Annual Report 2018
For the
generations
of today and
tomorrow
Quilter
We are a leading wealth management
business, helping to create prosperity for
the generations of today and tomorrow.
Financial highlights
Assets under management
and administration (AuMA)*
£109.3bn
2017: £114.4bn
Net client cash flow (NCCF)*
(excluding Quilter Life Assurance)
£4.7bn
2017: £7.6bn
Adjusted profit* before tax
Adjusted diluted earnings per share*1
£233m
2017: £209m
IFRS profit before tax
(from continuing operations)
£5m
2017: £(5)m
Contents
Strategic Report
An overview of our heritage, the trends
impacting our markets, our business
model and strategy. How we do business
responsibly, all accompanied by
relevant performance information,
and our principal risks.
This Strategic Report was approved
by the Board on 11 March 2019.
Glyn Jones
Chairman
Governance
An introduction to our Board of Directors,
executive management team, and our
approach to corporate governance
and remuneration.
Financial statements
Detailed financial information
provided within our financial
statements and notes.
Other information
Our Directors’ Report,
shareholder information and
glossary of useful terms.
12.3p
2017: 10.7p
Recommended final dividend per share
3.3p
* See page 204 for alternative performance
measure definitions
1 IFRS diluted EPS in 2018 was 26.5p (2017: 8.6p)
Quilter at a glance
2018 in pictures
Chairman’s statement
Chief Executive Officer’s statement
Responsible business
Market growth drivers
Business model
Our strategy
Key performance indicators
Financial review
Risk review
– Principal risks and uncertainties
Board of Directors
Executive management team
Chairman’s introduction
on corporate governance
Our approach to governance
Board Corporate Governance
and Nominations Committee report
Board Audit Committee report
Board Risk Committee report
Board IT Committee report
Remuneration report
Remuneration at a glance
Directors’ remuneration policy
Annual Report on Remuneration
Statement of Directors’ Responsibilities
Independent Auditor’s Report
Primary financial statements
Notes to the financial statements
Appendices
Parent Company financial statements
Directors’ Report
Shareholder information
Alternative Performance Measures
Glossary
01
02
04
06
08
12
16
18
19
24
26
32
33
38
40
42
44
48
52
54
60
62
64
67
69
78
86
88
89
96
102
181
188
196
198
202
204
206
01
Alternative Performance
Measures (“APMs”)
We assess our financial
performance using a variety
of measures. APMs are
not defined by the relevant
financial reporting framework
(which for the Group is
International Financial
Reporting Standards (“IFRS”)),
but we use them to provide
greater insight into the
financial performance,
financial position and cash
flows of the Group and the
way it is managed.
APMs should be read
together with the Group’s
IFRS consolidated income
statement, IFRS consolidated
statement of financial position
and IFRS consolidated
statement of cash flows,
which are presented in
the financial statements
of this report.
All APMs within the Strategic
Report are highlighted with
an asterisk and definitions
for each APM can be found
on page 204.
Strategic Report
Quilter Annual Report 2018
Quilter at a glance
Quilter is a leading UK and cross-border full service wealth
manager, providing advice-led investment solutions and
investment platforms to over 900,000 customers.
We are listed on the London and Johannesburg stock exchanges.
Employees
4,343
2017: 4,388
Assets under management and administration*
£109.3bn
2017: £114.4bn
Restricted financial planners (“RFPs”)
UK’s second largest adviser-focused platform
1,621
2017: 1,561
Investment managers (“IMs”)
1552017: 164
£49.9bn
2017: £50.2bn
Total fee revenue1
£788m
2017: £728m
Active relationships with third party IFAs
Operating margin*
4,000+
30%
2017: 29%
Quilter is a modern, multi-channel wealth
management company. We believe in
transparency and customer choice. We
service customers either through our
restricted financial planners or third-party
independent financial advisers by providing
investment solutions and platform services.
Quilter operates in one of the largest
wealth markets in the world – and one that
is growing. With scale and leading positions
in our chosen capabilities, we give financial
advisers and their clients choice and
flexibility in how they access our solutions
and services.
Our purpose
To help create prosperity for the generations
of today and tomorrow.
We believe:
• in the value of trusted face-to-face advice;
• that better choice doesn’t mean
more choice;
• that expert investment solutions
should be simply packaged;
• that award winning service and measurable
outcomes for our customers should always
offer good value; and
• that a company’s purpose goes beyond
making a profit.
Our
journey
to date
Old Mutual plc
Managed
Separation
announced
Sale of Single
Strategy asset
management
business to TA
Associates
Special dividend:
Return of net surplus
proceeds from sale of
Single Strategy business
Announced
Optimisation
plans
2017
2018
2019
Managed
Separation
completed
Listed as
Quilter plc on
LSE and JSE
Closure of FCA
investigation into
Life Assurance
book
Platform
Transformation
Programme:
Migration phases
commence
Building a track record with investors as a standalone listed company
02 Quilter Annual Report 2018
Strategic Report Our Group companies operate
in two main segments.
Assets under management*
£41.2bn
2017: £41.7bn
Net client cash flow*
£3.5bn
2017: £4.4bn
Adjusted profit* before tax
£102m
2017: £82m
Assets under administration*
£80.7bn
2017: £84.8bn
Net client cash flow*2
£3.4bn
2017: £5.9bn
Adjusted profit* before tax
£162m
2017: £158m
Advice and Wealth
Management
Our Advice and Wealth Management
segment consists of:
Quilter Financial Planning
Quilter has the second largest advice
business in the UK. Through our Network
advice business, 1,621 restricted financial
planners who operate through their own
branded firms, deliver face-to-face financial
advice tailored to meet specific needs of
customers. We stand behind their advice,
and provide them with a panel of selected
Quilter and third-party products which they
offer their clients. Quilter Private Client
Advisers is our rapidly growing high net
worth advice business. It is wholly owned
with all advisers employed by Quilter.
It is closely aligned with Quilter Cheviot,
specialising in providing financial advice
to affluent clients across the UK.
Wealth Platforms
Our Wealth Platforms segment comprises:
Quilter Wealth Solutions
Quilter Wealth Solutions is the UK’s second
largest adviser-focused investment platform
provider. The platform is available to both
Quilter Financial Planning and third party
advisers.
Quilter International
Quilter International is a leading investment
platform provider of cross-border
investment solutions aimed at affluent
and high net worth UK residents seeking
investment solutions outside of the UK,
as well as expatriates and international
investors in selected offshore markets.
Quilter Cheviot
Quilter Cheviot is a leading private client
wealth manager providing discretionary
and advisory wealth management services
to private investors and corporate pension
funds, trusts and charities.
Quilter Investors
Quilter Investors is a leading provider of
multi-asset investment solutions, offering
a broad range of solutions for its customers’
accumulation and decumulation needs.
Quilter Life Assurance
Quilter Life Assurance is the book of legacy
UK life insurance, and which includes the
institutional life business, that is closed to
new business and expected to run-off over
the next one to two years. The retail book is
also in steady run-off, expected to decline at
around 15% per annum.
Following the Listing of Quilter plc, all businesses within the Group will be subject to rebranding to align with the Quilter name. For the purposes
of the Annual Report, all businesses have been referenced by their new name – please see the Glossary on page 206 for further details.
Notes:
All figures as at 31 December 2018, unless otherwise stated. Segmental numbers are before eliminations,
Head Office and other shareholder assets, which are detailed in the Financial Review on page 26.
* See page 204 for alternative performance measure definitions.
1 For further information on Total fee revenue, see the Financial review on page 27 and 28.
2 NCCF Wealth Platforms excludes Quilter Life Assurance net outflow of £2.3 billion (2017: £1.6 billion)
as it is a closed-book business.
Strategic Report | Quilter at a glance
03
Quilter Annual Report 2018 Strategic Report
2018 in
pictures
2018 was a momentous year in our
journey to creating the UK’s leading
wealth management business. Key to
this is how we become one business
with one strategy under one brand.
The Quilter Foundation
was launched to provide
funding and skills to
charitable organisations
empowering young
people to overcome
barriers to prosperity.
Quilter successfully
listed on the London
and Johannesburg
Stock Exchanges.
Quilter is a principal partner of
England Rugby and title partner
of England Men’s and Women’s
Quilter internationals, known
as the ‘Quilter Internationals’.
Southampton
to Paris bike ride
challenge
A team from Quilter
successfully completed
a sponsored bike ride
from Southampton to
Paris in aid of Muscular
Dystrophy UK, in
remembrance of one
of our colleagues.
0404
04
Quilter Annual Report 2018
Quilter Annual Report 2018
Quilter Investors
rebranded and launched
its first campaign aimed
at financial advisers, to
help clients realise their
ambitions in retirement.
Quilter is the title partner of England
RFU’s Kids First programme which
aims to create a great rugby
environment for boys and girls
aged under 7 to under 13, as well
as upskilling coaches and teachers.
The programme provides a setting
in which children learn to play the
game at their own pace and develop
their skills through our Quilter
Kids First Skills Series, as well as
our Quilter Kids First Champions
programme. This rewards clubs
and schools who have shown
exceptional quality in delivering the
Quilter Kids First programme with
training sessions delivered by our
Quilter Kids First ambassadors.
We remain committed
to enhancing the number
and quality of financial
advisers with the 100th
student graduating in 2018.
Building a financially
capable generation
Our continued work with
financial education charity
MyBnk in 2018 helped to
equip over 6,000 young
people with vital money
skills and confidence to
help them manage their
money effectively.
Quilter Private Client Advisers
was the second part of
the Group to be rebranded
to Quilter as part of their
journey to become the
premier financial planning
firm in the UK.
Carers Trust
We proudly launched
a campaign with Carers
Trust to give tens of
thousands of young
carers the chance
of a brighter future.
Strategic Report | 2018 in pictures
Quilter Annual Report 2018
05
Chairman’s statement
Welcome to our first Annual Report.
Secondly, as our CEO, Paul Feeney, discusses
later in this report, the Quilter that we
brought to market was not “the finished
article”. We have more to do to reshape
the business and to improve our levels
of efficiency. Quilter has been built both
organically and by acquisition over the last
six years and was then brought to market in
line with the timetable set by Old Mutual plc
for their Managed Separation into demerged
businesses. We see significant scope to
optimise our business in terms of delivering
efficiency initiatives in both the short
and medium term, as well as periodically
reviewing the operations within the Group to
ensure that they are collectively contributing
towards shareholder value creation.
Dividends
Our dividend policy was set out in our Listing
documentation (and is described on page 7).
Following the special interim dividend of
12.0 pence per share which was paid on
21 September 2018, the Board is pleased
to recommend a final dividend of 3.3 pence
per Ordinary Share. The dividend will be paid,
subject to shareholder approval at our 2019
Annual General Meeting on 20 May 2019, to
shareholders on the register on 26 April 2019.
Board
We spent 2017 ensuring that we had a
Board that was fit for purpose to take Quilter
forward as a public, listed company. We
added breadth and depth to our existing
expertise during 2018, including welcoming
Ruth Markland as our Senior Independent
Director at the time of our Listing. Ruth
brings considerable FTSE 100 public company
experience as a Senior Independent Director.
In August 2018 we appointed Paul Matthews
and Dr Suresh Kana to our Board. Paul brings
relevant UK Wealth Management industry
experience and Suresh brings a South
African governance and business
perspective, which is important given
our shareholder register.
Glyn Jones
Chairman
I am delighted to introduce Quilter’s 2018
Annual Report and Accounts (“Annual
Report”), our first as an independent quoted
company. Our primary listing on the LSE
and secondary listing on the JSE on 25 June
2018 represented a significant milestone for
our business. We were pleased to attract a
strong, high quality investor base from the
shares offered through our IPO as well as
enjoying ongoing support from the investors
who came to us via the Managed Separation
from Old Mutual plc.
Overview
2018 was a year of strong financial
performance for the Company. In a year
characterised by increasingly challenging
markets and weakening investor sentiment,
we delivered year-on-year adjusted profit
growth of 11% to £233 million and generated
net client cash flow (“NCCF”) of £4.7 billion
(excluding Quilter Life Assurance), each
ahead of, or consistent with, our guidance
at the time of our IPO.
We achieved a number of milestones during
2018 including the Managed Separation
from Old Mutual plc, the Listing of the
Company, the sale of our Single Strategy
asset management business, as well as
successfully integrating a number of small
distribution acquisitions. We also ended
the year on a strong financial footing,
with a prudent balance sheet.
06
As this is my first Chairman’s letter for Quilter,
I would like to highlight two important points
in respect of where the Company is today.
These points are important in terms of
understanding the framework for the
direction that Quilter will take as we seek to
deliver robust returns for our shareholders.
First, capital discipline is very important to
us. We have started public life in a prudent
fashion with a well capitalised balance sheet.
We do not apologise for this as we recognise
that at times of market uncertainty, when
we face specific business and market risks,
having a robust capital position is a source
of strength and opportunity. I am pleased
that the feedback from our shareholders
supports this position. However, the Board
has no intention of hoarding excess capital
for no good reason and, I believe, the return
of the net surplus proceeds from the sale
of our Single Strategy asset management
business in September 2018 has
demonstrated our commitment in this
regard. We are excited about our growth
potential over the next several years, both
organically and through bolt-on acquisitions.
If we find ourselves in a position where
growth options become unattractive, we will,
of course, accelerate the return of capital to
shareholders.
Strategic ReportQuilter Annual Report 2018 Dividend policy
Key elements of our dividend policy
are as follows:
Dividend
pay-out policy
40-60% of post-tax adjusted
profit
Split:
– interim
– final dividend
One third
Two thirds
Our first dividend will be the final dividend
in respect of 31 December 2018, and will be
paid following the approval of the financial
statements at the AGM.
Recommended final dividend for 2018
3.3p/share
To be paid on 20 May 2019
Special interim dividend
12.0p/share
As announced on 8 August 2018, we paid
a special interim dividend on 21 September 2018
of 12.0 pence per share from the proceeds of
the sale of our Single Strategy asset management
business. The special interim dividend was
equivalent to a return of capital to shareholders
of £221 million representing the surplus capital
proceeds from the transaction, after repayment
of £300 million of debt.
In November 2018 we announced that Mark
Satchel would succeed Tim Tookey as Chief
Financial Officer in March of this year. I would
like to express my thanks to Tim for the huge
amount of work that he has done for the
Company, first as a Non-executive Director
and, over the last two years, as CFO. Tim’s
prior UK public company experience was
critical in ensuring our Listing process went
as smoothly as it did. I am also delighted that,
in Mark, we are fortunate to have an internal
candidate who was ready to step up to the
role of CFO. Mark has been ably mentored by
Tim over the last two years to help facilitate
this transition. Mark was a Board member
of Old Mutual Wealth prior to our Listing
and so is well known to the Board, to the
Executive team and to a number of our major
shareholders. As well as supporting Paul
Feeney with the development of Quilter over
the last six years, Mark was also responsible
for leading the sale of our Single Strategy
asset management business in 2018,
developing our Optimisation plans and was
also very involved in the detailed mechanics
of our Listing process and debt capital raise.
I know that Mark has all the key skills and
attributes to build on Tim’s legacy and to
be a highly effective public company CFO.
Our Board is comprised of a majority of
Non-executive Directors and I am confident
that it has the right balance of skills and
experience to challenge and support the
Executive team. More details on the Board
and appointments can be found in the
corporate governance section on
pages 38 to 63.
Corporate governance
The Board philosophy at Quilter is to ensure
that the business is well governed with the
Directors both supporting the executive
and holding them accountable to robustly
defined performance metrics. We want to
ensure an inclusive, strong and supportive
culture with clear lines of accountability
throughout the organisation. We will operate
in a safe and regulatory compliant manner
and ensure that there is sufficient capital and
liquidity, with appropriate buffers, to support
the business in its day-to-day operations.
At Listing, Quilter became subject to the
corporate governance requirements of the
UK Listing Authority’s Listing Rules, and the
UK Corporate Governance Code (the “Code”).
In the months leading up to the Listing,
much work was carried out to ensure that
the Board had constituted appropriate
Committees and adopted relevant policies
and procedures to support the development
of a robust governance structure and our
compliance with the Code at Listing. While
the King Code IV in South Africa does not
strictly apply to Quilter, the Board is satisfied
that an appropriate account has also been
taken of its approach to South African
corporate governance, given our secondary
Listing on the JSE.
Our work in applying the code is described
more fully in our corporate governance
report on pages 38 to 63. The Board
is satisfied that we have in place a robust
governance structure, which is compliant
with the Code and is fit for purpose. We have
ensured that our governance arrangements
continue to adapt, as appropriate, to achieve
compliance with the 2018 version of the
UK Corporate Governance Code which
has applied to us since 1 January 2019.
Odd-lot offer
As part of our drive for greater efficiency
and in line with our desire to act in the best
interests of all our shareholders, we are
seeking shareholder and other requisite
approvals to undertake an “odd-lot offer”.
An odd-lot offer entails Quilter making an
offer to eligible registered shareholders
(typically owners of under 100 shares subject
to certain exclusions) to repurchase their
shares at a modest premium to the market
price. Quilter currently has nearly 460,000
shareholders, of which nearly half each hold
less than 100 shares. These, principally South
African, shareholders were originally granted
their shares in Old Mutual plc from their
interest as policyholders when that business
demutualised in 1999. They have not actively
chosen to invest in a UK-domiciled company
and have become Quilter shareholders as a
result of our Managed Separation from Old
Mutual plc. The proposed odd-lot offer will
reduce the complexity and cost to Quilter
of managing our shareholder base and
will allow investors holding small numbers
of shares to dispose of their holdings in a
timely and cost effective manner. Eligible
shareholders can, of course, elect to retain
their shareholding in Quilter, if they so choose.
Conclusion
2018 has been a significant year in the
Company’s history and I feel privileged to
be Chairman at this exciting time in Quilter’s
development. On behalf of the Board, I would
like to thank our management team and
all of our employees for their continued
dedication and hard work.
Glyn Jones
Chairman
Strategic Report | Chairman’s statement
07
Quilter Annual Report 2018 Chief Executive Officer’s statement
2018 was a momentous year in the history of Quilter. We are
a modern, purpose-built UK wealth management company
that has many opportunities ahead of it.
enhance our position in the UK platform
market by providing us with a modern,
resilient system built on current technology
rather than legacy code as is the case
with the current platform.
We see four key stages to the successful
completion and delivery of our new platform:
First, the core system completion enabled us
to commence the soft launch phase in early
February 2019. Soft launch was deliberately
structured to be on a limited basis and this
valuable phase is being used to verify core
system functionality, processes and controls
in a live environment and it continues to
progress well.
Secondly, the final platform system, which
will incorporate full adviser functionality, is in
the last stages of development and, given the
critical nature of this, is undergoing rigorous
testing. Subject to these testing results,
we are targeting this to be completed by
early Summer.
The third key stage is migration planning
and this is at an advanced stage. We will
undertake a phased, controlled migration
of our existing book. We aim to migrate an
initial c.10% of assets under administration
from our existing platform, representing the
assets from around 100 adviser firms, in
early Autumn. Once we have incorporated
feedback from this into our processes, we
will continue migration of the remainder of
the book in appropriate phases considering,
amongst other things, the time of year and
market conditions.
Finally, our overriding principle is that high
quality delivery is of the utmost importance
and we are enhancing our detailed plans
to ensure customers and advisers are well
supported throughout the transition period.
This, together with the challenges imposed
by the need to train a large number of
advisers on a new system, are key issues
which have been highlighted in our reviews
of a number of problematic high profile
platform transitions across the UK financial
services industry in recent years. As a result,
we are considering adding additional adviser/
customer call centre capacity and/or taking a
more gradual approach to migration, which
could extend the project timeframe slightly.
Paul Feeney
Chief Executive Officer
Execution
As our Chairman, Glyn Jones, has noted,
2018 was a landmark year in the history of
Quilter. Six years after we set out to build a
modern UK wealth management company
and after two years of hard work to get the
business ready for Listing, on 25 June 2018
we completed the Managed Separation from
Old Mutual plc and our shares began trading
on the London and Johannesburg Stock
Exchanges. I would like to thank all of those
who worked tirelessly to deliver this outcome.
We were delighted with the level of investor
engagement and interest in Quilter from both
new and existing investors throughout this
process, and we look forward to delivering
prosperity for both shareholders and our
broader stakeholders.
The Listing of Quilter was the beginning of
our journey as an independent company.
In that context, we are pleased to deliver
a strong set of maiden full year results,
with an increase in adjusted profit of 11%
to £233 million and a 30% operating margin*
(2017: 29%). Our IFRS profit before tax
from continuing operations was £5 million
(2017: £(5) million).
Given the limited linkages between the
Single Strategy asset management business
and our retail-focused wealth business, the
sale of that business was consistent with our
objective of building the UK’s leading wealth
08
management company. The full consideration
received from the sale of the business to its
management team and funds managed by
TA Associates, which completed at the end
of June 2018, was £583 million. We paid a
special interim dividend of 12.0 pence per
share from the proceeds of this transaction,
equivalent to a £221 million return of capital
to shareholders. This represented the net
surplus proceeds from this disposal after the
repayment of the outstanding £300 million
senior unsecured term loan.
Transformation
As I have said on many occasions, we know
that Quilter is not the finished article. The
task that my team and I are undertaking is
nothing less than a multi-year transformation
of our business. There are two principal
strands to this process: successfully delivering
upon our UK Platform Transformation
Programme and optimising our business.
Our new UK Platform, once operational, will
allow us immediately to widen the product
set we currently offer to include SIPP
capabilities, Junior ISAs and cash accounts
as well as allowing us to hold a broader
spectrum of assets on behalf of clients such
as ETFs and investment trust shares. This
will provide us with the opportunity to target
a broader and higher net worth customer
segment in the UK market than we are
currently reaching. It will significantly
Strategic ReportQuilter Annual Report 2018 Our strategic priorities
We have a strong track record in terms of
growth and delivering against our promises.
We are well placed to grow sustainably,
providing we simplify and unify our business.
Post-Listing our strategic priorities over
the next few years are as follows:
1 Delivering on
customer outcomes
Ensure we deliver good customer
outcomes, strong investment
returns and quality customer
service.
2 Advice and Wealth
Management growth
Grow our advice business by adding
financial advisers and investment
managers, supporting them
to improve their individual
productivity. We will also complete
the build out of our Quilter
Investors team.
3 Wealth Platforms growth
Deliver our UK Platform
Transformation Programme which
will bring benefits including greater
capability and functionality.
4 Optimisation
We will grow our business by
enhancing our scale and efficiency
whilst reducing unnecessary
cost and complexity.
For detail on performance
towards our strategic objectives,
see pages 19 to 23.
* See page 204 for alternative performance
measure definitions.
Strategic Report | Chief Executive Officer’s statement
As at 31 December 2018, we had incurred
costs of £79 million since the programme
commenced in May 2017. If migration is
completed by the end of 2019, we would
expect total programme costs towards
the upper end of our £120 – £160 million
guidance range. Should we decide that it is
in the best interests of both customers
and advisers that programme completion is
extended into the first half of 2020, we would
expect modest additional programme costs,
largely reflecting the incremental potential
initiatives referenced above and a longer
period of dual system running than
originally planned.
Turning now to Optimisation. Optimisation
means making Quilter the best version
of ourselves that we can be. We want to
eliminate the inefficiencies in our
operational processes.
First, we see an opportunity to deliver an
improvement in operational performance
and efficiency of middle and back office
activities. Business areas which are involved
in the new UK Platform Transformation
Programme will be ring-fenced and largely
protected until that project is complete to
avoid any risk of disrupting the programme
delivery timetable.
In addition to those Optimisation savings
which have already been achieved through
cost avoidance during 2018, we believe
that the potential benefits from running
our existing businesses better can deliver
around a two percentage point uplift to our
2020 operating margin target of 30%. This
is despite ongoing investment in distribution
which has a negative short-term impact
on our operating margin. We also expect a
further two percentage point improvement
in 2021. This increases our previous 2020
guidance to around 32% and our 2021
guidance to around 34%, although, given that
the outcome here is a function of income and
costs, this target assumes broadly normal
market performance from around current
levels together with steady net flows. The
uplift will be achieved from cost savings with
an expected cost to achieve of c.£75 million
(inclusive of identified IT spend) to deliver
the programme over the next three years.
Once the UK Platform Transformation
Programme is complete, we will then be able
to consider further efficiency initiatives from
those areas previously ring-fenced until the
UK Platform Transformation Programme
has completed. Our goal will be to transition
towards a simpler, higher-growth business,
over time.
Operational performance
Good customer outcomes remain central
to everything we do. Delivering this starts
with trusted advice. Client confidence in
our proposition is demonstrated through
the strength of our integrated business
model and is shown by our net client cash
flow (“NCCF”) and the resilience of integrated
flows which have held up well despite more
challenging conditions in the second half of
the year. Integrated flows were down just
10% to £4.7 billion in the year.
Despite the significantly less buoyant
market conditions in the second half of the
year and more cautious investor sentiment,
we delivered NCCF of £4.7 billion in 2018,
excluding Quilter Life Assurance. This
represents 5% of opening Assets under
Management and Administration* (“AuMA”)
in line with our medium-term target. Overall
NCCF of £2.7 billion was down 57% on
prior year (2017: £6.3 billion) with this largely
due to the pre-announced run-off of the
low margin institutional life book within
our Quilter Life Assurance (or Heritage)
business and the natural attrition of the
rest of that book.
We have also demonstrated resilience in
AuMA (excluding Quilter Life Assurance)
which declined by just 2% over the year.
This contrasts with an overall decline in
AuM across the industry of 6% during 2018,
according to the Investment Association.
We added to our distribution capabilities
within our Private Client Adviser business
through 14 small acquisitions during the year,
with a corresponding total consideration of
up to c.£12 million that may be paid, with
just over half of this subject to performance
conditions being attained. This provides us
with the potential to build our base of client
assets over time.
Across our appointed representative firms,
we achieved satisfactory growth of 4% in
adviser numbers, and finished the year with
1,621 restricted financial planners (“RFPs”).
This is below our historic growth rate of 5%
and reflects a disappointing rate of growth
in the first half and so this was an area of
particular focus in the second half of the
year when the majority of this growth
was achieved.
On 14 February 2019, we purchased the
remaining shares in Charles Derby Group
that we did not already own. This business
will be positioned as part of our national
advice business instead of being an
appointed representative firm within our
network. We see significant opportunity from
broadening the existing Quilter Private Client
Advisers business model into the affluent
09
Quilter Annual Report 2018 Strategic Report | Chief Executive Officer’s statement continued
market instead of solely servicing high
net worth clients. The acquisition and
repositioning of Charles Derby Group will
provide us with meaningful scale and strong
market positioning to serve customers in the
affluent and mass affluent segment and will
complement Quilter Private Client Advisers
which focuses on high net worth customers.
We will continue to consider acquisitions
in advice and distribution capacity on a
selective and targeted basis but only where
quality and culture are a good fit with Quilter
as well as offering a strong business and
financial case.
As part of our commitment to advice we
have developed the Quilter Financial Adviser
School, which has been in operation since
2016. The School has contributed to growth
in financial advisers across the industry with
an average student age of 29 years and with
33% female participation. During 2018, the
100th student graduated, and currently we
have 94 students enrolled on courses which
cover all stages of financial advice; of these,
46 are potential RFPs. In light of the success
to date we are increasing our investment to
expand the capacity of the School to deliver
a higher level of new RFPs to Quilter. At
current capacity we can accommodate
around 100 students per annum. The
focused RFP programme takes 14 months
to complete and so we expect to see this
start to contribute to growth in our adviser
numbers later this year.
Quilter Cheviot NCCF slowed over the course
of the year mirroring the broader market
trends. Whilst disappointing, this reflected
lower levels of gross inflow and broadly
stable outflows. We expect the first half of
2019 flows to be impacted by the loss of a
c.£0.2 billion client where notice has been
given and with the funds expected to move
early in the year. The near institutional-type
mandate of this portfolio means that we
expect the loss to have minimal impact
on 2019 profitability.
During the last 18 months we have been
investing in the Quilter Cheviot investment
team with Investment Manager (“IM”)
headcount increasing to 168 by mid-2018.
Following Listing we saw a small number
of resignations from a particular cohort of
IMs. As a result, IM headcount fell to 155 by
year-end and, while we have mitigation plans
in place to reduce potential client departures,
we are expecting this could lead to higher
than trend outflows for Quilter Cheviot in the
second half of 2019 and early 2020. Growing
our IM count is a key focus for 2019 and
recruitment is ongoing with a number of new
starters in the pipeline.
Quilter Wealth Solutions achieved net inflows
of £3.1 billion, down 31% on prior year. Gross
sales of £7.7 billion (2017: £8.9 billion) were
down £1.2 billion as a result of the slower
trading environment seen in the second
half of the year as well as reduced transfers
of defined benefit (“DB”) schemes to defined
contribution (“DC”) schemes, which were
down 24% to £1.6 billion. We believe that
this was driven by the impact of increased
FCA scrutiny and resultant impact on
the availability and affordability of IFA
professional indemnity insurance. Overall,
our pension propositions continue to
perform well, with gross sales of £4.7 billion,
representing 60% of total Quilter Wealth
Solutions gross sales (2017: £5.4 billion
representing 61% of 2017 gross sales).
We continue to reposition our International
business and inflows have been particularly
weak in 2018. Our strategy is to focus our
international geographic footprint and
maintain the quality and value of new
business. We have deliberately taken an
early adopter strategy to the shifting of the
regulatory environment and, as previously
reported, this has had an impact on new
business flow but we believe this is the right
approach for both customers and Quilter.
Quilter Life Assurance had net outflows
of £2.3 billion, up from £1.6 billion in
2017, principally due to the closure of the
institutional life book of business announced
in 2017. The remainder of the Quilter Life
Assurance book ran off at a rate of c.14%
which is broadly in line with expectations.
Investment performance
2018 was a challenging year for investors.
Most major asset classes declined, and the
broad nature of the decline, particularly in
the fourth quarter, made it difficult to achieve
positive outcomes from Quilter Investor’s
diversified solutions.
Whilst we are conscious that short term
performance in certain portfolios was
disappointing, our multi-asset solutions
are aligned to the advice process, led by
well-regarded portfolio managers, with good
long term records. We remain particularly
pleased with the medium and longer term
performance of our biggest ranges, Cirilium
and Wealth Select as delivering to these goals
here is how the products are positioned in
the market.
Our largest multi-asset range, the £8.3 billion
Cirilium active, had a disappointing first
half of 2018, but, I am pleased to say, it has
started this year strongly. Over the three,
five and 10 year periods the performance
continues to be strong. The £6.0 billion
Managed Portfolio Service compares well
against its peer group and met its investment
objectives in 2018, defending well in the last
quarter of the year. It hit its fifth anniversary
in good shape.
Turning now to Quilter Cheviot, overall
performance remained consistently good
across all time periods relative to ARC
benchmarks to the end of September. This
is the most recent quarter for which we have
the detailed ARC comparisons which are
available as a benchmark.
Stewardship
We monitor employee engagement on a
quarterly basis and are delighted that it has
remained at a consistently high level despite
the significant work pressures that arose
through the Listing process.
Building an environment where our people
can thrive is important to me. One of the
principal benefits of Quilter being a
standalone business is the reinforcement
of our identity, and strengthening of the
ties that bind our people in their delivery
of our purpose. Virtually all of our staff were
awarded shares in Quilter on Listing and so
have a direct stake in the outcomes of their
efforts as we build the UK’s leading wealth
management company.
We believe that an organisation needs
to have a broader moral compass than
merely profit maximisation. Our Shared
Prosperity Plan, which is part of our
Responsible Business strategy, seeks to
improve financial capability across the UK
population. By equipping people to make
better financial decisions, we enable them
to have a secure financial future and we
aim to protect customer assets over the
long-term through inclusive and
responsible investment.
We were delighted to launch The Quilter
Foundation at Listing. As a registered charity,
the Foundation’s mission is to tackle the
barriers to prosperity in our society.
The Foundation’s first step is to work in
partnership with charities that support
young carers in the UK to help overcome
the challenges they face such as isolation,
mental health issues and poor outcomes
in education and employment.
We also continue to make good progress
in undertaking our voluntary redress for
customers within Quilter Life Assurance
who were subject to the terms of the FCA’s
thematic review into the fair treatment of
long-standing customers. We, of course,
welcomed the FCA’s decision to close their
investigation without any sanction on the
10
Quilter Annual Report 2018 Paul Feeney visiting a carers centre
in Camden, London.
“The Carers campaign makes me incredibly
proud and humbled. I’m so thankful we’re
in a position to support these amazing
young people.”
Early 2019 has seen a partial recovery in
markets. By the end of February 2019 our
AuMA had increased to c.£113 billion up
from £109.3 billion at year-end. While this
recovery in markets has been ahead of our
expectations, the trend in net client cash
flows has remained subdued. Brexit and
market uncertainty continue to temper
momentum in year-to-date flows and
therefore we remain cautious on net flows
going into 2019. However, as we set out in
our Prospectus ahead of Listing, we are
confident in our strategic path and growth
prospects. We are a modern, purpose-built
UK wealth management company that
has many opportunities ahead of it. Our
focus remains on embedding last year’s
cost successes into our 2019 performance,
delivering organic growth and executing
upon our transformation plans. I am
hugely excited about the journey ahead
and look forward to continuing to deliver
on our promises.
Paul Feeney
Chief Executive Officer
Company. Of the £69 million provision taken
in 2017 relating to our voluntary redress
of historic business written, we have paid
out £27 million and we remain confident
that the remaining provision will be
sufficient to meet the costs that were
identified from our review process.
Outlook
The UK wealth management industry
continues to offer strong secular growth
potential notwithstanding the short-term
headwinds. As it became apparent in the
second half of 2018 that global macro and
geopolitical uncertainty was impacting flows
and market sentiment, we increased our
focus on cost management and accelerated
some of the benefits we expected to deliver
from our first stage Optimisation initiatives.
As most of the decline in markets came
late in the year, the impact on our 2018
revenues was relatively muted. Closing
AuMA of £109.3 billion was £5.4 billion
less than the average AuMA* for 2018 of
£114.7 billion. Lower average asset values,
if sustained, would impact revenue
generation in the current year. While we
cannot avoid external headwinds, we aim
to keep 2019 costs broadly flat on 2018
(excluding acquisition activity), through
Optimisation and other initiatives, to
partially offset the anticipated tougher
revenue environment.
We remain resolutely focused on growing
our business and supporting our clients
towards achieving their savings and
investment goals. During 2019 we plan
to increase adviser numbers, expand our
national advice business including through
the recently announced acquisitions, add
Investment Managers in Quilter Cheviot,
finish the build out of our Quilter Investors
operation and complete, or substantially
complete, the safe delivery of our new
UK platform.
2019 will throw up other challenges for
Quilter. Brexit and market uncertainty are
having an impact upon investors’ appetite
to put new money to work. In addition, we
anticipate that the migration of advisers
to our new platform may contribute to a
slowdown in the flow of new money into
our platform services as advisers familiarise
themselves with, and are migrated to, the
new platform. As a result of both of these
factors, while we remain confident in a target
of 5% growth for NCCF on a medium-term
basis, we may undershoot this target during
calendar year 2019.
* See page 204 for alternative performance
measure definitions.
Strategic Report | Chief Executive Officer’s statement
11
Quilter Annual Report 2018 Responsible business
We are committed to growing Quilter
responsibly for the long-term, recognising
that we must earn the trust of our stakeholders.
Our Shared Prosperity Plan
In light of external trends and our strategic
business priorities, our Shared Prosperity
Plan focuses on three long-term goals and
nine commitments which are most material
to our customers and our business. These
goals and commitments will guide our
responsible business activity to 2025.
Goal 1: To enhance financial
capability
Our goal is to help people develop the skills,
knowledge and confidence to fully engage
in their financial lives, to be financially
secure and pursue their financial goals.
Financial capability commitments
• Enable all our colleagues to feel
money confident.
• Improve access to financial guidance
and advice for customers and consumers
more widely.
• Empower young people to manage
their money well for life.
Goal 2: To enable secure futures
Our goal is to support people to have a more
secure future by empowering customers
to be more engaged in their financial future
and by creating opportunities for people
to access and thrive in work.
Secure futures commitments
• Enable all colleagues to thrive in work
and fulfil their potential.
• Empower customers to be more engaged
in their financial future.
• Help people in the community overcome
barriers to prosperity.
Goal 3: To promote
responsible investment
Our goal is to invest responsibly, create
an inclusive culture and reduce our
environmental intensity as a business
and investor.
Responsible investment commitments
• Create an inclusive culture at work
that embraces diversity.
• Embed responsible investment
principles across our business.
• Reduce the environmental intensity
of our activities.
Jane Goodland
Corporate
Affairs Director
Our shared values
We are Pioneering
Leading change and driving growth from
the front, positively challenging industry
convention to create new and rewarding
opportunities for our customers
and ourselves.
We are Dependable
Using our expertise, care and judgement
to guide us and our customers through
complex and challenging times,
determined to take people to a
better place in their financial future.
We are Stronger together
Using our diversity and our relationships
– learning from each other – to create one
business with better opportunities for
our people and better outcomes for
our customers.
12
Our core purpose is to help create prosperity
for the generations of today and tomorrow.
That doesn’t just mean growing economic
wealth, it means enabling people and their
families to thrive and achieve their own
life goals.
It goes further than our customers; we
also strive to create long-term, sustainable
value for colleagues, business partners,
shareholders and society more broadly.
This is ‘shared prosperity’.
This also means playing our part in rebuilding
trust in financial services, and creating a
better future by understanding that our
value goes beyond making a profit.
Our Shared Prosperity Plan sets out our
approach to responsible business. It is
informed and shaped by our engagement
with our stakeholders and reflects external
socio-economic trends affecting our
customers, our society and our business.
These trends include the ageing UK
population and rising social care costs,
the shift of responsibility to individuals
for retirement savings, the lack of financial
capability, insufficient financial advice and
the widespread lack of long-term savings.
More broadly, the drive for sustainable
economic development and the role
of technology continue to be important
themes shaping economies.
Strategic ReportQuilter Annual Report 2018 Quilter colleagues 2018 vs 2017
As at 31 December 2018
Our progress
Total number of colleagues1
4,343
2017: 4,388
Total split by gender
% (number)
52% (2,258)
48% (2,085)
2017: 54% (2,355) | 46% (2,033)
Quilter plc Board split by gender
% (number)
64% (7)
36% (4)
2017: 64% (7) | 36% (4)
Executive Committee split by gender
% (number)
79% (11)
2017: 92% (12) | 8% (1)
21% (3)
Senior management split by gender2
% (number)
66% (70)
34% (36)
2017: 71% (66) | 29% (27)
Male
Female
1 Additional employee data is provided in
Note 11(b) on page 134 which shows the
average position during the year.
2 Senior management defined as Executive
Committee and their direct reports,
excluding administrative staff.
The Right Honourable Philip Hammond MP
at a KickStart Money session at Lyne and
Longcross School in Chertsey
Quilter founded and continues to co-chair
this collaborative industry initiative that
unites 20 leading investment and savings
firms to co-fund financial education targeted
at primary school children aged 7 to 11.
Launched in 2017, KickStart Money is on
target to reach over 18,000 primary school
aged children with financial education by
2021. The coalition of firms is also engaging
with the Government to call for financial
education to be included on the national
primary curriculum.
We launched the Shared Prosperity Plan
in 2018 and have made nine commitments
which guide our activity to 2025. Our
progress against these commitments
is shown fully in our Responsible Business
Report, with some highlights included below:
Commitment: Improve access to
financial guidance and advice for
customers and consumers
To bridge the financial advice gap in the
UK we launched the Quilter Financial Adviser
School in 2016 which, on a not-for-profit
basis, helps students achieve the
qualifications, skills and professionalism
required to have a successful career
as a financial adviser. By 2025, the school
aims to have trained over 1,000 new
financial planners.
Commitment: Empower young people
to manage their money well for life
Through our partnership with leading
financial education charity MyBnk, we
have reached over 13,000 young people
over the last three years in schools and
youth groups helping them develop money
skills for life. In addition we also co-chair
a collaborative industry initiative, KickStart
Money (see case study on the left).
Commitment: Enable all colleagues to
thrive in work and fulfil their potential
Our ability to attract, develop and retain the
best talent is critical to our business. We
strive for an engaged colleague community
and collegiate culture. Cathy Turner is the
designated Board member with responsibility
for ensuring the Board understands the
views of colleagues to enable their interests
to be taken into account. At least annually,
Cathy will meet with Quilter’s employee
forums, which are consultative bodies
to represent colleagues.
In addition, the views of colleagues are
sought through our regular culture survey
to identify where we are doing well and
where there is scope to improve. In 2018
we achieved a 71% response rate and
our engagement score was 7.7 out of 10
compared to 7.6 in 2017.
We have a full communication plan in place
across all of our business areas. This is
designed to ensure that colleagues are
fully briefed on a range of topics including
Company strategy, performance and results,
external social, financial and economic
factors impacting our business, our
community and responsible business
activities, and matters directly impacting
individuals such as mental and physical well
being initiatives.
Thrive ambassadors
In 2018 we launched the Thrive wellbeing
initiative which provides our colleagues
with tools, information and services to
enhance their health and wellbeing. This is
supported by over 120 Thrive ambassadors
and 12 trained mental health first aiders. In
July 2018 Quilter signed the Time to Change
Pledge to demonstrate our commitment
to change attitudes, behaviour and remove
the stigma associated with mental health
in the workplace.
We have an active learning and development
programme and in 2017 launched our
mentoring programme, which by the end
of 2018 included 49 mentoring relationships.
Commitment: Create an inclusive
culture at work that embraces diversity
We firmly believe our industry will be
stronger and deliver better outcomes if it
fosters a more inclusive and diverse culture.
We are committed to ensuring that everyone
at Quilter has the opportunity to fulfil
their full potential regardless of diversity
characteristics. We recognise we’re not
alone in this challenge, which is why we are
working collaboratively with other companies
through the Diversity Project to address
systemic barriers to inclusion within the
investment industry.
We have also signed the HM Treasury
Women in Finance Charter and have adopted
a target to reach 35-40% women in senior
management by the end of 2020. As at
31 December 2018 the female composition
of our senior management community
(the Executive Committee and their direct
reports, excluding administrative staff) was
34%, compared to 32% in the prior year.
The imbalance of men and women in our
senior management community and revenue
generating roles is a key driver of the Gender
Pay Gap, which we are committed to
reducing over the coming years.
Strategic Report | Responsible business
Quilter Annual Report 2018
13
Strategic Report | Responsible business continued
Gender Pay Gap
As at 05 April 2018/2017
Mean
Median
2018
2017
2018
2017
Hourly pay gap
35% 39% 29% 29%
Bonus gap
70% 70% 39% 41%
Women receiving
bonuses
Men receiving
bonuses
85% 85% 86% 85%
85% 83% 85% 83%
Proportion of men and women
by pay quartile
The bars below show the proportion of men and
women in each pay quartile from the first (highest
pay) to the fourth (lowest pay).
First quartile
%
72
2017: 75 | 25
Second quartile
%
52
2017: 48 | 52
Third quartile
%
42
2017: 43 | 57
Fourth quartile
%
28
48
58
41
59
2017: 41 | 59
Male
Female
Greenhouse gas emissions 20181
Scope 1
Scope 2
Scope 2 – market-based
TCO2e
2018
TCO2e
2017
636
3,037
1,976
556
3,289
3,079
Total – Scopes 1 and 2
3,672
3,845
Tonnes of CO2e/average
number of colleagues
0.83
0.91
1 Our emissions are calculated and reported in
accordance with the GHG Protocol Corporate
Standard. Please refer to the Glossary on page
206 for definitions of the GHG emissions
categories shown in the above table.
Quilter’s Gender Pay Gap figures are shown
on the left. We have seen the mean hourly
pay gap reduce since 2017 and we anticipate,
that over the long term, this trend will
continue as we seek to create more gender
balance within our senior management
community.
This is an ongoing process which will take
time to embed, and as such we recognise
that a substantial reduction in our Gender
Pay Gap figures may take some years
to achieve.
Commitment: Reduce the environmental
intensity of our activities
We have been formalising our environmental
management activities, in particularly to
reduce the energy consumption of our
buildings through planned refurbishment
activity and switching to renewable energy
where possible. Over 10 of our buildings
are now on renewable energy tariffs which
account for 57% of our total workforce.
With regard to greenhouse gas (GHG)
emissions, we support the Carbon Disclosure
Project and aim to publish our science-based
reduction targets for GHG emissions in 2019.
We also recognise that our investment
portfolios have indirect impacts on the
environment and this is an area we will
assess and measure more fully in future,
through our commitment to embed
responsible investment principles across
our business.
Greater transparency and disclosure of
climate-related risks by companies is critical
for investors on the transition to a lower
carbon economy. As such we welcome the
work of the Financial Stability Board’s Task
Force on Climate-related Financial Disclosure
(“TCFD”). In 2017 the TCFD launched
its voluntary framework for disclosure
of climate-related information around four
main themes: governance, strategy, risk
management, and metrics and targets.
As we formalise our approach to managing
climate-related risk we aim to work towards
full compliance with the TCFD disclosures.
Stakeholder engagement
We recognise the importance of engaging
with a range of stakeholders to ensure
we understand their expectations and
views of us and share information about
our approach and performance. Our
stakeholders are wide ranging and include
colleagues, customers, financial advisers,
investors, suppliers, regulators, media, NGOs
and other special interest groups. During
the year we reviewed and enhanced our
stakeholder engagement framework which
includes surveys, interviews and research
amongst our stakeholder community so we
can better understand their perspective and
their expectations of us.
Responsible business governance
Our responsible business approach
contributes to the management of our
strategic and business risks, particularly
brand and reputation, people and culture,
and conduct risk. For more information
about our principal risks and uncertainties,
see pages 32 to 37.
To ensure we have appropriate oversight
and control of our responsible business
activity we have introduced a governance
framework involving the Board and executive
management. Quilter CEO, Paul Feeney,
has overall accountability for ensuring we do
business in the right way. The Board receives
regular updates on responsible business
matters and formal oversight of responsible
business and wider stakeholder interests
is formally the remit of the Board’s Corporate
Governance and Nominations Committee,
chaired by the Group Chairman.
At an executive management level the
Responsible Business Forum provides
oversight, direction and challenge with
respect to Quilter’s approach to responsible
business. The Forum meets quarterly
and comprises members from across
the business and is chaired by the Corporate
Affairs Director.
In addition to these oversight and
management groups, our responsible
business governance framework comprises
policies, codes and standards. For example,
these include the Quilter code of conduct,
the supplier code of conduct, and policies on
the environment, human rights, community
investment, and responsible investment
and stewardship.
We are committed to maintaining the highest
standards of integrity and complying with all
relevant laws. Our code of conduct sets out
the duties and expectations of all colleagues
covering the prevention of financial crime,
treating customers fairly, conflicts of interest,
use of Company assets, market conduct,
working with regulators and Governments,
and information, data and communications.
We also have policies explicitly focused
on anti-money laundering, anti-bribery
and corruption, fraud prevention, and
market abuse.
14
Quilter Annual Report 2018
Community investment
£1.1m
This includes all direct corporate donations,
employee fundraising and investments made
by the Quilter Foundation
Non-financial information
statement
This section (pages 12 to 15) provides
information as required by regulation
in relation to:
• environmental matters;
• our employees;
• social matters;
• human rights; and
• corruption and bribery.
In addition other related information
can be found as follows:
• business model – page 18;
• principal risks and how they are
managed – pages 32 to 37; and
• non-financial key performance
indicators – pages 24 and 25.
The Sustainable Development
Goals were defined by the United
Nations in 2015 to end poverty,
protect the planet, and ensure
prosperity for all as part of a new
sustainable development agenda.
We support the goals and our
responsible business agenda
responds to those which are most
relevant for our business. See our
Responsible Business Report for
more information.
We have zero tolerance of any form of
harassment, abuse, discrimination or bullying
of colleagues, contractors, suppliers or
anyone we deal with. All colleagues are
required to behave in a way that supports
an inclusive culture, embracing all forms
of diversity. We respect human rights and
reject any form of modern slavery and in
accordance with the UK Modern Slavery Act,
we publish our Modern Slavery Statement
on our website. We are also an accredited
national living wage employer, ensuring
all employees are paid accordingly and we
require our suppliers who provide on-site
services to do the same.
Shani Brathwaite,
Young Carer Support Worker
We want a culture where people can speak
up and share their concerns. Colleagues
are made aware of our whistleblowing policy
and ethics hotline and we have appointed
the Chair of the Board Audit Committee,
George Reid, as Quilter’s whistleblowing
champion. All such reports and disclosures
are fully investigated by management whilst
protecting the confidentiality of those who
make reports.
The Quilter Foundation and Carers Trust
Through the Quilter Foundation, we have
launched a £1.5 million campaign to give
young carers the chance of a brighter future.
Our aim is to provide support for those who
need it, to help them to fulfil their potential in
education and employment, and support their
mental health and wellbeing. The campaign
also raises awareness of the incredible
contribution carers make to our society.
In addition to the financial education
programmes mentioned earlier, in 2018 we
launched our Young Carers campaign which
brings together the Carers Trust and The Mix,
both of which are leading charities in their
field. We know that this group of young
people are more likely to fall behind at
school, suffer with mental health issues and
may struggle to fulfil their potential. Through
the campaign the Foundation is giving small
grants, respite and a range of expert and
peer to peer support for young carers.
Over the next three years we aim to support
tens of thousands of young carers, helping
them to have a brighter future.
Jane Goodland
Corporate Affairs Director
See the Quilter Responsible
Business Report for more details
on our Shared Prosperity Plan.
Colleagues are required to undertake annual
mandatory training to ensure they fully
understand what is required of them. This
includes training on the code of conduct,
whistleblowing, human rights, and financial
crime (which includes anti-corruption and
anti-bribery). During 2018 over 4,000 of our
people completed this training.
Tax strategy
As a responsible business, we are committed
to full compliance with our tax obligations,
paying the right amount of tax at the right
time. We have zero tolerance for tax evasion
and we do not promote tax avoidance or
aggressive tax planning arrangements to
our customers or to other parties.
More information about our tax strategy
can be found on our website.
The Quilter Foundation
Anchored in our purpose to help create
prosperity for the generations of today and
tomorrow, this year we launched The Quilter
Foundation to act as the focal point of our
investment in the community. It has a clear
mission to help young people overcome
barriers that may prevent them to fulfil their
potential, thrive and prosper, particularly
concerning education, employment and
mental health.
The Foundation has formed a small number
of key strategic charity partnerships focused
on improving educational outcomes,
employment prospects and young people’s
health and wellbeing.
Strategic Report | Responsible business
15
Quilter Annual Report 2018 Market growth drivers
Our chosen markets are experiencing secular growth in the
demand for wealth management services, while at the same
time facing constrained supply of financial advisers.
Shift of savings responsibility to the individual
The ongoing shift in responsibility for ensuring sufficient long-term savings and
retirement provision to individuals increasingly means that customers need to make
their own financial plans.
Pension reform driving increased need for retirement solutions
Pension freedom increases the flexibility for guidelines to manage their long-term
savings. To support this, wealth managers need to be ready to advise on and manage
customers’ funds beyond the savings phase well into the retirement phase.
Demand
58%
Percentage of adult population
who think they have insufficient
understanding of pensions
to save for their retirement
Source: Wealth & Assets Survey 2017, ONS
38pp
Forecasted growth in “Solutions” share
of global asset management 2016-2020
Source: BCG Global Asset Management 2016
Demographics: ageing population, inter-generational wealth transfer
Demographic changes and the savings gap, create an increasing demand for wealth
solutions, supported by the existing Government’s policy to pass responsibility to the
individual. A shift from opaque, traditional life saving products to more modern, transparent
solutions held via platforms means that the UK Wealth market is ideally positioned to
benefit from these structural growth trends.
Population over 65 years old
will increase from 600 million
today to 2.1 billion in 2050
Source: World Economic Forum
Complexity driving increased need for advice alongside digital solutions
Pension freedom introduced in the UK has resulted in increased choice, and accordingly,
complexity for individuals to plan for their future. While self-directed and robo-advice will
be an important constituent of the wealth management sector, we continue to see
a significant opportunity for adviser-led investment solutions.
30%
Percentage of the UK population who
are likely to require financial advice
Source: FCA Financial Advice Market
Review 2017
16
Strategic ReportQuilter Annual Report 2018 5,000
Reduction in financial advisers
from 2011 to 2017
Source: FCA Financial Advice Market
Review Baseline Report 2017
70%
Decrease in annuity sales since
UK pension reforms in 2015
Source: ABI
Withdrawal of financial advisers post retail distribution review (RDR)
In terms of supply, RDR in 2013 triggered a reduction in the number of financial advisers
despite growing needs, so demand for investment advice exceeds supply.
Shift away from traditional insurance-based investment products
Investment platforms offer a wider choice of investments tailored to individual needs,
and are combined with easy-to-access digital services.
14%
2014-2018 compound annual growth
rate in UK platforms’ AuA
Source: Fundscape
Post RDR value chain and increasing regulatory costs placing pressure
on smaller firms
RDR and MiFID II have resulted in greater compliance and administrative burdens
on financial advisers and their firms, making smaller firms less economically viable.
The Quilter business model, where firms become restricted and benefit from our
support and buying power to provide high quality, cost effective solutions for their
clients, alleviates this burden.
“In some sectors, including pensions
and retirement income... some older
consumers’ financial services needs
are not being fully met, resulting in
exclusion, poor customer outcomes
and potential harm.”
Source: FCA 2018/19 Business Plan, Priorities
Increased focus on industry professionalism, transparency
and customer outcomes
Segments of the wealth industry have been increasingly scrutinised by the FCA including
life insurance products, platforms and advice quality leading to declines in supply from
smaller players. Many sole traders decided to leave the industry given the uncertainty
created and the requirement to achieve higher levels of qualification.
Supply
Strategic Report | Market growth drivers
17
Quilter Annual Report 2018 Business model
Our full-service model enables us to support the changing needs
of our customers throughout their life cycle.
A potential Quilter customer looking to
manage their wealth needs three things:
professional financial advice, investment
solutions to achieve their financial goals,
and a platform to hold their investment
either directly or through a tax-efficient
product wrapper. We earn revenues from
the assets under our management or
administration as a result of providing
advice-led investment solutions and our
platform to customers across the UK and
in select international markets.
Quilter has a multi-channel access model,
where customers can come to us through
both our advisers or their own, independent
adviser. When we support a customer to
manage their wealth in more than one
area, and therefore earn more than one
revenue stream from them, we refer to it
as an integrated flow. The unbundled, open
nature of our model, offering flexibility to
use one, two or all three components, is
a key competitive advantage and provides
customers and their advisers with choice
at every stage.
For Quilter, our model provides greater
market breadth, customer and adviser
choice, which supports long-term customer
relationships. Our scale and leading market
positions in each of our business segments
enables us to benefit from strong structural
growth dynamics and capture an increased
share of the market.
There are two ways customers can choose
to use our services:
Advised
channel
Initiated through one of our
own financial advisers.
Open market
channel
Initiated through
a third party adviser.
Financial advice
Quilter Financial Planning & PCA
Restricted advice
Third party independent advice
Independent advice
Platform and wrappers
Third party
platforms
Quilter platforms
Investment solutions
Quilter Cheviot & Quilter Investors
Third party
funds and
solutions
Quilter Cheviot
18
Strategic ReportQuilter Annual Report 2018 Our strategy
We aim to be the leading UK wealth manager
by continuing to focus on delivering good
outcomes for our customers.
With the UK having one of the largest savings
gaps in Europe and pension reforms making
individuals increasingly responsible for
managing their financial futures, the need
for financial advice, relevant investment
solutions and modern platform technology
is growing at pace.
Quilter’s strategy will enable us to respond
to these market needs by:
• becoming the largest provider of insightful,
trusted financial advice;
• providing outcome-based diversified
investment solutions, focused on meeting
the real needs of our customers;
• enabling easy and simple access to manage
investments on one platform; and
• ensuring customers only pay for the
services they take from us.
Key performance indicators (“KPIs”)
For details of how we measure our
strategic and operational performance,
see pages 24 and 25.
Our strategic priorities
By focusing on our four strategic priorities,
we aim to become the “go to” business for the
affluent and mass affluent segments.
4 Optimisation
2018 achievements
• Phase 1 planning complete
• Early savings achieved through cost
Focus in 2019
• Mobilise Phase 1 initiatives
• Protect PTP-related areas
management
3 Wealth Platforms
growth
2018 achievements
• Strong underlying UK
Platform growth
Focus in 2019
• UK platform migration
• Supporting advisers
• PTP progress leading to soft launch
and customers
in early 2019
2 Advice and Wealth
Management growth
2018 achievements
• Strong profit growth
• Resilient integrated flows
Focus in 2019
• Growth in RFPs/PCA – embed
and leverage acquisitions
• Growth in IMs in Quilter Cheviot
1 Delivering on
customer outcomes
2018 achievements
• Stable asset retention
• Low levels of upheld complaints
Focus in 2019
• Drive investment performance
• Launch full-service SIPP
Strategic Report | Our strategy
19
Quilter Annual Report 2018
Strategic Report | Our strategy continued
1. Deliver on customer outcomes
Investment performance
2018 was a challenging year to deliver
performance for investors. In the first three
quarters of the year, most stock markets
outside the US delivered lacklustre
performance. Moreover, US market
performance during this period was driven
by stock leadership from a narrow range
of tech-related companies. In the latter
part of the year, a number of these stocks
retrenched significantly which coincided with
a synchronised broad retrenchment across
most major asset classes, particularly in the
fourth quarter. This made it difficult to
achieve positive outcomes from Quilter
Investor’s diversified investment solutions.
While we are conscious that these unusual
market conditions meant that short-term
performance in certain portfolios was
disappointing, our multi-asset solutions
are aligned to our advice process. We remain
particularly pleased with the medium and
longer-term performance of our largest
ranges, Cirilium and Wealth Select, as
the ability to deliver over a longer-term
timeframe is how the products are
positioned in the market.
Quilter Cheviot’s overall performance
remained consistently good across all
time periods relative to ARC benchmarks
(to the end of September 2018 – the most
recent quarter for which the detailed ARC
comparisons are available as a benchmark).
Notably, performance remains top quartile
on a 10 year horizon. Since Quilter’s 2018
Interim Results, the five year performance
in ARC Balance Asset and ARC Steady Growth
categories declined from first to second
quartile. This was a function of a particularly
strong quarter dropping out of the five year
rolling period and being replaced by a
quarter of more normal performance.
2018 Performance
Good customer outcomes are central to
everything we do. Delivering that starts with
trusted advice. In a period where Brexit and
other geopolitical issues were weighing on
investor sentiment, maintaining discipline
to remain committed to a financial plan to
build long-term savings and to generate
sufficient pension provision for later life
can be daunting for customers. In such
times Advisers demonstrate their value.
Our advice-centric model means advisers
were on hand to support and guide clients
through periods of market volatility
and uncertainty.
Client confidence in our proposition is
demonstrated through the strength of our
integrated business model and is shown by
our NCCF and the resilience of integrated
flows. The latter held up well during 2018
despite challenging market conditions. While
net retail flows in the UK market were down
85% year-on-year (source: The Investment
Association), our integrated flows were
down just 10%. Less flow was available
but what flow there was touched more
of parts of Quilter.
Asset retention (excluding Quilter Life
Assurance) improved one percentage point
in 2018 to 91%, as a result of our strong
product and proposition offering, and high
customer service standards. Complaints
remained low and levels of upheld complaints
remained below the industry average.
Awards
During the year we were pleased to continue
to receive recognition for our customer
service and investment propositions through
a number of industry awards. Among others,
we were delighted to receive three awards
at the Financial Adviser Service Awards, to
achieve Defaqto’s “5 Diamond” rating for
seven Quilter Investor funds, and for Quilter
Cheviot to win “Best Wealth Manager –
Cautious Portfolio” and “Best International
Clients Team” at the Wealth Adviser
Awards 2018.
Our strategy is focused on ensuring good
customer outcomes and strong investment
returns while delivering quality service to
our customers. Developing appropriate
investment propositions and solutions
is a key part of delivering on this strategic
objective.
KPIs
• Integrated net flows
Other performance indicators
• Investment performance
• Levels of upheld complaints
2018 performance
Integrated flows*
£4.7bn
2017: £5.2bn
Asset retention*
91%
2017: 90%
* See page 204 for alternative performance
measure definitions.
Developing innovative
investment solutions
that give customers the
confidence to invest for
their future, is a key focus
for Quilter Investors.
Hinesh Patel
Portfolio Manager
Quilter Investors
20
Quilter Annual Report 2018 2. Advice and Wealth Management growth
We will grow our Advice business by
adding advisers through recruitment and
acquisitions, embedding recently acquired
firms and supporting the Financial Adviser
School intake and graduates as well as
supporting our advisers to improve their
individual productivity. We will continue
to develop our national advice business
including through selective targeted
acquisitions. We will add to our discretionary
investment managers to support the growth
of our investment and discretionary fund
management businesses.
KPIs
• NCCF/Opening AuMA
• Integrated net flows
• Adjusted profit before tax
• Restricted financial planners
• Investment managers
2018 performance
Growth in adjusted profit*
24%
2017: 39%
Stable Quilter Cheviot, Quilter Investors
and Quilter Financial Planning total AuM*
despite challenging market environment
£41.2bn
2017: £41.7bn
Growth in RFPs
4%
2017: 10%
Growth in investment managers
(5%)
2017: 4%
2018 Performance
We are growing our advice and wealth
management businesses through recruiting,
training and retaining advisers and
investment managers.
Advice:
In today’s increasingly complex world,
it is difficult for a one-or-two person
independent financial adviser operation
to offer whole-of-market advice. Quilter
offers the support to allow advisers to focus
on what they do best: providing high quality
advice and an appropriate level of choice
to their customers. Essentially we remove
distractions and give to them the tools they
need. This is an attractive proposition for
recruiting and retaining advisers.
We are committed to enhancing the number
and quality of financial advisers across
the industry. Our financial adviser school
is designed to train the financial advisers of
tomorrow. In September we were delighted
to announce, alongside its rebranding
to Quilter Financial Adviser School, the
expansion of the school’s offering. As well
as now giving students the opportunity to
obtain their Advanced Diploma, Quilter will
fully fund training programmes for anyone
who wishes to become an RFP within the
Quilter advice network. The School aims to
substantially increase the number of people
entering the advice profession and we expect
to retain an increasing proportion of those
graduates within Quilter.
During the year we added to our advice
capabilities within PCA, completing 14 small
bolt-on acquisitions. A key part of our
strategy has been to integrate and embed
these newly acquired firms and to support
our advisers to improve their individual
productivity.
Wealth Management:
We are a leading provider of investment
solutions in a growing market with a robust
and structured investment process,
we believe Quilter Investors to be a very
scaleable business. In 2018 we built out the
technology and employee infrastructure
supporting Quilter Investors and its
investment managers as it prepared to
separate from our Single Strategy asset
management business. We added 35
employees to the team in 2018 and expect
to welcome a further c.20 people in 2019.
Growth of RFPs
1,621
3
60
20
37
1,561
31 December
2017
4
years
31 December
2018
Acquisition
Transfer independent to restricted
Net organic recruitment
We have continued to invest in growing the
number of managers in the Quilter Cheviot
investment team, increasing the headcount
to 168 by June 2018. Following Listing we
saw a small number of resignations from a
particular cohort of IMs, with the headcount
falling to 155 by year-end as a result. Growing
our IM headcount is a key strategic objective
– recruitment is ongoing, with a number
of new starters in the pipeline.
The Financial Adviser School: Gabriela’s Story
“The School has been the ideal training ground
for the early stages of my career in financial
services. It has provided me with support for
my exams, training as well as shadowing a
qualified adviser. As a result I’m delighted to
have achieved my DipFA level 4 qualification,
which is the industry benchmark financial
adviser qualification, and I’m looking ahead
to Chartership.”
* See page 204 for alternative performance
measure definitions.
Strategic Report | Our strategy
21
Quilter Annual Report 2018
Strategic Report | Our strategy continued
3. Wealth Platforms growth
Our principal objective for 2019 is to safely
deliver our UK Platform Transformation
Programme with high quality support for
customers and advisers throughout the
migration process. Once implemented,
we will realise the benefits of the more
modern platform with an enhanced
proposition for advisers. We will maintain the
focus of Quilter International’s geographic
footprint and ensure a high quality and
value of new business. Lastly, we will seek
to manage the cost base of Quilter Life
Assurance down in line with revenues as
the book runs off.
2018 performance
Wealth Solutions:
We continue to implement the UK Platform
Transformation Programme in our UK
Platform business. Core system completion
in 2018 enabled the soft launch phase of the
programme to commence in early February
2019 which continues to progress well.
For further details on the UK Platform
Transformation Programme’s progress
through its four key stages to completion,
see the Chief Executive Officer’s statement,
pages 8 to 11.
KPIs
• NCCF/Opening AuMA
• Integrated net flows
• Adjusted profit before tax
2018 performance
Adjusted profit* growth
3%
2017: (5%)
AuA* in Wealth Platforms
£80.7bn
2017: £84.8bn
The new platform is intended to support
our own and third-party advisers and
customers. It will build on our key strengths,
fill proposition gaps and allow us to continue
to innovate. It will offer a wider product
and investment range to our customers as
described in the diagram to the right, and
will significantly improve the online customer
portal, providing greater accessibility and
functionality.
For advisers, we will ensure we retain key
experience differentiators such as the ease
of use of our online portals, the level of our
technical support and quality of our service.
We will also add and enhance the offering
in areas important to advisers such as
improved back office integration to adviser
systems, enhanced discretionary fund
management functionality and improved
client data reporting.
* See page 204 for alternative performance
measure definitions.
UK Platform Transformation Programme delivery timeline
Costs expected to be towards the upper end of £120 to £160 million guidance range.
New UK Platform functionality
Building on our key strengths and filling
proposition gaps.
Current
platform
New
platform
General Investment
Accounts
ISA
Personal pension
Onshore bond
Discretionary fund
management
Cash account
Investment trusts
Exchange-traded
funds (“ETFs”)
Self-invested pension
plan (“SIPP”)
Junior ISAs
Adviser back office
integration
(limited)
(limited)
International:
Over the past two years Quilter International
has withdrawn from over 80 overseas
markets, placed renewed emphasis on best
practice, and targeted higher quality new
business. These changes have put the more
focused business in a stronger position for
long-term success and positioned it well for
regulatory change in the overseas markets
in which it operates. This has affected its
performance in the short term, with NCCF
down 79% year on year.
Life Assurance:
As disclosed at Listing, the institutional
book of business in Quilter Life Assurance is
expected to run-off over the next one to two
years. The remaining retail book is expected
to run-off at c.15% net outflow per annum.
In 2018, the business performed broadly
in line with guidance.
Test and
Implement
Soft launch
System with
full adviser
functionality
complete
Complete for Soft Launch
Ongoing for future phases
Entered
Early Summer 2019
Migration phases commence
early Autumn 2019
22
Quilter Annual Report 2018 4. Optimisation
We will focus on driving operational
leverage through building enhanced scale
and delivering efficiency. Our Optimisation
programme will take a phased, multi-year
approach and will be measured against
the improvement in our operating
margin achieved.
KPIs
• Operating margin
• Adjusted profit before tax
Other performance indicators
• Achievement of target operating margin
• Control of costs to deliver the
programme
Optimisation focused on
addressable cost base (£m)
18
555
105
120
312
~300
Total
costs
Addressable
4
costs
years
Front office & operations
IT & Development
Support functions
Other
2018 performance
Optimisation means making Quilter the
best version of ourselves that we can be: to
eliminate the inefficiencies in our operational
processes.
While our phased, multi-year approach to
the programme was detailed to shareholders
and the analyst community at our Preliminary
2018 Results announcement in March 2019,
early Optimisation efficiencies were captured
in 2018. These early savings were largely
achieved through cost discipline, reducing
the cost base by approximately £11 million
during the year. Total costs to deliver the
programme are expected to be c.£75 million,
£7 million of which was incurred in 2018.
Throughout 2019 we will mobilise the
efficiency initiatives as planned, with the aim
of delivering improvements in operational
performance. Examples of these initiatives
include delayering and streamlining the
business; automating more of the advice
process to make case file checking less
manual while improving our control
environment; and implementing a new
single general ledger system across the
business, integrating the business onto
one common system. In phase one we
will protect and ring-fence business areas
involved in the UK Platform Transformation
Programme until completion of the project in
order not to jeopardise the quality and safety
of its delivery.
For further details on Optimisation see
the Chief Executive Officer’s statement,
page 8 to 11.
Strategic Report | Our strategy
23
Quilter Annual Report 2018
Key performance indicators
Quilter has identified the key performance indicators it
believes are useful in assessing the Group’s performance
against its strategic priorities. They encompass both
financial and non-financial measures, as set out below.
NCCF/opening assets under management and administration (“AuMA”)*
Definition
Total net flows as a percentage of opening
AuMA (excluding Quilter Life Assurance).
