St. James's Place plc (STJ) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the St. James's Place 2021 Half Year Results Q&A session. My name is Nadia, and I will be coordinating the call today. [Operator Instructions] I will now hand over to your host, Andrew Croft, from St. James's Place to begin. So Andrew, please go ahead.

Thank you, Nadia, and good morning, everyone. Welcome to the Q&A part of this morning's announcement. Now we set out our clear objectives back in February, and we hosted the in-depth Capital Markets event in May. Clearly, we're really pleased that we've made a very encouraging start to meeting those objectives in the first 6 months and also that July has started strongly. I'm also here today with my executive team who are on the call. So I think at that point, we'll hand over to the first question.

Our first question comes from Andrew Sinclair.

Well done with the good results today. The business really seems in great shape. Three from me as usual, if that's okay. Firstly, just on cash and new business margin in percentage terms. Last year, I think I was a bit depressed because expenses were being spread across less new business than planned, but we don't seem to see a big pickup in the new business margin in percentage terms this year. It looks like flat year-on-year. I just wondered if you can give a little bit of color on this and what we should see in terms of going forward on the new business margin in percentage terms. Second is looking a little bit further forward in terms of the tax rate change that will be coming in 2023. Insurance tax accounting vagaries are always pretty difficult for us to interpret from outside. Really just wondered if you can give us any idea of what the impact that would be in both in terms of the new business margin and also at the 63, 65 bps margin on mature FUM over the next few years. And thirdly was just on recruitment where I thought the figures were super impressive. Just really wondered if you can talk a little bit about the pipeline at the moment and whether you're seeing a boost from advisers reevaluating models after the turmoil of COVID looking to join the support that someone like SJP can give them.

Okay. So I'd pick up on the recruitment one first and ask Peter to come in and support me. Look, we're very pleased with the start on the recruitment, and we'll always use opportunities to recruit high-quality advisers. And we're 6 months into our 5-year plan. So our objective is still to grow new business by 10% per annum, supported by experienced recruitment, supported by the Academy and supported by productivity. But I'd say it's an encouraging start, particularly with the GBP 277 million individuals currently in the Academy. But I might just hand over to Pete just to talk about what we're seeing at that sort of proverbial coalface. Pete? If he's still there. Pete, you're still there?

Andrew, can you hear me?

Yes, yes. So we can hear you now.

Yes, sorry. Thank you, Andrew. Yes, with regards to the question around advisers having a look at their models and making decisions about their future, those of which, which are currently industry professionals, so to speak, I think -- yes, I think that is normal. That's something that advisory businesses would do on an ongoing basis. I think the pipeline for existing industry professionals is very strong. Our selection criteria, as you all know, is high. We take a great deal of care with the people that we bring into the partnership. But we're very confident that the blend that we have of people who are existing industry professionals alongside the Academy will help us achieve our medium-term growth target. So yes, lots of people reassessing their situation, but that is normal in financial services, to be fair.

Thanks, Pete. And the first 2 questions, I'm going to hand over to Craig. They're very much the financial ones.

Yes. So there were 2 there. One was on the new business margin. As we said before, this is a margin that has 2 key inputs, as all margins do, cost and income, but the relationship between those isn't linear. So we do have an element of fixed cost within that. And you're quite right, as business came under pressure in 2019 and 2020, it did more to reveal some of those fixed costs. We also have what you might describe as semi-variable costs. So for instance, performance-related bonus schemes might fall into that category. So you've actually got quite a mix of income and expense. The key thing that happened in the current period is that we clearly benefited from 27% growth, and that's driven an increase in the value of new business margin of about GBP 13 million. And it just so happens that it has moved broadly in line with the growth in new business. But the net effect of all of those moving parts mean that the actual margin itself has stayed fairly constant. It is worth saying that even if you take account of some of the ebbing and flowing of the margin, we're talking about relatively small numbers in the cash results. And I think that's what we're going to see in the future, that the guidance I would offer for the second half, in our outlook statement, we've said that we believe growth in gross flows of around 20% half year-on-half year is realistic. And therefore, what I would say for the second half is that we should assume that the new business margin half-on-half increases by 20% in terms of the value that, that will deliver. But it is a margin that will ebb and flow in the future because it's not linear. But I wouldn't expect much deviation from where we are at the moment. The second question, Andy, was on the tax rate change. I'd be the first one to agree with you on the complexity of life accounting. But the good news is when it's a fixed input such as the rate of corporation tax, although there will be some complexity and it won't be a perfect adjustment if you just look at the change in the rate of corporation tax, broadly speaking, if you just take the differential and apply it to each of the line items within the cash result, you will pretty much be there. We're going to put something on the website later today which brings that to life, and there will be no rocket science in there. It will be pretty intuitive. But that would be my starting point in terms of working out what the future of the cash result holds. And for those people on the call that follow embedded value, obviously, because that's a forward-looking statement, you have to incorporate known changes at the point at which they're substantively enacted, and that is the case with this tax rate change. So what you will see is that we've made an adjustment to what you might call the opening position in the embedded value. But we've also put an additional tax charge in to reflect the higher rate of tax that will be in place. Some of the value that's being created actually arises in the embedded value. And again, that's all within the report, but we'll make that clear on the slide that goes on to the website later. So I think the good news, if there is good news attached to this, is that the impact will be relatively simple to model.

