PG Mutual · Annual Reports and Financial Statements 2014 PG Mutual Pharmaceutical and General...

Annual Reports and Financial Statements

2014

PG Mutual

Pharmaceutical and General Provident Society Limited, trading as PG Mutual 11 Parkway, Porters Wood, St Albans, AL3 6PA

Incorporated in the United Kingdom under the Friendly Societies Act 1992, No. 462F Authorised and Regulated by the Financial Conduct Authority, FRN 110023

www.pgmutual.co.uk; 01727 840095

http://www.pgmutual.co.uk/

Annual Reports and Financial Statements 2014

Page | 1

Contents

Preliminaries

Terms and Definitions

The Officers and Advisors of the Society Page 3

The Chairman’s Report Page 4

The Chief Executive Officer’s Report Page 6

The Board of Directors Page 8

Board Reports

Strategic Report Page 10

Directors’ Report Page 14

Corporate Governance Report Page 15

Directors’ Remuneration Report Page 18

Auditors Report

Report of the Independent Auditor Page 20

Financial Reports

Income and Expenditure Account Page 23

Balance Sheet Page 24

Notes to the Financial Statements Page 25

Annual General Meeting

Invitation to Policyholders and Agenda of Business Page 34


Page | 2

Terms and Definitions

Throughout the reports the terms and abbreviations listed below will be defined as follows unless stated otherwise:

“ACGC” Annotated UK Corporate Governance Code

“AFH” Actuarial Function Holder

“AFS” Association of Friendly Societies

“AGM” Annual General Meeting of the Society

“ARC” Audit and Risk Committee of the Board

“Board” The Board of Directors of the Society

“Commuted” An investment only Holloway policy

“FCA” Financial Conduct Authority

“FFA” Fund for Future Appropriations

“FOS” Financial Ombudsman Service

“Holloway” An income protection insurance and investment product

“IC” Investment Committee of the Board

“ICA” Holloway policyholders’ Individual Capital Accounts

“IFA” Independent Financial Advisor

“IPRU (FSOC)” Interim Prudential Sourcebook for Friendly Societies

“KPI” Key Performance Indicators

“LPC” Local Pharmaceutical Committee

“LTBP” Long-Term Business Provision

“MCR” Minimum Capital Requirement

“NPA” National Pharmacy Association

“PGMS” P&G Insurance Services Limited, trading as PG Mutual Services

“PRA” Prudential Regulation Authority

“PSNC” Pharmaceutical Services Negotiating Committee

“RNC” Remuneration and Nomination Committee of the Board

“Rules” The Rules of the Society

“RPSGB” Royal Pharmaceutical Society of Great Britain

“Secretary” Secretary of the Society

“SID” Senior Independent Director of the Board

“Society” Pharmaceutical and General Provident Society Limited, trading as PG Mutual

“WPA” With-Profits Actuary


Page | 3

The Society’s Officers and Advisors

Board of Directors

W F Dove, BPharm (Hons), FRPharmS Chairman of the Board

S C Whale, BA (Hons) Vice-Chairman of the Board; SID (from 22 July 2014)

J G Warner, BSc (Hons), FRPharmS, MRI, FRSPH Independent Director

M Dreaper, BSc (Hons), ACMA, CGMA Independent Director (from 1 January 2014)

M Davies, BSc (Hons), FIA Independent Director (from 1 July 2014)

M Perry Chief Executive Officer

N J Morrell, BSc, FIA SID (until 5 June 2014)

Officers

M Perry Chief Executive Officer

A D Bowater, LL.B (Hons), MICA Secretary

D J McFarlane, ACCA Financial Officer

Arbitrators (until 4 June 2015)

I G Gardner J Williams, FCIB

G Targett-Adams, BA, ACIB B Zatland, JP, BPharm, FRPharmS

A Pieri, BA, ACII

Registered Office

Pharmaceutical and General, 11 Parkway, Porters Wood, St Albans, AL3 6PA

Independent Advisors and Consultants

Actuaries Steve Dixon Associates LLP, Epsom

Auditor (Independent) Moore Stephens, Bath, Somerset

Auditor (Internal) Gateway Assure, Bailey Drive, Gillingham

Bankers HSBC PLC, St Albans, Hertfordshire

Compliance Services Haven Risk Management, Chipping Campden

Fund Managers Morgan Stanley SA, Geneva, Switzerland (until 3 March 2015)

UBS SA, Geneva, Switzerland (from 3 March 2015)

European Wealth, London

Medical Consultant Dr M Allen, MA, MBBS, MRCP, MRCGP, St Albans


Page | 4

The Chairman’s Report

Financial Review

I am pleased to report that the Society continued to strengthen its balance sheet in 2014. Net assets grew from £35.9

million to £37.6 million, an increase of 5%. This is the strongest our balance sheet has ever been.

This growth has been supported by a solid performance in our equity portfolio. Equity investments grew from £15 million

to £15.5 million, an increase of 3%. The deposit and fixed interest environment continued to offer low levels of return

and we expect this to remain the case, at least for the short term.

Overall the Board is satisfied with the Society’s financial performance in 2014 and is pleased to declare an interest

apportionment of 3% to Holloway policyholders’ ICAs for the year.

Looking forward, the UK economy is expected to continue to grow but will retain a substantial budget deficit and a

significant national debt. If UK growth falls short of market expectations, or if international economic and geopolitical

concerns materialise, a return to volatility in the financial markets is possible. The Board has therefore determined it will

maintain a prudent resilience reserve within the balance sheet to help mitigate this risk.

Business Review

In 2014 the Society achieved growth in its premium income from Holloway business to £2.77 million (2013: £2.67 million),

an increase of 4%. Growth in the total number of Holloway policies continued in 2014 with a net gain of 102 policyholders

over the year.

The Society’s management costs were £1.18 million in 2014 compared with £1.29 million in 2013, a decrease of 8%. Our

total claims losses in 2014 were £975k (2013: £986k) and this positive claims performance combined with the fall in our

management costs helped to strengthen the Society’s premium surplus. The Board is therefore able to confirm that

bonuses to Holloway policy shares will be £2.00 per share for 2014.

The Board in 2014

The Board implemented a planned refreshment process during 2014. Two new directors, Matthew Dreaper and Mike

Davies, were appointed in January 2014 and July 2014 respectively and bring to the Board a substantial knowledge of

business strategy, finance and risk acquired from outside the friendly societies sector. After more than nine years as a

director, Nick Morrell retired from the Board in June 2014. On behalf of the Board I would like to thank Nick for the

significant contribution he made to the Society’s progress and wish him well in his retirement.

Throughout 2014 the Board took collective responsibility for the supervision of the Society’s business activities and

controls, and was closely involved in the Society’s corporate planning and budget process. The Board carried out a review

of its collective performance in November 2014 and the adequacy of its current corporate governance arrangements. I

can also confirm that I held individual performance appraisals with all the Board’s directors, and that I have been subject

to a similar appraisal by the Society’s SID using the collective feedback obtained from a meeting of the non-executive

directors, which was led by the SID.

Further details about the work and the responsibilities of the Board can be found in the Corporate Governance Report.


Page | 5

The Chairman’s Report (continued)

The Directors Standing for Election at the AGM

The directors who will be standing for re-election at the AGM are Simon Whale, Mike Perry and myself. Mike Davies, who

was appointed to the Board in July 2014, will be standing for election to his first term on the Board.

The Board formally recommends that policyholders vote to return all those directors standing for election at this AGM.

While I will exceed the normal retirement age of directors, in accordance with the Rules the Board have determined that

my investment knowledge, and my understanding of the Society’s market and background continue to be valuable when

undertaking its responsibilities to policyholders. On this basis, the Board recommends my re-election.

Acknowledgements

On behalf of the Board I wish to take this opportunity to thank all of you, our policyholders, for your continuing loyalty

and support. I would also like to extend my thanks to the executive team and my fellow directors for their good work in

the Society’s cause in 2014.

Wally Dove, BPharm (Hons), FRPharmS

Chairman of the Board

26 March 2015


Page | 6

The Chief Executive Officer’s Report

2014 Performance Summary

I am pleased to be able to report that the Society has continued to increase the size of its Holloway policy portfolio and

its premium income. Most encouraging for the Society has been the level of interest we have generated from professional

men and women in the early stages of the careers: as our Holloway policy is a long-term scheme this is a very encouraging

sign for the future strength of the Society.

