Individual Pensions and Drawdown new business sales were up by 64% to £2,916m (30 June 2016: £1,783m). The strong new business performance in the first half of the year reflects growth in the overall market size and significant success in our proposition, particularly the Drawdown Governance service. In addition to these factors, we have also experienced a net increase in individual pensions business from the Financial Conduct Authority’s (FCA) introduction of the early exit charge cap, primarily through our focus on offering products which are good value for money.
Group Pensions new business sales were up by 32% to £2,527m (30 June 2016: £1,921m). The strong performance in the first half of the year is a result of more members moving into existing schemes, increased transfer values driven by positive stock market performance, and higher quality schemes being won with larger average member numbers and contributions. We have indicated for some time that we expect a slowdown in workplace pensions, and the pipeline of schemes from auto-enrolment has indeed shown signs of reducing primarily as a result of reaching the final stages of auto-enrolment in 2017 where new schemes, which did not exist before 2012, are not taking adviser-led decisions.
As a result Group Pensions new business is expected to be lower in the second half of the year. The secondary market, where advisers recommend schemes move to take advantage of better quality scheme administration or investment options, has slowly started to emerge and we will increasingly focus on this market going forward.
Intermediary Protection new business sales increased by 34% to £384m (30 June 2016: £287m) following continued growth in the market. Despite increased competition, we have maintained our market position through our focus on adviser relationships and customer service. We are also working on solutions to extend our products to meet a wider range of customer needs, including piloting a new Diabetes Life Cover product and using technology to enhance the services to customers and advisers. Our Irish Protection business has developed a well-received critical illness proposition (known in Ireland as Specified Serious Illness) and has seen increasing volumes of Whole of Life business launched last year.
Our direct to consumer business was set up only three years ago with the aim of bringing fairer and better value for money products to customers. The business has initially focused on selling pre-paid funeral plans, over 50s life cover and simple life cover products through direct marketing and strategic distribution partnerships.
Consumer new business sales were up by 43% to £229m (30 June 2016: £160m), reflecting the continued success of the direct-to-consumer propositions and in particular our Over 50s Life Cover and Life Insurance products. In the first half of the year the Over 50s proposition achieved one of the top positions in the direct-to-consumer market. We have broadened our Term product to give customers higher levels of cover and improved pricing. We have a strong pipeline of new proposition developments underway.
A key part of our strategy is to expand distribution via strategic partnerships, and alongside existing partnerships with Co-operative Funeralcare and Ecclesiastical Insurance, our partnership with Post Office Money launched in January 2017 is performing well. We continue to seek opportunities to expand the reach of our propositions through further distribution partnerships.
Royal London Asset Management (RLAM) continued to perform well, attracting gross inflows of £5.1bn (30 June 2016: £2.3bn) arising from both Institutional and Wholesale markets. Institutional gross inflows were £3.1bn (30 June 2016: £1bn) with some large investment mandate wins during the first half of 2017. Gross and net flows in Wholesale continued to be strong as we broadened our coverage of wealth managers and financial advisers. Funds under management increased to £106bn (31 December 2016: £100bn), with market conditions more stable in the first half of 2017 compared with the same period in 2016. Our funds have performed well (particularly short duration bond funds, UK equity and sustainable fund ranges – all of which have won awards), and two new funds have also recently launched: the Emerging Markets Equity Tracker fund on 5 June 2017 and the Multi Asset Credit (MAC) fund on 17 July 2017.
Royal London Platform Services (RLPS) gross inflows were up 27% to £1.4bn (30 June 2016: £1.1bn), which maintained its market share. Royal London’s wrap platform saw assets under administration increase by 9% to £13.4bn (31 December 2016: £12.3bn). The business trades under the Ascentric brand and also provides white label platform services for larger advisory firms and other Royal London businesses. In the first half of 2017 Ascentric launched a simplified pricing structure with a single charge across all wrappers and investment offerings, which makes it easier for advisers and their clients to understand total costs. Since the new pricing structure was introduced in May, Ascentric has seen a significant increase in Self-Invested Personal Pension (SIPP) accounts set up on the platform.
Our EEV operating profit before tax increased by 34% to £185m (30 June 2016: £138m), assisted by strong new business profit of £149m (an increase of 71%) particularly in Pensions, Consumer and RLAM.
EEV profit before tax increased to £327m (30 June 2016: loss before tax £145m) as a result of the new business profit mentioned above, benefits from economic conditions and yield assumptions, and the Royal London Group Pension Scheme (RLGPS) moving from a deficit to a small surplus. The 2016 interim results included a charge for a change in basis for Solvency II of £182m, reflecting a one-off accounting charge arising from the alignment of EEV with the requirements of Solvency II.
The overall new business margins remained broadly in line with the prior period at 1.8% (30 June 2016: 1.7%), driven by the margins for new pensions business increasing to 2.3% (30 June 2016: 1.8%) from very strong pensions new business performance (both Individual Pensions and Drawdown and Group Pensions), offset by a decrease in margins on Protection business.
As a mutual company, all earnings are retained for the benefit of participating policyholders and are carried forward within the unallocated divisible surplus. The IFRS transfer to the unallocated divisible surplus (before other comprehensive income) for the six months ended 30 June 2017 was £192m (30 June 2016: deduction from the unallocated divisible surplus of £82m).
