“2017 Scheme”

Prepared by: David King Date: 13 April 2017

Proposed Insurance Business Transfer from:

Friends Life Limited Friends Life and Pensions Limited Aviva Investors Pensions Limited

to:

Aviva Life & Pensions UK Limited Aviva Pension Trustees UK Limited

Summary to the policyholders of Aviva Investors Pensions Limited of the Report of the Independent Expert under

Section 109 of the Financial Services and Market Act 2000

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Contents

1. Introduction .....................................................................................................3

2. Summary of conclusion ..................................................................................3

3. Background information – UK insurance industry .......................................4

4. The 2017 Scheme ............................................................................................5

5. The Independent Expert .................................................................................9

6. Scheme changes ............................................................................................10

7. Policyholder benefit expectations ...............................................................12

8. Policyholder security ....................................................................................14

9. Other considerations ....................................................................................18

10. Overall conclusion ........................................................................................19

11. Glossary .........................................................................................................21

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2. Summary of conclusionFor the reasons set out in the remainder of this Summary Report, I do not believe there is a reason that the Scheme should not proceed, and see no reason for additional safeguards beyond those contained in the Scheme to protect the interests of the AIPL policyholders.

All the direct costs of the 2017 Scheme will be met by the shareholders of UKLAP. None of the costs will be borne by policyholders, including by with-profits and unit-linked funds, so they will not be adversely affected in this regard.

Overall, I am therefore satisfied that policyholders’ security, security standards experienced, rights, and benefit expectations will not be materially adversely impacted by the Scheme.

This summary report has been produced for the policyholders of Aviva Investors Pensions Limited. If you also have a policy with Aviva Life & Pensions UK Limited, Friends Life Limited or Friends Life and Pensions Limited, please refer to the corresponding summary reports.

1. IntroductionI have produced a full Report on the proposed scheme (“2017 Scheme” or “Scheme”) involving the transfer of all of the long-term insurance business of Friends Life Limited (“FLL”) and Friends Life and Pensions Limited (“FLP”), and the annuity business of Aviva Investors Pensions Limited (“AIPL”), to Aviva Life & Pensions UK Limited (“UKLAP”) and Aviva Pension Trustees UK Limited (“UKPTL”) (together the “Companies”) as the Independent Expert for the Scheme. I have prepared summary reports to provide policyholders and other interested parties with a summarised version of that Report.

This particular Summary Report summarises my conclusions on the potential impact of the Scheme specifically in respect of AIPL policyholders and explains my rationale for reaching those conclusions. I have produced separate summary reports for other groups of affected policyholders.

This Summary Report and the conclusions within it apply equally to policyholders who are resident in Guernsey or Jersey, or were sold their policy while resident in Guernsey or Jersey.

This is intended to be a standalone summary of my full Report for AIPL policyholders, but these policyholders may wish to read my full Report, which provides greater detail on the Scheme and its effect on policyholders, and a more comprehensive explanation of my conclusions. Section 2 of that Report provides details of the scope, reliances and limitations of my work and why I believe that my work has been prepared in line with the relevant regulatory and professional guidance. The information in that section applies equally to this Summary Report. The full version of my Report can be obtained online at www.aviva.co.uk/transfer2017/documents or can be requested free of charge by calling the number shown on your letter.

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3. Background information – UK insurance industryThis section sets out some background information, which I believe will be helpful to aid readers’ understanding of the rest of this Summary Report. In particular, I have described the current prudential regulatory regime and some elements of the governance surrounding with-profits business in the UK.

3.1 Regulatory solvency regime – Solvency II

On 1 January 2016, a new prudential solvency regime for the European Union (‘‘EU’’) insurance and reinsurance industry, “Solvency II” came into force. The aim of Solvency II was to improve risk management and in doing so introduced solvency requirements which better reflected the risks that insurers and reinsurers face.

In addition to holding assets to cover the Best Estimate Liability (“BEL”) to meet its policyholder obligations, Solvency II requires insurers to hold a Risk Margin (‘‘RM’’), which is an adjustment designed to represent the amount that another insurance or reinsurance undertaking would require to be paid to take on the obligations of that insurance company. Together, the BEL and RM make up the Technical Provisions (“TP”). Eligible assets in excess of the TP, ie the amount of capital that is eligible to cover the regulatory capital requirements, are referred to as Own Funds (“OF”).

Solvency II defines the Minimum Capital Requirement (‘‘MCR’’) as the minimum level of security below which the amount of capital resources should not fall, which is the point of intensive regulatory intervention and the Solvency Capital Requirement (‘‘SCR’’) as an amount representing the capital required to cover a 1-in-200 year level of loss, below which the insurer is required to undertake management actions to re-establish it. The SCR can be calculated using either a prescribed Standard Formula or the firm’s own Internal Model or Partial Internal Model (where some elements are covered by an Internal Model and others by the Standard Formula). Use of an Internal Model or Partial Internal Model requires prior approval from the PRA.

Insurance companies within the scope of Solvency II are required, as a minimum, to hold assets to cover the TP and the SCR. In addition, companies generally hold an amount of buffer capital to protect their solvency position in a moderately adverse outcome in any one year. This is because regulators will require action from management if the level of eligible OF falls below the SCR. The amount of buffer capital that Aviva looks to maintain is defined by its Solvency Risk Appetite (“SRA”) and this is applied to all of the companies including FLL and FLP – see Section 6.1 for details of this and the changes proposed as part of the Scheme.

