Standard Life plc (SDLF) Earnings Call Transcript & Summary

Good morning, and welcome to Phoenix Group 2022 Full Year Results presentation. I'll now hand over to Andy Briggs, Group Chief Executive Officer, to introduce the session. Andy, over to you.

Thank you, Claire. Good morning, everybody, and welcome to Phoenix Group's 2022 full year results presentation. Thank you for coming and welcome to those of you joining us on our live webinar. Phoenix continues to deliver across all areas of our strategy despite the challenging economic backdrop. We have once again delivered a strong set of financial results underpinned by the clear progress we've made across our wider strategic priorities and our key ESG themes. We continue to grow organically across both our retirement solutions and fee-based businesses. And we've also announced our first-ever cash-funded acquisition of Sun Life of Canada U.K., all of which is enabling us to grow our dividend, both organically and inorganically with a 5% dividend increase recommended by the Board. We, therefore, retain all of Phoenix's long-standing strengths, delivering dependable cash, a resilient balance sheet and executing M&A, but we've now added sustainable organic growth to our business model, too. Phoenix is now truly a growing, sustainable business. Our strategic progress means that as ever, we've delivered a strong financial performance across cash, resilience and growth. Rakesh will cover this in more detail shortly, but in terms of the highlights, we've delivered just over GBP 1.5 billion of cash generation during the year, outperforming our target range of GBP 1.3 billion to GBP 1.4 billion. Our balance sheet remains as resilient as ever, with our Solvency II Surplus at GBP 4.4 billion and a shareholder capital coverage ratio of 189%. This ratio is above our target range, providing significant capacity for us to invest into growth. Finally, we've delivered record incremental new business long-term cash generation of over GBP 1.2 billion as we deliver on our organic growth strategy. As well as growing organically, we're delighted to be growing through M&A as well, where we announced the GBP 248 million cash-funded acquisition of Sun Life of Canada, U.K. We look forward to welcoming their customers and colleagues to the group, who bring around GBP 10 billion of assets and around 0.5 million policies. The transaction is expected to complete in April with the regulatory approval having now been received. And the financial benefits of this acquisition are clear. We expect to generate GBP 470 million of incremental long-term cash generation and we are targeting GBP 125 million of net synergies, which equates to 50% of the consideration paid. This transaction is therefore proof of concept that smaller cash-funded M&A can add significant shareholder value. And we expect further M&A opportunities of all sizes over time. It is particularly pleasing that this strong performance has enabled the Board to recommend a 5% dividend increase for 2022. This comprises a 2.5% organic dividend increase that reflects our strategic progress and organic growth and a 2.5% inorganic dividend increase, reflecting the value from the Sun Life of Canada, U.K. acquisition. Importantly, our increased level of dividend remains every bit as sustainable over the very long term because we've grown our group in-force long-term free cash. Rakesh will cover this in more detail later. So we're now building a track record of delivering growth alongside our long track record of in-force management. Together, these mean that Phoenix is well positioned to continue paying a dividend that is sustainable and grows over time. At the center of everything we do at Phoenix is our core social purpose, helping people secure a life of possibilities. And our 3 strategic priorities deliver our purpose and strategy. Optimizing our in-force business is the bedrock of what we do. This is about leveraging our scale to enhance our competitive advantage of capital efficiency and to deliver higher returns. As I've just covered, we're also growing organically and through M&A as we engage our existing customers to enable us to meet more of their evolving needs and by acquiring new customers. Here, we can leverage and enhance our competitive advantage of customer access to all 12 million of them. And underpinning both of these, we are enhancing our operating model and culture. This will maintain and enhance our competitive advantage of cost efficiency by completing our planned migrations and through driving simplification to a single best way of doing things. I will cover our progress against all 3 of these shortly. But first, I want to explain how sustainability is deeply embedded throughout as we focus on the key ESG themes where we can make the most difference to both the planet and to people. If we are really going to help people secure a life of possibilities, we need to play our part in tackling the climate crisis. This means managing the financial risks that climate change poses to our customers as well as maximizing the opportunities it creates. We've set clear targets for our journey to net zero across our investment portfolio, supply chain and operations. With an estimated 24 million tonnes of CO2 emissions from our investment portfolio, we really can make a difference. And we have made clear progress during the year with examples including the GBP 15 billion of assets we transitioned to our sustainable multi-asset default fund as we decarbonize our portfolios at scale. The development of our active stewardship engagement approach, where we're engaging directly with 25 high-emitting companies that account for nearly 1/3 of our total financed emissions. And with the GBP 340 million of policyholder assets, we're investing into an innovative climate solutions' mandate. I'm also delighted with the progress we are making to decarbonize our supply chain and operations with 82% of our key suppliers committed to science-based targets or race-to-zero based targets. And we've achieved an 80% reduction in the emissions intensity of our own operations since 2019. As the U.K.'s largest long-term savings and retirement business, we have a critical role to play in tackling the growing pension savings gap. And we are focused on 4 key levers to help drive change. The first is raising awareness of the issue with our think tank, Phoenix Insights publishing important research that has played a key role in the public debate this year. Second is helping customers on their journey to and through retirement. Here, we're uniquely placed to help millions of customers by developing innovative products and services that support their evolving needs. Third is promoting the role of good work and skills as people can only save if they are earning. And for this, they need to stay in good work for longer. We are therefore advocating strongly for change in working practices and lifelong learning. As an employer, Phoenix is committed to being an exemplar age-friendly workplace. Finally, we must advocate for and support societal change with Phoenix Insights active across a range of issues during the year, such as the reform of the state pension and the debate on economic inactivity. Delivering at scale on our key ESG themes is embedded into our strategic priorities, which you will see as I turn to our progress across each of these. Starting with optimizing our in-force business. I'm pleased that we have delivered a further GBP 700 million of management actions during the period as we continue to deliver a range of balance sheet efficiencies, which remains a differentiating capability for us, and also delivered further ReAssure integration synergies. Our comprehensive risk management approach means we remain as resilient as ever with both our long-term cash and Solvency Surplus protected. And we are continuing to broaden our asset management capabilities, enabling higher returns and investing in a sustainable future. We're also growing organically and through M&A with the ongoing development of innovative products and services supporting the growth of our Retirement Solutions business. And our capital-light fee-based Workplace business continues to go from strength to strength with GBP 2.4 billion of net fund flows in 2022, an 11-fold increase year-on-year. The Standard Life brand is firmly back in the market, and I'm delighted that we're not only retaining our existing schemes, but winning new schemes of all sizes. We're also executing on M&A with the Sun Life of Canada, U.K. acquisition expected to complete in April and the ongoing assessment of further M&A opportunities. And finally, we are continuing to engage people in better financial futures with examples including the launch of our financial inclusion strategy and the introduction of Phoenix Insights Longer Lives Index. Underpinning all of this is the work we're doing to enhance our operating model and culture with further progress made on our Standard Life migration, and the recent announcement that we would transfer all 3 million ReAssure customers to the Alpha -- from the Alpha platform to TCS BaNCS, which will improve the customer experience and will deliver a further GBP 180 million of net cost synergies. Our work on talent and culture also continues at pace, and it is pleasing that we now have gender balance on both our group Board and Executive Committee. Finally, we continue to lead as a responsible business with a comprehensive cost of living support package for our colleagues and 42% of our colleagues actively engaged in supporting local communities. So clear progress across all 3 of our strategic priorities. And with that, I will now hand you over to Rakesh, who will cover the financials in more detail.

