Publication of Annual Report and Accounts 2019
M&G plc NEWS RELEASE
3 April 2020
M&G plc
Annual Report and Accounts 2019
Following the release by M&G plc (the "Company") on 10 March 2020 of the Company's 2019 Full Year Results Announcement for the year ended 31 December 2019, the Company announces that it has today issued the 2019 Annual Report and Accounts ("Annual Financial Report").
The document is available to view on the Company's website and, in accordance with Listing Rule 9.6.1, a copy has been submitted to the National Storage Mechanism and will shortly be available for inspection at http://www.morningstar.co.uk/uk/NSM
Printed copies of the Annual Financial Report are expected to be mailed to shareholders on 15 April 2020, together with the Company's 2020 Notice of Annual General Meeting, in line with shareholder communication preferences.
Enquiries:
Alan Porter, Group General Counsel and Company Secretary - +44 (0)203 977 4064
Helen Archbold, Head of Group Secretariat - +44 (0)203 977 0057
Jonathan Miller, Head of External Communications - +44 (0)203 977 0165
Sophie Redburn, External Communications Manager - +44 (0)203 977 6300
Information required under the Disclosure & Transparency Rules ("DTR")
The following information is extracted from the M&G plc Annual Report 2019 (page references are to pages in the Annual Report) and should be read in conjunction with M&G plc's Full Year Results announcement issued on 10 March 2020. Together they constitute the material required by DTR 6.3.5(1) to be communicated to the media in unedited full text through a Regulatory Information Service. This material is not a substitute for reading the M&G plc Annual Report 2019 in full.
Principal risks and uncertainties
|
Principal risk |
|
Management and mitigation |
|
Outlook |
|
Business environment, environmental and market forces |
||||
|
Changing customer preferences and economic, political and environmental conditions could adversely impact our ability to deliver our strategy and have implications for the profitability of our business model. The markets in which we operate are highly competitive while customer needs and expectations are changing rapidly. At the same time, economic factors (including GDP growth and savings rates) may impact the demand for our products and our ability to generate an appropriate return. In addition, the risk of a hard Brexit at the end of the Brexit transition period persists, potentially acting as a drag on growth. Our key savings proposition, PruFund, accounts for a high proportion of our total sales, and we are also heavily reliant on the intermediated channel for savings solutions sales. This heightens our exposure to changing economic conditions and customer preferences. Increased geopolitical and environmental risks and policy uncertainty may also impact our products, investments and operating model. Our success depends upon our capacity to anticipate and respond appropriately to such external influences. |
|
We conduct an annual strategic planning process, which is subject to oversight by the Risk and Resilience function and the Board, and results in an approved strategy. The process considers the potential impact of the wider business environment and, throughout the year, we monitor and report on the delivery of the plan. We continue to diversify our savings and investments business to respond to developing customer needs in terms of products, distribution and servicing, and a significant digital transformation programme is being undertaken to deliver a more diversified distribution strategy. Prior to and since the UK's decision to leave the EU, we have run a Brexit programme to identify and mitigate the risks to our business, and ensure that we can continue to serve our customers and access markets. This has included preparations for a hard Brexit and the expansion of our presence in Luxembourg. We are building our capability to understand the implications of climate change and climate-related financial risks and opportunities. |
|
We believe competition will intensify in response to consumer demand, technological advances, the need for economies of scale, regulatory actions and new market entrants. We have launched a number of new products, including the PruFolio range of funds, to broaden our offering to customers, and work is ongoing to develop new propositions and expand into international markets. Given that our investment horizons are long term, we are potentially more exposed to the long-term implications of climate change risks. In the shorter term, our stakeholders increasingly require responsible investment principles to be adopted to demonstrate that ESG considerations (including climate change) are effectively integrated into investment decisions, fiduciary and stewardship duties and corporate values. We continue to focus on minimising the impact of Brexit on the service we provide to our customers. We are working with regulators and industry bodies to prepare for the end of the transition period. |
|
Investment performance and risk |
||||
|
The investment objectives and risk profiles of our funds and segregated mandates are agreed with our customers. A failure to deliver against these objectives (including sustained underperformance of funds), maintain risk profiles that are consistent with our customers' expectations, or ensure that fund liquidity profiles are appropriate for expected redemptions may all lead to poor customer outcomes and result in fund outflows. If these risks materialise for our larger funds or a range of funds, our profitability, reputation and plans for growth may be impacted. |