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4. The 2017 Scheme4.1 Purpose of the Scheme

In April 2015, Aviva plc (the ultimate holding company for UKLAP) acquired Friends Life Group (“FLG”), making Aviva plc the ultimate holding company of FLL and FLP. Holding the FLL and FLP businesses in separate companies from UKLAP is less capital efficient than having all the business in one company. As a result, transferring the long-term insurance business from FLL and FLP into UKLAP makes the use of capital more efficient by simplifying the corporate structure of the companies.

The annuity business in AIPL is currently wholly reinsured to UKLAP. It is therefore already considered in the capital requirements of UKLAP. Transferring this business to UKLAP will remove the need for the existing reinsurance arrangement, thereby simplifying the business.

UKPTL has been included in the 2017 Scheme in order to take on the scheme administrator and scheme operator roles in relation to certain business currently within FLP, specifically the Flexible Retirement Account, the Friends Life Corporate Self Invested Personal Pension Plan, and other products issued under the declaration of trust dated 6 June 2011 (the “My Money SIPP”), as UKLAP does not have authorisation to perform these roles.

The 2017 Scheme therefore serves the joint purpose of improving captial efficiency and simplifying the business.

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4.2 Description of the Scheme

The diagram below outlines the changes introduced by the Scheme and subsequent fund structure of UKLAP:

(Note that definitions of each of the funds and entities in the above diagram can be found in the Glossary)

2017 Scheme Overview

SGF

*The Stakeholder WPSF is a memorandum account within the Old WPSF and New WPSF from an accounting perspective. Therefore, the policies in the Stakeholder WPSF do not have a separate segregated asset pool from the Old WPSF and New WPSF, albeit the fund is operated and managed as a separate sub-fund with its own PPFM.

FP WPSF New WPSF

FLAS WPSF Old WPSF

FLC New WPSF UKLAP WPSF

FLC Old WPSF Irish WPSF

WL WPSF PM SF

SGF

FPLAL WPSF Stakeholder WPSF*

WPSF 5

Belgian SF

SHF

UKLAP

LTBF

NPSFMy

Money SIPP

Transferof pensionscheme provider

Transfer of operator and administration roles

FLL

FP WPF

FLAS WPF

FLC New WPF

FLC Old WPF

WL WPF

FPLAL WPF

FLL NPF

SHF

FLP

SHF

FLP NPF MyMoney SIPP

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2017 Scheme Overview

FP WPSF New WPSF

FLAS WPSF Old WPSF

FLC New WPSF UKLAP WPSF

FLC Old WPSF Irish WPSF

WL WPSF PM SF

SGF

FPLAL WPSF Stakeholder WPSF*

WPSF 5

Belgian SF

SHF

AIPL

LTBF

UKLAP

LTBF

NPSF

MyMoney SIPP

Transfer of operator and administration roles

Unit-linked managed pension fund business

Annuities

SHF

UKPTL

nEntity

nLong term business fund

nShareholder funds

nWith-profit funds/sub-funds

nNon profits funds/sub-funds

nGrey text represents funds/businesses which are transferred out of their current company post-scheme

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In summary:

➤ Policies, their associated liabilities, and the assets in the existing FLL and FLP with-profits funds will transfer into identical new funds in UKLAP, and where any new increments are still being written this will continue. The FP WPSF will be closed to new business at the same time as the Scheme but will continue to accept increments;

➤ Policies, their associated liabilities, and the assets in the existing non-profit funds of FLL and FLP will transfer into the UKLAP NPSF, and any new business that would have been written in the non-profit funds of FLL and FLP will be written in the UKLAP NPSF in future;

➤ The assets and liabilities of the FLL and FLP SHFs will transfer into the existing SHF in UKLAP;

➤ The annuity business in AIPL will transfer into the UKLAP NPSF, the fund into which it is currently reinsured;

➤ For the My Money SIPP, which is currently in FLP:

¡ The existing Trustee Investment Plan (“TIP”) contracts held under the My Money SIPP will transfer to UKLAP;

¡ UKLAP will become the scheme provider for all other products held under My Money SIPP while the scheme administrator and scheme operator roles will transfer to UKPTL. This is required because UKLAP does not have the authorisation to take on these roles, and UKPTL has been included in the 2017 Scheme for this purpose.

It should be noted that the 2017 Scheme will not proceed unless UKLAP is granted approval from the Prudential Regulatory Authority (“PRA”) to extend its Transitional Measures on Technical Provisions (“TMTP” and also referred to as “Transitional Deductions” as they represent a deduction from the TP), Matching Adjustment, and Volatility Adjustment to include the transferred business from FLL, FLP and AIPL. These are specific approvals under Solvency II impacting the companies’ level of required regulatory capital. UKLAP intends to apply to the PRA for these approvals following the Directions Hearing. This is discussed further in Section 8.1 below.

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5. The Independent Expert5.1 Introduction

I have been appointed as the Independent Expert (“IE”) to provide the required report on the proposed 2017 Scheme. I have been appointed by UKLAP and my appointment has also been approved by the PRA after consultation with the Financial Conduct Authority (“FCA”).

I am a Fellow of the Institute of Actuaries, having qualified in 1988, and am a Director in the EMEIA Insurance – Risk and Actuarial Services practice of Ernst & Young LLP (“EY”). I am independent of the Companies, and neither I nor any partner or member of staff of EY has acted for the Companies in developing any aspects of the Scheme.

