Standard Life plc (SDLF) Earnings Call Transcript & Summary

Good morning, everybody, and welcome to Phoenix Group's 2021 Full Year Results Presentation. I'm delighted to be back presenting in person, and it's great to see you all here. Thank you for coming. It's clearly been an extraordinary 2 years since I started firstly, with the pandemic and now with the tragic war in Ukraine. And our thoughts, of course, go out to all of those affected. Before we take you through our results, we wanted to share our new visual identity of Phoenix Group, which has been designed to embody our purpose and better reflects the growing sustainable business we now are. Under our new group brand strategy, Phoenix Group will be our master brand and employer brand and endorse our powerful consumer brands of Standard Life, SunLife, Phoenix Life and ReAssure, who will be part of Phoenix Group. A powerhouse of brands that together will support us in delivering our purpose and our strategy. Visual identity is important, but what a brand stands for is really critical. I passionately believe that the best businesses have a core social purpose, which is why ours is helping people secure a life of possibilities. Helping a broad range of people in the U.K. to journey to and through retirement and enjoy a better later life. As a purpose-led organization, we are committed to delivering better outcomes for all of our stakeholders. It is only by having the best people who are focused on our purpose that we can deliver better outcomes for our customers and wider society and in turn, produce stronger returns for all our investors. The virtuous circle you see on this slide. So how have we delivered for investors in 2021 against our financial framework of cash, resilience and growth. 2021 has been an outstanding year for Phoenix and extends our excellent track record of financial results. We delivered record cash generation, once again exceeding our target range for the year. Our balance sheet remains strong with our shareholder capital coverage ratio at the top end of our 140% to 180% target range. And we have generated record new business long-term cash generation up 55% for the year. I'm delighted that 2021 was the year that we have proven the wedge, the hypothesis first set back in 2018. In fact, we have more than proven the wedge with GBP 1.2 billion of new business long-term cash generation from our open business, exceeding the GBP 800 million per annum needed to offset the Heritage runoff. And the investment we are making into our open business means that we are now confident of delivering ongoing organic growth, which will more than offset the Heritage runoff year after year. In addition, we have unique market-leading capabilities and a proven track record of generating further value both by delivery management actions and by executing more M&A. Phoenix is now a growing sustainable business. As a result of our strong outperformance in 2021 and having met our 2 conditions for dividend growth, the Board has recommended Phoenix Group's first-ever organic dividend increase of 3%. This increase reflects both the growth in our business and our strong delivery of management actions during 2021. Our new increased level of ongoing dividend is just as sustainable as it was before. As you can see on the chart, our dividend track record is strong, and we have significantly outperformed the wider FTSE 100 over the past 7 years. However, until now, historical dividend increases have only come from M&A. What is really exciting is we now have 2 sources of potential dividend increases, both organic growth and inorganic growth. We have therefore evolved our dividend policy to reflect this, and Rakesh will cover this later. Organic growth is a huge step for Phoenix and significantly enhances our investment case. But what remains unique about Phoenix is both the dependability and resilience of our cash. We are confident that the cash from today's in-force business without any new business or any M&A can pay our current increased dividend over the very long term. There are very few stocks in any sector that can say that. And unlike any other insurer, our cash is also extremely resilient due to our hedging approach. As you can see here, in any market conditions over the last 5 years, our Solvency II economic variances have been negligible. This is clearly a huge advantage and differentiator in times of significant market uncertainty, such as we have today. And we continue to grow both through our open business and through further M&A. And as our business grows, so will our dividend while fully maintaining its sustainability and resilience. Putting all this together, I'm sure you agree, is a unique and highly attractive combination. So that's the numbers. What have we been focused on to deliver them? We have 5 strategic priorities that structure how we deliver our purpose and strategy across Heritage, Open and M&A. These are the key programs and initiatives that will build distinctive capabilities to win in our chosen markets. Let me talk through our progress during the year against each of these strategic priorities. Optimizing our in-force business is the bedrock of Phoenix. It is a market-leading capability that we have built up over many years, and we've undertaken a range of actions during the year. In particular, I am delighted that we have delivered a record level of management actions in 2021 at GBP 1.5 billion, which includes GBP 550 million from our internal model harmonization and the investment in our asset management capability is delivering tangible results with GBP 3 billion of new illiquid asset origination at a strong average illiquidity premium of 70 basis points. Enhancing our operating model and culture is our second strategic priority. Again, this is a distinctive capability that sets Phoenix apart from others. During 2021, we have once again demonstrated how good we are at realizing significant cost and capital synergies from our integrations with further substantial synergies in the year. Across our 2 integrations, we have now delivered over GBP 2.5 billion of synergies, having exceeded our target on Standard Life and delivered 89% of our target for ReAssure in just 18 months. These are huge numbers and demonstrate the significant value we create through M&A. This is underpinned by our unique capability of delivering multiple integrations concurrently as we delivered both the migration of Old Mutual Wealth customers onto our Alpha platform and the ongoing migration of Phoenix customers from Capita to TCS. Turning to our people and culture. On the right-hand side of this slide. A clear focus for me during 2021 has been investing in the development of our fantastic internal talent to support our ambitions as well as strengthening our teams through the hiring of market-leading external talent to bring new skills to the group. I'm also pleased that our focus on increasing female representation is beginning to develop momentum with a number of females in our top 100 leadership positions increasing from 21 to 31. Finally, it's always important to see our efforts reflected in an improved colleague engagement score. In particular, our colleagues tell us that our strong sustainability agenda is of real importance to them. Our third strategic priority is to grow our business to support both new and existing customers. We are investing in people, processes and technology to build a market-leading open business. I'm determined that our open business growth strategy is balanced over time between BPA and our capital-light asset-based businesses such as Workplace. And having acquired the Standard Life brand last year, we are leveraging this trusted brand to accelerate our growth. The investment into our Retirement Solutions business delivered a strong year in BPA with GBP 5.6 billion of premiums written while reducing our capital strain. But to be clear, we are not growing in BPA at the expense of our resilience with a balanced portfolio and low credit risk sensitivity remaining our long-term ambition here. I was also delighted that we saw clear momentum building in our Workplace business with 41 new schemes won during the year. This demonstrates the strong proposition we now have and is evidenced by us being awarded Master Trust offering of the Year by Pensions Age for the second year in a row. While these new scheme wins are small in terms of assets, it's an important milestone with advisers giving us the opportunity to prove ourselves on these smaller schemes before we hopefully begin winning the larger schemes in time. And finally, we have maintained yet again, our high customer satisfaction scores exceeding our targets for the year. Our fourth strategic priority is to innovate to provide our customers with better financial futures. U.K. faces a significant retirement savings gap, which we are committed to helping close. To do this, we will provide people with the right guidance and products at the right time to support the right decisions. Key successes in the year include the development of our digital capabilities, which supported a 16% increase in customer logins across our Standard Life digital platforms as well as the development of a road map to transition 1.5 million customers and over GBP 15 billion of assets into a sustainable default fund, which is now in train enabled by the strength of our core strategic asset management partner, Aberdeen. I'm also really excited by the 2022 program of work from our new FinTech Phoenix Insights. We will use research to lead fresh debate, prompt and national conversation and inspire the action needed to make better longer lives a reality for all of us. Be sure to keep an eye out for the launch of our Longer Lives Index on the 30th of March, which explores the U.K.'s preparedness for longer lives. And our fifth priority is to invest in a sustainable future. As the U.K.'s largest long-term savings and retirement business, we are responsible for managing over GBP 310 billion of assets on behalf of our 13 million customers. Our customers and shareholders trust us to keep their money safe and provide them with strong long-term financial returns while using our scale to play our part in delivering a sustainable future. That is why we are integrating ESG across our business, investing responsibly and progressing towards our commitment of being net-zero by 2050. A clear demonstration of the impact our scale affords us is the GBP 1.3 billion that we invested into sustainable assets during 2021. For example, we invested over GBP 500 million into affordable housing, which helped support some of society's most vulnerable people and invested over GBP 200 million into projects with a positive environmental impact such as the provision of renewable electricity to nearly 0.5 million homes. So in summary, 2021 was a pivotal year for Phoenix as we have now proven the wedge and are confident of proving it going forward. The Board has recommended our first-ever organic dividend increase of 3%, which remains just as sustainable over the long term. Strong progress has been made against our 5 strategic priorities as we deliver on our purpose and strategy. We offer an attractive dividend that is funded by our in-force business over the very long term. It is uniquely resilient and both our organic and inorganic growth can now support future dividend increases. And with that, I will hand over to Rakesh.