Thank you, Andy, and good morning, everybody. While there is a lot to cover today, there are 2 key messages that I want you to take away from our results. The first is that our group in-force long-term free cash is growing with a GBP 300 million year-on-year increase to GBP 12.1 billion, which enables us to pay a dividend that is sustainable and grows over time. The second is that despite the unprecedented economic volatility last year, our capital position remains highly resilient. With our shareholder capital coverage ratio having increased to 189%, and which provides us with significant capacity to invest into growth. So turning to the financial results. As Andy said, Phoenix has delivered a strong financial performance in 2022. We delivered another year of resilient cash generation, maintained our strong Solvency balance sheet and delivered record incremental new business long-term cash generation. This has enabled the Board to recommend a 5% dividend increase for the year. Our IFRS operating profit also remained strong at GBP 1.2 billion. Well, we have reported an IFRS loss after tax, and this has increased our Fitch leverage ratio to 30%. I will cover this in more detail later. Starting with cash. We have delivered just over GBP 1.5 billion of cash generation in 2022, which exceeded our target range of GBP 1.3 billion to GBP 1.4 billion for the year. This included around GBP 600 million of management actions. And importantly, the free surplus in our Life companies has remained strong at GBP 2.3 billion. Phoenix' business model is designed to deliver high levels of predictable cash generation, which enables us to set very clear targets. We are again setting a 1-year target of GBP 1.3 billion to GBP 1.4 billion in 2023 from our current in-force business. And we are now including future new business in our 3-year cash generation target, given our sustainable organic growth with an increased target of GBP 4.1 billion. And our confidence in the future organic growth is clearly demonstrated by our first ever incremental new business long-term cash generation target of GBP 1.5 billion per annum by 2025. I wanted to repeat this chart that I showed at the half year results to reiterate how cash generative our business is relative to our other companies in the FTSE 100 index. Cash is easily comparable across industry, and so it's a good metric for investors. Over the next 3 years, we expect to generate GBP 3.1 billion of free cash flow, which translates into an impressive 3-year average free cash flow yield of 16%, double the FTSE 100 average. This slide sets up the expected sources and uses of cash generation over the next 3 years, assuming we refinance our debt on the call date or at maturity. This includes our planned integration costs and the cash-funded acquisition of Sun Life of Canada, U.K., which we expect to complete in April. It shows that we expect to generate about GBP 1.5 billion of surplus cash over that period. This is a significant amount of cash that is available to invest into a range of growth opportunities. Group in-force long-term free cash is a measure of the cash that will be available to our shareholders over time from the business we have on our books today. It is calculated net of the cash needed to service and redeem all outstanding debt and after deducting committed integration costs. Not only is this cash balance huge at GBP 12.1 billion. It is growing. And this means that we can sustainably fund our increased annual dividend cost over the very long term. The key drivers of the GBP 300 million growth in group long-term free cash are shown on this slide. This demonstrates that our new business and own funds management actions more than offset our annual uses of cash, which includes investment into growth. And a growing business supports our policy of paying a dividend that is sustainable and grows over time. Turning now to resilience. Our Solvency II capital position remains strong with a surplus of GBP 4.4 billion, which, as ever, reflects the accrual of our recommended final dividend. We have also seen an increase in our shareholder capital coverage ratio to 189%. This is currently above our target range of 140% to 180%, which means we have plenty of capacity to invest into both organic growth and M&A. Looking next at the moving parts in the year. We continue to generate high levels of surplus emerging from our in-force business and have reported another year of management actions over delivery. Our strong capital position enabled us to repay the GBP 450 million Tier 3 bond that matured in July and invest nearly GBP 300 million of capital into BPA. Given the market volatility experienced last year, our economic variance was relatively small at just GBP 0.4 billion. And importantly, this was in line with our published sensitivities, which demonstrates that our hedging worked as we expected to, despite the unprecedented economic turbulence. As I've explained previously, our hedging approach does result in own funds volatility. This is a trade-off we accept to deliver sustainable and resilient dividend over the very long term. We managed GBP 259 billion of assets on behalf of our customers and shareholders. Importantly, we hedge our annual management charge fees, which means our revenue is broadly unaffected by the recent market movements and fall in asset values. We maintain a prudent, diversified GBP 31 billion shareholder credit portfolio, comprising both of liquid and illiquid credit with a BBB exposure of just 19%. We also remain conservative in the sector, positioning with only 3% of our credit portfolio exposed to cyclical sectors, which have an average credit rating of A minus. And we retain a small commercial real estate lending exposure, but have no equity investments and therefore, no exposure to the decline in these indices seen last year. The ongoing development of our asset management