My main Report will be presented to the Court at an initial hearing (the “Directions Hearing”) expected to take place on 27 April 2017. The 2017 Scheme is then expected to be submitted to the Court for sanction at a hearing on 13 September 2017 (the “Sanctions Hearing”). If approved, the Scheme is expected to become effective on 1 October 2017 (the “Effective Date”). I will continue to review the implications of the 2017 Scheme for policyholders, and I expect to provide a Supplementary Report for the Court shortly in advance of the Sanctions Hearing.

5.2 Role of the IE

As the IE, I am required to consider the effect of the 2017 Scheme on each group of policyholders and whether the position of any group is, or is likely to be, materially adversely affected. These groups include:

➤ Those policyholders transferring from FLL, FLP and AIPL (the “Transferring Policyholders”);

➤ Those policyholders currently in UKLAP, whose policies will not move, but will become part of a larger company (the “Transferee Policyholders”);

➤ Those policyholders in AIPL who will not be transferring.

I have separately considered the impact on policyholders in different funds, and with different classes of policies (specifically, with-profits policyholders, unit-linked policyholders and non-profit policyholders), as the implications of the Scheme may vary between them. Where relevant, I have separated my analysis and conclusions presented in this Summary Report between these groups of policyholders.

I have considered the likely impact of the 2017 Scheme on the security of policyholders’ benefits, and on the rights and benefit expectations of policyholders. In all cases, in arriving at my opinion, I have discussed the Scheme’s documentation and intended operation with Aviva management.

In this Summary Report I set out my considerations and conclusions relevant to AIPL policyholders only.

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6. Scheme changesThe 2017 Scheme is a consolidating scheme and will therefore supersede all existing court schemes that still apply to FLL, FLP and UKLAP, with the exception of the Irish Scheme, which was adopted under Irish law. I have considered these previous schemes and identified the ones which are currently in-force (see Section 11.6 of my full Report for brief descriptions of these, as well as other previous schemes that are no longer in-force):

➤ UKLAP Reattribution Scheme (2009)

➤ Hamilton Schemes (2009)1

➤ Peak Scheme (2011)

➤ 2013 Scheme (2013)

➤ Irish Scheme (2015)

➤ UKA Scheme (2016)

In replacing these historic schemes with the 2017 Scheme, Aviva plans to make a number of changes to existing scheme clauses to simplify the operation of the Scheme and reflect developments in the Companies or in the wider market environment since the original schemes were drafted. In the sub-sections below, I set out the key changes proposed by Aviva where these have an impact on AIPL policyholders and my conclusions regarding each. As none of the schemes above apply to AIPL, very few of the proposed changes directly impact AIPL policyholders. However where I believe there is potential for changes to have a material second order impact on AIPL policyholders I have commented in the following sub-sections. Other than these areas of change which I comment on specifically, I have concluded that previous schemes’ clauses have been carried forward appropriately without materially adversely impacting on policyholders’ security, rights or benefit expectations.

6.1 Including SRA within the 2017 Scheme

UKLAP, FLL, FLP and AIPL have a SRA which defines the level of capital in excess of the Solvency II regulatory requirements that each company aims to maintain. The SRA sets the threshold for the capital required such that there would be sufficient capital to meet the SCR with a certain degree of probability, and restricts these companies’ ability to pay dividends if they fail to meet this threshold. Specifically, the SRA sets out a series of ranges of capital coverage. Amongst these is the “preferred range”, which represents a level of coverage management is targeting. The ranges below the “preferred range” set out specific restrictions on management of the business such as restrictions regarding the payment of dividends. At a level of capital coverage above the “preferred range”, management would seek additional uses of capital or pay further

1 There are two Hamilton Schemes, involving the transfer of Hamilton Insurance Company Limited and Hamilton Life Assurance Company Limited respectively. Unless otherwise stated, when I refer to Hamilton Schemes in my report, I am referring to both schemes.

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dividends to the Aviva Group. Where I mention the “level of the SRA” or the “SRA threshold” in this Summary Report, I am referring to the bottom of the “preferred range”, ie the level below which dividend and other restrictions would apply.

Aviva is proposing to include the SRA in the 2017 Scheme which will make it applicable to all UKLAP policyholders post-Scheme and will strengthen the governance surrounding it. In particular, to make changes to the SRA will require approval of the UKLH Board following recommendation from the UKLH Risk Committee, and they can only be made provided they do not result in a ‘material weakening’ of the SRA framework. If there is a ‘material weakening’, the Board can make amendments but only after taking account of appropriate actuarial advice and having consulted with the WPC, PRA and FCA. I am satisfied that the internal governance over changes to the SRA will be sufficiently robust such that policyholders will not be materially adversely affected relative to the pre-Scheme position. In addition, there is an improvement in the strength of governance related to changes to the SRA for existing UKLAP policyholders and transferring AIPL policyholders as the previous SRA did not contain the same level of governance over changes.

Overall, I am satisfied that this change will not have a materially adverse impact on policyholders’ security, rights, and benefit expectations.

6.2 Super-Principle

The so-called “Super-Principle” clause is a paragraph in the 2013 Scheme. It states that management should take account of the support accounts for the FLAS WPF, FP WPF and FLC Old and New WPFs in managing these funds, provided that the FLL NPF and FLL SHF have sufficient assets to cover the liabilities of the FLL NPF. The purpose of this clause was to provide additional protection to FLL policyholders from changes to the investment strategy or bonus policy of the funds to which it applies.

