assessment of financial strength & corporate...

ASSESSMENT OF

F INANCIAL STRENGTH &

CORPORATE PROFILE B&CE GROUP OF COMPANIES

(TRADING AS B&CE)

FEBRUARY 2014

DRAFT AKG ASSESSMENT OF FINANCIAL STRENGTH & CORPORATE PROFILE: B&CE GROUP

AKG Actuaries & Consultants Ltd Page 2 February 2014

C O N T E N T S

1 INTRODUCTION ...................................................................................................................... 3 1.1 BACKGROUND .......................................................................................................................................... 3 1.2 AKG’S ASSIGNMENT ............................................................................................................................... 3 1.3 INFORMATION SOURCES ......................................................................................................................... 3 1.4 RELIANCES AND LIMITATIONS ............................................................................................................... 4 1.5 CONFIDENTIALITY ................................................................................................................................... 4

2 ASSESSMENT CRITERIA ......................................................................................................... 5 2.1 FINANCIAL STRENGTH AND CORPORATE PROFILE ............................................................................ 5

3 BACKGROUND .......................................................................................................................... 6 3.1 THE GROUP .............................................................................................................................................. 6 3.2 REGULATION ............................................................................................................................................ 7

4 THE PROPOSITION ................................................................................................................. 9 5 B&CE GROUP .......................................................................................................................... 10

5.1 CORPORATE STRUCTURE ....................................................................................................................... 10 5.2 B&CE GROUP ........................................................................................................................................ 12 5.3 PRODUCTS ............................................................................................................................................... 13 5.4 DISTRIBUTION ........................................................................................................................................ 15 5.5 IMAGE & STRATEGY .............................................................................................................................. 16 5.6 SERVICE ................................................................................................................................................... 16 5.7 REINSURANCE ......................................................................................................................................... 17

6 CONCLUSION ......................................................................................................................... 18 APPENDIX 1 CORPORATE STRUCTURE ............................................................................. 20 APPENDIX 2 FINANCIAL STRENGTH RATING ................................................................. 21 APPENDIX 3 INFORMATION ABOUT AKG ......................................................................... 22



1 INTRODUCTION

1.1 BACKGROUND

This Report has been prepared for the B&CE group of companies, trading as B&CE (the Client, B&CE). This Report replaces, in its entirety, AKG’s previous report dated March 2013.

1.2 AKG’S ASSIGNMENT

AKG’s assignment can be broadly summarised as ‘to produce a confidential independent assessment of B&CE, taking account of AKG’s generic experience of the requirements of leading intermediaries including IFAs and Employee Benefit Consultants, and including elements from the format of AKG’s annual Company Profile & Financial Strength Reports for UK Life Offices’.

1.3 INFORMATION SOURCES

AKG has been supplied with the following information:

a) Building and Civil Engineering Holidays Scheme Management Ltd ‐ Annual report and financial statements 31 March 2013

b) B & C E Insurance Ltd ‐ Annual report and financial statements 31 March 2013

c) B & C E Insurance Ltd ‐ FSA Returns 31 March 2013

d) B & C E Financial Services Ltd ‐ Annual report and financial statements 31 March 2013

e) Building and Civil Engineering Benefits Scheme, Building and Civil Engineering Accident Benefit Scheme, and Employee Life Cover from B&CE ‐ Trustee’s annual report and financial statements 31 March 2013

f) The People’s Pension Scheme ‐ Annual report and financial statements for the period 28 June 2012 to 31 March 2013

g) The People’s Pension Trustee Ltd ‐ Annual report and financial statements for the period 28 June 2012 to 31 March 2013

In addition AKG held a meeting with the following employees of B&CE: Paul Murphy, Director of Corporate Development, and Sam Stedman, Director of Finance.

Further information on B&CE, available at www.bandce.co.uk and www.thepeoplespension.co.uk, was also utilised.

Information in respect of other companies in the market was obtained from AKG’s internal library of information, which is maintained both by regular direct contact with product providers and by other channels of market intelligence.



1.4 RELIANCES AND LIMITATIONS

Much of the information upon which AKG’s comments are based has been supplied directly by the Client. AKG has made every effort to ensure the accuracy of the content of this report and to ensure that the information contained is as current as possible at the date of issue, but AKG (inclusive of its directors, officers, staff and shareholders and any affiliated third parties) cannot accept any liability to any party in respect of, or resulting from, errors or omissions.

Assessments of financial strength, etc. are generally based upon analysis of the annual Accounts and Statements of the companies concerned.

All analysis is based on the assumption that prospective policyholders (and their advisers) will wish to take a cautious approach to risk in respect of financial strength issues, etc. in the selection of appropriate product providers.

AKG personnel are available to expand upon the comments in this report, if required.

Whilst many aspects underlying AKG’s comments are likely to change only slowly, the financial services industry is a competitive and dynamic marketplace, with new products and developments being announced regularly. As a result, AKG cannot guarantee that any particular comment will remain appropriate at any future date. In particular, future developments such as product changes, or company restructuring, could have significant impact upon the comments.

AKG information, comments and opinion, as expressed in the form of its analysis and ratings, do not establish or seek to establish suitability in any individual regard and AKG does not provide, explicitly or implicitly, through this report and its content, or any other assessment, rating or commentary, any form of investment advice or fiduciary service.

