Standard Life plc (SDLF) Earnings Call Transcript & Summary

Good morning and welcome to Phoenix Group Half Year Results 2023. Please welcome Andy Briggs. Andy, over to you.

Good morning, everybody. Welcome to Phoenix Group's 2023 half year results presentation. Now as you know, we have always run our business focused on cash and capital as that's what underpins our sustainable and growing dividend, but we recognize the industry has transitioned to IFRS 17. So the plan today is that Rakesh and I will walk you through our excellent half year results as usual, including a summary of the key IFRS 17 transition impacts. We'll go straight into a Q&A on the main results. We'll then take a short break and follow up with a further education session for analysts on the technical accounting transition to IFRS 17. As you're probably aware, our half year IFRS 17 results will not be published until Thursday, the 28th of September. Sorry, I'll just let people come in and settle down. So half year IFRS results will not be published until Thursday, the 28th of September. I understand this may be frustrating for some of you, for which we apologize. It reflects a short delay in our process in part due to the complexity of the project. But let me reassure you there are no concerns with the numbers themselves. So starting with our first half performance. At Phoenix, we have a clear and focused strategy and I'm delighted with how well our team are executing on that strategy, delivering strong growth and resilient cash generation. We have more than doubled new business long-term cash year-on-year to GBP 885 million thanks to a strong performance in the first half in both Workplace and BPA. This means that we've already more than offset the runoff of our in-force business of GBP 800 million per annum in just the first half. Our new business net fund flows increased 72% year-on-year to GBP 3.1 billion. This is particularly pleasing given that across the wider market net fund flows are down. As ever, we delivered strong cash generation with around GBP 900 million remitted. We're therefore on track to deliver the top end of our target range of GBP 1.3 billion to GBP 1.4 billion for the year. Our balance sheet remains resilient with a shareholder capital coverage ratio of 180%, at the top end of our target range supporting our investment into growth. Phoenix has a single strategic focus, which is helping customers journey to and through retirement. This is important because we're seeking to meet a huge societal need. With only around 10% of people currently getting advice on their journey and only 1 in 7 defined contribution savers on track for a decent retirement income that maintains their current standard of living. So there's a clear need for more propositions and support, which we at Phoenix are well placed to provide, which is why we're building a business that can support customers across every point of their savings life cycle, to offering them the long-term savings and retirement propositions and the education and advice that they need as they accumulate wealth through the savings phase then transition through to securing income in retirement. And yet in spite of these unmet needs, the market is already huge today with an estimated GBP 3 trillion of stock and it's growing strongly with around GBP 150 billion to GBP 200 billion of annual flows that we can access. So a significant organic growth opportunity. Now many are saying that the U.K. economic environment is challenging and it is for most industries. But for us, the structural growth opportunities in the market are only being accelerated by the current economic environment. So we're seeing strong growth in Workplace fueled by the high levels of salary inflation and full employment in the U.K. economy. The retail market has slowed down in this economic environment with less switching of flows between providers. But for Phoenix, this is helpful given our scale in-force book as it helps us to improve our customer retention. And the BPA market is seeing record levels of demand due to higher interest rates making buy-ins and buyouts more affordable. Finally, we believe there will be more M&A opportunities coming to market over time as high inflation means it's harder to deliver the necessary cost reductions every year in unhedged closed books. So the cash generation will reduce. It's counterintuitive I know, but the challenging U.K. economic environment is positive for our sector. Now a bit more color on where we play in the market. Phoenix is the U.K.'s largest long-term savings and retirement business. We have a diversified and balanced business mix across the savings life cycle and 2/3 of our business is capital-light fee-based products. Our strategy is designed to maintain a balanced mix as we leverage our existing scale in capital-light fee-based products to grow our Pensions & Savings business. We are disciplined in our annuity growth as we keep this to a small proportion of our business mix and hence limit the credit risk we retain on our balance sheet. Our strategy is already delivering strong new business net fund flows, which are exceeding our expectations. This excellent execution of our strategy together with the positive tailwinds of the U.K. economic environment is why we are now confident of delivering positive group net fund flows from 2024, which means that our new business inflows will more than offset our legacy runoff outflows. This is a pivotal moment for Phoenix, which Rakesh will cover in more detail later. Having trusted brands is critical to engaging customers and having the credibility to support them with some of the most important financial decisions they make. We are, therefore, very proud to have a family of brands to successfully engage and support customers through their savings life cycle and therefore support our growth both organically and through M&A. I want to highlight Standard Life, our primary organic growth brand. It's a brand that people trust with a deep history and heritage going back nearly 200 years and it is therefore well known to both advisers and customers. But all of our brands have a role to play. In total, our brands service 12 million customers and they come together in our passion to deliver Phoenix Group's purpose of helping people secure a life of possibilities. We deliver that purpose and that strategy by focusing on our 3 strategic priorities: growing organically and through M&A, optimizing our in-force business and enhancing our operating model and culture; all of which are informed by and in support of our key ESG themes across both planet and people. Executing on these strategic priorities will strengthen our competitive advantages of capital efficiency, customer access and cost efficiency. Phoenix is well known for leveraging these competitive advantages to deliver strong financial outcomes on our in-force business and we have a long track record of successfully leveraging them on M&A and creating shareholder value. Now we're also growing organically by leveraging those same competitive advantages, all of which supports us in delivering increased cash, better