This measure evaluates the level of flows
during the period in relation to the asset
base, discretely from market movements.
6%
9%
Performance
NCCF as a percentage of opening AuMA
of 5%, which demonstrates the robustness
of our business model in a difficult
environment, and is in line with our 5%
medium-term target. The 5% compares
to 9% in the prior year when markets
were more stable and investor sentiment
considerably more buoyant.
5%
Integrated flows*
Definition
Total NCCF (excluding Quilter Life Assurance)
that has flowed through two or more
businesses within Quilter. It is a lead
indicator of revenue generation driven
by an integrated business model.
Performance
Integrated flows remained resilient at
£4.7 billion, in a year of challenging markets
as investors remained cautious following
Brexit and other geopolitical concerns,
particularly in the latter part of the year.
Operating margin*
Definition
Represents adjusted profit before tax
from continuing operations divided by total
fee revenue, including life tax contributions
and adviser fees. Operating margin excludes
financing costs. This is an efficiency measure
that reflects the percentage of net revenues
that become adjusted profit.
Adjusted profit* before tax
Definition
Represents the underlying operating profit
of the Group. It therefore adjusts IFRS
profits for key adjusting items such as
goodwill impairment and amortisation of
intangibles, business transformation costs,
debt interest and life tax contributions,
excluding non-core operations, as detailed
in note 7 in the financial statements.
Performance
The operating margin in 2018 increased
to 30% reflecting both the increase in
revenue and a strengthened cost discipline.
Performance
Adjusted profit before tax was £233 million,
up 11% from 2017, driven by higher average
AuMA and increased revenue, and
strengthened cost discipline.
* See page 204 for alternative performance measure definitions.
24
2016
2017
2018
£5.2bn
£4.7bn
£2.2bn
2016
2017
2018
32%
29%
30%
2016
2017
2018
£208m
£209m
£233m
2016
2017
2018
Strategic ReportQuilter Annual Report 2018 Total shareholder return (“TSR”)
Definition
The difference between the opening and
closing share price1 over the period, plus
any dividends paid during that period.
1 Performance shown for QLT as traded
on the London Stock Exchange.
IFRS profit before tax
Definition
IFRS profit before tax from continuing
operations prepared in accordance with
International Financial Reporting Standards.
For remuneration purposes IFRS profit
before tax excludes amortisation of
intangible assets and life tax contributions.
Performance
Quilter listed on 25 June 2018 at a price of
145 pence and closed the year at 118 pence,
having paid a special interim dividend of
12.0 pence per share during the period.
Share price weakness was seen across the
industry sector in the second half of 2018
as the effect of Brexit and other geopolitical
issues weighed on sentiment and outlooks of
the Diversified Financial stocks more generally.
Performance
IFRS profit before tax from continuing
operations in 2018 is £5 million, which has
increased from a loss of £(5) million primarily
due to the reasons outlined below and the
life tax contributions of £101 million in 2018.
IFRS profit before tax from continuing
operations, excluding amortisation and life
tax contributions of £112 million, in 2018 is
£63 million higher than 2017 primarily due
to higher adjusted profit, lower one-off
Managed Separation costs, lower finance
costs and non-repetition of the £69 million
voluntary customer remediation costs
recognised in 2017.
Restricted financial planners (“RFPs”)
Definition
Number of advisers licensed to advise clients
across Pension, Investment and Protection
solutions, but only permitted to recommend
products and solutions from providers on the
Quilter Financial Planning Restricted Panel.
Performance
We achieved solid growth of 4% in RFPs in
2018. We were disappointed with the rate of
growth in the first half of the year and
consequently it was an area of particular
focus in the second half, when the majority
of this growth was achieved.
Investment managers (“IMs”)
Definition
Number of individuals who provide
investment management services to
private clients of Quilter Cheviot in line
with individual circumstances and
investment objectives.
Performance
During the last 18 months, we have been
investing in the Quilter Cheviot investment
team with IM headcount increasing to
168 by June 2018. Following Listing, we
saw a small number of resignations from a
particular cohort of IMs, with the headcount
falling to 155 by year-end as a result. Growing
our IM numbers is a key focus for 2019.
This KPI is linked to Remuneration.
See Remuneration report on page 64
for more information.
2016
2017
2018
n/a
n/a
(11%)
£112m
£67m
£49m
£25m
£5m
£(5)m
2016
2017
2018
IFRS profit before tax (excluding
amortisation and life tax contributions)
IFRS profit before tax
1,561
1,621
1,423
2016
2017
2018
158
164
155
2016
2017
2018
Strategic Report | Key performance indicators
25
Quilter Annual Report 2018 Financial review
Strong adjusted profit growth despite challenging
market conditions in the fourth quarter.
for £2.4 billion, 86% of Quilter Investors’ net flows (2017: £2.5 billion,
76%), and £1.1 billion, 35% of Quilter Wealth Solutions net flows
(2017: £1.2 billion, 27%). Integrated flows from Quilter Financial
Planning and Quilter Private Client Advisers into Quilter Cheviot
amounted to £300 million (2017: £238 million) of which £122 million
(2017: £129 million) was through Quilter Private Client Advisers.
The Group’s total direct flows (excl. Quilter Life Assurance) were
£2.2 billion, down 57% (2017: £5.1 billion) primarily driven by both
the challenging trading environment and reduced transfers of DB
to Defined Contribution (“DC”) pension plans within the Independent
Financial Adviser (“IFA”) channel. This also influenced a reduction in
Quilter Wealth Solutions direct flows to £2.0 billion (2017: £3.3 billion).
The changing regulatory environment in Quilter International
impacted direct flows in this market, where we recorded a reduction
in net flows from £1.4 billion in 2017 to £0.3 billion in 2018.
Integrated flows
(excluding Quilter Life Assurance) (£bn)
Total integrated flows
Direct flows from third party distribution
Eliminations
Total Quilter plc NCCF
(excluding Quilter Life Assurance)
2018
4.7
2.2
(2.2)
2017
% Change
5.2
5.1
(2.7)
(10%)
(57%)
19%
4.7
7.6
(38%)
NCCF for the Advice and Wealth Management segment was £3.5 billion,
down 20% from 2017 (£4.4 billion), reflecting a slower second half of the
year, particularly within Quilter Investors where net flows declined by
15% for the year to £2.8 billion (2017: £3.3 billion). Net flows of £2.4 billion
(2017: £2.5 billion) were from the restricted channel, of which £1.1 billion
(2017: £1.1 billion) were from third party platforms and £1.3 billion
(2017: £1.4 billion) from our own platform, Quilter Wealth Solutions.
Independent third party net flows through Quilter Wealth Solutions
to Quilter Investors were £0.8 billion for the year (2017: £1.3 billion).
Quilter Cheviot experienced slower net flows in the second half of
the year, with net flows for the full year of £0.7 billion compared to
£1.1 billion in 2017.
The Wealth Platforms segment contributed NCCF of £1.1 billion
(2017: £4.3 billion). Quilter Wealth Solutions had net flows of £3.1 billion,
down 31% on prior year. Gross sales of £7.7 billion (2017: £8.9 billion)
were down £1.2 billion as a result of the difficult trading environment
experienced in the second half of the year, reduced transfers of DB
schemes to DC schemes, which were down 24% to £1.6 billion, reflecting
the impact of increased FCA scrutiny and resultant impact on IFA PII
(“Professional Indemnity Insurance”) availability and affordability.
Overall, our pension propositions continue to perform well, with gross
sales of £4.7 billion, representing 60% of total Quilter Wealth Solutions
gross sales (2017: £5.4 billion representing 61% of 2017 gross sales).
Quilter International had net inflows of £0.3 billion, down 79% on prior
year (2017: £1.4 billion, following a very strong final quarter in 2017).
International markets remain challenging, particularly given the
changing regulatory environment and the Insurance Distribution
Directive covering European and UK territories, which came into effect
on 1 October 2018. The reduction in International flows also reflects the
Group’s strategy to reduce its offshore geographic footprint and focus
on the quality of new business. Quilter Life Assurance had net outflows
of £2.3 billion, up from £1.6 billion of net outflows in 2017, with the increase
Tim Tookey
Chief Financial Officer
Review of financial performance
Overview
Our financial performance in 2018 demonstrates a strong set of
results despite investor uncertainty arising from Brexit and other
geopolitical issues which dominated over the course of the year,
in particular in the fourth quarter. Despite the challenging external
environment, Net Client Cash Flow (“NCCF”) for the Group, excluding
Quilter Life Assurance, was £4.7 billion, representing 5% of opening
Assets under Management and Administration (“AuMA”), in line with
our medium-term target. AuMA decreased by 4% to £109.3 billion
as a result of negative market movements, partly offset by positive
NCCF. Adjusted profit before tax grew strongly in the year, up 11%
to £233 million.
NCCF
NCCF performance was solid at £2.7 billion, in a year where investor
sentiment progressively weakened, in part due to Brexit uncertainties
and the market declines experienced late in the year. There was a
market-wide reduction of 85% year-on-year in net retail flows as
reported by the Investment Association. In comparison, 2017 NCCF
of £6.3 billion was achieved when markets were more stable and
investor sentiment considerably more buoyant. NCCF as a percentage
of opening AuMA (excluding Quilter Life Assurance) was 5%, in line
with our medium-term target, which demonstrates the robustness
of our business model in a difficult environment. Excluding Quilter
Life Assurance, the Group’s NCCF was £4.7 billion (2017: £7.6 billion),
down 38%, representing weaker flows across all businesses. Quilter
International experienced particular headwinds due to previously
disclosed changes in the regulatory environment which
impacted distribution.
Integrated flows (excluding Quilter Life Assurance) were £4.7 billion,
down 10% from 2017 (£5.2 billion), due to investor uncertainty arising
from Brexit and other geopolitical issues which dominated over the
course of the year, particularly in the fourth quarter. Quilter Wealth
Solutions experienced a decline in flows as a result of the anticipated
slowdown in transfers from Defined Benefit (“DB”) schemes.
The restricted channel of Quilter Financial Planning accounted
26
Strategic ReportQuilter Annual Report 2018 Key financial highlights
Year ended
31 December 2018
Continuing
operations only
Gross sales (£bn)
Gross outflows (£bn)
NCCF (£bn)
NCCF (excluding Quilter
Life Assurance) (£bn)
Integrated flows (excluding
Quilter Life Assurance)
(£bn)
AuMA (£bn)
NCCF/opening AuMA
(excluding Quilter
Life Assurance) (%)
Asset retention (excluding
Quilter Life Assurance) (%)
Year ended
31 December 2017
Continuing
operations only
Gross sales (£bn)
Gross outflows (£bn)
NCCF (£bn)
NCCF (excluding Quilter
Life Assurance) (£bn)
Integrated flows (excluding
Quilter Life Assurance)
(£bn)
AuMA (£bn)
NCCF/opening AuMA
(excluding Quilter
Life Assurance) (%)
Asset retention (excluding
Quilter Life Assurance) (%)
Advice &
Wealth
Management
Wealth
Platforms
Head
Office &
Eliminations
8.0
(4.5)
3.5
3.5
3.6
41.2
10.1
(9.0)
1.1
3.4
1.1
80.7
Total
Group
14.7
(12.0)
2.7
4.7
(3.4)
1.5
(1.9)
(2.2)
–
4.7
(12.6)
109.3
8%
5%
89%
91%
n/a
n/a
5%
91%
Advice &
Wealth
Management
Wealth
Platforms
Head
Office &
Eliminations
8.1
(3.7)
4.4
4.4
4.0
41.7
12.8
(8.5)
4.3
5.9
1.2
84.8
Total
Group
17.3
(11.0)
6.3
7.6
(3.6)
1.2
(2.4)
(2.7)
–
5.2
(12.1)
114.4
13%
10%
89%
90%
n/a
n/a
9%
90%
primarily due to the closure of the institutional life book of business
announced in 2017 which had net outflows of £1.3 billion in 2018.
Productivity for Quilter Financial Planning remained broadly stable
at £1.7 million per RFP (2017: £1.8 million per RFP) with a moderate
reduction in the second half of the year reflective of broader market
challenges that influenced investor confidence. The underlying trend
remains positive with growth in total flows from our employed advice
distribution model within Quilter Private Clients and benefits from
the full integration and adoption of our investment proposition by
RFPs that joined as part of the Caerus acquisition in June 2017. RFP
headcount of 1,621 represents net growth of 60 (increase of 4%) in
2018, driven by a combination of organic growth within existing, and
the recruitment of new, appointed representative firms. We also
continue to support IFAs converting to adopt our restricted advice
proposition. New RFP appointments have been partially offset by
natural attrition of advisers, with turnover levels within our appointed
representative firms staying relatively stable year on year. We expect
further growth in RFP numbers in 2019 following the repurposing
of our Financial Adviser School, which we announced in September
2018. The newly rebranded Quilter Financial Adviser School will fully
fund training programmes for anyone who wishes to become an RFP
within the Quilter advice network.
Asset retention (excl. Quilter Life Assurance) has improved marginally
to 91%, as a result of our comprehensive product and proposition
offering, high customer service standards, and our continued focus
on good customer outcomes.
Strategic Report | Financial review
AuMA
Year-end AuMA (including Quilter Life Assurance) was £109.3 billion,
down 4% in the year, driven by negative market performance of
£7.8 billion which was primarily experienced in the fourth quarter.
This was partially offset by positive NCCF of £2.7 billion.
Quilter Investors’ AuM was £17.8 billion, up 5% (2017: £16.9 billion).
The Cirilium fund range remained stable at £9.0 billion of AuM and
the WealthSelect fund range increased by 15% to £5.5 billion. Quilter
Cheviot AuM of £22.4 billion decreased by 5% in the year primarily
as a result of negative market movements. Quilter Wealth Solutions’
AuA decreased by 1% to £49.9 billion, which comprised primarily of
£23.2 billion within pension propositions (of which £3.0 billion has
been generated from the restricted channel and £20.2 billion from
third party advisers) and £14.5 billion of ISA products.
Adjusted profit before tax
Adjusted profit reflects the Directors’ view of the underlying
performance of the Group and is used for management decision
making and internal performance management. Adjusted profit is
a non-GAAP measure which adjusts IFRS profit for specific agreed
items, as detailed in note 7(a) in the consolidated financial statements,
and is the profit measure presented in the Group’s segmental
reporting. Adjusted profit before tax for 2018 was £233 million,
11% higher than the prior year (2017: £209 million), due to higher
revenue, partially offset by higher costs.
Net management fee* in 2018 of £647 million was 9% higher than
the £591 million in 2017. Net management fee revenue is primarily
influenced by the value of the assets that we manage and administer,
with different parts of the business employing different valuation
points for charging the management fees. Average AuMA for 2018
was £114.7 billion compared to £106.1 billion for 2017, an increase
of 9%, in line with our income growth.
Financial performance
(from continuing
operations only)
2018 (£m)
Net management fee*
Other revenue*
Total fee revenue
Expenses
Adjusted profit before tax
Tax
Adjusted profit after tax
Operating margin* (%)
Revenue margin* (bps)
Financial performance
(from continuing
operations only)
2017 (£m)
Net management fee
Other revenue
Total fee revenue
Expenses
Adjusted profit before tax
Tax
Adjusted profit after tax
Operating margin (%)
Revenue margin (bps)
Advice &
Wealth
Management
Wealth
Platforms
Head
Office
Total
Group
276
97
373
(271)
102
371
43
414
(252)
162
27%
65
39%
45
–
1
1
(32)
(31)
647
141
788
(555)
233
(6)
227
30%
57
Advice &
Wealth
Management
Wealth
Platforms
Head
Office
Total
Group
–
1
1
(32)
(31)
234
82
316
(234)
82
357
54
411
(253)
158
26%
63
38%
46
* See page 204 for alternative performance measure definitions.
591
137
728
(519)
209
(14)
195
29%
56
27
Quilter Annual Report 2018 Strategic Report | Financial review continued
Other revenue* for 2018 was £141 million, 3% up on 2017
(£137 million) primarily as a result of growth in advice fees of
13% in Quilter Financial Planning with the increase in the number
of RFPs, partially offset by higher claims experience and actuarial
assumption changes in Quilter Life Assurance.
Expenses increased 7% from £519 million to £555 million during the
year. Increases include investment in the business, the expected
higher costs of being a standalone listed company, and the incremental
costs in relation to the Long-Term Incentive Plan (“LTIP”), as well as the
impact of inflation. The Group’s overall operating margin increased
to 30% (2017: 29%) which is ahead of previous guidance as a result
of an increased focus on costs and early savings achieved
through Optimisation.
Total fee revenue
The Group’s total fee revenue increased by 8% to £788 million due
to higher average AuMA, primarily driven by more favourable market
conditions through to September 2018 despite weakening net flows
throughout the year. Net management fee revenue, which principally
comprises asset-based revenues including fixed fees, increased by
£56 million to £647 million during the year, accounting for 82% of
total fee revenue. Other revenue for the Group increased 3% to
£141 million, primarily within Quilter Financial Planning, as a result
of the growth in advice fees with the increase in the number of RFPs.
Total fee revenue for the Advice and Wealth Management segment
grew by 18% to £373 million, with average assets increasing 15%
during the year, with higher net management fees primarily from
Quilter Investors. Other revenue increased by £15 million to £97 million,
principally due to the growth in advice fees in Quilter Financial Planning,
driven in part by the continued acquisitions in this part of the business.
Total fee revenue for the Wealth Platforms segment in 2018 was
broadly flat at £414 million (2017: £411 million), due to higher fund-
based revenue offset by a decline in other revenue. Other revenue
decreased due to higher claims experience within the protection
book of business, actuarial assumption changes and lower protection
product volumes. Net management fee revenue for Quilter Wealth
Solutions increased by 8% to £168 million as a result of increased
average AuA from £45.9 billion to £51.5 billion, and Quilter International
benefitted from foreign exchange rate effects and improved
interest-related margins during the year. Net management fees
for Quilter Life Assurance increased by £2 million year on year,
where lower underlying fund-based revenue from both the retail
and institutional book run-off were more than offset by one-off
benefits from provision releases related to the earlier introduction
of capped exit fees on certain pension products and other benefits
from the movement in life charge provision.
The Group’s blended revenue margin of 57 basis points (“bps”) was a
slight improvement upon the prior year (2017: 56 bps), with a mixture
of greater integrated assets (where we generate revenues for more
than one service provision), a favourable impact from asset, and fund
selection mix as well as benefits from adjustments relating to life
tax contributions.
The revenue margin* for Advice and Wealth Management of 65 bps
was 2 bps higher compared to the prior year, due to an increase in
the revenue margin for Quilter Investors of 8 bps to 59 bps, reflecting
a change in the overall mix of AuM towards investment in products
which earn a higher margin, and additional revenue now recognised
from the WealthSelect funds. Quilter Cheviot’s revenue margin
remained in line with the prior year at 72 bps.
The revenue margin for Wealth Platforms decreased by 1 bp from the
prior year to 45 bps. This decline was driven by lower margin gross
28
sales for Quilter Wealth Solutions and gross outflows of higher margin
products for Quilter International. The revenue margin for Quilter
Life Assurance increased by 9 bps to 69 bps, reflecting the product
mix change benefit from the continued run-off of the very low margin
institutional life book and benefits from adjustments relating to life
tax contributions.
Expenses
Expenses increased by £36 million, up 7% to £555 million (2017:
£519 million) in the year, which was driven by increased costs for
Quilter Investors as the functionality for the business is built out
to be standalone, the inclusion of the full run rate costs for Caerus,
which was acquired on 1 June 2017, and the continued expansion of
the Quilter Private Client Advisers business, which has undertaken
14 small acquisitions over the past 12 months. Expenses also increased
due to the expected higher costs of being a standalone listed company,
and the incremental costs in relation to the LTIP, as well as the impact
of inflation. The overall impact of these increases is lower than
originally anticipated due to strengthened cost disciplines across
the business and early savings achieved through Optimisation.
Expense split (£m)
Front office and operations
IT and development
Support functions
Other
Expenses
2018
312
120
105
18
555
2017
293
120
89
17
519
Front office and operations expenses increased by 6% to £312 million
during the year (2017: £293 million), primarily due to the investment in
the business with the acquisitions for Quilter Private Client Advisers,
the inclusion of the full run rate of expenses for Caerus acquired on
1 June 2017 and increased cost of being a standalone listed company.
IT and development costs remained flat year on year at £120 million,
mainly due to increased IT run costs to facilitate growth in the business
and regulatory change, and the increased costs of being a standalone
listed company, offset by a reduction in development costs.
Support function expenses relate to middle and back office expenses
which have increased by 18% to £105 million (2017: £89 million), driven
primarily by the increased cost of being a standalone listed company.
Other costs include PII, charges for regulation, and licencing fees,
which remained broadly in line with 2017 levels, primarily due to 2018
reflecting nine months of the FCA regulatory fees compared to twelve
months in 2017. As noted at the half year results, the FCA changed the
period to which regulatory charges are applied during 2018, and these
are recognised in full at the point the charge is levied.
Taxation
The effective tax rate (“ETR”) on adjusted profit was 3% (2017: 7%).
The Group’s ETR is lower than the UK corporation tax rate of 19%,
principally due to profits from Quilter International being taxed at
lower rates than the UK and utilisation of brought forward capital
losses. The ETR is expected to normalise to 12%-14% within a couple
of years, however this will be dependent upon a number of factors
including the level of Quilter International profits, the utilisation of
capital losses which can be volatile, as well as the UK corporation
tax rate which is due to reduce to 17% from April 2020.
Earnings Per Share (“EPS”)
Basic EPS was 26.6 pence, compared to 8.6 pence in 2017. During
the year, the number of shares in issue increased to 1,902 million
following completion of the share capital restructure as part of the
separation from Old Mutual plc. The shares in issue for the basic EPS
Quilter Annual Report 2018 calculation were 1,832 million (after deduction of shares in treasury
of 70 million which are held in respect of staff share schemes within
employee benefit trusts). Comparative EPS has been restated
accordingly. Adjusted diluted EPS increased by 15% to 12.3 pence
(2017: 10.7 pence) as a result of increased adjusted profit and a lower
ETR on adjusted profit. The shares in issue for the basis of the
adjusted diluted EPS calculation was 1,839 million (following inclusion
of the dilutive effect of shares and options awarded to employees
under share-based payment arrangements – potential ordinary
shares, of 7 million). Shares in Treasury are expected to vest over the
next two years at which point future share awards are anticipated to
be satisfied through the purchase of shares from the market.
Optimisation
We have maintained strong cost discipline during the year
supplemented by the first phase of our Optimisation programme,
which predominantly focuses on improving our operational efficiency
within middle and back office activities in the near to medium-term.
We expect the programme to deliver a 2 percentage point increase in
operating margin in 2020, and a further 2 percentage point increase
by the end of 2021. This increases our previous 2020 guidance to 32%
operating margin. Given operating margin is a function of income and
costs, this target assumes broadly normal market performance from
around current levels together with steady net flows. The one-off
costs to deliver Optimisation are anticipated to be c. £75 million over
a three-year period, of which £7 million were incurred in 2018.
Reconciliation of adjusted profit to IFRS profit
IFRS profit after tax from continuing operations was £174 million for
2018, compared to £(46) million in 2017 and has increased due to
a higher level of adjusted profit, lower finance costs and £69 million
of voluntary customer remediation costs incurred in 2017. The table
below reconciles the Group’s adjusted profit to the IFRS results in
2018 and 2017.
Adjusted profit reflects the profit from the Group’s core operations,
and is calculated by making certain adjustments to IFRS profit to
reflect the Directors’ view of the Group’s underlying performance.
Details of these adjustments are provided in note 7(a) of the
consolidated financial statements and, in respect of tax, in note 13(c).
Business transformation costs of £84 million in 2018 (2017: £89 million)
included £58 million incurred on the UK Platform Transformation
Programme, £19 million of one-off costs associated with the separation
of Quilter Investors as a result of the sale of the Single Strategy asset
management business in June, and £7 million of costs in relation
to the Optimisation programme. In 2017, the costs associated with
the UK Platform Transformation Programme included £21 million
relating to the new programme with FNZ and £53 million relating
to the previous programme, including the contracts with IFDS, which
came to an end by mutual agreement with effect from 2 May 2017.
Managed Separation costs were £24 million (2017: £32 million),
reflecting costs associated with our successful separation from Old
Mutual plc and Listing in June. Remaining future costs of Managed
Separation of approximately £12 million, principally in respect of
rebrand and residual systems activity which are in line with previous
cost guidance, are expected to be incurred in 2019.
Finance costs were £13 million (2017: £39 million). The prior year
includes the cost of interest and finance charges on the Group’s
borrowings from Old Mutual plc. As previously reported, these were
converted into equity or repaid in February 2018.
Policyholder tax adjustments of £101 million in 2018 (2017: £17 million)
relate to the removal of distortions arising from the decline in markets
in the fourth quarter of 2018 that can, in turn, lead to volatility in the
policyholder tax charge between periods.
Reconciliation of adjusted
profit to profit after tax
For the year ended
31 December 2018 (£m)
Adjusted profit before tax
Advice and Wealth Management
Wealth Platforms
Head Office
Adjusted profit before tax
Reconciliation of adjusted profit
to profit after tax
Adjusting for the following:
Goodwill impairment and impact
of acquisition accounting
Profit on the acquisition and
re-measurement of subsidiaries
Business transformation costs
Managed Separation costs
Finance costs
Voluntary customer remediation
provision
Policyholder tax adjustments
Total adjusting items before tax
Profit/(Loss) before tax attributable
to equity profits
Income tax (expense)/credit
attributable to policyholder returns
Profit/(Loss) before tax from
continuing operations
Income tax credit/(expense)
on continuing operations
Profit/(Loss) after tax from
continuing operations
Profit after tax from discontinued
operations
Profit after tax for the year
2018
2017 % change
102
162
(31)
233
(50)
–
(84)
(24)
(13)
–
101
(70)
163
82
158
(31)
209
(54)
3
(89)
(32)
(39)
(69)
17
(263)
24%
3%
–
11%
7%
6%
25%
67%
494%
73%
(54)
402%
(158)
49
(422%)
5
169
174
314
488
(5)
200%
(41)
512%
(46)
478%
203
157
55%
211%
Cash generation*
Cash generation measures the proportion of adjusted profit that
is recognised in the form of cash generated from operations.
Cash generated from operations is calculated by removing non-cash
generative items from adjusted profit, such as deferrals required
under IFRS to spread fee income and acquisition costs over the
lives of the underlying contracts with customers. It is stated after
deducting an allowance for net cash required to support the capital
requirements generated by new business offset by a release of
capital from the in-force book.
The Group (excluding the now disposed Single Strategy asset
management business) achieved a cash generation rate of 88%
of adjusted profit over 2018. This is ahead of the 80% conversion
guidance provided at the time of IPO. The 2018 cash generation
rate reflects improvements to the attribution of changes in capital
requirements to underlying drivers such as new business and the
capital released from the in-force book.
Strategic Report | Financial review
29
* See page 204 for alternative performance measure definitions.
Quilter Annual Report 2018 Strategic Report | Financial review continued
Review of Financial Position
Capital and liquidity
The Group aims to maintain a strong solvency and liquidity position
through disciplined management of capital resources and risks.
This is important given the security and peace of mind that it affords
customers and advisers.
The Group maintains a disciplined approach to capital, in order
to balance its current and anticipated liquidity, regulatory capital
and investment needs, with a view to returning excess capital to
shareholders as appropriate. As part of its disciplined approach
to capital, the Group has a prudent capital management and
liquidity policy.
On 28 February 2018, the Group fully drew down on a £300 million
senior unsecured term loan facility with a number of relationship
banks. This term loan was fully repaid on 29 June 2018 from the
proceeds of the sale of the Single Strategy asset management business.
Also on 28 February 2018, the Group entered into a £125 million
revolving credit facility, which remains undrawn, and issued a £200
million subordinated debt security. The subordinated debt security
was issued in the form of a 10-year Tier 2 bond with a one-time issuer
call option after five years to J.P. Morgan Securities plc, paying a
semi-annual coupon of 4.478% per annum. The debt security is listed
on the London Stock Exchange and has a Fitch instrument rating of
BBB-. On 13 April 2018, the debt security was sold by J.P. Morgan
Securities plc to traditional debt capital market investors. Including
the amortisation of set-up costs, financing costs of approximately
£10 million per year are incurred in respect of this security.
The subordinated debt security and the revolving credit facility are
in place to ensure that the Group has sufficient capital and liquidity
to maintain strong capital ratios and free cash balances to withstand
severe but plausible stress scenarios. The full amount of the
subordinated debt security remains outstanding as at 31 December
2018, representing a leverage ratio of 12% (defined as the ratio of debt
to debt plus the consolidated IFRS equity after deducting intangible
assets) before the payment of the recommended final dividend.
Solvency II
The Group Solvency II surplus is £1,058 million at 31 December 2018
(2017: £651 million), representing a Solvency II ratio of 190% (2017: 154%)
calculated under the standard formula. The Solvency II information in
this results disclosure has not been audited.
Group regulatory capital (£m)
Own funds3
Solvency capital requirement (“SCR”)
Solvency II surplus
Solvency II coverage ratio
At
31 December
20181
At
31 December
20172
2,237
1,179
1,058
190%
1,849
1,198
651
154%
1 Based on preliminary estimates. Formal annual filing due to the PRA by
3 June 2019.
2 As represented within the Annual 2017 Solvency II submission of the
Old Mutual plc group, the group Quilter plc previously formed part of, to
the Prudential Regulation Authority (PRA). Own funds include a £566 million
subordinated loan from the parent company. This subordinated loan was
effectively converted to equity during H1 2018, following the acquisition
of the entity holding the loan.
3 Group own funds are stated after allowing for the impact of the recommended
final dividend payment relating to 2018 of £61 million.
* See page 204 for alternative performance measure definitions.
30
The 36% increase in the Group Solvency II ratio is primarily due
to corporate activity in the year with the two main contributors
being the issuance of the Tier 2 bond in February 2018 as described
above and the sale of Single Strategy asset management business
in June 2018, partly offset by the special interim dividend paid to
shareholders in September 2018 and the recommended final
dividend payment relating to 2018.
The Board believes that the Group Solvency II surplus includes
sufficient free cash and capital to complete all committed strategic
investments (including the UK Platform Transformation Programme).
The impact of this prudent policy is that Quilter expects to continue
to maintain a solvency position in excess of its target in the near term.
Composition of qualifying Solvency II capital
The Group own funds for Solvency II purposes reflect the resources
of the underlying businesses after excluding the recommended final
dividend of £61 million. The Group own funds include the Quilter plc
issued subordinated debt security which qualifies as capital under
Solvency II. The composition of own funds by tier is presented in the
table below.
Group own funds (£m)
At 31 December 2018
Tier 11
Tier 22
Total Group Solvency II own funds
2,036
201
2,237
1 All Tier 1 capital is unrestricted for tiering purposes.
2 Comprises a Solvency II compliant subordinated debt security in the form
of a Tier 2 bond, which was issued at £200 million in February 2018.
The Group’s Solvency Capital Requirements (“SCR”) is covered by
Tier 1 capital, which represents 173% of the Group SCR of £1,179 million.
Tier 1 capital represents 91% of Group Solvency II own funds. Tier 2
capital represents 9% of Group Solvency II own funds and 19% of the
Group surplus.
Net Asset Value (“NAV”)
The NAV of the Group was £2.0 billion at 31 December 2018
(31 December 2017: £1.1 billion). The increase reflects the conversion
of previous loans from Old Mutual plc into equity in February 2018,
the increased resources following the gain of £292 million on the sale
of the Single Strategy business and is after the £221 million special
interim dividend paid in September 2018. The NAV at 31 December
2018 is stated before the recommended final dividend of £61 million.
Dividend
The Board has recommended a final dividend of 3.3 pence per
share, in line with our dividend policy. A special interim dividend
of 12.0 pence per share was paid on 21 September 2018, returning
£221 million to shareholders from the surplus proceeds from the
sale of the Single Strategy asset management business. Subject to
shareholder approval, the recommended final dividend will be paid
on 20 May 2019 to shareholders on the UK and South African share
registers on 26 April 2019. For Shareholders on our South African
share register a dividend of 61.92028 South African cents per share
will be paid on 20 May 2019, using an exchange rate of 18.76372.
Return on Equity (“RoE”)*
Adjusted RoE for the period ended 31 December 2018, calculated
as adjusted profit after tax divided by average equity, was 12.9%.
This remained broadly stable with the adjusted RoE of 12.7%
for the full year ended 31 December 2017 (after adjusting equity
for the acquisition of Skandia UK Limited from Old Mutual plc
as part of Managed Separation and equity allocated to the
discontinued operations).
Quilter Annual Report 2018 Following Managed Separation, a special interim dividend totalling
£221 million was paid on 21 September 2018 to shareholders.
This represented the net surplus proceeds from this disposal
after the repayment of the outstanding £300 million senior
unsecured term loan following the sale of the Single Strategy
asset management business.
Net operational movements
Net operational movements for the holding companies of the Group
were £60 million for the period. This was predominantly comprised
of £54 million of corporate and transformation costs, which includes
one-off Managed Separation and Listing costs and implementation
costs for Optimisation. Interest paid of £6 million includes initial fees
paid on the Tier 2 bond and establishment costs for the revolving
credit facility. Interest on the Tier 2 bond is paid every six months in
February and August each year.
Internal capital and strategic investments
The main inflow relates to cash remittances from the trading
businesses totalling £167 million, partially offset by capital
contributions of £47 million to support business unit operational
activities, the Platform Transformation Programme, and to fund
strategic acquisitions within Quilter Financial Planning and Quilter
Private Client Advisers. The level of dividends paid to the holding
companies is, where relevant, after funds have been set aside in
those businesses for the Platform Transformation Programme and
the voluntary client redress programme.
London property relocation
Due to the expiry of property leases in 2020 which are not able
to be extended, we are planning to consolidate our London office
requirements at a new location. We have a number of options under
advanced consideration. The relocation will likely result in a one-off
cash cost associated with the fit-out of the new premises later in 2019
and 2020, and in higher run-rate expenses which we will update the
market on in due course.
Tim Tookey
Chief Financial Officer
Holding company cash
The holding company cash statement includes cash flows generated
by the three holding companies within the business: Quilter plc,
Old Mutual Wealth Holdings Limited and Old Mutual Wealth UK
Holding Limited. The flows associated with these companies will
differ markedly from those disclosed in the statutory statement of
cash flows, which comprises flows from the entire Quilter plc group.
The holding company cash statement illustrates cash received from
the key trading entities within the business units together with other
cash receipts, and cash paid out in respect of corporate costs and
capital servicing (including interest and dividends). Other capital
movements, including those in respect of acquisitions and disposals,
together with funding to business units, are also included. It is an
un-audited non-GAAP analysis and aims to give a more illustrative
view of business cash flows as they relate to the Group’s holding
companies compared to the IFRS consolidated statement of cash
flows which is prepared in accordance with IAS 7 which includes
co-mingling of policyholder related flows.
£m
Opening cash at holding companies at 1 January
Short-term loan and Tier 2 bond proceeds
Loans repaid to Old Mutual plc
Single Strategy asset management business sale –
cash proceeds
Short-term loan repayment
Costs of disposal and external financing fees
Special interim dividend
Net capital movements
Managed Separation and Head Office costs
External debt interest
Net operational movements
Cash remittances from subsidiaries
Net capital contributions and investments
Other
Internal capital and strategic investments
Closing cash at holding companies at 31 December
2018
36
500
(200)
576
(300)
(19)
(221)
336
(54)
(6)
(60)
167
(65)
2
104
416
Net capital movements
Net capital movements relate principally to transactions in respect of
establishing a strong opening balance sheet in preparation for Listing.
On 28 February 2018, borrowings totalling £500 million were incurred
to ensure sufficient capital and liquidity to withstand severe but
plausible stress scenarios. The borrowings consisted of a £200 million
Tier 2 bond which raised £197 million net of external fees of £3 million
(shown within the costs of disposal and external financing fees line
above) and a £300 million senior unsecured term loan (plus external
fees of £1 million) which was subsequently repaid.
The Single Strategy asset management business sale in June 2018
generated £576 million of cash proceeds (£15 million of costs incurred
in relation to the sale are shown in the costs of disposal and external
financing fees figure of £19 million) and includes a pre-completion
dividend receipt of £36 million.
The main outflows relate to repayment of the £200 million loan from
Old Mutual plc in February 2018 and repayment of the £300 million
senior unsecured term loan following the sale of the Single Strategy
business in June 2018. The £300 million senior unsecured term loan
was required to bridge the period from Listing until such time as the
cash consideration from the sale of the Single Strategy asset
management business was received.
Strategic Report | Financial review
31
Quilter Annual Report 2018 Risk review
Quilter has a strong solvency and
liquidity position and is operating
within its chosen risk appetite.
Iain Wright
Chief Risk Officer
The strength of the balance sheet is tested through stress
and scenario testing which shows that the solvency position
is resilient to severe stress scenarios.
We consider risks that may impact our customers and risks
to our business, brand and reputation as well as to
our financial position.
Overview and values
2018 was a pivotal year for Quilter. In 2017 and 2018, leading up
to Listing we developed our risk management framework and
capabilities in preparation for our new status as a standalone listed
company. We have continued to enhance our risk governance,
risk processes and risk infrastructure to ensure our management
of risk, both existing and emerging challenges.
We operate principally in the UK, with some overseas operations, and
have businesses spanning advice, investment platform, discretionary
fund management, multi-asset management and life assurance.
As such we face a range of diverse risks, including risks specific to
our businesses, industry risks, and a number of external threats.
Taking risk is an integral part of doing business, but this is done
carefully and within a risk appetite and framework agreed with the
Board. We endeavour to only take risks we understand, have the
expertise to manage and where we assess that potential benefits
outweigh the risks. Our risk management framework sets out the
approach we take to the identification, measurement, assessment,
management, monitoring and reporting of risks. Our Board sets risk
appetite and regularly reviews performance against appetite.
Having a good risk management framework is not adequate by
itself; its operation depends on a culture where our people act in
accordance with our corporate values. We do this by ensuring an
32
Effectiveness stems from nurturing
a culture where our people think and
apply risk management in line with
our corporate values.
appropriate tone from the top with clear management accountability
for the risks we face. This tone, reinforced by our code of conduct,
influences the behaviour of our employees throughout the Group
and drives a consistent consideration of risk as a natural part of
decision making.
Our customers, advisers, shareholders and other stakeholders
expect us to be resilient. We perform stress and scenario analysis
which helps us define our management responses to stresses and
ensure we have sufficient financial strength to weather unexpected
severe events. Where risk exposures move or have the potential to
move outside risk appetite, management takes proactive steps to
ensure we continue to operate safely.
Risk profile
Our strategy is a key driver of risks within the organisation. Our
external environment remains volatile, predominantly due to Brexit
and market uncertainties. As a result, the risk outlook for Quilter in
2019 and beyond remains challenging. The outcome of Brexit and our
current assessment is that the direct impacts are manageable given
our largely UK-based business model. However, we are conscious that
this position could change, resulting in significant second order
impacts such as a general loss of investor confidence.
There are a number of risks that arise from our strategic priorities or
that are inherent in our business model. In our day-to-day business,
we are exposed to market risks, such as equity risk, arising through
market movement impacts on our assets under management and
administration and hence our asset-based fees. We also face conduct
risk including the risks arising from providing financial advice, and
insurance liability risk. In delivering an integrated business approach
and enhancing our customers’ value for money and experience, there
are potential conflicts of interest which are identified and resolved.
The transformational change from delivering our strategic initiatives
heightens our operational risk exposures and we continue to manage
the risks relating to the volume and complexity of this change.
The delivery of the UK Platform Transformation Programme is a
key objective in 2019 and our IT and business resilience will continue
to be developed and tested to ensure a smooth launch. We are
also actively tracking other continually evolving risks including
cyber threats, regulatory change, third party risk, talent development
and retention.
Principal risks and uncertainties
The Directors have carried out a robust assessment of the principal
risks facing the Group, including those that would threaten its
business model, future performance, solvency and liquidity. Our
principal risks and uncertainties are described in the table on the
following pages. These are consistent with those set out in our Listing
Prospectus. The relationship between these risks and our strategic
priorities set out on pages 19 to 23 is also referenced. The Board
requires management to put in place actions to mitigate these risks,
and controls to maintain risk exposures within acceptable levels
defined by Quilter’s risk appetite. Regular monitoring and reporting
of risks enables continuous review and challenge of risks and actions.
Strategic ReportQuilter Annual Report 2018 Principal risks and uncertainties
The principal risks and uncertainties that could impact the Group are summarised below. As a UK-based financial services firm, the
implications and economic impact of several scenarios of the UK leaving the EU in relation to financial services will influence the degree to
which these risks act upon Quilter, particularly with regards to strategy, market, legal and regulatory, and third party risks, including potential
disruption to Quilter’s business operations and supply chain. In addition, recent quarters have seen reduced levels of investor confidence
and this could deteriorate further, potentially materially further, under various scenarios related to the UK leaving the EU. A Group-wide Brexit
programme is in place to actively monitor these risks and a number of actions are already in place to mitigate any implications to our business
and customers including for example, establishing a regulated asset management company in Ireland.
Strategic risks
The risk that the strategy is unsound due to poor decision making, incorrect information or assumptions, or that the activities supporting
the delivery of the strategy are inadequate or poorly designed.
Strategy
If Quilter’s strategy does not yield the anticipated benefits, for example, through
inaccurate prediction of the type of products and the level of advice required
by its target customer base or inability to price such products and services
competitively, this may have a material adverse effect on the Group’s business,
financial condition, results of operations and prospects, and reputation.
Reputation and brand
Quilter is dependent on the strength of its reputation and its brands, which are
vulnerable to adverse market perception or negative publicity, and the Company
may face challenges with regard to its ongoing rebranding initiative.
Competitive pressure
Quilter’s business is conducted in a competitive environment and,if Quilter is
not successful in anticipating and responding to competitive change, adviser
or customer preferences or demographic trends in a timely and cost effective
manner, its business, financial condition, results of operations and prospects
could be materially adversely affected.
People and culture
Quilter may fail to attract and retain talented advisers, investment managers,
portfolio managers, senior management and other key employees. This would
present a risk to the delivery of Quilter’s overall strategy, in particular during
this period of significant change across the Group. Additionally this could have
a material adverse effect on Quilter’s business, financial and operational
performance, prospects, and reputation.
Linked to strategic priorities 1, 2, 3, 4
Key management actions
• Strategic and business planning process
• Monitoring of key performance indicators
• Robust strategic initiative programme management
• Risk oversight and assurance activity
• Clear accountabilities
Linked to strategic priorities 1, 2, 3
Key management actions
• Employee engagement on responsible business,
responsible investment and business code
of conduct compliance
• Understanding potential impacts on reputation
through our risk framework and policies
• Brand use policy and standards
• Crisis management plans and procedures
Linked to strategic priorities 1, 2, 3
Key management actions
• Differentiated service and product offerings
• Competitor activity monitoring
• Disruptive technologies and non-traditional
competition monitoring
Linked to strategic priorities 1, 2, 3, 4
Key management actions
• Risk adjusted remuneration
• Performance appraisals and monitoring
• Culture and employee engagement surveys
• Employee wellbeing initiatives
• Compliance with the code of conduct and
human resources policies and standards
Strategic Report | Risk review
33
Quilter Annual Report 2018 Strategic Report | Risk review continued
Market risks
The risk of an adverse change in the level or volatility of market prices of assets, liabilities or financial instruments resulting in loss of earnings
or reduced solvency.
Market risks
Quilter’s results may be materially adversely affected by conditions in global
capital markets, the global economy generally and the UK economy in particular
that result in a decrease in the value of customer investment portfolios.
The volatility and strength of debt and equity markets, the direction and pace
of change of interest rates and inflation all affect the economic environment,
investor confidence, our reputation and, ultimately, the volume and profitability
of Quilter’s business.
Linked to strategic priorities 1, 2, 3
Key management actions
• Financial risk limits
• Stress and scenario analysis and stress testing
• Economic environment monitoring
• Financial risk policies and standards
• Maintain strong balance sheet
Business risks
The risk that business initiatives supporting the delivery of the strategy are not implemented correctly or in full, or that the business
performance fails to meet expectations across one or more key deliverables, resulting in an adverse impact to the achievement
of the Group’s business plan objectives.
Conduct risk
Conduct risk is the risk that decisions and behaviours made by Quilter, its
employees, its advisers and appointed representatives lead to customers
being treated unfairly or otherwise result in detrimental customer outcomes
and damage to our reputation. Conduct risk may arise where Quilter fails to
design, implement or adhere to appropriate policies and procedures, offer
products, services or other propositions that do not meet the needs of customers
or fails to perform in accordance with its intended design, fails to communicate
appropriately with customers, fails to deal with complaints effectively, sells or
recommends unsuitable products or solutions to customers, fails to provide
them with adequate information to make informed decisions or provide
unsuitable investment for financial planning advice to customers, or fails to
do any of the foregoing on an ongoing basis after initial sales, amongst other
things. This risk may also arise as a result of employee (mis)conduct.
Linked to strategic priorities 1, 2, 3
Key management actions
• Business code of conduct and mandatory training
• Defined and measured customer outcomes
• Customer outcomes governance
• Quilter policy suite compliance including responsible
business conduct, financial crime and customer policies
Conflicts of interest
Quilter faces significant potential and actual conflicts of interest, including those
which result from Quilter’s advised distribution channel. If the Group fails to
manage conflicts of interest between its advice channel and other businesses
across the Group, it could result in reputational damage, regulatory liability or
customer restitution, which could have a material adverse impact on Quilter’s
business, financial condition, results of operations and prospects, and reputation.
Linked to strategic priorities 1, 2, 3
Key management actions
• Conflicts of interest register and monitoring
• Conflicts identification and management training
• Conflicts of interest policy compliance
Investment performance
An important factor in Quilter’s ability to maintain and grow its customer base and
its network of advisers is the investment performance of the customer assets that
Quilter manages. Actual or perceived underperformance of customer assets that
are managed by Quilter could have a material adverse effect on Quilter’s business,
financial condition, results of operations and prospects, and reputation.
Linked to strategic priorities 1, 2
Key management actions
• Investment strategy
• Investment risk policy and standards compliance
• Investment performance monitoring
Insurance risks
The risk of a reduction in Own Funds from adverse experience or change in assumptions relating to claims, policyholder behaviours, mortality,
morbidity, longevity or expenses, resulting in an adverse impact to earnings or reduced solvency.
Insurance risks
Quilter has exposure to mortality risk (risk of higher than expected rate of death
claims on life protection business) and morbidity risk (risk of higher than expected
rate of claims on critical illness protection business) from its life assurance
business, which issues policies that carry certain guaranteed benefits upon the
death, or defined illness, of the policyholder. These risks could be aggravated by
any potential failure in underwriting processes and controls designed to identify
sub-standard lives at the new business stage.
Linked to strategic priorities 1, 3
Key management actions
• Underwriting standards and processes
• Claims investigations and pricing reviews
• Reinsurance
• Budgeting and expense management
34
Quilter Annual Report 2018 Operational risks
The risk of loss (or unintended gain/profit) arising from inadequate or failed internal processes, or from personnel and systems, or from
external events (other than financial or business environment risks), resulting in an adverse impact to earnings or reduced solvency.
Adviser and customer proposition
Failure by Quilter to offer products, services and platforms that meet adviser
and customer needs and which are considered suitable, or failure to fairly and
honestly communicate with advisers and customers, could result in advisers
ceasing to recommend Quilter’s products or services, or recommending fewer
of Quilter’s products or services, and declining persistency of Quilter’s products.
The asset classes or investment strategies underlying the portfolios managed
by Quilter may become less attractive to customers or their advisers, which
could reduce demand for Quilter’s products and have a material adverse impact
on Quilter’s business, financial condition, results of operations and prospects,
and reputation.
Linked to strategic priorities 1, 2, 4
Key management actions
• Ongoing adviser training
• Customer communication programme
• Suitability reviews
• Product and customer-related policies and standards
• Product and proposition governance
Information technology
Quilter uses computer systems to conduct its business, which involves managing
and administering assets on behalf of customers in its wealth portfolios and on
its platforms. Quilter’s business is highly dependent on its ability to access these
systems to perform necessary business functions and to provide adviser and
customer support, administer products, make changes to existing policies,
file and pay claims, manage customer’s investment portfolios and produce
financial statements and regulatory returns. Failure to manage this risk could
have a material adverse impact on Quilter’s business, financial condition, results
of operations and prospects, and reputation.
Linked to strategic priorities 1, 2, 3, 4
Key management actions
• IT estate enhancement programmes
• Active systems monitoring
• Resilience plans
• IT policies and standards compliance
Data information and cyber threats
Quilter’s business, by its nature, requires it to store, retrieve, evaluate and
utilise customer and Company data and information, which is highly sensitive.
Quilter is subject to the risk of IT security breaches from parties with criminal
or malicious intent (including cyber crime). Should Quilter’s intrusion detection
and anti-penetration software not anticipate, prevent or mitigate a network
failure or disruption, or should an incident occur to a system for which there
is no duplication, it may have a material adverse effect on Quilter’s customers,
business, financial condition, results of operations and prospects, and reputation.
Linked to strategic priorities 1, 2, 3, 4
Key management actions
• Cyber threat defences and monitoring Resilience
and continuity plans
• Data governance arrangements
• Information security and data protection policy
and standards compliance
Third party risk
Quilter outsources and procures certain functions and services to third
parties and may increase its use of outsourcing in the future. If Quilter does not
effectively develop and implement its outsourcing strategies and its internal
capability to manage such strategies, third party providers do not perform
as anticipated, or Quilter experiences technological or other problems with
a transition, it may not realise productivity improvements or cost efficiencies
and may experience operational difficulties, increased costs and loss of business,
and damage to its reputation.
Linked to strategic priorities 1, 2, 3, 4
Key management actions
• Third party criticality assessments, due diligence
and monitoring
• Resilience plans and exit planning
• Third party risk management policy and standards
including supplier management practices compliance
Strategic Report | Risk review
35
Quilter Annual Report 2018 Strategic Report | Risk review continued
Legal and regulatory risks
The risk of failing to comply with existing or new regulatory and legislative requirements including standards, principles and practices,
or an increased level of regulatory intervention resulting in sanctions or a capital add-on being imposed or a temporary restriction
on our ability to operate.
Legal and regulatory risk
Quilter’s regulated businesses are subject to extensive regulation both in the
UK (by the Prudential Regulatory Authority (“PRA”) and the Financial Conduct
Authority (“FCA”) and internationally, and Quilter faces risks associated with
compliance with these regulations. Quilter’s businesses are subject to the risk of
adverse changes in laws, regulations and regulatory requirements in the markets
in which they operate. Regulatory reform initiatives could also lead to increased
compliance costs or other adverse consequences for firms within the financial
services industry, including Quilter. Failure to manage these risks could have a
material adverse impact on Quilter’s business, financial condition, results of
operations and prospects, and reputation.
Financial crime
Quilter is required to comply with all applicable financial crime laws and
regulations (including anti-money laundering, anti-terrorism, sanctions, anti-fraud,
anti-bribery and corruption and insider dealing) in the jurisdictions in which it
operates. Where Quilter is unable to comply with applicable laws, regulations
and expectations, regulators and relevant law enforcement agencies have the
ability and authority to impose significant fines and other penalties, including
requiring a complete review of business systems, day-to-day supervision by
external consultants and ultimately the revocation of regulatory authorisations
and licences. Failure to manage these risks could have a material adverse impact
on Quilter’s business, financial condition, results of operations and prospects,
and reputation.
Linked to strategic priorities 1, 2, 3, 4
Key management actions
• Compliance advice and assurance programme
• Legislative and regulatory horizon scanning
• Training and staff awareness programme
• Compliance policy and standards compliance
Linked to strategic priorities 1, 2, 3
Key management actions
• Mandatory staff training
• Numerous controls including due diligence, politically
exposed persons assessment, and sanctions screening
• Financial crime policies and standards
Emerging risks and our regulatory landscape
Quilter is a long-term business and as such we monitor risks which are less certain in terms of time, velocity and impact. The identification of
these risks contributes to our stress and scenario testing which feeds into our strategic planning process and informs our capital calculations.
The following are the emerging risks we feel are the most significant.
Key emerging risks
– Changes in tax policies affecting our products
– Developments in the nature of cyber threats
– De-globalisation
– Stability of the UK Government
– Economic downturn
– Changes in the competitive environment
– Talent shortfall across financial services
– Disruptive technologies
– UK pension reform
– International regulatory change
– Climate change
Case study of risk management in action
Preparing for the General Data Protection
Regulations (“GDPR”)
In readiness for the go-live date on 25 May 2018, our existing
systems and processes were such that we were at risk of not
achieving compliance with a small number of the requirements,
potentially leading to a breach of our regulatory risk appetite.
The Executive Committee reviewed the regulatory gaps and
prioritised effort to ensure our customers were protected and
regulatory requirements met. Training for key staff was arranged
and people with a good understanding of our business and the
regulations were placed into senior roles such as the Group Data
Protection Officer and Data Guardians. Nine ‘at risk’ deliverables
were prioritised and risk assessed for impact on customers and
operations. A robust risk assessment process was co-ordinated
with both risk owners and the risk oversight function, ensuring
safe and timely decisions to meet the delivery timetable. As a
result, the business was GDPR-ready when the regulations came
into effect and our customers and employees data were
adequately protected.
36
Quilter Annual Report 2018 Our Enterprise Risk Management Framework
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Risk cult u r e
We continue to develop a well-defined, positive risk culture that is
understood across Quilter, as well as a risk and control framework
with clear articulation of the responsibilities between the three lines
of defence.
Our Group is regulated by the PRA under Solvency II and by the
FCA under Capital Requirement Directive regulations. To meet these
regulations, we operate a consistent approach to risk management
across Quilter. As such, we have integrated the Own Risk and
Solvency Assessment (“ORSA”) and Internal Capital Adequacy
Assessment Process (“ICAAP”) into our risk management framework.
Quilter’s ORSA and ICAAP are comprehensive risk processes which
set out how risks are managed and how risks might change over time,
as we roll out our strategy and in response to developing situations.
We analyse the capital required to protect the sustainability of the
Group, and how those capital requirements might develop over
our planning period.
The assessments include a range of stress and scenario testing
covering a broad range of scenarios, including market shocks, new
business growth scenarios and operational risk events. These tests
are in addition to the regulatory solvency capital requirements, which
allow for severe and extreme scenarios and stresses (1 in 200-year
risk events). Critical to our process is preparing management action
plans should adverse events occur. This helps us take comfort that
we are both well capitalised and prepared to take necessary action
in order to maintain our resilience to adverse conditions.
Viability statement
The viability statement can be found in the Directors’ report
on page 200.
Risk appetite
Our risk appetite is the amount of risk we are willing to take on in
the pursuit of our strategic priorities and is defined by the Board.
Culturally, it sets the tone regarding our attitude towards risk-taking.
Risk appetite also plays a central role in informing decision making
across the Group; protecting and enhancing the return on capital
invested. This risk appetite approach is applied consistently across
the Group.
To support the strategic decision making process we apply risk
preferences which provide guidelines for striking the appropriate
balance of risk and reward when setting our business strategy.
Strategic Risk Appetite Principles
A set of Strategic Risk Appetite Principles has been set by the Board.
These principles, set out below, provide the top-of-the-house
guidance on our attitude toward key areas of risk for the Group
and support the ongoing management and oversight of risk.
Customer
The Group will ensure fair
customer outcomes
Liquidity
The Group will ensure that
it has sufficient liquidity
to meet its financial
and funding obligations
Capital
The Group will hold or have
access to sufficient capital to
maintain own capital needs
Control environment
The Group will at all
times operate a robust
control environment
The Group’s position against these principles is measured on a
regular basis. These principles are communicated and applied to all
employees through a series of more granular risk appetite statements
and measures, policies and standards and key risk indicators.
Policies supporting the system of internal control
The Group Governance Manual (“GGM”) and policies form an integral
part of our governance and risk management framework, ensuring
an appropriate system of internal control. Together they form the
basis of clear delegated authorities and accountabilities, ensuring
there is appropriate Board oversight and control of important
decisions, and efficient and effective management of day-to-day
business. The GGM and policies are approved and adopted by
the Board.
Risk management culture
Undoubtedly the most important element to risk management is
a good culture of risk informed decision making. We believe that
a good risk culture enables effective management of risk. We link
risk management to performance and development, as well as
to the Group’s remuneration and reward schemes. An open and
transparent working environment which encourages our people
to embrace risk management is critical to the achievement of our
strategic priorities.
Iain Wright
Chief Risk Officer
Strategic Report | Risk review
37
Quilter Annual Report 2018
Governance
Governance
An introduction to our Board of
Directors, executive management
team, and our approach to corporate
governance and remuneration.
Board of Directors
Executive management team
Chairman’s introduction
on corporate governance
Our approach to governance
Board Corporate Governance
and Nominations Committee report
Board Audit Committee report
Board Risk Committee report
Board IT Committee report
Remuneration report
Remuneration at a glance
Directors’ Remuneration Policy
Annual Report on Remuneration
40
42
44
48
52
54
60
62
64
67
69
78
Governance
Quilter Annual Report 2018
39
Board of Directors
Chairman and Executive Directors
A robust governance
framework, overseen
by a skilled and
experienced Board
is absolutely critical.
Glyn Jones
Chairman
Appointed November 2016
Paul Feeney
Chief Executive Officer
Appointed August 2012
Skills and experience: Paul Feeney is
responsible for creating and developing
the vision and strategy of the Group.
His extensive knowledge of the asset
and wealth management industry derives
from experience gained in his roles as CEO
of NatWest Private Bank and of NatWest
Investments USA, Group Managing
Director and Head of Distribution for
Gartmore Investment Management and
Global Head of Distribution at BNY Mellon
Asset Management International.
Other appointments: Paul is a member
of the FCA Practitioner Panel and
a Non-executive Trustee of Sense
International.
Skills and experience: Glyn Jones
is an experienced chairman and
non-executive director, having served as
chairman of Aldermore Group plc, Hermes
Fund Managers, BT Pension Scheme
Management and Towry, a financial
planning and wealth advice business.
He has also served as Senior Independent
Director at Direct Line Insurance Group.
Glyn has significant UK and international
financial services consultancy experience,
having specialised in the sector while at
PwC’s predecessor firm, Deloitte, Haskins
& Sells, before moving on to run Standard
Chartered’s international private banking
business in Hong Kong. Glyn has also
served as CEO of Coutts Group and
Gartmore Investment Management.
Glyn is a Fellow of the Institute of Chartered
Accountants in England and Wales.
Other appointments: Glyn chaired Aspen
Insurance Holdings, a New York Listed
international speciality insurance business,
from 2007 until February 2019.
Tim Tookey
Chief Financial Officer
Appointed to the Board February
2017 and as Chief Financial
Officer from August 2017 until
13 March 2019
Skills and experience: Tim Tookey has
over 20 years’ experience working at board
level in financial services and has been
responsible for managing a large number
of significant business transformations and
strategic projects. He began his career at
KPMG, specialising in audit and corporate
finance advisory work. Tim has held
positions as Finance Director (UK and
Europe) at Prudential plc, Group Finance
Director of what is now Lloyds Banking
Group plc and CFO of Friends Life Group.
Tim is a member of the Institute
of Chartered Accountants in England
and Wales.
Other appointments: Tim is a
Non-executive Director of Nationwide
Building Society, where he chairs the
Board Risk Committee.
Independent Non-executive Directors
Ruth Markland
Senior Independent Director
Appointed June 2018
Skills and experience: Ruth Markland
brings a wealth of FTSE 100 Board
experience, having spent 12 years on
the board of Standard Chartered plc and
over 10 years on the board of Sage Group
plc. In both companies, Ruth served as
Senior Independent Director and Chair
of the Remuneration Committee. In her
various board roles, Ruth has had extensive
board committee experience including
audit, risk, remuneration, nominations
and financial crime risk committees.
Ruth headed the commercial practice of
Freshfields Bruckhaus Deringer in London
for a number of years and then became the
Managing Partner of the Asia business,
based in Hong Kong.
Other appointments: Ruth is a member
of the Supervisory Board of Arcadis NV
and an Independent Non-executive for
Deloitte LLP.
Paul Matthews
Appointed August 2018
George Reid
Appointed February 2017
Skills and experience: Paul Matthews is
a highly experienced FTSE 100 plc board
director who has over four decades’ worth
of knowledge of the savings and pensions
industry. Until he retired from full-time
executive roles, Paul worked at Standard
Life undertaking various roles between
1989 and 2017, including as a Group
Executive Director, Chief Executive Officer
UK & Europe and Chairman of Standard
Life Wealth. Paul has been a member of the
FCA Practitioner Panel, a Board Member
of the Association of British Insurers and
a Member of the Faculty of the Chartered
Insurance Institute.
Other appointments: Paul is currently
an Executive Mentor at Merryck & Co.
Skills and experience: George Reid has
a wealth of experience in finance having
spent over 20 years in the accounting
profession. He served the first 12 years
of his career at PwC, returning to the
accounting profession in 2006 with Ernst &
Young LLP latterly as managing partner and
head of financial services for Scotland and
UK regions, and serving as a member of the
UK Firm’s Financial Services Board. Prior to
that, George spent seven years in various
senior executive roles at Standard Life.
George is a Fellow of the Institute
of Chartered Accountants in England
and Wales.
Other appointments: George is Chairman
of the Children’s Hospice Association
Scotland.
Board and Committee
Membership key
Committee Chair
Board Audit Committee
Board Corporate
Governance and
Nominations Committee
Board IT Committee
Board Remuneration
Committee
Board Risk Committee
Major subsidiary board
membership – Please
refer to page 83 for more
information
40
GovernanceQuilter Annual Report 2018
Independent Non-executive Directors
Rosie Harris
Appointed April 2017
Suresh Kana
Appointed August 2018
Moira Kilcoyne
Appointed December 2016
Jon Little
Appointed May 2017
Skills and experience: Rosie Harris has
extensive knowledge and experience of
risk management within financial services.
She has served as Chief Operating Officer
(UK and Europe) at Prudential plc, Group
Risk Director at Old Mutual plc and Chief
Risk Officer (Insurance) and Managing
Director for General Insurance at Lloyds
Banking Group plc. From 2012 to 2015,
Rosie was the Group Chief Risk Officer
at Friends Life plc and, following Aviva’s
acquisition of Friends Life plc, was
appointed Chief Risk Officer for UK Life
at Aviva plc until her retirement in 2017.
Rosie is a member of the Institute of
Chartered Accountants in England
and Wales.
Other appointments: Rosie is a
Non-executive Director of Tokio Marine
Kiln’s Insurance and Syndicates businesses
and chairs its Risk Committee.
Skills and experience: Dr Suresh Kana
is a highly experienced South African
businessman who has spent over three
decades working in various roles at PwC,
most recently as Chief Executive Officer
and territory Senior Partner of PwC Africa.
He has a wealth of South African business,
public company and corporate governance
experience and served as Chairman
of Imperial Holdings Limited until its
de-merger in November 2018. Suresh
is a Chartered Accountant and Fellow
of the Institute of Directors.
Other appointments: Suresh is Chairman
of Murray & Robert Holdings Limited and
an independent Non-executive Director
of JSE Limited and a member of its Audit,
Risk and SRO Committees. He is Chairman
of the Financial Reporting Standards
Council in South Africa, Deputy Chair of the
Integrated Reporting Committee of South
Africa and Trustee of the International
Financial Reporting Standards Foundation.
He is also a Member of the Illovo Sugar
Limited Advisory Panel and Chairman
of South Africa’s King Committee on
Corporate Governance.
Skills and experience: Moira Kilcoyne
brings over 25 years of technology and
cyber security leadership and has spent
much of her career working in senior
technology roles in both London and New
York, predominantly with Morgan Stanley
and Merrill Lynch. Moira recently retired
from Morgan Stanley having held the
role of Managing Director and Co-Chief
Information Officer for global technology
and data at Morgan Stanley since 2013.
Other appointments: Moira is a director
of Citrix Systems Inc where she is also
a member of its Audit Committee.
She is also a Trustee of the board
of Manhattan College.
Skills and experience: Jon Little has over
30 years’ experience in the investment
management business internationally.
Jon has worked at Fidelity, JP Morgan
Investment Management and held various
senior executive roles at BNY Mellon –
latterly as Vice Chairman responsible
for the international asset management
business. He has served as Chairman
of The Dreyfus Corporation in New York
and Insight Investment Management.
Jon has also served on various asset
management boards, including Newton,
Walter Scott, Pareto and Alcentra, and as
a Non-executive Director of Jupiter Fund
Management plc.
Other appointments: Jon is a founder and
managing partner at Northill Capital since
November 2010 and is Chairman of the
Oxford Brookes Endowment Investment
Committee.
Company Secretary
Appointed post year-end
Patrick Gonsalves
Company Secretary
Appointed January 2017
Patrick Gonsalves is an experienced
Company Secretary with broad experience
across the financial services industry
gained with Lloyds Bank, NatWest Bank
and, up until December 2016, as Deputy
Secretary of Barclays plc.
Patrick was appointed Company Secretary
of Old Mutual Wealth Management Limited
in January 2017 and is a Fellow of the
Institute of Chartered Secretaries and
Administrators.
Cathy Turner
Appointed December 2016
Skills and experience: Cathy Turner is an
experienced non-executive director with
significant industry knowledge of HR and
remuneration matters, having served as
group HR Director at Barclays plc where
she was also a member of the group
executive committee. At various times,
her responsibilities also included group
strategy and investor relations. Her
most recent executive role was as Chief
Administration Officer at Lloyds Banking
Group plc where she was responsible
for a number of corporate functions.
Other appointments: Cathy serves as a
Non-executive Director and Chair of the
Remuneration Committees at Countrywide
and Aldermore Group. She is also a partner
at the senior advisory organisation,
Manchester Square Partners.
Mark Satchel
Chief Financial Officer Designate
Appointed effective
from 13 March 2019
Mark Satchel, who has been appointed
as Chief Financial Officer with effect from
13 March 2019, has over 20 years’ financial
and business experience within the
industry. Mark previously served as CFO
of the business from 2010 to August 2017
and as Corporate Finance Director for
the 17-month period to March 2019.
Mark joined Old Mutual in the UK in January
2000 and held numerous leadership
positions within the finance function and
businesses at Old Mutual plc. Mark played
a lead role in the acquisitions of Intrinsic
and Quilter Cheviot and was instrumental
in implementing the Group’s successful
business model. Mark is qualified as a
Chartered Accountant in South Africa,
and worked for KPMG in both South Africa
and Canada prior to moving to the UK.
Governance | Board of Directors
41
Quilter Annual Report 2018
Executive management team
The Board has delegated the
day-to-day running of Quilter to
Paul Feeney, as Chief Executive
Officer. Paul exercises these powers
through the Quilter Executive
Committee, the membership
of which comprises the Chief
Executive Officers of each of
Quilter’s businesses and key
function heads. The Executive
Committee meets regularly
to ensure the effective
implementation of the business
strategy, our customer strategy,
the financial performance of the
business against our business
plan and the culture and risk
management of our business.
Paul Feeney
Chief Executive Officer
Tim Tookey
Chief Financial Officer
For full biography, see page 40.
For full biography, see page 40.
Mark Satchel
Chief Financial Officer
Designate
For full biography, see page 41.
Michelle Andrews
Chief Marketing Officer
Matt Burton
Chief Internal Auditor
Karin Cook
Chief Operating Officer
Michelle has over 25 years’ experience in
financial services, having joined the
business in 1997, initially to drive the
international strategy. She has extensive
commercial experience, and has held key
roles across international distribution, UK
and international product development
and marketing.
Michelle has a successful track record
in leading major change, most latterly
in brand and proposition. She has
built significant strategic expertise
in marketing as well as in customer
proposition development.
Matt has over twenty five years’ of internal
audit experience across financial services.
Prior to joining Old Mutual Wealth
in April 2016 he was a partner in
PricewaterhouseCoopers’ (now PwC)
Financial Services Practice, where he
was responsible for leading their Internal
Audit offering within the Insurance and
Investment Management sector. He began
his career with Deloitte and has held senior
roles at Credit Suisse, and Deutsche Bank.
Matt is a member of the Institute
of Chartered Accountants in England
and Wales.
Karin, who joined Quilter in January 2019,
has over 27 years’ experience in financial
services, with previous roles at Lloyds
Banking Group, Goldman Sachs, Morgan
Stanley and HSBC. At HSBC she served
as Global Chief Operating Officer for its
Private Bank. Prior to that, Karin served
as HSBC’s Global Head of OTC Derivative
Operations, which included overseeing and
managing operational support of equity,
interest rate, currency, credit and emerging
markets derivatives.
42
GovernanceQuilter Annual Report 2018 Jane Goodland
Corporate Affairs Director
Paul Hucknall
Human Resources Director
Jane joined Quilter in August 2015 and has
over 20 years’ experience in institutional
asset management, investment consulting
and wealth management gained
at Willis Towers Watson, HSBC and Janus
Henderson. At Willis Towers Watson, Jane
founded a new consulting business and
research function focused on sustainable
investment for institutional investors.