Our next question comes from Colm Kelly from UBS.

Again, well done on the results today. Just first question on business mix. I think in the first half, we saw a higher proportion of ISA, Unit Trust investment business relative to pension business than we've seen in recent periods. And that's obviously important because it becomes -- it generates more assets that are more cash generative straight away. In terms of that product mix, is that just something you feel it will fluctuate from period to period, the balance between pensions and other products? Or within the growth targets that you have to 2025, do you have different expected rates of growth on those product lines such that we should expect to see some sort of mix effect continuing into the future? And that's the first question. Just a second question on solvency. I don't think it will be a Q&A session if I didn't ask one on solvency. Just the life operating entity solvency was 119%, which is well above the target of 110%. You do mention though that there's a management action taken in the first half related to the modeling of market risk capital. So I'm just wondering if you could explain that in a little bit more detail what the change is there and also how big an impact or benefit did that have on the life solvency ratio in the first half.

Okay. Thank you, Colm. And I'll take the business mix point and then hand over to Craig on the solvency. And just let's talk about the 2025 for a minute. We're not targeting specific business mixes because it really is an advice business and the business mix will be driven by the advice. Clearly, over the last 5 or 6 years, we've seen a bigger swing towards pensions. And this year, we've just seen more ISA business in the first quarter. And you will always see more ISA business in the first quarter. I would say there is an element this year of people putting more money into ISAs because they had more savings. But I'd expect the business mix to stay more or less the same throughout the planning environment. Unless there's changes to legislation, changes to regulation, changes the advice. So hopefully it helps. Over to solvency, Craig.

Yes. Thanks, Colm. It was difficult to keep a Solvency II question-and-answer brief, isn't it, but I'll do my best. Principally, the management action lies in the fact that whenever you go down the route of setting up a whole series of Solvency II standard formula models, you make certain assumptions around what happens, for example, in the event of a 40% equity downturn. And it's one of the various stress tests that you have to perform. When we first put together our Solvency II approach, we made various assumptions, which I would say were prudent assumptions but enabled us to work through the Solvency II data in a straightforward manner. But we always knew would have resulted in, if you like, a slightly more hair shirted answer, then would actually reveal itself in the event of a 40% downturn. And 1 example might be the use of derivatives across our investment management approach, which are there to provide for certain outcomes if the markets do behave in that way. And the important thing with all of this is to end up in a situation where you can point to one of those tests and say that is what actually would happen. And what we did with the benefit of better data, because as time goes on, there's always better data, I think Bluedoor has a role to play in that for us in providing us with that sort of granular data. We're able to take a more sophisticated approach and actually take advantage and take the benefit of some of those things that perhaps in the past, we haven't. And that's work that's been ongoing. Preparation for that was during the course of 2020. And the benefit has been booked in 2021. In terms of quantum, I would say it's not as sizable as the sort of volatility that the equity dampener offers, but it has resulted in a few percentage points of improvements in that ratio. And that's something I would expect to hold. One of the reasons we did this is really very much linked with the reason why there are -- there's plenty of consideration of Solvency II at the moment. What we've seen over the last 2 years is quite a lot of volatility coming out of the standard formula that means that this sort of activity has greater value.

Our next question comes from Andrew Crean from Autonomous.

