Doing business the just way Just group PLC Annual Report and accounts 2020
JUST GROUP PLC Annual Report and Accounts 2020
our PURPOSE
We believe that every decision we make and every action we take should help us achieve our purpose
Contents
Strategic Report 1 Our purpose 2 Investment case 3 Financial and operational highlights 4 At a glance 6 Chair’s Statement 8 Chief Executive Officer’s Statement 10 Market context 14 Businessmodel 16 Strategic priorities 18 Sustainable investment strategy 20 COVID strategy 22 Key performance indicators 24 Business Review 32 Riskmanagement 34 Principal risks and uncertainties 38 Environment 40 Colleagues and culture 44 Relationships with stakeholders 46 Section 172 statement 51 Non-financial information statement
Financial Statements 98 Independent Auditors’ Report 107 Consolidated statement of comprehensive income 108 Consolidated statement of changes in equity 109 Consolidated statement of financial position 110 Consolidated statement of cash flows 111 Notes to the consolidated financial statements 154 Statement of changes in equity of the Company 155 Statement of financial position of the Company 156 Statement of cash flows of the Company 157 Notes to the Company financial statements 161 Additional financial information 164 Information for shareholders 166 Directors and advisers 167 Glossary 169 Abbreviations
All Just Group plc regulatory announcements, shareholder information and news releases can be found on our Group website, www.justgroupplc.co.uk Cross linking Throughout this document we have linked content together in order to provide amore comprehensive report inside the Strategic Report, Governance Report and Financial Statements. These sections, taken together, comprise the Strategic Report in accordance with the UK Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013.
Governance REPORT 54 Chair’s introduction to Governance
56 Board of Directors 60 Senior leadership 62 Governance in operation 68 Nomination Committee Report 71 Audit Committee Report 76 Group Risk and Compliance Committee Report 78 Directors’ Remuneration Report 93 Directors’ Report 97 Directors’ Responsibilities
STRATEGIC REPORT
1
Individuals We provide guaranteed income for life to deliver security and peace of mind for our customers and we provide regulated advice, guidance and information services to help people make the most of their pensions and other savings.
READ MORE ON PG.4
we Help people
Pension scheme trustees We provide improved security of income for members of defined benefit pension schemes by transferring the risk to Just.
READ MORE ON PG.4
achieve a better later life
Homeowners We provide the resources to improve the later life of homeowners and their families.
READ MORE ON PG.4
Companies We provide advisory, technology and customer services to help UK companies with retirement focused solutions to meet the needs of their customers and clients in later life.
READ MORE ON PG.4
JUST GROUP PLC Annual Report and Accounts 2020
2
investment case
Capital sustainability,
competence, innovation and growth
Capital strength and sustainability Our priority is to deliver a sustainable capital model so that we can take advantage of the growth markets that we operate in. In 2020 we achieved a major landmark in the Group’s history by achieving capital self-sufficiency. We have improved our overall capital strength and are now working to increase our resilience as well as increasing our levels of organic capital generation. This focus will help us to fulfil our other goals and ensure we deliver value for shareholders. READ MORE ON PG.6 Deploying our highly effective new business franchise to create value from our leadership positions in attractive segments of the UK retirement income market Just has a compelling, clear purpose, to help people achieve a better later life by providing financial advice, guidance, competitive products and services to those approaching, at and in-retirement. READ MORE ON PG.5 Growing retirement markets As the population ages, our retirement markets grow. Whether it is defined benefit schemes de-risking or retirees seeking either to turn their pension into a guaranteed income for life or access equity in their homes, our markets have many years of growth ahead of them. READ MORE ON PG.10 we Help people achieve a better later life Positive disruption As retirement specialists we seek to positively disrupt the markets where we choose to participate, delivering better outcomes for customers so we may deliver value for shareholders. READ MORE ON PG.14 Leading distribution franchise Just has leadership positions in attractive segments of the retirement market. We have a strong brand, known and trusted for delivering outstanding service, which combines with a diversified distribution model to create a uniquely valuable franchise. READ MORE ON PG.14 Delivering value growth Our sustainable capital model combined with a leading distribution franchise that positively disrupts in growing retirement markets will allow us to help more people achieve a better later life and provide growth in shareholder value. READ MORE ON PG.14
We have made huge strides to rebuild our capital base while focusing on fulfilling our purpose and building value for shareholders
DAVID RICHARDSON Group Chief Executive Officer
READ MORE ON PG.8
STRATEGIC REPORT
3
Financial and Operational Highlights
KEY PERFORMANCE INDICATORS
SOLVENCY II CAPITAL COVERAGE RATIO (ESTIMATED) 2 156 % 141% at 31 December 2019
UNDERLYING ORGANIC CAPITAL GENERATION/(CONSUMPTION) 1 £ 18 m £(15)m at 31 December 2019
ORGANIC CAPITAL GENERATION/ (CONSUMPTION) 1 £ 221 m £36m at 31 December 2019
RETIREMENT INCOME SALES 1
NEW BUSINESS OPERATING PROFIT 1
ADJUSTED OPERATING PROFIT BEFORE TAX 1
£ 2,145.3 m 2019: £1,918.1m, up 12%
£ 199.2 m 2019: £182.0m, up 9%
£ 239.3 m 2019: £218.6m, up 9%
MANAGEMENT EXPENSES 1
IFRS PROFIT BEFORE TAX
IFRS NET ASSETS
£ 159.3 m 2019: £169.0m, down 6%
£ 236.7 m 2019: £368.6m, down 36%
£ 2,490.4 m 2019: £2,321.0m, up 7%
AWARDED FURTHER RECOGNITION FOR OUTSTANDING SERVICE
FINANCIAL ADVISER: 5 STAR SERVICE AWARD FINANCIAL ADVISER: 4 STAR SERVICE AWARD CONFIRMIT ACE AWARDS
FINANCIAL STRENGTH AND OTHER INDICATORS
FITCH INSURER FINANCIAL STRENGTH RATING A + for Just Retirement Limited (2019: A+)
FITCH ISSUER DEFAULT RATING
A for Just Group plc (2019: A)
1 Alternative performance measure (see glossary on page 167 for definition). Underlying organic capital generation/(consumption) and organic capital generation/(consumption) are reconciled to Solvency II excess own funds on page 25. New business operating profit, management expenses and adjusted operating profit are reconciled to IFRS profit before tax on page 27 and 28. Retirement Income sales are reconciled to gross premiums written in note 6 to the consolidated financial statements on page 122. 2 Solvency II capital coverage ratio allows for a notional recalculation of transitional measures on technical provisions (“TMTP”) at 31 December 2020.