function also enabled us to deliver another year of strong illiquid asset origination in competitive markets. Turning now to management actions. Our ability to deliver value-accretive management actions is a key differentiator for Phoenix and optimizing our in-force business is one of our key strategic priorities. We continue to demonstrate our capability here with GBP 739 million of management actions delivered in the year. The majority were from recurring business-as-usual actions which are not reliant on integrations. This included a range of ongoing balance sheet efficiency actions that is a unique capability of Phoenix as well as further illiquid asset origination and optimization of our liquid credit portfolio. We also delivered a further GBP 169 million of M&A integration synergies from ReAssure. We continue to simplify our business through our integrations. We have made good progress with the Standard Life migration to TCS BaNCS, and we also recently announced that we will be transferring all 3 million ReAssure customers from our in-house Alpha platform to TCS BaNCS as well. This will improve the customer experience, enhance the long-term cost efficiency with a further GBP 180 million of net cost synergies now expected from the ReAssure acquisition. Moving next to growth. I am delighted that we have delivered record incremental new business, long-term cash generation of over GBP 1.2 billion in 2022. Retirement Solutions remains the largest contributor at GBP 934 million with another strong year. The contribution from our fee-based businesses increased 28% year-on-year to GBP 299 million, primarily due to a strong performance in Workplace. The investment we have made into our capabilities is now delivering sustainable organic growth, and we are confident of continuing this going forward. Having firmly established ourselves as a key player in the BPA market in 2021, we have since been executing on our strategy to optimize our capital and deliver stronger returns. I'm therefore pleased that we've been able to maintain a stable level of new business long-term cash generation with 20% less capital invested, which has supported us in driving an improved cash multiple of 3.4x and a mid-teens IRR. This equates to a capital strain of 5.8% on a post capital management policy basis, down from 6.5% last year with a pre-CMP strain of 3.2%. That positions us competitively in the market. Looking forward, we are quoting on a significant pipeline of opportunities. We continue to target the deployment of around GBP 300 million of capital per annum into BPA, and we will maintain our pricing discipline through prioritizing value over volume. I was particularly pleased to see the significant increase in the net fund flows in our Workplace business. We delivered a net inflow of GBP 2.4 billion in the period compared with a GBP 0.2 billion last year as we retained our existing schemes and benefited from new joiners. Importantly, this improvement in net fund flows is also translating into increased long-term cash generation with a 53% year-on-year increase to GBP 212 million. We also won 76 new schemes during the year, totaling GBP 2 billion of assets that will transfer to us in the next 12 to 24 months. The momentum in this business is clear, and I'm confident that we will deliver strong growth in both net fund flows and new business long-term cash generation over the coming years. Turning to our IFRS results. We delivered operating profit of over GBP 1.2 billion in 2022, marginally up on the prior year. Other non-operating items include our integration costs, further IFRS17 implementation costs and the planned investment into projects to support our organic growth strategy. We experienced sizable adverse investment variances under IFRS due to the significant rise in yields. This is caused by the accounting volatility from our hedging approach of protecting the solvency balance sheet surplus and also an accounting mismatch related to the buy-ins of our own group pension schemes, which have driven a significant IFRS loss after tax. And this, in turn, increased our Fitch leverage ratio to 30%. However, we remain within our target operating range with our level of outstanding debt appropriate for a highly cash-generative business. Turning now to IFRS17. As we have said many times before, IFRS is not our primary reporting framework. Instead, we run our business for solvency and cash, which is what delivers our sustainable dividend. Therefore, the IFRS 17 accounting change is not going to impact our business strategy, our financial framework KPIs. It does not change the underlying economics of our business and it has no impact on our dividend paying capacity either. We currently expect to move to IFRS 17 to have a broadly neutral impact on our shareholder equity as at January 1, 2022, with an increase in equity due to the accelerated profits in our with-profits business, broadly offset by the deferral of annuity profits and the derecognition of our acquired value in-force assets. We also expect to establish a contractual service margin of at least GBP 2 billion at transition which primarily reflects our growing annuity business. We expect this to run off at 6% to 8% a year, but it will grow as we write new business. Finally, we plan to report our 2023 half year results on September 18, which will be our first formal reporting under the new standard. So to conclude, we have delivered strong financial results in 2022 across our financial framework of cash, resilience and growth. Our group in-force long-term free cash increased to GBP 12.1 billion, which is proof that Phoenix is a growing sustainable business, and we have set clear targets for 2023 and beyond. This will support us in delivering on our dividend policy, which is to pay a dividend that is sustainable and grows over time. With that, I will now hand you back to Andy for the outlook.