1.5 CONFIDENTIALITY

This report has been produced for the Client’s sole consideration.

AKG is happy for the Client to reproduce all or part of this report in any internal or external published material, subject to:

Prior arrangement of the content, context, duration and volume of such reproduction and of any reference, explicit or implicit, to AKG’s involvement in producing this report; and

Payment of such additional fees as may be mutually agreed between AKG and the Client.



2 ASSESSMENT CRITERIA

2.1 FINANCIAL STRENGTH AND CORPORATE PROFILE

A prime criterion in assessing financial service providers is that of Financial Strength and Corporate Profile. AKG invariably recommends the exclusion from consideration of product providers who do not rate highly enough in this respect, regardless of other considerations.

AKG consistently emphasises the need to evaluate ‘Financial Strength and Corporate Profile’ in the context of the product type under consideration. In AKG’s experience, it is not uncommon for a single company to have quite different Financial Strength ratings for different types of product. Thus, for example, AKG may rate a company very ‘strong’ for Non Profit products, but extremely ‘weak’ for With Profits products.

For the evaluation of ‘Financial Strength and Corporate Profile’, AKG’s general aim is to assess a company’s ability to support its business over the long‐term, taking the following main criteria into account:

Available capital

Parental strength (and likely attitude towards supporting the company)

Company size

Corporate structure

Operational capability and governance

Distribution image

Future strategy

AKG has rated B&CE B (Strong) for overall financial strength.

This rating is based on a mix of criteria, according to a balanced scorecard approach, with key aspects reflected in the assessment outlined in this report.

The rating and supporting assessment is comparable (i.e. shares the common rating currency) with those ratings for entities covered by AKG’s Company Profile & Financial Strength Reports.



3 BACKGROUND

3.1 THE GROUP

B&CE is the UK’s largest provider of financial benefits to the construction industry’s employers and employees. As at 31 March 2013, B&CE managed assets of over £1.9bn, providing financial benefits to over 177,000 individuals on behalf of over 5,200 corporate accounts. Since its launch in 1942, all efforts had gone towards achieving one goal: improving the personal and financial wellbeing of everyone working in construction. The group has created a range of financial products including a stakeholder pension scheme, annuities, accident cover, life cover, holiday pay, personal injury insurance and employee healthcare schemes.

This had remained the group’s focus over many years. However, more recently, the group has faced a number of challenges. Whilst new business levels have held up reasonably well, given the economic background, the group has seen a fall off in the number of employer groups as well as a decline in those members making their own contributions. Further, NEST and other pension providers were aggressively targeting its largest customers, where construction was often only a small part of their activities. Many of these employers were looking for a “one size fits all” solution and considered EasyBuild to be too construction sector specific. B&CE was conscious of the need to react to this, and whilst continuing to see the construction industry as its main focus, launched The People’s Pension, in November 2011, its default Automatic Enrolment (auto‐enrolment) solution, offered to existing and new employer customers and available to all employers, regardless of industry. B&CE considers that The People’s Pension, which became operational from October 2012, should appeal to industries with similar characteristics to construction e.g. those with a transient workforce of low‐to‐moderate earners, so widening its distribution reach. This has been borne out with a number of companies choosing to enrol their employees into The People’s Pension including Pret A Manger (Europe) Ltd, Mears Group plc, Rentokil Initial plc and Next Group plc.

B&CE has addressed the issue of declining membership. The major issue now is to deal with the increased new business levels.

B&CE is a ‘not‐for‐profit’ organisation whose primary concern has, historically, been employers and employees in the construction industry.

It is the group’s continued response to its various challenges that forms the ongoing background for assessment in this report.



3.2 REGULATION

The regulatory landscape for financial services providers of all shapes and sizes has changed significantly in recent years and continues to evolve.

National Insurance concession

Historically, the group’s original core product (the Holidays‐with‐Pay Scheme) was predicated on the concession that all amounts paid into the scheme were exempt from employers’ National Insurance contributions. In October 2007, the Government announced the immediate withdrawal of the concession for all industries, except for the construction industry, where the concession finally expired in October 2012.

As expected, contributions into the Holidays‐with‐Pay‐Scheme are now minimal. However, this has had little impact on B&CE’s revenue since only a small amount of income is generated here.

The Pensions Act 2008

The Pensions Act 2008 imposed compulsory workplace pensions for most employees. Workplace pension schemes incorporating auto‐enrolment must adhere to certain ‘qualifying’ standards and are subject to a phased implementation between 2012 and 2017.

The implementation of auto‐enrolment began in October 2012 and is staged so that employers must introduce it in order of their size. Large employers with 250 workers or more must comply between October 2012 and February 2014, medium employers with 50 to 249 workers from April 2014 to April 2015 and small with five to 49 workers, or micro employers with fewer than five workers, from June 2015. Implementation will be complete in 2018, by which time approximately 1.35m employers are required to have implemented auto‐enrolment.