Thank you, Andy, and good morning, everybody. It is great to see you all here. As Andy said, Phoenix has delivered a strong financial performance in 2021 and we delivered record cash generation of just over GBP 1.7 billion in the period, maintained our strong solvency balance sheet and achieved a 55% year-on-year increase in incremental new business long-term cash generation of GBP 1.2 billion. And having met our 2 conditions for organic dividend growth, the Board has recommended our first-ever organic increase of 3% in our final dividend, equating to a total dividend of 48.9p per share. As you can see from this slide, our record financial results reinforce our consistent track record of delivering cash, resilience and growth .For example, our generation has more than doubled over 5 years, while our dividend has increased by 8%. Meanwhile, our Solvency II surplus has nearly tripled over 5 years and our shareholder ratio has increased by 16 percentage points. And in terms of growth, our assets under administration have more than quadrupled and our incremental new business long-term cash generation has grown to nearly GBP 1.2 billion in just 4 years and from a standing start. Turning first to cash. With strong cash generation of GBP 1.7 billion, we have once again exceeded the top end of our target range of GBP 1.5 billion to GBP 1.6 billion for the year. This exceptional level of cash generation reflects the synergies generated by the integration of the Standard Life and ReAssure acquisition. We are also today setting new 1-year and 3-year targets with the latter becoming a rolling target that we will update every year going forward. For 2022, we have set a target range of GBP 1.3 billion to GBP 1.4 billion of cash generation. This is lower than 2021 due to a reduced level of integration capital synergies going forward, having over-delivered on both integrations already. Our 3-year cash generation target is GBP 4 billion and guidance over the life of the business is now GBP 17 billion. As ever, I do just want to remind you that Phoenix's cash generation guidance is conservatively based on our in-force business only. It excludes the benefit of any future new business or M&A and also excludes management actions from 2025 onwards. Looking over the period from 2022 to 2024, this slide sets out the HoldCo uses of cash generation. This includes operating costs, debt interest and our increased dividend. It also reflects debt maturities and call dates, which includes a GBP 450 million repayment due in July this year. This slide highlights the significant amount of surplus cash that will be generated over this period. We expect GBP 1.7 billion to be available for both organic growth through BPA and inorganic growth through M&A. Group long-term free cash was GBP 13.2 billion at the end of 2021, broadly flat on the prior year. Importantly, our recurring sources of cash exceeded our recurring uses by around GBP 300 million in the year. We have made a significant investment into our growth ambitions during the year with incremental costs we expect to incur to support our growth ambitions capitalized into long-term free cash with a total GBP 200 million impact. We've also recognized a GBP 200 million adverse impact from the industry-wide transition from LIBOR to SONIA. After the servicing of debt until maturity, there is GBP 11.8 billion of cash available to shareholders. With our future increased dividend cost around GBP 0.5 billion per annum, this level of group cash from our in-force business supports our dividend over the very long term. Our Solvency II capital position remains strong with a resilient surplus of GBP 5.3 billion which includes the deduction of our 2021 final dividend, while our shareholder capital coverage ratio has increased to 180%. We operate a target shareholder ratio range of 140% to 180%. Our ratio is at the top end of that range, which means we can invest in both organic and inorganic growth opportunities to drive future returns. Our Solvency II surplus has remained resilient through the year and the additional value we generated through management actions provided us with the capacity to invest into growth. This includes our allocation of GBP 0.4 billion of capital to BPA in 2021. We also continue to invest into our people, processes and technology, which underpin our future growth ambitions with these costs now reflected in the solvency balance sheet within our expense assumptions. While the surplus remains stable year-on-year, our ratio has increased by 16 percentage points, primarily due to the strong over-delivery of management actions. We have a particularly low appetite to equity, interest rate, inflation and currency risks, which we see as unrewarded, and therefore, hedge to protect our Solvency II surplus. This translates into the low sensitivities presented here under our new harmonized internal model. We also manage our longevity risk through reinsurance retaining around half of the risk across our current in-force book and reinsuring most of the risk on new business. We see credit risk as rewarded and so actively manage our portfolios to ensure to remain high quality and diversified. The key sensitivity we focus on here is a full letter downgrade of 20% of our credit portfolio, which is currently GBP 0.4 billion and small in the context of our GBP 5.3 billion Solvency II surplus. It is also worth noting that the credit sensitivities we disclosed here are prudent as they assume no management actions are taken to rebalance our portfolio, which is different to how many of our peers disclose. We will continue to manage our credit risk sensitivity as we grow in BPA through operating a balanced portfolio and with active risk management. As a consequence of our hedging approach, we are far more resilient to the major market risks than our U.K. peers as this slide clearly demonstrates. This low sensitivity is especially important during times of market volatility such as we have at present and remains a key differentiator for us. This resilience allows us to operate with 140% to 180% target range for our shareholder capital coverage ratio. We manage over GBP 310 billion of assets on behalf of our customers and shareholders. And we have invested significantly into our asset management capability, which oversees this key responsibility. We currently partner with 10 global asset managers to manage our portfolio, which provides us with access to a wide range of new assets to support our growth aspirations with the expertise of our core strategic partner, Aberdeen, a major advantage to us here. In order to manage our credit risk, Phoenix maintains a diversified GBP 40 billion shareholder credit portfolio split between liquid and illiquid credit. Our GBP 12 billion illiquid credit portfolio comprises 29% of annuity-backing assets and we continue to target increasing our allocation of liquid credit assets to around 40% over the medium term. The proactive management of our shareholder credit assets has enabled us to uphold the high credit quality of this portfolio where we manage our sector exposures to minimize our risk. Integral to this is ensuring we operate within our conservative risk appetite for our BBB exposure being below 20%. At the end of 2021, we were at 17%, while our exposure to BBB- remains very low at 3%, and we have had no defaults during the year. Also, given the current