Aegon : UK SFC Report

Aegon UK Group

Solvency and Financial Condition Report

2023

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Scope of the Report

Following changes to the Solvency II (SII) Pillar 3 regulatory reporting requirements, as from 31 December 2023, firms are no longer required to produce the Regular Supervisory Report (RSR) which was a private report to the supervisor and not disclosed publicly. Firms are required to continue producing the Solvency and Financial Condition Report (SFCR) containing both qualitative and quantitative information, and to disclose this report publicly and to the Prudential Regulation Authority (PRA) on an annual basis.

This report is Aegon UK Group's ('AUK Group') SFCR for the year ending December 31, 2023. This report informs AUK Group's stakeholders about the Group's:

• Business and performance (section A of the report);
• System of governance (section B of the report);
• Risk profile (section C of the report);
• Valuation for solvency purposes (section D of the report); and
• Capital management (section E of the report).

Basis of Preparation

This report is prepared in accordance with the requirements of Solvency II Directive and Delegated Regulation (in particular article 51 of the Solvency II Directive and articles 290-298 of the Delegated Regulation, and relevant European Insurance and Occupational Pensions Authority (EIOPA) Guidelines, in particular 'Guidelines on reporting and public disclosure' (EIOPA-BoS-15/109) as issued by EIOPA. Following the UK's withdrawal from the European Union, AUK Group must comply with the Solvency

1. regulatory regime as adopted in the UK. In this document, references to requirements set out in the Solvency II Directive, Delegated Regulation and EIOPA guidelines should be interpreted as requirements that apply as at 31 December 2023 under the corresponding version of those documents as adopted by the UK.

Aegon UK plc and its subsidiaries are referred to in this document as 'AUK Group' or 'the Group'. A set of acronyms and glossary of terms can be found in Appendices A and B of this document.

The Group's 2022 regulatory solvency requirements were calculated on a UK Standard Formula basis (SF) as at 31 December 2022. The Group changed to report on a UK Partial Internal Model (PIM) basis with effect from Q1 2023 following approval by the PRA on 16 March 2023. The prior period results have been restated on a PIM basis to aid comparison, where available.

The figures reflecting monetary amounts in the SFCR are presented in pounds sterling, and rounded to the nearest £0.1 million, unless otherwise stated. All ratios and variances are calculated using the underlying amount rather than the rounded amount.

In cases where International Financial Reporting Standards (IFRS) figures are disclosed, the figures are prepared in accordance with the International Accounting Standards in conformity with the requirements of the Companies Act 2006.

The 2023 SFCR of AUK Group has been prepared and disclosed under the responsibility of the AUK Group Board. The Group is required to ensure that its SFCR is subject to approval by its governing body and that the governing body takes responsibility for ensuring that the SFCR has been properly prepared in all material respects in accordance with the PRA rules and Solvency II Regulations.

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Summary

Introduction

The AUK Group comprises Scottish Equitable plc (SE plc), AUK Investment Group, Pension Geeks, and AUK Corporate Services Limited. SE plc is the only regulated insurance entity in the Group and writes all pensions and insurance business in the UK.

The AUK Investment Group is wholly comprised by Aegon UK Investment Holdings Limited and its subsidiaries; Cofunds Ltd, Aegon Investment Solutions Limited, Aegon Investments Limited and Momentum Group Ltd, which in turn has two subsidiaries Origen Financial Services Limited and Origen Limited.

Pension Geeks Ltd is an unregulated service company specialising in connecting people with their finances through innovative techniques, communication, and events.

Aegon UK Corporate Services Ltd is a service company which employs the staff of the Group.

The AUK Group is a subsidiary of Aegon Europe Holding B.V. and is a core business of the Aegon Group, one of the world's leading providers of life insurance and pensions operations and is also active in savings and asset management operations, accident and health insurance and general insurance. Aegon Group focuses on two core markets (the United States and the United Kingdom), three growth markets (Spain & Portugal, China, and Brazil) and one global asset manager. Until 30 September 2023 the ultimate parent undertaking was Aegon N.V. which was incorporated in the Netherlands. As part of the ultimate parent undertaking's re-domiciliation process to Bermuda, the ultimate parent undertaking was first converted into a Luxembourg entity, Aegon S.A. on 30 September 2023 before it was subsequently converted into the Bermuda company, Aegon Ltd. on the same day.