This is very much the space in which the group’s EasyBuild pension scheme operates and as such represented both a threat and an opportunity to the group. Contributions to the EasyBuild product are set through the Construction Industry Joint Council (CIJC) Working Rule Agreement whereby employers match employees’ contributions up to £10 per week. CIJC contributions going forward will be higher than the minimum required under the Pensions Act.

B&CE’s flagship product here is now The People’s Pension and employers currently using EasyBuild are expected to switch to The People’s Pension when they reach their auto‐enrolment staging date. To date, 28 out of 31 employers using Easybuild have switched to The People’s Pension at their staging date.

B&CE has been able to increase its membership significantly as a result of auto‐enrolment. A trend that is likely to continue as auto‐enrolment progresses.

Solvency II

Solvency II is a fundamental review of the capital adequacy regime for the European insurance industry. It aims to establish a revised set of EU‐wide capital requirements and risk management standards that will replace the current solvency requirements.

Originally intended to be effective from 1 January 2013 it has since been subject to ongoing delays. However, on 13 November 2013, the trilogue (of informal representation from the European Parliament, the Council of the EU and the European Commission) provisionally approved Omnibus II, thus clearing the way for the formal vote for the adoption of Solvency II. In the run up to implementation of Solvency II, insurance companies, including B&CE Insurance Ltd, are thoroughly assessing the risks within their businesses and taking steps accordingly. B&CE’s decision to stop writing annuities and to refer them to Partnership Assurance is partly in response to Solvency II, although the main driver here was to give customers access to enhanced annuity rates.

In the lead up to Solvency II the group has also investigated and/or implemented other options, leading to a Part VII transfer of its closed block of annuity business.



The Retail Distribution Review

The Retail Distribution Review (RDR) came into force on 31 December 2012 in the form of Conduct of Business Sourcebook (COBS) 6 “Information about the [advisory] firm, its services and remuneration”. It is a key part of the Financial Conduct Authority’s (FCA – having superseded the Financial Services Authority (FSA)) consumer protection strategy, specifically relating to retail investment products. It incorporates a number of significant changes in market regulation relating to the provision of advice, the costs incurred in terms of fees (as opposed to commissions) and the qualifications of advisers. Given the nature of the B&CE operation, it does not pay commission and generally distributes corporate products through fee based intermediaries, the direct impact of the RDR on the Group is potentially positive. Commission is still receivable from Westfield Health.



4 THE PROPOSITION

B&CE has reviewed its strategy in recent years in respect of both its proposition offering and target market.

As part of this it has sought to respond to the opportunities afforded by auto‐enrolment and the wider changes within the pensions’ landscape, as well as internal group changes and capability. It is also the case that some response, given the nature of the changes in the market, was necessary, given the trends within the business itself and also the actions of key competitors, to ensure the longer term future of the group.

EasyBuild has been replaced as the core proposition by The People’s Pension, a Master Trust based auto‐enrolment compliant pension scheme. It is not written within the insurance company as is the case with EasyBuild.

B&CE has been successful in establishing EasyBuild as the scheme of choice for construction workers. It claims coverage of employers representing over 50% of all construction workers, rising to 75% when looking at the major construction companies. Whilst contributions have fallen in recent years, reflecting the general economic downturn, this extensive industry footprint is seen as a significant opportunity post 2012 as auto‐enrolment ‘unlocks’ a potential very significant step up in contribution payments.

In addition, B&CE has seen and acted on additional opportunities post the introduction of auto‐enrolment, targeting a wider range of employment sectors, particularly those with a transient workforce. Thus B&CE can embrace the whole market, but specific targets include retail, hospitality, manufacturing, transport, and facilities management, as well as construction workers and the associated groups and trades that form part of the wider construction industry but had previously fallen outside its target market.

B&CE’s revised strategy is very much a combination of a response to regulatory change and a response to the dynamics within the group in recent years.

For reasons outlined elsewhere in this report, The People’s Pension product is key to B&CE’s future providing as it does an opportunity to maintain critical mass in what is the group’s core business area.

The challenge is to develop The People’s Pension as a significant UK pension offering, supporting both existing and new customers through the challenge of auto‐enrolment. New business acquisitions in the “large employer” sector (such as Next Group plc and Rentokil Initial plc) and a rapid acceptance by EBC intermediaries suggest that the new strategy is starting to pay dividends.

The People's Pension was established on 28 June 2012 and became operational in October 2012, coinciding with the introduction of auto‐enrolment. As at 31 March 2013 it had 10,750 members and 10 employers in the Scheme; 11,800 individuals having been enrolled but around 10% choosing to opt out. Employers have continued to join since then, with membership growing to over 400,000 as at December 2013 and expected to grow to over 500,000 by 31 March 2014. B&CE states that opt‐out rates have been lower than expected, currently running at under 7%.

B&CE remains committed to offering simple low cost products whilst aiming to provide excellent customer service. The People’s Pension has a flat charging structure – an annual management charge (amc) of 0.5%, waived for one year for existing clients.

See also Section 5.5 ‘Image & Strategy’ for further comment.



5 B&CE GROUP

5.1 CORPORATE STRUCTURE

There are a number of companies in the B&CE group. See Appendix 1 for a structure chart.

The companies are:

Building and Civil Engineering Holidays Scheme Management Limited

This is the parent company within the group. It is limited by guarantee and has no share capital.