returns and a dividend that grows over time. So looking at our first half performance against each strategic priority in turn. Starting first with our organic growth. I'm delighted with the further progress we've made this year on our capital-light fee-based business with new business long-term cash up almost 50% year-on-year. This growth has been driven by our Workplace business and reflects our success in leveraging our key competitive advantages in this market of customer access and cost efficiency. Workplace is different to most other markets in that majority of the growth comes from your existing customers with regular new joiners to existing schemes and increased member contribution through higher salary inflation. So it's critical to retain your existing customers, which is what we are now doing very successfully, and that is why 95% of our new business cash in the first half has come from our existing clients. Given there's virtually no acquisition cost on these incremental flows and our customer administration platform is already highly cost efficient, this embedded growth generates highly profitable long-term cash. In addition, by winning new schemes in the market, we can turbocharge our future growth too. It's therefore great to see that our new scheme wins continue to accelerate and we're now winning the bigger schemes too, which has enabled us to attract around GBP 3 billion of new scheme asset wins over the past 12 months. We expect these assets to transfer across to us in 2024 and 2025 and so will drive future net fund flows and new business cash. We're also currently quoting on a significant pipeline of new Workplace schemes and are confident of winning further new schemes over time. Finally, we're now turning our attention to the retail opportunity. Here we have a huge inbuilt growth opportunity to better support the 1 in 5 U.K. adults who are already customers of Phoenix Group with the development of our advice proposition a key enabler. I'm hugely excited by the opportunities we have available to us in both the Workplace and retail markets and I'm confident in our ability to achieve the ambitious targets we have set for our business. We also continued to deliver sustainable growth in our Retirement Solutions business where we are winning in a competitive BPA market with our strong proposition and the Standard Life brand. This market is large and growing ever more strongly due to higher interest rates. Our participation is consciously disciplined to limit our exposure to credit risk and maintain our balanced business mix. We, therefore, continue to take a selective approach up to deals focused on value over volume with GBP 3.2 billion of premiums written in the first half driving strong year-on-year growth in new business cash. However, given the size and attractiveness of the BPA market, we are exploring innovative ways of leveraging our expertise to participate in a capital efficient way through our recently established Bermudan entity Phoenix Re. Our initial focus is on proving our capital efficiency through internal reinsurance. Future plans could see us leverage third-party capital in time. Finally, we continue to see increased demand from customers for annuities and this month launched our first open market individual annuity product. This product is available to both new and existing customers under the Standard Life brand and is another example of us filling in the remaining gaps to complete our full service customer proposition. Turning now to M&A. We have a long and successful track record of delivering strong returns from M&A. By buying at an attractive price and delivering significant cost and capital synergies, we deliver cash generation over the life of the business which far exceeds the purchase price. What is particularly pleasing is the speed of that cash emergence. For example we bought ReAssure for GBP 3.2 billion and have already remitted GBP 3.7 billion in cash generation to achieve a 3-year payback with a further GBP 3.3 billion of cash generation still to emerge over time. While on Sun Life of Canada U.K., we completed the acquisition in April and have already received nearly 20% of the purchase price back within 3 months. Looking forward, we are optimistic on the outlook for further M&A over time with an estimated GBP 435 billion of heritage U.K. assets potentially available. Now I can't predict exactly which books of business will come to the market or when. But as you know, I have regular conversations with my peers across the industry and these suggest that the challenging economic environment makes M&A both large and small more likely. As ever, we stand ready to do our next deal through our ability to integrate efficiently and swiftly and to manage multiple migrations concurrently. We also have the financial capacity to fund deals with our surplus cash and capital ready to deploy and we have debt funding capacity too if required with a fixed leverage ratio that was 25% at the end of 2022. Our second and third strategic priorities are optimizing our in-force business and enhancing our operating model and culture. These are the core capabilities that drive management actions with GBP 412 million of benefit delivered in the first half. And these are the same capabilities that also help us to generate better returns from both organic growth and M&A. The slide covers the specifics of what we've delivered in the first half against the key actions I outlined at the full year results back in March. Our first half performance extends our recent track record of delivering high levels of management actions and reflects the fact that we continue to optimize and enhance our business. However, we do not expect our pipeline of management actions to ever dry up. Instead, we are confident that the capabilities we've now built in-house across asset management and capital optimization will enable us to leverage evolving market dynamics on an ongoing basis and hence deliver a repeatable pipeline of management actions over the very long term. So in summary, we are executing on our strategy to deliver a dividend that is sustainable and grows over time. Our organic growth is compelling. We've more than doubled our new business long-term cash in the first half. We are comfortably on track to deliver our target of GBP 1.5 billion per annum by 2025 and now expect to deliver positive group net fund flows from 2024. We're also growing through M&A, delivering strong returns with an accelerated payback. We are optimistic of further acquisition opportunities emerging over time and are confident in our ability to both fund and execute transactions successfully. Finally, we continue to optimize and enhance our business, which has supported the delivery of a further GBP 412 million of management actions in the period. And we believe that our enhanced in-house capabilities will enable us to deliver a sustainable level of repeatable management actions over the very long term. So a strong first half and an exciting future ahead. And with that, I'll now hand you over to Rakesh, who will cover our first half financials in more detail. Rakesh?