Jane is a Non-executive Director of The Tax
Incentivised Savings Association (TISA)
and chairs an Old Mutual Wealth Pension
Scheme. She is a Trustee of the Quilter
Foundation.
Paul has over 20 years’ experience working
in financial services and joined the
business as Human Resources Director in
January 2018. Prior to this, Paul was People
Director, Centres of Excellence at Lloyds
Banking Group, where he was responsible
for the design and delivery of the Group’s
overall HR strategy. Paul has held various
senior roles working at board level
in publicly listed financial services
companies such as Bank of America
and ING.
Peter Kenny
Chief Executive Officer,
Old Mutual International
Steven Levin
Chief Executive Officer,
UK Platform and Heritage
Peter joined Old Mutual International in
August 2016 as Managing Director. Peter
has over 30 years’ experience in financial
services, having previously held senior
roles including chief operating officer and
managing director of fund management
and distribution companies. Prior to that,
Peter worked for Zurich International Life
where he held various positions, including
that of strategic alliances and client
services director.
Peter is Chair of the Manx Insurance
Association.
Steven has extensive experience in
developing and distributing financial
products, as well as in asset management
and investments, and has been in his
current role since October 2015. Prior roles
include Global Head of Distribution and
Managing Director of Skandia International
(now Old Mutual International). He also
served as Product & Proposition Director
for Old Mutual in South Africa and globally
for Old Mutual plc. Steven is a qualified
Actuary and a Chartered Financial Analyst.
Andy McGlone
Chief Executive Officer,
Quilter Cheviot
Paul Simpson
Chief Executive Officer,
Quilter Investors
Andy has over 20 years’ experience
in investment management having worked
at Quilter Cheviot for his entire career,
beginning at Quilter Goodison in 1994 as
a Trainee Investment Manager. He worked
his way up through the private client
department before becoming joint head
of the newly merged Quilter and Cheviot
London front offices in late 2013. Prior
to becoming Chief Executive Officer, Andy
served as Managing Director. Andy is a
Chartered Fellow of the Chartered Institute
for Securities and Investments.
Paul has extensive experience in capital
markets and was appointed Chief Executive
Officer of Quilter Investors in January 2018.
He began his career in risk management
at Deutsche Bank and UBS before moving
into investment management at De Putron
Fund Management Ltd, where he later
focused on statistical arbitrage. Paul joined
Old Mutual in 2006 and was appointed
Head of Alternatives at Old Mutual Global
Investors (“OMGI”) in 2009 before being
made Investment Director in January 2015.
Andy Thompson
Chief Executive Officer, Intrinsic
Iain Wright
Chief Risk Officer
Andy, who was appointed Chief Executive
Officer of Intrinsic in December 2015, has
over 20 years’ experience in financial advice
and distribution. Having been a financial
adviser, Andy began his own successful
advice business in 2003, which was
subsequently acquired by Intrinsic in
2012, at which point Andy also joined
the Business. Andy has built a successful
distribution business and led many
acquisitions including those of Caerus
and Positive Solutions.
Iain has over 20 years’ experience
in financial markets and risk management
and became Chief Risk Officer in February
2016. Prior to this, he held various senior
risk and supervisory roles within Sun
Life Financial, Prudential and the FSA.
Iain trained as a Chartered Accountant with
Deloitte, and later served as Head of Equity
and Debt Markets at the London Stock
Exchange. Iain is a member of the Board
of the Institute of Risk Management.
Governance | Executive management team
43
Quilter Annual Report 2018 Chairman’s introduction
on corporate governance
We believe that outstanding
corporate governance adds value
for all of our stakeholders. That
conviction has guided the design
of our governance framework.
Dear Shareholder,
An effective system of corporate governance, with appropriate
checks and balances to assess, manage and mitigate risks, is
important in any organisation to enable it to anticipate and adapt
to changing internal and external circumstances. For a young, newly
standalone, listed company operating in a fast growing but highly
regulated environment a robust governance framework, overseen
by a skilled and experienced Board, is absolutely critical. We believe
that outstanding corporate governance adds value for all of our
stakeholders. That conviction has guided the design of our
governance framework.
My first priority on being appointed Chairman was to assemble
a strong Board of Directors and to work with my Board colleagues
and our Company Secretary to design and implement a governance
structure tailored for our transition from a subsidiary company
through to a standalone listed company. We also conducted a review
of the skills and experience available within our executive leadership
team to ensure that it too was equipped for this transition and the
delivery of the strategy approved by the Board. The executive team
has continued to evolve during 2018 with some key hires that were
supported by the Board. Your Board and the Quilter leadership team
was, and continues to be, fully prepared therefore to guide and
oversee the delivery of the exciting opportunities that exist in our
business in a safe and considered way that gives due consideration
to the duties we owe to our shareholders, employees, regulators,
customers and the wider communities in which we operate.
The Managed Separation of Quilter from Old Mutual plc involved
considerable work to enable our business to be standalone. This
involved clearly defining the perimeter of the business, establishing
new functions such as treasury and investor relations that were
previously provided to us, and transferring certain systems to our
control. The most significant issue was to determine a Day 1 balance
sheet that ensured we had the right amount, structure and quality
of capital, debt and liquidity to stand alone in a robust and prudent
manner. Within a clearly defined conflicts of interest framework, we
Glyn Jones
Chairman
The table below shows the Board meetings held during 2018:
Scheduled
Board
meetings
Ad hoc Board and
Board Committee
meetings
Glyn Jones
Paul Feeney
Rosie Harris
Moira Kilcoyne
Jon Little
Ruth Markland (Appointed 25/06/2018)
George Reid
Tim Tookey
Cathy Turner
Suresh Kana (Appointed 08/08/2018)
Paul Matthews (Appointed 08/08/2018)
Bruce Hemphill (Resigned 19/04/2018)
Ingrid Johnson (Resigned 19/04/2018)
Mark Satchel (Resigned 19/04/2018)
10/10
10/10
10/10
10/10
9/10
4/4
10/10
10/10
9/10
2/3
3/3
3/4
3/4
4/4
5/6
7/7
5/6
0/1
1/1
N/A
6/6
8/8
0/1
N/A
N/A
1/1
0/1
4/4
The ad hoc Board and Board Committee meetings reported above related to
the oversight of Managed Separation, the Listing of the business and the sale
of the Single Strategy asset management business. Meetings were often
arranged at short notice.
Board activity
CEO Report
CFO Report
Sale of Single Strategy
Business
11%
16%
2%
Quarterly CRO Report
Investment Performance
Reports
6%
5%
Committee Reports
Strategy
Managed Separation
and Listing
8%
23%
29%
44
GovernanceQuilter Annual Report 2018
and the Old Mutual plc executive and board worked well together
to execute our Managed Separation and Listing. I would like to thank
our ex-colleagues at Old Mutual plc for their professionalism and
teamwork.
In preparation for our Listings in London and Johannesburg,
the Board reviewed and approved the Prospectus prepared in
connection with the admission of our shares to trading. In doing so,
the Board thoroughly reviewed our readiness for Listing including in
relation to our compliance with the UK Corporate Governance Code
2016. We were pleased to be fully compliant with that Code on Listing
and have applied the UK Corporate Governance Code 2018 since
1 January 2019.
In reviewing and challenging the strategies of the business, the
Board concluded in 2017, and after discussion with the relevant
management teams that our single strategy asset management
business was not core to our business and our customers’ needs.
Considerable effort went into separating and selling this business
(now branded Merian Global Investors) in a competitive sale
process to obtain the best value for our shareholders. The sale
closed shortly after our Listing and, after the repayment of the
outstanding £300 million senior unsecured term loan, we distributed
the surplus proceeds to shareholders via a special interim dividend in
September 2018.
In launching Quilter as a standalone business, we were cognisant
of the need to design and build a resilient business with a strong
balance sheet. That resilience has enabled the Board to continue
to plan for profitable growth despite the uncertainties created by
increasing political and economic clouds. Brexit, growing tensions
in global trade, the increasing likelihood of a slowdown in the
global economy and the possible end to the long bull equity market
are all challenges that our business is robust enough to face with
confidence because of the prudence of decisions taken as part
of our planning to become a standalone listed company.
The role of your Board and our corporate
governance framework
The Quilter Board is responsible to our shareholders for creating
and delivering sustainable shareholder value through the effective
oversight and direction of the Group’s businesses. The Board
therefore determines the objectives and policies of Quilter that
we believe will deliver long-term value, providing overall strategic
direction within a framework of rewards, incentives and controls.
The Board ensures that management strike an appropriate
balance between promoting long-term growth and delivering
on short-term objectives.
As noted, Quilter was compliant with the 2016 UK Corporate
Governance Code (the “2016 Code”) when we listed the business
on 25 June 2018 but that does not tell the full story. For example,
in addition to the Board Committees recommended by the Code,
we also created a Board IT Committee. Moira Kilcoyne, the Chair
of the Board IT Committee provides a description of the Committee’s
role and activities on pages 62 and 63. Our creation of a Board IT
Committee emphasises the significant role that technology plays
in how we run our business and how we serve our customers.
In particular, that Committee has exercised close oversight of our
critical UK Platform Transformation Programme.
To ensure there is clarity in both the roles we expect our Directors
to discharge and the behaviours we expect them to exemplify we
have adopted a Board Charter that is available at quilter.com.
To ensure that the Quilter Board is as effective as possible, early in
2019 we commenced our first Board effectiveness review as a listed
company. The review is being facilitated by Professor Rob Goffee,
Emeritus Professor of Organisational Behaviour at London Business
School, who has considerable experience of undertaking such
reviews. The scope and design of the review has been approved
by our Board Corporate Governance and Nominations Committee.
The Board Effectiveness Review comprises a detailed questionnaire
to be completed by each Director covering the performance
of the Board and the Board Committees which is followed by
in depth interviews between Professor Goffee and each Director
and a number of senior Quilter executives. The results of the Board
Effectiveness Review will then be reported to the Board and the
Board Committees, as appropriate. Professor Goffee has no other
relationship with Quilter beyond the conduct of the Board review.
Glyn Jones
Chairman
11 March 2019
Governance | Chairman’s introduction on corporate governance
45
Quilter Annual Report 2018 Governance | Chairman’s introduction on corporate governance continued
Where your Board has focused its time in 2018
In undertaking its duties in 2018 your Board has continued to
be mindful of the need to appropriately balance the interests
and expectations of our shareholders, our people, our customers,
our regulators and the wider communities in which we operate.
For our shareholders
Delivering on strategic priorities – Having approved the strategy
of our business that was communicated in our Prospectus and
Showcase presentations, the Board received quarterly updates
on the key non-financial deliverables that support the delivery of
the strategy and challenged management when there were areas
of concern, and particularly as the external environment became
more challenging. In addition to the work of the Board IT Committee,
the Board has also remained close to the progress on our UK
Platform Transformation Programme receiving regular reports
from management and also meeting with the chief executive of
FNZ, the main supplier involved, to hear his perspective on the
progress of the programme.
Maintaining sustainable financial performance – Having approved
the business plan for 2018, the Board has reviewed a comprehensive
suite of financial information and analysis at each regular Board
meeting. That enabled the Board to ensure that financial performance
is in line with the plan and other external commitments made, or,
if not, to review the corrective actions proposed. The Board gave
regular feedback to management on the form of the management
information and key performance indicators required to allow the
Board to better track the delivery of key financial and performance
priorities. As the equity market environment became more
challenging in the second half of 2018, the Board supported
management in taking the required action to manage costs to
ensure that in year performance would meet expectations without
taking actions that would cause damage to our business long term
or undermine the delivery of our strategy.
Business plan 2019–2021 – The business plan approved by your
Board for 2019 to 2021 reflects the increasing challenges that will
face our business in 2019 onwards. The plan has been considered
at a series of Board meetings from September to the early part of
2019 and is reflective of the greater political, economic and market
uncertainty experienced at the end of 2018 and positions our
business well to respond to a more uncertain world.
Reshaping our business – We made it clear, as part of our Listing,
that Quilter is not yet the finished article and consequently we have
continued to oversee the reshaping of our business. During 2018 the
Board has overseen the completion of the sale of the Single Strategy
asset management business, continued to make small distribution
acquisitions to support the growth in Private Client Advisers and
scrutinised the build out of Quilter Investors. The work to optimise
our business to enhance long-term returns for shareholders has
received significant Board attention. Appropriately pacing and timing
the delivery of this programme of work has been an area of intense
discussion, given the other strategic priorities for the business in
2019, especially our UK Platform Transformation Programme. Our
Optimisation programme is designed to drive out the synergies
available from simplifying and unifying processes across our Group
where appropriate whilst not materially distracting those who directly
serve our customers from their primary purpose. This is especially
important in a period of uncertainty when we need more than ever
to stay close to our customers and deliver on organic growth and
the UK Platform Transformation Programme.
For our people
The Quilter leadership team have developed a culture dashboard that
allows management and the Board to track the levels of engagement
amongst our people and the actions that are being taken to address
areas where deeper engagement is desired. This reporting will be
further developed to allow the Board to understand the level of
alignment between our strategy and the culture of our business.
To ensure that the voice of our people is heard clearly at our Board,
Cathy Turner, an independent Non-executive Director, has been
appointed to act as a point of contact for our people and she will
be working with the employee forums that already exist across
our business to provide an important link between the Board
and our people. These changes have positioned us well for the
new requirements of the Code. We have more to do in this area
but we have made a good start.
For our customers
Investment performance – Quilter can only succeed if the
investment performance delivered for customers represents good
value. The Quilter Board therefore receives quarterly reports on
investment performance delivered by Quilter Cheviot and Quilter
Investors. That performance is assessed against both market
benchmarks and the risk-based expectations of customers.
Customer outcomes – The Board has also received regular
updates on the work of our Customer Outcomes Forum. The Forum,
which includes external representation, provides valuable insights
to identify areas where we can better serve our customers.
Customer reporting – In addition to the reporting to the Board on
customer outcomes, work is also under way to enhance the more
granular reporting the Board receives on customer issues more
generally. We want to ensure that our customer service and the
quality of advice we provide continue to be strong differentiators
for our businesses.
46
Quilter Annual Report 2018 For our regulators
Building and maintaining open, constructive and respectful
relationships with our regulators is essential and the Board and the
executive have worked hard to ensure this is achieved. In addition
to the reporting from the executive on key regulatory issues, I and
my Board Committee Chairs meet regularly to brief our regulators
on important new developments in our business and to listen to
their perspectives on our business and any concerns they may have.
At the start of 2018, and having considered the matter alongside the
Board of Old Mutual Wealth Life Assurance Limited, the Quilter Board
concluded that a voluntary customer redress scheme should be
initiated to address historic issues relating to the fair treatment of
long-standing customers in the life insurance sector. This was well
ahead of the conclusion of the FCA’s investigations into fair treatment
of long-standing customers in the life insurance sector. In September
2018, the FCA announced the closure of their investigation and
confirmed that the conduct of Old Mutual Wealth Life Assurance
Limited did not warrant enforcement action. The pace of regulatory
change continues unabated and significant management and
Board time has been taken up during 2018 in planning for and
implementing regulatory changes such as the new General Data
Protection Regulation, MiFID II and the application of the Senior
Managers and Certification Regime to certain parts of our business
as well as addressing other requests from regulators. Preparations
for Brexit have also intensified these requests.
For the wider community
Our Board Corporate Governance and Nominations Committee has
taken on the responsibility of overseeing our Responsible Business
agenda and the Shared Prosperity Plan which is described in more
detail on pages 12 to 15.
Governance in action
The Managed Separation and Listing of Quilter plc was a major
activity during the year that was overseen by the Board and its
Committees but involved many of our people at all levels and we
are grateful for the strong support we have received. Set out
below are some of the main activities overseen by the Board.
Preparing our business for Listing
Transforming our business from being a subsidiary of a global
organisation into a standalone company listed on the London
and Johannesburg Stock Exchanges involved a significant
amount of work by the Quilter executive team, with close
oversight from the Board of Quilter and its Committees.
Early on in the process it was agreed that the Board would focus
on overseeing the Managed Separation from Old Mutual plc
and the strategy to be articulated in the Prospectus and other
investor materials. Appropriate Board Committees were then
asked to focus their energies on other parts of the Prospectus
and the other documentation that supported our Listing.
Our Board Risk Committee focused on completing the build
out of our risk management framework and reviewed and
challenged the risk factors in our Prospectus. The Board
Remuneration Committee designed our remuneration policies
for a public company environment and oversaw the necessary
remuneration disclosures. The Board Audit Committee focused
on the Historical Financial Information and the Operating
and Financial Review and the Board Corporate Governance
and Nominations Committee focused on completing the
recruitment for the Board and designing our corporate
governance framework. Taken together, this was a great
example of teamwork in action.
Overseeing Managed Separation
The Managed Separation of Quilter from Old Mutual plc was
a complex and far reaching project that involved every part of
our business and all of our central functions. This was a multi-year
project successfully delivered in time to List Quilter on 25 June 2018.
The Investor Showcases
We committed significant time to overseeing the development
of the Quilter Showcase materials that were the markets’ first view
of Quilter as a standalone business. An off site strategy session
in August 2017 was used to agree the strategic priorities for the
business and further Board sessions refined, challenged and
tested the investment story that supported the Listing of Quilter.
The Board also ensured that the due diligence and verification
to support the Showcase materials and the Prospectus that
followed it was thorough and effective.
The Quilter Day 1 balance sheet
The Quilter Board were particularly mindful of the need to launch
Quilter as a standalone listed company with a resilient balance
sheet that prepared it for most eventualities given the increasing
likelihood of more challenging trading conditions. The Board
appointed an ad hoc Committee comprising the Chair of the
Board, the Board Audit Committee Chair and the Board Risk
Committee Chair to oversee the detailed technical analysis.
The Committee was well supported with independent advice
from JP Morgan Cazenove and high quality analysis of the
structure of the balance sheet, the debt and capital requirements
of the business and the risk scenarios that evidenced the resilience
of the proposals. The final balance sheet proposals that were
approved by the Board included a £125 million revolving credit
facility, which remains undrawn, a £200 million subordinated debt
security in the form of a 10-year Tier 2 Bond and a £300 million
unsecured term loan facility that was fully repaid post-Listing in
June 2018 from the proceeds of sale of the single strategy asset
management business. The successful issuance of this debt and
the prudent approach in building our balance sheet has positioned
our business well for the challenges ahead.
Governance | Chairman’s introduction on corporate governance
47
Quilter Annual Report 2018 Governance
Our approach to governance
UK Corporate Governance Code (the “Code”)
Quilter plc’s Ordinary Shares were admitted to trading on the
Main Market of the London Stock Exchange on 25 June 2018,
from which date Quilter has been required to apply the
principles of the Code as published in 2016 and comply, or
explain any non-compliance, with its provisions. The Financial
Reporting Council published a revised Code in July 2018
which has applied to Quilter since 1 January 2019. Details of
our corporate governance framework are available on our
website at quilter.com/corporategovernance. For the period
25 June 2018 to 31 December 2018, and at the date of this
report, we complied with all relevant provisions of the 2016
Code. We will report on how we have applied the 2018 Code
in next year’s Annual Report.
Disclosure Guidance and Transparency Rules
(“DTRs”)
By virtue of the information included in this Governance
section of the Annual Report and our Directors’ Report on
pages 198 to 201 we comply with the corporate governance
requirements of the FCA’s DTRs. Certain additional information
that is required to be disclosed pursuant to DTR 7.2.6 can be
found on pages 199 to 200.
Johannesburg Stock Exchange (the “JSE”)
Quilter has a secondary listing on the Johannesburg Stock
Exchange and is permitted by the JSE Listings Requirements
to follow the corporate governance practices of its primary
Listing market. Quilter is, however, mindful of the provisions
of the King IV Governance principles and the expectations
of our South African shareholders.
A. Leadership
The role of the Board
The Board of Directors is responsible to shareholders for creating and
delivering sustainable shareholder value through the management
of the Group’s businesses. We determine the objectives and policies
of Quilter with the aim of delivering long-term value, providing overall
strategic direction within a framework of rewards, incentives and
controls. We seek to ensure that management strikes an appropriate
balance between promoting long-term growth and delivering on
short-term objectives. The Board’s role in fostering the highest
Quilter Board and Board Committees
standards of corporate governance at Quilter is key to us meeting
these wider responsibilities. We lead by example to ensure that good
standards of behaviour permeate throughout all levels of Quilter.
Quilter’s corporate governance framework
Although our corporate governance framework is relatively new, we
believe that it is effective in embedding the right culture, values and
standards throughout the Group and we continue to work to embed
it further for that purpose.
The Board is responsible for ensuring that management maintains
a system of internal control, which provides assurance of effective
and efficient operations, internal financial controls and compliance
with laws and regulations. In carrying out this responsibility, we have
regard to what is appropriate for Quilter’s customers, business and
reputation, the materiality of the financial and other risks inherent
in the business and the relative costs and benefits of implementing
specific controls.
The Board is also the decision making body for all matters of such
importance as to be of significance to Quilter as a whole because of
their strategic, financial or reputational implications or consequences.
A summary of the matters that are reserved for the Board’s decision,
which includes Board appointments, Quilter’s strategy, financial
statements, capital expenditure and any major acquisitions, mergers
or disposals, can be found at quilter.com/corporategovernance.
Board governance framework
The Board has delegated some of its responsibilities, under
the authority contained in our Articles of Association, to five
Board Committees which comprise the Board Audit Committee,
Board Corporate Governance and Nominations Committee,
Board IT Committee, Board Remuneration Committee and
Board Risk Committee. Each Committee has specific responsibilities
delegated to it by the Board recorded in their Terms of Reference
which have been approved by the Board and can be found at
quilter.com/corporategovernance. Further information on the
role of each Committee, their composition and their activities
during the year can be found in this report.
From time to time the Board establishes additional ad hoc Board
Committees to consider specific matters. An example of this can be
found on page 47 where we describe the work of the Day 1 Balance
Sheet Committee.
Quilter plc Board
Responsible for promoting the long-term sustainable success of the Company,
generating value for shareholders and contributing to wider society
Board Audit
Committee
Examines and challenges
Quilter’s financial
statements and oversees
the management of
internal controls and the
work of our internal and
external auditors
Board Corporate
Governance and
Nominations
Committee
Oversees Board and
executive succession
planning. Has oversight of
corporate governance and
responsible business
activities
48
Board IT Committee
Oversees Quilter’s IT
estate and the
identification and
management of any
significant IT risks and
major IT change projects
Board Remuneration
Committee
Sets overarching
principles for
remuneration across
Quilter and approves
individual remuneration
for senior executives
Board Risk
Committee
Oversees Quilter’s
risk profile and
recommends our risk
appetite to the Board
Quilter Annual Report 2018 Roles on the Board
It is a principle of UK company law that Executive and Non-executive
Directors all have the same duties and are subject to the same
constraints. However, in line with the requirements of the Code,
there is a clear division of responsibilities at the head of Quilter
between the running of the Board and executive responsibility
for managing Quilter’s business.
Our Chairman is responsible for the leadership of the Board and
managing the business of the Board through setting its agenda
and taking full account of the issues and concerns of Board
members. Our Chief Executive Officer is responsible for the
day-to-day running of our business and the leadership of his
Group Executive Committee. Further information on the Group
Executive Committee can be found on pages 42 and 43.
In early 2018 we undertook an exercise by which we agreed and
documented the accountabilities, expectations and competencies
required of each role on the Board. This includes the responsibilities
of the Directors as a whole, and role profiles of the Chairman, the
Senior Independent Director, Committee Chairs, Non-executive
Directors and Executive Directors. Performance will be assessed in
our annual Board effectiveness review against these expectations.
The Board Corporate Governance and Nominations Committee will
review the Board Charter annually to ensure it remains relevant and
up to date. The Board Charter is published on our website at
quilter.com/corporategovernance to ensure complete
transparency of the standards we set for ourselves.
B. Effectiveness
Board composition
The Board is made up of a majority of independent Non-executive
Directors and currently comprises the Chairman, who was
independent on appointment, two Executive Directors and eight
independent Non-executive Directors. The independence of each
Non-executive Director is assessed on an annual basis against the
criteria set out in the Code. Through our Board effectiveness review,
performance against the behaviours set out in the Board Charter will
also be assessed.
Board skills
Capital management
Financial reporting
Risk management
and internal controls
Remuneration
Corporate Finance
Strategy
IT/Digital
Wealth distribution
Investment management
Governance
Non-executive Director
Chair or Committee Chair
Senior experience
in a major FTSE
0
2
4
6
8
10
12
The Board Corporate Governance and Nominations Committee
is responsible for overseeing the composition of the Board and
its Committees and ensuring that it is an appropriate size and that
there is an appropriate balance of diversity in skills, experience,
independence and knowledge. Biographies containing details of
Directors’ relevant skills and experience, Committee membership
and other principal appointments are set out on pages 40 and 41.
Geographical experience
With the exception of our Chief Executive Officer, the Board has been
entirely refreshed over the past two years in order to ensure the
presence of the knowledge, skills and experience required to, firstly,
see Quilter through Managed Separation and Listing, and now to
ensure that we make a success of being a standalone listed company,
delivering the strategy and growth targets that we have debated and
agreed as a Board.
Global
United States of America
United Kingdom
South Africa
0
2
4
6
Governance | Our approach to governance
49
Quilter Annual Report 2018 Governance | Our approach to governance continued
The Board is currently undertaking an independently facilitated
evaluation covering the 15-month period from 1 January 2018.
This is described in more detail on page 45. We intend to undertake
an annual assessment of the Board’s performance and that of its
Committees and individual Directors.
Service contracts for the Executive Directors and appointment
letters for the Chairman and Non-executive Directors are available
for inspection at our registered office.
Board induction
All Directors receive a full, tailored induction upon joining the Board,
which is designed to enable them to quickly understand Quilter
and each of our component businesses, including our opportunities,
challenges and risks. Inductions are usually completed within the
first few months of joining the Board, after which new Directors are
in a position to contribute to key strategic and oversight discussions.
Ruth Markland, Paul Matthews and Suresh Kana all received
inductions upon joining the Board in 2018. These included meetings
with members of the Quilter Executive Committee and the
Company Secretary.
Board training and development
We recognise that we all have development needs and that we
operate in a fast-moving business whereby the market, risk, legal
and regulatory environments evolve on a continuous basis. Directors
are therefore regularly provided with opportunities to undertake
training or development. As part of Directors’ annual performance
reviews the Chairman discusses any particular development needs
that can be met either through formal training or meeting with
a particular senior executive.
The Chairman and Company Secretary have organised formal
training events during the year, covering both Board and Board
Committee training requirements, to ensure that our insight into
Quilter’s businesses and awareness of the external environment
in which we operate continues after our formal induction schedules
have been completed.
During 2018, Directors attended briefings on the following subjects:
• Financial risk;
• The UK Platform Transformation Programme;
• Advances in technology;
• Cyber security;
• Internal Capital Allocation Assessment Process; and
• Listing responsibilities.
These briefings were supplemented by written materials.
Information provided to the Board
The Chairman is responsible, as set out in the Board Charter,
for ensuring that members of the Board receive accurate, timely
and high quality supporting information. This covers the Company’s
performance to enable us to take sound decisions, monitor
effectively and provide advice to promote the success of the
Company. Working in collaboration with the Chairman, the Company
Secretary is responsible for ensuring good governance and consults
Directors to ensure that good information flows exist and that the
Board receives the information it requires to be effective.
50 Quilter Annual Report 2018
Conflicts of interest
In accordance with the Companies Act 2006 and the Company’s
Articles of Association, the Board may authorise conflicts of interest.
Directors are required to declare any potential or actual conflicts
of interest that could interfere with their ability to act in the best
interests of Quilter. The Company Secretary maintains a conflicts
register which is reviewed by the Board and the Board Corporate
Governance and Nominations Committee.
In accordance with the new recommendation of the 2018 UK
Corporate Governance Code, the Board Corporate Governance
and Nominations Committee is required to pre-approve any new
external appointments that a Director wishes to adopt. Accordingly
the Board Corporate Governance and Nominations Committee
has agreed formal principles governing the approval of new
external appointments, taking account of legal, regulatory
and best practice requirements.
C. Accountability
Risk management and internal control
The Directors are responsible for ensuring that management
maintains an effective system of risk management and internal
control and for assessing its effectiveness. Such a system is designed
to identify, evaluate and manage, rather than eliminate, the risk
of failure to achieve business objectives and can only provide
reasonable and not absolute assurance against material
misstatement or loss.
Quilter is committed to operating within a strong system of internal
control that enables business to be transacted and risk taken without
exposing itself to unacceptable potential losses or reputational
damage. The Quilter Group Governance Manual sets out the Group’s
approach to internal governance and establishes the mechanisms
and processes by which management implements the strategy
set by the Board to direct the organisation, through setting the
tone and expectations from the top, delegating its authority and
assessing compliance.
Quilter’s principles of internal control are to maintain:
• clearly defined delegated authorities;
• clearly defined lines of responsibility;
• robust recording and reporting of transactions to support
the financial statements;
• financial reporting controls procedures and systems which
are regularly reviewed;
• protection of assets; and
• financial crime prevention and detection.
The Enterprise Risk Management Framework aims to align strategy,
capital, processes, people, technology and knowledge in order
to evaluate and manage business opportunities and threats in a
structured, disciplined manner. The principal risks are set out on
pages 33 to 36.
D. Remuneration
The Board has delegated responsibility for the consideration and
approval of the remuneration arrangements for the Chairman,
Executive Directors and other senior executives to the Board
Remuneration Committee. Fees paid to the Non-executive Directors
are considered annually by the Board as a whole, with Non-executive
Directors not participating. Information on the activities of the Board
Remuneration Committee in 2018 can be found in the Remuneration
Report on pages 64 to 85, which forms part of the corporate
governance report.
E. Relations with shareholders
The Board is committed to ensuring effective engagement with, and
encourages participation from, both our shareholders and our wider
stakeholders. We have in place a comprehensive Investor Relations
engagement programme with our investors. More information on
how we do this and our activities in 2018 is set out below. Details
of our private shareholder relations engagement are outlined below
and our approach to wider stakeholder engagement can be found
in the Responsible business section.
In the lead up to, and in the period after Listing, our Executive
Directors and senior management conducted nearly 300 meetings
with 200 institutional shareholders in London, Johannesburg, Cape
Town, Paris, Frankfurt, Amsterdam, Rotterdam, Zurich, Geneva, and
New York. This was in addition to the two Showcase events prior to
Listing held to present the Quilter investment case to prospective
investors. Meetings focused on Quilter’s growth profile and the
expansion of our advice and investment management businesses,
progress with the UK Platform Transformation Programme, revenue
margin trends, management of our cost base, operating leverage,
uses of cash and capital, the broader industry’s growth outlook,
and the impact of regulation and politics.
The Board regularly receives feedback on shareholder sentiment
and sell-side analysts’ views of the Group and the wider industry.
In January 2019, the Chairman met with our largest shareholders
during a roadshow in Johannesburg and Cape Town. The Chairman
welcomed the opportunity to listen to those shareholders in Quilter
and hear their views on corporate governance and related matters.
The Investor Relations team and management have frequent
contact with the nine equity research analysts who follow Quilter,
and regularly conduct presentations with the sales desks at
their institutions.
The Board Audit Committee regularly reviews the system of internal
control on behalf of the Board. The Board Risk Committee oversees
the risk management framework. In addition, the Board Audit
Committee receives regular reports from management, Internal
Audit and the Finance, Compliance and Legal functions covering,
in particular, financial controls, compliance and other operational
controls. Throughout the year ended 31 December 2018 and to date,
the Group has operated a system of internal control that provides
reasonable assurance of effective operations covering all controls,
including financial and operational controls and compliance with laws
and regulations. Processes are in place for identifying, evaluating and
managing the principal risks facing the Group in accordance with the
‘Guidance on Risk Management, Internal Control and Related Financial
and Business Reporting’ published by the Financial Reporting Council.
Internal control over financial reporting
Management is also responsible for establishing and maintaining
adequate internal control over financial reporting. Internal control
over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the
preparation of financial statements for external reporting purposes
in accordance with International Financial Reporting Standards
(“IFRS”) as adopted by the European Union and issued by the
International Accounting Standards Board (“IASB”). Internal control
over financial reporting includes policies and procedures that pertain
to the maintenance of records that, in reasonable detail, accurately
and fairly reflect transactions and dispositions of assets; provide
reasonable assurances that transactions are recorded as necessary
to permit the preparation of financial statements in accordance
with IFRS and that receipts and expenditures are being made only
in accordance with authorisations of management and the respective
Directors; and provide reasonable assurance regarding prevention
or timely detection of unauthorised acquisition, use or disposition of
assets that could have a material effect on the financial statements.
Assurance that these controls are adequate and operating effectively
is obtained through monthly control self assessments and regular
independent assurance activity undertaken by first line management
and Internal Audit respectively. Conclusions are reported to the Board
Audit Committee which examines the conclusions and provides
further challenge. Finally, the Board scrutinises and approves
results announcements and the Annual Report, and ensures that
appropriate disclosures have been made. This governance process
ensures that both management and the Board are given sufficient
opportunity to debate and challenge the Group’s financial statements
and other significant disclosures before they are made public.
Management has assessed the internal controls over financial
reporting as of 31 December 2018 and concluded that, based on
its assessment, the internal controls over financial reporting were
effective as of 31 December 2018. The Board Audit Committee has
reviewed these assessments as part of its review of the internal
controls over financial reporting. The Chair of the Board Audit
Committee reports on the review of controls over financial reporting
on page 57.
Governance | Our approach to governance
Quilter Annual Report 2018
51
Governance
Board Corporate Governance
and Nominations Committee report
Dear Shareholder,
The Quilter Board Corporate Governance and Nominations
Committee has three key responsibilities:
A nominations role, as set out in the UK Corporate Governance
Code, which focuses on the processes for establishing and
maintaining a Board that is fit for purpose for a public company
and the promotion of the long-term sustainable success of the
Company in the interests of all its stakeholders;
A governance role, to establish and maintain a robust corporate
governance framework, including standards and practices,
both for the Company and its main subsidiaries; and
A responsible business role, overseeing the development and
delivery of the Quilter responsible business agenda.
I received strong support in discharging these roles during the year
from Cathy Turner and the Committee was further strengthened by
the appointment of Ruth Markland, our Senior Independent Director
who brings deep experience of UK corporate governance, and Suresh
Kana who brings a wealth of knowledge of corporate governance in
the South African market.
The Committee discharged the functions described above, as follows.
Nominations
• identifying and monitoring the skills, experience and knowledge
required for appointment to the Quilter Board. The Committee
oversaw the profiles used to identify and assess the candidates for
each Board appointment and at the end of the year the Committee
analysed the Board’s skills mix against our ongoing requirements
to determine whether our Board is sufficiently strong in the relevant
areas or whether additional skills are needed;
• overseeing the process followed for each appointment. This
included assessing the rigour of the search process, the use of
external search firms, the development of a strong and diverse pool
of candidates and assessment of the identified candidates against
the search profile and consideration of their independence and
any potential conflicts of interest. We used Egon Zehnder in the UK
and Spencer Stuart in South Africa as our external search agents.
Neither Quilter nor any of its Directors have any relationship with
Spencer Stuart in South Africa. Egon Zehnder have previously
provided recruitment and executive assessment support and
in 2017 conducted a limited scope Board effectiveness review;
• overseeing the Director induction process to ensure that new
Directors are able to rapidly make a strong contribution to the
work of the Board. A comprehensive induction plan has been agreed
that all Directors complete as a minimum but additional activities
are organised according to the needs and interests of each Director;
• evaluating potential Executive Director succession candidates and
being closely involved in the Chief Financial Officer succession
planning process that resulted in a recommendation to the Board
of the appointment of Mark Satchel as Chief Financial Officer with
effect from 13 March 2019. The Committee has also overseen
Glyn Jones
Chairman
The table below shows the members of the Committee and
their attendance at the Committee’s meetings during 2018:
Membership of the Committee
Glyn Jones
Suresh Kana (appointed 08/08/18)
Ruth Markland (appointed 25/06/18)
Cathy Turner
Bruce Hemphill (resigned 19/04/18)
Committee activity
Scheduled
Committee
meetings
Ad hoc
meetings
3/3
1/1
2/2
3/3
1/1
Managed Separation
and Listing
Board Effectiveness
Succession Planning
Legal and Regulatory
Requirements
Responsible Business
1/1
N/A
1/1
1/1
1/1
42%
14%
24%
11%
9%
52
Quilter Annual Report 2018
the process utilised for the recruitment of other new members
of the Executive Committee; and
• reviewing the succession arrangements for Non-executive Directors.
This has been addressed in the first quarter of 2019 when the
Committee agreed the emergency succession plans for the Chair
role and the Chairs of each Board Committee should the need arise.
Governance
• adopting a Board Charter that sets out the roles and responsibilities
of all those on the Board and the exemplar behaviours expected.
You can find a copy of our Board Charter on the Quilter website at
quilter.com/corporategovernance;
• developing and approving the Quilter Group Governance Manual
that sets out the Quilter corporate governance framework,
as appropriate for a standalone listed company. A fuller
description of the Group Governance Manual can be found
at quilter.com/corporategovernance;
• developing and approving a Subsidiary Governance Manual that
sets out the minimum standards required of the Quilter subsidiary
boards and overseeing the recruitment of Independent
Non-executive Directors to those boards. Those appointments
were effected using selection processes that were aligned to
those used for similar appointments to the Quilter Board;
• assessing the Quilter corporate governance framework to confirm
that Quilter has been compliant with the UK Corporate Governance
Code from its Listing on 25 June 2018;
• considering any potential conflicts of interest that have arisen
during the year and agreeing the process by which those potential
conflicts have been managed and mitigated;
• agreeing the process and scope of a Board and Committee
effectiveness review and selecting Professor Rob Goffee to facilitate
the review which is currently being conducted; and
• reviewing and approving the action plan to ensure that Quilter will
comply with the 2018 UK Corporate Governance Code that applies
to all premium listed companies for accounting periods beginning
on or after 1 January 2019. This work included ensuring that Quilter
would be ready to comply with the new reporting requirements
relating to Section 172 Companies Act 2006 on Director’s duties.
Responsible business
• endorsing Quilter’s approach to responsible business and
approving the responsible business strategy that is primarily
delivered by the “Shared Prosperity Plan”; and
• reviewing and approving the disclosures on responsible business
in this Annual Report.
Shareholder engagement
The Chairman has met regularly with shareholders on a range of
topics, including briefing them on Quilter’s approach to corporate
governance and hearing their views. This has included discussions on
how shareholders would wish to engage with the Chairs of the Quilter
Board Committees as recommended by the 2018 Corporate
Governance Code.
More information on our engagement with shareholders can
be found on page 51.
Subsidiary governance
Quilter has implemented a subsidiary corporate governance
framework that sets minimum governance standards for all
Quilter subsidiaries. In addition to increasing the independent
representation on major subsidiary boards, going beyond what
is required either by law or by regulation, the framework also
requires strong linkages between the Quilter Board and its
subsidiary Boards. One Non-executive Director from the Quilter
Board sits on each of the major subsidiary boards to encourage
communication between the Group and subsidiaries. This additional
governance provides comfort that all of our businesses are governed
to a consistently high standard and supplements the work of the
Quilter Board.
Diversity
We believe that diversity brings benefits for our customers,
our business and our people. The Quilter Board has set a target
of having a minimum gender diversity target of 33% which is
in line with the Hampton-Alexander Review recommendations.
I am pleased that the current Quilter Board meets and exceeds
that target, with a gender split of 36% female and 64% male,
as at 31 December 2018, and in particular that four of our
five Board Committees are chaired by women and our Senior
Independent Director role is also held by a woman. We have
more to do to increase the number of women in senior
leadership roles below Board level. More broadly, we believe
that all colleagues should have the opportunity to reach their
full potential regardless of their age, gender, ethnicity, disability,
religion, sexual orientation, educational, social or cultural
background. We have published our Inclusion and Diversity
Statement on our website at quilter.com. In recruitment,
Quilter has adopted a diverse short list policy which means
that we will strive to ensure that all short lists have different
genders or ethnicities represented. We are also targeting new
recruitment channels which will attract diverse talent. Please
see further details on pages 13 and 14.
Glyn Jones
Chairman
Governance | Board Corporate Governance and Nominations Committee report
53
Quilter Annual Report 2018 Board Audit Committee report
George Reid
Chair of the Board
Audit Committee
The table below shows the Committee membership and
members’ attendance at meetings in 2018:
Membership of the Committee
George Reid (Chair)
Rosie Harris
Ruth Markland (appointed 25/06/2018)
Suresh Kana (appointed 08/08/2018)
Ingrid Johnson (resigned 19/04/2018)
Committee activity
Scheduled
Committee
meetings
Ad hoc
meetings
9/9
9/9
4/5
3/3
1/3
Integrity of the Financial
Statements
Internal Controls
Internal and External
Auditors
Managed Separation/
Listing
1/1
1/1
N/A
N/A
0/1
38%
13%
33%
16%
Dear Shareholder,
I am pleased to have this opportunity to set out how the Board
Audit Committee has undertaken its duties for the year ended
31 December 2018. Throughout the year the Committee has focused
clearly on its key responsibilities of assisting the Board in monitoring
the Group’s control environment, providing robust governance over
the Group’s financial reporting and challenging the judgements made
by management and the estimates and assumptions on which they
are based, whilst ensuring appropriate disclosures.
A major role for the Committee in the final months of 2017 and early
in 2018, related to the Managed Separation of our business from
Old Mutual plc and its Listing on the London and Johannesburg
Stock Exchanges.
As part of the preparations for Listing, the Committee agreed the
Basis of Preparation and the Accounting Policies that would be
applied for Quilter as a standalone listed company, and reviewed the
financial information (including the Historical Financial Information),
the Reporting Accountant’s Opinion, the Operating and Financial
Review and the Proforma Statement and Statement of Capitalisation
and Indebtedness included within the Prospectus and other
documents relating to the Listing of the business. The Committee’s
overriding objective in this work was to ensure that these important
documents were compliant with the relevant reporting requirements,
fair, balanced and understandable, recognising the complexity
of the information provided. This thorough process ensured that
the Committee could confidently recommend these important
disclosures for inclusion in the Quilter Prospectus.
Post Listing, the Committee oversaw the issue of Quilter’s first
Interim Results as a standalone listed company and the preparations
for the production of Quilter’s first Annual Report and Accounts.
During the year the Committee also:
• received regular reports from internal audit and external audit
covering all aspects of their respective work;
• received reports on compliance with the Financial Conduct
Authority’s Client Assets Sourcebook (“CASS”) rules in the Group’s
permissioned regulated subsidiaries;
• reviewed the Solvency and Financial Condition Reports relating
to the Old Mutual Wealth businesses for inclusion in the wider
reporting of the Old Mutual Group;
• monitored the Group’s whistleblowing procedures and results; and
• considered the possibility of tendering the external audit of Quilter plc.
There is further information on how the Committee has discharged its
role in the coming pages. Our report to you is structured in four parts:
• Governance;
• Report on activities for the year;
• External Audit; and
• Internal Audit.
54
George Reid
Chair of the Board Audit Committee
GovernanceQuilter Annual Report 2018
Governance
Report on activities for the year
Since the Listing of the Company in June 2018, the Committee has
comprised independent Non-executive Directors. Set out above are
tables showing the composition of the Committee and the members’
attendance at meetings. During the year, I was delighted to welcome
Ruth Markland and Suresh Kana as members of the Committee in
June and August 2018 respectively.
I would draw your attention to the biographical information on each
member set out on pages 40 to 41. You will see that the Committee
Chairman and other Committee members have recent and relevant
financial experience and the Committee as a whole has competence
relevant to the business sectors that Quilter operates within. The Terms
of Reference of the Board Audit Committee can be found on the Quilter
website at quilter.com/corporategovernance.
In some of the Committee’s areas of responsibility, including the
oversight of the UK Platform Transformation Programme and the
approval of the internal audit plan, the Committee has worked
collaboratively and effectively with other Board Committees,
particularly the Board IT Committee and the Board Risk Committee.
The Committee holds regular private sessions with the leadership
of both the internal and external auditors. The Committee Chair
also meets separately and regularly with the Chief Internal Auditor
and the KPMG lead audit partner.
The following section shows, in summary, how the Committee has
spent its time for the year ended 31 December 2018.
Glyn Jones, Chairman of Quilter, has mentioned elsewhere that
we are in the process of conducting a Board effectiveness review.
The Board Audit Committee will be part of that review with specific
feedback being sought from those who serve on the Committee,
other Board members and other key contributors on how effectively
the Committee has discharged its responsibilities. Any issues raised
by the review will of course be acted on, and I will report further
on this review in our 2019 Annual Report.
The Committee agreed at the start of 2018 its forward agenda
of business for the year. That rolling agenda comprises recurring
business, cyclical business and other business. As recurring business
the Committee reviews and discusses:
• updates from the finance team on significant financial reporting
matters and accounting policies;
• updates on significant accounting judgements and estimates
that will impact the financial statements;
• updates on the status of the internal controls over financial
reporting;
• findings from internal audit reports and how quickly audit findings
are being resolved by management;
• regular updates and refreshes of the internal audit plan;
• reports from the Chairs of the subsidiary audit committees;
• updates on the work of the external auditors including approval
of KPMG’s engagement letters, annual audit plans and
representation letters; and
• details of non-audit services requested of the external auditors
in accordance with the non-audit services policy.
Cyclical items reviewed by the Committee include:
• reports on compliance with The Financial Conduct Authority
CASS rules across the Group;
• reports on the Group’s whistleblowing arrangements and details
of how any whistleblowing incidents have been resolved; and
• Solvency II and other prudential reporting.
Details of work conducted in 2018
In addition to the work relating to the Managed Separation and
Listing of Quilter plc described above, the Committee also focused
on the following areas of work.
Financial reporting
Quilter’s accounts are prepared in accordance with International
Financial Reporting Standards. Certain Alternative Performance
Measures (“APMs”) are used to add insight for our shareholders on
the performance of the business, aligned with how the business
is managed. The use of APMs has been an area of close attention
for the Committee, as discussed later in this section.
The Committee has reviewed the Accounting Policies and
confirmed that they are appropriate to be used for the 2018 Quilter
financial statements. Detailed discussions have been held at Board
Audit Committee meetings on the adoption of IFRS 9 (financial
instruments), IFRS 15 (revenue recognition) and IFRS 16 (leases)
as well as a preliminary discussion of IFRS 17 (insurance contracts).
Governance | Board Audit Committee report
55
Quilter Annual Report 2018 Governance | Board Audit Committee report continued
The Committee has also reviewed the basis of accounting, the
appropriateness of adopting the going concern basis of preparation
of the Group’s financial statements and the Group’s viability
statement. In doing so, the Committee considered:
• the Group’s three-year Business Plan which includes consideration
The form of the viability statement and period covered by the
statement were considered by the Committee. The Committee was
satisfied with the content of the viability statement and supported
the time period of the statement which aligns with the three-year
internal financial planning cycle.
of the economic, regulatory, competitive and risk environment;
• the latest Group own risk and solvency statement, and internal
capital adequacy assessment process, which cover current
and future risk profile and solvency positions based on a series
of core assumptions, stress tests and scenario analysis; and
• the work performed for the Day 1 balance sheet of the business
ahead of Listing and the Working Capital Report.
The Committee reviewed and challenged the Interim Results for
2018 and the Annual Report and Accounts for 2018. The Committee’s
reviews were supported by analysis and discussion provided by
the finance and actuarial teams, reports from the second line
on the solvency position and the reports of the external auditors.
Having considered these inputs and the Committee’s own
independent judgements, the Committee recommended to
the Board the approval of each of these financial statements.
Accounting judgements and estimates
The Board Audit Committee has received good support from the Quilter finance team which has enabled it to consider in advance of the end
of each reporting period the approach that it would wish to take on the key areas of judgement and estimates that impact the financial results.
Key judgements and estimates deliberated by the Committee during 2018 included the treatment of:
Areas of focus
Issue/role of the Committee
Group accounting including the impact
of acquisitions and disposals
Sale of the Single Strategy business
Goodwill and intangibles
Provisions and contingent liabilities,
including voluntary customer
redress
Deferred tax assets
Valuation of level 3 financial investments
Classification and valuation of long-term
business insurance policy holder liabilities
The Committee considered and challenged the complex impacts on the financial statements
of Managed Separation from Old Mutual plc and the treatment of other acquisitions and
disposals (including the sale of the Single Strategy asset management business referred
to below). In addition, the Committee has reviewed the appropriateness of accounting for
structured entities, including investment funds.
The Committee reviewed the accounting and disclosure of the sale of the Single Strategy
asset management business, which was disclosed in our 2017 financial statements as
Held for Sale, with the sale completing and being recognised in our financial statements
in 2018. The Committee has considered carefully the costs of the transaction, warranties
provided and the costs associated with the build out of the Quilter Investors business
following the sale, including the estimates of future costs.
Goodwill and intangibles were reviewed in detail to ensure that the amounts recorded in our
balance sheet are well supported and based on thorough analysis and testing of the models
and assumptions utilised. We considered the sensitivity of the goodwill calculation to various
different assumptions. We also examined and agreed the impact on goodwill and intangibles
of the sale of the single strategy asset management business.
The assessment and approval of the provisions taken for voluntary customer redress
and other provisions were regularly considered by the Committee, as work progressed,
ensuring compliance with International Accounting Standard 37. This work involved
a number of judgements which were carefully tested.
The Committee has reviewed the approach to the recognition of deferred tax assets,
challenging management’s assumptions and considering compliance with International
Accounting Standard 12 on income taxes.
The level 3 financial assets disclosed in our financial statements chiefly relate to policyholder
funds in our life company subsidiaries where there is a matching investment contract
liability. These assets can be difficult to value and the Committee has taken an appropriately
sceptical approach in reviewing such valuations, whilst encouraging management’s efforts
to enhance procedures to minimise the valuation risks.
This judgemental and technical area has been reviewed by the Committee supported by
reports from the Group’s Chief Actuary. The Committee challenged the Group’s compliance
with the relevant Technical Actuarial Standards. The Committee has monitored the
enhancement of the processes that support the assumptions and methodology that
underpins the calculation of these liabilities. The Committee also paid particular attention
to areas of possible optimism and caution within the valuation, and concluded that the
valuation is appropriate.
In addition, the key performance indicators to be included in the Operating and Financial Review were approved by the Committee and the
Committee is content that they were appropriately disclosed. The Committee also reviewed the level of disclosures around the risks and
uncertainties of the UK leaving the EU and the potential implications to the business and customers and were satisfied that these were
appropriate. Many of the above key areas of judgement and estimates for the Committee are also commented on by KPMG in their Audit
Report on pages 89 to 95. The Committee has reviewed carefully the contents of KPMG’s opinion and considers that KPMG’s views on
these areas are aligned with those of the Committee.
56
Quilter Annual Report 2018 Alternative performance measures
A key area of discussion during the year has been consideration
of the use of APMs to ensure that shareholders and other
stakeholders have a clear understanding of the underlying
performance of the business and can also see clearly the financial
performance and financial position of the business on a statutory
reporting basis. The Committee has challenged management to
provide clarity for readers of our financial statements on the core
IFRS financial statements whilst enabling shareholders to understand
the items that are excluded when APMs are used and why those
exclusions are helpful in understanding the underlying performance
of the business. See pages 204 and 205.
CASS reporting
In addition to reviewing the CASS Reports produced by the
external auditors, the Committee has reviewed the programmes
of work under way in each of the regulated businesses to maintain
appropriate CASS controls. This has extended to ensuring that
the business’ CASS arrangements are well prepared for the
impact of new developments such as the sale of the single
strategy asset management business and our UK Platform
Transformation Programme.
Whistleblowing
The Chair of the Board Audit Committee is the Whistleblowing
Champion for Quilter. The Committee has reviewed the whistleblowing
processes in place across the Group, assessing their effectiveness
and benchmarking the level of whistleblowing against global data
from the provider of our confidential whistleblowing reporting
line. It is important that whistleblowing arrangements are not only
effective in practice but are seen by all staff as being fair, rigorous
and effective in resolving concerns. The Committee has challenged
management to continue to enhance how our whistleblowing
arrangements are communicated to our staff.
Fair, balanced and understandable
There has been a comprehensive review process to support the
Board in reaching its conclusion that the 2018 Annual Report is fair,
balanced and understandable and whether it provides the necessary
information for shareholders to assess the Group’s performance,
business model and strategy.
The process which enabled the Committee to reach this conclusion
included:
• the production of the 2018 Annual Report and Accounts, managed
closely by the Chief Financial Officer, with overall governance
and co-ordination provided by a cross-functional team of senior
management;
• cross-functional support to drafting the 2018 Annual Report
and Accounts which included input from Finance, Risk, Investor
Relations, Corporate Secretariat, HR and wider business leaders;
• a robust review process of inputs into the 2018 Annual Report
and Accounts by all contributors, to ensure disclosures were
balanced, accurate and verified, with further comprehensive
reviews by senior management;
• a review by the Company Secretary of all Board and Board
Committee minutes to ensure all material matters considered
at Board level meetings have been disclosed in the 2018 Annual
Report and Accounts;
• a specific management paper detailing the 2018 year-end
assessment of fair, balanced and understandable;
• a formal review by the Board Audit Committee of the draft 2018
Annual Report and Accounts in advance of final sign-off; and
• a final review by the Quilter Board of Directors.
Having carefully reviewed and considered all relevant information,
the Committee is satisfied that, taken as a whole, the 2018 Annual
Report and Accounts are fair, balanced and understandable and has
confirmed that to the Quilter Board. This process was also undertaken
in respect of the Group’s 2018 Interim Results to ensure that, taken
as a whole, based on the information supplied to it and challenged
by the Committee, they were fair, balanced and understandable,
and the Committee advised the Board to that effect.
Controls over financial reporting
A key challenge for the business ahead of Listing was to report its
own and the financial results of its principal subsidiaries to a much
earlier timetable than had previously been required. This required
investments to be made in our people and enhanced processes in
certain business locations, particularly our International business.
The Committee has scrutinised the internal financial controls and
governance framework that underpins our financial reporting and
has determined areas where efficiency and overall effectiveness
may be further enhanced. We have been overseeing progress on
delivering those further enhancements and we are content with the
clear progress made to date. We expect further progress in 2019.
As part of the process to review and challenge the 2018 financial
statements, the Committee again considered the processes and
controls in place to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of the financial
statements. I have reported to the Board on this area.
Governance | Board Audit Committee report
57
Quilter Annual Report 2018 Governance | Board Audit Committee report continued
External audit
It is crucial that Quilter benefits from a robust, high quality external
audit conducted by an independent and professional audit firm.
To this end, the Committee has received regular and detailed
reports from our external auditors throughout the period, covering
all aspects of their work. We have also assessed management’s
response to KPMG’s internal control findings. In advance of each
Board Audit Committee meeting, I, as Chair of the Board Audit
Committee, meet separately with KPMG’s lead audit partner,
Jon Mills, to ensure the discussions at our Committee meetings
are appropriately focused, challenging the conclusions reached by
management as well as the audit work performed thereon. Jon Mills
has been the audit partner for Quilter plc and its predecessor group,
Old Mutual Wealth, since the year ended 31 December 2016.
Therefore, 2018 is his third year in this role.
In addition to receiving KPMG’s regular confirmations of their
independence, we have received quarterly reports from management
on the level of audit and non-audit fees paid to KPMG. The level of
non-audit fees paid to KPMG in 2018 (see chart below) at £2.3 million
is above our policy guidance of 25% of the audit and audit-related
fee which totalled £4.5 million. The Committee is satisfied that this is
appropriate and justified given that 71% of the non-audit fees related
to the work KPMG conducted in relation to the Listing of Quilter plc.
This is work that is almost always conducted by the firm’s statutory
auditors given the knowledge and understanding they already
have and the benefits to shareholders of that knowledge and
understanding. KPMG has recently informed us that, as a matter
of policy, they will be restricting the range of non-audit work that
they will perform for their audit clients.
Auditors’ remuneration
Audit fees
Audit-related assurance services
Non-audit fees
Total Group auditors’ remuneration
– continuing operations
Total Group auditors’ remuneration
– discontinued operations
Total Group auditor’s remuneration
2018
£m
2017
£m
3.3
1.2
2.3
6.8
0.1
6.9
2.5
0.5
1.1
4.1
0.8
4.9
KPMG partners and staff have attended all of the meetings of the
Committee in 2018 withdrawing only when their attendance would
be inappropriate, such as when we were discussing conducting
an audit tender. KPMG have contributed strongly to discussions on
the Quilter financial statements, our financial reporting processes
and key accounting and reporting judgements. In the lead up to the
Listing of Quilter, KPMG clearly highlighted areas where management
needed to enhance our financial reporting capabilities, as we moved
from being a subsidiary to being a standalone listed company. In
November 2018 a survey was conducted by our Company Secretary
of management’s assessment of KPMG across a range of criteria
including; independence, objectivity, industry knowledge, efficiency
and, crucially, Audit quality. That survey and the Committee’s own
assessment concluded that KPMG are delivering an effective audit.
A number of areas were highlighted for improvement through this
review, including a need for enhanced planning and bringing to bear
the full value of their industry knowledge. That feedback has been
provided to KPMG.
The Board Audit Committee has monitored closely the recent debate
on the future of the audit industry and will continue to do so. Audit
quality is a theme that the Committee takes very seriously, and as
you would expect, we have discussed with KPMG the 2017/18 report
of the Financial Reporting Council’s Audit Quality Review Team and
the actions that KPMG propose to address its findings. We met
with KPMG’s UK leadership and were reassured that KPMG take
the findings of the report very seriously and are well advanced in
addressing its findings. To ensure clarity of expectations, I have also
met separately with KPMG’s Engagement Quality Control Review
Partner, who provides additional review and challenge to Jon Mills
and his audit team.
The Committee has recommended to the Board that KPMG should
be re-appointed as auditors of Quilter plc at the AGM on 16 May 2019.
That recommendation has been endorsed by the Board.
We have recently announced that Quilter will be conducting an
external audit tender. KPMG has audited the financial statements
of Quilter plc since 2008. Quilter plc, as a newly standalone, listed
company, has not previously put its audit to tender (although
Old Mutual plc last conducted a tender in 2014 when KPMG were
re-appointed) but it is sensible now that we take this opportunity to
assess the external audit support that will be needed as the business
progresses to the next stage in its development. Because of the
length of KPMG’s tenure, together with the fact that KPMG could
only continue as our auditor until 2023 at the latest, the Board Audit
Committee has concluded that KPMG should not be part of the
upcoming audit tender process. The audit tender will be launched
in March 2019 with a view to the selected firm auditing the financial
statements for the year ending 31 December 2020. In the coming
weeks, we will seek the views of shareholders regarding the audit
tender process.
58
Quilter Annual Report 2018 Internal audit
Our shareholders and customers can take comfort that the Quilter
internal audit function is mature, appropriately focused and is
functioning efficiently and effectively. I am delighted that they have
received external recognition of this by being voted the outstanding
team in the financial services sector, at the Audit & Risk Awards of the
Chartered Institute of Internal Auditors (“IIA”).
At the end of 2017 the Committee approved the internal audit plan
that was delivered during 2018. In May 2018 the Committee approved
the Internal Audit Charter that was put in place for the Listing of the
business in June 2018. We approved the minor variations to the plan
made during the year. In December 2018, the Committee approved
a risk-based internal audit plan for 2019 focused on the most critical
areas for the Quilter business, the successful delivery of the UK
Platform Transformation Programme and the strategy development
processes for our business. The Head of Internal Audit has confirmed
that he has the necessary resources to deliver the 2019 internal
audit plan, including having access to third party specialist support
when required.
PwC conducted an External Quality Assessment of the Internal Audit
function in 2017. The assessment concluded that internal audit was
“top quartile” assessed against its peers and identified some areas
for the function to focus on. An updated External Quality Assessment
was conducted in February 2018 which confirmed that the function
conforms to IIA Standards. The Head of Internal Audit attends all
meetings of the Committee and has reported in detail on the work
conducted by Internal Audit including key statistical analysis on the
results of their work, the pace at which management is addressing
any issues raised and the extent to which management has already
identified the issues being raised by internal audit. This is an
important indicator of the maturity of our control framework, and
we track this measure closely. The Committee has regular meetings
with the Chief Internal Auditor without management present,
in accordance with best practice.
The future
The Board Audit Committee has covered a significant amount of work
in 2018. Many of the Committee’s areas of focus will continue into
2019, as the business develops and the Group delivers on its plans
for the future.
Governance | Board Audit Committee report
59
Quilter Annual Report 2018 Board Risk Committee report
Rosie Harris
Chair of the
Board Risk Committee
The table below shows the Committee members and their
attendance at Committee meetings during 2018:
Membership of the Committee
Rosie Harris
Moira Kilcoyne
George Reid
Paul Matthews (appointed 08/08/2018)
Committee activity
Scheduled
Committee
meetings
Ad hoc
meeting
8/8
8/8
8/8
2/2
ORSA/ICAAP
Strategic Risk Appetite
CRO Report
Emerging Risks
Regulatory Change/
Update
Managed Separation/
Listing
1/1
1/1
1/1
N/A
20%
7%
18%
11%
30%
14%
Dear Shareholder,
2018 has been a transformative year for Quilter and I am pleased
to share with you my thoughts on how the Board Risk Committee
has contributed to the Company’s success in 2018 and give you
an indication of the challenges we face as we move forward. The
Company has gone through a period of significant change, including
the Managed Separation from Old Mutual plc, the Listing of our
shares in London and Johannesburg on 25 June 2018 and the
disposal of our Single Strategy asset management business.
Whilst we were on this journey we remained vigilant to the external
environment, where we continue to see a high degree of regulatory
change coupled with political and economic risk given the backdrop
of Brexit and tougher trading conditions in the UK and beyond.
Central to our role is how we hold management to account in
maintaining our ambition of putting the customer at the heart
of what we do in delivering our strategic priorities. The Committee
has played a core role in challenging management to deliver the
programme of voluntary customer remediation following the FCA’s
work on the fair treatment of long-standing customers in the life
insurance sector and will continue to monitor progress.
The Committee’s primary purpose is to:
• consider and recommend to the Board Quilter’s risk appetite;
• review Quilter’s risk profile; and
• commission, receive and consider reports on key financial,
operational and other risk issues.
You can read the full Committee Terms of Reference at
quilter.com/corporategovernance.
The Committee also has joint responsibility with the Board Audit
Committee for the oversight of the effectiveness of the internal
control framework across Quilter and operational risks in respect
of capital and reputation. Further detail on the work performed in
each of these areas is set out below.
I was fortunate to be supported during the year by George Reid
and Moira Kilcoyne, who bring significant experience and diverse
expertise enabling the Committee to identify the risks and challenge
management. In August 2018, the Committee composition was
further strengthened by the appointment of Paul Matthews
who brings complementary business experience. The Directors’
biographies are on pages 40 and 41. You can see how the Committee
is composed and members’ attendance opposite.
The performance of the Committee is being assessed as part of the
Board evaluation process the Chairman describes on page 45 and
I will report on the outcome of that review in the next Annual Report.
60
Rosie Harris
Chair of the Board Risk Committee
GovernanceQuilter Annual Report 2018
Operating in a rapidly changing external environment
Over the year we have also seen an improvement in the horizon
scanning performed to help identify emerging risks and managing
future change, which may impact the Company’s risk profile and
impact on our risk appetite. As part of this activity, the Committee
held a deep dive on the approach to the management of third party
suppliers and we continue to closely monitor progress in this area. In
addition, the Committee has asked management to assess emerging
risks arising as a result of the ongoing Brexit negotiations, and the
possibility of a hard Brexit, and this remains a key area of focus in 2019.
The Committee also asked for updates on the transitional services
arrangements following the sale of our single strategy asset
management business to TA Associates and the build out of our
Quilter Investors business. We made recommendations and were
given comfort around the mitigants that had been put in place to
manage the risks of separation resulting from the disposal of this
business. More broadly, the Committee has heard from management
on their view of top risks, shared our advice with management and
tested their assessments.
As Chair of the Board Risk Committee, I have met with our regulators
as a matter of routine and over the year the Committee has received
regular updates on the delivery of our response to regulatory change,
with the implementation of Markets in Financial Instruments
Directive, General Data Protection Regulation and Senior Managers
Certification Regime for our business. The scale and impact of
these changes, along with the uncertainty due to the ongoing Brexit
discussions, are risks we are very focused on managing. During the
year we have also reviewed customer metrics ahead of submission
to the Board and heard from our Customers Solutions team on their
work to put our customers at the heart of our business.
Looking ahead
The Committee has approved a calendar of business, and during
2019 we will carry out a series of focused deep dives on particular
risk areas. These will include updates from our businesses and
other areas of focus, including customer experience, and will include
reviews by the first line business risk owners as well as the risk team.
This will enable us to examine the risk profile in more depth.
We will also continue to examine the Strategic Risk Appetite Principles
and review top and emerging risks. We will continue to challenge and
analyse the risks from the macroeconomic outlook and conditions in
financial markets, together with geopolitical, legislative and regulatory
change risks that may impact the Group’s businesses, and risks
associated with the implementation of the Group’s strategy.
Report on key issues
Preparation for Listing
The Committee spent a significant amount of time in the first half
of the year ensuring that the Company would be ready for Managed
Separation and Listing. As part of that work, alongside the Board Audit
Committee, we reviewed and challenged the Company’s Day 1 balance
sheet to ensure we had sufficient capital as a standalone legal entity.
We actively engaged with the risk function and management to ensure
we were comfortable with preparations. We approved the stress
scenarios which may impact the Company, to provide comfort that the
Day 1 balance sheet was prudent and our Company would be resilient.
In addition to ensuring the Company’s capital position was appropriate,
an important task for the Committee in preparation for Listing was
reviewing, challenging and recommending to the Board Quilter’s
Strategic Risk Appetite Principles and debating and challenging the
principal risk disclosures in the Prospectus. You can find out more
about the Committee’s role in preparing for Listing on page 47 and
the assessment of our principal risks and uncertainties on pages 32
to 37.
Establishing and embedding a control framework
In line with the three lines of defence model for risk management,
we received a report from the CEO each quarter on his assessment
of key risks for our business and what actions are being taken to
mitigate these. We also received a quarterly report from the Chief Risk
Officer on his opinion of how the identified risks were being managed.
A substantial portion of our time has been spent reviewing reports
in relation to the Group’s own risk and solvency assessment, which is
required by the Prudential Regulation Authority, and internal capital
adequacy assessment process, which is required by the Financial
Conduct Authority, for recommendation to the Board. We have
welcomed and benefited from the challenge of our major subsidiary
boards and their Board Governance, Audit and Risk Committees
which reviewed these reports alongside us. We have further reviewed
the risk and capital profiles across the Group entities to ensure that
these remain appropriate.
We have worked collaboratively with the Board Audit Committee to
ensure that the internal control framework was appropriate for the
organisation and we have reviewed together the risk and regulatory
team’s annual plans and the Group Compliance Monitoring
programme. The Committees also met jointly to oversee the
implementation of the new Quilter policy suite and revisions to the
policy attestation process.
Management have been challenged to set and manage against
appropriate operational risk appetites and the Committee believe
more work is needed to further embed operational risk management
within the business. Where operational risk issues have occurred we
have challenged management to enhance controls and apply the
lessons Quilter wide.
As a matter of routine, we have heard from the risk and internal audit
functions on how they have challenged management’s approach.
Governance | Board Risk Committee report
61
Quilter Annual Report 2018 Board IT Committee report
Moira Kilcoyne
Chair of the
Board IT Committee
The table below shows the Committee members and the
attendance at Committee meetings during 2018:
Membership of the Committee
Moira Kilcoyne
Rosie Harris
George Reid
Committee activity
Scheduled
Committee
meetings
7/7
7/7
7/7
Ad hoc
meetings
2/2
2/2
2/2
Strategic Change
Programmes
Strategy
Cyber, IT and Resilience
Risk
Managed Separation
35%
7%
26%
24%
8%
Dear Shareholder,
2018 has been a busy and exciting year for Quilter and the
Committee has met and carried out its responsibilities during
a year of significant change, as we separated from Old Mutual plc
and became a listed company.
During 2018, the Board IT Committee has been focused on ensuring
that our Group IT strategy is effective for our business. At the heart
of our IT strategy is our desire to protect and serve our customers.
At a time of increasing demands placed on IT, with sophisticated
cyber attacks on companies and genuine and widespread concerns
about data privacy and IT security, our systems need to be resilient
and any enhancements sustainable and appropriate. In my report
below, you can find out more about what we have been doing
to support our goal and how we have challenged, supported
and advised management on a range of IT, cyber security and data
issues. We have been extremely focused on ensuring the resilience
of our current IT systems whilst planning and preparing for our
new business investment platforms. You can read more about
our approach to the important work the Committee is doing on
overseeing the planning and implementation for the new investment
platforms, both standalone and jointly with the Quilter Board,
Board Audit Committee and Board Risk Committee, opposite.