Building and Civil Engineering Holidays Scheme Management Limited administers the Building and Civil Engineering Holidays‐with‐Pay Scheme. It also administers the Building and Civil Engineering Benefits Scheme and is the appointed administrator of The Building and Civil Engineering Charitable Trust.

Whilst it does not publish its own profit and loss account, AKG understands that the company generated a pre‐tax profit of approximately £3m [2012: £5m] in the year ended 31 March 2013.

The company has two wholly owned subsidiaries: B & C E Financial Services Limited and B & C E Insurance Limited.

B & C E Financial Services Limited

B & C E Financial Services Limited is a subsidiary of Building and Civil Engineering Holidays Scheme Management Limited. Its principal activity now is to administer The People’s Pension, having been appointed as administrator by The People’s Pension Trustee Limited on 18 December 2012. It also administers a unit trust based personal pension scheme (the TUTMAN B&CE Contracted‐out Pension Scheme, BCECOPS) and an employee life cover scheme, the Employee Life Cover (ELC) from B&CE.

Additionally, it is the promotional and marketing arm of the group, distributing any third party products that B&CE offers in partnership with other financial services providers. The company currently promotes two such products: Employee Healthcare from B&CE (offered in partnership with Westfield Heath Ltd) and Partnership Annuities (with Partnership Life Assurance Company Ltd ‐ Partnership).

Turnover reduced by 5% in the year ended 31 March 2013, from £3.3m to £3.2m, primarily due to a fall in the receipt of administration fees (from £1.2m to £1.1m) from the ELC scheme, due to a fall in its membership following the loss of the construction industry National Insurance concession.

Costs increased significantly from £3.5m to £6.4m predominantly as the company is now responsible for meeting the majority of the costs associated with The People’s Pension Scheme. These costs are expected to exceed the associated income for some time and are being treated as an investment by the group, since significant levels of income are anticipated as the fund grows in size. To cover these costs, two cash injections each of £3.5m were made into the company in March 2013 and September 2013. The group states that further funding will be made available as required and until income exceeds expenditure.

The impact here was an operating loss of £3.2m [2012: loss of £0.2m]. Pre‐tax losses amounted to £2.8m [2012: profit of £1.2m boosted by one off profits amounting to £1.3m]. The company had shareholders’ funds of £7.9m [2012: £6.3m]. The company contributed £475k [2012: £225k] to the Building and Civil Engineering Charitable Trust and also contributed a further £250k by September 2013.

The company is clearly an important part of the Group, playing an important role as the administrator of The People’s Pension. The company receives a fee from The People’s Pension Scheme in respect of these services which is relatively small initially but will escalate over time as the size of the Scheme grows.



B & C E Insurance Limited

B & C E Insurance Ltd is a subsidiary of Building and Civil Engineering Holidays Scheme Management Limited. It is a composite insurance company, established in 1995, with the objective of offering appropriate insurance‐based products to all who work in the construction industry. The company has to date written predominantly life business – 2013 gross earned life premiums of £54.9m [2012: £57.0m], albeit reducing following the annuity referral arrangement with Partnership, were substantially more than general business gross earned premiums of £1.7m [2012: £1.9m]. Similarly whilst gross assets are in excess of £950m, a significant proportion of this was reinsured (£827m into Legal & General Assurance (Pensions Management) Limited and £85m into Partnership Life Assurance Company Ltd), leaving a Long Term Fund of just £47m [2012: £128m].

The reinsurance arrangement covering all in‐force annuities, introduced partly in response to Solvency II and reducing longevity risk, with Partnership Life Assurance Company Ltd was introduced on 1 August 2012, with the administration of the policies transferring on 6 June 2013. This business was formally transferred to Partnership in October 2013. New annuity business is no longer written by B&CE and is instead referred to Partnership.

General Business technical provisions, comprising unearned premiums and outstanding claims, were very low, at £295k [2012: £330k].

Pre‐tax profits increased to £7.1m in 2013, from £6.2m the previous year. Shareholders’ Funds increased from £58.1m to £63.6m. No dividend was paid [2012: nil].

In the Long Term Business Fund, solvency improved with increased free assets of £26.0m [2012: £22.4m] and a Capital Resources Requirement Coverage of 339% [2012: 297%]. In the General Business Fund free assets also rose to £24.3m [2012: £21.3m], giving a combined surplus of £50.3m [2012: £43.7m].

One of the products the company operates is EasyBuild, a stakeholder pension scheme, launched in 2001 with around 500,000 members. Following the launch of The People’s Pension, the group considers it likely that employers operating EasyBuild will generally switch to The People’s Pension, considerably reducing the number of active members within the EasyBuild scheme over the next 5 years as employers reach their auto‐enrolment staging dates.

No significant changes are planned for the rest of the company’s product range.

Whilst the company’s relative prominence within the overall group will diminish somewhat, AKG would still expect it to be appropriately supported.

The Building & Civil Engineering Charitable Trust

Launched in 1991, the trust offers financial assistance to construction workers and their families who are suffering hardship, principally to ease the financial distress that illness or changes to domestic circumstances can cause.