If the Super-Principle were carried over to the 2017 Scheme without modification, this clause would introduce the potential for contagion risk for UKLAP policyholders outside of the FLAS WPSF, FP WPSF and FLC Old and New WPSFs (contagion risk is described further in Section 8 below, but is the risk that the position of one fund is adversely impacted by that of another fund in the same company). This is because one of these with-profits funds could, through the application of the Super-Principle, continue to take investment risks and adopt a bonus policy that are not supportable with the available capital of UKLAP as a whole, thereby adversely affecting other UKLAP policyholders post-Scheme.

As a result of this potential contagion risk, the 2017 Scheme is proposing a modification to the Super-Principle. This change involves increasing the threshold at which the Super-Principle would take effect, such that the non-profit and shareholder funds must not only have sufficient assets to cover their liabilities but also to cover their Solvency II MCR. I am satisfied that this increased threshold provides sufficient protection to UKLAP policyholders in order to mitigate the contagion risk I have described above. I am therefore satisfied that inclusion of the

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Super-Principle will not materially adversely affect the security, rights or benefit expectation of any AIPL policyholders.

6.3 Pooling of assets

The UKLAP Reattribution Scheme included a clause allowing the Board to decide, having taken account of appropriate actuarial advice, to pool the assets between certain UKLAP sub-funds. Such pooling of assets can create efficiencies in the management of with-profits funds, which may be in policyholders’ interests. Further, including details of how the pooling should be performed in a court scheme provides protection for policyholders that this will be performed in a manner that does not disadvantage them. As part of the 2017 Scheme, Aviva plans to extend this clause such that it covers a greater range of funds, including the with-profits sub-funds that will contain the business transferring in from FLL and FLP.

The funds that this clause would apply to for the first time are the FLC Old and New WPSFs, FLAS WPSF, FPLAL WPSF, SGF, FP WPSF, WL WPSF and WPSF5. Policyholders transferring from FLL, FLP, and AIPL into the UKLAP NPSF will also be included in the scope of this clause for the first time. Further, the remaining UKLAP funds (other than the PM SF to which the clause does not apply) that are already in the scope of this clause would also experience a change because of the greater range of funds that their assets could be pooled with.

I note that the Scheme prescribes in detail how the pooling should be conducted (both regarding the decision to pool assets and how different funds’ interests in the pooled assets should be calculated over time). It also requires the Board to take account of appropriate actuarial advice in conducting this pooling, in addition to considering the interests of policyholders prior to making a decision to pool assets between funds.

I believe this governance provides sufficient protection to ensure that assets would be pooled in a manner that would treat all groups of policyholders fairly. I am therefore satisfied that this change will not materially adversely affect policyholders’ security, rights, or benefit expectations.

7. Policyholder benefit expectationsIn considering policyholder benefit expectations, I would be concerned if the 2017 Scheme were likely to materially adversely affect the level of benefits expected to be paid under any policy. However, I have concluded that this is not the case. In particular, I confirm that for AIPL policies the Scheme will not change the:

➤ Value of any policy;

➤ Death, maturity or other contingent benefits payable under any policy;

➤ Surrender value of any policy;

➤ Premiums payable under any policy;

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➤ Current or expected level of charges under any policy;

➤ Asset mix underlying any policy or the range of investment choices available;

➤ Range of options available under any policy and any guarantees included in the contract;

➤ Charges made for tax under any policy, or their eligibility for any favourable tax treatment;

➤ Terms and conditions of any policy.

There are a number of additional points to consider, and these vary by policy type. In the sub-sections below, I discuss separately the impact of the 2017 Scheme on the benefit expectations of:

➤ Holders of unit-linked policies;

➤ Holders of conventional non-profit policies.

7.1 Unit-linked policies

The following considerations in respect of the Scheme apply to the unit-linked policyholders that will remain in AIPL.

➤ The unit-linked policies will remain invested in the same unit-linked funds as previously, with the same number and value of units, and with the same range of fund choice available to them;

➤ There will be no change to the investment mandates, charges or taxation of any unit-linked fund;

➤ The pricing principles used for each unit-linked fund will remain unchanged;

➤ The approach to setting charges for additional benefits, such as protection benefits, and expenses will remain unchanged.

Taking account of these considerations, I am satisfied that the 2017 Scheme will not materially adversely affect the benefit expectations of these policies.

7.2 Annuity policies

The following considerations apply to the transferring conventional non-profit (ie annuity) policyholders in AIPL.

➤ Conventional non-profit policies that have guaranteed benefits will remain unchanged as part of the 2017 Scheme; there will also be no change to the terms and conditions of these policies;

➤ For those non-profit policies that have certain terms, such as reviewable premiums, which can be triggered by certain conditions, the conditions and the decision-making process for these reviews will not be changed as part of the 2017 Scheme.

Taking account of these considerations, I am satisfied that the 2017 Scheme will not materially adversely affect the benefit expectations of these policies.

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8. Policyholder securityI have considered the impact of the 2017 Scheme on the security of policyholders’ benefits. In particular, I would be concerned if the Scheme meant that policies were to move from a financially stronger company to a weaker one which had a significant chance of not honouring its obligations to policyholders.

A key element I have considered in reaching my conclusions regarding policyholder security is the SRA (as described in Section 6.1 above) and the protection it provides. The SRA provides additional security to policyholders by triggering management actions, including the non-payment of dividends, in the event of there being insufficient capital in AIPL, FLL, FLP or UKLAP.

