ALEXANDER FORBES GROUP HOLDINGS LIMITED INTEGRATED … Alexander Forbes is a market-leading provider...

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ALEXANDER FORBES GROUP HOLDINGS LIMITED

INTEGRATED ANNUAL REPORT 2019

CONTENTS

OVERVIEW 2 About this report3 The capitals in our report4 Who we are8 Message from the Chairman10 Message from the CEO

OUR REVISED STRATEGY14 Background15 Our strategic reset16 Five key deliverables – helping us achieve growth

OUR PERFORMANCE24 Chief Financial Officer’s review30 Operating performance

MATERIAL ISSUES40 Key matters raised by our stakeholders 42 Regulation 43 Leadership 44 Our clients 48 Our people52 Transformation

ACCOUNTABILITY58 Governance 64 Managing risk

Our journey since listing in 2014 has been eventful and, in the last two years, relatively turbulent. But amidst these changing times, we have retained the underlying attributes that have characterised us since our founding in 1935 – a desire to think outside the box, to do things differently, to innovate and improve, to find ways to serve our clients better and, in doing so, enrich their lives.

Many companies make claim to such innovation and thought leadership; few actually deliver on it. The awards we have won and market-leading products and solutions that we continue to deliver are testament to our drive to innovate and serve our clients.

We call this drive our ‘DNA’, and it is what has enabled Alexander Forbes to succeed and create opportunities from challenges in over eight decades. This year we reached a critical point in our own history, and we believe that this report reflects our continued ability to stand back, evaluate and reset. We have made a sound judgement call on what needs to be done to take this company forward to an exciting future.

In March 2019 we announced our revised strategy, following a strategic review initiated in December 2018. A valuable consequence was that it gave us the space to reimagine our business, our people, and how we align with client needs. It gave us the chance to reflect on our strengths, remind ourselves of what we stand for and to refresh to ensure we protect and reinforce our DNA.

Our revised strategy reaffirms Alexander Forbes’ strength as a trusted adviser to our clients with a renewed focus on the core businesses of consulting, administration and investments.

1

ABOUT THIS REPORT

Scope and boundaryThe Alexander Forbes Group Holdings Limited (Alexander Forbes or the company or the group) Integrated Report (the report) is our primary report to our stakeholders.

The report provides information relating to our strategy and business model, operating context, material risks, performance and governance, covering the year from 1 April 2018 to 31 March 2019 (2019). Any material events after this date and up to board approval on 24 July 2019 have also been included.

N Nyembezi DJ de VilliersNon-executive Chairman Chief Executive Officer

Reporting frameworks and assuranceWe take direction on reporting from the King IV Report on Corporate Governance for South Africa, 2016 (King IV) and the International Integrated Reporting Council’s (IIRC) International <IR> Framework. Financial information has been prepared in accordance with International Financial Reporting Standards (IFRS) requirements. Any disclosures on broad-based black economic empowerment (B-BBEE) information applies only to our South African operations. We used internal controls to ensure the accuracy of the information in this report.

The board reviews and approves the report and is comfortable, based on materiality, that external assurance on the accuracy of non-financial information is not necessary. This position will be reviewed annually by the board. Our annual financial statements have been audited by PricewaterhouseCoopers Incorporated (PwC) who expressed an unmodified opinion thereon. To obtain a full understanding of the nature of the information that has been audited, refer to the auditor’s report and the audited annual financial statements – available online. Our B-BBEE rating has been independently verified by Kopax BEE Solutions Proprietary Limited.

Board approvalIn the board’s opinion this report provides a fair and balanced account of the company’s performance on those material matters that we have assessed as having a bearing on our capacity to create and sustain value. The board wanted this year’s report to be distinct from previous reports and to clearly and unambiguously communicate the revised strategic journey the company has embarked on. Although we believe that this report has materially been prepared in accordance with the IIRC International <IR> Framework and we undertake to continually mature our level of integrated reporting over time.