Thank you, Rakesh. So Phoenix has a simple, clear and differentiated strategy, which is focused on the U.K. long-term savings and retirement market. Our in-force business is the GBP 260 billion of assets that we look after for our 12 million existing customers, and it provides us with 3 unique competitive advantages. The first is capital efficiency, where we get greater diversification from our breadth of in-force products. Second, we have an unrivaled level of customer access with around 1 in 5 U.K. adults being a Phoenix Group customer. This provides us with a clear organic growth opportunity, and that's embedded in our business. And thirdly, we have a significant cost efficiency advantage, enabled through our customer administration and IT partnership with TCS and our focus on delivering a simplified operating model. Our scale in-force business is also highly cash generative, and provide surplus cash that we can reinvest into growth. Organic growth comes primarily from meeting more of our existing customers' needs as they save for, transition to and secure an income in retirement. We will also acquire new customers who we can then help through their life cycles. And we have attractive M&A growth opportunities, too, where we acquire customers at scale and deliver better outcomes for them. And in the process, we transformed the acquired businesses to deliver significant cost and capital synergies. So if delivering our purpose is all about helping customers journey to and through retirement then our starting point is customer needs. This chart illustrates a typical customer's life cycle showing the long-term savings and retirement products they are likely to need. Our competitive advantage here is our existing customer base with 1 in 5 adults who will journey through this life cycle already Phoenix Group customers. So there's a huge opportunity for us to meet more of their evolving needs as we build and enhance our capabilities, particularly in retail savings, pension consolidation and drawdown markets. This slide demonstrates the sheer size of the growth opportunities that stem from those customer needs across both the long-term savings and retirement markets. Looking at the savings side. Defined contribution workplace pensions are the single largest long-term savings product in the U.K. with annual flows of around GBP 40 billion to GBP 50 billion. And with the U.K. having near full employment and higher inflation driving higher salary increases, we would expect stronger workplace contributions going forward. There's also a huge retail market, which spans individual savings, pension consolidation and income drawdown with a further GBP 80 billion to GBP 100 billion of annual flows. We operate across most of these markets today through our Standard Life branded Pensions and Savings business with GBP 82 billion of assets. And this is an area where we're building capabilities to take an increased share of flows over time. On the retirement side, we continue to see defined benefit pension scheme derisking through BPAs as a sustainable growth opportunity over the medium term with annual flows of GBP 30 billion to GBP 60 billion expected. This is a market where growth is being accelerated with higher interest rates, improving the funding positions of many schemes, enabling them to consider a buy-in or buyout earlier than expected. We have scale in this market, too, again, through our Standard Life brand with GBP 33 billion of assets. These markets are structurally growing and the opportunity for a scale player like us is clear. We set out our strategies across all of these markets in detail at our Capital Markets event in December, and we are now focused on executing to drive sustainable organic growth. M&A, both large and small also remains a core part of our growth strategy with GBP 470 billion of U.K. heritage assets potentially available over time. I continue to have my regular cups of tea with my fellow insurance CEOs and the message from the majority of them remains very much one of when, not if. We stand ready to consider our next deal enabled by the scalable TCS BaNCS platform, which can seamlessly manage multiple migrations concurrently. Indeed, we believe that the drivers of back book consolidation have been accelerated in the current economic environment. With the owners of these back books getting lower revenues due to lower assets under management fees, and who were struggling with higher costs due to the impact of inflation. We will also consider small bolt-on capability-based M&A if it has a strategic fit and where it can help accelerate our new business growth. I'm expecting 2023 to be another exciting year of progress for Phoenix as we execute against our 3 strategic priorities. We will optimize our in-force business by continuing to deliver value-accretive management actions by diversifying our asset portfolio and by staying true to our risk management approach that delivers our resilience. We'll also continue to grow organically across our retirement solutions and fee-based businesses and inorganically with the completion of the Sun Life of Canada, U.K. acquisition and through actively assessing further M&A opportunities. All of which is underpinned by the work we do to enhance our operating model and culture as we deliver our ongoing migrations, develop our internal talent pool and execute on our regulatory change agenda, including IFRS 17 and Solvency II reform. And sustainability is embedded throughout with our strategic priorities informed by and in support of the key ESG themes where we can make the most difference to both the planet and to people. Here, we will publish our net zero transition plan in May, which will set out the specific actions we'll be taking across our investments, operations and supply chain to manage the risk of climate change to our customers and deliver on our net zero targets while continuing to engage people in better financial futures with a target of reaching 4 million people with an awareness campaign on longer lives and under saving for retirement. And we will lead as a responsible business with meaningful progress towards delivering our sustainability targets, including for DE&I. In summary, Phoenix is a growing business. Our chosen markets are huge and structurally growing. We have 3 unique competitive advantages of capital efficiency, customer access and cost efficiency that come from our in-force business and are hard to replicate, which means that we are confident that we can and will win in our chosen markets. And this will support us in continuing to deliver on our financial framework of cash, resilience and growth. That means our dividend, which offers an attractive 8.5% yield today can be sustainably funded with the resilient cash from our current in-force business over the very long term and that is now growing both organically and through M&A. And with that, we will now move to questions. So we're going to start with questions in the room. [Operator Instructions] So I will take a seat as well. I did promise everyone at the last Capital Markets event that this was going to be the Rakesh show. So most are going that way. Yes. Right. Where are we? Should we start at the front here, Andy?