The gains achieved in both Holloway policyholders and premium income in 2014 means the Society has achieved a 23%

increase in its Holloway policies since 2009, and a 37% increase in premium income over the same period.

The Board continues to believe that the most effective means of maintaining, and where possible, improving upon the

personal service we provide our policyholders, and the apportionment levels of recent years, is to ensure we continue

increasing our premium income through growth in our Holloway policy portfolio.

Improving the Value of Your Subscriptions

The personal service the Society provides to our policyholders is very important to us, and the appreciative feedback we

receive from policyholders is reassuring. However, the Board does not want the current situation to be taken for granted.

To help improve our service, in December 2014 the Society launched a Membership Card and a “Members’ Area” on the

Society’s website (https://member.pgmutual.co.uk/Login). This service now allows you to enter a secure area to contact

the Society and access information about your policy.

Over the course of the next year, we will be introducing an online claim form to the Members’ Area to help streamline

the claims process for our policyholders and will eventually introduce online versions of other policy forms as well,

including making it possible for you to cast your AGM vote electronically.

As well as improving our service, we also want to provide our policyholders with the opportunity to make more of their

policy subscriptions. To this end we launched our new Member Benefits initiative in January 2015 that will enable

policyholders to obtain best value deals and discounts and a very wide range of products and services from well-known

high street brands: products and services that all of us to differing extents use from time-to-time.

I would like to thank all those policyholders who have already registered for the Members’ Area, and would encourage

those who haven’t done so yet to do so as soon as possible in order to take advantage of these offers.

From your Members’ Area you can access more information about the Membership Benefits available to you, and will

even be able to access a “savings calculator” that will help you to see the savings you could enjoy from the benefits we

are making available.

PG Mutual Health & Wellbeing

The launch of the PG “Mutual” brand in March 2012 was well received. It gave much greater prominence to our mutuality,

and supported our efforts to broaden the Society’s appeal to new professions. The Society’s Holloway policy has long

embodied the best qualities of the kind of insurance service that mutuals can provide: comprehensive cover and the

assurance that surpluses will be returned to policyholders.

https://member.pgmutual.co.uk/Login


Page | 7

The Chief Executive Officer’s Report (continued)

In launching our refreshed brand, we are looking to build on the Society’s strengths by extending our proposition to

include other insurance services relevant to the protection of our policyholders’ health and wellbeing: private medical

insurance, dental insurance, hospital cash plans, life assurance and critical illness insurance.

Acknowledgements

I would like to thank all of you for your support in 2014 and we hope you will all find the service enhancements and new

Membership Benefits useful. I would also like to thank all our staff for their hard work in 2014, and my colleagues on the

Board for their support.

Mike Perry Chief Executive Officer 26 March 2015


Page | 8

The Board of Directors in 2014


Chairman of the Board; IC Chairman (from 1 October 2014); RNC Member

Wally qualified in pharmacy from Chelsea College, London University, with an honours degree in 1966. He spent 12 years

gaining wide experience in the pharmaceutical industry in various research, development, production and marketing

positions. He then acquired his first pharmacy – and still has an interest in a community pharmacy on the Isle of Wight.

He is a past Chairman and Treasurer of the NPA, a former Chairman of the PSNC, and a former Council member of the

RPSGB.

Simon Whale, BA (Hons)

Vice-Chairman of the Board; SID (from 22 July 2014); RNC Chairman; PGMS Chairman

Simon is the managing director and co-owner of Luther Pendragon, the leading corporate communications consultancy

based in the City of London.

His firm has advised a wide range of clients in the financial services sector, including Aviva, Endsleigh and HSBC. He

worked with the AFS for more than ten years, helping the organisation promote the benefits of mutuality to the

government and politicians. This helped to pave the way for a new, less restrictive legislative regime for friendly societies.

He has worked extensively with healthcare organisations, including those representing pharmacy, dentistry, optometrists

and opticians. His work with the pharmacy sector spans more than 15 years.

J. Gary Warner, BSc (Hons), FRPharmS, MRI, FRSPH

Independent Director; ARC Chairman (from 22 July 2014)

Gary is a community pharmacist, working both in his own practices and in consultancy roles. He also has representative

roles at the LPC and at a national level with the PSNC, where he is the Chair of the Service Development Subcommittee.

He is a managing partner in Pinnacle Health Partnership LLP which is championing the development of the roles of

community pharmacists and embedding that role within the patient care pathways being developed in response to the

changing needs of the population. He qualified as an independent prescriber in 2008, specialising in the support and

treatment of substance misuse, and as the designer of an online system that captures the outcomes of pharmacist and

pharmacy team interventions with patients remains a strong advocate of the Healthy Living Pharmacy model.

Matthew Dreaper, BSc (Hons), ACMA, CGMA

Independent Director (from 1 January 2014); IC Member (from 1 October 2014); RNC Member (from 1 October 2014)

Matthew runs Chilcomb Management Services, which has worked with private and professional investors to establish,

fund and grow a number of early-stage businesses, primarily in the technology sector. Matthew also works as a consultant

helping the finance functions of large companies to deliver more effective governance and business support.

Matthew qualified as a Chartered Management Accountant while working for Cable & Wireless PLC and went on to be

the European Corporate Finance Manager for Hertz. He has been a Finance Director in various capacities since 2001,

including 2 years as Group Finance Director of Nucare PLC, one of the UK’s leading independent pharmacy groups until

its merger with Numark.


Page | 9

The Board of Directors (continued)

Mike Davies BSc (Hons), FIA

Independent Director (from 1 July 2014); IC Member (from 1 October 2014)

Mike has spent over 25 years working in the insurance industry, mainly as an actuarial consultant. He has worked in

several countries, for large and small companies, in a wide range of areas spanning the management of with-profit funds,

demutualisations, selling practices, mergers and acquisitions and financial reporting.

Mike qualified as an actuary in 1993. Prior to becoming an independent consultant in July 2013, Mike was most recently

a partner at Ernst & Young where he spent 10 years in several positions, culminating in the global leader of their actuarial

business consisting of over 1,000 employees.

Mike Perry

Chief Executive Officer; PGMS Director

Mike has extensive experience of sales, marketing and business development management roles, almost twenty years of

which has been in the UK building societies sector with societies such as the Norwich and Peterborough Building Society

and the Skipton Building Society. Prior to his appointment as Chief Executive Officer of the Society, Mike provided

business consultancy services to a number of small and medium sized building societies facing challenges in growing their

businesses.

Mike is a member of the Institute of Directors and is a passionate sports fan and participant.

Nick Morrell, BSc, FIA

SID (until 5 June 2014); RNC Member (until 5 June 2014); ARC Chairman (from 5 December 2013 until 5 June 2014)

After graduating from Bristol University in 1971, Nick qualified as a Fellow of the Institute of Actuaries in 1974. He has

40 years’ experience in the mutual life assurance industry in a variety of roles including Chief Executive Officer of a leading

friendly society. Since 2000 he has been an independent consultant advising friendly societies and small life assurance

companies on matters as diverse as statutory reserving provisions, bonus distributions, business strategy, and mergers

and acquisitions.

Nick was founder Chairman of the AFS Taxation Committee and takes a keen interest in developments affecting mutual

life insurers.


Page | 10

The Strategic Report

Strategic Management: Business Model, Strategy and Objectives

The Society’s purpose is the provision of Holloway policies to professionals, primarily to those working in pharmacy and

other healthcare professions. Holloway policies provide comprehensive income protection alongside a long-term

investment plan designed to provide a lump-sum payment upon a policyholder’s retirement. The Society generates value

for its policyholders by providing a diligent and personable service to complement our insurance policies, and by

managing the Society’s affairs in a manner that generates annual interest and bonuses to policyholders’ ICAs at a level

that meets or exceeds the reasonable expectations of those policyholders.

There are two pillars to the Board’s strategy to deliver value to the Society’s policyholders: (1) ensure an appropriate

proportion of policyholders’ funds are invested in assets with sound long-term yield prospects; and (2) grow the Society’s

Holloway policy fund and premium income, and gradually diminish the operating costs of the Society as a proportion of

premium income.

