Group EEV operating profit before tax increased by 16% to £282m (2015: £244m), despite the reduction in market interest rates, assisted by strong new business profit of £223m (an increase of 63%) particularly in Pensions, Consumer and RLAM, offset by an impairment to intangible assets of £44m. The impairment charge related to ongoing IT projects to enhance the Group’s service offering through investment in back office systems.
Margin for new life and pensions business increased to 2.5% in 2016 (2015: 2.0%), due to continued reductions in acquisition and maintenance unit costs resulting from the increase in volumes of business sold, and ongoing focus on operational efficiency.
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 for the year ended 31 December 2016 (before change in basis for Solvency II and other comprehensive income) was £241m (2015: £125m). The IFRS transfer to unallocated divisible surplus was £76m (2015: £125m). Our IFRS result also benefits from the strong trading performance of the Group but was impacted by the low interest rate environment during 2016.
Our capital position is robust, reflecting the strength of our underlying business and effective capital management strategies. We have a Solvency II Standard Formula basis Total Company (‘Investor View’)4 surplus of £4.5bn (1 January 2016: £3.8bn) and a capital cover ratio of 232% (1 January 2016: 226%) before Royal London Closed Fund (‘closed funds’) restrictions. After closed fund restrictions of £2.6bn the capital cover ratio was 155% at 31 December 2016 (1 January 2016: 169%). The Royal London Open Fund (‘open fund’) had an excess surplus of £1.9bn (1 January 2016: £2.1bn) and a capital cover ratio of 209% at 31 December 2016 (1 January 2016: 239%).
The majority (78%) of total Own Funds within the open fund is made up of Tier 1 capital, with subordinated debt valued at £0.8bn, classified as Tier 2 capital. Own Funds within the closed funds are entirely Tier 1 capital.
Reflecting the positive performance of the Group in 2016, the Board has decided to increase ProfitShare (after tax) from £70m in 2015 to £114m in 2016.
This year more than 700,000 members with unit-linked pension policies will receive their first ProfitShare allocation. We are delighted to see this expansion of the ProfitShare come to fruition. As we explained last year, existing with-profits members will not be disadvantaged by this expansion. The level of our profits available for distribution has been increased and with-profits members will benefit from an enhanced annual bonus. We have allocated a healthy ProfitShare to our with-profits members (a 1.4% addition to asset share) and honoured our commitment to commence ProfitShare allocations to our pension members. The first allocation to pension members will be equivalent to 0.18% of the current value of their pensions.
Phil Loney, Group Chief Executive of Royal London, said:
These results reflect the continued excellent progress of Royal London in 2016, performing well despite the backdrop of a turbulent year in politics and markets. It is clear from the sustained track record of growth that our strategy is working: we are delivering high-quality products and service; we are investing in our capabilities, making it easier for advisers to do business with us; and we are entering new consumer markets to offer better value where we see that the market is delivering a poor deal for consumers. As a result, our customers and financial advisers are increasingly recommending us to others. Our strategy to broaden distribution networks through partnerships with other like-minded organisations is coming to fruition.
Following our successful partnerships with the Co-operative and Ecclesiastical, we were able to announce an important strategic deal with Post Office Money in January 2017. Royal London is now the sole provider of life insurance products to the Post Office selling through 11,500 outlets and online.
Royal London is becoming a much bigger and more established presence in the markets in which we operate. We are now a top-three new business player in several key areas and Group funds under management grew to £100bn, which is 18% higher than the previous year. The resulting growth in our revenues has allowed us to maintain a strong capital position in a volatile world, and to invest heavily in new technology platforms which will enable the business to remain agile and competitive into the future.
Royal London’s operating profit has also showed strong growth despite operating in a low interest rate environment which tends to depress the profitability of insurance products.
This performance has translated into a 63% increase in the ProfitShare for 2016, to £114m enabling us to allocate a healthy ProfitShare to our with-profits members (a 1.4% addition to asset share) and to deliver on our commitment to start allocating ProfitShare to pension members. More than 700,000 pension members will be receiving a share of the profits that we are announcing today. This is a feature that is unique to Royal London and one of which we are justifiably proud.
Royal London now has over one million members. Numbers continue to increase rapidly as employees who join workplace pension schemes become members of Royal London, alongside self-employed customers buying our personal pensions and people using our well-regarded drawdown product to manage their retirement income.
For quarter of a million Royal London pension savers the allocation of ProfitShare will effectively wipe more than a third off their annual management charges. This is a helpful boost to growth for Royal London customers but it remains the case that, across the whole of the workplace pensions market, contributions to pensions are too low. Automatic Enrolment has been an undoubted policy success but there is no coherent plan to increase contributions to levels that will produce an adequate income when those workers retire.
The Government has just concluded a review of the detail of its Auto Enrolment policy, but this key issue was ignored. We know that for most people an 8% pension contribution, made by themselves and their employers, falls well short of providing an adequate level of income in retirement. It is time for Government to bite the bullet and adopt a clear policy about saving at realistic levels beyond 8%. Doing so would help to secure an appropriate level of income in retirement for generations of pensions savers.