JUST GROUP PLC Annual Report and Accounts 2020
4
at a glance
Leaders in our markets. We positively disrupt markets where we can become a leader and deliver great outcomes for customers so we may deliver value for shareholders
We are a specialist in our chosen markets, serving four distinct groups…
Trustees and scheme sponsors: Providing member security and de-risking pension liabilities Defined benefit pension schemes de-risking their liabilities by securing member benefits with an insurance contract.
Individuals: Providing retirement income People who have built up pension savings throughout their career and want a guaranteed income, flexible income or a combination in retirement.
ADDRESSABLE MARKET
MARKET VALUE OF DEFINED CONTRIBUTION PENSION SAVINGS > £ 1 trillion
> £ 1 trillion
Homeowners: Accessing property wealth People aged 60+ who want to access wealth locked up in their property.
Corporate clients: Solving problems for companies
We develop scalable retirement-focused solutions for banks, building societies, life assurance companies, pension scheme trustees, other corporate clients and for their customers, clients and members.
PROPERTY WEALTH OWNED BY PEOPLE AGED 55 + > £ 3.2 trillion
STRATEGIC REPORT
5
Competitive position: A leader
Developing
…WITH PRODUCTS AND SERVICES
SERVICES
BENEFIT AND COMPETITIVE POSITION
Just’s innovative approach and underwriting expertise in this segment delivers better prices for trustees.
Defined Benefit De-risking Solutions (“DB”) Solutions for pension scheme trustees to reduce the financial risks of operating pension schemes and increase certainty that members’ pensions will be paid in the future.
marketed products 1
By using our unrivalled intellectual property, Just provides an individually tailored solution providing customers typically with double-digit percentage increases in income compared to standard products. Just’s pioneering Secure Lifetime Income product enables customers to select a guaranteed income fromwithin a Self-Invested Personal Pension. This enables a customer to manage and blend their total pension assets tax efficiently within a single technology platform.
Guaranteed Income for Life (“GI f L”)
A solution for individuals/couples who want the security of knowing they will receive a guaranteed income for life.
SECURE LIFETIME INCOME (“SLI”) Launched in 2019, SLI is a tax-efficient solution for individuals who want the security of knowing they will receive a guaranteed income for life and the flexibility to make changes in the early years of the plan. Care Plans A solution for people moving to residential care who want the security of knowing a regular payment will be made to the care provider for the rest of their life.
Just’s Care Plans can be tailored to the individual and offer a tax-efficient solution to making payments to residential care providers.
Just provides a range of lifetime mortgages, enabling people to meet a variety of needs in later life.
Lifetime Mortgages (“LTM”) Solutions designed for people who want to release some of the value of their home.
1 Reported in our
Insurance segment.
SERVICES
BENEFIT AND COMPETITIVE POSITION
HUB Financial Solutions offers an innovative approach that provides affordable regulated advice to people with modest pension savings. It also delivers face-to-face nationwide advice at a time and place to suit the client, and enables pension schemes to deliver efficient and robust scheme-led defined benefit transfer programmes. + Provides a range of business services tailored to the needs of the organisation, ranging from consultancy and software development to fully outsourced customer service delivery and marketing services.
HUB Group Our professional services and distribution businesses delivering technology, broking and advice solutions for corporate clients and pension schemes. We also provide regulated financial advice on how people should use pension savings, or release some of the value from their home. + Support for organisations wanting to deliver whole-of-market shopping around services to source retirement income products for their customers, employees or pension scheme members. HUB Financial Solutions is the UK’s largest GIfL broker.