situation, I just wanted to flag that we no longer have any shareholder credit exposure to Russia or Ukraine nor any exposure to sanctioned banks. Long-dated or illiquid assets provide excellent cash flow matching for our GBP 42 billion annuity book and are a key enabler of reducing the capital strain on BPA business, too. Reflecting the ongoing investment into our capability and team. During the year, we increased our illiquid asset origination by 48% to GBP 3 billion with an average credit rating of A. The strength of the team we are building is demonstrated in the strong average illiquidity premium we achieved this year. We were able to rotate out of liquid credit assets into liquid credit at the same credit rating for a yield pickup of around 70 basis points. We have also increased our investment in sustainable assets to GBP 1.3 billion, which is now based on a rigorous definition of sustainable assets developed with sustainalytics. Importantly, our illiquid origination strategy is designed to diversify our risk. We do this through using the best asset managers in each asset class and geography as well as by limiting our credit concentration risk. Our ability to deliver value-accretive management actions is a key differentiator for Phoenix. I am, therefore, delighted that we have delivered record management actions of GBP 1.5 billion during the year. This included a strong performance of around GBP 700 million from business as usual activity, including liquid asset origination and asset risk management actions. In addition, our internal model harmonization success provided a significant contribution at around GBP 550 million, the majority of which was a reduction in SCR. With most of our capital synergies now realized, these will be lower in the future until the next M&A transaction. Going forward, there continues to be further BAU actions for us to realize. We continue to make great progress across both integration programs in 2021, with GBP 824 million of further synergies in the year. A big contributor was, of course, the internal model harmonization, which delivered upfront capital synergies of around GBP 550 million from Standard Life, exceeding our previous expectation of around GBP 400 million. It also supports future capital optimization actions and underpins our future M&A ambitions. We have now delivered over GBP 2.5 billion of synergies from Standard Life and ReAssure, with nearly GBP 2 billion of this realized through capital synergies. We've also taken the strategic decision to rephase our Standard Life customer and IT migration program with the legacy policy migrations now expected to complete by 2025. We are looking to accelerate some exciting new capability development on TCS BaNCS to support our future Workplace growth. Moving now to growth. We have reported a 55% increase in new business long-term cash generation to GBP 1.2 billion. The biggest contributor was Retirement Solutions were a strong year in BPA delivered GBP 950 million of long-term cash generation, an 82% increase on 2020. Elsewhere, it was great to see our asset-based businesses deliver increased long-term cash generation year-on-year after adjusting for the disposal of the platform businesses to Aberdeen in 2021. We remain focused on only allocating capital to the highest return growth opportunities for our shareholders. The investment we have made into our developing our BPA and asset management capabilities has supported us in writing GBP 5.6 billion of premiums during the year. Our capital strain has reduced from 9% last year to 6.5% this year. This is fantastic progress towards our target for 5% over the longer term. Having completed 2 significant transactions of GBP 1.7 billion and GBP 1.8 billion, it is clear we have become an established BPA market player. We've also continued to maintain our discipline in a competitive market as evidenced by the double-digit IRR we achieved on our transactions in 2021. As we enter 2022, we are confident in the outlook. Due to the surplus cash generated by our in-force business, we are now able invest around GBP 300 million of capital into BPA annually. We are expecting a larger market in 2022 at GBP 30 billion to GBP 40 billion, but do expect the market volumes to be more weighted to the second half based on our pipeline. However, I am delighted to report that we have already won 2 external transactions this year covering GBP 600 million of liabilities and expect these to complete in the second quarter. And we also expect to buy in the remaining Pearl Pension Scheme liabilities of around GBP 750 million in the second half. So that is a total of nearly GBP 1.4 billion already in train during the first quarter which is a great start to the year. We will, of course, continue to retain our pricing discipline through our focus on value over volume. And while individual deals will vary, we expect to see broadly similar transaction economics in 2022 as we did in 2021. Turning to our IFRS results. We delivered strong operating profit of GBP 1.2 billion in 2021, 3% higher than the prior year. Operating profit in our Heritage business increased year-on-year primarily reflecting a full year of profits from ReAssure. Our Open business operating profit reduced slightly year-on-year due to GBP 100 million lower longevity benefit in 2021 and the strengthening of expense assumptions to reflect our investment into our growth capabilities. This was partly offset by stronger new business profits from BPAs. The sizable swing in investment return variances and economic assumption changes reflects the impact of our hedging strategy from rising rates and equities. We hedged the solvency position to deliver dependable cash and dividend resilience and to protect against market uncertainty and accept that this will cause volatility in our IFRS balance sheet. Having proven the wedge and recommended our first-ever organic dividend increase for 2021, the Board has chosen to announce a new dividend policy to better reflect the growing sustainable business that Phoenix now is. We have, therefore, replaced our previous stable and sustainable dividend policy with a new policy that sets out our clear intention to pay a dividend that is sustainable and grows over time. It is important to emphasize that the Board will, above all else, prioritize the sustainability of our dividend over the long term. But we can now grow both organically through our open business and inorganically through M&A. The Board will, therefore, assess annually where the business growth can sustainably fund a dividend increase. We see this new dividend policy as a critical evolution in Phoenix's investment case. So to conclude, we delivered record financial results in 2021 across our financial framework of cash resilience and growth. And we have a clear set of targets for 2022. This includes a 1-year target of GBP 1.3 billion to GBP 1.4 billion of cash generation in 2022 and GBP 4 billion over the 3 years to 2024, and we will retain our resilient balance sheet by operating within our target ranges for solvency and leverage. In terms of growth, we are now confident of proving the wedge going forward through generating in excess of GBP 800 million of new business long-term cash generation annually. And we will also remain focused on completing value-accretive M&A. And with that, I will now hand you back to Andy for the outlook.

