Report to policyholders 2019 - PLL SMWP June 2020 Page 1 of 12

Phoenix Life Limited

Scottish Mutual With-Profits

Fund

Annual report to with-profits

policyholders by the Board of

Phoenix Life Limited for the

period 1 January 2019 to 31

December 2019

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Purpose We set out how we manage the Phoenix Life Limited with-profits funds in our Principles

and Practices of Financial Management (PPFM). The interests of with-profits policyholders are protected by the PPFM. In this report from the Phoenix Life Limited Board we give details of how we have complied with the PPFM during 2019 for our Scottish Mutual With-Profits Fund ('the fund'). This report should be read with the

PPFM. Our PPFM is available on our website at www.phoenixlife.co.uk, or you can ask us for a

copy. The Board of Phoenix Life Limited can make choices, or exercise discretion in a number

of areas, such as setting bonuses, policy payouts and surrender values, and in addressing any competing or conflicting rights of policyholders and shareholders. This report deals with how Phoenix Life Limited has exercised its discretion in these areas.

Summary It is the opinion of the Board that Phoenix Life Limited, including the Scottish Mutual

With-Profits Fund, was managed in line with the PPFM over 2019. The Board is also of the view that the decisions made in managing the Scottish Mutual With-Profits Fund were appropriate and treated with-profits policyholders fairly.

In preparing this report the Board took advice from the With-Profits Actuary and the With-Profits Actuary’s report is attached at the end of this report.

Background The Phoenix Life Limited Scottish Mutual With-Profits Fund consists of former Scottish Mutual Assurance Limited With Profits Sub-Fund policies.

The Scottish Mutual With-Profits Fund is part of Phoenix Life Limited, along with nine other with-profits funds and a non-profit fund. We manage each with-profits fund in line

with the relevant sections of our PPFM. The with-profits bonuses, policy returns and payouts for each with-profits fund reflect the financial position of that fund. The performance of each with-profits fund reflects the historic performance of the original

with-profits funds and companies up to their respective transfer to Phoenix Life Limited, and then their performance within Phoenix Life Limited since that time. The Scottish Mutual With-Profits Fund is run as a separate ring fenced fund within

Phoenix Life Limited but with the additional security that comes from being part of a large well capitalised company. In extreme circumstances one fund may have to provide financial assistance to another. However there are internal arrangements to ensure that

Phoenix Life Limited holds assets in excess of the requirements of our regulator and,

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because of this, it is extremely unlikely that a with-profits policy in one fund will be affected by losses from another fund.

We have produced separate reports for our other with-profits funds. The with-profits policies fall into two main types. These are:

traditional with-profits; and

unitised with-profits.

Independent review The company formally consulted with, and took into account the opinions of the With-Profits Actuary and the With-Profits Committee (a committee that is independent by

virtue of its majority of independent members) regarding all material changes during 2019. The roles of the With-Profits Actuary and the With-Profits Committee are to consider the interests of all policyholders and advise the Board on achieving fair

treatment for those policyholders. Over 2019 the With-Profits Committee exercised independent judgement on the fair treatment of policyholder in relation to matters including changes to bonus rates, surrender values and estate management.

Compliance with the PPFM during 2019 The guiding principles and practices apply to all the with-profits funds and in the event of

conflict with other principles take priority. The PPFM guiding principles cover the following.

Legal requirements, that is, Phoenix Life Limited and its with-profits funds are managed in line with Phoenix Life Limited’s then current understanding of all legal

and regulatory requirements.

Basic fund concepts, that is, each with-profits fund is operated as a stand-alone fund.

Fair treatment, that is, Phoenix Life Limited aims to treat its with-profits policyholders fairly.

The guiding principles are presented here at a high level rather than in the full detail of the PPFM.

In the Board’s opinion, the guiding principles were applied in line with the PPFM.

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Amounts payable under a with-profits policy We aim to pay all policyholders their fair share of the profits that the fund has earned

over the time they have held their policy. We pay the share of profits in the form of annual and final bonuses. When deciding what is a fair share we consider the underlying value (sometimes called the 'asset share') of representative specimen policies as a guide. We aim to pay 100% of the underlying policy value plus any uplift

described under ‘Estate management’. Where the underlying policy value is bigger than the benefits already guaranteed by the policy then, subject to smoothing, we aim to add bonuses so that the amount we pay in total is equal to the underlying policy value. The

underlying value of policies reflects the premiums paid and the investment performance of the fund over the lifetime of the policies, after allowing for factors such as our costs, the tax we have to pay, the shareholders' share of profits, charges for death benefits,

charges for guarantees and other profits and losses. This was the approach we used over 2019. For policies where the guaranteed benefits are bigger than the underlying policy value

we will be paying out more than 100% of the underlying policy value. It is unlikely that any further bonuses will be added to these policies.