Strategic Environmental Factors: Business Permissions and Market Influences

The Society is an incorporated friendly society authorised and regulated by the PRA and the FCA for investment and

insurance business in the UK, and is limited by its memorandum to providing among other things permanent health

insurance, life assurance, pensions, and annuities. The subsidiary of the Society, PGMS, is authorised and regulated by

the FCA for non-investment insurance broking services.

All the business activities of the Society and its subsidiary, PGMS, during the last financial year have been carried out

within their respective memorandums and the permissions granted to them by the relevant regulatory authorities.

The Society markets its services to those UK professionals traditionally described as “white collar” professionals.

Historically, this was limited to pharmacy but since 2010 has been gradually extended to include all white collar

professionals. The Board has typically found that the fluctuations in the macroeconomic environment have had a limited

influence on the Society’s work with these markets.

Strategic Environment: Principal Risks and Uncertainties

The Society’s risk management framework identifies and controls the key risks to its business and strategy. These key

risks are market risk, insurance risk, credit risk, interest rate risk, foreign exchange risk, liquidity risk, and operational risk.

Market Risk

This is the risk that arises from fluctuations in the values of, or income from, the Society’s assets. The Society’s risk

appetite includes market risk in order to ensure we achieve the level of financial return necessary to support the Society’s

strategic and operational objectives. The Society manages its market risks by maintaining a balanced portfolio of

investments and monitoring equity markets on a daily basis and by carrying out portfolio reviews at each Board meeting.

Procedures are in place to ensure that if there is severe volatility in the financial markets the Board will act to protect the

financial strength of the Society.

Foreign Exchange Risk

Exchange Rate Risk comes from the Society’s exposure to overseas investments and the potential for loss due to

unanticipated changes in exchange rates. The Society hedges all Euro denominated holdings back to Sterling on a rolling

monthly basis and limits its exposure to other currencies on to under 2% of the equity portfolio, which effectively

manages this risk.


Page | 11

The Strategic Report (continued)

Credit Risk

Credit Risk is the potential loss suffered if another party fails to perform its obligations. The Society's exposure to Credit

Risk results from financial transactions with counterparties including fund managers and short term depositors. Credit

Risk is managed by ensuring that all counterparties have strong credit ratings, by holding investments in segregated client

funds, and by maintaining a diversified portfolio of investments which reduces the potential impact of any one credit

event.

Interest Rate Risk

Interest rate risk is the potential for loss on the value of fixed interest rate investments arising from changes in interest

rates. The Society is exposed to interest rate risk to the extent that it currently holds much of its fixed rate investments

by way of short term deposits and corporate bonds. In recent years this has been more advantageous than holding longer

term, government issued gilt securities. The economic climate remains a concern and further changes to the Society’s

asset allocation will be made if the Board determines it appropriate to do so.

Liquidity Risk

Liquidity Risk is the risk that cash may not be available to pay obligations when due at a reasonable cost. The Board

arranges the Society’s short term investments to ensure sufficient funds are available to meet the liabilities and

management costs of the Society, such as new business costs, planned strategic activities, Member withdrawals, and

claim payments. To manage liquidity risk the Board maintains substantial funds in low risk short-call deposit accounts

and arranges short-term fixed interest deposits in a spread that ensures these funds mature at reasonable intervals.

Insurance Risk

Insurance risk arises from the inherent uncertainties as to the occurrence, amount and duration of the Society’s income

protection insurance liabilities. The Society manages insurance risk by following underwriting policies that take into

account the risk the Society is prepared to accept, maintaining a structured approach to product development and

pricing, and undertaking an annual analysis of our claims experience.

When valuing the Society’s insurance liabilities, the Actuarial Function Holder and With-Profits Actuary take a prudent

view of future sickness rates, mortality experience, investment performance and future bonus distributions. The Board

is confident that the Society can withstand any reasonably foreseeable insurance risk events without compromising the

solvency of the Society.

Operational Risk

Operational Risk refers to the risk of loss resulting from inadequate or failed internal processes, people and systems or

from external events. Operational risks are recorded and monitored regularly, and the Board has engaged the services of

an independent internal auditor to assist in this process.

Strategic KPIs: Investment of Policyholders Funds

The aims of the Board’s investment strategy are to maintain the capital strength of the Society in accordance with PRA

regulations, and to ensure a sustainable level of interest and bonuses to policyholders’ ICAs. The Board measures the

success of its investment strategy by carefully monitoring the Society’s FFA and MCR, the asset mix of the Society’s

investment portfolio, the performance of the investment portfolio, and the interest and bonuses levels to policyholders’

ICAs.


Page | 12


Capital Management

Throughout 2014 the Society has maintained a healthy solvency margin in excess of the MCR required by the PRA. The

MCR is now £1,291,486 as of the 31 December 2014 (£1,250,371 in 2013) and as of the 31 December 2014 the Society’s

FFA stood at £13,080,532 (£12,185,487 at 31 December 2013).

Asset Mix of Investment Portfolio

The Society’s Holloway policy aims to provide a lump sum payment to policyholders in their retirement years. As such,

the Board looks to ensure that an appropriate proportion of the Society’s investment portfolio is held in assets with good

prospects for long-term yields, while ensuring sufficient funds are on hand to meet the cash-flow requirements of the

Society.

Investments 2014 (£) 2014 % 2013 (£) 2013 %

Shares and Other Variable Yield Securities 15,469,616 42 15,041,287 43

Debt and Other Fixed Income Securities 14,535,968 40 14,696,409 42

Deposits with Credit Institutions 5,613,935 15 4,727,492 13

Investment in Subsidiary and Other 1,139,018 3 656,541 2

Total 36,758,537 100 35,121,729 100

The IC monitors the adequacy of the asset mix on behalf of the Board on a regular basis and will make adjustments where

it is considered appropriate in the context of the Board’s investment strategy.

Investment Performance

In 2014 the investment portfolio grew from £35,121,729 at the end of 2013 to £36,758,537 at the end of 2014: a gain of

5% during the year. Total investment income in 2014 before realised losses was £1,205,925 (£1,188,002 in 2013). There

were realised losses of £117,974 in 2014 compared to realised gains in 2013 of £875,586.

Interest and Bonuses to Policyholders’ ICAs

Having taken advice from the Society’s AFH and WPA, the Board has adopted what it considers to be a prudent approach

to the Society’s interest and bonus rates for 2014 in light of the Society’s performance. These are as follows:

Apportionment 2014 2013

Interest rate for Holloway policyholders 3% 3.5%

Bonus-per-share for Holloway policyholders £2.00 £2.00

Bonus-per-share for Commuted Holloway policyholders £2.00 £2.16

In preparing the bonus recommendations to the Society, the WPA has taken into consideration the importance of

smoothing bonus levels over a reasonable period to minimise fluctuations that exaggerate or undermine the reasonable

expectations of our policyholders.

Terminal Bonuses

From the 1 May 2015, the terminal bonus for eligible Holloway policyholders will remain at 25% (5% from the 1 April

2013 until the 30 April 2014). Terminal bonuses are not guaranteed and can be increased or decreased during the year

by the Board as appropriate in response to changes in the Society’s financial circumstances.


Page | 13


Strategic KPIs: Holloway Growth

The Society’s Holloway policy is a with-profit contract. The future bonus apportionments that will be critical to building

strong ICA balances for our policyholders rely on the Society maintaining a healthy surplus, and the Board’s strategy to

meet this objective is to grow the Society’s Holloway portfolio and premium income while carefully managing operational

expenses. This will enable the Board to progressively diminish management costs as a proportion of total Holloway

premiums and strengthen the surplus.

2014 saw the Society achieve a net growth in Holloway policies of 102 and a net growth in premium income of £100,493.

This growth was not as substantial as the Society’s 2013 performance: a net increase of 308 Holloway policies and

£187,032 in premium income; but remains consistent with the Board’s desire to focus on gradual growth to avoid any

risk of the high standard of personal, professional service that the Society provides to its Holloway policyholders being

compromised. From a costs perspective, 2014 saw management costs fall by £107,961 and claims costs fall by £10,141.

The Board is therefore pleased to report that its strategy to improve the Society’s surplus is making good progress.