The detailed role of the Committee is set out in the Terms of Reference
which are available at quilter.com/corporategovernance but the
role of the Committee can be summarised as to oversee:
• the Group’s IT estate; and
• the identification and management of any IT matters that pose
a significant risk to the Group, including Information and Data
Security.
Over the year, the Committee has received reports from business
and IT leaders and I have spent time in our London Head Office
and in Southampton, which is one of our main customer centres
and where the majority of our people focused on IT are based,
discussing these critical issues with management. I am heartened
by the diligence and professionalism of the IT professionals I have
met and I am grateful to them for their efforts. I am further grateful
to my fellow Committee members, Rosie Harris and George Reid,
who chair the Board Risk Committee and Board Audit Committee
respectively. Their expertise and experience enables us to identify
and analyse risks, provide guidance and challenge management
effectively. By holding Combined Committee meetings, the Chairman
of the Board and other Non-executive Directors have been able
to scrutinise this important topic efficiently. You can see how the
Committee is composed and members’ attendance in the adjacent
tables. You can also see more about how frequently we met,
and what we focused our time on.
62
Moira Kilcoyne
Chair of the Board IT Committee
GovernanceQuilter Annual Report 2018 Governance in action
UK Platform Transformation Programme
The Committee has been extremely focused during the latter
half of 2018 on ensuring that Quilter’s new investment platform
is delivered well. That level of focus will only increase into 2019
as the programme moves into the delivery phase. Given the
strategic importance to Quilter of the programme, we have met
as a combined Committee to ensure that there is appropriate
oversight and the governance is efficient for management
and the Board. Reporting to the Quilter Board, the Board IT
Committee has led the work in partnership with the Board
Audit Committee and the Board Risk Committee to oversee
the delivery of the UK Platform Transformation Programme.
In March 2018 we also held a workshop with management to
work through in more detail the programme and ensure the
Committee were fully briefed on the key issues.
There is an understandably high degree of scrutiny around the
programme from our investors and regulators and we maintain
an open dialogue with shareholders and regulators regarding
progress. We are working in partnership with FNZ to deliver the
programme and, given the importance of the project to Quilter,
there has been senior engagement between our Board and
their CEO. The Committee has received regular updates from
the programme team on the plan and the timetable. We have
further considered lessons learnt from other investment
platform migrations where appropriate. Quilter is working in
partnership with Deloitte on the programme plan and testing
and the Committee has received direct input and support from
them. The Committee have heard, challenged and advised
as to how the business integration for the new system will be
managed. We have challenged management as to how they will
measure customer impact from these changes.
Quilter Board
Overall oversight
of the Programme
Board IT
Committee
Board Audit
Committee
Board Risk
Committee
• Detailed oversight on
the Programme plan
and implementation
timetable
• Detailed review of the
• Overall
go/no-go criteria
consideration of
the impact of the
Programme on
Quilter’s overall
risk appetite and
risk profile
• Consideration and
assurance around
the operation and
robustness of the
Company’s financial
reporting processes
• Oversight for the
appropriateness of
the protections for
Client Assets
Report on key issues
Set out below are the key issues that the Committee has spent its
time on in 2018.
Development of the IT Strategy
In preparation for the Managed Separation of Quilter from Old Mutual
plc, the Committee has overseen the development by management
of an IT strategy appropriate for Quilter plc as a standalone listed
company with an increasingly integrated business model.
We have received and questioned regular updates from management
on the maturity of the IT function as the function’s target operating
model develops and have been supportive of the enhancements
presented. In particular, we have welcomed the investment in new
talent and expertise in the function that ensures that we are building
sustainable IT solutions. The Committee has had the opportunity to
hear directly from senior business leaders on the risks and challenges
they are managing and how these risks are mitigated. We have set
strategic priorities and challenged management to prioritise their
activities appropriately under a centralised team for greater control
and efficiency.
We are driving simplification through the IT estate, and the Committee
has been pleased with progress on enhancing the resilience of our
existing investment platform. We recognise that there is much more
to do as our legacy systems are complex and they are not as efficient
or cost effective as we would like them to be. Management have
been open in their commitment to invest in the Company’s IT to ensure
that it is appropriate for a business of this scale and complexity, but
it takes time and diligence to address historic issues.
Cyber, information management, IT security
and resilience
We recognise how important it is for our customers’ data to be
maintained securely and, along with the Board Audit Committee
and Board Risk Committee, we have reviewed and questioned new
and enhanced policies in relation to information management and IT
security and have ensured the appropriate focus was given to their
implementation. We have challenged management to develop key
metrics to enable them to baseline performance across the Quilter
wide IT estate with a view to increasing efficiency and ensuring
appropriate standards are implemented Quilter wide. In line with
the Group’s approach to risk management, this base data will enable
us to focus further the Committee’s attention in 2019. Given the
importance of this issue to the whole Quilter Board, in August we
received a briefing on cyber security from a leading external expert in
this area. When necessary we have asked management to implement
enhancements more swiftly and we will continue to monitor the
effectiveness of the solutions implemented during the year.
As a matter of routine we have received, analysed and queried
regular updates from the risk and internal audit teams to hear their
views and to ensure that any thematic issues and lessons learnt can
be applied across all our businesses.
Preparing for Managed Separation and Listing
The Board IT Committee met jointly with the Board Audit and Board
Risk Committee to consider and challenge the risk factors in relation
to IT. You can read more about this on page 47.
Committee effectiveness
The performance of the Committee is being assessed as part of the
Board evaluation process the Chairman describes on page 45 and
I look forward to reporting on what actions we have taken as a result
of that review in the next Annual Report.
Governance | Board IT Committee report
63
Quilter Annual Report 2018 Remuneration report
Annual statement from the Chair of the Board
Remuneration Committee
In preparation for Listing, the
Committee developed a remuneration
policy to align executive reward
with business performance and
the long-term, sustainable success
of the Company, in the best interests
of all stakeholders.
Dear Shareholder,
As Chair of the Board Remuneration Committee (the “Committee”),
I am pleased to present on behalf of the Board the remuneration
report in respect of the year ended 31 December 2018, the Company’s
first financial year-end as a listed company.
This statement and the accompanying report aims to ensure high
levels of disclosure around pay policy and transparency around
remuneration decision making which meet the standards of a
listed company.
The Committee addressed a number of legacy arrangements from
the period prior to Listing, to ensure that Quilter plc had a coherent
and consistent policy from the point of Listing, in accordance with
best practice. The Directors’ Remuneration Policy (the “Policy”)
presented is in line with the principles set out in the IPO Prospectus,
and has been further enhanced to reflect developments in good
corporate governance.
I set out below a summary of the objectives of the Policy, the
performance outcomes in respect of the 2018 financial year,
and how we intend to operate the Policy in 2019.
Role of the Board Remuneration Committee
The Committee’s primary purpose is to exercise competent and
independent judgement on remuneration policies and practices
for the Executive Directors and certain other members
of senior management.
The Committee’s full Terms of Reference may be viewed on
quilter.com/corporategovernance.
Cathy Turner
Chair of the Board
Remuneration
Committee
The table below shows the members and attendees of the
Committee during 2018:
Membership of the Committee
Cathy Turner (Chair)
Glyn Jones
Jon Little
Ruth Markland (appointed 25/06/2018)
Ingrid Johnson (resigned 19/04/2018)
Scheduled
Committee
meetings
Ad hoc
meetings
5/5
5/5
4/5
2/2
1/2
1/1
1/1
1/1
1/1
N/A
The CEO and other senior members of Quilter’s senior management team
may attend by invitation but will not be present when their own remuneration
is discussed. The meetings are also attended by an independent Committee
adviser.
Committee’s time allocation
Group Remuneration
Policy
Specific Remuneration
Arrangements
Remuneration Schemes
Shareholding Policy
Governance
Managed Separation/
Listing
21%
27%
34%
3%
4%
11%
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GovernanceQuilter Annual Report 2018
Remuneration Policy overview
• The proposed Policy, subject to the shareholders’ vote at the 2019
AGM, will become formally effective from the date of the AGM, and
is intended to remain in effect for three years.
• Underpinning the Policy, the Committee’s objective is to ensure
remuneration encourages, reinforces and rewards the growth of
shareholder value and promotes the long-term sustainable success
of the Company.
• The Policy explains the purpose and principles underlying the
structure of remuneration, and how the Policy links remuneration
to the achievement of sustained, high performance.
• Overall, remuneration is structured and set at levels to enable
Quilter to recruit and retain high calibre colleagues, necessary
for business success, whilst ensuring that:
– our reward structure, performance measures and mix between
fixed and variable elements support our business strategy;
– principles of best practice and good corporate governance
are reflected;
– reward structures do not incentivise excessive risk-taking;
– rewards are aligned to strategic business aims and the long-term
interests of our shareholders; and
– the approach is simple to communicate to participants
and shareholders.
Key performance highlights
• During 2018 we successfully completed Managed Separation from
Old Mutual plc and Listed on the London and Johannesburg Stock
Exchanges, on 25 June 2018.
• There was also good progress in strategic priorities, including
the completion of the sale of the Single Strategy asset management
business to TA Associates on 29 June 2018, and build-out of Quilter
Investors, providing diversified long-term multi-asset investment
solutions for retail investors.
Remuneration outcomes
• This robust business performance combined with the strong
performance against personal objectives resulted in a short-term
incentive (“STI”) award of 92.5% of maximum potential for the Chief
Executive Officer, and 94.2% of maximum potential for the Chief
Financial Officer. 50% of the awards will be deferred into an award
of conditional shares under the Share Reward Plan (“SRP”), and will
vest annually in equal tranches over three years.
• Reward outcomes are aligned with overall Company performance.
No discretion was exercised to override performance or variable
pay outcomes.
Changes to the management team
• Mark Satchel, Quilter’s Corporate Finance Director, was an Executive
Director for the period up to the 19 April 2018. His 2018
remuneration for the period served as a Director is included
in the Single Figure Remuneration Table.
• As announced on 1 November 2018, Tim Tookey, Chief Financial
Officer, will step down from the Board with effect from 13 March
2019. The leaving arrangements for Tim are included in this report.
• Tim will be succeeded by Mark Satchel from 13 March 2019. Mark’s
remuneration package as Chief Financial Officer is also included
in this report. His pension allowance has been set at 10% of base
salary, rather than the 30% of base salary which applied to Tim
Tookey, in line with our Policy to consistently align pension provision.
Considerations for the year ahead
Looking forward, we continue to monitor executive remuneration
developments within the industry and the regulatory landscape,
and ensure that remuneration supports the alignment of executive
with shareholder interests and is consistent with the prudent risk
management of the business.
• Overall, and with specific reference to key remuneration drivers,
2018 has been a year of very strong performance relative to key
annual financial and non-financial targets, including adjusted profit
of £233 million, 11% higher than the prior year.
The Committee considered the overall remuneration arrangements
for the Executive Directors for 2019 in accordance with the Policy.
Key points are as follows:
• there will be no increase to the Executive Directors’ salaries
• During the year we have continued to put significant focus on the
at the 1 April 2019 review date;
improvement of our customer outcomes, though the level of
customer maturity varies across the business and there is a need
to develop further consistency in our approach to customer service.
This reinforces the strategic importance of the Optimisation
programme we have embarked on as detailed on page 9 in
the Chief Executive Officer’s statement, which will be a key area
of focus for management in 2019.
• Risk management has been further strengthened through the
embedding of our risk management framework in the lead up to
and since Listing, contributing to the development of an effective
risk management culture.
• the structure, performance metrics and maximum award level
of the 2019 STI awards will remain unchanged. STI for on-target
performance is set at 50% of maximum;
• the structure, performance metrics and maximum award
opportunity of the 2019 LTI, including the maximum level of awards,
will also be unchanged; and
• there will be no increase in fees to the Board Chairman for 2019;
and the Board has concluded that there will also be no increase
to Non-executive Directors’ fees for 2019.
Governance | Remuneration report
65
Quilter Annual Report 2018 Governance | Remuneration report continued
Inclusion, diversity and the Gender Pay Gap
Diversity in the workforce and a commitment to building a more
inclusive culture is central to our success and remains a key priority
for the Company. We are striving to improve diversity across all levels
of our organisation and our Gender Pay Gap figures for 2018, as
summarised in our Responsible Business Report, demonstrate that
we are making progress against this commitment. Our mean pay gap
has reduced by 4 percentage points from 39% in 2017 to 35% in 2018,
and our median bonus gap has reduced by 2 percentage points from
41% in 2017 to 39% in 2018. The proportion of females in our top pay
quartile has also increased by 3 percentage points from 25% in 2017
to 28% in 2018. We recognise that there is still much to do to address
gender imbalance in the industry as a whole, and some of the actions
we are taking to tackle this can be seen in our Responsible Business
Report on pages 13 and 14.
Employee Voice in the Boardroom
Finally, I am personally delighted to assume Non-executive
responsibility for conveying the views and opinions of our employees
to the Board from 2019 onwards, which will be collected primarily via
our employee forums and culture surveys, both of which have been
established within Quilter for some time. This will provide powerful
insight into Board discussion and decision making, on a wide range
of issues.
Cathy Turner
Chair of the Board Remuneration Committee
Corporate Governance Code and updated
shareholder guidelines
The Committee has considered the remuneration changes in the
UK Corporate Governance Code, and recent changes to shareholder
guidelines on remuneration. A number of these new features are
already incorporated into our Directors’ Remuneration Policy:
• a two-year post-vesting holding period, in addition to the three-year
vesting period, applies to the long-term incentive;
• malus and clawback provisions apply to short and long-term
incentive plans, including a range of potential ‘trigger events’;
• alignment of pension arrangements to the wider workforce, with
pension provisions for new Executive Director appointments set
at 10% of base salary. Quilter’s intention is to standardise pension
provisions at this level for new hires across the wider UK workforce
and develop a transition plan for existing employees; and
• Quilter already has some existing arrangements for post-
employment shareholding, applicable to good leavers; any shares
that they are permitted to retain will normally continue to vest over
the three-year vesting period and remain subject to any applicable
performance conditions, and will be subject to any post-vesting
holding period. The Committee will consider this post-employment
shareholding policy in further detail during 2019, and include more
information on this in the Remuneration Report for 2019.
The ratio of CEO total pay to the median, lower quartile and upper
quartile of UK employees will be reported in the Remuneration
Report for 2019, in accordance with the new regulations.
Consideration of shareholders’ views
The Committee actively engages with shareholders and investor
bodies, and welcomes the opportunity to discuss their views on
relevant remuneration issues. Institutional Shareholder Services’
feedback regarding the Quilter plc Performance Share Plan prior
to Listing was taken into account. The plan rules were subsequently
amended to include maximum award limits in accordance with
those set in the Remuneration Policy.
The 2019 AGM will be the first occasion on which shareholders
will vote on the Director’s Remuneration Policy and Remuneration
Report. The Committee will ensure that it considers all the feedback
which it receives from its shareholders during this process.
This report has been prepared in accordance with Schedule 8 to The Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008
as amended by The Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013 (Directors’ Remuneration Reporting
Regulations (“DRRR”)), the Companies Act 2006 (CA2006) as amended by the Enterprise and Regulatory Reform Act 2013, FCA listing rules where applicable.
66
Quilter Annual Report 2018 Remuneration at a glance
The following pages provide detail around remuneration
paid to our Executive Directors and our Policy. These two
pages summarise the key elements.
Components of remuneration
Salary
Benefits
Pension
Fixed pay
Short-term
Incentive
Value earned
from LTI
awards
Total
remuneration
Variable pay
How much our Executive Directors earned in 2018
Single total figure of remuneration – Executive Directors
The following chart sets out the aggregate emoluments earned by the Directors in the year ended 31 December 2018.
Paul Feeney
741
Tim Tookey
788
1,250
1,130
788
£2,779
£1,918
0
£’000s
1,000
2,000
3,000
Link between remuneration and business strategy
Business
drivers
Profit
Non-financial
Performance
indicators
Metrics in the
executive remuneration
2018
Achievement
2020
IFRS profit
before tax
60% of 2018 STI awards
100% of max
Risk management
10% of 2018 STI awards
75% of max
Customer Outcomes
10% of 2018 STI awards
50% of max
EPS growth
EPS CAGR
70% of 2018 PSP awards
Results in 2020
Shareholder value
Total shareholder return
(Relative to peers)
30% of 2018 PSP awards
Results in 2020
e
v
i
t
n
e
c
n
I
m
r
e
t
-
t
r
o
h
S
e
v
i
t
n
e
c
n
I
m
r
e
t
-
g
n
o
L
Governance | Remuneration report | Remuneration at a glance
67
Quilter Annual Report 2018
Governance | Remuneration report | Remuneration at a glance continued
Shareholding
Paul Feeney
Tim Tookey
Ownership as
% 2018 base salary1
188%
181%
Minimum
Shareholding
required
(after 5 years)2
300%
300%
1 Includes the estimated net value of unvested share awards which are not subject to performance conditions.
2 Executive Directors normally have five years from the Company’s Listing date, or date of appointment, to meet the shareholding requirement.
Summary of the key elements of our remuneration policy and how we will implement it in 2019
The table below provides a high-level summary of the key remuneration elements under our Directors’ Remuneration Policy, which will be
presented for approval at our 2019 AGM. It also shows how the policy will be implemented in relation to awards granted in 2019. Full details
of the proposed Policy, subject to shareholder approval, are set out in pages 68-76.
Fixed remuneration
• Normally reviewed annually with effect from 1 April.
2019
2020
2021
2022
2023
Implementation for 2019
– Paul Feeney – £675,000
– Mark Satchel – £450,000
Short-Term Incentive
Total incentive award in respect of Company and individual performance.
1/3
1/3
1/3
Key performance measures and weighting:
• IFRS profit (60%)
• Customer/Risk measures (20%)
• Personal objectives (20%)
Paul Feeney
• Maximum opportunity 200% of salary
Mark Satchel
• Maximum opportunity 200% of salary
Cash element of incentive outcome (50% of the whole award) is paid in
Q1 following the end of the performance year.
Deferred element of incentive outcome (50% of the whole award)
is granted in shares and vests in three equal tranches in Q1 2021,
Q1 2022 and Q1 2023 subject to the plan rules.
Long-Term Incentive
Awards subject to three-year performance period ending 31 Dec 2021.
Key performance measures and weightings:
• EPS Compound Annual Growth Rate (“CAGR”) (70%)
• Total Shareholder Return (“TSR”) Ranking relative to FTSE 250
excluding investment trusts (30%)
Paul Feeney
• Maximum opportunity 200% of salary
Mark Satchel
• Maximum opportunity 200% of salary
Award vests in Q1 following end of the performance period and
subject to further two-year holding period.
Key
Performance period
Vesting period
Additional hold period
As announced, Tim Tookey will step down and Mark Satchel will be appointed to the Board of Quilter plc on 13 March 2019.
68
Quilter Annual Report 2018 Directors’ Remuneration Policy
The key drivers of our Remuneration Policy:
Alignment to culture
• to align the interests of the Executive Directors, senior executives
and employees with the long-term interests of shareholders and
strategic objectives of the Company;
• to incorporate incentives that are aligned with and support the
Group’s business strategy and align executives to the creation of
long-term shareholder value, within a framework that is sufficiently
flexible to adapt as our strategy evolves;
• to reinforce a strong performance culture, across a wide range
of individual performance measures, including behaviours, risk
management, customer outcomes and the development of the
Company’s culture in line with its values over the short and
long-term; and
Risk
• to provide a balanced package between fixed and variable pay,
and long and short-term elements, to align with the Company’s
strategic goals and time horizons whilst encouraging prudent
risk management; and
• to ensure reward processes are compliant with applicable
regulations, legislation and market practice, and are operated
within the bounds of the Board’s risk appetite.
Predictability
• to set robust and stretching performance targets which
reward exceptional performance; and
• to set remuneration within the limits established under
• to align management and shareholder interests through building
the Remuneration Policy.
material share ownership over time.
Clarity
• to clearly communicate our Remuneration Policy and reward
outcomes to all stakeholders.
Simplicity
• to ensure that our Remuneration Policy is transparent and easily
understood; and
Proportionality
• to attract, retain and motivate the Executive Directors and senior
employees by providing total reward opportunities which, subject
to individual and Group performance, are competitive within our
defined markets both in terms of quantum and structure for the
responsibilities of the role;
• to ensure that remuneration practices are consistent with and
encourage the principles of equality, inclusion and diversity; and
• to operate simple and clear remuneration structures across
• to consider wider employee pay when determining that of our
the Company.
Executive Directors.
Remuneration Policy for Executive Directors
The table below summarises the key components of Executive Director remuneration arrangements, which will form part of the remuneration
policy subject to formal approval by shareholders at the 2019 AGM. It is intended that this policy will apply for three years from that date.
Remuneration element
Base salary
Purpose and link to strategy
Operation
Essential to attract and retain Executive Directors with the calibre, personal skills and attributes
to develop, lead and deliver the Group’s strategy.
Base salaries are paid in 12 equal monthly instalments during the year and normally are reviewed
annually with increases effective 1 April. In reviewing base salaries the Committee takes into
account a number of factors, including:
• Group and individual performance;
• the skills, experience and level of responsibilities of the Executive Director and his/her
market value;
• the scope, nature and size of the role;
• levels of increase across the wider employee population; and
• affordability, economic factors, external market data, business and personal performance.
The Committee considers the direct and indirect impacts of any base salary increases
on total remuneration.
Maximum opportunity
There are no prescribed maximum salary levels, but any salary increases will normally be in line
with percentage increases across the wider employee population.
In specific circumstances, the Committee may award increases above this level, for example:
• where the base salary for a new recruit or promoted Executive Director has been set
to allow the individual to progress into the role over time;
• to reflect a material increase in the size or scope of an individual’s role or responsibilities;
• where a change is deemed necessary to reflect changes in the regulatory environment; and
• where the size, value or complexity of the Group warrants a higher salary positioning.
Individual and Company performance will be taken into account in determining any
salary increases.
Performance metrics
Proposed changes for 2019
No change in approach.
Governance | Remuneration report | Directors’ Remuneration Policy
69
Quilter Annual Report 2018
Governance | Remuneration report | Directors’ Remuneration Policy continued
Remuneration element
Benefits
Purpose and link to strategy
Operation
Benefits are provided to Executive Directors to attract and retain the best talent for
the business and to ensure that the total package is competitive in the market.
The Committee’s policy is to provide Executive Directors with a market competitive level
of benefits taking into consideration benefits offered to other senior employees in the UK.
Benefits currently provided to Executive Directors include:
• private medical insurance;
• life assurance;
• income protection; and
• personal accident insurance.
Specific benefit provisions may be subject to change from time to time.
In line with other Quilter employees, Executive Directors can access discounted Company
products and are eligible to participate in the Company’s voluntary benefits which they fund
themselves, sometimes through salary sacrifice. Executive Directors are eligible for other
benefits that are introduced for the wider workforce on broadly similar terms.
They are eligible to participate in the UK all-employee share plans on the same terms as other
employees, including the Company’s Share Incentive Plan and Sharesave Plan
Where the Committee considers it appropriate, other benefits may be provided on recruitment
or relocation for a defined period.
Any reasonable business-related expenses (including tax thereon if determined to be a taxable
benefit) can be reimbursed.
In line with other UK employees, there is no maximum monetary level for benefits as this is
dependent on the individual’s circumstances, market practice and the cost to the Company.
Maximum opportunity
Performance metrics
There are no performance conditions.
Proposed changes for 2019
No change in approach. The approach to benefit provisions for Executive Directors is the same as that operated for senior managers
in the rest of the UK organisation.
Remuneration element
Pension
Purpose and link to strategy
Operation
To provide a market-competitive contribution towards retirement benefits that helps to attract
and retain the best talent for the business.
Executive Directors are eligible to receive employer contributions to the Company’s pension
plan (which is a defined contribution plan) or a cash allowance in lieu of pension benefits,
or a combination. Contributions and/or cash alternative are paid monthly.
Maximum opportunity
10% of base salary per annum.
This takes account of the pension provision for the wider workforce. Quilter’s intention is
to standardise provisions at this level for new hires across the wider UK workforce and develop
a transition plan for existing employees.
Tim Tookey, who is leaving the business in 2019, is entitled to a pension contribution of 30% of
base salary per annum under exceptional arrangements agreed at the time of his appointment
prior to Listing.
Performance metrics
There are no performance conditions.
Proposed changes for 2019
No change in approach.
70
Quilter Annual Report 2018 Remuneration element
Short-Term Incentives (“STI”)
Purpose and link to strategy
The STI plan is designed to align remuneration with performance against financial and strategic
business plan targets and personal predetermined goals, within the Group’s risk appetite and
taking into consideration the Company’s culture and values, on an annual basis.
A portion of any award is deferred and delivered in shares to aid retention, encourage long-term
shareholding, discourage excessive risk taking and align the executive and shareholder interests.
Performance targets and weightings are reviewed and set annually by the Committee taking
into account business plans and the Company’s risk appetite.
STI awards are funded from the overall Group bonus pool which is approved each year
by the Committee.
STI payout for on-target performance is set at 50% of maximum.
For Tim Tookey, who is leaving the business in 2019, STI on-target performance is set at 60% of
maximum under exceptional arrangements agreed at the time of his appointment prior to Listing.
Overall pool funding is also subject to risk adjustment after the Committee’s consideration
of a comprehensive report from the Chief Risk Officer and recommendations from the Board
Risk Committee in relation to the nature and incidence of risk events and an overall assessment
of risk management relative to the Board’s risk appetite.
50% of any STI awarded to an Executive Director is normally deferred in the form of Conditional
Awards under the Share Reward Plan (“SRP”), which vest annually in equal annual instalments
over a three-year period subject to the rules of the SRP.
Dividend equivalents may accrue on deferred awards during the deferral period and are paid
in the form of shares or, exceptionally, cash to the Executive Directors upon vesting.
Malus and clawback provisions apply to both cash and deferred portions of the STI awards
as described in further detail in ‘Risk adjustments, malus and clawback’ on page 73.
The maximum STI opportunity for Executive Directors is set at 200% of base salary for stretch
performance.
The STI plan uses a balanced scorecard of Group and individual performance measures, which
are aligned with the key strategic priorities of the Group and designed to deliver sustainable
shareholder value.
Performance is measured based on a mix of financial, strategic and personal targets. The splits
between the performance measures and relative weighting of the targets are reviewed by
the Committee at the start of each year and set out in the Annual Report on Remuneration.
The majority of any annual bonus is subject to challenging financial measures, with at least 50%
of the scorecard reflecting financial performance.
When determining the outcome of the performance measures, the Committee will seek the
advice of the Chief Risk Officer and the Board Risk Committee to ensure all relevant risk factors
are identified and the bonus pool and/or individual awards adjusted accordingly.
Specific measures, targets and weightings will be set by the Committee annually and disclosed
on a retrospective basis.
Operation
Maximum opportunity
Performance metrics
Proposed changes for 2019
No change in approach.
Governance | Remuneration report | Directors’ Remuneration Policy
71
Quilter Annual Report 2018
Governance | Remuneration report | Directors’ Remuneration Policy continued
Remuneration element
Long-Term Incentives (“LTI”)
Purpose and link to strategy
Operation
Maximum opportunity
Performance metrics
To incentivise and reward Executive Directors for achieving superior long-term business
performance that creates shareholder value and maximises sustainable shareholder returns.
Long-Term Incentive awards are made under the Quilter plc Performance Share Plan (“PSP”).
Awards are normally granted annually as nil cost options, which are subject to performance
conditions. Awards normally vest after three years subject to the achievement of performance
conditions and continued employment.
Financial performance targets are set annually by the Committee prior to the beginning of the
relevant performance period to provide alignment with the Company’s strategic priority of
delivering sustainable returns to shareholders over the long-term. The targets may be subject
to review and possible amendment for future plan cycles.
Vested awards:
• are subject to a post-vesting holding period of two years during which the net-of-tax number
of shares may not normally be exercised or sold; and
• must be exercised within 10 years of the grant date.
Dividend equivalents accrue during the vesting period and are released on the vesting date,
or date of exercise of the vested option. These will normally be delivered in the form of shares
on an assumed reinvested basis.
LTI awards are subject to malus and clawback provisions as described in further detail in
‘Risk adjustments, malus and clawback’ on page 73.
The maximum annual value of a PSP award for any Executive Director is an award over Company
shares with a face value of 200% of base salary at the date of grant.
If the Committee deems that there are exceptional circumstances, such as the recruitment of
a key individual or a significant strategic initiative, the maximum PSP award may be increased
up to 400% of the Executive’s base salary.
Performance measures are selected by the Committee for the relevant plan cycle prior to the
beginning of the relevant performance period. Measures are designed to align with the Group’s
strategic priority of delivering sustainable returns to shareholders over the long-term.
Performance measures currently include an adjusted profit-based EPS CAGR (adjusted profit
pre-tax, pre-dividend excluding amortisation and goodwill) and TSR Ranking relative to the
FTSE 250 excluding investment trusts.
The Committee may introduce or re-weight performance measures so that they are directly
aligned with the Company’s strategic objectives for the performance period.
For each performance metric, a threshold and stretch level of performance is set. At threshold,
25% of the relevant element vests rising on a straight-line basis to 100% for attainment of levels
of performance between threshold and maximum targets.
When determining the outcome of the performance measures, the Committee will seek the
advice of the Chief Risk Officer and the Board Risk Committee to ensure all relevant risk factors
are identified and the award outcomes adjusted accordingly. The Committee also has discretion
to reduce award outcomes to nil if required, via a risk management assessment based on a
report of risk exposures; or to reflect financial underperformance not adequately reflected
in the financial measures.
Proposed changes for 2019
It is not proposed to change the existing LTIP construct, however the Committee does propose to adopt an earnings growth performance
condition for 2019 based on Adjusted EPS CAGR (pre-dividend excluding amortisation and goodwill), compared to an Adjusted Profit-based
EPS CAGR (pre-tax, pre-dividend excluding amortisation and goodwill) used in the 2018 LTIP.
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Quilter Annual Report 2018 Remuneration element
Shareholding requirement
Purpose and link to strategy
To align Executive Directors’ interests with those of shareholders.
Operation
Proposed changes for 2019
No change in approach.
The Group operates a mandatory shareholding under which Executive Directors are required to
build up and maintain a shareholding in the Company with a value at least equal to 300% of base
salary. Executive Directors are expected to meet the requirement within five years of Admission
or, for newly appointed Executive Directors, within five years of appointment if later.
At least 50% of any shares vesting under Quilter share plans (on a net-of-tax basis) are expected
to be retained until the shareholding requirements are met.
In accordance with changes to the UK Corporate Governance Code, the Committee is developing a post-employment shareholding policy
taking into account emerging market practice and shareholder guidance. In addition, for any good leaver, all unvested share awards that
are permitted to be retained continue to the original vesting date(s) and remain subject to post-vesting holding periods post-termination.
Committee scope for discretion
The Committee will operate the STI plan and the PSP according
to their respective rules (the terms of which were summarised for
Shareholders in the Company’s IPO Prospectus) and the policy set
out above. The Committee, consistent with market practice, retains
discretion in a number of areas relating to the operation and
administration of these plans. These include (but are not limited to)
the following:
• who participates in the plans;
• the timing of award grants and/or payments;
• the size of an award and/or a payment (within the limits set out
in the policy table above);
• the choice and weighting of performance metrics (in accordance
with the statements made in the policy table above);
• in exceptional circumstances, determining that any share-based
award (or any dividend equivalent) shall be settled (in full or in part)
in cash;
• discretion relating to the measurement of performance in the event
of a change of control or restructuring;
• determination of a good leaver (in addition to any specified
categories) for incentive plan purposes based on the rules of each
plan and the appropriate treatment in such circumstances;
• determining the extent of payment or vesting of an award based on
the assessment of any performance conditions, including discretion
as to the basis on which performance is to be measured if an award
vests in advance of normal timetable (on cessation of employment
as a good leaver or on the occurrence of a corporate event) and
whether (and to what extent) pro-rating shall apply in such
circumstances;
• whether (and to what extent) malus and/or clawback shall apply
to any award;
• adjustments required in certain circumstances (e.g. rights issues,
corporate restructuring, on a change of control and special
dividends); and
• the ability to adjust existing performance conditions for exceptional
events so that they can still fulfil their original purpose whilst being
no less stretching.
Legacy arrangements
Executive Directors may be eligible to receive any relevant payment
from any award or other remuneration arrangements made prior
to the approval of the Remuneration Policy (such as the vesting
of share awards made prior to IPO, or prior to appointment to the
Board). Details of any such payments will be set out in the Annual
Report on Remuneration as they arise as required.
Payment of statutory entitlements and settlement
of claims
The Company may pay any statutory entitlements, to which a director
is entitled, or settle or compromise any claims made in connection
with the employment of a director where the Committee considers
such claims to have a reasonable prospect of success and that it is
in the best interests of the Company to do so.
Performance measures
The performance measures selected for the STI plan and PSP have
been chosen by the Committee to align with the Group’s strategic
priorities and are consistent with the key performance indicators in
relation to the operation of the business. Targets are set annually
taking into account a number of internal and external reference
points including: the level of performance that is achievable over a
sustained period of time; historic performance and internal forecasts
of future performance; market expectations and any guidance
provided to the market, and the Company’s agreed risk appetite.
Risk adjustments, malus and clawback
All variable pay arrangements operated by the Group are subject to
malus and clawback provisions. The Committee may, in its absolute
discretion, determine to reduce the number of shares before they are
released (malus), impose further conditions on the vesting or exercise
of an award or, alternatively, at any time within five years of an award
being made, the Committee may require the Executive Director
to transfer to the Company a number of shares or a cash amount
(clawback).
Malus may be applied where:
• the results or accounts or consolidated accounts of any company,
business or undertaking in which the Executive Director worked
or works or for which he or she was or is directly or indirectly
responsible are found to have been materially incorrect or
misleading;
• any material failure of risk management at a Group, or business
unit level;
• there is evidence of Executive Director gross misconduct or it is
discovered that the Executive Director’s employment could have
been summarily terminated;
• the behaviour by the Executive Director resulted or is likely to result
in serious reputational damage to the Company or is likely to bring,
the Company into disrepute in any way; and
• any other circumstances similar in nature to those described above
where the Committee consider adjustments should be made.
Governance | Remuneration report | Directors’ Remuneration Policy
73
Quilter Annual Report 2018 Governance | Remuneration report | Directors’ Remuneration Policy continued
Clawback may be applicable where:
• there is evidence of Executive Director misbehaviour or
material error;
• there is evidence of Executive Director gross misconduct or it is
discovered that the Executive Director’s employment could have
been summarily terminated; or
• there is material failure of risk management at a Group, business
area, division or business unit level.
The structure of variable elements will be in accordance with the
Company’s approved Policy detailed above. The maximum variable
pay opportunity will be set out in the remuneration table. Different
performance measures may be set initially during the year of joining
to take into account the responsibilities of the individual and the
point when he or she joined the Board. An LTI award can be made
shortly following an appointment (assuming the Company is not in
a closed period).
The Committee may buy out incentive awards a new hire has forfeited
on joining the Group, if it considers the cost can be justified and is
in the best interests of the Company. Any buy-out award would take
into account timing and expected value (e.g. likelihood of meeting any
performance criteria) of the forfeited awards and be structured, to
the extent possible, to take into account other key terms (e.g. vesting
schedules and performance conditions) of the awards which are
being replaced. The Committee retains the discretion to rely on the
exemption under LR 9.4.2 of the Listing Rules to make such an award,
or to utilise any other incentive plan operated by the Group. The aim
of any such award would be to ensure that as far as possible, the
expected value and the structure of the award will be no more
generous than the amount forfeited.
Where an Executive Director is appointed from within the Group,
any legacy arrangements would be honoured in line with the original
terms and conditions as long as these do not cause a material conflict
with the Remuneration Policy.
For an overseas appointment, the Committee will have discretion to
offer cost effective benefits and pension provisions which reflect local
market practice and relevant legislation.
Fees for a new Chair or Non-executive Director will be set in line with
the Remuneration Policy.
Executive Directors’ service agreements
All Executive Directors enter into service agreements with the
Company. The service agreements are of indefinite duration, subject
to termination by either party on six months’ notice. Where a longer
notice period is required to recruit an executive, a notice period of
up to 12 months may be offered for an initial period. The agreement
contains terms typical for a senior executive, including entitlement to
a salary, pension contribution, other core benefits including annual
holiday entitlement, and eligibility for consideration of annual
short-term and LTI awards in accordance with the Remuneration
Policy. The Executive Director is also entitled to reimbursement
of reasonable business expenses incurred by him/her in the
performance of his/her duties and will be eligible for cover under
any director or officer insurance the Company has in place from
time to time. Service contracts are available for inspection at the
Company’s registered office.
The Committee is supported in this by the Board Risk and Board
Audit Committees and the Quilter Risk function.
Remuneration policy for other employees
The general principles of the Remuneration Policy are broadly applied
throughout the Group and are designed to support recruitment,
motivation and retention as well as to reward high performance
in a framework of approved risk management.
The structure of total remuneration packages for the Executive
Directors and for the broader employee population is similar,
comprising of salary, pension and benefits and eligibility for a
discretionary STI award based on a combination of Company
and personal performance in the financial year. The level of STI
opportunity is determined by role and responsibility.
All employees are subject to the Company’s deferral policy, which
applies above a certain threshold of annual incentive award or such
other amount as may be required in accordance with regulatory
requirements. Deferred bonuses are granted in the form of a
conditional award of shares in Quilter plc under the Share Reward
Plan (“SRP”), or for portfolio managers in Quilter Investors in their
own funds and vest no faster than annually, over three years in
equal parts.
Executive Directors and other selected senior executives participate
in the PSP to aid retention and motivate the delivery of long-term
growth in shareholder value and to align their interests with those
of shareholders.
Annual base pay increases for the Executive Directors are normally
limited to the average base pay increase for the wider employee
population unless there are exceptional circumstances such as a
change in role or salary progression for a newly appointed director.
The provision of pension contributions for the Executive Directors
is broadly consistent with that operated for other senior managers
across the business and the intention is to align the wider employee
population to the same contribution level in the future.
Recruitment policy
The remuneration package for a new director will be established
in accordance with the Company’s approved Policy subject to such
modifications as set out below.
Salary and pension levels for Executive Directors will be set in
accordance with the Remuneration Policy, considering the experience
and calibre of the individual and his or her existing remuneration
package. Where it is appropriate to offer a lower salary initially, a
series of increases to the desired salary positioning may be made
over subsequent years subject to individual performance and
development in the role. Benefits will be limited to those outlined
in the Remuneration Policy, with relocation assistance provided
where appropriate. Where provided, relocation assistance will
normally be for a capped amount and/or limited time.
74
Quilter Annual Report 2018 Termination of office policy
If the employment of an Executive Director is terminated, any compensation payable will be determined by reference to the terms of the
service agreement in force at the time. As variable pay awards are not contractual, treatment of these awards is determined by the relevant
plan rules. The Committee may structure any compensation payments beyond the contractual notice provisions in the contract in such a way
as it deems appropriate as set out in the table below and taking into account the best interests of the Company.
Policy element
Notice
Normally six months’ notice
Details
• In certain cases, Executive Directors will not be required to work
their notice period and may be put on garden leave or granted
pay in lieu of all or part of their notice period (“PILON”). PILON may
be paid monthly or in a lump sum depending on circumstances
• Holiday does not accrue when PILON is paid. During a period of
garden leave holiday that has accrued is deemed to have been
taken during the garden leave
• Executive Directors will be subject to annual re-election at the AGM
Treatment of annual incentive awards
• Annual incentive awards will be made to good leavers (see below)
• Delivered in line with normal Remuneration Policy and timeline,
based on an overall assessment of corporate and personal
performance and (normally) pro-rated for the period worked in the
performance year of termination
including the application of deferral into shares
Treatment of unvested legacy LTI and deferred annual incentive share awards
• LTI awards continue to the normal vesting date for good leavers1
unless (exceptionally) the Committee applies discretion to
accelerate the vesting to the termination date. In each case,
the number of shares released shall be based on the achievement
of performance conditions over the performance period (or
curtailed performance period, if applicable). The number of shares
that vest would typically be calculated on a pro rata basis, based
on time served during the vesting period
• Deferred annual incentive share awards for good leavers1 continue
to the normal vesting date unless the Committee applies discretion
to accelerate the vesting to the termination date
• Terms are subject to the signing of a settlement agreement
All awards lapse except for good leavers
Compensation for loss of office
Settlement agreements may provide for, as appropriate:
• Incidental costs related to the termination, such as legal fees
for advice on the settlement agreement
• Provision of outplacement services
• Payment in lieu of accrued, but untaken, holiday entitlements
• Exit payments in relation to any legal obligation or damages arising
from such obligation
• Settlement of any claim arising from the termination
• Continuation or payment in lieu of other incidental benefits
• In the case of redundancy, in line with the Company operated
enhanced redundancy policy
1 Subject to further adjustments which may be applied to discretionary good leavers. An executive will be treated as good leaver under certain circumstances
such as death, illness, injury, disability, redundancy, retirement, their employing company ceasing to be a Group company or any other circumstances at the
discretion of the Committee.
Prior arrangements
The Committee reserves the right to make any remuneration
payments and payments for loss of office notwithstanding that they
are not in line with the terms of the Remuneration Policy where the
terms of the payment were agreed:
• before the Policy set out above came into effect; or
• at a time when the relevant individual was not a director of
the Company and the payment was not in consideration for
the individual becoming a director of the Company.
Change of control Policy
STI awards may continue to be paid in respect of the full financial year
pre and post change of control, or a pro-rated STI award may be paid
in respect of the portion of the year that has elapsed at the point
of change of control. Exceptionally the Committee may exercise its
discretion to waive pro-rating.
All the Company’s employee share plans contain provisions relating to
a change of control. In the event of a change of control, outstanding
awards and options may be lapsed and replaced with equivalent
awards over shares in the new company, subject to Committee
discretion. Alternatively, outstanding awards and options may
vest and become exercisable on a change of control, subject where
appropriate to the assessment of performance at that time and
pro-rating of awards.
Governance | Remuneration report | Directors’ Remuneration Policy
75
Quilter Annual Report 2018 Governance | Remuneration report | Directors’ Remuneration Policy continued
External appointments
Subject to prior clearance by the Board, an Executive Director is
permitted to hold one external non-executive directorship of a
listed company and is entitled to retain any fees paid for doing so.
Compliance with regulatory requirements
The Remuneration Policy is compliant with current regulatory
requirements, namely the PRA and FCA Remuneration Codes that
apply to the Company. Remuneration arrangements will operate in
line with the PRA and FCA Remuneration Codes, as amended from
time to time.
Illustrations of the application of the Remuneration Policy
Our aim is to ensure that superior rewards are only paid for exceptional performance, with a substantial proportion of Executive Directors’
remuneration payable in the form of variable, performance-related pay. The graphics below illustrate the Executive Directors’ fixed
remuneration and how much they could earn for target and maximum performance for 2019.
Chief Executive Officer (£’000)
Chief Financial Officer (£’000)
Fixed remuneration
100%
£748
Fixed remuneration
100%
£499
On-target
33%
30%
37%
£2,267
On-target
33%
30% 37%
£1,512
Maximum
22%
39%
39%
£3,448
Maximum
22%
39%
39%
£2,299
0
1,000
2,000
3,000
4,000
0
1,000
2,000
3,000
Fixed remuneration
Annual variable element
Long-Term element
In developing the scenarios, the following assumptions have been made:
Fixed remuneration Consists of 2019 base salary plus the value of benefits in 2018 and a 10% pension contribution or allowance.
On-target
Based on value of fixed remuneration plus the potential value that the Executive Director could earn for
on-target performance:
• annual variable element paying out at 50% of maximum; and
• long-term incentive element (under PSP) paying out at 62.5% of maximum.
The assumptions noted for ‘on-target’ performance are provided for illustration purposes only.
Maximum
In addition to fixed remuneration, includes the potential value under the SRP and PSP that the Executive Director could
earn for maximum performance.
Share price growth
Assuming share price growth of 50% to the maximum long-term incentive award would result in:
• Chief Executive Officer: a long-term incentive vesting of £2,025,000 and a total remuneration of £4,123,000; and
• Chief Financial Officer: a long-term incentive vesting of £1,350,000 and a total remuneration of £2,749,000.
How the views of employees are taken into account
Pay and employment conditions generally in the Group will be
considered when setting Executive Directors’ remuneration.
Reflecting standard practice, the Company does not consult
with employees specifically in determining the Executive Director
remuneration nor in drawing up the Company’s Annual Report on
Remuneration. However, the Committee will receive regular updates
on overall pay and conditions in the Group, including (but not limited
to) changes in base pay and the incentive schemes in operation.
The Committee also has oversight of the all-employee share plans
which Executive Directors and all other Group employees can
participate in on the same terms and conditions. The Committee
receives regular updates regarding wider employee pay.
In addition, as stated in the Chair’s statement, from 2019 the
Committee Chair will take on responsibility as the designated
Non-executive Director for conveying the Employee Voice to
the Boardroom. This role extends to a range of issues that matter
to employees and will include inputs from annual employee
engagement and culture surveys, meetings with Employee Forums/
representatives and a report to the Board.
Statement of consideration of shareholder views
In developing the Policy the Committee has considered the guidelines
from shareholder bodies and the views of major shareholders.
76
Quilter Annual Report 2018 Non-executive Directors
The following table sets out the key elements of remuneration and policy for Non-executive Directors:
Approach and link
to strategy
Fees for the Chairman and Non-executive Directors are set at an appropriate level to attract individuals of the highest
calibre with relevant commercial and other experience to develop, monitor and oversee the Group’s strategy.
Fee levels take into account:
• the time commitment required to fulfil the role;
• the duties and responsibilities associated with the role; and
• external fee reference points and typical practice from relevant FTSE and other comparable competitor organisations.
Operation
The Chairman receives an all-inclusive annual fee which is reviewed periodically by the Committee.
All Non-executive Directors receive a basic annual fee. Additional fees may be payable to:
• the Senior Independent Director;
• the Chairs of the Board Audit, Risk, Remuneration, IT and Corporate Governance and Nominations Committees1; and
• other members of the Board Audit, Risk, Remuneration, IT and Corporate Governance and Nominations Committees.
Additional fees to reflect the extra responsibilities and additional time commitment required from Non-executive
Directors of chairmanship or membership of subsidiary boards may be introduced. If there is a temporary yet material
increase in the time commitments for Non-executive Directors, the Board may pay extra fees on a pro rata basis
to recognise the additional workload.
Fee levels are reviewed annually by the Chairman and Executive Directors. The Chairman’s fee is reviewed annually
by the Committee. No individual may participate in the approval of his or her own fees.
Neither the Chairman nor other Non-executive Directors are eligible for any performance-related remuneration or
a pension contribution. They do not receive any benefits but they may be reimbursed or paid directly by the Company
for the cost of any reasonable and properly documented business expenses incurred in carrying out their duties which
are deemed taxable by the relevant tax authority (including any personal tax due on such expenses).
Details of current fees are set out in the Annual Report on Remuneration.
1 The Board Corporate Governance and Nominations Committee is currently chaired by the Chairman who receives an all-inclusive annual fee.
Proposed changes for 2019
No change in approach.
Letters of appointment for Non-executive Directors
All Non-executive Directors have letters of appointment with the Company for an initial period of three years, subject to annual reappointment
at the AGM. Appointments may be terminated with three months’ notice. The appointment letters for the Chairman and Non-executive
Directors provide that no compensation is payable on termination, other than accrued fees and expenses. All Directors submit themselves for
re-election at the AGM each year. Service contracts and letters of appointment are available for inspection at the Company’s registered office.
The service contract policy for a new appointment will be on similar terms as existing Executive Directors, with the facility to include a notice
period of no more than three months.
Details of the Chairman’s and Non-executive Directors’ terms of appointment are set out in the table:
Non-executive Director
Effective date of appointment
Initial term
Notice period by Company
Glyn Jones
Rosie Harris
Moira Kilcoyne
Jon Little
George Reid
Cathy Turner
Ruth Markland
Suresh Kana
Paul Matthews
7 November 2016
3 April 2017
31 December 2016
5 May 2017
8 February 2017
31 December 2016
25 June 2018
8 August 2018
8 August 2018
3 years
3 years
3 years
3 years
3 years
3 years
3 years
3 years
3 years
3 months
3 months
3 months
3 months
3 months
3 months
3 months
3 months
3 months
Termination of office policy
Non-executive Directors
• Three months’ notice period
• Appointed for an initial three-year term
• Normally expected to serve two three-year terms, subject to annual re-election at the AGM
• A third term (of up to three years, or longer in exceptional circumstances) may be offered on
a year-by-year basis after completion of the first two terms
Details
• Subject to annual re-election at the AGM
Governance | Remuneration report | Directors’ Remuneration Policy
77
Quilter Annual Report 2018 Governance
Annual Report on Remuneration
Audited
Content within an ‘Audited’ tab indicates that all the information
is audited.
Application of the Policy in 2019
Content within a tinted box indicates that the information
is planned for implementation in 2019.
The Annual Report sets out how the Directors’ Remuneration Policy of the Company has been applied since Admission and how the Committee
intends to apply the policy going forward. An advisory shareholder resolution to approve this report will be proposed at the AGM.
The table below sets out the single figure remuneration for full financial year 2018. Only 2018 data has been included as the Company listed
on the Main Market of the London Stock Exchange on 25 June 2018.
Audited
Executive Director
Paul Feeney
Tim Tookey
Mark Satchel – stepped down
from the Board on 19 April 2018
Base salary1
£’000
Benefits
£’000
618.8
600.0
121.8
5.2
8.4
1.2
Pension2
£’000
84.4
180.0
STI3
£’000
1,250.0
1,130.0
12.2
233.8
LTI4
£’000
788.8
–
–
Other5
£’000
31.7
–
Total
£’000
2,778.9
1,918.4
14.1
383.1
1 Remuneration is for full calendar year 2018 and hence part of the remuneration relates to the period pre-Admission. Mark Satchel’s remuneration
is pro-rated for the period served as a Director.
2 Pension includes contributions made under the Group defined contribution pension scheme plus, where applicable, amounts received as a pension
allowance.
3 STI includes the full amount awarded in respect of calendar year 2018 (see further details pages 70 to 81 including amounts received in cash and deferred
under the Share Reward Plan.
4 LTI includes awards vested for qualifying services during the year under the Joint Share Ownership Plan (see page 81).
5 Other includes Old Mutual plc Sharesave Plan early exercise bonus and dividends on Joint Share Ownership Plan for Paul Feeney and Mark Satchel’s
grandfathered cash benefit allowance which ceased on the 1 April 2018.
Components of the single figure
Salary
Audited
Name
Paul Feeney
Tim Tookey
Mark Satchel – stepped down from the Board on 19 April 20181
1 Mark Satchel’s salary was increased to £450,000 with effect from 1 November 2018.
Annual base salary
as at 1 April 2018
£’000
Total base salary
paid in 2018 for
qualifying services
£’000
Total base salary
effective 1 April 2019
£’000
675
600
435
619
600
121.8
675
600
450
Benefits
Benefits include life assurance, private medical cover, income protection and personal accident insurance.
Audited
Name
Paul Feeney
Tim Tookey
Mark Satchel – stepped down from the Board on 19 April 2018
Benefits for 2019
Benefits for 2019 to be in line with Policy.
Life assurance
£’000
2.6
4.3
0.5
Medical
£’000
0.95
0.95
0.4
Income
protection
£’000
1.5
1.3
0.2
Personal
accident
insurance
£’000
0.17
0.18
0.04
78
Quilter Annual Report 2018 Pension
Pension includes contributions made under the Group defined contribution pension scheme and/or amounts received as cash in lieu
of pension contributions due to the impact of HMRC limits.
The contribution rate for the Chief Executive Officer was set at 10% of base salary from 1 April 2018 in line with contribution rates for other
senior employees. Prior to this date the contribution rate for the Chief Executive Officer was 30% of base salary.
The Chief Financial Officer, Tim Tookey, was entitled to a pension contribution equal to 30% of salary per annum under arrangements entered
into at the time of his appointment.
Audited
Name
Paul Feeney
Tim Tookey
Mark Satchel – stepped down from the Board on 19 April 2018
Cash in lieu of
pension contribution
£’000
Contribution to
pension scheme
£’000
Total contribution
£’000
84.4
180
9.2
–
–
3
84.4
180
12.2
Pension for 2019
As described in the Policy report, Paul Feeney and Mark Satchel will each receive a pension contribution of 10% of salary.
2018 Short-Term Incentive (“STI”) Awards
This reflects the total STI awards to be paid in 2019 based on performance for the year ended 31 December 2018. The value includes both
the cash element and the portion deferred into shares (50% of the award).
For the purpose of determining the 2018 STI outcome, the Committee assessed the performance of the business and the individuals by
reference to a balanced scorecard of Financial (60%), Customer/Risk (20%) and strategic Personal performance objectives (20%) in line with
the Directors’ Remuneration Policy.
Group financial achievement
Audited
Group financial performance measures
IFRS profit (pre-tax, excluding
amortisation of intangibles and goodwill)
Weighting as %
of total STI
opportunity
Threshold
Target
Maximum
Actual
Outcome as %
of max
60%
£80m
£100m
£120m
£120m
100%
Governance | Annual Report on Remuneration
79
Quilter Annual Report 2018 Governance | Annual Report on Remuneration continued
Group Risk and Customer performance achievement
Key Group non-financial objectives represented a maximum of 20% of the total STI opportunity. The risk measure is the success of embedding
the Enterprise Risk Management Framework at an overall corporate level. For the Customer element of the scorecard, six main Customer
Outcome KPIs (culture, experience, value for money, communications, protection and meeting commitments) were assessed over 2018 to
inform a qualitative assessment of overall performance. Performance commentary is given in the table below.
Audited
Customer and Risk
Performance measures
Embedding the
Enterprise
Risk Management
Framework
Weighting as %
of total
STI opportunity Key achievements in the year
Outcome as %
of max
10%
• Overall, against the context of significant corporate activity in 2018 there has been
75%
evidence of improving risk maturity with significant engagement, understanding and
use of the Risk Management Framework across the business and embedding of the
Framework Principles in all key business decisions and activities
• The Company had a strong solvency and liquidity position and was operating within risk
appetite at the end of 2018
• Risks to which the Company is exposed were understood and managed effectively
through the Risk Management Framework, which also identifies changes to the risk
profile, and adequate capital was held against these risks
• Regulatory relationships have strengthened and the Company met all commitments
to the PRA and FCA through the year
Customer
Outcomes
10%
• There was a continued focus on customer outcomes in 2018 to ensure quality client
50%
experience and customer satisfaction. Clear customer improvement actions were put
in place across all business units and there was evidence of a customer-focused culture
developing across the Group
• The level of customer maturity, however, varies across Quilter and there is progress
required to bring the overall Group to a consistent standard. Overall, the Committee
considered that customer performance was in line with expectations in 2018
Strategic personal performance – achievement
Personal objectives represented a maximum of 20% of total STI opportunity. A performance commentary is given in the table below.
Audited
Executive
Director
Paul
Feeney
Weighting as %
of total STI
opportunity Overview
20%
For 2018, Paul’s objectives
focused on a number of key
activities, including the
Managed Separation of Quilter
plc from Old Mutual plc and the
smooth transition to a listed
environment
Key achievements in the year
• Managed Separation was handled timely and securely, with
due consideration of risk and meeting shareholder needs
• The Listing process of Quilter plc and IPO was delivered
very successfully
• Positive engagement with regulators in all matters of the business
and regulatory industry agenda
• Completion of the disposal of the Single Strategy business,
contributing to the strong financial performance of the Company and
payment of a special dividend to shareholders shortly after Listing
Tim
Tookey
20%
Tim’s objectives focused on all
financial activities relating to the
Listing and IPO of Quilter plc,
including delivery of a suitable
balance sheet and cost
structure for a standalone listed
business to meet the needs of
existing and future
shareholders
• Tim successfully constructed and delivered a sound and sustainable
Day 1 balance sheet for the IPO
• He led the successful placement of the £200 million Tier 2 bond
and subsequent capital raise at a very competitive coupon rate
• He has put in place and embedded significantly improved cost
control, cash and capital reporting
• He played a pivotal role in achieving a successful IPO, delivering high
quality documentation including the Prospectus, business showcase
and investor engagement
Outcome as
%of max
100%
100%
Mark
Satchel
20%
Mark’s objectives focused on
strategic M&A activities relating
to the Managed Separation and
the disposal of the Single
Strategy asset management
business
• Mark demonstrated strong leadership and focus on delivery, which
90%
resulted in the successful completion of these key projects and
contributed significantly to the successful IPO, debt issuance and
commercial success of the business
• His expertise was crucial in leading the successful sale of the Single
Strategy asset management business, contributing to the strong
financial performance of the Company in 2018
80
Quilter Annual Report 2018 Risk consideration
As part of the review, the Committee considered whether the overall STI outcomes were appropriate in the context of overall Group
performance, business performance and individual strategic/personal objectives, and whether any exceptional risk events occurred which,
in the Committee’s opinion, may have materially affected the STI outcome. The Committee also considered an annual Risk Report and the
recommendations of the Chief Risk Officer and Board Risk Committee in respect of the incidence and materiality of any risk issues arising
during the year and an overall assessment of risk management relative to the Board’s risk appetite and risk culture across the business.
The Committee decided that no discretionary risk-based adjustment was required at either an overall pool or individual level.
Deferral policy
In line with our policy, 50% of the Executive Directors’ 2018 STI awards were deferred into a conditional award of Ordinary Shares under the
Share Reward Plan (“SRP”) and will vest in equal annual instalments over a three-year period, subject to continued employment and malus and
clawback provisions in accordance with the rules of the SRP. As Mark Satchel was not an Executive Director for the majority of 2018 and at the
time the policy came into effect, the deferred element of his bonus was calculated at a rate of 40% in accordance with the Company policy for
all other employees.
Audited
Executive Director
Paul Feeney
Tim Tookey
Mark Satchel
£’000
1,250
1,130
234
Total
% of salary
185%
188%
192%
Deferred bonus1
To be paid in cash
% of salary
£’000
% of salary
93%
94%
77%
625
565
140
93%
94%
115%
£’000
625
565
93.5
1 A grant of shares equal in value to the deferred bonus will be awarded to each of the Executive Directors. The awards are expected to be granted in late
March 2019 on a date determined by the Company, with the number of shares awarded based on the preceding day’s closing share price.
Short-Term Incentive (“STI”) for 2019
In line with our policy for 2019, both Executive Directors are eligible to receive up to 200% of base salary. Performance will be based on
a combination of Group financial performance targets as well as strategic (including customer and risk measures) and personal measures.
The percentage weightings will be the same as in 2018. Actual targets have not been disclosed due to commercial sensitivity. Group financial
targets will be disclosed in the 2018 Annual Report.
2018 Long-Term Incentive (“LTI”) Awards
LTI awards vested during the year under the Joint Share Ownership Plan (“JSOP”).
Audited
Paul Feeney
2015 (1) JSOP
Vested at
admission
shares
2015 (2) &
2016 JSOP
Vested and sold
at admission
shares to cover
tax liability1
2015 (2) JSOP
Vested
December 2018
shares
2016 JSOP
Outstanding
shares
339,508
61,875
180,178
54,415
1 A tax charge on these awards was triggered on the Managed Separation and Listing of the Company.
Legacy arrangements
As disclosed in the IPO Prospectus, the JSOP was implemented for certain key employees of Quilter in 2013, with the final grant of awards in
2016. The plan was designed to reward participants for the achievement of strategic objectives, value creation and other profitability metrics
over a three-year period. It provided participants with an interest in the capital growth of the Company by granting joint ownership of shares
in Old Mutual Wealth Management Limited (now Quilter plc) with an employee benefit trust (“EBT”), whereby the trust owned the principal
value of the shares and the participants owned any growth in value during the vesting period. On the Managed Separation and Listing of
Quilter plc, the trust exercised a call option to acquire the participants’ interest in the shares based on the growth in value of the Company
between grant and Listing, in return for consideration shares in Quilter plc. Some of the shares under the plan vested at this point, some
vested in December 2018 and the remaining shares will continue to the original vesting date of July 2019 subject to the rules of the JSOP. The
consideration shares for any awards that remain unvested are restricted until the normal vesting date, and attract dividends during that time.
Taking account of his critical role as Corporate Finance Director, in March 2017 Mark Satchel was granted a one-off conditional, deferred award
of £1 million. The vesting of this award was subject to the successful Managed Separation and Listing of Quilter plc, and his continued service,
and was paid in July 2018. This award was agreed prior to the Company’s admission and was put in place as part of the planning for Listing.
The award was designed to reflect Mark’s extensive knowledge of the business and the criticality of his role in the transaction, and the Board’s
desire to retain him as a potential successor to the CFO – a position he will assume on 13 March 2019.
Governance | Annual Report on Remuneration
81
Quilter Annual Report 2018 Governance | Annual Report on Remuneration continued
Long-Term Incentive (“LTI”) Awards granted in 2018
Executive Directors are eligible to participate in the Performance Share Plan (“PSP”), the plan used to grant LTI awards.
The awards granted in 2018 are subject to the following performance conditions:
Audited
Performance condition
EPS CAGR (2017-20)2
Relative TSR3
1 Straight line interpolation between points.
2 Adjusted profit-based growth, pre-tax, pre-dividend and excludes amortisation and goodwill.
3 Ranking relative to the FTSE 250 excluding Investment Trusts.
Weighting
70%
30%
Threshold1
(25% vesting)
Maximum1
(100% vesting)
6%
10%
Median Upper Quartile
At the end of the three-year performance period, the Committee will critically assess whether the formulaic vesting outcome produced
by the matrix is justified. To do this, the Committee will look at a number of factors, including whether the result is reflective of underlying
performance and has been achieved within the Company’s agreed risk appetite. If such considerations mean that the formulaic outcome
of the vesting schedule is not felt to be justified, then the Committee can exercise downward discretion.
Vested awards are subject to a further holding period of two years, such that the minimum period between the date of grant and release
is five years.
The following PSP awards were granted in respect of the 2018 performance year:
Audited
Executive Director Form of award
Date of award
Basis of award
(% of salary)
Share price at
the date of grant
Nil cost
options awarded
Face value
of award1
% vesting at
threshold
Performance
period
Paul Feeney
NCOs
25/06/2018
200%
1.45
931,034
1,350,000
25%
2018–2020
1 The number of shares awarded was calculated based on the share price of the Company at Admission on 25 June 2018, being 145 pence per share. The face
value of the award figure is calculated by multiplying the number of shares awarded by the share price figure of 145 pence.
Notes
When Tim Tookey commenced employment in 2017, prior to Admission, there was no LTIP in operation and he was granted an equity award at 500% of base
salary (covering each of the years 2017, 2018 and 2019) in lieu of any LTI expectation for those years. To reflect this, he was not entitled to be considered for
any new LTI award (under the PSP) until 2020 at the earliest and will therefore not receive any LTI award prior to stepping down from the Board and leaving
the Company in 2019.
Performance Share Plan (“PSP”) 2019
The Committee intends to grant Executive awards over nil cost options with a face value of 200% of base salary.
For the 2019 award, the following performance measures will be used:
Financial metrics
EPS CAGR (2018–21)2
TSR Ranking3
1 Straight line interpolation between points.
2 Pre-dividend excl. amortisation and goodwill.
3 Ranking relative to the FTSE 250 excluding Investment Trusts.
Weighting
70%
30%
Threshold1
(25% vesting)
Maximum1
(100% vesting)
5%
11%
Median
Upper Quartile
All-employee share plans
The Company operates a UK tax advantaged all-employee Share Incentive Plan (“SIP”). The SIP was used in 2018 to make an award of free
shares to the value of £2,000 to all UK employees (including Executive Directors) shortly following Admission. The number of shares awarded
was calculated based on the mid-market closing price of Quilter plc shares on the day before the Award Date of 26 June 2018, this being
152 pence.
82
Quilter Annual Report 2018 Non-executive Director total remuneration
The total remuneration for the Non-executive Directors is set out in the table below. For 2018, the regular fees were paid at the following rate:
Annual fees (Quilter plc Board)
Chairman1
Basic annual fee1
Additional fees:
Senior Independent Director
Chairs of Board Audit, Risk, Remuneration and IT Committee
Members of the above Committees
Members of the Board Corporate Governance and Nominations Committee
Fees (Subsidiary Boards):
Chairman of Subsidiary Boards2
Board Member of Intrinsic, Quilter Investors Limited (“QI”), Quilter Cheviot Limited (“QC”)
Members of the Subsidiary Board Committees3
Current fee
£375,000
£65,000
£20,000
£25,000
£10,500
£5,500
£100,000
£45,000
£5,000
1 With effect from Listing, the Chairman’s fee increased by £50,000 to £375,000 and the basic annual fee for a Non-executive Director increased by £5,000 to
£65,000.
2 Chairman of the Old Mutual Wealth Limited (“OMWL”), Old Mutual Wealth Life & Pensions Limited (“OMWLP”) and Old Mutual Wealth Life Assurance Limited
(“OMWLA”) and Chairman of QI – £100,000 for the first year falling to £80,000 thereafter.
3 Governance, Audit and Risk Committee (“GARC”) – fee applicable to OMWL, OMWLP, OMWLA and QC only.
Audited
Non-executive Director
Board & Committee membership
Subsidiary Board
& Committee membership
Fees for 20181
£’000
Subsidiary Board fees
£’000
Total for 2018
£’000
Glyn Jones
Rosie Harris
Chairman, Chair CGN, R
INED, Chair Ri, IT, A
QC and GARC member
Moira Kilcoyne
INED, Chair IT, Ri
Jon Little2
George Reid
INED, R
INED, Chair A, IT, Ri
Chair QI
Chair OMWL, OMWLP,
OMWLA, GARC member
Ruth Markland3
SID, CGN, A, R
Cathy Turner
Suresh Kana
INED, Chair R, CGN
QI
INED, A, CGN
Paul Matthews
INED, Ri
Intrinsic and GARC member
399.0
132.8
122.3
85.2
132.8
57.6
117.3
32.2
30.0
–
50.0
–
101.1
97.8
–
39.5
–
17.9
399.0
182.8
122.3
186.3
230.6
57.6
156.8
32.2
47.9
Committee Key:
INED = Independent Non-executive Director
A = Board Audit
R = Board Remuneration
Ri = Board Risk
SID = Senior Independent Non-executive Director
IT = Board Information Technology
CGN = Board Corporate Governance and Nominations
1 To recognise the additional workload associated with preparation for Listing the Non-executive Directors received an additional fee in the lead-up to
the Managed Separation and Listing of Quilter plc. This additional fee was £100,000 per annum for the Chairman, £50,000 per annum for the Committee
Chairs and £25,000 per annum for the other Non-executive Directors. The additional fee ceased at Admission.
2 Jon Little was also a Board member of Old Mutual Global Investors (UK) Limited, resigned 9 February 2018. Annual fees payable were the same as per the
Subsidiary Board member fees disclosed in the table above.
3 Ruth Markland was appointed as a Board member of Old Mutual International Isle of Man Limited on 1 January 2019.
Governance | Annual Report on Remuneration
83
Quilter Annual Report 2018 Governance | Annual Report on Remuneration continued
TSR performance graphic over the period since Admission
£
105
100
95
90
85
80
The graph on the left shows the Company’s TSR performance versus
the FTSE 250 excluding Investment Trusts over the period since
Admission to 31 December 2018. The FTSE 250 has been chosen
as the Company is a member of that index.
Jun 18
Jul 18
Aug 18
Sep 18
Oct 18
Nov 18
Dec 18
Quilter
FTSE 250 ex Inv Trusts
Group Chief Executive Officer pay
As the Company listed during 2018, there is no disclosure of remuneration relating to prior years.
Financial year
2018
Name
Total remuneration £’000
Annual bonus as
% of maximum
Paul Feeney
2,779
92.5%
Percentage change in CEO Remuneration compared to the average employee
As this is the Company’s first remuneration report, there is no year-on-year comparison. A comparison of remuneration in 2018 and 2019 will
be made in the Remuneration Report for 2019.
Relative importance of spend on pay
The following table sets out the profit, dividends and overall spend on pay in the year ending 31 December 2018:
Operating profit before tax (£m)
Dividends (£m)
Employee remuneration costs (£m)
233
221
311
Executive Directors’ shareholding and interests in Quilter Share Schemes
The table below shows the Executive Directors’ interests in Group share schemes which will vest in future years subject to performance and/or
continued service at 31 December 2018 together with any additional interests in shares held beneficially by the Executive Directors outside
of Group share schemes the share price at 31 December 2018 was £1.1832.
Between 31 December 2018 and 4 March 2019 there were no exercises or other dealings in the Company’s share awards by the Directors.