Thank you, Andy, and good morning, everybody. Phoenix has a clear financial framework, which is designed to support growth and deliver enhanced shareholder returns over time. We are investing in our growth, which is accelerating as we maintain our balanced business mix and our high levels of predictable cash generation provide the financial flexibility to invest into the significant growth opportunities available to us. All of which is underpinned by a resilient balance sheet, which we will not compromise. Phoenix has delivered a strong financial performance in the first 6 months of the year. Our dependable cash generation continues to emerge as expected and we have more than doubled incremental new business long-term cash generation while our long-term free cash has also increased and our balance sheet remains resilient as ever. As a result, the Board has declared a 26p per share interim dividend, in line with our final 2022 dividend, which is a 5% year-on-year increase. So turning to the detail starting with cash. We have delivered GBP 898 million of cash generation in the first half and now expect to deliver at the top end of our target range of GBP 1.3 billion to GBP 1.4 billion for the full year with a long track record of meeting or exceeding our targets. Our group holding company cash balance is around GBP 700 million and means we have surplus cash available. This is because I would generally look to hold a minimum buffer of around GBP 300 million to GBP 400 million. This is sufficient to cover 6 months of costs and dividends and it is appropriate given that cash remittances from our life companies are typically paid up twice a year. In addition, the free surplus in our life companies is significant at GBP 1.7 billion and provides further financial flexibility should we need it. Group in-force long-term free cash is a measure of the cash that will be available to our shareholders over time from our existing business. It is calculated net of the cash needed to service and redeem all outstanding debt and after deducting committed integration costs. During the first half, it increased by around GBP 400 million primarily driven by a net GBP 700 million increase through organic growth and GBP 200 million through the M&A growth. This equates to a long-term free cash growth of 7% in just 6 months, which more than offsets our uses of cash in the period. At GBP 12.5 billion, we have a huge amount of in-force cash to emerge over time and this means that we can sustainably fund our dividend over the very long term. And as it continues to grow, it will support us in delivering on our policy of paying a dividend that is sustainable and grows over time. Turning next to resilience. Our resilient Solvency II capital position is enabling us to invest surplus capital into growth opportunities with our shareholder capital coverage ratio of 180% remaining at the top end of our target range even after this investment. Our surplus prior to investment was broadly flat with the high levels of predictable surplus and management actions funding our ongoing uses. Our closing surplus of GBP 3.9 billion, therefore, reflects our active decision to invest around GBP 400 million of surplus capital into growth, which has increased our group in-force long-term free cash and will drive future cash and capital generation. And as ever, our reported surplus also reflects the accrual of our interim dividend. Looking forward, I expect our end of year surplus to be slightly lower as we continue to invest into growth. Our ability to deliver management actions is a key differentiator for Phoenix and we continue to demonstrate our capability here with GBP 412 million of management actions delivered in the first half. This significant ongoing level management actions reflects our focus on optimizing and enhancing our business. During the first half, the majority of these were business as usual actions. They included GBP 151 million of asset management actions primarily driven by the dynamic optimization of our liquid credit portfolio and GBP 157 million of ongoing cost and capital actions. It is also pleasing to see that we continue to deliver integration synergies from our previous acquisitions such as ReAssure with GBP 104 million realized in the period. We have invested into enhancing our in-house asset management capability. We have built an expert team of investment professionals who set the strategic asset allocation and oversee the performance of our assets. This capability enables us to operate our differentiated strategic partnership model and partner with the best asset managers in each asset class and geography. Aberdeen, who manage around half of our customer assets, continue to be a key strategic asset management partner and playing a significant role in supporting the asset deployment from our new business growth. We are also complementing our partnership approach by developing our own in-house capabilities and we remain very focused on integrating ESG into our wider investment decision making with our recent addition as a signatory to the U.K. Stewardship Code a clear statement of intent. As you can see on the right hand side of the slide, we are seeing the benefits of our investment. We are confident that our capabilities will enable us to leverage evolving market dynamics on an ongoing basis and deliver a repeatable pipeline of management actions over the very long term. Looking next in detail at our credit portfolio. As Andy outlined earlier, our strategy is designed to maintain a balanced business mix with credit risk making up a small proportion of our balance sheet. We, therefore, maintain a prudent and diversified GBP 34 billion shareholder credit portfolio, which is currently around 13% of our total GBP 269 billion of assets. We are conservative in our sector positioning with only 2% of our credit portfolio exposed to cyclical sectors and our portfolio is 99% investment grade. During the first half of the year, we have seen more credit rating upgrades than downgrades and have suffered no defaults, testament to the proactive approach taken by our in-house asset management team. Looking forward, we will continue to manage our portfolio to optimize our risk-adjusted returns. Moving now to growth. Phoenix is now delivering sustainable organic growth year in, year out. The growth in our new business net fund flows is accelerating through our success in Workplace and BPA. And we now expect group net fund flows to be positive in 2024 for the first time in Phoenix's history as new business inflows offset the legacy outflows due to our improved proposition and higher customer retention. Our progress is also delivering increased incremental new business long-term cash generation and we are very much on track to deliver on our target of GBP 1.5 billion