The Aegon Group headquarters are currently located in The Hague, the Netherlands. From the beginning of 2025, the World Trade Center, Schiphol, will host all staff from Aegon's headquarters and employees of the Dutch part of Aegon Asset Management.

Aegon operates in a fast-changing environment, in which we face new challenges but also opportunities. Aegon aims to play a key role in shaping a thriving and sustainable society by delivering on our purpose of Helping people live their best lives. Aegon's strategy is not just about strengthening our operational and financial performance, but also strives to have a positive impact on society at large, including by managing our direct operations and our investment activities as sustainably and responsibly as possible.

A. Business and Performance

Group overview

The Aegon UK Group is one of the UK's leading providers of corporate and individual pensions, protection products, savings and investment products. The largest operating subsidiaries in the Aegon UK Group are Scottish Equitable plc and Cofunds Limited. The Group is primarily a long-term savings and protection business, supporting customers who are retired or saving for their retirement. Products are sold through its online platform, which enable advisors, employers, and individuals to buy and manage investments online, and to also have a single view of investments.

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Strategic overview

On 4 April 2023 the Group announced the sale of its UK individual protection book to Royal London. Under the terms of the agreement the Group has initially reinsured the portfolio to Royal London, which will be followed by a Part VII transfer of the legal ownership of the individual protection book in 2024. The transfer is subject to court approval. The Company's individual protection business is a portfolio of life, critical illness, and income protection policies for 400,000 high-net worth individual customers, that was sold through independent financial advisers. The portfolio closed to new business on 4 April 2023. The transaction does not have a material financial impact on the capital position, nor the risk profile, of the Group.

The Group has an established advisory business in Origen Financial Services Limited (a subsidiary of Aegon UK plc), providing independent advice directly to high net worth clients. In August 2023, Aegon agreed a transaction with the Nationwide Building Society (NBS), which concluded on 1 February 2024, to transfer NBS's financial planning service. The agreement extends the existing strategic partnership, with the transfer of c. 300 staff to Origen Financial Services Limited (a subsidiary of the Company) along with the agreement of a new introducer arrangement for those advisers to continue to provide services to Nationwide customers. The transaction does not have a material financial impact on the capital position, nor the risk profile, of the Group.

As an insurance and investment group, some of the Group's largest exposures are to changes in financial markets (e.g. interest rate, and equity market risks) that affect the value of the investments held (either directly or indirectly through fees on policyholder funds), and the liabilities from products that the Group sells. Other risks include insurance related (underwriting) risks, such as changes in mortality and the persistency rates as well as the operating expenses for the business.

The Directors consider that the Group has the plans and resources to manage its business risks successfully despite this economic and regulatory uncertainty through its plans for focussing on investing in growing the customer base, improving customer retention, and growing margins.

A key element of the Group's strategy is to maintain capital at an appropriate level as protection for policyholders. The key performance indicator for Solvency II is the Solvency II surplus ratio which at 31 December 2023 is 197% (2022: 178%, restated on PIM basis). The key driver for the increase in ratio was the UK Solvency II Risk Margin reform effective from 31 December 2023. Other drivers include ongoing capital generation and impacts from market movements and de-risking activities. This was partially offset by dividends paid, new business strain and an update to expense assumptions.

Full details on AUK Group's business and performance are described in Chapter A. Business and Performance.

B. System of Governance

Corporate governance

The Group ownership structure is presented in section A.1.4 Ownership Structure. Our corporate governance structure is in place to ensure the safe and efficient management of the Group, its operations, and to protect the interests of its customers.

The Aegon UK Group Board (AUKGB) is the statutory board of Aegon UK plc, Scottish Equitable plc, Scottish Equitable Holdings Limited, Aegon UK Investment Holdings Limited, Cofunds Limited and Aegon Investments Limited. It has oversight of the Group and assumes overall management responsibilities for the Group. The AUKGB has delegated responsibilities to committees of the Board, and the Board and its committees form the Administrative, Management, or Supervisory Body (AMSB).

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Specifically the AMSB includes:

• AUKGB
• AUKG Executive Committee
• AUKG Audit Committee
• AUKG Investment Committee
• AUKG Board Risk and Capital Committee
• AUKG Remuneration Committee ("REMCO")
• AUKG Nomination Committee
• With-ProfitsForum (WPF)

In addition, the AUKGB has input and challenge from two governance forums, Scottish Equitable Policyholders' Trust (SEPT) in relation to with-profits and the Independent Governance Committee in relation to the value for money of workplace pensions. The Aegon Master Trust Board may also escalate issues to the AUK Group Board in relation to its purpose of performing the functions given to the Trustees of the Aegon Master Trust.