Thank you, Rakesh. There are 4 major trends in the U.K. long-term savings and retirement market. And these offer Phoenix multiple growth opportunities. The Heritage M&A market is huge at around GBP 480 billion. And with the BPA market, estimated at over GBP 2 trillion of uninsured defined benefit liabilities, many would say the current GBP 40 billion per annum of flows will be exceeded in the future. While the Workplace and Individual Retirement Solutions market, each with an estimated GBP 40 billion of annual market flows represent significant capital-light growth opportunities for us over time. We have a clear and differentiated strategy, which creates shareholder value through leveraging all 4 of these major market trends. Heritage is the bedrock of our business. which delivers high levels of predictable cash that covers our dividend into the very long term. And it also generates surplus cash that we can reinvest into both our open business to support organic growth and into M&A to support inorganic growth, both of which can support future dividend increases. We are very focused on optimizing every pound of shareholder capital through a rigorous capital allocation framework that ensures we only invest in those growth opportunities that drive real value. Heritage and M&A are unique market-leading capabilities for Phoenix and create significant value. While the investment we are making into our Open business, we'll develop market-leading capabilities here, too. What is particularly attractive about Phoenix is how the whole is greater than the sum of the parts. By reinvesting surplus cash into Open and M&A, we are effectively generating further in-force business. And as we apply our distinctive Heritage capabilities of optimizing our in-force business, and enhancing our operating model to this further in-force business. We will have material competitive advantage and hence, will generate significant shareholder value. Let me give you some specific examples. For our Open business, the Heritage book enables significant capital efficiencies, particularly in our Retirement Solutions business, so BPAs. This is because we can diversify the different risks across the 2 portfolios, which reduces the capital we have to hold under Solvency II. Others without a Heritage business cannot do this. Another example is that our strategic partnership with TCS, driven by the scale of our Heritage business provides us with a market-leading cost per policy administration platform that will give us a meaningful cost advantage for our asset-based businesses. And our scale in Heritage means our Open business has access to around 13 million customers where we can meet a broader range of their needs over time, including helping them consolidate their pensions and journey to and through retirement with us. Now to be clear, we are not fully leveraging these advantages for our Open business today. We need to invest to fully do that. But if you think about the progress we are making and the structural competitive advantage we will have in time, I think this is really exciting. Because this is the same logic as when we do M&A. We have demonstrated how we leverage these core Heritage capabilities to the further in-force business we acquire inorganically. Our Heritage business enables us to generate significant cost and capital synergies to underpin our track record of shareholder value creation in M&A. So let me talk further on M&A. M&A has always been a key part of Phoenix's DNA and very much remains a core part of our growth strategy. Like my predecessor, I'm very fond of cups of tea with my fellow insurance CEOs, indeed, really a week goes by where I don't partake. And when I meet with these CEOs, the message from most of them is very much one of when, not if. That is because over time, the attraction of the steady cash flows is overtaken by the cost challenges of legacy IT and [ burden ] of regulatory change. In addition, insurers across the market are looking to simplify their strategies and seeking to unlock trapped capital for reinvestment. We, therefore, have a clear M&A strategy that responds to these drivers. We are unquestionably the market leader in Heritage M&A and have a proven track record of delivering significant shareholder value through cost and capital synergies. Phoenix is also a trusted counterparty for vendors and is well known as a safe home for customers. So we're one of the first names on the core list for any potential disposals. In terms of the market opportunity, we believe that the GBP 480 billion U.K. Heritage market can be broadly split into 2 parts. The first is a small number of large portfolios that might come to market over time. While the likelihood and potential timings remain uncertain, we will be keen and enthusiastic if they do. The second category comprises a larger number of small to midsized portfolios, which have an estimated consideration of up to GBP 1 billion. These can be funded from our own resources and therefore, will be strongly accretive for our investors. The feedback from CEOs here is when, not if. So there is likely to be a series of these opportunities over time. And we stand ready to do our next deal enabled by our scalable platforms and our GBP 1.3 billion of available firepower. 2022 will therefore be another exciting year for Phoenix as we execute against our 5 strategic priorities. Our key focus areas for the year are outlined on this slide. I'm not going to go through these individually, but as you can see, we are prioritizing and investing in the areas that build our competitive advantage to enable us to differentiate ourselves in the market. In summary, we have a clear and differentiated strategy, which leverages the major market trends where the whole is greater than the sum of the parts. This supports us in continuing to deliver cash, resilience and growth. With the cash from our in-force business, funding our attractive dividend over the very long term. While our business is uniquely resilient, owing to our strong capital position, which is hedged against the major market risks, particularly important in uncertain times. And we will be growing both organically and inorganically. Phoenix is a growing, sustainable business.