per annum by 2025. I am delighted, therefore, that we can more than double incremental new business long-term cash generation to GBP 885 million in the first half. The contribution from our fee-based businesses increased nearly 50% year-on-year to GBP 220 million primarily due to a strong performance in Workplace. Retirement Solutions remains the largest contributor at GBP 665 million with an impressive first half in BPA. And whilst I do expect 2023 to be another record year for new business, you shouldn't expect this first half performance to simply be annualized when looking at the full year. A lower second half contribution is expected from BPA reflecting our disciplined approach to capital allocation, in line with our annual investment of around GBP 300 million. Building on the momentum we saw in 2022, our Workplace business has continued to grow strongly in the first half through the Standard Life brand. This is due to the investment we have made into our enhanced Workplace proposition, which is helping us to both retain our existing schemes and win new schemes in the market. Our strong retention is enabling us to reduce our outflows and stabilize the inflows from our existing business. We will continue to benefit from the Workplace compounding flywheel effect with new business growth coming from our joiners to our existing schemes and increased member contributions, including salary inflation. On top of that, we are winning new schemes in the market, which will both increase the stock of existing assets and accelerate new inflows. That is why I am delighted with the success we are having in attracting new clients of all sizes. Last year, our largest scheme win covered GBP 2 billion of assets and is expected to transfer in 2024 with a further GBP 1 billion scheme won this year that is expected to transfer in 2025. And neither of these schemes are in our numbers today so they will benefit future net fund flows and cash generation. We're also quoting on a strong pipeline of opportunities totaling GBP 3.5 billion of assets and are confident of winning further new schemes over time. The strength of the Standard Life brand is also helping us to win new business in a competitive BPA market with GBP 3.2 billion of premiums written in the first half driving GBP 665 million of new business long-term cash generation with an improved cash multiple of 3.4x achieved. Our capital strain in the first half was 6% on a post-CMP basis with our target of 5% remaining very much on track and this target equates to a 3% on a pre-CMP basis and positions us well in a competitive market. Looking forward, we are quoting on a significant pipeline of opportunities and expect a total market in excess of GBP 40 billion this year. Turning next to IFRS 17. IFRS 17 is a new accounting standard that became effective on 1st of January 2023. However, I want to emphasize that this accounting change does not alter the underlying economics of our business. It therefore has no impact on our strategy or dividend and we will continue to remain focused on delivering cash and capital. I do though want to provide a short update on the impact of IFRS 17 transition for Phoenix and I will also host an IFRS 17 transition education session for the analysts following this main presentation to answer any of the more technical questions. It is important to note that the impact of IFRS 17 is different for Phoenix due to our history of M&A. As a result of the value accretive transactions we have completed, around 95% of our business has been recognized using the fair value approach and this results in a lower CSM at transition and increased volatility in our shareholders' equity. So looking first at our adjusted shareholders' equity. This was GBP 5.2 billion at the end of 2022, which is 24% higher than under IFRS 4. This is inclusive of a GBP 2 billion CSM net of tax, which is a significant store of future profits. And importantly, on a gross of tax basis, this grew year-on-year by 7% in 2022. Unadjusted shareholders' equity is lower under IFRS 17 primarily due to the transfer of items to the CSM and increased accounting volatility related to our hedging approach and the loss of some prudence that existed under IFRS 4. IFRS 17 rebase lines the level of operating profit we will report. In 2022, our adjusted operating profit has reduced to around GBP 600 million. This is principally due to the well understood transfers of annuity new business profits, assumption changes and management actions to the CSM. There is also a small reduction from items not recognized in operating profit under IFRS 17. Looking to the full year of 2023, I would expect a broadly similar level of annual operating profit. So turning now to our leverage position. Our restated Fitch leverage ratio at the end of 2022 was 25%. This includes the impact of the transition to IFRS 17, which had only a small adverse impact on the ratio. There is a material reduction in the ratio due to the consistent application of the Fitch ratio calculation with others in the industry. This update to our calculation was made in agreement with Fitch and follows our most recent annual review with them. As you can see on the slide, we now include the policyholder share of the with-profits estate due to its loss absorbency in stress. Any burn-through risk is covered by that estate first before it impacts shareholders. This is the same approach used by our peers and so updating it alongside the other IFRS 17 methodology changes now brings us on a market consistent basis. At the end of 2022, we were at the bottom of our target ratio range of 25% to 30%, which is a key factor for maintaining our investment-grade credit rating. We've also been proactively delevering our balance sheet over the past few years with GBP 772 million of debt repaid since the end of 2020. And importantly, we have increased our group in-force long-term free cash to GBP 12.5 billion, which is after the redemption of all our outstanding debt and the servicing of interest to maturity. We do not see leverage as a constraint to future M&A. To put it into context, GBP 200 million of additional debt is around a 1 percentage point increase in the Fitch leverage ratio as at the end of 2022. I remain comfortable with our leverage position and the wider financial flexibility we have available to support our strategy. So to conclude, we are executing on our strategy and delivering on our financial framework of cash, resilience and growth. We have delivered a strong first half financial performance across our core reporting metrics and we have clear targets for this year and beyond. All of which support us in delivering on our dividend policy, which is to pay a dividend that is sustainable and grows over time. With that, I'll now hand you back to Andy for the summary.