Professional services 2
2 Reported in our Other segment.
JUST GROUP PLC Annual Report and Accounts 2020
6
Chair’s statement
Just’s purpose is compelling, clear and acts as a beacon for colleagues across the Group to live the purpose every day
Engaging PURPOSE, delivering our commitment
John Hastings-Bass Chair
STRATEGIC REPORT
7
I am pleased to introduce Just Group plc’s 2020 Annual Report, my first since becoming Chair in August 2020. We have continued to strengthen the capital position of the Group, increasing our resilience and delivered an excellent operating performance. I’m delighted to have joined the Company to lead the Board. I’ve received a warmwelcome and have been hugely impressed by the quality of colleagues I have had an opportunity to meet across the Group. Before commenting on the Company’s performance, on behalf of the Board I would like to express our gratitude to my predecessor, Chris Gibson-Smith. Chris was Chair of Just Group since its creation, overseeing a transformational merger and navigating significant regulatory change. He has steered the Group through some very challenging times and takes with him our best wishes for the future. OUR PRIORITY IN 2020 Our first priority in 2020 has been to ensure the wellbeing of our colleagues and our customers in response to the global COVID-19 pandemic. David Richardson and his team have demonstrated outstanding leadership in their considered and rapid response. Within days, 99% of our colleagues had been equipped with new technology and other equipment to enable them to work at home productively. All of our colleagues remain on full pay and the Group has not used the government’s job retention scheme. We maintained the delivery of all the Group’s services to customers, most of whom are in the more vulnerable groups. To support our customers through this difficult period, we have made a number of changes to our products and services. You can read more about these changes and the support we have provided to our colleagues throughout this report. In the 2018 and 2019 Annual Reports we set out the uncertainty presented to Just and other companies in the industry resulting from the Prudential Regulation Authority’s (“PRA”) consultation and policy statements into the treatment of equity release mortgages being held to back annuity liabilities. The impact on the Group over this period has been significant. In 2019 the Board instigated a less capital intensive strategy. David Richardson and his team’s response to adapting the business model has been disciplined and focused and we are improving our organic capital generation. Additionally, they have demonstrated strong competence in delivering their commitments by executing a wide programme of management actions over a two year period to improve the Group’s capital position. We continue to engage constructively with the PRA and although our solvency position continues to strengthen, regulatory scrutiny remains high and some uncertainty and risk remains, further details of which are set out in the principal risks and uncertainties section, and in note 35, Capital. The Group’s financial strength and performance is explained in detail in the Business Review. DIVIDEND Whilst the Group has made significant progress to build its capital base to accommodate the regulations on equity release mortgages and to start to grow its underlying capital generation, the external environment as we emerge from the pandemic continues to be uncertain. The Board therefore considers that it would not be appropriate to recommend recommencing dividend payments and will continue to keep this situation under review.
BOARD COMPOSITION AND GOVERNANCE I am pleased to welcome Kalpana Shah who joined the Group Board on 1 March. She has considerable commercial and insurance experience which will benefit our Group. I take great pride in leading the Board and the Group’s governance function, and my introduction to the Corporate Governance Report provides further information on our governance and decision making processes. I would like to thank the entire Board for their significant contribution, and look forward to working with them in 2021. ENGAGEMENT WITH OUR STAKEHOLDERS The Board engages directly and indirectly with our customers, shareholders, colleagues, regulators, legislators, professional bodies and wider society to promote the interests of our customers more broadly. We place great importance on working effectively with these groups and actively seeking their feedback. We work hard to ensure our customers benefit from our services and our shareholders receive the benefit of long-term value creation. Throughout this report you can read how the Board takes into consideration feedback from the Company’s stakeholders and how the Board and colleagues across the Group promote the success of the Company. OUR PURPOSE Before joining the Company, as I began my conversations with members of the Board, I was immediately drawn to the powerful purpose that sits at the heart of Just. Just’s purpose is compelling, clear and acts as a beacon for colleagues across the entire Group to live the purpose every day. Quite simply, we help people achieve a better later life. We achieve this by providing financial advice, guidance, competitive products and services and we help our customers achieve security, certainty and provide themwith peace of mind in retirement. CONTRIBUTING TO A GREENER, MORE SUSTAINABLE FUTURE In support of our important role in helping the world transition towards a sustainable environment and low-carbon global economy, I was delighted that Just became the first UK insurance company to launch a Green Bond. You can read more about this on page 18. OUTLOOK The fundamental drivers for growth in our core markets continue to be strong. We have met our commitment to achieve capital self-sufficiency this year which puts us in a strong position to selectively grow our business and create value for shareholders. We are continuing to increase our resilience with further planned actions to reduce our capital sensitivity to our residential property exposure. The commercial outlook remains favourable for our Group. On behalf of the Board, I would like to close by thanking all of our colleagues across the Group for their exceptional agility in responding to the pandemic and for their commitment to providing the best service possible to our customers and business partners. We are building a stronger, more resilient Just company that can be increasingly optimistic about the future.
ANNUAL GENERAL MEETING 2021 10.00 am 11 May 2021
at Just Group plc Enterprise House Bancroft Road Reigate Surrey RH2 7RP
JUST GROUP PLC Annual Report and Accounts 2020
8
chief executive officer’s statement
2020 was a major landmark in the Group’s history. We achieved our goal of becoming capital self-sufficient and we now have more choices in how we deploy our resources. We have a resilient, sustainable business and are well placed to help even more people achieve a better later life
Solvency ii capital coverage ratio (estimated) 1 156 % 2019: 141% Organic capital generation 2 £ 221 m 2019: £36m adjusted operating profit before tax 2 £ 239.3 m 2019: £218.6m 1 Solvency II capital coverage ratio allows for a notional recalculation of TMTP at 31 December 2020. 2 Alternative performance measure. IFRS profit before tax £236.7m (2019: £368.6m).