It's Andy Sinclair from Bank of America. And I'll just stick with my usual 3. Excellent. First just on new business contribution to the medium-term cash target. Firstly, can you just confirm how much did new business include and actually now that you are including that in your targets, what would it take to include it in your dividend policy to include that new business over the next few years to give a progressive policy. Secondly, IFRS, you said it didn't really affect your business planning, but it does affect your leverage calculation, your Fitch leverage ratio. It looks to me like your leverage ratio might actually look a bit better on an IFRS 17 basis. Does that change how you think at all about debt issuance or basically, how does IFRS 17 change your thinking on debt? And third was just on M&A. It feels to me like the last few years have maybe been a bit more tilted towards talking about small bolt-on M&A. It feels to me like it's maybe a bit more balanced, including kind of larger M&A and the discussion again. We haven't seen many smaller bolt-on acquisitions. You said when rather than if, but what is it taking to bring some more of those to the table?

Sure. So Rakesh, do you want to take the first 2, and then I'll take the third?

Yes. So starting with the cash target. So we announced a 3-year cash target of GBP 4.1 billion. That's a huge amount of cash to deliver. Last year our 3-year rolling was GBP 4 billion. And then that, as you know, gives us a free cash flow yield of 16%. We have included new business within that GBP 4.1 billion of -- and that represents roughly about GBP 0.2 billion because the new business that we write will be run off over the period. And during that 3-year period, it will be roughly GBP 0.2 billion. But as you know that, certainly, we do have a new business long term -- incremental long-term cash generation out there. By 2025, we expect to get GBP 1.5 billion. So we're really confident on delivering that. And in terms of the dividend, we currently have a policy that is sustainable and grows over time. That is appropriate for Phoenix. Certainly, when the Board sit down, we'll review that dividend every March to see how the company has performed in terms of its growth ambitions. But certainly, where I sit here today, I'm confident in the future on that. Second, your IFRS question. So currently, our Fitch leverage ratio is at 30%. What we have heard from Fitch, and this is yet to be confirmed absolutely, but what we have is that certainly, there'll be no rating impact from the move to IFRS 17 because the changing in accounting standard should have no impact on the underlying business. And they said they will include the CSM at least at a minimum into their calculation. So we actually play all that through, it ends up being that. We looked at the numbers we provided on IFRS 17, and take the -- and reperform the leverage calculation. You probably end up at broadly the same amount on IFRS 17. So certainly, ultimately, IFRS 17 is not our primary reporting framework. Our focus is on cash and resilience. And therefore, the amount of cash that we have, the fact that we grew our long-term free cash in force to GBP 12.1 billion means that I'm comfortable with the leverage that we have today. Andy?

Thanks, Rakesh. So on M&A, absolutely, you're right, Andy, we are interested in smaller bolt-ons or in larger M&A, but both would be core parts of the strategy. We're kind of ready and keen and enthusiastic to look at the next M&A opportunity, obviously, focused also on getting Sun Life of Canada, U.K. completed early next month. And I think it probably is fair to say, when you have just done the Standard Life deal and the ReAssure deal, there's a period where you probably want to break the back of getting those integrations done before you took something large on again, but we're pretty much through both -- all the main -- or most of the main effort of those big integrations. We've now got the ability with TCS BaNCS to run multiple migrations concurrently. So we're definitely set here keen enthusiastic. And I mean just a little bit more color on the drivers I talked about in my presentation. So we definitely feel optimistic in terms of the outlook for M&A. And that's because as I -- when I go and have my cups of tea on a regular basis with the CEOs of the groups who own these back books, large or small. They always talk about liking the predictable steady cash flow. It gives them cash they can invest into growth. But recognizing being a closed book, that runs down typically 6% a year. And so ultimately, you've got to get 6% on your cost base a year just to stand still. If you don't, you'll be capitalizing a higher level of expense reserves and won't get the cash flow and dividend out of that business. So there's sort of 2 challenges to that going on at the moment. One is it's harder to cut your cost by 6% a year with inflation at 10%, that becomes more challenging. And then secondly, as you know, we hedge out the impact of markets on our assets under management and our asset under management fees. But if you don't do that, and your assets management -- assets under management have come down with these market conditions and the revenue side of that cash flow is going to be lower as well. So we are optimistic and confident on the outlook, but there are a finite number of these books out there. So what we can't do is predict which deal might happen and when it might happen. We are -- but we're absolutely set here, keen and enthusiastic and ready to go when opportunities come along. Should we come along to Rhea here. I'm going to go across the front row and then we'll zigzag back.

Rhea Shah, Deutsche Bank. Three questions from me. So how should we think about management actions going forward? So within that GBP 4.1 billion, what level of management actions are you building in for '24, '25? And then how should we think about that going forwards as well after that? And then the 5.8% new business strain, is that a level that you want to hold around or better that number going forwards as well? Or should we continue to build in around 6% instead? And then thirdly, the nonoperating cash outflows that you had of GBP 395 million, what was in that number? Was it mostly restructuring costs? Or was there something else going on within that number?