Thanks, Rakesh. So in summary, Phoenix is successfully executing on its single strategic focus, helping customers to journey to and through retirement. We do this by leveraging our position as the U.K.'s largest long-term savings and retirement business offering a full range of products and services to support customers through all stages of their savings life cycle. This market is our sole focus. It's huge, it's structurally growing and this growth is being accelerated by the current economic environment. This is enabling us to deliver strong organic growth as we leverage our 3 competitive advantages of capital efficiency, customer access and cost efficiency. We're also confident of executing further value accretive M&A over time with the financial capacity to fund transactions as and when they emerge. Delivering on our strategy drives our dividend. We offer an extremely attractive yield today, which is sustainably funded by the resilient cash from our current in-force business over the very long term and will grow over time both organically and through M&A. And with that, we'll move to questions.

So as a reminder, I've got a little bit of script first just to tell people in line. They're keen. They're enthusiastic here. Remind, the purpose of this Q&A session is to cover our strategy and the results we've just presented. We'll be hosting an IFRS 17 transition session for the analysts following this so please save any detailed technical accounting questions for that. Given our agenda today, we've also got a stricter time for the Q&A so around 40 minutes remaining. This is going to hurt I know, but I'm going to have to limit you to 2 questions each at least in the first time around. But if we have time, we'll get around for a second round. For those watching on the webinar, please use the Q&A facility there and we'll come to your questions after we've answered those in the room. So you can go now. If you're ready, raise your hand and please just state the institution you're representing as well. Why don't we start here and move across?

Okay. Andrew Baker, Citi. So 2 questions then, both on leverage actually. So first, are you able to give an update of the first half '23 Fitch ratio? And I guess within this, on the Fitch ratio you noted that you've taken a haircut to the policyholder estate. Are you able to say how much that haircut was? And then secondly, your peers -- I guess you've heard several peers that once they get to sort of 30%, 35% Solvency II leverage ratio, they've undertaken debt reduction programs. Just interested, I think you were at 37% at the half year. why you guys are different on the Solvency II lens and why you don't see any, I guess, need to take action there and why the Fitch is your primary metric?