Audited
Paul Feeney
Tim Tookey
Scheme interests at 31 December 2018
Legally owned
(shares)
Subject to legacy
JSOP (shares)
Subject to SIP
(shares)
618,356
65,500
54,415
–
1,428
1,428
Deferred
STI awards
(shares)
Subject to
performance
conditions under
the LTIP (shares)
752,774
931,034
1,603,694
–
Directors’ personal holding and beneficial share interests
In line with the Remuneration Policy, each Executive Director is required to acquire and maintain a shareholding equivalent to 300% of base
salary (including shares beneficially held by the individual or his/her spouse, and the net of tax value of unvested share interests within
Company share plans which are not subject to performance conditions).
As of 31 December 2018, neither Executive Director had satisfied the minimum shareholding requirement but have five years from the date
of Admission, or appointment if later, to achieve the minimum. As Tim Tookey will step down from the Board in Q1 2019, less than one year
from Admission, he will not be required to the meet the minimum in full.
Audited
Name
Paul Feeney
Tim Tookey
Includes the estimated net value of unvested share awards which are not subject to performance conditions.
Calculation based on the share price on 31 December 2018, being 118 pence per share.
84
Value £ Multiple of base salary
1,269,774
1,084,859
188%
181%
Quilter Annual Report 2018
Shareholding guidelines – Executive and Non-executive Directors
As of the date of Admission and 31 December 2018, the Executive and Non-executive Directors held the following legal and beneficial interests
in Ordinary Shares:
Audited
Name
Paul Feeney
Tim Tookey
Glyn Jones
Cathy Turner
Rosie Harris
Moira Kilcoyne
Jon Little
George Reid
Ruth Markland
Suresh Kana
Paul Matthews
On Admission
1,425,545
2,314,530
537,872
68,965
17,241
34,482
20,689
20,689
20,689
n/a – appointed 8/08/2018
n/a – appointed 8/08/2018
31/12/18
1,426,973
1,670,622
800,000
68,965
17,241
34,482
20,689
20,689
20,689
–
30,000
Between 31 December 2018 and 4 March 2019 there were no changes to the interests in shares held by the Directors, as set out in the table above.
Payments within the year to past Directors
There were no payments to past Directors during the year.
Leaving arrangements for Tim Tookey
Although there were no payments for loss of office during the year, a ‘good leaver’ arrangement for Tim Tookey, who will step down from the
Board in Q1 2019, was agreed. Tim’s six-month notice period commenced on 31 October 2018. He will continue to work during this notice period
to provide a smooth handover to his successor. Under his service contract, Tim will be eligible for a pro-rated STI award in relation to the portion of
2019 that he works. Any STI awarded will be subject to the satisfaction of performance conditions. As a good leaver on termination, his outstanding
deferred share awards will be retained, subject to pro-rating for time served in the case of his long-term incentive award. The long-term incentive
award was performance assessed at Listing and the Committee determined that the performance conditions had been met in full. This award and
Tim’s outstanding deferred STI awards will continue to vest on their normal vesting timetable. Post vesting, the long-term incentive award shares
are subject to an additional two-year holding period. This represents a substantial level of ongoing post-employment shareholding. In addition,
Tim and his immediate family will continue to receive staff terms for services provided by Quilter subsidiaries.
External directorships
The table below sets out external directorships held by the Executive Directors.
Name
External directorships held
Executive Directors
Paul Feeney
Tim Tookey
None
Non-executive Director, Nationwide Building Society
Fees received and
retained
–
£127,500
External advisers
For the first 10 months of 2018, the Committee engaged the services of Deloitte as interim independent remuneration adviser to the Committee,
principally to provide relevant guidance and advice covering the period up to the Managed Separation and Listing of the Company in London
and Johannesburg. During Q3 2018, the Committee conducted a formal tender process to identify and formally appoint a remuneration
adviser. Initially seven external advisers were invited to participate in the process, from which four companies were shortlisted to provide a
formal presentation to the Committee. Following the conclusion of that process, Aon was appointed as remuneration adviser to the Committee
with effect from 1 November 2018 and attended the November meeting of the Committee in that capacity. From time to time, Aon may provide
other services to Quilter plc such as remuneration benchmarking data and insurance broking. However, these do not provide a conflict with
the advice received by the Committee, which is provided by Aon’s specialist Executive Remuneration practice. This practice is not involved
in the marketing of other Aon services and is obliged to abide by the Remuneration Consultant’s Code of Conduct. Apart from the above,
neither Deloitte nor Aon have any other connection with the Company.
The Committee is satisfied that the advice received from both Deloitte and Aon is objective and independent, and both firms are members of the
Remuneration Consultants Group, whose voluntary code of conduct is designed to ensure objective and independent advice is given to Committees.
The total fees paid in respect of remuneration advice during 2018 are as follows:
Firm
Deloitte LLP
Aon
Key areas of advice received
Remuneration policy, market practice, regulatory and corporate governance developments
Annual remuneration report and policy disclosure, market practice, incentive design
Governance | Annual Report on Remuneration
Total fees 2018
£21,050
£20,000
85
Quilter Annual Report 2018 Financial
statements
86
Quilter Annual Report 2018
Financial statements
Detailed financial information
provided within our financial
statements and notes.
Statement of Directors’ Responsibilities
Independent Auditor’s Report
Primary financial statements
Notes to the financial statements
Appendices
Parent company financial statements
88
89
96
102
181
188
Financial statements
Quilter Annual Report 2018
87
Statement of Directors’ responsibilities
in respect of the Annual Report and Accounts and the financial statements
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
Group and parent Company and the undertakings included in the
consolidation taken as a whole; and
• 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.
Signed on behalf of the Board
Paul Feeney
Chief Executive Officer
Tim Tookey
Chief Financial Officer
11 March 2019
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 on the same basis.
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 and
reliable;
• state whether they have been prepared in accordance with IFRSs as
adopted by the EU;
• assess the Group and parent Company’s ability to continue as a
going concern, disclosing, as applicable, matters related to going
concern; and
• 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.
88
Financial statementsQuilter Annual Report 2018
Independent auditor’s report
to the members of Quilter plc
Overview
Materiality:
Group financial
statements as a whole
£11m
4% of normalised profit before tax from continuing
operations (“PBTCO”)
Coverage
90% of Group profit before tax
Key audit matters
Event driven
Brexit Uncertainties
Recurring risks
of the Group
Valuation of level 3 financial investments
Valuation of long-term business insurance
policyholder liabilities
Valuation of the voluntary customer remediation
provision
Valuation of goodwill
Parent Company risk: Valuation of investments
in group subsidiaries
1: Our opinion is unmodified
We have audited the financial statements of Quilter plc (the
“Company”) for the year ended 31 December 2018 which comprise
the consolidated income statement, consolidated statement of
comprehensive income, reconciliation of adjusted profit to profit
after tax, consolidated statement of changes in equity, consolidated
statement of financial position and consolidated of cash flows,
Company statements of financial position, cash flows and changes
in equity and the related notes, including the accounting policies
in note 4.
In our opinion:
• the financial statements give a true and fair view of the state of the
Group’s and of the parent Company’s affairs as at 31 December 2018
and of the Group’s profit for the year then ended;
• the Group financial statements have been properly prepared in
accordance with International Financial Reporting Standards as
adopted by the European Union (IFRSs as adopted by the EU);
• the parent Company financial statements have been properly
prepared in accordance with IFRSs as adopted by the EU and as
applied in accordance with the provisions of the Companies Act
2006; and
• the financial statements have been prepared in accordance with the
requirements of the Companies Act 2006 and, as regards the Group
financial statements, Article 4 of the IAS Regulation.
Basis for opinion
We conducted our audit in accordance with International Standards on
Auditing (UK) (“ISAs (UK)”) and applicable law. Our responsibilities are
described below. We believe that the audit evidence we have obtained
is a sufficient and appropriate basis for our opinion. Our audit opinion is
consistent with our report to the audit committee.
We were first appointed as auditor by the Directors in advance of our
first audit for the year ended 31 December 2018 prior to the Company
becoming a public interest entity. The period of total uninterrupted
engagement is for the financial year ended 31 December 2018 as a
public-interest entity and 11 years in total. We have fulfilled our ethical
responsibilities under, and we remain independent of the Group in
accordance with, UK ethical requirements including the FRC Ethical
Standard as applied to listed public interest entities. No non-audit
services prohibited by that standard were provided.
Financial statements | Independent auditor’s report
Quilter Annual Report 2018
89
Financial statements
Independent auditor’s report continued
to the members of Quilter plc
2: Key audit matters: including our assessment of risks of material misstatement
Key audit matters are those matters that, in our professional judgement, were of most significance in the audit of the financial statements and
include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by us, including those which had the
greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team.
We summarise below the key audit matters in arriving at our audit opinion above, together with our key audit procedures to address those matters
and our findings from those procedures in order that the Company’s members as a body may better understand the process by which we arrived
at our audit opinion. These matters were addressed, and our findings are based on procedures undertaken, in the context of, and solely for the
purpose of, our audit of the financial statements as a whole, and in forming our opinion thereon, and consequently are incidental to that opinion,
and we do not provide a separate opinion on these matters.
The risk
Our response
The impact of uncertainties due
to the UK exiting the European
Union on our audit
Refer to page 33 (principal risks),
page 200 (viability statement),
page 60 (Board Risk Committee
Report) and page 54 (Audit
Committee Report).
Unprecedented levels of uncertainty
All audits assess and challenge the
reasonableness of estimates, in particular
as described in the valuation of level 3
investments and the valuation of goodwill, and
related disclosures and the appropriateness
of the going concern basis of preparation of
the financial statements. All of these depend
on assessments of the future economic
environment and the group’s future prospects
and performance. In addition, we are required
to consider the other information presented
in the Annual Report including the principal risks
disclosure and the viability statement and to
consider the directors’ statement that the
annual report and financial statements taken
as a whole is fair, balanced and understandable
and provides the information necessary for
shareholders to assess the Group’s position,
performance and business model.
Brexit is one of the most significant economic
events for the UK and at the date of this report
its effects are subject to unprecedented levels
of uncertainty of outcomes, with the full range
of possible effects unknown.
Valuation of level 3
financial investments
(2018: £1,154m; 2017: £1,169m)
Refer to page 107 (accounting
policy) and page 147 (financial
disclosures)
Subjective valuation
A subjective estimate exists for financial
instruments where an objective external price
does not exist, or where such a price is not
readily observable, which is principally the case
for level 3 financial instruments.
There is a significant risk associated with level 3
financial instruments within the Wealth Platforms
segment due to the application of valuation
techniques which involve judgement and the
use of assumptions and estimates.
The effect of these matters is that, as part of
our risk assessment, we determined that the
valuation of level 3 financial investments has
a high degree of estimation uncertainty, with
a potential range of reasonable outcomes
greater than our materiality for the financial
statements as a whole, and possibly many
times that amount. The financial statements
note 22 disclose the sensitivity estimated by
the Group.
Our procedures included:
We developed a standardised firm-wide approach to the
consideration of the uncertainties arising from Brexit in planning
and performing our audits. Our procedures included:
• Our Brexit knowledge: We considered the directors’ assessment
of Brexit-related sources of risk for the Group’s business and
financial resources compared with our own understanding of the
risks. We considered the directors’ plans to take action to mitigate
the risks.
• Sensitivity analysis: When addressing the valuation of goodwill
and other areas that depend on forecasts, we compared the
directors’ analysis to our assessment of the full range of reasonably
possible scenarios resulting from Brexit uncertainty and, where
forecast cash flows are required to be discounted, considered
adjustments to discount rates for the level of remaining uncertainty.
• Assessing transparency: As well as assessing individual
disclosures as part of our procedures on the valuation of level 3
investments and the valuation of goodwill, we considered all of the
Brexit related disclosures together, including those in the strategic
report, comparing the overall picture against our understanding of
the risks.
Our findings
As reported under the valuation of level 3 investments and the
valuation of goodwill, we found the resulting estimates and related
disclosures of the valuation of level 3 investments, the valuation of
goodwill and disclosures in relation to going concern to be
acceptable. However, no audit should be expected to predict the
unknowable factors or all possible future implications for a company
and this is particularly the case in relation to Brexit.
Our procedures included:
• Methodology choice: We critically assessed the valuation
methodologies applied by the Group against current market
best practice.
• Our sector experience: We challenged all key inputs and
assumptions used by the Group in the applied valuation
methodology such as estimated market movements and expected
cash flows with reference to our own independent expectations,
which were based on similar instruments in the market and our
industry knowledge and experience.
• Assessing transparency: We assessed the adequacy of
the disclosures including the description of the fair value
measurement process and whether the sensitivity to key
inputs appropriately reflects the Group’s exposure to financial
instruments valuation risk.
Our findings
We found the resulting valuations in relation to the level 3 financial
investments to be balanced with proportionate disclosures of the
related assumptions and sensitivities.
90 Quilter Annual Report 2018
2: Key audit matters: including our assessment of risks of material misstatement continued
The risk
Our response
Valuation of long-term
business insurance
policyholder liabilities
(2018: £602m; 2017: £489m)
Refer to page 109 (accounting
policy) and page 159 (financial
disclosures)
Valuation of the voluntary
customer remediation provision
(2018: £38m; 2017: £69m)
Refer to page 117 (accounting
policy) and page 162 (financial
disclosures)
Our procedures included:
• Control design: We evaluated the controls over the measurement
and management of the Group’s calculation of insurance liabilities.
We challenged Group’s own “analysis of change” to assess the
explanations provided aligned with our expectations and wider
business understanding. We considered the valuation model
output for key products to validate that the key drivers of the
insurance liabilities are being modelled correctly.
• Our sector experience: We considered the Group’s approach
to setting assumptions and assessed whether it is consistent with
industry practice and the Group’s documented approval process.
• Our actuarial expertise: We utilised our own actuarial specialists
to assist us in assessing and challenging certain assumptions used
in the actuarial models and the process for setting and updating
these assumptions. This included assessing the data used in the
Group’s analysis to set assumptions, in the context of our own
industry knowledge, external data and our views of experience
to date.
• Assessing transparency: We assessed the adequacy of the
disclosures in relation to the long-term policyholder liabilities.
Our findings
We found the valuation of the long-term business insurance
policyholder liabilities to be mildly optimistic with proportionate
disclosures of the related assumptions and sensitivities.
Our procedures included:
• Governance considerations: We attended recent governance
forums to understand the status of programme planning
and the Directors’ views on the key areas of uncertainty.
• Model interrogation: We assessed the latest model to determine
whether the results produced were in line with the Group’s
intentions in respect of the approved methodology.
• Our sector experience: We assessed the application of
accounting policies adopted by the Group for the recognition
of the provision. We assessed and challenged the Group’s
methodology and the assumptions applied in arriving at the
provision. We considered the appropriateness of adjustments
made to the provision to reflect latest expectations.
• Assumptions: We challenged the assumptions applied in
the models and challenged the sensitivity analyses prepared
by the Group’s actuary in respect of interest rates and timing.
We considered the basis for the various overlays established
and corroborated assumptions as far as possible in respect of
similar past experience.
• Assessing transparency: We assessed whether the disclosures
made in relation to the recognition, estimation uncertainty and
presentation of the provision were appropriate.
Our findings
We found the estimates in relation to the valuation of the voluntary
client redress provision to be cautious with proportionate disclosures
of the related assumptions and sensitivities.
Subjective valuation
Valuation of life insurance contract liabilities
within the Wealth Platforms segment involves
significant judgement in the choice of
assumptions applied in determining the ultimate
total settlement value of long-term policyholder
liabilities. Economic assumptions, such as
discount rates, and operating assumptions,
such as mortality and morbidity, persistency
and expenses are the key inputs used in the
valuation of these long term liabilities.
The effect of these matters is that, as part of
our risk assessment, we determined that the
valuation of long term business insurance
policyholder liabilities has a high degree of
estimation uncertainty, with a potential range
of reasonable outcomes greater than our
materiality for the financial statements as a
whole, and possibly many times that amount.
The financial statements note 29 disclose the
sensitivities estimated by the Group.
Subjective estimate
The voluntary customer redress provision
relates to payments to the subset of protection
plan holders and associated programme costs
within the Wealth Platforms segment
significant. The risk relates to the uncertainty of
the estimates and assumptions used and the
methodology employed in determining the
amount of provision to be recognised and/ or
disclosed under IAS 37 Provisions, contingent
liabilities and contingent assets.
The key estimates and assumptions in relation
to the provision are:
• The various assumptions included in the
modelled amounts to be repaid, including
interest rates, time taken for remediation
to commence and plans in scope;
• The judgemental overlays established to
cover additional uncertainties in respect
of known data issues, potential complaints
and broader market movements which could
impact plan valuations; and
• The programme costs of carrying out the
remaining remediation activity, in particular
how much external support is required in
delivering the remediation to policyholders.
The effect of these matters is that, as part
of our risk assessment, we determined that the
valuation of the voluntary customer remediation
provision has a high degree of estimation
uncertainty, with a potential range of reasonable
outcomes greater than our materiality for the
financial statements as a whole. The financial
statements note 30 discloses the sensitivity
estimated by the Group.
Financial statements | Independent auditor’s report
Quilter Annual Report 2018
91
Financial statements
Independent auditor’s report continued
to the members of Quilter plc
2: Key audit matters: including our assessment of risks of material misstatement continued
The risk
Our response
Valuation of goodwill
(2018: £314m; 2017: £306m)
Refer to page 115 (accounting
policy) and page 139 (financial
disclosures)
Forecast-based valuation
Goodwill is significant and the determination
of the recoverable amount of each reportable
segment is complex and involves a high level
of judgement. The significant judgements arise
over the discount rate, growth rate and cash
flow forecasts which are key inputs in the
valuation of goodwill.
The effect of these matters is that, as part of
our risk assessment, we determined that the
valuation of goodwill has a high degree of
estimation uncertainty, with a potential range
of reasonable outcomes greater than our
materiality for the financial statements as a
whole, and possibly many times that amount.
The financial statements note 16 disclose the
sensitivity estimated by the Group.
Parent Company risk:
Valuation of investments
in group subsidiaries
(2018: £2,663m; 2017: £2,069m)
Refer to page 106 (accounting
policy) and page 192 (financial
disclosures)
Low risk, high value
The carrying amount of the Parent Company’s
investments in subsidiaries represents 79%
of the Parent Company’s total assets. The
recoverability is not at a high risk of significant
misstatement or subject to significant
judgement. However, due to their materiality
in the context of the Parent Company financial
statements, this is considered to be the area
of greatest audit effort in our overall Parent
Company audit.
Our procedures included:
• Our sector experience and benchmarking assumptions:
We challenged the cash flow forecasts, including the consistency
of forecasts applied across the Group.
We utilised our own corporate finance specialists to assist us in
challenging the key assumptions and methodologies applied by the
Group in the determination of discount rates, with reference to our
own independent expectations, which were based on our industry
knowledge and experience.
• Comparing valuations and historical assumptions:
We compared forecasts to approved business plans and also
previous forecasts to actual results to assess the performance of
the business and the accuracy of forecasting. We also considered
the appropriateness of the scenarios used in the context of our
wider business understanding.
• Sensitivity analysis: We performed sensitivity analyses on the
key assumptions in the Advice and Wealth Management and
Wealth Platforms cash generating units.
• Assessing transparency: We assessed that the adequacy of
the disclosures in relation to goodwill appropriately reflect the
associated risks and the disclosures in relation to the sensitivity
of the goodwill balance to changes in key assumptions.
Our findings
We found the resulting estimate of the recoverable amount of
goodwill was balanced with proportionate disclosures of the related
assumptions and sensitivities.
Our procedures included
• Tests of detail: We compared the carrying amount of a sample
of the highest value investments, representing 97% of the total
investment balance with the relevant subsidiaries’ draft balance
sheets to identify whether their net assets, being an approximation
of their minimum recoverable amount, were in excess of their
carrying amount.
We assessed the recoverable value for investments, representing
97% of the total investment balance using cash flow forecasts.
Procedures performed over cash flow forecasts and the related
assumptions are described in the section on valuation of goodwill
above.
• Assessing subsidiary audits: As Group auditors, we assessed
the work performed by the subsidiary audit teams on that sample
of those subsidiaries and considered the results of that work,
on those subsidiaries’ profits and net assets.
Our findings
We found the valuation of investments in group subsidiaries
to be balanced.
92 Quilter Annual Report 2018
3: Our application of materiality and an overview
of the scope of our audit
Materiality for the group financial statements as a whole was set at
£11 million, determined with reference to a benchmark of group profit
before tax attributable to equity holders normalised by £116 million to
exclude any goodwill impairment and impact of acquisition accounting,
business transformation costs and managed separation costs as
disclosed in note 7, of which it represents 4%.
Materiality for the parent company financial statements as a whole
was set at £9 million, determined with reference to a benchmark
of total assets.
We agreed to report to the Audit Committee any corrected or
uncorrected identified misstatements exceeding £0.55 million,
in addition to other identified misstatements that warranted reporting
on qualitative grounds.
Of the Group’s 9 reporting components, we subjected 8 to full scope
audits for group purposes and 1 to the audit of specific account
balances. The latter was not individually financially significant enough
to require a full scope audit for group purposes, but did present specific
individual risks that needed to be addressed.
The components within the scope of our work accounted for the
percentages illustrated opposite.
The remaining 4% of total group revenue, 10% of group profit before
tax and 1% of total group assets is represented by non-reporting
components, none of which individually represented more than
1% of any of total group revenue, group profit before tax or total group
assets. For these residual components, we performed analysis at an
aggregated group level to re-examine our assessment that there were
no significant risks of material misstatement within these.
The Group team instructed component auditors as to the significant
areas to be covered, including the relevant risks detailed above and
the information to be reported back. The Group team approved the
component materialities, which ranged from £2 million to £9 million,
having regard to the mix of size and risk profile of the Group across
the components. The work on 8 of the 9 components was performed
by component auditors and the rest, including the audit of the parent
company, was performed by the Group team. The group team
performed procedures on the normalising adjustments.
Of the Group’s 9 reporting components, 7 components are UK based.
For the remaining components, the Group team visited 1 component
location in Isle of Man to assess the audit risks and strategy. Video and
telephone conference meetings were also held with all component
auditors including those that were not physically visited. At these visits
and meetings, the findings reported to the Group team were discussed
in more detail, and any further work required by the Group team was
then performed by the component auditor.
Normalised PBTCO
£279m
Group Materiality
£11m
£11m
Whole financial
statements materiality
(2017: £10m)
£9m
Range of materiality at 9
components (£2m to £9m)
(2017: £2m to £9m)
£0.55m
Misstatements reported
to the Audit Committee
(2017: £0.5m)
Normalised PBTCO
Group materiality
Group revenue
Group profit before tax
14
96%
82
20
90%
90
Group total assets
Normalised PBTCO
8
99%
91
30
100%
80
70
Full scope for group audit purposes 2018
Specified risk-focused audit procedures 2018
Residual components
Financial statements | Independent auditor’s report
Quilter Annual Report 2018
93
Independent auditor’s report continued
to the members of Quilter plc
4: We have nothing to report on going concern
The Directors have prepared the financial statements on the going
concern basis as they do not intend to liquidate the Company or to
cease its operations, and as they have concluded that the Group and
the Company’s financial position means that this is realistic. They have
also concluded that there are no material uncertainties that could have
cast significant doubt over its ability to continue as a going concern for
at least a year from the date of approval of the financial statements
(“the going concern period”).
Our responsibility is to conclude on the appropriateness of the
Directors’ conclusions and, had there been a material uncertainty
related to going concern, to make reference to that in this audit report.
However, as we cannot predict all future events or conditions and as
subsequent events may result in outcomes that are inconsistent with
judgements that were reasonable at the time they were made, the
absence of reference to a material uncertainty in this auditor’s report
is not a guarantee that the Company will continue in operation.
In our evaluation of the Directors’ conclusions, we considered the
inherent risks to the Group’s business model, including the impact
of Brexit, and analysed how those risks might affect the Group’s
financial resources or ability to continue operations over the going
concern period. We evaluated those risks and concluded that they
were not significant enough to require us to perform additional
audit procedures.
Based on this work, we are required to report to you if:
• we have anything material to add or draw attention to in relation
to the directors’ statement in Note 1 to the financial statements on
the use of the going concern basis of accounting with no material
uncertainties that may cast significant doubt over the Group’s
use of that basis for a period of at least twelve months from
the date of approval of the financial statements; or
• the related statement under the Listing Rules set out on page 102
is materially inconsistent with our audit knowledge.
We have nothing to report in these respects, and we did not identify
going concern as a key audit matter.
5: We have nothing to report on the other
information in the Annual Report
The directors are responsible for the other information presented in the
Annual Report together with the financial statements. Our opinion on
the financial statements does not cover the other information and,
accordingly, we do not express an audit opinion or, except as explicitly
stated below, any form of assurance conclusion thereon.
Our responsibility is to read the other information and, in doing so,
consider whether, based on our financial statements audit work,
the information therein is materially misstated or inconsistent with the
financial statements or our audit knowledge. Based solely on that work
we have not identified material misstatements in the other information.
Strategic report and directors’ report
Based solely on our work on the other information:
• we have not identified material misstatements in the strategic report
and the directors’ report;
• in our opinion the information given in those reports for the financial
year is consistent with the financial statements; and
• in our opinion those reports have been prepared in accordance with
the Companies Act 2006.
Directors’ remuneration report
In our opinion the part of the Directors’ Remuneration Report to
be audited has been properly prepared in accordance with the
Companies Act 2006.
Disclosures of principal risks and longer-term viability
Based on the knowledge we acquired during our financial statements
audit, we have nothing material to add or draw attention to in relation to:
• the directors’ confirmation within the Group’s viability statement
on page 200 that they have carried out a robust assessment of the
principal risks facing the Group, including those that would threaten
its business model, future performance, solvency and liquidity;
• the Principal Risks disclosures describing these risks and explaining
how they are being managed and mitigated; and
• the directors’ explanation in the Group’s viability statement of how
they have assessed the prospects of the Group, over what period
they have done so and why they considered that period to be
appropriate, and their statement as to whether they have a
reasonable expectation that the Group will be able to continue in
operation and meet its liabilities as they fall due over the period of
their assessment, including any related disclosures drawing attention
to any necessary qualifications or assumptions.
Under the Listing Rules we are required to review the viability
statement. We have nothing to report in this respect.
Our work is limited to assessing these matters in the context of only
the knowledge acquired during our financial statements audit. As we
cannot predict all future events or conditions and as subsequent events
may result in outcomes that are inconsistent with judgements that
were reasonable at the time they were made, the absence of anything
to report on these statements is not a guarantee as to the Group’s and
Company’s longer-term viability.
Corporate governance disclosures
We are required to report to you if:
• we have identified material inconsistencies between the knowledge
we acquired during our financial statements audit and the directors’
statement that they consider that the annual report and financial
statements 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; or
• the section of the annual report describing the work of the Audit
Committee does not appropriately address matters communicated
by us to the Audit Committee.
We are required to report to you if the Corporate Governance
Statement does not properly disclose a departure from the eleven
provisions of the UK Corporate Governance Code specified by the
Listing Rules for our review.
We have nothing to report in these respects.
94 Quilter Annual Report 2018
Financial statementsQuilter Annual Report 2018 Firstly, the group is subject to laws and regulations that directly affect
the financial statements including financial reporting legislation
(including related companies legislation), distributable profits legislation
and taxation legislation and we assessed the extent of compliance with
these laws and regulations as part of our procedures on the related
financial statement items.
Secondly, the group is subject to many other laws and regulations
where the consequences of non-compliance could have a material
effect on amounts or disclosures in the financial statements, for
instance through the imposition of fines or litigation or the loss of the
group’s licence to operate. We identified the following areas as those
most likely to have such an effect: health and safety, anti-bribery,
employment law, regulatory capital and liquidity and certain aspects
of company legislation recognising the financial and regulated nature
of the group’s activities and its legal form. Auditing standards limit the
required audit procedures to identify non-compliance with these laws
and regulations to enquiry of the directors and other management and
inspection of regulatory and legal correspondence, if any. These limited
procedures did not identify actual or suspected non-compliance.
8. The purpose of our audit work and to whom
we owe our responsibilities
This report is made solely to the Company’s members, as a body, in
accordance with Chapter 3 of Part 16 of the Companies Act 2006 and
the terms of our engagement by the Company. Our audit work has
been undertaken so that we might state to the Company’s members
those matters we are required to state to them in an auditor’s report
and the further matters we are required to state to them in accordance
with the terms agreed with the Company and for no other purpose.
To the fullest extent permitted by law, we do not accept or assume
responsibility to anyone other than the Company and the Company’s
members, as a body, for our audit work, for this report, or for the
opinions we have formed.
Jonathan Mills
(Senior Statutory Auditor)
for and on behalf of KPMG LLP, Statutory Auditor
Chartered Accountants
15 Canada Square
London
E14 5GL
11 March 2019
6. We have nothing to report on the other matters
on which we are required to report by exception
Under the Companies Act 2006, we are required to report to you if,
in our opinion:
• adequate accounting records have not been kept by the parent
Company, or returns adequate for our audit have not been received
from branches not visited by us; or
• the parent Company financial statements and the part of the
Directors’ Remuneration Report to be audited are not in agreement
with the accounting records and returns; or
• certain disclosures of directors’ remuneration specified by law are
not made; or
• we have not received all the information and explanations we require
for our audit.
We have nothing to report in these respects.
7. Respective responsibilities
Directors’ responsibilities
As explained more fully in their statement set out on page 198,
the directors are responsible for: the preparation of the financial
statements including being satisfied that they give a true and fair
view; 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; assessing the Group
and parent Company’s ability to continue as a going concern, disclosing,
as applicable, matters related to going concern; and using 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.
Auditor’s responsibilities
Our objectives are to obtain reasonable assurance about whether the
financial statements as a whole are free from material misstatement,
whether due to fraud, other irregularities (see below), or error, and
to issue our opinion in an auditor’s report. Reasonable assurance
is a high level of assurance, but does not guarantee that an audit
conducted in accordance with ISAs (UK) will always detect a material
misstatement when it exists. Misstatements can arise from fraud,
other irregularities or error and are considered material if, individually
or in aggregate, they could reasonably be expected to influence
the economic decisions of users taken on the basis of the financial
statements.
A fuller description of our responsibilities is provided on the FRC’s
website at www.frc.org.uk/auditorsresponsibilities.
Irregularities – ability to detect
We identified areas of laws and regulations that could reasonably be
expected to have a material effect on the financial statements from
our general commercial and sector experience, through discussion
with the directors and other management (as required by auditing
standards), and from inspection of the group’s regulatory and
legal correspondence and discussed with the directors and other
management the policies and procedures regarding compliance
with laws and regulations. We communicated identified laws and
regulations throughout our team and remained alert to any indications
of non-compliance throughout the audit. The potential effect of these
laws and regulations on the financial statements varies considerably.
Financial statements | Independent auditor’s report
Quilter Annual Report 2018
95
Consolidated income statement
For the year ended 31 December 2018
Revenue
Gross earned premiums
Premiums ceded to reinsurers
Net earned premiums
Fee income and other income from service activities
Investment return
Other income
Total revenue
Expenses
Insurance contract claims and changes in liabilities
Change in investment contract liabilities
Fee and commission expenses, and other acquisition costs
Change in third party interest in consolidated funds
Other operating and administrative expenses
Finance costs
Total expenses
Profit on acquisitions
Profit/(Loss) before tax from continuing operations
Tax credit/(expense) attributable to policyholder returns
Profit/(Loss) before tax attributable to equity holders
Income tax credit/(expense)
Less: tax (credit)/expense attributable to policyholder returns
Tax credit attributable to equity holders
Profit/(Loss) after tax from continuing operations
Profit after tax from discontinued operations
Profit for the period after tax
Attributable to:
Equity holders of Quilter plc
Earnings per Ordinary Share on profit attributable to ordinary shareholders of Quilter plc
Basic
From continuing operations (pence)
From discontinued operations (pence)
Basic earnings per Ordinary Share (pence)
Diluted
From continuing operations (pence)
From discontinued operations (pence)
Diluted earnings per Ordinary Share (pence)
Year ended
31 December
2018
£m
Year ended
31 December
2017
£m
Note
148
(88)
60
1,046
(3,482)
35
(2,341)
(33)
3,236
(437)
369
(772)
(17)
2,346
–
5
158
163
169
(158)
11
174
314
488
148
(88)
60
895
5,195
13
6,163
(15)
(4,308)
(320)
(673)
(816)
(39)
(6,171)
3
(5)
(49)
(54)
(41)
49
8
(46)
203
157
488
157
9.5
17.1
26.6
9.4
17.1
26.5
(2.5)
11.1
8.6
(2.5)
11.1
8.6
8(a)
8(b)
29(b)
29(d)
9(a)
9(b)
10
5(a)
13(a)
5(c)
5(c)
14(a)
5(c)
14(b)
The attached notes on pages 102 to 187 form an integral part of these consolidated financial statements.
96
Financial statementsQuilter Annual Report 2018 Consolidated statement of comprehensive income
For the year ended 31 December 2018
Profit for the period after tax
Other comprehensive income:
Exchange gains on translation of foreign operations1
Items that may be reclassified subsequently to income statement
Income tax on items that will not be reclassified subsequently to income statement2
Items that will not be reclassified subsequently to income statement
Total other comprehensive income, net of tax1
Total comprehensive income for the period
Attributable to:
Continuing operations
Discontinued operations
Equity holders of Quilter plc
Note
Year ended
31 December
2018
£m
Year ended
31 December
2017
£m
488
157
–
–
–
–
–
3
3
3
3
6
488
163
5(d)
174
314
488
(47)
210
163
1
2
In the year ended 31 December 2017, £3 million previously shown within the consolidated statement of changes in equity as a change in participation
in subsidiaries has been reclassified to other comprehensive income, to conform with current year presentation.
In the year ended 31 December 2017, £3 million previously shown within other comprehensive income for the period has been reclassified to income tax
on items that will not be reclassified subsequently to income statement, to conform with current year presentation.
The attached notes on pages 102 to 187 form an integral part of these consolidated financial statements.
Financial statements | Primary financial statements
97
Quilter Annual Report 2018 Reconciliation of adjusted profit to profit after tax
For the year ended 31 December 2018
Adjusted profit before tax
Advice and Wealth Management
Wealth Platforms
Head Office
Adjusted profit before tax
Reconciliation of adjusted profit to Profit after tax
Adjusting for the following:
Goodwill impairment and impact of acquisition accounting
Profit on business acquisitions and disposals
Business transformation costs
Managed Separation costs
Finance costs
Policyholder tax adjustments
Voluntary customer remediation provision
Total adjusting items before tax
Profit/(Loss) before tax attributable to equity holders
Income tax attributable to policyholder returns
Profit/(Loss) before tax from continuing operations
Income tax credit/(expense) on continuing operations
Profit/(Loss) after tax from continuing operations
Profit after tax from discontinued operations
Profit for the period after tax
Adjusted profit after tax attributable to ordinary shareholders of Quilter plc
Adjusted profit before shareholder tax
Shareholder tax on adjusted profit
Adjusted profit after tax attributable to ordinary shareholders of Quilter plc
Adjusted weighted average number of Ordinary Shares used to
calculate adjusted basic earnings per share (millions)
Adjusted basic earnings per share (pence)
Adjusted weighted average number of Ordinary Shares used to calculate adjusted
diluted earnings per share (millions)
Adjusted diluted earnings per share (pence)
Year ended
31 December
2018
£m
Year ended
31 December
2017
£m
102
162
(31)
233
(50)
–
(84)
(24)
(13)
101
–
(70)
163
(158)
5
169
174
314
488
82
158
(31)
209
(54)
3
(89)
(32)
(39)
17
(69)
(263)
(54)
49
(5)
(41)
(46)
203
157
Year ended
31 December
2018
£m
Year ended
31 December
2017
£m
233
(6)
227
1,832
12.4
1,839
12.3
209
(14)
195
1,830
10.7
1,830
10.7
Note
6(b)
7(a)
13(b)
5(c)
Note
13(c)
14(c)
14(c)
14(c)
14(c)
14(c)
Basis of preparation of adjusted profit
Adjusted profit is one of the Group’s Alternative Performance Measures and reflects the Directors’ view of the underlying performance of the
Group. It is used for management decision making and internal performance management and is the profit measure presented in the Group’s
segmental reporting. Adjusted profit is a non-GAAP measure which adjusts the IFRS profit for specific agreed items as detailed in note 7(a):
Adjusted profit adjusting items.
Adjusted profit excludes significant costs or income that are non-operating or one-off in nature, including the impairment of goodwill;
amortisation and impairment of other intangibles acquired in business combinations; the profit or loss on business acquisitions and disposals;
costs related to business transformation; Managed Separation costs; the effects of interest costs on borrowings; and voluntary customer
remediation provisions. Adjusted profit also treats policyholder tax as a pre-tax charge (to offset against the related income collected from
policyholders), though adjusted to remove the impact of non-operating tax items.
Adjusted earnings applied in the calculation of adjusted earnings per share is calculated based on adjusted profit after tax. The calculation
of the adjusted weighted average number of shares includes own shares held in policyholders’ funds.
The Group Audit Committee regularly reviews the use of adjusted profit to confirm that it remains an appropriate basis on which to analyse
the operating performance of the business. The Committee assesses refinements to the policy on a case-by-case basis, and where possible
the Group seeks to minimise such changes in order to maintain consistency over time.
98
Financial statementsQuilter Annual Report 2018 Consolidated statement of changes in equity
For the year ended 31 December 2018
For the year ended 31 December 2018
Note
Balance at 1 January 2018
Profit for the period
Total comprehensive income
Dividends
Acquisition of entities due to managed
separation restructure¹
Issue of share capital
Movement in treasury shares
Equity share-based payment transactions2
Change in participation in subsidiaries
Aggregate tax effects of items recognised directly
in equity
Total transactions with the owners of the
Company
15
27(b)
27
Share
capital
£m
130
Share
premium
£m
58
–
–
–
–
3
–
–
–
–
3
–
–
–
–
–
–
–
–
–
–
Balance at 31 December 2018
133
58
Merger
reserve
£m
Share-based
payments
reserve
£m
Other
reserves
£m
Retained
earnings
£m
–
–
–
–
591
(3)
–
–
–
–
588
588
38
–
–
–
–
–
–
7
(12)
1
(4)
34
1
–
–
–
–
–
–
–
–
–
–
1
Total
share-
holders’
equity
£m
1,099
488
488
(221)
591
–
5
42
–
1
872
488
488
(221)
–
–
5
35
12
–
(169)
1,191
418
2,005
1 Acquisition of the Skandia UK group of entities from Old Mutual plc.
2 Equity share-based payment transactions include £27 million of IFRS 2 costs and £35 million transfer to retained earnings representing share-based payment
schemes that have fully vested. In addition, £15 million previously recognised within liabilities was transferred to equity, including cash awards that have been
converted to equity-settled awards.
For the year ended 31 December 2017
Note
Balance at 1 January 2017
Profit for the period
Other comprehensive income
Total comprehensive income
Dividends
Issue of share capital
Reduction of share capital
Movement in treasury shares1
Equity share-based payment transactions2
Change in participation in subsidiaries
Total transactions with the owners of the
Company
Balance at 31 December 2017
15
27(a)
27(a)
Share
premium
£m
Share-based
payments
reserve
£m
Other
reserves
£m
Foreign
currency
translation
reserve
£m
Retained
earnings
£m
Total
share-
holders’
equity
£m
–
–
–
–
–
58
–
–
–
–
58
58
75
–
–
–
–
–
–
–
(36)
(1)
(37)
38
3
–
–
–
–
–
–
–
–
(2)
(2)
1
2
–
–
–
–
–
–
–
–
(2)
(2)
–
782
157
6
163
(210)
–
200
(99)
31
5
(73)
872
992
157
6
163
(210)
258
–
(99)
(5)
–
(56)
1,099
Share
capital
£m
130
–
–
–
–
200
(200)
–
–
–
–
130
1 Movement in treasury shares includes £99 million of treasury shares within the JSOP Employee Benefit Trust that transferred from Old Mutual plc to the
Company during 2017. See note 28(g) for further details.
2 Equity share-based payment transactions include £18 million of IFRS 2 costs and £31 million transfer to retained earnings representing share-based payment
schemes that have fully vested. In addition, £23 million was paid to employee benefit trusts in respect of share-based payment scheme settlements.
The attached notes on pages 102 to 187 form an integral part of these consolidated financial statements.
Financial statements | Primary financial statements
99
Quilter Annual Report 2018 Consolidated statement of financial position
At 31 December 2018
Assets
Goodwill and intangible assets
Property, plant and equipment
Investments in associated undertakings2
Deferred acquisition costs1
Contract costs1
Contract assets1
Loans and advances
Financial investments2
Reinsurers’ share of policyholder liabilities
Deferred tax assets
Current tax receivable
Trade, other receivables and other assets
Derivative assets
Cash and cash equivalents
Assets of operations classified as held for sale
Total assets
Equity and liabilities
Equity
Ordinary Share capital
Ordinary Share premium reserve
Merger reserve
Share-based payments reserve
Other reserves
Retained earnings
Total equity
Liabilities
Long-term business insurance policyholder liabilities
Investment contract liabilities
Third-party interests in consolidated funds
Provisions
Deferred tax liabilities
Current tax payable
Borrowings
Trade, other payables and other liabilities
Deferred revenue1
Contract liabilities1
Derivative liabilities
Liabilities of operations classified as held for sale
Total liabilities
Total equity and liabilities
Note
16
17
25(a)
25(a)
25(b)
18
19
29
31
31(c)
24
20
26(b)
5(f)
27(a)
27(a)
27(b)
29
29
30
31
31(c)
32
33
34
34
20
5(f)
At
31 December
2018
£m
At
31 December
2017
£m
550
17
2
11
551
44
222
59,219
2,162
38
47
486
46
2,395
–
65,790
133
58
588
34
1
1,191
2,005
602
56,450
5,116
94
59
5
197
999
–
226
37
–
63,785
65,790
574
18
1
611
–
–
199
64,250
2,908
22
–
497
87
2,360
446
71,973
130
58
–
38
1
872
1,099
489
59,139
7,905
104
190
38
782
1,331
244
–
433
219
70,874
71,973
1 The Group has initially applied IFRS 15 and IFRS 9 at 1 January 2018. It has applied IFRS 15 using the cumulative effect method, under which the comparative
information is not restated. It has also taken advantage of the exemption in paragraph 7.2.15 of IFRS 9 from restating prior periods in respect of IFRS 9’s
classification and measurement (including impairment) requirements. Refer to note 4(r) for further information.
2 As at 31 December 2017, £2 million has been reclassified from investments in associated undertakings to financial investments to conform with current
year presentation.
Approved by the Board on 11 March 2019.
Paul Feeney
Chief Executive Officer
Tim Tookey
Chief Financial Officer
The attached notes on pages 102 to 187 form an integral part of these consolidated financial statements.
100
Financial statementsQuilter Annual Report 2018
Consolidated statement of cash flows
For the year ended 31 December 2018
The cash flows presented in this statement cover all the Group’s activities and include flows from both policyholder and shareholder activities.
All cash and cash equivalents are available for use by the Group except for cash and cash equivalents in Consolidated Funds.
Cash flows from operating activities
Profit before tax
Non-cash movements in profit before tax
Net changes in working capital1
Taxation paid
Total net cash flows from operating activities
Cash flows from investing activities
Net acquisitions of financial investments
Acquisition of property, plant and equipment
Acquisition of intangible assets
Acquisition of interests in subsidiaries
Cash added within acquisition of Skandia UK Limited
Net proceeds from the disposal of interests in subsidiaries3
Total net cash used in investing activities
Cash flows from financing activities
Dividends paid to ordinary equity holders of the Company
Finance costs
Proceeds from issue of Ordinary Shares
Proceeds from issue of subordinated and other debt
Subordinated and other debt repaid
Total net cash used in financing activities
Net (decrease)/increase in cash and cash equivalents
Cash and cash equivalents at beginning of the year
Effects of exchange rate changes on cash and cash equivalents
Cash and cash equivalents at end of the period
Year ended
31 December
2018
£m
Year ended
31 December
20172
£m
321
584
(669)
(92)
144
(366)
(7)
(4)
(5)
25
350
(7)
(221)
(8)
–
497
(516)
(248)
(111)
2,507
(1)
2,395
227
3,151
980
(9)
4,349
(3,549)
(8)
(9)
(33)
–
208
(3,391)
(210)
(39)
258
–
(57)
(48)
910
1,595
2
2,507
Note
26(a)
26(a)
5(a)
26(c)
26(b)
Cash flows include both continuing and discontinued operations and cash held for sale.
1 In the year end 31 December 2017, the cash flow statement has been amended to include cash of £147 million that was previously included in assets held for
2
3
sale in respect of the Single Strategy Asset Management business which has subsequently been sold in 2018.
A number of items within the 2017 comparatives have been reclassified to align with the presentation within the 2018 financial statements. There was no impact
on cash and cash equivalents resulting from these reclassifications.
Net proceeds from the disposal of interests in subsidiaries in 2018 includes the cash consideration on disposal of the Single Strategy Asset Management
business of £540 million (see note 5(b)), less cash within the Single Strategy Asset Management business at the point of disposal of £170 million and £20 million
transaction costs.
The attached notes on pages 102 to 187 form an integral part of these consolidated financial statements.
Financial statements | Primary financial statements
101
Quilter Annual Report 2018 Basis of preparation and significant accounting policies
For the year ended 31 December 2018
General Information
Quilter plc (the “Company”), a public limited company incorporated and domiciled in the United Kingdom (“UK”), together with its subsidiary
undertakings (collectively, the “Group”) offers investment and wealth management services, life assurance and long-term savings, and financial
advice through its subsidiaries and associates primarily in the UK with a presence in a number of cross-border markets.
The address of the registered office is Millennium Bridge House, 2 Lambeth Hill, London EC4V 4AJ.
The Company was, until 25 June 2018, a wholly owned subsidiary of Old Mutual plc, a FTSE 100 listed group. The Company formed part
of the Old Mutual Wealth division of Old Mutual plc, for which it acted as a holding company and delivered strategic and governance
oversight. On 25 June 2018, Quilter plc was listed on the London and the Johannesburg Stock Exchanges and is no longer part of the
Old Mutual plc group.
1: Basis of preparation
The consolidated financial statements of Quilter plc for the year ended 31 December 2018 have been prepared in accordance with
International Financial Reporting Standards (“IFRS”) as endorsed by the European Union (“EU”), and those parts of the Companies Act 2006
applicable to those reporting under IFRS.
Pursuant to section 435 of the Companies Act, the comparative figures for the financial year ended 31 December 2017 are not the Group’s
statutory accounts for that financial year. Those accounts were separate financial statements of the Company and have been reported on by
the Company’s auditor and delivered to the registrar of companies. The report of the auditor was (i) unqualified, (ii) did not include a reference
to any matters to which the auditor drew attention by way of emphasis without qualifying their report, and (iii) did not contain a statement
under section 498 (2) or (3) of the Companies Act 2006. The comparative figures for the financial year 31 December 2017 are the same as
those reported in the Group’s Listing Prospectus dated 20 April 2018, which is available on the Group’s website.
This is the first set of the Group’s annual financial statements in which IFRS 9 Financial Instruments and IFRS 15 Revenue from Contracts with
Customers have been applied. Changes in significant accounting policies to reflect these new IFRSs are explained in note 4.
The financial statements have been prepared on the historical cost basis, except for the revaluation of certain financial instruments, and are
presented in pounds sterling, which is the currency of the primary economic environment in which the Group operates.
The separate financial statements of the Company are on pages 188 to 195. The Company financial statements are prepared in accordance
with these accounting policies, other than for investments in subsidiary undertakings, which are stated at cost less impairments in accordance
with IAS 27 Separate Financial Statements.
Going concern
The Directors have considered the resilience of the Group, taking into account its current financial position, the principal risks facing the
business and the effectiveness of the mitigating strategies which are or will be applied. As a result, the Directors believe that the Group is
well placed to manage its business risks in the context of the current economic outlook and have sufficient financial resources to continue in
business for a period of at least 12 months from the date of approval of these financial statements. They therefore continue to adopt the going
concern basis in preparing the financial statements.
Basis of consolidation
The Group’s consolidated financial statements incorporate the assets, liabilities and the results of the Company and its subsidiaries.
Subsidiaries are those entities, including investment funds, controlled by the Group. More information on how the Group assesses whether it
has control is provided in accounting policy 4(a). Subsidiaries are consolidated from the date the Group obtains control and are excluded from
consolidation from the date the Group loses control.
Where necessary, adjustments are made to financial statements of subsidiaries to bring the accounting policies used in line with Group
policies. All intercompany transactions, balances and unrealised surpluses and deficits on transactions between Group companies are
eliminated on consolidation.
Liquidity analysis of the statement of financial position
The Group’s statement of financial position is in order of liquidity as is permitted by IAS 1 Presentation of Financial Statements. For each asset
and liability line item, those amounts, expected to be recovered or settled after more than 12 months after the reporting date are disclosed
separately in the notes to the financial statements.
Acquisitions and disposals
The following acquisitions and disposals have taken place and therefore their financial impacts have been accounted for in the relevant
reporting period (further details are included in note 5).
102
Financial statementsQuilter Annual Report 2018 1: Basis of preparation continued
Acquisitions completed in 2018:
• Skandia UK Limited – acquired from Old Mutual plc on 31 January 2018 (this included £566 million of intercompany indebtedness which
was replaced with equity in the form of share capital and a merger reserve; further details are included in note 27)
• 14 adviser businesses – acquired during the year to form part of Quilter Private Client Advisers (“QPCA”)
Disposals completed in 2018:
• Old Mutual Wealth Single Strategy Asset Management business – sale completed on 29 June 2018
Acquisitions completed in 2017:
• Attivo Investment Management Limited – acquired on 29 March 2017
• Caerus Capital Group Limited – acquired on 1 June 2017
• Commsale 2000 Limited – acquired from Old Mutual plc on 29 September 2017
• Global Edge Technologies (Pty) Limited – acquired from Old Mutual plc on 30 November 2017
• Eight adviser businesses – acquired during the year to form part of QPCA
Disposals completed in 2017:
• Old Mutual Wealth Italy S.p.A – sale completed on 9 January 2017
Critical accounting estimates and judgements
The preparation of financial statements requires management to exercise judgement in applying accounting policies and make estimates and
assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements. Critical accounting estimates and
judgements are those that involve the most complex or subjective assessments and assumptions. Management uses its knowledge of current
facts and circumstances and applies estimation and assumption setting techniques that are aligned with relevant actuarial and accounting
guidance to make predictions about future actions and events. Actual results may differ significantly from those estimates.
The Group Audit Committee reviews the reasonableness of judgements and estimates applied and the appropriateness of significant
accounting policies adopted in the preparation of these financial statements. The areas where judgements and estimates have the most
significant effect on the amounts recognised in these financial statements are summarised below:
Area
Critical accounting judgements
Group accounting
including the
consolidation of
investment funds
The Group has undertaken a number of acquisitions and disposals during the year including those as part of
Managed Separation and the sale of the Single Strategy Asset Management business. Other than for common
control transactions, the Group uses the acquisition method of accounting for business combinations where
the cost is measured as the aggregate of the fair values (at the date of exchange) of assets acquired, liabilities
incurred, and equity instruments issued for control of the acquirer. Judgement is applied in determining the
fair value of the consideration and net assets acquired and also the date at which the Group obtains or
cedes control. In addition, the Group’s interest in investment funds can fluctuate according to the Group’s
participation in them as clients’ underlying investment choices change. Third-party interests in consolidated
funds are classified as a liability rather than a non-controlling interest as they meet the liability classification
requirement set out in IAS 32.
Insurance contracts
– classification
The Group is required to apply judgement in assessing the level of insurance risk transferred to the Group in
determining whether a contract should be classified (and accounted for) as an insurance or investment contract.
The majority of the contracts written by the Group do not meet the definition of an insurance contract as they
do not transfer significant insurance risk and as such are accounted for as an investment contract.
Provisions
– recognition
Deferred tax
– recognition
In assessing whether a provision should be recognised, the Group evaluates the likelihood of a constructive
or legal obligation to settle an event that took place in the past and whether a reliable estimate can be made.
Significant provisions have been made in respect of the voluntary client remediation provision and the
restructuring provision in respect of the sale of the Single Strategy Asset Management business.
The timing and recognition of any deferred tax assets have been impacted as the Group has become standalone
under Managed Separation. Due to ambiguities in tax law and the complex nature of the separation process,
the tax treatment of specific potential tax assets are being discussed with the relevant tax authorities. Where
management believe there is a significant risk that the tax authorities may take a different view no asset has
been recognised. Management expects discussions with the tax authorities on Managed Separation
transactions to be concluded during 2019.
Note
4(a)
29
30
31
Financial statements | Basis of preparation and significant accounting policies
103
Quilter Annual Report 2018 Basis of preparation and significant accounting policies continued
For the year ended 31 December 2018
1: Basis of preparation continued
Area
Critical accounting estimates
Insurance contracts
– measurement
Measurement involves significant use of assumptions including mortality, morbidity, persistency, expense
valuation and interest rates.
Provisions
– measurement
Deferred tax
– measurement
Goodwill and
intangible assets
The amount of provision is calculated based on the Group’s estimation of the expenditure required to settle the
obligation at the statement of financial position date. The key assumptions in relation to the voluntary customer
remediation provision have included the investment return used, the point at which customers are remediated
and the timing of remediation. The provision includes estimates of the cost of future claims and programme
remediation costs.
The estimation of future taxable profits is performed as part of the annual business planning process, and
is based on estimated levels of assets under management, which are subject to a large number of factors
including worldwide stock market movements, related movements in foreign exchange rates and net client
cash flow, together with estimates of expenses and other charges.
The valuation of goodwill and intangible assets that are recognised as the result of a business combination
involves the use of valuation models. These have arisen principally on the acquisition of the Quilter Cheviot
business, Intrinsic and on various adviser business acquisitions. In relation to goodwill impairment, the
determination of a cash generating unit’s (“CGUs”) recoverable value is based on the discounted value of
the expected future profits of each business. Significant estimates include forecast cash flows, new business
growth and discount rates.
Valuation
of investments
Where quoted market prices are not available, valuation techniques are used to measure financial investments.
When valuation techniques use significant unobservable inputs they are subject to estimation uncertainty
and are categorised as level 3 in the fair value hierarchy. Matching liabilities are similarly categorised as level 3.
Note
29
30
31
16
22
2: New standards, amendments to standards, and interpretations adopted by the Group
The Group adopted IFRS 9 Financial Instruments and IFRS 15 Revenue from Contracts with Customers for the first time in 2018. Although significant
standards, they did not have a material impact on the Group. The majority of the Group’s financial assets and liabilities continue to be measured
at fair value through profit or loss (“FVTPL”) after the implementation of IFRS 9. In relation to IFRS 15 the Group was already largely compliant in
the way it recognises fee and commission income. The impact of adopting these two new standards is outlined in note 4(r): Changes in significant
accounting policies.
Other standards:
In addition to IFRS 9 and IFRS 15, the following amendments to the accounting standards, issued by the International Accounting Standards
Board (“IASB”) and endorsed by the EU, have been adopted by the Group from 1 January 2018 with no material impact on the Group’s
consolidated results, financial position or disclosures:
• Amendments to IFRS 2 Classification and Measurement of Share-based Payment Transactions;
• Amendments to IFRS 4 Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts;
• Amendments to IAS 40 Transfers of Investment Property;
• Amendments to IFRS 1 and IAS 28 Annual improvements to IFRSs 2014–2016 cycle; and
• IFRIC 22 Foreign currency transactions and advance consideration.
3: Future standards, amendments to standards, and interpretations not early-adopted in these financial statements
Certain new standards, interpretations and amendments to existing standards have been published by the IASB that are mandatory for the
Group’s annual accounting periods beginning after 1 January 2019. The Group has not early-adopted these standards, amendments and
interpretations. The new standards that will have a significant impact on the Group are summarised below:
• IFRS 16 Leases
The IASB issued IFRS 16 Leases in January 2016. IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure
of leases for both parties to a contract, i.e. the customer (“lessee”) and the supplier (“lessor”). IFRS 16 replaces the previous leases standard,
IAS 17 Leases, and related interpretations and will be effective for accounting periods beginning on or after 1 January 2019.
104
Financial statementsQuilter Annual Report 2018 3: Future standards, amendments to standards, and interpretations not early-adopted in these
financial statements continued
Under IFRS 16 and at inception of a contract, the Group assesses whether a contract is, or contains, a lease. A contract is, or contains, a lease
if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. To assess where a
contract conveys the right to control the use of an identified asset, the Group assesses whether:
• the contract involves the use of an identified asset – this may be specified explicitly or implicitly, and should be physically distinct or
represent substantially all of the capacity of a physically distinct asset. If the supplier has a substantive substitution right, then the asset
is not identified;
• the Group has the right to obtain substantially all of the economic benefits from use of the asset throughout the period of use; and
• the Group has the right to direct the use of the asset. This is deemed to be when it has the decision making rights that are most relevant to
changing how and for what purpose the asset is used. In rare cases where the decision about how and for what purpose the asset is used
is predetermined, the Group has the right to direct the use of the asset if either:
• it has the right to operate the asset; or
• it designed the asset in a way that predetermines how and for what purpose it will be used.
This policy is applied to contracts entered into, or changed, on or after 1 January 2019.
For lessees, IFRS 16 will result in almost all leases being recognised in the statement of financial position as IFRS 16 eliminates the
classification of leases as either operating leases or finance leases as is required by IAS 17 and, instead, introduces a single lessee accounting
model. Applying that model, a lessee is required to recognise:
• assets (the right to use the leased item) and liabilities (the obligation to pay lease rentals); and
• depreciation of lease assets separately from interest on lease liabilities in the income statement.
The Group intends to apply the simplified transition approach and will not restate comparative amounts for the year prior to first adoption.
At transition, lease liabilities will be measured at the present value of the remaining lease payments, discounted at the Group’s incremental
borrowing rate as at 1 January 2019. Right-of-use assets will be measured at their carrying amount as if IFRS 16 had been applied since the
commencement date, discounted using the lessee’s incremental borrowing rate at the date of initial application – the Group will apply this
approach for all of its property leases.
On transition to IFRS 16, the Group estimates that it will recognise an additional £74 million of right-of-use assets and £83 million of lease
liabilities, recognising a reduction in opening retained earnings at 1 January 2019 of £9 million, with no impact to the income statement.
In subsequent periods, the Group will recognise a depreciation charge on right-of-use assets and finance interest charges on lease liabilities
in the income statement and, over the term of lease contracts, expect a broadly neutral impact to the income statement as the aggregate
depreciation charges and finance interest charges replace office lease rental payments. When measuring the lease liabilities, the Group
discounts the lease payments using its incremental borrowing rate at 1 January 2019. The rate applied is dependent on the duration of the
lease contract and will range from 1.7% to 3.7%.
The Group will use the following practical expedients when applying IFRS 16 to leases previously classified as operating leases under IAS 17:
• apply a single discount rate to a portfolio of leases with similar characteristics;
• apply the exemption not to recognise right-of-use assets and liabilities for leases for low value items (IASB basis of conclusion is that low
value items should be the GBP equivalent of less than USD $5,000) or short term leases (less than 12 months); and
• use hindsight when determining the lease term if the contract contains options to extend or terminate the lease.
Accounting for lessors will not change significantly, as IFRS 16 substantially carries forward the lessor accounting requirements in IAS 17.
Accordingly, a lessor continues to classify its leases as operating leases or finance leases, and to account for those two types of leases
differently.
• IFRS 17 Insurance contracts
The IASB issued IFRS 17 Insurance Contracts in May 2017. When IFRS 17 is endorsed by the EU, it will replace its interim predecessor, IFRS 4
Insurance Contracts. IFRS 17 is a comprehensive standard which provides a single accounting model for all insurance contracts. IFRS 17 will
replace a wide range of different accounting practices previously permitted, improving transparency and enabling investors and regulators
to understand and compare the financial position and performance of an insurer, irrespective of where they are based geographically.
Financial statements | Basis of preparation and significant accounting policies
105
Quilter Annual Report 2018 Basis of preparation and significant accounting policies continued
For the year ended 31 December 2018
3: Future standards, amendments to standards, and interpretations not early-adopted in these
financial statements continued
The measurement model
The use of current estimates at each reporting date and an explicit risk adjustment to measure obligations created by insurance contracts,
provides up to date information about cash flows and associated risk and timing. ‘Day one’ profits are deferred and recognised in the income
statement through the release of the contractual service margin (“CSM”), which has the effect of recognising revenue as services are
provided. This is consistent with the treatment in IFRS 15.
Presentation and disclosure
Insurers’ financial statements will look different under IFRS 17. Insurers will be required to provide information about sources of profit
or losses from insurance and investment related services, comprising insurance revenue and insurance service expenses (underwriting
activity), as well as finance income or expense (investing activity). New performance metrics and KPIs will be required to explain business
results to the investment community. Disclosure requirements focus on amounts recognised in the financial statements, significant
judgements and changes in those judgements, as well as information about the nature and extent of risks that arise from insurance
contracts.
Effective date
The IASB has recently announced that it has tentatively decided to defer the effective date of IFRS 17 by 1 year to 1 January 2022, with early
adoption available. The standard is yet to be endorsed by the EU. Management is currently assessing the impact of this standard on the
Group and is establishing a multi-functional project team involving Finance, Actuarial, Risk and IT.
• IFRIC 23 Uncertainty over income tax treatments
The IASB issued IFRIC 23 Uncertainty over Income Tax Treatments in June 2017. This interpretation sets out how to determine taxable profits/
losses, tax bases, unused tax losses, unused tax credits and tax rates (collectively referred to as ‘accounting tax position’) where there
is uncertainty over treatment. The Group is concluding on the impact of the adoption of this Interpretation. All tax provisions for the Group
are currently calculated consistent with the requirements of IAS 12 Income taxes.
Effective date
IFRIC 23 is effective for the Group for the accounting period beginning on 1 January 2019.
4: Significant accounting policies
The Group’s significant accounting policies are described below. Any changes to the Group’s significant accounting policies as a result
of changes in accounting standards during the year are detailed in note 4(r).
4(a): Group accounting
Subsidiaries
Subsidiary undertakings are those entities (investees) controlled by the Group. The Group controls an investee if, and only if, the Group has
all of the following three elements of control:
• power over the investee;
• exposure or rights to variable returns from its involvement with the investee; and
• the ability to affect those returns through its power over the investee.
For operating entities this usually arises with a shareholding in the entity of 50% or more. The Group also consolidates certain of its interests in
open-ended investment companies (“OEICs”), unit trusts, mutual funds and similar investment vehicles (collectively “investment funds”). Where,
as is often the case with investment funds, voting or similar rights are not the dominant factor in deciding who controls the investee, other
factors are considered in the control assessment. These are described in more detail below.
The Group continually assesses any changes to facts and circumstances to determine, in the context of the three elements of control listed
above, whether it still controls investees and is required to consolidate them.
Investment funds
The Group invests in a wide range of investment funds such as OEICs and unit trusts generally in respect of its unit-linked investment contracts
where investments are made to match clients’ investment choices. For some of these funds it also acts as fund manager. These funds invest
predominantly in equities, bonds, cash and cash equivalents. The Group holds interests in these investment funds mainly through the receipt
of fund management fees, in the case where the Group acts as fund manager, which provide a variable return based on the value of the funds
under management and other criteria, and in the case of third party funds where fund performance has an impact on fund-based fees within
unit-linked investment contracts and other similar client investment products. Where the Group acts as fund manager it may also hold
investments in the underlying funds, through acquiring units or shares. Where these investments are held in unit-linked funds, the Group
has a secondary exposure to variable returns through the management fees that it deducts from unit-linked policyholders’ account balances.
The Group’s percentage ownership can fluctuate from day to day according to the Group’s participation in them as clients’ underlying
investment choices change.
106
Financial statementsQuilter Annual Report 2018 4: Significant accounting policies continued
4(a): Group accounting continued
When assessing control of investment funds, the Group considers the purpose and design of the fund, scope of its decision making authority,
including its ability to direct relevant activities and to govern the operations of a fund so as to obtain variable returns from that fund and its
ability to use its power to affect these returns, both from the perspective of an investor and an asset manager. In addition, the Group assesses
rights held by other parties including substantive removal (“kick-out” rights) that may affect the Group’s ability to direct relevant activities.
On consolidation, the interests of parties other than the Group are assessed to determine whether they should be classified as liabilities or as
non-controlling interests (“NCIs”) on the statement of financial position. Interests classified as a liability are described as “Third-party interests
in consolidated funds”. Such interests are not recorded as NCIs as they meet the liability classification requirement set out in IAS 32 Financial
Instruments: Presentation. These liabilities are regarded as current, as they are repayable on demand, although it is not expected that they will
be settled in a short time period.
Business combinations
The Group is required to use the acquisition method of accounting for business combinations. Business combinations are accounted for at the
date that control is achieved (the acquisition date). The cost of a business combination is measured as the aggregate of the fair values (at the date
of exchange) of assets given, liabilities incurred or assumed, and equity instruments issued by the Group in exchange for control of the acquiree.
The acquiree’s identifiable assets, liabilities and contingent liabilities that meet the conditions for recognition under IFRS 3 Business
Combinations are recognised at their fair value at the acquisition date.
If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, the Group
reports provisional amounts. Where provisional amounts are reported these are adjusted during the measurement period which extends up
to a maximum of 12 months from the acquisition date. Additional assets or liabilities may also be recognised during this period, to reflect any
new information obtained about the facts and circumstances that existed as of the date of acquisition date that, if known, would have affected
the amounts recognised on that date.
Goodwill represents the excess of the cost of an acquisition over the fair value of the Group’s share of the identifiable net assets of the
acquired entity at the date of acquisition. Acquisition related costs are expensed as incurred.
The difference between the proceeds from the disposal of a subsidiary undertaking and its carrying amount as at the date of disposal,
including the cumulative amount of any related exchange differences that are recognised in the foreign currency translation reserve equity,
is recognised in the consolidated income statement as the gain or loss on disposal of the subsidiary undertaking.
Common control combinations
Merger accounting is used by the Group for common control combinations, which are transactions between entities that are ultimately
controlled by the same party or parties. This method treats the merged entities as if they had been combined throughout the current and
comparative accounting periods. Merger accounting principles for these combinations result in the recognition of a merger reserve in the
consolidated statement of financial position, being the difference between the nominal value of any new shares issued by the parent company
for the acquisition of the shares of the subsidiary and the subsidiary’s Net Asset Value (“NAV”). Such transactions attract merger relief under
section 612 of the Companies Act 2006.
4(b): Fair value measurement
The Group uses fair value to measure the majority of its assets and liabilities. Fair value is a market-based measure and is the price that would
be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. For a
financial instrument, the best evidence of fair value at initial recognition is normally the transaction price, which represents the fair value of the
consideration given or received.
Where observable market prices in an active market, such as bid or offer (ask) prices are unavailable, fair value is measured using valuation
techniques based on the assumptions that market participants would use when pricing the asset or liability. If an asset or a liability measured
at fair value has a bid or an offer price, the price within the bid-offer spread that is most representative of fair value is used as the basis of the
fair value measurement.
The quality of the fair value measurement for financial instruments is disclosed by way of the fair value hierarchy, whereby level 1 represents a
quoted market price for identical financial assets and liabilities, level 2 financial assets and liabilities are valued using inputs other than quoted
prices in active markets included in level 1, either directly or indirectly and level 3 whereby financial assets and liabilities are valued using
valuation techniques where one or more significant inputs are unobservable.
Classifying financial instruments into the three levels outlined above provides an indication about the reliability of inputs used in determining
fair value. More information is provided in note 22.
Financial statements | Basis of preparation and significant accounting policies
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Quilter Annual Report 2018 Basis of preparation and significant accounting policies continued
For the year ended 31 December 2018
4: Significant accounting policies continued
4(c): Product classification
The Group’s life assurance contracts are categorised as either insurance contracts or investment contracts, in accordance with the
classification criteria set out in the paragraphs below.
Insurance contracts
The Group’s insurance contracts include traditional life and health insurance contracts including for the latter standalone critical illness
and long term care policies, as well as the unbundled insurance component of unit-linked contracts. Life assurance contracts are categorised
as insurance contracts at the inception of the contract only if the contract transfers significant insurance risk. Insurance risk is significant if,
and only if, an insured event could cause the Group to make significant additional payments in any scenario, excluding scenarios that lack
commercial substance. Such contracts remain insurance contracts until all rights and obligations are extinguished or expire. It is possible
to reclassify contracts as insurance contracts after inception if insurance risk becomes significant.
IFRS accounting for insurance contracts in UK companies was ‘grandfathered’ at the date of transition to IFRS and determined in accordance
with the Statement of Recommended Practice on Accounting for Insurance Business (issued by the Association of British Insurers and
subsequently withdrawn from 1 January 2015), adjusted to remove certain regulatory reserves and margins in assumptions.