The report, including the annual financial statements for the year ended 31 March 2019, was approved by the board of directors on 14 June and 24 July 2019 respectively, and signed on its behalf by:

Forward-looking statements This report contains certain unaudited forward-looking statements and targets. These, by their nature, involve risk and uncertainty as they relate to future events and may be influenced by factors outside the company’s control. There are various factors that could cause actual results to differ materially from those expressed or implied by these forward-looking statements.

Alexander Forbes cannot guarantee that any forward-looking statements will materialise and accordingly readers are cautioned not to place undue reliance on any forward-looking statements. The company disclaims any intention and assumes no responsibility or obligation to update or revise any forward-looking statements, even if new information becomes available as a result of future events or for any other reason, other than as is required by the JSE Listings Requirements.

Alexander Forbes Group Holdings Limited | Integrated annual report 31 March 2019

2

THE CAPITALS IN OUR REPORT

This report incorporates the IIRC International <IR> Framework’s principles of the forms of capital that apply to Alexander Forbes throughout the report. Below is a summary of how we use these capitals in our business model to create value:

The cash generated from our operations, together with funding from investors and financial institutions, is used to support our business and operating activities. This brings value to our shareholders and ensures we support our clients’ financial well-being.

Chief Financial Officer’s Review

Operating Performance

Accountability

Financial

Our information technology infrastructure and physical footprint enables us to create value and provide our clients with a quality service.

Our Revised Strategy

Material Issues: Our ClientsManufactured

Our brand promise, product development, reputation, unrivalled expertise and strategic partnerships are key inputs deployed through our business model to achieve our desired strategic outcomes.

Our Revised Strategy

Material Issues: Our Clients

Material Issues: Our People

Accountability

Intellectual

We engage and empower our people, investing in their development and our collective knowledge, skills and experience to provide best advice and develop innovative solutions for our clients.

Material Issues: Leadership

Material Issues: Our People

Material Issues: Transformation

Accountability

Online governance report

Human

Our stakeholders are key to our continued value-creation journey. These include clients, employees, investors, regulators and our society. We recognise the importance of building relationships based on trust and work to improve the financial well-being of our clients and members throughout their life journey.

Material Issues: Key Matters Raised by Our Stakeholders

All Material Issues: Regulation

Material Issues: Transformation

Social and relationship

3

WHO WE ARE

OUR VISIONAlexander Forbes seeks to be the adviser of choice for clients in securing their financial well-being for a lifetime.

Trust We believe in treating our customers and our employees fairly and providing them with reliable financial advice and solutions at every stage of life.

Integrity We are truthful, ethical and transparent. We lead by example.

Customer first We put our customers at the centre of our business and help them secure financial well-being for a lifetime.

Collaboration We collaborate to innovate and achieve excellence.

OUR VALUESOur values are the principles we live by. They guide our relationships, actions and behaviours.


4

WHO WE ARE Alexander Forbes is a market-leading provider of integrated retirement and investment

solutions as well as holistic wealth management.

For 84 years the Alexander Forbes brand has been synonymous with financial expertise and

innovative, yet reliable, solutions. We have built our premium brand through an in-depth

understanding of the employee benefit and investment industry and have provided innovative

solutions to our clients, making us a trusted adviser and partner of choice.

The company employs 3 120 people, all of whom are dedicated to delivering outstanding

employee benefit, investment solutions and administrative services for institutional clients and

securing the financial well-being of individual clients.

OWNERSHIP

1. Forfeitable share plan.2. Subsequent to year-end, ARC increased its shareholding to 13.11% from 8.9% through open market purchases on the JSE Limited.

African Rainbow Capital Financial Services Holdings Proprietary Limited (ARC)2

Alexander Forbes Group Holdings Limited

Mercer Africa Limited

Public

Alexander Forbes Acquisitions Proprietary Limited

Alexander Forbes Limited

Alexander Forbes Isilulu, Community, FSP1 trusts and

treasury shares

African Rainbow Capital Financial Services

Holdings Proprietary Limited

33.0% 8.9% 49.4%

100%

90%

8.7%

10%

5

WHAT WE DO We create value for our clients by ensuring they are at the centre of everything we do.