KPIs Summary and Future Outlook

The Board remains committed to the Society’s business model and strategy. The steady increases in Holloway

membership and premium income has continued for a fifth consecutive year. The Board will keep the Society’s strategy

under careful review to both ensure that the growth achieved in recent years is sustained, and that the Society takes

advantage of any new opportunities that could support its strategic objectives.

Mike Perry

Chief Executive Officer

26 March 2015


Page | 14

The Directors’ Report

Board of Directors’ Responsibilities

The names of the directors during 2014 are shown on page 3 and their profiles on page 9 and 10. All the Society’s directors

and officers have the requisite regulatory approvals and continue to be fit and proper for their roles. Under the Friendly

Societies Act 1992, the Board is required to prepare financial statements for each financial year which give a true and fair

view of the state of affairs of the Society and of the income and expenditure of the Society for that period. In preparing

those financial statements, the Board is required to:

select suitable accounting policies and then apply them consistently,

make judgements and estimates that are reasonable and prudent,

state whether applicable accounting standards have been followed, subject to any material departures disclosed

and explained in the financial statements,

prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Society

will continue in business, in which case there should be supporting assumptions or qualifications as necessary.

The directors confirm that they have complied with the above requirements in preparing the financial statements.

The Board is responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the

financial position of the Society and to enable them to ensure that the financial statements comply with the Friendly

Societies Act. They are also responsible for safeguarding the assets of the Society and hence for taking reasonable steps

for the prevention and detection of fraud and other irregularities. The Board does not believe the Society has carried on

any activities outside its powers during the year, and in the case of each director in office, at the date of the report of the

Board being approved:

a) so far as each director is aware, there is no relevant audit information of which the Society’s independent auditors

are unaware; and

b) each director has taken all the steps that he ought to have taken as a director in order to make himself aware of any

relevant audit information and to establish that the Society’s independent auditors are aware of that information.

Political and Charitable Donations

The Society made no political or charitable donations during the financial year.

Going Concern The Directors are satisfied that the Society has the necessary financial resources to continue as a going concern and have

therefore prepared its accounts on this basis.

Complaints Procedure Policy

It is the Society’s policy to investigate and resolve all complaints received from policyholders promptly and fairly. The

Society is a member of the FOS. All complaints are handled in accordance with the requirements of the FCA. Full details

can be obtained from the Secretary at the Society’s office.

Independent Auditor

Moore Stephens have expressed their willingness to continue in office and a resolution to reappoint them will be

proposed at the AGM.

Mike Perry

Chief Executive Officer


Page | 15

The Corporate Governance Report

Compliance with the ACGC

The Board has sought to integrate the best practice standards of the ACGC into its governance arrangements for the

Society in full. However, during the last financial year the Society departed from ACGC guidance on four points.

1. The Chairman did not meet the ACGC criteria for ‘independence’ upon first appointment because he had been a

non-executive director of the Society for more than 9 years at the time he first became Chairman. The Board

continue to believe that the benefits of the Chairman’s extensive knowledge and experience of the Society and its

traditional market of pharmacy justifies departure from this best practice standard. As the Chairman has served

more than 9 years on the Board, he submits himself for re-election at each AGM.

2. The new Chairman of the ARC, Gary Warner is not a qualified financial professional as recommended by the ACGC.

However, the Board made the appointment on the basis of Gary Warner’s operational risk expertise, particularly IT

and communication systems. As a fellow member, Matthew Dreaper brings the requisite financial expertise to

support the ARC’s work.

3. The RNC has not followed the ACGC recommendation to recruit suitable non-executive directors via either an

external recruitment agency or open advertising. The Board does not believe that the cost of either of these

methods of recruitment is appropriate given the Society’s size and scale. The Society has instead consulted with

industry contacts for suitable candidate recommendations.

4. The Board has not established a dedicated member’s forum to facilitate member feedback on the Society’s strategy

and corporate governance arrangements. Given the current size and scale of the Society, the Board believes that

the AGM remains an appropriate forum to allow policyholders the opportunity to meet all the Society’s directors

and senior officers, including the Chairman, Chief Executive Officer, SID and the Chairmen of the Board Committees.

How the Board Operates

The Board is responsible for the direction and management of the Society and comprises five non-executive directors

and one executive director, led by the Chairman and Vice-Chairman. The Board is responsible, among other things, for

the following:

The Society’s business model and strategy;

Ensuring adequate resources are in place to ensure the proper management of the Society’s activities and the

viability of its strategy;

The solvency and financial strength of the Society; and

The governance and risk controls of the Society.

To ensure the Society operates efficiently the Board delegates a number of its authorities, discretions, duties and powers

to the senior management team of the Society. For example, decisions with regards to the admission of new

policyholders; admission of applications for increases in income protection cover; applications for Commuted status; and

decisions with respect to the eligibility of claims for income protection benefit are delegated to the Society’s senior

management. To ensure it can appropriately direct and oversee the activities of the Society, the Board has a balance of

skills and experience relevant to its responsibilities such as audit, communications, finance, marketing etc.


Page | 16

The Corporate Governance Report (continued)

The Board meets on five occasions each year, spread over ten days, in addition to other work undertaken between

meetings. The Board reviews its meeting arrangements on a regular basis and will vary the number of meetings necessary

to strike the most appropriate balance between the need for the Board to properly direct the Society’s business and

monitor operational activities with the need to properly control costs. Additional meetings can be held on an ad hoc basis

if necessary. The Board will continue to review the adequacy of its meeting arrangements on an annual basis.

The directors have access to external advice at the Society’s expense if they believe it is appropriate to seek such advice.

Board Performance Evaluation

The Board is committed to ensuring that the performance of individual directors is properly assessed on an annual basis.

The Chairman is responsible for evaluating the performance of the non-executive directors and the Chief Executive

Officer. The Chairman is appraised by the SID after receiving feedback from the other directors.

The Independence of Non-Executive Directors

The Board determine the Chairman to be the only non-executive director who did not meet the criteria for independence

under the ACGC in 2014. As the Chairman has served more than nine years on the Board, he is subject to annual re-

election at the Society’s AGM.

Election and Re-Election of Directors

All directors appointed to vacancies by the Board are required to stand for election at the next AGM of the Society. Once

elected to the Board, directors are required to stand for re-election every three years until they complete nine years. If a

director continues to serve on the Board after nine years, they are required to stand for re-election on an annual basis.

The ACGC includes a best practice standard that all directors should be subject to annual re-election by policyholders

unless they are a small company (average assets of less than £100 million over 3 years; average gross premium income

of less than £20 million over 3 years). The Board has considered this matter and is satisfied both that the Society is a small

company for this purpose, but also that the best interests of our policyholders will not be served by introducing this

change at this point.

Board Committees

There are three Board Committees: the RNC; the ARC; and the IC.

The IC was established by the Board to manage the Society’s investment strategy on its behalf. The RNC is responsible

for making recommendations to the Board in respect to any vacancies arising on the Board or in the executive

management team, and in respect to policies for the remuneration of non-executive directors and executive officers.

When undertaking its recruitment responsibilities the RNC first identifies the skills and experience that the appointee will

need in order to achieve the balance of skills required by the Board. The RNC members then communicate with a broad

range of industry contacts to acquire candidate recommendations with the appropriate expertise.


Page | 17

The Corporate Governance Report (continued)

As part of the Board’s commitment to developing the diversity of its composition the RNC members actively look for a

diverse range of candidates. The RNC makes recommendations for appointment to the Board on the basis of how

effectively the candidate will satisfy the objective needs of the vacancy concerned, including the ability of the candidate

to commit the necessary amount of time to the role.

The ARC is responsible for the oversight of the Society’s financial and internal risk control frameworks, the scrutiny of all

financial and audit reports including year-end financial reports, and for making recommendations to the Board in respect

to these duties. The ARC did not find any significant issues with the accounts or the reports when auditing the 2014

financial statements. The ARC is also responsible for making recommendations to the Board in respect to the

appointment, the remuneration and the dismissal of the independent (external) and internal auditors.

The ARC has held meetings with both the independent and internal auditors in order to review their work and their

findings, with feedback from the Society’s management team also taken into consideration. Having followed this process

the ARC proposed that the independent auditor be recommended for re-appointment by policyholders at the AGM. The

Board accepted this recommendation.