I have also considered whether the Scheme will materially impact the nature, mix and materiality of risks for policyholders. In doing so I have reviewed the risk profiles of FLL, FLP, AIPL and UKLAP both pre- and post-Scheme, focussing on the range and balance of risks policyholders are exposed to. I would be concerned if policyholders were to move from an entity exposed to a balanced range of risks to an entity exposed to just a small number of material risks. Therefore, my review has considered both the range of risks and the relative exposure to each risk.

A specific point when considering policyholder security is that, when several funds co-exist in the same company, it may be possible for the position of one fund to materially adversely impact that of another. This is called contagion risk, and I have considered this in reaching my conclusions regarding the impact of the Scheme on policyholder security. The 2017 Scheme increases the potential for contagion risk for transferring AIPL policyholders, to the extent that they will be exposed to the risks of UKLAP’s pre-Scheme business as well as the risks of FLL’s and FLP’s transferring business.

In the sub-sections below, I have:

➤ Commented on the financial position of AIPL, FLL, FLP and UKLAP pre- and post-Scheme; and

➤ Summarised my conclusions regarding the impact of the 2017 Scheme on the security of the different groups of AIPL policyholders within the scope of the Scheme.

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8.1 Financial position

The table below shows the estimated impact of the 2017 Scheme as at 30 June 2016 if the Scheme had been effected on that date, on a Solvency II basis.

Pre-Scheme Post-Scheme

30 June 2016 £m

FLL* UKLAP** UKLAP Impact of Scheme

Own Funds 5,337 7,282 13,303 684

SCR 3,847 4,847 9,064 370

Surplus Capital 1,490 2,435 4,239 314

Solvency ratio 139% 150% 147%

* The FLL pre-Scheme financial position includes FLP, for which the standalone solvency ratio is 124%.

** The UKLAP pre-Scheme financial position includes the AIPL transferring business which is currently reinsured to UKLAP. AIPL’s standalone solvency ratio is 148% and 155% pre- and post-Scheme respectively.

In reviewing the impact of the Scheme, I have compared the sum of the pre-Scheme FLL and pre-Scheme UKLAP positions, with the post-scheme UKLAP position. Although I have discussed these impacts with Aviva management, I have placed reliance on Aviva’s governance processes for the accuracy of the impacts.

The Scheme increases Surplus Capital by an estimated £314m. There are a number of offsetting items making up this overall impact both in respect of the Own Funds (particularly Transitional Deductions and the Risk Margin) and the SCR. However, the largest driver of the impact is improved diversification of risks between FLL, FLP and UKLAP following the transfer. I note here that both pre- and immediately post-Scheme, AIPL, FLL, FLP and UKLAP are capitalised above the level of their SRAs – indeed, each is above the preferred range specified in the SRA. This provides me with comfort that the financial impact of the Scheme does not affect policyholder security, since:

➤ Any excess capital above the level of the SRA, could be removed at any future point (eg via dividend payments). As such, the exact amount of excess capital over each of AIPL, FLL, FLP, and UKLAP’s SRAs pre- and post-Scheme provides limited protection to policyholders;

➤ Post-Scheme UKLAP is capitalised above the SRA and the SRA post-Scheme offers at least the same protection as UKLAP’s SRA and AIPL’s solvency risk appetite pre-Scheme.

I also note that the Solvency ratio of AIPL increases from 148% to 155% post-Scheme as the Scheme removes a very small amount of counterparty credit risk that AIPL is currently exposed to in relation to the current reinsurance of the AIPL annuities to UKLAP (ie the policies transferring to UKLAP). Both of these ratios are above the level of AIPL’s SRA, which itself is unchanged as a result of the Scheme.

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Although the above results present the regulatory solvency position for AIPL, FLL, FLP and UKLP, I note that there are a number of material technical items included, and that some of these are not entirely consistent from one company to another. In order to gain comfort over the impact of the Scheme on policyholder security and the relative financial strength of the companies pre- and post-Scheme, I have therefore considered separately these items and their influence on the financial impact of the Scheme. Most material amongst these items are the treatment of Transitional Deductions and the use of a Standard Formula basis to calculate the SCR for Friends Life business, each of which I discuss further in the next two paragraphs.

Transitional Deductions were introduced as part of Solvency II (subject to approval by the PRA) to smooth the financial impact of moving to Solvency II over a 16 year period. They serve, inter alia, to reduce the adverse financial impact of the introduction, as part of Solvency II, of the Risk Margin, an additional reserving requirement which had no counterpart previously under Solvency I. The PRA has allowed the use of Transitional Deductions for UK insurance companies where the conditions for approval are met and approved their use for UKLAP, FLL, and FLP pre-Scheme (and, as mentioned in Section 4.2 above, the Scheme will not proceed without a similar approval for UKLAP post-Scheme). The Surplus Capital positions pre- and post-Scheme include the effect of Transitional Deductions. As UKLAP has a high risk margin, the Transitional Deductions have a particularly material impact for UKLAP. The use of approved Transitional Deductions as part of the financial position is in line with market practice and regulations. Moreover, I have reviewed the projections provided by Aviva and am satisfied that the amortisation of Transitional Deductions is supportable from the run-off of the Risk Margin. For these reasons, I am satisfied that it is appropriate to consider the position post Transitional Deductions when assessing the impact of the Scheme on policyholders’ security.

