GOVERNANCE REPORT
75
non-GAAP measures disclosed in the Annual Report and Accounts and will be closely monitored by the Committee to ensure disclosures are appropriate. NEW ACCOUNTING STANDARDS The Committee continued to monitor the progress towards being in a position to implement IFRS 17 and received regular status updates. We welcomed the progress made towards more appropriate treatment of the Retirement Income business enabled by the June 2019 exposure draft and look forward to the timely conclusion of the remaining areas for International Accounting Standards Board consideration. Work continues in parallel to develop Just’s systems solution for computation of the new IFRS 17 accounting data. IFRS 16 was implemented at the beginning of 2019 and the impact of this on the Group was published in the interim report for 2019 and is included on page 115 of the Annual Report and Accounts. EXTERNAL AUDIT The Committee is responsible for recommending to the Board the appointment, remuneration and terms of engagement letter of the external auditor. It also ensures that appropriate audit plans are in place and that an effective relationship is maintained with the auditor. This is achieved through regular reports from the auditors and by holding meetings with the lead audit engagement partner, Daniel Cazeaux, without the presence of management. Daniel Cazeaux was appointed as lead audit engagement partner for the 2017 year end. In 2019, the Committee: • reviewed the 2019 year-end audit work plan including the scope of the audit and the materiality levels adopted by the external auditor; • reviewed the Group’s policy on the use of the external auditor for non-audit work and concluded that further work commissioned during the year was in compliance with the policy. It also evaluated the independence and objectivity of the external auditor having regard to: a) the report from the external auditor describing the general procedures to safeguard independence and objectivity; and b) the level and extent of non-audit services provided by the external auditor; • agreed the terms of engagement and fees to be paid to the external auditor for the audit of the 2019 Accounts; and • reviewed recommendations made by the external auditor in their management letters and on the adequacy of management’s response. The effectiveness of the external audit process is dependent on appropriate audit risk identification at the start of the audit cycle. The Committee receives a detailed audit plan from KPMG, identifying its assessment of these key risks. For the 2019 reporting period the significant risks identified were in line with 2018. The key risks identified were in relation to the valuation of insurance liabilities, the valuation of loans secured by residential mortgages, going concern, recoverability of investment in subsidiaries, the valuation of hard to value investments and deposits received from reinsurers. The significant judgements made in connection with these risks are set out in the table on page 74. The Committee challenged the work done by the auditor to test management’s assumptions and estimates around these areas. The Committee assesses the effectiveness of the audit process in addressing these matters through the reporting received from KPMG at the interim and year end. In addition, the Committee seeks feedback from management on the effectiveness of the audit process. For the 2019 reporting period, management were satisfied that there had been appropriate focus and challenge on the primary areas of audit risk and assessed the quality of the audit process to be good. The Committee concurred with the view of management.
VALUATION MODEL FOR LIFETIME MORTGAGES The measurement of the no-negative equity guarantee underlying the fair value of loans secured by mortgages uses a variant of the Black-Scholes option pricing formula, which has been adapted to use real world assumption instead of risk neutral assumptions due to the lack of the relevant observable market input to support a risk neutral valuation approach. The Committee considered the appropriateness of this model and whether any alternative approaches should be considered. The Committee concurred with the Group’s view that the approach used is in line with common industry practice and that there does not appear to be an alternative approach that is widely supported in the industry. The Committee noted that there has been significant recent academic and market debate concerning the valuation of no-negative equity guarantees and that the Group intends to continue to actively monitor this debate. ALTERNATIVE PERFORMANCE MEASURES The Committee considered the alternative performance measures used by the Group and whether these remained appropriate and useful measures. The Committee reviewed the disclosures in the Annual Report and Accounts in relation to the APMs used by the Group and also considered compliance with the guidance on APMs set out by the European Securities and Markets Authority. GOING CONCERN As part of the assessment of going concern and longer-term viability for December 2019, the Committee considered the impact of complying with 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”, which meant that the Group restructured and updated its internal Lifetime Mortgage (“LTM”) securitisation. A restructure was effected on 31 December 2019 which involved a redemption of existing notes, a restructuring, and an issuance of new LTM notes. The restructure removes much of the uncertainty on the level of matching adjustment relating to LTMs in the regulatory balance sheet. Papers were reviewed by the Committee during the year regarding changes to the assumptions, projections and modelling as a result of updated regulatory expectations. The Committee also considered other risks in stressed scenarios for the going concern assessment including the risks associated with capital requirements to write anticipated levels of new business which form part of the Group’s business plan; the projected liquidity position of the Group; eligible own funds being in excess of minimum capital requirements in stressed scenarios; the findings of the Group Own Risk and Solvency Assessment; and risks arising from Brexit. In addition to risks, the Committee considered the Group Plan approved by the Board in the first quarter of 2020 and the forecast regulatory solvency position calculated on a Solvency II basis as well as the benefit of the new equity, Restricted Tier 1, and Tier 2 capital raised during the year, and steps taken by the Group during 2019 to improve capital efficiency. REGULATORY REPORTING OVERSIGHT The Committee receives regular updates on the Group’s regulatory reporting matters, including the oversight and preparation of the Group’s annual SFCR. The Committee also receives regular updates relating to the on-going publication by the Prudential Regulation Authority of supervisory statements that set out its expectations for certain aspects of prudential regulation. The Audit Committee also has responsibility for overseeing the recalculation of TMTP. The implementation of Solvency II in practice has continued to evolve and is expected to do so in the future. During 2019 and to date in 2020 the Committee has spent a significant amount of time considering the impact of SS3/17, PS19/19, PS31/18 and CP7/19 on the Group. The emergence of new supervisory statements could impact certain key
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