A couple of questions from me. Firstly, I think historically, you've talked about the business coming from SMEs, from people selling their businesses and then investing with you. I just wondered where we are on that cycle in terms of the recovery from lockdown, whether you're beginning to see material amount of business coming from people selling businesses or whether that's still up the line. And then secondly, I think you talked about 277 people in the Academy. I think if you go back over time, you had up to 400 people in the Academy. Is there an intention to build out the Academy to a bigger number?

Okay. Thank you, Andrew. I'll try and answer both of those, and perhaps I'll ask Peter to come in and support me on the Academy again. As far as SMEs are concerned, you are correct. We do, do work with SMEs when they sell their business because sort of growing their business is their retirement pot, so to speak. And when they sell the business, they're looking for that financial planning for their retirement. There hasn't been much of that in the last 2 years because of Brexit and obviously, COVID. There's certainly indications that more activity is around with respect to that. They tend to be -- I mean there's not matters and matters of these cases, but they tend to be large sort of one-offs coming in from time to time. When I say large one-offs, usually sort of GBP 15 million to GBP 30 million, something along those lines. But definitely more sense that people are getting back into that sort of selling their business. In terms of the Academy, obviously, last year, we suspended the Academy, which would have reduced the number. But what we've been able to do is use COVID as a big sort of learning lesson in terms of how the Academy works. And there's a lot more online, if you like, which means that the Academy that used to be a series of places in London, Manchester and Edinburgh, Solihull, we are now able to reach across the whole of the U.K. because it can be done online. And at that point, I might just ask to -- Pete just to come in and say a few other words.

Yes. Thank you, Andrew. So the way we adapted, and I made reference to this at the Capital Markets Day, the way we have adapted the training of the students in the Academy has led to a blended approach of face-to-face training and virtual, as Andrew has alluded to. We do have a number of people in training at the moment, as you've said, about 277. However, we have intakes throughout H2 of this year and into H1 of next year lined up in their free training engagement phase. So we will see the numbers of Academy students and then Academy graduates increase over time. But one of the things we are very conscious of is taking our time with the growth of the Academy to get back up to full speed as the country emerges from lockdown, and we're more able to do things face to face.

Our next question comes from Louise Miles.

Well done on the strong set results as well. Just 3 questions from me, please. So what was the proportion of flows that came from new clients versus existing clients in the first half? And how does it compare with like the normalized level that you see? I'm just trying to get a feel of how well advisers have done in the first half for attracting new clients. And then a question on inflation. How confident are you on the 5% growth in controllable expenses after 2021, even given the outlook for inflation that we're seeing? And then finally, I've got a question on your strategy and in particular on your proposition aims at women specifically. I read somewhere that 53% of U.K. millionaires will be female by 2025. How well placed is St. James's Place that appears to serve this growing segment of the market?

Okay. Thank you, Louise. I'll probably take the proportion of flows and the diversity question and ask Craig to pick up the inflation question on expenses. In terms of the proportion of flows, these are very round numbers and nothing's really changed over the years. But what you tend to find is about 50% of flows come from existing clients. And that's people on their financial journey, if you like, to retirement or inheritance. 35% to 40% will come from introductions and referrals from existing clients. And then the balance comes from other marketing client acquisition, if you like, initiatives. Nothing has much really changed over the years. And I don't think too much has changed recently. Other than those last year, those other marketing initiatives that might be a seminar about inheritance tax. Because of the social distancing, they clearly -- yes, we weren't able to have those. But it's small in terms of the sort of size of the numbers that we're talking about now. Very, very good question on diversity. So thank you for that. Now being a face-to-face advice business, there is no doubt that people bond and transact with similar types of people. So if we want to get more female wealth, if you like, then ultimately, we will need more female advisers. Now in terms of recruiting experienced advisers, yes, there's a finite pool there. But this is where the Academy comes into play in that there's no reason why the Academy cannot be producing 50% female, 50% male and equally across all categories of diversity, and that's the [indiscernible].

The inflation question.

Yes.

Yes, thanks, Louise. I would say that the start point to the answer to that question is that I'm certainly not planning any change in guidance based on what we see on inflation at the moment. There's that killer question out there, is this short term or long term? We've planned on the basis that we've planned. The other thing I'd throw in there is that, yes, there's inflation, but also, as we increase our scale, we have better purchasing power, and that is something we've experienced. So we've got clear plans. We've got a clear financial envelope. And I'm not planning on any change to that guidance at the moment. If God forbid we end up in a high inflationary environment, then there may be another conversation. But as we see things at the moment, the plan is the plan.

