industries. Royal London has good financial strength Mutuals’ Deferred Shares Bill As a result, Royal London’s and a stable outlook, meaning members We welcome the recent Mutuals’ Deferred actual future financial condition, and policyholders can be confident they Shares Bill, which at the time of writing is performance and results may awaiting Royal Ascent. We will consider differ materially from the plans, are dealing with a secure company. goals and expectations set out in The agencies Standard and Poor’s and whether such instruments are relevant for Royal London’s forward-looking Moody’s have issued ratings on Royal Royal London and revert to members as statements. Royal London undertakes London for a number of years based the enabling regulations become clear. no obligation to update the forward- on several factors including financial looking statements contained in this document or any other forward- strength. During 2014 our ratings were Reinsurance looking statement it may make. unchanged: our Standard and Poor’s In May, we signed a £1bn longevity rating is A and our Moody’s rating is A2. reinsurance deal covering 70,000 CIS policies, which reduced risks for the Mutuality Royal London balance sheet. Strategic report We are committed to our mutual status. The 2014 Strategic Report, We are owned by our members and we Summary from page 02 to page 31, was want our members to benefit from our During 2014 we have delivered a strong approved by the Board of Directors on 31 March 2015. successes. Over the past decade we have operating result, which is enabling us to given £466m in Profit share back to our allocate the Royal London Profit Share By order of the Board eligible with-profits policyholders. to our eligible policyholders for another year. We have also seen a substantial One of the challenges we face is that the increase in our capital strength. This number of customers choosing traditional demonstrates our commitment to deliver forms of with-profits products has been value to our customers and members. declining – so fewer customers benefit Simon Mitchley from our Profit share each year. At the Looking forward, our financial priorities Company Secretary same time the number of our members continue to be to grow our profitable For and on behalf of Royal London who are not with-profits policyholders business lines, further improve our Management Services Limited has been increasing. We want to bring operational effectiveness, work to meet 31 March 2015 things back into line by extending the the requirements of Solvency II and scope of our Profit share – so that more manage the potential impacts of the new customers share in our successes – and capital requirements. hope to achieve this by launching a new form of with-profits product next year.

It is essential that we treat all of our customers, in particular our existing with- profits customers, fairly in the way we Tim Harris introduce these new with-profits products. Group Finance Director 32 Royal London Group Annual Report and Accounts 2014

Corporate Governance

TAKING THE LONG VIEW Annual Report and Accounts 2014 Royal London Group 33

Introduction from the Chairman STRATEGIC REPORT

A customer judges how a company is run largely by what it produces: good buns or bad, or for that matter, good insurance policies or not. GOVERNANCE

This section deals with the way Royal To be effective, the directors need a London is run, but from the other end complementary mix of skills, experience of the chain. The Group’s Board – who and personalities. ‘Diversity’ is the latest is on it, what it does, how it works – is of word to describe what has always been Nobody should doubt that what great interest to our members who own desirable, and in my view there is now seems a long way from the sharp the company and our regulators who healthy diversity on your Board. Details end of selling pensions, protection monitor it. But nobody should doubt that of each director are on pages 34 and 35. and asset management is, in what seems a long way from the sharp

fact, integral to the kind of ADDITIONAL INFORMATION NOTICE OF AGM & RESOLUTIONS EUROPEAN EMBEDDED VALUE FINANCIAL STATEMENTS company we are. end of selling pensions, protection and Although the Board itself consists asset management is, in fact, integral to of both executive and non-executive the kind of company we are. The tone directors, only the latter are on the six at the top echoes all the way through to committees that report to the Board. our customers. There are a few exceptions: that the Group Finance Director is a member For a company like Royal London, of the Investment Committee and this matters far more than it does for With-Profits Committee, and that a bunmaker. Much of what we do is the Group Risk Director is on Rupert Pennant-Rea very long term. We take money from a the Investment Committee. The Chairman customer over many years and invest it Committees cover Audit, Remuneration, throughout, before eventually starting to Risk, With-Profits, Investment and pay, for instance, a pension to him or her. Nominations, and have clear terms Our customers must be confident that of reference to prevent unhelpful we will be there for the long term, doing duplication whilst ensuring that things a good job with their money year after do not slip through the cracks. They do year. Regulators concentrate on that a lot of detailed work and help the Board same issue. Both groups want to be sure to make sure the Group’s activities are that their concerns are shared by the properly scrutinised. Board and staff. If I can single out one Committee, The Board has two main jobs that it it is Remuneration, not least because performs all the time, and one that is the pay of senior executives is so equally vital but only occasional. It (a) controversial. You will find a detailed sets the strategy for the Group, and then report from this Committee on pages (b) checks whether the strategy is being 52 to 70, so I will emphasise only followed and is achieving or exceeding one point: in financial services, most its goals. The job of actually running the bad outcomes – financial losses for business from day to day is the Group shareholders, disappointment for Chief Executive’s, and the Board will customers – can be traced back to badly judge him or her on that. From time to designed incentive schemes. They are time, when the Group Chief Executive not the only reason things go wrong, but leaves, the Board’s job (c) is to choose the they are certainly the most visible sign of right successor. poor corporate governance. 34 Royal London Group Annual Report and Accounts 2014

Board of Directors

Rupert Pennant-Rea Phil Loney Chairman Group Chief Executive Rupert Pennant-Rea was appointed to the Board Phil Loney was appointed to the Board on on 13 December 2012 and was appointed Chairman 1 October 2011, coinciding with his appointment after the AGM in 2013. Rupert has extensive as Chief Executive of the Group. He previously financial services industry experience. He was spent eight years at Lloyds Banking Group, chairman of Henderson Group for eight years and most recently as managing director of the Life, stepped down at its AGM in May 2013. He was Pensions and Investments business. Prior to deputy governor of the Bank of England from joining Lloyds Banking Group, Phil held senior 1993 to 1995, prior to which he spent 16 years with management positions with AXA, Norwich Union, The Economist, where he was editor from 1986 to CGU and Lloyds Abbey Life amongst others. He is 1993. He was appointed non-executive chairman a director of the Association of British Insurers. of the Economist Group in July 2009. His other directorships include PGI Group Limited and Times Newspapers Holdings Limited.

Tim Harris Andrew Carter Jon Macdonald Group Finance Director Executive Director Group Risk Director Tim Harris was appointed to the Board as Andrew Carter was appointed to the Jon Macdonald was appointed to the Group Finance Director on 19 May 2014. Board on 2 January 2007. He joined Board on 14 December 2012 having Before joining Royal London, Tim was Royal London Asset Management in joined the Group in November 2012 as chief finance officer for Torus Insurance September 2001 as Chief Investment Group Risk Director. He was previously and prior to that deputy group chief Officer and was promoted to Chief group chief risk officer for RSA. He financial officer at Aviva Plc, where he was Executive Officer in September has held a number of senior risk and responsible for leading the group capital 2003. In 2012 he was made Chief capital management roles at Prudential, team with specific responsibility for Executive Officer of Royal London PricewaterhouseCoopers LLP, Aviva managing capital across Aviva, including Wealth. Andrew has extensive asset Plc, Fox-Pitt Kelton, Swiss Re and treasury, asset and liability management, management experience of the major Zurich and is a Fellow of the Institute reinsurance and Solvency II. He was also asset classes, beginning his career in of Actuaries. He is a member of the a partner in the Global Capital Markets investment management in 1983 with Institute of Actuaries’ Risk Management practice at PricewaterhouseCoopers Provident Life. Prior to joining Royal Executive Committee. LLP. Tim is a Fellow of the Institute of London, he held a number of investment Chartered Accountants and a Chartered management positions at Gartmore Insurance Practitioner. from 1987 to 2001. Annual Report and Accounts 2014 Royal London Group 35 STRATEGIC REPORT

Sally Bridgeland Ian Dilks Duncan Ferguson Non-Executive Director Non-Executive Director Senior Independent Director Sally Bridgeland was appointed to Ian Dilks was appointed to the Board on Duncan Ferguson was appointed to the the Board on 14 January 2015. She 14 November 2014. He is a member of Board on 1 April 2010. He is Senior GOVERNANCE is a member of the Nomination and the Nomination, Investment and Audit Independent Director and Chairman Investment Committees. Sally spent Committees. Ian spent his entire career of the With-Profits Committee. 20 years at AON Hewitt. She was at PricewaterhouseCoopers LLP, joining He also sits on the Nomination, Board appointed chief executive officer of the the firm (which was then Coopers Risk and Audit Committees. He BP Pension Fund in 2007, where she was & Lybrand) in 1974 and becoming was senior risk partner of Bacon & responsible for strategy, regulatory and a partner in 1986. He rose to become Woodrow, then B&W Deloitte from operational matters for the £19bn fund. a member of the global financial services 1994 to 2003 and a non-executive Sally is currently a trustee of NEST leadership team and global insurance director of Henderson Group until Corporation; chairs the Education leader. He also led their IFRS conversion December 2013. Duncan was also a non- Committee of the Worshipful Company businesses in the UK. In his final role executive director of Halifax from 1994 ADDITIONAL INFORMATION NOTICE OF AGM & RESOLUTIONS EUROPEAN EMBEDDED VALUE FINANCIAL STATEMENTS of Actuaries and is a trustee of its at PricewaterhouseCoopers LLP he until it merged with Bank of Scotland Charitable Trust. Sally is also a member had responsibility for the regulatory in 2001 and then of HBOS Financial of FTSE’s Policy Group. affairs of the global network. He Services until 2007. He is currently is currently Chairman of the NHS Chairman of the Guardian With-Profits Litigation Authority. Committee. He was president of the Institute of Actuaries from 1996 to 1998.

Tracey Graham Andrew Palmer David Weymouth Non-Executive Director Non-Executive Director Non-Executive Director Tracey Graham was appointed Andrew Palmer was appointed David Weymouth was appointed to the to the Board on 10 March 2013. to the Board on 1 April 2011. Board on 1 July 2012. He chairs the She is Chairman of the Remuneration Andrew is Chairman of the Board Risk Committee and sits on the Committee and sits on the Audit and Audit Committee and sits on the Nomination and Audit Committees. Nomination Committees. She was Remuneration, Board Risk and David will retire as Group Chief Risk chief executive of Talaris Limited, Nomination Committees. He was group Officer at RSA Insurance Group at an international cash management finance director of Legal & General the end of May 2015. He previously business, from 2005 to 2010 and led the Group Plc where he also held a number consulted for a number of major firms and management buyout of that business of financial and operational roles in government departments and enjoyed a from De La Rue. Prior to that, she was the asset management, insurance and 27-year career at Barclays including the president of Sequoia Voting Systems international businesses. He is role of group chief information officer. and customer services director at AXA, a non-executive director of Direct Line He is a non-executive director of the and held a number of senior positions at Insurance Group, a trustee and honorary Financial Services Compensation Scheme. HSBC. Tracey is currently non-executive treasurer of Cancer Research UK, He has previously held a number of director at RPS Group Plc and Dialight and a member of the Financial non-executive roles at the Department of Plc, where she chairs their respective Reporting Review Panel of the Trade and Industry, Chordiant Software remuneration committees. Financial Reporting Council. and the Charities Aid Foundation. 36 Royal London Group Annual Report and Accounts 2014

Directors’ report for the year ended 31 December 2014

The directors present their report for the year ended 31 December 2014. The Directors’ report should be read together with the Strategic report and the Corporate Governance statement, which are incorporated in this Directors’ report by reference.

The purpose of the Strategic report is to Annual General Meeting provide a fair, balanced and comprehensive view of the development and performance The Annual General Meeting (AGM) of of the Group’s business, its financial the Company will be held at 11.00 a.m. on performance during the year and likely Wednesday 10 June 2015, at The Kia Oval, developments. It also reports on the Group’s Kennington, London, SE11 5SS. The Notice ongoing strategy and business model. convening the meeting together with guidance The Corporate Governance statement reports on the AGM is sent to all members. on the Company’s compliance with the UK Corporate Governance Code 2012: Directors An Annotated Version for Mutual Insurers (the Code) and includes information about Details of the current directors are set out any principal risks and uncertainties associated on pages 34 and 35. All of the directors with the business. have held office throughout the year except as noted below: Principal activities Appointments Date The Group comprises The Royal London Mutual Insurance Society Limited and its Sally Bridgeland 14 January 2015 subsidiaries. The Group is structured into Ian Dilks 14 November 2014 a number of businesses as set out in the Tim Harris 19 May 2014 Strategic report. The principal activity of the Company is the transaction of long-term Resignations Date insurance business covering life and pensions. The principal activities of the subsidiary Kerr Luscombe 14 May 2014 undertakings are set out in note 21 to the Kathryn Matthews 31 December 2014 financial statements. In accordance with the Code, all continuing Going concern directors retire and offer themselves for reappointment each year. The details of the After making enquiries, the directors are executive directors’ service contracts are set satisfied that the Company and the Group out in the Directors’ remuneration report on have adequate resources to continue to operate pages 52 to 70. None of the directors has, as a going concern for the foreseeable future or had, an interest in the equity shares of any and have prepared the financial statements on Group undertaking. that basis. There are no material uncertainties to our ability to adopt the going-concern Directors’ indemnities basis of accounting. The directors have the benefit of a qualifying Dividend third-party indemnity provision (as defined in section 234 of the Companies Act 2006). The Company is limited by guarantee without The Company also maintains directors’ and share capital and therefore no dividend officers’ liability insurance in respect of itself is payable. A description of how value is and its directors. returned to members is provided on page 29. Annual Report and Accounts 2014 Royal London Group 37 STRATEGIC REPORT GOVERNANCE

Directors’ conflicts Political donations

In accordance with the articles of No political donations were made in the association the Board is authorised to year ended 31 December 2014 (2013 nil). After making enquiries, approve conflicts or potential conflicts the directors are satisfied that of directors’ interests. The Board has Auditors the Company and the Group have reviewed the interests of the directors adequate resources to continue and their connected persons and has A resolution for the reappointment

to operate as a going concern for ADDITIONAL INFORMATION NOTICE OF AGM & RESOLUTIONS EUROPEAN EMBEDDED VALUE FINANCIAL STATEMENTS the foreseeable future and have authorised any interests which conflicted of PricewaterhouseCoopers LLP prepared the financial statements or potentially conflicted with the interests as auditors of the Company will be on that basis. There are no of the Company. On an ongoing basis proposed at the AGM. The directors material uncertainties to our the Board periodically reviews conflict who held office at the date of approval ability to adopt the going-concern basis of accounting. authorisations to determine whether of this Directors’ report confirm that: the authorisation given should continue, be added to, or be revoked by the Board. [[ so far as they are each aware, there is no relevant audit information of which the Financial instruments Company’s auditors are unaware; and [[ each director has taken all steps that The Group makes extensive use of ought to have been taken as a director financial instruments in the ordinary to be aware of any relevant audit course of its business. Details of the information and to establish that the risk management objectives and policies Group’s auditors are aware of that of the Group in relation to its financial information. This confirmation is given instruments and information on the and should be interpreted in accordance risk exposures arising from those with the provisions of section 418 of instruments are set out in note 43 the Companies Act 2006. to the financial statements. By order of the Board. Employees

Details of the Group’s employment policies are shown on page 21.

Risk management

The Group has procedures in place to identify, monitor and evaluate the significant risks it faces. The Group’s Simon Mitchley risk management objectives and policies For and on behalf of Royal London are set out on pages 49 to 50 and in Management Services Limited note 43 on pages 163 to 177 of the Company Secretary financial statements. 31 March 2015 38 Royal London Group Annual Report and Accounts 2014

Corporate Governance statement

The Board is committed to high standards of corporate governance which it believes are critical to business integrity, performance and maintaining member confidence.

In this report, the term ‘period under review’ [[ strategy and objectives and approves an means the period from 1 January 2014 to the annual business plan and budget and monitors date of this report. the Group’s performance in achieving them; [[ risk appetite; The UK Corporate The Board conducts a formal Governance Code [[ organisational structure; and and rigorous evaluation of its performance, the performance [[ remuneration (including pension) policies. of its directors and the The Board considers that throughout the performance of its committees. period under review it has applied the relevant The Board also: The process is led by the principles and complied with the relevant [[ reviews the most significant risks affecting Chairman and supported by provisions of the UK Corporate Governance the Group and the action being taken to the Company Secretary. Code 2012: An Annotated Version for Mutual manage or mitigate them; Insurers, published in September 2012 [[ appoints directors and makes and approves (the Code). certain senior appointments including the Group Chief Executive, the executives who Members report directly to him, the senior actuarial appointments, the Group Risk Director and As a mutual, the Company has no shareholders the Company Secretary; and is owned by its members. This means that the focus of the Company is to provide long- [[ determines the responsibilities of the Group term benefit to those members. The Company Chief Executive and approves any delegation has recently started holding roadshows of his responsibilities to executive directors, where members can meet the Company’s heads of business units or support functions; management at periods throughout the year, [[ declares annual and final bonuses in addition to the Annual General Meeting. (and the basis for payment of benefits on The first of these events was held in September early termination, including market value 2014 at Lord’s Cricket Ground in London. adjustment factors) on with-profits policies Members can register their interest in future issued by any Group company; roadshows in the members’ area of the website. [[ approves the Annual Report and Accounts The Board and the significant regulatory returns; [[ approves the Principles and Practices The Board is given the powers to manage the of Financial Management for the Company’s business by the members. One with-profits funds; and of the main roles of the Board is to focus on the strategic objectives of the Royal London [[ reserves to itself certain decisions. Group, to ensure that it is appropriately managed and that it achieves these objectives. These reserved decisions include: [[ those relating to the acquisition or disposal Role of any business or major asset; The Board meets regularly to determine the Group’s strategy, to review the Group’s operating [[ setting up of a new business or joint venture and financial performance, to set the Group’s or the merging of any part of the Group’s risk appetite and to provide oversight that the business with a third party; Group is adequately resourced and effectively [[ making or guaranteeing a significant loan; and controlled. The Board determines the Group’s: [[ significant investments and transactions not [[ values, standards and ethics; at arm’s length. Annual Report and Accounts 2014 Royal London Group 39

Allocation of Board agenda time STRATEGIC REPORT

8% 8% 17% n Financial – 17% n Assurance – 14% n Customers and members – 16% 14% n Future strategy – 37% n Capital planning – 8% 37% n Other matters – 8% 16% GOVERNANCE

Those matters that are not specifically The Board’s policy is to appoint and The other connection Promontory has reserved for the Board are delegated retain non-executive directors who with the Company is in the provision of to the Group Chief Executive, who can apply their wider knowledge and training for non-executive directors and has in place clear and appropriate experience to their understanding of the senior executives of the Company. apportionment of responsibilities Royal London Group, and to review and amongst executive directors and senior refresh regularly the skills and experience The review in 2014 included aspects managers in order that the business of the Board requires. The Nomination of Board governance including the Group can be effectively managed Committee is responsible for succession examining three in-depth topics: and reported on. planning for directors and other senior ADDITIONAL INFORMATION NOTICE OF AGM & RESOLUTIONS EUROPEAN EMBEDDED VALUE FINANCIAL STATEMENTS executives to ensure that an appropriate [[ Business Planning Process; The roles of the Chairman and Group balance of skills and experience is [[ Auto-Enrolment and Protection Chief Executive are separate and there maintained and that there is progressive Strategies; and is a clear division of responsibilities refreshing of the Board. As part of the between the two roles. The Chairman process for the appointment of new [[ Emerging Risks (following the is primarily responsible for leading the directors, the Nomination Committee, acquisition of Royal London Board, ensuring its effectiveness and on behalf of the Board, considers the (CIS) Limited). setting its agenda. The Group Chief diversity of the Board, including gender. Executive is responsible for the The aim is that the Board as a whole Following the first phase of the Board day-to-day management of the Group’s should have an appropriate balance of effectiveness review completed earlier business. All directors have access to skills, experience, independence and in 2014, Promontory concluded that the the advice and services of the Company knowledge to enable each director and the Board actively encouraged discussion Secretary who is responsible for ensuring Board as a whole to discharge their duties and a common approach among Board that Board procedures are complied and responsibilities effectively. Each members. Upon completion of the with. In addition, all directors have director must be able to devote sufficient review, it was concluded that the Board access to independent professional advice time to the role in order to discharge his had the experience, knowledge and at the Company’s expense where they or her responsibilities effectively. The ability to provide effective oversight consider it necessary in the discharge process for appointing new directors is and challenge to the Executive, which of their duties. conducted by the Nomination Committee was evident throughout the deep-dive and a description of its duties is set out topics examined. Allocation of time in its report. Following its assessment The chart above provides an illustration and review of the composition of the The matters resulting from the of the time allocated to matters Board, the Nomination Committee evaluation included the need for the considered by the Board during the year. recommended the appointment of two Board to ensure its oversight of capital additional directors to the Board in 2014. and financial risks remained vigorous Composition and balance in light of the challenging external The Board currently comprises the Board effectiveness environment facing the Group. Chairman, six independent non- The Board conducts a formal and executive and four executive directors. rigorous evaluation of its performance, All matters arising from the evaluation One of the non-executive directors, the performance of its directors and have been assigned an action plan and Duncan Ferguson, is the Senior the performance of its committees. will be regularly reviewed by the Board. Independent Director. The biographies The process is led by the Chairman and of all the directors appear on pages 34 supported by the Company Secretary. The Board considers that each non- and 35, together with summaries of their The Board considers that an external executive director, including the experience and qualifications and a note review should be held at least every Chairman, displayed the commitment of their other significant commitments. three years. Following the external required to discharge the role properly Membership of the Board’s committees review in 2013, the Group commissioned and was independent. The Chairman is set out in this statement. Promontory, an independent consultancy meets from time to time with the firm, for the Board effectiveness review non-executive directors in the absence in 2014. of the executive directors. By way of 40 Royal London Group Annual Report and Accounts 2014

Corporate Governance statement continued

a Board development plan, the directors [[ Risk management and control have continued to update their skills and • Solvency II. knowledge, both within the Group and outside. Presentations have been given on [[ Financial analysis and controls The directors are responsible key issues and developments within the • financial reporting and external audit; and for safeguarding the assets industry. The directors are kept informed of of the Company and the relevant regulatory and corporate governance • internal controls. Group and hence for taking developments as they arise through senior reasonable steps for the [[ Governance oversight and controls prevention and detection of managers and external advisers. fraud and other irregularities. [[ Remuneration policy They are also responsible for Induction and development the maintenance and integrity [[ Regulatory framework and requirements of the Group’s website. Induction [[ Chrysalis As provided by the Code, the Chairman is responsible for ensuring that a full, Essential information covering the following formal and tailored induction is provided is also provided in a Director Induction Pack: to all new directors and he is assisted by [[ Directors’ duties the Company Secretary in facilitating the induction. A tailored induction programme is [[ The Company’s business provided for all newly-elected non-executive [[ Board issues: memorandum and articles of directors and it is designed to enhance the association; minutes of recent Board meetings; directors’ knowledge and understanding of Board committees’ terms of reference the Company’s businesses, operations and regulatory environment. The induction [[ Internal policies programme provided is specific to each new director, with consideration given to their Development experience, background and level of knowledge The Chairman has the responsibility to review of the Company’s business. The induction and agree with each director their training and usually includes meetings with management development needs and the Company Secretary and external stakeholders, visits to business has primary responsibility for co-ordinating units and presentations on the regulatory the ongoing training and development of all framework applicable to the Company. directors. The continuing development of the directors entails regular updates on the The following is an example of the induction Company’s businesses and industry-related programme for a non-executive director: matters as well as any changes in the regulatory environment. We have also introduced [[ Introduction mandatory training for the non-executive • Royal London structure; and directors, as currently required for all employees. This covers areas such as the Approved Persons • introduction to business areas and functions. Regime, Fighting Financial Crime, Data [[ Market knowledge Protection and Treating Customers Fairly. • Group products – pensions, with-profits policies, platforms, and investment management. [[ Business strategy and model • business model; • operations; • risk and strategy; and • IFAs and customers. Annual Report and Accounts 2014 Royal London Group 41 STRATEGIC REPORT

During the year the directors received Directors’ responsibilities It should be noted that legislation briefings on the following topics: in the UK governing the preparation The directors are responsible for preparing and dissemination of financial [[ Approach of the Prudential the Annual Report and Accounts, the statements may differ from legislation Regulation Authority; Directors’ remuneration report and the in other jurisdictions. GOVERNANCE [[ Comments on Financial Conduct financial statements in accordance with Authority’s Chrysalis Policy Statement; applicable law and regulations. The directors are responsible for safeguarding the assets of the Company [[ Asset Management Market Company law requires the directors and the Group and hence for taking – new product developments; to prepare financial statements for reasonable steps for the prevention [[ At Retirement Market; each financial year. Under that law and detection of fraud and other the directors have elected to prepare irregularities. They are also responsible [[ Derivatives; the Company and Group financial for the maintenance and integrity of the [ statements in accordance with IFRS as Group’s website. [ Direct to Consumer – digital; ADDITIONAL INFORMATION NOTICE OF AGM & RESOLUTIONS EUROPEAN EMBEDDED VALUE FINANCIAL STATEMENTS adopted by the European Union (EU). [[ Internal Model; Under company law the directors must Each of the directors, whose names [[ Solvency II; not approve the financial statements and functions are shown on pages unless they are satisfied that they give a 34 to 35, confirms that, to the best [[ Regulatory Expectations; and true and fair view of the state of affairs of their knowledge: [[ Wrap Platform Market. of the Company and the Group and of the profit or loss of the Group for that [[ the Group financial statements, Succession and diversity period. In preparing those financial which have been prepared in statements, the directors are required to: accordance with IFRS as adopted by It is the responsibility of the Board the EU, give a true and fair view of the to ensure that plans are in place for [[ select suitable accounting policies and assets, liabilities, financial position and appointments to the Board that will then apply them consistently; profit of the Group; maintain an appropriate balance of [[ make judgements and accounting [[ the Strategic report on pages 1 to 31 skills and experience. The Nomination estimates that are reasonable includes a fair review of the development Committee provides advice to the Board and prudent; and performance of the business and the on succession planning. position of the Group; [[ state whether applicable IFRS as The Board is committed to ensuring a adopted by the EU have been followed, [[ a description of the principal risks and diverse pool of candidates is considered for subject to any material departures uncertainties that the Group faces any vacancies that may arise and that they disclosed and explained in the financial together with details of the Group’s are filled by the most qualified candidates statements; and risk governance structure are provided on pages 49 to 50; and based on merit having regard to the [[ prepare the financial statements on benefits of diversity, including gender. the going concern basis unless it is [[ the Annual Report and Accounts, inappropriate to presume that the taken as a whole, is fair, balanced Institutional shareholder Company will continue in business. and understandable and provides the information necessary for members The Group, through Royal London The directors are responsible for keeping to assess the Company’s performance, Asset Management Limited (RLAM), adequate accounting records that are business model and strategy. firmly believes in the use of best sufficient to show and explain the practices by the companies in which it Group’s transactions and disclose, invests and its approach is set out in the with reasonable accuracy at any time, Corporate Responsibility statement on the financial position of the Company pages 20 to 21. and the Group and enable them to ensure that the financial statements and the Directors’ remuneration report comply with the Companies Act 2006. 42 Royal London Group Annual Report and Accounts 2014

Corporate Governance statement continued

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

Board Audit Board Risk Investment Nomination Remuneration With-Profits Committee Committee Committee Committee Committee Committee Total number of 11 5 6 4 6 9 7 scheduled meetings (2) (1) (1) (1) (2) in 2014 Unscheduled meetings in brackets

Attendance

Board Audit Board Risk Investment Nomination Remuneration With-Profits Committee Committee Committee Committee Committee Committee Sally Bridgeland (appointed to the Board N/A ------14 January 2015) Andy Carter 11 ------(2) Ian Dilks 2/2 2/2 - 0/1 N/A - - (appointed to the Board (N/A) 14 November 2014) Duncan Ferguson 11 5 7 5 - 4 - (2) (1) (2) Tracey Graham 11 9 4 - - 6 - (0) (1) Tim Harris 6/6 - - 4/4 - - 5/5 (appointed to the Board (2/2) 19 May 2014) Phil Loney 11 - - - 4/4 - - (2) Kerr Luscombe 5/5 1/1 2/2 - - - - (Retired 14 May 2014) (N/A) (N/A) 2/2 Jon Macdonald 11 4 - - - - - (2) (1) Kathryn Matthews 9 11 4 - - 6 (1) - (Retired 31 December (0) (1) 2014) Andrew Palmer 11 6 3 9 5 6 - (2) (1) (1) (1) Rupert Pennant-Rea 11 9 - - - 6 - (2) (1) David Weymouth 10 6 5 - 4 - - (1) (1) Annual Report and Accounts 2014 Royal London Group 43 STRATEGIC REPORT

Board Committees Report of the Audit Committee [[ approving the annual Internal Audit plan; [[ making recommendations to the The Board has established the On behalf of the Audit Committee Board in relation to the appointment following committees: (the Committee) I am pleased to present

of the external auditors, to be put to GOVERNANCE the Committee’s report for 2014. the members for their approval in [[ Audit Committee; The membership of the Committee general meetings; [[ Board Risk Committee; currently comprises Andrew Palmer (Chairman), Ian Dilks, Duncan [[ recommending to the Board, prior to [[ Investment Committee; Ferguson, Tracey Graham and David being put to the members for their [[ With-Profits Committee; Weymouth. David joined the Committee approval, the remuneration and terms when he assumed the chairmanship of the of engagement of the external auditors; [[ Nomination Committee; and Board Risk Committee in May 2014 and reviewing and monitoring the external [[ Remuneration Committee. Ian joined the Committee following his auditors’ independence, objectivity, appointment to the Board in November. expertise and resources and the The terms of reference of all Board Rupert Pennant-Rea attends meetings effectiveness of the audit process; ADDITIONAL INFORMATION NOTICE OF AGM & RESOLUTIONS EUROPEAN EMBEDDED VALUE FINANCIAL STATEMENTS Committees are published on the of the Committee, but is not a member [[ monitoring the engagement of Group’s website in the corporate of the Committee. The respective chairs the external auditors to supply governance section. of this Committee and the Board Risk non-audit services; Committee attend meetings of the other committee as members. This ensures [[ determining the Group’s policy for that the two committees are operating employing former employees of the effectively together on areas of common external auditors; and responsibility and where either of the [[ reviewing arrangements by which staff committees is required to collaborate may, in confidence, raise concerns about on, or assume responsibility for, a review possible improprieties in matters of conducted by the other. The qualifications financial reporting, financial control of each member of the Committee or otherwise. are included in the biographies of the directors on pages 34 and 35. The The Committee reports to the Board responsibilities of the Committee include: on the above matters, identifying any issues which it considers require [[ monitoring the integrity of the financial action or improvement and makes statements and formal announcements recommendations to the Board. relating to financial performance; [[ reporting to the Board the Committee’s The executive directors and some view of all aspects of proposed financial members of senior management reporting by the Company; including the Head of Internal Audit and the external auditors attend [[ monitoring and reviewing the meetings of the Audit Committee and effectiveness of the Group’s some members of senior management internal controls; submit reports to the Committee. [[ reviewing the external auditors’ findings (including those contained in The UK Corporate Governance Code management letters) and management’s states that the Board should satisfy response to them; itself that at least one member of the Committee has recent and relevant [[ reviewing accounting policies and financial experience. The Board takes actuarial liabilities; the view that more than one member of [[ reviewing accounting matters requiring the Committee has recent and relevant the exercise of judgement; financial experience. The Board also views the Committee as a whole for [[ reviewing, on an ongoing basis, reports this test and has concluded that the from the Internal Audit function; Committee does have the relevant skills [[ reviewing the effectiveness of the and financial experience necessary. Internal Audit function; 44 Royal London Group Annual Report and Accounts 2014

Corporate Governance statement continued

During the year the Committee particularly undertaken of Capita’s Internal Audit is given to the skills and experience, the focused on the following areas. function and how the Capita internal audit impact on independence and the safeguards plan would be delivered. in place. The overall level of fees relative to 1. Financial reporting matters the audit fee is also considered. The Committee reviewed the Group’s The Committee reviewed and provided annual and half-year IFRS and EEV input into the risk-based internal audit plans The non-audit services performed by reporting. In doing so, the Committee for 2015, with a focus on obtaining assurance the external auditors in 2014 included considered the accounting policies that an appropriate level of internal audit the following: adopted by the Group, the impact of any resources has been planned for the year. emerging technical accounting issues and The Committee held a number of meetings [[ Royal London Asset Management and the significant reporting and valuation with the Head of Internal Audit without the Royal London Cash Management judgements made by management. This executives present. controls reporting; included assessing the process for the [[ various tax and VAT advice, including in valuation of investments by the directors, The Head of Internal Audit reports to the relation to the Part VII transfer of Royal the key actuarial assumptions underpinning Chairman of the Audit Committee and the London (CIS) Limited; the insurance liabilities and any material Group Chief Executive. contingent assets and liabilities. The [[ review of business rates; and Committee discussed and reviewed the 4. External audit [[ stakeholder schemes reporting. results and the presentation of them in the The Committee monitored the operation Annual Report and Accounts, press releases of the Group’s external audit, including Objectivity and independence of and going concern statement. receiving reports from the external auditors the external auditors on their audit plan, the key audit risks, their 2. Control environment progress during the year, significant findings The Committee is satisfied as to the The Committee reviewed the effectiveness arising from their audit and reviewing the continued independence and objectivity of of the control environment across the Group audit fee. the auditors, PricewaterhouseCoopers LLP throughout 2014. This included reviewing (PwC). An evaluation of the effectiveness reports from management on major control Auditor objectivity and independence were of the external auditors was reviewed by the issues being managed in the year, and the safeguarded through the authorisation of Committee, which was prepared by assessment of the effectiveness and consistency non-audit services by either the Committee Internal Audit using input from across the of the Group’s processes. The Committee or the Chairman of the Audit Committee, Group, and which concluded the external concluded that the control environment of the depending on fee thresholds. auditors were effective. In addition, the Group was generally effective throughout the Committee conducted private meetings year and that any matters arising had been 5. S olvency II reporting with the external auditors to discuss and appropriately dealt with. In the event of any The Committee considered the proposed review key issues, without management significant weaknesses being identified, the governance arrangements for Solvency II being present. Board will ensure that necessary actions are reporting and also received an update taken to address them. on the Solvency II programme and Policy on external audit tendering governance structure. 3. Internal Audit The Committee keeps under review the The Committee oversaw the activities of The report on the proposed governance ongoing legislative proposals on audit the Internal Audit function. It received arrangements included an overview of tendering and rotation from the EU and summary reports on the results of all audits Solvency II reporting to be presented to the Competition and Markets Authority, performed and monitored management’s future Audit Committee meetings, which as well as the Financial Reporting Council, responses to issues identified and the has now been included in the 2015 agenda and will implement the proposals when timeliness of their resolution. This included planner for the Committee. they become final. PwC has been the a consideration of the audit report on IT Group’s auditor since 2000, which was the resilience and management of customer Non-audit services provided by last time an audit tender was carried out. gone aways and address unknowns, as well the external auditor The Committee will continue to consider as a consideration of risk-accepted actions annually the need to go to tender for audit highlighted in Internal Audit reports. The Committee received regular updates quality or independence reasons. Subject The Committee received updates on the on the level of all non-audit work performed. to the outcome of this process continuing HR amendments to payroll audit and The fees paid or invoiced for non-audit to be satisfactory, it is currently expected on a review of the Transitional Services services in 2014 were £599k, which was 17% that PwC will remain in office and a Agreement in respect of the acquisition of the fees paid to the auditors in 2014. In resolution to reappoint PwC for the of CIS entities. The Committee was determining if the appointment of PwC for 2015 audit will therefore be proposed at also briefed on the review that had been non-audit work is appropriate, consideration the AGM. Annual Report and Accounts 2014 Royal London Group 45 STRATEGIC REPORT

Significant matters considered by the Audit Committee in 2014

This table highlights some significant matters considered by the Audit Committee in 2014 and the actions taken.

Matters considered Action taken by the Committee GOVERNANCE Review of effectiveness of the The Committee considered the feedback received across the Group on the 2013 external audit external auditor process and the comments made were noted. Long-term business liability The Committee considered The Royal London Mutual Insurance Society Limited (RLMIS) and valuations – methodology and Royal London (CIS) Limited long-term business regulatory liability valuations as at 31 December assumption recommendations 2013 and accepted the Valuation Report of the Actuarial Function Holder, for the year ended 31 December 2013, including the changes to methods and assumptions. Presentation on key The Committee was briefed on the key accounting and actuarial judgements and assumptions, accounting and actuarial including the most notable areas of the 2014 Group accounts involving judgements. The

judgements and assumptions Committee approved the change proposed to the valuation of Royal London OTC derivatives, ADDITIONAL INFORMATION NOTICE OF AGM & RESOLUTIONS EUROPEAN EMBEDDED VALUE FINANCIAL STATEMENTS in order to harmonise this with the treatment of RL (CIS) OTC derivatives. It also reviewed the proposed approach, specifically any changes since the previous year, and it recommended to the Board the proposed approach for key accounting/actuarial judgements and the assumptions. Management of customer gone The Committee received and considered the Internal Audit report on the management of customer aways and address unknowns gone aways and address unknowns and noted the management actions to address the issue. It was agreed that there would be increased reporting on the issue to the Board Risk Committee. Review of Capita Internal The Committee was briefed on Capita’s our outsource service provider Internal Audit which included Audit assurance activity an update on how the Capita internal audit plan would be delivered. The Committee received a confirmation of continued monitoring and reporting of the audits by Group Internal Audit. Valuation interest rates The Committee considered a report on the data used by Royal London (CIS) Limited to set the for RL (CIS) Pillar 1 valuation interest rates for Pillar 1 (minimum capital requirements) regulatory reporting. The regulatory reporting controls around the valuation were noted and it was agreed that steps would be taken to harmonise the RL (CIS) Limited valuation controls with the existing Royal London controls. Proposed governance The Committee was provided with a report on the consideration of the governance arrangements arrangements for that are to be applied to regular Solvency II reporting and an overview of Solvency II reporting to Solvency II reporting be presented to future Audit Committee meetings. Update on Solvency II The Committee received an update on: programme and [[ the programme structure and individual responsibilities, highlighting areas where the structure governance structure had been strengthened; [[ the governance, including proposed reporting to the Board Committees; and [[ the scope of the workstreams and the transition states the organisation will undergo as the new solutions and working practices become effective. Internal control The Committee considered regular reports from the Head of Internal Audit on the effectiveness of the Group’s control environment.

Allocation of agenda time The chart provides an illustration of the approximate percentage of total time spent by 6% the Committee on various matters during 2014. 6% 6% n Financial reporting – 50% n External audit – 16% n Internal audit – 16% n Control environment – 6% 16% 50% n Solvency II – 6% n Other matters – 6%

16% Andrew Palmer Chairman of the Audit Committee 46 Royal London Group Annual Report and Accounts 2014

Corporate Governance statement continued

Report of the Report of the Board The Committee reports to the Board on all Nomination Committee Risk Committee of the matters detailed above, identifying any matters in respect of which it considers that On behalf of the Nomination Committee On behalf of the Board Risk Committee action or improvement is needed and makes I am pleased to present the Committee’s I am pleased to present the Committee’s recommendations to the Board. The Group report for 2014. report for 2014. Risk Director attends meetings of the Board Risk Committee. The executive directors and The current membership of the Nomination The membership of the Board Risk certain members of senior management, such Committee comprises Rupert Pennant-Rea Committee comprises David Weymouth as the Group Head of Regulatory Risk and (Chairman), Sally Bridgeland, Ian Dilks, (Chairman), Duncan Ferguson and Compliance and the Head of Internal Audit, Duncan Ferguson, Tracey Graham, Andrew Palmer. In accordance with best attend meetings regularly by invitation. Andrew Palmer and David Weymouth. practice, Rupert Pennant-Rea attends, but is not a member of the Committee. During the year the Committee particularly The responsibilities of the Nomination focused on the following areas: Committee include: The responsibilities of the Board Risk Committee include: [[ Chief Risk Officer review; [[ reviewing the structure, size and [[ Solvency II programme; composition (including the skills, [[ reviewing and recommending to the knowledge and experience) of the Group Board the assignment of risk [[ Risk management framework; Board and making recommendations management responsibilities, including [[ Review and approval of Group policies; to the Board with regard to any changes; the interaction between the Board and the boards of operating subsidiaries; [[ Business risk review; [[ nominating for Board approval candidates to fill vacancies on the [[ reviewing and challenging risk [[ Conduct Risk Deep Dive; Board and its committees; information received, including whether [[ Change Delivery and Capability Update; key risks are managed to an acceptable [[ succession planning, taking into level and cost; [[ Co-operative Banking Group contingency account in particular the challenges and planning; and opportunities facing the Group and the [[ providing oversight and advice to the Board skills and expertise needed on the Board on the current risk exposures of the Group [[ IT security. in the future; and by reviewing and recommending to the Board actions on significant risk issues, [[ keeping under review the leadership needs The chart below provides an illustration trends, practices, litigation and loss events of the organisation, both executive and of the approximate percentage of total time that have implications for the Group; non-executive, with a view to ensuring spent by the Committee on various matters the continued ability of the organisation [[ monitoring the effectiveness of the Group’s during 2014. to compete effectively in the marketplace. overall risk and capital management frameworks through ongoing review and During the year the Committee independent assurance, including approving 14% focused on the appointment of two significant changes to the Internal Model; 3% new directors, following a review of the skills and experience of the Board. [[ reviewing and challenging the stresses and 39% When recommending the additional scenarios undertaken, including reverse 19% appointments the Committee considered stress tests; the expertise and skills of the Board, [[ reviewing and recommending to the our Group strategy, potential acquisitions 4% Board the Group’s risk appetite and 13% 6% and diversity, including gender. ensuring it is aligned with the future strategy of the Group; The Board Chairman’s other significant 2% commitments and any changes to them are [[ reviewing and approving the Group’s policies in relation to strategic, financial n Solvency II programme – 14% highlighted in the biography section on n Risk management framework – 3% pages 34 and 35. and operational risks, including the process n Business Model risks – 19% for identifying and assessing business and n Review of Group policies – 4% environmental risks and the management n Business risk review – 6% n Co-operative Banking Group contingency planning – 2% of these risks by the Group; n Operational excellence and conduct risk – 13% n Others – 39% [[ ensuring that the Group conducts appropriate review and due diligence of acquisition propositions; and

Rupert Pennant-Rea [[ an annual review of results to ensure Chairman of the Nomination Committee profits are aligned with risk appetite David Weymouth for remuneration purposes. Chairman of the Board Risk Committee Annual Report and Accounts 2014 Royal London Group 47 STRATEGIC REPORT

Report of the Investment During the year, as part of its normal This chart below provides an illustration Committee duties, the Committee focused on: of the approximate percentage of total time spent by the Committee on various matters On behalf of the Investment Committee [[ supporting the Board RL (CIS) Limited during 2014. I am pleased to present the Committee’s Board in the implementation of the report for 2014. investment strategy for Group assets; [[ the establishment of an Investment The current membership of the Office to support the Committee 11% Investment Committee comprises both 19% and Board in achieving the Group’s executive and non-executive directors.

investment objectives; GOVERNANCE Current membership of the Investment Committee comprises Kathryn [[ the development of a clear investment Matthews (Chair), Sally Bridgeland, Ian philosophy and risk management 25% 45% Dilks, Julius Pursail, Tim Harris and framework for Group assets to aid Jon Macdonald. In addition, Andrew the Committee and Board in their Carter (CEO, Wealth), Piers Hillier investment decision-making process; (Chief Investment Officer, RLAM), [[ the integration of RL (CIS) Limited Stephen Wilson (With-Profits Actuary) into the Group and particularly the and Rachel Elwell (Investment Office n Supporting Committee oversight merger of TCAM with RLAM; Director) attend Committee meetings. and escalation items – 11%

n Investment strategy – 45% ADDITIONAL INFORMATION NOTICE OF AGM & RESOLUTIONS EUROPEAN EMBEDDED VALUE FINANCIAL STATEMENTS [ [ detailed reviews of a selection of key n Risk, governance The responsibilities of the Investment investment strategies where RLAM has and oversight matters – 25% n Committee include: a mandate to manage assets on behalf Other matters – 19% of the Group to satisfy the Committee [[ reviewing the investment strategy for of RLAM’s ongoing suitability to the management of Group assets; manage those assets;

[[ ensuring that the investment mandates [[ regular reviews of quarterly market

are in line with the strategy; and economic data to ensure that the Kathryn Matthews macroeconomic environment still [[ reviewing investment performance to Chairman of the Investment Committee ensure that it is meeting its agreed targets supports the current investment strategy; and is within acceptable risk tolerance; [[ regular assessment of investment [[ providing oversight on the effectiveness performance of the different portfolios of risk management within RLAM; to ensure they are meeting their investment objectives within agreed [[ reviewing the suitability of new risk tolerances; investment asset classes, instruments or products; [[ reviewing the operation of the Group’s stock-lending policy; [[ ensuring alignment of investment policies with any mutual or ethical [[ reviewing RLAM’s compliance with brand proposition statements; the Stewardship Code; [ [[ reviewing summary activity from the [ providing oversight of RLAM’s executive supporting committees; and derivative capabilities and management; [ [[ agreeing action on any escalated points [ providing oversight of investment- arising from the supporting committee related regulatory matters and meetings including approval of the implementation of best practice appointment and removal of key guidance; and external portfolio managers. [[ reviewing Custodian performance. 48 Royal London Group Annual Report and Accounts 2014

Corporate Governance statement continued

Report of the [[ Project Chrysalis; Report of the With-Profits Committee [[ capital planning for Solvency II; Remuneration Committee On behalf of the With-Profits Committee [[ management of the With-Profits The Remuneration Committee comprises I am pleased to present the Committee’s Fund, including valuation and capital non-executive directors and is chaired by report for 2014. management plan; Tracey Graham. The other members are Andrew Palmer and Rupert Pennant-Rea. [[ the capital strength and related volatility The With-Profits Committee comprises Further details of the members of the of the Royal Liver Sub Fund; two Company-appointed members Remuneration Committee during the year and three independent members. [[ the effectiveness of the With-Profits and the work of the Committee are set out in The Company-appointed members Actuary; the Directors’ Remuneration report on pages are Duncan Ferguson and Tim Harris. 52 to 70. [[ gone aways and complaints by The independent members are Julius policyholders; Pursail, Jim Gallagher and Paul Coulthard. The With-Profits Actuary [[ Part VII Transfer of Royal London and the Actuarial Function Holder attend (CIS) Limited; Committee meetings. [[ appointment of an Independent Expert to Tracey Graham review member account proposition; and The Committee’s role is to carry out Chairman of the Remuneration Committee a proactive review of the regulatory role [[ Group strategy. as specified in FCA rules and provide independent opinion and oversight on The chart below provides an illustration of material matters that affect with-profits the approximate percentage of total time policyholders, in particular the FCA’s spent by the Committee on various matters Principles for Business such as treating during 2014. customers fairly, effective management and control, communicating with customers and managing conflicts of interest.

The Committee’s role is to assess, report on and provide clear advice on: 17% 12% [[ the way each with-profits fund is managed; 8% 30% [[ compliance with each with-profits fund’s Principles and Practices of Financial 19% Management (PPFM); [[ whether the interests of with-profits 7%7% policyholders, and the respective interests of groups of with-profits policyholders, are fairly reflected in the management of the Long-Term Fund. This will include n Investment strategy and results – 12% n Regulation/Project Chrysalis – 30% considering the treatment of any conflicts n Governance/management of WP funds – 7% of interest that may arise between different n Policyholder complaints and communication – 7% groups of with-profits policyholders, n Part VII transfer of Royal London (CIS) Limited – 19% n Capital planning for Solvency II – 8% between with-profits policyholders and n Other matters – 17% the Company, and between with-profits policyholders and the members of the Company; and [[ any other matter in which it might reasonably be expected that the Committee should have an involvement. Duncan Ferguson Chairman of the With-Profits Committee During the year the Committee focused on:

[[ the Profit share and bonus rates; [[ investment performance and investment strategy; Annual Report and Accounts 2014 Royal London Group 49

Risk management and internal control STRATEGIC REPORT

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

The system is designed to manage rather [[ promote a clear understanding of decision-making processes and that the than eliminate the risks of failure to the risks faced to allow the Group risk management framework is well achieve business objectives and can provide to balance risk, capital and return embedded across all its business areas. only reasonable and not absolute assurance effectively, enhancing the Group’s During 2014, Royal London continued against material misstatement or loss. The decision-making capacity; to strengthen its risk management system has been in place throughout the framework with respect to risks to [[ promote the preparation of reliable period under review and accords with the end customers or conduct risk. The published financial statements and UK Corporate Governance Code. The Group consistently seeks good customer selected financial data; and ADDITIONAL INFORMATION NOTICE OF AGM & RESOLUTIONS EUROPEAN EMBEDDED VALUE FINANCIAL STATEMENTS Board is very conscious of the importance outcomes in everything it does and of the Group’s internal controls and [[ facilitate compliance with applicable has no appetite for knowingly treating attaches high priority to developing them laws, regulations and internal policies. customers unfairly. In 2015, as part of in line with best practice. The Board is a continuous improvement approach to aware that from time to time, due to the The Group has a formal governance the management of risk, all areas of the size and scale of the Group, issues could structure of committees to manage Group have been set objectives to further arise that impact the reputation of the risk, reporting to the Board, and this strengthen their risk management Group and its operations. In the event of has been further improved in 2014. processes and culture. such risk materialising, the Board will Risk management is an integral part ensure that necessary actions are taken to of the Group’s corporate agenda The Board has conducted a review address them. and employees at all levels have risk of the effectiveness of the Group’s management responsibilities. The system of internal control during the The Board has established an ongoing Group’s primary objective in undertaking year ended 31 December 2014 taking process for identifying, evaluating and risk management is to ensure that the into account matters arising up to the managing the significant risks faced by achievement of the Group’s performance date of approval of this Annual Report the Group. The management of each and objectives is not undermined by and Accounts. The review covered all business unit and support function is unexpected events and that sufficient material controls including business, responsible for identifying, evaluating, capital is maintained. The framework operational, financial, compliance and rating (in terms of probability of described below, in conjunction with the risk management processes. It was occurrence and likely impact), assigning Individual Capital Assessment (ICA) conducted on an ongoing basis, via responsibility for, reporting, managing and the Group risk register, is used to reports submitted to the Board, the and mitigating all risks relevant to its help identify, mitigate, monitor and Board Risk Committee and the Audit area of business, including the design quantify significant risks to which the Committee and also by reports prepared and operation of suitable internal controls. Group is exposed. as part of the year-end process.

The Group’s system of risk management This approach enables the early Three lines of defence and internal control comprises its system identification of risks and, through an The Group’s governance structures of governance, risk appetite, risk policies, assessment of likelihood and impact, for risk management are based on the internal control and monitoring activities the Group seeks to understand fully ‘three lines of defence’ model. Primary and the internal environment including the dimensions of the exposures it responsibility for risk management lies its philosophy, culture and behaviours. faces. In response to unacceptable with the business units and specialist exposures, targeted action plans are operational process functions. A second Taken together these elements are put in place. Regular reporting on risks line of defence is provided by specialist designed to: and mitigating actions is undertaken by functions that undertake monitoring, individual business units through the challenge and policy setting, such as [[ facilitate the effective and efficient Executive Risk Committee to the Board the Group’s independent Risk and operation of the Group by enabling it Risk Committee. Compliance function. The third line to respond appropriately to significant of defence is provided by Group Internal strategic, business, operational, financial, The Group has made a considerable Audit which provides process assurance, regulatory and other risks that could effort to ensure that there is a strong supported by external audit. impact upon the delivery of its objectives; risk management culture in all important 50 Royal London Group Annual Report and Accounts 2014

Risk management and internal control continued

In practice, executive management Capital Solvency II has been delegated the day-to-day The Group will ensure it has sufficient The EU-wide Solvency II regime, which responsibility for establishing and capital in excess of its regulatory is intended to strengthen the integration implementing appropriate systems requirements to be broadly consistent of risk and capital management and and controls and for managing the with an AA credit rating. The closed to harmonise the capital requirements risks which impact upon their respective funds will target capital to minimise across European insurers, will be areas of responsibility. Business-unit the probability of requiring support implemented from 1 January 2016. managers identify, assess and record from the Open Fund whilst distributing material risks, including information surplus to with-profits policyholders The regime allows insurers to use a on their likelihood and severity and the in a fair manner. Both available and standard formula for determining their mitigating controls or actions planned. required capital will be managed as regulatory capital requirements or to part of this appetite. use their own Internal Model, which This framework allows the Group to will require approval from the regulator. assess its overall risk exposure and to Performance Building on its existing strong capital- create a map of major risk exposures The Group aims to manage its earnings modelling and control capabilities, along with associated actions. This map volatility such that profits are within it is the Group’s intention to use its is continually monitored and refreshed a defined percentage of plan. It will own Internal Model. The Internal and evidence of control effectiveness is also target optimisation of longer-term Model is central to the business and it regularly reported. value and returns including targeting will enable the Group to make more a minimum internal rate of return effective decisions by fully integrating These processes are supported by the on capital on both new business risk and capital management. The Group Risk and Compliance function and transactions. Group has been planning its work on which is independent of the business and the development and implementation of reports to the Group Chief Executive Reputational the Internal Model and recognises that via the Chief Risk Officer. Group Risk The Group is averse to risk exposures a Solvency II standard formula approach and Compliance provides specialist that could impact the Group’s reputation will have to be used from 1 January 2016 knowledge, review, challenge and quality or brand. whilst Internal Model approval is sought. assurance, as well as the co-ordination of In addition, during this period the Group reporting to appropriate committees and Operational will continue to use its own capital- the Board. The Group acknowledges that a certain modelling and control capabilities. level of operational risk needs to be Group risk appetite taken. It has a low appetite for losses Principal risks and uncertainties The Group’s risk appetite statements due to operational risk exposure but Managing risk is fundamental to the set out explicitly the amount of risk the impacts of operational risk controls Group’s activities in order to generate that the Group is currently willing to should be commensurate with the scale returns for policyholders. The Group accept, which aligns with its capacity to and the nature of the risks mitigated. has processes in place to identify and bear risk. The Board has responsibility manage risks, which include assessing for setting the risk appetite for the Liquidity scenarios and reverse stress tests. The Group as a whole. It is applied by the The Group will ensure there is Group’s approach to risk management use of principles and by the setting of sufficient liquidity to meet our expected is set out earlier in this statement. The tolerances, limits and authority levels. short-term cash outflows in extreme Board believes the principal risks and but plausible scenarios. uncertainties facing the Group are The Group’s risk strategy defines the key as set out on pages 10, 11 and 12 with principles that set out the way the Group Group risk policies the actions taken to manage and takes on, approaches and manages the The Group’s risk policies are the mitigate them. risks that it is (or could be) exposed to in high-level standards and requirements the pursuit of its business objectives. The that determine the way in which risks Group’s risk strategy also defines the risks are to be managed and controlled. that the Group views as being desirable, The Board ensures that policies neutral, or undesirable. The Board has are regularly reviewed to reflect the approved risk appetite statements for five changing commercial and regulatory categories of risk as follows: environment as well as the Group’s organisational structure. Annual Report and Accounts 2014 Royal London Group 51

The Group’s governance structures

Responsibilities of the Board

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

Board Risk Committee The role of the Committee is to ensure that the interests of the members of The Royal London Mutual Insurance Society Limited are properly protected through the application of effective risk and capital management frameworks.