All Board Committees are required to work in accordance with their terms of reference, which includes compliance with

the ACGC and any other relevant best practice guidance or requirements. The Board Committees the directors serve on

can be seen in The Board of Directors report.

Review of Business Risks and Internal Controls

The Board, with the support of the ARC and our internal audit service provider, has carried out a review of the key risks

facing the Society as part of its annual strategic review and is happy that the internal controls in place to manage, and

where possible, mitigate these risks continue to be appropriate.

Communication with Policyholders

The Board welcomes feedback from our policyholders with regards to the Society’s management, its strategy, its product

or its service. We can be contacted via our website (www.pgmutual.co.uk), via your member area, via telephone, post or

fax. If you would prefer to meet with a representative of the Society, please let us know.

The Board reminds policyholders that all the Society’s directors including the Chairman, the SID, the Chief Executive

Officer, the Chairmen of the Board Committees, and the Secretary are scheduled to attend the Society’s AGM. You are

encouraged to attend this event as it offers you an opportunity to engage with the Society’s management team in person.



26 March 2015


Page | 18

The Directors’ Remuneration Report

Introduction

The Board has prepared this report on the remuneration of its directors in accordance with the relevant principles of the

ACGC. This report shall be subject to a non-binding resolution at the Society’s AGM.

Role of the RNC

The RNC is responsible for making recommendations to the full Board with regards to the remuneration of executive and

non-executive directors. Where the full Board considers the recommendations of the RNC with regards to executive

remuneration, the non-executives meet without the executive director.

The RNC members in 2014 were Simon Whale (Chairman), Wally Dove, Nick Morrell (until 5 June 2014) and Matthew

Dreaper (from 1 October 2014). While no external expertise was used by the RNC in 2014, the RNC is authorised to access

such expertise at the Society’s expense if considered appropriate.

Directors Remuneration

The breakdown of directors’ remuneration in 2014 is as follows.

Director Basic

Salary Benefits

Annual

Bonus

Pension

Contributions

Total

2014

Total

2013

Executive Directors

Mike Perry £100,000 £5,897 £3,000 £4,000 £112,897 £119,424

Non-Executive Directors

Wally Dove £20,270 - - - - £18,440

Simon Whale £16,165 - - - - £13,665

J. Gary Warner £12,000 - - - - £11,375

Matthew Dreaper £10,000 - - - - -

Mike Davies £5,692 - - - - -

Nick Morrell £12,326 - - - - £14,665

Remuneration Policy The Board believes that its remuneration policy for directors strikes an appropriate balance between the need to ensure

the Board is cost effective and the need to ensure the Board is able to attract and motivate individuals with the necessary

expertise for the Board to properly undertake its responsibilities to policyholders.

For executive directors, the Board has also sought to find an appropriate balance between salary and rewards linked to

performance. With this in mind an executive bonus scheme is in place based on the achievement of KPI’s agreed between

the Chief Executive Officer and the RNC. The RNC will continue to monitor the adequacy of the Board’s remuneration

policy for directors during 2014.


Page | 19

The Directors’ Remuneration Report (continued)

Meetings

The following table shows the number of meetings each director was due to attend. The figures in brackets are the actual

number of meetings attended.

Director Board 2014 IC 2014 ARC 2014 RNC PGMS Total 2014

Total 2013

Mike Perry 5 (5) - - - 4 (4) 9 (9) 8 (8)

Wally Dove 5 (5) 2 (2) - 5 (5) - 12 (12) 10 (10)

Simon Whale 5 (5) - - 5 (5) 4 (4) 14 (14) 13 (13)

J. Gary Warner 5 (5) - 6 (6) - - 11 (11) 9 (9)

Matthew Dreaper 5 (5) 2 (2) 6 (6) 2 (2) - 15 (15) -

Mike Davies* 3 (4) 2 (2) 0 (1) - - 5 (7) -

Nick Morrell** 2 (2) - 2 (2) 2 (2) - 6 (6) 10 (12)

* Mike Davies attended an ARC meeting and a Board meeting in 2014 as a guest prior to his appointment.

** Nick Morrell attended two meetings of the ARC in 2013 at the invitation of the Chairman.



26 March 2015


Page | 20

The Report of the Independent Auditor

We have audited the financial statements of Pharmaceutical and General Provident Society Limited (the Society) for the

year ended 31 December 2014 which comprise the Income and Expenditure Account, Balance sheet and the related notes

1 to 18. The financial reporting framework that has been applied in their preparation is applicable law and United

Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice), having regard to the statutory

requirement to maintain equalisation provisions.

This report is made solely for the Society’s policyholders, as a body, in accordance with the Friendly Societies Act 1992.

Our audit work has been undertaken so that we might state, to the Society’s policyholders, those matters we are required

to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept

or resume responsibility to anyone other than the Society’s policyholders as a body, for our audit work, for this report or

other opinions we have formed.

Respective Responsibilities of the Board and Auditor

As explained more fully in the Directors’ Responsibilities statement in the Directors Report, the Board is responsible for

preparing financial statements which give a true and fair view. Our responsibility is to audit and express an opinion on

the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland).

Those standards require us to comply with the Auditing Practices Boards (APB’s) Ethical Standards for Auditors.

Scope of the Audit of the Financial Statements

An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give

reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or

error. This includes an assessment of: whether the accounting policies are appropriate to the Society’s circumstances and

have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made

by the Board; and the overall presentation of the financial statements. In addition, we read all the financial and non-

financial information in the Directors Report to identify material inconsistencies with the audited financial statements

and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the

knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material

misstatements or inconsistencies we consider the implications for our report.

Our Assessment of Risks of Material Misstatement

We consider that the following areas present the greatest risk of material misstatement in the financial statements and

consequently have had the greatest impact on our audit strategy, the allocation of resources and, the efforts of the

engagement team, including the more senior members of the team:

the operation and effectiveness of the Society’s Member’s system during the year and specifically the operation of

the system over premium income and claims paid to policyholders;

the valuation and ownership of the Society’s investments at the year end and the recording of transactions

throughout the year; and

the Society’s compliance with applicable regulations.

Revenue recognition and the risk of fraud arising from management override of internal control have been addressed.


Page | 21

The Report of the Independent Auditor (continued)

Our Application of Materiality

We apply the concept of materiality both in planning and performing our audit, and in evaluating the effect of

misstatements on our audit and on the financial statements. For the purpose of determining whether the financial

statements are free from material misstatement we define materiality as the magnitude of misstatement that makes it

probable that the economic decisions of a reasonably knowledgeable person, relying on the financial statements, would

be changed or influenced. We also determine a lower level of performance materiality which we use to determine the

extent of testing needed to reduce to an appropriately low level the probability that the aggregate of uncorrected and

undetected misstatements exceeds materiality for the financial statements as a whole.

When establishing our overall audit strategy, we determined a magnitude of uncorrected misstatements that we judged

would be material for the financial statements as a whole. We determined materiality for the Society to be £350,000

which is approximately 1% of net assets. We use net assets to ensure the level of uncorrected misstatements does not

materially impact the Society’s solvency calculations.

On the basis of our risk assessments, together with our assessment of the overall control environment, our judgement is

that performance materiality should be 70% of materiality, namely £245,000. Our approach is designed to have a

reasonable probability of ensuring that the total of uncorrected and undetected audit differences does not exceed our

materiality of £350,000 for the financial statements as a whole. We agreed with the ARC that we would report to the

Board all audit differences in excess of £5,000, as well as differences below that threshold that, in our view warranted

reporting on qualitative grounds.