Investment contracts
Investment contracts do not meet the definition of an insurance contract as they do not transfer significant insurance risk from the
policyholder to the insurer. Unit-linked investment contracts are separated into two components being an investment management services
component and a financial liability. The financial liability component is mandatorily at FVTPL as it is managed on a fair value basis, and its value
is directly linked to the market value of the underlying portfolio of assets. The Group does not share in the explicit returns of the assets held
by the policyholder, apart from secondary exposure to future annual management fees that the Group expects to receive over the life of the
policy.
“Hybrid” Insurance and investment contracts – unbundling
Generally, life and pensions contracts allow for a single classification at product class level. For those contracts containing both an insurance
component and an investment component, the Group has elected to unbundle these contracts and account for each component separately.
This approach has been applied to a number of the Group’s unit-linked assurance business contract types where a significant component of
insurance risk exists.
4(d): Fee income and other income from service activities
Fee income and other income from service activities represents the fair value of services provided, net of value-added tax and consists
predominantly of fees charged to clients for plan and policy administration, investment management, surrenders and other contract services
in relation to the Group’s unit-linked business. The fees may be for fixed amounts or vary with the amounts being managed, and will generally
be charged as an adjustment to the policyholder’s balance. Fee income is recognised as revenue as investment management services are
provided to policyholders. Where fees are received upfront, either at inception or over an initial period for services not yet provided, the
income is deferred and recognised as a deferred revenue liability on the statement of financial position and released to the income statement
as services are provided over the lifetime of the contract. Deferred fee income has been renamed to contract liabilities in 2018 following
the adoption of IFRS 15. In addition, this also includes advice income from Quilter Financial Planning.
4(e): Investment return
Investment return comprises two elements: investment income; and realised and unrealised gains and losses on investments held at FVTPL.
Investment income
Investment income includes dividends on equity securities which are recorded as revenue on the ex-dividend date and interest income which
is recognised using the effective interest rate method which allocates interest and other finance costs at a constant rate over the expected life
of the financial instrument.
Realised and unrealised gains and losses
A gain or loss on a financial investment is only realised on disposal or transfer and represents the difference between the proceeds received,
net of transaction costs, and its original cost (or amortised cost). Unrealised gains or losses, arising on investments which have not been
disposed or transferred, represent the difference between the carrying value at the year end and the carrying value at the previous year end
or purchase value (if this occurs during the year), less the reversal of previously recognised unrealised gains or losses in respect of disposals
made during the year.
Gains and losses resulting from changes in both market value and foreign exchange on investments classified at FVTPL are recognised in the
consolidated income statement in the period in which they occur.
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Financial statementsQuilter Annual Report 2018 4: Significant accounting policies continued
4(f): Premiums
Premiums receivable under insurance contracts are shown in the income statement gross of commission and exclude sales-based taxes
and levies. For regular (and recurring) premium contracts, receivables are recognised when payments are due. Premiums in respect of
other insurance contracts are recognised in the income statement when receivable, apart from premiums received in respect of unit-linked
insurance contracts (see below). Where policies lapse due to non-receipt of premiums, then all the related premium income accrued but not
received from the date they are deemed to have lapsed is offset against premiums.
Premiums received in respect of unit-linked insurance contracts are recognised when the corresponding liability to the policyholder
is established. For single premium business, this is the date from which the policy is effective.
4(g): Deferred acquisition costs and Contract costs
Investment contracts
Incremental costs, including fee and commission expenses, that are directly attributable to securing either unit-linked investment contracts or
other asset management services are deferred and recognised as a deferred acquisition cost (“DAC”) asset if they can be identified separately
and measured reliably and it is probable that the costs will be recovered. Deferred acquisition costs have been renamed to contract costs in
2018 following the adoption of IFRS 15. Contract costs are linked to the contractual right to benefit from providing investment management
services, they are therefore amortised through the income statement as the related revenue is recognised.
After initial recognition, contract costs are reviewed by category of business and are impaired to the extent that they are no longer considered
to be recoverable. All other costs are recognised as expenses when incurred.
Insurance contracts
Incremental costs directly attributable to securing an insurance contract, such as initial commission and the costs of obtaining and processing
such business are deferred and a DAC asset recognised, to the extent that they are expected to be recovered out of future margins.
Contract costs and insurance DAC are amortised as an expense on a straight line basis, adjusted for expected persistency, over the expected
life of the contract, as the services are provided (equal service provision assumed) but subject to a restriction whereby it is no longer than the
period in which such costs are expected to be recoverable out of future margins.
At the end of each reporting period, contract costs and DAC are reviewed for recoverability, by category of business, against future margins
from the related contracts. They are impaired in the income statement where they are no longer considered to be recoverable.
4(h): Investment contract liabilities
The majority of the Group’s investment contracts are unit-linked contracts. At inception, investment contract liabilities for unit-linked business
are designated as financial liabilities and measured at FVTPL (mandatory under IFRS 9 from 1 January 2018 and previously designated at FVTPL
under IAS 39 Financial Instruments: Recognition and Measurement see note 4(r) for full details of the impact to the Group of transitioning from
IAS 39 to IFRS 9). For these contracts, the fair value liability is equal to the total value of units allocated to the policyholders, based on the bid
price of the underlying assets in the fund. The FVTPL classification reflects the fact that the matching investment portfolio, that backs the
unit-linked liabilities, is managed, and its performance evaluated, on a fair value basis.
Contributions received on investment contracts are treated as policyholder deposits and credited directly to investment contract liabilities
on the statement of financial position, as opposed to being reported as revenue in the consolidated income statement. This practise is known
as deposit accounting. Withdrawals paid out to policyholders on investment contracts are treated as a reduction to policyholder deposits,
reducing the investment contract liabilities on the statement of financial position, as opposed to being recognised as expenses in the
consolidated income statement.
4(i): Insurance contract liabilities
Claims
Long-term business claims reflect the cost of all claims arising during the year and include payments for maturities, annuities, surrender, death
and disability claims, as well as claims handling costs, incurred in connection with the negotiation and settlement of claims. They are recognised
as expenses in the income statement. Maturity and annuity claims are recorded as they fall due for payment. Death and disability claims and
surrenders are accounted for when notified. Reinsurance recoveries are accounted for in the same period as the related claim.
Long-term business liabilities
The Group calculates its long term business liabilities for the life operation, based on local regulatory requirements and actuarial principles
consistent with those applied in the local market. For UK business this is in accordance with UK regulatory requirements (the Modified
Statutory Solvency Basis), in place before the introduction of Solvency II, adjusted to remove certain regulatory reserves and margins in
assumptions. Liabilities are calculated using the gross premium valuation method, which is based on the amount of contractual premiums
receivable and includes explicit assumptions for interest and discount rates, as well as for mortality, morbidity, persistency and future
expenses. These assumptions are based on market data, internal experience data and also external data where either no internal experience
data exists or where internal data is too sparse to give credible estimates of the true expectation of experience. Anticipated future trends have
been allowed for in deriving mortality and morbidity assumptions. The liability for contractual benefits that are expected to be paid in the
future is determined as the discounted value of the excess of future expected outgoings over future expected income. Future expected
outgoings include claim costs, direct expenses, commissions and reinsurance premiums. Future expected income includes premiums payable
by policyholders and recoveries made from reinsurers. For anticipated future claims that have been incurred but not yet paid, the Group
establishes a provision for outstanding claims.
Financial statements | Basis of preparation and significant accounting policies
109
Quilter Annual Report 2018 Financial statements
Basis of preparation and significant accounting policies continued
For the year ended 31 December 2018
4: Significant accounting policies continued
4(i): Insurance contract liabilities continued
The method used to determine liabilities for long-term life business makes allowance for the level of risk and uncertainty inherent in the
business by the use of margins for caution within the assumptions used to project future income and outgoings. The portion of premiums
received that relates to unexpired risks as at the reporting period end is reported within the long term insurance liabilities. The change
in insurance contract liabilities, comprising the full movement in the corresponding liabilities during the period, is recognised in the
income statement.
Liability adequacy test
At each reporting date, the Group assesses whether the recognised insurance contract liabilities are adequate in light of current estimates
of future cash flows. This liability adequacy test is performed by comparing the carrying value of the insurance contract liabilities and the
discounted projections of future cash flows. If the carrying value is less than the future expected cash flows, the deficiency is initially recognised
by writing down the DAC asset. The recoverability of the DAC asset is tested against present value of in-force (“PVIF”) business, determined on
a best estimate basis, with any deficit written off the DAC asset immediately. Any required write down in excess of the value of the DAC asset
is recognised in the income statement with a corresponding additional provision in the statement of financial position.
4(j): Reinsurance
Long-term insurance business
The Group cedes reinsurance in the normal course of business for the purpose of limiting its claims costs. Ceded reinsurance contracts include
arrangements where regular risk premiums are paid by the Group to the reinsurer and an agreed share of claims are paid by the reinsurer
to the Group. These arrangements are in respect of underlying policies that are classified as insurance contracts. Accordingly, contracts with
reinsurers are assessed to establish whether they contain significant insurance risk to justify such a classification. Only rights under contracts
that give rise to a transfer of significant insurance risk are accounted for as long term insurance business reinsurance assets.
Reinsurance premiums for ceded reinsurance are recognised as an expense on a basis that is consistent with the recognition basis for
the premiums on the related insurance contracts. Reinsurance recoveries are recognised in the income statement in the same period
as the related claim.
Reinsurance recoveries due from reinsurers and reinsurance premiums due to reinsurers under reinsurance contracts that are contractually
due at the reporting date are separately recognised in other receivables and other payables respectively unless a right of offset exists, in which
case the net amount is reported on the consolidated statement of financial position. Assets, liabilities, income and expenses arising from
ceded reinsurance contracts are presented separately from the related assets, liabilities, income and expenses from the underlying insurance
contracts because the reinsurance arrangements do not relieve the Group from its direct obligations to its policyholders.
The value of the benefits that the Group is entitled to under the ceded reinsurance arrangements are reported as “reinsurers’ share of
policyholder liabilities” in the statement of financial position. This is calculated as the difference between the insurance contract liability
assuming no reinsurance arrangement exists (the gross basis) and the liability with explicit allowance for all cash flows relating to the
reinsurance arrangement (the net basis). Insurance contract liabilities are calculated quarterly on the gross and net bases taking into account
all relevant experience effects. The reinsurers’ share of insurance provisions is updated consistently with these calculations. Any resulting
movement in the reinsurers’ share of insurance provisions is recognised in the income statement.
Reinsurance assets are assessed for impairment at each reporting date. A reinsurance asset is impaired if there is objective evidence, as
a result of an event that occurred after its initial recognition, that the Group may not recover all amounts due to it under the terms of the
contract and that the event has an impact that can be measured reliably in respect of amounts expected to be received from the reinsurer.
The reinsurers’ share of policyholder liabilities is updated for any impairment. Any resulting movement in the reinsurers’ share of policyholder
liabilities is recognised in the income statement.
Investment contracts
Policyholder investments recognised by the Group that are fully managed by a third party reinsurer are shown on the statement of financial
position within reinsurers’ share of investment contract liabilities, with the corresponding liability to the policyholder included within liabilities
for linked investment contracts.
4(k): Financial instruments (other than derivatives)
As of 1 January 2018, the Group adopted IFRS 9 Financial Instruments and categorises its financial instruments as described in detail below.
Prior to this, the Group applied the previous accounting policy in line with IAS 39 Financial Instruments: Recognition and Measurement. As detailed
in note 4(r) this change in accounting standard has mainly resulted in new classifications, all of which are shown in note 4(r) under both IFRS 9
and IAS 39.
Financial instruments cover a wide range of financial assets, including financial investments, trade receivables and cash and cash equivalents
and certain financial liabilities, including investment contract liabilities, trade payables, and borrowings. Derivatives, which are also financial
instruments, are covered by accounting policy 4(l). Financial assets and financial liabilities are recognised in the Group’s statement of financial
position when the Group becomes party to the contractual provisions of the instrument. The Group derecognises a financial asset when the
contractual rights to receive cash flows have expired or been forfeited by the Group. A financial liability is derecognised when the liability is
extinguished.
110110 Quilter Annual Report 2018
Financial statementsQuilter Annual Report 2018 4: Significant accounting policies continued
4(k): Financial instruments (other than derivatives) continued
The Group assesses the objective of a business model in which an asset is held at a portfolio level because this best represents the way the
business is managed and information is reported to management. The assessment considers the stated portfolio policies and objectives.
The Group determines its strategy in holding the financial asset, particularly considering whether the Group earns contractual interest
revenue, for example to match the duration of financial assets to the duration of liabilities that are funding those assets or to realise cash
flows through the sale of the assets. The frequency, volume and timing of sales in prior periods may be reviewed, along with the reasons
for such sales and expectations about future sales activity. These factors enable management to determine which financial assets should
be measured at fair value through the profit or loss (“FVTPL”).
Initial measurement
A financial asset (unless it is a trade receivable without a significant financing component that is initially measured at the transaction price)
is initially measured at fair value plus, for an item not at FVTPL, transaction costs that are directly attributable to its acquisition.
Subsequent measurement
The classification of financial assets depends on: (i) the purpose for which they were acquired; (ii) the business model in which a financial
asset is managed; and (iii) its contractual cash flow characteristics. The standard has four categories, of which two are applicable within
Quilter: FVTPL and amortised cost. This classification determines the subsequent measurement basis. The following accounting policies
apply to the subsequent measurement of financial assets.
Measurement basis
Accounting policies
Financial assets at FVTPL
Amortised cost
These financial assets are subsequently measured at fair value. Net gains and losses, including interest and
dividend income, are recognised in profit or loss.
These financial assets are subsequently measured at amortised cost using the effective interest rate method.
The amortised cost is reduced by impairment losses. Interest income, foreign exchange gains and losses and
impairment are recognised in profit or loss. Any gain or loss on de-recognition is recognised in profit or loss.
Amortised cost
A financial asset is measured at amortised cost if it meets both of the following conditions and is not measured at FVTPL:
• the asset is held within a business model whose objective is to hold assets to collect contractual cash flows; and
• the contractual terms of the financial asset give rise to cash flows that are solely payments of principal and interest (“SPPI”) on the principal
amount outstanding on specified dates.
For the purposes of this assessment, principal is defined as the fair value of the financial asset on initial recognition. Interest is defined as
consideration of the time value of money and for the credit risk associated with the principal amount outstanding during a particular period
of time and for other basic lending risks and costs (e.g. liquidity risk and administrative costs), as well as profit margin.
Financial investments
All other financial assets that are not measured at amortised cost are classified and measured at FVTPL. This includes any derivative financial
assets (the majority of which are as a result of the consolidated of funds, as described in note 4(a)). In addition, on initial recognition, the Group
may irrevocably designate a financial asset that otherwise meets the requirements to be measured at amortised cost, at FVTPL, if doing so
eliminates or significantly reduces an accounting mismatch that would otherwise arise.
The Group’s interests in pooled investment funds, equity securities and debt securities are mandatorily at FVTPL, as they are part of groups of
financial assets which are managed and whose performance is evaluated on a fair value basis. These investments are recognised at fair value
initially and subsequently, with changes in fair value recognised in investment return in the consolidated income statement.
The fair value of quoted financial investments, which represents the vast majority of the Group’s investments, are based on the bid value
(within the bid-ask spread) which the Group considers to be the most representative of fair value. If the market for a financial investment is
not active, the Group establishes fair value by using valuation techniques such as recent arm’s length transactions, reference to similar listed
investments, discounted cash flow or option pricing models.
The Group recognises purchases and sales of financial investments on trade date, which is the date that the Group commits to purchase
or sell the assets. The costs associated with investment transactions are included within expenses in the consolidated income statement.
Financial statements | Basis of preparation and significant accounting policies
Quilter Annual Report 2018
111111
Financial statements
Basis of preparation and significant accounting policies continued
For the year ended 31 December 2018
4: Significant accounting policies continued
4(k): Financial instruments (other than derivatives) continued
Loans and advances
Loans with fixed maturities, including policyholder loans, are recognised when cash is advanced to borrowers or policyholders. Policyholder
loans are interest free and are mandatorily at FVTPL since they are taken from the policyholder’s unit-linked account and thereby matched
to underlying unit-linked liabilities held at FVTPL, which are unaffected by the transaction. Other loans and advances are carried at amortised
cost using the effective interest rate method. These assets are subject to the impairment requirements outlined below.
Cash and cash equivalents
Cash and cash equivalents comprise cash balances, call deposits, money market collective investment funds and other short term deposits
with an original maturity of three months or less.
Cash and cash equivalents held within money market collective investment funds are classified as FVTPL. All other cash and cash equivalents
are classified as amortised cost which means they are initially recognised at fair value and subsequently carried at amortised cost using the
effective interest method and are subject to the impairment requirements outlined below. The carrying amount of cash and cash equivalents,
other than money market collective investment funds which are measured at fair value, approximates to their fair value.
Financial liabilities and equity
Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. At inception,
investment contract liabilities for unit-linked business are designated as financial liabilities and measured at FVTPL. For unit-linked contracts,
the fair value liability is equal to the total value of units allocated to the policyholders, based on the bid price of the underlying assets in the
fund. The FVTPL classification reflects the fact that the matching investment portfolio, that mirrors the unit-linked liabilities, is managed, and its
performance evaluated, on a fair value basis. Other financial liabilities, including the Group’s borrowings and trade payables, are measured at
amortised cost using the effective interest method.
Trade payables and receivables
Trade payables and receivables are classified at amortised cost. Due to their short term nature, their carrying amount is considered to be the
same as their fair value.
Investments in subsidiaries
Parent Company investments in subsidiary undertakings are initially stated at cost. Subsequently, investments in subsidiary undertakings are
stated at cost less provision for impairment. An investment in a subsidiary is deemed to be impaired when its carrying amount is greater than
its estimated recoverable amount, and there is evidence to suggest that the impairment occurred subsequent to the initial recognition of the
asset in the financial statements. All impairments are recognised in the Parent Company income statement as they occur.
Impairment of financial assets
IFRS 9 introduces an expected loss accounting model for credit losses that differs significantly from the incurred loss model under IAS 39
and results in earlier recognition of credit losses.
The new impairment model applies to financial assets measured at amortised cost, contract assets, but not to investments in equity
instruments. Financial assets at amortised cost include trade receivables, cash and cash equivalents (excluding money market collective
investment funds which are measured at fair value) and corporate debt securities.
Under IFRS 9, credit loss allowances are measured on each reporting date according to a three-stage expected credit loss (“ECL”) impairment
model:
Performing financial assets
Stage 1
From initial recognition of a financial asset to the date on which an asset has experienced a significant increase in credit risk relative to its initial
recognition, a stage 1 loss allowance is recognised equal to the credit losses expected to result from its default occurring over the earlier of the
next 12 months or its maturity date (“12-month ECL”).
Stage 2
Following a significant increase in credit risk relative to the initial recognition of the financial asset, a stage 2 loss allowance is recognised equal
to the credit losses expected from all possible default events over the remaining lifetime of the asset (“Lifetime ECL”).
The assessment of whether there has been a significant increase in credit risk requires considerable judgement, based on the lifetime
probability of default (“PD”). Stage 1 and 2 allowances are held against performing loans; the main difference between stage 1 and stage 2
allowances is the time horizon. Stage 1 allowances are estimated using the PD with a maximum period of 12 months, while stage 2 allowances
are estimated using the PD over the remaining lifetime of the asset.
112 Quilter Annual Report 2018
4: Significant accounting policies continued
4(k): Financial instruments (other than derivatives) continued
Impaired financial assets
Stage 3
When a financial asset is considered to be credit-impaired, the allowance for credit losses (“ACL”) continues to represent lifetime expected
credit losses. However, interest income is calculated based on the amortised cost of the asset, net of the loss allowance, rather than its gross
carrying amount.
Application of the new impairment model
The Group applies IFRS 9’s new ECL model to two main types of financial assets that are measured at amortised cost:
• trade receivables and contract assets, to which the simplified approach prescribed by IFRS 9 is applied. This approach requires the
recognition of a Lifetime ECL allowance on day one and thereafter; and
• loans at amortised cost, to which the general three-stage model (described above) is applied, whereby a 12-month ECL is recognised
initially and the balance is monitored for significant increases in credit risk which triggers the recognition of a Lifetime ECL allowance.
ECLs are a probability-weighted estimate of credit losses. ECLs for financial assets that are not credit-impaired at the reporting date are
measured as the present value of all cash shortfalls (i.e. the difference between the cash flows due in accordance with the contract and the
cash flows that the Group expects to receive). ECLs for financial assets that are credit-impaired at the reporting date are measured as the
difference between the gross carrying amount and the present value of estimated future cash flows. ECLs are discounted at the effective
interest rate of the financial asset. The maximum period considered when estimating ECLs is the maximum contractual period over which
the Group is exposed to credit risk.
The measurement of ECLs considers information about past events and current conditions, as well as supportable information about future
events and economic conditions. The Group has implemented its impairment methodology for estimating the ACL, taking into account
forward-looking information in determining the appropriate level of allowance. In addition it has identified indicators and set up procedures
for monitoring for significant increases in credit risk.
Credit-impaired financial assets
At each reporting date, the Group assesses whether financial assets carried at amortised cost are credit-impaired. A financial asset is credit-
impaired when one or more events that have a detrimental impact on the estimated future cash flows of the financial asset have occurred.
Evidence that a financial asset is credit-impaired includes events such as significant financial difficulty of the borrower or issuer, a breach
of contract such as a default or past due event or the restructuring of a loan or advance by the Group on terms that the Group would not
otherwise consider. The assumption that the credit risk for balances over 30 days significantly increases has been rebutted on the basis
that some balances will exceed 30 days in the normal course of the settlement cycle, and therefore, there is no increase in the credit risk.
Presentation of impairment
Loss allowances for financial assets measured at amortised cost are deducted from the gross carrying amount of the assets.
Write-offs
Loans and debt securities are written off (either partially or in full) when there is no realistic prospect of the amount being recovered. This is
generally the case when the Group concludes that the borrower does not have assets or sources of income that could generate sufficient cash
flows to repay the amounts subject to the write-off.
Hedge accounting
The Group does not currently apply hedge accounting and has elected to defer the application of hedge accounting requirements in IFRS 9 and
will assess them once the IASB has completed its macro-hedging project. It will disclose information on the impact of adoption in the first set of
financial statements in which it has applied the IFRS 9 hedging requirements.
4(l): Derivatives
The Group has limited involvement in the use of derivative instruments and does not use them for speculation purposes. Derivative financial
instruments are used to manage well-defined foreign exchange risks arising out of the normal course of business in our International
operations and the Group uses forward foreign exchange contracts to reduce the currency risk on certain US dollar, Euro and Swedish krona
denominated future revenues and accounts receivables. Management determines the classification of derivatives at initial recognition and
classifies derivatives as mandatorily at FVTPL. All derivatives are carried as assets when their fair value is positive and as liabilities when their
fair value is negative.
The only other derivatives recognised in the Group’s statement of financial position are as a result of the consolidation of funds (described
in note 4(a)).
Financial statements | Basis of preparation and significant accounting policies
Quilter Annual Report 2018
113
Financial statements
Basis of preparation and significant accounting policies continued
For the year ended 31 December 2018
4: Significant accounting policies continued
4(m): Employee benefits
Pension obligations
The Group operates two types of pension plans which have been established for eligible employees of the Group:
• defined contribution schemes where the Group makes contributions to members’ pension plans but has no further payment obligations
once the contributions have been paid; and
• defined benefit plans which provide pension payments upon retirement to members as defined by the plan rules.
The Group has funded these liabilities by ring-fencing assets in trustee-administered funds.
Defined contribution pension obligation
Under a defined contribution plan, the Group’s legal or constructive obligation is limited to the amount it agrees to contribute to a pension
fund and there is no obligation to pay further contributions if the fund does not hold sufficient assets to pay benefits. Contributions in respect
of defined contribution schemes for current service are expensed in the income statement as staff costs and other employee-related costs
when incurred.
Defined benefit pension obligation
A defined benefit pension plan typically defines the amount of pension benefit that an employee will receive on retirement. For these plans,
the Group’s defined benefit obligation is calculated by independent actuaries using the projected unit credit method, which measures the
pension obligation as the present value of estimated future cash outflows. The discount rate used is determined based on the yields for
investment grade corporate bonds that have maturity dates approximating to the terms of the Group’s obligations. Plan assets are measured
at their fair value at the reporting date. The net surplus or deficit of the defined benefit plan is recognised as an asset or liability in the
statement of financial position and represents the present value of the defined benefit obligation at the end of the reporting period less
the fair value of the plan assets.
An asset is recognised only where there is an unconditional right to future benefits.
The current service cost and any past service costs together with the expected return on plan assets less the unwinding of the discount on
the plan liabilities is charged to “other expenses” in the income statement.
Re-measurements which comprise gains and losses as a result of experience adjustments and changes in actuarial assumptions, the actual
return on plan assets (excluding interest) and the effect of the asset ceiling are recognised immediately in OCI in the period in which they occur.
Re-measurements are not reclassified to the income statement in subsequent periods. Administration costs (other than the costs of managing
plan assets) are recognised in the income statement when the service is provided.
When the benefits of a plan are changed, or when a plan is curtailed, the portion of the changed benefit related to past service by employees,
or the gain or loss on curtailment, is recognised immediately in the income statement when the plan amendment or curtailment occurs.
Employee share-based payments
The Group operates a number of share incentive plans for its employees. These generally involve an award of shares or options in the Group
(equity-settled share-based payments), but may also take the form of a cash award based on the share price of the Group (cash-settled
share-based payments).
The Group’s incentive plans have conditions attached before the employee becomes entitled to the award. These can be performance and/or
service conditions (vesting conditions) or conditions that are often wholly within the control of the employee, for example where the employee
has to provide funding during the vesting period, which is then used to exercise share options (non-vesting condition).
Performance conditions may be market-based or non-market based. Market performance conditions are those related to an entity’s equity,
such as achieving a specified share price or target based on a comparison of the entity’s share price with an index of share prices. Non-market
performance conditions are those related to an entity’s profit or revenue targets, an example of which would be Earnings per Share (“EPS”).
Market-based performance conditions and non-vesting conditions are taken into account when estimating the fair value of the share or option
awards at the measurement date. The fair value of the share awards or options is not adjusted to take into account non-market performance
features. These are taken into consideration by adjusting the number of equity instruments in the share-based payment measurement and
this adjustment is made each period until the equity instruments vest.
114 Quilter Annual Report 2018
4: Significant accounting policies continued
4(m): Employee benefits continued
The fair value of share-based payment awards granted is recognised as an expense in the income statement over the vesting period which
accords with the period for which related services are provided by the employee. A corresponding increase in equity is recognised for
equity-settled plans and a corresponding financial liability for cash-settled plans.
For equity-settled plans, the fair value is determined at grant date and not subsequently re-measured. For cash-settled plans, the fair value is
re-measured at each reporting date and the date of settlement, with any changes in fair value recognised in the profit or loss for the period and
the liability adjusted accordingly.
At each period end the Group reassesses the number of equity instruments expected to vest and recognises any difference between the
revised and original estimate in the income statement with a corresponding adjustment to the share-based payments reserve in equity.
At the time the equity instruments vest, the amount recognised in the share-based payments reserve in respect of those equity instruments
is transferred to retained earnings.
4(n): Tax
Current tax
Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the reporting
date and any adjustment to income tax payable in respect of previous years. Current tax is charged or credited to the income statement,
except when it relates to items recognised directly in equity or in other comprehensive income.
Deferred tax
Deferred taxes are calculated according to the statement of financial position method, based on temporary differences between the tax base
of assets and liabilities and their carrying amounts in the consolidated financial statements. Deferred tax is calculated at the tax rates that are
expected to apply in the period when the liability is settled or the asset is realised.
Deferred tax assets are recognised to the extent that it is probable that taxable profit will be available against which the deductible temporary
differences can be utilised.
Deferred tax is charged or credited to the income statement, except when it relates to items recognised directly in equity or in other
comprehensive income. In certain circumstances, as permitted by accounting guidance, deferred tax balances are not recognised. In particular,
where the liability relates to the initial recognition of goodwill, or transactions that are not a business combination and at the time of their
occurrence affect neither accounting nor taxable profit. Note 31(b) includes further detail of circumstances in which the Group does not
recognise temporary differences.
Policyholder tax
Certain products are subject to tax on policyholder’s investment returns. This “policyholder tax” is an element of tax expense. To make the
tax expense more meaningful, tax attributable to policyholder returns and tax attributable to shareholder profits is shown separately.
The tax attributable to policyholder returns is the amount payable in the year plus the movement of amounts expected to be payable in future
years. The remainder of the tax expense is attributed to shareholders as tax attributable to shareholder profits.
4(o): Goodwill and intangible assets
The recognition of goodwill arises on the acquisition of a business and represents the premium paid over the fair value of the Group’s share
of the identifiable assets and liabilities acquired at the date of acquisition. Intangible assets include both purchased intangible assets initially
recognised as part of a business combination and internally generated assets, such as software development costs related to amounts
recognised for in-house systems development.
Financial statements | Basis of preparation and significant accounting policies
Quilter Annual Report 2018
115
Financial statements
Basis of preparation and significant accounting policies continued
For the year ended 31 December 2018
4: Significant accounting policies continued
4(o): Goodwill and intangible assets continued
Goodwill and goodwill impairment
Goodwill arising on the Group’s investments in subsidiaries is shown as a separate asset, while that on associates, where it arises, is included
within the carrying value of those investments. Goodwill is recognised as an asset at cost at the date when control is achieved (the acquisition
date) and is subsequently measured at cost less any accumulated impairment losses. Goodwill is not amortised but is subject to annual
impairment reviews.
Goodwill is allocated to one or more cash-generating units (“CGUs”) expected to benefit from the synergies of the combination, where the
CGU represents the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from
other assets or group of assets. Goodwill is reviewed for impairment at least once annually, as a matter of course even if there is no indication
of impairment, and whenever an event or change in circumstances occurs which indicates a potential impairment. For impairment testing, the
carrying value of goodwill is compared to the recoverable amount, which is the higher of value in use and the fair value less costs of disposal.
Any impairment loss is recognised immediately in profit or loss and is not subsequently reversed.
On disposal of an operation within a group of CGUs to which goodwill has been allocated, the goodwill associated with that operation is
included in the carrying amount of the operation when determining the gain or loss on disposal. It is measured based on the relative values
of the operation disposed of and the portion of the CGU retained.
Intangible assets acquired as part of a business combination
Intangible assets acquired as part of a business combination are recognised where they are separately identifiable and can be measured
reliably. Acquired intangible assets consist primarily of contractual relationships such as customer relationships and distribution channels.
Such items are capitalised at their fair value, represented by the estimated net present value of the future cash flows from the relevant
relationships acquired at the date of acquisition. Brands and similar items acquired as part of a business combination are capitalised at their
fair value based on a “relief from royalty” valuation methodology.
Subsequent to initial recognition acquired intangible assets are measured at cost less amortisation and any recognised impairment losses.
Amortisation is recognised at rates calculated to write off the cost or valuation less estimated residual value, using a straight-line method over
their estimated useful lives as set out below:
• Distribution channels
• Customer relationships
• Brand
10 years
10 years
15–20 years
The economic lives are determined by considering relevant factors such as usage of the asset, product life cycles, potential obsolescence,
competitive position and stability of the industry. The amortisation period is re-evaluated at the end of each financial year end.
Internally developed software
There are a number of factors taken into account when considering whether internally developed software meets the recognition criteria
in IAS 38 Intangible assets. Where for example a third party provider retains ownership of the software, this will not meet the control criterion
in the standard (i.e. the power to obtain benefits from the asset) and the costs will be expensed as incurred.
Where it is capitalised, internally developed software is held at cost less accumulated amortisation and impairment losses. Such software
is recognised in the statement of financial position if, and only if, it is probable that the relevant future economic benefits attributable to the
software will flow to the Group and its cost can be measured reliably.
Costs incurred in the research phase are expensed, whereas costs incurred in the development phase are capitalised, subject to meeting
specific criteria, as set out in the relevant accounting guidance, the main one being that future economic benefits can be identified as a result
of the development expenditure. Amortisation is charged to profit or loss on a straight-line basis over the estimated useful lives of the relevant
software, which range between three and five years, depending on the nature and use of the software.
Subsequent expenditure
Subsequent expenditure on intangible assets is capitalised only when it increases the future economic benefits embodied in the specific asset
to which it relates. All other expenditure is expensed as incurred.
116 Quilter Annual Report 2018
4: Significant accounting policies continued
4(o): Goodwill and intangible assets continued
Impairment testing for intangible assets
For intangible assets with finite lives, impairment charges are recognised where evidence of impairment is observed. If an indication of
impairment exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). The
recoverable amount is calculated as the higher of fair value less costs to sell and value in use. If the recoverable amount of an intangible asset
is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. An impairment loss is
recognised as an expense in the income statement immediately, unless the relevant asset is carried at a revalued amount, in which case the
impairment loss is treated as a revaluation decrease.
4(p): Assets and liabilities held for sale and discontinued operations
Assets (and disposal groups) are classified as held for sale if their carrying amount will be recovered through a sales transaction rather than
through continuing use. This condition is regarded as having been met only when the sale is highly probable and the asset (or disposal group)
is available for immediate sale in its present condition. Management must be committed to the sale, which should be expected to qualify for
recognition as a completed sale within one year of the date of classification. Assets and liabilities held for sale are presented separately in the
consolidated statement of financial position.
Assets and liabilities (and disposal groups) classified as held for sale are measured at the lower of their carrying amount and their fair value less
costs to sell. No depreciation or amortisation is charged on a non-current asset while classified as held for sale or while part of a disposal group
once it has been classified as held for sale.
The Group classifies as discontinued operations areas of the business which have been disposed of, or are classified as held for sale at the year
end and which either represent a separate major line of business or geographical area, or are part of a plan to dispose of one, or are subsidiaries
acquired exclusively with a view to resale.
When an asset (or disposal group) ceases to be classified as held for sale, the individual assets and liabilities cease to be shown separately
in the statement of financial position at the end of the year in which the classification changes. Comparatives are not restated. If the line of
business was previously presented as a discontinued operation and subsequently ceases to be classified as held for sale, profit and loss and
cash flows of the comparative period are restated to show that line of business as a continuing operation.
Further information can be found in note 5.
4(q): Provisions and contingent liabilities
Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events, it is more probable than
not that an outflow of economic benefits will be required to settle the obligation and a reliable estimate of the amount of the obligation can
be made. Provisions are measured at management’s best estimate of the expenditure required to settle the obligation at the reporting date.
Where the effect of the time value of money is material, provisions are discounted and represent the present value of the expected expenditure.
The Group recognises specific provisions where they arise for the situations outlined below:
• client compensation and related costs when the Group has decided to compensate clients in the context of providing fair customer
outcomes;
• onerous contracts when the expected benefits to be derived by the Group from a contract are lower than the unavoidable cost of meeting
the obligations under the contract;
• corporate restructuring only if the Group has approved a detailed formal plan and raised a valid expectation among those parties directly
affected, that the plan will be carried out either by having commenced implementation or by publicly announcing the plan’s main features.
Such provisions include the direct expenditure arising from the restructuring, such as employee termination payments but not those costs
associated with the ongoing activities of the Group; and
• legal uncertainties and the settlement of other claims.
Provisions are not recognised for future operating costs or losses.
Contingent liabilities are possible obligations of the Group of which the timing and amount are subject to significant uncertainty. Contingent
liabilities are not recognised in the consolidated statement of financial position, unless they are assumed by the Group as part of a business
combination. They are however disclosed, unless they are considered to be remote. If a contingent liability becomes probable and the amount
can be reliably measured it is no longer treated as contingent and recognised as a liability.
Contingent assets which are possible benefits to the Group are only disclosed if it is probable that the Group will receive the benefit. If such
a benefit becomes virtually certain, it is no longer considered contingent and is recognised on the consolidated statement of financial position
as an asset.
Financial statements | Basis of preparation and significant accounting policies
Quilter Annual Report 2018
117
Financial statements
Basis of preparation and significant accounting policies continued
For the year ended 31 December 2018
4: Significant accounting policies continued
4(r): Changes in significant accounting policies
4(r)(i): Changes to the “Group Accounting” accounting policy
The Group Accounting policy (note 4(a)) has been updated to include our use of “Merger accounting”: used by the Group for common control
combinations, which are transactions between entities that are ultimately controlled by the same party or parties. For further information of
the impact of this during the current year, see note 27.
4(r)(ii): Changes to the “Financial Instruments” accounting policy
As outlined in Note 2 above, the Group has adopted IFRS 9 Financial instruments as issued by the IASB in July 2014. The adoption of IFRS 9
during the year has resulted in changes to accounting policies (see note 4(k)) and a small adjustment to opening retained earnings for moving
to a forward looking impairment model, based on ECLs.
IFRS 9 Financial Instruments – Transition impacts
Assessments have been carried out on the basis of the facts and circumstances that existed at the date of initial application to determine
the business model within which a financial asset is held and to establish the designation and revocation of previous designations of certain
financial assets and financial liabilities as measured at FVTPL.
Changes in accounting policies resulting from the adoption of IFRS 9 have been applied retrospectively, except that, in accordance with
the transitional provisions in paragraph 7.2.15 of IFRS 9, comparative information for prior periods has not been restated. Accordingly, all
comparative period information is presented in accordance with the Group’s previous accounting policies. Differences in the carrying amounts
of financial assets and financial liabilities resulting from the adoption of IFRS 9 are recognised in retained earnings as at 1 January 2018.
Classification and measurement on adoption
On adopting IFRS 9 the Group has incurred a small additional impairment allowance, adjusting the Group’s opening retained earnings by
£0.2 million at 1 January 2018. This is shown below. There has also been a change to classification terminology, outlined below for the Group’s
main financial instruments:
Financial instrument
• Cash and cash equivalents, excluding money market funds
• Contract assets
• Trade receivables
• Loans and advances (not unit-linked)
• Debt instruments (unit-linked)1
• Equity instruments (unit-linked)
• Loans and advances (unit-linked)
• Reinsurers’ share of policyholder liabilities (unit-linked)
• Cash and cash equivalents, money market funds only
• Debt instruments (non-linked)
IFRS 9 – Current year
IAS 39 – Prior year
Classifications and
measurement models
Classifications
Measurement model
Amortised Cost
Loans and receivables
Amortised Cost
FVTPL (mandatory)
FVTPL (designated)
FVTPL
FVTPL
(designated)
FVTPL
(designated)
FVTPL
1 Quilter’s unit-linked business, where a portfolio of financial assets and liabilities is managed and its performance evaluated on a fair value basis in accordance
with its risk management strategy, is required (not elected) to be held at FVTPL under IFRS 9. This is due to the business model being neither (i) held to collect
contractual cash flows nor (ii) held both to collect contractual cash flows and to sell financial assets.
Impairment on adoption
For assets in the scope of the IFRS 9 impairment model, the impact of adopting IFRS 9 at 1 January 2018 is as follows:
Opening retained earnings IAS 39
Increase in provision for trade receivables
Increase in provision for loans
Total adjustment to retained earnings for adoption of IFRS 9
Opening retained earnings IFRS 9
£m
872.0
(0.1)
(0.1)
(0.2)
871.8
118 Quilter Annual Report 2018
4: Significant accounting policies continued
4(r): Changes in significant accounting policies continued
IFRS 15 Revenue from Contracts with Customers
As indicated in Note 2 above, the Group has adopted IFRS 15 Revenue from Contracts with Customers as issued by the IASB in May 2014 using the
cumulative effect method. Accordingly, the information presented for 2017 has not been restated, i.e. it is presented, as previously reported,
under IAS 18 Revenue. The adoption of IFRS 15 has not resulted in any material impact on the Group’s existing practices and accounting policies,
except for the incorporation of new terminology introduced by the standard.
Under IFRS 15, revenue is recognised when a customer obtains control of goods or services. Determining the timing of the transfer of control,
at a point in time or over time, requires judgement. IFRS 15 establishes a comprehensive framework for determining whether, how much and
when revenue is recognised.
The Group performed an assessment to determine the impact of the new standard on the Group’s statement of financial position and
performance. It considered the five-step analysis prescribed by the standard, taking into account the different types of contracts it has with
its customers, the corresponding types of services provided to customers and when these service obligations are satisfied. In addition, the
Group considered the types of fee income generated across all products from the contracts with its customers and when the fee income is
recognised – see the table below for further information. The assessment concluded that no changes were required to the measurement and
recognition of revenue from customer contracts. Consequently, the cumulative impact of adoption was £nil and as a result no adjustment to
the Group’s opening retained earnings as at 1 January 2018 has been recognised.
The table below summarises the types of fee and commission income generated by the Group.
Type of fee
Premium-based fees
Fund-based fees
Fixed fees
Surrender fees
Other fee and commission income
Description
This relates to non-refundable initial fees taken on receipt of clients’ investments
and recognised on receipt over the life of the contract, in line with the performance
obligation associated with the contract in respect of the administration of
the underlying client records and client benefits, and results in the recognition
of a contract liability on the statement of financial position (see note 34 for
further information).
This is periodic fee income based on the market valuation of the investment contracts.
They are calculated and recognised on a daily basis in line with the provision of
investment management services.
This is periodic fee income which is fixed in value according to underlying contract
terms and relate to the provision of services and transactional dealing fees. These are
recognised on provision of the transaction.
Fee income relates to client charges received on the surrender of an investment
contract or insurance contract, which is based on the value of the policy and
recognised on surrender of the policy.
Fees in respect of advice provided to clients. Typically, fee income is paid by providers
of the financial products at the point of sale to the client. This is when the advice has
been provided to the client and the financial adviser’s performance obligation has
been fully delivered. Accordingly, fee income is recognised at the inception of the
financial product sold.
Nature of change in
accounting policy
IFRS 15 did not have
a significant impact on
the Group’s accounting
policies.
The introduction of IFRS 15 did not result in changes to the Group’s significant accounting policies, except to update them for new terminology
introduced by the new standard for contract costs (previously known as deferred acquisition costs for non-insurance contracts – refer to note
4(g) for further information), contract assets (previously known as accrued income from contracts with customers), and contract liabilities
(previously known as deferred fee income from contracts with customers).
Financial statements | Basis of preparation and significant accounting policies
Quilter Annual Report 2018
119
Notes to the consolidated financial statements
For the year ended 31 December 2018
5: Acquisitions, discontinued operations and disposal groups held for sale
This note provides details of the acquisitions and disposals of subsidiaries the Group has made during the period, together with details
of businesses held for sale during that same period.
5(a): Business acquisitions completed during the period
Business acquisitions completed during year ended 31 December 2018
Acquisition of Skandia UK Limited from Old Mutual plc
On 31 January 2018, the Group acquired the Skandia UK Limited group of entities from Old Mutual plc which comprises seven Old Mutual plc
group entities with a net asset value (“NAV”) of £591 million. The transfer was effected by the issue of a share and with the balance represented
by a merger reserve. No debt was taken on as a result of this transaction. The most significant asset within these entities is a £566 million
receivable which corresponds to an equivalent payable within the Group’s statement of financial position. The net effect of this transaction
for the Group is to replace a payable due to Old Mutual plc with equity. For further information see note 27.
Acquisition of adviser businesses by Quilter Private Client Advisers (“QPCA”) (formerly Old Mutual Wealth Private Client Advisers)
During the year, the Group continued its expansion of the QPCA business, aiming to develop a Quilter plc branded, employed adviser business
focused upon servicing upper affluent and high net worth clients, offering a centrally-defined restricted advice proposition focused upon
the Group’s investment solutions and platform. In the year the Group completed the acquisition of 14 adviser businesses as part of the
expansion of the QPCA business. The total cash consideration paid was an initial £5.3 million with additional potential deferred consideration
of £6.4 million which is expected to be paid in full (discounted to net present value for this and all other acquisitions listed below), dependent
upon meeting certain performance targets generally relating to funds under management.
Net tangible assets of £0.2 million were acquired and goodwill of £5.1 million, other intangible assets of £7.4 million and a deferred tax liability
of £1.0 million were recognised as a result of the transaction. The deferred consideration was capitalised in the calculation of goodwill recognised.
Business acquisitions completed during year ended 31 December 2017
Caerus Capital Group Limited (“Caerus”)
On 1 June 2017, the Group, completed the acquisition of 100% of the share capital of Caerus, a UK-based adviser network that operates in
a similar manner to Intrinsic (another Group business within the Advice and Wealth Management segment) and which has approximately
£4 billion of funds under advice and 300 advisers.
The total consideration of £22 million includes £15 million cash consideration and up to £3 million that has been deferred for two years and
up to £4 million that has been deferred for three years. The deferred consideration has been included as part of the cost of the acquisition
as there is no continuing employment condition applying to the sellers of the business. The deferred consideration payable is dependent on
turnover targets post acquisition and is potentially reduced by the amount of any relevant claims arising from in-force business existing prior
to the payment dates.
The purchase price has been allocated based on the fair value of assets acquired and liabilities assumed at the date of acquisition determined
in accordance to IFRS 3 Business Combinations.
The carrying value of assets and liabilities in Caerus’s consolidated statement of financial position on acquisition date approximates the fair
value of these items determined by the Group. Net tangible assets of £1 million were acquired and in addition, the Group recognised identified
intangible assets of £14 million and a deferred tax liability of £2 million relating to customer distribution channels. The value of the intangible
assets was determined by applying cash flows to standard industry valuation models. Goodwill of £9 million was recognised on the acquisition
which is attributable to the delivery of cost and revenue synergies that cannot be linked to identifiable intangible assets.
Transaction costs incurred of £1 million relating to the acquisition have been recognised within other expenses in the consolidated income
statement, but not included within adjusted profit.
Acquisition of adviser businesses by Quilter Private Client Advisers (“QPCA”)
During 2017, the Group completed the acquisition of eight adviser businesses as part of the expansion of its QPCA business that was launched
in October 2015. The purchase price has been allocated based on the fair value of assets acquired and liabilities assumed at the date of
acquisition determined in accordance to IFRS 3 Business Combinations.
The aggregate estimated consideration payable was £18 million, of which £10 million was cash consideration and up to £8 million in deferred
payments. The amount of deferred consideration is dependent upon meeting certain performance targets, generally relating to the value
of funds under management and levels of ongoing fee income. The deferred consideration has been included as part of the cost of the
acquisition. Total other intangible assets of £13 million and a deferred tax liability of £2 million in respect of customer relationships have been
recognised as a result of the acquisitions, together with goodwill of £7 million, £2 million of which has been transferred from intangibles to
goodwill following a review of the purchase price allocations in 2018 (see note 16(a)).
Transaction costs incurred of £1 million relating to the acquisitions have been recognised within other operating expenses in the consolidated
income statement, but not included within adjusted profit.
120
Financial statementsQuilter Annual Report 2018 5: Acquisitions, discontinued operations and disposal groups held for sale continued
5(a): Business acquisitions completed during the period continued
Attivo Investment Management Limited (“AIM”)
On 29 March 2017, the Group completed the acquisition of 100% of the share capital of AIM, a UK-based investment management business
offering a comprehensive investment management service.
The fair value of the total estimated consideration was £8 million, of which £5 million was cash consideration and £3 million was deferred
for two years. The deferred consideration is included within the cost of the acquisition because it is dependent on levels of assets under
management being maintained, with no requirement for continuing employment applied to the sellers of the business.
The book value of total assets and total net assets of the acquired business were both less than £1 million.
The purchase price has been based on the fair value of assets acquired and liabilities assumed at the date of acquisition determined in
accordance to IFRS 3 Business Combinations.
The carrying value of assets and liabilities in AIM’s statement of financial position on acquisition date approximates the fair value of these items
determined by the Group. Other intangible assets of £9 million and a deferred tax liability of £2 million, relating to customer relationships, were
recognised as a result of the acquisition. No goodwill was recognised on this transaction.
Transaction costs incurred of £0.5 million relating to the acquisition have been recognised within other operating expenses in the consolidated
income statement, but not included within adjusted profit.
Commsale 2000 Limited (“Commsale”)
On 29 September 2017, the Group acquired Commsale from Old Mutual plc. Commsale is a UK-based service company that runs the lease for
the London Head Office building and is responsible for the payment of rent, rates and service charges relating to the building and recharging
the costs to all tenants through a service charge.
This represents a business combination involving entities or businesses under common control because the combining businesses are
ultimately controlled by the same party or parties before and after the business combination.
The total consideration was £0.3 million. The fair value of the identifiable assets at the date of acquisition was £0.5 million, with a gain
on purchase of £0.2 million being recognised, representing assets not valued within the agreed consideration.
Global Edge Technologies (Pty) Ltd (“GET”)
On 30 November 2017, the Group acquired 100% of the issued share capital of GET from Old Mutual plc. GET is a service company
incorporated in South Africa, with a branch in the UK that provides IT support for the Group’s Platform business services.
This represents a business combination involving entities or businesses under common control because the combining businesses are
ultimately controlled by the same party or parties before and after the business combination.
The total consideration was £1 million. The fair value of the identifiable assets at the date of acquisition was £4 million, with a gain on purchase
of £3 million being recognised. The Group determined that the excess of book value over consideration paid was attributable to potential
future integration costs which, if incurred, would be expensed in future periods. As potential future integrating activities do not qualify to
be recognised as a liability in the application of the acquisition method of accounting, no such liability was recognised, and the Group recorded
the excess as a bargain purchase gain.
5(b): Disposal of subsidiaries, associated undertakings and strategic investments
Year ended 31 December 2018
In December 2017, the Group announced that it had entered into an agreement to sell its Single Strategy Asset Management business (“Single
Strategy business”) to a special purpose vehicle ultimately owned by funds managed by TA Associates and certain members of the Single
Strategy management team (together “the Acquirer”). On 29 June 2018, the Group completed the sale for a total consideration of £583 million,
comprising cash consideration of £540 million on completion, with an additional £7 million anticipated to be payable thereafter, to be paid
primarily in 2019 to 2021 as surplus capital associated with the separation from the Group is released in the business. The deferred
consideration is not subject to performance conditions. The remaining proceeds of £36 million were received in cash as a pre-completion
dividend on 15 June 2018. Economic ownership of the Single Strategy business passed to the Acquirer effective from 1 January 2018 with all
profits and performance fees generated up until 31 December 2017 for the account of Quilter plc. The results of the Single Strategy business
continued to be included as part of the Group up until the date of sale on 29 June 2018. The Group recognised a post tax profit on disposal of
£292 million.
During the year an expense provision of £2 million in relation to the sale of Old Mutual Wealth Italy S.p.A. in the prior year (see below for details
of this sale) was released as it is not expected to be incurred, giving rise to a £2 million increase in the profit on sale.
Financial statements | Notes to the consolidated financial statements
121
Quilter Annual Report 2018 Notes to the consolidated financial statements continued
For the year ended 31 December 2018
5: Acquisitions, discontinued operations and disposal groups held for sale continued
5(b): Disposal of subsidiaries, associated undertakings and strategic investments continued
Year ended 31 December 2017
In August 2016, the Group announced that it had agreed to sell Old Mutual Wealth Italy S.p.A. to Ergo Previdenza S.p.A. (“Ergo”), a member of
the Flavia insurance group. The sale completed on 9 January 2017. The consideration for the transaction was £221 million (€278 million) in cash,
plus interest to completion recognising a profit on disposal of £80 million.
Consideration received1
Less: transaction costs on the sale of Single Strategy
Plus: release of accrued expenses in relation to OMW Italy S.p.A. disposal
Net proceeds from sale
Carrying value of net assets disposed of
Profit on sale of operations before tax
Tax on disposals
Profit on sale of operations after tax
Year ended
31 December
2018
Year ended
31 December
2017
Single Strategy business and
Old Mutual Wealth Italy adjustment
£m
Old Mutual Wealth Italy
£m
546
(20)
2
528
(238)
290
4
294
221
(4)
–
217
(137)
80
–
80
1 Consideration received in respect of the Single Strategy business includes £540 million of cash received together with the discounted deferred consideration
of £6 million, and excludes the £36 million pre-completion dividend received in June 2018.
5(c): Discontinued operations – Income statement
For the years ended 31 December 2018 and 31 December 2017, the Group’s discontinued operations included the Single Strategy business
(previously part of Old Mutual Global Investors). Old Mutual Wealth Italy S.p.A. is also included in discontinued operations up to the date its
sale completed on 9 January 2017.
The table below sets out the trading results of the Group’s discontinued operations and also any profit on the sale of discontinued operations
during the period.
Revenue
Fee income and other income from service activities
Investment return
Other income
Total revenue
Expenses
Fee and commission expenses, and other acquisition costs
Other operating and administrative expenses
Total expenses
Profit on the disposal of subsidiaries
Profit before tax from discontinued operations
Tax (expense) attributable to equity holders
Profit for the period after tax from discontinued operations
Attributable to:
Equity holders of Quilter plc
Earnings per Ordinary Share on profit attributable to ordinary shareholders of Quilter plc
Basic – from discontinued operations (pence)
Diluted – from discontinued operations (pence)
Note
8(a)
8(b)
9(a)
9(b)
5(b)
Year ended
31 December
2018
£m
Year ended
31 December
2017
£m
136
–
2
138
(31)
(81)
(112)
290
316
(2)
314
389
7
3
399
(62)
(185)
(247)
80
232
(29)
203
314
203
17.1
17.1
11.1
11.1
122
Financial statementsQuilter Annual Report 2018 5: Acquisitions, discontinued operations and disposal groups held for sale continued
5(d): Discontinued operations – Statement of comprehensive income
Profit for the period
Other comprehensive income from discontinued operations:
Items that may be reclassified subsequently to income statement
Exchange gains on translation of foreign operations
Other comprehensive income for the period
Total other comprehensive income from discontinued operations, net of tax
Total comprehensive income for the period from discontinued operations
5(e): Discontinued operations – Net cash flows
Total net cash flows from operating activities
Total net cash used in investing activities
Total net cash used in financing activities
Net increase in cash and cash equivalents
Year ended
31 December
2018
£m
Year ended
31 December
2017
£m
314
–
–
–
314
203
4
3
7
210
Year ended
31 December
2018
£m
Year ended
31 December
2017
£m
(63)
131
(45)
23
(22)
137
–
115
5(f): Assets and liabilities held for sale
Assets and liabilities held for sale
Assets and liabilities of operations classified as held for sale at 31 December 2017 relate to the Single Strategy business. The operation was
classified as held for sale from December 2017 and, on 29 June 2018, the Group completed the sale. See note 5(b) above. The assets and
liabilities held for sale are disclosed in the table below.
Assets classified as held for sale
Goodwill and intangible assets
Deferred acquisition costs
Deferred tax assets
Trade, other receivables and other assets
Cash and cash equivalents
Assets of operations classified as held for sale
Liabilities directly associated with assets classified as held for sale
Current tax payable
Trade, other payables and other liabilities
Liabilities of operations classified as held for sale
Net assets of operations classified as held for sale
Note
16(b)
25
31
24
26
33
Year ended
31 December
2018
£m
Year ended
31 December
2017
£m
–
–
–
–
–
–
–
–
–
–
82
4
9
204
147
446
33
186
219
227
Financial statements | Notes to the consolidated financial statements
123
Quilter Annual Report 2018 Notes to the consolidated financial statements continued
For the year ended 31 December 2018
6: Segmental information
6(a): Segmental presentation
The Group’s operating segments comprise Advice and Wealth Management and Wealth Platforms, which is consistent with how the Group is
managed. For all reporting periods, these businesses have been classified as continuing operations in the IFRS income statement and as core
operations in determining the adjusted profit. Head Office includes certain revenues and central costs that are not allocated to the segments.
For the period ended 31 December 2018, the Group has classified the Single Strategy Asset Management business as discontinued. For the
period ended 31 December 2017, the Group has classified the Italian business as discontinued. These businesses were sold or held for sale in
these periods. Further detail is included in note 5(b).
There have been no changes to the basis of segment information for the period in these financial statements.
The Group’s segmental results are analysed and reported on a basis with the way that management and the Board of Directors of Quilter plc
assess performance of the underlying businesses and allocate resources. Information is presented to the Board on a consolidated basis in
pounds sterling (the presentation currency) and in the functional currency of each business.
Adjusted profit is one of the key measures reported to the Group’s management and Board of Directors for their consideration in the allocation
of resources to, and the review of, the performance of the segments. As appropriate to the business line, the Board reviews additional
measures to assess the performance of each of the segments. These typically also include net client cash flows, assets under management
and administration, and revenue and operating margins.
Consistent with internal reporting, assets, liabilities, revenues and expenses that are not directly attributable to a particular segment are
allocated between segments where appropriate and where there is a reasonable basis for doing so. The Group accounts for inter-segment
revenues and transfers as if the transactions were with third parties at current market prices.
The revenues generated in each reported segment are provided in the analysis of profits and losses in note 6(b). The segmental information
in this note reflects the adjusted and IFRS measures of profit or loss and the assets and liabilities for each operating segment as provided to
management and the Board of Directors. There are no differences between the measurement of the assets and liabilities reflected in the
primary statements and that reported for the segments.
The Group is primarily engaged in the following business activities from which it generates revenue: investment and asset management,
financial advice (revenue from fee income and other income from service activities), and life assurance (revenue from premium income).
Investment return includes gains and losses on investment securities and other income includes other fees and miscellaneous income.
The principal lines of business from which each operating segment derives its revenues are as follows:
Advice and Wealth Management
This segment comprises Quilter Investors, Quilter Cheviot Limited and Quilter Financial Planning, including Quilter Private Client Advisers
(“QPCA”).
Quilter Investors is a leading provider of investment solutions in the UK multi-asset market. It develops and manages investment solutions in
the form of funds for Quilter plc and third party clients. It has several fund ranges which vary in breadth of underlying asset class. The business
has primarily been accumulation-focused, with recent development of decumulation solutions.
Quilter Cheviot Limited provides discretionary investment management in the United Kingdom with bespoke investment portfolios tailored to
the individual needs of affluent and high net worth customers, charities, companies and institutions through a network of branches in London
and the regions. Investment management services are also provided by branches in Jersey, Channel Islands and the Republic of Ireland.
Quilter Financial Planning is a restricted and independent financial adviser network (including QPCA) providing mortgage and financial planning
advice and financial solutions for both individuals and businesses through a network of intermediaries. They operate across all markets, from
wealth management and retirement planning advice through to dealing with property wealth and personal and business protection needs.
Wealth Platforms
This segment comprises Quilter Wealth Solutions (“QWS”) and Quilter Life Assurance (“QLA”), and Quilter International cross-border
businesses.
QWS and QLA provide advice based predominantly unit-linked wealth management products and services in the UK, which serves a largely
affluent customer base through advised multi-channel distribution. The QLA business is predominantly a closed book, made up of legacy
products. Protection and institutional pension products are also part of the business.
Quilter International is a cross-border business, focusing on high net worth and affluent local customers and expatriates in Asia, the Middle
East, Europe and Latin America.
In addition to the two operating segments, Head Office comprises the investment return on centrally held assets, central function expenses,
such as Group treasury and finance functions, along with central core structural borrowings and certain tax balances in the segmental
statement of financial position.
124
Financial statementsQuilter Annual Report 2018 6: Segmental information continued
6(b)(i): Adjusted profit statement – segmental information for the year ended 31 December 2018
Adjusted profit – Continuing operations
Reconciliation to IFRS
Operating segments
Advice and
Wealth
Management
£m
Note
Wealth
Platforms
£m
Head
Office
£m
Adjusted
profit
£m
Consolidation
adjustments1
£m
Adjusting
items
(Note 7(a))
£m
IFRS Income
Statement
£m
Revenue
Gross earned premiums
Premiums ceded to reinsurers
Net earned premiums
Fee income and other income from service activities
8(a)
Investment return
Other income
Segmental revenue
Expenses
Claims and benefits paid
Reinsurance recoveries
Net insurance claims and benefits incurred
Change in reinsurance assets and liabilities
Change in insurance contract liabilities
Change in investment contract liabilities
Fee and commission expenses, and other acquisition costs
Change in third-party interest in consolidated funds
Other operating and administrative expenses
Finance costs
Segmental expenses
10
Adjusted profit/(loss) before all tax
Tax attributable to policyholders’ funds
Adjusted profit/(loss) before tax attributable to
equity holders
Reconciliation to IFRS:
Adjusted for non-operating items:
7(a)
Goodwill impairment and impact of acquisition accounting
Business transformation costs
Managed Separation costs
Finance costs
Policyholder tax adjustments
Reallocation of central costs2
Adjusting items before tax
Profit/(Loss) before tax attributable to equity holders
–
–
–
547
9
2
148
(88)
60
507
(3,248)
101
558
(2,580)
–
–
–
–
–
–
(163)
–
(290)
(3)
(456)
102
–
102
(49)
(19)
–
–
–
–
(68)
34
(87)
60
(27)
103
(109)
3,236
(170)
–
(347)
(1)
2,685
105
57
162
(1)
(58)
(1)
–
101
(2)
39
201
–
–
–
–
3
6
9
–
–
–
–
–
–
–
–
(40)
–
(40)
(31)
–
(31)
–
(7)
(23)
(13)
–
2
(41)
(72)
148
(88)
60
1,054
(3,236)
109
(2,013)
(87)
60
(27)
103
(109)
3,236
(333)
–
(677)
(4)
2,189
176
57
233
(50)
(84)
(24)
(13)
101
–
(70)
163
1 Consolidation adjustments comprise the elimination of inter-segment transactions and the consolidation of investment funds.
2 Reallocation of central costs reverses management reallocations included within adjusted profit to reconcile back to IFRS profit.
–
–
–
(8)
(246)
(74)
(328)
–
–
–
–
–
–
(104)
369
63
–
328
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(158)
(13)
(171)
(171)
101
(70)
148
(88)
60
1,046
(3,482)
35
(2,341)
(87)
60
(27)
103
(109)
3,236
(437)
369
(772)
(17)
2,346
5
158
163
Financial statements | Notes to the consolidated financial statements
125
Quilter Annual Report 2018 Notes to the consolidated financial statements continued
For the year ended 31 December 2018
6: Segmental information continued
6(b)(ii): Adjusted profit statement – segmental information for the year ended 31 December 2017
Adjusted profit – Continuing operations
Reconciliation to IFRS
Operating segments
Advice and
Wealth
Management
£m
Note
Wealth
Platforms
£m
Head
Office
£m
Adjusted
profit
£m
Consolidation
adjustments1
£m
Adjusting
items
(Note 7(a))
£m
IFRS Income
Statement
£m
Revenue
Gross earned premiums
Premiums ceded to reinsurers
Net earned premiums
Fee income and other income from service activities
8(a)
Investment return
Other income
Segmental revenue
Expenses
Claims and benefits paid
Reinsurance recoveries
Net insurance claims and benefits incurred
Change in reinsurance assets and liabilities
Change in insurance contract liabilities
Change in investment contract liabilities
Fee and commission expenses, and other acquisition costs
Change in third-party interest in consolidated funds
Other operating and administrative expenses
Finance costs
Segmental expenses
10
Profit on disposal of subsidiaries, associated
undertakings and strategic investments
Adjusted profit/(loss) before all tax
Tax attributable to policyholders’ funds
Adjusted profit/(loss) before tax attributable to
equity holders
Reconciliation to IFRS:
Adjusted for non-operating items:
7(a)
Goodwill impairment and impact of acquisition accounting
(53)
Net profit on business disposals and acquisitions
Business transformation costs
Managed Separation costs
Finance costs
Policyholder tax adjustments
Voluntary customer remediation provision
Adjusting items before tax
Profit/(Loss) before tax attributable to equity holders
–
–
–
–
–
–
(53)
29
–
–
–
382
3
2
387
–
–
–
–
–
–
(52)
–
(253)
–
148
(88)
60
526
4,412
83
5,081
(76)
54
(22)
85
(78)
(4,308)
(198)
–
(336)
–
(305)
(4,857)
–
82
–
82
–
224
(66)
158
–
–
(89)
–
–
17
(69)
(141)
17
–
–
–
(13)
779
(75)
691
–
–
–
–
–
–
(70)
(673)
52
–
(691)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(244)
(39)
(283)
3
(280)
17
(263)
148
(88)
60
895
5,195
13
6,163
(76)
54
(22)
85
(78)
(4,308)
(320)
(673)
(816)
(39)
(6,171)
3
(5)
(49)
(54)
–
–
–
–
1
3
4
–
–
–
–
–
–
–
–
(35)
–
(35)
–
(31)
–
(31)
(1)
3
–
(32)
(39)
–
–
(69)
(100)
148
(88)
60
908
4,416
88
5,472
(76)
54
(22)
85
(78)
(4,308)
(250)
–
(624)
–
(5,197)
–
275
(66)
209
(54)
3
(89)
(32)
(39)
17
(69)
(263)
(54)
1 Consolidation adjustments comprise the elimination of inter-segment transactions and the consolidation of investment funds.
126
Financial statementsQuilter Annual Report 2018 6: Segmental information continued
6(c)(i): Statement of financial position – segmental information at 31 December 2018
Advice and
Wealth
Management
£m
Note
Wealth
Platforms
£m
Head
Office
£m
Consolidation
Adjustments1
£m
Total
Continuing
Operations
£m
Discontinued
Operations
£m
Assets
Goodwill and intangible assets
Property, plant and equipment
Investments in associated undertakings
Deferred acquisition costs
Contract costs
Contract assets
Loans and advances
Financial investments
Reinsurers’ share of policyholder liabilities
Deferred tax assets
Current tax receivable
Trade, other receivables and other assets
Derivative assets
Cash and cash equivalents
Inter-segment funding – assets
Total assets
Liabilities
Long-term business insurance policyholder liabilities
Investment contract liabilities
Third-party interests in consolidated funds
Provisions
Deferred tax liabilities
Current tax payable
Borrowings
Trade, other payables and other liabilities
Contract liabilities
Derivative liabilities
Inter-segment funding – liabilities
Total liabilities
Total equity
Total equity and liabilities
16
17
25
25
25
18
19
29
31
31(c)
24
20
26
29
29
30
31
31(c)
32
33
34
20
386
10
–
–
–
44
27
3
–
7
–
197
–
358
–
164
7
–
11
551
–
188
54,636
2,162
22
46
178
–
1,113
12
1,032
59,090
–
–
–
26
40
9
–
340
1
–
–
602
56,450
–
59
19
14
–
579
225
1
–
416
57,949
–
–
2
–
–
–
7
2
–
9
1
8
–
440
–
469
–
–
–
9
–
(18)
197
20
–
–
12
220
–
–
–
–
–
–
–
4,578
–
–
–
103
46
484
(12)
550
17
2
11
551
44
222
59,219
2,162
38
47
486
46
2,395
–
5,199
65,790
–
–
5,116
602
56,450
5,116
–
–
–
–
60
–
36
(12)
94
59
5
197
999
226
37
–
5,200
63,785
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1 Consolidation adjustments comprise the elimination of inter-segment transactions and the consolidation of investment funds.
Total
£m
550
17
2
11
551
44
222
59,219
2,162
38
47
486
46
2,395
–
65,790
602
56,450
5,116
94
59
5
197
999
226
37
–
63,785
2,005
65,790
Financial statements | Notes to the consolidated financial statements
127
Quilter Annual Report 2018 Notes to the consolidated financial statements continued
For the year ended 31 December 2018
6: Segmental information continued
6(c)(ii): Statement of financial position – segmental information at 31 December 2017
Advice and
Wealth
Management
£m
Note
Wealth
Platforms
£m
Head
Office
£m
Consolidation
Adjustments1
£m
Total
Continuing
Operations
£m
Discontinued
Operations2
£m
Assets
Goodwill and intangible assets
Property, plant and equipment
Investments in associated undertakings3
Deferred acquisition costs
Loans and advances
Financial investments3
Reinsurers’ share of policyholder liabilities
Deferred tax assets
Trade, other receivables and other assets
Derivative assets
Cash and cash equivalents
16
17
25
18
19
29
31
24
24
26
Assets of operations classified as held for sale
5(f)
Inter-segment funding – assets
412
9
–
–
18
2
–
6
208
–
303
–
4
162
9
–
611
180
56,562
2,908
15
210
1
1,061
–
12
–
–
1
–
1
1
–
1
19
–
83
–
–
–
–
–
–
–
7,685
–
–
60
86
913
–
(16)
574
18
1
611
199
64,250
2,908
22
497
87
2,360
–
–
–
–
–
–
–
–
–
–
–
–
–
446
–
Total
£m
574
18
1
611
199
64,250
2,908
22
497
87
2,360
446
–
Total assets
Liabilities
Long-term business insurance
policyholder liabilities
Investment contract liabilities
Third-party interests in consolidated funds
Provisions and accruals
Deferred tax liabilities
Current tax payable
Borrowings
Trade, other payables and other liabilities
Deferred revenue
Derivative liabilities
Liabilities of operations classified as held for sale
Inter-segment funding – liabilities
Total liabilities
Total equity
Total equity and liabilities
962
61,731
106
8,728
71,527
446
71,973
29
29
30
31
31(c)
32
33
34
20
5(f)
–
–
–
10
40
21
–
275
1
–
–
–
489
59,139
–
89
150
40
–
607
243
–
–
–
347
60,757
–
–
–
5
–
(23)
782
43
–
–
–
16
823
–
–
7,905
–
–
–
–
406
–
433
–
(16)
489
59,139
7,905
104
190
38
782
1,331
244
433
–
–
8,728
70,655
–
–
–
–
–
–
–
–
–
–
219
–
219
489
59,139
7,905
104
190
38
782
1,331
244
433
219
–
70,874
1,099
71,973
1 Consolidation adjustments comprise the elimination of inter-segment transactions and the consolidation of investment funds.