I note that the financial impact of the Scheme set out above is based on a Solvency II Standard Formula basis for the business currently in FLL and FLP. Aviva has recently obtained approval from the PRA to extend its Internal Model to cover the business currently in the FLL, NPF and FLP NPF. Whilst I have not been provided with the financial impact of the Scheme on this basis, I have reviewed the impact of moving the business currently in the FLL NPF and FLP NPF from a Standard Formula basis to an Internal Model basis on the pre-Scheme position, and have received a statement from Aviva management in respect of the anticipated post-Scheme position. I am satisfied that it is highly unlikely that FLL, FLP or UKLAP (pre- and post-Scheme) would be capitalised below the level of the SRA if the business currently in the FLL NPF and FLP NPF were captured on an Internal Model basis. As such, I am satisfied that this approval does not invalidate my conclusions regarding the Scheme, and in particular, the comments that I have made earlier in this section in relation to the financial impact of the Scheme and the SRA. I will comment further on this matter in my Supplementary Report.

Separate to the above financial position, I have reviewed a range of sensitivities provided by Aviva to gain comfort that the Scheme does not materially adversely impact policyholder security under stressed scenarios. I am satisfied that these scenarios do not impact my conclusions in relation to the Scheme.

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My review also considered the Capital Plan, which forecasts the post-Scheme capital position of UKLAP (including FLL and FLP business) over the next 10 years allowing for expected new business volumes. Having reviewed this, I am satisfied that the expected developments over the period, including new business and management actions, do not invalidate my conclusions set out in this Summary Report. In particular, the Capital Plan demonstrates that:

➤ UKLAP is expected to meet its SCR (and cover its SRA) over the period;

➤ As mentioned above, the amortisation of the Transitional Deductions is supportable from the run-off of the Risk Margin, such that the size of these technical items will not materially alter the financial position as the Transitional Deductions reduce over 16 years.

At the time of writing of this Report, financial impacts of the Scheme and an overall post-Scheme financial position as at 31 December 2016 were not available. Nevertheless, Aviva has provided me with draft versions of the 31 December 2016 financial positions of AIPL, FLL, FLP and UKLAP pre-Scheme. I note that Aviva is continuing to investigate certain aspects of these financial positions, and that the audit of this information will not be concluded until after the Directions Hearing. I will therefore consider further the 31 December 2016 position, including on a post-Scheme basis, in my Supplementary Report. Nevertheless, having reviewed the draft pre-Scheme financial positions and discussed these with management, I am satisfied that as at 31 December 2016 AIPL, FLL, FLP and UKLAP are all capitalised above the level of the SRA, and that it is highly likely that on a post-Scheme basis UKLAP would be capitalised above the level of the SRA. For this reason, I am satisfied that the conclusions I present in this Report, which are based largely on 30 June 2016 financial positions, remain appropriate.

8.2 Transferring policies from AIPL

For the reasons set out below, I am satisfied that the 2017 Scheme will not materially adversely affect the benefit security of the Transferring Policyholders currently in the Long Term fund (“AIPL LTF”) (specifically, the annuity policyholders):

➤ Pre-Scheme, as the AIPL annuity business is reinsured to UKLAP, AIPL annuity policyholders have exposure to UKLAP’s risk profile albeit indirectly. The primary exposure for AIPL policyholders is the event of UKLAP defaulting, although this risk is itself dependent on UKLAP’s risk profile. Following the 2017 Scheme, when this business resides in UKLAP, the current AIPL annuity policyholders will be exposed directly to UKLAP’s risk profile. I am satisfied that the direct exposure to UKLAP will not materially adversely affect policyholders because (as noted above) UKLAP is expected to be capitalised above the level of its SRA immediately following the Scheme, and this SRA provides at least the same level of protection as AIPL’s SRA. Further, I am satisfied that these policyholders will not be materially adversely affected by the risk profile they are exposed to within UKLAP post-Scheme, relative to the risks they are exposed to pre-Scheme as they will be exposed to a more balanced and diversified range of risks.

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➤ The solvency ratio of UKLAP post-Scheme is expected to be 147%, which is similar to that of AIPL pre-Scheme (148%). Both solvency ratios are above the level of the SRA for these companies. I am therefore satisfied that the transferring AIPL policyholders’ security will not be materially adversely impacted.

8.3 Policies remaining in AIPL

For the reasons set out below, I am satisfied that the 2017 Scheme will not materially adversely affect the benefit security of the policyholders remaining in the AIPL LTF (specifically, the unit-linked managed pension fund policyholders):

➤ The only change for the policyholders remaining in the AIPL LTF as part of the Scheme is that the transferring AIPL annuity policyholders will no longer be in the same company. However, this is an immaterial change due to the relative sizes of the transferring and remaining businesses (£10m of liabilities for transferring policyholders relative to £1.8bn of liabilities for remaining policyholders) and the fact that the transferring policies are already fully reinsured to UKLAP. As a result, I am satisfied that the remaining AIPL policyholders will not be materially adversely impacted by the Scheme.

9. Other considerations9.1 Administration services and investment management services

The 2017 Scheme will not cause any change to the administration services provided to policyholders. All policies transferring from AIPL will continue to be administered by the same service companies as currently and there will be no change to the terms and conditions of the service agreements that apply.

Investment management of AIPL policyholder funds will continue to be performed by the same fund managers, using the same processes as are currently in place, and the investment management agreements will be unchanged, albeit transferred to UKLAP as required, as part of the 2017 Scheme.

As a result, I do not believe that there will be any materially adverse impact on the quality of administration or investment management services, or to the costs that AIPL policyholders will bear in this respect, as a consequence of the 2017 Scheme.

9.2 Reinsurance

Intra-group reinsurance arrangements between AIPL, FLL, FLP and UKLAP will either be eliminated or be converted to arrangements equivalent to reinsurance between funds of UKLAP. This will not, however, result in any material changes to the arrangements and I therefore do not believe policyholders will be materially adversely impacted by changes to intra-group reinsurance as a result of the Scheme.

