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Corporate Governance

The full Corporate Governance Statement can be found in the Society’s Annual Report and Accounts to 31 December 2015 which is updated annually.

Click here to view Annual Report and Accounts 2015

Below are highlights as at 21 March 2016 based on the 2015 statement. If you would prefer not to read the whole statement you may go straight to one of the following areas:

Statement from the Chairman
Governance by Directors
Management of the Society
Internal Controls and Risk Management
Governance Advisory Arrangement
Policyholder Communications
Board Committees
Statement of Compliance with the UK Corporate Governance Code
Principles and Practices of Financial Management
Stewardship


1. Statement from the Chairman
The Society aims to meet the highest standards in corporate governance and voluntarily adopts the relevant provisions of the 2014 UK Corporate Governance Code (“UKCGC). The Society is reporting against these codes. The Board is responsible to the Society’s members for good corporate governance and applies high standards to ensure that this is achieved.

This report summarises the Society’s governance arrangements including reports on each of the Board Committees. Personal statements from the Chair of the Audit and Risk Committee and the Chair of the Remuneration Committee are also included below.

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2. Governance by Directors

The Board
The Board meets regularly to lead, control and monitor the overall performance of the Society. The Board’s principal functions are: to determine the strategy and policies of the Society; to set out guidelines within which the business is managed; and to review business performance. The Board considers and decides on all major matters of Society corporate strategy and ensures that the strategy is consistent with its appetite for risk. There is a formal schedule of matters reserved for the Board’s decision. Members of senior management supply the Board with appropriate and timely information and are available to attend meetings and answer questions. Authority is delegated to the Chief Executive for implementing strategy and managing the Society.

The roles of Chairman and Chief Executive are separated and the Chairman has primary responsibility for the effective functioning of the Board.

Board Committees
The Board formally delegates certain specific responsibilities to the three Board Committees described elsewhere in this report.

Board and Committee meetings
Details of the number of meetings of the Board and Board Committees, and attendance by Directors are given in the table on page 16 of the Annual Report and Accounts 2015.

Taking advice
The Board and its Committees are able to take advice from professional advisers to assist them in assessing the business of the Society. Each Director has access to the Company Secretary.

Subject to defined procedures, Directors may also obtain independent professional advice, at the Society’s expense, about any matter concerning the Society relevant to their duties.

Directors
The Board had two executive Directors who served throughout 2015: the Chief Executive and the Finance Director. There are five non-executive Directors on the Board. Penny Avis was appointed a non-executive Director on 16 January 2015. The Chairman and the Deputy Chairman are elected by the Board.

Click here to view Descriptions of the Board members

Click here to view a Specimen of the letter currently used for the appointment of new non-executive Directors

The Board reviews the independence of the non-executive Directors and has concluded that Penny Avis, Ian Gibson, Keith Nicholson and Cathryn Riley should be considered to be independent.

The Directors’ remuneration report in the Annual Report and Accounts 2015 explains the basis of remuneration of the executive and non-executive Directors.

Performance evaluation
The Board reviews its own performance and that of its Committees each year. In 2013, we commissioned the Board’s independent advisor, Nicholas Wells, to carry out a full review of the Society’s Board and its Committees. This took into account the guidance in the UKCGC that an evaluation of the Board of FTSE 350 companies should be externally facilitated every three years. In 2015, the Board reviewed responses to a questionnaire completed by Directors and agreed relevant actions. It is proposed that an independent review will next be carried out in 2016.

Typically, non-executive Directors spend at least 20 days on work for the Society each year, including attendance at Board and Board Committee meetings. Directors regularly visit our offices in Aylesbury to spend time with our staff to understand better the key risks and controls of running our business.

With assistance from the Nominations Committee, the Board reviews the performance of individual Directors annually. The non-executive Directors meet under the leadership of the Senior Independent non-executive Director to review the performance of the Chairman. In conducting these reviews, the Board has regard to the guidance on performance evaluation accompanying the UKCGC. The Board recognised that, in accordance with the Code, any term beyond six years for a non-executive Director should be subject to particularly rigorous review and should take into account the need for progressive refreshing of the Board.

In the light of the reviews referred to above, the Board considers it has the appropriate balance of skills and experience to meet the requirements of the Society’s business. The diverse experience, skills and independent perspective of the Directors provide effective review of and challenge to the Society’s activities.