|
Our fund managers are accountable for the performance of the funds they manage and the management of the risks to the funds. An independent Investment Risk and Performance team monitors and oversees fund performance, liquidity and risks, reporting to the Chief Risk and Resilience Officer. Such activities feed into established oversight and escalation forums to identify, measure and oversee investment performance, investment risk and fund liquidity risks. |
|
Fund liquidity will be a key theme in the near term, with the Financial Conduct Authority considering changes to rules in how funds invest in unquoted and hard-to-trade assets. Ensuring our customers understand the risks to which they are exposed, including liquidity risk, and delivering strong fund performance will be key to our success. |
|
Financial risks |
||||
|
Credit |
|
|
|
|
|
M&G plc is exposed to the risk that a party to a financial instrument, banking transaction or reinsurance contract causes a financial loss to us by failing to discharge an obligation. In the case of invested assets, this relates to the risk of an issuer being unable to meet their obligations, whilst for trading or banking activities this relates to the risk that the counterparty to any contract the business enters into is unable to meet their obligations. Our solvency is also exposed to changes in the value of invested credit assets arising from credit spread widening and/or credit rating downgrades. |
|
Our Credit Risk Framework sets standards for the assessment, measurement and management of credit risk, which are monitored by a dedicated, independent team. We set and regularly review limits for individual counterparties, issuers and ratings, and monitor exposures against these limits. Our policy is to undertake transactions with counterparties and invest in instruments of high quality. Collateral arrangements are in place for derivative, secured lending, reverse repurchase and reinsurance transactions. |
|
Our credit risk exposure is expected to reduce over time as our annuity business runs off. However, we do not expect the nature of our exposure to credit risk, nor our framework and processes for managing and measuring the risk will materially change in the short term. |
|
Market |
|
|
|
|
|
M&G plc's profitability and solvency are sensitive to market fluctuations. Significant changes in the level or volatility of prices in equity, property or bond markets could have material adverse effects on our revenues and returns from our savings and investment management businesses, and exchange rate movements could impact fee and investment income denominated in foreign currencies. Furthermore, material falls in interest rates may increase the amount that we need to set aside in order to be able to meet our future obligations. |
|
Market risk appetite is set and monitored to limit our exposure to key market risks, and we have prescribed limits on the seed capital provided for new funds. Where appropriate, and subject to risk limits and procedures, we use derivatives for risk reduction, for example, to hedge equities, interest rates and currency risks, and we carry out regular reviews of hedging and investment strategies, including asset-liability matching, informed by stress testing. |
|
Our market risk exposure is expected to increase, as the increase expected from the growth of the PruFund business outweighs the reduction in market risk that occurs from the run-off of the Heritage book. However, the risks are well understood, and closely managed and monitored. As such, we do not expect our market risk exposure, net of risk reduction activity, to be materially impacted in the short term. |
|
Corporate liquidity |
|
|
|
|
|
Even as a profitable, financially resilient business, we must carefully manage the risk that we have insufficient cash resources to meet our obligations to policyholders and creditors as they fall due. This includes ensuring each part of our business and M&G plc as a whole has sufficient resources to cover outgoing cash flows, under a range of extreme scenarios. |
|
Risk appetite is set such that we maintain adequate liquid resources and our liquidity position is regularly monitored and stressed. Detailed liquidity contingency funding plans are in place to manage a liquidity crisis. Liquidity, cash and collateral is managed for the Group by Prudential Capital, which holds liquid, high grade assets and has access to external funding. |
|
We expect the nature of our exposure to liquidity risk, and our approach to managing the risk, will remain materially unchanged in the short term. |
|
Longevity |
|
|
|
|
|
We make assumptions regarding the life expectancy (longevity) of our customers when determining the amount that should be set aside to pay future benefits and expenses. Unexpected changes in the life expectancy of our customers could have a material adverse impact on both profitability and solvency. This risk mainly arises from our large annuity book and, although we no longer write new annuity business in the open market, the size of the back-book remains significant. |
