GOVERNANCE REPORT
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• reviewed the eight key performance indicators (“KPIs”) used by the Group to assess its financial performance and revised two KPIs to focus performance more clearly on the Group’s capital position and capital generation; • reviewed the alternative performance measures (“APMs”) used by the Group and how these are disclosed within the Annual Report and Accounts; • reviewed the 31 December 2019 Group Annual Report and Accounts and the half-year statements to 30 June 2019; and • assessed whether the Annual Report and Accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group’s performance, business model and strategy and concluded that they are. To assist with the review, the Committee considers reports from the Group Chief Financial Officer and the Chief Actuary. It also reviews reports from the external auditor on the outcomes of their half-year review and year-end audit. The Committee encourages the external auditor to display the necessary professional scepticism its role requires. Interaction with the Financial Reporting Council (“FRC”) During November 2019, the Company received a letter from the FRC’s Corporate Reporting Review team, which is authorised to review the annual accounts, strategic reports and directors’ reports of public and large private companies. The FRC team requested further information in relation to the Company’s 2018 Annual Report and Accounts. The letter set out a request for further information in relation to Parent Company investment in subsidiaries; equity release mortgages; non-financial reporting; taxation and alternative performance measures. The Committee discussed and reviewed the correspondence and the Group’s proposed responses to the FRC’s enquiries prior to them being issued. The Group subsequently responded to the FRC’s questions providing clarifying information and proposing enhancements to disclosures relating to Parent Company investment in subsidiaries, equity release mortgages, non-financial reporting, taxation and alternative performance measures in the 2019 Annual Report and Accounts. The Committee reviewed the inclusion of these disclosure enhancements as part of its review of the 2019 Annual Report and Accounts. The FRC has now completed its review and has closed its enquiry. The FRC noted that its review provides no assurance that the Annual Report and Accounts are correct in all material respects, and that the FRC’s role is not to verify the information provided, but to consider compliance with reporting requirements. The FRC’s review is based on a review of the Annual Report and Accounts and does not benefit from detailed knowledge of the business. Significant accounting judgements The key areas of judgement considered by the Committee in relation to the 2019 accounts, and how these were addressed, are set out in the following table.
STATEMENT FROM THE AUDIT COMMITTEE CHAIR In summary The report sets out the activities carried out during the year to fulfil the Audit Committee’s responsibilities. 2019 saw the Group finalise its implementation of the requirements of Article 39 of the Statutory Audit Directive, as amended by Directive 2014/56/EU for PRA regulated firms, with the creation of audit committees for the Group’s two PRA regulated subsidiaries, Just Retirement Limited and Partnership Life Assurance Company Limited. The Committee reviewed and updated its terms of reference to reflect the changes required to its roles and responsibilities. The Committee remains responsible for the Group’s consolidated financial reporting and regulatory, internal controls and relationship with the Group auditor. However, the audit committees of Just Retirement Limited and Partnership Life Assurance Company Limited took on responsibility for their own reporting and controls and relationship with the auditor. This has had an impact on some of the activities of the Committee during the year. The Committee conducted a thorough review of the significant financial judgements and financial statement assumptions made in the preparation of the 2019 Annual Report and Accounts and of the Annual Report and Accounts themselves. The Committee was pleased to advise the Board that the judgements and assumptions are appropriate and that the Annual Report and Accounts are fair, balanced and understandable, and provide the necessary information for shareholders to assess the Company’s position, prospects, business model and strategy. The Committee also oversaw the preparation and review of the Group Solvency and Financial Condition Report (“SFCR”) as at 31 December 2018, the Group and Solo Regular Supervisory Reports and the Annual Quantitative Reporting Templates for the PRA submission in April and May 2019. A revised shorter timetable was prepared to meet the reduced period in future years for filing the regulatory reports. During 2019 we conducted a tender for the future provision of external audit services. We were pleased to announce on 1 November 2019 that PwC had been selected, subject to shareholder approval at the 2020 AGM, as the Group’s external auditor for the financial year ending 31 December 2020. PwC has been invited to observe the financial year ended 31 December 2019 to ensure an orderly transition. We would like to acknowledge the important contribution KPMG has made as the Company’s auditor. Further information regarding the tender process is included later in this report. Activities of the Committee during the year The Committee follows an annual rolling forward agenda with standing items considered at each meeting in addition to any matters arising and topical business or financial items which the Committee has decided to focus on. Financial reporting In 2019 and to date in 2020, the Committee: • reviewed the quality and acceptability of accounting policies and practices; • reviewed the appropriateness and clarity of the disclosures and compliance with financial reporting standards and relevant financial and governance reporting requirements; • reviewed material areas in which significant judgements have been applied or there has been discussion with the external auditor; • reviewed accounting judgements in relation to the new accounting standards IFRS 16 “Leases” and IFRS 17 “Insurance Contracts”; • reviewed the assumptions critical to assessing the value of assets and liabilities, in particular insurance liabilities and lifetime mortgages; • reviewed documentation prepared in support of the going concern basis and longer-term viability assessment, including the impact of the updated regulatory expectations set out in SS3/17 “Solvency II: matching adjustment – illiquid unrated assets and equity release mortgages” and PS19/19 “Solvency II: Equity release mortgages – Part 2”;
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