Focusing on capital, sustainability and purpose
DAVID RICHARDSON Group Chief Executive Officer
STRATEGIC REPORT
9
I am delighted to present my Chief Executive Officer’s Statement for the 2020 financial year. CAPITAL Our priority has been to deliver a sustainable capital model and 2020 was an important year in the attainment of that goal, as we achieved capital self-sufficiency more than a year earlier than originally planned. Our Solvency II capital coverage ratio has grown to 156% (estimated, post notional TMTP recalculation) from 141% at the end of 2019, an exceptional achievement given the particularly difficult economic environment. The increase reflects a sustained improvement in organic capital generation and the benefits arising from the successful execution of a range of management actions. Increasing the organic capital generation has been a key focus of the whole leadership team. Underlying organic capital generation was positive for the first time in 2020, with management actions adding further to the surplus. Our increased focus on reducing costs and new business strain is helping to increase the underlying capital generation which provides a sustainable foundation for the future. We have taken action to introduce significant de-risking initiatives over the year which have helped to increase the resilience of the balance sheet and to reduce the sensitivity of our capital position to economic factors. We have entered into our second and third no-negative equity guarantee (“NNEG”) hedging transactions, sold a portion of our lifetime mortgages portfolio, released capital through more longevity reinsurance, this time on the GIfL portfolio and, as previously announced, signed our first DB partnering deal. We have successfully hedged against interest rate movements and proactively managed our credit portfolio to positively contribute to our solvency capital despite credit downgrades. The UK property market has been resilient since the start of the COVID-19 pandemic. We recognise that the uncertainty over the health of the UK economy makes it more difficult to predict the future trajectory of UK property prices to which our solvency position is exposed, as shown in the Solvency II property sensitivities included in the Business Review. The sensitivity has reduced due to the significant management actions we have executed over the year – both in further NNEG hedges, which partially protect around 20% of our LTM book against adverse future property performance, and in the sale of around 8% of the mortgage book. We expect further management actions will be implemented to reduce risk and boost the Group’s capital position. Regulatory engagement has remained high, as we have taken action to strengthen our capital position and reduce our property exposure. Some uncertainty and risks remain with further details in the principal risks and uncertainties section, and in note 35, Capital. GROWTH AND INNOVATION The retirement markets we participate in provide long-term structural growth opportunities and we are able to achieve high levels of return on the capital we invest in those markets. In the second half of 2020 we started to take more of those opportunities and we will be building on those foundations in 2021. We are investing for growth by developing new solutions to positively disrupt our markets and deliver better outcomes for customers. This year we announced our first defined benefit partnering transaction, a capital light model for DB de-risking transactions which exceed £250m in size. In our retail markets we have introduced Destination Retirement, our unique automated advice service which has been developed to help close the financial advice gap for people in middle Britain with more modest pension savings. OUR PURPOSE AND SUSTAINABILITY Just has a strong social purpose: we help people achieve a better later life. We help our customers achieve security, certainty and peace of mind. During 2020, we have further strengthened our sustainability credentials as we became the first UK insurer to issue a Green Bond and the first to provide a green lifetime mortgage. The Green Bond enshrines our commitment to supporting the transition to a low-carbon global economy as all the proceeds are earmarked to be invested in green infrastructure
projects. In 2019 our carbon intensity per employee was already the lowest in the FTSE 350 life insurance sector and in 2020 we have achieved further dramatic reductions. However this is a long-term journey and we will continue to work hard to improve all aspects of sustainability that we touch as a business. CUSTOMERS The needs of our customers are forefront when setting our goals. Many of our customers are in vulnerable groups and so we are proud that we have maintained the delivery of all the Group’s services to customers during the disruption caused by the pandemic. In addition, we made a number of changes to our products and services to help support our customers through this difficult period where many household services have been impacted by the pandemic. You can read more about our response to help customers on page 21. COLLEAGUES AND CULTURE Protecting the welfare of our colleagues across the Group and ensuring the delivery of critical services to customers have been clear priorities driving our response to the pandemic. We are very aware of the challenges colleagues face when working from home and particularly for those with additional caring responsibilities. You can read in detail how we have supported our colleagues and achieved our highest ever Best Companies score on page 21. We are rightly proud of our award-winning service, and of our strong social purpose, which together deliver a “Just” experience to our customers. Our colleagues are at the heart of this and I am grateful for the immense contribution they make to our business and for the way they have adapted so positively and with such agility to our new way of working during the pandemic. Building a diverse workforce and strengthening our inclusive culture is a key priority for Just. It’s the right thing to do and it helps us to succeed, innovate and better serve our customers. I am proud that we have increased gender diversity across senior roles by five percentage points in 2020 and we are on track to achieve our pledge as a signatory to the Women in Finance Charter that 33% of our senior leaders will be female by 2023. PERFORMANCE REVIEW I am very pleased that, as our capital position has improved over the year and after taking decisive action to reduce new business strain, we have been able to return to new business growth in the second half of the year. For the whole year, Retirement Income sales were £2,145m, an increase of 12% from the prior year. The DB market has been very resilient throughout the crisis. DB sales were up 22% to £1,508mwhich is testament to how well both trustees and employee benefit consultants have adapted to working remotely. The retail business was initially more affected but adapted swiftly and by the second half of 2020 GIfL and LTM sales were similar to those in the second half of 2019. IFRS profit before tax for 2020 was £237m (2019: £369m) due to lower economic profits in 2020. Adjusted operating profit before tax rose to £239m (2019: £219m), as higher sales and new business profit, together with improved in-force earnings, have helped to offset higher finance costs. The attention to capital discipline has resulted in a further fall in our new business strain to £48m (2019: £74m) and helped to achieve a very pleasing positive organic capital generation of £221m. We are building a strong, sustainable track record in capital generation, something that we are all committed to continuing. IN CONCLUSION These are extraordinary times and we are doing all we can to ensure we live up to our purpose to help people achieve a better later life. I am very grateful to my colleagues for their resilience, commitment and adaptability during this challenging period. We are pleased that our relentless focus on our key goal of strengthening the Group’s capital has resulted in a much improved position that will allow us to make more positive choices around growth, innovation and shareholder returns in 2021 and beyond.