Sometimes we may pay out less than the underlying policy value for individual policies, for instance because we calculate bonuses using an average approach for groups of policies.

Except where the payment of a guaranteed benefit results in a higher amount, and except where the amount cannot reasonably be compared with a calculated underlying policy value we aim to maintain the payout ratios for the specimen policies we use within

a target range of 80% to 120% of the underlying policy value. We believe this range is appropriate to accommodate market movement in the assets backing the funds. We changed our final bonus scales twice during 2019 in order to move our payouts closer to

our 100% target and to keep the majority of payouts within the target range for the specimen policies. Where a policy is surrendered close to maturity and the asset share is less than the guaranteed amount, the payout may be in excess of the target range.

We seek to maintain high administrative standards. However, errors occur from time to time in the operation of with-profits and other types of business. When we discover such errors we correct them. If appropriate, we make additional payments to policyholders

whose payouts have been adversely affected by such errors. No errors that we were aware of in payouts during 2019 compromised our compliance with the PPFM.

In the Board’s opinion, the method used to calculate the underlying value of policies and the discretion applied to the methods used to determine payouts on all policies during 2019 has been in line with the PPFM.

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Annual bonus rates We generally declared nil annual bonus rates for 2019 in March 2020 (as we did for

2018 in March 2019). Type of business 2019 Declared

Annual bonuses as a % of sum assured

Annual bonuses as a % of attaching bonus

UK life assurances 0% 0%

Special pension endowments 0% 0%

Individual pension 0% 0%

Type of business 2020 Declared

(the bonus rate is a %age of the purchased pensions in respect of a complete year's participation from the policy anniversary in 2019 to the policy anniversary in 2020)

Annual bonuses as a % of benefits

Annual bonuses as a % of vesting

Group deferred annuity / pension pre 2016 premium rates 0% 0%

Group deferred annuity / pension 2016 premium rates 0.5% 0%

Group cash policies 0% n/a

Policy anniversaries from 6 April 2019 to 5 April 2020

With-profits annuity 4.50%

For unitised business, annual bonus is declared in advance and applied from 1 April for life and pension series and from 1 March for International series. The following table shows the declared annual bonuses as a percentage increase in unit price from 1 April 2020 (1 March 2020).

Type of business From 1 April 2020

Life series I & II 3.00%

Life series III 3.50%

Life series IV 3.00%

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Type of business From 1 April 2020

Pension series I & II - accumulation units 4.00%

Pension series I & II - initial units 0.00%

Pension series III - accumulation units 3.50%

Pension series III - initial units 0.00%

Pension series VII 5.00%

From 1 March 2020

International series - sterling 3.00%

International series - US dollar 2.00%

International series - euro 2.00%

Our policy continues to be to aim to build up final bonus rates to a target level before we consider reintroducing or increasing annual bonus rates. We continue to believe that this is the best and fairest way for all our policyholders to benefit from the returns of the fund.

The Board is satisfied that the approach taken in determining annual bonuses during the year was in line with the PPFM.

Final bonus rates We changed final bonus rates on 1 January 2019 and 1 July 2019.

We also reviewed final bonus rates to apply from 1 January 2020.

For some policies where the value of guaranteed benefits already exceeded the underlying policy value, we did not add any final bonus.

With-profits annuities and group deferred cash and group pension policies do not receive any final bonus. They receive their share of distributed profits as annual bonuses only. The Board is satisfied that the changes to final bonus rates resulted in changes to

payouts that were consistent with the PPFM and were consistent with treating customers fairly.

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Smoothing

During 2019 when we changed bonus rates, we compared the resulting maturity or

retirement payout with the payouts if bonus rates were not changed and generally limited the changes in maturity or retirement payouts, to not more than 7.5% at each six monthly review. Similarly we generally limited changes in surrender values to not more than 10% at each six monthly review. These limits are applied before making any

changes to payouts to allow for estate distribution. For some policies where payout ratios were significantly out of line with 100% of the underlying policy value, we allowed larger differences.