|
We conduct annual reviews of longevity assumptions, supported by detailed assessments of actual mortality experience, and have a team of specialists undertaking longevity research. Regular stress and scenario testing is performed to understand the size of the longevity risk exposure. We have undertaken longevity risk transfer transactions, where attractive financial terms are available from suitable market participants. |
|
The pace of longevity improvements among the annuitant population has slowed in recent years. Additionally, our existing business will continue to run off, reducing our longevity exposure over the longer term. However, the pace of run-off is relatively slow and therefore we expect no material change in our exposure in the short term. |
|
Operational |
||||
|
A material failure in the processes and controls supporting our activities, that of our third-party suppliers or of our technology could result in poor customer outcomes, reputational damage, increased costs and regulatory censure. We have a high dependency on technology, and the loss or sustained unavailability of key hardware or software, inadequate information security arrangements and ineffective use of digital solutions could impact our ability to operate effectively. Additionally, serious failings in the delivery and/or persistent underperformance of third-party supplier arrangements could impact the delivery of services to our customers. |
|
We have put in place an Operational Risk Framework in order to identify, assess, manage and report on the operational risks and associated controls across the business, including IT, data and outsourcing arrangements. We have established a programme of activity to ensure that the Group remains resilient as a result of material operational incidents or business disruption. We continue to maintain, test and upgrade our IT environment, processes and controls to maintain IT performance and resilience and prevent, detect and recover from security incidents, including cyber attacks. We have undertaken a programme of work to standardise and enhance our oversight and risk management of third parties across the Group, including our approach to selection, contracting and on-boarding, management and monitoring, and termination and exiting. |
|
Attempts by external parties to disrupt our operations and inappropriately access and obtain customer data and funds will remain an ongoing threat. At the same time, regulatory scrutiny of, and reputational damage from issues arising from the processing of customer data, and the security and resilience of our technology and processes, will remain high. Like many of our peers, our increasing dependency on third parties for critical activities such as customer engagement, investment management, fund administration and technology will increase the importance of managing third-party risks, including having contingency planning in case of outage or failure. Our operational resilience programme has been designed to respond to material business disruption issues including those from third-party suppliers, IT incidents or other causes (eg pandemic). |
|
Change |
||||
|
We have a number of significant transformation programmes underway to deliver our strategy for growth, improve customer experiences and outcomes, strengthen our resilience and control environment and support scalable growth. A failure to deliver these programmes within timelines, scope and cost may impact our business model and ability to deliver our strategy. |
|
Strong project governance is in place for all aspects of the transformation programme (including oversight), with reporting and escalation of risks to management and the Board. We employ a suite of metrics to monitor and report on the delivery, costs and benefits of our transformation programmes. We conduct regular deep-dive assessments of transformation programmes, individually and collectively. |
|
Our exposure to change risk will remain material through 2020 and beyond. A significant volume of activity and benefits are due to be delivered in the year, whilst further transformation delivery is planned for subsequent years, in addition to those change programmes that are always required to meet ongoing business and regulatory developments. |
|
People |
|
|
|
|
|
The success of our operations is highly dependent on the ability to attract, retain and develop highly qualified professional people with the right mix of skills and behaviours to support our business strategy and culture. As a large and newly listed public company, and as we continue to implement our change programme, our people risk and associated reputational impact is heightened in a number of areas including our pay practices, staff workloads and morale, the conduct of individuals or groups of individuals and industrial relations (our own and that of key third-party providers). |
|
Our HR Framework includes policies for Diversity and Inclusion, Employee Relations, Talent and Resourcing, Remuneration, and Performance and Learning. The framework is designed to align staff objectives and remuneration to our business strategy and culture. Our management and Board receive regular reporting on people issues and developments, for example, the succession plans for critical talent, the management of industrial relations, pay, culture and diversity. We conduct regular surveys to better understand colleagues' views on our business and culture, the findings of which drive actions to improve the experience of our staff. The Risk and Resilience team has begun monitoring and reporting a series of indicators of behavioural risk. |