Okay. We're hitting a balance here, it's 2 Rakesh's and 1 Andy so far on both of these. So I'll take the second of those in terms of the BPA new business strain. So delighted that we've -- the work we've been doing on that to kind of leverage our capital efficiency advantage we have from our scale and breadth of in-force business has got the strain last year post capital management policy, down from 6.5% to 5.8%. Our target is to get down to 5%. And so yes, I would -- it can vary a bit from year to year. We're really pleased by getting a mid-teens return on capital on the BPA business last year. But over time, we're looking to get that post capital management policy strain down to around 5% from the 5.8% currently. And I think in particular, given the scale of pipeline in the market, I mean, we always focus here on value over volume, and we'll be disciplined. But I think with more and more demand coming into the market and a finite number of direct writers, I think generally for the market as a whole, the outlook for margins should be fairly attractive. Rakesh, do you want to take the first and third?

Yes. So starting with the management actions. So I think generally, I would say, certainly, in these targets here and as a rule of thumb going forward, I would expect about 30% of our annual cash generation to be made up from management actions. And if you actually look at our past since we became listed and just added up all the management actions that we've delivered, you can just see that's a substantial amount. We have an ongoing -- the fact that we've delivered these on an ongoing basis. So going forward, 30% seems an appropriate number to use. And then on your third question about nonoperating cash flows, you're absolutely right. It's a lot of project recharges, which includes the transformation transition that we're -- integration that we're doing on moving the Standard Life policies to Diligenta, also cost on IFRS 17 and investment into our growth strategy.

We go to Farooq.

Thanks very much. Probably 3 for Rakesh, but we'll see. So first one, just going to Rhea's question on the GBP 4.1 billion and the management actions. Can you remind us of the really big blue sky things that are not included generally in your management actions, but you've spoken about before as longer-term opportunities and what that could mean qualitative or quantitatively. Secondly, yes, looking at your cash position, obviously, that's dropped because of the debt call, the GBP 450 million, are you -- going back to your question of leverage, now if you -- are you happy that from that GBP 1.5 billion that you're going to generate that -- I mean do you feel that you need to reduce more debt and you're happy that you have the cash to do that given that your holdco position has dropped quite a lot? And the last one was on you mentioned capability-based M&A, actually, it's probably more of a Andy question. Could you talk us through what that means? And presumably that doesn't mean capability in bulks?

Yes. So I'll do one of the last one, and Rakesh will take the first 2. So what we're focused on there is, are there areas where we could just accelerate our organic growth strategy through a capability-based M&A. We're clear we don't need to. All the things we want to do in our organic strategy, we could do ourselves. I think it's unlikely to be anything in the BPA space because I think we've got strong capability there. We're already a top 3 player in that market. Also, just to be clear, I think we're unlikely to be buying big troops of advisers or we're unlikely to be paying out for a platform. It will be more whether there's very small capability base that might enable us to get better CRM systems around our existing customers or propositions to engage our 12 million customers that then helps us on that -- to get more of them on that -- engage with us on that journey to and through retirement. So it will be very modest capability base. We don't need to, but we are open-minded to that if there are opportunities available would accelerate and speed up the organic growth strategy.

Okay. Let me take the first 2. Let me start with management actions and probably just worth putting it into context. The GBP 739 million that we actually delivered this year, so GBP 295 million of that was normal balance sheet, what Phoenix is well known for. And that will continue. The fact that we are getting these businesses together. We put them on our platform. But as we then drive efficiencies, the single best way of doing things, I can see that continuing going forward. And then as you know, we are invested in building our asset management function. Mike Eakins is doing a fantastic job in delivering on that. So if you actually look at the other management actions that we've delivered, it's on optimizing our liquid credit portfolio. So not only -- we know on the illiquid side, and we're all aware of the illiquid and the 70 basis points uplift that we get on that, and then we're trying to get to a level at least at the 40% in terms of matching our back book annuities. But if you then think about the potential on the corporate credit side and the liquid, there's that's huge, and that was GBP 141 million this year. So there's a lot there to go after. Plus we'll get the ongoing future benefit on the terms of the savings on the fact that we are moving the Alpha platform on to BaNCS, which will come as cash. The savings will come over time as well because we're taking the costs upfront. So there's a number of areas there that we've still lots to do. On the second one about the debt. Now if you think about we repaid GBP 450 million this year, which is a significant amount. So that's -- debt has dropped from GBP 4.6 billion to about GBP 4.1 billion. Our in-force long-term free cash has gone up from GBP 11.8 billion to GBP 12.1 billion. So you can just see the total cash in the business is going up. Debt is going down. I'm more than comfortable with that. Clearly, going forward, we will look at that. And as you're growing business, you'll still need to operate within that 25% to 30% Fitch leverage, which is the intention to do, and therefore, that will mean refinancing some of that debt that's due. But the key is the amount of cash in the business, which is growing.

Thank you. Abid?

It's Abid Hussain from Panmure. Two questions for me, if I can. So 1 on BPA. I'm just wondering what's your appetite here for large or mega deals that potentially might come to market this year or next year? And then the second question is on TCS. You've migrated the ReAssure policies. I'm just wondering, is there another batch that you could potentially migrate to TCS? Is there another meaningful batch that might come down the road to generate some more cost saves and cost efficiencies?