Responsibilities of management

Executive Capital Risk Management Committee Committee The role of the Committee is The role of the Committee is to advise to monitor the risk management and support senior management and processes, to develop the overall risk the Board regarding the Group’s capital strategy and to ensure that position. It also ensures that the Group appropriate action is taken has in place the necessary processes to manage risk. to identify, manage and report on market, credit and liquidity risks in accordance with the Group’s Risk Appetite Customer Statements and the parameters Internal Standards set by the Board. Model Governance Committee Committee The role of the Committee is to The role of the Committee is to oversee customer outcomes in relation review, challenge and approve the overall to our customer strategy. It provides design, implementation and performance challenge over business practices of the Internal Model including relevant to our strategic customer its scope and application. objectives and conduct regulatory requirements. 52 Royal London Group Annual Report and Accounts 2014

2014 Directors’ remuneration report

Annual statement from the Remuneration Committee chairman

Dear member, The remuneration policy has three There have been no changes in the main aims: Directors’ remuneration policy in 2014, On behalf of the Board I am pleased to although the Committee conducted present the Remuneration Committee [[ to align executives’ interests with those a review of our long-term incentive report for 2014. of our members and customers; measures for 2015 onwards to ensure [[ to support the delivery of the Group that they continue to align as well as Whilst Royal London is not required to strategy, whilst ensuring adherence to possible with the Group’s strategic aims comply with the remuneration reporting the Group’s risk appetite; and and with the interests of our members requirements applicable to listed and customers. companies the format and content of this [[ to ensure remuneration is competitive report are intended to broadly meet these for our markets to help the Group The Committee also reviewed the requirements. This is because your Board attract and retain talent. remuneration policy for all Group believes that best practice disclosure will employees and is satisfied that an help members better understand how The Remuneration Committee’s appropriate reward structure exists below the remuneration strategy supports the primary role is to ensure that the Group’s Board level to attract and retain the talent Group’s strategy and their interests. remuneration structure is in line with the Group requires. Details of other these three aims. The Group strategy activities undertaken by the Committee The remuneration report is split into determines the medium-term (three- during 2014 are provided in the Annual two parts: the Directors’ remuneration to five-year) and annual business plans. report on remuneration. policy which sets out the Group’s policy These in turn guide the Board’s selection on directors’ remuneration, and the of measures and targets from the Group This year we will be asking for an Annual report on remuneration which Balanced Scorecard (page 57). advisory vote only on the Annual report sets out the payments and awards made on remuneration, as the remuneration to directors during the year and explains To incentivise executives appropriately, policy approved by members last year has the link between executive remuneration the main elements of the reward package remained unchanged. The Annual report and Company performance. are salary, a Short-Term Incentive Plan on remuneration is set out on pages 60 to (referred to as the ‘STIP’) linked to the 70 of this report. To be successful, the Group needs to achievement of the annual business plan, attract talented people who can ensure a Long-Term Incentive Scheme (the The Remuneration Committee and Royal London has the best products and ‘LTIS’) linked to the achievement of the the Board recommend that you vote services and delivers sustainably high levels three- to five-year business plan, market- for the resolution on the Annual of performance for our members. We are a related benefits and pension provision. report on remuneration. mutual organisation competing for talent predominantly against publicly-listed and The Board’s assessment of performance is privately-held financial institutions, and captured and summarised in the Group’s this requires a careful balance between scorecard of financial and non-financial competitive pay, motivational incentives measures. I am pleased to say that the to drive performance, and appropriate Group performed well on most measures. management of risk. The Committee reviewed the scorecard results against the Group’s wider performance, in particular the strong growth in our Pensions businesses, and RLAM has continued to perform well, Tracey Graham and agreed a final award of 142%. Chairman of the Remuneration Committee Annual Report and Accounts 2014 Royal London Group 53 STRATEGIC REPORT

Directors’ remuneration policy

Key principles of remuneration policy

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

Align executives’ interests [[ Performance-related incentive arrangements will be designed to align the interests with those of our members of executives with those of members and other customers. and other customers Support delivery of Group strategy [[ Performance-related incentive arrangements will be designed to reinforce the whilst ensuring adherence to the achievement of Group strategy. Group’s risk appetite [[ The remuneration policy will have regard to the remuneration codes of all relevant

regulators, including the Prudential Regulation Authority and Financial Conduct ADDITIONAL INFORMATION NOTICE OF AGM & RESOLUTIONS EUROPEAN EMBEDDED VALUE FINANCIAL STATEMENTS Authority, as well as institutional investor guidance on remuneration governance best practice. [[ The Committee will ensure that risk-taking outside of the Group’s risk appetite is not rewarded and will have absolute discretion to amend incentive amounts prior to payment to ensure they are appropriate. [[ When assessing performance, the Committee will take into account not just the measures and targets in the balanced scorecard, but also wider views of Company performance, quality of earnings and the sustainability of performance before finalising awards. Align with relevant market practice [[ Total remuneration will be appropriately competitive to support the recruitment, retention and motivation of talented people, and to help the Group compete effectively with leading UK life insurers and other financial services companies with which it competes for talent.

The tables overleaf set out separately the remuneration policy for executive directors and non-executive directors, as approved at the AGM in 2014. No material changes have been made to the approved policy, although additional information has been included to enhance transparency for our members.

The Policy that was voted on and approved by 92% of members in 2014 can be found at www.royallondon.com/about/annual-reports/2013annualreport 54 Royal London Group Annual Report and Accounts 2014

2014 Directors’ remuneration report continued

Future remuneration policy table – executive directors

Purpose and Operation Maximum Performance measures link to strategy opportunity Base salary Support the Salaries are reviewed annually by Increases for executive Subject to annual review of recruitment, considering the role and its pay directors will normally individual contribution and retention and positioning against the median of be in line with those for Group performance. motivation of appropriate comparator groups. The the broader Royal London talented people. primary benchmarking comparator group employee population is the top 12 UK life insurers with whom who achieved the same we compete for talent and business. The performance rating Committee also takes into account any and have a similar pay changes in responsibilities since the salary positioning relative was last reviewed, individual performance, to market. Company performance, and the outcome of the salary review for the broader Royal London employee population. Short-Term Focus Performance is assessed against a balanced Maximum STIP Performance is assessed against Incentive participants scorecard of one-year measures, with opportunity of up to a scorecard covering five areas Plan, STIP1 on the in-year vesting outcomes subject to a discretionary 150% of salary. Target of performance which are results that need override by the Committee (which may STIP opportunity of up reviewed each year. For 2015 to be achieved decrease or increase the award) to ensure to 75% of salary. No the measures and weights to meet Royal that awards fairly reflect underlying payment is made for are: Financial Performance London’s annual performance. Payment of at least threshold performance. (40%), Customers and financial and one-third of any amount earned under Project-related STIP Members (15%), Our People non-financial the STIP is deferred for three years and awards may be in addition (15%), Assurance (15%) and objectives in the is adjusted for the change in the value of to the maximum STIP. Building the Future (15%). The context of the Royal London to its members2 over the weighting for each category and agreed Group period. Unvested deferred STIP awards the selection of sub-measures or strategy. are subject to malus.3 An additional tasks within each category may project-related STIP may be offered be tailored each year to reflect in exceptional circumstances at business priorities, although the Committee discretion. weighting on financial measures will be no less than 30%.4 Long-Term Help align Vesting of awards is based on performance The maximum potential The key long-term Incentive executives with over three years against the Group’s key opportunity is 187.5% of performance measures for Scheme, the long-term long-term performance measures. To align salary. No award is payable 2014 are: Operating Profit LTIS interests of further with members’ long-term interests, for delivering an ‘On plan’ (55%), Investment Performance members and release of any award is further deferred level of performance. (25%), Customer Experience other customers. as follows: (10%) and Quality of [[ 50% vests after three years; Proposition (10%). [[ 25% vests after four years; and LTIS awards of up to 150% can be adjusted by a multiplier [[ 25% after five years from the date of grant. of +/- 25% based on the Vesting outcomes are subject to a cumulative Profit share over the discretionary override by the Committee three years. (which may decrease or increase the award) Specific performance measures to ensure that overall awards fairly reflect and weightings for each LTIS underlying performance and are also cycle will be described in the subject to clawback from 2014. Deferred Annual report on remuneration payments are also subject to malus.3 in the year of grant and the Further, the value of an award is adjusted year of vesting. for the change in the value of Royal London to its members.4 The vesting calculation is reviewed by internal audit. Annual Report and Accounts 2014 Royal London Group 55 STRATEGIC REPORT

Purpose and Operation Maximum Performance measures link to strategy opportunity GOVERNANCE RLAM Provide strong Vesting of awards is based on investment Maximum Key long-term performance Long-Term alignment of performance and profit growth over opportunity of measures for RLAM, Incentive participants three years. up to 150% of split 70% on investment Plan (RLAM with RLAM Vesting outcomes are subject to a discretionary salary per annum, performance and 30% LTIP) long-term override based on the Committee’s assessment with 34% of on revenue growth over performance. maximum three years. Applies to of underlying performance and are also subject to clawback from 2014. payable for Specific performance only one achieving the executive measures and weightings target level of for each RLAM LTIP director performance. No cycle will be described ADDITIONAL INFORMATION NOTICE OF AGM & RESOLUTIONS EUROPEAN EMBEDDED VALUE FINANCIAL STATEMENTS (CEO, payment is made RLAM)5 in the Annual report on for below-target remuneration in the year of performance. grant and the year of vesting. Benefits To support the Benefits are reviewed from time to time to Varies by recruitment, ensure they remain competitive in the relevant individual retention and talent markets. Currently they include life and level. motivation insurance, private medical insurance, medical of talented screening and a discretionary living-away- people. from-home allowance and either a company car or a cash allowance in lieu of a car. Executive directors may participate in the Group’s flexible benefit scheme. Executive directors may be eligible to receive relocation support based on the requirements of their role as determined by the Company. Pension6 To support the There are two schemes currently operating. Up to 25% recruitment, The Defined Contribution Scheme applies to of salary. retention and newly-appointed executive directors who are motivation not members of the Defined Benefit Scheme. of talented Directors may elect to receive all or part of people. the Company contribution to the Defined Contribution Scheme as a cash allowance. We also operate a Defined Benefit Scheme. Up to 1/45th The main terms applying to the final salary of final salary pensions accrued since April 2011 under this for each year scheme are: worked. [[ payable from age 60; [[ spouse’s pension (55% of the director’s pension) payable on death of the director; [[ increase in payment in line with inflation, up to a maximum of 2.5% each year; and [[ maximum increase in accrual of 2.5% per annum (anything accrued prior to April 2011 is not capped). This scheme is closed to new employees. 56 Royal London Group Annual Report and Accounts 2014

2014 Directors’ remuneration report continued

Future remuneration policy table – non-executive directors (NEDs)

Purpose and Operation Maximum Performance link to strategy Opportunity measures Annual fee Sufficient to attract Fees are reviewed annually against non- Fees will be targeted Continued good and retain directors executive director fees at companies of to be broadly contribution. of the highest calibre a similar size, with particular reference within 20% of fees and reflecting the to financial services and the UK life at companies of a responsibilities and insurance sector. similar size, with time commitment All directors abstain on determination of particular reference required. their own remuneration. to UK life insurers and financial The remuneration of the Group Chairman services companies. and the non-executive directors is determined by the Board as a whole (excluding the non-executive directors). The Chairman and non-executive directors are not eligible to participate in incentive schemes and their service is not pensionable. Fees for To reflect the additional Fees for chairing committees are reviewed Same approach as Continued good chairing time commitment that in the same way as the annual fee, as set set out above for contribution. committees chairing a committee out above. annual fee. requires. Additional To ensure that the The non-executive directors may be paid Same approach as Continued good fees governance framework an additional fee for projects that the set out above for contribution. remains flexible. Board considers are over and above their annual fee. normal duties. Such additional fees are paid on a per diem rate, based on the additional time commitment required. 1 To be eligible to receive any payment, participants must be in employment and not be under notice prior to the date payment is due in accordance with the Plan Rules. In exceptional circumstances, the Committee may make higher awards, or select different performance measures or waive deferrals, where it considers this to be in the best interests of members. 2 Deferred STIP and LTIS awards are converted into EEV units whose value is based on the Royal London Group European Embedded Value (EEV). The Royal London Profit Share (formerly known as Mutual Dividend) allocated during the period is notionally added back to the unit value. Prior to 2014, the value of units was calculated using Royal London’s Appraisal Value. The Committee considers EEV to be a simpler and more objective measure of Royal London’s value, which is easier to benchmark against other life insurers. 3 Malus may be applied at the discretion of the Committee for reasons such as, but not limited to, misconduct, material financial restatement, or behaviour that could lead to significant reputational damage. 4 To avoid any conflict with control function independence, the control function STIP is based on the performance of the function, and the Group financial element is minimal (10% of the overall rating). Of the executive directors, this arrangement only applies to Jon Macdonald. 5 The RLAM LTIP is in addition to the Group LTIS. 6 Historically, employees who had reached the HMRC lifetime allowance limit were invited to accrue an equivalent replacement benefit under an Unfunded Unapproved Retirement Benefit Scheme. This arrangement has been closed to new members and Andrew Carter is the only executive director who continues to participate in this scheme.

Deferral Additional fees for non-executive directors in Deferral is a key principle of the remuneration policy for exceptional circumstances executive directors. When an award is deferred, the cash A basic level of time commitment is expected from each non- amount is converted into EEV units1 that change in value in executive director to carry out their duties as set out in their line with the value of Royal London to its members, and these letter of appointment. Where additional duties are required, EEV units cannot vest (be converted back into cash and paid) non-executive directors may receive payment of additional until the end of the deferral period. The change in value of fees on a per diem basis for any time commitment over and EEV units supports alignment of executive director interests above the normal expectation. For example, the acquisition with those of our members. of the life, pensions and asset management business of the Co-operative Group in 2013 required additional governance 1 In the past the value of Royal London was based upon Appraisal Value (AV) and executives were awarded AV units. and oversight of the business acquired, and its integration into the Group requires additional time to be committed by some non-executive directors. Annual Report and Accounts 2014 Royal London Group 57 STRATEGIC REPORT

Remuneration policy for all employees is set at a level which might be achieved only once in every five The remuneration policy for Royal London employees is the years. A balanced scorecard is used to provide a holistic view same as for executive directors, although levels of remuneration of our overall Group performance. To do this, our business differ and the majority of employees do not participate in performance has been divided into the five sections shown the LTIS or RLAM LTIP. For all employees and directors, below. For 2015 the STIP comprises these five measures, GOVERNANCE remuneration is set with reference to the specific requirements with the relative proportion of each measure shown.1 of the individual role and pay levels in the relevant talent markets. The Committee does not consult directly with The Committee adopts a similar approach when setting employees specifically on remuneration policy for directors, targets for the Group LTIS and RLAM LTIP, with targets but is mindful of pay and employment conditions elsewhere based on the Group budget for year one of the performance in the Company when doing so, and when considering period, and on the Group’s MTP for years two and three. potential payments under the policy. The Committee receives Further details on measures used in our incentives are provided detailed information from management regarding the annual below. The current measures and weightings used for the pay review for all employees and also reviews the CEO’s LTIS are also outlined.2 recommendations for salary and STIP for his direct reports. ADDITIONAL INFORMATION NOTICE OF AGM & RESOLUTIONS EUROPEAN EMBEDDED VALUE FINANCIAL STATEMENTS It also reviews all awards to be made under long-term incentive In addition, a capital strength multiplier is applied, reflecting plans including the LTIS and RLAM LTIP. the potential profit share capacity over the performance period. The long-term awards are deferred through EEV units that Remuneration under previous policies change in value based on the Group’s EEV. The Committee Any awards made prior to the implementation of the has discretion to add or remove performance measures. remuneration policy detailed in this report will be honoured. These include the Group deferred STIP, LTIS, LTIP Scope for Committee discretion and RLAM LTIP awards from prior years. The value As outlined in the policy table, the Committee has discretion of outstanding awards is shown in the Annual report on to override formulaic outcomes for the STIP, LTIS and remuneration on page 68. RLAM LTIP, either positively or negatively. The Committee intends to use its discretion only when it is necessary to Performance measure selection and approach ensure that actual awards fairly reflect the underlying business to target setting performance that has been delivered for members. Any Performance targets are set for each incentive plan measure, discretion would be applied within the maximum award reflecting the expected level of performance, as defined in the limits of the relevant plan. Group’s Medium-Term Plan (MTP). For the STIP, minimum and maximum levels of bonus pay-out are set around the plan. 1 In the case of the CEO of RLAM Andrew Carter, 73% of the STIP is based on measures specific to RLAM performance. The threshold pay-out level is set with regard to the prior 2 Andrew Carter receives a smaller Group LTIS, but also participates in the year’s achievement. On-target performance equates to RLAM LTIP linked 70% to RLAM investment performance and 30% to a performance equal to plan and the maximum pay-out level RLAM revenue growth.

Performance measure selection and Performance measure selection and approach to target setting: 2015 STIP approach to target setting: 2015 LTIS n Financial performance– n Financial performance increasing the value of the n Customer experience – business, and ensuring we can by delivery of better always meet our obligations customer service we will 15% n Customers & members – 10% outperform our competitors providing good service n Investment performance and good, sustainable n Quality of proposition financial return measured through n 15% Our people – ensuring our 25% achievement of market share 40% employees are engaged with and taking account of the the Company, which in turn 55% quality of new business and leads to better service for our effective management of risk members and customers n Assurance – ensuring 15% we understand and 10% 15% effectively manage the risks of our business n Building the future – delivery of our key investment projects 58 Royal London Group Annual Report and Accounts 2014

2014 Directors’ remuneration report continued

Approach to the recruitment of executive directors towards the guideline. Executive directors are therefore The Nomination Committee of the Board appoints given time to acquire units, with 50% of any LTIS and directors who are the most appropriate for each position. deferred STIP (net of tax) vesting deferred in units The Committee’s approach to determining remuneration for until the holding requirement is satisfied. The Committee new executive directors is to pay sufficiently to recruit the reviews these guidelines periodically to ensure they individual, giving careful consideration to internal and external are appropriate for Royal London, taking into account market pay levels, as well as previous remuneration. The market practice. following limits are placed on remuneration awarded to new executive directors: Pay scenario charts The charts opposite illustrate the potential total pay [[ the maximum STIP award will not exceed 150% of salary; opportunity for each executive director for the 2015 [[ the maximum combined LTIS and RLAM LTIP opportunity performance year, based on different scenarios. on recruitment will not exceed 300% of salary; and Scenario Salary, STIP LTIS [[ pension and benefits will be as outlined in the Policy table. pension outcome outcome and benefits (% of (% of Where a newly-recruited executive forfeits incentives max) max) from their previous employer, Royal London may make Fixed 0 0 compensatory awards, typically using one-off additional STIP, LTIS (and LTIP in RLAM), or EEV unit awards to offset On-plan 50 01 any losses. Such awards will be made on no more than an equal Performance Received in line fair value basis, taking into account performance measures, (achieves targets) with contractual time horizon and other aspects of the award that has been Maximum entitlement. 100 100 forfeited. Depending on the value of the award forfeited, the Performance normal maximum plan limits may need to be exceeded on a (significantly one-off basis. exceeds targets)

In the event of an internal promotion to the Board, any prior 1 34% for RLAM LTIP contractual obligations and incentive awards to the new executive director may be honoured. Fixed elements of pay (salary, pension and benefits) are positioned to ensure the total package is appropriate for the The approach to setting remuneration for newly-appointed individual and role. non-executive directors (NEDs) is aligned with the approach taken for the annual review of fees as stated in the Future The short- and long-term incentives are designed to align remuneration policy table and takes into account market- executives with the interests of members and customers and competitive fee levels and the fees paid to the existing NEDs. reinforce the short- and long-term success of Royal London.

Ownership guidelines Actual variable pay outcomes can vary between 0% and 100% The Group CEO and other executive directors are required of maximum depending on actual performance delivered, to hold either AV or EEV units earned under the short- and resulting in a higher or lower split between fixed and variable long-term incentive plans and build up a minimum holding pay. This is illustrated in the charts opposite. over a period of three to five years. This means that the value of a participant’s holding changes in line with the value of Service contracts Royal London to its members. The Committee believes that All new executive director service contracts will require ownership of EEV units reinforces the principles underlying 12 months’ notice to the Company, and will also require the Group’s remuneration policy and further aligns the that the director mitigate any pay in lieu of notice. Details of interests of executives with those of members. The current the service contracts for the current executive directors are holding requirements by each director are detailed in the provided in the Annual report on remuneration. Annual report on remuneration. The Chairman and non-executive directors have letters of The requirement to hold units was introduced in 2011. Only appointment with the Company. Letters of appointment do not units that have vested (and are no longer conditional on contain provisions for loss of office payments, or any additional performance) under Royal London incentive schemes count remuneration other than the fees set to this policy. Annual Report and Accounts 2014 Royal London Group 59 STRATEGIC REPORT

Pay scenarios Exit payment policy The Company’s approach to any payments in the event of termination is to take account of the individual circumstances, including the reason for termination, any contractual obligations Andrew Carter £1,953k and applicable incentive plan and pension scheme rules. n LTIS/RLAM LTIP Executive directors’ contracts do not include any specific n STIP (including deferral) compensation for severance as a result of a change of control. GOVERNANCE n Fixed 45% £971k In the event an executive leaves for reasons of death, injury, disability, change of control of the Company, or any other £523k 18% 28% reason which the Committee in its absolute discretion permits, 28% any outstanding awards under applicable short and long-term 100% 54% 27% incentive plans will be pro-rated for time and performance. For all other leavers, outstanding short- and long-term incentive awards will lapse. The Committee retains discretion Fixed On-plan Maximum to alter these provisions as permitted by the relevant plan rules on a case-by-case basis following a review of circumstances ADDITIONAL INFORMATION NOTICE OF AGM & RESOLUTIONS EUROPEAN EMBEDDED VALUE FINANCIAL STATEMENTS Tim Harris £1,800k and to ensure fairness for members and participants. Salary, n LTIS pension and benefits will normally be paid up to the date of n STIP (including deferral) termination of employment. In certain circumstances, payment n Fixed 44% of salary (this may also include pension and benefits) in respect of the notice period may be made as a single £763k payment in lieu of notice. Salary, pension and benefits £512k 33% 28% included in any termination payments will be in line with the remuneration policy. 100% 67% 28% Under certain circumstances, it may be in members’ interests for the Group to enter into a legally binding agreement with Fixed On-plan Maximum an executive director when their employment is terminated. In these circumstances, the Company may reimburse reasonable Phil Loney £3,108k legal fees that have been incurred by the executive director. n LTIS n STIP (including deferral) External appointments n Fixed 39% Subject to approval of the Board, executive directors may accept external non-executive director appointments. The executive £1,387k director may retain any fees that they receive from these £895k 32% appointments. None of the executive directors currently hold a 35% paid external appointment. Details of any external directorships 100% 65% 29% will be disclosed in the Annual report on remuneration for the relevant year.

Fixed On-plan Maximum Consideration of members’ views In determining remuneration policy, the Committee endeavours Jon Macdonald £1,095k to take into account the views that members express at the n LTIS AGM, following the Remuneration Committee Chairman’s n STIP (including deferral) presentation. Members of the Committee are also available to n Fixed 34% speak with members on an individual basis at the AGM. £540k

£360k 33% 33%

100% 67% 33%

Fixed On-plan Maximum

Note: This excludes buy out awards that were made on joining Royal London. 60 Royal London Group Annual Report and Accounts 2014

2014 Directors’ remuneration report continued

Annual report on remuneration

Activities of the Remuneration Committee during 2014

During the year the Committee met 10 times and the table below sets out the principal activities of the Committee during 2014.

Area Activity Directors’ The Committee reviewed the Directors’ remuneration policy and agreed that no changes were remuneration policy required for 2015. Incentive scheme targets The Committee agreed the targets for the 2014 STIP, the 2014 LTIS and the 2014 RLAM LTIP. Salary review As part of the annual salary review, the Committee benchmarked salaries relative to the competitive market for each role within its remit, taking into consideration the performance of the executives. Incentive scheme The Committee reviewed STIP, LTIS and RLAM LTIP outcomes for 2014 in the context of outcomes overall Group performance and risk appetite. LTIS measures The Committee kept the performance conditions in the Group’s LTIS under review to ensure that they continued to align with the Group’s overall purpose and strategy, which includes maximising value for the Group’s members and customers. Appointment of the new The Committee reviewed and approved the remuneration-related terms for the appointment of Chief Finance Officer Tim Harris, the Group’s new Chief Finance Officer. Review of clawback The Committee updated the scheme rules to align with market practice and UK regulatory requirements. Our current approach allows us to demand participants to pay back awards already paid to them. We continue to monitor use of these provisions. Standardisation The Committee continued an ongoing programme to standardise benefits where possible across of benefits the Group. Regulatory changes The Committee considered the impact of new regulations from the FCA and other regulatory bodies and considered how these should be adopted by the Group.

Exercise of discretion by the Committee

A small amount of upward discretion of 3% was applied in adjudicating the 2014 STIP as the Committee felt the formulaic outcome understated their holistic assessment of 2014 performance. The Committee did not exercise its discretion on the outcomes of the LTIS and RLAM LTIP. Annual Report and Accounts 2014 Royal London Group 61 STRATEGIC REPORT

Executive director remuneration in 2014 – audited

The table below sets out the single figure for total remuneration for each executive director.

Andrew Carter Jon Macdonald Kerr Luscombe Phil Loney Tim Harris Restated 2014 2013 2014 2013 2014 2013 2014 2013 2014 2013 (£000) (£000) (£000) (£000) (£000) (£000) (£000) (£000) (£000) (£000) Salary 354 348 292 285 126 340 634 623 255 - Benefits 15 15 15 15 5 14 75 92 9 - GOVERNANCE Other fixed remuneration - - - - 2 - - - - - Pension supplement - - 13 12 19 51 151 134 51 - Pension benefits 144 148 31 30 - - 5 22 - - TOTAL 513 511 351 342 152 405 865 871 315 - STIP 389 475 312 329 - 150 904 867 325 - TOTAL

remuneration for ADDITIONAL INFORMATION NOTICE OF AGM & RESOLUTIONS EUROPEAN EMBEDDED VALUE FINANCIAL STATEMENTS performance year 902 986 663 671 152 555 1,769 1,738 640 - Long-term incentives vesting 747 683 218 85 - 100 1,090 876 - - Total remuneration 1,649 1,669 881 756 152 655 2,859 2,614 640 - Note: Salaries are shown gross of any Salary Sacrifice element and the pension benefits for Jon Macdonald and Phil Loney do not include employee contributions made by Salary Sacrifice. STIP values are the full value awarded for the performance year including amounts still subject to time-based conditions. The Long-Term Incentives values are based on the estimated value of awards exercisable (after a three-year performance period) at the reporting date and exclude any estimated value of awards deferred to future years (but include awards restricted by holding conditions). Andrew Carter’s 2013 Long-Term Incentives value has been restated to also include the value of the RLAM LTIP that vested at 31 December 2013.

Salary Pensions supplement The salaries shown for executive directors are prior Kerr Luscombe, Jon Macdonald, Phil Loney and Tim Harris to participation in any benefit-related Salary Sacrifice received cash supplements in lieu of pension of 15%, 15%, 25% arrangements. and 20% of salary respectively. Phil Loney and Jon Macdonald invested part of this supplement into the Group’s Defined Benefits Contribution Scheme. Benefits include life insurance, private medical insurance, medical screening and company car (or cash allowance in lieu Other – payment to leavers of a car). Phil Loney receives an allowance of £56,000 per No payments other than those disclosed under the ‘Loss of annum to fund transport and overnight expenses connected to office payments’ on page 64, the ‘Interest in Deferred Bonus travel between his home and place of work. Awards’ and the ‘Interest in exercisable long-term incentive awards’ on page 68 were made to past directors. Other fixed remuneration Details of payments in respect of Kerr Luscombe are provided Defined benefit pension on page 64. This was calculated as 20 times the increase in accrued pension in the year, net of inflation and employee contributions. 62 Royal London Group Annual Report and Accounts 2014

2014 Directors’ remuneration report continued

2014 STIP outcome – audited Max award Outcome The maximum STIP opportunity levels, (as % of salary) (as % of salary) performance ratings and overall STIP outcomes for Andrew Carter 150 109 the executive directors in respect of 2014 are shown Jon Macdonald 120 106 in the table on the right. Phil Loney 150 142 Tim Harris 120 79 Note: Kerr Luscombe did not receive an award for 2014. Tim Harris received an award based upon 12 months’ salary in accordance with his hiring terms (no additional buy outs were made on his recruitment).

2014 STIP performance was assessed against the following measures:

Measure and weighting Threshold Target Maximum

Financials 40%

Customers and members 15%

Our people 10%

Assurance 15%

Building the future 20%

Actual performance

73% of Andrew Carter’s 2014 STIP award was assessed against RLAM specific measures:

Measure and weighting Threshold Target Maximum

RLAM performance 100%

Actual performance

The Board believes that due to the commercial sensitivity of One-third of STIP payments are deferred for three years. these targets, disclosing them may damage the competitive The value of the deferred element varies over the deferral position of the Group. period in line with the value of Royal London to its members (plus any Profit share allocatedduring the period). The STIP Individual awards were calculated with reference to the overall figures shown in the single figure table include the deferred scorecard outcomes, the maximum opportunity level, and the element of the payment. Further details of outstanding individual’s performance rating. deferred STIP awards are provided on page 68. Annual Report and Accounts 2014 Royal London Group 63 STRATEGIC REPORT

Long-term incentives vesting Scheme Initial award Vesting in 2014 – audited (as % of (as % of The table on the right details the percentage of salary) salary) long-term incentive awards granted in 2012 which Andrew LTIS 80 39 vested at 31 December 2014. Carter RLAM LTIP 150 128 Jon LTIS 100 48 Macdonald Phil Loney LTIS 150 73 GOVERNANCE

The performance measures and estimated outcomes for the 2012 LTIS are as follows:

Measure and weighting Threshold Maximum

Growth in value of Royal London relative to peers 50% IACA TTMNSERPA MEDDVLENTC FAM&RSLTOSADDITIONAL INFORMATION NOTICE OF AGM & RESOLUTIONS EUROPEAN EMBEDDED VALUE FINANCIAL STATEMENTS

Investment returns of Royal London With-Profits fund 20%

Growth in value of Royal London in absolute terms 15%

Growth in new business 15%

Cumulative Profit share multiplier

Actual performance

The performance measures and outcomes for the 2012 RLAM LTIP were as follows:

Measure and weighting Threshold Target Maximum

Investment performance 70%

Revenue growth 30%

Actual performance

The Board believes that due to the commercial sensitivity of these targets, disclosing them may damage the competitive position of the Group.

2012 LTIS and RLAM LTIP awards vest at the end of the three-year performance period, with vested awards released 50% after three years, 25% after four years, and 25% after five years from the date of grant.

All long-term incentive award outcomes are reviewed by internal audit. 64 Royal London Group Annual Report and Accounts 2014

2014 Directors’ remuneration report continued

Loss of office payments – audited Executive director pensions – audited Details of loss of office payments made in 2014, and any Andrew Carter is the only executive director who currently outstanding loss of office payments, are provided in the participates in the Group’s Defined Benefit pension scheme. table below. Details of his pension rights under the scheme as at 31 December 2014 are outlined in the table below. Name Details of loss of office payments John No additional payments were made to John Pension rights as at Deane Deane other than those in accordance with 31 December 2014 the terms disclosed in the 2012 Directors’ (£000) remuneration report. Andrew Carter 100 Kerr Kerr Luscombe stepped down as Group Finance Luscombe Director on 14 May 2014 and received the following payment in 2014 which is included in The main terms applying to their final salary pensions accrued the ‘Other fixed remuneration’ row of the single since 30 November 2001 are: figure remuneration table: [[ payable from normal retirement age of 60; [[ Holiday pay: £1,700 [[ spouse’s pension of 55% of the director’s pension, payable on Mike No additional payments were made to Mike death of the director; Yardley Yardley other than those in accordance with the terms disclosed in the 2011 Directors’ [[ pensions in payment increase in line with RPI (up to a remuneration report. maximum of 7.5% each year) in relation to pension accrued Stephen In line with his leaving provisions set out in the before 1 April 2011 and in line with CPI (up to a maximum Shone 2013 remuneration report, a payment of £104,140 of 2.5% each year) in relation to pension accrued from was made in 2014 in respect of pay in lieu of notice. 1 April 2011; [[ pensionable salary increases are capped at a maximum of 2.5% each year in respect of service from 1 April 2011; and Payments to past directors - audited No payments other than those disclosed under the ‘Loss of office [[ no additional benefit is receivable in the event of payments’ above, the ‘Interest in Deferred Bonus Awards’ and the early retirement. ‘Interest in excercisable long-term incentive awards’ on page 68.

Non-executive director remuneration in 2014 – audited The non-executive directors received the following remuneration:

Annual fee Committee Additional fee1 Total (£000) chairmanship fee (£000) (£000) (£000) 2014 2013 2014 2013 2014 2013 2014 2013 Andrew Palmer 55 55 20 13 23 14 98 82 David Weymouth 55 55 17 - 6 - 78 55 Duncan Ferguson 55 55 33 36 23 13 111 104 Ian Dilks 7 - - - - - 7 - Kathryn Matthews 55 55 15 14 - - 70 69 Rupert Pennant-Rea 220 155 - - - - 220 155 Tracey Graham 54 51 20 10 - - 74 61 1 David Weymouth took over as Chairman of the Board Risk Committee from Duncan Ferguson in April 2014. Duncan Ferguson receives a fee for his role as the Senior Independent Director and this is included in the disclosure of his Committee chairmanship fee. Those NEDs who took on extra responsibilities when the Group acquired CIS were paid an additional fee for their time commitment. Annual Report and Accounts 2014 Royal London Group 65 STRATEGIC REPORT

CEO remuneration compared to Royal London The comparator group of life insurers for Royal London The table below shows the CEO single remuneration figure comprises Aviva, Legal & General, Old Mutual, Prudential, compared to EEV growth over the past six years. It should be Friends Life , Standard Life and St. James’s Place. These noted that Phil Loney joined the Group on 1 October 2011 represent the companies with which Royal London most directly and the remuneration shown before that date is that of Mike competes. We will continue to review this group of life insurers to Yardley who resigned on 30 September 2011. ensure that they are the most relevant peer group to compare to.

Restated 2009 2010 2011 2012 2013 2014 Total single figure (£000s) - - 1,403 1,703 2,614 2,859 GOVERNANCE CEO Bonus vesting as a % of maximum - - 93 85 93 95 Phil Loney LTI vesting as a % of maximum - - - - 71 39 2013 restated to reflect the % of Royal London units which vested. 2009 2010 2011 2012 2013 2014 Total single figure (£000s) 1,385 2,343 4,420 - - - CEO Bonus vesting as a %

of maximum 82 94 92 - - ADDITIONAL INFORMATION - NOTICE OF AGM & RESOLUTIONS EUROPEAN EMBEDDED VALUE FINANCIAL STATEMENTS Mike Yardley LTI vesting as a % No maximum award limit. Value at vesting of maximum included in total single figure stated above. - - -

Percentage change in Royal London EEV since 2008 v life insurance comparator group*

160 ● Royal London Group 140 ● Comparator group 120

100

0 2008 2009 2010 2011 2012 2013 2014

Note: The 31 December 14 comparator group percentage change is estimated based on information publicly available. * EEV for Royal London and the comparator group includes cumulative dividends paid since 31 December 2008.

Supporting social responsibility set a target to raise £100,000 for our national charity partner At Royal London, we believe social responsibility is at Leukaemia & Lymphoma Research over two years. In addition the centre of making mutuality meaningful. Phil Loney, to supporting social responsibility at a corporate level, Group CEO, leads by example and annually donates a we actively encourage it at an individual level, enabling quarter of his STIP to charity. In addition our ‘Stepforward’ our people to donate tax effectively through ‘Give As You programme enables our people to undertake voluntary Earn’ schemes. These schemes have contributed significant work in and around our communities, and the Group has donations to charity. 66 Royal London Group Annual Report and Accounts 2014

CEO remuneration compared to other employees During the year Phil Loney’s remuneration increased by 1.4% compared to 2013, whereas the average employee’s remuneration increased by 4.4%.

Change in remuneration % change in base % of target STIP % change in STIP % change in total salary 2013 to 2014 earned 2013 to 2014 remuneration 2013 to 2014 Chief Executive 1.5 189 4.3 1.4 All employees 4.6 142 8.4 4.4 Note: ‘% of target STIP earned’ is not the level of bonus earned. For example, if an employee has a target bonus of 10% of salary and an average rating they would have received 14.2% of salary (10% x 142%). ‘% of target STIP earned’ analysis includes all participants in the 2014 STIP, not just those employed at 31 December 2014. Total remuneration includes salary, allowances, benefits and STIP (excludes long-term incentives and pension which are deemed too volatile to make meaningful comparisons).

[[ an external review of executive reward; Employee performance has a significant impact on the annual STIP received by employees in any given year. The [[ the current remuneration package, experience, achievements Committee therefore considers employees who received the same and individual performance; performance rating as the CEO for 2014 as the most meaningful [[ the performance of Royal London Group and its business group with which to compare the change in CEO remuneration. units; and In 2014, for those employees with the same performance rating as the CEO, total remuneration increased by 5.7%. [[ the annual review of remuneration for all employees in the Royal London Group. Implementation of remuneration policy in 2014 As part of the annual executive directors’ remuneration review The following section sets out how remuneration policy will be the following matters are taken into account: implemented in 2015, including details of salary increases and short- and long-term incentive awards. [[ the overall Group cap on increase in salary bill;

Salaries Salaries for executive directors were reviewed in accordance with the remuneration policy. The following table sets out the annual salaries payable to each director from 1 April 2014.

2015 2014 Increase (£000) (£000) (%) Andrew Carter 364 356 2.2 Phil Loney 656 637 3.0 Jon Macdonald 300 294 2.0 Tim Harris 419 410 2.2

STIP opportunities for 2015 Performance measure selection and In line with remuneration policy, STIP opportunities and approach to target setting: 2015 STIP performance measures for the executive directors in respect n Financial - increasing the of 2015 performance are as follows: value of the business and ensuring we can always meet our obligations Maximum n Customers & members - 15% providing good service (as % of salary) and good sustainable financial return Andrew Carter 150 15% 40% n Our people - ensuring our Phil Loney 150 employees are engaged with the Company, which, Jon Macdonald 120 in turn leads to better service for our members Tim Harris 120 and customers 15% n Assurance - ensuring we 15% understand and effectively In the case of the CEO of RLAM, Andrew Carter, 73% of the manage the risks of our business STIP is based on measures specific to RLAM performance. n Building the future Further detail on targets set for each measure will be provided - delivery of our key investment projects in the Directors’ remuneration report for 2015, subject to commercial sensitivity. Annual Report and Accounts 2014 Royal London Group 67 STRATEGIC REPORT

Long-term incentive awards granted in 2015 The following long-term incentive awards will be granted to executive directors in 2015, in accordance with the remuneration policy.

Role Scheme Face value % vesting End of (as % of salary) for plan performance performance period Andrew Carter LTIS 80 0 CEO, RLAM RLAM 150 34 LTIP 31 December Jon Macdonald CRO LTIS 100 0 2017 GOVERNANCE Phil Loney CEO LTIS 150 0 Tim Harris CFO LTIS 150 0

Performance measures for LTIS awards granted in 2015 are Actual targets set for each measure will be disclosed in the shown in the chart below. Directors’ remuneration report for 2017, unless the Committee considers them too commercially sensitive to disclose. Performance measure selection and Pension and benefits approach to target setting: 2015 LTIS ADDITIONAL INFORMATION NOTICE OF AGM & RESOLUTIONS EUROPEAN EMBEDDED VALUE FINANCIAL STATEMENTS Pension and benefits will be implemented in line with the stated remuneration policy in 2015. n Financial performance n Customer experience 10% n Investment performance Non-executive director fees for 2015 n Quality of proposition The annual base fee for non-executive directors in 2015 is £56,400. Additional fees are payable for Committee 25% Chairmanship as follows: 55% [[ Board Risk Committee: £22,000; 10% [[ Investment Committee: £15,000; [[ With-Profits Committee: £20,000; [[ Audit Committee: £20,000; and

In addition, a capital strength multiplier is determined and [[ Remuneration Committee: £20,000. applied by the Committee at the end of the performance period. The multiplier reflects the potential Profit share The annual fee for the Group Chairman is £225,500 and the capacity over the performance period. annual fee for the Senior Independent Director is £10,000.

The RLAM LTIP is linked 70% to RLAM investment In addition, non-executive directors may receive additional performance and 30% to RLAM revenue growth. fees in respect of time commitment over and above that normally required, as described in the remuneration policy.

Units held by executive directors The table below sets out the value of units held by executive directors as at 31 December 2014 and their individual holding requirements.

Holding requirement Value of units held (£000) at 31 Dec 2014 (£000) Andrew Carter 285 721 Jon Macdonald 294 435 Phil Loney 1,273 1,920 Tim Harris 615 - Note: Current holding requirements are stated as a % of salary. Total share interests include all long-term incentives which have satisfied their performance conditions and are value based on their starting unit price. RLAM LTIP awards are not subject to holding conditions. 68 Royal London Group Annual Report and Accounts 2014

Outstanding awards under incentive schemes – audited The following tables provide details of outstanding awards under incentive schemes, including deferred STIP and other deferred bonus awards.

Interest in deferred bonus awards Value of Paid in Deferred in Change in value of Value of non-exercisable 2014 2014 non-exercisable non-exercisable awards as at (£000) (£000) awards during awards as at 31.12.2013 2014 31.12.2014 (£000) (£000) (£000) Andrew Carter 658 (220) 168 61 667 John Deane 595 (205) - 39 429 Jon Macdonald 112 - 132 25 269 Kerr Luscombe 165 (37) - (128) - Mike Yardley 873 (373) - - 500 Phil Loney 538 - 357 91 986 Stephen Shone 858 (213) 107 74 826 Notes: The value of all non-excercisable awards is estimated based on information available at the reporting date. Kerr Luscombe resigned in 2014 and forfeited all remaining unvested deferred bonus awards.

Interest in exercisable long term incentive awards Value of Transfer from Change in value Paid in 2014 Value of exercisable non-exercisable of exercisable (£000) exercisable awards as at awards awards during awards as at 31.12.20131 (£000) 2014 31.12.2014 (£000) (£000) (£000) Andrew Carter 813 747 69 (718) 911 John Deane 289 190 61 (350) 190 Jon Macdonald 85 286 27 (68) 330 Kerr Luscombe 100 - 21 (121) - Phil Loney 876 1,337 254 (531) 1,936 Stephen Shone2 569 603 121 (690) 603 1 The value of exercisable awards is estimated based on information available at the reporting date and includes awards subject to holding conditions. 2 Stephen Shone’s ‘Value of exercisable awards as at 31.12.2013’ has been restated from £888,000, as the value of exercisable awards as at 31.12.13 reported in the 2013 Directors’ remuneration report included an award that had been paid in 2013.

In addition to the previously noted exercisable awards, the following values have been estimated in respect of plans which have not reached their third anniversary or date of exercise. Non-exercisable as at 31.12.2014 Restated value of Transfer to Change in value of Non- Non- Total non-exercisable exercisable non-exercisable exercisable, exercisable, (£000) awards as at awards2 awards during subject to subject to 31.12.20131 (£000) 2014 time only3 performance4 (£000) (£000) (£000) (£000) Andrew Carter5 1,550 (747) 842 317 1,328 1,645 John Deane 289 (190) 91 190 - 190 Jon Macdonald 579 (286) 292 289 296 585 Kerr Luscombe 653 - (653) - -- Phil Loney 2,284 (1,337) 1,110 1,090 967 2,057 Stephen Shone 887 (603) 319 603 - 603 Tim Harris6 - - 330 - 330 330 Notes: The value of non-exercisable awards is estimated based on information available at the reporting date. Kerr Luscombe resigned in 2014 and forfeited all unvested awards. Included in this amount are buyout awards for Phil Loney and Jon Macdonald that were made on joining Royal London and disclosed in the Directors’ remuneration report for the year in which they joined 1 In previous Directors’ remuneration reports, the provision for non-exercisable awards was calculated based on the forecast award at vesting, spread over the period of vesting. In order to increase transparency for members, this disclosure has been changed to show the face value of non-exercisable long-term incentive awards as at the start and end of the year .The value as at 31 Dec 13 has therefore been restated. 2 This is the value of long-term incentive awards that became exercisable in 2014 and are no longer subject to performance or time-based conditions. 3 This is the value of long-term incentive awards that are no longer subject to performance, but may not be exercised until a future date. 4 This is the value of long-term incentive awards that are subject to further performance, i.e. the performance period has not yet ended. 5 Andrew Carter’s RLAM LTIP has been restated to be the full amount of the award, which is not yet exercisable and subject to performance in accordance with note 1. 6 Tim Harris joined in 2014 and was invited into the 2014 LTIS scheme with an initial award equivalent to 150% of salary. Annual Report and Accounts 2014 Royal London Group 69 STRATEGIC REPORT

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

CEO terms Other executive director terms Duration Continuous term to retirement age. Continuous term to retirement age. Notice period 12 months by the Company. 12 months by the Company. 12 months by the CEO. Up to 12 months by the executive director. Pay in lieu of notice Pay in lieu of notice (salary and Pay in lieu of notice (salary and contractual benefits) if employment is contractual benefits) if employment

terminated by the Group for reasons is terminated by the Group for reasons GOVERNANCE other than misconduct. other than misconduct. Other allowances Company reimburses reasonable travel Not applicable. and overnight expenses in connection with work-related travel to and from home to place of work.

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

The main terms of non-executive directors’ letters of appointment are provided in the table below. IACA TTMNSERPA MEDDVLENTC FAM&RSLTOSADDITIONAL INFORMATION NOTICE OF AGM & RESOLUTIONS EUROPEAN EMBEDDED VALUE FINANCIAL STATEMENTS

Date of letter of appointment Notice period Andrew Palmer 25 March 2011 3 months David Weymouth 24 April 2012 3 months Duncan Ferguson 31 March 2010 3 months Ian Dilks 17 September 2014 3 months Kathryn Matthews 24 April 2012 3 months Rupert Pennant-Rea 4 September 2012 3 months Tracey Graham 19 December 2012 3 months

Remuneration Committee meetings in 2014 The Committee received support and advice from external The Remuneration Committee met 10 times in 2014. advisers during the year. From time to time it undertakes due During 2014, the members of the Committee were as follows: diligence to ensure that the advice it receives is independent. The table below provides details of the external advisers to [[ Tracey Graham (Chairman) the Committee and the respective fees paid to them in 2014. [[ Kathryn Matthews Fees are charged based on the scope and requirements of the work as agreed with the Committee or Royal London Group [[ Rupert Pennant-Rea as a whole. [[ Andrew Palmer (joined June 2014).

Nature of advice provided to Total Nature of advice Appointed by the Remuneration Committee fees provided to other (£000) parts of the Royal London Group Kepler Associates Independent advice on all aspects 153 None. Appointed by the of remuneration of the executive Remuneration Committee. directors and senior executives. Kepler does not provide Provides support on other advice to other parts of aspects of Group remuneration the Group and is therefore for the Committee. considered independent. Pinsent Masons Legal support with regard to the 19 General legal advice. Advisers to the Company on operation of the Group’s incentive HR matters. plans and matters pertaining to the terms of appointment of directors. PricewaterhouseCoopers Agreed upon procedures on RLAM 19 Audit, tax and Appointed by the Committee incentive schemes. non-audit services. but auditors to the Company. Towers Watson Audit on RLAM incentive schemes. 10 Administration and Appointed by the Company. secretarial support to the Group Pension Scheme. 70 Royal London Group Annual Report and Accounts 2014

Distribution statement The illustration below shows the increase in EEV profit before tax and Profit share, EEV operating profit, Profit share and total employee pay expenditure in 2014.

EEV profit EEV operating profit Profit share Total employee from continuing from continuing pay expenditure operations before operations before tax and Profit share exceptional items

Includes a £150m one-off gain from CIS acquisition £551m £259m £196m £220m £81m £60m £175m £190m

2013 2014 2013 2014 2013 2014 2013 2014

Note: The decrease on the prior year’s profit is due to the impact of exceptional items: £150m gain arising on the acquisition of CIS in 2013 and a charge of £61m arising in 2014 from the introduction of charge capping on defined contribution group pension schemes, together with lower economic items, a decrease in the Royal London Group Pension Scheme surplus and an increase in financing costs.

Consideration of members’ views The voting outcome on the Directors’ remuneration report at the 2014 and 2013 AGMs is shown in the table below. Members expressed no adverse views on executive remuneration at the AGM.

