Highlights of PwC’s 2019 with-profits survey
25 November 2019
With-profits may be in decline but remains firmly in the spotlight, whether that be due to acquisitions, restructuring or the FCA’s recent thematic review of the fair treatment of with-profits customers (TR19/3). PwC’s recent survey including 14 of the largest with-profits providers in the UK market covered restructuring, run-off plans and with-profits governance in relation to the management of legacy books, mirroring some of the key findings from the FCA review.
Restructuring and acquisition activity continuing at pace
Restructuring and acquisition activity shows little sign of slowing down - in fact we expect increased restructuring activity over the coming years as companies make changes to achieve an orderly run-off as funds decline. We found that only one participant is not currently considering some form of restructuring. The most common restructuring activities currently either under consideration or being implemented by participants in our survey were:
- Outsourcing administration – as companies look at ways of simplifying their business and managing their expense base.
- Compromise or other significant work on policies deemed to be ‘goneaways’ - the issue of goneaways continues to be significant for many companies, as holding reserves for policies where there is unlikely to ever be a claim risks delaying the distribution of surplus. Improvements in tracing techniques have helped to improve customer engagement for many established books, but for legacy Industrial Branch businesses, where policyholder data is scarce, these techniques have limited benefit.
- Fund mergers – consistent with the run-off of policies almost half of participants expect to complete a fund merger within the next 10 years.
We found facilitating an orderly run-off and allowing a fair distribution of estate were the key drivers of restructuring activity, which combined with recent regulatory interest in sunset clauses and assessing the appropriateness of trigger points highlights the importance of actively managing funds in run-off.
The challenge of orderly run-off across the with-profits sector is growing and it is clear that an innovative solution will be required. Could government intervention via a lifeboat fund, similar to the Pension Protection Fund, offer a solution, particularly for the mutual sector? Or would regulatory intervention, perhaps by allowing a simplified or streamlined transfer process for smaller funds, recognising proportionality and the limited options for these funds, encourage large consolidators to take on smaller funds which are not economically significant for them?
Run-off plans – a higher bar?
Despite being a regulatory requirement for all closed funds since 2012, the use of run-off plans to inform management decisions was identified by the FCA thematic as a general weakness. In fact, the latest feedback has increased expectations and best practice beyond the rules – our survey found that some of the common considerations in run-off plans, beyond the requirements set out in the SUP guidance, include: sunset clauses; fair payouts; the effect of management actions; estate distribution; and triggers for revisiting plans.
In our experience companies manage their funds through other sources of projections such as the ORSA and assessment of estate distribution; and historically this has meant that for some run-off plans have acted more as a compliance exercise rather than the primary tool for managing funds. Half of participants indicated that their run-off plan is reviewed and updated annually, suggesting that the focus on run-off plans has begun to change as response to the FCA’s findings and feedback.
A useful tool in understanding long term projections and tontine effects is scenario testing – our survey found that the use of scenario analysis to support solvency and distribution varied with just under half not using any scenario analysis and even among who did there was a wide range in the number of scenarios considered.
Evidencing effective challenge
Many governance structures are long-standing and with expectations and best practice evolving it is important that companies can demonstrate: their governance arrangements are appropriate for the size and complexity of their funds; there is effective discussion and challenge; and that the considerations and rationale for decisions are adequately documented. For example considering two findings from the FCA thematic:
Demonstrating that the With-Profits Committee has sufficient time to provide effective challenge and influence the outcome of decisions before they are presented to the Board. Our survey showed the majority of participants hold WPC meetings less than a week in advance of Board meetings, with almost half having both meetings on the same day. In practice many firms manage key decisions through prior discussion papers - nevertheless striking the balance between providing timely information and sufficient time to raise meaningful challenge is likely to remain an area of focus.
For firms with multiple funds, ensuring the availability of resources to support decision making – with the thematic finding that the time spent across each fund was not even and indicating that in some cases this resulted in differing service levels. In our experience, there is an increasing trend in WPCs seeking independent external advice, in particular on more subjective and/or new issues. This is supported by the survey responses, with half of participants requesting external advice in the last 12 months.
Time to take action
Our survey has highlighted a number of key issues in with-profits management. The regulatory focus and shrinking market mean the need to take action is becoming more critical. If you are looking for practical support please get in touch.