The board of Building and Civil Engineering Holidays Scheme Management Limited had agreed to donate up to £1.5m to the Building & Civil Engineering Charitable Trust to fund the charity’s activities. On 29 March 2012, the board agreed to fund a further £200,000 per annum until 31 March 2014. At the year end (March 2013) £1,639,102 in total had been transferred to the Trust. A further £475k was also donated by B&CE Financial Services in the year ending 31 March 2013.

The Trust is administered by Building and Civil Engineering Holidays Scheme Management Limited.



Building and Civil Engineering Benefits Scheme Trustee Limited

The company acts as Corporate Trustee to the Benefits Scheme (encompassing the LSRB Scheme, the AVC Scheme and the Death Benefit Scheme) and the ELC Scheme, both of which are schemes established for the provision of death, retirement and accident benefits. The Accident Benefits Scheme, to which it was also the Corporate Trustee, closed in October 2013. Through its Board of Directors the company exercises general oversight of the Benefit Schemes’ operations. Its primary role is to provide suitable and appropriate financial management, to ensure assets are managed appropriately to achieve funding objectives, specifically the Lump Sum Retirement Benefit Scheme and the AVC Scheme.

The Death Benefit Scheme is now closed to new contributions. The Benefits Scheme will stop paying Death Benefit claims in October 2015.

The company produces financial statements under the small companies’ regime of the Companies Act. For the year ended March 2013 the company reported turnover of £16,600 [2012: £15,950] offset by operating charges of £16,600 [2012: £15,950]. Assets and liabilities were nil. The company is limited by guarantee.

The People’s Pension Trustee Limited

Incorporated on 30 May 2012, The People’s Pension Trustee Limited had its first year end on 31 March 2013. The company has no financial activity and has been established solely to provide the trustee service to The People’s Pension Scheme. The company appointed B & C E Financial Services Ltd as administrator of The People’s Pension Scheme on 18 December 2012.

The People’s Pension Scheme

The first members were enrolled into the scheme in October 2012 and as at 31 March 2013 11,800 employees had been enrolled into the Scheme from 10 employers, increasing to over 400,000 members by the end of December 2013. This number is anticipated to grow to over 500,000 employees by 31 March 2014.

As at 31 March 2013, contributions totalling £266k had been paid into the Scheme. There were also transfers in amounting to £199k. By December 2013, the Scheme was valued at over £37m after allowing for investment returns and other adjustments.

5.2 B&CE GROUP

The group had assets under management of around £1.9bn as at 31 March 2013. At a consolidated level, turnover reduced from £22.9m to £14.9m (£20m on a like for like basis – investment income of £5.1m [2012: £7.7m] now being shown separately). Pre‐tax profits reduced from £12.5m to £7.5m, a major impact here being increased net operating expenses from £19.6m to £24.3m mainly in relation to the continued development of The People’s Pension. Staff costs increased from £6.5m to £7.7m. As at 31 March 2013, the group had 164 employees [2012: 142]. Whilst some of these additional costs are permanent, they are expected to be more than offset in time by increased income resulting from The People’s Pension. Before the development and introduction of The People’s Pension, consolidated operating expenses had been on a downward path, B&CE priding itself on its expense control and in a survey (Money Management October 2011 – as extracted in the Financial Times September 24/25 2011) was shown to have the lowest ‘true cost’ of charges for its stakeholder pension product.

Group Reserves increased from £91.2m to £101.0m.



Total available capital resources increased to £97.8m [2012: £88.3m], of which £28.5m [2012: £24.7m] was deemed by the group as Unrestricted Capital, in that of the £97.8m, amounts of £63.1m and £6.2m are held in B & C E Insurance Ltd and B & C E Financial Services Ltd respectively, and are restrained by regulatory requirements.

The group has various income streams. These include Management Fees, which in 2013 reduced slightly to £6.4m [2012: £6.6m], whilst EasyBuild Fees increased, up from £5.4m to £6.1m. The year saw fees from the new Employee Accident Cover product of £1.1m [2012: £1.2m]. B&CE is expecting to generate a significant income stream from The People’s Pension. Whilst this will be relatively small initially, it is expected to become the group’s largest source of income.

Investment income reduced, down from £7.7m to £5.1m, as B&CE transferred a large proportion of its long term insurance assets to Partnership under the reinsurance agreement.

5.3 PRODUCTS

At March 2013 there were over 5,200 employer accounts operating B&CE schemes covering over 177k active individuals [2012: 5,800 and 199k respectively]. The reduction in the number of employees covered reflected the continued downturn in the construction industry and also issues with regards to the wider economy. The main products are as follows:

The People’s Pension

The People’s Pension, a “Master Trust”, from B&CE is a flexible and portable workplace pension, considered suitable for any organisation, large or small, in any sector. Launched in November 2011, it became operational in October 2012. There is a flat charge of 0.5% per annum. There are no other fees or charges. It has similar fund choices as EasyBuild, which are managed by Legal & General Investment Management, with the additional options of Shariah and Ethical funds managed by HSBC and Legal & General Investment Management respectively. The first members enrolled into The People’s Pension included in excess of 10,000 employees from Next Group plc. B&CE expects to have in excess of 500,000 eligible employees by March 2014.