Appointments to the Board
Directors must retire and seek re-election at the first Annual General Meeting (“AGM”) following appointment. The Society’s Articles require one third of the Directors who are subject to retirement by rotation to retire at each AGM and also that all Directors must submit themselves for re-election by rotation at an AGM at least every three years. 

The on-going suitability of Directors is subject to annual review by the Board, as advised by the Nominations Committee. The Board’s policy on remuneration is set out in the Directors’ remuneration report.

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3. Management of the Society

The Executive team meets weekly to manage business activities. Papers are prepared and presented to the Board and its Committees by the Executive team. The Executive team comprises: the Chief Executive; the Finance Director; the Risk Director; the Chief Actuary; the Head of Customer Service; and the Head of Human Resources.

The Chief Actuary, Martin Sinkinson, advises on the Society’s ability to meet obligations to policyholders. He identifies and assesses the risks that could have a material impact on meeting these objectives as well as the capital needed to support the business. He also advises the Board on the methods and assumptions to be used for the assessment of the value of the Society’s liabilities, and reports on the results. The Society is also required to appoint a With-profits Actuary, who advises the Board on key aspects of the discretion to be exercised affecting with-profits business, including the fair treatment of and communication with with-profits policyholders, and advice on bonus rates. Louise Eldred is the With-profits Actuary.

The Board has responsibility for investment strategy, investment policy and appointing investment managers. These responsibilities are discharged through the Society’s Asset and Liability Committee, which is chaired by the Finance Director. The Committee takes advice from the Chief Actuary and the Chief Investment Officer, and regularly liaises with the investment advisers to oversee day-to-day investment matters.

The Finance Director is the executive responsible for the Society’s Finance, IT Change, Company Secretariat and Investment functions. He also runs the strategic and planning processes and monitors progress against targets.

Monthly management information in respect of financial performance, fair treatment of policyholders, complaints handling, risk management, compliance and investment performance is prepared and reviewed by senior management, the Executive team and the Board.

Each year, the Society prepares a three-year business plan and budget to assist in the monitoring of results, assets, liabilities and investment performance. Actual performance against these plans is actively monitored and, where appropriate, corrective action is agreed and implemented.

The Head of Customer Service, Sonia Sahnan, is responsible for ensuring that the day-to-day needs of policyholders are met through the Customer Service and other operational teams.

The Risk Director, Dave Pearce, is responsible for: providing the framework of risk policies; processes and approaches to be followed by staff; and for reporting to the Audit and Risk Committee and the Board on the key risks facing the Society and how those risks are controlled and managed.

The Head of Human Resources, Carol Whitehead, is responsible for establishing appropriate standards of: recruitment, staff performance review; union relations; and staff communications.

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4. Internal controls and risk management

The Directors are ultimately responsible for the Society’s system of internal control and for reviewing management’s arrangements for ensuring its effectiveness, including the effectiveness of controls over outsourced activities. This system is designed to manage rather than eliminate the risk of failure to achieve business objectives. The system can only provide reasonable, rather than absolute, assurance against material loss or misstatement. The Directors seek to ensure that the Society mitigates its exposure to risks consistent with its strategy. They also take into consideration the materiality of the risks to be managed and the cost-effectiveness of the relevant aspects of internal control.

The recapture of the Society’s unit-linked business from Halifax Life was completed in March 2015. The operational risks associated with the end to end management of the unit-linked business, such as box management, fund pricing, and new third party relationships, are now managed and controlled by the Society. In bringing back the unit-linked business, the Society took steps to ensure that appropriate processes, systems, capability and controls were in place to manage this business.

The Society has reviewed the effectiveness of its internal control environment for the unit-linked business. In doing so, assistance has been sought from Ernst & Young, who have carried out independent reviews to validate the effectiveness of the operation of the Unit Pricing Committee and the Asset and Liability Committee. A report confirming the effectiveness of the controls for unit-linked business was presented to the Society’s Audit and Risk Committee in September 2015.

In March 2015, we contracted with Canada Life to transfer to them the Society’s £0.9bn annuity book, thereby releasing further capital for distribution to policyholders. The transfer of the annuity book to Canada Life completed successfully in February 2016. The Society worked closely with Canada Life to ensure that the risks associated with the transfer were appropriately managed through to completion.