DRR for year Number of Percentage of Number of Percentage of votes Total Number of votes cast for votes cast for votes against cast against votes cast votes withheld (%) (%) 2014 14,943 95.1 771 4.9 15,714 424 2013 15,287 94.6 882 5.4 16,169 319

By order of the Board

Tracey Graham Chairman of the Remuneration Committee Annual Report and Accounts 2014 Royal London Group 71

Auditors’ report STRATEGIC REPORT

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

Report on the financial statements Certain required disclosures have been [[ The valuation of insurance contract presented elsewhere in the Annual liabilities, focusing particularly on: Report and Accounts (the “Annual Our opinion • Guaranteed annuity options In our opinion: Report”), rather than in the notes to the financial statements. These are • Persistency assumptions GOVERNANCE [[ The Royal London Mutual Insurance cross-referenced from the financial • Expense assumptions Society Limited’s Group financial statements and are identified as audited. statements and Parent company financial [[ Pension scheme surplus valuation, statements (the “financial statements”) The financial reporting framework that particularly focused on inflation, give a true and fair view of the state of has been applied in the preparation of discount rates and mortality the Group’s and of the Parent company’s the financial statements is applicable law assumptions in the calculation of affairs as at 31 December 2014 and of and IFRSs as adopted by the European the liability; and the Group’s result and the Group’s and Union and, as regards the Parent [[ Valuation of complex financial the Parent company’s cash flows for the company financial statements, as applied investments, particularly focusing ADDITIONAL INFORMATION NOTICE OF AGM & RESOLUTIONS EUROPEAN EMBEDDED VALUE FINANCIAL STATEMENTS year then ended; in accordance with the provisions of the on investments where the valuations Companies Act 2006. [[ the Group financial statements have involved judgements or specialist been properly prepared in accordance valuation processes. with International Financial Reporting Our audit approach Standards (“IFRSs”) as adopted by the The scope of our audit and our areas European Union; Overview of focus Materiality We conducted our audit in accordance [[ the Parent company financial statements Overall Group materiality was set at with International Standards on have been properly prepared in £85m which represents 2.7% of the Auditing (UK and Ireland) (“ISAs accordance with International Financial unallocated divisible surplus. (UK & Ireland)”). Reporting Standards (“IFRSs”) as adopted by the European Union and as Scoping We designed our audit by determining applied in accordance with the provisions Using the outputs of our risk assessment, materiality and assessing the risks of of the Companies Act 2006; and together with our understanding of material misstatement in the financial the Group structure, we scoped our statements. In particular, we looked [[ the financial statements have been audit based on the size of, and the at where the directors made subjective prepared in accordance with the risks identified within, the individual judgements, for example, in respect requirements of the Companies reporting units relative to the financial of significant accounting estimates Act 2006 and, as regards the Group statements and taking into account both that involved making assumptions financial statements, Article 4 of the the qualitative and quantitative factors and considering future events that IAS Regulation. in their contribution to the overall are inherently uncertain. As in all of What we have audited Group financial performance and our audits, we also addressed the risk The Royal London Mutual financial position. of management override of internal Insurance Society Limited’s financial controls, including evaluating whether statements comprise: In doing so, we planned to obtain there is evidence of bias by the directors sufficient coverage across all financial that may represent a risk of material [[ the Group and Parent company balance statement line items in the financial misstatement due to fraud. sheets as at 31 December 2014; statements. This resulted in audit work [[ the Consolidated statement of being performed over 10 reporting The risks of material misstatement that comprehensive income for the year units. Additional procedures were also had the greatest effect on our audit, then ended; performed at the Group level over the including the allocation of our resources Group consolidation and other reporting and effort, are identified as “areas of [[ the Group and Parent company units to obtain additional audit evidence. focus” in the table below, together with statements of cash flows for the year an explanation of how we tailored our then ended; and Areas of focus audit to address these specific areas. [[ the notes to the financial statements, Our risk assessment identified the This is not a complete list of all risks which include the significant following as areas of focus specific to identified by our audit. accounting policies and other our audit of the financial statements: explanatory information. 72 Royal London Group Annual Report and Accounts 2014

Auditors’ report continued

Area of focus How our audit addressed the area of focus Valuation of insurance contract liabilities Refer to page 87 (Accounting policies) and page 124 (note 25) for further information Guaranteed annuity option take-up rates We tested the accuracy of the historic data being used in management’s experience analysis and assessed how this data had Guaranteed annuity options (GAOs) impact the valuation been put together from previous observations of policyholder of insurance contract liabilities within the Group financial GAO option take-up. We found no material exceptions. statements. The Group financial statements include liabilities of £2.3bn as at 31 December 2014 (see note 44) to the financial We tested the changes to the GAO liability calculation, statements for more information) relating to management’s assessing whether they reflected the changes relating to the estimate of the future cost of GAOs. Finance Act 2014 in force as at 31 December 2014 and we found no material exceptions. GAOs provide policyholders with the option to take out annuities at a guaranteed minimum rate upon retirement. We examined management’s analysis and rationale on whether We applied particular focus on GAOs because the liabilities recent short-term changes to the GAO take-up rate provide are sensitive to changes in assumptions, including the sufficient and robust evidence of a change to the long-term trend. proportion of eligible policyholders taking the GAO (the We tested the impact on reserving from applying different take- ‘GAO take-up rate’). The Group makes its assumptions about up rates and assessed how this information was used to inform the GAO take-up rate using ‘experience analysis’ based on the judgements made when choosing the final assumptions. historical data about policyholder behaviour. Finally, we compared the GAO take-up rate assumptions with As a consequence of the Finance Act 2014, individuals now those adopted by other insurers using our in-house industry also have greater choice at retirement about access to their benchmarking data. pension savings. From April 2015 policyholders with larger This is an inherently subjective area, but we found that policies will be able to take the whole of the fund as cash, in management’s approach to reflecting the new environment in the way that smaller policyholders already can. This may mean the valuation model on which the GAO liabilities are based was that policyholder behaviour changes in the future and is an supported by the evidence we obtained. important judgement affecting the calculation of the liabilities. Persistency assumptions We tested the accuracy of the data being used in management’s experience analysis and found no material exceptions. The Group financial statements include intangible assets relating to management’s estimate of the acquired Value of With respect to the experience investigations we assessed: In-Force Business (VIF), which total £211m across the Group as [[ how the data had been put together from previous at 31 December 2014. See note 28 to the financial statements for observations of policyholder retention; and more information. [[ the validity of the analysis performed on the data by The Group has material intangible assets, in particular the management and their conclusions drawn. VIF acquired, being the value of the projected future profits Using our understanding of the expected impact of regulatory arising from the income from servicing policies. We focused changes we challenged the appropriateness of management’s on persistency because this is a significant assumption for the assumptions including: valuation of the VIF intangible, being the assumption relating [[ observing persistency experience and analysing the experience to retention of policies over time. for lines of business that may be affected by legislative Persistency assumptions are driven by past experience and changes; and assumptions about future changes to policyholder behaviour [[ the application of adjustments for potential impacts on (the experience investigations), and could have a material policyholder behaviour such as regulatory changes. impact on the value of future income from servicing policies and therefore on the value of the related intangible assets. We found no material issues as a result of this testing. Persistency can be impacted by a range of factors including We also compared the persistency assumptions with those changes to regulation for products sold by the Group. In adopted by other insurers using our in-house industry recent times the Group’s products have been affected by benchmarking data. regulatory changes including the Retail Distribution Review, The results of our testing allowed us to conclude that the data Auto-enrolment and more recently, the Finance Act 2014. used, adjustments made and assumptions applied, including We focused on whether management had made appropriate the impact of regulatory changes, were supported by the assumptions against this background. evidence we obtained. Annual Report and Accounts 2014 Royal London Group 73 STRATEGIC REPORT

Area of focus How our audit addressed the area of focus Expense assumptions We obtained evidence over key inputs and assumptions as follows: The Group financial statements include liabilities for [[ We tested the completeness of the expenses used in the calculation of the expense liabilities through reconciling the total expenses recorded within the the estimated future expenses that would be incurred GOVERNANCE in continuing to maintain the existing policies to accounting records of the Group, to the total expenses input into the ABC maturity. These expense liabilities are included model and found them to be materially consistent; within the insurance and investment contract [[ We tested the policy numbers used in setting expense assumptions liabilities. See note 27 to the financial statements by corroborating these to the Group policy numbers used in the financial for more information. statements without exception; The expense assumptions are calculated using [[ We assessed significant judgements made in setting the assumptions such an Activity Based Costing (ABC) model. The as the split between acquisition and maintenance costs, the one-off project significant assumptions and judgements in this costs, and the allocation of costs model are the overall costs in the future and cost to different products and found these judgements to be reasonable; IACA TTMNSERPA MEDDVLENTC FAM&RSLTOSADDITIONAL INFORMATION NOTICE OF AGM & RESOLUTIONS EUROPEAN EMBEDDED VALUE FINANCIAL STATEMENTS allocations between products which have different [[ We recalculated the per-policy expense across a sample of policies. expected durations and therefore different This recalculation was performed without exception; and expected product lifetime costs. The most [[ We compared the resulting expense assumptions to the expenses incurred significant area of risk with expense reserving lies over the period 12 months, along with any known expected increases, in in the methodology used to categorise expenses order to satisfy ourselves that the assumptions were sufficient in aggregate between one-off, acquisition and maintenance, and we found the results comparable. of which only the latter is used in the expense- reserving calculation. Any change in methodology applied could have a significant impact on the quantum of the expense reserve. Pension scheme surplus liability valuation See note 1 to the financial statements for the directors’ disclosures of the related accounting policies, judgements and estimates and note 38 for detailed pension disclosures. The Group has a defined benefit pension plan net We evaluated the impact of the economic downturn on the assumptions made surplus of £48m (2013 £90m), comprising assets of by the pension administrator in relation to the valuation of the liabilities in the £2,329m and liabilities of £2,281m. pension plan as follows: The valuation of the pension liability requires [[ We tested the completeness and accuracy of the scheme data used by the significant levels of judgement and technical pension administrator by agreeing a sample of member records back to expertise in choosing appropriate assumptions. source documentation and found no material exceptions; Changes in assumptions about inflation, discount [[ We assessed the appropriateness of the key assumptions used, being the rates and mortality can have a material impact on discount rate, RPI/CPI (inflation) spread and life expectancy of both the calculation of the liability. pensioners and non-pensioners. We found them to be consistent with the prior year and within an acceptable range using an internally developed range of acceptable assumptions for valuing pension liabilities, based on our view of various economic indicators; and [[ We compared the key assumptions used against those used by similar companies. Overall, we found the assumptions used to calculate the scheme liability to be acceptable. 74 Royal London Group Annual Report and Accounts 2014

Auditors’ report continued

Area of focus How our audit addressed the area of focus Valuation of complex investments See note 1 to the financial statements for the directors’ disclosures of the related accounting policies and use of estimates. Note 16 provides further information on judgements and estimates specific to the investment risks. The Group holds investments in We performed detailed testing for directly held property as follows. We: property, private equity and hedge [[ obtained valuation reports from management’s valuation experts and assessed their funds. We focused on this area independence and competency; because these asset classes are complex [[ assessed the assumptions and methodology used by management’s valuation experts to in nature and there is subjectivity in check these were reasonable and appropriate. We found the assumptions were supported their valuation due to limited or no by the audit evidence obtained; and observable market prices. [[ agreed a sample of inputs used by management’s valuation experts to source documentation. For private equity and hedge funds we tested the controls that management has in place around the valuations of holdings in private equity and hedge funds. This testing did not identify any material exceptions. We also performed the following: [[ obtained independent confirmations of the valuations as at 31 December 2014 from fund managers; [[ considered the fund managers’ bases of valuation for these funds and assessed the appropriateness of the valuation methods used; [[ for a sample of funds compared the last audited net asset values with unaudited quarterly statements to obtain evidence over the accuracy of the reporting of the fund manager; and [[ considered the appropriateness of the accounting policies applied by the funds. Based on our audit work we found that the judgements used were consistent with industry practice and that the inputs and assumptions were supported by the audit evidence obtained. Annual Report and Accounts 2014 Royal London Group 75 STRATEGIC REPORT

How we tailored the audit scope unit reports into a central Group 99.5% of the transfer to UDS. Overall, We tailored the scope of our audit finance team through an integrated we concluded that this gave us the to ensure that we performed enough consolidation system. evidence we needed for our opinion on work to be able to give an opinion on the financial statements as a whole. the financial statements as a whole, All material reporting units within GOVERNANCE taking into account the structure of the the segments were audited by the Materiality Group, the accounting processes and Group audit team. In establishing the The scope of our audit is influenced controls, and the industry in which the overall approach to the Group audit we by our application of materiality. Group operates. determined the type of work that we We set certain quantitative thresholds needed to perform in each segment. For for materiality. These, together with The Group is structured along four core the Group’s 10 individually financially qualitative considerations, helped us to segments: Intermediary, Direct, Wealth significant reporting units a full scope determine the scope of our audit and the and ‘Central and Other items’. The audit was performed over their complete nature, timing and extent of our audit Intermediary segment is further sub- financial information. Other reporting procedures and to evaluate the effect of divided into the individual ‘brands’ that units were selected to provide coverage misstatements, both individually and on ADDITIONAL INFORMATION NOTICE OF AGM & RESOLUTIONS EUROPEAN EMBEDDED VALUE FINANCIAL STATEMENTS have been acquired by Royal London across all material financial statement line the financial statements as a whole. which, together with the subsidiary items and to perform audit work over the entities, each represented a reporting areas of focus we identified and which are Based on our professional judgement, unit for the purposes of our scoping set out above. The reporting units where we determined materiality for the assessment. Each reporting we performed audit work accounted for financial statements as follows:

Overall Group £85m (2013 £85m). materiality How we Our primary benchmark used to determine materiality was the Unallocated Divisible Surplus (UDS). Our determined it overall materiality represented 2.7% of the UDS (2013 2.8%). Rationale for We had regard to the UDS as disclosed in note 31 to the financial statements and which represents the benchmark applied amount of surplus yet to be allocated to the members of the Company to whom this opinion is addressed. When analysing the facts and circumstances specific to Royal London, we used our professional judgement, considering the reasonableness of the overall materiality in relation to the Key Performance Indicator metrics reported by the Group including the operating profit, the Profit share and the IFRS result before tax.

We agreed with the Audit Committee companies with a premium listing presumes that the Group and Parent that we would report to them on the London Stock Exchange. company have adequate resources to misstatements identified during our remain in operation, and that the directors audit above £4.25m (2013 £4.25m) The directors have requested that we intend them to do so for at least one year as well as misstatements below that review the statement on going concern from the date the financial statements amount that, in our view, warranted as if the Parent company were a premium were signed. As part of our audit we have reporting for qualitative reasons. listed company. We have nothing to concluded that the directors’ use of the report having performed our review. going concern basis is appropriate. Going concern The directors have voluntarily complied As noted in the directors’ statement, However, because not all future events with Listing Rule 9.8.6(R)(3) of the the directors have concluded that it is or conditions can be predicted, these Financial Conduct Authority and appropriate to prepare the financial statements are not a guarantee as to the provided a statement in relation to going statements using the going concern basis Group’s and Parent company’s ability to concern, set out on page 36, required for of accounting. The going concern basis continue as a going concern. 76 Royal London Group Annual Report and Accounts 2014

Auditors’ report continued

Other required reporting

Consistency of other information Companies Act 2006 opinion In our opinion, the information given in the Strategic Report and the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements.

ISAs (UK & Ireland) reporting The directors have reported against the UK Corporate Governance Code – An Annotated Version for Mutual Insurers (“the Code”). Under ISAs (UK & Ireland) we are required to report to you if, in our opinion:

[[ Information in the Annual Report is: We have no exceptions to report arising • materially inconsistent with the information in the audited financial from this responsibility. statements; or • apparently materially incorrect based on, or materially inconsistent with, our knowledge of the Group and Parent company acquired in the course of performing our audit; or • otherwise misleading. [[ The statement given by the directors on page 41, in accordance We have no exceptions to report arising with provision C.1.1 of the Code, that they consider the Annual from this responsibility. Report taken as a whole to be fair, balanced and understandable and provides the information necessary for members to assess the Group’s and Parent company’s performance, business model and strategy is materially inconsistent with our knowledge of the Group and Parent company acquired in the course of performing our audit. [[ The section of the Annual Report on page 43, as required by We have no exceptions to report arising from provision C.3.8 of the Code, describing the work of the Audit this responsibility. Committee does not appropriately address matters communicated by us to the Audit Committee.

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

[[ we have not received all the information and explanations we require for our audit; or [[ adequate accounting records have not been kept by the Parent company, or returns adequate for our audit have not been received from branches not visited by us; or [[ the Parent company financial statements are not in agreement with the accounting records and returns.

We have no exceptions to report arising from this responsibility. Annual Report and Accounts 2014 Royal London Group 77 STRATEGIC REPORT

Directors’ remuneration Responsibilities for the financial We primarily focus our work in statements and the audit these areas by assessing the directors’ Under the Companies Act 2006 we judgements against available evidence, are required to report to you if, in our Our responsibilities and those of forming our own judgements and opinion, certain disclosures of directors’ the directors evaluating the disclosures in the GOVERNANCE remuneration specified by law are not As explained more fully in the Directors’ financial statements. made. We have no exceptions to report Responsibilities statement set out on arising from this responsibility. page 41, the directors are responsible We test and examine information, using for the preparation of the financial sampling and other auditing techniques, Other voluntary reporting statements and for being satisfied that to the extent we consider necessary to they give a true and fair view. provide a reasonable basis for us to draw Opinion on additional disclosures conclusions. We obtain audit evidence Directors’ remuneration report Our responsibility is to audit and express through testing the effectiveness of The Parent company voluntarily prepares an opinion on the financial statements in controls, substantive procedures or a a Directors’ remuneration report in accordance with applicable law and ISAs combination of both. ADDITIONAL INFORMATION NOTICE OF AGM & RESOLUTIONS EUROPEAN EMBEDDED VALUE FINANCIAL STATEMENTS accordance with the provisions of the (UK & Ireland). Those standards require Companies Act 2006. The directors us to comply with the Auditing Practices In addition, we read all the financial have requested that we audit the part Board’s Ethical Standards for Auditors. and non-financial information in the of the Directors’ Remuneration Report Annual Report to identify material specified by the Companies Act 2006 to This report, including the opinions, inconsistencies with the audited be audited as if the Parent company were has been prepared for and only for financial statements and to identify a quoted company. the company’s members as a body any information that is apparently in accordance with Chapter 3 of materially incorrect based on, In our opinion, the part of the Directors’ Part 16 of the Companies Act 2006 or materially inconsistent with, remuneration report to be audited has and for no other purpose. We do not, the knowledge acquired by us in been properly prepared in accordance in giving these opinions, accept or the course of performing the audit. with the Companies Act 2006. assume responsibility for any other If we become aware of any apparent purpose or to any other person to whom material misstatements or inconsistencies Matter on which we have agreed to this report is shown or into whose hands we consider the implications for report by exception it may come save where expressly agreed our report. Corporate Governance statement by our prior consent in writing. The Parent company reports against the UK Corporate Governance Code – An What an audit of financial Annotated Version for Mutual Insurers statements involves as if the Financial Conduct Authority’s An audit involves obtaining evidence Listing Rules 9.8.6.R (5) and (6) and about the amounts and disclosures in Disclosure and Transparency Rules apply the financial statements sufficient to give to it. reasonable assurance that the financial Gavin Phillips (Senior Statutory statements are free from material Auditor) for and on behalf of The directors have requested that misstatement, whether caused by fraud PricewaterhouseCoopers LLP we review the parts of the Corporate or error. This includes an assessment of: Chartered Accountants Governance statement relating to the and Statutory Auditors Parent company’s compliance with the [[ whether the accounting policies are London nine provisions of the Code specified appropriate to the Group’s and the 31 March 2015 for auditor review by the Listing Rules Parent company’s circumstances and of the Financial Conduct Authority. a. The maintenance and integrity of The Royal have been consistently applied and London Mutual Insurance Society Limited We have nothing to report having adequately disclosed; website is the responsibility of the directors; the performed our review. work carried out by the auditors does not involve [[ the reasonableness of significant consideration of these matters and, accordingly, the auditors accept no responsibility for any changes accounting estimates made by the that may have occurred to the financial statements directors; and since they were initially presented on the website. [ b. Legislation in the United Kingdom governing the [ the overall presentation of the preparation and dissemination of financial statements financial statements. may differ from legislation in other jurisdictions. 78

Consolidated statement of comprehensive income for the year ended 31 December 2014

Group 2013 2014 Restated Notes £m £m Revenues Gross earned premiums 3 (a) 1,218 1,092 Premiums ceded to reinsurers (1,794) (366) Net earned premiums (576) 726 Fee income from investment and fund management contracts 4 243 217 Investment return 5 7,796 3,798 Gain arising on business combinations 22 (b) - 125 Other operating income 6 47 37 Total revenues 7,510 4,903 Policyholder benefits and claims Claims paid, before reinsurance 7 (a) 2,569 2,229 Reinsurance recoveries 7 (a) (432) (290) Claims paid, after reinsurance 2,137 1,939 Increase/(decrease) in insurance contract liabilities, before reinsurance 3,749 (1,054) Reinsurance ceded (1,515) 570 Increase/(decrease) in insurance contract liabilities, after reinsurance 2,234 (484) Decrease/(increase) in non-participating value of in-force business 3 (279) Increase in investment contract liabilities 1,846 2,313 Total policyholder benefits and claims 6,220 3,489 Operating expenses Administrative expenses 8, 9 486 424 Investment management expenses 11 190 175 Amortisation charges and impairment losses on acquired PVIF and other intangible assets 19 72 70 Investment return attributable to external unit holders 36 101 235 Other operating expenses 12 42 35 Total operating expenses 891 939 Finance costs 13 43 30 Result before tax from continuing operations and before transfer to unallocated divisible surplus 356 445 Tax charge 14 (a) 207 73 Transfer to the unallocated divisible surplus from continuing operations 31 149 372 Result after tax from discontinued operations - (42) Transfer from the unallocated divisible surplus from discontinued operations 31 - (42) Profit for the year - - Other comprehensive income from continuing operations: Items that will not be reclassified to profit or loss Remeasurements of defined benefit pension schemes 38 (15) 7 Transfer (from)/to the unallocated divisible surplus 31 (15) 7 Other comprehensive income for the period, net of tax from continuing operations - - Other comprehensive income from discontinued operations - - Total comprehensive income for the year - -

As a mutual company, all earnings are retained for the benefit of participating policyholders and are carried forward within the unallocated divisible surplus. Accordingly, there is no total comprehensive income for the year shown in the statement of comprehensive income. STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS EUROPEAN EMBEDDED VALUE NOTICE OF AGM & RESOLUTIONS ADDITIONAL INFORMATION 56 64 £m 2013 79 79 Restated 1 January ------87 33 52 49 108 £m 232104 232 458 127 478 151 144 314 174 640558232 398 245 293 228 257 879608 957 1,159 2013 2,503 2,234 1,760 2,091 1,9802,938 1,947 2,668 3,388 3,797 (1,169) (906) 36,334 33,801 15,017 15,431 19,642 17,194 36,334 33,801 18,96411,098 18,833 8,094 11,268 11,722 16,254 13,397 Restated

Parent company - - - - 91 91 51 24 41 £m 237 237 232 232 171 128 285 893 893 640 425 244 2014 2014 2,259 2,259 2,308 3,183 7,504 7,504 5,486 4,633 4,633 5,462 (1,332) (1,332) 70,785 30,195 70,785 29,682 22,691 33,841 33,841 12,894 12,894 44,231 - 0 42 56 82 £m 2013 Restated 1 January -- -- 41 46 34 42 69 61 121 £m 640248 398 320 238 322 250222 254 458 137 554 151 144 508 277 2013 2,160 2,899 2,2843,005 1,947 2,668 6,999 4,069 4,095 352 2,486 1,413 4,074 2,284 1,0413,947 1,083 1,159 (1,335) (963) 64,301 39,667 30,319 15,374 26,147 21,570 64,301 39,667 52,321 31,648 26,365 11,722 19,148 17,501 Restated Group Group - - - 91 52 46 34 45 £m Board of Directors and signed on its behalf on 31 March 2015. 250 316 250 177 931 128 640 425 412 2014

2,736 2,308 3,139 7,506 3,122 4,727 5,462 5,544 (1,332) 33,722 30,197 29,607 22,691 73,934 73,934 59,492 24 25 29 31 28 25 29 32 33 34 35 36 37 17 18 19 25 38 37 20 21 23

Notes e contract liabilities

y y y on investment contracts on investment contracts F cquired PVI cquired PVIF on insurance contracts otal liabilities liabilities otal rade and other receivables receivables other rade and otal assets otal intangible assets intangible assets otal T Payables and other financial liabilities and liabilities otherPayables financial Provisions liabilities Other unit holders external to Liability Deferred tax liabilit liabilit tax Current insuranc Non-participating investment contract liabilities Non-participating liabilities Subordinated LIABILITIES liabilities Participating insurance contract liabilities contract Participating investment Unallocated divisible surplus value of in-force business Non-participating Financial investments entities in Group Investments T Cash and cash equivalents T T share contract liabilities of insurance Reinsurers’ Pension scheme asset Deferred tax asset Current tax asset Goodwill A A Deferred acquisition costs on investment contracts assets Other intangible ASSETS Property, plant and equipment Investment propert assets Intangible The financial statements 78 to 182 were approved by the on pages Tim Harris Group Finance Director Balance sheets Balance as at 31 December 2014 80

Statements of cash flows for the year ended 31 December 2014

Group Parent company 2013 2014 Restated 2014 2013 Notes £m £m £m £m Cash flows from operating activities Transfer to the unallocated divisible surplus 134 379 245 270 Adjustments for non-cash items 42 (a) (1,036) (1,232) (2,711) 163 Adjustments for non-operating items 42 (b) 43 30 7 (62) Acquisition of investment property (277) (330) (264) (325) Net acquisition of financial investments (414) (585) (1,777) (992) Proceeds from disposal of investment property 54 247 50 181 Changes in operating receivables 96 (157) 29 (140) Changes in operating payables 1,646 (28) 4,918 249 Change in liability to external unit holders 636 1,001 - - Net cash flows from operating activities before tax 882 (675) 497 (656) Tax (paid)/received (47) (18) 1 (2) Net cash flows from operating activities – continuing operations 835 (693) 498 (658) Net cash flows from operating activities – discontinued operations - (42) - - Total net cash flows from operating activities 835 (735) 498 (658) Cash flows from investing activities Acquisition of property, plant and equipment (15) (4) - - Acquisition of intangibles - (4) - - Acquisition of Group entities 42 (d) (180) 153 (8) (43) Proceeds from disposal of Group entities 42 (d) - (390) 10 105 Proceeds from sale of property, plant and equipment - 4 - - Dividends received from Group entities - - 31 49 Net cash flows from investing activities – continuing operations (195) (241) 33 111 Net cash flow from investing activities – discontinued operations - 7 - - Total net cash flows from investing activities (195) (234) 33 111 Cash flows from financing activities Proceeds on issue of debt - 394 - 394 Proceeds from/(repayment of) other debt and finance lease liabilities - (154) 14 (154) Interest paid (43) (30) (41) (28) Net cash flows from financing activities – continuing operations (43) 210 (27) 212 Net increase/(decrease) in cash and cash equivalents 597 (759) 504 (335) Cash and cash equivalents at 1 January 2,133 2,892 1,749 2,084 Cash and cash equivalents at 31 December 24 2,730 2,133 2,253 1,749

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

STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS EUROPEAN EMBEDDED VALUE NOTICE OF AGM & RESOLUTIONS ADDITIONAL INFORMATION 81 81 IFRS 11, ‘JointIFRS Arrangements’– the now accountsGroup for itsjoint ventures using the equity method, whereas was consolidation proportional previously used. There was no material impact from this change on the consolidated statement of comprehensive income thefor years to 31 December 2014 or 31 December 2013 or on the Group and Parent company balance sheets as at those dates. In the balanceGroupJanuary the sheet at 1 2013 application of the new requirements has resulted in a reduction in ‘investment property’ of £106m, a reduction in ‘cash of £2m and a and cash equivalents’ reductionin ‘payables other and financial liabilities’ of £108m, with no overall net impact. TheGroupbalance sheetat as 1 January 2013 and the Group cash flow statement thefor year to 31 December 2013 have been restated for these changes. The impact of the above restatements is shown in the following tables.

and liabilities both There was no material impact statement of on the consolidated for the comprehensive income years to 31 December 2014 or 31 December 2013. At 1 January 2013 there was no change in total consolidated assets and liabilities, but within assets £71m has been reclassified from financial investments to investment property. company balance Within the Parent sheet £71m has been reclassified from in financial investments to investments 2013, Group entities. At 31 December consolidated assets increased by £177m and there was a reclassification of £158m from financial investments to investments in Group entities in the Parent company.

IFRS Financial 10, ‘Consolidated definition of Statements’ changes the are entities which control that determines accounts. consolidated in the Group the Group Under the new definition it has all of the controls an investee if the investee, following: power over its involvement with variable returns from to use its the investee and the ability returns. The power to affect those has resultedapplication of IFRS 10 in the vehicles consolidation of some investment that were not previously consolidated. The Group has applied the standard the retrospectively in accordance with standard’s transitional provisions and has figures restated the comparative Group accordingly. The impact on the out below: is set and Parent company • •

Notes to the financial statements statements to the financial Notes endedfor the year 31 December 2014 1. Accounting policies (a) Basis of preparation The financial statements of the Group (‘the financialand the Parent company statements’) havebeen prepared in Financial International accordance with and (IFRS) Reporting Standards by the IFRS Interpretations issued IC) as Committee (IFRS Interpretations adopted for use in the European Union. The financial statements have also been parts prepared in accordance with those Act 2006 applicableof the Companies to companies reporting under IFRS. The financial statements have been prepared on the historical cost basis as modified by the inclusion of certain assets and liabilities at fair value as permitted or required by IFRS. The accounting policies set out below are reviewed for appropriateness each year. These policies have been applied consistently to all periods presented in these financial statements, unless otherwise stated. All amounts in the financial statements are is the sterling, which shown in pounds the Group and presentational currency of otherwise Unless the Parent company. stated, amounts are shown in millions of pounds, rounded to the nearest million. New and amended standards adopted by the Group The following new and amended standards for the by the Group have been adopted first time in these financial statements: 82

1. Accounting policies (continued) (a) Basis of preparation (continued) The impact on the balance sheets as at 31 December 2013:

Group – 2013 Parent company – 2013 As As previously Impact of previously Impact of reported IFRS 10 Restated reported IFRS 10 Restated £m £m £m £m £m £m Assets Investment property 3,998 76 4,074 2,503 - 2,503 Financial investments 52,231 90 52,321 19,122 (158) 18,964 Investments in Group entities - - - 10,940 158 11,098 Current tax 2 2 4 8 - 8 Trade and other receivables 505 3 508 314 - 314 Cash and cash equivalents 2,154 6 2,160 1,760 - 1,760 Other assets not impacted by IFRS 10 5,234 - 5,234 1,687 - 1,687 64,124 177 64,301 36,334 - 36,334

Liabilities Payables and other financial liabilities 4,089 6 4,095 - - - Liability to external unit holders 2,315 171 2,486 - - - Liabilities not impacted by IFRS 10 57,720 - 57,720 - - - 64,124 177 64,301 - - -

At 31 December 2014, consolidated assets and liabilities were both £167m higher than would have been the case before the adoption of IFRS 10.

STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS EUROPEAN EMBEDDED VALUE NOTICE OF AGM & RESOLUTIONS ADDITIONAL INFORMATION 37 (28) (18) £m 247 364 210 (585) (154) (759) (234) (234) 83 83 2,133 tities. tities. Restated had had ity to - 6 £m Impact 10 & 11 of IFRSs Group – 2013

As 37 - (37) 9 (12) (6) £m 353 (106) 830 171 1,001 364 135 75 135 (767) 8 (615) 30 (154) (3) (157) (234) - (229) 75 (668) (67)(668) (735) (234) - (234) 2,894 (2) 2,892 2,127 2,127 (1,070) (162) (1,232) res on investments in Group en reported previously losures forassets. non-financial 31 December 2013 is shown below. There was no impact on the on the There was no impact is shown below. 2013 31 December ves and Continuation of Hedge Accounting’. of Hedge Accounting’. ves and Continuation ial Assets and Financial Liabilities’. tations applicable for the first time in these financial statements, which have not

y Assets’, recoverable amount disc

y and cash equivalents Amendments to IAS 36, ‘Impairment of IFRIC 21, ‘Levies’. IAS 27, ‘Separate Financial Statements’. IAS 28, ‘Investments in Associates and Joint Ventures’. Amendments to IFRSs 10, 11 and 12 – transition guidance. Amendments to IAS 32, ‘Offsetting Financ Amendments to IFRSs 10 and 12 and IAS 27 – ‘Investment Entities’. Amendments to IAS 39, ‘Novation of Derivati

djustments for non-cash items djustments for non-cash items otal net cash flows from financing activities from flows financing activities net cash otal otal net cash flows from operating activities from activities flows operating net cash otal • • IFRS 12, ‘Disclosure of Interests in Other Entities’ has resulted in some changes to the disclosu • • • • • •

Cash and cash equivalents at 31 December Repayments of other debt and finance lease liabilitiesRepayments of other debt and finance lease not impacted by IFRSs 10 & 11 cash flows Other financing T in Net decrease cash Cash and cash equivalents at 1 Januar T Cash flows from investing activities by IFRSs 10 & 11 not impacted Investing cash flows Total net cash flows from investing activities Cash flows from financing activities Net acquisition of financial investments Net acquisition of financial receivables Changes in operating payables Changes in operating Change in liability to external unit holders not impacted by IFRSscash flows Other operating 10 & 11 Tax paid flows fromCash activities operating A of disposal investment propert Proceeds from a material impact on the Group are listed below: a material impact on the Group are Other new and amended standards and interpre across several lines,The impact in 2014 was an increase in the movement offset by an increase of in liabil £262m in the change external unit holders. external unit holders. 1. Accounting policies (continued) (a) Basis of preparation (continued) the year to for flows cash of Group statement on the The impact Parent company statement of cash flows.Parent company statement

1. Accounting policies (continued) subsequent acquisitions, all acquisition costs Any rights held by other parties and the (a) Basis of preparation (continued) are expensed as incurred. The value of nature of those rights. New and amended standards not deferred consideration payable on yet effective acquisition or receivable on disposal of a Where the funds are consolidated, the The following new and amended standards, subsidiary is determined using discounted interests of the other parties are included which have been issued but are not yet cash flow techniques. within liabilities and are presented as effective, have not been applied in these ‘Liability to external unit holders’. Holdings financial statements: The excess of the cost of a business of investment funds of between 20% and combination over the fair value of the 50%, which are not consolidated, are treated IFRS 9, ‘Financial Instruments’, final identifiable net assets acquired is recorded as associates. version issued July 2014. This new as goodwill. If the cost of the business standard was issued in several phases and combination is less than the fair value of The Group also invests in certain private will replace IAS 39, ‘Financial identifiable net assets acquired, the equity funds and property unit trusts, which Instruments: Recognition and difference is recognised immediately in the are managed by external third-party Measurement’ when it becomes effective statement of comprehensive income. administrators. The structure of each fund, in 2018. The standard covers the terms of the partnership agreement and classification and measurement and hedge The Group has chosen to apply predecessor the Group’s ownership percentage are all accounting. The Group is continuing to accounting to transactions whereby the taken into consideration in determining assess the impact of this standard in trade and assets of a Group entity or the whether the Group has control and conjunction with the latest proposals entity itself are transferred to another entity therefore whether the fund/unit trust should emerging from the IFRS insurance within the Group, known as common be consolidated. accounting project; control business combinations. The effect IFRS 15, ‘Revenue from contracts with of predecessor accounting is that the assets Associates are entities over which the customers’, effective from 1 January 2017. and liabilities recognised by the acquiring Group has significant influence but not The Group is considering how this entity in such a transaction are those used control, generally accompanying an standard will impact the reporting of previously in the Group consolidated ownership interest of between 20% and investment contract revenue and has yet accounts. 50%. The Group’s investments in associates to complete its final assessment. are all investment funds and have been The financial statements produced by accounted for as financial assets held at fair There are no other standards or subsidiaries for inclusion in the Group value through profit or loss as permitted by interpretations that are not yet effective and financial statements are prepared using IAS 28, ‘Investments in Associates and that would be expected to have a material accounting policies consistent with those Joint Ventures’. impact on the Group. adopted by the Group. Intra-group transactions, balances and unrealised gains (c) Classification of contracts (b) Basis of consolidation and losses on intra-group transactions The Group classifies its products for The Group financial statements incorporate are eliminated. accounting purposes as insurance, the assets, liabilities and results of the investment or investment with discretionary Parent company and its subsidiaries. The Group invests in investment funds, participation features. Insurance contracts which themselves invest mainly in equities, are those contracts that transfer significant Subsidiaries are those entities (including bonds and cash and cash equivalents. Some insurance risk. Contracts that do not OEICs and other investment funds) over of these funds are managed by Group transfer significant insurance risk are which the Group has control. The Group companies and therefore in addition to investment contracts. controls an entity when it has power over it, investment income from its holding in the is exposed to, or has rights to, variable funds, the Group also receives management A discretionary participation feature is a returns from its involvement with the entity fees from external unit holders. Where the contractual right held by a policyholder to and has the ability to affect those returns Group’s holding is greater than 50% it is receive additional payments as a supplement through its power over the entity. The presumed that it is exposed to variable to guaranteed benefits: Group considers all relevant facts and returns from the fund and can use its power that are likely to be a significant to influence those returns; in such cases the circumstances when determining whether proportion of the total contractual fund is consolidated. Conversely where the control exists and makes a re-assessment payments; and whenever those facts and circumstances Group’s holding is less than 20% it is not change. Profits or losses of subsidiaries sold considered to have significant influence over whose amount or timing is contractually or acquired during the period are included the fund and the fund is accounted for at the discretion of the issuer and that is in the consolidated results up to the date within financial investments at fair value. contractually based on: that control ceases or from the date of • the performance of a specified pool of Holdings between 20% and 50% are gaining control. contracts, or a specified type of assessed to determine whether the Group is contract, or The Group applies the purchase method in deemed to have control; judgement is made accounting for business combinations. The around the concept of power and factors • realised and/or unrealised investment cost of business combinations comprises the taken into account include: returns on a specified pool of assets fair value of the consideration paid and of held by the issuer, or The Group’s level of combined interest in the liabilities incurred or assumed. For the fund (from investment income and • the profit or loss of the company that acquisitions completed prior to 2010, the management fees); issues the contracts. cost of business combinations also included any directly related expenses. For STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS EUROPEAN EMBEDDED VALUE NOTICE OF AGM & RESOLUTIONS ADDITIONAL INFORMATION 85 85 probable that the temporary difference temporary difference the probable that inwill not reverse future. the foreseeable A deferred tax asset to is recognised only is probable that future it the extent that available againsttaxable profits will be be utilised. which the asset can (g) Property, plant and equipment and buildingsOwner-occupied land are sheet. the balance carried at fair value in Fair value is determined annually by valuers, independent professional who are of Institution members of the Royal and is basedChartered Surveyors, on market evidence. An increase in fair value is income, comprehensive recognised in other that it is the reversal of extent except to the a previous revaluation decrease which was recognised in profit or loss. A decrease in fair value is immediately in profit recognised it reverses a or loss, except to the extent that previous revaluation surplus recognised in income. other comprehensive of Other plant and equipment consisting office equipment and computer equipment, vehicles are stated at cost less accumulated impairment losses. Cost depreciation and comprises the fair of the consideration value paid to acquire the asset and includes directly related expenditure. are included in Subsequent costs an asset’s that it is carrying value only to the extent will be future probable that there economic and the benefits associated with the item can bemeasured reliably. cost of the item All other repairs and maintenance costs are of comprehensive charged to the statement in which they period income during the are incurred. Land is not depreciated. No depreciation is buildings as provided on owner-occupied such depreciation would be immaterial. other items of property, Depreciation on plant and equipment is charged to the income and is statement of comprehensive calculated so as to of the reduce the value assets to their estimated residual values on a straight-line basis over the estimated useful range lives of the assets concerned, which years. from three to eight The residualvaluesestimated and useful lives arereviewed annually.Where asset’s an amountcarrying exceeds its recoverable amount the carrying amount is written down immediately to the recoverable amount. Gains and losses on disposals are included of comprehensive income in the statement and are determined by comparing proceeds with carrying amounts. temporary differences arising on investments in subsidiaries where the reversal the timing of the Group controls of the temporary difference and it is the initial recognition of goodwill not deductible for tax purposes; and

(iv) Commission income for certain acts as an introducer The Group income insurers. Commission third-party received on the and profit commission those insurersunderwriting results of is of statement recognised in the the related as comprehensive income services are provided. (e) Claims Claims paid and recoveries reinsurance non-hybrid relate to insurance and For contracts. participating investment claimsnon-linked policies, maturity and due for for when annuities are accounted for payment. Surrenders are accounted when paid or, if earlier, on the date when within the the policy ceases to be included calculation of the related contract liabilities. Death claims and all other non-linked claims are accounted for when notified. For linked policies, claims are accounted for on cancellation of the associated units. Claims payable include related claims handling costs. Reinsurance recoveries are accounted for in the same period as the related claim. (f) Tax expense Tax expense comprises current and deferred tax and is recognised in profit or loss except it relates to items that to the extent recognised directly in other comprehensive income, in which case it is recognised directly in other comprehensive income. Both current and deferred tax are calculated using tax rates enacted or substantively sheet date. enacted at the balance (i) Current tax on Current tax is the expected tax payable for the year and any the taxable income payable in respect of adjustment to tax previous years. (ii) Deferred tax Deferred tax is provided using the balance sheet liability method, providing for carrying the temporary differences between amounts of assets and liabilities for financial reporting purposes and the amounts used taxation purposes. The amount of for deferred tax provided is based on the of realisation or settlement expected manner of the carrying amount of assets and liabilities. The following temporary differences are not provided for: ipating n-partic investment contracts when accounting for premiums, claims and other revenue. (d) Revenue (i) Premiums Premiums received and reinsurance premiums paid relate to insurance and non- hybrid participating investment contracts. for when due for They are accounted payment except for recurring single premiums and premiums in respect of unit- linked business, which are accounted for when the related liabilities are created. fund investment and (ii) Fee income from management contracts arising from investment Management fees are and fund management contracts recorded in the statement of comprehensive services in which the income in the period are provided. Initial fees, which relate to the future provision of services are deferred of and recognised in the statement anticipated the over comprehensive income will the services period in which be provided. Such deferred fee income is shown as a liability in the balance sheet. (iii) Investment return comprises the investment Investment return income and fair value gains and losses derived from assets held at fair value loss, rental incomethrough profit or and fair value gains and losses derived from and interest income investment property derived from cash and cash equivalents. Investmentincomederived from assets held at fair value through profit or loss includes dividends and interest income. Dividends are recorded on the date on which the shares are declared ex-dividend.UK dividendsare recorded net of the associated tax credits; overseasdividends arerecorded gross, with the related withholding tax included within the tax expense as foreign tax. Interest income is recognised on an accruals basis. Rental income from investment property, net of any leaseincentives receivedor paid, is recognised on a straight-line basis over the term of the lease. 1. Accounting policies (continued) (c) Classification of contracts (continued) Such contracts are more commonly known as ‘with-profits’ or as ‘participating’ contracts. Hybrid contracts those are where the policyholdercan investswitch in and betweenboth unit-linked (non-participating) and unitisedwith-profits (participating) investment mediums at the same time. Certain hybrid contract types are treated as if they were wholly no 86

1. Accounting policies (continued) (iv) Other intangible assets All investment property is subsequently (h) Intangible assets Other intangible assets include investment carried at fair value in the balance sheet. (i) Goodwill management rights, administration Fair value is determined annually by Goodwill is tested annually for impairment servicing rights and distribution agreements independent professional valuers based on and is stated at cost less accumulated acquired as part of a business combination, market evidence. Any gain or loss arising impairment losses. Any gain or loss on software licences and deferred incremental from a change in fair value is recognised in subsequent disposal of a subsidiary will acquisition costs directly related to the costs the statement of comprehensive income. include any attributable goodwill remaining. of acquiring new unit trust business. They are carried at cost less accumulated (ii) Financial investments (ii) Acquired PVIF amortisation and impairment losses. The All investment transactions are recognised The present value of acquired in-force initial cost is determined as the fair value at trade date. business (PVIF) arises on the acquisition of of the intangible asset at the date of portfolios of investment and insurance acquisition. Where that fair value is not All financial investments are classified upon contracts, either directly or through the readily observable it is determined using initial recognition as held at fair value acquisition of a subsidiary. It represents the a valuation technique such as discounted through profit or loss (FVTPL). The Group net present value of the expected pre-tax cash flow analysis. does not classify any financial investments cash flows of the contracts which existed at as ‘available for sale’ or as ‘held to maturity’. the date of acquisition and is amortised over Other intangible assets are amortised on a The FVTPL category has two sub- the remaining lifetime of those contracts. straight-line basis over their useful lives, categories: financial assets held for trading The amortisation is recognised in the which range from 3 to 10 years. The useful and those designated as FVTPL. All statement of comprehensive income and is lives are determined by considering relevant derivative instruments are classified as held calculated on a systematic basis to reflect the factors such as the remaining term of for trading as required by IAS 39, ‘Financial pattern of emergence of profits from the agreements, the normal lives of related Instruments: Recognition and acquired contracts. Amortisation is stated products and the competitive position. Measurement’. All other financial net of any unwind of the discount rate. investments are classified as designated (i) Reinsurance as FVTPL. The estimated lifetime of the acquired The Group seeks to reduce its exposure to contracts ranges from five to 35 years for potential losses by reinsuring certain levels of Financial assets that are designated life business and 17 to 40 years for risk with reinsurance companies. Reinsurance as FVTPL are: pensions business. contracts that meet the classification financial assets held in the internal linked requirements for insurance contracts set out funds of the Group backing unit-linked above are classified as reinsurance contracts The value of the acquired PVIF is assessed insurance and investment contract held. Contracts that do not meet these annually for impairment and any liabilities. The designation of these assets classification requirements are classified as impairment is recognised in full in the at FVTPL eliminates or significantly financial assets. statement of comprehensive income in reduces a measurement or recognition

the year it is identified. inconsistency (sometimes referred to as Reinsurance assets represent short-term an ‘accounting mismatch’) that would payments due from reinsurers and longer- (iii) Deferred acquisition costs otherwise arise from measuring assets or term receivables that are dependent on the Deferrable acquisition costs for non- liabilities or recognising the gains and expected claims and benefits arising under participating and hybrid participating losses on them on different bases; or investment contracts are capitalised as an the related reinsured insurance contracts. intangible asset, provided that it is They are measured on a consistent basis to financial assets managed and whose considered probable that those costs are the reinsured insurance contracts. performance is evaluated on a fair recoverable. Deferrable costs are restricted Reinsurance liabilities represent premiums value basis. to directly related and incremental costs payable for reinsurance. incurred for the acquisition of new Financial assets classified as FVTPL, contracts. This consists of commission only, (j) Investments including derivatives classified as held for including the value of future commission (i) Investment property trading, are initially recognised at the fair payable to third parties. All other Investment property is property held for value of the consideration paid. They are acquisition costs are expensed as incurred. rental, capital growth or both, excluding subsequently measured at fair value with any The deferred acquisition cost asset is that occupied by the Group or the Parent resultant gain or loss recognised in the amortised over the anticipated lifetime of company. Investment property includes statement of comprehensive income. the related contracts in the same pattern freehold and leasehold land and buildings. as the related services are provided. Investment property is initially measured at All acquisition costs on insurance and non- cost. For freehold property, cost comprises hybrid participating investment contracts the fair value of the consideration paid plus are recognised as an expense in the the associated transaction costs. For statement of comprehensive income leasehold property, the cost is the lower of when incurred. the fair value of the property and the present value of the minimum lease payments at the inception of the lease.

STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS EUROPEAN EMBEDDED VALUE NOTICE OF AGM & RESOLUTIONS ADDITIONAL INFORMATION 87 87 ment contracts can be related objectively For financial assets (other than those at assets (other than those For financial impairmentFVTPL) an is recognised loss if future value of the estimated the present cash flows arising from the asset is lower than the asset’s carrying value. For the impairment, assets are purposes of assessing levels for grouped at the lowest which there are separately identifiable cash flows (cash- losses are generating units). Impairment of statement recognised in the comprehensive income. respect of An impairment loss in is goodwill of other non- never reversed. In respect financial assets, an impairment loss is reversed if there has been a change in the estimates used torecoverable determine the assets amount. For financial (other than those at FVTPL) an impairment loss is reversed if there is a decrease in the impairment that Under IFRS 4, ‘Insurance Contracts’, Under IFRS 4, ‘Insurance Contracts’, insurance and participating investment are valued usingcontract liabilities with those consistent policies accounting IFRS. adopted prior to the transition to to an event occurring after the impairment after the to an event occurring was recognised. An impairment loss is the reversed only to after the extent that reversal, the asset’s carrying amount is no have would amount that greater than the net of depreciation or been determined, amortisation, if no impairment loss had been recognised. (o) De-recognition and offset of financial assets and financial liabilities A financial asset is de-recognised when the contractual rights to receive the cash flows from the asset have expired or where they have been transferred and the Group has also transferred substantially all of the risks and rewards of ownership. A financial liability is de-recognised when is in the contract the obligation specified discharged or cancelled or expires. All derivatives are accounted for on a are basis and not offset contract-by-contract in the balance sheet. (p) Cash and cash equivalents Cash and cash equivalents in the balance sheet comprise cash balances, deposits held short-term and other on call with banks highly liquid investments months with three or less to maturity from the date of acquisition. Cash and cash equivalents in the statement of cash flows are stated net of bank overdrafts. (q) Insurance contracts and participating invest The Group leases certain freehold buildings leases certain freehold The Group byto third parties way of lease. No finance for these buildings amount is recognised Instead an asset property. within investment and other is recognised within trade the Group’s net receivables that represents leases. This asset is receivable from finance initially stated at an amount equal to the present value of the minimum lease rentals lease. As inception of the receivable at the lease rentals are received, these are split calculated on element, between an interest which is credited an effective interest basis, of comprehensive income to the statement the and a capital element, which reduces finance lease receivable. (ii) Group acting as lessee Leases under which substantially the all risks and rewards of ownership are assumed by the lessee are classified as finance leases. Leasehold investment property is for as accounted a finance lease. At the of the lease an asset is commencement at an property investment recognised within of the fair value the lower amount equal to of the property and the present value of the minimum lease payments. An equal liability is established to represent the financing element of the lease contract. As lease payments are made, these are split between an an interest element, calculated on effective interest basis, which is charged to and the statement of comprehensive income a capital element, which reduces the finance lease liability. (m) Operating lease payments Leases, where a significant portion of the risks and rewards of ownership is retained by the lessor, are classified as operating leases. Payments leases, net under operating of lease incentives received, are recognised of comprehensive income in the statement on a straight-line basis over the term of the lease. (n) Impairment Goodwill is tested for impairment annually. The carrying amounts of other intangible assets, property, plant and equipment and financial assets at (other than those sheet FVTPL) are reviewed at each balance date for any indication of impairment or indicate or circumstances whenever events be that their carrying amount may not recoverable. For non-financial assets, an impairment loss is recognised whenever the carrying amount The amount. exceeds the recoverable of the higher is the recoverable amount asset’s fair value less costs to sell and its value in use. 1. Accounting policies (continued) (continued) (j) Investments (continued) investments (ii) Financial in an Fair value for quoted investments price, which active market is the bid representativemanagement believe is of fair in unit trusts, value. For investments funds OEICs and other pooled (including those classified as investments in Group entities) it is the last bid price quoted on the which period on day of the accounting could beinvestments in such funds for a quotedredeemed. If the market or the not active financial investment is the fair value is investment is unquoted, determined by using valuation techniques. For these investments, the fair value is established by using quotations from parties, such as brokers independent third or pricing services, or by using internally developed pricing models. Priority is given to publicly available prices from available, but when independent sources, overall, the source of pricing and/or is chosen with the valuation technique of arriving at a fair valueobjective measurement which reflects the price at take which an orderly transaction would on the participants place between market measurement date. Valuation techniques include the use of recent arm’s length current fair transactions, reference to the value of other instruments that are substantially the flow same, discounted cash analysis and option pricing models making maximum use of market inputs from independent sources and relying as little as possible on entity specific inputs. entities in Group (iii) Investments the Group entities within Investments in Parent company financial statements are designated as FVTPL. Fair value for those not unit trusts, OEICs entities which are and other pooled funds is determined as using the same valuation techniques as are used for unquoted investments, described above. (k) Trade and other receivables Trade and other receivables are initially recognised at fair value. Subsequently they are measured at amortised cost using the effective interest method. (l) Finance leases (i) Group acting as lessor Leases under which substantially all the risks and rewards of ownership are transferred by the lessor are classified as finance leases. 88

1. Accounting policies (continued) The surpluses in the closed funds are (s) Unallocated divisible surplus (q) Insurance contracts and included within the participating contract The nature of benefits for participating participating investment contracts liabilities because they are not available for contracts is such that the allocation of (continued) distribution to other policyholders or for surpluses between participating (i) General insurance contracts other business purposes. The closed funds policyholders is uncertain. The amount not The Group does not write general insurance are the Refuge Assurance IB Sub-fund, the allocated at the balance sheet date is business. The business of Royal London United Friendly IB Sub-fund, the United classified within liabilities as the unallocated (CIS) Limited (RL (CIS)), acquired in Friendly OB Sub-fund, the Scottish Life divisible surplus. 2013, included a portfolio of general fund, the PLAL With-Profits Fund, the insurance business in run off. All of this Royal Liver Assurance fund and the RL (t) Non-participating investment general insurance business has been (CIS) with-profits funds. contracts transferred out of the Group by way of a All the non-participating investment Part VII transfer with an effective date of The participating liabilities include an contracts issued by the Group are unit- 31 March 2014. All contracts of general assessment of any future options and linked. The financial liabilities for these insurance are classified as insurance. guarantees included in this business on a contracts are designated at inception as at market-consistent basis. The calculations fair value through profit or loss. This General insurance claims incurred comprise also take into account bonus decisions, classification has been used because it claims paid during the year together with which are consistent with the Parent eliminates or significantly reduces a related claims handling costs and the company’s Principles and Practices of measurement or recognition inconsistency change in the gross liability for claims in the Financial Management. In determining the (sometimes referred to as an ‘accounting period net of related recoveries. realistic value of the participating liabilities mismatch’) that would otherwise arise the value of non-profit business written in from measuring assets or liabilities or Claims outstanding comprise provisions the participating funds is accounted for as recognising the gains and losses on them representing the estimated ultimate cost part of the calculation. The present value of on different bases. of settling: future profits on this business is separately calculated and this value is deducted from The fair value of a unit-linked financial estimates on claims reported by the the participating liabilities. liability is determined using the current unit balance sheet date (‘claims reported’); and values that reflect the fair values of the expected additional cost in excess of For linked insurance contracts, the financial assets contained within the ‘claims reported’ for all claims occurring calculation of the liability is based upon the Group’s unitised investment funds linked by the balance sheet date (‘claims incurred fund value at the valuation date plus a to the financial liability, multiplied by the but not reported’). reserve, where on a prudent basis, it is number of units attributed to the contract estimated that future cash outflows cannot holder at the balance sheet date. Aggregate claims provisions include be covered by future cash inflows. attributable claims handling expenses. If the investment contract is subject to Anticipated reinsurance recoveries are A liability adequacy test is then carried out a surrender option, the fair value of the disclosed separately within assets under the on long-term insurance liabilities to ensure financial liability is never less than the heading of ‘Reinsurers’ share of insurance that the carrying amount of the liabilities amount payable on surrender, discounted contract liabilities’. (less related intangible assets) is sufficient for the required notice period, where in the light of current estimates of future applicable. (ii) Long-term insurance and participating cash flows. When performing the liability investment contracts adequacy test, all contractual cash flows (u) Premiums received and claims paid The long-term insurance and participating are discounted and compared against the on investment contracts investment contract liabilities are carrying value of the liability. Where a For non-participating investment and determined annually in accordance with shortfall is identified it is charged hybrid participating investment contracts regulatory requirements. For participating immediately to the statement of the amounts received as premiums are not contracts the liabilities are determined on a comprehensive income. included in the statement of comprehensive realistic basis in accordance with FRS 27, income but are accounted for as deposits ‘Life Assurance’, except that the The estimation techniques and assumptions received and are added to the value of participating liabilities within the closed are periodically reviewed, with any changes investment contract liabilities in the funds are adjusted to ensure that any in estimates reflected in the statement of balance sheet. difference between the surplus in those comprehensive income as they occur. funds as measured on an IFRS basis and the Amounts repaid as claims on non- surplus as measured on a realistic basis is (r) Embedded derivatives participating investment and hybrid included within participating liabilities. The Group does not separately measure participating investment contracts are not embedded derivatives that meet the included in the statement of comprehensive definition of an insurance contract or income but are accounted for as a deduction embedded options to surrender insurance from investment contract liabilities. contracts for a fixed amount (or a fixed amount and an interest rate). All other embedded derivatives are separated and carried at fair value if they are not closely related to the host contract and they meet the definition of a derivative.

STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS EUROPEAN EMBEDDED VALUE NOTICE OF AGM & RESOLUTIONS ADDITIONAL INFORMATION 89 89 or (z) currency translation Foreign in economic environment The primary and the Parent company which the Group Hence the Kingdom. operate is the United and the the Group of currency functional sterling.Parent company is pounds Assets and liabilities denominated in foreign in sterlingcurrencies are expressed at the sheet on the balance exchange rate ruling for foreign date. Revenue transactions at averageoperations are translated rates year. For all other the exchange for of and those operations, revenue transactions and realisation relating to the acquisition translated into of investments have been sterling at the rates of exchange ruling at the time of the respective transactions. Exchange differences arising from the translation of foreign operations are included within the statement of other within comprehensive income or other operating operating income expenses as appropriate. Any other exchange differences are dealt with in the income under statement of comprehensive the same heading as the underlying transactions are reported. (aa) Segmental reporting Operating segments are reported in a with the internal manner consistent reporting provided to the chief operating decision-maker. The chief operating decision-maker, who is responsible f allocating resources and assessing performance of the operating segments, has been identified as the Group Board Directors. of tion arrangements A provision for onerous contracts is for A provision onerous contracts to be the expected benefits when recognised the a contract are less than derived from the obligations of meeting unavoidable costs under the contract. (y) Pension costs defined benefit The Group operates three of defined schemes and a number arrangements. contribution (i) Defined benefit schemes provide The defined benefit schemes pensionable pay. benefits based on final The assets of the schemes are held in separate trustee administered funds. The position of each scheme is assessed annually by an independent qualified actuary using credit method. the projected unit in The pension scheme asset recognised is the excess that is the balance sheet fair value of therecoverable of the plan assets in a scheme over the present value of that scheme’s liabilities. Deficits in the value of a scheme’s assets over its scheme liabilities are recognised in the balance sheet as a pension liability. ‘Current service cost’ and the ‘Net interest on the net defined benefit asset’ are included within ‘Administrative expenses’ on an incurred basis. ‘Past service costs’ arising on a plan amendment or curtailment are included immediately within ‘Administrative expenses’. Remeasurements are charged or credited to the unallocated divisible surplus the in income in other comprehensive they arise. period in which (ii) Defined contribu The Group operates a number of defined arrangements for employees contribution members of a group who are not active pays defined benefit scheme. The Group contractual contributions in respect of these are arrangements and such contributions recognised as an expense as the related employee services are provided. financial liabilities 1. Accounting policies (continued) (v) Subordinated debt are Liabilities for subordinated debt the fairrecognised initially at value the of any discount and net of proceeds received, less attributable costs. transaction they are Subsequent to initial recognition, The transaction stated at amortised cost. amortised over the costs and discount are redemptionperiod to the earliest possible rate basis. date on an effective interest is included in The amortisation charge income the statement of comprehensive equivalent An within finance costs. amount value of theis added to the carrying liability the value date such that at the redemption of the liability equals the redemption are expensed value. Interest costs as they are incurred. (w) Payables and other financial liabilities (i) Reinsurance arrangement The Group has a financial liability in respect of a reinsurance arrangement and holds an unquoted debt security which has of the cash flows which exactly match those reinsurance liability. Consequently both the debt security and the reinsurance liability are designated at FVTPL in order to avoid mismatch. an accounting fair value of theMovements in the liability the are recognised within revenue in income within statement of comprehensive premiums ceded to reinsurers. The fair value of in the matching movement the debt security is shown in the statement of comprehensive income within investment return. financial liabilities (ii) Other All other payables and are initially measured at fair value, being plus any directlyconsideration received attributable transaction costs. Subsequently measurement is at amortised cost using the effective interest method. (x) Provisions A provision is recognisedbalance in the is a present legalsheet when there or constructive obligation as a result of a past event, and it is probable that an outflow of will be required to settle benefits economic If the effect is material, the obligation. provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. No provision is established where a reliable be made. estimate of the obligation cannot 90

1. Accounting policies (continued) The preparation of financial statements Intermediary (bb) Use of judgements, estimates and also requires the use of estimates and Pensions assumptions assumptions that affect the amounts Royal London provides pensions and other The preparation of financial statements reported in the balance sheet and statement retirement products to individuals and to requires management to make judgements of comprehensive income and the disclosure employer pension schemes in the UK. in the process of applying the Group’s of contingent assets and liabilities at the Protection date of the financial statements. Although accounting policies. In selecting accounting UK Protection provides protection products these estimates are based on management’s policies where IFRS permits a choice of to individuals in the UK. Royal London best knowledge of current circumstances policy, the directors have applied judgement Ireland provides protection products to and expectations of future events and in determining the most appropriate policy individuals in the Republic of Ireland. actions, actual results may differ from those as follows: estimates, possibly significantly. This is measurement model for certain assets. Consumer particularly relevant to the following: IFRS allows a choice of measurement Consumer administers the Group’s direct-

model for financial assets, investment to-customer business. Item Note property, property, plant and equipment and, in the Parent company balance Classification of Wealth sheet, investments in Group entities. This contracts as insurance The Wealth segment mainly comprises is typically a choice between a cost and a or investment 1 (c) Royal London Asset Management, which is fair value model. The Group and Parent Deferred tax 1 (f) (ii), 37 the fund management operation of the Group. It provides investment management company have applied a fair value model Intangible assets 1 (h), 19 to all these assets, with the exception of services to the other entities within the Fair values of investment trade and other receivables and Group and to external clients, including property and financial 1 (j) (i), (ii), computers, office equipment and vehicles. pension funds, local authorities, universities investments 18, 20 The fair value model has been used in and charities as well as individuals. The order to match asset valuations to the Impairment 1 (n) segment also includes Ascentric, the valuation of the related policyholder Insurance contracts and Group’s wrap platform. liabilities; participating investment Central items measurement model for non-participating contract liabilities 1 (q), 25 to 30 This segment comprises mainly centrally investment contracts. As set out in Pension costs 1 (y), 38 held items, such as group functions. note 1 (t) these liabilities have been

valued at fair value in order to match their 2. Segmental information Royal London 360° valuation to the related assets; The segmental disclosures required under Royal London 360° was the international valuation of financial assets in illiquid IFRS are based on operating segments that business of the Group, providing markets. The Group closely monitors the reflect the level within the Group at which investment, savings and protection valuation of assets in markets that have key strategic and resource allocation products. It was sold on 14 November 2013 become less liquid. Determining whether decisions are made and the way in which and has been classified as a discontinued a market is active requires the exercise of operating performance is reported operation in the comparatives. judgement and is determined based upon internally. the facts and circumstances of the market (a) Segment profit for the instrument being measured. Comparative figures have been restated for The profit measure used by the Group Where it is determined that there is no the impact of IFRS 10, as detailed in note Board of Directors to monitor performance active market, fair value is established 1(a). The activities of each operating is European Embedded Value (EEV) using a valuation technique as described segment are described below. operating profit before tax. Further detail on in note 1 (j) (ii); the EEV results is given within the EEV section on pages 183 to 194. The EEV the classification of contracts as insurance operating profit by operating segment is or investment on initial recognition; and shown in the following table, together with the determination of whether the Group a reconciliation of the total EEV operating has control over an entity. This decision profit before tax to the IFRS result before requires the consideration of a number tax. Revenues by segment are not given as of factors. As set out in note 1 (b) these this information is not provided to the include the Group’s ownership interest, Group Board of Directors and consequently any other rights it has over the entity there is no reconciliation of reportable and the rights of third parties. segments’ revenues to the Group’s revenue.

The tables in the geographical analysis present revenues split by the geographic region in which they were written.

STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS EUROPEAN EMBEDDED VALUE NOTICE OF AGM & RESOLUTIONS ADDITIONAL INFORMATION - - 8 32 83 42 37 73 69 39 47 (25) (40) (26) (30) (11) (81) £m £m £m 150 162 726 217 125 346 306 445 243 91 91 Total (576) Total 2013 Restated - - - 6 (8) Group 78 63 42 42 £m £m £m (11) (61) (11) (60) (17) (43) 220 159 356 479 (143) 2014 International International Group – 2014 Group – 2014

37 - 46 1 UK UK UK Group – 2013 – restated £m £m 702 24 217 - 125 - 243 - (616) 40 (616) 4,824 79 4,903 3,743 55 3,798 7,677 1197,677 1607,350 7,796 7,510 vidual policyholders. As such, the Group and

mpany’s externalthe indi customers to be

xcluding amounts included in OCI) xcluding amounts included

r Royal London Ireland Gain arising on business combinations Othe Pensions UK Protection mortisation of intangibles otal revenues from continuing operations otal revenues from continuing operations otal EEV operating profit before ta profit EEV operating otal

Investment return Investment return Gain arising on business combinations income Other operating T Revenues Net earned premiums fund management contracts and investment Fee income from Fee income from investment and fund management contracts and investment Fee income from Investment return income Other operating T Revenues Net earned premiums Movement in pension scheme surplus Movement in pension (e Financing costs Profit share operations IFRS result from discontinued before ta IFRS result EEV operating loss before tax from discontinued operations T A and IFRS Valuation differences between EEV variances Investment return assumption changes Economic Central items: continuing operations tax from before profit EEV operating change arising cost regulatory from Exceptional Consume Wealth Intermediary Parent company are not reliant on any individual customer. (c) Major customers The directors consider the Group and Parent co

(b) Geographical analysis 2. Segmental information2. Segmental (continued) profit (continued) (a) Segment 92

3. Premiums (a) Gross earned premiums Group 2014 2013 £m £m Regular premiums Insurance contracts 840 824 Participating investment contracts 24 21 864 845 Single premiums Insurance contracts 351 246 Participating investment contracts 3 1 354 247 1,218 1,092

(b) Premiums received on investment contracts As set out in note 1(u) the Group does not account for the amounts received as premiums in relation to non-participating and hybrid participating investment contracts as premium income in the statement of comprehensive income. These amounts are accounted for as deposits received and are added to the value of investment contract liabilities in the balance sheet. The amounts received by the Group during the year were £3,513m (2013 £2,815m) in respect of non-participating contracts and £9m (2013 £10m) in respect of hybrid participating contracts.

4. Fee income from investment and fund management contracts Group 2014 2013 £m £m Investment contract fees receivable Annual management charges applied to linked funds 121 113 Policy administration fees 14 23 Bid/offer spread and other charges 5 4 140 140 Fund management fees receivable 76 58 216 198 Change in deferred fee income 27 19 243 217

STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS EUROPEAN EMBEDDED VALUE NOTICE OF AGM & RESOLUTIONS ADDITIONAL INFORMATION 37 14 21 17 20 £m £m £m 186 180 307 307 (290) 93 93 2013 2013 2013 spect 1,632 1,939 1,238 2,159 3,798 1,922 2,229 as Restated id al es of of es the Group

investment s and losses Group Group Group 11 17 30 47 £m £m £m (27) 159 159 243 441 (432) 2014 2014 2014 1,978 2,137 1,561 5,567 7,796 2,569 2,410

s paid out as claims and hybr in relation to non-participating racts and £56m (2013 contracts £58m) in re n-participating investment ntract liabilities in the balance sheet. The amounts repaid by The amounts ntract liabilities in the balance sheet. luation of assets held at the balance sheet date and the gain luationsheet date of assets held at the balance at FVTPL are fair value gains of £1,189m (2013 fair value loss ly and the 2013 comparatives have been restated accordingly: tot accordingly: ly and have been restated the 2013 comparatives atement of comprehensive income. These amounts are accounted for are accounted income. These amounts atement of comprehensive gains offrom financial investments held at FVTPL include a gain £477m

ld at fair value through profit or loss held at fair value through profit or loss held at fair value through

y y unquoted debt security held under a reinsurance arrangement (see note 33). arrangement unquoted debt security held under a reinsurance gain / Insurance contracts Insurance contracts contracts Participating investment Insurance contracts Insurance contracts contracts Participating investment Insurance contracts

Claims paid, after reinsurance Reinsurance recoveries Claims paid, before reinsurance Commission income Commission income Other Fair value gains from financial investments Fair value gains from propert investment Rental income from propert investment Fair value gains from from cash and cash equivalents Interest income (loss) Net foreign exchange Investment income from financial investments he from financial investments Investment income (b) Claims on investment contracts for the amount As set out in note 1(u) the Group does not account 7. Claims paid(a) Claims

6. Other operating income The fair value gains from financial investments held at fair value through profit or loss (FVTPL) and gains the fair value from 5. Investment return 5. Investment loss on the reva fair value gain and property include both the net realised on assets disposed of during the year. The fair value (2013 loss of £33m) in respect of an retrospective As set out in note 1 (a) IFRS 10 has been applied investment return is £1m less reported. than previously gains fair value investments held Included within from financial £16m) arising on assets held for trading. participating investment contracts as a claim expense in the st contracts participating investment during the year totalled £1,605m (2013 £1,796m) in respect of no deposits repaid and are deducted from the value of investment co contracts. of hybrid participating investment 94

8. Administrative expenses by type Group 2014 2013 £m £m Acquisition costs Expenses 139 111 Commission 78 91 Movement in deferred acquisition costs on investment contracts (note 19) Additions (22) (37) Amortisation and impairment charges 55 57 250 222 Maintenance costs Operational expenses 131 102 Renewal commission 38 39 Restructuring expenses 3 5 IT systems development expenses 3 1 Movement in provision for future commission (note 34) 7 13 Pension scheme cost 12 12 194 172

Other administrative expenses, including long-term incentive plans 42 30 486 424

STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS EUROPEAN EMBEDDED VALUE NOTICE OF AGM & RESOLUTIONS ADDITIONAL INFORMATION 5 3 4 4 12 39 20 91 39 21 70 13 16 16 71 £m 424 500 149 312 321 95 95 2013 2013 £000 1,375 1,089 3,604 ee of the

- 7 4 Group Group 33 78 38 32 13 13 71 14 14 45 £m 163 103 831 285 312 106 486 149 2014 2014 £000 1,787 3,470

audits are agreed by the trust t udi A – udit A t – udi A –

t company and consolidated financial statements t company and consolidated

rance Limited Superannuation Fund (ROl) s on investment contracts (note 19) contracts s on investment ssurance Superannuation Fund ssurance Superannuation Fund A tion, net of VAT udit of the company’s subsidiaries udit related assurance services A A services Tax compliance Tax advisory services Other assurance services Other non-audit services cquisition commission cquisition commission otal

Fees in respect of the Royal Liver Assu T Fees in respect of the Royal London Group Pension Scheme Fees in respect of the Royal London Group Pension Fees in respect of the Royal Liver Total Fees payable to PwC for the audit of the Paren Fees payable to PwC for other services: Regulatory, and administration professional fees 34) for future commission (note Movement in provision Other expenses A Renewal commission property, plant and equipment (note 17) Depreciation of and ren Information systems maintenance Property costs Staff costs acquisitionMovement in deferred cost

The appointment of auditors to the Group’s pensionThe appointment the schemes and respect of those fees paid in scheme who acts independently from the management of the Group. of the Group. independently from the management scheme who acts Auditors’ remunera 9. Administrative expenses by nature expenses 9. Administrative 96

10. Staff costs (a) Analysis of staff costs Group 2014 2013 £m £m Wages and salaries 151 138 Social security contributions 16 14 Other pension costs – defined contribution arrangements 6 7 Other pension costs – defined benefit schemes (note 38) 12 12 Termination benefits 5 4 190 175

Number Number The average number of persons (including executive directors) employed by the Group during the year was: Sales and sales support 345 417 Administration 2,456 2,633 2,801 3,050

The total staff costs of £190m (2013 £175m) are included in the statement of comprehensive income within administration expenses (2014 £163m, 2013 £149m) and within investment management expenses (2014 £27m, 2013 £26m).

(b) Directors’ emoluments Group 2014 2013 £m £m Total emoluments 6 5 Long-term incentives vesting in the year 2 2

Full details of the directors’ emoluments are included in the Directors’ remuneration report on pages 52 to 70. The information included therein, together with the table above, encompasses that required by the Companies Act 2006.

(c) Key management compensation payable Compensation payable to key management, including executive directors, is shown in the table below. The number of key management for the year, including executive and non-executive directors, was 29 for the Group and 24 for the Parent company (2013 30 for the Group and 24 for the Parent company).

Group Parent company 2014 2013 2014 2013 £m £m £m £m Salaries, short-term incentive plans and other benefits 11 11 9 9 Post-employment benefits – defined contribution arrangements - 1 - 1 Post-employment benefits – defined benefit schemes - 1 - - Change in amounts payable under long-term incentive plans 9 5 7 3 20 18 16 13

‘Post-employment benefits – defined benefit schemes’ comprise the current service cost calculated in accordance with IAS 19, ‘Employee Benefits’. This represents the increase in the present value of the defined benefit obligation in respect of key management arising from their service during the year.

The Group’s policy for determining key management remuneration, including executive directors, is for total remuneration to be at the median of the UK financial services market. Bonus plans are designed to encourage and reward increases in the value of the business for the benefit of members. The total amount receivable by key management, including executive directors, under long-term incentive plans was £6m as at 31 December 2014 (2013 £1m). The amount of long-term incentive plans exercised by key management during the year was £6m (2013 £4m).

STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS EUROPEAN EMBEDDED VALUE NOTICE OF AGM & RESOLUTIONS ADDITIONAL INFORMATION 2 4 4 (4) 35 26 30 26 21 26 19 49 34 12 21 £m £m £m 175 2013 2013 2013 97 97 Restated al

- - 2 7 3 Group Group Group 29 16 27 31 61 26 33 42 40 43 £m £m £m 190 2014 2014 2014

ly and the 2013 comparatives have been restated accordingly. Tot accordingly. ly and have been restated the 2013 comparatives r staff costs othe – –

holders from consolidated funds from holders

r Other Subordinated liabilities

Finance costs comprise interest payable arising from:

Operating interest payableOperating interest Provisions Foreign currency translation Loss on disposal of intangibles Other Other transaction costs Other transaction costs operations management Costs of in-house investment operations management Costs of in-house investment external unit Distributions to Othe Property expenses

investment management expenses are £2m higher than previously investment management expenses are £2m reported. 13. Finance costs As set out in note 1 (a) IFRS 10 has been applied retrospective As set out in note 1 (a) IFRS 10 has been applied 12. Other operating expenses 11. Investment management expenses 98

14. Tax charge (a) Tax charge in the statement of comprehensive income Group 2013 2014 Restated £m £m Tax has been provided as follows: UK corporation tax charge Current year 87 13 Adjustments in respect of prior periods (2) - 85 13

Foreign tax partially relieved against UK corporation tax 16 9 Deferred tax (note 37) 106 51 207 73

As set out in note 1 (a) IFRS 10 has been applied retrospectively and the 2013 comparatives have been restated accordingly. The total tax charge is £4m less than previously reported.

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

Group 2013 2014 Restated £m £m Result before tax from continuing operations and before transfer to unallocated divisible surplus 356 445

Tax calculated at the standard rate of corporate tax in the UK 71 94

Accounting profit not subject to policyholder tax (71) (21) Policyholder tax on long-term insurance business 207 - Tax charge for the year 207 73

UK corporation tax in the statement of comprehensive income has been calculated at a rate of 20% (2013 20%) on the taxable profits in respect of insurance business of the long-term fund and at 21.5% (2013 23.25%) on the taxable profits of the subsidiaries of the long-term fund.

The Finance Act 2013 reduced the rate of corporation tax from 23% to 21% effective from 1 April 2014 and to 20% from 1 April 2015. The impact of this reduction in tax rate, which is applicable to the subsidiaries of the long-term fund’s calculation of deferred tax assets and liabilities at the reporting date, is reflected in the deferred tax charge above.

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

STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS EUROPEAN EMBEDDED VALUE NOTICE OF AGM & RESOLUTIONS ADDITIONAL INFORMATION level 99 99 hierarchy Fair value he £m Parent company Fair value - - n/a 2013 – restated 10 9 3 25 5 2 12 2 2 21 18 3 24 - 3 78 13 2 £m 559 33327 9 2 2 265 - 2 184 -171 - 2 3 422 143154 60 3 3 Group Group 1,988 772 2 2,447 33 2 4,074 2,503 3 8,849 3,598 2 18,132 4,130 1 12,239 5,971 1 Fair value level

hierarchy Fair value £m Parent 2014 company Fair value 993 993 663 663 312 312 28 1933 2 33 3 31 - 1 25 - 3 70 70 2 £m 180 15 2 180 180 3 250 250550 2 550 2 146 146 3 Group 2,815 2,815 2 1,725 1,444 2 2,250 2,250 2 4,727 4,633 3 11,108 9,537 2 19,024 7,287 1 14,146 13,267 1 Fair value measured at fair measured at period. T end of each reporting value at the lues of these and assets liabilities are determined.

chniques and key inputs and chniques te sources, using consensus pricing. g he NAV provided by the third-party he NAV provided by the external olatility. Quoted prices provided by third-party pricin Quoted prices in an active market. gross Mark to model technique using a redemption yield. Carrying value. Prices provided by third-party pricing sources, using consensus pricing. (NAV) of the entity. T administrator adjusted for any cash flows occurring after the NAV date and before end. the reporting period T fund managers. Debt Management Office (DMO) price (average of prices used in actual transactions). Quoted prices provided by third-party pricing sources. Mark to model technique using expected Mark to model technique using expected rates. foreign exchange market Mark to model technique using swap rates. Quoted prices in an active market. Quoted prices, but insufficient trading market is active. activity to confirm Fair value is derived using observable market prices. Fair value is based on the net asset value income capitalisation and market income capitalisation methods. comparison valuation Fair value is determined using both and market income capitalisation comparison valuation methods. Mark to model technique using expected dividend yields and market-implied v market Mark to model technique using swap rates. Mark to model technique using forward swap rates and interest rate volatility. Fair value is determined using both

r securities fixed income securities Other quoted debt and fixed income securities Loans secured by policies debt Other unquoted and fixed income Government bonds Government bonds – othe Other quoted debt and fixed income securities Other quoted debt and Equity securities – – securities Equity unquoted – property funds Government bonds – UK treasuries Equity securities – unquoted Equity securities – unquoted Equity securities – unquoted – private equity Derivatives – total return swaps Equity securities – quoted Equity securities – quoted rate swaps Derivatives – interest rate swaptions Derivatives – currency forwards Derivatives – equity options Derivatives – interest Owner-occupied land Owner-occupied land and buildings Investment property Asset/liability Valuation Asset/liability 16. Fair measurement value (a) valueFair of the Group and Parent company’s assets and liabilities that are measured at fair value a recurring on basis assets Group and Parent company’s Some of the and liabilities are fair va about how the following table gives information 100

16. Fair value measurement (continued) (a) Fair value of the Group and Parent company’s assets and liabilities that are measured at fair value on a recurring basis (continued) 2014 2013 – restated Fair value Fair value Fair value Parent Fair value Fair value Parent Fair value Group company hierarchy Group company hierarchy Asset/liability Valuation techniques and key inputs £m £m level £m £m level Other unquoted debt and Mark to model technique using a gross fixed income securities redemption yield. --n/a122 116 3 Unit trusts and other Quoted prices in an active market. pooled investments – quoted 4,631 4,557 1 4,103 3,397 1 Unit trusts and other Quoted prices, but insufficient trading pooled investments – activity to confirm market is active. quoted 234 234 2 306 288 2 Unit trusts and other The NAV provided by external fund pooled investments – manager. unquoted 487 487 3 11 11 3 Investment in Group Net present value of future projected entities – shares cash flows. -4703 - 477 3 Investment in Group Carrying value. entities – loans -293 - 32 3 Investment in Group Quoted prices in an active market. entities – investment funds - 12,233 1 - 10,589 1 Investment in Group The NAV provided by external fund entities – investment manager. funds - 162 3 - - n/a Non-participating Determined by the fair value of the investment contract net assets of the underlying unitised liabilities investment funds. (22,691) (22,691) 2 (19,148) (16,254) 2 Liability to external Quoted prices in an active market. unit holders (3,122) - 1 (2,486) - 1 Reinsurance liability Discounted cash flows are used to derive the fair value. (2,799) (2,799) 2 (2,390) - 2 Derivative liabilities As described above for each type of derivative. (2,064) (2,057) 2 (933) (42) 2 Provision for future Present value of future projected commission cash flows. (212) (212) 3 (205) (205) 3

The Group and Parent company’s policy is to recognise transfers into and transfers out of fair value hierarchy levels at the end of the reporting period. £111m has been transferred from level 2 to level 1 as a quoted price in an active market was available as at 31 December 2014 (2013 £147m was transferred from level 2 to level 1).

There are no fair value measurements in the balance sheet on a non-recurring basis.

(b) Fair value of the Group and Parent company’s assets and liabilities that are not measured at fair value on a recurring basis (but fair values are disclosed) Group and Parent company 2014 2013 Fair value Fair value Fair value hierarchy Fair value hierarchy Asset/liability Valuation techniques and key inputs £m level £m level Subordinated liabilities Quoted market price. 682 1 648 1

STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS EUROPEAN EMBEDDED VALUE NOTICE OF AGM & RESOLUTIONS ADDITIONAL INFORMATION 6 8 25 £m 5 539 , Total 101 101 ly quoted . ined by the liability, either observable are as follows: the arket is one in £m he inputs used in ts entirety. The Level 3 99 -1

- (212)- -- (212) (3,122) - 25 - 4,727- 4,727 28 -28 19,052 £m 180 359 180 234 487 5,352 Group – 2014 Group – 2014 Level 2 ir valueir hierarchy are shownin -- - (2,064) (2,064) - - - 3,123- - 3,123 -- - 2,815 --- 2,815 -- - (22,691) - (2,799) (22,691) (2,799) 31 6 11,108 11,145 £m tes and yield curves observable at common 4,631 (3,122) (3,122) (212) (27,554) (30,888) Level 1 37,832 861 19,213 37,83237,832 57,906 861 19,213 5,613 19,213 59,492 64,244 19,024 14,146 - 1,725 15,871 t volumes to provide pricing information on an ongoing basis t on an ongoing volumes to provide pricing information asset or liability in the fair value hierarchy has to be determ t’s or liability’s fair three levels of the hierarchyvalue. The intothethe three levels of fa included within level 1, which are observable included within level for the assetor be significant to the valuation of the asset or liability invaluation of the asset or liability i be significant to the using a fair value hierarchy that reflects theusing a fair significance of t for the asset. For example, interest ra cluded within level 1 that are observable

ntract liabilities (note 29) in active markets -occupied land and buildings (note 17) r Quoted Unquoted Government bonds Other quoted Loans secured by policies Other unquoted Unit trusts and other pooled investments Deposits with credit institutions

Debt and fixed income securities Other investments Derivative assets Equity securities otal assets at fair value value fair at liabilities otal quoted prices for identical assets in markets that are not active; quoted prices for identical assets in markets that are not active; quoted prices for similar assets in active markets; and inputs to valuation models that are observable intervals, volatilities and swap rates.

T Liabilities investment co Non-participating Reinsurance liability (note 33) Derivative liabilities (note 33) Provision for future commission (note 34) Liability to external unit holders (note 36) Total financial investments (note 20) T Financial investments: Assets Owne (note 18) Investment property Level 1 – Quoted prices Level 2 – Inputs other than quoted prices in Inputs to level 1 fair values are quotedInputs to level 1 fair values prices (unadjusted) in identicalactive markets for or liabilities. assets An active m Inputs to level 2 fair values are those other than quoted prices are those other than quoted Inputs to level 2 fair values which transactions occur with sufficient frequency and at sufficien occur with sufficient frequency which transactions i.e.directly as prices or indirectly, derived from prices. 2 inputs Level include: hierarchy only reflects the methodology used to derive the asse making the fair position assigned to the value measurement. The 16. Fair (continued) measurement value (c) Fair value hierarchy Assets liabilitiesand at fair value held been classified have lowest level of any to that is considered input to its valuation Level 3 – Inputs not based on observable data Inputs to level 3 fair values are unobservable inputs for the asset or liability. Unobservable inputs are typically used where inputs are not available. The Group and Parent company’s assets and liabilities classified following tables. 102

16. Fair value measurement (continued) (c) Fair value hierarchy (continued) Group – 2013 – restated Level 1 Level 2 Level 3 Total £m £m £m £m Assets Owner-occupied land and buildings (note 17) - - 24 24 Investment property (note 18) - - 4,074 4,074 Financial investments: Derivative assets - 1,254 - 1,254 Equity securities Quoted 18,132 12 - 18,144 Unquoted - 184 747 931 Debt and fixed income securities Government bonds 12,239 1,988 - 14,227 Other quoted - 8,849 21 8,870 Loans secured by policies - - 10 10 Other unquoted - 2,447 122 2,569 Other investments Unit trusts and other pooled investments 4,103 306 11 4,420 34,474 15,040 911 50,425 Deposits with credit institutions - - - 1,896 Total financial investments (note 20) 34,474 15,040 911 52,321 Total assets at fair value 34,474 15,040 5,009 56,419 Liabilities Non-participating investment contract liabilities (note 29) - (19,148) - (19,148) Reinsurance liability (note 33) - (2,390) - (2,390) Derivative liabilities (note 33) (933) - (933) Provision for future commission (note 34) - - (205) (205) Liability to external unit holders (note 36) (2,486) - - (2,486) Total liabilities at fair value (2,486) (22,471) (205) (25,162)

STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS EUROPEAN EMBEDDED VALUE NOTICE OF AGM & RESOLUTIONS ADDITIONAL INFORMATION £m 374 Total 103 103 £m Level 3 99 - (212)- (212) - 4,633 - 4,633 -- 1,074 - 661- 12,894 19 - 19 359 15 7,306 £m 234 487 5,278 Level 2 Parent company – 2014 2014 – Parent company -- - (22,691) -- (22,691) - - (2,799) - (2,057) (212) (27,547) (2,799) (2,057) (27,759) - - 3,121 -- 3,121 --- - 6 9,537 2,815 - 9,543 - 2,815 £m 7,287 4,557 Level 1 13,267 1,444 - 14,711 25,111 861 17,185 25,11112,233 43,157 861 17,185 44,231 37,344 6,155 17,185 61,758

ntract liabilities (note 29) Deposits with credit institutions Quoted Unquoted Government bonds Other quoted Loans secured by policies Other unquoted Unit trusts and other pooled investments

Equity securities Debt and fixed income securities Other investments Derivative assets otal assets at fair value value fair at liabilities otal Derivative liabilities (note 33) T Investments in Group entities (note 21) Group entities Investments in T Liabilities investment co Non-participating Provision for future commission (note 34) Reinsurance liability (note 33) Total financial investments (note 20) Investment property (note 18) (note Investment property Financial investments: Assets

16. Fair (continued) measurement value (c) Fair value hierarchy(continued) 104

16. Fair value measurement (continued) (c) Fair value hierarchy (continued) Parent company – 2013 – restated Level 1 Level 2 Level 3 Total £m £m £m £m Assets Investment property (note 18) - - 2,503 2,503 Financial investments: Derivative assets -60 - 60 Equity securities Quoted 4,130 2 - 4,132 Unquoted - - 203 203 Debt and fixed income securities Government bonds 5,971 772 - 6,743 Other quoted - 3,598 18 3,616 Loans secured by policies - - 9 9 Other unquoted - 33 116 149 Other investments Unit trusts and other pooled investments 3,397 288 11 3,696 13,498 4,753 357 18,608 Deposits with credit institutions --- 356 Total financial investments (note 20) 13,498 4,753 357 18,964 Investments in Group entities (note 21) 10,589 - 509 11,098 Total assets at fair value 24,087 4,753 3,369 32,565 Liabilities Non-participating investment contract liabilities (note 29) - (16,254) - (16,254) Derivative liabilities (note 33) - (42) - (42) Provision for future commission (note 34) - - (205) (205) Total liabilities at fair value - (16,296) (205) (16,501)

As set out in note 1 (a) IFRS 10 has been applied retrospectively and the 2013 comparatives have been restated accordingly. In the Parent company this has resulted in the reclassification of £83m from unit trusts and other pooled investments and £75m from unquoted equities to investments in Group entities and in the Group, an increase of £90m across several investment categories.

(d) Level 3 assets and liabilities For the majority of level 3 investments, the Group and Parent company do not use internal models to value the investments but rather obtain valuations from external parties. The Group and Parent company review the appropriateness of these valuations on the following basis: for investment and owner-occupied property, the valuations are obtained from external valuers and are assessed on an individual property basis. The principal assumptions will differ depending on the valuation technique employed and sensitivities are determined by flexing the key inputs listed in the table below using knowledge of the investment property market; private equity fund valuations are provided by the respective managers of the underlying funds and are assessed on an individual investment basis, with an adjustment made for significant movements between the date of the valuation and the end of the reporting period. Sensitivities are determined by comparison to the private equity market; and corporate bonds are predominantly valued using single broker indicative quotes obtained from third-party pricing sources. Sensitivities are determined by flexing the single quoted prices provided using a sensitivity to yield movements.

STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS EUROPEAN EMBEDDED VALUE NOTICE OF AGM & RESOLUTIONS ADDITIONAL INFORMATION roup ts. uld ld by price d result e tax 105 105 rates rease in uded below. p entities; x 1,000,000 £ 1.65-£800 (£179.08) 9,700- £ £ n/a n/a n/a n/a 10.0-55.7 (20.9) 5.81-15.56 (8.6) 3.15 14.9-35.0 (19.3) 20,912 (13,714) At enacted rates of corporation ta n/a 0.01-1.00 (0.52) 2.20 (2.20) 0-13.7 (6.2) 4,705 Range (weighted average) average) (weighted Range 2.30%-14.96% (5.82%) by 100bps would result in an following impact on the Royal London G following impact on the half year and end for inclusion year in the financial statemen djustment to carrying value ax eeing the asset valuation basiseeing the asset valuation for any assets where a market per square foot Price per acre Adjustment to net asset value Unadjusted single broker quotes A Adjustment to net asset value Fees (bps) p.a. Expenses (bps) p.a. Investment return (%) p.a. Surrender rate (%) p.a. Funds under management end 2014 (end 2013) T Carrying value Fund based commission renewal rated (%) p.a. Investment return (%) p.a. Surrender rate (%) p.a. Value of underlying funds at end 2014 (£m) Unobservable input Unobservable input Equivalent yield Estimated rental value se in the value of the underlying funds at 31 December 2014 wo se in the value of the underlying funds at 31 future projected cash flows is used) a 100bps increase or dec ssumed yields at 31 December 2014 ease in profit before tax and fair value of investment in Grou se in the value of the underlying funds woul at 31 December 2014 ssible alternative assumptions the would have ndon Open Fund would impact the Group’s profit impact the Group’s profit changes in assets he for the year, as ndon Open Fund would using significant unobservable inputs: using significant unobservable movement in investment and insurance contract are not incl liabilities and therefore movement ng any changes to the valuation principles. to the valuation ng any changes Present value of future projected cash flows Adjusted net asset value Net present value of future projected cash flows Carrying value Valuation technique Valuation technique Income capitalisation Market comparison Adjusted net asset value Single broker quotes Carrying value value of the corporate bonds of £0.2m; the of increase in profit after tax and the fair value of corporate bonds risk-free interest rates would result or decr in a £9.2m increase result in a £20m increase or decrease in the provision for future commission and a 10% increase or decrease in future surrender would result in a £15m increase or decrease in the provision. for level 3 privateequity investments a 10% increase or decrea assumed yieldsfor level 3 corporate at 31 December would result bonds, increasing 2014 by 100bps a decrease in profit befor in and the fair value bonds of £0.2m. Decreasing a of the corporate (where the net present value of for investments in Group entities and increasefor the provision for future commission, a 10% or decrea in a £5.8m increase or decrease inin a £5.8m increase or before tax or total assets profit or liabilities;

Investments in Group entities – Group entities – Investments in loans Provision for future commission Investments in shares Group entities – private equity and property funds Debt and fixed income securities Loans secured by policies Unit trusts and other pooled investments Owner-occupied property and investment property Equity securities – unquoted – to reasonablyChanges in the assumptions po for the year: IFRS result before tax the closed funds are offset by an opposite

Asset/liability 16. Fair (continued) measurement value (d) Level 3 assets and liabilities (continued) measurementsThe fair value for and the Group Investment are level 3 assets Investment Committee reviewed by the RLAM the Audit Committee at and approved by the Performance Committee is not readily available, as well as agreei held byOnly changes in assets the Royal Lo The Group Investment Performance Committee is responsible for agr is Committee Performance The Group Investment

fair value measurementsInformation about 106

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

Group – 2014 Owner- Financial occupied Investment investments property property Total £m £m £m £m At 1 January (restated) 911 24 4,074 5,009 Purchases 15 - 274 289 Sales (219) - (56) (275) Net gains and (losses) recognised in profit or loss 167 1 435 603 Transfers into level 3 4-- 4 Transfers out of level 3 (17) - - (17) At 31 December 861 25 4,727 5,613 ‘Net gains and (losses) recognised in profit or loss’ that relate to assets still held at the balance sheet date 122 1 425 548

Group – 2013 – restated Owner- Financial occupied Investment investments property property Total £m £m £m £m At 1 January (restated) 574 31 2,284 2,889 Purchases 91 - 330 421 Sales (184) - (241) (425) Net gains and (losses) recognised in profit or loss (1) - 182 181 Acquisition of subsidiary 526 - 1,519 2,045 Disposal of subsidiary (9) (7) - (16) Transfers into level 3 6-- 6 Transfers out of level 3 (92) - - (92) At 31 December 911 24 4,074 5,009 ‘Net gains and (losses) recognised in profit or loss’ that relate to assets still held at the balance sheet date 17 - 108 125

STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS EUROPEAN EMBEDDED VALUE NOTICE OF AGM & RESOLUTIONS ADDITIONAL INFORMATION 89 89 (60) £m £m (12) 674 284 Total Total e within 107 107 £m £m entities entities in Group in Group Investments Investments -6 -1 - - - - - £m £m (50) (10) (50) (220) 103 (36) 325 311 110 (32) 262 8 262 356 (175)356 303 354 (175) 248 property property property Investment Investment Parent company – 2014 – 2014 Parent company Parent company – 2013 – restated 6- 1- 22 38 11 69 14 (60) £m £m (12) 357 2,503 509 3,369 493 2,234 424 3,151 357 509 2,503 592 3,369 329 1,564 861 2,485 122 661 4,633 6,155 (131) (166) (194) (491) (160) Financial Financial investments investments intoperiod. and out of level 3 at the end of the reporting profit and loss’ shown above are included within the statement of comprehensive incom profit and within the statement of comprehensive loss’ shown above are included

in profit or loss’ that relate in profit or loss’ that relate

y t 1 Januar t 31 December t 31 December t 1 January (restated) (restated) t 1 January ‘Net gains and (losses) recognised to assets stillsheet date held at the balance Purchases Sales Net gains and (losses) recognised in profit or loss Transfers into level 3 Transfers out of level 3 A A Transfers 3 into level Transfers out of level 3 A ‘Net gains and (losses) recognised to assets stillsheet date held at the balance A Purchases Sales Part VII transfer in Net gains and (losses) recognised profit or loss in The ‘Net gains and (losses) recognised in ‘Investment return’. ‘Investment return’. The Group and Parent company’s policy is to recognise transfers

is shown in the provision for future commission note 34. The movement in 16. Fair (continued) measurement value (d) Level 3 assets and liabilities (continued) 108

17. Property, plant and equipment Group – 2014 Owner- Computers, occupied office land and equipment buildings and vehicles Total £m £m £m Cost or valuation At 1 January 43 83 126 Additions -15 15 At 31 December 43 98 141 Accumulated depreciation and impairment losses At 1 January (19) (73) (92) Depreciation charge -(4) (4) Reversal of impairment losses 1- 1 At 31 December (18) (77) (95) Net book value At 1 January 24 10 34 At 31 December 25 21 46

Group – 2013 Owner- Computers, occupied office land and equipment buildings and vehicles Total £m £m £m Cost or valuation At 1 January 50 84 134 Additions -4 4 Disposals (7) (5) (12) At 31 December 43 83 126 Accumulated depreciation and impairment losses At 1 January (19) (73) (92) Depreciation charge - (4) (4) Disposals -4 4 At 31 December (19) (73) (92) Net book value At 1 January 31 11 42 At 31 December 24 10 34

For the purposes of the disclosure required by IAS 1, ‘Presentation of Financial Statements’, all property, plant and equipment held by the Group is classified as being held for more than 12 months from the balance sheet date. The Parent company did not hold any property, plant and equipment at the balance sheet date or at the previous balance sheet date.

Owner-occupied land and buildings shown above are held on a freehold basis. If the owner-occupied land and buildings were stated on a historical cost basis, the amounts would be as follows:

Group 2014 2013 £m £m Cost 35 35 Accumulated depreciation and impairment losses (18) (19) Net book value 17 16

STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS EUROPEAN EMBEDDED VALUE NOTICE OF AGM & RESOLUTIONS ADDITIONAL INFORMATION

k - - 33 19 £m 110 149 292 (166) 2013 2,234 2,503

nt cordingly. 109 109 a and et gain from ified as as ified uired to t date and

- 59 17 £m (45) 205 347 154 2014 2,503 1,564 4,633 Parent company Parent company

- 38 26 £m 292 175 186 (234) 2013 2,284 1,519 4,074 e fair value of properties, the highest restated

- - Group 72 29 £m (51) 205 427 243 2014 4,727 4,074

ty from financial investments. There was no impact on the Pare ty from financial investments. There was no of investment property at the balance sheet date that is class that investment property at the balance sheet date of were DTZ CBRE Limited, Cushman and Wakefield, Knight Fran and (2013 £3,982m) and £4,623m for (2013 £2,449m). Parent company the date the future minimum lease payments receivable under non-cancellable date the future minimum lease payments receivable een no change to the valuation technique during the year. The n valuation technique een no change to the d not generate income are £13m (2013d not generate income £3m) for the Group £13m and y properties disposed of during the year.

lue annually with an effective date of 31 December. The fair values are determined by y

above includes £548m (2013 £524m) for the for the Parent Group and £548m (2013 £285m) e represents the net fair value gain on the revaluation of properties held at the balance shee

r cquisition of new properties A Capitalised expenditure on existing properties Capitalised expenditure on existing t 31 December cquired through business combinations cquired through business t 1 January restated dditions

A Part VII transfe A investment propert Rental income from propert Direct operating expenses arising from investment A A Disposals Net gain from fair value adjustments Fair value does not include gains or losses realised on are leased toInvestment properties third parties under operating leases. Under the terms of certain leases, the company is req fair value adjustments shown abov repair and maintain the related properties. At the balance sheet leases are of this table,shown in the following table. For the purposes the minimum lease period has been taken as the period to the first the lessee. terminated by possible date that the lease can be being held for more than 12 months is £4,717m for the Group being held for more than 12 months The fair value of investment property company held under finance leases. that di The total direct expenses above relating to properties (2013 £1m) for the Parent company. Investment property is revalued to fair va recognised registered independent valuer having an appropriate professional qualification location in the and recent experience As set out in note 1 (a) IFRS 10 has been applied retrospectivelyAs set out in note 1 (a) IFRS 10 has been applied and for the restated ac the 2013 comparatives Group have been 18. Investment property property 18. Investment This has resulted in £76m being reclassified to investment proper principal valuers usedcategory of the property being valued. The (note 16 (d)). LLP. Fair value In estimating th is determined using market and income approaches and best use of the properties is their b current use. There has company balance sheet. For the purposes of the disclosure required by IAS 1, the amount 110

18. Investment property (continued) These total future minimum lease payments receivable can be analysed as follows:

Group Parent company 2014 2013 2014 2013 £m £m £m £m Not later than one year 227 215 226 130 Later than one year and not later than five years 698 665 694 398 Later than five years 1,261 1,230 1,258 472 2,186 2,110 2,178 1,000

Group Parent company 2014 2013 2014 2013 £m £m £m £m Freehold 1,815 1,764 1,807 856 Leasehold 371 346 371 144 2,186 2,110 2,178 1,000

19. Intangible assets The following tables show the movements in the intangible assets of the Group and the Parent company.

Group – 2014 Deferred Acquired Acquired acquisition PVIF on PVIF on costs on Other investment insurance investment intangible Goodwill contracts contracts contracts assets Total £m £m £m £m £m £m Cost At 1 January 250 421 1,013 816 215 2,715 Additions - - - 22 - 22 At 31 December 250 421 1,013 838 215 2,737 Accumulated amortisation and impairment losses At 1 January - (379) (791) (358) (146) (1,674) Amortisation charge - (8) (18) (55) (24) (105) Impairment losses - - (27) - - (27) At 31 December - (387) (836) (413) (170) (1,806) Net book value At 1 January 250 42 222 458 69 1,041 At 31 December 250 34 177 425 45 931

The net book value of intangible assets at 31 December 2014 can be analysed between amounts expected to be amortised (goodwill subject to annual impairment review):

Within 12 months - 2125215 81 In more than 12 months 250 32 165 373 30 850 250 34 177 425 45 931

STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS EUROPEAN EMBEDDED VALUE NOTICE OF AGM & RESOLUTIONS ADDITIONAL INFORMATION 0 74 £m 103 938 138 Total 111 111 £m Other assets intangible 28 - 10 3 54 22 70 4 (68) (25) (141) £m 816 215 2,715 404 47 458 69 1,041 554 82458 69 1,083 1,041 887 205 2,696 costs on Deferred contracts acquisition investment - 84 19 (27) (141) (4)(25) (193) £m 203 222 137 222 921 119 Group – 2013 Group – 2013 PVIF on Acquired contracts insurance - 8 9 71 34 42 56 42 (17) (23) £m 429 421 1,013 (373) (784)(379) (333) (123) (791) (1,613) (358) (146) (1,674) PVIF on be analysed between amounts expected to be amortised (goodwill be analysed between amounts expected Acquired contracts investment ------1 - (4) £m 250 250 254 250 254 250 Goodwill

t 31 December t 31 December t 31 December t 1 January cquired through business combinations cquired through business t 1 January mortisation charge t 1 January Within 12 months months In more than 12 Disposals A value book Net A A Disposals A and amortisation Accumulated losses impairment A A Cost A A Other additions

The net book value of intangible assets at 31 DecemberThe net book value of intangible 2013 can subject to annual impairment review): 19. Intangible assets (continued) assets (continued) 19. Intangible 112

19. Intangible assets (continued)

Parent company – 2014 Deferred Acquired Acquired acquisition PVIF on PVIF on costs on Other investment insurance investment intangible Goodwill contracts contracts contracts assets Total £m £m £m £m £m £m Cost At 1 January 232 410 891 816 138 2,487 Part VII transfer - - 112 - - 112 Other additions - - - 22 - 22 At 31 December 232 410 1,003 838 138 2,621 Accumulated amortisation and impairment losses At 1 January - (377) (787) (358) (86) (1,608) Amortisation charge - (9) (18) (55) (11) (93) Impairment losses - - (27) - - (27) At 31 December - (386) (832) (413) (97) (1,728) Net book value At 1 January 232 33 104 458 52 879 At 31 December 232 24 171 425 41 893

The net book value of intangible assets at 31 December 2014 can be analysed between amounts expected to be amortised (goodwill subject to annual impairment review):

Within 12 months - 2115212 77 In more than 12 months 232 22 160 373 29 816 232 24 171 425 41 893

STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS EUROPEAN EMBEDDED VALUE NOTICE OF AGM & RESOLUTIONS ADDITIONAL INFORMATION 37 92 £m five- 957 879 787 879 Total d 113 113 tion. on mption n rights n rights coverable ates. Some to the to the siness unit. w unit trust w unit £m Other assets intangible

37 - 54 11 (57) (12) (115) £m 478 64 458 52 779 138816 138 2,450 2,487 404 41 458 52 possible change in a key assu racts and policy administratio racts costs on Deferred contracts acquisition investment (2013 £110m) in respect of the acquisiti - 19 85 (23) £m 127 104 104 891 891 ion costs directly related to acquiring ne PVIF on Acquired contracts insurance Parent company Parent company – 2013 ent company resulting from a reclassificationent company from acquire - 8 56 33 25 33 term plan approved by the Board of Directors, term plan approved by the Board which covers a grow at a steady rate of between 2.5% and 3% per annum (2013 (23) £m 410 410 (354)(377) (764) (787) (301) (74) (358) (86) (1,493) (1,608) volves comparing the carrying value of the goodwill to its re of the goodwill volves comparing the carrying value PVIF on of the goodwill and a reasonably be analysed between amounts expected to be amortised (goodwill be analysed between amounts expected Acquired include customer numbers, premium rate and fee income changes, fee income changes, premium rate and include customer numbers, contracts investment management business and £18m (2013 £18m) relating to the acquisition business management profits based on both historical experience and expected growth r profits experience and expected based on both historical eful life. The carrying value of £250m comprises £119m relating onships, investment management cont ing a risk-adjusted discount rate of 6.1% (2013 6.1%). expected useful expected lives of 10 years.between three and - - - - - £m 232 232 232 232 232 232 Goodwill ilities, as a result of the Part VII transfer.

the expected profits arising from the future new business written by the relevant bu in-use calculations are as follows: sinesses and assets in 2008 (2013 £119m), £110m

t 31 December t 31 December t 31 December dditions t 1 January mortisation charge t 1 January t 1 January claims inflation and commission rates; year period, and as such reflects the best estimate of future profits of the assumptions that underlie the budgeted expected 2.5% to 3% per annum); and Discount rates – The cash flows us have been discounted Expected profits from future new business are based on the medium- Growth rates – Cash flows beyond to that period have been assumed

Within 12 months months In more than 12 A A Accumulated amortisation and amortisation Accumulated losses impairment A A A value book Net Cost A A A subject to annual impairment review): and Par The impairment losses in 2014 include £26m for both the Group The net book value of intangible assets at 31 DecemberThe net book value of intangible 2013 can 19. Intangible assets (continued) assets (continued) 19. Intangible VIF to non-participating insurance contract liab insurance contract VIF to non-participating of Scottish Life in 2001, £3m (2013 £3m) in relation to a cash Limited. Limited and Investment Sciences Direct Group of Investment Funds Goodwill is tested for impairment annually. The impairment test in (a) Goodwill an indefiniteGoodwill is the only intangible asset that has us acquisition of the former Resolution bu calcula using a value-in-use basis. The recoverable amount of the goodwill has been determined unit amount on a cash-generating This is determined as the present value of The key assumptions used for the value- The recoverable amount significantly exceeds the carrying amount will not cause the carrying value of the goodwill to exceed its recoverable amount. amount. will not cause the carrying value of the goodwill to exceed its recoverable (b) Other intangible assets relati assets consist of Other intangible distribution channel acquired as part of business combinations, software licences and incremental acquisit management business. They are being their amortised over 114

20. Financial investments

Group Parent company 2013 2013 2014 restated 2014 restated £m £m £m £m Financial investments held at fair value through profit or loss (FVTPL) Classified as held for trading 3,123 1,254 3,121 60 Designated as FVTPL 56,369 51,067 41,110 18,904 59,492 52,321 44,231 18,964

As set out in note 1 (a) IFRS 10 has been applied retrospectively and the 2013 comparatives have been restated accordingly. In the Group this has resulted in an increase of £90m in total financial investments recognised across several investment categories. In the Parent company total financial investments are £158m lower than previously stated, due to a reclassification to investments in Group entities.

For the purposes of the disclosure required by IAS 1, it has been assumed that financial investments will be realised in order to settle the claims expected to arise during the 12 months following the balance sheet date. On this basis, the amount of financial investments at the balance sheet date that are classified as being held for more than 12 months is £55,420m for the Group (2013 £47,348m) and £40,161m for the Parent company (2013 £15,900m).

The Parent company includes within its investment portfolio a significant holding in OEICs and other investment funds managed by subsidiary companies. Those funds over which the Parent company has control are classified as subsidiaries (‘consolidated funds’). The Parent company’s investment in these consolidated funds is shown in note 21 and is not included in the Parent company figures below. On consolidation, the underlying investments of the consolidated funds are included within the appropriate investment line in the balance sheet and are therefore included in the Group figures shown below.