Okay. So I'll take the second question and then get Rakesh to answer the first. So in terms of the second, we use the Fitch methodology as an input. I think what's different with us is firstly, we have a big stock of in-force business with high levels of cash so GBP 12.5 billion of cash due to come from our in-force business over time. Secondly, we hedge out the major financial risk so that cash is very, very predictable over time. So what I'd say, Andrew, is that we had GBP 4.9 billion of leverage a couple of years ago and GBP 11 point something billion of cash in the business and we were fine with that level of leverage at that point in time. We've now got GBP 800 million less leverage than that today, but we've got GBP 12.5 billion of cash in the in-force business. So Fitch is 1 input to our considerations, but we do feel comfortable with our current level of leverage. We were comfortable with the level we had before and we don't see that as a constraint. I think the other point I'd draw out is that when we do M&A, it pays back really quickly. So we paid GBP 3.2 billion to buy ReAssure 3 years ago. We've had GBP 3.7 billion of cash back already so a less than 3-year payback period, GBP 3.3 billion more still to come going forward. So that's also a consideration when we consider leverage from an M&A perspective. I think in terms of the first half, we can't say much, can we? I'll let you say we can't say much.

So yes, as you'd expect, we can't say much on the first half. What we have given you is the sensitivity of it and the calculation itself. So we'd expect to be comfortably within the range. So that's all I can say. So nothing more because it's based on half year. And in terms of the prudency the haircut that we've taken, we've taken about half of that policyholder estate for prudency.

So we'll keep going across this way, yes.

Mandeep Jagpal, RBC Capital Markets. Two questions. First one is on the new business cash generation, which was strong over the period. Could you provide any details on your current thinking on how a year-on-year increase in this metric at the full year will affect dividend growth? And then a second question, kind of a big picture question. Andy mentioned at the start there only 1 in 7 DC savers is on track for savings that maintain the current standard of living. What are your current thoughts on how the government could enact policy changes to address this and how could that impact Phoenix in the long run?

Okay. So on the first one, really delighted with the organic growth we delivered in the first half and the fact that we've got new business long-term cash at GBP 885 million for half a year when what we need to offset the runoff of the in-force is GBP 800 million for a whole year was very pleasing. I was even more delighted to be honest with the net fund flow position and the 72% growth. I struggle to find a peer that was up when I kind of interrogated their results. So delighted with that. Our dividend policy is we pay a dividend that's sustainable and grows over time. That delivery of growth in new business long-term cash and indeed benefits of M&A are key inputs, but the Board makes a dividend decision in March each year and it will make that decision based on a range of judgments when we get to March and not now I'm afraid. So on the second question. So 10 years ago in the U.K. we had 10 million people saving for their retirement through Workplace pensions. Today it's 20 million, been a huge success. The challenge is that it's only an 8% contribution and that isn't going to give you a decent standard of living in retirement. So we think that definitely needs to change. Actually one of the things we've done at Phoenix as part of being a purpose-led organization is we created our own think tank called Phoenix Insights trying to do research into this area and we're currently doing a piece of work through Phoenix Insights which we'll publish shortly, which basically recognizes the current cost of living crisis, recognizes that right now it will be challenging to start increasing those contributions with the cost of living crisis. But what would be the economic conditions in the U.K. that would need to prevail for it to be a good time to start to do that because we do think it's something that needs to happen in time. The other thing that needs to happen is more than 10% need to get advice and support on the journey to and through retirement. If you sort of think about the organic growth for Phoenix, we've kind of built the BPA business first, we've been #2 in the last 2 years. Workplace is going fantastically well, really delighted 64% growth in new business cash there. We're now turning our attention to that retail opportunity, helping those customers consolidate their multiple pension pots develop a plan through retirement income. But we think that's a great market opportunity generally and with 1 in 5 U.K. savers being customers of Phoenix Group particularly attractive for us.

Farooq Hanif from JPMorgan. Going back to capacity to do M&A, I mean you've given some numbers on the percentage points. It sounds like GBP 1.1 billion on leverage and then you've got surplus and then it also depends on what you buy as well I guess it creates some headroom. But what are your thoughts -- given how profitable you're saying this business is and the cash generation on M&A, what are your thoughts on raising equity again if you see something that's profitable enough? Are you sort of happy to do that given the economics? And then question 2 is I know you don't care about IFRS, but IFRS volatility is something that investors will look at. Are you able to within your hedging framework reduce that volatility and also maintain your hedging philosophy or is that something that's just going to stay with us?