|
Competition for top talent is expected to remain intense. We continue to increase our investment in leadership and manager development in order to be successful and drive the right culture, behaviour and norms in today's fast-changing world. Our growth strategy (including international expansion), significant change agenda and a challenging cost environment mean that people risk is expected to remain elevated, requiring close management and monitoring. |
|
Regulatory compliance |
||||
|
We operate in highly regulated markets and interact with a number of regulators across the globe, in an environment where the nature and focus of regulation and laws remain fluid. There are currently a large number of national and international regulatory initiatives in progress, with a continuing focus on solvency and capital standards, conduct of business and systemic risks. The consequences of non-compliance can be wide-ranging and include customer detriment, reputational damage, fines and restrictions on operations or products. |
|
Our dedicated Compliance function co-ordinates regulatory activities, The function provides guidance to, and oversight of, the business in relation to regulatory compliance and conflicts National and global regulatory developments are monitored and form part of our engagement with government policy teams and regulators, which includes updates on our responses to the changes. |
|
Significant progress has been made in addressing historic regulatory issues, including those identified through the Legacy Review and the Thematic Review of Annuity Sales Practices. However, the legacy book will remain an area of considerable management and regulatory focus. Furthermore, as we continue to expand our international presence, our engagement and compliance with regulatory regimes beyond the United Kingdom will become more material. |
|
Reputational |
||||
|
Our reputation is the sum of our stakeholders' perceptions, which are shaped by the nature of their expectations and our ability to meet them. Consequently, there is a risk that through our activities, behaviours or communications we fail to meet stakeholder expectations in ways which adversely impact trust and reputation. Failure to effectively manage reputational risk could therefore have an adverse impact on our revenues and cost base, which could also result in regulatory intervention or action. |
|
We view reputational risk not as a secondary risk that arises from the crystallisation of primary risk events (eg a process failure), but instead as a standalone risk in its own right that can also arise from people's behaviours and an inability to communicate effectively. We have developed a bespoke Reputational Risk Management Framework and established a dedicated Reputational Risk team, reporting directly to the Chief Risk and Resilience Officer. |
|
We could face an increasing range and severity of reputational events as the business and its social media presence evolve. A number of factors mean that such pressures will increase, including the greater focus of customers, regulators and investors on ESG issues and social media providing the means for opinions to be stated and shared instantaneously. |
A Risk management and sensitivity analysis is also set out in Note 34 of the Consolidated Financial Statements.
Statement of Directors' Responsibilities
Statement of Directors' responsibilities in respect of the Annual Report and the financial statements
The Directors are responsible for preparing the Annual Report and the Group and Parent Company financial statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare Group and Parent Company financial statements for each financial year. Under that law they are required to prepare the Group financial statements in accordance with International Financial Reporting Standards as adopted by the European Union (IFRSs as adopted by the EU) and applicable law and have elected to prepare the Parent Company financial statements in accordance with UK accounting standards, including FRS 101 Reduced Disclosure Framework.
Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and Parent Company and of their profit or loss for that period. In preparing each of the Group and Parent Company financial statements, the Directors are required to:
- select suitable accounting policies and then apply them consistently.
- make judgements and estimates that are reasonable, relevant, reliable and prudent.
- for the Group financial statements, state whether they have been prepared in accordance with IFRSs as adopted by the EU;
- for the Parent Company financial statements, state whether applicable UK accounting standards have been followed, subject to any material departures disclosed and explained in the Parent Company financial statements.
- assess the Group and Parent Company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern.
- use the going concern basis of accounting unless they either intend to liquidate the Group or the Parent Company or to cease operations, or have no realistic alternative but to do so.