JUST GROUP PLC Annual Report and Accounts 2020
10
market context
DEFINED BENEFIT DE-RISKING SOLUTIONS Defined benefit pension schemes have an obligation to pay members a retirement income based on their earnings history, length of employment and age. Operating these schemes has become unattractive and more costly for employers over the last decade and this has created an opportunity for guaranteed income providers to de-risk, fully or partially, an employer’s defined benefit obligations to its members. Defined benefit de-risking can occur via a Buy-in, whereby a pension scheme pays a premium to an insurance company to purchase an income stream that matches its obligations to some or all of its members, but retains legal responsibility for those obligations. An alternative is to Buy-out, where a pension scheme removes its obligations by purchasing individual insurance policies to pay the benefits of some or all of its members, who then become customers of the de-risking provider. DELIVERING BETTER OUTCOMES FOR CUSTOMERS Structural drivers in our markets mean we can grow profits while delivering better outcomes for customers
CURRENT MARKET AND OUTLOOK 2019 was a record year for de-risking transactions, with a total market volume of over £40bn driven by a number of megadeals. Megadeals have been largely absent from the market in 2020, providing an opportunity for more sub-billion transactions to secure insurer interest. Volatility in financial markets and subsequent illiquidity, both caused by COVID-19, provided both challenges and opportunities for schemes. As credit spreads widened, exceptional value in pensioner Buy-in and Buy-out pricing relative to holding gilts was available between April and July for those schemes ready and able to transact quickly. Since then, pricing still represents better value than before COVID-19 and where schemes have the funding in place, they’re keen to transact. As a result, the market size in 2020 is estimated to have exceeded £25bn (source: LCP), making it the second busiest year on record. There are an estimated £2.4tn of UK defined benefit pension scheme liabilities which have yet to be secured with an insurer (source: PPF) and the drivers remain in place to ensure continued high demand for de-risking solutions. The draft of the Pensions Regulator’s defined benefit funding code is expected in spring 2021. The regulation is expected to ensure pension schemes are managing their risks appropriately and are on track to be fully funded by the time their cash flows turn negative, or face a bespoke approach to regulation. As a result we expect more schemes will have the funding in place to de-risk. Research by LCP in 2020 found that 80% of defined benefit schemes expected to reach their endgame within ten years, with steady annual demand for de-risking volumes forecast to be in excess of £30bn until 2029 (source: Hymans Robertson). In their outlook for 2021, Fitch also believe that the strong demand for defined benefit de-risking is likely to continue. Even with self-sufficiency and commercial consolidation as possible endgames, we believe trustees will be competing for insurer attention. While insurer capacity to write a higher volume of individual transactions will increase in the long term, over the medium termwe believe the demand for the number of de-risking transactions will exceed the supply available from providers. The seasonality in the defined benefit de-risking market has become less prevalent, with strong demand across the year. The exception in 2020 was in the months immediately after the first COVID-19 lockdown in March, when demand fell sharply but recovered again to pre-pandemic levels by early summer. Heightened government, regulatory and fiduciary focus alongside consumer activism has pushed environmental, social and governance (“ESG”) up the agenda for UK defined benefit pension schemes. Many trustees considering de-risking seek assurance that ESG considerations underpin the asset choices in the insurer’s investment portfolio. At Just, our assets are invested sustainably in line with our ESG policy and the Green Bond we issued in October, the first by a UK insurance company, demonstrates how we’ve embedded ESG into our investment strategy. In June 2020 the Pensions Regulator issued their guidance for so called superfunds, a pension consolidation solution for schemes and sponsors to transfer risk where they cannot achieve a Buy-out from an insurance company. The interim guidance sets out the standards the regulator states must be met in the period before longer-term legislation is in place. Regulation by the Pensions Regulator is outside of the insurance regime and so these new consolidators would not be subject to the more robust capital requirements of the Solvency II regulations. If these new arrangements are regulated as proposed, they would provide a cheaper solution to a Buy-out of liabilities for some pension schemes, although at the cost of reduced protection for members compared to an insurance solution. One of these new consolidation models is a bridge to Buy-out and so schemes entering would eventually come to the insurance market. This new superfund regime could provide additional competition for parts of the market we target. This won’t be clear until the government and regulator have established rules for superfunds.