On behalf of the Board, the Audit and Risk Committee has reviewed the effectiveness of the risk management and internal control systems for the year ended 31 December 2015, taking into account matters arising up to the date of this report. 

The review demonstrated that the Society has in place a comprehensive set of risk management and internal control arrangements. These include the identification, assessment, measurement, monitoring, reporting and management of risks. A programme of internal audits and compliance monitoring takes place to provide assurance that the Society’s controls are fit for purpose and that regulatory requirements are being met. No material control issues arose in 2015 and there were no material risk events or breaches during the year. If significant failings or control deficiencies were to be identified, the Committee would confirm whether or not appropriate remedial action had been taken. The review concluded that the Society’s risk management and internal control systems are operating effectively.

The principal components of the Society’s system of internal control are detailed below. The Society follows the widely recognised ‘three lines of defence’ approach to governance, under which primary responsibility for day-to-day risk management and compliance rests with business areas. Oversight and challenge is provided by the Risk and Compliance function as the second line of defence, and independent assurance is provided by Internal Audit as the third line of defence.

Control environment
The Society is committed to the highest standards of business ethics and conduct, and seeks to maintain these standards across all of its operations. The Society regularly reviews its governance arrangements and guiding principles to ensure that these remain appropriate for its business.

An appropriate organisational structure for planning, executing, controlling and monitoring business operations is in place in order to achieve the Society’s objectives. The structure is reviewed and updated on a regular basis, taking into account the different priorities of the Society’s business, to ensure that it provides clear responsibilities and control for key areas. Separate functions have been established for Risk Management, Compliance and Internal Audit.

Risk management
The Audit and Risk Committee has delegated authority from the Board for reviewing the Society’s internal control and risk management systems, and for monitoring performance against the Board's risk appetite. 

The Risk Director is responsible for ensuring that there is an effective and well-documented enterprise-wide risk management framework, including:

  • A risk and control self-assessment process no less frequently than half-yearly, which requires senior management to attest to the risks and associated controls in place within their area of the business;
  • Risk management policies for all principal risk categories. Material changes to these policies are approved by the Board;
  • The agreement by the Board of risk appetite statements which are closely linked to the achievement of the Society’s strategic objectives, and key risk indicators for monitoring against risk appetite;
  • A robust and consistent approach across the Society for risk identification and risk assessment; and
  • Detailed monitoring, review and reporting on material risks, including to the principal management and risk committees.

The Risk Management Framework is designed to meet the requirements and standards set by the Prudential Regulation Authority (“PRA”) and the Financial Conduct Authority (“FCA”), and under the new Solvency II requirements which applied from 1 January 2016.

The Strategic report in the Annual Report and Accounts 2015 sets out the principal risks faced by the Society.

Monitoring and other assurance activities
Assurance is provided to the Audit and Risk Committee and the Board on the effectiveness of the key controls through:

  • Review and recommendation to the Audit and Risk Committee of the Annual Assurance plan;
  • Regular reporting by Internal Audit on findings from audits and other assurance reviews, and the  management actions to address the findings;
  • Annual review of effectiveness of key internal controls by the Executive team and the Audit and Risk Committee;
  • Reporting on the regulatory environment and associated regulatory risks by the Society’s Risk  Director;
  • Review of emerging risks, their implications for the Society, and identification of appropriate  mitigating actions;
  • Reports received from the Society’s Risk and Compliance functions on specific elements of risk  and their management; and
  • The work of other independent advisers commissioned to report on specific aspects of internal  control.

The Audit and Risk Committee monitors the status of actions to improve the effectiveness of the system of internal control.

Internal Audit
The Society’s in-house Internal Audit team provides assurance over the operation of governance, risk management and the system of internal control. The team draws on technical audit support from a specialist third party.

The programme of internal audit reviews is based on the Society’s risk profile, independently assessed by Internal Audit and reviewed by the Audit and Risk Committee. The delivery of the Internal Audit plan and the activities to report and track audit findings are reviewed by the Executive Committee and are reported to, and reviewed by, the Audit and Risk Committee.