For group deferred cash and group pension policies we smooth the actual investment return when reviewing annual bonuses. For with-profits annuities we smooth the annual

bonus rates. The Board is satisfied that the movements in final bonuses and maturity payouts in 2019 were necessary to keep payouts reasonably in line with the underlying value of policies,

to ensure fairness between groups of policyholders and to protect the financial position of the fund, and were in line with the PPFM.

Surrender values

For traditional business, during 2019, we set surrender values with the aim of paying 100% of the underlying value of representative specimen policies plus any uplift described under ‘Estate management’. Surrender values include an allowance for

final bonus and these final bonus allowances were revised from 1 January 2019, 1 July 2019 and 1 January 2020 in line with changes in final bonus rates. In some cases, values in excess of asset share were paid when policies are surrendered close to maturity and the asset share of the relevant specimen policy was less than

the guaranteed benefits at maturity.

For unitised with-profits business, we based surrender values on the value of the with-profits units and final bonus, subject to the potential application of a market value reduction (MVR). If the underlying policy value was less than the value of the

with-profits units, then no final bonus was added and we applied a market value reduction which reduced the value of the with-profits units, so that the surrender value reflected the underlying policy value. We apply market value reductions to

ensure fairness to all with-profits policyholders, so that surrender values are not unfairly higher than the policies' share of the underlying value of the fund’s assets.

We changed market value reductions at the same time we changed final bonus

rates. In addition, we normally reviewed market value reductions each month and changed them if necessary.

In the Board’s opinion, the method used to determine surrender values has been in line with the PPFM.

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Investment strategy

We invest the fund in a mix of higher risk assets such as company shares (equities) and property and lower risk assets such as fixed interest stocks (bonds or loans issued by governments or companies) and cash deposits.

We had the following asset mix for traditional with-profits policies on 31 December 2019.

Asset type Traditional

life policies

Traditional

pension policies

Traditional with-

profits annuities

Company shares (equities) 40% 24% 24%

Property 7% 4% 4%

Other growth assets 3% 2% 2%

Total Growth assets 50% 30% 30%

Fixed interest stocks - issued by the UK government (gilts)

22% 34% 34%

Fixed interest stocks - other (including corporate bonds)

25% 34% 34%

Cash 3% 2% 2%

Total Fixed interest and cash assets

50% 70% 70%

Total assets 100% 100% 100%

The asset mix for traditional with-profits group pension policies and traditional with-profits annuity policies on 31 December 2019 was the same as the traditional pension policies asset mix in the table above.

We had the following asset mix for unitised with-profits policies on 31 December 2019.

Investment type Unitised with-profits policy with guaranteed minimum bonus rate

Unitised with-profits policy without guaranteed minimum bonus rate

Company shares (equities) 24% 47%

Property 4% 9%

Other growth assets 2% 4%

Total Growth assets 30% 60%

Fixed interest stocks - issued by the UK government (gilts)

34% 16%

Fixed interest stocks - other (including

corporate bonds)

34% 21%

Cash 2% 3%

Total Fixed interest and cash assets

70% 40%

Total assets 100% 100%

The above asset mix applies to the main with-profits business. For overseas life

assurance business, sterling, euro and US dollar denominated policies different asset mixes apply.

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The fund also contains investments which back the cost of guarantees, the cost of

smoothing and the estate. The Board is satisfied that the approach taken in following the investment strategy during the year was in line with the PPFM.

Business risks

There were no significant changes to the risks the fund was exposed to during the year. There was an annual review by the Board of existing business risk exposure. In the

opinion of the Board, appropriate measures were taken to limit the with-profits business exposure to risk to amounts which are fair. The Board is satisfied that it has managed its business risks in line with the PPFM.

Expenses and charges

The way charges and expenses were set was unchanged during the year. The Board is satisfied that the allocation of expenses and the charges deducted were in line with the PPFM.

We allocated a share of the provisional amount of tax we incurred to the fund, in line with the PPFM. We calculated this by treating the fund as though it was our only fund. Once we have agreed our tax charge with HM Revenue & Customs (HMRC), we will review

the amount of tax we have allocated to the fund to ensure it is fair. We made an appropriate allocation of tax to the underlying value of with-profits policies

in the fund. The policies in the fund provide a number of guarantees. We do not currently make any charges for the cost of guarantees although such charges have been made in the past.