(a) Financial investments classified as held for trading

Group Parent company 2014 2013 2014 2013 £m £m £m £m Derivatives (note 20 (d)) Unquoted 3,123 1,254 3,121 60

(b) Financial investments designated as FVTPL

Group Parent company 2013 2013 2014 restated 2014 restated £m £m £m £m Equity securities Quoted 19,052 18,144 7,306 4,132 Unquoted 539 931 374 203 19,591 19,075 7,680 4,335 Debt and fixed income securities Government bonds 15,871 14,227 14,711 6,743 Other quoted 11,145 8,870 9,543 3,616 Loans secured by policies 9 10 9 9 Deposits with credit institutions 1,586 1,896 1,074 356 Other unquoted 2,815 2,569 2,815 149 31,426 27,572 28,152 10,873 Other investments Unit trusts and other pooled investments 5,352 4,420 5,278 3,696 Total financial investments designated as FVTPL 56,369 51,067 41,110 18,904

STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS EUROPEAN EMBEDDED VALUE NOTICE OF AGM & RESOLUTIONS ADDITIONAL INFORMATION f 115 115 ent and he event quity The of its fixed its fixed of party makes anage its anage its changes in itial cash ve a quoted ve a quoted y rates er financial er financial tched by nterest rates mount of a re-determined exposed to credit risk on oth exposed to credit risk e a guaranteed investment return based on e e a guaranteed investment return nds, issued by companies and guaranteed by their respective by their respective by companies and guaranteed nds, issued dge market risk (see note 43), fordge market risk (see note portfolio managem efficient tives in the same way as it is tives in the same way currency at a specified exchange rate and on a specified date. currency at a specified exchange right, but not the obligation, to buy or to sell a buy specific a obligation, to the right, but not in is exchanged during the life of the contract in response to life of the contract in the in is exchanged during yments based on a set rate, fixed or variable, while the other debt securities above is £2,799m (Group 2013 £2,390m) in respect o £2,799m (Group 2013 £2,390m) in respect debt securities above is transaction. Cash margin is collateral in the form of cash. In transaction. Cash margin ys a periodic premium in exchange for a contingent payment in t ys for a contingent a periodic premium in exchange rate risk annuit mitigate the interest inherent in guaranteed te, or during a set period. The Group uses equity options to m ture used to limit exposure to fluctuations in i date, and are the point in time is ma derivatives held any by the Group at e Group uses credit default swaps to manage the credit exposure e Group uses credit default swaps to manage the credit nt. Only the net interest payments are exchanged. No exchange of principal areOnly the net interest payments exchanged. No nt. e either ‘exchange-traded’ (regulated by an exchange), which ha e either ‘exchange-traded’ 20(e). The remaining credit risk is managed within the Group’s risk 20(e). The remaining credit risk is managed within the betweento the contract), which are unquoted. the parties hase a particular equityhase at a specified price. posure to fluctuations in equity markets.posure to fluctuations posure to movements in exchange rates. exchange posure to movements in s and to back certain products which includ

reinsurance rearrangement (see note 33). (see note reinsurance rearrangement the value of the derivative. Further details are giventhe value of the derivative. Further details are in note price, at or by a set da financial instrument at a pre-determined management framework, which is discussed further in note 43. furthermanagement framework, which is discussed in note 43. followingThe Group and Parent company utilise the derivatives: warrants and Options under which the seller grants the buyer the Options are contracts 20. Financial investments (continued) bo corporate above are bonds the figures for Government Included in governments, of £215m for the Group (2013 £286m) of £215m for the Group governments, (2013 £30m). the Parent company and £209m for for unquoted Group and Parent company figure Included in the (c) Derivative instruments financial company utilise derivative The Group and Parent instruments to he a loan note held in respect of a a loan note held in respect this risk, a portion of the fair value of investments. To mitigate

over the long term. over the long term. return swaps Total A total return swap is a contract under which one party makes pa Group uses currency forwards to reduce ex payments based an underlying item. on the return of Swaptions, interest rate swaps and total return swaps are used to rate financial assets. forwards Currency amount of A currency forward is a contract to exchange an agreed granted by the Group. granted by the swaps default Credit A credit default swap is a contract under which the purchaser pa of a credit default occurring in an agreed underlying asset. Th exposure to fluctuations in equity market margin is exchanged at the outset of the contract. Variation marg of the contract. margin is exchanged at the outset to credit risk on the carrying value of deriva The Group is exposed for the matching of liabilities to policyholders. Derivatives of liabilities to policyholders. for the matching ar market price, or ‘over-the-counter’ (individually negotiated to the from the counterparty received collateral and cash margin takes place. Swaptions swap at a fu an interest rate Swaptions are options to enter into price. The Group uses futures to manage its ex price. The Group uses futures to manage its Interest rate swaps interest paymentsAn interest rate swap is a contract under which for interest payments at a fixed interest rate are exchanged at a variable interest rate (or vice versa) based on an agreed principal amou Futures sell a given quantityA futures contract is an agreement to buy or of a financial instrument, at a specified future date at a p values. Warrants give the holder the right to purc values. Warrants give the holder the right to 116

20. Financial investments (continued) (d) Fair value of derivative instruments held

Group 2014 2013 Contract/ Fair values Contract/ Fair values notional notional amount Assets Liabilities amount Assets Liabilities £m £m £m £m £m £m Equity options and warrants 619 70 (8) 1,667 78 - Interest rate swaps 18,659 2,250 (1,947) 19,414 559 (864) Interest rate swaptions 8,105 250 - 8,400 327 - Total return swaps 6,039 550 (94) 6,565 265 (5) Credit default swaps 5 - - 5- - Currency forwards 1,703 3 (15) 1,871 25 (64) Total derivative assets/(liabilities) 3,123 (2,064) 1,254 (933)

Parent company 2014 2013 Contract/ Fair values Contract/ Fair values notional notional amount Assets Liabilities amount Assets Liabilities £m £m £m £m £m £m Equity options and warrants 619 70 (8) 180 13 - Interest rate swaps 18,659 2,250 (1,946) 1,447 33 (40) Interest rate swaptions 8,105 250 - 1,089 9 - Total return swaps 6,039 550 (94) -- - Credit default swaps 5 - - 5- - Currency forwards 695 1 (9) 508 5 (2) Total derivative assets/(liabilities) 3,121 (2,057) 60 (42)

In addition to the above, the Group and Parent company make use of futures contracts. At 31 December 2014, the Group and Parent company had entered into equity futures trades giving exposure to equities with a notional value of Group £457m (2013 £339m) and Parent company £309m (2013 £nil) and into gilt futures trades giving exposure to gilts with a notional value of £245m for both Group (2013 £223m) and Parent company (2013 £nil). The equity and gilt futures had no market value at that date because all variation margin on these contracts is settled on a daily basis.

The Group paid initial cash margin of £26m (2013 £24m) and Parent company £19m (2013 £nil) in respect of these trades, which is included within ‘trade and other receivables’. The net variation margin payable by the Group and the Parent company at 31 December 2014 was £2m (2013 £nil), being the amount due for the movement on the last business day of 2014, which was settled on the first business day in 2015. Variation margin receivable is included within ‘trade and other receivables’ and variation margin payable is included within ‘payables and other financial liabilities’.

(e) Collateral and other arrangements (i) Stock loan agreements The Group and Parent company have entered into a number of stock lending transactions that transfer legal title to third parties, but not the exposure to the income and market value movements arising from those assets. As a result, the Group and Parent company retain the risks and rewards of ownership and the assets continue to be recognised in full on the Group and Parent company balance sheets. There are no restrictions arising from the transfers.

The assets transferred under these agreements are secured by the receipt of collateral. The level of collateral held is monitored regularly and adjusted as necessary to manage exposure to credit risk.

The collateral received was in the form of UK, US, Japanese and European Government bonds and quoted equities. It may be sold or re-pledged in the absence of default. No collateral was sold or re-pledged in the year (2013 £nil) and there were no defaults in the year (2013 none).

STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS EUROPEAN EMBEDDED VALUE NOTICE OF AGM & RESOLUTIONS ADDITIONAL INFORMATION 3 tive 34 £m 530 734 167 765 2013 o ed debt loan 117 117 the 13 Parent es and es and nancial n the year for the Parent - 68 £m 117 669 458 643 2014 Parent company Parent company

3 47 £m 512 792 2013 1,354 1,415 - Group 71 £m 592 548 2014 1,211 1,273 y was included within ‘payables and other fi mpany: £9m) of assetsmpany: as collateral in respect of deriva ) and the Parent company (2013 £nil) in respect of an unlist ) and the Parent company (2013 £nil) in respect initial and variation cash margin in respect of derivatives. t bonds. The market value of the deposits in respect of which t bonds, other fixed income debt securities, floating rate not t bonds, other company balance sheets that have been transferred under stock UK Government bonds and European sovereign debt. It may be sold bonds and European sovereign or UK Government re-pledged i in the year (2013 £nil) and there were no defaults and cash margin were received was £1,168m for both the Group (20 for both the and cash margin were received was £1,168m within ‘payables and other financial liabilities’ and amounted(2013 to £102m n-cash collateral was £684m for both the Group (2013 £1,013m) and the n-cash collateral was £684mGroup for both the which the collateral was received which the was £2,799m (2013 £2,390m). ed within ‘payables and other financial liabilities’. iabilities. The corresponding repo liabilit

t Listed equities Corporate bonds Government bonds deb Other unquoted

Collateral received Stock loan agreements Stock loan agreements liabilities’ and amounted to £100m. deposits. The collateral received was in the form of UK Governmen company was pledged in respect of repo l Collateral of £642m was received for both the Group (2013 £1,151m) and the Parent company (2013 £nil) in respect of reverse rep There was no collateral pledged in year in respect of repo the liabilities. In 2013 collateral of £103m for the Group and £nil security. The collateral received was in the form of UK Governmen cash. The market in respect of value of the debt security collateral was received was £640m (2013 £1,154m). collateral as pledged (iii) Assets The Group and Parent company pledged £95m (2013 Group: £894m; Parent co contracts. The corresponding derivative liability is included Group: £894m; Parent company £9m). Group and Parent company paid £3m (2013 £nil) of In addition, the (2013 none). Cash margin was £288m (2013 £26m) Parent the for both the Group and ‘cash and company. Cash margin received is included within cash equivalents’, with an offsetting liability includ (2013 £25m).£1,206m) and the Parent company Group (2013 £2,431m Collateral of £2,795m was received for both the received collateral (ii) Other Collateral was also received in respect of derivatives. No was sold or re-pledged in the absence of default. No collateral The market value of derivatives in respect of which collateral 20. Financial investments (continued) (e) Collateral arrangementsand other (continued) (i) Stock loan agreements (continued) and Parent the assets within the Group The following table shows company (2013 £nil). The collateral received was in the form of agreements and the related collateral received. agreements and the related 118

20. Financial investments (continued) (f) Sovereign debt exposures Included within the Group and Parent company’s government bonds are the following exposures to sovereign debt shown by country:

Group Parent company 2013 2014 restated 2014 2013 £m £m £m £m UK 14,146 12,239 13,267 5,971 Germany 233 182 200 164 France 107 126 104 124 Ireland 2 - 1 - Italy 39 26 30 21 Spain 10 9 8 7 Slovenia - 16 - 14 Belgium 34 37 34 37 Austria 26 30 26 30 Finland 25 28 23 26 Holland 28 37 28 37 Other Europe 143 21 133 16 USA 368 193 255 133 Canada 21 13 13 7 Japan 90 81 56 53 Rest of World 39 14 33 12 Total 15,311 13,052 14,211 6,652

The Group’s exposure to the sovereign debt of Greece, Ireland, Italy, Portugal and Spain represents less than 1% (2013 less than 1%) of the total investment portfolio. As set out in note 1 (a) IFRS 10 has been applied retrospectively and the 2013 comparatives have been restated accordingly. In the Group this has resulted in an increase of £34m in UK government bonds.

21. Investments in Group entities The Parent company’s investments in Group entities comprise:

Parent company 2013 2014 restated £m £m Shares 470 477 Loans 29 32 OEICs and other investment funds 12,395 10,589 12,894 11,098

Investments in Group entities are carried in the balance sheet at fair value. For the purposes of the disclosure required by IAS 1, all of the investments in Group entities held at the balance sheet date are classified as being held for more than 12 months.

The OEICs and other investment funds represent the Parent company’s investment in funds which are managed by subsidiaries of the Group and over which the Group has control. As set out in note 1 (a), the definition of control has changed following the adoption of IFRS 10 and the 2013 comparatives have been restated accordingly. This has resulted in an increase of £83m in the OEICs and other investment funds balance and an increase of £75m in the shares balance from those previously stated.

STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS EUROPEAN EMBEDDED VALUE NOTICE OF AGM & RESOLUTIONS ADDITIONAL INFORMATION fund trust trust trust trust trust tion 119 119 company company company assurance nd in the nd in the management management Property unit trust Nature of business Nature

- OEIC 79.4 OEIC 83.9 OEIC 76.7 OEIC 74.2 OEIC 90.2 OEIC 91.9 OEIC 91.4 OEIC 92.0 OEIC 99.7 OEIC 58.7 OEIC 70.2 OEIC 84.9 OEIC 54.8 OEIC 70.9 OEIC 99.9 OEIC 44.8 OEIC 32.6 OEIC 30.8 OEIC 99.7 Unit 89.1 Unit 55.9 Unit 33.8 Unit 90.1 Wrap platform management 99.9 68.8 OEIC 71.1 OEIC 96.2 OEIC 99.9 OEIC 89.1 OEIC 2013 100.0 OEIC 100.0 OEIC 100.0 Investment 100.0 Property 100.0 Investment management 100.0 Investment 100.0 ISA 100.0 ISA 100.0 Unit trust management 100.0 100.0 Finance Pension fund management 100.0 Finance 100.0 Life 100.0 100.0 Service Unit trust management per share and it is now a wholly-owned subsidiary. % holding 36.3 81.7 85.3 78.6 73.2 90.0 90.8 90.8 90.2 99.0 37.3 99.7 99.9 80.1 67.3 97.8 53.2 98.7 87.1 57.1 99.9 96.8 99.7 90.1 41.5 47.3 43.5 34.1 51.4 64.8 2014 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 list of all of its subsidiaries. can be fou This information iary undertakings are included in the consolidation. rvices Limited was repurchased by the Group at a price of £4.40 . The Group has taken advantage of the exemp in Jersey. The Group has taken Trust, which is incorporated

t t

1 -term Money Market Fund t The Royal London Shor Credit Fund The Royal London Short Duration The Royal London Absolute Return Government Bond Fund TrustCIS Sustainable Managed Income TrustCIS Sustainable Managed Growth TrustCIS US Growth Growth Trus CIS European Goldman Sachs Multi-Strategy Portfolio COIS Limited The Royal London Property Trus The Royal London UK Equity Fund The Royal London Asia ex Japan Tracker Fund The Royal London UK Smaller Companies Fund The Royal London Cash Plus Fund Bond Fund The Royal London European Corporate Tracker Fund The Royal London Europe ex UK Fund Government Bonds The Royal London International Gilt Fund The Royal London Short Duration Bond Fund The Royal London Government Fund Yield Global High The Royal London Short Duration Yield Bond Fund The Royal London Global High Linked Fund The Royal London Global Index Commercial Properties (UK) Unit Trust The Royal London Sterling Credit Fund The Royal London UK Mid Cap Growth Fund The Royal UK Opportunities Fund London The Royal London European Income Fund The Royal London Japan Tracker Fund The Royal London FTSE 350 Tracker Fund The Royal London US Tracker Fund The Royal All Share Tracker London Fund Fund The Royal London Index Linked Fund The Royal London UK Growth Growth Fund The Royal London European

Royal London Management Services Limited Royal London Management Services Unit trusts, OEICs and other investment funds reported as subsidiaries under IFRS: Royal London Pooled Pensions Company Limited Royal London Pooled plc RL Finance Bonds No 2 plc RL Finance Bonds Wrap IFA Services Limited Royal London (CIS) Limited RLUM (CIS) Limited Royal London Asset Management Limited Royal London Asset Management Managers LimitedRoyal London Unit Trust Limited RL Marketing (CIS) Royal London Savings Limited 1 In October 2014, the non-controlling interest in Wrap IFA Se Name 21. Investments in Group entities (continued) in Group 21. Investments (a) Significant subsidiaries all significant subsidiaries, has the following with the and Wales or Scotland, incorporated in England of which are company The Parent of Commercial Properties (UK) Unit exception Companies Act 2006 not to provide a complete in Section 410 of the House. All to Companies Group’s annual return subsid 120

21. Investments in Group entities (continued) (b) Interests in associates All of the Group’s associates are investment funds accounted for as financial assets held at fair value through profit or loss and are all incorporated in England. At 31 December 2014, the following four funds have been recognised as associates:

Group’s % holding Name of investment fund 2014 2013 Royal London Corporate Bond Fund 20.3 30.5 CIS Corporate Bond Income Trust 29.8 28.9 CIS UK Growth Trust 22.9 22.4 Royal London Property Fund 22.8 27.3

Summarised financial information for associates: (i) Summarised balance sheet

Royal London CIS Corporate CIS UK Royal London Corporate Bond Fund Bond Income Trust Growth Trust Property Fund Total 2014 2013 2014 2013 2014 2013 2014 2013 2014 2013 £m £m £m £m £m £m £m £m £m £m Current assets Cash & cash equivalents 11 5 1 5 18 19 3 2 33 31 Other current assets 17 12 7 - 3 4 12 22 39 38 Total current assets 28 17 8 5 21 23 15 24 72 69 Current liabilities Financial liabilities 5 5 1 1 2 2 5 3 13 11 Other current liabilities 3 3 ------3 3 Total current liabilities 8 8 1 1 2 2 5 3 16 14 Non-current assets 674 472 345 358 1,135 1,227 315 216 2,469 2,273 Total net assets 694 481 352 362 1,154 1,248 325 237 2,525 2,328

(ii) Summarised statement of comprehensive income

Royal London CIS Corporate CIS UK Royal London Corporate Bond Fund Bond Income Trust Growth Trust Property Fund Total 2014 2013 2014 20131 2014 20131 2014 2013 2014 2013 £m £m £m £m £m £m £m £m £m £m Interest income 29 27 19 6 - - - - 48 33 Net gains (losses) on investments 44 (8) 20 (4) (2) 82 24 13 86 83 Other income/(expense) (31) (30) (19) (9) (5) 5 - - (55) (34) Net income 42 (11) 20 (7) (7) 87 24 13 79 82

1 The 2013 income and expenses shown above for the CIS Corporate Bond Income Trust and the CIS UK Growth Trust are since the acquisition of Royal London (CIS), i.e. for the period from 31 July to 31 December 2013.

The Group also invests in a number of private equity funds, some of which represent an ownership interest of greater than 20%; however, these are all managed by external administrators and the Group has no involvement in the management, operation or decision-making of the funds. As such, the presumption that significant influence exists is overcome and these investments have not been recognised as associates, but have been treated as investment funds within financial investments.

STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS EUROPEAN EMBEDDED VALUE NOTICE OF AGM & RESOLUTIONS ADDITIONAL INFORMATION £m ent e 172 180 583 370 s. 2014 1,412 1,967 1,388 1,042 7,114 121 121 s in ovided, sitional he year inancial hicles, ported ported g who d by means of or which IFRS 12 period prior to the first annual period f ICs and £32m in respect of internally managed unit trusts. are not managed by Group companies is the carrying value of th by Group companies are not managed ties are comprised of investments in a range of investment ve ties are comprised of investments the exemption available in IFRS 12 in accordance with the tran IFRS 12 in accordance in the exemption available the table above and the total management fees received during t the total management fees the table above and nagement fees received on those investments that the Group manage that the those investments fees received on nagement voting or similar rights are not the dominant factor in decidin dominant factor in rights are not the or similar voting se investments is the carrying value on the Group balance sheet and future managem balance sheet and se investments is the carrying value on the Group ther support to any consolidated structured entity. ther support to any consolidated s interests in structured entities for the

idated structured entities entities structured idated -backed securities t Other interests in unconsol interests Other Consolidated structured entities entities structured Consolidated entities structured Unconsolidated

sse otal

Venture capital offshore funds funds Other investment T Land investment pools investments pooled other and Unit trusts Investment in associates Unit trusts OEICs Debt and fixed income securities securities fixed income Debt and A equity securities Unquoted Private equity funds The Group’s maximum to loss from the exposure fees. The Group’s holdings in these investments are included in 2014 were £19m in respect of internally managed to 31 December OE The Group’s maximum to loss from those investments that exposure within ‘financial investments’. The has taken advantage of Group provisions not to provide disclosures it on sheet. Group balance investment on the (iii) through ma The Group also has interests in structured entities 21. Investments in Group entities (continued) in Group 21. Investments in(c) Interests entities structured so that has been designed entity is an entity that A structured principally pooledinvestment funds and unquoted equity securities, managed both internally and externally, and some investment asset-backed securities. (i) control over a the Group has The Group has not pr determined that Where it has been has been consolidated. structured entity it of providing, financial or o nor has any intention (ii) structured entities. The in unconsolidated The Group also invests nor has any intention of providing, f Group has not provided, structured entity. unconsolidated or other support to any of theThe following table shows the carrying value structured entities, all of which Group’s holdings in unconsolidated are re is applied and hence for 2013 have no comparatives been presented. controls the entity, such as when voting rightscontrols the entity, such relate to the administrative tasks only and the relevant activities are directe in interests The Group’s structured enti contractual arrangements. 122

22. Part VII transfers and corporate transactions (a) Part VII transfers On 30 December 2014 the entire long-term business and related assets and liabilities of the subsidiary companies, Royal London (CIS) and Royal London Pooled Pensions Company, were transferred to the Parent company by way of transfers made under Part VII of the Financial Services and Markets Act 2000. No consideration was paid for either transfer and the transfers resulted in no gain or loss for the Parent company.

The Royal London (CIS) transfer resulted in £27,111m of assets and £27,111m of liabilities being transferred into the Parent company. The Royal London Pooled Pensions Company transfer resulted in £3,227m of assets and £3,227m of liabilities being transferred into the Parent company.

As the Part VII transfers were between entities within the Group, there was no net impact on the Group balance sheet or the consolidated statement of comprehensive income. As set out in 1 (b), transfers between entities within the Group are accounted for using predecessor accounting, with the effect that the assets and liabilities recognised by the acquiring entity are those used previously in the Group consolidated accounts. As a result the Parent company has recognised £112m of acquired VIF relating to the transferred business. In addition, both the Group and Parent company have derecognised £26m of acquired VIF which following the transfer is now presented as a deduction from the non-participating insurance contract liabilities.

On 31 March 2014 the entire general insurance business of RL (CIS) and the related assets and liabilities were transferred to CIS General Insurance Limited (CISGIL) under a Part VII transfer. This resulted in £86m of assets and £86m of liabilities being transferred.

(b) Prior year acquisition of Royal London (CIS) Limited and Royal London Asset Management (CIS) Limited On 31 July 2013, the Group acquired the life assurance and asset management business of the Co-operative Banking Group (CBG) by acquiring the entire issued share capital of the Co-operative Insurance Society Limited (CIS) and The Co-operative Asset Management Limited (TCAM). As part of the completion process CIS converted from an Industrial and Provident Society into a limited company and changed its name to RLG (CIS) Limited. On 1 August 2013 CIS was renamed as Royal London (CIS) Limited (RL (CIS)) and TCAM was renamed Royal London Asset Management (CIS) Limited (RLAM (CIS)).

The transaction gave rise to an excess of the fair value of net assets acquired over the consideration of £125m as shown in the table below. This value was recognised in the 2013 consolidated statement of comprehensive income as ‘gain arising on business combinations’.

£m Fair value of consideration 220 Less: fair value of net assets acquired (345) Excess of fair value of net assets acquired over the consideration (125)

(c) Prior year disposal of Royal London 360° Insurance Company Limited The Group’s wholly owned subsidiary, Royal London 360° Insurance Company Limited, was sold on 14 November 2013 and has been classified as a discontinued operation. The total consideration was £126m comprising cash consideration of £105m and deferred consideration with a fair value of £21m. The nominal value of the deferred consideration is a fixed amount of £29m plus interest accruing at the rate of 0.75% per annum, all of which is payable five years after the date of sale. The loss was included in the 2013 statement of comprehensive income as a discontinued operation; calculated as follows:

Discontinued operations £m Total revenue 140 Total expenses (138) Profit before tax 2 Tax expense - Loss on disposal (44) Transfer from the unallocated divisible surplus (42)

STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS EUROPEAN EMBEDDED VALUE NOTICE OF AGM & RESOLUTIONS ADDITIONAL INFORMATION 4 6 6 1 5 1 11 16 16 54 11 11 65 10 23 29 11 (18) £m £m 135 314 304 314 2013 2013 123 123 y. ed 6 5 1 5 1 4 11 17 21 89 32 11 13 97 10 23 29 11 £m £m (18) 285 275 285 2014 2014 Parent company Parent company Group and Parent company company Group and Parent

- 18 16 11 38 10 £m 105 218 102 508 498 508 2013 restated - Group 17 21 86 11 10 34 £m 119 124 412 402 412 2014 umber of properties under long-term leases, whichumber of properties under long-term leases, are classifi ely and accordingl the 2013 Group comparatives have been restated eet at amortised cost, which approximates fair value.eet at amortised cost, which approximates fair

es – minimum lease receipts:

r r mounts due from brokers mounts due from brokers entities Group mounts due from other mounts due from customers Present value of receivables under finance leases: Not later than one yea Later than one year and not later than five years Later than five years Not later than one yea years Later than one year and not later than five Later than five years charges Less: future Present value of receivables under finance leases Receivables under finance leas Receivables

Prepayments and accrued income income Prepayments and accrued Other receivables 12 months within Expected to be recovered than 12 months in more Expected to be recovered Receivables arising under reinsurance contracts Receivables arising under receivable Investment income A Finance lease receivables A A as finance leases. The terms of the finance leases entered into range from 150 to 240 years. balance sh Trade and other receivables are carried in the Finance lease receivables have leased toThe Group and the Parent company a third parties n

As set out in note 1 (a) IFRS 10 has been applied retrospectiv As set out in note 1 (a) IFRS 10 has been applied 23. Trade and other receivables and other receivables 23. Trade 124

24. Cash and cash equivalents

Group Parent company 2013 2014 restated 2014 2013 £m £m £m £m Bank balances 1,408 816 949 505 Short-term bank deposits 1,325 1,344 1,307 1,255 Short-dated debt 3 - 3 - 2,736 2,160 2,259 1,760

As set out in note 1 (a) IFRS 10 has been applied retrospectively and the 2013 Group comparatives have been restated accordingly.

The cash and cash equivalents for the purposes of the statements of cash flows are as follows:

Group Parent company 2013 2014 restated 2014 2013 £m £m £m £m Cash and cash equivalents 2,736 2,160 2,259 1,760 Bank overdrafts (note 33) (6) (27) (6) (11) Cash and cash equivalents in the statements of cash flows 2,730 2,133 2,253 1,749

25. Insurance contract liabilities and reinsurance assets

Group Parent company 2014 2013 2014 2013 £m £m £m £m Gross Participating insurance contract liabilities 29,607 26,365 29,682 11,268 Non-participating insurance contract liabilities General insurance contracts 2 87 - - Long-term insurance contracts 7,504 6,912 7,504 3,388 Total non-participating insurance contract liabilities 7,506 6,999 7,504 3,388 Total insurance contract liabilities 37,113 33,364 37,186 14,656

Reinsurers’ share of insurance contract liabilities Participating insurance contract liabilities (1,466) (1,218) (1,466) - Non-participating insurance contract liabilities General insurance contracts - (87) - - Long-term insurance contracts (3,996) (2,642) (3,996) (608) Total non-participating insurance contract liabilities (3,996) (2,729) (3,996) (608) Total reinsurers’ share of insurance contract liabilities (5,462) (3,947) (5,462) (608)

Net of reinsurance Participating insurance contract liabilities 28,141 25,147 28,216 11,268 Non-participating insurance contract liabilities General insurance contracts 2 - - - Long-term insurance contracts 3,508 4,270 3,508 2,780 Total non-participating insurance contract liabilities 3,510 4,270 3,508 2,780 Total insurance contract liabilities, net of reinsurance 31,651 29,417 31,724 14,048

STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS EUROPEAN EMBEDDED VALUE NOTICE OF AGM & RESOLUTIONS ADDITIONAL INFORMATION ------£m Net a 4. 125 125 adder. d: ws. £m share 2013 Reinsurers’

------8 (8) 6 (6) (2) 2 81 (81) 60 (60) 27 (27) 87 (87) £m Gross techniques including chain l

------Group ultimate cost of claims. These ultimate cost include £m Net 1 1 86 £m (60) (27) (87) general insurance business of RL (CIS) to business of RL general insurance by way of CISGIL share estimates) – statistical actuarial 12th edition of the Judicial Studies Boardedition of the Judicial guidelines; 12th ets Act 2000. The transfer had an March 201 effective date of 31 2014 2014 Reinsurers’ ------2-2 2-2 (1) (1) 60 27 87 £m (86) Gross

y assumptions date of transfer in the period to the used and in 2013 were as follo ation and onto a provisioning basis; ation and onto a provisioning to apply to claim numbers; and

y a small proportionof large claims being settled by periodic payments; and of the size of claims. the case estimation techniques resulting in earlier recognition improvements in use of the appropriate Ogden Tables; increased awards for general damages in accordance with the

t 1 Januar t 31 December cquired through business combinations

• • projecting numbers of claims; projecting numbers for future infl adjusting case estimates per claim deriving average costs claims paid and data (payment plus projecting historic incurred for bodily injury claims allowance was made for: • • projecting historic claims payment claims and recoveries data; projecting historic

Claims incurred but not reported Claims incurred but not reported A Increase/(decrease) in liabilities arising from prior year claims and expense income recognised Total for the financial year Part VII transfe Notified outstanding claims Notified outstanding claims Claims incurred but not reported A A Claims paid during the yea

26. General insurance contracts26. General (a) Part VII transfer of the entire sanctioned a transfer 2014 the High Court On 17 March transfer made under Part VII of the Financial Services and Mark The basis of assessing liabilities and the ke (b) Basis of assessing liabilities of recognised actuarial and statisticalA combination techniques were used to assess the (c) Key assumptions Principal assumptions provisions included: underlying the claims (d) Change in general insurance liabilities and reinsurance assets (i) General insurance – claims and loss adjustment expenses 126

27. Long-term insurance contract liabilities and reinsurance assets The movement in long-term insurance contract liabilities and reinsurance assets in the year is shown in the following tables.

Group – 2014 Long-term insurance contract Reinsurers’ share of long-term Long-term insurance contract liabilities, gross of reinsurance insurance liabilities liabilities, net of reinsurance Non- Non- Non- Participating participating Participating participating Participating participating £m £m £m £m £m £m At 1 January 26,365 6,912 (1,218) (2,642) 25,147 4,270

Expected changes during the year (1,830) (110) 136 84 (1,694) (26)

Expected closing position 24,535 6,802 (1,082) (2,558) 23,453 4,244

New business 118 187 - (161) 118 26

Experience variations Demographic 303 16 - (2) 303 14 Economic 2,827 54 (17) - 2,810 54 3,130 70 (17) (2) 3,113 68 Changes in assumptions Demographic (16) 49 22 (29) 6 20 Expense 58 (26) - - 58 (26) Economic 1,697 460 (333) (227) 1,364 233 Management actions 113 - - (1,019) 113 (1,019) Methodology (12) (23) 2 (7) (10) (30) 1,840 460 (309) (1,282) 1,531 (822) Other movements Claims outstanding - 6-2- 8 Other (16) (21) (58) 5 (74) (16) (16) (15) (58) 7 (74) (8)

At 31 December 29,607 7,504 (1,466) (3,996) 28,141 3,508

STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS EUROPEAN EMBEDDED VALUE NOTICE OF AGM & RESOLUTIONS ADDITIONAL INFORMATION - - 8 (3) 19 30 16 16 51 19 £m 251 221 (300) Non- 127 127 participating £m liabilities, net of reinsurance Participating Long-term insurance contract Long-term insurance contract

- - - (10) - 65 (1) - 4 748 8 41 (4) 707 (10) (95) (61) (52) (11) - (51) (11) £m 155 (1,366) (134) 598 (37) (164) 60 Non- participating - (1,159) 11,722 2,910 - - - - - 9 6 5 4 1 (2) insurance liabilities 5810,356 (1,004) 2,776 13 58 (21) £m Group – 2013 Group – 2013 Participating Reinsurers’ share of long-term Reinsurers’ share of long-term - - 30 26 22 70 16 £m 112 172 225 247 (300) Non- participating - - (9) (1) 60 37 65 (57) (16) (601) (11) £m 698 735 (101) (1,424) (289) 15,345 3,47215,329 (1,273)26,365 2,601 (2,004) 14,072 6,912 (1,294) 1,468 (1,417) 14,035 (1,218) (2,642) 25,147 1,184 4,270 11,722 4,069 10,298 3,780 Participating Long-term insurance contract Long-term insurance contract liabilities, gross of reinsurance

r t 31 December t 1 January t 1 January cquired through business combinations A Disposal of subsidiary undertakin Claims outstandin Othe Economic Economic Management actions Methodology Other movements A Economic Economic Changes in assumptions Demographic Expense New business Experience variations Demographic A the year during Expected changes position closing Expected

27. Long-term insurance27. Long-term liabilities contract and reinsurance assets (continued) 128

27. Long-term insurance contract liabilities and reinsurance assets (continued)

Parent company – 2014 Long-term insurance contract Reinsurers’ share of long-term Long-term insurance contract liabilities, gross of reinsurance insurance liabilities liabilities, net of reinsurance Non- Non- Non- Participating participating Participating participating Participating participating £m £m £m £m £m £m At 1 January 11,268 3,388 - (608) 11,268 2,780

Expected changes during the year (460) (6) - (17) (460) (23)

Expected closing position 10,808 3,382 - (625) 10,808 2,757

New business 1 39 - (101) 1 (62)

Experience variations Demographic 43 17 - (2) 43 15 Economic 670 58 - - 670 58 713 75 - (2) 713 73 Changes in assumptions Demographic (14) 35 - (14) (14) 21 Expense 63 (27) - - 63 (27) Economic 380 312 - (77) 380 235 Management actions 100 - - - 100 - Methodology (3) - - - (3) - 526 320 - (91) 526 229 Other movements Part VII transfer-in 17,641 3,693 (1,466) (3,180) 16,175 513 Claims outstanding - 6-2- 8 Other (7) (11) - 1 (7) (10) 17,634 3,688 (1,466) (3,177) 16,168 511

At 31 December 29,682 7,504 (1,466) (3,996) 28,216 3,508

STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS EUROPEAN EMBEDDED VALUE NOTICE OF AGM & RESOLUTIONS ADDITIONAL INFORMATION - - y 4 14 30 31 71 24 16 (68) (10) £m 235 205 Non- 129 129 to from the participating to be settled £m liabilities, net of reinsurance Participating Long-term insurance contract Long-term insurance contract

- 65 (1) - - (12) 6 468 7 56 (1) 412 (2) - (37) (65) (27) (22) (10) (95) £m 598 7 596 7 115 (866) (100) (608)11,268 2,780 (129) 2 Non- liabilities classified as due red annuity liabilities of £598m participating - - (1,159) 11,722- 2,638 (1,044)10,856 2,538 ------insurance liabilities £m due to be recovered in more than 12 months in more due to be recovered Parent company Parent company – 2013 Participating Reinsurers’ share of long-term Reinsurers’ share of long-term - - 16 61 23 51 31 26 £m 108 206 229 (608) (592) Non- ed a transfer of fully reinsu of long-term insurance contract of participating ent the liabilities of the open and closed sub-funds. 075m for the Group (2013 £29,767m) and £35,150m for the Parent compan - 7 7 2 (1) 56 65 (65) (22) (12) (95) £m 412 468 (866) (215) 11,268 3,388 11,722 3,797 10,856 3,582 Participating Long-term insurance contract Long-term insurance contract liabilities, gross of reinsurance -term insurance liabilities classified-term as

r t 31 December t 1 January t 1 January Othe A Economic Economic Management actions Methodology Other movements Claims outstandin Economic Economic Changes in assumptions Demographic Expense New business Experience variations Demographic A the year during Expected changes position closing Expected in more than 12 months from the balance sheet date is £35, months from the in more than 12

(2013 £12,835m). The amount of the reinsurers’ share of long balance sheet date is £5,298m for and £5,298m for the the Group (2013 £3,377m) (2013 £419m). Parent company The ‘Other’ in 2013 includ figure for the Group and Parent company Prudential Retirement Income Limited. repres the Parent company The amounts presented above for For the purposes of the disclosure required by IAS 1, the amount 27. Long-term insurance27. Long-term liabilities contract and reinsurance assets (continued) 130

28. Non-participating value of in-force business The movement in the non-participating value of in-force business in the year is shown in the table below.

Group Parent company 2014 2013 2014 2013 £m £m £m £m At 1 January Non-participating value of in-force business included within participating contract liabilities 1,335 963 1,169 906 Non-participating value of in-force business included within the fair value of insurance subsidiaries - - - 67 Acquired PVIF 264 193 137 183 Adjusted deferred acquisition costs arising on investment contracts 285 376 285 305 Deferred fee income on investment contracts (216) (258) (216) (231) Total value of in-force business at 1 January 1,668 1,274 1,375 1,230 Expected changes during the year (139) (126) (131) (106)

Expected closing position 1,529 1,148 1,244 1,124

New business 129 91 124 85

Experience variations Demographic (7) (7) (12) (7) Economic 65 132 57 91 58 125 45 84 Changes in assumptions Demographic 59 48 40 41 Expense 10 12 12 25 Economic (77) 103 (16) 103 Management actions (64) - - - Methodology (37) - - - (109) 163 36 169

Other movements Acquired through business combinations - 298 - - Disposal of subsidiary undertaking - (154) - (87) Part VII transfer-in - - 128 - Other 3 (3) 17 - 3 141 145 (87)

1,610 1,668 1,594 1,375 At 31 December Non-participating value of in-force business included within participating contract liabilities 1,332 1,335 1,332 1,169 Acquired PVIF 211 264 195 137 Adjusted deferred acquisition costs arising on investment contracts 261 285 261 285 Deferred fee income on investment contracts (194) (216) (194) (216) Total value of in-force business at 31 December 1,610 1,668 1,594 1,375

STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS EUROPEAN EMBEDDED VALUE NOTICE OF AGM & RESOLUTIONS ADDITIONAL INFORMATION - - - 5 1 1 £m 422 (771) Non- 014 131 131 . For more more participating - (1,889) 2- 3 9 2,330 2013 (1) (1) 11 3041 1,549 1,554 14 (16) (11) £m 296 285 (1,467) 1,947 17,501 1,950 16,730 2,284 19,148

Participating

- - (2) (2) (2) Group £m 955 955 452 Non- relates to future commission. relates to future participating participating -- -- 1- 1- 3- 3- 2014 2014 (2) (6) (6) 99 32 17 2,871 e equal to the deferred acquisition costs arising on deferred acquisition e equal to the £m 131 1,407 (121) (733) 2,308 22,691 2,163 18,415 2,284 19,148 Participating us page is equal to the deferred fee income shown in note 35 us page is equal to the relation to fund management contracts of £3m at 31 December 2 of £3m contracts relation to fund management amount of the Group balance of £1,332m (2013 £1,335m) amount of the Group and Parent ing on investment contracts shown above ar above contracts shown ing on investment

g nt contract liabilities

r t 31 December t 1 January t 1 January cquired through business combinations Disposal of subsidiary undertakin Othe A Management actions Management actions Other movements A Changes in assumptions Demographic Expense Economic New business Experience variations Demographic Economic A during the year Expected changes position closing Expected the Group only, this is adjusted tothe Group only, this is in remove deferred fee income (2013 £8m). disclosureFor the purposes of the by IAS required 1, the (2013company balance of £1,332m value due to be recovered in of in-force business classified as of non-participating £1,169m) sheet date is £1,166m (2013 £1,109m)from the balance and £1,166mthan 12 months (2013 £985m) respectively.

in the year is shown liabilities contract investment in the tables below. The movement in 29. Investment contract 29. Investment contract liabilities (a) Movement in investme 28. Non-participating 28. Non-participating value (continued) of in-force business costs aris deferred acquisition The adjusted 19 less the element contracts shown in note investment of those acquisition deferred costs that shown on the previo contracts The deferred fee income on investment 132

29. Investment contract liabilities (continued) (a) Movement in investment contract liabilities (continued)

Parent company 2014 2013 Non- Non- Participating participating Participating participating £m £m £m £m At 1 January 1,980 16,254 1,947 13,397

Expected changes during the year (121) (429) (20) (484)

Expected closing position 1,859 15,825 1,927 12,913

New business 17 2,316 9 1,850

Experience variations Demographic 103 253 11 (87) Economic 11 620 45 1,578 114 873 56 1,491 Changes in assumptions Demographic 1-(16) - Expense (2) - (1) 1 Economic 1-14 - Management actions 3-2 - 3-(1) 1

Other movements Part VII transfer-in 318 3,679 - - Other (3) (2) (11) (1) 315 3,677 (11) (1) At 31 December 2,308 22,691 1,980 16,254

The participating investment contract liabilities include a discretionary element, determined by management from time to time, with regard to the returns earned on investments in the relevant with-profits fund. These liabilities have been calculated on a basis consistent with the valuation of insurance contracts. It is not considered practicable to provide a fair value for these liabilities.

For the purposes of the disclosure required by IAS 1, the amount of investment contract liabilities classified as due to be settled in more than 12 months from the balance sheet date is £22,801m (2013 £19,576m) for the Group and £22,801m (2013 £16,644m) for the Parent company.

The amounts presented above represent the liabilities of the open and closed sub-funds.

STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS EUROPEAN EMBEDDED VALUE NOTICE OF AGM & RESOLUTIONS ADDITIONAL INFORMATION 133 133 ed on idity rates estimates. to provide perience or re typically ally 2%. longer than available in sufficient volume available in sufficient ating liabilities the margins a reference to either industry ex reference to either industry of in-force business the margins are typic are updated at least at each reporting date to reflect latest are updated at least at fficient, bases have been set by company experience, where it is experience, where company in experience. For non-particip in experience. For ities. For annuity business the risk is that live policyholders place to mitigate mortality and morbidity risks. place to mitigate mortality most lines of business. For protection most business an increase in mortality and morb d the calculation of the non-profit value d the calculation of the non-profit

leads to increased claim levels andleads to increased claim in liabil hence an increase The principal mortality assumptions are shown in the following table. The assumptions used can be summarised as The assumptions used follows. (i) Demographic Mortality and morbidity Mortality and morbidity risks are inherent in expected. Reinsurance arrangements have been put in have been put arrangements expected. Reinsurance The rates of mortality set in line and morbidity are recent with reliable results. Where company experience is not considered su experience is not reliable results. Where company the terms on which the business is reinsured. the terms on which adverse variations A margin is included to provide for potential 8%, whilst for participating liabilities an 30. Long-term insurance30. Long-term and contractinvestment liabilities and reinsuranceassets – assumptions valuation (a) Assumptions and investment to determine long-term insurance The assumptions used contract liabilities are set bas by the Board of Directors advice given by the Actuarial Function Holder. These assumptions Actuarial Function Holder. advice given by the 134

30. Long-term insurance and investment contract liabilities and reinsurance assets – valuation assumptions (continued) (a) Assumptions (continued) (i) Demographic (continued)

Class of business 2014 mortality 2013 mortality Ordinary long-term assurances Royal London Mutual and Ex-United Assurance 90.72% AMC00 and 117.72% AFC00 78.84% AM92 and 113.40% AF92 Group non-linked Ex-Scottish Life 59.40% AMC00 AND 97.20% AFC00 57.24% AM92 and 91.80% AF92 Ex-Royal Liver 112.32% AMC00 AND 117.72% AFC00 103.68% AM92 and 115.56% AF92 RL Retail non-linked term assurances male non-smokers 88.56% TMN00 sel 88.56% TMN00 sel male smokers 92.88% TMS00 sel 92.88% TMS00 sel female non-smokers 90.72% TFN00 sel 90.72% TFN00 sel female smokers 95.04% TFS00 sel 95.04% TFS00 sel Self Assurance term assurances male non-smokers 74.52% TMN00 sel 79.92% TMN00 sel male smokers 100.44% TMS00 sel 93.96% TMS00 sel female non-smokers 64.80% TFN00 sel 70.20% TFN00 sel female smokers 87.48% TFS00 sel 83.16% TFS00 sel RL (CIS) traditional with-profits 66.96% AMC00 77.00% AM00 accumulating with-profits bond 87.40% AMC00 85.00% AM00 Pensions – deferred annuities in deferment Ex-Refuge Assurance OB non-linked 95.68% PPMD00 and 88.32% PPFD00 105.80% PPMD00 and 102.12% PPFD00 Ex-Scottish Life – individual 72.68% AMC00 and 71.76% AFC00 62.56% AM92 and 60.72% AF92 Ex-Scottish Life – group 71.76% AMC00 and 72.68% AFC00 56.12% AM92 and 57.96% AF92 Pensions – immediate annuities and deferred annuities in payment Ex-Royal London 100% PPMV00 CMI (2013) 2%pa1 111% PPMV00 CMI (2013) 2%pa1 87% PPFV00 CMI (2013) 2%pa1 96% PPFV00 CMI (2013) 2%pa1 Ex-Scottish Life 91% PPMV00 CMI (2013) 2%pa1 101% PPMV00 CMI (2013) 2%pa1 83% PPFV00 CMI (2013) 2%pa1 92% PPFV00 CMI (2013) 2%pa1 RL (CIS) Personal pensions in payment 112.88% PPMV00 CMI (2012) 2%pa2 109% PPMV00 CMI (2012) 2%pa2 103.75% PPFV00 CMI (2012) 2%pa2 105% PPFV00 CMI (2012) 2%pa2 Section 226 retirement annuity 99.60% RMV00 CMI (2012) 2%pa2 100% RMV00 CMI (2012) 2%pa2 105.41% RFV00 CMI (2012) 2%pa2 100% RFV00 CMI (2012) 2%pa2 Industrial assurance Royal London Mutual 82.08% ELT16 (males) 82.08% ELT16 (males) Ex-United Assurance Group 82.08% ELT16 (males) 82.08% ELT16 (males) Ex-Royal Liver 70.20% ELT15 (males) 77.76% ELT15 (males) RL (CIS) endowment 81.00% ELT16 (males) 83.00% ELT16 (males) whole life 70.20% ELT16 (males) 72.00% ELT16 (males)

1 The mortality basis is displayed as a percentage of base table mortality in 2000 projected in line with the 2013 CMI model mortality improvements and a percentage per annum long-term improvement rate. 2 The mortality basis is displayed as a percentage of the base table mortality in 2000 projected in line with the 2012 CMI model mortality improvements and a percentage per annum long-term improvement rate.

STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS EUROPEAN EMBEDDED VALUE NOTICE OF AGM & RESOLUTIONS ADDITIONAL INFORMATION s 135 135 (CIS) (CIS) s not r expected nsferred r some re typically of the non- 6% for ally 5%. non-participating liabilities are typically ating liabilities the margins a ating liabilities the margins of in-force business the margins are typic iate scheme of transfer. Expenses for those classes of busines RL (CIS), a 0.7% margin is applied and the for participating liabilities g liabilities. For participating liabilities and the calculation g s vary by product line, sales channel,fo duration in force and in experience. The margins for in experience. The in experience. For non-particip in experience. For in accordance with management service agreements and for busines agreements management service in accordance with and in line with the change in the Retail Price Index plus 0. Retail Price Index and in line with the change in the d are not for any reason lapsed, maded are not for any reason surrendered paid-up, or tra the non-profit value of in-force business. d the calculation of the non-profit value non-profit d the calculation of the value of in-force business. 8%. For RL (CIS), a 2.8% margin is applied for non-participatin plus 1%. Retail Price Index Excluding RL (CIS), expenses areExpenses assumed to inflate in line with the change in the for RL calculation of the non-profit profit value of in-force business are typically the margins 2%. For are assumed to inflate by 3.6% for liabilities, non-participating transfer are based on the actual expenses incurred. or a scheme of transfer are based on the actual expenses a management service agreement covered by either adverse variations A margin is included to provide for potential participating liabilities and the calculation of transferred to the Parent company, in accordance with the appropr in accordance transferred to the Parent company, prior to maturity or expiry. prior to maturity or expiry. company experience.The rates of persistency are set in line with recent adjusted to Where appropriate these rates are allow fo different from past experience.future experience being The rate products by fund size. to provide for potential adverse variations A margin is included 20% whilst for participating an liabilities (ii) Expenses are set of business, expenses For the main classes maintenance 30. Long-term insurance30. Long-term and contractinvestment liabilities and reinsuranceassets – (continued) assumptions valuation (a) Assumptions (continued) (i) Demographic (continued) Persistency Persistency is the remain in force an policies extent to which 136

30. Long-term insurance and investment contract liabilities and reinsurance assets – valuation assumptions (continued) (a) Assumptions (continued) (ii) Expenses (continued) The principal expense assumptions are shown in the following table.

2014 2013 Per policy Premium Reserve Per policy Premium Reserve Class of business £ % % £ % % Ordinary long-term RL OB WP life & pensions 11.00 5.40 0.0970 9.42 5.40 0.0970 Ex-RA OB WP pre 1998 life & pensions 9.60 4.32 0.0830 9.37 4.32 0.0750 Ex-UF OB WP DWP pensions 0.00 0.1910 0.00 0.1840 Scottish Provident business 19.13 0.0650 19.57 0.0650 Bright Grey 13.68 0.0650 16.47 0.0650 RL Retail protection business 19.30 0.0650 20.65 0.0650 RL (CIS) OB Investments premium paying 20.08 19.78 single premium/paid up 17.22 16.98 OB Protection premium paying 18.79 18.57 single premium/paid up 16.46 16.25 OB annuities in payment 16.80 16.63 Pensions – deferred annuities Ex-Scottish Life – Individual RP 43.63 0.0810 43.52 0.0810 Ex-Scottish Life – Group RP 37.63 0.0810 40.38 0.0810 RL (CIS) premium paying 17.11 16.82 paid up 14.53 14.32 Industrial assurance Royal London Mutual 6.19 5.40 0.097 6.50 5.40 0.0970 Ex-Refuge Assurance 7.27 2.70 0.066 7.09 2.70 0.0780 Ex-Royal Liver 7.64 0.00 0.065 7.62 0.00 0.0650 Ex-United Friendly 6.96 2.70 0.093 6.79 2.70 0.0840 RL (CIS) premium paying 12.93 12.79 paid up 11.00 10.89

STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS EUROPEAN EMBEDDED VALUE NOTICE OF AGM & RESOLUTIONS ADDITIONAL INFORMATION (1) (1) 3.750 3.000 3.900 3.900 3.125 4.300 2.400 3.900 3.125 2.600 2.400 4.375 3.125 3.750 3.125 4.000 ty a rate d 137 137 lation n to support % per annum gins 2013 interest retrospective (1) (1) 2.625 2.750 3.800 2.250 2.800 2.250 1.900 2.800 3.750 2.250 2.625 2.250 2.875 3.400 3.400 4.400 % per annum 2014 interest 2014 interest ues. Market consistency is achieved by ues. business in force. This business in force. This is a model. Each scenario is discounted at model. Each scenario increases the liabilities. increases the liabilities. ed on a market-consistent basis.ed on a market-consistent Future investment returns an allocation to the various lines of business of assets and mar et data interpolation/extrapo by duration and price, subject to reference to the market value of, and yields on, assets chose using market-consistent techniq using market-consistent options (including premium rate guarantees and guaranteed annui options (including premium the aggregate asset share for the the aggregate asset share A reduction in interest rates A reduction in interest le scenarios through a stochastic valuation

t t

t ed using the forward gilt curve. gilt curve. the forward using ed where traded security prices do not exist. deriving the underlying risk-free risk-free the forward gilt curve; and deriving the underlying rate from calibrating equity and interest rate volatility to observed mark

• • value of in-force business Non-participating The non-participating value of in-force business has been calculat yields. discount rates are set by reference to risk-free Non-participating liabilities liabilities Non-participating rate for any given product group is set by The valuation interest Participating liabilities liabilities are calculated as The majority of the participating that product group. The valuation interest rates used reflect the The that product group. solvency basisconsistent with the statutory of valuation. consistent with the individual simulation.achieve market consistency by: consistent with the economic scenarios The calculation based on actual experience. The values of financial The values experience. calculation based on actual options) and future deductions from asset shares areoptions) and future deductions calculated running a large number of economically credib

Industrial assurance Royal London fund business Ex-Refuge Assurance fund business Liver fund business Ex-Royal Ex-United Friendly fund business RL CIS Ex-Scottish fund – in paymen Life Pensions – individual – in payment Royal London fund business Liver fund business Ex-Royal RL CIS Royal – in defermen London fund Royal London fund – in paymen Ex-Royal Liver fund – in defermen Ex-Royal Liver fund – in paymen Ex-Scottish Life fund – in defermen Ordinary long-term non-linked life assurances Royal London fund business Liver fund business Ex-Royal Ex-Scottish fund business Life RL (CIS) – deferredPensions annuities determin rates Valuation interest (1) Class of business 30. Long-term insurance30. Long-term and contractinvestment liabilities and reinsuranceassets – (continued) assumptions valuation (a) Assumptions (continued) (iii) Economic The valuation interest rates used liabilities are shown in the following table. for non-participating 138

30. Long-term insurance and investment contract liabilities and reinsurance assets – valuation assumptions (continued) (b) Changes in assumptions The following tables show the impact of changes in the assumptions used to calculate insurance contract liabilities and reinsurance assets during the year. The tables demonstrate this effect by showing the 2014 year-end liabilities as if they had been calculated using the 2013 year-end assumptions.