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5. Governance Advisory Arrangement

In February 2015, the FCA set out new rules for providers operating workplace pension plans to take effect from 6 April 2015. From that date, those providers had to have set up an Independent Governance Committee or appointed a Governance Advisory Arrangement (“GAA”), whose principal function would be to:

  • Act solely in the interests of the members of those pension plans; and
  • Assess the ‘value for money’ delivered by the pension plans to those members.

Pitmans Trustees Limited were appointed to provide the Society’s GAA for our workplace pension plans, which were all grouped personal pension plans at commencement. The GAA is required to produce an annual report on a number of matters, including an assessment of the value delivered by these pension plans. Click here to view their report dated March 2016.  In the report, they conclude that our grouped personal pension plans “represent reasonable to good value for money, taking into account the benefits offered to members.”

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6. Policyholder communications

The Board is committed to open communications with policyholders. We continue to simplify our processes and written material, dispensing with jargon as much as possible.

In January 2015, we wrote to individual policyholders about the forthcoming pension changes.

In March, we wrote to policyholders to advise them about the transfer of our annuity book of business to Canada Life. This was followed by a mailing in October giving details of the transfer as well as the Court process for the approval of the transfer.

During the summer, focus groups were held with unit-linked policyholders to obtain feedback on topics, including their view of the Society and how we communicate with them, including the information available on the website.

The October mailing drew attention to: the information available on the website for with-profits and unit-linked policyholders; and the impending review of our unit-linked business. In December, details of changes to fund charges and our plans for simplifying the range of funds available were sent to unit-linked policyholders.

Notice of the 2015 AGM was sent to all Members of the Society, together with the Summary Annual Report. We advised in October 2015 that, as the Society’s Report and Accounts are published on our website, copies would only be provided to those who have requested to receive a paper version.

Simplified Annual Statements were issued to all with-profits and unit-linked policyholders in April 2015.

In October, quantitative research was undertaken among a large group of policyholders. This research provided valuable feedback and, most importantly, the great majority of policyholders researched considered the Board to be steering the Society in the right direction.

At the AGM, members of the Board are available to answer questions. Separate resolutions are proposed on each issue so that they can be given proper consideration. Resolutions are dealt with on a show of hands unless a poll is called. The Society counts all proxy votes and indicates the level of proxies lodged on each resolution, after it has been dealt with on a show of hands. The proxy form specifically provides for members to be able to abstain on a resolution or resolutions if they wish. Written feedback on their view of the Society was invited from those who attended the AGM.

The Society produces a document setting out its Principles and Practices of Financial Management. In 2015, there were no changes to the principles. There were some changes to the practices. There is also a simplified version of this document: “A guide to how we manage the with-profits fund”. The latest versions of these are available on the Society’s website, together with information about with-profits bonus rates. Any material changes in these documents are drawn to the attention of policyholders.

Each year, reports are produced by the Board and by the With-profits Actuary on how the with-profits fund has been managed. These documents are available on the Society’s website and on request for members without Internet access.

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7. Board Committees

The Audit and Risk Committee

Statement from the Audit and Risk Committee Chair
The Board’s approach to governance over audit and risk is to delegate responsibility to a single committee: the Audit and Risk Committee. This means that we have an efficient and effective oversight of both the risk and control frameworks of the Society as well as taking responsibility for both internal and external audit. Naturally, this does mean that the Committee has to ensure an appropriate balance of discussion between risk and audit at its meetings throughout the year. Therefore, in planning the agendas, they continued to be structured in a manner so that risk and audit alternate as the first item in our meetings.

While the Board has delegated oversight in relation to risk matters to the Committee, there are occasions when it is more appropriate for detailed discussions on risks relating to specific events or transactions to be considered by both the Committee and the Board.  Such matters in the last year included the risks around: taking back our unit-linked business from Halifax Life; the sale of our annuity book of business; cyber security; and capital distribution. The Committee took account of these activities in planning its work on risk for the year.

The Committee invited to its meetings members of the Executive and other senior managers as appropriate so that they provide their reports at first hand. It enabled them to hear and respond to the constructive challenges made by members of the Committee, who draw on their own experience and wider industry knowledge. This approach results in the Committee reaching agreement on appropriate outcomes for the Society. In addition, we held meetings separately with each of the Finance Director, the Risk Director, the Chief Actuary and the Head of Internal Audit without any other executives present. There were no issues raised by them in regard to discharging their responsibilities.