EasyBuild

A unit linked stakeholder pension scheme launched in April 2001 and issued and administered by B & C E Insurance Limited. The unit funds are reinsured to Legal & General Assurance (Pensions Management) Limited.

AKG rates Legal & General Assurance (Pensions Management) Limited A (Superior) for financial strength.

The total number of EasyBuild policies remained relatively flat, with a relatively low number of new policies, reflecting the fact that employers are no longer expected to make contributions for new starters (unless they themselves contribute). At 31 March 2013 there were 498,885 [2012: 502,048] EasyBuild policies of which 89,621 [2012: 100,352] were receiving contributions. Total contributions to EasyBuild policies fell to £54.9m from £56.8m the previous year, reflecting the downturn in active membership. The trend of falling membership is one that is set to continue – and is expected to be accelerated through the phased introduction of auto‐enrolment as employers switch their pension arrangements to schemes designed to cater for auto‐enrolment such as The People’s Pension.

Increasing the number of active members is a major focus in the group’s future strategy in order to reverse this trend. The auto‐enrolment arrangements, post 2012, have improved contribution levels, albeit this is in The People’s Pension, rather than EasyBuild.

Despite lower contributions, the EasyBuild assets under management grew significantly during the period, boosted by strong investment growth, increasing to £827m [2012: £715m].



Employee Life Cover from B&CE

Launched in October 2010, the Employee Life Cover Scheme (ELC) is a death benefit only (currently up to £25,000) occupational pension scheme, for which Building & Civil Engineering Benefits Scheme Trustee Limited acts as trustee. B & C E Financial Services Limited acts as administrator, for which it receives a fee of £0.12 per individual per week. The scheme is not insured.

Employee Accident Cover from B&CE

Launched in October 2010, the Employee Accident Cover Scheme (EAC) is provided by B & C E Insurance Limited. Employees are covered for a range of injuries, providing up to £25,000 for accidents at work, or travelling to or from work.

At March 2013 there were 166,587 [2012: 195,915] members covered under ELC and EAC.

In addition there is a range of discontinued products. Most significant are:

Lump Sum Retirement Benefit

Introduced in 1982, this is an approved occupational pension scheme that pays a one‐off tax free lump sum at age 65. It closed to new members on the launch of EasyBuild, but again increased in value over the period to £746m [2012: £736m] due to investment gains made over the year. The scheme paid out a total of £41.2m in retirement benefit claims during the year [2012: £36.4m], a significant increase caused by a large member tracing exercise carried out during the year.

B&CE Annuity

B & C E Insurance Limited launched B&CE Compulsory Purchase Annuity in April 1997, followed by a Protected Rights Annuity product in December 2008. Annuities are now written under the arrangement with Partnership Life Assurance Limited. As a consequence, no policies were set up by B&CE during the year [2012: 53].

B&CE reinsured its annuity portfolio with effect from August 2012 to Partnership, with these policies formally transferring to Partnership via a Part VII transfer in October 2013. The administration of the policies had already been transferred to Partnership from 3 June 2013.

RapidCash

Launched in 1997 but not currently promoted, RapidCash is a low cost injury insurance product.

Providing benefits up to £300 per week should an employee be unable to work and £50,000 for accidental death, the product is no longer sold.



TUTMAN B&CE Contracted‐out Pension Scheme (BCECOPS)

A unit linked personal pension, launched in 1988, enabling a member to elect for their, and the employer’s, NI contributions to be paid into their own pension arrangement. Previously called the Building and Civil Engineering Contracted‐out Pension Scheme, it was renamed on 1 July 2010 when B & C E Financial Services Limited retired as Manager to the Scheme and was replaced by Thesis Unit Trust Management Limited.

The product is not actively marketed and numbers are declining. Policies totalled 9,132 at March 2013 [2012: 9,901]. The fund value stood at £249m [2012: £229m] as at 31 March 2013 due to strong investment performance.

Holiday‐with‐Pay Scheme

This was the original financial services product, launched by the Group in 1943. Amounts of holiday pay deposited by employers were historically exempt from National Insurance contributions – a concession that expired in October 2012. At 31 March 2012 the scheme had a balance of £62.0m. Following the removal of the NI concession, this had reduced to £13.8m at 31 March 2013.

The group also offers products through arrangements it has with various third party ‘best of breed’ providers, including:

Partnership Annuities

In December 2010 B&CE started referring annuity business to Partnership Life Assurance Company Limited, a specialist annuity provider. B&CE Financial Services Limited no longer receives a referral few of 2% on this business in order to improve annuity rates. £18.6m was paid to Partnership in relation to 2,235 annuities [2012: £18.2m and 2,994 respectively].

AKG rates Partnership Life Assurance Company Limited B (Strong) for overall financial strength and 4 (very good) for unit linked financial strength.

5.4 DISTRIBUTION

The platform for distribution had traditionally been solely focused on a direct route through the building and construction sector. This provided the group with expertise in auto‐enrolment and weekly, as well as monthly, collection.

The emphasis today is on widening this focus to other sectors outside of its traditional base, but utilising that expertise and experience.

To facilitate this, the distribution target market has been re‐orientated to include third parties and intermediaries such as Employee Benefit Consultants (EBCs), large IFA and accountancy practices. B&CE reports significant success in this regard and the organisation’s acceptance and reputation appears to be positively establishing itself beyond its traditional environment.