Our next question comes from Andrew Baker from Citi.

So just two left for me, please. First is on retention. So I understand you're confident in the retention outlook, but I don't believe that includes withdraws. So are you including -- are you expecting any structural increase in the withdrawal rate over the longer term as your customer base ages? Or are you adding enough younger clients to offset this? And then just secondly, on the controllable expense. I know you sort of reiterated the 5% growth for 2021. Previously, you've given sort of underpinning this was flat establishment expense growth, 25% growth in operational and strategic development costs and 15% in Academy expenses. Is there any change to this view based on sort of what you've seen in the first half?

Yes, I'll ask Craig just to pick up the expense question first.

Yes. But simply, there's no change. The point we're making at the half year is that the impact of the operating environment has had an impact on phasing, that the guidance we put out at the beginning of the year remains very much in place. And for anyone who has that to hand, we pulled together a table within the slide deck back in February setting out what we expected the outcome to be on controllable expenses. And I would still assume that, that's the case in any modeling you do for the remainder of 2021.

Thank you, Craig. And in terms of the withdrawals, again, a great question. Thank you, Andrew. So there's 2 answers to it, a short-term and a longer-term answer. If I do the short term first, what we saw sort of around about July, August last year was people reducing the income that they were taking from their plans because quite simply, they weren't spending it. So therefore, you saw a pickup or a reduction in withdrawals. We expect that to -- that's going to reverse back to where it was previously. So that's the short-term one. And clearly, as people enter into retirement, they're going to be taking withdrawals on pension plans, et cetera. But the advantage of being a growth business like ours is that we're constantly adding a greater number of flows going in each year from younger clients. So therefore, it's not shifting the dial at all. I hope that sort of makes sense.

So our next question comes from Oliver Steel from Deutsche Bank.

Three questions from me. I mean the first, notwithstanding what you said in your presentation, Andrew, is really about the sort of outlook for flows from here. I mean June, in particular, was an enormous month relative -- I mean even if I go back to 2019, to go back to some sort of normalized year, you had, I think, 39% or 34% growth. I can't even read my own rating, 30-something-percent growth June '19 to June 2021. How much -- so sort of A and B on that one. How much -- I mean given that you're going for only 20% growth in the second half of the year, we clearly expect a significant slowdown in the growth rate versus, say, 2019 in the second half of the year. So I'm just sort of trying to sort of work out here how much of the sort of exceptional surge we've seen and how much is still out there in the future. And then I suppose the part B question is, if you do achieve GBP 17.7 billion of flows in the full year, which appears to be your new guidance, is that a sustainable number? Is that a number you can grow from next year? Second question, rather more quickly, is coming back to Colm's question about ISA and Unit Trust growth. That -- I mean that's basically been sort of minimal growth over the last 3 years, and suddenly we're seeing more surge. Is that element of the first half growth, perhaps where we see the most exceptional element? Is that where a sort of -- is that where there's basically been a sort of holding back of cash over the last 12 months, which has been just sort of surged into the flows in the first half of this year? And then the third question I've got is about Academy productivity. So something like half of the net increase in agents came from the Academy as far as I can work out in the first half. And it's pretty important, I guess, then to understand the Academy productivity. So the question I've got is, does the guidance -- or does the experience you gave us in 2018 in that Investor Day about Academy graduate productivity beating average productivity by year 5 or 6, I think it was, does that still hold true? Or if not, how has it changed?