The Committee meets with Marcus Hine, our PricewaterhouseCoopers LLP (“PwC”) Audit Partner, in private session once a year at the meeting when we are considering the Annual Report and Accounts. This session is held at the beginning of our meeting to consider the Annual Report and Accounts so as to inform the Committee in its deliberations. There were no matters arising that the Committee had to follow up with the Executive prior to making recommendations to the Board on the Annual Report and Accounts.

The report that follows gives a high level overview of the matters covered during the year.

Penny Avis joined the Committee in September 2015. Her wide-ranging experience will be a valuable contribution to the Committee.

Keith Nicholson
Chair, Audit and Risk Committee

Audit and Risk Committee report
Throughout 2015, the Committee comprised: Keith Nicholson (Chair); Ian Gibson; and Cathryn Riley. Penny Avis joined the Committee in September 2015. All members of the Committee are non-executive Directors.

The Committee met five times last year and it paid particular attention to the Society’s:

  • Fair, balanced and understandable financial reporting;
  • Compliance with the UKCGC;
  • Risk management systems, risk appetite and the identification and management of key risks;
  • Arrangements for ensuring compliance with regulatory requirements, in particular,  implementation plans for Solvency II;
  • Control environment;
  • Internal and external audit processes;
  • Resourcing of the risk, compliance and internal audit functions as the business runs off;
  • Business continuity arrangements; and
  • Procedures for handling allegations from whistle-blowers.

The Committee assisted the Board in fulfilling its responsibilities in regard to the Society’s Financial Statements and Annual Regulatory Returns to the PRA. The Chairman reported to the Board meeting that followed each Audit and Risk Committee meeting, with the minutes of the meetings being subsequently circulated to the Board.

Internal Audit prepared a draft Assurance plan, for review and challenge by the Committee at its meeting in September. The final plan reflecting the outcome of the review and challenge was approved at the December meeting.

Reports were provided by the Risk Director throughout the year on the management and identification of risks. The Committee reviewed and discussed the risk assessments, the risk appetite statements and the mitigating actions prior to submission to Board for approval. Matters considered by the Committee included:

  • Cyber security: this is an increasing threat and the Committee received assurance on the effectiveness of the Society’s controls and the plans in place for dealing with potential attacks;
  • The implications of the outcome of the UK General Election;
  • The implications of a UK exit from the European Union;
  • The arrangements in place following the recapture of our unit-linked business. We received assurance that the controls were operating effectively; and
  • The Committee received regular progress reports from management on the Society’s preparedness for Solvency II during the year and reviewed the Own Risk and Solvency Assessment prior to the Board’s strategy meeting. PWC were engaged to undertake an independent review on the application of the standard formula to the Society’s business. The Committee was satisfied that the Society would be ready for the implementation of Solvency II reporting.

In relation to the financial statements for 2015, the following significant issues were considered by the Committee:

  • The methodologies and assumptions used in the valuation of the Society’s liabilities were presented to the Committee by the Chief Actuary and his team. PwC commented on the reasonableness of the assumptions, drawing on their own knowledge and experience. The Committee’s review focused on the methodology and the data underlying the principal assumptions of policyholder behaviour and expenses. The Committee considered the longevity assumptions and noted that this risk had been reassured to Canada Life pending full transfer of the annuity book of business to them in 2016;
  • During 2015, the Committee and the Board regularly reviewed policyholder behaviour in light of the pension reforms implemented in April 2015 and the increase in the level of capital distribution. As the Chairman mentions in his report, we need to develop our understanding of the influences that cause policyholders to take their benefits, and work to address this issue will start in 2016. The Committee considered carefully policyholder behaviour assumptions for 2015. We agreed with management’s recommendation that the assumptions should remain fundamentally unchanged from 2014. They continue therefore to be based on the Society’s existing longer-term experience of policyholder behaviour, with appropriate sensitivity disclosures;
  • The Committee reviewed the assumptions recommended by management in applying the budgeted expenses approved by the Board to the valuation of the liabilities. The Committee considered the run-off plans of management in concluding the approach recommended by management; and
  • The valuation of the Society’s invested assets. Reports from the Finance Director were submitted to the Committee providing information on the valuation processes followed for invested assets, including how these provided a fair value.

The Committee considered whether the Annual Report and Accounts, taken as a whole, is fair, balanced and understandable, and provided the information necessary for members to assess the Society’s performance, business model and strategy and how these judgements were reached.