2 Discontinued operations includes the balances of the Group’s Single Strategy Asset Management business.
3 As at 31 December 2017, £2 million has been reclassified from investments in associated undertakings to financial investments to conform with current
year presentation.
2017 comparatives for the segmental statement of financial position have been re-presented due to the reallocation of a UK holding company
from Wealth Platforms to Head Office. This change was made to ensure that all material intercompany loan balances are reported (and eliminate)
within Head Office.
128
Financial statementsQuilter Annual Report 2018 6: Segmental information continued
6(d): Geographic segmental information
In presenting geographic segmental information, revenue is based on the geographic location of our businesses. The Group has defined
two geographic areas: UK and International.
For the year ended 31 December 2018
Note
Revenue
Gross earned premiums
Premiums ceded to reinsurers
Net earned premiums
Premium-based fees
Fund-based fees1
Retrocessions received, intragroup
Fixed fees
Surrender charges
Other fee and commission income
Fee income and other income from
service activities
8(a)
Investment return
Other income
Total revenue
UK International
Advice and
Wealth
Management
£m
Wealth
Platforms
£m
Head
Office
£m
Wealth
Platforms
£m
Consolidation
Adjustments
£m
Total
Continuing
Operations
£m
Discontinued
Operations
£m
Total
Group
£m
–
–
–
87
460
–
–
–
–
547
9
2
147
(87)
60
15
243
17
4
1
–
280
(2,332)
98
558
(1,894)
–
–
–
–
–
–
–
–
–
–
3
6
9
1
(1)
–
77
102
4
28
16
–
227
(916)
3
(686)
–
–
–
–
–
(21)
–
–
13
(8)
(246)
(74)
(328)
148
(88)
60
179
805
–
32
17
13
1,046
(3,482)
35
(2,341)
–
–
–
–
136
–
–
–
–
136
–
2
148
(88)
60
179
941
–
32
17
13
1,182
(3,482)
37
138
(2,203)
1 Income from fiduciary activities is included within fund-based fees.
For the year ended 31 December 2017
Note
Revenue
Gross earned premiums
Premiums ceded to reinsurers
Net earned premiums
Premium-based fees
Fund-based fees1
Retrocessions received, intragroup
Fixed fees
Surrender charges
Other fee and commission income
Fee income and other income from
service activities
8(a)
Investment return
Other income
Total revenue
UK International
Advice and
Wealth
Management
£m
Wealth
Platforms
£m
Head
Office
£m
Wealth
Platforms
£m
Consolidation
Adjustments
£m
Total
Continuing
Operations
£m
Discontinued
Operations
£m
Total
Group
£m
–
–
–
76
306
–
–
–
–
382
3
2
387
147
(87)
60
29
241
17
5
1
–
293
3,366
81
3,800
–
–
–
–
–
–
–
–
–
–
1
3
4
1
(1)
–
74
107
6
26
20
–
233
1,046
2
1,281
–
–
–
–
–
(23)
–
–
10
(13)
779
(75)
691
148
(88)
60
179
654
–
31
21
10
895
5,195
13
6,163
–
–
–
–
148
(88)
60
179
389
1,043
–
–
–
–
389
7
3
–
31
21
10
1,284
5,202
16
399
6,562
1 Income from fiduciary activities is included within fund-based fees.
Financial statements | Notes to the consolidated financial statements
129
Quilter Annual Report 2018 Notes to the consolidated financial statements continued
For the year ended 31 December 2018
7: Adjusted profit and adjusting items
7(a): Adjusted profit adjusting items
In determining the adjusted profit for core operations, certain adjustments are made to profit before tax to reflect the underlying long-term
performance of the Group. The following table shows an analysis of those adjustments before and after tax.
Expense/(income)
Goodwill impairment and impact of acquisition accounting
Profit on business acquisitions and disposals
Business transformation costs
Managed Separation costs
Finance costs
Policyholder tax adjustments
Voluntary customer remediation provision
Total adjusting items before tax
Tax on adjusting items
Less: policyholder tax adjustments
Total adjusting items after tax
Note
7(b)
7(c)
7(d)
7(e)
7(f)
7(g)
7(h)
13(c)
Year ended
31 December
2018
£m
Year ended
31 December
2017
£m
50
–
84
24
13
(101)
–
70
(118)
101
53
54
(3)
89
32
39
(17)
69
263
(39)
17
241
7(b): Goodwill impairment and impact of acquisition accounting
The recognition of goodwill and other acquired intangibles is created on the acquisition of a business and represents the premium paid over
the fair value of the Group’s share of the identifiable assets and liabilities acquired at the date of acquisition (as recognised under IFRS 3). The
Group excludes from adjusted profit the impairment of goodwill, the amortisation and impairment of acquired other intangible assets as well
as the movements in certain acquisition date provisions.
Costs incurred on completed acquisitions are also excluded from adjusted profit, including any finance costs related to discounted deferred
consideration.
The effect of these adjustments to determine adjusted profit are summarised below:
For the year ended 31 December 2018
Impairment of other intangible assets
Amortisation of other acquired intangible assets
Acquisition costs1
Unwinding of discount on deferred consideration
Total goodwill impairment and impact of acquisition accounting
For the year ended 31 December 2017
Amortisation of other acquired intangible assets
Change in acquisition date provisions
Acquisition costs1
Unwinding of discount on deferred consideration
Total goodwill impairment and impact of acquisition accounting
Advice and
Wealth
Management
£m
Wealth
Platforms
£m
Head
Office
£m
–
41
5
3
49
1
–
–
–
1
–
–
–
–
–
Advice and
Wealth
Management
£m
Wealth
Platforms
£m
Head
Office
£m
39
–
13
1
53
–
–
–
–
–
–
1
–
–
1
Total
Group
£m
1
41
5
3
50
Total
Group
£m
39
1
13
1
54
1 Acquisition costs include items such as transaction costs or deferred incentives arising on the acquisition of businesses.
7(c): Net profit/loss on business disposals and acquisitions
As part of the Group’s Managed Separation from Old Mutual plc, the Group acquired Commsale 2000 Limited (“Commsale”) from Old Mutual
plc on 29 September 2017. The total consideration was £0.29 million. The NAV at the date of acquisition was £0.45 million, with a gain on
purchase of £0.16 million being recognised, representing assets not valued within the agreed consideration.
On 30 November 2017, the Group acquired 100% of the whole of the issued share capital of Global Edge Technologies (Pty) Ltd (“GET”),
a company incorporated in South Africa, from OM Group (UK) Limited (part of the Old Mutual plc group) for £1 million. Along with recording
the book values of the assets acquired and liabilities assumed of £4 million, the Group recognised a bargain purchase gain of £3 million.
We determined that the excess of book value over consideration paid was attributable to potential future integration costs which, if incurred,
would be expensed in future periods. As potential future integrating activities do not qualify to be recorded as a liability in the application of
the acquisition method of accounting, none were recorded.
130
Financial statementsQuilter Annual Report 2018 7: Adjusted profit and adjusting items continued
7(d): Business transformation costs
Within business transformation costs are four items: costs associated with the UK Platform Transformation Programme, build out costs
incurred within Quilter Investors as a result of the sale of our Single Strategy Asset Management business, Optimisation programme costs and,
in the prior period, certain one-off charges relating to the transformation of our business as we separated from Old Mutual plc. Each item is
described in detail below.
UK Platform Transformation Programme – 31 December 2018: £58 million, 31 December 2017: £74 million
In 2013, the Group embarked on a significant programme to develop new platform capabilities and to outsource UK business administration.
This involved replacing many aspects of the existing UK Platform, and on completion certain elements of service provision would be migrated
to International Financial Data Services (“IFDS”) under a long-term outsourcing agreement. The cost of developing the new technology did not
meet the criteria for capitalisation and were expensed. These direct costs and the costs of decommissioning existing technology and migrating
of services to IFDS are excluded from adjusted profit. The contracts with International Financial Data Services related to the UK Platform
transformation came to an end by mutual agreement effective as of 2 May 2017. For the year ended 31 December 2018, these costs total £nil
(31 December 2017: £53 million).
The Group conducted a comprehensive review of the options available to the UK Platform business and, in May 2017, entered into a new
contract with FNZ, having concluded that FNZ’s scale, market-proven and functionally-rich offering was the most suitable to meet the current
and anticipated needs of the business.
In partnership with FNZ, the Group expects to deliver all the existing functionality of the platform with increased levels of straight-through
processing and enhanced functionality for new business and to migrate the in-force (UK Platform) business over time. For the period ended
31 December 2018, these costs totalled £58 million (31 December 2017: £21 million).
Quilter Investors’ build out costs – 31 December 2018: £19 million, 31 December 2017: £nil
In March 2016, Old Mutual plc announced its Managed Separation strategy that sought to unlock and create significant long-term value for
shareholders. As part of this strategy, Quilter’s Multi-Asset (now renamed as Quilter Investors) and Single Strategy teams were to develop as
separate distinct businesses, and the Single Strategy Asset Management business was sold to its management and TA Associates on 29 June
2018. As a result, the Group has incurred £24 million of one-off costs in the year ended 31 December 2018, £5 million of which are included in
profit on disposal within discontinued operations and £19 million is an adjusting item within continuing business.
One-off transformational costs as a result of Quilter’s Managed Separation from Old Mutual plc – 31 December 2018: £nil,
31 December 2017: £15 million
The Group historically had a number of arrangements with the wider Old Mutual plc group’s South African businesses. As a consequence
of Managed Separation these arrangements were severed and, as a result, deferred acquisition cost balances totalling £10 million were written
off (included within fee and commission expenses in the income statement), together with a loss incurred of £5 million on the cancellation
of reinsurance arrangements (included within other costs within the income statement) in the year ended 31 December 2017. These charges
are regarded as one-off and related to the transformation of the business to a standalone group.
Optimisation programme costs – 31 December 2018: £7 million, 31 December 2017: £nil
Following the Group’s Managed Separation from Old Mutual plc, the Group has initiated an Optimisation programme focused on driving
operational efficiencies, incurring £7 million of one-off project costs to date.
7(e): Managed Separation costs
One-off costs related to the implementation of Managed Separation recognised in the IFRS income statement have been excluded from
adjusted profit on the basis that they are not representative of the operating activity of the Group. These costs relate to preparing the Group
to operate as a standalone business and the execution of various transactions required to implement our Managed Separation strategy.
They are not expected to persist in the long term as they relate to a fundamental restructuring of the Group, which is not operational in nature,
rather than more routine restructuring activity which would be seen as part of the usual course of business. The treatment and the disclosure
of these costs as an adjusting item are also intended to make these costs more visible to the readers of the financial statements in the context
of publicly disclosed estimates previously given in relation to these items. For the period ended 31 December 2018, these costs totalled
£24 million (31 December 2017: £32 million).
7(f): Finance costs
The nature of much of the Group’s operations means that, for management’s decision making and internal performance management, the
effects of interest costs on borrowings are removed when calculating adjusted profit. For year ended 31 December 2018, the finance costs
totalled £13 million (31 December 2017: £39 million) – see note 10.
7(g): Policyholder tax adjustments
Adjustments to policyholder tax are made to remove distortions arising from market volatility that can in turn lead to volatility in the
policyholder tax charge between periods. The significant market volatility during the year ended 31 December 2018 has resulted in a £96 million
adjustment (31 December 2017: £(4) million). For a further explanation of the impact of markets on the policyholder tax charge see note 13(a).
Adjustments are also made to remove distortions from other non-operating adjusting items that results in a further £5 million tax adjustment
as at 31 December 2018 (31 December 2017: £21 million).
For the period ended 31 December 2018, the total policyholder tax adjustments to adjusted profit total £101 million (31 December 2017:
£17 million) as shown in note 13(c).
Financial statements | Notes to the consolidated financial statements
131
Quilter Annual Report 2018 Notes to the consolidated financial statements continued
For the year ended 31 December 2018
7: Adjusted profit and adjusting items continued
7(h): Voluntary Customer Remediation Provision
As detailed in note 30 Provisions and Accruals, as part of its ongoing work to promote fair customer outcomes, the Group conducted product
reviews consistent with the recommendations from the Financial Conduct Authority’s (“FCA”) thematic feedback and the FCA’s guidance
“FG16/8 Fair treatment of long-standing customers in the life insurance sector”. Following those reviews, the Group decided to commence
voluntary remediation to customers in certain products, resulting in an additional provision raised during 2017 of £69 million.
During 2018 £31 million of this provision has been utilised against programme costs and pension remediation incurred.
The provision was recognised in the IFRS income statement but has been excluded from adjusted profit on the basis that it is not
representative of the operating performance of the business.
8: Details of income
This note gives further detail on the items appearing in the income section of the consolidated income statement.
8(a): Fee income and other income from service activities
This note analyses the fees, commission and other income from service activities earned by the Group.
Fee income and other income from service activities
Premium-based fees
Fund-based fees2
Fixed fees
Surrender charges
Other fee and commission income
Fee income and other income from service activities – continuing operations
Fee income and other income from service activities – discontinued operations
Total fee income and other income from service activities
1 A number of items have been reclassified in the prior year comparatives to conform with current year presentation.
2 Income from fiduciary activities is included within fund-based fees.
8(b): Investment return
This note analyses the investment return from the Group’s investing activities.
Net investment income
Interest and similar income
Investments and securities
Cash and cash equivalents1
Total interest and similar income
Dividend income
Foreign currency gains and losses
Total gains on financial instruments at fair value through profit and loss2
Mandatorily at fair value through profit and loss2
Designated at fair value through profit and loss2
Net investment income – continuing operations
Net investment income – discontinued operations
Total net investment income
Year ended
31 December
2018
£m
Year ended
31 December
20171
£m
179
805
32
17
13
1,046
136
1,182
179
654
31
21
10
895
389
1,284
Year ended
31 December
2018
£m
Year ended
31 December
2017
£m
59
21
80
99
2
(3,663)
(3,658)
(5)
(3,482)
–
(3,482)
53
10
63
83
3
5,046
–
5,046
5,195
7
5,202
1 Included within interest on cash and cash equivalents is £2 million arising from assets held at amortised cost. The remainder is from assets at FVTPL.
2 The Group has initially applied IFRS 9 at 1 January 2018 and has taken advantage of the exemption in paragraph 7.2.15 of IFRS 9 from restating prior periods in
respect of IFRS 9’s classification and measurement (including impairment) requirements. Refer to note 4(r) for further information.
132
Financial statementsQuilter Annual Report 2018 9: Details of expenses
This note gives further detail on the items appearing in the expense section of the consolidated income statement.
9(a): Fee and commission expenses
This note analyses the fee and commission expenses and other acquisition costs.
Fee and commission expenses
Fee and commission expense
Acquisition commission costs – investment contracts
Acquisition commission costs – insurance business
Renewal commission – investment contracts
Retrocessions paid
Changes in deferred acquisition costs and contract costs
Fee and commission expenses – continuing operations
Fee and commission expenses – discontinued operations
Total fee and commission expenses
Year ended
31 December
2018
£m
Year ended
31 December
2017
£m
Note
227
54
7
74
26
49
437
31
468
92
80
12
84
16
36
320
62
382
25
9(b): Other operating and administrative expenses
This note gives further detail on the items included within other operating and administrative expenses section of the consolidated income statement.
Other operating and administrative expenses
Staff costs1
Depreciation
Operating lease payments
Amortisation of purchased software
Amortisation of other acquired intangibles
Administration and other expenses1
Other operating and administrative expenses – continuing operations
Other operating and administrative expenses – discontinued operations
Total other operating and administrative expenses
Note
11
Year ended
31 December
2018
£m
Year ended
31 December
2017
£m
394
8
16
5
41
308
772
81
853
388
8
14
2
39
365
816
185
1,001
1 In the year ended 31 December 2017, £9 million of share-based payments expenses have been reclassified from administration and other expenses to staff costs.
Operating lease payments principally represent rentals payable by the Group for the rental of buildings and equipment.
Administration and other expenses include business transformation costs for the year ended 31 December 2018 of £58 million
(2017: £74 million) in relation to the UK Platform Transformation Programme and £nil in relation to the voluntary customer remediation
provision (2017: £69 million), as well as general operating expenses such as IT related costs, premises and marketing.
Financial statements | Notes to the consolidated financial statements
133
Quilter Annual Report 2018 Notes to the consolidated financial statements continued
For the year ended 31 December 2018
10: Finance costs
This note analyses the interest costs on our borrowings and similar charges, all of which are valued at amortised cost. Finance costs comprise:
Term loans and other external debt
Subordinated debt securities (Tier 2 bond)
Loans from Old Mutual plc
Interest payable on borrowed funds
Other
Total finance costs – continuing operations
Year ended
31 December
2018
£m
Year ended
31 December
2017
£m
2
8
3
13
4
17
–
–
39
39
–
39
Finance costs represent the cost of interest and finance charges on the Group’s borrowings from a number of relationship banks and
Old Mutual plc. The Group has had no borrowings from Old Mutual plc since 28 February 2018. More details regarding borrowed funds,
including the interest rates payable, are shown in note 32. These costs are excluded from adjusted profit within the “Finance costs”
adjusting item.
Including the impact of amortisation of bond set-up costs, the issuance of the Tier 2 Bond will result in expenses in the Head Office segment of
approximately £10 million on an annual basis. This has replaced the £39 million of interest on the borrowings with Old Mutual plc in prior years.
Within other finance costs above is £3 million relating to the impact of unwinding the discount rate on deferred consideration payable as
a result of various acquisitions. These costs are excluded from adjusted profit within the “Goodwill impairment and impact of acquisition
accounting” adjusting item as shown in note 7(b).
11: Staff costs and other employee-related costs
11(a): Staff costs
Wages and salaries
Bonus and incentive remuneration1
Social security costs
Retirement obligations
Defined contribution plans
Share-based payments
Cash-settled¹
Equity-settled1
Other
Staff costs – continuing operations
Staff costs – discontinued operations
Total staff costs
Year ended
31 December
2018
£m
Year ended
31 December
2017
£m
Note
232
65
27
13
3
26
28
394
56
450
235
66
28
11
4
17
27
388
142
530
28(f)
28(f)
¹ In the year ended 31 December 2017, £9 million of administration and other expenses (see note 9(b)) and £3 million of bonus and incentive remuneration have
been reclassified to share-based payment expenses. This has resulted in a corresponding reclassification of £4 million relating to cash-settled schemes and
£8 million relating to equity-settled schemes in the table above.
11(b): Employee numbers
The average number of persons employed by the Group was:
Advice and Wealth Management
Wealth Platforms
Head Office
Continuing operations
Discontinued operations
Total average number of employees during the year
Year ended
31 December
2018
Number
Year ended
31 December
2017
Number
1,396
2,823
60
4,279
141
4,420
1,360
2,514
66
3,940
283
4,223
The average number of persons employed by the Group is based on permanent employees, fixed term contractors and contractors employed
via third parties.
134
Financial statementsQuilter Annual Report 2018 12: Auditors’ remuneration
Included in other operating and administrative expenses are fees paid to the Group’s auditors. These can be categorised as follows:
Fees for audit services
Group and Parent Company
Subsidiaries
Total fees for audit services
Fees for audit-related assurance services
Total fees for audit and audit-related assurance services
Fees for non-audit services
Total Group auditors’ remuneration – continuing operations
Total Group auditors’ remuneration – discontinued operations
Total Group auditors’ remuneration
Year ended
31 December
2018
£m
Year ended
31 December
2017
£m
1.1
2.2
3.3
1.2
4.5
2.3
6.8
0.1
6.9
0.4
2.1
2.5
0.5
3.0
1.1
4.1
0.8
4.9
13: Tax
This note analyses the income tax expense recognised in profit or loss for the period and the various factors that have contributed to the
composition of the charge.
13(a): Tax charged to the income statement
The total tax charge for the period comprises:
Current tax
United Kingdom
International
Adjustments to current tax in respect of prior periods1
Total current tax
Deferred tax
Origination and reversal of temporary differences
Effect on deferred tax of changes in tax rates
Adjustments to deferred tax in respect of prior periods
Total deferred tax
Year ended
31 December
2018
£m
Year ended
31 December
2017
£m
Note
6
4
(25)
(15)
(155)
(1)
2
(154)
(169)
2
(167)
(158)
(9)
(167)
43
3
1
47
2
(1)
(7)
(6)
41
29
70
49
21
70
Total tax (credited)/charged to income statement – continuing operations
Total tax charged to income statement – discontinued operations
5(c)
Total tax (credited)/charged to income statement
Attributable to policyholder returns
Attributable to equity holders
Total tax (credited)/charged to income statement
1 The current year tax adjustment in respect of prior periods is £(25) million (31 December 2017: £1 million). This is primarily as a result of the carry back of
policyholder capital losses in the life businesses as permitted under UK tax legislation resulting in tax credits in respect of 2016 and 2017.
Policyholder tax
Certain products are subject to tax on policyholders’ investment returns. This “policyholder tax” is an element of total tax expense. To make the
tax expense more meaningful, tax attributable to policyholder returns and tax attributable to equity holders’ profits is shown separately in the
income statement.
The tax attributable to policyholder returns is the amount payable in the year plus the movement of amounts expected to be payable in future
years. The remainder of the tax expense is attributed to shareholders as tax attributable to equity holders.
Significant market volatility during the year ended 31 December 2018 resulted in investment return losses of £623 million on products
subject to policyholder tax. This loss is a component of the total “investment return” loss of £3,482 million shown in the income statement.
The impact of the £623 million investment return loss, together with the utilisation of brought forward capital losses, are the primary
reasons for the £158 million tax credit attributable to policyholder returns for the year ended 31 December 2018 (31 December 2017:
£49 million charge).
Financial statements | Notes to the consolidated financial statements
135
Quilter Annual Report 2018 Notes to the consolidated financial statements continued
For the year ended 31 December 2018
13: Tax continued
13(b): Reconciliation of total income tax expense
The income tax charged to profit or loss differs from the amount that would apply if all of the Group’s profits from the different tax jurisdictions
had been taxed at the UK standard corporation tax rate. The difference in the effective rate is explained below:
Year ended
31 December
2018
£m
Year ended
31 December
2017
£m
Note
Profit/(Loss) before tax
Tax at UK standard rate of 19% (2017: 19.25%)
Different tax rate or basis on overseas operations
Untaxed and low taxed income
Disallowable expenses
Adjustments to current tax in respect of prior years1
Net movement on deferred tax assets not recognised
Effect on deferred tax of changes in tax rates
Adjustments to deferred tax in respect of prior years
Income tax attributable to policyholder returns
Total tax (credited)/charged to income statement – continuing operations
Total tax charged to income statement – discontinued operations
5(c)
Total tax (credited)/charged to income statement
5
1
(5)
(15)
6
(25)
(11)
(1)
2
(121)
(169)
2
(167)
(5)
(1)
(3)
(2)
7
1
(14)
(1)
(7)
61
41
29
70
1 The adjustment in current tax in respect of prior years of £(25) million (31 December 2017: £1 million) is primarily as a result of the carry back of policyholder
capital losses in the life businesses as permitted under UK tax legislation resulting in tax credits in respect of 2016 and 2017.
13(c): Reconciliation of income tax expense in the IFRS income statement to income tax on adjusted profit
Income tax (credit)/expense on continuing operations
Tax on adjusting items
Goodwill impairment and impact of acquisition accounting
Business transformation costs
Managed Separation costs
Finance costs
Policyholder tax adjustments
Voluntary customer remediation provision
Other shareholder tax adjustments
Total tax on adjusting items
Tax attributable to policyholders returns
Tax charged on adjusted profit – continuing operations
Tax charged on adjusted profit – discontinued operations
Tax charged on adjusted profit
Year ended
31 December
2018
£m
(169)
8
16
2
2
101
–
(11)
118
57
6
5
11
Year ended
31 December
2017
£m
41
8
14
4
8
17
14
(26)
39
(66)
14
29
43
14: Earnings per share
The Group calculates earnings per share (“EPS”) on a number of different bases as appropriate to prevailing International and UK practices and
guidance. IFRS requires the calculation of basic and diluted EPS. Adjusted EPS reflects earnings per share that is consistent with the Group’s
alternative profit measure. The Group’s EPS on these different bases are summarised below.
Disclosure of basic and diluted EPS is required by IAS 33 Earnings per Share. On 6 June 2018, the Board approved a reorganisation of the
Company’s share capital to enable the implementation of the Managed Separation before the initial public offering on 25 June 2018 and,
consequently, both basic and diluted EPS for historical periods was not representative of the Group’s current structure. In accordance with
IAS 33, share transactions that change the number of shares in issue but do not result in any corresponding change to an entity’s resources,
such as share splits, bonus issues to existing shareholders and share consolidations are adjusted for in the EPS denominator as if these
transactions had occurred at the start of the earliest period for which EPS is presented. Accordingly, the weighted average number of Ordinary
Shares in issue at 31 December 2017 have been retrospectively restated to take account of the new share structure at Listing. As a result, the
Group’s EPS has fallen relative to the position shown in the 31 December 2017 Historical Financial Information, within the Listing Prospectus,
because the number of shares has increased on Listing.
For further information on share capital refer to note 27.
136
Financial statementsQuilter Annual Report 2018 14: Earnings per share continued
Basic earnings per share
Diluted basic earnings per share
Adjusted basic earnings per share
Adjusted diluted earnings per share
Headline earnings per share (net of tax)
Diluted headline earnings per share (net of tax)
Source of guidance
IFRS
IFRS
Group policy
Group policy
JSE Listing Requirements
JSE Listing Requirements
Year ended
31 December
2018
pence
Year ended
31 December
2017
pence
26.6
26.5
12.4
12.3
10.6
10.5
8.6
8.6
10.7
10.7
4.0
4.0
Note
14(a)
14(b)
14(c)
14(c)
14(d)
14(d)
14(a): Basic earnings per share (IFRS)
Basic EPS is calculated by dividing the profit for the financial period attributable to ordinary equity shareholders of the parent by the weighted
average number of Ordinary Shares in issue during the year. The weighted average number of shares excludes the following treasury shares:
Quilter plc shares held within Employee Benefit Trusts (“EBTs”) to satisfy the Group’s obligations under employee share awards; and Quilter plc
shares held in consolidated funds. Treasury shares are deducted for the purpose of calculating both basic and diluted EPS.
(i) The profit attributable to ordinary shareholders is:
Profit/(Loss) after tax from continuing operations
Profit after tax from discontinued operations
Profit for the for the financial period for the calculation of earnings per share
Year ended
31 December
2018
£m
Year ended
31 December
2017
£m
174
314
488
(46)
203
157
The table below summarises the calculation of the weighted average number of Ordinary Shares for the purposes of calculating basic earnings
per share:
Weighted average number of Ordinary Shares in issue (millions)
Treasury shares including those held in EBTs (millions)
Adjusted weighted average number of Ordinary Shares used to calculate basic earnings per share (millions)
Basic earnings per Ordinary Share (pence)
Year ended
31 December
2018
Year ended
31 December
2017
1,902
(70)
1,832
26.6
1,902
(72)
1,830
8.6
14(b): Diluted earnings per share (IFRS)
Diluted EPS recognises the dilutive impact of shares and options awarded to employees under share-based payment arrangements (potential
Ordinary Shares), to the extent they have value, in the calculation of the weighted average number of shares, as if the relevant shares were in
issue for the full year. The table below summarises the calculation of weighted average number of shares for the purpose of deriving diluted EPS:
Profit attributable to ordinary equity holders (£m)
Diluted profit attributable to ordinary equity holders (£m)
Adjusted weighted average number of Ordinary Shares (millions)
Adjustments for share options held by EBTs and similar trusts (millions)
Weighted average number of Ordinary Shares used to calculate diluted
earnings per share (millions)
Diluted earnings per Ordinary Share (pence)
Note
14(a)
Year ended
31 December
2018
Year ended
31 December
2017
488
488
1,832
7
1,839
26.5
157
157
1,830
–
1,830
8.6
There is no dilutive impact of potential shares on EPS for the period ended 31 December 2017 because the new share-based payment
arrangements, settled in Quilter plc shares, have only been in place since Listing (25 June 2018).
Financial statements | Notes to the consolidated financial statements
137
Quilter Annual Report 2018 Notes to the consolidated financial statements continued
For the year ended 31 December 2018
14: Earnings per share continued
14(c): Adjusted earnings per share
The following table presents a reconciliation of profit for the financial period to adjusted profit after tax attributable to ordinary equity holders
and summarises the calculation of adjusted earnings per share:
Profit for the financial period attributable to shareholders of the Company
Adjusting items
Income tax expense on adjusting items
Less: Policyholder tax adjustments
Less: Profit after tax from discontinued operations
Adjusted profit after tax attributable to ordinary shareholders
Adjusted weighted average number of Ordinary Shares used to calculate adjusted
basic earnings per share (millions)
Adjusted basic earnings per share (pence)
Adjusted weighted average number of Ordinary Shares used to calculate diluted
adjusted earnings per share (millions)
Adjusted diluted earnings per share (pence)
Note
7
13(c)
13(c)
5(c)
14(a)
14(b)
Year ended
31 December
2018
£m
Year ended
31 December
2017
£m
488
70
(118)
101
(314)
227
1,832
12.4
1,839
12.3
157
263
(39)
17
(203)
195
1,830
10.7
1,830
10.7
14(d): Headline earnings per share
The Group is required to calculate headline earnings per share (“HEPS”) in accordance with the Johannesburg Stock Exchange Limited (“JSE”)
Listing Requirements, determined by reference to the South African Institute of Chartered Accountants’ circular 02/2015 “Headline Earnings”.
The table below sets out a reconciliation of basic EPS and HEPS in accordance with that circular. Disclosure of HEPS is not a requirement of IFRS,
but it is a commonly used measure of earnings in South Africa.
The table below reconciles the profit for the financial period attributable to equity holders of the parent to headline earnings and summarises
the calculation of basic HEPS:
Profit for the period attributable to shareholders of the Company
Adjusting items:
Less: Profit on disposals of subsidiaries
Headline earnings
Diluted headline earnings
Weighted average number of Ordinary Shares (millions)
Diluted weighted average number of Ordinary Shares (millions)
Headline earnings per share (pence)
Diluted headline earnings per share (pence)
Year ended
31 December 2018
Year ended
31 December 2017
Gross
£m
(290)
(290)
Net of tax
£m
488
(294)
194
194
1,832
1,839
10.6
10.5
Gross
£m
(83)
(83)
Net of tax
£m
157
(83)
74
74
1,830
1,830
4.0
4.0
15: Dividends
This note analyses the total dividends paid during the year. The table below does not include the final dividend proposed after the year end
because it is not accrued in these financial statements.
Ordinary dividends declared and charged to equity in the year
2017 Special dividend paid – 161.47p per Ordinary Share
2018 Special interim dividend paid – 12.00p per Ordinary Share
Dividends paid to ordinary shareholders
Payment
date
Year ended
31 December
2018
£m
Year ended
31 December
2017
£m
9 January 2017
21 September 2018
–
221
221
210
–
210
138
Financial statementsQuilter Annual Report 2018 15: Dividends continued
Subsequent to year ended 31 December 2018 the Directors proposed a final dividend for 2018 of 3.3 pence per Ordinary Share amounting
to £61 million in total. Subject to approval by shareholders at the AGM, the dividend will be paid on 20 May 2019. In compliance with the
rules issued by the Prudential Regulation Authority (“PRA”) in relation to the implementation of the Solvency II regime and other regulatory
requirements to which the Group is subject, the dividend is required to remain cancellable at any point prior to it becoming due and payable
on 20 May 2019 and to be cancelled if, prior to payment, the Group ceases to hold capital resources equal to or in excess of its Solvency Capital
Requirement, or if that would be the case if the dividend was paid. The Directors have no intention of exercising this cancellation right, other
than where required to do so by the PRA or for regulatory capital purposes.
Final and interim dividends paid to ordinary shareholders are calculated using the number of shares in issue at the record date less own shares
held in Employee Benefit Trusts.
16: Goodwill and intangible assets
16(a): Analysis of goodwill and intangible assets
The table below shows the movements in cost, amortisation and impairment of goodwill and intangible assets.
Gross amount
At 1 January 2017
Acquisitions through business combinations1
Transfer to non-current assets held for sale2
Other movements
At 31 December 2017
Acquisitions through business combinations
Additions
Transfer to non-current assets held for sale
Other movements3
At 31 December 2018
Amortisation and impairment losses
At 1 January 2017
Amortisation charge for the year
Transfer to non-current assets held for sale
Other movements
At 31 December 2017
Amortisation charge for the year
Impairment of other acquired intangibles
Other movements
At 31 December 2018
Carrying amount
At 31 December 2017
At 31 December 2018
Goodwill
£m
Software
development
costs4
£m
Other
intangible
assets4
£m
373
15
(82)
–
306
5
–
(1)
4
94
–
(2)
5
97
–
4
–
(1)
350
30
(3)
(6)
371
9
–
–
–
314
100
380
–
–
–
–
–
–
–
–
–
306
314
(90)
(2)
2
(2)
(92)
(4)
–
1
(95)
5
5
(73)
(39)
3
1
(108)
(41)
(1)
1
(149)
263
231
Total
£m
817
45
(87)
(1)
774
14
4
(1)
3
794
(163)
(41)
5
(1)
(200)
(45)
(1)
2
(244)
574
550
1 Goodwill acquired through business combinations for the year ended 31 December 2017 of £15 million relates to the acquisition of Caerus Capital Group
Limited (£10 million) and various acquisitions by the QPCA business (£5 million). Refer to note 5(a) for further information.
2 Goodwill transferred to non-current assets held for sale relates to the Single Strategy Asset Management business (see note 5(f)).
3 Goodwill has increased by £4 million in 2018 due to a review of the purchase price allocation (“PPA”) calculation at 31 December 2017 year end relating
to the QPCA acquisitions resulting in a reclassification from other intangibles to goodwill.
4 In year ended 31 December 2017 £6 million has been reclassified from software development costs to other intangible assets to conform with current
year presentation.
Financial statements | Notes to the consolidated financial statements
139
Quilter Annual Report 2018 Notes to the consolidated financial statements continued
For the year ended 31 December 2018
16: Goodwill and intangible assets continued
16(a): Analysis of goodwill and intangible assets continued
The net carrying amount of other intangible assets at 31 December 2018 principally comprises:
• £168 million (FY 2017: £196 million) relating to distribution channels in the Quilter Cheviot business (to be amortised over a further six years);
• £19 million (FY 2017: £25 million) relating to mutual fund and asset management relationship assets in the Intrinsic business (to be amortised
over a further four years);
• £4 million (FY 2017: £7 million) relating to the Quilter Cheviot brand (to be amortised over a further one year);
• £3 million (FY 2017: £3 million) relating to the acquisition of AAM Advisory Pte Ltd (to be amortised over a further seven years);
• £9 million (FY 2017: £8 million) relating to customer distribution channels of Caerus Capital Group Limited (to be amortised over a further
six years);
• £20 million (2017: £16 million) relating to customer relationships of the QPCA business (to be amortised over six to eight years); and
• £8 million (2017: £8 million) relating to customer relationships of Attivo Investment Management Limited (to be amortised over 6 years).
16(b): Allocation of goodwill to cash generating units (“CGUs”) and impairment testing
Goodwill is allocated to the Group’s CGUs, which are contained within the following operating segments as follows:
Goodwill (net carrying amount)
Advice and Wealth Management
Wealth Platforms
Goodwill (as per the Statement of Financial Position)
Goodwill held for sale
Total goodwill
At
31 December
2018
£m
At
31 December
2017
£m
153
161
314
–
314
148
158
306
82
388
In accordance with the requirements of IAS 36 Impairment of Assets, goodwill in both the Advice and Wealth Management and Wealth Platforms
CGUs is tested for impairment annually by comparing the carrying value of the CGU to which the goodwill relates to the recoverable value of
that CGU, being the higher of that CGU’s value-in-use or fair value less costs to sell. An impairment charge is recognised when the recoverable
amount is less than the carrying value.
The value-in-use calculations for life assurance operations are determined as the sum of net tangible assets, the expected future profits arising
from the in-force business, together with the expected profits from future new business derived from business plans. Future profit elements
allow for the cost of capital needed to support the business.
The net tangible assets and future profits arising from the in-force business are derived from Solvency II (“SII”) calculations. The value of in-force
(VIF) is calculated as the prospective value of future expected cash flows on all in-force policies at the valuation date on a policy-by-policy basis
allowing for surrender or transfer payments, death claims, income withdrawals, maintenance expenses, fund-based fees, mortality charge/
protection premiums and other policy charges. The underlying assumptions are based on the best estimate view for the future, which is largely
based on recent business experience and any emerging trends. The unit fund growth rates (gross of investment charges) and the risk discount
rates are set using the prescribed SII term-dependent risk-free interest rates. The SII calculations are adjusted for a risk margin using the
prescribed SII rules.
The value-in-use calculations for asset management operations are determined as the sum of net tangible assets and the expected profits
from existing and expected future new business.
The cash flows that have been used to determine the value-in-use of the cash generating units are based on three year business plans.
These cash flows grow at different rates because of the different strategies of the CGUs. In cases where the CGUs have made significant
acquisitions in the recent past, the profits are forecast to grow faster than the more mature businesses. Post the three year growth business
plan, the growth rate used to determine the terminal value of the cash generating units approximates to the UK long-term growth rate of 2.1%
(2017: 2.9%). Market share and market growth information are also used to inform the expected volumes of future new business.
The Group uses a single cost of capital of 10.8% (2017: 9.4%) to discount future expected business plan cash flows across its two CGUs because
they are perceived to present a similar level of risk and are strongly integrated. Capital is provided to the Group predominantly by shareholders
with only a small amount of debt. The cost of capital is the weighted average of the cost of equity (return required by shareholders) and the
cost of debt (return required by bond holders). When assessing the systematic risk (i.e. beta value) within the calculation of the cost of equity,
a triangulation approach is used that combines beta values obtained from historical data, a forward looking view on the progression of beta
values and the external views of investors.
On business disposals, goodwill is allocated to the disposed business based on the relative value-in-use of the business from calculations used
within the impairment reviews.
During the period, the Group updated its assessment of goodwill for potential impairment. The recoverable amounts of goodwill allocated to
the CGUs are determined from value-in-use calculations. There was no indication of impairment of goodwill during the period. The goodwill
model is subject to certain stress tests, including sudden stock market falls, the absence of net client cash flow, and the impact of an increase
in discount rates. None of these have resulted in any indication of impairment to goodwill.
140
Financial statementsQuilter Annual Report 2018 17: Property, plant and equipment
The following table analyses property, plant and equipment.
Cost
At 1 January 2017
Additions
Additions from business combinations
Disposals
Foreign exchange and other movements
Transfer to assets held for sale
At 31 December 2017
Additions
Disposals
Foreign exchange and other movements
At 31 December 2018
Accumulated depreciation and impairment
At 1 January 2017
Depreciation charge for the year
Disposals
Foreign exchange and other movements
At 31 December 2017
Depreciation charge for the year
Disposals
Foreign exchange and other movements
At 31 December 2018
Carrying amount
At 31 December 2017
At 31 December 2018
Leasehold
improvements
£m
Plant and
equipment
£m
Total
£m
12
1
–
–
–
–
13
2
–
(2)
13
(4)
(1)
–
(2)
(7)
(1)
–
–
(8)
6
5
73
7
3
(4)
(2)
(2)
75
5
(1)
–
79
(63)
(7)
4
1
(63)
(7)
2
1
(67)
12
12
85
8
3
(4)
(2)
(2)
88
7
(1)
(2)
92
(67)
(8)
4
(1)
(70)
(8)
2
1
(75)
18
17
18: Loans and advances
This note analyses the loans and advances the Group has made. The carrying amounts of loans and advances were as follows:
Loans to policyholders
Loans to brokers and other loans to clients
Other loans
Gross loans and advances
Provision for impairments
Total net loans and advances
To be recovered within 12 months
To be recovered after 12 months
Total net loans and advances
Financial statements | Notes to the consolidated financial statements
At
31 December
2018
£m
At
31 December
2017
£m
189
27
7
223
(1)
222
199
23
222
181
19
–
200
(1)
199
190
9
199
141
Quilter Annual Report 2018 Notes to the consolidated financial statements continued
For the year ended 31 December 2018
18: Loans and advances continued
The carrying amount of loans approximates to their fair value which is measured as the principal amounts receivable under the loan agreements.
Policyholder loans are amounts taken from an individual policyholder’s unit-linked accounts and loaned to the same policyholder. Policyholder
loans are non-interest bearing and are deemed to be risk free from a shareholder perspective as the policyholder retains all associated risks.
Policyholder loans are available on demand as they have no repayment schedule.
Included within loans to brokers and other loans to clients, are loans to advisers made on commercial terms.
Other loans represent a loan to TA Associates in respect of the deferred consideration receivable arising from the sale of the Single Strategy
Asset Management business. The loan is repayable no later than 2022, but is expected to be repaid between 2019 and 2021 as surplus capital
is released from that business.
The provision for impairments is a specific impairment relating to a balance due from a financial adviser that is not expected to be recovered.
The impairment was recognised during 2016 under IAS 39; any future provisions will be recognised under IFRS 9 and disclosed in the expected
credit loss model in note 40.
19: Financial investments
The table below analyses the investments and securities that the Group invests in, either for its own proprietary behalf (shareholder funds)
or on behalf of third parties (policyholder funds).
Government and government-guaranteed securities
Other debt securities, preference shares and debentures
Equity securities1
Pooled investments
Short-term funds and securities treated as investments
Other
Total financial investments
To be recovered within 12 months
To be recovered after 12 months
Total financial investments
At
31 December
2018
£m
At
31 December
2017
£m
1,175
2,095
10,006
45,931
12
–
2,427
2,401
12,556
46,455
15
396
59,219
64,250
59,044
175
59,219
64,074
176
64,250
1 At 31 December 2017, £2 million has been reclassified from investments in associated undertakings to financial investments to aid comparability
between periods.
The financial investments recoverability profile is based on the intention with which the financial assets are held. These assets, together with
the reinsurers’ share of investment contract liabilities, are held to cover the liabilities for linked investment contracts (net of reinsurance), all of
which can be withdrawn by policyholders on demand.
19(a): Other debt securities, preference shares and debentures
All debt securities, preference shares and debentures are neither past due nor impaired. These debt instruments and similar securities are
classified according to their local credit rating (Standard & Poor’s or an equivalent), by investment grade. Further information of the credit rating
of debt securities, preference shares and debentures is analysed in the table in note 40(b).
19(b): Equity securities
Equity securities are held to cover the liabilities for linked investment contracts. The majority of the listed securities are traded on the
London Stock Exchange.
The majority of the Group’s holdings of unlisted equity securities arise principally from private equity investments, held exclusively on behalf
of policyholders.
142
Financial statementsQuilter Annual Report 2018 20: Derivative financial instruments – assets and liabilities
The Group has limited involvement with derivative instruments and does not use them for speculation purposes. Derivative instruments
are used to manage well-defined foreign exchange risks arising out of the normal course of business. The Group enters into forward foreign
exchange contracts to reduce currency risk on accounts receivable and future revenues denominated in United States dollars. The Group
does not anticipate any material adverse effect on its financial position resulting from its involvement in these types of contracts, nor does
it anticipate non-performance by counterparties. The Group only deals with highly rated counterparties.
The majority of derivatives included within the statement of financial position relate to instruments included as a consequence of the
consolidation of investment funds. This can be seen within the segmented statement of financial position (note 6(c)).
Assets
Liabilities
At
31 December
2018
£m
At
31 December
2017
£m
46
37
87
433
21: Categories of financial instruments
The analysis of financial assets and liabilities into their categories as defined in IFRS 9 Financial Instruments is set out in the following tables.
Assets and liabilities of a non-financial nature, or financial assets and liabilities that are specifically excluded from the scope of IFRS 9, are
reflected in the non-financial assets and liabilities category.
For information about the methods and assumptions used in determining fair value please refer to note 22. The Group’s exposure to various
risks associated with financial instruments is discussed in note 40(c).
At 31 December 2018 – Measurement basis
Assets
Investments in associated undertakings2
Reinsurers’ share of policyholder liabilities
Contract assets
Loans and advances
Financial investments
Trade, other receivables and other assets
Derivative financial instruments
Cash and cash equivalents
Total assets that include financial instruments
Total other non-financial assets
Total assets
Liabilities
Long-term business insurance policyholder liabilities
Investment contract liabilities
Third-party interest in consolidation of funds
Borrowings
Trade, other payables and other liabilities
Derivative financial instruments
Total liabilities that include financial instruments
Total other non-financial liabilities
Total liabilities
Fair value1
Mandatorily
at FVTPL
£m
Designated
at FVTPL
£m
Amortised
cost
£m
Non-financial
assets and
liabilities
£m
–
1,671
–
189
59,052
–
46
1,361
62,319
–
62,319
–
56,450
5,116
–
–
37
61,603
–
61,603
–
–
–
–
167
–
–
–
167
–
167
–
–
–
–
–
–
–
–
–
–
–
44
33
–
449
–
1,034
1,560
–
1,560
–
–
–
197
840
–
1,037
–
1,037
2
491
–
–
–
37
–
–
530
1,214
1,744
602
–
–
–
159
–
761
384
1,145
Total
£m
2
2,162
44
222
59,219
486
46
2,395
64,576
1,214
65,790
602
56,450
5,116
197
999
37
63,401
384
63,785
1 The Group adopted IFRS 9 Financial Instruments for the first time in 2018. IFRS 9 introduces new classification and measurement categories. The Mandatorily at
Fair Value Through Profit or Loss (FVTPL) category includes financial assets that are managed (and their performance evaluated) on a fair value basis, including
those previously described as “held for trading”. The majority of the Group’s financial assets and liabilities continue to be measured at FVTPL. The Group has
taken advantage of the exemption in paragraph 7.2.15 of IFRS 9 from restating prior periods in respect of IFRS 9’s classification and measurement (including
impairment) requirements. For further information on IFRS 9 refer to note 4.
2 Investments in associated undertakings classified as non-financial assets and liabilities are equity accounted.
Financial statements | Notes to the consolidated financial statements
143
Quilter Annual Report 2018
Notes to the consolidated financial statements continued
For the year ended 31 December 2018
21: Categories of financial instruments continued
At 31 December 2017 – Measurement basis
Assets
Investments in associated undertakings2, 3
Reinsurers’ share of policyholder liabilities
Loans and advances
Financial investments3
Trade, other receivables and other assets
Derivative financial instruments
Cash and cash equivalents4
Total assets that include financial instruments
Total other non-financial assets
Total assets net of held for sale
Total assets classified as held for sale
Total assets
Liabilities
Long-term business insurance policyholder liabilities
Investment contract liabilities
Third-party interest in consolidation of funds
Borrowings
Trade, other payables and other liabilities
Derivative financial instruments
Total liabilities that include financial instruments
Total other non-financial liabilities
Total liabilities net of held for sale
Total liabilities classified as held for sale
Total liabilities
Fair value1
Designated at
fair value
through the
profit or loss
£m
Held for
trading
£m
Amortised cost
Loans and
receivables
£m
Financial
liabilities
amortised cost
£m
Non-financial
assets and
liabilities
£m
–
–
–
–
–
87
–
87
–
87
–
87
–
–
–
–
–
433
433
–
433
–
433
–
2,525
180
64,250
–
–
412
67,367
–
67,367
–
67,367
–
59,139
7,905
–
–
–
67,044
–
67,044
–
67,044
–
–
19
–
154
–
1,948
2,121
–
2,121
147
2,268
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
782
505
–
1,287
–
1,287
–
1,287
1
383
–
–
343
–
–
727
1,225
1,952
299
2,251
489
–
–
–
826
–
1,315
576
1,891
219
2,110
Total
£m
1
2,908
199
64,250
497
87
2,360
70,302
1,225
71,527
446
71,973
489
59,139
7,905
782
1,331
433
70,079
576
70,655
219
70,874
1 The Group adopted IFRS 9 Financial Instruments for the first time in 2018. The Group has taken advantage of the exemption in paragraph 7.2.15 of IFRS 9
from restating prior periods in respect of IFRS 9’s classification and measurement (including impairment) requirements. For further information on IFRS 9
refer to note 4.
Investments in associated undertakings classified as non-financial assets and liabilities are equity accounted.
2
3 As at 31 December 2017 £2 million has been reclassified from investments in associated undertakings to financial investments to conform with current
year presentation.
4 As at 31 December 2017 £412 million money market collective investment funds has been reclassified from amortised costs to FVTPL level 1 to aid
comparability between periods.
144
Financial statementsQuilter Annual Report 2018 22: Fair value methodology
This section explains the judgements and estimates made in determining the fair values of financial instruments that are recognised and
measured at fair value in the financial statements. Classifying financial instruments into the three levels below, prescribed under accounting
standards, provides an indication about the reliability of inputs used in determining fair value.
22(a): Determination of fair value
The fair value of financial instruments that are actively traded in organised financial markets is determined by reference to quoted market exit
prices for assets and offer prices for liabilities, at the close of business on the reporting date, without any deduction for transaction costs:
• for units in unit trusts and shares in open ended investment companies, fair value is determined by reference to published quoted prices
representing exit values in an active market;
• for equity and debt securities not actively traded in organised markets and where the price cannot be retrieved, the fair value is determined
by reference to similar instruments for which market observable prices exist;
• for assets that have been suspended from trading on an active market, the last published price is used. Many suspended assets are still
regularly priced. At the reporting date all suspended assets are assessed for impairment; and
• where the assets are private company shares the valuation is based on the latest available set of audited financial statements where available,
or if more recent, a statement of valuation provided by the private company’s management.
There have been no significant changes in the valuation techniques applied when valuing financial instruments. The general principles applied
to those instruments measured at fair value are outlined below:
Reinsurers’ share of policyholder liabilities
Reinsurers’ share of policyholder liabilities are measured on a basis that is consistent with the measurement of the provisions held in respect
of the related insurance contracts. Reinsurance contracts which cover financial risk are measured at fair value of the underlying assets.
Loans and advances
Loans and advances include loans to policyholders, loans to brokers, and other secured and unsecured loans. Loans and advances to
policyholders of investment-linked contracts are measured at fair value. All other loans are stated at their amortised cost.
Financial investments
Financial investments include government and government-guaranteed securities, listed and unlisted debt securities, preference shares and
debentures, listed and unlisted equity securities, listed and unlisted pooled investments (see below), short-term funds and securities treated
as investments and certain other securities.
Pooled investments represent the Group’s holdings of shares/units in open-ended investment companies, unit trusts, mutual funds and
similar investment vehicles. Pooled investments are recognised at fair value. The fair values of pooled investments are based on widely
published prices that are regularly updated.
Other financial investments that are measured at fair value are measured at observable market prices where available. In the absence of
observable market prices, these investments and securities are fair valued utilising various approaches including discounted cash flows,
the application of an earnings before interest, tax, depreciation and amortisation multiple or any other relevant technique.
Derivatives
The fair value of derivatives is determined with reference to the exchange traded prices of the specific instruments. In situations where
the derivatives are traded over the counter the fair value of the instruments is determined by the utilisation of option pricing models.
Investment contract liabilities
The fair value of the investment contract liabilities is determined with reference to the underlying funds that are held by the Group.
Third-party interests in consolidation of funds
Third-party interests in consolidation of funds are measured at the attributable net asset value of each fund.
Borrowed funds
Borrowed funds are stated at amortised cost.
Financial statements | Notes to the consolidated financial statements
145
Quilter Annual Report 2018 Notes to the consolidated financial statements continued
For the year ended 31 December 2018
22: Fair value methodology continued
22(b): Fair value hierarchy
Fair values are determined according to the following hierarchy:
Description of hierarchy
Types of instruments classified in the respective levels
Level 1 – quoted market prices: financial assets and liabilities with quoted
prices for identical instruments in active markets.
Level 2 – valuation techniques using observable inputs: financial assets and
liabilities with quoted prices for similar instruments in active markets or
quoted prices for identical or similar instruments in inactive markets and
financial assets and liabilities valued using models where all significant
inputs are observable.
Listed equity securities, government securities and other listed debt
securities and similar instruments that are actively traded, actively traded
pooled investments, certain quoted derivative assets and liabilities,
reinsurers’ share of investment contract liabilities and investment contract
liabilities directly linked to other Level 1 financial assets.
Unlisted equity and debt securities where the valuation is based on models
involving no significant unobservable data.
Over the counter (OTC) derivatives, certain privately placed debt
instruments and third-party interests in consolidated funds.
Level 3 – valuation techniques using significant unobservable inputs:
financial assets and liabilities valued using valuation techniques where
one or more significant inputs are unobservable.
Unlisted equity and securities with significant unobservable inputs,
securities where the market is not considered sufficiently active,
including certain inactive pooled investments.
The judgement as to whether a market is active may include, for example, consideration of factors such as the magnitude and frequency of
trading activity, the availability of prices and the size of bid/offer spreads. In inactive markets, obtaining assurance that the transaction price
provides evidence of fair value or determining the adjustments to transaction prices that are necessary to measure the fair value of the asset
or liability requires additional work during the valuation process.
The majority of valuation techniques employ only observable data and so the reliability of the fair value measurement is high. However, certain
financial assets and liabilities are valued on the basis of valuation techniques that feature one or more significant inputs that are unobservable
and, for them, the derivation of fair value is more judgemental. A financial asset or liability in its entirety is classified as valued using significant
unobservable inputs if a significant proportion of that asset or liability’s carrying amount is driven by unobservable inputs.
In this context, “unobservable” means that there is little or no current market data available for which to determine the price at which an
arm’s length transaction would be likely to occur. It generally does not mean that there is no market data available at all upon which to base
a determination of fair value. Furthermore, in some cases the majority of the fair value derived from a valuation technique with significant
unobservable data may be attributable to observable inputs. Consequently, the effect of uncertainty in determining unobservable inputs
will generally be restricted to uncertainty about the overall fair value of the asset or liability being measured.
22(c): Transfer between fair value hierarchies
The Group deems a transfer to have occurred between Level 1 and Level 2 or Level 3 when an active, traded primary market ceases to exist for
that financial instrument. A transfer between Level 2 and Level 3 occurs when the majority of the significant inputs used to determine fair value
of the instrument become unobservable.
There were transfers of financial investments of £13 million from Level 1 to Level 2 during the year (2017: £154 million). There were transfers
of financial investments of £107 million from Level 2 to Level 1 during the year (2017: £20 million). These movements are matched exactly
by transfers of investment contract liabilities. See note 22(e) for details of movements in Level 3.
22(d): Financial assets and liabilities measured at fair value, classified according to fair value hierarchy
The tables below present a summary of the Group’s financial assets and liabilities that are measured at fair value in the consolidated statement
of financial position according to their IFRS 9 classification, as set out in changes to accounting policies in note 4(r). The Group has initially
applied IFRS 9 at January 2018. Under the transition methods selected, comparative information is not restated.
The Group has not disclosed the fair value for financial instruments not measured at fair value because their carrying values are a reasonable
approximation of fair value.
The majority of the Group’s financial assets are measured using quoted market prices for identical instruments in active markets (Level 1) and
there has been no significant change during the year.
The assets, together with the reinsurers’ share of investment contract liabilities, are held to cover the liabilities for linked investment contracts
(net of reinsurance). The difference between linked assets and linked liabilities is principally due to short term timing differences between
policyholder premiums being received and invested in advance of policies being issued, and tax liabilities within funds which are reflected
within the Group’s tax liabilities.
146
Financial statementsQuilter Annual Report 2018 22: Fair value methodology continued
22(d): Financial assets and liabilities measured at fair value, classified according to fair value hierarchy continued
Financial assets measured at fair value
Level 1
Level 2
Level 31
Total
Financial liabilities measured at fair value
Level 1
Level 2
Level 3
Total
At 31 December 2018
At 31 December 2017
£m
%
£m
%
52,060
9,272
1,154
62,486
54,944
5,508
1,151
61,603
83.4%
14.8%
1.8%
100.0%
89.2%
8.9%
1.9%
100.0%
58,357
7,928
1,169
67,454
57,399
8,911
1,167
67,477
86.5%
11.8%
1.7%
100.0%
85.1%
13.2%
1.7%
100.0%
1 As at 31 December 2017 £2 million has been reclassified from investments in associated undertakings to Level 3 financial assets to conform with current
year presentation.
At 31 December 2018
Financial assets measured at fair value
Mandatorily (fair value through profit or loss)
Reinsurers’ share of policyholder liabilities
Loans and advances
Financial investments
Cash and cash equivalents
Derivative financial instruments – assets
Designated (fair value through profit or loss)
Financial investments
Total assets measured at fair value
Financial liabilities measured at fair value
Mandatorily (fair value through profit or loss)
Investment contract liabilities
Third-party interests in consolidated funds
Derivative financial instruments – liabilities
Level 1
£m
51,893
1,671
189
48,672
1,361
–
167
167
Level 2
£m
Level 3
£m
9,272
1,154
–
–
–
–
9,226
1,154
–
46
–
–
–
–
–
–
Total
£m
62,319
1,671
189
59,052
1,361
46
167
167
52,060
9,272
1,154
62,486
54,944
54,944
–
–
5,508
355
5,116
37
1,151
1,151
–
–
61,603
56,450
5,116
37
Total liabilities measured at fair value
54,944
5,508
1,151
61,603
Financial statements | Notes to the consolidated financial statements
147
Quilter Annual Report 2018 Notes to the consolidated financial statements continued
For the year ended 31 December 2018
22: Fair value methodology continued
22(d): Financial assets and liabilities measured at fair value, classified according to fair value hierarchy continued
At 31 December 2017
Financial assets measured at fair value
Held-for-trading (fair value through profit or loss)
Derivative financial instruments – assets
Designated (fair value through profit or loss)
Reinsurers’ share of policyholder liabilities
Loans and advances
Financial investments1
Cash and cash equivalents2
Total assets measured at fair value
Financial liabilities measured at fair value
Held-for-trading (fair value through profit or loss)
Derivative financial instruments – liabilities
Designated (fair value through profit or loss)
Investment contract liabilities
Third-party interests in consolidated funds
Level 1
£m
Level 2
£m
Level 3
£m
–
–
58,357
2,525
180
55,240
412
87
87
–
–
7,841
1,169
–
–
7,841
–
–
–
1,169
–
Total
£m
87
87
67,367
2,525
180
64,250
412
58,357
7,928
1,169
67,454
–
–
57,399
57,399
–
433
433
8,478
573
7,905
–
–
1,167
1,167
–
433
433
67,044
59,139
7,905
Total liabilities measured at fair value
57,399
8,911
1,167
67,477
1 As at 31 December 2017 £2 million has been reclassified from investments in associated undertakings to Level 3 financial investments to conform with current
year presentation.
2 As at 31 December 2017 £412 million money market collective investment funds has been reclassified from amortised costs to FVTPL Level 1 to aid
comparability between periods.
22(e): Level 3 fair value hierarchy disclosure
The majority of the assets that are classified as Level 3 are held within linked policyholder funds. This means that all of the investment risk
associated with these assets is borne by policyholders and that the value of these assets is exactly matched by a corresponding liability
due to policyholders. The Group bears no risk from a change in the market value of these assets except to the extent that it has an impact
on management fees earned. Also included within the assets classified as Level 3 is a shareholder investment in an unlisted equity of
£3 million (2017: £2 million); this is not matched by a corresponding liability and therefore any changes in market value are taken to the
Group’s income statement.
The table below reconciles the opening balance of Level 3 financial assets to the closing balance at the end of the year:
At beginning of the year
Total net fair value gains recognised in:
– profit or loss
Purchases
Sales
Transfers in
Transfers out
Foreign exchange and other
Total Level 3 financial assets
Unrealised fair value gains/(losses) relating to assets held at the year end recognised in:
– profit or loss
At
31 December
2018
£m
1,169
54
38
(25)
69
(151)
-
At
31 December
2017
£m
581
(23)
618
(23)
167
(152)
1
1,154
1,169
54
(23)
Amounts shown as sales arise principally from the sale of private company shares, unlisted pooled investments and from distributions
received in respect of holdings in property funds.
Transfers into Level 3 assets for the current period comprise £69 million (2017: £167 million) of stale priced assets that were previously shown
within Level 2 and for which price updates have not been received for more than six months. Transfers out of Level 3 assets in the current
period comprise £151 million (2017: £152 million) of stale priced assets that were not previously being repriced and that have been transferred
into Level 2 as they are now actively priced.
148
Financial statementsQuilter Annual Report 2018 22: Fair value methodology continued
22(e): Level 3 fair value hierarchy disclosure continued
The table below analyses the type of Level 3 financial assets held:
Pooled investments
Unlisted and stale price pooled investments
Suspended funds
Private equity investments
Total Level 3 financial assets
At
31 December
2018
£m
At
31 December
2017
£m
86
82
4
1,068
1,154
186
185
1
983
1,169
All of the liabilities that are classified as Level 3 are investment contract liabilities which exactly match against the Level 3 assets held in linked
policyholder funds.
The table below reconciles the opening balance of Level 3 financial liabilities to the closing balance at the end of the year:
At beginning of the year
Total net fair value gains recognised in:
– profit or loss
Purchases
Sales
Transfers in
Transfers out
Foreign exchange and other
Total Level 3 financial liabilities
Unrealised fair value gains/(losses) relating to liabilities held at the year end recognised in:
– profit or loss
At
31 December
2018
£m
1,167
53
38
(25)
69
(151)
–
At
31 December
2017
£m
581
(23)
616
(23)
167
(152)
1
1,151
1,167
53
(23)
22(f): Effect of changes in significant unobservable assumptions to reasonable possible alternatives
Favourable and unfavourable changes are determined on the basis of changes in the value of the financial asset or liability as a result of varying
the levels of the unobservable parameters using statistical techniques. When parameters are not amenable to statistical analysis, quantification
of uncertainty is judgemental.
When the fair value of a financial asset or liability is affected by more than one unobservable assumption, the figures shown reflect the most
favourable or most unfavourable change from varying the assumptions individually.
The valuations of the private equity investments are performed on an asset-by-asset basis using a valuation methodology appropriate to the
specific investment and in line with industry guidelines. Private equity investments are valued at the value disclosed in the latest available set of
audited financial statements or if more recent information is available from investment managers or professional valuation experts at the value
of the underlying assets of the private equity investment.
Details of the valuation techniques applied to the different categories of financial instruments can be found in note 22(a) above.
Management believe that in aggregate, 10% (2017: 10%) change in the value of the financial asset or liability represents a reasonable possible
alternative judgement in the context of the current macro-economic environment in which the Group operates. It is therefore considered that
the impact of alternative assumptions will be in the range of £115 million, both favourable and unfavourable (2017: £117 million). As described
in note 22(e) above, changes in the value of Level 3 assets held within linked policyholder funds are exactly matched by corresponding changes
in the value of liabilities due to policyholders and therefore have no impact on the Group’s net asset value or profit or loss, except to the extent
that it has an impact on management fees earned.
Financial statements | Notes to the consolidated financial statements
149
Quilter Annual Report 2018 Notes to the consolidated financial statements continued
For the year ended 31 December 2018
22: Fair value methodology continued
22(g): Fair value hierarchy for assets and liabilities not measured at fair value
Certain financial instruments of the Group are not carried at fair value. The carrying values of these are considered reasonable approximations
of their respective fair values, as they are either short term in nature or are repriced to current market rates at frequent intervals. Their
classification within the fair value hierarchy would be as follows:
Contract assets
Trade, other receivables, and other assets
Cash and cash equivalents
Trade, other payables, and other liabilities
Level 3
Level 3
Level 1
Level 3
Loans and advances are financial assets held at amortised cost and therefore not carried at fair value, with the exception of policyholder loans
which are categorised as FVTPL. Loans and advances held at amortised cost would be classified as Level 3 in the fair value hierarchy.
Borrowed funds are financial liabilities held at amortised cost and therefore not carried at fair value. Borrowed funds relate to subordinated
liabilities and would be classified as Level 2 in the fair value hierarchy.
23: Structured entities
23(a): Group’s involvement in structured entities
Some investment vehicles are classified as structured entities because they have a narrow and well defined purpose. In structured entities,
voting rights are not the predominant factor in deciding who controls the entity but rather it is the Group’s exposure to the variability of returns
from these entities. The table below summarises the types of structured entities the Group has an interest in. These entities are not
consolidated where the Group determines that it does not have control:
Type of structured entity
Nature
Purpose
Interest held by the Group
• Investments in collective
investment vehicles
• Investments in collective
investment vehicles
• Manage client funds through
• Generate fees from managing assets
• Investment in units issued by the
the investment in assets
on behalf of third-party investors
vehicles
• Manage shareholder funds through
• Generate fees from managing
• Investment in units issued by
the investment in assets
company assets
the vehicles
The Group’s holdings in investment vehicles are subject to the terms and conditions of the respective investment vehicle’s offering
documentation and are susceptible to market price risk arising from uncertainties about future values of those investment vehicles. All of
the investment vehicles in the investment portfolios are managed by portfolio managers who are compensated by the respective investment
vehicles for their services. Such compensation generally consists of an asset-based fee and a performance-based incentive fee, and is
reflected in the valuation of the investment vehicles.
23(b): Interests in unconsolidated structured entities
The Group invests in unconsolidated structured entities as part of its normal investment and trading activities. The Group’s total interest in
unconsolidated structured entities is classified as investments and securities held at fair value through profit or loss. The table below provides
a summary of the carrying value of the Group’s interest in unconsolidated structured entities:
Financial investments
Cash and cash equivalents1
Total Group interest in unconsolidated structured entities
At
31 December
2018
£m
At
31 December
2017
£m
40,815
1,361
42,176
43,848
412
44,260
1 In the year ended 31 December 2017 money market funds of £412 million have been reclassified on the statement of financial position from Financial
Investments to Cash and cash equivalents.
The Group’s maximum exposure to loss with regard to the interests presented above is the carrying amount of the Group’s investments.
Once the Group has disposed of its shares or units in a fund, it ceases to be exposed to any risk from that fund. The Group’s holdings in the
above unconsolidated structured entities are largely less than 50% and as such the net asset value of these structured entities is likely to be
significantly higher than their carrying value.
150
Financial statementsQuilter Annual Report 2018 23: Structured entities continued
23(c): Consolidation considerations for structured entities managed by the Group
The Group acts as fund manager to a number of investment funds. Determining whether the Group controls such an investment fund usually
focuses on the assessment of decision making rights as fund manager, the investor’s rights to remove the fund manager and the aggregate
economic interests of the Group in the fund in the form of interest held and exposure to variable returns.
In most instances the Group’s decision making authority, in its capacity as fund manager, with regard to these funds is regarded to be
well-defined. Discretion is exercised when decisions regarding the relevant activities of these funds are being made. For funds managed
by the Group where the investors have the right to remove the Group as fund manager without cause, the fees earned by the Group are
considered to be market related. These agreements include only terms, conditions or amounts that are customarily present in arrangements
for similar services and level of skills negotiated on an arm’s length basis. The Group has concluded that it acts as agent on behalf of the
investors in all instances.
The Group is considered to be acting as principal where the Group is the fund manager and is able to make the investment decisions on behalf
of the unit holders and earn a variable fee, and there are no kick out rights that would remove the Group as fund manager.
There have been no changes in facts or circumstances which have changed the Group’s conclusion on the consolidation of funds.
The Group has not provided any non-contractual support to any consolidated or unconsolidated structured entities.
23(d): Other interests in unconsolidated structured entities
The Group receives management fees and other fees in respect of its asset management businesses that manage investments in which the
Group has no holding. These also represent interests in unconsolidated structured entities. As these investments are not held by the Group,
the investment risk is borne by the external investors and therefore the Group’s maximum exposure to loss relates to future management
fees. The Group does not sponsor any of the funds or investment vehicles from which it receives fees.
The table below shows the assets under management of entities that the Group manages but does not have a holding in and the fees earned
from those entities:
Pooled investments
Open Ended Investment Company (OEIC)
Total other interest in unconsolidated structured entities
24: Trade, other receivables and other assets
The note analyses total trade, other receivables and other assets.