Okay. I suspect I'm going to be picking up all these questions. I can see a big smile on Craig's face. So there you go. Let's do the Academy productivity first. Nothing has changed from that sort of 2018 guidance. It takes people a little bit longer understandably because they're establishing a business. They need to build a client bank. But after 4 or 5 years, they tend to cross over. But 2 other points within there, Oliver. Firstly is there's sort of 2 strands to the Academy that people have always spoken about. One is next generation. So next generation will be sons and daughters, nephews and nieces working in an existing business. And then the second one is people establishing their own business. And I think we're mainly talking now about people that establish their own business. And then the other really important point is the average age is a good 10, 12 years younger than -- actually, it might even be a bit more than that, than an experienced recruit. So the economic value these individuals will add will probably be for a longer period of time. So hopefully, that answers that one. On the ISA, Unit Trust growth rate, I mean a couple of things there, and again, it was probably 2018. I forget the date now, but George Osborne increased the ISA allowance by 33% and then it stayed flat since then. So historically, what you would always have seen is the ISA business as a minimum would be growing as the ISA allowance went up. So that's been some of the challenge over the last couple of years. There is no doubt in my mind that people have put more into their ISAs this year because they've not been spending the money, which I think feeds into your first question. And I want to go back to what I said in my presentation, is that the pandemic has really thrown up in the air normal business patterns and comparatives. It's dangerous in my view to compare percentage growth with periods of the pandemic. If we look at the remainder of the year, then the third quarter is, I don't like to use the word, but I will, the sort of softer comparative of the year. And we've said that we got off to a good start in July. But then the fourth quarter is we started seeing business picking up in the fourth quarter. So that's why we believe 20% is the right number. That isn't what we're targeting. If we can do 25%, we'll do 25%-type situation.

Can I just come back to you on that number? Because I was comparing the numbers to 2019, so prepandemic. So your June figure was up 39% versus June 2019. Your guidance for the second half was up 9% to 10% versus the second half '19. So I'm just wondering, are your numbers just exceptionally conservative? Or is there sort of something exceptional in the first half that we should be aware of?

Look, I think there's definitely that pent-up demand in the first half. I mean if you look at the first quarter this year, it was up 18% on the first quarter last year that wasn't lockdown. So the first quarter was very, very strong. I answered all those, and I think [indiscernible]. So okay. Thank you, Oliver.

So our next question comes from Greg Simpson from Exane BNP Paribas.

I just wanted to ask you a broad question on COVID and productivity. Sort of productivity per adviser returned back to H1 2018 levels. I'm just wondering what's your sense on the current COVID impact on advisers. Presumably, there's still not many face-to-face meetings going on, but it seems like advisers have quite well adapted to seeing clients virtually, and maybe that allows them to have a broader client reach. So basically, the question is, do you think productivity is still being held back by a lack of face-to-face meetings or not so much? That's the first question. And then just secondly, quickly on DFM, you mentioned contracting SS&C for outsourcing. And it sounds like that's an important element for reaching the cash breakeven. Just to check at 2023 that you expect the impact on the cash result to be visible. And is it something that's quite straightforward to implement because you have that existing relationship with SS&C?

Yes. I'll pick up the productivity and pass over the DFM question to Craig. Look, productivity is always an interesting one, isn't it? And I'm going to refer back to what Peter Edwards was saying at the Capital Markets event. We see plenty of scope for increased productivity going forward, partly because as you sort of pointed out there, Greg, people are able to use more online stuff, making it easier for us to do business. I don't get any sense of productivity has been held back at this particular point in time by people not being able to meet. And indeed, there have been plenty of face-to-face meetings in a socially distanced way probably over the last quarter. But there is -- we feel very strongly some great scope for productivity gains in the future. Craig, do you want to do DFM?

Yes. So I mean I use the expression game changer, and I really think it is. It's the -- what you might see is one of the final areas of substantial investment. And the reason we're doing it is that what we have at the moment is a business that essentially has the same back office and IT systems as it did when we made the acquisition. So this time is always going to come. You're quite right. I think you used the expression sort of tried and tested with SS&C. And boy, has that been tried and tested as we went into lockdown and went through one of the most challenging operating environments you can imagine. So we're very clear that we've got the right partner here, and we're very clear that they've got the right back-office infrastructure for us to use. And this is really about future scalability and efficiency. And it just so happens, it's a cost that passes through. And for that reason, having started and having planned to get the job done over a sort of 18-month time horizon, I would expect the DFM result to be somewhere in the region of a net investment of GBP 10 million for '21 and '22. But because that then -- that period investment comes to a sharp close, you should then see in '23 a sharp reversal of that towards breakeven in 2024. So absolutely no change to the breakeven point that we talked about at the Capital Markets event.

Our next question comes from Larissa Van Deventer from Barclays.

Just 1 quick question from me. On Solvency II, you reported a ratio of 119%. Recognizing that gestation business is very different to your typical life insurer. Can you give us some color on how you think about the levels where the ratio should be and what the risks are to the sensitivities being more severe than those that you model?