TAKING THE RISK OUT OF PAYING COMPANY PENSIONS
STRATEGIC REPORT
11
INDIVIDUAL RETIREMENT INCOME MARKET Guaranteed Income for Life (“GIfL”) products are bought by individual customers to convert some or all of their accumulated pension savings into a guaranteed lifetime retirement income. The solution provides people with peace of mind from the security of knowing the income will continue to be paid for as long as the customer and, where relevant, for as long as they or, typically, their spouse, lives. In the UK, GIfLs traditionally offered an income payable without reference to the individual’s health or lifestyle, and were differentiated only by reference to a limited number of factors such as age, postcode, premium size and, prior to 31 December 2012, gender. An individually underwritten GIfL takes into account an individual’s medical conditions and lifestyle factors to determine their life expectancy. People who are eligible and purchase an individually underwritten GIfL typically achieve double-digit percentage increases in income compared to purchasing a GIfL which is not individually underwritten. Current market and outlook Pension customers are encouraged to compare the GIfL offer provided by their existing pension company to those offered on what is the open or external market. In March 2018 the Financial Conduct Authority (“FCA”) introduced rules requiring pension companies to provide customers with an external GIfL quotation showing the best quote available from the external market alongside the quotation from the incumbent firm. These requirements were subsequently strengthened and from January 2020 all firms are required to provide a medically underwritten comparison where a customer is eligible. This should provide new opportunities for Just Group as we compete in the open market when these customers choose to shop around; this is our addressable market as we do not have an existing base of pension savings customers. The open market maintained a 50% share of the total GIfL market, unchanged from 2019 (source: ABI). Continuing developments are driving growth in our addressable market: • the structural drivers of growth in the retirement income market are strong and assets accumulating in defined contribution (“DC”) pension schemes are projected to increase consistently over the next decade. This growth arises from an increase in the number of people joining workplace pension schemes as a result of the successful state auto-enrolment policy and the increase in contribution rates implemented in 2018; • growth in DC pension assets also arises as companies close down final salary or defined benefit pension schemes and offer their employees DC pensions instead; • some people are transferring out of defined benefit pension schemes into DC pension schemes to take advantage of Pension Freedoms. When transferring, many people are choosing to secure a guaranteed income for life, by using some of the transfer value to purchase an individually underwritten GIfL; and • many life and pension companies are choosing to put in place broking solutions to offer their pension savings customers access to the best individually underwritten GIfL deals in the market. Some are choosing to transfer their obligations to provide a guaranteed GIfL rate to their customers to an alternative product provider or broking solution. This grows our addressable market and provides customers with better outcomes. Our HUB group of companies is providing many of these corporate services. The number of individual retail customers transferring their pension benefits into defined contribution pensions from their final salary (defined benefit) pension has reduced significantly in 2019/20. This reduction follows a review and introduction of remediation measures by the FCA into the quality of advice provided to individual retail customers exploring transferring their benefits. A proportion of the proceeds from these transfers are used to secure a guaranteed income by investing in a GIfL. This reduction in activity will be a drag on the positive growth factors above. The first COVID-19 lockdown impacted the ability for some customers to transact business in the market which has resulted in a reduction in the size of the GIfL market in 2020. Volumes of transactions in the second half of the year have started to return to near pre-pandemic levels. The FCA has announced they intend to complete further work on the suitability of advice and associated disclosure (known as “Assessing
PROVIDING SECURITY AND PEACE OF MIND
87% o dfnd bnft pnin s hms a e coe t nw mme s ad ic esnl t ftr a c ul (%) OF DEFINED BENEFIT PENSION SCHEMES ARE CLOSED TO NEW MEMBERS AND INCREASINGLY TO FUTURE ACCRUAL (%)
100
80
60
40
20
2018 2019 2020 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Closed to new members (open to benefit accrual)
Source: The Purple Book 2020, PPF Closed to future accrual
E p ce got i D d -r sig tascin (£b) DB DE-RISKING TRANSACTIONS (£BN)
40
30
20
10
2011 2012 2013 2014 2015 2016
2017 2018 2019 2020 (forecast)
Buy-in/Buy-out Source: Just analysis, LCP
Backbook acquisition
2,500 EXTERNAL GIFL MARKET (£M)
2,000
1,500
1,000
500
2015
2016
2017
2018
2019
2020
Source: Just analysis, ABI
JUST GROUP PLC Annual Report and Accounts 2020
12
market context continued
Suitability Review 2”). The review will focus on initial and on-going advice to consumers on taking an income in retirement. This evolving market has changed significantly following the Pension Freedom reforms and the FCA want to assess the outcomes consumers are receiving. The Governor of the Bank of England has expressed concerns that people may not have the financial resilience to withstand significant asset price volatility and the FCA has expressed concerns that people may not have sufficient sources of sustainable income. These comments and regulatory reviews shine a spotlight on the importance of securing a guaranteed income for life. LIFETIME MORTGAGES A lifetime mortgage (“LTM”) allows homeowners to borrowmoney secured against the equity in their home. The amount borrowed is repayable together with accrued interest on the death of the last remaining homeowner or their move into permanent residential care. This product can be used by retirees to supplement savings, top up retirement income or to settle any outstanding indebtedness. The typical lifetime mortgage customer is around 69 years old, has a house valued at around £275,000 and borrows 29% of the property value. People are becoming increasingly positively disposed to accessing some of the equity in their homes to improve the quality of their later lives or to help their family. The compound annual growth rate of the lifetime mortgage market between 2011 and 2020 was 19.7% and this has attracted new providers to enter the market in the last few years. Just Group is a leading product provider of lifetime mortgages. Our HUB Financial Solutions business is a leading distribution business providing consumers with regulated advice on equity release solutions from across the market. CURRENT MARKET AND OUTLOOK Just Group expects Lifetime Mortgages to continue to provide an important, but reducing component of the investments it uses to back its Retirement Income new business liabilities. Homeowners aged over 55 are estimated to own property wealth of over £3.2tn (source: ONS). We estimate that the existing industry loan book including interest is just £31bn. Increased competition stemming from the new entrants to the marketplace has increased the availability of product variants, rising from 315 at the end of 2019 to 525 at the end of August 2020 (source: YourMortgage), in turn resulting in greater product choice and flexibility for customers. Market growth stalled in the second quarter of 2020 given the unprecedented environment resulting from the COVID-19 pandemic and the temporary closure of the housing market. Retail activity started to rebuild in the second half of 2020 as customers looked to take advantage of the broad range of competitive solutions available. Just is forecasting that the LTMmarket will grow to around £5.7bn per annum by the end of 2023, which is a compound annual growth rate of 13.6% from 2020. The primary drivers of growth are: • households wanting to top up their retirement income to improve their standard of living in later life; • an increase in the number of people with outstanding interest-only mortgages who are entering retirement and require a solution to settle the debt with the existing mortgage company; • strong demographic growth. The number of people aged 65 and over is forecast to increase from around 12 million today to over 18 million by 2040; and • an increase in new entrants who spend money on advertising which results in people becoming aware of LTMs, combined with people becoming more disposed to using some of their housing equity. In October the FCA wrote to chief executive officer’s and board directors of lifetime mortgage lenders and mortgage intermediaries. The FCA set out their view of the key risks these firms pose to their consumers or the markets in which they operate. They outlined their expectations of firms including how firms should be mitigating these key risks. They described their supervisory strategy and programme of work to ensure that firms are meeting the regulators’ expectations and that any harms and risks of harm are being remedied and/or mitigated.