Okay. So I think they're both for me actually. So just on the BPA. So kind of plan A for us is to invest around GBP 300 million of capital into BPA business, which would 5% strain mean us writing about GBP 6 billion. But we have developed the ability and did some quota share reinsurance last year. We've also established a reinsurance entity, Phoenix Re in Bermuda, which gives us some optionality around reinsurance and third-party capital. So we would explore some of those areas. And the GBP 300 million is not a hard and fast number. So in 2021, we invested GBP 360 million. The opportunities were there. It's very much driven by value, not volume and the returns we can get on capital. I love the way you said you've migrated the Alpha policies. We've announced the plan to migrate them over the next 3 years. The hard work starts here. So sort of think about -- I mean, 3 kind of groups of customers, not that dissimilar in size to each other, Phoenix Life, Standard Life, ReAssure. Yes? So Phoenix Life, most is already on TCS BaNCS, but there are a couple of areas we're still moving customers across, and that's in train. Standard Life, we've moved the first 400,000 across last year, which is fantastic. The first migration of that Standard Life mainframe. So delighted to have done that successfully. The rest would come over the next 2 or 3 years. And then we're starting the program of work on the ReAssure side. So in reality, that's all going to keep us pretty busy with TCS for a period of time. The Sun Life of Canada, U.K. deal, the 0.5 million customers there, the vast majority of those are already on the TCS BaNCS' platform. So that was kind of quite handy really. It makes that stage a bit very, very straightforward for us. Thomas?

Thomas Bateman from Berenberg. Just 1 question for me. Just on Workplace, GBP 2 billion of net inflows, you talked about winning, I think, 70-odd new schemes. What does that number look like in terms of kind of recurring amount? Should that be up? Is that a high number, the GBP 2 billion? Or should we expect that to grow pretty strongly?

Okay. So the GBP 2.4 billion net fund flows is basically made up of the kind of in-force premiums that are ongoing. Then the new business in the year offset by the outflows. Yes, you've kind of got 3 components building that up. And last year, we both reduced the outflows basically because we've invested in the proposition, the proposition is much stronger. Our existing clients want to stay. They don't want to go and then we're winning lots of new clients in the market. Last year, in terms of the new schemes we won last year with about GBP 2 billion of assets, we expect that to fund over the next 12 to 24 months. And so that -- hardly any of that is already in that GBP 2 billion net -- GBP 2.4 billion net fund flows for last year, that's still to come. I wouldn't want to put a specific number around that new scheme wins going forward. I mean the guys had a particularly successful year last year. Again, we'd be focused on value, not volume. But we are -- we've set a target by 2025 of getting the net fund flows up to GBP 5 billion in Workplace. We're at GBP 2.4 billion last year. And I'd say we sit here very confident that we will deliver on that target. And hence, that part of the business's contribution to the GBP 1.5 billion new business long-term cash generation target for 2025. So the outlook on organic growth, really pleased with the progress last year and very optimistic of the outlook going forward. I want to go back to -- well, along to Ashik at the end, and then we'll come to you, Gordon. Yes.

Yes. Just a few questions I have. So first of all, I mean if I look at the GBP 4.1 billion number, Rakesh, you mentioned 30% is management actions. So that's GBP 1.2 billion. So it's kind of organic, you're saying it's GBP 2.9 billion, whereas your back book is GBP 800 million a year, so that's GBP 2.4 billion. So what is it this GBP 500 million? I mean, organic growth over 3, 4 years or GBP 500 million is 25%, that's quite a lot. So would be good to get some color about this GBP 500 million. The second is, I mean, clearly, you showed a slide where you mentioned that the firepower of growth is about GBP 1.45 billion. Now I guess we need to strip off GBP 900 million for annuities into that. So that leaves a holding company cash of about GBP 0.5 billion at the end of 2025, which I would kind of assume that you would need to hold to maintain -- make sure that the dividend is sustainable in the long run. So how do we think about M&A budget within that? I mean, would you say that at least at the moment, there is not much of M&A budget left? Or how do you think about that? And thirdly, can we just get some color about the revenue margin for workplace pension and retail savings that you're winning these days, just revenue margin would be great.

Okay. I think they are probably all for you, Rakesh, I mean, we -- yes, I can pick up revenue margin, if you don't want to, up to you. We don't quite revenue margin. So I guess it's...

Yes. All right. Let me start with the GBP 4.1 billion. So yes, broadly, I said 30% is the rule of thumb on management actions. And if you do the math, GBP 800 million organic. But what you would expect is, as you then continue to write some new business that will add on to the GBP 800 million. But broadly, yes, there is a difference, and we expect that difference to either come from outperformance because if you actually looked at the -- what we've done previously, we've -- we aim to outperform. Andy sets me those stretching targets. So I aim for outperformance, but also we will -- we've got the GBP 2.3 billion surplus sitting in the Life companies that we will slowly start taking to the holdco for us to use for various reasons, of which delivering cash generation and M&A, for example, maybe one. So that hopefully gives you a better insight into that. Second, on the firepower. I mean, GBP 1.5 billion is a lot of cash. I'll start with the first thing. I can sit back as a CFO and say, you've got GBP 1.5 billion to spend on various growth opportunities. Admittedly, we're saying we want to invest about GBP 900 million over 3 years into BPA. But certainly, as we've always said, we will always allocate capital to which maximizes the returns. So that may mean we may decide to invest a little bit more, a little bit less on BPAs or M&As depending on the outcome. And again, similar to on the point about outperformance as well to the extent we do outperform our targets that will come and increase that number as well. And then generally, in the context of M&A, you've seen previously the fact that in 2016 with the AXA deal, we got cash out of that acquisition within 6 months. So where you've got targets where you can see the synergy, you can see the repayment profile. I'm happy to lever up to more than 30%. If I can see a clear plan, to get back down. Taking ReAssure as another example, we knew when we acquired that business was cash generative. We've pretty much got all the consideration out as cash. So again, you could structure a deal such that you lever up in the short term and come back down and happy to do that as long as there's a plan to get back to that 25% and to 30%. And finally, on the revenue margin, we don't quote that. Clearly, the fact that we're doing really well. And the team -- Colin and the team are doing a fantastic job on the workplace and retail side. And you've heard the guidance that we've put out there for 2025. I'm really pleased on what they're doing and long may it continue.