So I'll let Rakesh take the second of those. In terms of the first so we have 3 core criteria, as I've said before very consistently, for M&A. The first is that it's value accretive so we're looking very hard at the financials, the cash flows and it's value accretive. Secondly, it supports cash generation and our dividend. And thirdly, we want to maintain our investment grade credit ratings. Those are the 3 criteria. So in the context of that, we would consider raising equity. But obviously with equity prices being lower, effectively the returns on a deal would need to be sufficiently attractive to justify it. So we wouldn't rule it out and it will be a very tough objective assessment of what are the cash flows in the business we're buying? What can we get them to as we drive out cost and capital synergies? What are we raising? What's the cost of what we're raising in terms of funding to do the deal? What's the economics of that and the return on that capital? So it will be a very tough objective assessment. Depending on the nature of a deal and the pricing of a deal, it's definitely possible that we could use equity as part of it. Do you want to pick up on the second one?

Yes. So on the IFRS volatility. So I mean first thing I would say, our focus has always been to manage cash and capital. That ultimately protects the dividend in the short term and also our hedging strategy ensures it protects the long-term free cash in the long term as well and that means the dividend is safe. Now in relation to the IFRS volatility, we always saw this under IFRS 4 and what's happening under IFRS 17 is probably just increased slightly because essentially the CSM is insensitive to interest rates and therefore, you're getting that little bit of additional volatility coming through that. Now our focus will continue to be on cash and capital, but I will continue to review my hedging and to make sure it's optimal for the business as a whole. So that will continue, but the focus continues to be on cash and capital.

It's Andy Sinclair from Bank of America. First one, just digging further I guess on leverage. Just want to check how you think about Solvency II tiering capacity constraints and if that influences your thoughts on debt issuance? I suppose if you went to the top end of your debt leverage range, you would have some non-qualifying debts under Solvency II. Do you care about that and does that influence thoughts of senior versus subordinated debt issuance? And then second question was just on consumer duty. I just wonder if you can give us a little bit of color what does that mean for Phoenix for your heritage book when it comes in and do you see any changes on charges, on cash or anything really?

Okay. So I'll take the second and get Rakesh to take the first. So on the second, I mean we are supportive of consumer duty and the direction of travel because the essence of it is basically we're focusing in on getting the right outcome for the customer. As a purpose-led organization and as a company that has a single strategic focus helping customers journey to and through retirement, we want to focus on those outcomes. So like others in the market, what we've done is we've enacted consumer duty around our open product lines and we're now working on enacting consumer duty and implementing consumer duty on our closed product lines with a deadline of July of next year. We've had an ongoing focus on this in Phoenix over many years. So as we transform businesses we buy and close products and migrate them to more modern technology, give those customers better experience and outcomes, drive the cost and capital synergies; we have shared a fair bit of that benefit with customers over time. So we've kept charges in different areas would be 1 good example of that. So we're not expecting the impact on our book to be material in terms of the scheme of the financials of Phoenix Group overall, but we're still working through that project over the next 10 months. Rakesh, do you want to pick up on the tiering question?

Yes. Sure Andy. So we would always look at all the possible options and tiering is 1 area we continue to look at. In the context of M&A, which is why I've always said every time you've asked me this question, it always depends on the company that you're buying because that capital structure will determine on how you best finance that deal. So in the context of M&A if you're acquiring a company that's got no debt, you effectively got more capacity to do it. So even if you do effectively utilize the headroom that we have currently, which is still quite big, you still have the ability if you're buying a company that's got no debt at all to utilize that headroom and to make it the most efficient capital structure, which is something I've always been saying. And if it meant that in that context if the cash is really quick like we've seen in ReAssure where you get it back in 3 years as we've just shown and demonstrated with that, then why wouldn't you use also having senior as an option as part of that?

Steven?

Steven Haywood from HSBC. 2 questions. Following on from the consumer duty one related to your surprise announcement to go positive net fund flows in 2024. Do you see yourself retaining more customers going forward and is this related to the Consumer Duty Act or is it just how well you're doing on the open business side of things? Secondly, you mentioned on the BPA that you are looking at more efficient capital ways to enhance this business I guess. Could you give a bit more detail in terms of what you could possibly do? And are you thinking about literally doubling the amount of BPA business you can do by adding on another GBP 300 million of third-party capital to your already GBP 300 million of own capital going forwards?