And with that, we will move to questions. So we will start with questions from the audience in the room. [Operator Instructions] So I'm going to ask Rakesh to rejoin me on the stage. And also, Andy Curran, the CEO of our Heritage -- of our Open business, almost changed your role there, Andy. And Mike Eakins, our group CIO, will also join us on the stage. So somehow or other, Andy Sinclair managed to snap on the microphone first. That's probably just to remind me that Scotland [indiscernible] Rugby score earlier this year, but we'll see you, Andy, fire away.

Yes. I just wish we could back up with a few more results. My usual 3, please. Firstly was just on M&A. Just wondered, firstly, could you look at that GBP 480 billion AUM figure and give me an idea kind of what that means in terms of Own funds for the market opportunity, for M&A. And you said when not if, for those smaller deals coming to market. But the smaller ones are probably ones where we don't really get as much vision as much insight over. Can you just give us an idea of kind of what are the triggers to bring those sorts of deals to market. So that's the first 1 on M&A. Secondly, it was just on the dividend. Great to see the first organic increase coming through. But to me, I say M&A is still so important for Phoenix. Where do you think more of the growth will come through in the dividend over the next few years? Do you think that will still be M&A? Or do you think organic is the core part of the dividend increase? And thirdly was just on annuities. You said economic is pretty much the same for 2022 as 2021. Just really given your increased capabilities, what is the next leg that takes us down to the 5% strain from where we were in 2021?

Okay. Thank you, Andy. So I will take the first couple of those and then I'll ask Andy to take the third one. So in terms of M&A, you asked of the GBP 480 billion, what's the kind of -- what's the Own funds. So I guess what I'd point you to is if you think about the ReAssure deal, that was about GBP 3.5 billion of own funds for GBP 80 billion of assets. So that's probably not a bad guide to thinking about what's the level of own funds within that market, if you like. And then in terms of the larger number of smaller deals, so yes, as we said on the slide, we see there's about GBP 255 billion of assets there. So put another way, that's going to be a little over GBP 10 billion of own funds. But there's a series of books, and we think up to about GBP 1 billion. And what is particularly attractive is all the M&A we've done historically we've raised equity. And therefore, you need to service that equity. If we can do M&A from our own cash resources, then clearly, it's going to be particularly accretive and attractive from a shareholder perspective. And so as I go around ahead [indiscernible], my cups of tea, and I was on the receiving of those from Clive for many years. So it's quite nice to be [ on the other ] side of the table doing that. As I say, what I get consistently from the significant majority of those CEOs is we do quite like the reliable cash flows that come off this closed book business. But every single year, it goes down a bit, and you've got to reduce your costs every year to keep in line. And that becomes a challenge particularly when you have legacy IT and particularly when there's cost of regulatory change. So what they all say is there comes a point where we will -- it's a when not an if, we will sell this. In terms of dividend going forward from here, so I would think about it that we have a model where Heritage generates very high level of predictable, resilient cash, and that covers our current dividend into the very long term, very resilient reliable. That is very attractive. But it's generating excess cash. And what we do is we quite rigorously think about how can we generate the best return on each pound of excess shareholder cash. And so that will vary over time. We're very confident of the ability to deploy into BPA on an ongoing basis. We are confident that M&A will happen over time. What we can't predict is the exact timing, and I would view it that Phoenix Group is now a 3-legged stool. So actually, our strategy is quite a lot more focused than most of our competitors. We do the 3 things. Heritage, Open and M&A. The excess cash from Heritage will redeploy based on where we can get the most attractive returns. We absolutely believe M&A will be a core part of that going forward. We're keen [ be ] ready to do the next deal and think will drive substantial value as we do so. Andy, do you want to pick up on the BPA side?