External reinsurers will be contacted to notify them of the Scheme and, if they feel they will be adversely affected by the Scheme, they may put their representations to the Court. I will consider any representations that have been made when concluding my view on the appropriateness of the Scheme for the Sanctions Hearing and will report as appropriate in my Supplementary Report.

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9.3 Tax

I have reviewed information provided to me by Aviva and have taken advice, where appropriate, from EY tax specialists. On the basis of this information, I am satisfied that there should be no materially adverse tax effects on policyholders, and in particular on the transferring FLL, FLP and AIPL policyholders. This is subject to the clearances and other confirmations being received. I do not expect any issues in this respect but will comment on any further developments in my Supplementary Report.

9.4 Representations and objections

Any policyholder who feels they will be adversely affected by the Scheme may put their representations or objections to the Court either in writing, by attending the Sanctions Hearing, or by asking a legal representative to raise their representations or objections. In deciding whether to sanction the Scheme, the Court will consider any representations or objections raised. I will also consider any representations or objections that have been made in writing sufficiently in advance of the Court date when concluding my view on the appropriateness of the Scheme for the Sanctions Hearing and will report as appropriate in my Supplementary Report.

10. Overall conclusionI am aware of certain areas where work is still in progress, some of which are material to the proposed transfer of business, and which I will continue to keep under review in the period leading up to the Sanctions Hearing. The material areas include:

➤ Approval by the FCA of a number of variations of permission to ensure that UKLAP has the required permissions to operate the FLL and FLP business post-Scheme;

➤ Applications and approvals for the use of the Volatility Adjustment, Matching Adjustment, and Transitional Measures for Technical Provisions in UKLAP post-Scheme; and

➤ Receipt of the tax clearances and confirmations requested from Her Majesty’s Revenue and Customs (“HMRC”).

I will provide an update on these areas, and any impact on my opinion, in my Supplementary Report. However, I do not anticipate any material issues with these areas.

I also note that there are possible changes in the market environment, which could influence the impact of the Scheme and therefore my conclusions, such as the possible impact of the UK exit from the EU on the economic environment.

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Where possible, I have sought to take account of such possible changes through consideration of different scenarios in reaching my key conclusions. Nevertheless, I will keep the economic environment under review and, where appropriate, comment further in my Supplementary Report.

Finally, I note that all the direct costs of the 2017 Scheme will be met by the shareholders of UKLAP, either directly from the shareholder funds or indirectly from the UKLAP NPSF (excluding the RIEESA). None of the costs will be borne by policyholders, including by with-profits and unit-linked funds, so they will not be adversely affected in this regard.

Having taken account of the basis for opinions set out in Section 1.3.1 of my main Report and subject to the areas of ongoing review noted out above:

➤ I am satisfied that the implementation of the Scheme on the Effective Date is not likely to lead to a materially adverse effect on the security of the guaranteed benefits for the AIPL policyholders;

➤ I am satisfied that the implementation of the Scheme on the Effective Date is not likely to lead to a materially adverse effect on the reasonable benefit expectations of the AIPL policyholders, nor on their being treated fairly in accordance with the FCA’s Treating Customers Fairly regime;

➤ I am satisfied that the Scheme is equitable to all classes and generations of policyholders;

➤ I am satisfied that implementation of the Scheme on the Effective Date is not likely to lead to a materially adverse effect on the service levels experienced by the AIPL policyholders; and

➤ I am satisfied that there would be no material change to the security or benefit expectations for policyholders who are residents in Guernsey or Jersey, or were sold their policy whilst resident in Guernsey or Jersey, and that my conclusions on the Scheme extend to this group of policyholders.

I therefore do not believe there is a reason that the Scheme should not proceed, and see no reason for additional safeguards beyond those contained in the Scheme to protect the interests of the AIPL policyholders.

David King, FIA Date: 13 April 2017

Director Ernst & Young LLP 25 Churchill Place London E14 5EY

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11. Glossary

11.1 Terms used in this Report

AIPL LTF AIPL Long Term Fund

BEL Best Estimate Liability

Board The board of directors of the relevant entity from time to time

Companies Friends Life Limited (“FLL”), Friends Life and Pensions Limited (“FLP”), Aviva Investors Pensions Limited (“AIPL”), Aviva Life & Pensions UK Limited (“UKLAP”) and Aviva Pension Trustees UK Limited (“UKPTL”)

Court High Court of Justice of England and Wales

Directions Hearing

The initial hearing at the Court relating to the consideration of the Scheme and allowing it to proceed to the Sanctions Hearing

Effective Date 1 October 2017, the date on which the Scheme is expected to be implemented

EU European Union

EY Ernst & Young LLP

FCA Financial Conduct Authority

FLAS WPF FLAS With-Profits Fund which exists prior to the 2017 Scheme’s Effective Date

FLAS WPSF FLAS With-Profits Sub-Fund which will become a sub-fund of UKLAP’s LTBF as a result of the 2017 Scheme; note that in some cases, for simplicity (such as where referring to both pre and post Scheme in the same paragraph), I have used this term interchangeably with FLAS WPF

FLC New WPF FLC New With-Profits Fund which exists prior to the 2017 Scheme’s Effective Date

FLC New WPSF FLC New With-Profits Sub-Fund which will become a sub-fund of UKLAP’s LTBF as a result of the 2017 Scheme; note that in some cases, for simplicity (such as where referring to both pre and post Scheme in the same paragraph), I have used this term interchangeably with FLC New WPF