Risk management

AUK Group's Enterprise Risk Management (ERM) framework is aligned to the Aegon Group ERM framework. This framework is designed to identify and manage potential events and risks that may affect the Group. It involves:

• Understanding which risks the Group is facing
• Establishing risk tolerances for the level of exposure to a particular risk
• Utilising risk policies to set minimum standards to be met
• Monitoring risk exposure and actively maintaining oversight over the Group's overall risk and solvency positions.

Control environment

In addition to risk management, AUK Group's Solvency II control environment consists of an internal control system, which includes the Compliance function, the Actuarial Function and the Internal Audit function. The internal control system serves to facilitate compliance with applicable laws, regulation, and administrative processes and it provides for an adequate control environment including appropriate control activities for key processes. The Actuarial Function has end-to-end accountability for the adequacy and reliability of reported technical provisions, including policy setting and monitoring of compliance regarding actuarial risk tolerances. AUK Group's Internal Audit function is independent and objective in performing its duties in evaluating the effectiveness of AUK Group's internal control system.

Full details on AUK Group's system of governance are described in Chapter B. System of Governance.

C. Risk Profile

Key risks

As an insurance and investment group, AUK Group is exposed to a variety of risks. Some of the Group's largest exposures are to changes in financial markets (e.g. interest rate, and equity market risks) that affect the value of the investments held (either directly or indirectly through fees on policyholder funds), and the liabilities from products that the Group sells. Other risks include insurance related (underwriting) risks, such as changes in mortality and the persistency rates as well as the operating expenses for the business.

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The key risks as reflected in the Group's Solvency II Partial Internal Model (PIM) Solvency Capital Requirement (SCR) are:

Solvency Capital Requirement for AUK Group (unaudited)

Note: The detailed split shown above for 2023 is not available for 2022 PIM SCR as this was calculated on a Standard Formula basis. The equivalent total for 2022 on a PIM SCR basis was £1,295.9m.

• In this summary presentation, the credit risk values represent counterparty exposure only, with other credit risk relating to financial investments (spread risk, migration risk and default risk) included within Market Risk IM.
• Loss absorbing capacity of technical provisions (LAC-TP) refers to the management actions available to the With-Profits Sub Fund (WPSF) to reduce the impact of stressed scenarios. These are a combination of regular management actions such as change of investment strategy and other management actions that may be implemented in more extreme conditions to maintain the solvency of the WPSF.
• Diversification reflects diversification between Standard Formula and Internal Model components and between risk modules / components.
  "SF" Standard Formula, "IM" Partial Internal Model

Market Risk

Market risk exposures arise as a result of investments in assets which may fall in value, including equities, properties or other alternative asset classes. Such exposures may be indirect, for example where a fall in the value of investments held on behalf of customers results in a fall in expected future management fees in both AUK's insurance and investment business.

The market risks (excluding Credit risk, which is considered separately) that are most material to AUK's insurance business are Equity and Interest Rate risks.

• Equity falls result in a reduction in Own Funds, as the value of future profits falls.
• The cash balances on SE plc Platform business earn interest at a corporate rate, reflecting our global corporate banking partnership with HSBC. An allowance for retention of some of the interest earned on these cash balances has been included in the Group's 2023 Solvency II balance sheet, which introduces a new exposure to changes in interest rates. Interest rate falls result in a reduction in Own Funds, driven by the negative impact of lower interest on cash balances.

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AUK Group continues to run an active Unit Matching programme in SE plc as a means of hedging the equity market risk exposure that arises through the value of future fee income in SE plc, and the programme was extended in 2023 to include the TargetPlan book. We continue to supplement this hedging with equity put options.

AUK Group also continues to hold a portfolio of centrally cleared swaps in SE plc to hedge interest rates and inflation.

Credit Risk

There were no significant changes in the composition of credit risk during the year. Our main exposures remain through reinsurance counterparty exposure on our Protection business in SE plc and through our External Fund Links (EFLs).

Underwriting Risk

Through SE plc, AUK Group writes primarily unit-linked retirement savings contracts. The Group's principal underwriting risk exposures therefore arise from risks that could adversely affect the value of future charge income in excess of costs relating to those contracts, namely persistency risk and expense risk. With an update to our year end best estimate expense and persistency assumptions as well as market movements over the year, we have seen a marginal increase in persistency and expense risk in 2023. The decrease in Standard Formula underwriting risk reflects the impact of the reinsurance agreement between SE plc and Royal London.