Sure. Thank you, Andy, for the question. I guess the first thing I would say is we will always think about the BPA market across value not volume. So that's the first thing I would say. The second thing I would say is I'm pleased with the momentum, which we've delivered last year. So what's the outlook where we continue to focus, I guess, there are probably 4 areas where I would draw your attention to, #1, sort of broaden and deepen the quality of our relationships with the reinsurers, first thing. Second thing is working with my team on the liquid asset origination. So that's obviously an important part of the equation. We will continue thirdly, to optimize our capital efficiency using our internal model and over and into 2023, we'd expect to have a major model change, which we would expect to be approved next year. And of course, without questioning, given that you're sitting next to Tom Ground. The quality of the BPA team itself is, in my opinion, market-leading. So we're delighted with that. So they would be the 3 or 4 major areas where we think we can drive ultimately towards the capital -- turn towards a capital strain of around the 5% mark.

Just coming back on the M&A market. And you were saying the cost pressure is really one of the triggers, does that mean that a higher inflation world should potentially accelerate the BPA -- sorry, the M&A market?

Yes. I would say generally a more challenged economic environment. Then you've got a whole host of drivers, haven't you? Because balance sheets have economic impacts on them. Generally, capital is tighter. Generally, inflation will be more of a challenge exactly as you say. So I agree. And what we can't do is we can't predict the exact timing. But what I can say is we are really confident that there will be a series of the smaller deals over time. And I think there's a decent chance of bigger deals as well for the reasons you know well. So it remains a core part of the strategy. And we're confident, as we sit here year-by-year going forward, we will be talking about organic growth consistently, and we will also consistently be talking about inorganic growth. Andrew?

It's Andrew Crean for Autonomous. 3 questions. Just coming back on the M&A side. It's been over 2 years since you announced your last deal. That money could be deployed to increase the earnings per share and the dividend per share immediately through a buyback. What are the chances of you doing a deal this year? I know you say when not if, but the market can be quite [ in tempered ]. Secondly, just to clarify on the organic dividend growth. I assume that if you generated long-term capital generation of GBP 800 million, the dividend flat from an organic point of view. Can you tell us for every GBP 100 million over the [ 8 ], what does that mean in points our dividend growth? And then thirdly, you were talking about taking advantage of maturing Heritage customers to bring them into our retirement products. Could you tell us at the moment what proportion of your Heritage clients who are reaching 65 are actually buying products from you?

Sure. So I'm going to take the start of the first one of those and then pass to Rakesh to cover the dividend aspects and the share buyback question. And then I'll ask Andy talk to the last of those. So you're right. We completed our last M&A deal just over 18 months ago. I would say, though, that the GBP 2.5 billion of synergies we've delivered from the Standard Life and ReAssure deals over the last couple of years, we've not really been set [indiscernible] our thumbs. We've been driving lots of value within the business. I mean, we can't predict when these things would happen. I would say there is a good chance of an M&A deal this year because I talked to the different CEOs out there and the sense I get is that there is a good chance of a deal this year. But we can't be sure. What we can be sure of is we are ready, eager and keen to go when the opportunity presents itself. We will create higher levels of synergies than anyone else. We are the most reliable and trusted counterparty, regulate relationships, ability to look after customers well, look after colleagues well. So I think we're exceedingly well placed as of when things come along.

Yes. So on the share buyback, I mean, clearly, this is something that the Board is updated on, on a regular basis. But at the moment, we have a clear financial framework that looks at cash, leverage and capital, and we aim to operate within our ranges. So for leverage between 25% to 30% on a Fitch basis and for capital, 140% to 180% on a Solvency II shareholder coverage ratio basis. So on a Fitch basis, we're currently at 28%. So sort of in the middle. On the ratio, we're at 180% throughout the top end. But clearly, then the next step is to see what are the opportunities for reinvestment of that capacity into other value-accretive returns. Andy has already spoken about the M&A aspect of it. But clearly, the progress we are making on our Open business and the fantastic [indiscernible] that was done on the BPA of achieving GBP 950 million of long-term cash generation. We talked about today that I'm looking to spend around GBP 300 million on BPA annually, value over volume. But also I also -- I highlighted the fact that we've got a GBP 450 million maturity as well on our Tier 3 in July of this year. So in summary, we keep a constant watch to make sure we drive the best return for our investors. But certainly, where we are today, we see a lot of opportunity for organic growth and also inorganic growth.

Andy?

On the third part of your question, it's very difficult to see in aggregate because each individual product type has very different characteristics. So what we've been building through the Open division is working really hard with how do we think about engagement, how do we think about propositions. We've had significant improvement across engagement, digital engagement, in particular, has made a big difference from a retention perspective, and we're working through this year, in particular, a new and wider propositions to engage our customers for longer. All of that is on the bedrock of an extremely good level of customer service. I think it was covered in the previous session, which was just explaining that all of our customer metrics are above the 90% mark. So from that perspective, it's really encouraging and also the Standard Life brand and the clarity around where that sits has made a massive difference to us. So to give you just a number on that. So we have around about 0.25 million members of pension schemes now engaging with us digitally. That's a massive increase on the previous year. And as we continue to build out what we think will be innovative solutions with that engagement layer, we'll be in a very strong position going forward. The other thing just to say about scale, there are around about 30 million adults in the U.K. who are between the age of 50 and 65. And we would guess that we have around about GBP 4 million of them as policyholders. So that is a massive scale opportunity for us. And it's up to me, I guess, along with the team to make sure that we find a way of engaging with those people and making sure that we deliver products, which will help them as they move to and through retirement.

So no pressure there. But in fairness, we have done a bit of sequencing here or a degree of sequencing. So we focused on BPA, first and foremost, and you can see the benefits of that. Then on Workplace. And I think the 41 new schemes having won virtually none in the preceding years, albeit they're only smaller initially, and that's how advisers will always test this out is great progress and then what we call the customer savings and investment side. You sort of think about that the slide I did on outlook with the 4 market trends. M&A, we've always been after and focused on. And then it's BPA and then Workplace and then the kind of consolidation and rollover into retirement income. So there is a logical sequence we've been investing there. Okay. As we move along the road here.