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Parent Company's transactions and disclose with reasonable accuracy at any time the financial position of the Parent Company and enable them to ensure that its financial statements comply with the Companies Act 2006. They are responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error, and have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities.
Under applicable law and regulations, the Directors are also responsible for preparing a Strategic Report, Directors' Report, Directors' Remuneration Report and Corporate Governance Statement that complies with that law and those regulations.
The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
Responsibility statement of the Directors in respect of the annual financial report
We confirm that to the best of our knowledge:
- The financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole.
- The Strategic Report includes a fair review of the development and performance of the business and the position of the issuer and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.
We consider 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 position and performance, business model and strategy.
Clare Bousfield
Chief Financial Officer
9 March 2020
37 Related party transactions
The Group and its related parties comprise members of the M&G plc Group, as well as the Group's joint ventures and associates, and any entity controlled by those parties.
37.1 Transactions with Prudential plc
The following transactions were carried out with members of the Prudential plc group who were considered related parties until demerger on 21 October 2019:
|
|
For the year ended |
|||
|
|
2019 |
2018 |
||
|
|
£m |
£m |
||
|
Revenue |
16 |
|
13 |
|
|
Expenses |
63 |
|
68 |
|
|
|
As at |
|
|
|
2018 |
|
|
|
£m |
|
|
Amounts due from related parties |
1,207 |
|
|
Amounts due to related parties |
3,291 |
|
Details of related party capital support arrangements are included in Note 35
37.2 Transactions with the Group's joint ventures and associates
The Group received dividends of £192m for the year ended 31 December 2019 (2018: £9m) and made additional capital injections of £4m in the year ended 31 December 2019 (2018: £181m) from/to joint ventures or associates accounted for using the equity method.
In addition, the Group had balances due from joint ventures or associates accounted for using the equity method of £132m as at
31 December 2019 (2018: £163m) and balances due to joint ventures or associates accounted for using the equity method of £nil as at
31 December 2019 (2018: £29m).
Furthermore, in the normal course of business a number of investments into/divestments from investment vehicles managed by the Group were made. This includes investment vehicles which are classified as investments in associates and joint ventures measured at FVTPL.
The Group entities paid amounts for the issue of shares or units and received amounts for the cancellation of shares or units. These transactions are not considered to be material to the Group.
37.3 Compensation of key management personnel
Key management personnel for the year ended 31 December 2018 included Directors of the Company and their compensation was based on their role within the Group prior to the establishment of the Company. For the year ended 31 December 2019 the members of the Executive Committee, which was formed in 2019, are deemed to have power to influence the direction, planning and control the activities of the Group, and hence are also considered to be key management personnel.
Key management personnel of the Company may from time to time purchase insurance, asset management or annuity products marketed by the Group companies in the ordinary course of business on substantially the same terms as those prevailing at the time for comparable transactions with other persons.
Other transactions with key management personnel are not deemed to be significant either by virtue of their size or in the context of the key management personnel's respective financial positions. All of these transactions are on terms broadly equivalent to those that prevail in arm's length transactions.
The summary of compensation of key management personnel is as follows:
|
|
For the year ended |
|||
|
|
2019 |
2018 |
||
|
|
£m |
£m |
||
|
Salaries and short-term benefits |
11.1 |
|
5.1 |
|
|
Post-employment benefits |
0.6 |
|
0.4 |
|
|
Share-based payments |
5.9 |
|
1.5 |
|
|
Total |
17.6 |
|
7.0 |
|
Information concerning individual Directors' emoluments, interests and transactions are provided in the single figure tables in the Remuneration Report on pages 88 and 98
LEI: 254900TWUJUQ44TQJY84
Classification: 1.1 Annual Financial Report
This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.
Latest directors dealings
- 2 days ago City of London Investment Group
- 2 days ago Aberdeen Group plc
- 2 days ago NATWEST GROUP
- 2 days ago Ondo Insurtech
- 2 days ago Banco Santander S.A.