An Overview of the Scope of the Audit of the Financial Statements

The way in which we scoped our response to the risks identified above was as follows:

In order to address risk around the operation of the Society’s management system during the year we have tested

the operating effectiveness of the controls over policyholders records, premium income and claims paid to

policyholders. The controls were tested on a sample basis, and the extent of testing varied depending on the

frequency with which the control is operated;

In order to address risk around ownership of the Society’s investments held at the year end, we confirmed the entirety

of the holdings to independent third party confirmations provided by the Society’s custodians. These statements were

compared to known movements in the investments holdings in the year through comparison to contract notes and

testing of the management’s monthly investment reconciliations;

In order to address the risk around the valuation of the Society’s investment we obtained from independent third

parties confirmations of the prices for the purpose of subscription or redemption of interest in the underlying

investments in investee funds as at 31 December 2014;

In order to address the risk of associated with the recording of investment transactions through the year ended 31

December 2014 we have tested a sample of transactions to independent documentation;

In order to address the risk over the Society’s compliance with it regulatory environment we updated our

understanding of the regulatory requirements and reviewed the Society’s correspondence with its regulators,

statutory filings and management’s records of compliance with appropriate regulations;

As part of our testing of the member’s system we performed testing relating to controls over the recognition of

premium income and the process for the ensuring the accuracy of changes to member’s records, including new

policyholders. We also performed substantive testing on a sample of premium income and analytical procedures to

validate whether revenue recognition procedures complied with UK Generally Accepted Accounting Practice;


Page | 22

The Report of the Independent Auditor (continued)

Finally we performed analytical procedures and journal entry testing in order to identify and test the risk of fraud

arising from management override of controls.

Opinion on Financial Statements

In our opinion the financial statements:

give a true and fair view, in accordance with UK Generally Accepted Accounting Practice, of the state of the Society’s

affairs as at 31 December 2014 and of the income and expenditure of the Society for the year then ended; and

have been properly prepared in accordance with the Friendly Societies Act 1992.

Opinion on Other Matters Prescribed by the Friendly Societies Act 1992

In our opinion the Strategic Report and the Directors Report has been prepared in accordance with the Friendly Societies

Act 1992 and the regulations made under it, and the information given therein is consistent with the financial statements

for the financial year.

Matters on Which We Are Required to Report by Exception

We have nothing to report in respect of the following matters where the Friendly Societies Act 1992 requires us to report

to you if, in our opinion:

proper accounting records have not been kept; or

the financial statements are not in agreement with the accounting records; or

we have not received all the information and explanations and access to documents that we require for our audit.

M P Burnett, ACA

Senior Statutory Auditor

For and on behalf of Moore Stephens

Chartered Accountants & Statutory Auditor

7 April 2015


Page | 23

The Financial Statements:

Income and Expenditure Account for the Year Ended 31 December 2014

Technical Account: Long-Term Business Notes 2014 2013

£ £

Earned Premium Income 2 2,766,952 2,666,459

Investment Income 3 1,087,951 2,063,588

Unrealised Gains/(Losses) on Investments 875,148 1,483,135

Total Technical Income 4,730,051 6,213,182

Income Protection Claims Incurred 4 (975,381) (985,522)

Endowment Maturities 4 - (19,651)

Mid-Year Interest and Bonuses (including Terminal Bonuses) 5 (106,548) (38,215)

Management Costs 6 (1,183,456) (1,291,417)

Investment Expenses and Charges 10 (105,761) (96,826)

Interest and Bonus Apportionment to Members’ ICAs 14 (1,066,174) (1,118,247)

Transfer (to)/from the LTBP 14 (397,686) 844,696

Transfer (to)/from the FFA 14 (895,045) (3,508,000)

Balance on the Technical Account 0 0

Statement of Total Recognised Gains and Losses Notes 2014 2013

£ £

Transfer (to)/from the FFA 14 (895,045) (3,508,000)

Total recognised gains/(losses) since last Annual Report 895,045 3,508,000

All these activities are in respect to continuing operations.

Please see the Notes to the Financial Statements section for more detail.


Page | 24

The Financial Statements (continued):

Balance Sheet as at 31 December 2014

Notes 2014 2013

£ £ £ £

Fixed Assets

Tangible Fixed Assets 12 483,062 419,921

Investments

Shares and Other Variable Yield Securities 13 15,469,616 15,041,287

Debt and Other Fixed Income Securities 13 14,535,968 14,696,409

Deposits with Credit Institutions 13 5,613,935 4,727,492

Other 13 1,129,247 648,117

Investment in Subsidiary 13 9,771 8,424

36,758,537 35,121,729

Other Assets

Cash at Bank 57,328 178,724

Prepayments and Accrued Income 316,025 196,575

Deferred Acquisition Costs 7 18,045 66,934

Total Assets 37,632,997 35,983,883

FFA 14 13,080,532 12,185,487

LTBP 15

Policyholders’ ICAs 14 14,562,941 14,216,247

Mathematical Reserves 14 9,629,168 9,231,482

24,192,109 23,447,729

Creditors

Creditors Arising From Insurance Activities 135,155 110,509

Other Creditors 18 225,202 240,158

360,357 350,667

Total Liabilities 37,632,997 35,983,883

Please see the Notes to the Financial Statements section for more detail.

These financial statements were approved by the Board on the 26 March 2015.




Page | 25

Notes to the Financial Statements

1. Accounting Policies

The financial statements have been prepared in accordance with The Friendly Societies (Accounts and Related Provisions)

Regulations 1994 (‘the Regulations’) made under the Friendly Societies Act 1992 and with applicable accounting

standards in the United Kingdom and with all material provisions of the Statement of Recommended Practice (SORP) on

‘Accounting for Insurance Business’ issued by the Association of British Insurers in 2005. A summary of the more

important accounting policies, which, except as noted, have remained unchanged from the previous year, is set out

below.

Earned Premiums

Earned premiums are accounted for an accruals basis based on the period they related to. Premiums relating to the

unexpired term of policies in force at the balance sheet date are treated as unearned.

Claims and Benefits

Claims for sickness, death or surrender are accounted for from the appropriate date of the event as notified. Claims

payable include all related internal and external claims handling costs.

Investment Income

Income from investments is included in the Technical Account Long-Term Business. Account is taken of income from gilts

and interest on cash deposits on an accruals basis and dividends from equities are included according to the date of

receipt by the Society.

Realised and Unrealised Investment Gains

Realised gains and losses, being the differences between the net sale proceeds and market value (see Valuation of

Investments below) at the beginning of the year, is included within investment income in the Technical Account when

attributable to assets in the Long-Term Business Fund. Unrealised gains and losses represent the difference between the

valuation of investments at the balance sheet date and market value at the beginning of the year. Unrealised gains and

losses on assets purchased during the year are valued on the difference between the purchase price and the valuation at

the balance sheet date.

Movements in unrealised gains and losses attributable to assets in the Long-Term Business Fund are reported in the

Technical Account – Long-Term Business.

The Society’s wholly owned subsidiary, PGMS, has been valued on a Net Realisable Value basis, with any losses or gains

accounted for as unrealised losses or gains within the accounts.

Acquisition Costs

Acquisition costs comprise direct costs, such as introduction commissions, as well as indirect costs such as advertising,

production, marketing and sales staff etc. Indirect acquisition costs will vary from year-to-year according to the budgets

determined by the Board, while direct costs will vary in line with the premium value of the business sold and the

commission level applicable.


Page | 26

Notes to the Financial Statements (continued)

Commissions payable to IFA’s are prepaid over 36 months from the date of the relevant member joining the Society. The

deferred costing method creates an asset in the balance sheet that then decreases through the prepaid period (deferred

acquisition costs) to reflect the Society’s ability to contractually recover a proportion of the commission paid from the

IFA if the member terminates within the 36 month period.

Leasing

Rentals applicable to operating leases where substantially all of the benefits and risks of ownership remain with the lessor

are charged against profits on a straight line basis over the period of the lease.

Interest on Policyholders’ ICAs

Bonuses to policyholders in the form of interest and bonuses are recognised in the Technical Account Long-Term Business

when declared and Terminal Bonuses when paid.

FFA

The FFA incorporates amounts which have yet to be allocated to policyholders. Transfers to and from the FFA reflect the

excess or deficiency of revenues (including premiums and investment gains and losses) over expenses (including claims

and bonuses) in each accounting period arising from the Society’s Long Term Business Fund.

Taxation

The Society is not subject to income or corporation tax.

Valuation of Investments

The market value of quoted fixed interest and equity investments is stated in the financial statements at the closing mid-

market values at the balance sheet date. Where there is no apparent market for an asset and therefore no quoted market

value, a mark to model approach is taken to estimate what the market value would be if a market existed.