In the investment group AUKIG, the underwriting risk extends to lower profitability and loss of large institutional or large retail accounts.

The Group no longer writes new annuity business, with an arrangement in place under which annuities from vesting policies are placed with a third-party provider. However, it has some residual exposure to longevity risk through inward reinsurance of a closed book of annuity business in addition to the longevity risk associated with the DB Pension Scheme exposure.

Some policies in With-ProfitsSub-Fund provide Guaranteed Minimum Pensions and Guaranteed Annuity Options which results in exposure to longevity risk and changes in Guaranteed Annuity Option take-up rates within the fund.

Operational Risk

The operational risk capital requirement increased over 2023, primarily reflecting an increase in the assessed exposure of risk to cybercrime and an increase in the assessed impact of potential fines for products not performing in line with expectations.

Risk Management

The Group manages risk based on risk appetite and policies established across the Aegon Group with appropriate local application. Aegon's integrated approach to risk management involves common measurement of risk and scope of risk coverage to allow for aggregation of the overall Aegon Group's risk position.

Risk mitigation techniques are employed within the business. Techniques are adopted to reduce risk exposures within risk appetite. Examples include reinsurance and derivative hedging programmes.

Sensitivity and scenario analysis is utilised to test the overall financial strength of the business and the exposure to specified risk exposures. Sensitivities and scenario analysis is a core part of the risk framework in allowing the business to measure, monitor and manage risk exposures at any time.

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Climate change risk

The Group can support the transition to a climate resilient economy and a net zero world using both sides of its balance sheet. We finance the upside through our responsible investment framework, while mitigating the downside through integrating ESG into our risk management processes, and the savings and protection solutions we provide. The influence, both positive and negative, we can have as an investor is significant, and we have committed to transitioning our general account investment portfolio to net-zero greenhouse gas (GHG) emissions by 2050.

During 2023, Aegon UK became a founding signatory of the Mansion House Compact agreement. The Compact is a voluntary, industry-led expression of intent to take meaningful action to secure better outcomes for UK pension savers through increased investment in unlisted equities.

The Group does not operate energy or resource intensive processes as part of its direct business operations and is not aware of any incidents relating to these activities impacting the natural environment. Aegon's UK business operations have been carbon-neutral since 2016, which has been achieved by substituting its energy consumption with renewable sources and offsetting its remaining carbon emissions. We have selected carbon offset projects in close consultation with our customers, and to align the socio-economic benefits they bring in connection with our purpose.

In line with the net-zero commitment announced in November 2021, Aegon has set a supporting operational greenhouse gas emission reduction target to reduce the carbon footprint of its operational activities by 25% by 2025 (i.e. before the impact of green energy procurement and carbon offsetting has been applied). We expect the companies we invest in to have similar ambitions and, while our operational footprint as a business is relatively small, it is important that we set a good example. The Group supports the increased regulatory oversight of climate risk in the UK and the recommendations set out by the Taskforce for Climate-Related Financial Disclosures (TCFD), and Aegon UK published a climate-related financial disclosure report on its website which includes a section on Risk Management. We also recognise the growing expectations of our stakeholders to mitigate the threats presented by climate change and inequality, and to capture the opportunities offered by moving to a more sustainable and equal world.

On 30 August 2023, Aegon UK was accepted as a signatory to the Financial Reporting Council's (FRC) UK Stewardship Code. The code is recognised globally as a best-practice benchmark in investment, setting high standards for those investing money on behalf of UK savers and pensioners, and it aims to improve the quality of stewardship practices by asset owners, managers and service providers.

Full details of AUK Group's risk profile are described in Chapter C. Risk Profile.

D. Valuation for Solvency Purposes

Valuation

The valuation of assets and technical provisions for Solvency II purposes are derived predominantly from the same data and models as used in preparation of the AUK Group Consolidated Statutory Accounts, and a key internal process control is to reconcile from the audited Statutory Accounts to the valuation of assets and technical provisions for Solvency II reporting. Full details of the reconciliation between AUK Group's International Accounting Standards in conformity with the requirements of the Companies Act 2006 balance sheet and its Solvency II balance sheet are described in Chapter D. Valuation for Solvency Purposes.

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