Dom O'Mahony, BNP Paribas Exane. Love the new brand. 3 questions, if that's all right. The first is just on the cash flow guidance. Your GBP 4 billion for the '22 to '24 period implies roughly, roughly flat cash flow given the 1.3, 1.4 in '22 I'm just trying to square that with the synergies and you delivered GBP 800 million -- on a capital basis, you delivered GBP 800 million of synergies in '21. My understanding is the synergies usually flow into cash thereafter, not immediately. And in fact, I think only GBP 400 million of the cash in 2021 was synergies. That implies quite a large sort of availability of synergies from a capital perspective. Would it be fair to assume you're expecting that to come through into cash over several years rather than in a sort of an early way. Is that the right way to sort of read it? I promise the other questions aren't quite as complicated. The second question is really simple. The war chest number, the GBP 1.3 billion, could you just remind us how that's calculated? And is that leverage the binding constraint on that? Thirdly, on M&A, could you give us a sense of your philosophy about the sustainability of the dividend increase. So the point here is a simple one, which is an acquisition of a runoff book naturally has a runoff profile, a dividend, a sustainable dividend is flat. Those 2 things created quite an interesting intersection where you can imagine a higher dividend policy being sustainable for 10 years, a lower dividend being sustainable for 20 years and thereafter. So what's your philosophy on what sustainable looks like in terms of a dividend increase from M&A?

Rakesh, I think they are probably all 3 for you, I mean.

All right. No, thank you.

Mike's getting easy here, by the way.

All right. Let me start with the first one on the guidance and the synergies point. So clearly, we had a fantastic year on the synergies and delivering GBP 2.5 billion of synergies across the acquisition of Standard Life and ReAssure. So what we particularly got this year was the benefit of the internal model harmonization. And as I pointed out in half year last year. And then what we ended up with, we've got delivered GBP 550 million of synergy from that particular initiative. Now a lot of that is from the benefit of having group diversification. So if you imagine what we were doing was effectively bringing together Standard Life and the legacy Phoenix businesses onto 1 internal model. And therefore, at the group level, we can take that benefit from capital because it's under 1 internal model, I can take that diversification benefit. So that will then turn into cash when we do the [indiscernible] essentially because that diversification will then sit in the individual entities. And therefore, when we look to bring those companies together, which is scheduled, as you would have seen in one of the slides for 2023, the second half or 2023, that will then turn that -- a lot of that into the cash, and that's already within the numbers that we've quoted. So hopefully, that gives you some color on that. On the second one, on how that the GBP 1.3 billion calculated. Well, that's calculated at a point in time. So it's based on the 31 December balance sheet, it looks at the leverage ratio and look at the cash position. And you're right, at that point in time, it is the leverage ratio that is then restricting if -- getting us to 30%. So what we do is take the cash number, look at how much cash we would take to get to 30% leverage. And that is essentially what that figure represents. And that will fluctuate over time as cash is generated from the operating companies. We've got GBP 2.6 billion of surplus sitting there. So that will move. But as it currently stands at 31 December, that's what that 1.3 billion represents. And the third point on sustainability and M&A and what that means for how we think about the sustainability of the dividend. I think it really depends on each transaction on what that transaction is and how the cash evolves over time. And that will be different for each one. But certainly for what's paramount for me and for the Board is that sustainability is maintained. That has to be key. And then if we're then able to grow the total amount of cash through the acquisitions, then we can see whether that dividend increase can fund that sustainably. And how long period, I mean it will depend on each transaction. I don't want to put a figure on it, but it's got to keep the resilience that we have today on our dividend. That's paramount.

We pass along to [ Faruk ].

[indiscernible] [ Faruk ] from JPMorgan. Three questions as well, please. And one on investment, you'll be happy to know. So a big problem that I see is the availability of a illiquids when you've got Solvency II reform, everybody wants sustainable assets. So how do you see that challenge for yourselves? Do you think you're small enough now that it doesn't matter to get your 40%? Or do you -- would you be considering going overseas, would you consider putting your own equity into originate? Second question on the new business strain. So if you get down to 5%, would you get the same cash multiple? So what's the interplay between those 2? I mean truly it's more important to keep the 2.6% than it is to go down to 5% so, I mean are you going to be willing to look at that on a value basis going forward? And then last question, just more of a #1. On the GBP 1.2 billion of new business. What's the phasing on that? Should we assume a 6%? I mean what's the realization of that into cash generation?

Okay. I'm going to ask Mike to take the first and the second and Rakesh the third, I think.

So just on the liquid origination, [ Faruk ], it is a challenging market. It is competitive. Our response to that has been to really increase our capabilities internally. So you would have seen over the course of the last 18 months, we've made some material hires. And that's really helped us focus on our strategy in illiquids, which is focusing on quality over quantity. And so if we look at 2021, in terms of that GBP 3 billion number that we originated for illiquids, we actually only transacted on 10% of the deals that were shown to us. The second area where we believe we've got a real competitive advantage is that we can partner with any asset manager anywhere in the world to get the best illiquid asset origination, both from a return perspective but also from a sustainability perspective. And that latter point in terms of geographical diversification is a key area of focus for us. So even over the course of this year in the recent market volatility, we've actually been able to rotate significant quantums of our liquid credit portfolio out of sterling into non-sterling assets, cross-currency swap back to sterling and that really does give us that diversification and increases the bandwidth of assets that we can originate.

Yes, [ Faruk ], on the strain question, and the multiple question. Clearly, the capital deployment will depend across a broad range of considerations, which Andy and Rakesh and others will consider. So we would take that in the round as a way we can see, as I said, we would always think about this as a value over volume play. The multiples of cash are a function of the capital deployed. So we just think about it in that respect is pretty simple.