Regarding note 11 below, the Society’s freehold properties are held at valuation. The property was valued as of the 31

December 2014 on the 13 February 2015using an Open Market basis by Allied Surveyors and Valuers, a RICs Registered

Valuer at that time. Our policy is to value the Society’s property every three years.

Pension Scheme Arrangements

The Society runs a defined contribution pension scheme that each member of staff is eligible to join after completing

their induction period and is arranged through Scottish Widows. The Society’s obligation to this fund is limited to the

contributions made and due. For members of staff employed by the Society prior to the 1 November 2010, the employer

contribution is 10% of gross salary and the employee’s contribution is 5% of gross salary. For members of staff joining

from the 1 November 2010, the employer will match the employee’s contribution up to a maximum contribution of 4%.

LTBP The LTBP has been calculated by the AFH, having due regard to the requirements of the Friendly Societies (Accounts and

Related Provisions) Regulations 1994. Details of the main elements of the method and bases are in the notes to the

accounts (note 14).


Page | 27


Depreciation

Depreciation is charged on fixed assets other than freehold properties on a straight line basis as follows:

Building Improvements 10.0%

Fixtures, Fittings and Furniture 12.5%

Computer Equipment 33.3%

Motor Cars 25.0%

Freehold properties are included at the re-valued amount based on an independent valuation in accordance with FRS 15.

Any surplus/deficit on revaluation is taken to the revaluation reserve to the extent that any deficit does not exceed

surpluses in previous years.

2. Earned Premium Income

2014 (£) 2013 (£)

Holloway policy subscriptions 2,766,952 2,666,384

Endowment policy subscriptions - 75

Earned Premium Income 2,766,952 2,666,459

3. Investment Income

2014 (£) 2013 (£)

Listed Investments 928,257 712,005

Deposits with Banks and Fund Managers 277,668 475,997

Investment Income (excluding Realised Gains/(Losses)) 1,205,925 1,188,002

Net Gains/(Losses) on the Realisation of Investments (117,974) 875,586

Investment Income 1,087,951 2,063,588

4. Claims Incurred

2014 (£) 2013 (£)

Income Protection Claim Payments 792,221 900,226

Claims Handling Expenses 183,160 137,204

Other - (51,908)

Income Protection Claims Incurred 975,381 985,522

Endowment Maturities - 19,651

Total Claims Incurred 975,381 1,005,173

5. Policyholders’ ICA Withdrawals

2014 (£) 2013 (£)

Capital Payments on Terminations 656,298 857,401

Capital Payments on Partial Withdrawals 63,182 24,494

Total Policyholders’ Capital Withdrawals 719,480 881,895

Mid-Year Interest and Bonuses (including Terminal Bonuses) 106,548 38,215


Page | 28


6. Management Costs

2014 (£) 2013 (£)

IFA Commissions (Note 7) 53,889 70,777

Other Acquisition Costs 504,814 623,729

Administration and Other Costs 624,753 596,910

Management Costs 1,183,456 1,291,417

7. Deferred Acquisition Costs

2014 (£) 2013 (£)

Deferred Acquisition Costs Brought Forward 66,934 127,770

Plus New IFA Commissions 5,000 9,941

Less Deferred Acquisition Costs Carried Forward 18,045 66,934

IFA Commission Recognised in the Income Statement 53,889 70,777

8. Independent Auditor Remuneration

2014 (£) 2013 (£)

Fees Paid to Moore Stephens for Audit Services 29,300 27,512

9. Staff

2014 (£) 2013 (£)

Salaries (including the Chief Executive Officer) 517,975 499,671

Social Security Costs 57,295 53,766

Defined Contribution Pension Costs 14,425 16,115

Staff Costs 589,695 569,552

The number of people who worked for the Society during the financial year was 17 (2013: 16)

10. Investment Expenses and Charges

2014 (£) 2013 (£)

Management Charges 105,761 96,826

11. Non-Executive Board Director’s Remuneration

2014 (£) 2013 (£)

Fees 76,454 74,778


Page | 29


12. Tangible Fixed Assets

Freehold

Properties

£

Improvement

to Buildings

£

Fixtures,

Fittings,

Furniture

£

Computers and

Office

Machinery

£

Motor cars

£

Total

£

Cost or Valuation

At 1 Jan 2014 380,000 24,252 13,013 226,241 - 643,506

Additions - - - 38,412 - 38,412

Revaluation 43,000 - - - - 43,000

Disposals - - - - - -

At 31 Dec 2014 423,000 24,252 13,013 264,653 - 724,918

Accumulated Depreciation

At 1 Jan 2014 - 9,249 8,894 205,442 - 223,586

2013 Charge - 2,425 1,627 14,218 - 18,270

Disposals - - - - - -

As 31 Dec 2014 - 11,674 10,521 219,661 - 241,856

Net Book Value

At 31 Dec 2013 380,000 15,003 4,119 20,799 - 419,921

At 31 Dec 2014 423,000 12,578 2,492 44,992 - 483,062

Please see the Valuation of Investments section on the Notes for details of the valuation basis Society’s property.

13. Investments

The Society's investments were as follows: 2014 (£) 2013 (£)

UK investments 24,520,091 25,228,637

Overseas investments 5,485,493 4,509,059

30,005,584 29,737,696

Current value Historical cost

2014 (£) 2013 (£) 2014 (£) 2013 (£)

Shares and Other Variable Yield Securities 15,469,616 15,041,287 15,102,015 13,590,743

Debt and Other Fixed Income Securities 14,535,968 14,696,409 13,498,839 13,503,494

Deposits with Credit Institutions 5,613,935 4,727,492 5,613,935 4,727,492

Other (Deposits with Fund Managers) 1,129,247 648,117 1,129,247 648,117

Investment in Subsidiary 9,771 8,424 10,000 10,000

36,758,537 35,121,729 35,354,036 32,479,846

The Society owns all the issued share capital of its subsidiary, PGMS. The Society invested a further £5,000 in PGMS in

2013.


Page | 30


14. LTBP and FFA

Policyholders’

ICAs (£)

Mathematical

Reserves (£) FFA (£)

At 1 January 2014 14,216,247 9,231,482 12,185,487

Transfer to the FFA - - -

Transfer from Mathematical Reserves - - -

Interest and Bonuses on Policyholders’ ICAs 1,066,174 - -

Policyholders’ Withdrawals (Note 5) (719,480) - -

Transfers from the Technical Account - 397,686 895,045

At 31 December 2014 14,562,941 9,629,168 13,080,532

Details of the calculations of the LTBP and the accounting policy on the interest on policyholders’ ICAs are shown below.

15. LTBP and Insurance Liabilities

a) LTBP

The Long Term Business Provision has been calculated by the Actuarial Function Holder having due regard to the

requirements of The Friendly Societies’ (Accounts and Related Provisions) Regulations 1994 using a modified statutory

basis. The key elements are as follows:

Valuation Basis Summary Shares Units

Method Gross premium Gross premium

Interest rate 1.8% 1.8%

Allowance for expenses 45% of gross premium after reduction by allowance for future bonus

45% of gross premium

Allowance for future bonus

Explicit allowance of £1.75 per share for all policies on the current new business premium rates and £2.00 per share for all policies currently being converted from old premium rates.

n/a

Mortality No mortality No mortality

Morbidity Prudent assessment based on Society’s experience Prudent assessment based on Society’s experience

In addition, Members’ capital accounts have been included at face value.

Aggregate provisions calculated for the purposes of the Interim Prudential Sourcebook for Friendly Societies have been

excluded. A summary of the changes in the long term business provision (LTBP) due to certain changes in financial and

demographic assumptions are as follows:

A reduction in interest rates reduces the impact of discounting within the LTBP, resulting in an increase in the provision.

If the valuation interest rate is reduced by 0.50% to 1.3%, the LTBP increases by £664,074. This does not include the

corresponding impact on the valuation of assets. Likewise, an increase in interest rates increases the impact of

discounting within the LTBP, resulting in a decrease in the provision. If the valuation interest rate is increased by 0.50%

to 2.3%, the LTBP reduces by £597,740. Again, this does not include the corresponding impact on the valuation of assets.