Sure. So I'll let Rakesh take the second of those. In terms of the first, I mean I do think getting Phoenix Group what people would have historically seen as a closed book consolidator to be net fund flow positive next year is a huge step for us and I'm excited by it and I really am genuinely delighted with how our organic growth is coming along. That's not driven by consumer duty. Our strategy helping customers journey to and through retirement is the right strategy for our business. It's also entirely consistent with consumer duty, but we were going in that direction anyway. And again just at the risk of repeating that there's basically that GBP 150 billion to GBP 200 billion of gross inflows across the market each year, the growth in the market. GBP 40 billion to GBP 50 billion of that is Workplace and obviously that's going exceptionally well for us. GBP 30 billion to GBP 60 billion of it is BPA and again very happy with that performance there. GBP 80 billion to GBP 100 billion is in what we call the retail space so that's helping these customers who move jobs and therefore have multiple Workplace pension parts to think about consolidating those together and journeying through into retirement income. So at the moment, our business is roughly circa GBP 20 billion of inflows and GBP 20 billion of outflows a year give or take a bit. GBP 7 billion to GBP 9 billion of that GBP 20-odd billion of outflows is transfers to other pension providers. So effectively we're a net kind of loser there at the moment because we haven't had an offer for our customers there, we haven't focused on that. So that market opportunity when 1 of 5 of those customers is customers of Phoenix Group when only 10% are getting advice on the journey to and through retirement. We think that's a substantial opportunity to be the one they turn to and engage with to think about bringing those pension pots together and that's what we're now starting to turn our attention to. Don't expect that to have an impact on the numbers this year. We're still building the capabilities we need to go after that; things like the new Standard Life individual annuity is a good example of building those capabilities. But as we get into 2024, I'd expect to start to see some benefit from that. Rakesh, do you want to?

Yes, sure. So on the BPA more efficient capital way. So this is reflecting what we're doing by setting up this Bermudan reinsurer. We just started on this so this is very early days, but the intention here is potentially to look at generating more value internally from the annuities that we have within the group currently that are not necessarily getting the best return and this is outside of the U.K. currently and then we would look to access if we can third-party capital. So what this will enable us to do is essentially bring that capital to the U.K. and really access the fact that we in line with our purpose of helping people secure a life of possibilities get those customers who are looking, the corporates who are looking to do a BPA transaction and help them do that over time. What it will mean is that we'll be able to do more deals, but what it won't mean that we'll be spending any more of our own money. We're still disciplined in our own GBP 300 million. But essentially we were facilitating additional deals by the use of getting more capital in and we'll be able to also be earning fees from that in a capital-light way, which essentially which will help us in our strategy.

Abid Hussain from Panmure Gordon. Two follow-up questions if I can. One on M&A capacity, just wondering how much firepower you have for M&A as opposed to organic growth without raising equity capital? And the second question is also a follow-up on the BPA stream. I'm just wondering if it's possible to get down to the 5% new business strain before 2025 or is it largely dependent on when the Bermudan reinsurer comes online?

Both for you, Rakesh.

So on the first question, I mean it's similar. It's going to be on the capital structure of whatever we're acquiring to understand how much you need before going to equity. You need to understand the size of the deal that you're doing and the capital structure before you can actually determine whether it is you need equity to do that deal. But in any deal that we do, the returns have got to be attractive, right? That's the first and foremost. And you've seen ReAssure, a lot of it was through equity and you can see the attractiveness of that deal. But a lot depends on the size and the capital structure to determine. So it's difficult to give a precise number on that, but it's certainly a small deal, bit like the one we did with the Sun Life of Canada, the U.K. business, you wouldn't need any equity for that as a guide. So it depends on the bigger you go, it's going to depend on the capital structure. And then on the strain and can we get down to 5%. So we're currently at 6% on a post-CMP basis and then the market is pretty competitive, but we are on track to get down to 5%. There's still lots we've got to do on the reinsurance side and also on our credit modeling as well that would improve that and what the opportunity what Bermuda gives us is some additional fees. Most of it will be actually from the work that we're doing on the reinsurance side and on the credit modeling side.

It's probably worth just adding. We did less quota share reinsurance in the first half than we did through last year. We had the Mitchells & Butlers and the Chubb schemes. So they were both over GBP 1 billion and they both landed in June. That gives you less time to work through some of those elements here.

Andreas van Embden from Peel Hunt. Just a quick question about own funds. If I look at the unrestricted Tier 1 equity, it's come down to around GBP 4.5 billion this half year. It's been coming down for some time. I just wonder what are the drivers of that decline and are you comfortable with the level?

Yes. So the Tier 1 has been coming down. But ultimately as we've said, our focus has always been on managing the cash and capital position. So what we do in that context is manage the surplus above the SCR. So we ensure we're always protecting that. What that does, it protects the cash and also protects the dividend. That's ultimately what that means. Therefore, the impact of that is that as SCR moves, your Tier 1 own funds will also move. But we accept that tradeoff because what it's doing is protecting our cash today and it also protects the cash over the very long term.