Our IFRS result for the first six months of 2017 benefited from the strong trading performance of the Group and rising stock markets increasing investment returns, however the results remained impacted by the low interest rate environment. The 2016 interim results included a charge for a change in basis for Solvency II of £165m.
Our capital position is robust and our Solvency II Standard Formula basis Investor View surplus was £4.0bn at 30 June 2017 (31 December 2016: £4.5bn) with a capital cover ratio of 203% (31 December 2016: 232%). The Regulatory View surplus was £1.9bn at 30 June 2017 (31 December 2016: £1.9bn) with a capital cover ratio of 149% (31 December 2016: 155%).
The 31 December 2016 Solvency II surplus and capital cover ratios are as presented in Royal London’s 2016 Annual Report and Accounts. These figures were estimates and final figures were disclosed in the Solvency and Financial Condition Report (SFCR) in May 2017; being a capital cover ratio of 227% and £4.4bn surplus (Investor View), and capital cover ratio of 153% and £1.8bn surplus (Regulatory View). The decrease in surplus and the reduction in the capital cover ratio on an Investor View and Regulatory View in the first half of 2017 were predominantly as a result of the expected run off of the Transitional Measure on Technical Provisions (TMTP) from 1 January 2017, and a revised capital add-on agreed with the Prudential Regulation Authority (PRA) on 7 March 2017 which was mainly as a result of a fall in the risk-free rate during 2016.
Phil Loney, Group Chief Executive of Royal London, said:
Our market position reflects our strategy of delivering high-quality products and service. We continue to invest in our capabilities to increase value for money for customers and to make it easier for their advisers to do business with us.
For example the new Royal London Review Service launched in July 2017 automatically collates all Royal London pensions information for advisers into individual tailored client reports; advisers are then able to focus their time on providing important advice and recommendations for their clients based on this insight.
Our strategy remains to deliver excellent value for money by focusing on creating the best customer outcomes and best customer experiences at really competitive prices. This philosophy is rooted in our status as a mutual. The growth in profit and new business sales we announce today underlines the continued success of our strategy.
During 2017 we have consolidated our position as one of the new business leaders in the retail protection, pension and drawdown markets, and as one of the main providers of new workplace pension schemes entering auto-enrolment. Our Consumer business continues to grow successfully, in particular through the Over 50s Life Cover and Life Insurance products whilst securing strategic distribution partnerships.
Our market position reflects our strategy of delivering high-quality products and service. We continue to invest in our capabilities to increase value for money for customers and to make it easier for their advisers to do business with us. For example the new Royal London Review Service launched in July 2017 automatically collates all Royal London pensions information for advisers into individual tailored client reports; advisers are then able to focus their time on providing important advice and recommendations for their clients based on this insight.
As part of our strategy we are working continually to improve our proposition and enter new consumer markets to offer better value where we see that the market is delivering a poor deal for consumers. We have recently launched pilots for two new innovative products. In April 2017 we introduced the Diabetes Life Cover plan to improve outcomes for a group of consumers who are not currently well served by the life insurance industry; reducing the time taken to accept an application from weeks to less than an hour. Further, in June 2017 a new life insurance application service moved into pilot called ‘Streamlined Mortgage Protection’, which uses advanced ‘machine learning’ to simplify the underwriting journey and provide an online, immediate decision to mortgage customers without additional underwriting questions and medical evidence being required.
Recent FCA data confirmed a significant rise in Income Drawdown business across the market since the introduction of ‘Pension Freedoms’ in 2015. The data revealed a particular surge in non-advised Drawdown sales; we think this is concerning as the best outcome for customers when choosing an income drawdown strategy generally occurs when they take financial advice, as the decisions are complex and can form a significant part of an individual’s retirement income. We are pleased that the FCA is looking at this area more closely, and our view is that they should do more to encourage individuals to take impartial financial advice when contemplating Income Drawdown. We are also concerned that some providers may be "sleep-walking" their existing non-advised pension customers into their own in-house drawdown offerings, repeating some of the poor practice seen in the historic annuity market. Royal London intends to develop a better value for money drawdown offering and tools for those clients who insist on the non-advised route, but such competition will only be a viable solution if the FCA takes action to open this part of the market up to competition.
We also believe that the Pensions Dashboard has the potential to boost competition in the UK pensions market. It is an important project designed to help customers by allowing savers and their advisers to have a comprehensive view of their pension savings and entitlements in one place to determine their retirement income. The dashboard could also provide a useful starting point for those advisers and customers seeking to obtain better value for money by consolidating numerous small pension pots. There is currently no legislation to ensure that all pension providers make their data available to the dashboard, which may create gaps in the data available causing the project to fail. We believe it is imperative that the Government legislates to mandate participation in the Pensions Dashboard as a key step to underpin greater competitive rivalry in the UK pensions sector which will in turn drive better value for money for consumers.
During the first half of 2017 Article 50 was triggered and the process commenced for the UK to leave the European Union (EU). We are in the process of domiciling a subsidiary in Ireland to enable our business in the Republic of Ireland to continue to trade and to mitigate any uncertainty. We expect to maintain strong capitalisation and profitability as the UK leaves the EU.