Page | 31


An increase in morbidity rates would increase the expected future sickness benefits paid out by the Society, resulting in

an increase in the required income protection provision. A 10% increase in morbidity rates increases the LTBP by

£2,786,671. A decrease in morbidity rates would decrease the expected future sickness benefits paid out by the Society,

resulting in a decrease in the required income protection provision. A 10% decrease in morbidity rates decreases the

LTBP by £2,526,974.

An increase in the policy expense allowances (caused by increases in management expenses) would result in an increase

in the LTBP. A 5% increase in policy expense allowances, from 45% to 47.25% of premiums, increases the LTBP by

£907,569. This does not allow for any impact this would have on the expense reserve. A decrease in the policy expense

allowances (caused by decreases in management expenses) would result in a decrease in the LTBP. A 5% decrease in

policy expense allowances, from 45% to 42.75% of premiums, decreases the LTBP by £847,987. Again, this does not allow

for any impact this would have on the expense reserve.

The interest rate (before allowance for investment management expenses of 0.3%) used to discount the liabilities of the

income protection business was limited to the maximum reinvestment rate, which is set by the Prudential Regulations

Authority (PRA). Since the FTSE UK 15 year long term gilt yield (LTGY) was below 3% at the valuation date, the

reinvestment rate formula results in the annualised FTSE UK 15 year LTGY being the reinvestment rate (2.19%). The

interest rate before allowance for investment management expenses was set to 2.15%.

The sickness claim rates assumed in calculating the income protection reserves vary by age and duration and are based

on the Society’s recent experience over a three year period with an appropriate margin for prudence. In addition, zero

mortality has been assumed to provide a prudent margin in the reserves. The allowance for expenses is based on the

Society’s experience over the 12 months prior to the valuation date, adjusted for one-off and acquisition costs, and on

the Society’s budgeted expenses for the next 12 months. The expense allowance is a percentage of the premiums.

Expense inflation is implicitly allowed for as premiums increase with age. Finally, the explicit allowances for future

apportionments are £1.75 per share for policies already on the current new business unisex premium rates and £2.00

per share for policies currently being converted from the older premium rate scales. All policies will be charged the same

unisex premium rates from 2017. This allowance for future apportionments is deducted from the share premiums when

calculating the income protection reserve. Any distribution above these amounts will be paid out of the Society’s surplus.

The above relates to the income protection business only as all the endowment policies have now reached maturity.

b) Insurance Liabilities

Capital Statement: Long-Term Insurance Business 2014 (£) 2013 (£)

Available Capital Resources:

FFA 13,080,532 12,185,487

Adjustments onto Regulatory Basis:

Adjustments to Assets (86,566) (114,454)

Resilience Reserve (2,010,613) (1,894,515)

Expenses Reserves (542,842) (574,469)

Counterparty Risk Reserve (11,000) -

Terminal Bonus Reserve (1,380,170) (1,283,847)

9,049,341 8,318,202


Page | 32


Summary

The total available capital resources of the Society’s long-term insurance business amount to £9,049,341 (2013:

£8,318,201). Its capital resource requirements amount to £1,291,486 (2013: £1,250,371) resulting in a surplus of

available capital resources over regulatory capital of £7,757,855 (2013: £7,067,830).

Set out below are the details of how the available capital resources have been calculated, the restrictions in place over

the available capital resources, the basis of calculating the regulatory capital requirements and an explanation of the

change in available capital.

Basis of Calculation of Available Capital Resources

The available capital of the Long Term Insurance Fund has been determined in accordance with the Prudential Regulations

Authority’s (PRA) regulations in IPRU (FSOC) and includes the Funds for Future Appropriations (FFA). The FFA represents

surplus funds of the Society which have not been allocated to Members and is available to meet the regulatory and

solvency requirements of the Society.

The significant assumptions used to determine the sickness provision can be found above in Note 14 a): Long Term

Business Provision. These assumptions have been derived based on recent operating experience with appropriate

allowances for prudence as well as any PRA requirements within IPRU (FSOC).

Restrictions on Available Capital

The available surplus held in the Society’s Long Term Insurance Fund can only be applied to meet the requirements of

the fund itself or be distributed to the Members.

Basis of Calculation of Capital Requirements

The capital resource requirement amounts to £1,291,486 (2013: £1,250,371) and is determined in accordance with

capital requirement as defined by PRA regulations, namely the Solvency Margin.

As at 31 December 2014, the Society’s total available capital resources moved from £8,318,201 to £9,049,341 (701% of

capital requirement).

The table below summarises the key factors affecting the movement in the income protection reserve:

Factor Effect of Change Due to Each Change

in Valuation Basis (£’000)

(a) Policies on old premium rates converting to current new business unisex rates over a

shorter time period of two years and inclusion of premium discounts in income protection

reserves

(458)

(b) reduction in valuation interest rate from 2.3% to 1.8% 599

(c) change in future apportionment allowance from £1.80 for all policies to £1.75 for those

on the new premium rates and £2.00 for those on the old premium rate scales. 248

There have been no other changes in management policy or any other factors that affect the total amount of available

capital for the business.


Page | 33


The expense ratio has a significant impact on reserves and the Society is managing this by:

Taking steps to increase premium income by introducing new members to reduce the expense ratio;

Setting a detailed budget for each level of expenditure;

Reviewing management accounts to monitor expenses compared to budget and seeking explanations for any major

variations.

The Society’s management of market risk is stated in the Strategic Report.

The table below summarises the movement in capital during the year:

£

Balance at 1 January 2014 8,318,201

Opening adjustments (389,590)

Effect of investment variations 625,794

Effect of variations in non-economic experience 1,561,110

Cash distributions (1,066,174)

Balance as at 31 December 2014 9,049,341

Note: The opening adjustment is the total of the key factors in the previous table

16. Financial Commitments

As at 31 December 2013 the Society was committed to making the following payments under non-cancellable operating

leases in the year to the 31 December 2014.

Operating Leases Which Expire: 2014 (£) 2013 (£)

Within One Year - 1,416

Between Two and Five Years 10,356 10,356

10,356 11,772

17. Remuneration of the AFH and WPA

The AFH and WPA has been Mr Stephen William Dixon of Steve Dixon Associates LLP. Mr Dixon has confirmed that neither

he, his family, nor staff are, or were, policyholders of the Society, nor do they have any financial or pecuniary interest in

the Society with the exception of fees payable of £68,960 (£58,428 in 2013).

18. Other Creditors

2014 (£) 2013 (£)

PAYE and National Insurance Contributions 15,671 17,164

Purchase Ledger Control 66,117 54,017

Pension Liability - -

Accruals 143,414 168,977

225,202 240,158


Page | 34

Notice to, and Agenda of Business for, the 87th AGM of the Society

Time and Venue

By order of the Board, Notice is hereby given that the 87th AGM of the Society will be held on Wednesday, 3 June 2015

at 12:30 to consider and, if thought fit, pass the following by way of Ordinary Resolutions:

Agenda

1. To consider and approve the minutes of the 86th AGM of the Society.

2. To receive the Strategic Report and Directors Report for the year ended 31 December 2014.

3. To receive the Financial Statements for the year ended 31 December 2014.

4. To receive the Independent Auditor’s Report for the year ended 31 December 2014;

5. To receive the Board’s Corporate Governance Report for the year ended 31 December 2014 (non-binding resolution);

6. To receive the Board’s Remuneration Report for the year ended 31 December 2014(non-binding resolution);

7. To re-appoint Moore Stephens as the Independent Auditor of the Society and to authorise the Board to determine

their remuneration;

8. To confirm the adoption of the new Rules of the Society with effect from the 1 June 2015;

9. To consider the appointment of the following directors standing for election:

a) Mr Wally Dove;

b) Mr Simon Whale;

c) Mr Mike Davies;

d) Mr Mike Perry.

Please Note:

Policyholders entitled to attend and vote at a general meeting convened by the above notice may appoint another person

as proxy to vote at a poll on their behalf. A proxy form will be provided which to be valid must be returned to the

registered office of the Society not less than 48 hours before the time of the meeting.

Andrew Bowater, LL.B (Hons), MICA

Secretary

26 March 2015

PG Mutual · Annual Reports and Financial Statements 2014 PG Mutual Pharmaceutical and General...

Documents

Transcript of PG Mutual · Annual Reports and Financial Statements 2014 PG Mutual Pharmaceutical and General...