Yes. Thanks. And maybe just to -- from a CFO perspective on what Andy Curran just said, absolutely agree with him, it's value over volume. But I wouldn't necessarily think about the interaction because imagine what we achieved in 2020, we were at 9% strain and 2.3% cash multiple. And this year, we've done 6.5% strain and 2.6% cash multiple. So it's not -- a lot depends, as Andy exactly -- rightly said, it depends on each deal, the dynamics of each deal, and ultimately, the value over volume. On that final point, we've got GBP 1.2 billion. Most of that is, as you know, GBP 950 million of that is from the BPAs, and therefore, I would expect most of that to be running off in line with our overall runoff of the GBP 800 million, so around what 6%, 7%, 8%.

So should we start with Louise and come back here.

It's Louise Miles from Morgan Stanley. I'll just take 2 questions, please. The first one is on your expense base. So you've hired quite a lot of people, and you want to invest more in your Open business capabilities. It looks like on the IFRS operating profit, expenses might have been a little bit higher this year. I'm just wondering, are you finished with the hiring and the investment here? And if not, how much more should we expect in terms of the expense base going up, going forward, particularly given inflation is high, hiring people is getting more and more expensive. So that's my first question. And the second one is on the dividend increases. You've got rid of the 2 conditions that you used to have. I'm just trying to understand the rationale for that. I suppose, having a simplistic dividend policy is a lot easier to communicate. So that might just be the reason. Obviously, on condition 2, I think, sources of cash have to exceed uses of cash. And given you're now saying you've got GBP 300 million of cash that's going to be invested in BPAs versus the GBP 150 million to GBP 200 million before. I guess there was more reliance on the overrun of management actions. So if you could just give us a bit of color there? And does this now mean that you'll kind of -- you increase the dividend even if uses of cash were smaller or bigger than the source of cash? Hopefully, that makes sense.

Yes, very good. Do you want to take the first of those? And I'll take the second.

Yes, absolutely. So looking at the investment we're making in our growth capabilities. I think you would see some of the benefits of that into this year's results with GBP 1.2 billion of new business cash generation, going -- originating GBP 3 billion of illiquid assets, GBP 1.5 billion of management actions, of which GBP 0.7 billion is BAU. So we can see the benefit of that investment coming through. We have now set the strategy. So as I sit here today, I'm not expecting any further increases in that. But that said, to the extent there are opportunities to drive value accretive returns for investors. I will consider that in that time.

Okay. And then in terms of the dividend, I mean, so first point to be clear on is that the Board is really determined that the dividend is sustainable into the very long term, and we prioritize that sustainability. We are confident as an executive team, as a Board, that we will deliver both organic growth and inorganic growth going forward. But what the board is going to do is rather than have specified set conditions that they're going to form a judgment once a year, and it will be additive between what's happened organically and what's happened in organically, add the kind of 2 together, and make a decision each March on the dividend going forward, but using a broader range of judgment in the same way most companies would rather than have specified set out conditions. So that's how we're thinking about it. As I say, key point, sustainability into the very long term, but confidence within the business that we will deliver growth both organically and inorganically. Come along on the lines.

Mandeep Jagpal, RBC Capital Markets. Three questions from me, please. In this year's results, there was another material longevity release. So how is Phoenix thinking about the long-term impacts of COVID when making its assumptions in 2022? And then on the Open business, the long-term cash generation is currently heavily weighted towards BPA versus the Workplace. How should we expect the proportion to change and how quickly? And then as a follow-up on that, on organic dividend growth, does the split between BPA and Workplace affect the ability to grow the dividend organically? Given the cash profile of these 2 products is quite different.

Okay. So I'll get Rakesh to take the first and third of those, and Andy to comment on the second. I would just go to quickly say, it's great to have you here. We're sorry, Gordon isn't here, but it's fantastic. We still get a longevity release question from RBC because it wouldn't be the same without it. So do you want to do that one? That one, first.

All right. Let me start with the longevity question. So yes, we did get a release this year, but it was nothing to do with COVID related. So although that the benefit -- although the new table came out, the CMI 20, where we effectively calibrate our own cause of death model to the CMI 20 tables. What we did was exclude the 2020 data. It's just not -- you can't set an assumption, and this was based on our view of it and also a lot of medical experts view on it, you just can't use it. So we have not used that at all. The benefit essentially arises from just further refinement of the methodology, but nothing to do -- anything to do with the pandemic or anything like that.

Yes. On the -- the balance between BPA is the major driver of long-term cash in the Open business. It's very clear that -- what we want to do is meet that much more balanced picture. As you quietly point out that will take a bit of time. Each product has a slightly different financial footprint. My focus last year was particularly on getting retirement solutions where we really needed it to be. This year, the focus will be around that capital-light market. I must see I'm encouraged with that as well. I think Andy quoted 41 new scheme wins in the whole of last year. The year before, it was only 1, just 1. This year, it's already 16, and we see our pipeline growing almost by the day, which is also encouraging. We are also continuing to develop our engagement, our digital capability across many of our product lines, which will make a big difference. So for example, over 1/3 of our pension customers are now self-serving. So from my perspective, it's very, very clear, the instruction is to balance that long-term cash generation from the non-BPA part of our portfolio into the capital-light portfolio. My own sense of this having been in the industry for a very, very long time, I can feel there's definitely a momentum building. And one of the things we'll continue to invest in which we're not seeing the benefit of so far is how we approach the retail IFE market. We will focus on that as they move quite a bit of money.

Just so you don't a totally unreasonable boss. If there's GBP 950 million of BPA, we spent GBP 350 million of capital getting that. So it's sort of a net of GBP 600 million, if you like. That's the way to sort of calibrate thinking about being balanced. Yes, so.