ENABLING PEOPLE TO IMPROVE THEIR LATER-LIFE LIVING STANDARDS
People are becoming increasingly positively disposed to accessing some of the equity in their homes to improve the quality of their later lives or to help their family
STRATEGIC REPORT
13
The FCA are engaging with a number of firms across the industry and this phase of work is due to conclude in May 2021. They have committed to write to firms after this date to provide an updated view of the key risks posed by firms in this sector and their supervisory plans. LONG-TERM CARE SOLUTIONS Care Plans, or immediate needs annuities, are a form of purchased life annuity. In exchange for an up-front premium, they provide a guaranteed income for the life of the insured to help contribute to the cost of their care. Under current rules this income is tax free when paid directly to a registered care provider, with Care Plans available both to individuals entering care facilities and receiving domiciliary support. As such, Care Plans provide a form of longevity insurance to an individual against the on-going costs of receiving care until their death. The COVID-19 pandemic had a severe and well publicised impact on the care home sector during 2020. Although this caused significant short- term disruption to our core market, it has helped to focus attention on the funding issues that the care market is currently facing, and could be the stimulus for future government structural reform for funding this critical consumer need. CURRENT MARKET AND OUTLOOK There is a substantial market for care in the UK. The drivers of the need for care are strong because: • there are currently around 1.6 million people aged 85 or over in the UK – this is the average age at which people go into care homes; • this is the fastest growing demographic cohort, with its number expected to almost double over the next 25 years, suggesting a growth rate in excess of 2.6%; • 40% of all people in the UK aged 65 and over are estimated to have a limiting long-standing illness, which may require care in the future; and • the recent focus on pressures within the care sector has highlighted the need to plan for care, and any government reformwill provide additional focus on the limited number of solutions currently available.
L f t m mrgg mre s z ad g o t rt (£m) LIFETIME MORTGAGE MARKET SIZE AND GROWTH RATE (£M)
4,000
3,000
2,000
1,000
2011 2012 2013 2014 2015 2016
2017 2018 2019 2020
Lump sum mortgage sales
Existing drawdown mortgages – further advances Source: Equity Release Council New drawdown mortgages – initial advance
N m e o pol (mlin ) a e 65 + UMBER OF PEOPLE (MILLIONS) AGE 65 +
% of UK population over age 65
20
18.3% 18.7% 19.9% 21.7% 23.2% 23.9%
15
10
5
2018
2020
2025
2030
2040
2035
Source: O ce for National Statistics
A LEADER IN UK LONG-TERM CARE FINANCIAL SOLUTIONS FOR
20 Years
JUST GROUP PLC Annual Report and Accounts 2020
14
business model
Our resilient business model is designed to create long-term value in the retirement market for customers and shareholders Creating long-term value
How we create value
What sets us apart
Our strengths are the foundation of our sustainable success…
Our products and services are
distributed via our multi-channel model
RESILIENT AND AGILE • We have met our commitment to achieve capital self-sufficiency this year and we are continuing to increase our resilience. A STRONG REPUTATION • Our reputation in the retirement market is unrivalled. • We put the customer at the centre of what we do and this is reflected in the feedback we receive from customers. STRONG FINANCIAL, RISK MANAGEMENT AND TECHNICAL PRICING CAPABILITY • We are able to select risks that we know will create value. • Through hedging and reinsurance, we are able to manage our capital whilst continuing to grow and scale our business lines. INDUSTRY INNOVATOR • We have a strong track record of positively disrupting markets. • We selectively innovate and bring new solutions to market – you can read more about these on pages 5 and 9. IN-RETIREMENT SPECIALIST MARKET INSIGHT • We focus on attractive segments of the retirement market. • We understand our markets and invest time developing insight to drive the direction of our business and to understand what our customers need.
RISK SELECTION Selecting the right risks and pricing our products appropriately
PrognoSys™ is our powerful proprietary tool for pricing and reserving that allows the Group to identify and price for the risks we want and improve customer outcomes.