In arriving at their conclusion, the Committee reviewed the Board and Audit and Risk Committee papers and minutes to satisfy itself that the Annual Report and Accounts did meet these criteria and could be recommended to the Board for approval.

The Committee kept the relationship between the Society and its external auditors under review and considered their independence, including the extent, if any, of their fees from non-audit services. As part of the review, the Committee obtained confirmation that, in PwC’s opinion, their independence as auditors has not been compromised. The Committee approved the terms of engagement and the remuneration to be paid to the external auditors in respect of audit services.

The Society’s general principle is that our external auditors should not provide non audit-related services for the Society. In 2015, the exceptions to this were in relation to: the provision of regular regulatory updates in relation to policies sold in Germany; induction training for the Society’s Risk Director; and assurance activities in regard to our preparation for Solvency II. 

The Audit and Risk Committee has primary responsibility for recommending to the Board the appointment, reappointment and removal of the external auditors. In considering this, the Committee takes into account the firm’s independence and whether it would be appropriate to invite tenders for the role of external auditors.

PwC have acted as the Society’s external auditors since 2001. The Committee reviewed the appointment of external auditors during 2012 as there was a mandatory rotation of the Audit Partner at PwC during 2013. In recommending the reappointment of PwC as the Society’s external auditors and not making the role subject to tender at that time, the Committee considered the need for continuity of experience in the external auditor, in particular, during periods of significant change. The Board agreed the Committee's recommendation to submit the role of external auditor to formal tender process at the time the next rotation of Audit Partner is due (expected to be in 2018), subject to continued satisfactory performance by PwC until that time. The Committee continues to monitor the development of European regulations in relation to audit tendering and rotation.

The Committee reviewed the effectiveness of the external audit process at its meeting on 17 March 2016, utilising input from the Chair and the Finance Director. The Committee concluded that PwC’s performance had been effective and recommended to the Board that they be reappointed for 2016.

The UKCGC states that the Board should satisfy itself that at least one member of an Audit Committee has recent and relevant financial experience. The Board has agreed that Keith Nicholson should be regarded as the member having recent and relevant financial experience. 

The UKCGC states that no one other than the Committee Chair and members should be entitled to be present at a meeting of an Audit Committee, but others may attend at the invitation of the Committee. The Audit and Risk Committee has indicated that any Director may attend its meetings if he or she wishes.

Click here to view Terms of Reference of the Audit and Risk Committee

With-Profits Committee

The Committee considers matters affecting with-profits policyholders such that the interests of all, or where relevant specific groups of, policyholders are appropriately considered. Its primary objective is to ensure the fair treatment of with-profits policies, having due regard to:

  • Appropriate risk and capital management;
  • Fair payouts when benefits are taken;
  • Appropriate investment strategies for the Society’s fund;
  • Clear and timely policyholder communications; and
  • Any issues that with-profits policyholders might reasonably expect the Committee to consider.

Details of how this is achieved are documented in the Society’s Principles and Practices of Financial Management and ‘Guide to how we manage the with-profits fund’ published on our website. The Committee is responsible for the maintenance of these documents.

The Committee works closely with, and obtains the opinion and advice of, the Society’s With-Profits Actuary. It advises the Board on matters affecting with-profits policyholders.

The Society has concluded that it is appropriate for the Board as a whole to carry out the duties of the With-Profits Committee. In order to ensure appropriate focus is given to these duties, the Board forms a With-Profits Committee to consider relevant items at Board meetings.

Click here to view Terms of Reference for the With Profits Committee

Nominations Committee
During 2015, the Nominations Committee comprised two non-executive Directors: Ian Brimecome (Chair), and Keith Nicholson ; and the Chief Executive, Chris Wiscarson.

The Committee assists the Board in ensuring that the Society meets the relevant principles and provisions of the UKCGC. 

The UKCGC states that the Board and its committees should have the appropriate balance of skills, experience, independence and knowledge of the company to enable them to discharge their respective duties and responsibilities effectively.

In relation to the Committee’s review of the appropriateness and suitability of Board members, Directors are required to provide feedback to the Chairman both on their own performance and that of their colleagues.

The feedback was discussed at the March Nominations Committee meeting, following which the Chairman provided specific feedback to each Board member.