Group 2014 Impact of change in variable Liability Liability using 2013 using 2014 assumptions Demographic Expenses Economic Other assumptions £m £m £m £m £m £m Long-term insurance contract liabilities, gross Participating insurance contracts 27,767 (16) 58 1,697 101 29,607

Non-participating insurance contracts Unit-linked 1,874 6 - 98 - 1,978 Non-profit, other than annuities 909 11 (15) 108 (33) 980 Non-profit annuities 3,901 32 (11) 254 10 4,186 Claims outstanding 360 ---- 360 7,044 49 (26) 460 (23) 7,504 34,811 33 32 2,157 78 37,111 Reinsurers’ share of long-term insurance liabilities Participating insurance contracts (1,158) 22 - (333) 3 (1,466)

Non-participating insurance contracts Non-profit, other than annuities (408) (4) - (27) (34) (473) Non-profit annuities (2,252) (25) - (200) (992) (3,469) Claims outstanding (54) ---- (54) (2,714) (29) - (227) (1,026) (3,996) (3,872) (7) - (560) (1,023) (5,462) Long-term insurance contract liabilities, net Participating insurance contracts 26,609 6 58 1,364 104 28,141

Non-participating insurance contracts Unit-linked 1,874 6 - 98 - 1,978 Non-profit, other than annuities 501 7 (15) 81 (67) 507 Non-profit annuities 1,649 7 (11) 54 (982) 717 Claims outstanding 306 ---- 306 4,330 20 (26) 233 (1,049) 3,508 30,939 26 32 1,597 (945) 31,649 Non-participating value of in-force business (1,457) (59) (10) 77 117 (1,332)

STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS EUROPEAN EMBEDDED VALUE NOTICE OF AGM & RESOLUTIONS ADDITIONAL INFORMATION (56) £m 478 839 354 298 (361) Liability 139 139 using 2013 assumptions £m Other

------3 - 1,583 6 - 3,808 6 - (1,218) (4)- 1,911 (4) - 1,911 (7) - (4) - (3,860) (3) - (2,225) 16 - 4,270 26 - 6,912 17 - 24 - (75) 64 33,277 (79) 64 29,417 (95) 64 25,147 (10) - (2,642) £m Economic Economic ------5 1 6 1 1 1 (9) (9) 16 16 24 24 (10) (11) (101) 64 26,365 (12) (103) - (1,335) £m Impact of change variablein Group 2013 Expenses - - - 8 8 (9) (3) (2) 61 14 19 14 27 70 29 (11) (48) (21) (30) (51) (53) £m Demographic (56) £m 429 298 762 354 (333) 1,900 1,592 4,219 1,900 3,784 6,800 (2,192) (2,581) (3,804) (1,172) (1,223)

Liability 25,199 29,418 26,422 33,222 using 2012 assumptions

g g g

-linked -linked -linked -linked t t Uni than annuities Non-profit, other Non-profit annuities Claims outstandin Non-profit, other than annuities Non-profit, other Non-profit annuities Claims outstandin Uni than annuities Non-profit, other Non-profit annuities Claims outstandin

of in-force value Non-participating business Non-participating insurance contracts Non-participating contract insurance Long-term net liabilities, Participating insurance contracts insurance contracts Non-participating Reinsurers’ share of long-term liabilities insurance Participating insurance contracts insurance contracts Non-participating Long-term insurance contract contract insurance Long-term gross liabilities, contracts Participating insurance

30. Long-term insurance30. Long-term and contractinvestment liabilities and reinsuranceassets – (continued) assumptions valuation (b) Changes in assumptions (continued) 140

30. Long-term insurance and investment contract liabilities and reinsurance assets – valuation assumptions (continued) (b) Changes in assumptions (continued)

Parent company 2014 Impact of change in variable Liability Liability using 2013 using 2014 assumptions Demographic Expenses Economic Other assumptions £m £m £m £m £m £m Long-term insurance contract liabilities, gross Participating insurance contracts 29,156 (14) 63 380 97 29,682

Non-participating insurance contracts Unit-linked 1,874 6 - 98 - 1,978 Non-profit, other than annuities 867 13 (15) 115 - 980 Non-profit annuities 4,083 16 (12) 99 - 4,186 Claims outstanding 360 ---- 360 7,184 35 (27) 312 - 7,504 36,340 21 36 692 97 37,186 Reinsurers’ share of long-term insurance liabilities Participating insurance contracts (1,466) ---- (1,466)

Non-participating insurance contracts Non-profit, other than annuities (441) (8) - (24) - (473) Non-profit annuities (3,410) (6) - (53) - (3,469) Claims outstanding (54) ---- (54) (3,905) (14) - (77) - (3,996) (5,371) (14) - (77) - (5,462) Long-term insurance contract liabilities, net Participating insurance contracts 27,690 (14) 63 380 97 28,216

Non-participating insurance contracts Unit-linked 1,874 6 - 98 - 1,978 Non-profit, other than annuities 426 5 (15) 91 - 507 Non-profit annuities 673 10 (12) 46 - 717 Claims outstanding 306 ---- 306 3,279 21 (27) 235 - 3,508 30,969 7 36 615 97 31,724 Non-participating value of in-force business (1,296) (40) (12) 16 - (1,332)

STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS EUROPEAN EMBEDDED VALUE NOTICE OF AGM & RESOLUTIONS ADDITIONAL INFORMATION (37) £m 635 212 331 175 363 630 (608) (608) (304) (267) Liability 141 141 using 2013 assumptions £m Other

------3 - 6 - (4)- 1,911 (4) - 1,911 (7) - (3) - 16 - 2,780 26 - 3,388 17 - 24 - (79)64 14,048 (69) 64 14,656 (10) - (10) - (95) 64 11,268 (95) 64 11,268 £m Economic Economic ------1 1 19 19 31 31 30 30 (12) (12) (25) (103) - (1,169) £m Impact of change variablein Expenses Parent company 2013 - - - 2 (5) (4) (1) 29 14 24 14 51 15 41 (22) (22) (41) (27) (27) (26) £m Demographic (37) £m 269 365 175 540 628 212 (571) (571) (271) (263) 1,900 2,709 1,900 3,280 (1,000)

Liability 11,333 14,042 11,333 14,613 using 2012 assumptions

g g g

Non-participating value of in-force value Non-participating business Long-term insurance contract contract insurance Long-term net liabilities, Participating insurance contracts insurance contracts Non-participating Reinsurers’ share of long-term liabilities insurance insurance contracts Non-participating insurance contracts Non-participating Long-term insurance contract contract insurance Long-term gross liabilities, contracts Participating insurance

30. Long-term insurance30. Long-term and contractinvestment liabilities and reinsuranceassets – (continued) assumptions valuation (b) Changes in assumptions (continued) 142

31. Unallocated divisible surplus The movement in the unallocated divisible surplus (UDS) during the year is shown in the table below.

Group Parent company 2014 2013 2014 2013 £m £m £m £m At 1 January 3,005 2,668 2,938 2,668 Transfer from profit or loss from continuing operations 149 372 260 263 Transfer to profit or loss from discontinued operations - (42) - - Total transfer from profit or loss 149 330 260 263 Transfer (to)/from other comprehensive income (15) 7 (15) 7 At 31 December 3,139 3,005 3,183 2,938

The UDS represents a surplus for which the allocation between participating policyholders has yet to be determined. Therefore, for the purposes of the disclosure required by IAS 1, the whole of the UDS at the balance sheet date has been classified as a balance that will be settled after more than 12 months.

The closing balance on the UDS for both the Group and Parent company includes amounts attributable to the Royal London fund only. The surpluses in the closed funds are included within the participating contract liabilities because they are not available for distribution to other policyholders or for other business purposes. The closed funds are the Refuge Assurance IB Sub-fund, the United Friendly IB Sub- fund, the United Friendly OB Sub-fund, the Scottish Life Fund, the PLAL With-Profits Fund, the Royal Liver Assurance Fund and the RL (CIS) with-profits funds. In 2013, the surpluses in the RL (CIS) with-profits funds were included within participating liabilities in the Group balance sheet as they were in the subsidiary, RL (CIS). In 2014 this business was transferred to the Parent company by way of a Part VII transfer (see note 22).

32. Subordinated liabilities

Group and Parent company Effective interest rate 2014 2013 2014 2013 £m £m % % Perpetual Cumulative Step-up Subordinated Guaranteed Notes 245 245 6.30 6.28 Fixed Rate Reset Callable Guaranteed Subordinated Notes due 2043 395 395 6.30 6.32 640 640

All of the balance shown above is expected to be settled more than 12 months after the balance sheet date.

Subordinated liabilities are carried in the balance sheet at amortised cost. Their fair value at 31 December 2014 was £682m (2013 £648m).

Perpetual Cumulative Step-up Subordinated Guaranteed Notes On 14 December 2005, RL Finance Bonds plc, a wholly owned subsidiary of the Parent company, issued the Perpetual Cumulative Step-up Subordinated Guaranteed Notes (Perpetual Notes). The issue price of the Perpetual Notes was 99.676% of the principal amount of £400m. The discount of £1m and the directly related costs incurred to issue the Perpetual Notes of £4m have been capitalised as part of the carrying value and are being amortised on an effective interest basis over the period to the first possible redemption date.

The Perpetual Notes are guaranteed by the Parent company. The proceeds of the issue were loaned to the Parent company on the same interest, repayment and subordination terms as those applicable to the Notes.

The Perpetual Notes have no maturity date but the issuer has the option to redeem all of them at their principal amount on 15 December 2015 and at three-monthly intervals thereafter. Interest is payable on the Perpetual Notes at a fixed rate of 6.125% per annum for the period to 15 December 2015, payable annually in arrears on 15 December each year. If the Perpetual Notes are not redeemed on 15 December 2015 the interest rate will be re-set on that date and at three-monthly intervals thereafter, at a rate equal to the offered three-month sterling deposit rate quoted on the interest re-set date, plus 2.45%. Following the first interest re-set date, interest becomes payable three-monthly in arrears on 15 March, 15 June, 15 September and 15 December in each year.

STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS EUROPEAN EMBEDDED VALUE NOTICE OF AGM & RESOLUTIONS ADDITIONAL INFORMATION - 7 26 42 31 35 33 59 31 11 £m 180 136 558 525 558 l on 101% 2013

to ed as n full y. 143 143 nnum for agreement r value e Group’s e Group’s movement in movement luded in ion date. ion date. equal to the t also purchased - - 6 21 39 98 37 £m 288 110 2014 2,057 3,035 2,830 5,486 2,451 5,486 Parent company

- 21 78 26 27 £m 933 135 100 180 172 2013 4,095 1,725 2,370 4,095 2,423 restated

- - - 6 Group 21 98 52 £m 288 185 ) with-profits fund. Under the reinsurance 2014 2,509 3,035 2,830 2,064 5,544 5,544 were purchased by way of a tender offer at by way of a tender were purchased equal to a price on to redeem all of the 2043 amount Notes at their principal on to redeem s of the issue were loaned to the Parent company on the same s of the issuecompany were loaned to the Parent terest is payable on the Notes at a fixed rate of 6.125% Notes at per a terest is payable on the sts incurred to issue the 2043 Notes of £3m have been capitalis sts incurred to issue the accordance with a schedule of payments covering a period of up accordance with a schedule of payments covering a d on the fifth anniversary of that date thereafter, at a rate on the fifth anniversary d ncial liability of £2,799m (2013 £2,390m) which is valued at fai of the financial liability as amounts fall due for payment. The sts totalling £2m were recognised within finance costs. within £2m were recognised sts totalling ely and accordingl the 2013 Group comparatives have been restated rer under a reinsurance agreement to reinsure a proportion of th a rer under a reinsurance agreement to reinsure (2013 period since acquisition was a gain of £33m) which is inc s as those applicable to the 2043 Notes. s as those applicable to s and annuities in payment of the RL (CIS

mounts owed to credit institutions mounts owed to credit institutions mounts due to customers mounts due to brokers mounts due to other Group entities Expected to be settled within 12 months within 12 months Expected to be settled 12 months in more than Expected to be settled A Bank overdrafts (note 24) Other payables Deferred consideration Payables arising under reinsurance contracts A Finance lease obligations Collateral loans Derivative liabilities (note 20 (d)) A A premiums ceded to reinsurers. within the statement of comprehensive income by a charge representing the net present value of the contracted payments and continues to payments and continues value of the contracted by a charge representingthe net present income of comprehensive within the statement premium has to fall due yet i At inception of the contract, recognise a financial liability to the extent that the for payment. a debt security, cash flows from will fund which discharge the the fair value of the liability in the year was a loss of £477m 2066. At inception of the contract, which was before RL (CIS) was2066. At inception of the contract, acquired by the Group, it recognised its premium obligation i the RL (CIS) with-profits fund, is contracted to pay premiums in the RL (CIS) with-profits fund, is contracted to pay through profit or loss. The liabilitythrough profit or is owed to a major reinsu obligations in respect of deferred annuitie include a fina The payables arising under reinsurance contracts As set out in note 1 (a) IFRS 10 has been applied retrospectiv the period to 30 November 2023, payable annually in arrears on 30the period to 30 November 2023, November each year. If the 2043 Notes are not redeemed on rate will be re-set on that date an the interest 30 November 2023 33. Payables and other financial liabilities 32. Subordinated liabilities32. Subordinated (continued) of with a nominal value 2013, Perpetual Notes £154m On 29 November of the nominal value. The premiumof the nominal co and related transaction co discount of £3m and the directly related amount of £400m. The period to the first possible on an effective interest basis over the part of the carryingredempt amortised value and are being Fixed Rate Reset Guaranteed Subordinated Callable due 2043Notes RL Finance Bonds No. 2 plc, a wholly ownedOn 29 November 2013, issued the subsidiary of the Parent company, Rate Reset Fixed 2043 (the 2043 Notes). Notes due The issue priceCallable Guaranteed Subordinated of the 2043 Notes was 99.316% of the principa five-year gilt rate plus 4.321%. by the Parent company. The proceed The 2043 Notes are guaranteed interest, repayment term and subordination date thereafter. In payment and on each interest 30 November 2023 The issuer has the on 30 November 2043. The 2043 Notes mature opti 144

33. Payables and other financial liabilities (continued) The reinsurance liability and the derivative liabilities are stated at fair value. All the remaining balances are carried in the balance sheet at amortised cost, which approximates to fair value.

(a) Amounts owed to credit institutions

Group Parent company 2014 2013 2014 2013 £m £m £m £m Not later than one year - 100 - -

(b) Finance lease obligations Leased investment property is accounted for as if it had been acquired under a finance lease. At the commencement of the lease a liability is established to represent the financing element of the lease contract. As lease payments are made, these are split between an interest element, calculated on an effective interest basis, which is charged to the statement of comprehensive income and a capital element, which reduces the finance lease liability. The average term of finance leases entered into is 197 years for the Group (2013 195 years) and 197 years for the Parent company (2013 195 years). The interest rate inherent in the leases is fixed at the start of the lease.

Group Parent company 2014 2013 2014 2013 £m £m £m £m Obligations under finance leases – minimum lease payments: Not later than one year 1 1 1 1 Later than one year and not later than five years 6 6 6 2 Later than five years 243 185 243 49 250 192 250 52 Less: future charges (229) (171) (229) (45) Present value of obligations under finance leases 21 21 21 7

Present value of obligations under finance leases: Not later than one year 1 1 1 - Later than one year and not later than five years 4 5 4 2 Later than five years 16 15 16 5 21 21 21 7

Group Parent company 2014 2013 2014 2013 £m £m £m £m Collateral loans – contractual maturity analysis: Later than one year and not later than five years 106 7 106 7 Later than five years 182 19 182 19 288 26 288 26

STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS EUROPEAN EMBEDDED VALUE NOTICE OF AGM & RESOLUTIONS ADDITIONAL INFORMATION - 29 53 27 29 27 25 10 £m £m £m (13) 216 245 192 245 205 232 203 232 2013 2013 Other

145 145 provisions Group Group e. - 50 75 25 35 £m £m £m 169 212 237 202 237 194 244 244 2014 2014 future future Parent company Parent company Parent company commission Provision for 4- 5- -1 48 48 43 30 38 212 38 10 25 10 43 205 £m £m £m (15) (27) (15) 124 224 320 196 320 205 248 218 248 2013 2013 Other provisions

-- 5- 4- Group Group Group 69 50 38 37 25 £m £m £m (27) 212 197 316 169 316 212 250 213 250 205 147 2014 2014 future future commission Provision for ents are contingent on the related policies remaining in forc on the related ents are contingent centive plan, an unfunded pension provision, the mortgage endowment centive plan, an unfunded pension provision, Group is contractually committed to make in future periods for Group is contractually ministration closed and for offices which have been which the released to income as the services are rendered. amortised cost, which approximates to fair value. to fair value. amortised cost, which approximates

r t 31 December 2014 ccrued expenses t 1 January 2014 dditional provisions within 12 months Expected to be settled 12 months in more than Expected to be settled Deferred fee income A Othe A A A Part VII transfe Utilised during the yea Unwind of the discount rate Change in basis 12 months within Expected to be settled 12 months than in more Expected to be settled Provision for future commission Other provisions

services. These amounts are non-refundable and are Other liabilities are carried in the balance sheet at Deferred fee income is front-end fees received from as a prepayment for holders investment contract asset management and relate 35. Other liabilities The provision for future commission relates to paymentsThe provision for future that the 34. Provisions 34. Provisions investment contracts sold as at theinvestment contracts sheet date. These paym balance of the long-term in Other provisions comprise amounts in respect review, Royal Liver past business review and surplus sales and ad retains lease commitments. provisions during the year is shown The movement in in the following table. 146

36. Balances in respect of external unit holders (a) Investment return attributable to external unit holders The investment return attributable to external unit holders represents the portion of the investment return included within the Group statement of comprehensive income that relates to the consolidated funds that are owned by third parties.

(b) Liability to external unit holders The liability to external unit holders represents the portion of the consolidated funds included within the Group balance sheet but which is owned by third parties. The balance is stated at fair value being the quoted bid price of the relevant fund on the last day of the accounting period on which investments in such funds could be redeemed.

As set out in note 1 (a) IFRS 10 has been applied retrospectively and the 2013 comparatives have been restated accordingly.

For the purposes of the disclosure required by IAS 1, none of the balance (2013 none) is classified as being expected to be settled in more than 12 months from the balance sheet date.

37. Deferred tax (asset)/liability (a) Net deferred tax balance The tables below show the movement in the net deferred tax balance in the year. The deferred tax assets and liabilities are considered to be non current.

Group – 2014 Recognised in the statement of comprehensive 1 Jan income 31 Dec £m £m £m Deferred acquisition expenses (69) 69 - Excess management expenses carried forward (75) 75 - Revaluation of investments 90 (90) - Other short-term timing differences (7) 7 - Net deferred tax asset (61) 61 -

Group – 2014 Recognised in the statement of comprehensive 1 Jan income 31 Dec £m £m £m Deferred acquisition expenses (15) (46) (61) Excess of management expenses carried forward - (26) (26) Revaluation of investments 58 127 185 Other short-term timing differences 3 (10) (7) Net deferred tax liability 46 45 91

Group – 2013 Recognised in the Acquired statement of through comprehensive business 1 Jan income combinations 31 Dec £m £m £m £m Deferred acquisition expenses (93) 24 - (69) Excess management expenses carried forward (32) (43) - (75) Revaluation of investments 14 76 - 90 Other short-term timing differences (10) 3 - (7) Net deferred tax asset (121) 60 - (61)

STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS EUROPEAN EMBEDDED VALUE NOTICE OF AGM & RESOLUTIONS ADDITIONAL INFORMATION 46 58 (15) £m £m £m 31 Dec 31 Dec 31 Dec 147 147 As at ilities of RL £m current tax through business Acquired combinations 5 33 1 (16) 7 (61) (9) 55 (2) 3 (2) 24 (68) 76 89 59 (49) 86 175 86 49 (26) (43) (75) (10) 68 £m £m £m in the in the in the Group – 2013 income income income Parent company – 2013 Parent company – 2014 – 2014 Parent company Recognised Recognised Recognised Recognised statement of statement of statement of comprehensive comprehensive comprehensive comprehensive - - -- - 32 5 13 89 (92) (32) £m £m £m (68) (75) (49)91 140 (108) 1 Jan 1 Jan 1 Jan of £62m relating to the Part VII transfer in of RL (CIS) VII transfer in of of £62m relating to the Part (note 22). nces and so were shown as separate deferred tax liabilities. n this liability deferred tax assets have been offset as all meet the they al authority.prior year, the acquired deferred tax In the liab

y -term timing differences -term -term timing differences -term -term timing differences -term t t t Deferred acquisition expenses Excess management expenses carried forward Revaluation of investments Other shor Net deferred tax asset Net deferred tax Net deferred tax liabilit Deferred acquisition expenses Excess management expenses carried forward Revaluation of investments Other shor Net deferred tax liability Deferred acquisition expenses Revaluation of investments Other shor 31 December 2014 there is an overall deferred31 December 2014 tax liability; withi criteria above. criteria above. (CIS) could not be offset with the Group’s other deferred tax bala The 2014 deferred tax charge in the Parent company includes a charge the Parent company The 2014 deferred tax charge in numbers above. This is eliminated on consolidation in the Group Deferred tax assets and liabilities are offset where against to offset current tax assets there is a legally enforceable right liabilities and where the deferred taxes relate to the same fisc

37. Deferred tax (asset)/liability (continued) tax (asset)/liability 37. Deferred balance (continued) tax Net deferred (a) 148

37. Deferred tax (asset)/liability (continued) (b) Unrecognised deferred tax balances (i) Unrecognised deferred tax assets Deferred tax assets arising from certain capital losses, excess management expenses, surplus trading losses and capital allowances are recognised to the extent that the realisation of the related tax benefit through future taxable profits is probable. The Group did not recognise deferred tax assets of £6m (2013 £12m), of which £5m (2013 £11m) related to the Parent company. These unused losses and allowances can be carried forward and utilised as long as the company in which they arose is active or trading.

(ii) Unrecognised deferred tax liabilities Deferred tax liabilities arising from gains on subsidiary holdings have not been recognised by the Parent company as it controls the timing of any sale of a subsidiary and the repatriation of any dividend and it is not probable that a sale or repatriation will happen in the foreseeable future as the Group’s intention is that these investments will be held to provide long-term returns. The potential tax liability arising is less than £1m (2013 less than £1m).

There are no other unrecognised deferred tax liabilities within the Group.

38. Pension schemes The Group provides pension benefits for its employees in order to support recruitment, retention and motivation of talented people. For all employees joining after 1 September 2005, this is via contributory, defined contribution arrangements which are benchmarked to ensure that the reward package overall is competitive. Where possible under local regulation, employees are auto-enrolled and the Group sees a correspondingly high take-up across employees. The Group pays contractual contributions in respect of these arrangements and such contributions are recognised as an expense as the related employee services are provided. The expense recognised in 2014 is £6m (2013 £7m) and is reported within staff costs (note 10(a)).

In addition to the above arrangements, the Group operates three funded defined benefit schemes, which are established under separate trusts. The assets of the schemes are held in separate trustee administered funds and the funding position of each scheme is assessed annually by an independent qualified actuary using the projected unit credit method.

The ability of the defined benefit pension schemes to meet the projected pension payments is maintained through investments and, where applicable, regular contributions from employees and the Group. Risk arises because the estimated market value of the pension fund assets might decline; or their investment returns might reduce; or the estimated value of the pension liabilities might increase. In these circumstances, the Group could be required to make additional contributions.

The main defined benefit scheme is the Royal London Group Pension Scheme (‘RLGPS’). On 1 September 2005, RLGPS was closed to new entrants. As a result of the Royal Liver acquisition on 1 July 2011, the Group took responsibility for two further defined benefit pension schemes: the Royal Liver Assurance Limited Superannuation Fund (‘Royal Liver UK’) and the Royal Liver Assurance Limited (ROI) Superannuation Fund (‘Royal Liver ROI’). Royal Liver employees in these schemes stopped earning additional defined benefit pensions on 30 June 2011.

In addition, the Group also operates a small, legacy unfunded unapproved arrangement for certain executives who joined before 1 September 2005, which provides mirror RLGPS benefits for accrual above that provided by RLGPS. This has £10m of liabilities, for which a provision is held in the Group’s balance sheet.

The Group pays contractual contributions to RLGPS in line with a funding framework agreed with the RLGPS Trustee, which includes an agreement on the approach to be taken in the event of a funding deficit. As at the most recent triennial valuation dated 31 December 2013, RLGPS was in surplus and therefore the only contributions payable are in respect of the ongoing accrual of benefits and, if RLGPS has insufficient surplus, costs of any augmentations including the award of discretionary pension increases.

The Royal Liver schemes are supported in the first instance by the Royal Liver Assurance fund. Only in the event of that fund having insufficient assets to meet the needs of the Royal Liver schemes would the Royal London Open Fund be required to provide support. This structure is supported via guarantees from the Parent company to the schemes’ Trustees. Both the Royal Liver schemes were in surplus at the most recent triennial valuation dated 31 December 2012. As these schemes are closed to future accrual, no contributions are currently payable.

STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS EUROPEAN EMBEDDED VALUE NOTICE OF AGM & RESOLUTIONS ADDITIONAL INFORMATION - 29 29 £m 189 (160) 2013 n to the 149 149 nd thus the ble as a tions in tions in - 30 30 £m 209 (179) 2014 Royal Liver ROI 49 32 (17) £m 290 (241) 2013 77 77 50 £m (27) (27) 336 336 (259) (259) Royal Liver UK 2014 2014 - 90 90 £m 2013 2,155 (2,065) - RLGPS RLGPS 48 48 £m 2014 2,329 (2,281) es that it has an unconditional right to a refund of surpluses that it has an unconditional a e value of the net pension scheme asset that can be recognised in the asset that can be recognised scheme e value of the net pension fits available in the form of refunds from the scheme or reduc fits (17) £m 168 151 employer. This tax deduction has been shown above as a restrictio 2013 2,634 hemes. For the Royal Liver UK scheme, the benefit is only availa hemes. For the Royal Liver UK scheme, the (2,466) Total Total £m (27) 155 128 2014 2,874 (2,719) e as follows for thee as follows Parent company: Group and

Fair value of plan assets obligation Pension scheme surplus Pension scheme Less: restriction surplus of Net pension scheme asse In accordance with paragraph 64 of IAS 19, ‘Employee paragraph Benefits’ th with In accordance 38. Pension schemes (continued)38. Pension (a) Amounts recognised in the balance sheet sheet ar recognised in the balance The amounts value of economic bene balance sheet is restricted to the present As defined the Group believ future contributions. under IFRIC 14, gross pension surplus in full in can be recognised sc all three refund, as no additional defined pension benefits are being earned. Under UK tax legislation an income tax deduction of 35% is applied of 35% is to Under UK tax legislation an income tax deduction refund, as no additional defined pension benefits are being earned. a refund from a before it is passed to the UK pension scheme, asset that can be recognised for this scheme. value of the net pension scheme 150

38. Pension schemes (continued) (b) Reconciliation of net pension scheme asset The movement in the net pension scheme asset during the year can be analysed as follows:

Total Total pension scheme Present value Fair value of surplus/ Restriction on Net pension of obligation plan assets (deficit) surplus scheme asset £m £m £m £m £m At 1 January 2013 (2,362) 2,524 162 (18) 144 Costs recognised in profit for the year: Current service cost (9) - (9) - (9) Administration costs - (3) (3) - (3) Interest (expense)/income (100) 107 7 (1) 6 Past service cost (6) - (6) - (6) (115) 104 (11) (1) (12) Remeasurements recognised in OCI: Return on plan assets in excess of interest (expense)/income -8484 - 84 Changes in demographic assumptions 3-3- 3 Changes in financial assumptions (91) - (91) - (91) Experience gains 9-9- 9 Changes in the effect of the asset ceiling ---2 2 (79) 84 5 2 7 Other movements: Exchange differences (5)5-- - Employer contributions -1212 - 12 Employee contributions (2)2-- - Benefit payments 97 (97) - - - At 31 December 2013 (2,466) 2,634 168 (17) 151 Costs recognised in profit for the year: Current service cost (8) - (8) - (8) Administration costs - (4) (4) - (4) Interest (expense)/income (105) 112 7 (1) 6 Past service cost (6) - (6) - (6) (119) 108 (11) (1) (12) Remeasurements recognised in OCI: Return on plan assets in excess of interest (expense)/income - 240 240 - 240 Changes in demographic assumptions (39) - (39) - (39) Changes in financial assumptions (234) - (234) - (234) Experience gains 27 - 27 - 27 Changes in the effect of the asset ceiling - - - (9) (9) (246) 240 (6) (9) (15) Other movements: Exchange differences 11 (13) (2) - (2) Employer contributions -66 - 6 Employee contributions (2)2-- - Benefit payments 103 (103) - - - At 31 December 2014 (2,719) 2,874 155 (27) 128

It is anticipated that the Group and Parent company will make contributions of £10m to RLGPS in the year to 31 December 2015. No contributions are anticipated to be made to the Royal Liver pension schemes. STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS EUROPEAN EMBEDDED VALUE NOTICE OF AGM & RESOLUTIONS ADDITIONAL INFORMATION - - - - 3 3 (9) (6) (8) (6) (2) (3) 90 82 93 12 23 10 48 (39) (89) (14) (34) (14) £m 161 (179) s 151 151 ionary Net pension Net pension scheme asset scheme £m surplus Restriction on on Restriction -6 ------6 ------3 - 3 - (9) - (2) - (6) - (8) - (3) - (6) - 90 - 82 - 12 - 23 - 93 - 10 - 48 - 48 (14) - (39)- (34) - (14) - (89) - £m 161 - (179)- scheme scheme (deficit) surplus/ surplus/ RLGPS RLGPS Total pension Total pension ------2 2 (2) (3) 12 90 86 93 93 88 93 (85) (80) £m 161 161 plan assets Fair value of -66 ------6-6 (2) (2) (8) (6) (9) (6) 85 80 23 (90) (39) (85) (89) (83) £m (104) (179) (195) (100) (2,065) 2,155 (1,960) 2,042 (2,281) 2,329 the pension scheme obligation due to the granting of discret granting to the obligation due scheme the pension have been no other plan amendments, curtailments or settlement plan amendments, curtailments other have been no of obligation Present value value Present

g g

: : on scheme asset (continued) asset (continued) on scheme

ofit for the year: ofit for the year:

t t

: :

t t contributions contributions r t 31 December 2014 dministration costs t 31 December 2013 t 31 December t 1 January 2013 dministration costs A Other movements Exchange differences contributions Employer contributions Employee Benefit payments (expense)/income Changes in demographic assumptions Changes in financial assumptions Experience gains of the asset Changes in the effect ceilin Interest (expense)/income Past service cos Remeasurementsin OCI recognised in excess of interest Return on plan assets Employee contributions contributions Employee Benefit payments A Costs recognised in pr Current service cos A Changes in the effect of the asset Changes in the effect ceilin Other movements Exchange differences Employe Remeasurementsin OCI recognised of interest in excess Return on plan assets (expense)/income Changes in demographic assumptions Changes in financial assumptions Experience gains Current service cos A Interest (expense)/income Past service cos A Costs recognised in pr

The past service The past service (2013 £6m) representscost of £6m the increase in 38. Pension schemes (continued)38. Pension (b) Reconciliation pensi of net members. There of scheme categories pension increases to certain in the period. 152

38. Pension schemes (continued) (b) Reconciliation of net pension scheme asset (continued)

Royal Liver UK Total pension scheme Present value Fair value of surplus/ Restriction on Net pension of obligation plan assets (deficit) surplus scheme asset £m £m £m £m £m At 1 January 2013 (238) 290 52 (18) 34 Costs recognised in profit for the year: Current service cost ---- - Administration costs - (1) (1) - (1) Interest (expense)/income (10) 13 3 (1) 2 Past service cost ---- - (10) 12 2 (1) 1 Remeasurements recognised in OCI: Return on plan assets in excess of interest (expense)/income - (2) (2) - (2) Changes in demographic assumptions ---- - Changes in financial assumptions (4) - (4) - (4) Experience gains 1-1- 1 Changes in the effect of the asset ceiling ---2 2 (3) (2) (5) 2 (3) Other movements: Exchange differences ---- - Employer contributions ---- - Employee contributions ---- - Benefit payments 10 (10) - - - At 31 December 2013 (241) 290 49 (17) 32 Costs recognised in profit for the year: Current service cost ---- - Administration costs - (1) (1) - (1) Interest (expense)/income (10) 13 3 (1) 2 Past service cost ---- - (10) 12 2 (1) 1 Remeasurements recognised in OCI: Return on plan assets in excess of interest (expense)/income -4545 - 45 Changes in demographic assumptions ---- - Changes in financial assumptions (21) - (21) - (21) Experience gains 2-2- 2 Changes in the effect of the asset ceiling - - - (9) (9) (19) 45 26 (9) 17 Other movements: Exchange differences ---- - Employer contributions ---- - Employee contributions ---- - Benefit payments 11 (11) - - - At 31 December 2014 (259) 336 77 (27) 50

STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS EUROPEAN EMBEDDED VALUE NOTICE OF AGM & RESOLUTIONS ADDITIONAL INFORMATION - - - - 1 1 1 1 2 (7) (2) 34 29 28 30 (34) £m 153 153 Net pension Net pension scheme asset scheme £m surplus Restriction on on Restriction ------2 ------3 -2 -2 ------1 - 1 - 1 - 1 - 2 - (7) - (2) - 34 - 29 - 28 - 30 - 30 (34)- £m scheme scheme (deficit) surplus/ surplus/ Total pension Total pension Royal Liver ROI - 6 6 6 6 5 (7) (7) (7) (7) 34 34 (13) £m 189 192 plan assets Fair value of ------7 2-2 7 3-3 2-2 2-2 7 (5) (5) (5) (5) (5) 11 (34) (32) £m (160) (164) (179) 209 of obligation Present value value Present

g g

: : on scheme asset (continued) asset (continued) on scheme

ofit for the year: ofit for the year:

t t

: :

t t t 31 December 2014 dministration costs t 31 December 2013 t 31 December dministration costs t 1 January 2013 Employer contributions contributions Employer contributions Employee Benefit payments A Experience gains of the asset Changes in the effect ceilin Other movements Exchange differences Remeasurementsin OCI recognised in excess of interest Return on plan assets (expense)/income Changes in demographic assumptions Changes in financial assumptions Costs recognised in pr Current service cos A Interest (expense)/income Past service cos Other movements Exchange differences contributions Employer contributions Employee Benefit payments A Changes in demographic assumptions Changes in financial assumptions Experience gains of the asset Changes in the effect ceilin Interest (expense)/income Past service cos Remeasurementsin OCI recognised of interest in excess Return on plan assets (expense)/income A Costs recognised in pr Current service cos A

38. Pension schemes (continued)38. Pension (b) Reconciliation pensi of net 154

38. Pension schemes (continued) (c) Analysis of plan assets

Total 2014 2013 Quoted Unquoted Total Quoted Unquoted Total £m £m £m £m £m £m Debt instruments: Fixed interest bonds 167 - 167 134 - 134 High-yield bonds 112 2 114 99 3 102 Index-linked bonds 771 - 771 657 4 661 Corporate bonds 819 7 826 745 9 754 Equities 683 - 683 641 2 643 Equity investment funds - 62 62 106 74 180 Diversified growth collective investment scheme - 12 12 - 12 12 Property - 14 14 - 20 20 Property investment funds 185 - 185 91 - 91 Derivative instruments: Foreign exchange forwards - - - -2 2 Interest rate swaps - (5) (5) - (1) (1) Total return swaps 43 (43) - - (2) (2) Cash and other receivables 10 35 45 - 38 38 Fair value of plan assets 2,790 84 2,874 2,473 161 2,634

RLGPS 2014 2013 Quoted Unquoted Total Quoted Unquoted Total £m £m £m £m £m £m Debt instruments: Fixed interest bonds 13 - 13 12 - 12 High-yield bonds 112 2 114 99 3 102 Index-linked bonds 644 - 644 558 4 562 Corporate bonds 655 7 662 598 7 605 Equities 683 - 683 641 2 643 Equity investment funds - - - 106 - 106 Diversified growth collective investment scheme ------Property ------Property investment funds 185 - 185 91 - 91 Derivative instruments: Foreign exchange forwards - - - -2 2 Interest rate swaps - (3) (3) -- - Total return swaps ------Cash and other receivables 10 21 31 - 32 32 Fair value of plan assets 2,302 27 2,329 2,105 50 2,155

STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS EUROPEAN EMBEDDED VALUE NOTICE OF AGM & RESOLUTIONS ADDITIONAL INFORMATION ------4 2 2 (1) (2) 25 12 79 70 43 99 79 49 18 £m £m 290 189 Total Total 155 155 £m £m Unquoted Unquoted 2013 2013

- 25 - 12 - 4 - 2 - (1) - 2 - 49 - 18 - (2) - - 79 - 69 1 43 - 99 - 78 1 £m £m 148 41 220 70 Quoted Quoted - - 6 2 6 2 (2) 96 68 58 96 £m £m 336 209 127 Total Total Royal Liver UK Royal Liver ROI - - - - - 62 21 63 21 (2) 15 42 £m £m (13) (30) Unquoted Unquoted 2014 2014 2014 ------2 -1 -22 ------77 ------3 ------1 ------77 96 68 30 58 96 13 £m £m 127 194 294 Quoted Quoted

assets (continued) (continued) assets ield bonds ield bonds y y Total return swaps Index-linked bonds Index-linked bonds Corporate bonds Foreign exchange forwards Interest rate swaps Total return swaps Fixed interest bonds High- High- Index-linked bonds Corporate bonds Foreign exchange forwards Interest rate swaps Fixed interest bonds Fixed interest bonds Cash and other receivables Fair value of plan assets Equity investment funds Diversified growth collective investment scheme Property Property investment funds Derivative instruments: Equities Fair value of plan assets Debt instruments: Derivative instruments: Cash and other receivables Equities Equity investment funds Diversified growth collective investment scheme Property Property investment funds Debt instruments: Debt instruments:

38. Pension schemes (continued)38. Pension of (c) Analysis plan 156

38. Pension schemes (continued) (d) Risks All three schemes remain exposed to differing levels of interest rate, inflation, credit and market risk. The Group has agreed with the Trustee Boards of each pension scheme that, where appropriate, each schemes’ risks will be managed in line with the Group’s risk appetite. In particular, the schemes’ investment strategies are designed to minimise interest rate, inflation and market risk exposure where this is cost and capital effective.

The schemes have active liability-driven investment strategies using a combination of corporate and sovereign debt and derivative instruments such as interest rate and inflation swaps. Approximately 65% of RLGPS assets and 80% of Royal Liver assets are invested in instruments that provide a match to the schemes’ projected cash flows thereby reducing the Group’s exposure to interest rate and inflation risk.

The Group’s exposure to market risk is reduced by a combination of restricting the allocation to growth assets such as equities and by diversification both within the asset classes (e.g. geographically and across industry sectors) and across asset classes (e.g. allocations to property and to high-yield debt.) Credit risk is managed via a strategy of diversification across industry, issuer, credit rating and stock selection.

The schemes, and therefore the Group, are also exposed to longevity risk. The Group believes that some of this risk exposure is partially mitigated via a natural hedge with the mortality risk inherent in the protection business written by the Group.

Further information on the schemes’ risk management strategies can be found in the schemes’ annual reports and accounts which are available on the Group’s website.

(e) Assumptions and sensitivity analysis The major assumptions used to calculate the pension scheme asset for both the Group and the Parent company are:

2014 2013 RLGPS UK ROI RLGPS UK ROI % % % % % % Discount rate 3.6 3.6 2.0 4.4 4.4 3.5 Price inflation (RPI) 3.0 3.0 n/a 3.4 3.4 n/a Price inflation (CPI) 2.0 2.0 1.7 2.4 2.4 2.0

The salary growth assumption (only applicable to RLGPS) at 31 December 2014 was CPI +1.0% (2013 CPI +1.5%) but it does not have a significant impact on the defined benefit obligation and thus has not been included in the above table.

The most significant non-financial assumption is the assumed rate of mortality. The table below shows the life expectancy assumptions used in the accounting assessments based on the life expectancy of a scheme member aged 60 (non-pensioner is assumed to be 45 now). A weighted average is shown for the UK schemes.

Group and Parent company 2014 2013 UK ROI UK ROI Pensioner Male 26 27 27 27 Female 28 29 28 29 Non-pensioner Male 27 29 28 29 Female 30 30 29 30

STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS EUROPEAN EMBEDDED VALUE NOTICE OF AGM & RESOLUTIONS ADDITIONAL INFORMATION 3

66 £m (27) (17) n/a ROI £m 2013 157 157 egulatory

igation asset- the when the ected unit ected unit is unlikely , thereby 42 UK £m £m 2014 Group and Parent company Group and Parent

32 3 32 £m RLGPS RLGPS g across the Group and, as and impact the schemes’ asset values 38 £m (526)(307) (48) (451) (28) (279) (324) (28) (279) Total fined benefit obligation fined benefit obligation in de Increase/(decrease) issues from past inappropriate selling practices and other r to make capital purchases as at thedate: balance sheet d. When calculating the sensitivity of the definedd. When calculating the benefit obl ision for any liabilities arisin d Parent company have adequate reserves to meet all reasonably Parent company have adequate d emes’ liabilities to changes in the key assumptions. Due to the ied as when calculating the pension liability recognised within ied as when calculating the pension liability while holding all other assumptions constant. In practice, this while holding all other in the principal assumptions is shown in the table below: in the table below: assumptions is shown principal in the nt rates and inflation will also

y nefit obligation is 18 years (2013 17 years). same method (present value of the defined benefit obligation calculated with the proj benefit obligation same method (present value of the defined

Investment property Investment property 100 basis point increase in risk discount100 basis point increase rates in mortality and morbidit 5% proportionate decrease in inflation100 basis point decrease (RPI) in inflation100 basis point decrease (CPI)

40. Commitments (a) Capitalexpenditure commitments The Group and Parent company have the following 39. Contingent liabilities reviews Regulatory Parent company continued to address During the year, the Group and

This sensitivity analysis is based onassumption a change in an 38. Pension schemes (continued)38. Pension (e) Assumptionssensitivity and analysis (continued) ofThe sensitivity benefit the defined obligations to changes

to occur, and changes in some of the assumptions may beto occur, and changes correlate to significant actuarial assumptions, the to significant actuarial balance sheet. sensitivity of the sch The information provided above shows the on the Group. of such changes mitigating the effect profile Maturity (f) be The weighted average duration of the defined liability matching strategies, the impact of changes in discou liability matching strategies, the impact of changes matters. The directors consider that they have made prudent prov matters. The directors consider that such provision arise, that the Group an for circumstances calling credit method at the end of the reporting period) has been appl credit method at the end of the reporting period) foreseeable eventualities. 158

40. Commitments (continued) (b) Investments in private equity funds The Group and Parent company have a portfolio of investments in private equity funds. The structure of these funds is such that the commitment is drawn down over the investment period. The total amount committed, net of drawdown, at the balance sheet date for the Group and Parent company is £159m (2013 £227m).

(c) Operating lease commitments Operating lease payments represent rentals payable by the Group for land and buildings. The total future minimum lease payments due under these arrangements, net of any related sub-lease receipts, are shown in the following table.

Group and Parent company 2014 2013 £m £m Total future minimum lease payments under non-cancellable leases: Not later than one year 2 2 Later than one year and not later than five years 3 4 Later than five years 1 2 6 8 Less: total future minimum sub-lease payments under non-cancellable sub-leases expected to be received (1) (2) 5 6

41. Related party transactions The Parent company is the ultimate parent undertaking of the Group. The Group and Parent company carried out the following transactions with related parties.

(a) Related party transactions of the Group Transactions between Group entities are eliminated on consolidation. The following are those transactions carried out by Group entities with those related parties that are outside the Group.

(i) Subsidiaries’ transactions with OEICs and other investment funds The Group markets a portfolio of OEICs and other investment funds. A number of these funds are classified as subsidiaries for the purposes of financial reporting and hence are included within the Group. For those funds not consolidated within the Group the transactions during the year were as follows:

2014 2013 £m £m Management fees earned during the year 62 35

There were no amounts outstanding between the Group and the funds at the year end (2013 £nil). The total value of units held by the Parent company at 31 December 2014 in the funds that are not consolidated into the Group was £1,015m (2013 £449m). The acquisition and sale of units in the funds during the year were as follows:

2014 2013 £m £m Acquisition of funds 155 262 Proceeds from sale of funds 106 138

STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS EUROPEAN EMBEDDED VALUE NOTICE OF AGM & RESOLUTIONS ADDITIONAL INFORMATION 2 is 13 (26) £m £m 229 242 2013 2013

iaries ese ese 159 159 ordance same terms 3 13 £m £m (40) 255 242 2014 2014 Parent company Parent company

nagement activities of the Parent company. The Parent company Parent company of the Parent company. The nagement activities ts and for business transferred in acc to the Parent company, d liabilities, lending the proceeds to the Parent company on the Parent company d liabilities, lending the proceeds to the and charges interest on an arm’s length basis. and charges interest on an arm’s length basis. s incurred by the Parent company during the year. company s incurred by the Parent

nt services provided by subsidiaries by subsidiaries provided nt services ns of the Parent company dministration fees Interest income on loans to subsidiaries on loans Interest income liabilities on subordinated Interest expense A fees Investment management

with the appropriate scheme of transfer. with the appropriate scheme theThe following table summarises and recharge fees with subsidiaries undertaken transactions (ii) Financing has providedThe Parent company loans to subsidiaries 41. Related party transactions (continued) (continued) party transactions 41. Related (b) Related party transactio its subsid Parent company and subsidiaries of theThe significant the Transactions between shown in note 21. are Parent company transactionsand other related party shown below. of the Parent company are (i) Administration and investment manageme ma perform the administration and investment Subsidiary companies issued subordinate As set out in note 32, two subsidiaries have as the original debt issue. The following table summarises the by the Parent company during the year in relation to th and expense incurred interest income transactions. charged fees for services agreemen these services under management 160

41. Related party transactions (continued) (b) Related party transactions of the Parent company (continued) (iii) Other income received from subsidiaries

Parent company 2014 2013 £m £m OEIC management fee rebates 40 38 OEIC distributions 249 213 Other dividends receivable from subsidiaries 211 49 Rental income 3 3 503 303

The OEIC management fee rebates relate to the investment in Group OEICs made by certain unit-linked funds of the Parent company. The Parent company deducts an investment management fee from the unit-linked fund. The authorised corporate director of the OEICs, which is a subsidiary of the Parent company, deducts an investment management fee from the OEIC in which the unit-linked fund has invested. In order to avoid the unit-linked fund bearing both these investment management fees, the subsidiary company rebates the portion of its charge relating to the internal holding of OEICs to the unit-linked fund.

OEIC distributions are those received from OEICs that are classified as subsidiaries for financial reporting purposes.

(iv) Outstanding balances with Group entities at the year end At the year end, the following balances were outstanding with Group entities in relation to the transactions above.

Parent company 2014 2013 £m £m Amounts due from Group entities 13 11 Loans to Group entities 29 32 42 43

Subordinated liabilities (640) (640) Amounts due to Group entities (39) (31) (679) (671)

The amounts due to and from Group entities are due on demand and are not secured.

STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS EUROPEAN EMBEDDED VALUE NOTICE OF AGM & RESOLUTIONS ADDITIONAL INFORMATION - - - - 4 7 58 20 33 61 (20) £m £m 550 163 (129) (454) (263) (409) (119) 2,020 1,216 2013 2013 2,857 (2,033)

161 161 y. s. er non- - - - 5 4 33 22 23 £m £m (47) 328 197 (163) (359) 2014 2014 2,278 4,116 6,437 1,047 Parent company Parent company (1,976) (2,711) (4,854) 18,414 (24,891)

- 2 7 1 4 (2) 70 20 41 73 (21) £m 570 (702) (279) (353) (180) 2013 3,071 (2,159) (1,395) (1,232) restated

- 3 2 4 (1) Group 77 33 23 27 24 £m 507 207 (160) (441) 2014 3,242 3,543 (1,515) (5,567) (1,036) (1,044) t require disclosure, other than those given in the Directors’ t require disclosure, in the given other than those y has holdings in OEICs and other funds, managed y has by subsidiarie sets transferred to external clients of £160m (2013 £2m). The oth ly and the Group 2013 comparatives have been restated accordingl ly and comparatives have been restated the Group 2013 t

these funds during follows: the year were as t eration is disclosed eration note 10. in for non-cash the following: comprise items

the Parent company (continued)

t surance contract liabilities surance contract property, plant and equipmen (gain) on financial investments / r non-cash items cquisition of fundscquisition of Other non-cash items Other non-cash Change in non-participating value of in-force business Change in non-participating in liabilities contract Change in non-participating investment Change in provisions Non-cash investments transfer of Change in reinsurers’ share of insurance liabilities scheme asse Change in pension Fair value gain on financial investments loss Net foreign exchange Change in participating insurance contract liabilities contract liabilities Change in participating investment Depreciation of property, plant andproperty, Depreciation of equipmen Reversal of impairments on Fair value gain on investment propert PVIF and other Amortisation and impairment charges on acquired intangible assets Change in deferred acquisition costs Tax charge Loss on disposal of intangibles A funds sale of Proceeds from cash items in the Parent company predominantly relate in of RL (CIS) and to the Part VII transfer RLPPC. of investmentsThe non-cash transfer shown above relates to as As set out in note 1 (a) IFRS 10 has been applied retrospective (v) Other transactions of the Parent company with related parties parties related with company of the Parent transactions (v) Other As part of its portfolio assets, the Parent of investment compan Key management remun remuneration report. 42. Additional cash flow information (a) Adjustments fo Adjustments in the statements of cash flows management personnel with key (vi) Transactions the Group tha or arrangements with No director had transactions 41. Related party transactions (continued) (continued) party transactions 41. Related (b) Related party transactions of acquisitions and sales of The Parent company’s 162

42. Additional cash flow information (continued) (b) Adjustments for non-operating items Adjustments in the statements of cash flows for non-operating items comprise the following:

Group Parent company 2014 2013 2014 2013 £m £m £m £m Fair value loss/(gain) on investments in Group entities - - 177 (41) Dividends received from subsidiaries - - (211) (49) Finance costs 43 30 41 28 43 30 7 (62)

The fair value loss/(gain) on investments in Group entities and the dividends received from subsidiaries shown above exclude amounts in relation to OEICs and other funds treated as subsidiaries for financial reporting purposes.

(c) Dividends and interest Interest and dividend receipts and payments included in the statements of cash flows are as follows:

Group Parent company 2014 2013 2014 2013 £m £m £m £m Dividends received: Operating cash flows (including Group OEICs) 520 459 355 339 Investing cash flows - - 31 49 520 459 386 388

Interest received: Operating cash flows 1,037 796 496 481

Interest paid: Operating cash flows 3 2 3 2 Financing cash flows 43 28 41 26 46 30 44 28

(d) Acquisition and disposal of Group entities The Parent company’s operating portfolio of investment assets includes OEICs and other investment funds that are classified for financial reporting purposes as subsidiaries. Cash flows in relation to these assets are classified as operating cash flows for the Parent company statement of cash flows. The amount included within ‘Net acquisition of financial investments’ relating to the acquisition and disposal of such funds was a net acquisition of £1,231m (2013 £804m).

The figures for the acquisition and disposal of Group entities in the statements of cash flows can be analysed as follows: the acquisition of Group entities figure of £180m in the Group represents the cash settlement of the deferred consideration payable on the acquisition of RL (CIS) and RLAM (CIS); the £153m in 2013 related to the net cash acquired on the acquisition of RL (CIS) and RLAM (CIS) and was the net of the cash balances acquired of £193m and the cash paid of £40m; the acquisition of Group entities in the Parent company in 2014 of £8m relates to the purchase of the minority interest in Wrap IFA Services Limited of £4m and capital injections into subsidiaries totalling £4m; in 2013 the total of £43m related to the acquisition of RL (CIS) and RLAM (CIS) of £40m and capital injections into subsidiaries of £3m; the Group net outflow of £390m in ‘Proceeds from disposal of group entities’ in 2013 related to the cash received on the sale of RL360o of £105m, net of the cash balances transferred out on the sale of £495m; and the Parent company proceeds of £10m in 2014 relate to a share capital reduction in a subsidiary; in 2013 the £105m from disposal of Group entities related to the disposal of RL360o .

STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS EUROPEAN EMBEDDED VALUE NOTICE OF AGM & RESOLUTIONS ADDITIONAL INFORMATION ns of ce

163 163 the ntracts. ntracts. ce and cludes cludes risks and lts are tives future rred prior tee also tee also roup’s risk hich are es which . For those . For those nd bilities. bilities. sk limits. ts contracts, assuming insurance contracts, Annual Report and Accounts in Annual Report and Accounts risk through its risk management istency and expenses. The Commit r policies remain in force than expected psed, made paid-up, surrendered or transfe stment returns, interest rates and tax rates. a diverse group concentratio of people and have no material ve written substantially all of their business in the UK, resu guidelines around the identification, assessment, mitigation, Concentrations of insurance risk are considered by the Insuran of insurance Concentrations t classes, the setting of policyholder bonus rates (some of w ts to ensure that the insurance risk acceptedts to ensure that the remains within risk policyholders fall ill or become incapacitated than expected; than expected; policyholders fall ill or become incapacitated rather than eliminate, the risk of rather than eliminate, failure to meet business objec risk through the use of reinsurance, portfolio analysis and ri risk orate governance section of this orate governance ligations is assessed by reference to assumptions with regard to ral towards or undesirableral towards of the G which form a core part and the Insurance Committee. This Committee has responsibility for the Insurance Committee. e and over large numbers of individual risks to reduce variability in loss amount and timing of claims paymentsamount and timing under insurance co arising to calculate premiums and monitor claims patterns. Past experien than assumed in the pricing and reserving basis used; and than assumed in the pricing and reserving from mortality, morbidity, pers risk exposure are summarised sections. in the following s in excess of risks in excess appetite, to limit the a Group’s exposure to large single claims remain in force and are for any reason la remain in ut guarantees, the risk is generally that fewe ine appropriate assumptions for those models. idity rates, persistency rates, expenses, inve ntrol of insurance risks; to maturity or expiry. For policies witho with guarantees, the risk is generally that more remain in force than expected; strain;catastrophes and to alleviate the impact of new business monitoring, reporting and co development and pricing. control over product the use of the policy framework, guidelines, limits and authority levels for concluding insurance the use of the Group insurance risk policy to provide Group-wide compared to agreed limi regular monitoring of actual exposures appetite; exposure the use of reinsurance to mitigate the diversification of business over several classes of insuranc experience; and annuitant longevity – the risk that the annuitant lives longer – the risk that lives annuitant longevity the annuitant higher than those expected. expenses – the risk that actual expenses are mortality – the risk that the Group’s experience of life assurancemortality – the risk that the Group’s experience policyholders is different from that expected. For life assurance the risk is that more policyholders die than expected; health insurance morbidity – the risk that more of the Group’s persistency – the risk that policies do not handling insurance claims;

considers the Group’s reinsurance coverage. considers the Group’s reinsurance coverage. Insurance risks are managed through the following mechanisms: setting of policy and for monitoring the levels of risksetting of policy and for monitoring the levels arising mortality or (if applicable) morb 43. Risk management As a servicesfinancial is the managed the Group’s business provider, a set of risk risk. The Group has acceptance of preferenc define the types neut views as being desirable, of risk the Group management framework and control techniques. The Group seeks and control management framework to to manage its exposures risk agreed by the Board. The the residual risk exposures are within acceptableframework ensuring that management tolerances within the Group is designed to manage, framework established date of claim. The amount of such future ob accumulated to the as well as to ensure that the Group is well capitalised. The Corp is well capitalised. as well as to ensure that the Group are supported by the use of actuarial models, These techniques Concentration risk The Group and Parent company write a diverse mix of business across In addition, it is necessary for the Group to make decisions which of assets relativeappropriate accumulation to lia ensure an statistical methods are also used to determ risk by product type. However, as the Group and Parent company ha sensitive to demographic and economic changes arising in the UK. These decisions asse include the allocation of investments between guaranteed) and the setting of surrender terms. The primary responsibility for managing insurance risk falls to the risk is within the Group’s overall risk appetite. that Committee to ensure risk of excess concentrationsThe Group seeks to mitigate the of to a significant extent on the value of claims to depends The exposure of the Group be paid in the future, relative to the asse as The main insurance risks can be summarised follows: a summary of the approach. controls Group’s risk management and internal of for the major categories The key control techniques (a) Insurance risk the uncertaintyInsurance risk arises from occurrence, over the 164

43. Risk management (continued) (a) Insurance risk (continued) Sensitivity analysis The following tables present the sensitivity of insurance and investment contract liabilities to the insurance risks set out above. Sensitivities are only shown in one direction as an equal and opposite movement in the variable for the majority of business would have an equal and opposite impact on the value of insurance and investment contract liabilities. Mortality and morbidity 5% proportionate decrease in base mortality and morbidity rates. This sensitivity demonstrates the effect of a decrease in the rate of deaths and serious illness. The impact of such a change on the contract liabilities varies depending on the type of business written. For life assurance business a decrease in mortality rates will typically decrease the liabilities as there will be fewer payouts for early death. However, for those policies which contain a guaranteed annuity option the policy liability may increase as its value depends in part on the length of time over which the guaranteed rate will be paid. Likewise, for annuity business a decrease in mortality rates will increase the liability as the average period over which annuity payments have to be made will be extended. Persistency 10% proportionate decrease in lapse rates. This sensitivity reflects a single, downward movement in lapse rates. This means that fewer policies are being surrendered or terminated early, with the result that more policies are assumed to remain in force. Expenses 10% decrease in maintenance expenses – the ongoing cost of administering contracts. This sensitivity is applied to the projected level of expenses. There is no change to the assumed rate of future expense inflation. A reduction in expenses will reduce the value of the liabilities for most classes of business. For some unit-linked contracts where future charges cover expenses, however, the liability may be unaffected.

The tables demonstrate the effect of a change in a key assumption whilst other assumptions remain unchanged. In practice, the assumptions may be interdependent. It should also be noted that the impact on the liabilities from changes in these assumptions may not be linear as implied by these results. Larger or smaller impacts should not be interpolated or extrapolated from these results.

STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS EUROPEAN EMBEDDED VALUE NOTICE OF AGM & RESOLUTIONS ADDITIONAL INFORMATION - - - £m 165 165 Expenses £m Lapses 2013 £m morbidity Mortality &

£m 298 - - 478 (22) (1) (37) 839 (124) 24354 - - (37) Impact of change in variable 1,583 19 - (13) 3,808 57 -266,912 (61) (13) (52) 4,270 3 1 (52) (2)2,284 (9) (2) 1,911 6 2 (2) 1,911 6 2 (2) (1,335) (7) (47)(1,335) (7) (45) 29,417 (10) (1) (27) 19,148 - - 26,365 6 - 25 2633,277 (55) (27) 25,147 (13) (2) 25 (2)21,432 (9) (2) reported Liability as - - Group £m Expenses -- (7) - - (1) - (14) £m Lapses - 10 (26) - - - 2014 2014 £m Impact of change in variable Impact of change morbidity Mortality & £m 507717306 (23) 9 - (29) 980 (134)360 28 (29)

3,508 (6) 32,308 (38) (14) (3) (3) 1,978 8 3 (2) 1,978 8 3 (2) 4,1867,504 66 (60) 31 (45) (1,332) (12) (78) (69) 22,691 29,607 31 12 11 37,111 (29) 43 (34) 31,649 24,999 (14) (3) (4) 28,141 6 7 12 reported Liability as

g g

-linked -linked -linked -linked t t Uni than annuities Non-profit, other Non-profit annuities Claims outstandin Uni than annuities Non-profit, other Non-profit annuities Claims outstandin

contract liabilities Investment contracts Participating investment investment contracts Non-participating of in-force value Non-participating business insurance contracts Non-participating contract insurance Long-term net liabilities, Participating insurance contracts Non-participating insurance contracts insurance Non-participating Long-term insurance contract contract insurance Long-term gross liabilities, contracts Participating insurance

43. Risk management (continued) risk(a) Insurance (continued) 166

43. Risk management (continued) (a) Insurance risk (continued)

Parent company 2014 2013 Impact of change in variable Impact of change in variable Liability as Mortality & Liability as Mortality & reported morbidity Lapses Expenses reported morbidity Lapses Expenses £m £m £m £m £m £m £m £m Long-term insurance contract liabilities, gross Participating insurance contracts 29,682 31 12 11 11,268 5 3 6

Non-participating insurance contracts Unit-linked 1,978 8 3 (2) 1,911 6 2 (2) Non-profit, other than annuities 980 (134) 28 (29) 635 (121) 21 (29) Non-profit annuities 4,186 66 - (14) 630 8 - (4) Claims outstanding 360 - - - 212 - - - 7,504 (60) 31 (45) 3,388 (107) 23 (35) 37,186 (29) 43 (34) 14,656 (102) 26 (29)

Long-term insurance contract liabilities, net Participating insurance contracts 28,216 6 7 12 11,268 5 3 6

Non-participating insurance contracts Unit-linked 1,978 8 3 (2) 1,911 6 2 (2) Non-profit, other than annuities 507 (23) - (29) 331 (23) (3) (29) Non-profit annuities 717 9 - (7) 363 5 - (4) Claims outstanding 306 - - - 175 - - - 3,508 (6) 3 (38) 2,780 (12) (1) (35) 31,724 - 10 (26) 14,048 (7) 2 (29)

Non-participating value of in-force business (1,332) (12) (78) (69) (1,169) (10) (50) (43)

Investment contract liabilities Participating investment contracts 2,308 (14) (3) (3) 1,980 (9) (2) (2) Non-participating investment contracts 22,691 - - (1) 16,254 - - - 24,999 (14) (3) (4) 18,234 (9) (2) (2)

STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS EUROPEAN EMBEDDED VALUE NOTICE OF AGM & RESOLUTIONS ADDITIONAL INFORMATION or y vatives with aries 167 167 interest ement ppropriate ctuations atching Group’s Group’s isk and these or matching or matching lue of assets include liability, or its liability, or debt and fixed lt of the holders nsurance and ng dates, creating t vary. For the ity durationcontrol. s in market prices, ies as these risks are borne by ial instruments change as a resu change as ial instruments will fluctuate because of change tion and performance benchmarks consistent benchmarks tion and performance Market risk arises for the Group from flu ng under the Group’s i to the liabilities ainly arises from the Group’s investments in outlined above and in accordance with the relevant regulator the accordance with outlined above and in mpany and its asset managementspecifies the limitsmpany and f company the type and quality of assets that support can be held to ks with appropriate durations and, in some instances, using deri e market risk The Group’s Capital resulting from the mismatch. e changes may be caused by factors specific to the asset or e changes may be caused by factors specific vernment securities with interest rate swap overlays to provide vernment securities It also arises in certain products sold by the Group, which t allocation and performance against benchmark. t allocation and performance against benchmark. ld to liabilit cover unit-linked ldings The Board sets the in equities and investment property. om the fund-based management charges levied on these contracts v fund-based management charges om the the value of the backing assets where interestthe value rates change. e, however, prudently managed in order to meet policyholders’ r e, however, prudently managed in order to asset category or specific investment. The Group’s Capital Manag ere the impact of a market change impacts differently on the va differently change impacts ere the impact of a market cash flows of the Group’s of the Group’s cash flows financ ing, stress testing, Value-at-Risk analysis and asset and liabil equities and property is included (iv). in section in its assets and the capital available. The Group has established approaches f yed are the establishment of asset alloca yed are the establishment y exchange rates and other market prices. y exchange responsibility for implementation is delegated to the Group’s investment management Group’s investment management responsibility for implementation is delegated to the g assets and liabilities – actual or notional – with differentg assets and liabilities – maturity or re-prici actual or notional y matching. This balances the risks relati st rates, whether real or notional. It m risk is included in section (iv). ages interest rate risk using performance benchmar ages requirements. The principal techniques emplo techniques requirements. The principal the Group’s risk appetite and asset-liabilit investment contracts against the risks inherent investment contracts against regulatory requirements prescribe In addition, reward expectations. from the effect on liabilities. from the effect on liabilities. market risk The Group manages within the risk management framework Suchdirectly with the value of the underlying assets. assets ar liabilities. The Group’s exposure to market risk arises principally from asset price risk, interest rate risk and currency risk. (i) Asset price risk Asset price risk is the risk that the fair value or flows of an asset or liability cash future 43. Risk management (continued) risk (b) Market arisesMarket risk from the possibilityfair value or that the and liabilitiesin the value of both assets and in particular wh movements in interest rates, foreignmovements in interest currenc currency risks. other than those arising from interest rate or Thos guarantees as they can lead to claim values being higher than The Group man cash flow match.to achieve a closer The Parent company uses go Exposure to interest rate risk is monitored using scenario test rate sensitivity matching. A sensitivity analysis to interest rate assets and liabilities, including hedging policyholder options risks.and, where cost effective, unrewarded Where appropriate m to manage th actions are in place management cannot be achieved, processes. monitors these regularly Management Committee respectThe Group is not exposed to market risk in of assets he of the contracts concerned, except to the extent that income fr that to the extent except concerned, of the contracts holdings in certain asset categories. Asset allocation and performance benchmarks are set, which ensure that each fund has an a are set, which ensure that each fund benchmarks and performance allocation holdings in certain asset categories. Asset exposure to changes in the level of intere interest rates. which are exposed to changes in income securities, issuer, or by factors affecting all similar assets or liabilities. from its ho The Group’s exposure to this risk arises principally investment policy and strategy. Day-to-day in place. subsidiary with monitoring procedures co between the Parent in place The investment management agreement particular mix of assets and is not over or under-exposed to a the actual asse monitor Committee Investment Committee and A sensitivity analysis to changes in the market prices of Group, interest rate risk arises from holdin rate (ii) Interest risk Interest rate risk is the risk that the fair value or cash of flows a financial as instrument will vary market rates of interes 168

43. Risk management (continued) (b) Market risk (continued) (iii) Currency risk Currency risk is defined as the risk that the fair value or future cash flows of an asset or liability will change as a result of a change in foreign exchange rates. As the Group operates principally in the UK its assets and liabilities are mainly denominated in sterling. For investment assets, the Group’s investment management policies and procedures allow for a small exposure to overseas markets, via both equities and fixed interest securities. The resulting currency risk is managed by the use of exposure limits and authorisation controls operated within the Group’s risk management framework.

The tables below demonstrate the extent to which the assets and liabilities of the Group and the Parent company are exposed to currency risk. Linked assets are not subject to currency risk as this risk is borne by the policyholders concerned. A sensitivity analysis of the Group and Parent company’s exposure to currency risk is included in section (iv).

Group Parent company 2013 2013 2014 restated 2014 restated £m £m £m £m Non-linked assets denominated in GBP 45,880 39,827 42,776 16,416 Non-linked assets denominated in EUR 1,044 991 999 1,031 Non-linked assets denominated in USD 1,892 1,708 1,892 608 Non-linked assets denominated in JPY 159 169 159 40 Non-linked assets denominated in other currencies 290 369 290 73 49,265 43,064 46,116 18,168 Linked assets not subject to currency risk 24,669 21,237 24,669 18,166 73,934 64,301 70,785 36,334

Non-linked liabilities denominated in GBP 48,027 41,485 44,878 16,838 Non-linked liabilities denominated in EUR 1,238 1,330 1,238 1,330 Non-linked liabilities denominated in USD - 248 - - Non-linked liabilities denominated in other currencies - 1 - - 49,265 43,064 46,116 18,168 Linked liabilities not subject to currency risk 24,669 21,237 24,669 18,166 73,934 64,301 70,785 36,334

As set out in note 1 (a) IFRS 10 has been applied retrospectively and the 2013 comparatives have been restated accordingly.

At 31 December 2014, the Group and Parent company held currency forwards with a sterling notional value of £189m (2013 Group £1,308m; Parent company £78m) in respect of the non-linked assets denominated in currencies other than sterling. These are included in the table above.

(iv) Market risk sensitivity analysis The following table shows the impact on the unallocated divisible surplus (before tax) from changes in key market variables. Each sensitivity is performed with all other variables held constant. The sensitivity scenarios used are as follows.

Interest rates 100 basis point per annum reduction and increase in market interest rates. For example, if current market rates are 4%, the impact of an immediate change to 3% and 5%. A reduction in interest rates increases the current market value of fixed interest assets but reduces future reinvestment rates. The value of liabilities is also increased when interest rates fall as the discount rate used in their calculation will be reduced. An increase in rates will have the opposite effect.

Currency rates 10% increase and decrease in the rates of exchange between sterling and the overseas currencies to which the Group is exposed. An increase in the value of sterling relative to another currency will reduce the sterling value of assets and increase the sterling value of liabilities denominated in that currency. As the Group holds relatively few liabilities in overseas currencies, an increase in the value of sterling will reduce the unallocated divisible surplus.

STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS EUROPEAN EMBEDDED VALUE NOTICE OF AGM & RESOLUTIONS ADDITIONAL INFORMATION 6 2 2 (5) (1) (2) 46 (38) £m 101 214

(148) (221) 2013 debt ts,

there there et class nage t 169 169 r as uld be set. d by a fall ties and on the same nd cash ations with ations with 9 ly fashion. (8) (8) 15 23 ation requirements. £m (15) (12) (21) 163 239 (133) (236) 2014 Parent company 2 (1) 91 16 31 (13) (28) £m 168 219 (136) (138) (226) well as detailing specific ass 2013

(8) Group 15 23 14 £m (15) (12) (12) (21) 163 239 (133) (236) and it has been decided that no limit sho and it has been decided that no 2014 sk. Limits exist on individual counterpar egation of transactions (not necessarily of egation gations or fails to perform them in a time gations ion is exposure to the UK Government. Investment in government in Investment the UK Government. is exposure to ion edit and liquidity risks policy and procedures and the investmen vestment portfolio, from its holdings in bonds, derivatives a ange in the market value of assets.ange in the market value value of liabilitiesThe will decrease Committees as part of the overall credit risk policy.Committees Consequently, the unallocated divisible Consequently, the unallocated surplus will be reduce at fall the valuation date, without a corresponding in or rise dividend sible surplus from changes in these assumptions may not be linea ample, the Group’s financial risk managementample, strategy aims to ma derivatives, the policy also details legal, collateral and valu are within the regulatory limits that restrict excessive concentr are within the regulatory insurance arrangements. The credit exposures for reinsuranceinsuranceacts are The credit exposures contr arrangements. not be interpolated or extrapolated from these or extrapolated results.not be interpolated industry sector and by credit rating. in order to control exposure to credit ri ion with a single transactionion with or an aggr d asset and liability management strategies e monitored against the agreed limits by the Committee. For Management Group’s Capital investment market conditions change, management actions could include selling investmen actions investment change, management market conditions if another party fails to perform obli its

other currencies exchange rates other currencies exchange EUR rate exchange rate USD exchange rate JPY exchange EUR rate exchange rate USD exchange rate JPY exchange rates other currencies exchange / / / / / / / / 10% increase in GBP 10% decrease in GBP 10% increase in GBP 10% decrease in GBP Equity/property+10% prices Equity/property-10% prices Interest rates -100bp 10% increase in GBP 10% decrease in GBP 10% increase in GBP 10% decrease in GBP Interest rates +100bp type) with a single counterparty. The Group’s exposure to credit risk arises principally from its in in particular and from reinsurance arrangements. The market, cr management agreements stipulate approved counterparties, permittedas stipulate approved counterparties, investments and exchanges, management agreements exposure limits. The policy also requires that asset holdings or with particular asset individual counterparties classes. For Where possible, significant counterparty exposures, particularly in Where possible, significant counterparty respect of stock lending and derivatives, are mitigated by the use of collateral. A comprehensive system of limits is in place the overall quality the Group’s of The one except bond portfolio. changing investment portfolio allocation, adjusting bonuses credited to policyholders and taking other protective action. to policyholders and taking other protective action. bonuseschanging investment portfolio allocation, adjusting credited divi on the unallocated It should also be noted that the impact Limitations of sensitivity analysis the effect of a change in a key assumptiondemonstrates The above table assumptions In practice, while other unchanged. remain As market fluctuations. the exposure to implied by these results. Larger or smaller impacts should (c) Credit risk Credit risk is defined as the risk of loss Exposure to credit risk may arise in connect 43. Risk management (continued) risk (continued) (b) Market (continued) analysis risk (iv) Market sensitivity capital values Equity/property in equity and property capital values 10% increase and decrease in asset values. UDS on the tax Impact before underlying risks. may be dependencies between the managed. For ex The Group’s assets and liabilities are actively or rental yield. of a sudden ch This sensitivity shows the impact when asset values fall, but unit-linked business, other than for the decrease will beless than the fall in asset values because of the presence of financial guarantees and options in the underlying contracts. is a key part of the Group’s investment an If the UK’s credit standing were to deteriorate significantly, however, this decision would be reviewed. Exposures to individual counterparties ar bond holdings, exposures are also monitored by risk in respectThe Group is also exposed to credit of its re monitored by the Group’s Capital Management and Insurance Group’s Capital Management monitored by the 170

43. Risk management (continued) (c) Credit risk (continued) The following tables show the assets of the Group and Parent company that are subject to credit risk and a reconciliation to the balance sheet carrying values. The credit risk in respect of linked assets is borne by the holders of the contracts concerned except where investment is made in the funds of other life companies via reinsurance contracts.

Group 2014 2013 – restated Non-linked Non-linked assets subject Linked Balance sheet assets subject Linked Balance sheet to credit risk assets carrying value to credit risk assets carrying value £m £m £m £m £m £m Financial investments (note 20) Debt and fixed income securities 21,587 9,839 31,426 19,904 7,668 27,572 Derivatives 3,122 1 3,123 1,251 3 1,254 Cash and cash equivalents 1,546 1,190 2,736 1,116 1,044 2,160 Reinsurers’ share of insurance liabilities 5,462 - 5,462 3,947 - 3,947 Trade and other receivables 251 161 412 341 167 508 31,968 11,191 43,159 26,559 8,882 35,441

Parent company 2014 2013 – restated Non-linked Non-linked assets subject Linked Balance sheet assets subject Linked Balance sheet to credit risk assets carrying value to credit risk assets carrying value £m £m £m £m £m £m Financial investments (note 20) Debt and fixed income securities 21,529 6,623 28,152 8,091 2,782 10,873 Derivatives 3,120 1 3,121 59 1 60 Cash and cash equivalents 1,386 873 2,259 944 816 1,760 Reinsurers’ share of insurance liabilities 5,462 - 5,462 608 - 608 Trade and other receivables 182 103 285 220 94 314 31,679 7,600 39,279 9,922 3,693 13,615

The following tables show an analysis of the credit quality of those assets that are subject to credit risk, using credit ratings issued by companies such as Standard & Poor’s, where these are available. AAA is the highest rating possible for assets exposed to credit risk.

The credit ratings in respect of derivative financial investments are those of the counterparties to the derivative contracts. The debt and fixed income securities which have not been rated by an external agency are subject to internal analysis to provide an internal rating, the average of which at 31 December 2014 was BBB+.

The internal rating process used by the Group is to assess credit risk within the context of the bond issuer’s financial position, the bond’s covenants and structure and the likely recovery should default occur. Three major sectors which are significant issuers of sterling denominated unrated bonds: social housing, investment trusts and property, are each asset rich. For these sectors, documented specific credit analysis is undertaken, which assesses the individual risks of bonds in the sector and relates the risk of loss with that implied by the rating bands of the rating agencies. The internal ratings produced are compared for consistency with formally rated, broadly equivalent stocks in the same sector and for consistency with the market pricing of the underlying bond. For stocks in other sectors, the background of issuer and bond characteristics are assessed within a framework similar, where possible, to credit rating agency methodology.

STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS EUROPEAN EMBEDDED VALUE NOTICE OF AGM & RESOLUTIONS ADDITIONAL INFORMATION £m £m £m Total Total Total 171 171 lending BB or £m £m £m Not rated Not rated Not rated CC CC CC £m £m £m

£m £m £m BB/B BB/B BB/B BB/B BB/B BB/B £m £m £m BBB BBB BBB Group – 2013 Group – 2014 Group – 2014 Parent company – 2014 – 2014 Parent company A A A £m £m £m AA AA AA £m £m £m arrangements in respect of their derivative exposures and stock arrangements in respect Parent company invest primarily in higher graded assets, rated B higher graded assets, primarily in invest Parent company ------251251 ------4,458 3,008 1,004 113 -1 - - 3,122 - - - 5,462 - - - -341 - - 341 -- - 3,807 1,202 76 - -49 - - 1,251 64 - - 3,947 -- -- 4,458 3,007 1,004 113 ------3,120 - - - 5,462 -182 - - 182 22 910 601 - - - 13 1,546 22 460 622 -- 12 - 1,116 22 893 466 -- 5 - 1,386 £m £m £m AAA AAA 453 15,516 2,930 2,16732721,587 1 193 475 20,884 7,543 2,28057931,968 1 206 AAA 453 15,458 2,930 2,16732721,529 1 193 475 20,809 7,407 2,28050931,679 1 198 1,491 17,176 5,330 1,582837 142 1 26,559 1,469 12,909 3,430 1,582383 130 1 19,904

the 20(e).collateral held are shown in note

Debt and fixed income securities Debt and fixed income securities Derivatives Debt and fixed income securities Debt and fixed income securities Derivatives Debt and fixed income securities securities Debt and fixed income Derivatives ssets subject to credit risk: credit risk: to subject ssets ssets subject to credit risk: credit risk: to subject ssets ssets subject to credit risk: credit risk: to subject ssets

Cash and cash equivalents Reinsurers’ share of insurance liabilities Trade and other receivables A Financial investments Cash and cash equivalents Reinsurers’ share of insurance liabilities Trade and other receivables A Financial investments Cash and cash equivalents Reinsurers’ share of insurance liabilities Trade and other receivables A Financial investments

activity, wherever possible. Further details of activity, wherever possible.

43. Risk management (continued) risk (c) Credit (continued) and credit risk the Group its exposure to minimise In order to use of collateral also make company and Parent above. The Group 172

43. Risk management (continued) (c) Credit risk (continued)

Parent company – 2013 AAA AA A BBB BB/B CC Not rated Total £m £m £m £m £m £m £m £m Assets subject to credit risk: Financial investments Debt and fixed income securities 528 5,243 898 943 97 1 381 8,091 Derivatives - - 21 - - - 38 59 Cash and cash equivalents 21 438 485 - - - - 944 Reinsurers’ share of insurance liabilities - 532 76 - - - - 608 Trade and other receivables ------220 220 549 6,213 1,480 943 97 1 639 9,922

The following tables show the financial assets that are exposed to credit risk, analysing them between those that are neither past due nor impaired, those that are past due (by age band) but are not considered to be impaired and those that have been impaired.

Group – 2014 Assets that are past due but not impaired Neither Assets past due that have nor 0–3 3–6 6 months– been impaired months months 1 year >1 year impaired Total £m £m £m £m £m £m £m Assets subject to credit risk: Financial investments Debt and fixed income securities 21,587 - - - - - 21,587 Derivatives 3,122 - - - - - 3,122 Reinsurers’ share of insurance liabilities 5,459 2 - 1 - - 5,462 Trade and other receivables 230 21 - - - - 251 30,398 23 - 1 - - 30,422

Group – 2013 Assets that are past due but not impaired Neither Assets past due that have nor 0–3 3–6 6 months– been impaired months months 1 year ˃1 year impaired Total £m £m £m £m £m £m £m Assets subject to credit risk: Financial investments Debt and fixed income securities 19,904 - - - - - 19,904 Derivatives 1,251 - - - - - 1,251 Reinsurers’ share of insurance liabilities 3,944 1 2 - - - 3,947 Trade and other receivables 298 41 1 - 1 - 341 25,397 42 3 - 1 - 25,443

STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS EUROPEAN EMBEDDED VALUE NOTICE OF AGM & RESOLUTIONS ADDITIONAL INFORMATION £m £m ts

Total Total nsure t 173 173 ub-fund. ub-fund. ired funds options, options, are reported ould have iabilities as ces available £m uidity risk can £m been Assets impaired impaired that have that have have been Assets that £m £m 1 year 1 year 1 year ˃ ˃

- - - - - 21,529 - - - 3,120 - - - 182 - - - 8,091 - - -- 1 - 608 220 - 1 - 8,978 - - - 59 (CIS) also monitored liquidity risk by £m £m 1 year 1 year 1 year w scenario. Liquidity exposures 6 months– 6 months– ------1 - 5,462 - 1 - 30,293 - - - £m £m 3–6 3–6 Parent company – 2013 Parent company – 2014 2014 – Parent company months months - - - - £m £m 0–3 0–3 months months os are calculated and monitored for each long-term fund and s are calculated and each long-term monitored for os able in a sufficiently short time frame l to besettle able to ment management strategies as appropriate to meet these requirements, strategies as appropriate to meet ment management ugh solvent, either does not have sufficient financialugh solvent, either resour me to sell investments in an orderly requ fashion to provide the siness to the Parent company, RL siness assets, unit-linked funds, contract for example, terms investment property 59 nor £m nor £m 605188 1 31 2 161 21 this area within its Group functions and its investment managemen this area within its Group functions Assets that are past due but not impaired impaired not due but past that are Assets eeded to cover an extreme outflo eeded to cover an extreme aired (2013 £nil). financial assets There that w were no material 8,943 32 2 8,091 3,120 5,459 2 Neither Neither 21,529 30,269 23 past due past due impaired impaired aluation of a range of possible adverse scenarios; assets and liabilities. The Group has an Asset Liability Management (ALM) policy to e ll due or can secure them only at excessive cost.

Debt and fixed income securities Debt and fixed income securities Derivatives Debt and fixed income securities securities Debt and fixed income Derivatives ssets subject to credit risk: credit risk: to subject ssets ssets subject to credit risk: credit risk: to subject ssets to the Group’s Capital Management Committee. to the Group’s Capital Management Committee. the duration of liabilities is matched by assets; and regular and alternative sources of liquidity and an ev calculating the level of liquid assets held against the level n short and medium-term liabilities. It also includes a clear management action plan providing an analysis of available financing transfer of its bu In the period prior to the Part VII long-term maintaining a contingency funding plan that covers the framework to enable ongoing monitoring of the Group’s capacity to meet i monitoring the framework to enable ongoing plan that covers funding maintaining a contingency of appropriate matching of the maturities a risk limit framework for liquidity risk. Liquidity Coverage Rati maintaining forecasts of cash requirements and adjusting invest of cash requirements and maintaining forecasts holding sufficient assets in investments readily market which are these fall due. Where liabilities are backed by less marketable to delay settlement provide the ti permit the Group in order to should the need arise; both in the short and longer term; both in the short

Reinsurers’ share of insurance liabilities Trade and other receivables A Financial investments Reinsurers’ share of insurance liabilities Trade and other receivables A Financial investments No collateral was held against assets that are past due or imp been past due or impaired had the terms of the instrument not been renegotiated. renegotiated. the instrument not been been past due or impaired had the terms of (d) Liquidity risk The Group defines liquidity risk as the risk that the Group, altho to enableits obligations it to meet as they fa The Group has limited exposure to liquidity risk due primarily to its financial strength and availability of liquid assets. Liq

43. Risk management (continued) risk (c) Credit (continued) capabilities in be managed effectively and the Group has good subsidiary. The Group’s liquidity management process includes: 174

43. Risk management (continued) (d) Liquidity risk (continued) These processes are regularly reviewed and updated to ensure the continued effectiveness of these risk-mitigation techniques.

The Group’s exposure to liquidity risk principally arises from its insurance and investment contracts. The following tables show a maturity analysis for the Group and Parent company’s insurance and investment contract liabilities. As permitted by IFRS 4, for insurance and participating investment contracts, this has been presented as the expected future cash outflows arising from the liabilities. The analysis for the non-participating investment contracts has been shown on the same basis for consistency. Had the analysis for these liabilities been presented on the basis of the earliest contractual maturity date (as required by IFRS 7) then the whole balance would have been included in the ‘0–5 years’ column, as policyholders can exercise surrender options at their discretion. In such a scenario the liability may be reduced by the application of surrender penalties. The tables also show a maturity analysis for the Group and Parent company’s derivative liabilities and the reinsurance liability held in FVTPL presented on a contractual cash flow basis.

The longer-term matching of assets and liabilities is covered within market risk, note 43 (b). As a result of the policies and procedures in place for managing its exposure to liquidity risk, the Group considers the residual liquidity risk arising from its activities to be immaterial. Therefore, an analysis of the Group’s asset cash flows by contractual maturity is not considered necessary to evaluate the nature and extent of the Group’s liquidity risk.

Group – 2014 Cash flows (undiscounted) Balance sheet carrying value 0–5 years 5–10 years 10–15 years 15–20 years ˃20 years Total £m £m £m £m £m £m £m Participating insurance contract liabilities (29,607) (8,896) (7,295) (7,042) (6,355) (4,942) (34,530) Participating investment contract liabilities (2,308) (732) (563) (485) (373) (667) (2,820) Non-participating insurance contract liabilities (7,506) (1,106) (747) (687) (527) (726) (3,793) Non-participating investment contract liabilities (22,691) (7,151) (5,926) (5,054) (3,946) (5,710) (27,787) (62,112) (17,885) (14,531) (13,268) (11,201) (12,045) (68,930) Derivative liabilities (2,064) (901) (879) (872) (842) (1,415) (4,909) Reinsurance liability (2,799) (418) (556) (658) (658) (1,852) (4,142)

Group – 2013 Cash flows (undiscounted) Balance sheet carrying value 0–5 years 5–10 years 10–15 years 15–20 years ˃20 years Total £m £m £m £m £m £m £m Participating insurance contract liabilities (26,365) (8,836) (6,897) (7,030) (6,659) (5,728) (35,150) Participating investment contract liabilities (2,284) (756) (619) (553) (438) (741) (3,107) Non-participating insurance contract liabilities (6,999) (1,409) (1,049) (989) (812) (1,234) (5,493) Non-participating investment contract liabilities (19,148) (6,521) (5,776) (4,977) (3,924) (5,217) (26,415) (54,796) (17,522) (14,341) (13,549) (11,833) (12,920) (70,165) Derivative liabilities (933) (752) (554) (573) (540) (1,013) (3,432) Reinsurance liability (2,390) (398) (536) (660) (687) (2,130) (4,411)

STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS EUROPEAN EMBEDDED VALUE NOTICE OF AGM & RESOLUTIONS ADDITIONAL INFORMATION £m £m 270 Total rises Total meet tuaries tuaries 175 175

stimated utions. £m £m 20 years 20 years ˃ ˃ 50 136 50 £m £m ilities. The schemes’ main exposures are 15–20 years 15–20 years 15–20 years 42 be required to make additional contrib £m £m nsion scheme assets and liabilities, see note 38. nsion Cash flows (undiscounted) Cash flows (undiscounted) Cash flows (undiscounted) 10–15 years 10–15 years Parent company – 2013 32 Parent company – 2014 – 2014 Parent company £m £m through whom any risk management activity must be conducted. must be conducted. any risk managementthrough whom activity and regular contributions from employees and the Group. Risk a of metrics which are regularly reviewed Capital by the Group’s bility of each scheme’s Trustees, who also appoint the Scheme Ac 5–10 years 5–10 years required to meet the scheme’s liab £m £m 0–5 years 0–5 years se. In these circumstances, the Group could the Group could circumstances, se. In these (42) 10 £m £m ngevity risk. For further information on pe (1,980) (687) (526)(3,388) (863) (448) (705) (346) (608) (649) (2,615) (495) (607) (3,319)

(2,308) (732)(2,308) (563) (485) (901)(2,057) (667) (373) (418)(2,799) (2,820) (879) (556) (872) (658)(1,415) (842) (1,852) (658) (4,909) (4,142) (7,504) (1,104)(7,504) (747) (687) (527) (726) (3,791) (16,254) (4,959)(32,890) (10,526) (4,869) (9,272) (4,415) (8,416) (3,563) (4,788) (7,204) (8,667) (22,594) (44,085) (11,268) (4,017) (3,172) (2,904) (2,800) (2,664) (15,557) (22,691) (7,151)(22,691) (17,905)(62,185) (5,926) (14,551) (5,054) (13,287) (12,058) (11,219) (5,710) (3,946) (69,020) (27,787) (29,682) (8,918)(29,682) (7,315) (7,061)(4,955) (6,373) (34,622) Balance sheet carrying value Balance sheet sheet Balance carrying value

Derivative liabilities Non-participating Non-participating insurance contract liabilities Non-participating investment contract liabilities Participating insurance contract liabilities Participating investment contract liabilities Derivative liabilities Reinsurance liability insurance contract insurance contract liabilities Non-participating investment contract liabilities Participating insurance Participating insurance contract liabilities Participating investment contract liabilities Non-participating to perform triennial valuations to assess the level of funding the projected pension payments is maintained through investments payments is maintained the projected pension value of the pension liabilities might increa the assets of the Management of pension schemes is the responsi (e) Pension schemes The Group maintains three defined benefit pension schemes for past The and current employees. of the pension schemes to ability because the estimated market value of the pension fund assets might decline; or their investment returns might reduce; or the e market value of the pension fund assets might investment because the estimated decline; or their

43. Risk management (continued) risk (continued) (d) Liquidity pension schemes’ exposure using a variety its The Group monitors the Trustees, in discussions with and used Management Committee to equity, interest rate, inflation and lo 176

43. Risk management (continued) (f) Operational risk Operational risk is defined as the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events. Operational risks include, but are not limited to, information technology, information security, human resources, change management, tax, legal, fraud and compliance. Senior management has primary responsibility for the management of operational risks through developing policies, procedures and controls across the different products, activities, processes and systems under their control and for the allocation of responsibilities.

Details of risks on inherent (before controls) and residual (after controls) bases are maintained on risk registers, with each part of the business being responsible for identifying, assessing, managing and reporting on its operational risks and for implementing and maintaining controls in accordance with the Group’s operational risk methodology. In performing these assessments, account is taken of the Group’s risk appetite with greater significance being placed on those risks that fall outside these parameters. This is used as a basis for review and challenge by senior management, Risk Committees and the Board of Directors. Management attention is focused upon those controls identified as not working as effectively as desired and upon action plans which are put in place when any weakness is identified. In addition, the Group conducts a series of operational risk scenarios. These scenarios allow the Group to consider how effective controls will be should an extreme event occur and to make improvements where necessary. The scenarios also provide data that is used to calculate the capital held by the Group for operational risk.

(g) Emerging risk All insurers may be impacted by risks that are potentially significant but are currently only just beginning to emerge. The Group has defined emerging risks as being newly developing or changing risks which are difficult to quantify or may be uncertain and which could have a major impact on an organisation. Typically the drivers for these risks are technological, economic, environmental or geo-political. The Group’s Emerging Risk Forum comprises members from across the Group who identify and assess emerging risks and possible mitigating actions. Information about emerging risks is provided to senior management and the Board and is used to inform decision making.

(h) Risk governance An independent Risk and Compliance function provides challenge to the business on the effectiveness of the risk management practices being followed, on the risks identified, the strength of the controls in place and any actions being progressed. In many parts of the Group, governance and risk teams are embedded within business units supporting the process. The independent function provides advice and guidance on the impact of regulatory change and undertakes risk-based compliance monitoring reviews to assess the quality of business processes and controls, reporting the results of its findings to management and to the Board on a monthly basis.

(i) Stress and scenario testing The Group conducts a range of sensitivity analysis and stress and scenario testing activity in order to help it understand its risk profile and assess and manage its risks. This is a key element of the Group’s risk management framework, as well as being a regulatory requirement.

Stress and scenario testing in various forms is carried out on a regular basis as part of business as usual and in response to specific regulatory initiatives and can involve either: straightforward stress tests/sensitivity analysis: analyses of the sensitivity of financial and operational metrics and the risk profile to discrete changes in market values or demographic experience; or scenarios that involve a combination of changes in economic parameters or that concentrate on specific operational, non-market and/or market risks.

The following outputs are produced as part of business as usual and include results from one or both of the tests described above: Group Performance Reviews, produced monthly; Capital Monitoring Reports, produced monthly for the Capital Management Committee; Capital Management Plan, produced bi-annually; ICA results, produced annually; ICAAP results for regulated non-insurance firms (where applicable), produced annually; and Medium-Term Plans, produced annually.

STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS EUROPEAN EMBEDDED VALUE NOTICE OF AGM & RESOLUTIONS ADDITIONAL INFORMATION e pany riendly iness asset. 177 177 approach realistic n its It is lar 2 el analysis ace. hese ties, could be in p’s actual e outlined e outlined uld be /risks which e Group’s e Group’s measured ired in-force fulfil its sks that need fail. risks, as well as sessment of the ported privately to the PRA. potential investments is also potential potentially catastrophic, events pment of the business in order to pment of the ls and mitigating actions can be put in pl ls and mitigating actions can oup over the year, as well as businessoup over the mod ed for this risk. The stresses allow an as ness purposes outside its long-term fund. icipating business issued by the Group may be included as an icipating business , the Royal Liver Assurance Fund and the RL (CIS) with-profits Capital Assessment which is re er of RL (CIS)’s long-term insurance business com to the Parent higher of two prescribed tests, Peak 1 and Peak 2, which ar their best estimate assumption and the outcome provides detail of provides detail the outcome their best estimate assumption and the nce IB Sub-fund, the United Friendly IB Sub-fund, the United F nce United Friendly the IB Sub-fund, es the analysis of single, but distribution. A top-down the frequency of occurrence and the ing liabili assets and participating a market value on both the le it to invest in the develo le it turn forecast to be achieved on those funds within the Parent company currently bus those funds within the Parent company open to new ary benefits. Additionally, the value of future profits on acqu s in market risk, credits in market insurance risk, and operational risks r year, RL (CIS) was shown separately as the excess capital withi ose forecasts are compared against the available capital and th ose forecasts are compared against the available where the Group’s ability to carry out its business activities wo the Parent company is determined in accordance with the PRA’s the is determined in Parent company accordance with ence likely to occur once in every 200 years, based on the Grou rious financial metrics. This informs the business key ri of the financial long-term strength, strategy and liquidity. The outcome of these basis Th and reviewed formally by the Capital Management Committee. impact stress events which may cause a firm’s business model to expected future cash flows of the Group’s life funds. account the risk associated with the investment. associated with the investment. the risk account ss tests have been considered in the Gr analysis of in a significant way. These events events that would affect the Group analysis providing security to policyholders; tees of the Group’s life life the Group’s funds; and tees of completed to calculate the capital requir the completed to calculate lling the capital requirement. stated core strategic objectives as determined by the Board; and stated core strategic objectives as determined Peak 1 – prudent valuation of the guaran Peak 2 – a realistic, valuation of the market-consistent to protect the Group’s financial Group’s strength, to protect the Group’s capital position is sufficient to enab to ensure that the at any point in the current requirements breached these PRA’s capital requirements. The Group has not to comply with the or prior year.

workshops lead to improved business continuity plans and ensure the Group is better equipped to handle possible future events. Reverse stress tests are specifically used to identify the high severely impacted. contacts Participants include senior managers and key from relevant business areas. The lessons learned in t placeBusiness continuity planning workshops take to consider relation to issues such as the markets the Group operates in, relation to issues such scenarios informs the Group of any areas of potential weakness, so appropriate contro activity. These scenarios provide a top-down activity. These scenarios long-term fund was not available for distribution to other policyholders or for busi funds of Realistic available capital for both the open and closed within the Parent company as well as on non-part long-term business balance This can be sheet methodology. broadly described as plac including both benefits alreadyincluding both guaranteed and future discretion to be managed and monitored. monitored. to be managed and Operational risk stresses and scenarios are arising from a given way risk by extreme impacts of of assessment capital requirement which involv is used for determining the ICA mode cover all risks used for andVarious broad-based scenarios reverse stre 44. Capital management (a) Capital management policies and objectives objectives are: The Group’s capital management sensitivity of these assumptions and va the resultant impact on 43. Risk management (continued) and (i) Stress (continued) scenario testing testingThe stress as performed, detailed above, includes change combinations of these risk types. Key assumptions varied from are broadly equivalent to the capital needed to cover adverse experi broadly equivalentneeded to cover to the capital portfolio of risks having regard to the Group’s own risk controls. (b) Realistic balance sheet A summary realistic balance sheet is shown below, split between and those that are closed. The closed funds are the Refuge Assura The Pillar 2 capital requirement is based on the Group’s Individual on a regular The capital position of the Group is monitored a regular basis. Group’s capital requirements are forecast on Th internal rate of re required minimum internal rate of return. The OB Sub-fund, the Scottish Life Fund, the PLAL With-Profits Fund funds. The RL (CIS) with-profits funds were formed on the transf by way of a Part In the prio VII transfer on 30 December 2014. requirements. The Pillar 1 capital requirement is calculated as the as follows: against minimum required benchmarks taking intoagainst minimum required benchmarks taking The PRA’s capitalmust hold capital Group requirement is that the in excess of the higher of two amounts – the Pillar 1 and Pil 178

44. Capital management (continued) (b) Realistic balance sheet (continued) Participating liabilities comprise asset shares, plus the costs of smoothing, plus the value of guarantees and options which have been granted to policyholders. The asset share represents the premiums received to date, together with investment return earned, less expenses and charges.

There are two principal types of financial option and guarantee: guaranteed lump sum payments due on specified dates. These mainly comprise the sum assured together with annual bonuses added onto participating contracts. Although the Group invests in a broad spread of asset types, there is still a risk that assets held to back any individual policy (the asset share) may be depressed at the time that the guaranteed payment due at maturity falls to be paid. The potential cost of honouring these guarantees is quantified as part of the liability for participating contracts; and guaranteed annuities. These primarily arise in connection with pension business and occur in one of two forms: • a guaranteed income specified in the contract; and • guaranteed terms for converting lump sum maturity benefits into an income at maturity.

When calculating the participating liabilities, allowance has been made for actions that management would be expected to undertake on key assumptions, for example future bonus or investment policy in varying market conditions, in line with the PPFM. The costs of financial options and guarantees are measured using a market-consistent stochastic model.

For the purpose of the capital statement, all excess assets associated with policies written within the closed funds of the Parent company, amounting to £3,052m (2013 £972m), are reported as liabilities because they are not available for distribution to other policyholders or for other business purposes. However, those excess assets are available to provide support to the relevant policies under stressed financial conditions before any call on the reported excess capital within the open funds of the Parent company need be made. As noted above, in 2013 the excess capital within RL (CIS) was only available to the policyholders within its long-term fund and for the business purposes of that fund and was therefore shown separately. This business was transferred to the Parent company by way of Part VII transfer during the year and is therefore included in the 2014 Parent company table below.

2014 2013 Total Parent Total Parent Open funds Closed funds company Open funds Closed funds company £m £m £m £m £m £m Total realistic participating assets 7,248 30,451 37,699 6,678 8,296 14,974 Value of in-force business on a realistic basis 1,956 320 2,276 1,912 149 2,061 Current liabilities and subordinated liabilities (1,020) (5,869) (6,889) (1,101) (334) (1,435) Total realistic participating net assets 8,184 24,902 33,086 7,489 8,111 15,600

Realistic participating liabilities Participating benefit reserve 4,889 18,770 23,659 4,663 6,427 11,090 Costs of smoothing (13) 168 155 3 84 87 Guarantees 227 888 1,115 197 253 450 Options (guaranteed annuities) 232 2,028 2,260 150 339 489 Future charges for guarantees - (508) (508) - (55) (55) Other 85 504 589 22 91 113 Total realistic participating liabilities (before closed fund transfer commitments) 5,420 21,850 27,270 5,035 7,139 12,174 Total realistic available capital (before closed fund transfer commitments) 2,764 3,052 5,816 2,454 972 3,426 Closed fund transfer commitments - (3,052) (3,052) - (972) (972) Total realistic available capital 2,764 - 2,764 2,454 - 2,454

STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS EUROPEAN EMBEDDED VALUE NOTICE OF AGM & RESOLUTIONS ADDITIONAL INFORMATION (17) £m £m 284 549 879 258 201 (434) (161) (415) 2013 2014 1,445 1,978 5,528 3,139 2,308 3,139 2,764 (3,677) (1,332) 17,574 14,181 11,501 12,736 22,691 30,197 63,919 29,607 33,722 RL (CIS) 179 179 pension schemes and deferred tax assets e contract liabilities

r r -linked -linked -linked t t djustments to liabilities on a regulatory basis djustments to liabilities on a regulatory basis Uni Othe Uni Inadmissible goodwill, other intangibles, Other adjustments to the value of net assets A Participating benefit reserve Participating benefit Costs of smoothin Guarantees Options (guaranteed annuities) Future charges for guarantees Othe djustments onto a regulatory basis basis a regulatory onto djustments liabilities of nalysis otal long-term contract liabilities liabilities contract long-term otal otal available capital resources otal realistic participating net assets net assets participating realistic otal liabilities participating realistic otal otal realistic available capital otal realistic participating assets assets participating realistic otal

Non-participating investment contract liabilities Non-participating T Unallocated divisible surplus value of in-force business Non-participating insuranc Non-participating T A liabilities Participating insurance contract liabilities contract Participating investment Unallocated divisible surplus A T T on a realistic basis Value of in-force business subordinated liabilities Current liabilities and T liabilities Realistic participating T

44. Capital management (continued) (c) Capital statement (continued)

2013 Total Group Parent before Group company RL (CIS) adjustment adjustments Total Group £m £m £m £m £m Unallocated divisible surplus 2,938 1,520 4,458 (1,453)1 3,005 Adjustments onto a regulatory basis Inadmissible goodwill, other intangibles, pension schemes and deferred tax assets (457) - (457) - (457) Other adjustments to the value of net assets (116) (75) (191) - (191) Adjustments to liabilities on a regulatory basis 89 - 89 - 89 Total available capital resources 2,454 1,445 3,899 (1,453) 2,446

Analysis of liabilities Participating insurance contract liabilities 11,268 13,652 24,920 1,4451 26,365 Participating investment contract liabilities 1,980 304 2,284 - 2,284 Unallocated divisible surplus 2,938 1,520 4,458 (1,453)1 3,005 Non-participating value of in-force business (1,169) (166) (1,335) - (1,335) 15,017 15,310 30,327 (8) 30,319 Non-participating insurance contract liabilities Unit-linked 1,911 - 1,911 - 1,911 Other 1,477 3,611 5,088 - 5,088 Non-participating investment contract liabilities Unit-linked 16,254 446 16,700 2,4482 19,148 19,642 4,057 23,699 2,448 26,147 Total long-term contract liabilities 34,659 19,367 54,026 2,440 56,466

1 The UDS of RL (CIS) is included within participating liabilities in the Group balance sheet as the surplus in its with-profits funds is only available for distribution to policyholders of those funds and for the business purposes of those funds. 2 Adjustment to include the unit-linked liabilities of the subsidiary, Royal London Pooled Pensions Company Limited.

The capital statement sets out the financial strength of the Group and provides a reconciliation of the unallocated divisible surplus to the available capital resources. The available capital resources are determined using PRA valuation rules. The asset valuation rules are based on IFRS, adjusted to exclude certain assets not admissible for regulatory purposes and for other specific valuation differences.

The capital requirement for the Group is the Risk Capital Margin (RCM). This represents the level of capital that the Group is required to hold in a stress event. The RCM for the Parent company is £15m (2013 £nil) and is calculated assuming that persistency improves by 32.5% (2013 32.5%), that equity markets fall by 20.0% (2013 20.0%), property values fall by 12.5 % (2013 12.5%) and risk-free yields fall by 38 basis points (2013 60 basis points). Credit risk is allowed for by assuming an immediate and permanent widening in yield spreads on corporate bonds over risk-free rates, calculated on a stock-by-stock basis.

During 2014, the Parent company transitioned on to the realistic peak while, prior to transfer, RL (CIS) remained on the realistic peak. On the regulatory basis, the Group and Parent company’s total available capital was £13,366m (2013 £9,103m), the capital resources requirement was £9,976m (2013 £6,354m) and the excess capital was £3,390m (2013 £2,749m).

STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS EUROPEAN EMBEDDED VALUE NOTICE OF AGM & RESOLUTIONS ADDITIONAL INFORMATION - 1 6 36 73 34 (46) (71) £m £m 199 291 175 mic, 2013 1,411 1,445 181 181 ent Parent RL (CIS) company tions nomic nomic iabilities he better Total Parent ns and ed value of ed value - £m £m (22) (49) (458) 2014 1,354 1,445 (2,270) (1,445) RL (CIS) RL 2013 Closed funds

- 1,045 1,045 - (972) (972) 36 - (94) (186)(41) (30) (280) £m 153 46 194 97 248 (73) 2,206 - 2,206 2,206 1,045 3,251 2,454 972 3,426 2,454 - 2,454 Open funds ities in respect of guarantees, options and 23 £m 972 654 arantees caused by the higher than expect arantees caused by the higher than company Total Parent Total Parent - - 2,764 – 2,454 £m 972 972327 3,426 Directors of the relevant entity which affect the value of l Directors of the relevant entity fit reserve. The dominant effect arises from changes in eco capital resources analysed by open closed funds within the and cluding the unwind of discount rate from, and the effect of, t 2014 2014 Closed funds liabilities realistic balance sheet and is quoted net within the of development - - (3,052) (3,052) 23 £m (46) (126) (172) to reflect improved modelling and residual items. 327 110310 2,261 2,080 2,371 2,390 (104) (382) (486) 2,764 3,0522,764 5,816 2,454 2,454 Open funds iabilities, and the reduction in cost of gu

to with-profits policyholders. y y

r /acquisition /acquisition y t 31 December t 1 Januar Changes in management polic Changes in management Other movements Part VII transfe Movement A A Changes in assumptions Investment performance At 31 December (before closed fund commitments) transfer Closed fund transfer commitments At 31 December (after closed fund commitments) transfer Investment performance Investment performance New business polic Changes in management Other movements Movement At 1 January (after closed fund commitments) transfer Closed fund transfer commitments At 1 January (before closed fund commitments) transfer Changes in assumptions company and separately for RL (CIS) for 2013 and until the Part VII The impact from assumption changes includes econo transfer. assumptions. than the risk-free rate anticipated. Investm The investment performance impact arises from which was greater investment return, capital, in opening after-tax return on the performance comprises The table above shows key elementsThe table above of the movement in available persistency, mortality, expense and regulatory valuation assumption changes and their effects on the costs of guarantees, optio of in-force business and the participating bene smoothing, the value of in-force business, out-performance on assets backing liabil on the value than expected return policy-related l future smoothing and other set aside to meet future payments experience profits over the year including subsidiaries, include on non-life the impactOther movements those earned of acquisi

costs and tax. policy reflect actions taken by the Board of Changes in management 44. Capital management (continued) in available(d) Movement capital resources asset shares. underlying Value of new business is calculated on the basis used to value closed funds and opening adjustments in the open and

182

44. Capital management (continued) (d) Movement in available capital resources (continued) There were no significant changes in regulation or other similar external developments.