FLC Old WPF FLC Old With-Profits Fund which exists prior to the 2017 Scheme’s Effective Date

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FLC Old WPSF FLC Old With-Profits Sub-Fund which will become a sub fund of UKLAP’s LTBF as a result of the 2017 Scheme; note that in some cases, for simplicity (such as where referring to both pre and post Scheme in the same paragraph), I have used this term interchangeably with FLC Old WPF

FLL NPF FLL Non-Profit Fund

FLL SHF FLL Shareholder Fund

FLP NPF FLP Non-Profit Fund

FLP SHF FLP Shareholder Fund

FP WPF FP With-Profits Fund which exists prior to the 2017 Scheme’s Effective Date

FP WPSF FP With-Profits Sub-Fund which will become a sub fund of UKLAP’s LTBF as a result of the 2017 Scheme; note that in some cases, for simplicity (such as where referring to both pre and post Scheme in the same paragraph), I have used this term interchangeably with FP WPF

FPLAL WPF FPLAL With-Profits Fund which exists prior to the 2017 Scheme’s effective date

FPLAL WPSF FPLAL With-Profits Sub-Fund which will become a sub fund of UKLAP’s LTBF as a result of the 2017 Scheme; note that in some cases, for simplicity (such as where referring to both pre and post Scheme in the same paragraph), I have used this term interchangeably with FPLAL WPF

HMRC Her Majesty’s Revenue and Customs

Independent Expert

The individual appointed to report on the terms of an insurance business transfer scheme and approved by the PRA and FCA pursuant to Section 109 of FSMA

LTBF Long Term Business Fund of UKLAP

MCR Minimum Capital Requirement

NPSF Non-Profit Sub-Fund, a sub fund of UKLAP’s LTBF

New WPSF New With-Profits Sub-Fund, a sub fund of UKLAP’s LTBF

Old WPSF Old With-Profits Sub-Fund, a sub fund of UKLAP’s LTBF

Own Funds Amount of capital that is eligible to cover the regulatory capital requirements

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Part VII Transfer A court-sanctioned legal transfer of some or all of the policies of one company to another. It is governed by Part VII of the Financial Services and Markets Act 2000 (FSMA) with supplementary guidance set out in the FCA Handbook and the PRA’s Statement of Policy.

PM SF Provident Mutual Sub-Fund, a sub-fund of UKLAP’s LTBF

PRA Prudential Regulation Authority

Regulators PRA and FCA

RM Risk Margin

Sanctions Hearing

The hearing at the Court at which the final decision whether or not to approve the Scheme is made

Scheme The insurance business transfer scheme that is the subject of this Report

SCR Solvency Capital Requirement

SGF Secure Growth Fund

SIPP Self-Invested Personal Pension

Solvency I Solvency I is the old insurance regulatory regime that has been replaced by Solvency II on 1 January 2016

Solvency II Solvency II is a new EU-wide insurance regulatory regime implemented since 1 January 2016

SRA Solvency Risk Appetite Framework for UKLAP, FLL, FLP and AIPL

Standard Formula

Under Solvency II, insurance/reinsurance companies can opt to calculate SCR on a Standard Formula basis under which, the SCR is calculated in a formulaic way using a specified stress level for each risk exposure

Supplementary Report

A further report required by paragraph 2.39 of the PRA Policy Statement to be prepared prior to the final Court hearing in order to provide an update for the Court on the Independent Expert’s conclusions in the light of any significant events subsequent to the date of the finalisation of this Report

Surplus Capital Excess of Own Funds over SCR

TMTP Transitional Measures on Technical Provisions

TP Technical Provisions

Transferring Policyholders

Policyholders of all the long-term business in FLL and FLP and policyholders of the annuity business in AIPL that will be transferred to UKLAP on the Effective Date

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Transferee Policyholders

Policyholders currently in UKLAP, whose policies will not move under the 2017 Scheme

Transitional Deductions

Introduced by Solvency II, these transitional measures spread the impact on Technical Provisions of the transition for insurance companies from Solvency I to Solvency II over 16 years

Transitional Measures on Technical Provision

See description for Transitional Deductions

UKA Scheme The transfer of the existing business from UKA to UKLAP

UKLAP WPSF UKLAP With-Profits Sub-Fund, a sub fund of LTBF

WL WPF WL With-Profits Fund which exists prior to the 2017 Scheme’s Effective Date

WL WPSF WL With-Profits Sub-Fund which will become a sub fund of UKLAP’s LTBF as a result of the 2017 Scheme; note that in some cases, for simplicity (such as where referring to both pre and post Scheme in the same paragraph), I have used this term interchangeably with WL WPF

WPC With-Profits Committee

WPSF5 With-Profits Sub-Fund (5), a sub fund of UKLAP’s LTBF

2017 Scheme The Part VII scheme involving the transfer of all of the long-term insurance business of FLL and FLP, and the annuity business of AIPL, to UKLAP and UKPTL

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11.2 Company abbreviations referred to in this Report

AIPL Aviva Investors Pensions Limited

FLAS Friends Life Assurance Society

FLC Friends Life Company Limited

FLG Friends Life Group

FLL Friends Life Limited

FLP Friends Life and Pensions Limited

FPLAL Friends Provident Life Assurance Limited

UKA Aviva Annuity UK Limited

UKLAP Aviva Life & Pensions UK Limited

UKPTL Aviva Pension Trustees UK Limited

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