STRATEGIC REPORT
15
Who we create value for
SHAREHOLDERS By managing our resources effectively we generate profits in excess of our cost of capital. We manage our capital conservatively and are focused on increasing our organic capital generation.
INVESTMENT STRATEGY Continuous improvements in our investment strategy to generate value for shareholders and better value for customers We invest in private placements, commercial property mortgages and infrastructure loans, as well as investment grade fixed income securities such as government and corporate bonds. We originate lifetime mortgages to provide matching cash flows for longer duration liabilities and to achieve a higher return than liquid financial assets.
CUSTOMERS Individuals: We use our medical underwriting to fairly optimise the returns for our customers. Corporate clients: We create opportunities and solve problems for companies using our scalable retirement focused solutions. Trustees and scheme sponsors: We provide member security and de-risk pension liabilities.
COMMUNITIES We are a significant local employer in our communities of Reigate and Belfast. Our communities benefit from job creation, our tax payments and community outreach activities.
INNOVATION Innovatively utilising external funding and reinsurance tools to improve our capital position This includes: • Defined benefit partnering model. • Reinsurance options on new and existing business. • No-negative equity guarantee risk transfer solution.
COLLEAGUES We develop, recognise and reward our colleagues to secure a skilled and motivated team.
For more information on engagement with stakeholders see page 44.
JUST GROUP PLC Annual Report and Accounts 2020
16
strategic priorities
1. 2.
In 2020 we successfully executed our strategy to strengthen the Group’s capital position
IMPROVE OUR CAPITAL POSITION
TRANSFORM HOW WE WORK
2020 has been a year of challenges, but it has also been a year where we have evidenced how resilient we are as a business. We have demonstrated our operational capabilities to respond to the COVID-19 impacts to an exceptional standard. Despite the economic headwinds we have continued to make significant progress on the delivery of strong capital generation. Our markets have been resilient to the external pressures with negligible impact on our performance and strategy execution.
FOCUS We need to deliver a sustainable capital model to maximise opportunities available to us.
FOCUS To optimise our capital position we will continue to improve our processes to become more efficient and productive.
2020 PROGRESS • We have successfully delivered a significant technology upgrade across the Group this year which was a critical enabler to our ability to respond to COVID-19 impacts. • Behavioural and technical learning to support our new environment has been embedded to support the upgrade. • We have made good progress improving our business processes across the Group.
2020 PROGRESS • Capital management actions have been delivered. We have reduced our property risk exposure through the sale of an LTM portfolio, further NNEG hedge transactions and alternative investment strategies. • We completed our first DB partner transaction and have made progress towards scaling our partnering propositions. • The cost base has further reduced in 2020 by £6m.
2021 FOCUS • Maintain our focus on capital self-sufficiency, while taking advantage of growth opportunities in our markets. • Continue to de-risk our balance sheet to potential economic and regulatory challenges.
2021 FOCUS • We will have an enhanced focus on
Principal risks and uncertainties
A Market environment B Pricing assumptions C Regulatory changes D Economic environment E Operational processes and systems f Brand and reputation
transformation in 2021 with plans in place to streamline and digitise our operations across the business. • Building on our new technology capability we will complete the next stage of our programme to create a modern workplace fit for the future.
Link to risks and uncertainties:
Link to risks and uncertainties:
a b c d e f
a b c d e f
Page 1 Page 2 Page 3 Page 4 Page 5 Page 6 Page 7 Page 8 Page 9 Page 10 Page 11 Page 12 Page 13 Page 14 Page 15 Page 16 Page 17 Page 18 Page 19 Page 20 Page 21 Page 22 Page 23 Page 24 Page 25 Page 26 Page 27 Page 28 Page 29 Page 30 Page 31 Page 32 Page 33 Page 34 Page 35 Page 36 Page 37 Page 38 Page 39 Page 40 Page 41 Page 42 Page 43 Page 44 Page 45 Page 46 Page 47 Page 48 Page 49 Page 50 Page 51 Page 52 Page 53 Page 54 Page 55 Page 56 Page 57 Page 58 Page 59 Page 60 Page 61 Page 62 Page 63 Page 64 Page 65 Page 66 Page 67 Page 68 Page 69 Page 70 Page 71 Page 72 Page 73 Page 74 Page 75 Page 76 Page 77 Page 78 Page 79 Page 80 Page 81 Page 82 Page 83 Page 84 Page 85 Page 86 Page 87 Page 88 Page 89 Page 90 Page 91 Page 92 Page 93 Page 94 Page 95 Page 96 Page 97 Page 98 Page 99 Page 100 Page 101 Page 102 Page 103 Page 104 Page 105 Page 106 Page 107 Page 108 Page 109 Page 110 Page 111 Page 112 Page 113 Page 114 Page 115 Page 116 Page 117 Page 118 Page 119 Page 120 Page 121 Page 122 Page 123 Page 124 Page 125 Page 126 Page 127 Page 128 Page 129 Page 130 Page 131 Page 132 Page 133 Page 134 Page 135 Page 136 Page 137 Page 138 Page 139 Page 140 Page 141 Page 142 Page 143 Page 144 Page 145 Page 146 Page 147 Page 148 Page 149 Page 150 Page 151 Page 152 Page 153 Page 154 Page 155 Page 156 Page 157 Page 158 Page 159 Page 160 Page 161 Page 162 Page 163 Page 164 Page 165 Page 166 Page 167 Page 168 Page 169 Page 170 Page 171 Page 172 Page 173 Page 174Powered by FlippingBook