UKCGC principles also specify that there should be a formal, rigorous and transparent procedure for the appointment of new directors to the Board.

On joining the Board, new Directors receive an extensive bespoke induction programme. Meetings take place with Directors and senior management to share and explain the Society's internal and external reports on important aspects of its business.

The Board is committed to appropriate diversity, including gender diversity. The Board’s clearly stated intention in its 2013 Annual Report and Accounts was to have at least two women directors. This we have achieved.

It is our intention to have a leadership team that brings different skills and perspectives as well as different experiences and backgrounds. By the end of 2015, we had achieved our aim to have an equal number of women and men in senior management positions with 50% women and 50% men in such positions. This compares with 34% women and 66% men two years ago. At the end of 2015, the Society’s workforce comprised 69% women and 31% men. Currently, two of the six members of the Executive Committee are women, as is the With-Profits Actuary, the Head of IT, the Head of Legal Services and the Company Secretary.

Click here to view Terms of Reference of the Nominations Committee

The Remuneration Committee

Statement from the Remuneration Committee Chair 

As the Chairman has set down in his statement, the Society made further good progress in 2015. It is in this light that the remuneration of the Chief Executive, the Finance Director and the Executive team has been assessed. Our driving force as a Remuneration Committee is to ensure that executive remuneration fairly and effectively rewards good performance for the year immediately past as well as having a clear eye to doing what is necessary to secure the future success of the Society.

Review of 2015

During 2015, the Committee made the following decisions, full details of which are set out in the Directors’ remuneration report:

  • Assessing Executive Director performance against the 2015 targets;
  • Agreeing the final vesting under the Finance Director’s Long–Term Incentive Plan (“LTIP”);
  • Approving performance targets for 2016;
  • Agreeing to make no change to the Chief Executive’s and Finance Director’s base salaries in 2016;
  • Increasing the Chairman’s fee; and
  • Agreeing the revised remuneration policy, which is now tabled for members’ approval.

New remuneration policy

Last year, the Remuneration Committee decided that that there was no need to introduce a new LTIP upon its expiry in 2015. The Committee proposed a new annual bonus scheme with a higher bonus opportunity and a substantial deferred portion subject to clawback and malus, as defined below. I said that we would seek views before bringing forward our final proposals for members’ approval at the AGM in May 2016.

Our principal way of obtaining members’ feedback was through four focus groups held in London and Cardiff. I am very grateful to attendees for so clearly articulating their views. In summary, attendees asserted that: arrangements must be simple; there must be a strong link between pay and performance; and there should be no increase in the overall level of executive Director remuneration.

The Committee wholeheartedly concurs with these views. We are now seeking formal endorsement of the proposals we put forward last year.

The new remuneration policy:

• One bonus scheme with a higher bonus opportunity
• No LTIP
• 50% of sum awarded deferred for up to three years
• Clawback and malus

 

 

 

 

 

 In putting this policy forward, we have certainly simplified things by not replacing the LTIP and by having just one bonus scheme. The objectives for payment under the scheme are clearly set down in the policy. Since 2014, 30% of the bonus awarded has been deferred for one year. Under the new policy, from January 2016, 50% of the bonus awarded will be deferred for up to three years.

In addition, the entire discretionary bonus will be subject to clawback and the deferred portion of the bonus will also be subject to malus. Both of these terms are defined below.

While these changes affect executives, I wish to make it clear that we propose no change to the current Chief Executive’s bonus arrangement. His maximum opportunity will remain at 25% of base salary, although he has never taken a bonus or pay increase. The Chief Executive has no LTIP arrangements.

In making recommendations to adopt a new remuneration policy, the Remuneration Committee considered the merit of doing away with any sort of bonus. We concluded that such a practice would not be in the best interests of the Society. It would lead to fixed salaries above our appetite, and be a disincentive to staff to ‘go the extra mile’. Such a unique stance would not only be potentially demotivating to our staff but would also provide a substantial barrier to good people joining the Society as and when the need arises.

I want to reassure members that removal of the LTIP does not mean that the Society is no longer focused on the long term. I hope it is clear from the business strategy that we place proper emphasis on what is needed to provide policyholder value both now and in the future.