The cost of guarantees is currently borne by the estate. The Board is satisfied that this apportionment of a fair share of the cost of guarantees is in line with the PPFM.

Estate management There is more money in the fund than we expect to pay out in claims, unless we uplift bonuses. We refer to this surplus money as the ‘estate’. Some of this surplus money is

used to protect the fund against unexpected shocks, for example a fall in the value of the fund’s investments. However, the remainder can be released and used to increase the amounts we pay out to policyholders.

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It has been decided that some of this surplus money can be used to increase the final bonuses by including an additional amount which we call an ‘uplift’.

The table below shows the percentage uplift applicable during 2019 and also from January 2020.

Date applicable Policy values increased by up to

01/01/2020 – 30/06/2020 44.3%

01/07/2019 – 31/12/2019 43.1%

01/01/2019 – 30/06/2019 40.9%

It is however important to understand that even though an uplift is currently being

applied, it can go up or down or may be removed entirely. The actual payout value you receive will reflect the uplift applying at your payout date. The amount of surplus money in the fund continually changes and is affected by a range

of factors. If your policy doesn’t mature for several years it’s likely the uplift percentage shown on any projections you receive will change many times before the maturity date of your policy.

In the Board’s opinion, both the method used to calculate the estate and the distribution of the estate have been in line with the PPFM.

New business The fund is no longer actively seeking new business. The Board is satisfied that this is

in line with the PPFM.

Equity between the fund and shareholders Our shareholders received a share of the distributed profits. For traditional with-profits policies sold after the Scottish Mutual Assurance Society demutualised on 1 January 1992, this was equal to one ninth of the value of bonuses we distributed to with-profits

policyholders. For unitised with-profits policies, the shareholders receive the annual management charges. The shareholders' share of distributed profits for 2019 was £1.4m. The policyholders’ share of distributed profits for 2019 was £42.5m.

The Board is satisfied that the shareholders’ share of the distributed profits for 2019 is in line with the PPFM.

Where there are material transactions that involve both shareholder and with-profits policyholder interests these are considered by the appropriate governance committees including the With-Profits Committee before implementation.

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This will include any changes to commercial arrangements with Pearl Group Management Services (PGMS), as well as the terms of any transactions between the

with-profits fund and the Non-Profit Fund. PGMS is a company within the Phoenix group of companies (Phoenix Group), providing management and administration services to the with-profits fund.

The Board is satisfied that this is in line with the PPFM.

Changes to the PPFM during 2019 We include a description of the recent changes to the PPFM with any annual statement we issue to with-profits policyholders.

Communications to with-profits policyholders During 2019, we provided with-profits policyholders with key information concerning

annual bonuses and changes to the PPFM with their annual statement. The Phoenix Life website (www.phoenixlife.co.uk) was updated to provide access to

tailored content for each with-profits fund.

Conclusion

It is the opinion of the Board that Phoenix Life Limited including the Scottish Mutual With-Profits Fund was, in all material respects, managed in line with the PPFM over 2019.

The With-Profits Committee has reviewed this annual report to with-profits policyholders and does not wish to make any additional or separate reports.

The Directors of Phoenix Life Limited

June 2020

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Report to with-profits policyholders by the With-Profits Actuary of the Phoenix Life Limited Scottish Mutual With-Profits Fund for the period 1 January 2019 to 31 December 2019 As With-Profits Actuary I advise Phoenix Life Limited (PLL) when it exercises its discretion in managing the Scottish Mutual With-Profits Fund with-profits business, for

example in declaring with-profits bonuses. Each year I have to provide a statement to with-profits policyholders regarding PLL

Scottish Mutual With-Profits Fund’s annual report, and the discretion exercised in the management of with-profits business. From the information and explanations provided to me by PLL, I believe that the PLL

Scottish Mutual With-Profits Fund’s report adequately explains how PLL has fairly exercised its discretion. It is my opinion that the report and the discretion exercised by PLL during 2019 took your interests into account in a reasonable and proportionate

manner. In making this statement I have taken account of relevant rules issued by the Financial

Conduct Authority and followed applicable professional guidance and standards. Andrew Burke Fellow of the Institute of Actuaries

With-Profits Actuary June 2020 Phoenix Life Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority

and the Prudential Regulation Authority. Phoenix Life Limited is registered in England No. 1016269 Registered Office: 1 Wythall Green Way, Wythall, Birmingham B47 6WG

www.phoenixlife.co.uk