To facilitate its expansion through different distribution, the organisation has established a geographically based sales team with further expansion likely in response to its evolving market activity.

In 2012 B&CE also announced an initiative with Scottish Widows to jointly deliver auto‐enrolment to employers requiring a mix of propositions in line with their workforce profile. This relationship brings with it further proactive distribution capability in terms of existing Scottish Widows intermediary relationships and resources. Whilst, only part of the mix for both parties, and with B&CE able to also participate in split provision with other providers, initial indications from this relationship are positive and it appears to be a valuable avenue of market participation.



5.5 IMAGE & STRATEGY

The group, in particular The People’s Pension, is gaining market awareness, certainly amongst intermediaries and EBCs, where previously recognition would have been relatively poor when compared with the more mainstream pension providers operating in the intermediated (IFA and EBC) sector or directly with consumers. Within its historic sector niche, the construction industry, and in terms of a target market of relatively transient ‘blue collar’ workers, with incomes in a low to moderate bracket, B&CE can clearly be considered as having established a definite degree of market traction and experience.

In large part its strategy for expansion has sought to utilise this image basis, with a proven track record of delivery, together with the catalyst of pension regulatory developments, to expand its target market. Thus it seeks to additionally encompass a similar profile of workers across a broader industry base, thereby reducing its reliance on one economically sensitive sector of industry.

A strategy of expansion sees the organisation working with fee‐based advisers (including EBCs and Accountants) and directly with existing employers to offer improved auto‐enrolment compliant pensions.

Crucially the strategy is segmented in terms of target increases in volume. With larger employers being in scope for its first phase e.g. the organisation will not be proactive to the whole market in the first instance, very much in line with the staged roll out of auto‐enrolment, with further implementation of web‐based provision for employers lower down the size threshold.

The organisation has allocated resources to promotional activity to support its expansion. In particular, the group has strengthened its Corporate Development function.

The smaller end of the market is intended to be satisfied through a more transactional (web‐based) approach in the longer term, with plans in place for 2014.

B&CE was named ‘Pension Scheme of the Year’ at the Financial News Awards for Excellence in Institutional Pensions UK 2012. B&CE was also awarded ‘Auto‐ Enrolment Provider of the Year’ at the UK Pensions Awards 2013 and The People’s Pension was won the award for ‘DC Master Trust / Bundled Services Provider’ at the annual Pension and Investment Provider Awards. The People’s Pension also received the Pensions Quality Mark (“PQM”) Ready standard.

5.6 SERVICE

The organisation sets itself a requirement to deliver service excellence as part of an approach which espouses an ability to make things easier for its customers.

To this end it utilises an infrastructure which previously, whilst built for volume, had only utilised a fraction of its capacity. The growth in scheme members through initial and ongoing success with The People’s Pension in auto‐enrolment will put significant volumes through the administrative infrastructure in 2013 and beyond. Staff levels have already increased to facilitate this with further requirement also planned.

Systems are proprietary, having been substantially refreshed 7 years ago and more recently have been further enhanced through upgrades to the EasyBuild product and online capability.

Since then, there has been an increase in client firm own‐service capability via an online offering. The takeup on this facility has now passed the 50% mark, helped by a disproportionately high takeup by larger schemes.

Service metrics are consistently high and the organisation reports very low complaint levels.



To date the organisation’s experience of data quality has included a full spectrum from highly professional delivery to the more patchy quality experienced from the small firms end of the construction sector. This has the advantage of having provided the organisation with experience in coping with this variance and having implemented the systems checks to manage it.

5.7 REINSURANCE

The extent to which a provider and its proposition rely on external reinsurance will usually form part of AKG’s overall assessment. Whilst The People’s Pension will not be written into the group’s insurance company, and hence there is no ‘reinsurance’ as such, Legal & General Investment Management Limited is the preferred investment manager, for the majority of investments. AKG has no concerns regarding the financial strength of Legal & General Investment Management Limited, part of the Legal & General Group plc. Other investment managers may be appointed in future as appropriate. The Shariah Fund is managed by HSBC.



6 CONCLUSION

The implementation of the Pensions Act 2008 represents a significant challenge to a range of different sectors of the working population and none more so than those occupational groups that comprise transient low to moderate weekly paid blue collar workers.

Against this background, and empathising very strongly with these sectors, B&CE is demonstrating a very clear and focused strategy to a market it understands and to which it is committed. Its revised strategy represents an opportunity to widen its footprint and maintain critical mass by diversifying into related or similar employer groups and reducing its reliance on the construction industry.

This is a sector of the market that many established pension providers may find it difficult to operate in, both operationally and economically. More specifically, these providers may not be geared for administering weekly payments of low premiums from a potentially very transient population.

Notwithstanding its wider ambitions, the Pensions Act also represents an opportunity for the group to significantly increase contributions from its core market, the construction industry.

B&CE has the requisite experience, having successfully administered a low‐cost semi‐automatic enrolment operation in precisely this sector of the marketplace for over ten years.

B&CE, through its ‘not for profit’ business model, has the financial resources to fund and support any necessary infrastructure development.