(e) Sensitivity of capital The capital position of the Group is sensitive to changes in economic conditions and financial markets both through the impact on asset values and also the effect that changes in interest rates and investment returns may have on liability valuations. The liabilities are also sensitive to the other assumptions that have been used in their calculation, such as mortality and persistency. The Group’s approach to managing these risks is detailed in note 43.

(i) Economic conditions and financial markets The liability valuation will include assumptions about interest rates and investment returns. An adverse change in either variable will increase liabilities and, to the extent that assets are impacted, this may increase or decrease the available capital. For example, a reduction in long-term interest rates would increase the amount of the Group’s liabilities and could therefore reduce its available capital, depending upon the extent to which the liabilities are matched by assets with similar anticipated cash flows. Currently, the available capital of the Group will increase if interest rates fall.

Similarly, an adverse change in the markets for the Group’s investment assets could increase or decrease the available capital of the Group to the extent that equity falls cannot be reflected in reductions in payments to policyholders because of the presence of guarantees and options in the underlying contracts, and any change in assets within the working capital. Currently, a fall in equity/property values would reduce available capital for the Parent company.

(ii) Assumptions The Group monitors actual experience in mortality, morbidity and persistency rates against the assumptions used, and applies that outcome to refine its long-term assumptions. Amounts paid will inevitably differ from estimates, particularly when the expected payments do not occur until well into the future. Liabilities are evaluated at least half yearly, allowing for changes in the assumptions used, as well as for the actual claims experience. If actual claims experience is less favourable than the underlying assumptions, or it is necessary to increase provisions in anticipation of a higher rate of future claims, then available capital will be reduced. STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS EUROPEAN EMBEDDED VALUE NOTICE OF AGM & RESOLUTIONS ADDITIONAL INFORMATION ave 183 183 external experience and to any relevant relevant experience and to any es is stated, those principles require the the supplementary information. ted by the Additional Guidance on European Additional Guidance on European ted by the tary information in accordance with the European Embedded Value the European with tary information in accordance st, current and expected future th the Embedded Value Methodology (EVM) contained in the EEV the Embedded Value Methodology (EVM) th siness has been included in siness r 2005. When compliance with the EEV Principl When compliance with the 2005. r non-compliance with the EEV Guidance included in the EEV Principles.the non-compliance with h The directors to the covered business; to the covered business; issued in May 2004 as supplemen by the CFO Forum, data and then applied them consistently; prepared the supplementary information in accordance with the EEV Principles; prepared the supplementary in accordance with the EEV information identified and described the business covered by the EVM; applied the EVM consistently determined assumptions on a realistic basis, having regard to pa and made estimates that are reasonable and consistent; business that is notbasis on which determined the covered bu

Embedded ValueOctobe Disclosures issued in European Embedded Value supplementary information information Value supplementary Embedded European ofStatement in relation responsibilities directors’ the European to Value Embedded basis information supplementary supplemen London have chosen to prepare The directors of Royal Principles (the EEV Principles)

directors to prepare supplementary information in accordance wi directors to prepare supplementary Market Consistent Embedded Value adopt the Principleschosen not to published by the CFO Forum in June 2008. EEV supplementary the directors have: information, In preparing the Principles and to disclose and explainPrinciples and to disclose any 184

Independent auditors’ report to the directors of The Royal London Mutual Insurance Society Limited on the supplementary financial statements – European Embedded Value Basis We have audited the Supplementary Financial Statements – European Embedded Value Basis of The Royal London Mutual Insurance Society Limited (‘the Company’) for the year ended 31 December 2014 which comprise the Consolidated Income Statement – European Embedded Value Basis, Consolidated Balance Sheet – European Embedded Value Basis and the related notes (“the supplementary financial statements”) which have been prepared in accordance with the European Embedded Value (“EEV”) basis set out in Note (a) – Basis of Preparation and which should be read in conjunction with the Group’s financial statements.

Respective responsibilities of directors and auditors As explained more fully in the Statement of directors’ responsibilities, the directors are responsible for preparing the supplementary financial statements in accordance with the EEV basis set out in Note (a) – Basis of Preparation. Our responsibility is to audit and express an opinion on the supplementary financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors.

This report, including the opinion, has been prepared for and only for the Company’s directors as a body in accordance with our letter of engagement dated 14 July 2014 and for no other purpose. We do not, in giving this opinion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.

Scope of the audit of the supplementary financial statements An audit involves obtaining evidence about the amounts and disclosures in the supplementary financial statements sufficient to give reasonable assurance that the supplementary financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Group’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the supplementary financial statements. In addition, we read all the financial and non-financial information in the Annual report to identify material inconsistencies with the audited supplementary financial statements. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.

Opinion on the supplementary financial statements In our opinion, the supplementary financial statements for the year ended 31 December 2014 have been properly prepared in all material respects in accordance with the European Embedded Value basis set out in Note (a) – Basis of Preparation.

PricewaterhouseCoopers LLP Chartered Accountants London 31 March 2015

Notes: (a) The supplementary financial statements are published on the website of the Royal London Group, www.royallondon.com. The maintenance and integrity of the Royal London Group website is the responsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the supplementary financial statements since they were initially presented on the website. (b) Legislation in the United Kingdom governing the preparation and dissemination of supplementary financial statements may differ from legislation in other jurisdictions.

STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS EUROPEAN EMBEDDED VALUE NOTICE OF AGM & RESOLUTIONS ADDITIONAL INFORMATION - 8 34 83 70 63 29 48 11 (40) (26) (86) (36) (38) (59) £m 150 465 429 391 196 346 306 140 2013 185 185 - - - 7 85 91 56 12 42 £m (35) (73) (61) (42) (40) (64) 195 160 160 220 159 159 325 (143) 2014

(g) (i) (g) (i) (g) (v) (g) (v) (g) (ii) (g) (x) (g) (x) Notes (g) (iv) (g) (iv) (g) (vi) (g) (iii) (g) (ix) (g) (xi) (g)(vii) (g) (xii) (g) (viii) (g) (xiii)

x Experience variances Experience Operating assumption changes Expected return ttributed tax charge ttributed tax charge otal operating profit before ta before profit operating otal ta after EEV profit otal otal operating profit before tax continuing tax operations from before otal operating profit

EEV profit after tax from continuing operations from continuing operations after tax EEV profit from operations after tax discontinued EEV profit T Movement in RLGPS pension scheme surplus Movement in RLGPS pension scheme surplus Financing costs Profit share operations from continuing before tax EEV profit A T tax before discontinued operations from Operating profit/(loss) T variances Economic experience assumption changes Economic Expected return on opening net worth net Expected return on opening Profit on uncovered business Strategic development costs and other items items and exceptional tax before from profit operations Operating continuing Gain arising on business combinations arising from regulatory Exceptional cost change Contribution from new business Contribution Profit from existing business Continuing operating activities operating Continuing

Consolidated income statement – EEV basis – EEV statement income Consolidated endedfor the year 31 December 2014 186

Consolidated balance sheet – EEV basis as at 31 December 2014

2014 2013 £m £m Assets Assets held in closed funds 32,927 9,538 Assets backing non-participating liabilities 21,938 18,567 Reinsurance assets 7,576 2,466 Assets backing participating liabilities and net worth UK equities 1,781 1,938 Overseas equities 687 624 Land and buildings 776 657 Approved fixed interest securities 2,313 1,716 Other fixed interest securities 1,332 1,353 Other assets 669 910 Value of in-force business 1,838 1,701 Pension scheme surplus (RLGPS) 48 90 Total 71,885 39,560

Liabilities Liabilities in closed funds 32,927 9,538 Non-participating liabilities 21,938 18,567 Reinsured liabilities 7,576 2,466 Participating liabilities 5,438 5,062 Current liabilities 1,020 1,101 Total 68,899 36,734 Embedded Value Net worth 1,100 1,035 Value of in-force business 1,838 1,701 Pension scheme surplus (RLGPS) 48 90 Total 2,986 2,826

Value of in-force business – EEV basis as at 31 December 2014

2014 2013 £m £m Value of in-force business before allowance for burn-through and capital costs 1,881 1,736 Burn-through cost (9) (2) Cost of capital (34) (33) Value of in-force business 1,838 1,701

STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS EUROPEAN EMBEDDED VALUE NOTICE OF AGM & RESOLUTIONS ADDITIONAL INFORMATION in

rpreted ordance in-force paring RBS ers. As a that gibles gibles es net 187 187 ition of a . 6 with the 6 with ofit ofit h the net cognition cognition , any mpany’s net valued using e RBS shows reinsured liabiliti ing profit includes amortisation of intan l London (CIS) Limited at 31 December 2013 l London (CIS) Limited at 31 December 2013 in the RBS at the value of the Parent co in the RBS at the ation for the year ended 31 December 2014 and should be read and should be 2014 year ended 31 December ation for the ary companies to assess the valueary companies to assess of the firm to its sharehold held by members do not generally contribute to the value of not generally held by members do ion regarding the Group’s financialion regarding the prepared in acc statements accordance with the EEV Principles Guidance and the Additional with accordance et-consistent methodology. Within a market-consistent framework, a market-consistent Within et-consistent methodology. e deducted from total assets to arrive at net worth. Hence assets to arrive at net worth. e deducted from total s to include and exclude, as operating profit given on page 2 s to include and exclude, e excluded from EEV. Thise excluded from EEV. is a basis of pre of the consequence clude goodwill or other intangible assets arising on the acquis goodwill or other intangible clude between covered and uncovered business according to whether the the to whether business according and uncovered between covered use such items are not permitted to be recognised in the RBS be recognised use such items are not permitted to d up to show the reinsured liabilities and assets separately. lance Sheet (RBS). Some items recognised under IFRS are inadmissiblelance Sheet (RBS). Some items recognised ilities of subsidiaries held within the long-term funds for whic consistently with each other. In principle, each cash flow is consistently with each other. In principle, rds Board and adopted for use in the European Union. for use in the European Union. rds Board and adopted Group’s total business, is valued on an EEV basis. siness, in the case of Royal London, incorporates: estimate of Royal London’s value to its members. m business by UK andm business overseas regulators; and in our EEV reporting. Most notably, operat recognise the economic value of a new policy at the point it is written. The total pr value of a new policy at the point it is written. the economic recognise most notably the long-term fund of Roya

iabilities of subsidiaries which are included Parent company on 30 December 2014). Parent company on 30 December life and pensions business defined as long-ter from the life and pensions that derived asset management business; both business and (except that arising from external clients arising from cash mandates, which is treated as uncovered).

(a) Basis of preparation The EEV results prepared in been this document have presented in This business, which represents the vast majority of the

issued in 2005 by the CFO Forum. They provide by the CFO Forum. issued in 2005 inform supplementary results. These contain informat the Group’s IFRS with conjunction under IFRS but ar of certain items which are recognised exception with IFRS issued by the International Accounting Standa Accounting International with IFRS issued by the in and flow through the income matched by a corresponding movement not the net worth assets will change movement in liabilities an value provides embedded statement. The reported follows theEEV operating profit item same principles, in terms of subsidiary or business (other than Value of in-force business) beca The EEV Principles and Guidance by propriet were designed for use mutual, Royal London has no shareholders. Instead we regard our members has no shareholders. mutual, Royal London inte nearest equivalent to shareholders and have as the Guidance accordingly. With-profits policies the EEV Principles and business.the liabilities However, ar associated with these contracts the Group EEV results, which is Realistic Ba by reference to the in the RBS and are therefore not recognised assets and liabilities are valued in line with market prices and result is retained wholly within that fund, is different. For the purposes of EEV adopted a mark reporting, the Group has investment. However, this gross up excludes any investment. However, assets and liab (subsequently transferred into the of the related reinsurance asset. The EEV balance sheet is grosse lifetime of a policyrecognised over the under the IFRS basis of reporting, of re is the same but the timing as that recognised a cash flow in applied to such with that the capital markets. a discount rate consistent (ii) Covered business The EEV Principles require an insurance to distinguish company A further presentation sheet is made to the EEV balance adjustment in respect of reinsurance. Th (b) EEV methodology (i) Overview The EEV basis of reporting is designed to business is valued on EEV Principles. The covered bu (and impairment if relevant) whereas in our EEV reporting, we ex (and impairment if relevant) whereas in our company. In orderThe RBS is produced at the level of the Parent to present the EEV balance sheet as a group balance sheet, the is grossed up to include the assets and l 188

(iii) Embedded value The reported embedded value provides an estimate of the value of the covered business, including future cash flows expected from the existing business but excluding any value that may be generated from future new business. For covered business, it comprises the sum of the net worth calculated on an EEV basis and the value of the in-force business. For uncovered business, it comprises the IFRS net worth.

The net worth is the market-consistent value of the net assets (excluding the value of in-force business and pension scheme surplus) over and above those required to manage the business in line with the published Principles and Practices of Financial Management (PPFM). It is based on the RBS working capital in those funds within the Group that are open to new business and allows for the value of the sub-debt on a market-consistent basis.

The value of in-force business is the present value of the projected streams of future cash flows available from the existing business at the valuation date, on a best estimate basis allowing for risk, adjusted for the cost of holding the required capital.

(iv) Allowance for risk The allowance for risk is a key feature of the EEV Principles. The table below summarises how each item of risk has been allowed for:

Type of risk EEV methodology Market-related risks Allowed for explicitly in the EEV calculations Non-market risks which are symmetrical Allowed for within the estimates of future operating experience in terms of the impact on EEV Non-market risks which are asymmetrical Allowed for in the calculation of VIF and financial options by way of in terms of the impact on EEV an additional margin in the estimates of future operating experience

Market risk The approach adopted to calculate the Market Consistent Embedded Value combines deterministic and stochastic techniques. Deterministic techniques have been used to value ‘non-option cash flows’; that is cash flows whose values vary linearly with market movements. Stochastic techniques have been used to value cash flows with an asymmetric effect on profit, such as investment guarantees on with-profits products.

In principle, each cash flow is valued using the discount rate consistent with that applied to such a cash flow in the capital markets. For example, an equity cash flow is valued using an equity risk discount rate and a bond cash flow is valued using a bond risk discount rate. If a higher return is assumed for equities, the equity cash flow is discounted at this higher rate. In practice, it is not necessary to discount each cash flow at a different rate. For cash flows that are either independent or move linearly with the market, a method known as the ‘certainty equivalent approach’ will achieve the same results. Under this method all assets are assumed to earn the risk-free rate of return and all cash flows are discounted using the risk-free rate. This approach has been adopted to value the ‘non-option cash flows’ within a deterministic model.

Non-market risk In general, the allowance for non-market risk is covered by the margin incorporated into the Group’s estimates of future operating experience assumptions. However, there are certain situations in which the impact of fluctuations in experience is asymmetric, namely that adverse experience can have a higher negative impact on value than the positive impact generated by favourable experience.

In these cases, an additional margin over best estimate is incorporated into the experience assumptions. The methodology used to determine the appropriate allowance for non-market risk is based on the analyses undertaken as part of the development of the RBS and the Individual Capital Assessment.

(c) Cost of capital The EEV Principles require capital allocated to the covered business to be split between required capital, the future distributions of which are restricted, and free surplus. We have defined the amount of required capital to be that necessary to meet the more onerous of the PRA Pillar 1 and Pillar 2 capital requirements, which for Royal London is currently Pillar 2.

The EEV includes a deduction for the frictional cost of holding the required capital. Frictional costs, being the tangible costs of holding capital, have been allowed for on a market-consistent basis. These consist of the total taxation and investment expenses incurred on the required capital over the period it is anticipated to be required. They reflect the cost to a member of having an asset held within a mutual insurance company, rather than investing in the asset directly.

No allowance has been made for any agency costs. These represent the potential markdown to value that members might apply because they do not have direct control over their capital. Any adjustment would be subjective and different members will have their own views of what adjustment, if any, should be made.

STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS EUROPEAN EMBEDDED VALUE NOTICE OF AGM & RESOLUTIONS ADDITIONAL INFORMATION ith pment e closed the fee 189 189 they arise. scenarios. to the 15m (2013 he tion, due e company the extent that the extent only occur in only occur lled stochastically, as it will conditions at the valuation date. In addi conditions at the ibutable to the covered businesses.ibutable To to the n the EEV and instead are accounted for as siness has been calculated using the servic ss may be required any deficits that to make good arise in th of expense assumptions, and include an appropriate allowance of expense assumptions, in respect of each policy it administers, is responsiblet for Management (RLAM) in respect of investment management services Management (RLAM) in respectmanagement services of investment een classified as (including an element of develo either ongoing thin the administration service company from activities related thin the administration service company capital support required in a large number of market-consistent capital support required the burn-through cost, is mode similar arrangement exists for asset management services, although company and £69m (2013company £39m) is recognised RLAM’s in respect of rgin has been incorporated into the operating assumptions. assumptions. into the operating rgin has been incorporated any contractual future increments on new contracts); any contractual single premium) on existing policies; and within the EEV they are accounted for as they arise. for as they arise. the EEV they are accounted within scenarios for management actions, such as consistent w altered investment strategy, actions, scenarios for management liability have been calibrated to market a corporate level that are not directly attr level that are a corporate ional costs have not been anticipated withi have not been ional costs

premiums from the sale of new contracts (including regular and increments (both non-contractual in Group pension schemes. premiums relating to new entrants

funds. The time funds. The this potential liability,value cost of known as (d) Burn-through cost busine to new that remain open conditions, the funds Under adverse

adverse scenarios. calculated as the average value of the cost is The burn-through the PPFM. used to calculate this The stochastic models anticipated future corporate costs have not been is applied as a percentage of assets. The value of the life and pensions bu in-force (e) Expenses to perform an active review The EEV Guidance requires companies company costs. and service for corporate costs Corporate costs Corporate costs are those costs incurred at costs Service company receives a fee which An in-house administration service company, Allowance has been made under the different Allowance has been made of this liability, an additionalto the asymmetric nature ma administration of the majority of Royal London’s policies. A (including asset management) fees. service company have b in-house administration Costs within the The profits expected pensions to arise from life and business wi maintenance of existing business and within Royal London Asset London and within Royal of existing business maintenance the EEV. These within calculations result inof further value in £ have been capitalised the in-force business. the recognition £18m) is recognised in respect of the administration service services. investment management No allowance has been made for productivity gains. future (f) New business includes: New covered business expenditure) or exceptional costs. Except expenditure) or exceptional costs. 190

(g) Analysis of EEV profit (i) Contribution from new business The contribution from new business is calculated using economic assumptions at the end of the period. It is shown after the effect of required capital, calculated on the same basis as for in-force covered business.

New business sales are expressed on the present value of new business premiums (PVNBP) basis. PVNBP is calculated as total single premium sales received in the year plus the discounted value, at point of sale, of regular premiums expected to be received over the term of the new contracts. The premium volumes and projection assumptions used to calculate the present value of regular premiums for each product are the same as those used to calculate the new business contribution, so the components of the new business margin are on a consistent basis.

The new business contribution in the table below represents the new business contribution grossed up for tax at 21% (2013 23%). This is to aid comparability with proprietary companies which typically pay tax at the main corporation tax rate of 21% (2013 23%).

The new business margin represents the ratio of the new business contribution to PVNBP.

Present value of new business New business New business premiums contribution margin 2014 £m £m % Intermediary Pensions 4,454 55.6 1.2 Protection 338 22.7 6.7 Consumer 34 (12.9) (37.9) Continuing life and pensions business 4,826 65.4 1.4 Total life and pensions business 4,826 65.4 1.4 Wealth 3,755 29.9 0.8 Total 8,581 95.3 1.1

Present value of new business New business New business premiums contribution margin 2013 £m £m % Intermediary Pensions 2,996 26.7 0.9 Protection 436 20.0 4.6 Consumer 32 0.9 2.8 Continuing life and pensions business 3,464 47.6 1.4 Discontinued life and pensions business 396 9.0 2.3 Total life and pensions business 3,860 56.6 1.5 Wealth 3,933 30.7 0.8 Total 7,793 87.3 1.1

Pension volumes are up 49% on 2013 due mainly to the introduction of auto-enrolment. The increase in margin is largely attributed to a reduction in acquisition and maintenance unit costs resulting from the increase in volumes of business sold.

Protection comprises Bright Grey, Scottish Provident and Caledonian Life (now rebranded Royal London Ireland). Overall, volumes are down reflecting the very competitive market but margins have increased reflecting the higher value associated with this business arising from lower market yields at December 2014 and from the adoption of a yield curve which more accurately reflects the value of the cash flows generated by this type of business.

Although Consumer volumes are up 10%, the margin reflects the 2014 launch of the direct-to-consumer proposition.

Royal London Asset Management’s new business volumes from new asset management mandates were down 4% on 2013 whilst the margin has increased slightly.

STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS EUROPEAN EMBEDDED VALUE NOTICE OF AGM & RESOLUTIONS ADDITIONAL INFORMATION 7 6 1 (1) (7) (3) 11 (17) (34) (59) £m £m 2013 2013 -up ations 191 191 profit ll deliver r unit costs 6 3 7 (3) (1) (1) 28 £m £m (31) (67) (73) 2014 2014

ofits (for example, by reducing ongoing ture expense assumptions reflecting lowe ture expense assumptions assumed future persistency rates, of lower GAO take recognition impact of any changes in the way the business is modelled and as used in the primary financial statements. A breakdown of the ence for the period and that assumed in the embedded value calcul for the period and that assumed in the embedded ence ease in the opening risk-free rateease in the opening from 2.30% to 3.45%. ects a small number changes. of modelling investments improve future EEV pr made to business at the start of the period; plus the start of the period; business at ons regarding future operating experience. ons regarding future operating future mortality assumptions and revised fu

r nnuity and other commissions scentric otal otal corporate costs; and corporate costs; items. As an example, this would include the other exceptional techniques. valuation improvements to other development costs, which are typically other development costs, which are typically expense levels or increasing new business volumes); expense levels or increasing new the expected return on the value of in-force return on the value the expected profits and losses by differences caused experi between actual in the assumpti the impact of any changes at the start of the period; plus at the start of the period;

Other development costs Corporate costs Modelling and other changes T Strategic development costs Royal London Financial Planne Royal London Financial T General insurance commissions A A good returns in the future. of: Other items represent a combination The ‘modelling component refl and other changes’

costs and (v) Strategic development items other that we believe are important for our future competitiveness and we expect wi costs represent investments Strategic development (ii) Profit from existing business business existing from (ii) Profit existingProfit from business comprises: A breakdown of these items is shownbelow: in the table reflects better changes assumption The £12m impact of operating rates for trivial pension policies, updated reflects the incr return The increase in the expected and also £51m expected cost of the Solvency II transformation programme. programme. and also £51m expected Solvency II transformation cost of the opening return on net worth (iii) Expected over the period. investment return on the net worth net worth represents the expected on opening The expected return (iv) Profit on uncovered business business has IFRS basis, Profit on uncovered been valued on an reported on uncovered businessin the table below: is shown 192

(vi) Gain arising on business combinations On 31 July 2013, Group acquired the life assurance and asset management business of the Co-operative Banking Group by acquiring the entire issued share capital of the Co-operative Insurance Society Limited (CIS) and The Co-operative Asset Management Limited. Under the terms of the transaction the RL (CIS) life insurance business will be maintained in accordance with a fixed charging structure for administration and asset management services for an agreed period. It is anticipated that this business can be administered and managed for less than the fixed fees, thereby generating future profits in the Royal London Open Fund. The estimated value of these future profits is shown as ‘Gain arising on business combinations’.

(vii) Exceptional cost arising from regulatory change In March 2014, DWP set out various proposals relating to defined contribution pension scheme charging following completion of their Better Workplace Pensions consultation. We estimate that complying with these proposals will have a £(61)m impact on operating profit.

(viii) Economic experience variances This shows the impact of actual investment returns relative to those expected. Economic experience variances have an impact on the value of in-force (VIF) business and on the net worth.

The economic experience variance on the VIF arises from the change in policy values in which Royal London has an interest. The economic experience variance on the net worth represents the impact that investment returns, being different to those anticipated, have on: the value of the opening net worth; the value of financial options and guarantees (*); and the value of the assets backing the financial options and guarantees (*).

(*) Excluding those movements due solely to changes in the yield curve, which have been netted off against the movement in the value of assets caused by the shift in the yield curve.

The value of the second and third items above is generally far more significant for Royal London, as a mutual insurance company, than would be the case for an equivalent proprietary company, whose interest in the surplus in its with-profits funds is restricted typically to 10% of the distributable surplus.

For assets held within the Royal London fund, property returned in excess of 20% whilst bond returns over 19% were assisted by a material reduction in market yields. Overseas equities returned over 10% while UK equity returns were flat during 2014.

(ix) Economic assumption changes Long-term economic assumptions were revised to take into account the financial conditions at the end of the period including the impact of related management actions. The effect of these changes contributed £(143)m (2013 £83m) to the pre-tax result. Further details of the economic basis used are provided in section (h).

(x) Pension scheme surplus The principal scheme is the Royal London Group Pension Scheme, a final salary scheme that is closed to new entrants. On an International Accounting Standard (IAS) 19 basis, the scheme had a surplus of £48m at 31 December 2014 (December 2013 £90m).

The surplus in the two pension schemes acquired as part of the Royal Liver transaction is part of the closed Liver Sub-fund and so is not included in the EEV income statement.

(xi) Financing costs In December 2005, Royal London raised £395m (after expenses) of subordinated debt, which carries a coupon of 6.125% per annum. On 29 November 2013, notes with a nominal value of £154m were purchased by way of a tender offer at a price equal to 101% of the nominal value and a further £397m (after expenses) of subordinated debt, which also carries a coupon of 6.125% per annum, was issued. The cost of servicing the debt over the year has increased to £40m (2013 £26m) due to the larger debt in issue and is included as a financing cost.

(xii) Profit share In 2014, Royal London’s Board exercised its discretion to allocate a proportion of the profits to certain asset shares by crediting an investment return in excess of the rate earned on the underlying assets, thereby directly increasing the value of the liabilities set aside to meet future payments to relevant policyholders. This is the ‘Profit share’ of £60m referred to in the Chairman’s statement (£60m being the net of tax amount). In 2013, the corresponding figure was £81m.

(xiii) Attributed tax charge EEV profits are calculated net of tax and then grossed up at an appropriate tax rate. In general, this will be 6%, the expected long-term rate of tax payable by Royal London, although subsidiary companies may be subject to different rates of tax.

STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS EUROPEAN EMBEDDED VALUE NOTICE OF AGM & RESOLUTIONS ADDITIONAL INFORMATION 0 % % 30 2.50 2.00 3.45 3.50 4.50 4.8% 7.2% 7.4% 2013 2013 26.3% n curves. 193 193 ge number ate. For the ate. For the the lation llowing table:llowing 03 % % 2.50 2.00 2.20 3.00 4.00 4.7% 7.3% 2014 2014 24.9% 28.5% 24.3%

2 5 15 20 5.3% 8.1% 23.6% Term (years) Term (years) Term (years) 01 10 is discounted at a rate consistent with 7.2% 9.6% 21.7% 23.0% 5 51 evailing market assets at the yields on risk-free valuation d d business has been updated to use risk-free yield and inflatio use risk-free yield to d business has been updated 10.3% 12.3% 19.3% 21.7% 12.3% 10.1% 8.5% 7.5% 10.9% 8.5% 6.6% 5.5% 5.6% 20.4% ent techniques. Market consistency is achieved by running a lar Market consistency ent techniques. et data interpolation/extrapo by duration and price, subject to returns over the period, allowance is made for a risk premium as set out in the fo

-free zero coupon bonds coupon -free zero -free zero coupon bonds k k ear AA-rated corporate bonds ear ris bonds ear AA-rated corporate ear ris -free rate y y y y k where traded security prices do not exist. We attempt to achieve the best possible fit, although modelling restrictions prevent this best possible fit, although modelling to achieve the attempt where traded security prices do not exist. We from being perfect. deriving the underlying risk-free risk-free the forward gilt curve; deriving the underlying rate from calibrating equity and interest rate volatility to observed mark

Risk premium – property Risk premium – equities 15- 15- Equities 15- 15- Equities Ris Retail price inflation Expense inflation 2013 All other assets are assumed to earn the risk-free rate. period in reporting returns (iii) Expected For the purposes of calculating the expected 2014 2014 (ii) Principal economic assumptions – stochastic and future costs and guaranteed annuity options), smoothing The value of financial options (including premium rate guarantees deductions from asset shares are calculated using market-consist (h) EEV assumptions – deterministic assumptions economic (i) Principal actively and areassumptions are reviewed Economic based on the pr 31 December 2014 EEV, the valuation of non-profit and unit-linke EEV, the valuation of non-profit 31 December 2014 The tables below used show the implied volatilities in the modelling by asset class: of economically credible scenarios through a stochastic valuation model. Each scenario Indicative values are provided in the Indicative values are provided purposes: table below for comparison individual simulation. scenarios achieve market consistency by: The economic 194

(iv) Other assumptions Demographic assumptions are regularly reviewed having regard to past, current and expected future experience, and any other relevant data. These are generally set as best estimate with an appropriate margin for adverse deviations.

(v) Sensitivity analyses The table below shows the sensitivity of the embedded value at 31 December 2014 and the 2014 contribution from new business to changes in assumptions:

Change in Change in new embedded business value contribution Notes £m £m 100 basis point reduction in risk-free rates (20) (1) 10% increase in market values of equities and property 1 257 - 10% proportionate decrease in lapse and paid-up rates 90 28 10% proportionate decrease in expenses 129 30 5% proportionate decrease in mortality and morbidity (2) 2 50% increase in capital requirements (17) -

Notes: 1 The value of new business is assessed at the point of sale. Increases in the value of equities and property at this date have no impact on the value of new business. 2 The sensitivities in the table include the impact of stress testing the Royal London Group Pension Scheme.

(i) Reconciliation of the IFRS unallocated divisible surplus to the European Embedded Value

2014 2013 £m £m IFRS unallocated divisible surplus 3,139 3,005 Valuation differences between IFRS and EEV Goodwill and intangible assets (273) (284) Deferred tax valuation differences 3 (21) Subordinated debt at market value (42) (16) Capital requirements of subsidiaries and other valuation differences (46) (20) Add items only included on an embedded value basis Valuation of asset management and service subsidiaries 187 143 Other valuation differences 18 19 European Embedded Value 2,986 2,826

(j) Reconciliation of IFRS transfer to unallocated divisible surplus to EEV profit

2014 2013 £m £m IFRS transfer to unallocated divisible surplus 134 337 Amortisation of intangible assets 11 13 Differences in valuation of subsidiaries 17 57 Change in realistic value of subordinated debt (26) (63) Movement in valuation differences for deferred tax assets 24 78 Other movements in valuation bases - (31) EEV profit for the year 160 391

Annual Report and Accounts 2014 Royal London Group 195

Notice of Annual General Meeting STRATEGIC REPORT

Notice is hereby given that the 2015 10. That Tim Harris be reappointed Annual General Meeting of The Royal a director. London Mutual Insurance Society 11. That Phil Loney be reappointed Limited (the Company) will be held a director. at 11am on Wednesday 10 June 2015, GOVERNANCE at The Kia Oval, Kennington, London 12. That Jon Macdonald be reappointed SE11 5SS to consider and, if thought a director. fit, pass the following resolutions as 13. That Andrew Palmer be reappointed ordinary resolutions: a director. 1. That the audited Annual Report and 14. That Rupert Pennant-Rea be Accounts with the related Auditors’ reappointed a director. Report for the year ended 31 December 2014 be received. 15. That David Weymouth be

reappointed a director. EUROPEAN EMBEDDED VALUE FINANCIAL STATEMENTS 2. That the Annual report on remuneration for the year ended 31 By order of the Board December 2014 be approved. 3. That PricewaterhouseCoopers LLP be reappointed as auditors to the Company until the conclusion of the next Annual General Meeting. 4. That the remuneration of PricewaterhouseCoopers LLP be fixed by the directors. Simon Mitchley For and on behalf of Royal London 5. That Sally Bridgeland be reappointed Management Services Limited a director. Company Secretary 6. That Andrew Carter be reappointed 31 March 2015 a director. The Royal London Mutual Insurance 7. That Ian Dilks be reappointed Society Limited a director. 8. That Duncan Ferguson be 55 Gracechurch Street, London reappointed a director. EC3V 0RL NOTICE OF AGM & RESOLUTIONS 9. That Tracey Graham be reappointed Registered in England and Wales, a director. No. 99064 ADDITIONAL INFORMATION 196 Royal London Group Annual Report and Accounts 2014

Commentary on the resolutions

Resolution 1 Resolutions 3 and 4

Annual Report and Accounts 2014 Appointment and remuneration Following changes introduced by the of auditors Companies Act 2006 (‘the Act’), the The Board considers it best practice Company is not required to lay its that at each general meeting at which accounts before a general meeting. accounts are laid, the Company appoints The Board nonetheless considers it best an auditor to hold office until the next practice to do so and will continue to general meeting at which accounts are present the Annual Report and Accounts laid. The general meeting must also to the Annual General Meeting (AGM). determine the remuneration or the way in which it will be determined. Resolution 2 PricewaterhouseCoopers LLP are the Company’s existing auditors and Annual report on remuneration the directors recommend that they be Following the amendments to the Act, reappointed and their remuneration be which became effective from 1 October determined by the directors. 2013, new requirements were introduced to the content of the Directors’ Resolutions 5 to 15 remuneration report and the approval of the report. As Royal London is not a Reappointment of directors listed company it does not have to and In accordance with The Association in some ways cannot comply with the of Financial Mutuals’ Annotated UK requirements of the Act. However, the Corporate Governance Code and to directors believe that the disclosure aids increase accountability, all directors members’ understanding and sets the will retire at each AGM and stand level for good governance and so have for reappointment. Accordingly, all of voluntarily complied with the legislation your directors are retiring and offering where appropriate. themselves for reappointment at this AGM. The Board considers that each The Act now requires the following in of the directors offering themselves for the Directors’ remuneration report: re-election brings a wealth of valuable experience to the Board, enhancing its [[ an annual statement by the Chairman skill and knowledge base and should be of the Remuneration Committee; reappointed. Biographical details of all [[ an annual report describing the directors are included on pages 34 and implementation of the Company’s 35 of the Annual Report and Accounts. remuneration policy (the annual report Note: The terms and conditions of appointment of on remuneration) during the year under non-executive directors are available for inspection at the Company’s registered office at 55 Gracechurch review; and Street, London EC3V 0RL during business hours on any weekday (except public holidays) and will be [[ a remuneration policy report describing available for inspection at the AGM. the company’s remuneration policy (Directors’ remuneration policy).

Resolution 2 seeks approval for the Annual report on remuneration. The Directors’ remuneration report appears on pages 52 to 70 of the Annual Report and Accounts.

Resolution 2 is an advisory vote. Annual Report and Accounts 2014 Royal London Group 197

Glossary STRATEGIC REPORT

A closed funds. This potential liability is known D as the burn-through cost. It is modelled using Association of British Insurers (ABI) stochastic techniques as it will only occur in Deferred acquisition costs (DAC) The ABI represents the collective interests of adverse scenarios. The method of accounting whereby certain the UK’s insurance industry. acquisition costs on long-term business are Business unit deferred and therefore appear as an asset. Acquisition costs A sub-division of the Group that focuses on This leads to a smoothed recognition of The costs of acquiring and processing new a specific product offering, market or function. acquisition costs instead of recognising the business, including a share of overheads. A business unit may be a statutory entity or full amount in the year of acquisition. part of one or more separate statutory entities. Adviser Deferred fee income Someone authorised by the FCA, who is C The method of accounting whereby up-front GOVERNANCE qualified by experience and examination to policy charges are deferred and therefore provide financial advice. Capital markets appear as a liability. This leads to a smoothed Markets in which institutions and individuals recognition of these charges instead of Annuity trade financial securities such as long-term recognising the full amount in the year An insurance policy that provides a regular debt and equity securities. These markets of acquisition. income in exchange for a lump-sum payment. are also used by both the private and public sectors to raise funding from investors, Defined benefit scheme Annuity Bureau typically for the longer term. A type of occupational pension scheme, Launched in 2014, a Royal London service where the benefits are based on the employee’s used to help customers who wish to buy a CFO Forum salary and service. guaranteed income for life find the best rate A high-level discussion group formed and NOTICE OF AGM & RESOLUTIONS EUROPEAN EMBEDDED VALUE FINANCIAL STATEMENTS for their individual circumstances. attended by the Chief Financial Officers Direct to consumer of major European insurance companies to Insurance business sold by the Group directly Asset share discuss and harmonise reporting standards. to end customers, rather than through A policy’s asset share is calculated by advisers. accumulating the premiums paid, deducting CIS all applicable expenses and tax, and adding its The Co-operative Insurance Society Limited Discontinued operations share of the investment returns achieved by purchased by the Group on 31 July 2013. This represents Royal London 360° the with-profits fund over the policy’s lifetime. On 1 August was renamed to Royal London Insurance Company Limited, which was (CIS) Limited. sold on 14 November 2013. Assets under administration (AUA) The total assets administered on behalf of Company Discounting individual customers and institutional clients. The Royal London Mutual Insurance The process of expressing a future cash It includes those assets for which the Group Society Limited. transaction in terms of its present value using provides investment management services, a discount rate which reflects the time value as well as those that the Group administers Consumer division of money. where the customer has selected an external Our business division that sells life and third-party investment manager. pensions business directly to customers. E Includes MoneyVista, the financial-planning Auto-enrolment and education business unit, brought into the Economic assumptions The Government has introduced a new Consumer division in 2014 and rebranded as Assumptions of future interest rates, investment law designed to help people save more for Royal London. returns, inflation and tax. The impact of their retirement. It requires all employers to variances in these assumptions is treated as enrol their workers into a workplace pension Consumer Price Index (CPI) non-operating profit or loss under EEV. scheme if they are not already in one. A measure of changes in the price level of a market basket of consumer goods and services European Embedded Value (EEV) Available regulatory capital purchased by households. The EEV basis of reporting attempts to The excess of admissible assets over liabilities, recognise the true economic value added as measured following the PRA’s regulatory Continuing operations over a period and is calculated according to reporting requirements for UK life insurers. This includes all businesses excluding Royal guidelines issued by the CFO Forum. London 360º, which was sold during 2013. The total profit recognised over the lifetime B of a policy is the same as that recognised Covered business under the IFRS basis of reporting but the Bright Grey The business covered by the EEV timing of the recognition is different. Royal London business unit providing methodology. This includes life and pensions protection products in the UK through business defined as long-term business by UK EEV operating profit intermediaries. To be combined with Scottish and overseas regulators and asset management The profit on an EEV basis resulting from Provident in 2015 as a single life assurance business (excluding cash management). our primary business operations namely: ADDITIONAL INFORMATION business under the Royal London brand. life insurance and pensions; managing Critical illness cover and administering investments; and acquiring Burn-through cost Cover that pays a lump sum if the insured and administering closed long-term Under adverse conditions, the fund that person is diagnosed with a serious illness that insurance funds. remains open to new business may be required meets the cover’s definition. to make good any deficits that arise in the 198 Royal London Group Annual Report and Accounts 2014

Glossary continued

Exceptional items G Internal rate of return (IRR) Items that in the Directors’ view, The discount rate at which the present value are required to be separately disclosed Governed portfolio range of the after-tax cash flows we expect to earn by virtue of their nature or incidence to A mix of assets held within each portfolio over the lifetime of the business written is enable a full understanding of the Group’s designed to match risk attitude and time to equal to the total capital invested to support financial performance. retirement to a suitable mix of assets and funds. the writing of that business.

Excess realistic capital Group International Financial Reporting The excess of realistic working capital over The Royal London Group. Standards (IFRS) the risk capital margin. Accounting standards issued by the Guaranteed annuities International Accounting Standards Board Excess regulatory capital These primarily arise in connection with (IASB). The excess of available regulatory capital over pension business as either: the regulatory capital required. [[ a guaranteed income specified in the policy; or K [ F [ guaranteed terms for converting the pension Key performance indicator (KPI) fund of a policy into an income for life at An indicator used by a business to measure its Fair value the policy’s pension date. development, performance or position. The amount for which an asset could be exchanged or a liability settled between I M knowledgeable, willing parties in an arm’s length transaction. Industrial Branch (IB) Maintenance expenses Life insurance where (often relatively small) Expenses related to the servicing of the Financial Conduct Authority (FCA) premiums were originally collected at the in-force book of business, including An independent conduct of business policyholder’s home. investment and termination expenses and regulator, which ensures that business is a share of overheads. conducted in such a way that advances the Income drawdown interests of all users of, and participants in, Also known as pension-fund withdrawal Market-consistent basis the UK financial sector. or income withdrawal. Drawdown allows A basis of valuation in which assets and putting off buying an annuity to a maximum liabilities are valued in line with market prices Financial options and guarantees age of 75, giving an income directly from the and consistently with each other. In principle, For Royal London business, ‘financial pension fund in the meantime. each cash flow is valued using a discount rate options’ refers principally to guaranteed consistent with that applied to such a cash annuity options. ‘Guarantees’ refers to Independent financial adviser (IFA) flow in the capital markets. with-profits business where there are Someone authorised by the FCA, qualified guarantees that part of the benefits will by experience and examination to provide Mortgage endowment not reduce in value, or are subject to a financial advice, who is not working for any An insurance contract combining savings and minimum value. single product provider company. protection elements designed to repay the principal of a loan or mortgage. Financial Reporting Council Individual Capital Assessment (ICA) The Financial Reporting Council is the An assessment of the capital required by the Mutual UK’s independent regulator responsible for Group, reported privately to the PRA. It is A company owned by its members which is promoting high quality corporate governance broadly equivalent to the capital needed to not listed on the stock market. A member of and reporting to foster investment. cover the Group’s actual portfolio of risks at a mutual company can attend and vote at its a ‘one in two hundred year event’ risk level, Annual General Meeting. Finglish glossary having regard to the Group’s own risk controls. A term used to describe mystifying financial N services language. Insurance Groups Directive (IGD) The IGD is a regulatory directive for Net worth Flexi-Access Drawdown (FAD) insurance group’s requirement to submit The excess of assets over liabilities on the On death before the age of 75, by taking the details relating to their own solvency position EEV basis of reporting, where assets exclude pension fund in two or more instalments, no and also the overall solvency position of the PVIF and the pension scheme surplus. tax will be due on benefits taken over time parent undertaking. from a defined contribution scheme. New business contribution Intermediary division The expected present value on the EEV basis FTSE 100 Our business division that sells life and of reporting of all cash flows arising from This is the share index of the 100 largest pensions business through intermediaries, new business. companies by market capitalisation listed on primarily independent financial advisers. the London Stock Exchange. New business margin Internal Model The new business contribution as Funds under management (FUM) The processes, systems and calculations that a percentage of the present value of The total of assets actively managed or together allow the Group to control the risks new business premiums. administered by, or on behalf of, the Group, that it faces and quantify the capital needed to including funds managed by third parties. support those risks. It includes a calculation Non-profit policy engine to quantify capital requirements, the Long-term savings and insurance products Group’s risk management framework other than with-profits policies. and its system of governance. Annual Report and Accounts 2014 Royal London Group 199

O Pension date Realistic balance sheet (RBS) The date at which income can be taken from The Group’s balance sheet as calculated on Open-ended investment company a pension either through a cash lump sum or the realistic reporting approach. STRATEGIC REPORT (OEIC) investment in an annuity. Investment funds which pool together Realistic reporting approach investors’ money and invest this in a broad Personal pension This is prescribed by the PRA and recognises range of shares and other assets. They are A pension plan for an individual policyholder. the potential for future final bonus payments similar to unit trusts. under with-profits business, the value of in- PLAL force business and the cost of future financial Operating assumptions Phoenix Life Assurance Limited. PLAL’s options and guarantees, which is calculated Assumptions in relation to future levels of assets and liabilities were transferred into explicitly using stochastic techniques. mortality, morbidity, persistency and expenses. Royal London Group with effect from The impact of variances in these assumptions 29 December 2008. Realistic working capital is included as operating profits under EEV. See definition of ‘working capital’. Present value of in-force business

Operating experience variances (PVIF) Regular premium GOVERNANCE The impact of actual mortality, morbidity, The present value of the projected future A series of payments for an insurance persistency and expense experience being profits after tax arising from the business contract, typically monthly or annually. different to that expected at the start of in-force at the valuation date. the period. Regulatory capital required Present value of new business The amount of capital that the PRA requires Operating profit premiums (PVNBP) a UK life insurer to hold which is calculated Operating profit is the profit resulting from The PVNBP is the total of new single using the European Union solvency our business operations. Our primary business premium sales received in the year plus the requirements basis, also known as the operations are providing life assurance and discounted value, at the point of sale, of the Insurance Groups Directive requirement. pensions, managing and administering regular premiums we expect to receive over investments and acquiring and administering the term of the new contracts sold in the year. Regulatory reserving basis NOTICE OF AGM & RESOLUTIONS EUROPEAN EMBEDDED VALUE FINANCIAL STATEMENTS closed long-term insurance funds. We The basis of reserving for liabilities following describe this in detail on page 26. Principles & Practices of Financial the regulatory approach. This is prescribed by Management (PPFM) the PRA and is a prudent approach but does Over-the-counter (OTC) derivatives A document detailing how we manage our not recognise the potential for future final Contracts which are traded (and privately with-profits funds. bonus payments under with-profits business. negotiated) directly between two parties, without going through an exchange or Profit share Required capital other intemediary. Profit share, previously referred to as the An amount that an insurer must set aside mutual dividend, is an allocation of part of in addition to the value of the technical P the Group’s operating profits by means of a provisions to give additional comfort that discretionary enhancement to asset shares of an insurer will be able to meet policyholder Parent company eligible policies. liabilities as they fall due. The Royal London Mutual Insurance Society Limited. Project Chrysalis Retail Distribution Review (RDR) An ongoing FCA review of the application A major FSA regulatory reform programme, Part VII Insurance Business Transfers of conduct-of-business rules to mutual with- implemented on 31 December 2012, which The court process that enables groups of profits life insurers, in light of falling volumes changes the way investment and pension insurance policies to be moved between of with-profits business. products are sold. insurers, under Part VII of the Financial Services and Markets Act 2000. Protection Retail Price Index (RPI) A policy providing a cash sum or income on A measure of inflation published monthly by Participating the death or critical illness of the life assured. the Office for National Statistics. It measures Contracts which are with-profits in type. the change in the cost of a representative Prudential Regulation Authority (PRA) sample of retail goods and services. Payback period Part of the Bank of England that is The period required for the after-tax cash responsible for the authorisation, regulation Risk capital margin flows expected to arise on new business to be and day-to-day supervision of all insurance The required capital amount as prescribed by equal to the capital invested to support the firms that are subject to prudential regulation. the PRA’s realistic reporting approach. writing of the business. Q Risk-free rate Pension The theoretical rate of return of an A means of providing income in retirement Quantitative easing investment with no risk of financial loss. for an individual and possibly his/her Monetary policy used by a central bank dependants. Our pension products include to stimulate an economy when standard Royal London 360° personal and group pensions, stakeholder monetary policy has become ineffective. Royal London business unit responsible for pensions and income drawdown. international business. This business was

R disposed of during 2013. ADDITIONAL INFORMATION Pension charge cap In the April 2014 Budget the Government Rating agencies Royal London Asset Management announced the introduction of a cap on A rating agency (also called a credit rating (RLAM) member charges of 0.75% from April 2015 on agency) is a company that assigns credit Royal London business unit responsible for the defaults available in defined contribution ratings, which rate a debtor’s ability to pay managing the Group’s financial assets as pension schemes used to comply with the back debt by making timely interest payments well as funds for external clients, including automatic enrolment legislation. and the likelihood of default. multi-managers, pension funds for FTSE 250 companies, local authorities, universities, charities and individuals. 200 Royal London Group Annual Report and Accounts 2014

Glossary continued

Royal London Asset Management Royal London With-Profits Fund Uncrystallised Fund Pension Lump Channel Islands (RLAM CI), The long-term business fund of Royal London, Sum (UFPLS) Royal London Cash Management comprising the Royal London Open Fund and Lump sum paid on the death, before the (RLCM) a number of closed sub-funds from businesses age of 75, of a member of a money purchase Royal London’s two cash-management acquired in the past. pension scheme, in respect of funds thathave operations which provide specialist cash- not been used to purchase an annuity or management services for a wide range S provide unsecured pension benefits. of clients including charities, insurance companies, universities and plcs. These were Scottish Life Unallocated divisible surplus transferred into RLAM during 2014. Royal London business unit providing The amount of surplus which has not been pensions and retirement-planning products allocated to policyholders at the balance Royal London (CIS) Limited, to the UK market and third-party sheet date. Royal London Asset Management administration services to external clients. (CIS) Limited Scottish Life was rebranded as Royal London Unit-linked policy On 31 July 2013, the Group acquired the life during 2014. A policy for which the premiums buy units in assurance and asset-management business a chosen investment fund. of the Co-operative Banking Group (CBG) Scottish Provident by acquiring the entire issued share capital Royal London business unit, providing Unit trust of the Co-operative Insurance Society protection products in the UK through A collective investment which invests in a Limited (CIS) and The Co-operative Asset intermediaries. Scottish Provident will be range of assets such as equities, fixed interest Management Limited (TCAM). On rebranded as Royal London during 2015, investments and cash. A unit trust might be 1 August 2013 CIS was renamed as Royal when it is combined with Bright Grey. a general fund or specialise in a particular London (CIS) Limited (RL (CIS)) and type of asset, for example property, or in a TCAM was renamed Royal London Asset Single premium particular geographical area, for example Management (CIS) Limited (RLAM (CIS)). A single payment for an insurance contract. South East Asia.

Royal London Group Solvency II Unitised with-profits policy The Royal London Mutual Insurance Society A major European Union directive which A policy for which the premiums buy units in Limited and its subsidiaries. will transform how we manage and report a with-profits fund. risk and capital. Royal London Ireland V Rebranded from Caledonian Life in 2014, Stochastic techniques the Royal London business unit providing Valuation techniques that allow for the Value of in-force business (VIF) protection products in the Republic of Ireland potential future variability in assumptions by See definition of ‘Present value of in-force through intermediaries. the running of multiple possible scenarios. business (PVIF)’.

Royal London Open Fund Subordinated debt W The part of the Royal London With-Profits In the event of bankruptcy, dissolution or Fund into which all of the Group’s new winding-up, the payments arising from this Wealth division insurance business is written, with the debt rank after the claims of other creditors. Our fund manager, Royal London Asset exception of Royal London (CIS) Limited Management (RLAM), and Royal London and Royal London Pooled Pensions Company T Platform Services (RLPS). Limited. Also known as The Royal London IB and OB sub-fund. TCAM With-profits policy The Co-operative Asset Management A policy which participates in the profits of Royal London Platform Services Limited purchased by the Group on 31 July a with-profits fund. This participation may (trading as Ascentric) 2013. On 1 August was renamed Royal be in the form of one or more of a cash bonus, Royal London’s independent wrap platform London Asset Management (CIS) Limited. an annual bonus or a bonus paid on the exit of services which trades as Ascentric, providing the policy. investment administration and consolidation Three lines of defence model services to long-term investors and financial The three lines of defence model can be Working capital advisers through its online wrap service. used as the primary means to demonstrate The excess of assets over liabilities, as measured and structure roles, responsibilities and by the PRA’s realistic reporting approach. Royal London Plus accountability for decision making, risk and Royal London business unit responsible for control to achieve effective governance, risk Wrap platform managing the Group’s direct-to-consumer management and assurance. A trading platform enabling investment businesses. This includes customers who were funds, pensions, direct equity holdings and transferred from Refuge Assurance, United U some life assurance contracts to be held in the Friendly, Phoenix Life Assurance Limited same administrative account rather than as and Royal Liver. Royal London Plus became UK Corporate Governance Code separate holdings. part of the Consumer division in 2014. (‘the Code’) This sets out guidance in the form of Wrap provider Royal London Pooled Pensions principles and provisions on how companies An investment company, such as Ascentric, Company Limited (RLPPC) should be directed and controlled to follow that offers investors the opportunity to A subsidiary of the Company providing good governance practice. consolidate their different investments under managed fund facilities to pension schemes. a single administrative account. RLPPC was transferred into the Royal London Open Fund during 2014. About us 2015 Financial calendar

31 March Financial results for 2014 and investor conference call

12 May Interim management statement and first quarter new business figures About Royal London Group Some key numbers 3,000 5.3m 10 June Annual General Meeting

Financial statements

Royal London Group Annual Report and Accounts 2014 78 Consolidated statement of comprehensive income 79 Balance sheets 80 Statements of cash flows 81 Notes to the financial statements

European embedded value 183 EEV supplementary information 184 EEV auditors’ report 185 Consolidated income statement – EEV basis 186 Consolidated balance sheet - EEV basis

Notice of Annual General Meeting 195 Notice of Annual General Meeting 196 Commentary on the resolutions

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