Gordon?

Gordon Aitken from RBC. Three questions, please. First, on the budget on Wednesday, a bit of talk in the press that we came about annual allowance and lifetime allowance being pushed up, what impact would that have on your business? And second question on synergies. The Sun Life of Canada synergies, you said were 50% of the consideration. That's a significant proportion. Just maybe provide a little bit more detail here. How does that relate to the average in terms of the deals you've done in the past? And where do you get the biggest gain here? And maybe just talk about with profit, nonprofit and annuities. And then the final question is on your in-force long-term free cash of GBP 12.1 billion. Just how different is that number to embedded value?

Okay. I'll let Rakesh take the third of those, and I'll take the first 2. So on the budget and the annual allowance, so what's going on here is that we think there's reasonable evidence that when people in some professions say doctors, for example, get to their annual allowance, they then think, okay, I can't paint my pension anymore I may as as well retire. And what I'm keen actually more with my other job, my government older work, a business champion job on. We have -- and it's a key part of what we want to do here at Phoenix. We want to create an environment where those that choose to can work for longer. And rather than automatically think I've hit the lifetime allowance, I should retire. We would like people to stop and think, well, I don't have to. Actually, do I want to carry on working? Do I want to have more income in retirement? Do I enjoy what I do? Shall I work more flexibly? So that's more the angle on it. I mean, if we ended up seeing the lifetime allowance increase, it would have a positive impact on our business. But we are a pretty broad church of customers. So not that many of our customers are up at the lifetime allowance limit. We've kind of got more mass affluent rather than particularly just high net worth customers. On the SLOC synergies, so the 50% is not untypical. So if you take the Standard Life deal, we paid GBP 2.9 billion to buy that, and we've delivered GBP 1.6 billion of synergies. If you take the ReAssure deal, we paid GBP 3.2 billion to buy it, and the current synergy target is around GBP 1.3 billion, I think, isn't it? GBP 1 billion, GBP 1.3 billion, yes? Yes. So -- yes, and the earlier deals were 50%-ish, so that's not unusual. The gains basically come from a combination of cost efficiencies as we move things to a single -- 1 single best way of doing things and then capital efficiencies as we apply our capability and managing the balance sheet to drive out the capital synergies as we bring things onto our internal model as we consolidate the legal entities for a Part VII transfer and a range of other actions of that nature. And ultimately, that -- it is what is particularly unique about Phoenix is this ability and discipline to migrate to a single best way of doing things, which means we are more capital efficient and we are more cost efficient than others. And that is hugely beneficial in terms of synergies on M&A, but it also means that Andy, Tom and Colin and the guys basically get the benefits of that cost and capital efficiency as they go out trying to drive organic growth, and which is why our margins are strong there, and we're delivering strong new business long-term cash generation. So it benefits all aspects of the business. Do you want to pick up the third one?

Yes. Yes, third, your question was the difference between the long-term free cash, in-force long-term free cash and embedded value. There are probably a number of areas where they're different. But I'll just highlight the few big ones. So first of all, it's undiscounted, so that's a big difference. Second, we take a reasonable look at where the cash will emerge from. And we do believe, as I've said previously, that something like owned funds is not a -- it's probably more prudent. So we've -- for example, the undiscounted cash flow, the long-term free cash flow will include the release of the fundamental spread in the numbers as well as the risk margin over time, net of TMTP. It also include real-world returns allowing for our hedging that we do as well. So just to give you what is more of a realistic number that's undiscounted.

Nasib?

Nasib Ahmed from UBS. So first question on the GBP 2.3 billion free surplus in the LifeCos. How much of that is liquid, if you can give us a percentage or a number as at full year '22 or as of now? And then second question on ratings. So would you consider getting a second rating and what are the costs and benefits of doing that? I can think of 1 benefit, you could raise debt at a lower coupon for M&A. And then thirdly, on TCS contract, is that inflation protected? I know it's evergreen, but what inflation clauses do you have in that?

Okay. I'll take the third of those, and Rakesh take the first 2, yes?

Yes. Just with the first one. I didn't quite get the question. So it was about the long -- the free surplus n lifeco GBP 2.3 billion...

How much of that is liquid versus future profits as of full year '22?

Liquid versus future profits?

Yes.

Yes, so this number is essentially the amount of cash on top of its capital management policy. So what is in each of the entities that we have, regulated entities that we have within the group, the amount of surplus above its capital management policy. So it's surplus that is essentially available, yes?

So cash you mean hard cash is it?

Yes, yes. And...

I think, sorry. I think the GBP 2.3 billion excess of capital management policy, some of it will be cash. Some of it will be future VIF. Yes? We don't disclose the distinction between the 2, but you probably couldn't take all GBP 2.3 billion out tomorrow because some of it is cash, but some is VIF, yes.