Whilst there will undoubtedly be competition in the pensions market as auto‐enrolment evolves, B&CE, with its demonstrable experience and commitment in a sector of the market that may not appear that attractive to other, more mainstream, providers, appears very well placed. With over ten years of experience with EasyBuild there is an element of “been there – done that” and B&CE ticks many of the boxes that advisers would look for in an auto‐enrolment pension provider for appropriate groups of employees.

The tie‐up with Scottish Widows, together with successful market penetration, provides a credible avenue to market.

Expenses have increased but these are expected to be more than offset in time by increased income as the business grows.

B&CE can point to some significant early success with regards scheme enrolment. B&CE has nailed its colours firmly to the 'auto‐enrolment mast' and its success will clearly be aligned to the success of auto‐enrolment itself. Whilst there are undoubtedly risks involved in being overly exposed to one proposition or niche area, as evidenced by ramifications in some quarters over the removal of the child trust fund, there are clear reasons to support this strategy.

Increasing longevity Declining private pension provision Falling annuity rates Potential pressure on government finances B&CE's respected position in a relevant part of the target market



Whilst there is no guarantee, it would appear that auto‐enrolment (including relevant evolution and development) is here to stay and that B&CE should be well placed to succeed, assuming that it can deliver on its promises, particularly around service. Early indications are that the proposition is highly regarded and is scalable and well placed to deliver, although it is yet to be fully tested. Once the scheme reaches critical mass and B&CE moves back into a position that is profitable (there is a significant amount of necessary ongoing investment currently), its true level of success and ongoing viability will become more visible.

AKG has rated B&CE B (Strong) for overall financial strength.

AKG’s assessment indicates that B&CE should be considered as:

• Demonstrating a level of capital support and availability consistent with the peer group. • Maintaining a prudent approach to business written and risk management. • Delivering a strategic plan with proactive growth for the maintenance of its position, at the upper

end of its peer group. • Demonstrating appropriate governance and management capability. • Having achieved a degree of wider market acceptance.

Having addressed the issue of declining levels of new business, the challenge now facing B&CE is to successfully deal with the increased membership that auto‐enrolment brings.



APPENDIX 1 CORPORATE STRUCTURE

The Building &Civil EngineeringCharitable Trust

Building & Civil EngineeringHolidays Scheme Management

Ltd

Building & CivilEngineering

Benefits SchemeTrustee Ltd

B & C E FinancialServices Ltd

B & C E InsuranceLtd

Benefits Scheme ELC Scheme

The People'sPension Trust Ltd

The People'sPension Scheme



APPENDIX 2 FINANCIAL STRENGTH RATING

The objective is to provide a simple broad‐brush indication of the general financial strength of a company.

In addition to an assessment of the company’s ability to meet all of its guaranteed payments to policyholders, AKG also aims to factor in the degree to which policyholders’ expectations are likely to be met ‐ or even exceeded ‐ in the long‐term. This involves an assessment of a company’s ability to survive in its current form for the long term. The overall rating inherently reflects the mix of business in‐force within the company, since different types of policyholder have different expectations, and the company’s particular strengths and weaknesses in respect of its key product areas.

The rating takes into account those of the following criteria which are relevant (depending upon the company's mix of business in‐force): capital base and free asset position, with profits realistic balance sheet position, structure (and size) of funds within the company, parental strength (and likely attitude towards supporting the company), typical fund performance achievements, and image and strategy.

RATING

A Superior

B+ Very Strong

B Strong

B‐ Satisfactory

C Weak

D Very Weak



APPENDIX 3 INFORMATION ABOUT AKG

AKG is an actuarially based consultancy specialising in the provision of ratings, information and market assistance to the financial services industry.

A wide range of Clients

Within a specialist focus on the financial services industry, AKG has developed a broad, complementary range of clients including: Intermediaries (IFAs and EBCs), Life Companies, Friendly Societies, IFA Networks, Regulators, Fund Managers, Trade Bodies, Service Providers, Banks, and Building Societies.

Support for Product Providers

AKG assists Providers in:

Financial Strength Analysis and Presentation

Data and Information Provision

Actuarial Consultancy

Distribution Consultancy

Assistance to Financial Intermediaries

AKG assists Intermediaries in:

Financial Strength Analysis and Ratings of Product Providers

Best Advice Panel Services

Data and Information Provision

Actuarial and Technical Support

Regular Reports

AKG publishes the following reports to assist providers and intermediaries:

AKG Company Profile & Financial Strength Reports

(Covering UK life assurance companies)

AKG Offshore Profile & Financial Strength Reports

(Covering Offshore life assurance companies)

AKG Platform Profile & Financial Strength Reports

(Covering platform operations)

AKG UK Life Office With Profits Report

(Providing further depth in the assessment of with profits funds)

For further details on any of the above please contact AKG:

Tel: +44 (0) 1306 876439, email: [email protected]

Or online at www.akg.co.uk


Produced by:

AKG Actuaries & Consultants Limited

Anderton House, 92 South Street, Dorking, Surrey, RH4 2EW

Tel No: 01306 876439 | Fax No: 01306 885325 | E-mail: [email protected]

www.akg.co.uk

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