At 31 December 2018
At 31 December 2017
Assets under
management
£m
Fees
earned
£m
Assets under
management
£m
Fees
earned
£m
–
–
1
1
275
275
6
6
At
31 December
2018
£m
At
31 December
20172
£m
Note
Debtors arising from direct insurance business – amounts owed by intermediaries
Debtors arising from reinsurance business
Outstanding settlements
Other receivables
Accrued interest
Prepayments and accrued income1
Management fees
Other assets
Total trade, other receivables and other assets
Less: trade, other receivables and other assets classified as held for sale
5(f)
Total trade, other receivables and other assets net of held for sale
To be settled within 12 months
To be settled after 12 months
Total trade, other receivables and other assets net of held for sale
–
5
327
94
2
34
23
1
486
–
486
486
–
486
1 In the year ended 31 December 2018 £44 million has been reclassified to contract assets (see note 25(b)) as a result of the Group’s adoption of IFRS 15 on
1 January 2018.
2 A number of items have been reclassified in the prior year comparatives to conform with current year presentation.
Financial statements | Notes to the consolidated financial statements
2
8
307
244
3
63
44
30
701
(204)
497
469
28
497
151
Quilter Annual Report 2018 Notes to the consolidated financial statements continued
For the year ended 31 December 2018
24: Trade, other receivables and other assets continued
Other receivables mainly relate to trade debtors, tax debtors and other debtors. There have been no non-performing receivables or material
impairments in the financial year that require disclosure. Information about the Group’s impairment losses on trade receivables is included in
note 40(b). None of the receivables reflected above have been subject to the renegotiation of terms. All amounts are current, short term and
interest free with the carrying amount approximating to fair value.
25: Deferred acquisition costs, contract costs and contract assets
25(a): Deferred acquisition costs and contract costs
Deferred acquisition costs (on insurance contracts) and contract costs (on investment contracts and asset management contracts) relate to
costs that the Group incur to obtain new business. These acquisition costs are capitalised in the statement of financial position and are
amortised in profit or loss over the life of the contracts. The table below analyses the movements in these balances relating to insurance,
investment and asset management contracts.
Balance at 1 January 2017
New business
Amortisation
Movement shown in fee and commission
expenses1
Foreign exchange
Deferred acquisition costs written off2
Other movements related to discontinued
operations3
Transfer to non-current assets held for sale
Balance at 31 December 2017
Reclassification to contract costs4
New business
Amortisation
Other movements
Movement shown in fee and commission
expenses1
Balance at 31 December 2018
Deferred acquisition costs
Investment
contracts
£m
Insurance
contracts
£m
Asset
management
£m
Investment
contracts
£m
Contract costs
Asset
management
£m
629
79
(108)
(29)
1
(9)
–
–
592
(592)
–
–
–
–
–
17
–
(3)
(3)
–
–
–
–
14
–
–
(3)
–
(3)
11
9
3
(7)
(4)
–
–
4
(4)
5
(5)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
592
50
(97)
2
(45)
547
–
–
–
–
–
–
–
–
–
5
1
(2)
–
(1)
4
Total
£m
655
82
(118)
(36)
1
(9)
4
(4)
611
–
51
(102)
2
(49)
562
1 Changes in deferred acquisition costs and contract costs, within the fee and commission expenses note 9(a).
2 As part of the managed separation of the Old Mutual plc Group, part of the Group’s DAC balance was written off in respect of a South African book of business
transferred outside of the Quilter plc Group.
3 Other movements in 2017 includes £5 million of new business and £(1) million of amortisation relating to discontinued operations.
4 Reclassified from deferred acquisition costs to contract costs at 1 January 2018, as a result of IFRS 15.
25(b): Contract assets
Contract assets (on non-insurance contracts) of £44 million at 31 December 2018 were previously (before the adoption of IFRS 15) known
as accrued income from contracts with customers and were disclosed within other receivables.
152
Financial statementsQuilter Annual Report 2018 26: Cash and cash equivalents
26(a): Analysis of net cash flows from operating activities:
Cash flows from operating activities
Profit before tax
Adjustments for non-cash movements in net profit for the year
Depreciation of property, plant and equipment
Movement on deferred acquisition costs and contract costs
Movement on deferred fee income and contract liabilities
Amortisation and impairment of intangibles
Fair value movements of financial assets
Fair value movements in investment contract liabilities
Other change in investment contract liabilities
Profit on sale of subsidiaries and bargain purchase
Other movements
Net changes in working capital
Decrease/(increase) in derivatives1
Decrease/(increase) in loans and advances
(Decrease)/increase in provisions
Decrease/(increase) in other assets/liabilities2
Taxation paid
Net cash flows from operating activities
Year ended
31 December
2018
£m
Year ended
31 December
20173
£m
321
6
49
(14)
46
3,473
(4,119)
1,412
(290)
21
584
(353)
(23)
(6)
(287)
(669)
(92)
144
227
8
40
(24)
41
(4,688)
3,958
3,871
(83)
28
3,151
315
23
75
567
980
(9)
4,349
1 The movement in derivatives primarily relates to consolidated funds as explained in note 20.
2 Working capital changes in respect of other assets and liabilities primarily relate to consolidation of funds.
3 A number of items within the 2017 comparatives have been reclassified to align with the presentation within the 2018 financial statements.
There was no impact on cash and cash equivalents resulting from these reclassifications.
26(b): Total cash and cash equivalents can be broken down as follows:
Cash at bank
Money market funds
Cash and cash equivalents in consolidated funds
Total cash and cash equivalents per statement of financial position
Cash within held for sale
Total cash and cash equivalents per consolidated statement of cash flows
At
31 December
2018
£m
At
31 December
2017
£m
550
1,361
484
2,395
–
2,395
1,036
412
912
2,360
147
2,507
Except for cash and cash equivalents subject to consolidation of funds of £484 million (2017: £912 million), management do not consider that
there are any material amounts of cash and cash equivalents which are not available for use in the Group’s day-to-day operations.
Financial statements | Notes to the consolidated financial statements
153
Quilter Annual Report 2018 Notes to the consolidated financial statements continued
For the year ended 31 December 2018
26: Cash and cash equivalents continued
26(c): Cash flows from financing activities is further analysed below:
For the year ended 31 December 2018
Opening balance at 1 January 2018
Cash flows from financing activities
Liability related:
Finance costs
Proceeds from issue of subordinated and other debt
Subordinated and other debt repaid
Equity related:
Dividends paid to ordinary equity holders of the Company
Proceeds from issue of Ordinary Shares
Cash flows from financing activities
Other changes
Other changes in liabilities2
Liability related
Equity related
Closing balance at 31 December 2018
For the year ended 31 December 2017
Opening balance at 1 January 2017
Cash flows from financing activities
Liability related:
Finance costs
Subordinated and other debt repaid
Equity related:
Dividends paid to ordinary equity holders of the Company
Proceeds from issue of Ordinary Shares
Cash flows from financing activities
Other changes
Foreign exchange movements
Other changes in liabilities
Liability related
Equity related
Closing balance at 31 December 2017
Liabilities
Equity1
Deposits from
reinsurers
£m
Changes in
equity
£m
Total
£m
Note 33
16
1,099
1,897
Borrowings
£m
Note 32
782
(7)
497
(516)
–
–
(26)
(559)
(559)
–
197
Borrowings
£m
Note 32
839
(39)
(57)
–
–
(96)
–
39
39
–
782
(1)
–
–
–
–
(1)
1
1
–
16
–
–
–
(221)
–
(221)
–
–
1,127
2,005
Liabilities
Equity1
Deposits from
reinsurers
£m
Changes in
equity
£m
(8)
497
(516)
(221)
–
(248)
(558)
(558)
1,127
2,218
Total
£m
Note 33
14
992
1,845
–
–
–
–
–
–
2
2
–
16
–
–
(210)
258
48
–
–
–
59
1,099
(39)
(57)
(210)
258
(48)
–
41
41
59
1,897
1 Full details of changes in equity are shown in the consolidated statement of changes in equity.
2 Other changes in liabilities in the year ended 31 December 2018 includes the £566 million receivable transferred into the Group as part of the acquisition of the
Skandia Ltd group, which offsets with the corresponding payable already within the Group, as explained in note 5(a).
154
Financial statementsQuilter Annual Report 2018
27: Share capital and merger reserve
27(a): Share capital
Financial instruments issued are classified as equity when there is no contractual obligation to transfer cash, other financial assets or issue
a variable number of own equity instruments. Incremental costs directly attributable to the issue of equity instruments are shown in equity
as a deduction from the proceeds, net of tax. The Parent Company’s equity capital currently comprises 1,902,251,098 Ordinary Shares of
7 pence each with an aggregated nominal value of £133,157,577 (2017: 130,000,257 Ordinary Shares of 100 pence each with an aggregated
nominal value of £130,000,257).
This note gives details of the Company’s Ordinary Share capital and shows the movements during the period:
At 1 January 2017
Issue of share capital1, 2
Reduction of share capital3
At 31 December 2017
At 1 January 2018
Issue of share capital4
Sub-division of Ordinary Shares of 100p each to 1p each5
Bonus shares issued to ordinary shareholders of 1p each6
Conversion of Ordinary Shares of 1p each to 7p each7
At 31 December 2018
Number of
shares
130,000,256
200,000,001
(200,000,000)
130,000,257
130,000,257
1
130,000,258
12,870,025,542
13,000,025,800
315,731,886
13,315,757,686
(11,413,506,588)
1,902,251,098
Nominal
value
£m
Share
premium
£m
130
200
(200)
130
130
–
130
–
130
3
133
–
133
–
58
–
58
58
–
58
–
58
–
58
–
58
1 On 3 May 2017 the Company allotted and issued 200 million £1 Ordinary Shares, for a consideration of £200 million, to its now former parent Old Mutual plc.
2 On 21 December 2017 Old Mutual plc contributed £58 million to the Company in exchange for the issue of 1 share.
3 On 27 November 2017 the Company carried out a share capital reduction, which cancelled the 200 million £1 Ordinary Shares.
4 On 31 January 2018 the Company allotted and issued 1 Ordinary Share of £1.
On 6 June 2018 the Board approved a reorganisation of its share capital to enable the implementation of the Managed Separation and to ensure that existing
shareholders of Old Mutual plc received one Ordinary Share for every three Ordinary Shares they hold in Old Mutual plc, as described in the Prospectus
document. The share capital reorganisation consisted of the following steps:
Each of the Company’s existing 130,000,258 Ordinary Shares of £1.00 each was sub-divided into 100 Ordinary Shares of £0.01 each, following which the
Company’s share capital consisted of 13,000,025,800 Ordinary Shares of £0.01 each, with an aggregate nominal value of £130,000,258;
5
6 The Company allotted 315,731,886 bonus Ordinary Shares of £0.01 each to the existing shareholders of the Company (with any fractional entitlements arising
7
to be aggregated and allotted to Old Mutual plc), following which the Company’s share capital consisted of 13,315,757,686 Ordinary Shares of £0.01 each,
with an aggregate nominal value of £133,157,577; and
The Company’s 13,315,757,686 Ordinary Shares of £0.01 each were consolidated into Ordinary Shares of £0.07 each (with any fractional entitlements arising
to be aggregated and allotted to Old Mutual plc), following which the Company’s share capital consists of 1,902,251,098 Ordinary Shares of £0.07 each,
with an aggregate nominal value of £133,157,577.
27(b): Merger reserve
On 31 January 2018, the Group acquired the Skandia UK Ltd group of entities from its then parent company Old Mutual plc. This comprised
of seven Old Mutual plc group entities with a net asset value of £591 million. The transfer was effected by the issue of one share and with
the balance giving rise to a merger reserve of £591 million in the consolidated statement of financial position, being the difference between
the nominal value of the share issued by the parent company for the acquisition of the shares of the subsidiaries and the subsidiaries’ net asset
value. No debt was taken on as a result of this transaction. The most significant asset within these entities is a £566 million receivable which
corresponds to an equivalent payable within the Group’s consolidated statement of financial position. The net effect of this transaction for
the Group was to replace a payable due to Old Mutual plc with equity.
Following the acquisition the Company allotted 315,731,886 bonus Ordinary Shares of £0.01 each to the existing shareholders of the Company
(with any fractional entitlements arising to be aggregated and allotted to Old Mutual plc), with a total nominal value of £3 million. This had the
effect of reducing the merger reserve by £3 million to £588 million at 31 December 2018.
This transaction attracted merger relief under section 612 of the Companies Act 2006.
Financial statements | Notes to the consolidated financial statements
155
Quilter Annual Report 2018 Notes to the consolidated financial statements continued
For the year ended 31 December 2018
28: Share-based payments
During the year ended 31 December 2018 and the year ended 31 December 2017, the Group participated in a number of Old Mutual plc and
Quilter plc share-based payment arrangements. This note describes the nature of the plans and how the share options and awards are valued.
28(a): Arrangements in place from 25 June 2018 onwards
The Group created four new share-based payment schemes with awards over Quilter plc shares which came into force on 25 June 2018: the
Quilter plc Performance Share Plan, the Quilter plc Share Reward Plan, the Quilter plc Share Incentive Plan, and the Quilter plc Sharesave Plan.
The Old Mutual Wealth Joint Share Ownership Plan, the Old Mutual Wealth Phantom Share Reward Plan and the Old Mutual plc Managed
Separation Incentive Plan were awards over Old Mutual plc shares or, in the case of the Old Mutual Wealth Phantom Share Reward Plan,
notional Old Mutual plc shares. These share-based payment schemes were transferred to awards over Quilter plc shares on 25 June 2018
and continue to the original vesting dates.
Description of award
Vesting conditions
Scheme
Quilter plc Performance Share Plan
– Share Options (Nil cost options)2
Quilter plc Performance Share Plan
– Conditional Shares
Quilter plc Share Reward Plan
– Conditional Shares
Quilter plc Share Incentive Plan
– Restricted Shares
Quilter plc Sharesave Plan4
Old Mutual Wealth Joint Share Ownership Plan
– Jointly Owned/Restricted Shares5
Old Mutual Wealth Phantom Share Reward Plan
– Conditional Shares6
Old Mutual plc Managed Separation Incentive
Plan – Share Options (Nil cost options)
Restricted
shares
Conditional
shares
Options
Other
Dividend
entitlement1
Contractual
life
(years)
Typical
service
(years)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Up to 10
Not less
than 3
Typically
3
Not less
than 3
3½ – 5½
3
Typically
3
Up to 10
3
3
3
2
3 & 5
3
3
–
Performance
(measure)
AP EPS
CAGR3 and
Relative Total
Shareholder
Return
Conduct, Risk &
Compliance
Underpins
–
–
–
–
–
Targets in
respect of
Managed
Separation
completion
1 Participants are entitled to actual dividends for the Joint Share Ownership Plan Restricted Shares and the Share Incentive Plan. For all other schemes
participants are entitled to dividend equivalents.
2 The EPS element of options granted under the Performance Share Plan are subject to a performance period commencing 1 January 2018, and with a grant date
of 25 June 2018. In accordance with IFRS 2 Share-based Payment the cost of the EPS element of the award is recognised from the start of the performance period
until the date upon which the options are expected to vest.
3 Adjusted Profit compound annual growth rate (“CAGR”).
4 The Quilter plc Sharesave Plan is linked to a savings plan.
5 The Joint Share Ownership Plan (“JSOP”) was implemented for certain key employees of the Group in 2013, with the final grant of awards in 2016. It provided
participants with an interest in the capital growth of the Company by granting joint ownership of shares in Old Mutual Wealth Management Ltd (now Quilter plc)
with an employee benefit trust (“EBT”), whereby the trust owned the principal value of the shares and the participants owned any growth in value during
the vesting period. Upon the demerger and Listing of Quilter plc, the trust exercised a call option to acquire the participants’ interest in the shares based on the
growth in value of the Company between grant and Listing, in return for consideration shares in Quilter plc. The consideration shares for any awards that remain
unvested are restricted until the normal vesting date, and attract dividends during that time.
6 Awards granted under the Phantom Share Reward Plan prior to the demerger of Quilter plc were made over notional Ordinary Shares in Old Mutual plc that
were settled in cash on the vesting date. Upon the demerger and Listing of Quilter plc, all unvested notional share awards were converted to conditional awards
over Ordinary Shares in Quilter plc, which will be settled in Quilter plc shares on the normal vesting dates.
156
Financial statementsQuilter Annual Report 2018 28: Share-based payments continued
28(b): Arrangements in place up to 25 June 2018 onwards
The share-based payment schemes listed below were all awards over Old Mutual plc shares or, in the case of the Old Mutual Wealth Phantom
Share Reward Plan, notional Old Mutual plc shares. The majority of these share-based payment schemes were subject to early vesting or
exercise, apart from the Old Mutual plc and Old Mutual Wealth schemes listed in note 28(a) above.
Scheme
Old Mutual plc Share Reward Plan
– Restricted Shares
Old Mutual plc Performance Share Plan
– Share Options (Nil cost options)
Old Mutual plc 2008 Sharesave Plan1
Old Mutual Wealth Joint Share Ownership Plan
– Jointly Owned/Restricted Shares
Old Mutual Wealth Phantom Share Reward Plan
– Conditional Shares
Old Mutual plc Managed Separation Incentive
Plan – Share Options (Nil cost options)
1 Sharesave scheme linked to a savings plan.
Restricted
shares
Conditional
shares
Options
Other
Dividend
entitlement
Contractual
life
(years)
Typical
service
(years)
Performance
(measure)
Description of award
Vesting conditions
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1-3
–
–
–
Up to 10
3½ – 5½
3
Typically
3
Up to 10
Not less
than 3
3 & 5
3
3
–
Target growth
in EPS
and ROE
–
–
–
Targets in
respect of
Managed
Separation
completion
28(c): Reconciliation of movements in options
The movement in the options outstanding under these arrangements during the period is detailed below:
Options over shares
(London Stock Exchange)
Outstanding at beginning of the period
Granted during the period
Forfeited during the period
Exercised during the period
Expired during the period
Cancelled during the period
Other transfers during the period
Outstanding at end of the period
Exercisable at end of the period
Year ended
31 December 2018
Year ended
31 December 2017
Number of
options
7,622,956
2,824,136
(2,252,333)
(5,578,539)
(5,967)
(141,289)
–
2,468,964
–
Weighted
average
exercise
price
£1.60
–
£1.60
£1.60
£1.60
£1.60
–
–
–
Number of
options
10,250,582
–
(284,093)
(1,819,897)
(39,892)
(510,560)
26,816
7,622,956
104,204
Weighted
average
exercise
price
£1.60
–
£1.62
£1.61
–
–
–
£1.60
£1.61
The amount outstanding at the end of the period for 2018 and 2017 includes an amount for employees who have transferred into/out of
Quilter plc from/to other Old Mutual divisions.
The weighted average fair value of options at the measurement date, for options granted during the year ended 31 December 2018, was £1.24.
The options outstanding at 31 December 2018 have an exercise price of £nil, as they are all nil cost options (2017: £1.28 to £1.87)
and a weighted average remaining contractual life of 2.7 years (2017: 1.1 years).
Financial statements | Notes to the consolidated financial statements
157
Quilter Annual Report 2018 Notes to the consolidated financial statements continued
For the year ended 31 December 2018
28: Share-based payments continued
28(d): Measurements and assumptions
In determining the fair value of equity-settled share-based awards and the related charge to the income statement, the Group makes assumptions
about future events and market conditions. Specifically, management makes estimates of the likely number of shares that will vest and the fair
value of each award granted which is valued and “locked in” at the grant date.
The fair value of services received in return for share options granted are measured by reference to the fair value of share options granted.
The estimate of fair value of share options granted is measured using either a Black-Scholes option pricing model or a Monte Carlo simulation.
The inputs used in the measurement of fair values at the grant date for awards granted during 2018 were as follows:
Scheme
Old Mutual Wealth Phantom Share Reward Plan –
Conditional Shares
Quilter plc Share Incentive Plan – Restricted Shares
Quilter plc Performance Share Plan – Share Options
(Nil cost options)
Quilter plc Performance Share Plan – Conditional Shares
Weighted
average
share
price
£
1.52
1.53
1.52
1.41
Weighted
average
expected
volatility
24.8%
24.3%
29.5%
29.2%
Weighted
average
expected
life
(years)
Weighted
average
risk free
interest
rate
Weighted
average
expected
dividend
yield
Expected
forfeitures
per annum
1.85
2.00
2.75
2.93
0.7%
0.7%
0.8%
0.8%
0.0%
0.0%
0.0%
0.0%
4%
10%
4%
4%
28(e): Forfeitable/Restricted/Conditional Share grants
The following summarises the fair value of Restricted Shares and Conditional Shares granted by the Group during the year:
Instruments granted during the period
Quilter plc Share Incentive Plan – Restricted Shares
Quilter plc Performance Share Plan – Conditional Shares
Old Mutual Wealth Phantom Share Reward Plan – Conditional Shares
Old Mutual plc Share Reward Plan – Restricted Shares
28(f): Financial impact
The total expense recognised for the period arising from equity compensation plans was as follows:
Expense arising from equity-settled share and share option plans – continuing operations1
Expense arising from cash-settled share and share option plans – continuing operations¹
Expense arising from equity-settled share and share option plans – discontinued operations1
Total expense arising from share option plans
¹ 2017 comparatives have been reclassified consistent with note 11(a) Staff costs.
Number
granted
5,202,140
5,928,616
6,474,853
1,890,693
2018
2018
2018
2017
Weighted
average
fair value
£1.53
£1.41
£1.52
£2.18
Year ended
31 December
2018
£m
Year ended
31 December
2017
£m
26
3
1
30
17
4
1
22
28(g): JSOP Employee Benefit Trust (“JSOP EBT”)
On 22 December 2017 the JSOP EBT, which was set up for the benefit of the Group employees, was transferred to the Group from Old Mutual
plc. As a result of this transfer, on consolidation the Group’s equity was reduced by £99 million, representing the value of Company shares held
within the trust, which are recognised as treasury shares and deducted from equity.
The JSOP EBT held 72 million Quilter plc shares at the point of the Quilter plc Listing on 25 June 2018. Following the Listing of Quilter plc, a
number of the shares were transferred out of the JSOP EBT into a new Quilter Employee Benefit Trust to be used to support not only the JSOP
but also other existing and future share scheme obligations. As at 31 December 2018 the JSOP EBT did not hold any Quilter plc shares.
158
Financial statementsQuilter Annual Report 2018 29: Insurance and investment contract liabilities
The following is a summary of the Group’s insurance and investment contract provisions and related reinsurance assets:
Note
Gross
£m
Reinsurance
£m
Net
£m
Gross
£m
Reinsurance
£m
Net
£m
At 31 December 2018
At 31 December 2017
Life assurance policyholder liabilities
Long-term business insurance policyholder
liabilities
Life assurance policyholder liabilities
29(a)
Outstanding claims
Investment contract liabilities
Unit-linked investment contracts
29(d)
Total life assurance policyholder liabilities
588
14
602
56,450
57,052
(478)
(13)
(491)
110
1
111
480
9
489
(375)
(8)
(383)
105
1
106
(1,671)
(2,162)
54,779
54,890
59,139
59,628
(2,525)
(2,908)
56,614
56,720
29(a): Insurance contract liabilities
Movements in the amounts outstanding in respect of life assurance policyholder liabilities, other than outstanding claims, are set out below:
Note
Carrying amount at 1 January
Impact of new business
Impact of experience effects
Impact of assumption changes
Other movements
Movement shown in consolidated income statement
29(b)
Total insurance contract life assurance
policyholder liabilities
29(b): Insurance contract claims and change in liabilities
Gross
£m
480
2
38
69
(1)
108
588
At 31 December 2018
At 31 December 2017
Reinsurance
£m
(375)
(10)
(26)
(68)
1
(103)
Net
£m
105
(8)
12
1
–
5
Gross
£m
402
42
30
7
(1)
78
Reinsurance
£m
(290)
(55)
(23)
(7)
–
(85)
Net
£m
112
(13)
7
–
(1)
(7)
(478)
110
480
(375)
105
Claims and benefits paid
Reinsurance recoveries
Net insurance claims and benefits incurred
Change in reinsurance assets and liabilities
Change in insurance contract liabilities
Insurance contract claims and change in liabilities
Note
29(a)
29(a)
Year ended
31 December
2018
£m
Year ended
31 December
2017
£m
(87)
59
(28)
103
(108)
(33)
(76)
54
(22)
85
(78)
(15)
A presentational change has been made to the face of the consolidated income statement from the prior year. Details of the breakdown
of insurance and investment expense, which were previously shown on the face of the income statement, are now included in this note.
29(c): Assumptions – life assurance
The key assumptions considered are mortality/morbidity rates, maintenance expenses, interest rates, persistency rates and maintenance
expense inflation. These assumptions are based on market data and internal experience data. External data is also used where either no
internal experience data exists or where internal data is too sparse to give credible estimates of the true expectation of experience.
Anticipated future trends have been allowed for in deriving mortality and morbidity assumptions.
The liabilities for non-linked contracts have been calculated using a gross premium discounted cash flow approach on a policy by policy basis,
using the following assumptions:
Class of business
Non-linked protection business
(pre 1 January 2013)1
Non-linked protection business
(post 31 December 2012)1
Mortality/morbidity
2018
2017
Based on relevant CMI tables
Risk reinsurance rates
Based on relevant CMI tables
Risk reinsurance rates
Pension annuity payment
100% PA92 (C2030) ult. projected using the long-term cohort basis
1 On 1 January 2013 the discount rate was impacted by Finance Act 2012 amendments to the life tax rules.
Interest rates
2018
2017
1.724%
1.610%
1.378%
1.420%
1.287%
1.330%
Financial statements | Notes to the consolidated financial statements
159
Quilter Annual Report 2018 Notes to the consolidated financial statements continued
For the year ended 31 December 2018
29: Insurance and investment contract liabilities continued
29(c): Assumptions – life assurance
The Continuous Mortality Investigation (“CMI”), supported by the Institute and Faculty of Actuaries (“IFoA”), provides mortality and sickness rate
tables for UK life insurers and pension funds.
The interest rate assumption is set with reference to a matching portfolio of gilts. During 2017, a modification was made to achieve a better
match of the IFRS liabilities to available gilts. In aggregate, the non-linked protection business is expected to generate net income over the next
3 years. This net income has been excluded from the matching exercise and has instead been discounted using Bank of England forward rates
of the relevant durations. Liabilities after these three years are matched and the rates provided above are used.
For non-linked contracts (defined as insurance contracts under IFRS 4), the margin of prudence for the individual assumptions is generally
taken as the 60% confidence interval over a one-year timeframe so that, broadly speaking, in 100 scenarios the reserves are expected to cover
the liabilities in 60 of those scenarios. Overall, the level of confidence is likely to be greater than 60% on the basis that these margins are applied
to several assumptions at the same time and prudence is applied to all future years.
The liability values do not make allowance for the amortisation of the DAC asset. A separate liability adequacy test is carried out on best
estimate assumptions allowing for all of the cash flows used to derive the liability values and the run-off of the DAC.
Impact of assumption changes
Assumptions are reviewed on an annual basis and updated as appropriate. The impact of the assumption changes on annual IFRS profit
are as follows:
2018
Assumption
Mortality/morbidity rates
Maintenance expense
Maintenance expense inflation
Interest rates
Persistency rates
2017
Assumption
Mortality/morbidity rates
Maintenance expense
Maintenance expense inflation
Interest rates
Persistency rates
The sensitivity of IFRS profit before tax to variations in key assumptions are shown below:
(Decrease)/Increase in IFRS profit before tax
Mortality/morbidity rates
Maintenance expenses
Persistency rates
+10%
£m
(3.3)
(2.2)
2.6
Impact on
IFRS reported
profit (before
reinsurance)
£m
Impact of
reinsurance
£m
Impact on
IFRS reported
profit (after
reinsurance)
£m
(86.5)
1.9
0.1
21.3
(5.4)
(68.6)
81.4
–
–
(18.4)
4.6
67.6
(5.1)
1.9
0.1
2.9
(0.8)
(1.0)
Impact on
IFRS reported
profit (before
reinsurance)
£m
Impact of
reinsurance
£m
Impact on
IFRS reported
profit (after
reinsurance)
£m
10.1
3.1
0.3
(15.1)
(5.0)
(6.6)
2018
-10%
£m
3.4
2.2
(2.8)
(10.7)
(0.1)
–
13.0
4.8
7.0
+10%
£m
(3.0)
(2.6)
2.4
(0.6)
3.0
0.3
(2.1)
(0.2)
0.4
2017
-10%
£m
3.1
2.6
(2.6)
The values have, in all cases, been determined by varying the relevant assumption as at the reporting date and considering the consequential
impact assuming other assumptions remain unchanged.
160
Financial statementsQuilter Annual Report 2018 29: Insurance and investment contract liabilities continued
29(d): Unit-linked investment contract liabilities
Movements in the amounts outstanding in respect of unit-linked and other investment contracts are set out below:
Carrying amount at 1 January
Fair value movements
Investment income
Movements arising from investment return
Contributions received
Maturities
Withdrawals and surrenders
Claims and benefits
Other movements
Change in liability
Currency translation (gain)/loss
At 31 December 2018
At 31 December 2017
Gross
£m
59,139
(4,119)
805
(3,314)
7,117
(183)
(6,091)
(234)
(2)
(2,707)
18
Reinsurance
£m
(2,525)
78
–
78
774
–
–
–
2
854
–
Net
£m
56,614
(4,041)
805
(3,236)
7,891
(183)
(6,091)
(234)
–
(1,853)
18
Gross
£m
51,265
3,958
680
4,638
9,718
(220)
(5,682)
(217)
(408)
7,829
45
Reinsurance
£m
(2,560)
(330)
–
(330)
365
–
–
–
–
35
–
Net
£m
48,705
3,628
680
4,308
10,083
(220)
(5,682)
(217)
(408)
7,864
45
Total unit-linked investment contract policyholder liabilities
56,450
(1,671)
54,779
59,139
(2,525)
56,614
For unit-linked investment contracts, movements in asset values are offset by corresponding changes in liabilities, limiting the net impact on profit.
The benefits offered under the unit-linked investment contracts are based on the risk appetite of policyholders and the return on their
selected investments and collective fund investments, whose underlying investments include equities, debt securities, property and
derivatives. This investment mix is unique to individual policyholders.
The maturity value of these financial liabilities is determined by the fair value of the linked assets at maturity date. There will be no difference
between the carrying amount and the maturity amount at maturity date.
The reinsurers’ share of policyholder liabilities relating to investment contract liabilities of £1,671 million (2017: £2,525 million) were rated
according to the table in note 40. None of these were past due as at 31 December 2018 (2017: £nil).
29(e): Methodology and assumptions – investment contracts
For unit-linked business, the unit liabilities are determined as the value of units credited to policyholders. Since these liabilities are determined
on a retrospective basis no assumptions for future experience are required. Assumptions for future experience are required for unit-linked
business in assessing whether the total of the contract costs asset and contract liability is greater than the present value of future profits
expected to arise on the relevant blocks of business (the “recoverability test”). If this is the case, then the contract costs asset is restricted
to the recoverable amount. For linked contracts, the assumptions are on a best estimate basis.
30: Provisions
Year ended 31 December 2018
Balance at beginning of the period
Additions from business combinations
Charge to income statement
Utilised during the period
Unused amounts reversed
Reclassification within Statement of Financial Position
Balance at 31 December 2018
Year ended 31 December 2017
Balance at beginning of the year
Charge to income statement – Voluntary remediation
Charge to income statement – Other
Utilised during the year
Foreign exchange and other movements
Balance at 31 December 2017
Financial statements | Notes to the consolidated financial statements
Compensation
provisions
£m
Sale of
Single Strategy
business
£m
82
–
11
(31)
(4)
(4)
54
–
–
25
(5)
–
–
20
Compensation
provisions
£m
Sale of
Single Strategy
business
£m
13
69
7
(5)
(2)
82
–
–
–
–
–
–
Other
£m
22
1
3
(5)
(1)
–
20
Other
£m
16
–
6
(5)
5
22
Total
£m
104
1
39
(41)
(5)
(4)
94
Total
£m
29
69
13
(10)
3
104
161
Quilter Annual Report 2018 Notes to the consolidated financial statements continued
For the year ended 31 December 2018
30: Provisions continued
Compensation provisions
Compensation provisions totalled £54 million (31 December 2017: £82 million).
Voluntary client remediation provision
During 2017, as part of ongoing work to promote fair customer outcomes, the Group conducted product reviews consistent with the
recommendations from the FCA’s thematic feedback and the FCA’s guidance ‘FG16/8 Fair treatment of long-standing customers in the life
insurance sector’. Following these reviews, the Group decided to commence voluntary remediation to customers of certain legacy products,
establishing a provision in 2017 for £69 million.
The redress relates to early encashment charges and contribution servicing charges made on pension products and, following the re-introduction
of annual reviews, compensation payable to a subset of protection plan holders.
During 2018, £27 million has been utilised against programme costs and pension remediation incurred. There was also a £4 million reclassification
to ‘liabilities for linked investment contracts’, reflecting the capping of early encashment charges on live pension plans. The remaining provision
includes £6 million of programme costs and £7 million of estimated interest. Of the total provision outstanding, £20 million is estimated to be
payable after one year.
Estimates and assumptions
Key assumptions in relation to the calculation are:
• investment return used within the protection remediation calculations;
• timing of protection customer remediation; and
• the programme costs of carrying out the remediation activity.
The model used to calculate the costs of protection remediation assumes a generic annual investment return across the population of plans
in scope. A sensitivity analysis has been calculated to determine the impact of adjusting the return rate.
The current model assumes protection customers will be compensated within a certain timeframe. Delays to the programme and more
specifically, in locating customers and resolving complicated plan arrangements will increase the final cost of remediation.
The programme costs of conducting the remediation activity are highly variable and are subject to a number of uncertainties. In calculating
the best estimate of these costs, consideration has been given to such matters as the identification of impacted customers, likelihood of
the customer contesting the offer, the complexity of the calculations, the level of quality assurance and checking, the ease of contacting and
communicating with customers and the level of customer interactions. As a result of these uncertainties, the current provision for programme
costs has been calculated as falling within a range of approximately £5 million to £7 million.
Sensitivities relating to the assumptions and uncertainties are provided in the table below:
Assumption/estimate
Modelled investment return
Timing of protection remediation
Change in assumption/estimate
+/- 2%
12-month delay
Consequential change in provision
£m
+/- 0.2
+ 2.0
Compensation provision (other)
The other compensation provision includes amounts relating to the cost of correcting deficiencies in policy administration systems, including
restatements and clawbacks, any associated litigation costs and the related costs to compensate previous or existing policyholders. This
provision represents best estimates based upon management’s view of expected outcomes based upon previous experience. Due to the
nature of the provision, the timing of the expected cash outflows is uncertain. Estimates are reviewed annually and adjusted as appropriate
for new circumstances.
Sale of Single Strategy Asset Management business
A restructuring provision was recognised as a result of the sale of the Single Strategy Asset Management business to enable the remaining
Quilter Investors business to function as a standalone operation going forward. The provision includes those costs directly related to replacing
and restoring the operational capability that previously underpinned and supported both parts of the asset management business. Key parts
of this capability had either been disposed of or disrupted as a consequence of the sale. The total provision established in the year was
£19 million, of which £5 million has now been utilised. The carried forward provision at 31 December 2018 is £14 million. Further provisions
may be established as the project progresses.
Additional provisions totalling £6 million have been made as a consequence of the sale of the Single Strategy Asset Management business.
These have been made in relation to various sale related future commitments, the outcome of which was uncertain at the time of the sale and
the most significant of which is in relation to the guarantee of revenues in future years.
162
Financial statementsQuilter Annual Report 2018 30: Provisions continued
Other provisions
Other provisions include amounts for the resolution of legal uncertainties and the settlement of other claims raised by contracting parties,
property dilapidation provisions and indemnity commission provisions. Where material, provisions and accruals are discounted at discount
rates specific to the risks inherent in the liability. The timing and final amounts of payments in respect of some of the provisions, particularly
those in respect of litigation claims and similar actions against the Group, are uncertain and could result in adjustments to the amounts recorded.
Of the other provisions recorded above, £5 million (2017: £10 million) is estimated to be payable after one year.
31: Tax assets and liabilities
Deferred income taxes are calculated on all temporary differences at the tax rate applicable to the jurisdiction in which the timing differences arise.
Deferred tax summary
Deferred tax assets
Less: amounts classified as held for sale
Deferred tax assets
Deferred tax liabilities
Net deferred tax liability
Note
5(f)
At
31 December
2018
£m
At
31 December
2017
£m
38
–
38
59
21
31
9
22
190
168
31(a): Deferred tax assets
Deferred tax assets are recognised for tax losses carried forward only to the extent that realisation of the related tax benefit is probable, being
where on the basis of all available evidence it is considered more likely than not that there will be suitable taxable profits against which the
reversal of the deferred tax asset can be deducted.
The movement on the recognised deferred tax assets account is as follows:
Year ended 31 December 2018
Tax losses carried forward
Accelerated depreciation
Other temporary differences
Share-based payments
Contract liabilities
Deferred expenses
Netted against liabilities
Deferred tax assets at 31 December 2018
Year ended 31 December 2017
Tax losses carried forward
Accelerated depreciation
Other temporary differences
Share-based payments
Contract liabilities
Deferred expenses
Netted against liabilities
Deferred tax assets at 31 December 2017
At
beginning
of the year
£m
Income
statement
(charge)
/credit
£m
Acquisition
/disposal of
subsidiaries
£m
6
17
4
2
3
24
(34)
22
13
(4)
–
2
(1)
11
(5)
16
–
–
–
–
–
–
–
–
At
beginning
of the year
£m
Income
statement
(charge)
/credit1
£m
Acquisition
/disposal of
subsidiaries
£m
6
–
9
–
4
27
(38)
8
–
17
(2)
2
(1)
(3)
4
17
–
–
(3)
–
–
–
–
(3)
At end
of the
year
£m
19
13
4
4
2
35
(39)
38
At end
of the
year
£m
6
17
4
2
3
24
(34)
22
1 £5 million has been reclassified from acquisition/disposal of subsidiaries to income statement movements, to conform with current year presentation. Closing
deferred tax assets are unchanged.
Financial statements | Notes to the consolidated financial statements
163
Quilter Annual Report 2018 Notes to the consolidated financial statements continued
For the year ended 31 December 2018
31: Tax assets and liabilities continued
31(a): Deferred tax assets continued
Unrecognised deferred tax assets
The amounts for which no deferred tax asset has been recognised comprise:
Expiring in less than a year
Expiring between one and five years
Expiring after five years
Unrelieved tax losses
Accelerated capital allowances
Other timing differences
Total unrecognised deferred tax assets
At 31 December 2018
At 31 December 2017
Gross
amount
£m
–
–
663
663
93
285
1,041
Tax
£m
–
–
112
112
16
49
177
Gross
amount
£m
–
–
471
471
108
269
848
Tax
£m
–
–
80
80
18
46
144
Movements in unrecognised deferred tax assets
The unrelieved tax losses have increased by £192 million during the year which is mainly as a result of the reclassification of capital losses
previously shown in ‘Other timing differences’ that have now crystallised. Other timing differences have increased due to the net impact of
the reclassification of capital losses (as described above) and the addition of previously unrecognised assets on the acquisition of Skandia UK
Limited under Managed Separation.
31(b): Deferred tax liabilities
The movement on the deferred tax liabilities account is as follows:
Year ended 31 December 2018
Deferred acquisition costs
Other acquired intangibles
Other temporary differences
Investment gains
Netted against assets
Deferred tax liabilities at 31 December 2018
Year ended 31 December 2017
Deferred acquisition costs
Other acquired intangibles
Other temporary differences
Investment gains
Netted against assets
Deferred tax liabilities at 31 December 2017
At
beginning
of the year
£m
Income
statement
(credit)/
charge
£m
Acquisition
/disposal of
subsidiaries
£m
15
41
1
167
(34)
190
(4)
(8)
–
(121)
(5)
(138)
–
7
–
–
–
7
At
beginning
of the year
£m
Income
statement
(credit)/
charge
£m
Acquisition
/disposal of
subsidiaries
£m
20
49
2
146
(38)
179
(5)
(8)
(1)
21
4
11
–
–
–
–
–
–
At end
of the
year
£m
11
40
1
46
(39)
59
At end
of the
year
£m
15
41
1
167
(34)
190
31(c): Current tax receivables and liabilities
Current tax receivables and current tax liabilities at 31 December 2018 were £47 million (2017: £nil) and £5 million (2017: £38 million), excluding
amounts classified as held for sale in 2017 (see note 5(f)).
32: Borrowings
The following table analyses the Group’s borrowed funds, repayable on demand and categorised in terms of IFRS 9 Financial Instruments as
“Financial liabilities amortised cost”. All amounts outstanding at 31 December 2018 are payable to a number of relationship banks. All amounts
outstanding at 31 December 2017 were payable either to the Group’s previous ultimate Parent Company, Old Mutual plc, or to other related
entities within the Old Mutual plc group.
164
Financial statementsQuilter Annual Report 2018 32: Borrowings continued
Subordinated debt
Fixed rate loan at 5.50%1
Fixed rate loan at 4.478%2
Other borrowed funds
Floating rate loan at 6-month LIBOR + 0.25%3
Floating rate loan at 3-month LIBOR + 0.10%4
Fixed rate loan at 3.125%5
Total borrowings
At
31 December
2018
£m
At
31 December
2017
£m
–
197
–
–
–
197
566
–
93
80
43
782
1 Commenced on 25 February 2015 and was used to finance the acquisition of the Quilter Cheviot group.
2 Commenced on 28 February 2018 and used for general corporate purposes.
3 Commenced during 2014 and was used to finance the acquisition of Intrinsic Financial Services Limited.
4 Commenced in 2011 and was used to finance other historical corporate activity.
5 Commenced on 21 June 2016 and was used to finance one of the Group’s employee benefit trusts.
On 23 February 2018, the Group entered into and fully drew down the New Term Loan, a £300 million senior unsecured term loan with five
relationship banks with an annual coupon of 45 basis points above LIBOR, to be updated every three months. The New Term Loan was repaid
in full using proceeds from the sale of the Single Strategy Asset Management business following the completion of the transaction in June 2018.
On 28 February 2018, the Group issued a £200 million subordinated debt security in the form of a 10-year Tier 2 bond with a one-time issuer
call option after five years to J.P. Morgan Securities plc, paying a semi-annual coupon of 4.478% (the “Tier 2 Bond”). The bond was remarketed
and sold to the secondary market in full on 13 April 2018. It is now listed and regulated under the terms of the London Stock Exchange.
In addition, the Group entered into a £125 million revolving credit facility which remains undrawn and is being held for contingent funding
purposes.
As part of a series of internal transactions, £566 million of intercompany indebtedness to other companies within the Old Mutual plc group was
equitised, with the effect of the intercompany indebtedness being cancelled and replaced with equity in the form of share capital and a merger
reserve. The overall indebtedness also reduced by £16 million from ordinary course transactions.
The remaining £200 million intercompany indebtedness was repaid in full from the new facilities referred to above and from existing cash
resources on 28 February 2018. On the same date, the £70 million revolving credit facility with Old Mutual plc was cancelled.
Borrowings at 31 December 2017 were borrowed from Old Mutual plc and were unsecured and were repayable on demand. The carrying
amount approximates to fair value which is valued as the principal amount repayable.
33: Trade, other payables and other liabilities
Claims outstanding
Amounts owed to intermediaries
Amounts payable on direct insurance business1
Deposits received from reinsurers1
Accounts payable on reinsurance business
Outstanding settlements
Accruals and deferred income
Trade creditors
Deferred consideration
Other liabilities
Total trade, other payables and other liabilities
Less: Trade, other payables and other liabilities classified as held for sale
Total trade, other payables and other liabilities net of held for sale
To be settled within 12 months
To be settled after 12 months
Total trade, other payables and other liabilities net of held for sale
1 Deposits received from reinsurers was included within the direct insurance business category previously.
2 A number of items have been reclassified in the prior year comparatives to conform with current year presentation.
Financial statements | Notes to the consolidated financial statements
At
31 December
2018
£m
At
31 December
20172
£m
226
22
248
16
8
386
147
33
37
124
999
–
999
981
18
999
283
50
333
16
6
708
250
38
35
131
1,517
(186)
1,331
1,295
36
1,331
165
Quilter Annual Report 2018 Notes to the consolidated financial statements continued
For the year ended 31 December 2018
34: Contract liabilities and deferred revenue
Prior to the implementation of IFRS 15 on 1 January 2018, contract liabilities were classified as deferred revenue. Deferred revenue relates to
non-refundable front-end fee income, comprising fees received at inception or receivable over an initial period for services not yet provided,
and is deferred through the creation of a deferred revenue liability on the statement of financial position and released to income as the
services are provided. Equal service provision is assumed over the lifetime of the contract and, as such, the deferred revenue is amortised
on a linear basis over the expected life of the contract, adjusted for expected persistency. The deferred revenue principally comprises fee
income already received in cash. The table below analyses the movements in contract liabilities (since 31 December 2017) and deferred
revenue (prior to 1 January 2018).
Balance at 1 January 2017
Fees and commission income deferred
Amortisation
Foreign exchange
Deferred revenue written off1
Balance at 31 December 2017
Reclassification to contract liabilities2
Fees and commission income deferred
Amortisation
Foreign exchange
Balance at 31 December 2018
Life and Savings
Asset Management
Deferred
revenue
£m
Contract
liabilities
£m
Deferred
revenue
£m
Contract
liabilities
£m
255
16
(33)
7
(3)
242
(242)
–
–
–
–
–
–
–
–
–
–
242
10
(23)
(4)
225
6
1
(5)
–
–
2
(2)
–
–
–
–
–
–
–
–
–
–
2
–
(1)
–
1
Total
£m
261
17
(38)
7
(3)
244
–
10
(24)
(4)
226
1 As part of the managed separation of the Old Mutual plc Group, part of the Group’s DFI balance was written off in respect of a South African book of business
transferred outside of the Quilter plc group.
2 Reclassified as a result of IFRS 15 at 1 January 2018.
The Group expects to recognise the above contract liability balances as revenue in the following years3:
Within one year
One to five years
More than five years
Balance at 31 December 2018
At
31 December
2018
£m
27
78
121
226
3 The Group has initially applied IFRS 15 at 1 January 2018, using the cumulative effect method under which the comparative information is not restated.
35: Post-employment benefits
The Group operates a number of defined contribution and defined benefit pension schemes in the UK, the Channel Islands and Ireland.
Defined contribution pension schemes
The Group operates a number of defined contribution schemes. The schemes require contributions to be made to funds held in trust,
separate from the assets of the Group. Participants receive either a monthly pension supplement to their salaries or contributions to personal
pension plans. For the defined contribution schemes, the Group pays contributions to separately administered pension schemes. The Group
has no further payment obligations once the contributions have been paid. The contributions are recognised in current service cost in the
consolidated income statement as staff costs and other employee-related costs when they are due.
Defined benefit schemes
The Group operates two defined benefit schemes: The Quilter Cheviot Limited Retirement Benefits Scheme and the Quilter Cheviot Channel
Islands Retirement Benefits Scheme which are both closed to new members. The assets of these schemes are held in separate trustee
administered funds. Pension costs and contributions relating to defined benefit schemes are assessed in accordance with the advice of
qualified actuaries. Actuarial advice confirms that the current level of contributions payable to each pension scheme, together with existing
assets, are adequate to secure members’ benefits over the remaining service lives of participating employees. The schemes are reviewed at
least on a triennial basis or in accordance with local practice and regulations. In the intervening years the actuary reviews the continuing
appropriateness of the assumptions applied.
166
Financial statementsQuilter Annual Report 2018 35: Post-employment benefits continued
The Group has considered the requirements of IFRIC 14, including whether the Group has an ‘unconditional right’ to a refund of any surplus
that may exist at the conclusion of the schemes. This includes a scenario where the schemes’ liabilities are gradually settled over time until all
members have left the schemes (i.e. on the death of the last beneficiary), along with all other potential outcomes for the schemes. The Group
has concluded that it does not have an unconditional right to a refund of any surplus that may exist under these circumstances, and in
accordance with IFRIC 14 has not recognised the current surplus as an asset within the statement of financial position.
IAS 19 Employee Benefits disclosures
This note gives full IAS 19 Employee Benefits disclosures for the above schemes.
35(a): Liability for defined benefit obligations
The IAS 19 value of the assets and the scheme obligations are as follows:
Changes in retirement benefit obligations
Total IAS 19 retirement benefit obligation at 1 January
Interest cost on benefit obligation
Effect of changes in actuarial assumptions
Actuarial gains
Benefits paid
Total IAS 19 retirement benefit obligations at period end
Change in plan assets
Total IAS 19 fair value of scheme assets at 1 January
Actual return on plan assets
Company contributions
Benefits paid
Total IAS 19 fair value of scheme assets at period end
Net IAS 19 asset/(liability) recognised in statement of financial position
Funded status of plan
Unrecognised assets
Net IAS 19 amount recognised in statement of financial position
At
31 December
2018
£m
At
31 December
2017
£m
(48)
(1)
1
1
3
(44)
61
(3)
1
(3)
56
12
(12)
–
(52)
(3)
1
–
6
(48)
62
4
1
(6)
61
13
(13)
–
35(b): Income/expense recognised in the income statement
The total pension charge to staff costs for all of the Group’s defined benefit schemes for the year ended 2018 was £nil (2017: £nil).
Actuarial gains and losses and the effect of the limit to the pension asset under IAS 19 Employee Benefits paragraph 58 have been reported
in other comprehensive income.
The cumulative amount of actuarial losses recognised in other comprehensive income is £26 million (2017: £25 million).
Assumptions
The expected long-term rate of return on assets represents the Group’s best estimate of the long-term return on the scheme assets and
generally was estimated by computing a weighted average return of the underlying long-term expected returns on the different asset classes,
based on the target asset allocations. The expected long-term return on assets is a long-term assumption that generally is expected to remain
the same from one year to the next unless there is a significant change in the target asset allocation, the fees and expenses paid by the plan or
market conditions.
The Group, in consultation with its independent investment consultants and actuaries, determined the asset allocation targets based on its
assessment of business and financial conditions, demographic and actuarial data, funding characteristics and related risk factors. Other
relevant factors, including industry practices, long-term historical and prospective capital market returns, were also considered.
The scheme return objectives provide long-term measures for monitoring the investment performance against growth in the pension
obligations. The overall allocation is expected to help protect the plan’s funded status while generating sufficiently stable real returns
(net of inflation) to help cover current and future benefit payments.
Financial statements | Notes to the consolidated financial statements
167
Quilter Annual Report 2018 Notes to the consolidated financial statements continued
For the year ended 31 December 2018
35: Post-employment benefits continued
35(b): Income/expense recognised in the income statement continued
Both the equity and fixed income portions of the asset allocation use a combination of active and passive investment strategies and different
investment styles. The fixed income asset allocation consists of longer duration fixed income securities in order to help reduce plan exposure
to interest rate variation and to better correlate assets with obligations. The longer duration fixed income allocation is expected to help
stabilise plan contributions over the long run.
The following table presents the principal actuarial assumptions at the end of the reporting period:
Discount rate
Rate of increase in defined benefit funds
Inflation
The mortality assumptions used give the following life expectancy at 65:
2018
%
2.9
3.6
3.3
2017
%
2.5
3.8
3.2
31 December 2018
31 December 2017
Life expectancy at 65 for
male member currently
Life expectancy at 65 for
female member currently
Mortality table
Aged 65
Aged 45
Aged 65
Aged 45
S2PA Light
S2PA Light
23.30
22.30
24.90
23.60
24.30
23.30
26.10
24.70
Significant actuarial assumptions for the determination of the defined benefit obligation are discount rate, inflation rate and rate of mortality.
The sensitivities regarding the principal assumptions used to measure the defined benefit obligations are described below. Reasonably
possible changes at the reporting date to one of the principal actuarial assumptions, holding other assumptions constant, would have affected
the defined benefit obligation as follows:
Discount rate (0.1% movement)
Inflation rate (0.1% movement)
Rate of mortality (increase by 1 year)
At
31 December
2018
£m
At
31 December
2017
£m
Increase
Decrease
Increase
Decrease
(0.8)
0.4
1.5
0.8
(0.4)
–
(0.8)
0.2
1.7
0.8
(0.2)
–
35(c): Scheme assets allocation
Scheme assets are stated at their fair values. Total scheme assets are comprised as follows:
Equity securities
Debt securities
Cash and other assets
Total IAS 19 fair value of scheme assets
At
31 December
2018
%
At
31 December
2017
%
At
31 December
2018
£m
At
31 December
2017
£m
21
77
2
100
39
61
–
100
12
43
1
56
24
37
–
61
36: Master netting or similar agreements
The Group offsets financial assets and liabilities in the statement of financial position when it has a legal enforceable right to do so and intends
to settle on a net basis simultaneously. Currently, the only such offsetting within the Group relates to the pooling of bank accounts and, in some
circumstances a bank account may be overdrawn and therefore offset.
168
Financial statementsQuilter Annual Report 2018 36: Master netting or similar agreements continued
The following tables present information on the potential effect of netting offset arrangements after taking into consideration these types
of agreements.
At 31 December 2018
Financial assets
Cash and cash equivalents
Financial liabilities
Amounts owed to bank depositors
At 31 December 2017
Financial assets
Cash and cash equivalents
Financial liabilities
Amounts owed to bank depositors
Amounts
offset in the
statement
of financial
position
£m
Net amounts
reported in
the statement
of financial
position
£m
Related amounts available
for future set off
Master netting
agreement
£m
Collateral
received/
pledged¹
£m
(24)
(24)
2,395
–
–
–
–
–
Amounts
offset in the
statement
of financial
position
£m
Net amounts
reported in
the statement
of financial
position
£m
Related amounts available
for future set off
Master netting
agreement
£m
Collateral
received/
pledged¹
£m
(55)
(55)
2,360
–
–
–
–
–
Gross
amounts
£m
2,419
24
Gross
amounts
£m
2,415
55
Net
amount
2,395
–
Net
amount
2,360
–
1 This represents the amounts that could be offset in the event of default. These arrangements are typically governed by master netting and collateral arrangements.
37: Contingent liabilities
The Group, in the ordinary course of business, enters into transactions that expose it to tax, legal and business risks. The Group recognises a
provision when it has a present obligation as a result of past events, it is probable that a transfer of economic benefits will be required to settle
the obligation and a reliable estimate of the amount can be made (see note 30). Possible obligations and known liabilities where no reliable
estimate can be made or it is considered improbable that an outflow would result are reported as contingent liabilities in accordance with
IAS 37 Provisions, Contingent Liabilities and Contingent Assets.
Tax
The Revenue authorities in the principal jurisdictions in which the Group operates routinely review historical transactions undertaken and
tax law interpretations made by the Group. The Group is committed to conducting its tax affairs in accordance with the tax legislation of the
jurisdictions in which they operate. All interpretations made by management are made with reference to the specific facts and circumstances
of the transaction and the relevant legislation.
There are occasions where the Group’s interpretation of tax law may be challenged by the Revenue authorities. The financial statements
include provisions that reflect the Group’s assessment of liabilities which might reasonably be expected to materialise as part of their review.
The Board is satisfied that adequate provisions have been made to cater for the resolution of tax uncertainties and that the resources required
to fund such potential settlements are sufficient.
Due to the level of estimation required in determining tax provisions amounts, eventually payable may differ from the provision recognised.
Complaints and disputes
The Group is committed to treating customers fairly and supporting its customers in meeting their lifetime goals. The Group does from time
to time receive complaints, claims and have commercial disputes with service providers, in the normal course of business. The costs, including
legal costs, of these issues as they arise can be significant and where appropriate, provisions have been established under IAS 37.
Contingent liabilities – acquisitions and disposals
The Group routinely monitors and reassesses contingent liabilities arising from matters such as litigation, warranties and indemnities relating
to past acquisitions and disposals. These are not expected to result in any material provisions.
38: Commitments
The Group has contractual commitments in respect of funding arrangements and leases which will be payable in future periods. These
commitments are not recognised on the Group’s statement of financial position at the year end but are disclosed to give an indication of the
Group’s future committed cash flows. See note 39.
Financial statements | Notes to the consolidated financial statements
169
Quilter Annual Report 2018 Notes to the consolidated financial statements continued
For the year ended 31 December 2018
39: Operating lease arrangements
The Group has entered into commercial non-cancellable leases on certain property, plant and equipment where it is not in the best interest
of the Group to purchase these assets. Such leases have varying terms, escalation clauses and renewal rights. All Group leases are operating
leases, being leases where the lessor retains substantially all the risks and rewards of the ownership of the leased asset.
Operating lease commitments where the Group is the leasee
The future aggregate minimum lease payments under non-cancellable operating leases are as follows:
Within one year
Between one and five years
After five years
Outstanding commitments under non-cancellable operating leases
At
31 December
2018
£m
At
31 December
2017
£m
15
40
43
98
14
37
42
93
40: Capital and financial risk management
40(a): Capital management
The Group manages its capital with a focus on capital efficiency and effective risk management. The capital objectives are to maintain the
Group’s ability to continue as a going concern while supporting the optimisation of return relative to the risks. The Group ensures that it can
meet its expected capital and financing needs at all times having regard to the Group’s business plans, forecasts and strategic initiatives and
regulatory requirements in all businesses in the Group. The Group’s overall capital risk appetite is set with reference to the requirements of the
relevant stakeholders and seeks to:
• maintain sufficient, but not excessive, financial strength to support stakeholder requirements;
• optimise debt to equity structure to enhance shareholder returns; and
• retain financial flexibility by maintaining liquidity including unutilised committed credit lines.
The primary sources of capital used by the Group are equity shareholders’ funds and subordinated debt. Alternative resources are utilised
where appropriate. Risk appetite has been defined for the level of capital, liquidity and debt within the Group. The risk appetite includes long
term targets, early warning thresholds and risk appetite limits. The dividend policy sets out the target dividend level in relation to profits.
The regulatory capital for the Group is assessed under Solvency II requirements.
40(a)(i): Regulatory capital
Solvency II is the European Union solvency regime for insurance undertakings and insurance groups which came into force on 1 January 2016.
The Group is subject to Solvency II group supervision by the Prudential Regulation Authority (“PRA”). The Group is required to measure and
monitor its capital resources under the Solvency II regulatory regime.
The Group’s insurance undertakings are included in the Group solvency calculation on a Solvency II basis. Other regulated entities are included
in the Group solvency calculation according to the relevant sectoral rules. The Group’s Solvency II surplus is the amount by which the Group’s
capital on a Solvency II basis (own funds) exceeds the Solvency II capital requirement (the Solvency Capital Requirement or “SCR”).
The Group’s Solvency II surplus is £1,058 million at 31 December 2018 (2017: £651 million), representing a Solvency II ratio of 190% (2017: 154%)
calculated under the standard formula. The Solvency II information in this results disclosure has not been audited.
The estimated SCR and corresponding eligible own funds for each period (unaudited) were as follows:
Own funds3
Solvency capital requirements (SCR)
Solvency II surplus
Coverage
At
31 December
20181
£m
At
31 December
20172
£m
2,237
1,179
1,058
190%
1,849
1,198
651
154%
1 Based on preliminary estimates. Formal annual filing due to the PRA by 3 June 2019.
2 As represented within the Annual 2017 Solvency II submission of the Old Mutual plc group, the group Quilter plc previously formed part of, to the PRA. Own
funds include a £566 million subordinated loan from the parent company at the time. This subordinated loan was effectively converted to equity during H1 2018,
following the acquisition of the entity holding the loan.
3 Group own funds are stated after allowing for the impact of the proposed final dividend payment relating to 2018 of £61 million.
170
Financial statementsQuilter Annual Report 2018 40: Capital and financial risk management continued
40(a): Capital management continued
40(a)(i): Regulatory capital continued
The Group own funds include the Quilter plc issued subordinated debt security which qualifies as capital under Solvency II. The composition of
own funds by tier is presented in the table below for year ended 31 December 2018. At 31 December 2017, Solvency II group reporting was not
required at a Quilter plc level and is therefore not included in the table below.
Group own funds
Tier 11
Tier 22
Total Group Solvency II own funds
At
31 December
2018
£m
2,036
201
2,237
1 All Tier 1 capital is unrestricted for tiering purposes.
2 Comprises a Solvency II compliant subordinated debt security in the form of a Tier 2 bond, which was issued at £200 million in February 2018.
The Group’s EU insurance undertakings are also subject to Solvency II at entity level. The Group’s asset management and advisory businesses
are subject to group supervision under the Capital Requirement Directive IV (“CRD IV”). Other regulated entities in the Group are subject to the
locally applicable entity-level capital requirements in the jurisdictions in which they operate.
The solvency and the capital requirements for the Group and each of its regulated subsidiaries are reported and monitored through monthly
Capital Management Forum meetings. Throughout 2018, the Group and each of its regulated subsidiaries have complied with the applicable
regulatory capital requirements.
40(a)(ii): Loan covenants
Under the terms of the revolving credit facility agreement, the Group is required to comply with the following financial covenant: the ratio of
total net borrowings to consolidated equity shareholders’ funds shall not exceed 0.5.
Total external borrowings of the Company
Less: cash and cash equivalents of the Company
Total net external borrowings of the Company
Total shareholders’ equity of the Group
Tier 2 bond
Total Group equity (including Tier 2 bond)
Ratio of Company net external borrowings to Group equity
Note
32
32
At
31 December
2018
£m
197
(281)
(84)
2,005
197
2,202
-0.038
The Group has complied with the covenant since the facility was created in February 2018.
40(a)(iii): Own Risk and Solvency Assessment (“ORSA”) and Internal Capital Adequacy Assessment Process (“ICAAP”)
The Group ORSA process is an ongoing cycle of risk and capital management processes which provide an overall assessment of the current
and future risk profile of the Group and demonstrates the relationship between business strategy, risk appetite, risk profile and solvency
needs. These assessments support strategic planning and risk-based decision making.
The underlying ORSA processes cover the entire Group and consider how risks and solvency needs may evolve over the planning period.
The ORSA includes stress and scenario tests, which are performed to assess the financial and operational resilience of the Group.
The Group ORSA report is produced annually. This report summarises the analysis, insights and conclusions from the underlying risk and
capital management processes in respect of the Group. The ORSA report is submitted to the Prudential Regulation Authority (“PRA”) as part
of the normal supervisory process and may be supplemented by ad hoc assessments where there is a material change in the risk profile of the
Group outside the usual reporting cycle.
In addition to the Group ORSA process, entity level ORSA processes are performed for each of the solo insurance entities within the Group.
The Group ICAAP process is similar to the ORSA process although the ICAAP process is performed for a subset of the Group consisting of the
investment and advisory firms within the Group (the “ICAAP Group”). The Group ICAAP report is also produced annually. This report summarises
the analysis, insights and conclusions from the underlying risk and capital management processes in respect of the ICAAP Group. The ICAAP
report is submitted to the Financial Conduct Authority (“FCA”) as part of the normal supervisory process and may be supplemented by ad hoc
assessments where there is a material change in the risk profile of the ICAAP Group outside the usual reporting cycle.
The conclusions of ORSA and ICAAP processes are reviewed by management and the Board throughout the year.
Financial statements | Notes to the consolidated financial statements
171
Quilter Annual Report 2018 Notes to the consolidated financial statements continued
For the year ended 31 December 2018
40: Capital and financial risk management continued
40(b): Credit risk
Overall exposure to credit risk
Credit risk is the risk of adverse movements in credit spreads (relative to the reference yield curve), credit ratings or default rates leading to a
deterioration in the level or volatility of assets, liabilities or financial instruments resulting in loss of earnings or reduced solvency. This includes
counterparty default risk, counterparty concentration risk and spread risk.
The Group has established a credit risk framework that includes a Credit Risk Policy, Credit Risk Standard and Credit Risk Appetite Statement.
This framework applies to all activities where the shareholder is exposed to credit risk, either directly or indirectly, ensuring appropriate
identification, measurement, management, monitoring and reporting of the Group’s credit risk exposures.
The credit risk arising from all exposures is mitigated through ensuring the Group only enters into relationships with appropriately robust
counterparties, adhering to the Group Credit Risk Policy. For each asset, consideration is given as to:
• the credit rating of the counterparty, which is used to derive the probability of default;
• the loss given default;
• the potential recovery which may be made in the event of default;
• the extent of any collateral that the firm has in respect of the exposures; and
• any second order risks that may arise where the firm has collateral against the credit risk exposure.
The credit risk exposures of the Group are monitored regularly to ensure that counterparties remain creditworthy, to ensure there is
appropriate diversification of counterparties and to ensure that exposures are within approved limits. At 31 December 2018, the Group’s
material credit exposures were to financial institutions (primarily through the investment of shareholder funds), corporate entities (including
external fund managers and reinsurers) and individuals (primarily through fund management trade settlement activities).
There is no direct exposure to European sovereign debt (outside of the UK) within the shareholder investments. The Group has no significant
concentrations of credit risk exposure.
Reinsurance arrangements
The Group has reinsurance arrangements in place to mitigate the risk of excessive claims on unit-linked and non-linked protection contracts.
Reinsurance arrangements are also used in respect of unit-linked institutional business to access specific funds not available through direct
fund links and to provide liquidity.
Since the Group uses reinsurance as a means of mitigating insurance risk, reinsurance counterparties bear a significant financial obligation
to the Group.
In general, credit risk is controlled through the use of risk premium reinsurance terms, where reinsurance cover is paid for as the cover is
provided. In these arrangements credit risk is limited to the risk of being unable to recover amounts due as a result of claims arising over the
latest quarter, since reinsurance accounts are settled quarterly in arrears. This risk is largely mitigated since the Group would be able to
withhold amounts due to the reinsurer to offset amounts due from the reinsurer.
The Group also has reinsurance arrangements in which there is a timing difference between the reinsurance premium payment and the
provision of cover, which results in prepayment for cover by the Group. In respect of these arrangements, a credit risk exposure can arise.
Reinsurance credit risk is managed by dealing only with reinsurance firms with credit ratings which meet the requirements of the Group’s credit
risk policy on inception of new reinsurance arrangements. The Group monitors the exposure to and credit rating of reinsurance counterparties
regularly to ensure that these remain within acceptable limits. Legal agreements are in place for all reinsurance arrangements which set out the
terms of the arrangement and the rights of both the Group and the reinsurance providers.
None of the Group’s reinsurance assets are either past due or impaired. Of the reinsurance assets shown in the statement of financial position
all are considered investment grade with the exception of £20 million of unrated exposures (2017: £51 million). Collateral is not taken against
reinsurance assets or deposits held with reinsurers other than in limited circumstances. For further information see note 29.
Details of the age analyses and credit quality of reinsurance assets in respect of insurance contracts and investment contracts are included below.
172
Financial statementsQuilter Annual Report 2018 40: Capital and financial risk management continued
40(b): Credit risk continued
Investment of shareholder funds
The risk of counterparty default in respect of the investment of shareholder funds is managed through:
• setting minimum credit rating requirements for counterparties;
• setting limits and key risk indicators for individual counterparties and counterparty concentrations;
• monitoring exposures regularly against approved limits; and
• ongoing monitoring of counterparties and associated limits.
Other credit risks
The Group is exposed to financial adviser counterparty risk through a number of loans that it makes to its advisers and the payment of upfront
commission on the sale of certain types of business. The risk of default by financial advisers is managed through monthly monitoring of loan
and commission debt balances.
The Group is exposed to the risk of default by fund management groups in respect of settlements and rebates of fund management charges
on collective investments held for the benefit of policyholders. This risk is managed through the due diligence process which is completed
before entering into any relationship with a fund group. Amounts due to and from fund groups are monitored for prompt settlement and
appropriate action is taken where settlement is not timely.
Legal contracts are maintained where the Group enters into credit transactions with a counterparty.
Details of the credit quality of debt securities can be found in this note in the table below.
Impact of credit risk on fair value
Due to the limited exposure that the Group has to credit risk, credit risk does not have a material impact on the fair value movement of financial
instruments for the year under review. The fair value movements on these instruments are mainly due to changes in market conditions.
Maximum exposure to credit risk
The table below represents the Group’s maximum exposure to credit risk. The Group’s maximum exposure to credit risk does not differ from
the carrying value disclosed in the relevant notes to the financial statements. Exposure arising from financial instruments not recognised on
the statement of financial position is measured as the maximum amount that the Group would have to pay, which may be significantly greater
than the amount that would be recognised as a liability. The “not rated” balances represent the pool of counterparties that do not require a
rating. These counterparties individually generate no material credit exposure and this pool is highly diversified, monitored and subject to limits.
The Group does not have any significant exposure arising from items not recognised on the statement of financial position.
Credit rating relating to financial assets that are neither past due nor impaired
At 31 December 2018
Financial investments at FVTPL
Government and government-related securities
Other debt securities, preference shares and
debentures
Short-term funds and securities
Reinsurance assets
Cash and cash equivalents
Cash at amortised cost, subject to lifetime ECL
Money market funds at FVTPL
Loans and advances
Loans and advances subject to 12-month ECL
Loans and advances at FVTPL
Other receivables
Other receivables subject to lifetime ECL
Prepayments and accruals
Contract assets subject to lifetime ECL
AAA
£m
–
–
–
–
–
1,358
–
1,358
–
–
–
–
–
–
–
AA
£m
201
201
–
–
930
60
60
–
–
–
–
–
–
–
–
A
£m
–
–
–
–
1,186
451
451
–
–
–
–
–
–
–
–
BBB
£m
–
–
–
–
26
1
1
–
–
–
–
–
–
–
–
1,358
1,191
1,637
27