It's my turn to smile at Craig.

Yes, I'll pick that up. So you're right. So in the first instance, it's always slightly dangerous to compare solvency ratios between different life companies because different business models will carry with them different inherent risks. And I would assert that we're at the lower end of that risk spectrum because we're basically asset-backed and unit-linked. So the risk that we think about as we work out what an appropriate ratio is, is operational risk. And all of the work we do is all geared towards scenarios that could result in some kind of operational stress. And we often talk about the management solvency buffer. And the reason we think about that is that it's very important to turn complexity into reality. And the reality is that as a Board on a life company, you have to figure out how much cash you want, how much reserve you want and, of course, liquidity within that in order to solve a problem. And the problem that you're solving comes out of all of the scenario planning that you do. And you essentially come up with a lump of asset that is there to be deployed. What we then do is think of that in the context of the Solvency II regime. And that's what's driven us to a conclusion over the years, which again is tried and tested, that 110% is the level that we would seek not to go below, which is lower than you'll see in other life companies. But you would be comparing that with other life companies that carry substantial risk. The other thing that's just worth flagging is that this isn't the only thing you have to have on your dashboard in front of you. So as well as the Solvency II measure, obviously, because you always have to think about liquidity. And then you have to think about IFRS. And we had a number of conversations at this time back in February around the dividend guidance where we thought very long and hard about the long-term impact that IFRS has, and that resulted in a -- the adoption of a different dividend payout ratio. So all of that is in front of you, but basically, 110% is the number that we live with under Solvency II.

Our next question comes from Enrico Bolzoni from Credit Suisse.

Just a couple of very quick for me. The first one is on the competitive landscape. So the industry clearly is attracting a lot of new players that are coming in, in this offering slightly different things, sometimes partially overlapping with what you offer. Just wanted a comment from you on how do you see the competitive landscape in the industry big enough in a way to -- do you have space enough for everyone? Or are you seeing the competition increasing? And the second question was on DFM. I mean clearly, the industry for DFM is very fragmented. Again, just wanted to ask you whether you have a [indiscernible] your capabilities.

Yes. Enrico, you broke up on the second question. I think you might have been asking about acquisitions, were you?

Yes, that's right. Sorry. About the DFM space in the U.K.

Yes, yes. Okay, fine. Look, let me pick up the competitive landscape first. And I think you're absolutely right. There's a lot of interest in this space quite rightly so because it's an incredibly exciting space to be operating in. And you would have heard us talk before about there being 10 million individuals in the U.K. marketplace in our sort of -- sorry, in our marketplace. You had heard us talk about there being the advice gap. You would have heard us talking about the complexity of the rules, the need for advice. And you would have heard us talk about the very large intergenerational transfer of wealth sort of occurring in the U.K. That's why it's a very exciting market and why there's lots of people interested in this space. We are one of the market leaders. So I think we're in a great space to continue to expand in that marketplace. In terms of the DFM, I'm going to pass you over to Craig again.

Yes. Look, the plan for DFM is organic growth. When we made the acquisition, the plan at that stage was always for organic growth, and that's proving to be a very successful strategy. It's always inadvisable to say ever in these situations. And so I would never say never. If we found that there was a small opportunity that was just too good to refuse, I think we would owe it to everyone to give that due consideration. But I think the other criteria that would have to be met in that situation, if it arose, that it would also have to be pretty modest. And the reason for that is that we already have a successful formula for growth that we're applying. So I think what I would assume for planning purposes is that this is not an acquisition strategy. But if something came along that was just too good to turn down, we would clearly feel obliged to have a look at least.

Our next question comes from Rhea Shah from Deutsche Bank.

I've just got 1 question left. If I can circle back to Andrew's questions on expenses. And you've already mentioned that there's going to be phasing in the second half, specifically from the development costs. I know that there's going to be intelligent automation and sales force within that. But how much of this is going to be implemented in the second half? And how much could we expect to see coming through in 2022?