In writing this report, I am mindful that the Society remains a substantial business managing £7bn savings for more than 450,000 policyholders. It is essential to have the right people running the organisation and they must be paid properly. In setting the level of reward, we have made our approach simpler, with a stronger link between pay and performance, and have put in place safeguards, including a higher proportion of deferred pay and the introduction of malus and clawback. 

In closing, I repeat my words from last year: it is a very firm principle that this new policy does not lead to greater levels of overall remuneration through the back door. You have my commitment on this. I commend the Society’s new remuneration policy to members.

Cathryn Riley
Chair, Remuneration Committee

Definitions

Base salary
Fixed amount; reviewed annually and paid monthly in twelve equal instalments.

Bonus
The annual discretionary bonus rewards achievement of key deliverables in the relevant financial year. The maximum possible bonus is expressed as a percentage of base salary.

Long-Term Incentive Plan
The Long-Term Incentive Plan (“LTIP”), introduced in 2012, expired in 2015. There is no replacement.

Clawback
Clawback allows for the recovery of sums already paid to executive Directors. Clawback applies to bonus and LTIP awarded after 1 January 2015, for a period of two years following award in any of the following circumstances: a misstatement of the Society’s financial accounts deemed material by the Remuneration Committee; or a failure of risk management deemed material by the Remuneration Committee; or gross misconduct by the executive Director.

Malus
Malus allows for the forfeiture of bonus in the deferred period before it has been paid to the executive Director in any of the following circumstances: a restatement of the Society’s financial accounts as a result of an error; or failure by the executive Director to comply with the rules, policies or procedures of the Society, or those of our regulators, deemed to be significant by the Remuneration Committee; or any adverse post-implementation review findings relating to a project or task, deemed to be significant by the Remuneration Committee, for which the executive Director is accountable; or dismissal of the executive Director.

About the Remuneration Committee and the Directors’ remuneration report
The Remuneration Committee is the Board Committee with responsibility for recommending remuneration policy to the Board. The Committee comprises three non-executive Directors: Cathryn Riley, Ian Brimecome and Keith Nicholson. The Committee reviews remuneration policy annually and sets the terms of employment and remuneration of executive Directors.

The Committee operates to the standards set out in the UKCGC and by the Association of British Insurers.

More information on the work of the Remuneration Committee and the Directors’ remuneration policy is given in the Directors’ remuneration report in the the Annual Report and Accounts 2015.

Click here to view Terms of Reference of the Remuneration Committee

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8. Statement of compliance with the UK Corporate Governance
The Board considers that the Society has applied the relevant principles of the UK Corporate Governance Code. The Society complied with the Code and associated guidance throughout the year, other than in respect of a majority of members on the Nominations Committee being independent non-executive Directors, and that the Remuneration Committee should consist of at least three non-executive Directors. The membership of Nominations Committee has been revised so that the Society will comply in 2016. With regard to the Remuneration Committee, the Board believes it is sufficient that two independent non-executive Directors are members of the Committee.

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9. Principles and Practices of Financial Management
The Society has produced a detailed statement about how it manages the with-profits fund. The document is called ‘Principles and Practices of Financial Management’ (PPFM) and complies with the requirements laid down by Financial Conduct Authority. The document is intended to assist knowledgeable observers to understand the way in which the with-profits business of the Society is conducted. The Society has also produced a much simpler, easier to follow version of the Principles and Practices in Plain English called ‘A guide to how we manage the with-profits fund’.

Click here to view A guide to how we manage the with-profits fund

Click here to view Annual report to with-profits policyholders

Click here to view Changes to the PPFM

Click here to view Principles and Practices of Financial Management (PPFM)

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10. Stewardship
The Society does not undertake investment management directly as this has been outsourced to Aberdeen Asset Management for our unit-linked funds, and to BlackRock for our other funds.

Aberdeen Asset Management and BlackRock have confirmed that they comply with the UK Stewardship Code. Both have been assessed by The Financial Reporting Council (FRC) as Tier 1 firms. This means FRC consider they “provide a good quality and transparent description of their approach to stewardship and explanations of an alternative approach where necessary”.

Click here to view;

BlackRock's statement on their compliance with the UK Stewardship Code

Aberdeen Asset Management's statement on their compliance with the UK Stewardship Code

Our mandates with BlackRock and Aberdeen Asset Management require them to report on activity in this area and we will monitor this on a regular basis.

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