Yes. Thank you, Rhea. The -- what -- the way to think about this, we've got very ambitious plans for investment improvement and growth. But within our controllable overheads, we've set a very clear financial envelope, and that's the financial envelope that grows by 5% a year. So the simple answer to your question as to what you can expect in 2022 is a 5% increase on the total cost for 2021, which itself will be 5% ahead of the total cost in 2020 because that's the envelope that we're working within. And it's that envelope that we have in sight as we commit to the plans that we're in the process of committing to. The phasing point is simply -- and you sort of hope this is more a feature of 2020 and '21. When you find yourself in lockdown conditions, the good news is that it hasn't obviously impacted the top line, but it does speed -- it does impact on the speed of execution, particularly of projects. But we do expect to catch up with that in the second half. So we expect that envelope to write itself during the course of this year. So put simply, the guidance that we put out at the beginning of the year, which projected into 2022, remains very much in place.

Our next question comes from Steven Haywood from HSBC.

Just following up actually on the previous question. Could you remind me of guidance on your strategic development costs? They've been obviously low in the first half of this year. Do you see them back-end-loaded in the second half? And then secondly from me, you've had a significant change in your persistency assumption on the embedded value. Can you talk about whether this sort of assumption is now in line with your current experience? Or are you still being somewhat conservative on your assumption? And this -- does it take into account your regular withdrawals, the surrenders and maturities and taking into account all of the money leaving your funds? And I noticed that obviously, you always provide your retention rate, excluding the regular withdrawals and surrenders. Why is this -- this is part of the ongoing nature of the business. I just wonder why you always exclude this from your retention rate.

Okay. I might just pick up the last bit just from a historical point of view. So the way the embedded value is working, if you look at the withdrawal rates, the withdrawal rates are assumed in the embedded value calculation for the new business profit, et cetera, et cetera. So that's why it was logical to map the retention that we talk about to the calculation of the embedded value. Your other questions, I think, were around expenses and the change. So I'll hand back to Craig.

Yes. So I go back to the guidance actually because you're right, strategic development costs are lower than you might have modeled for the half year, but the point we're making here is that, that will catch up in the second half. And I think for simple modeling purposes, the best way to think about this is the way we've structured the guidance, which is to lump them all together and think of them on a combined basis as controllable overheads. And if you assume that year-on-year, those controllable overheads will go up by 5%, you will have the right overall number in your model for the year. When we pull together the guidance, we said that there would be a 25% increase in operational developments. And we also combined with that strategic developments. And that's the basis on which we're going to be reporting at the end of the year. So that 25% increase on GBP 42 million in 2020 would take you up to about GBP 53 million. And I think that's what we're saying you should expect to see on a combined basis at the end of the year. Turning to the assumption change in embedded value. You've used the word conservative. I would use the word prudent because prudence is a requirement when you produce an embedded value. What you don't want to be doing is changing these things year in, year out. So what you will have observed in our embedded value over the years is a stream of positive variances. And that's usually indicative of being on the right side of prudence within the embedded value. So I would say what it does is it takes account of everything we've seen over the past few years. You don't pick on any particular year. So for example, 2020, we would have had very strong experience, but that may not be sustainable. What we've done is we've looked at it over a very long period of time and concluded that now is the right time to change the assumptions that go into the embedded value. And all of this is geared towards what an actuary would call a best estimate. But within that best estimate, there is always a degree of prudence because that is essentially a requirement.

Our next question is our final question, a follow-up from Andrew Crean from Autonomous.

It's a point of clarification, Andrew. On Page 20 of your result, you see that the funds in gestation will contribute about GBP 22.2 million to the 2021 result as they come out of gestation and start earning a fee. And then in the slide, you said that there was about GBP 20 million benefit to net income in the first half due to maturing gestation funds. Am I to conclude, therefore, that the benefit in the second half will be GBP 2.2 million?

I'll take that. No, that's not the case, Andrew. Because if you think about the disclosure here, what we're saying is for the remainder of 2021, there will be an additional GBP 22.2 million contribution, and that's on top of GBP 20 million that we've already seen coming through.

Okay. So it's H2 '21, not -- okay, got you.

Andrew, so what we're saying is the little table you see there for 2021, because we're at the half year point, is 6 months. It sort of also explains the step-up to next year and the year after type situation. I think that probably comes to an end of the questions, unless anyone's got any final questions. If not, just to say thank you very much for taking the time to both watch the presentation and participate in the questions and answers. No doubt, as you go through the body of the accounts, you might have some other queries, and Hugh is the first person to contact now, I think. Now Craig and I are now both smiling at Hugh, so there you go. So thank you very much, everyone, and have a good day.