We provide advice, products and solutions that meet the needs of our clients through our

client-centric operating model. We are the largest administrator of retirement funds, multi-

manager and healthcare consultancy in South Africa.

Institutional

Corporate & Employee Benefits (continuing operations) Consulting

Retirements

Administration only

Group Risk (discontinued operations)

Investments

Retail

Wealth and investments

Insurance (discontinued operations)

Emerging markets

Southern Africa

(Namibia and Botswana)

West Africa

(Nigeria)

East Africa

(discontinued operations)

Standalone and umbrella retirement fund administration and consulting

Retirement fund and actuarial consulting

Asset and investment consulting and administration

Beneficiary fund consulting and administration

Investment manager surveys

Multi-manager portfolio construction, manager research and advice

Health and medical scheme consulting, and absenteeism and disability reporting, management and consulting

Group risk insurance

Investment management administration services

Multi-manager portfolio construction, manager research and advice

Individual financial planning, wealth management, savings and investment product administration

Bespoke investment portfolios for independent financial advisers (IFAs)

White-labelled investment portfolios

Retail umbrella fund

Short-term insurance

Standalone and umbrella retirement fund administration and consulting

Actuarial consulting

Asset and investment consulting

Multi-manager portfolio management, manager monitoring and consulting

Retail offering, including short-term insurance, financial planning consulting and retail umbrella funds for savings (Namibia)

PRODUCTS AND SERVICES

WHO WE ARE [CONTINUED]


6

ADVICE-LED BUSINESS

INVESTMENT CASE

A COMMANDING POSITION IN THE INDUSTRY

A ROBUST BALANCE SHEET WITH

CAPACITY TO GROW

A STRONG CLIENT VALUE PROPOSITION

A WELL-KNOWN AND TRUSTED BRAND

A STRONGLY CASH-GENERATIVE BUSINESS

A FOCUSED BUSINESS

CAPITAL-LIGHT BUSINESS MODEL

Proven strength and expertise in core activities

Market leader in institutional employee benefits, multi-manager investments and healthcare consultancy in South Africa

Predictable revenue base and highly cash generative

Strong profit to cash conversion

Institutional integrity focused on relationships built on trust

The Alexander Forbes brand is synonymous with financial expertise and innovative, reliable solutions

Moving towards a capital-efficient business model

Surplus capital to be returned to shareholders

Dividend cover: 1.5 to 2.0 times

Single-minded business with reduced complexity

Simple operating model making it easier for clients to understand and access

Integrated client-facing teams will deliver greater expertise and innovation

Holistic offering across the value chain

Supported by strong cash generation

Well capitalised (cover ratio of 1.6 times)

Low level of gearing

7

Alexander Forbes has emerged with a positive outlook under new management following a challenging year that saw a parting of ways with the previous executive team, the necessary yet costly shutdown of the information technology (IT) modernisation programme, and a strategic shift following a review of the previous Ambition 2022 strategy. These developments occurred within the context of a low-growth domestic economy and a maturing industry in a country that has been waiting for an election to provide policy certainty and improved business and consumer confidence.

MESSAGE FROM THE CHAIRMAN

Performance in a low-growth economy The challenging operating environment saw the domestic economy exit a technical recession in 2019. However, low business and consumer confidence as well as high levels of unemployment resulted in marginal growth ahead of the May general elections. These macroeconomic conditions, coupled with domestic socio-economic difficulties, had a tangible effect on our clients. We were also affected by volatile and declining equity market performance, which impacted about 50% of our business.

Savings and retirement markets were also under pressure and we also did not perform to expectation, resulting in some lost business. The 6% year on year increase in operating income from total operations to R3 863 million reflects these impacts but, importantly, demonstrates the resilience of Alexander Forbes within this challenging economic climate.

A challenging yearAlexander Forbes experienced significant internal challenges last year, which required the board to take bold decisions and to engage meaningfully with our shareholders to ensure we emerged with a positive outcome. When the board was alerted to a broad range of issues, it took swift action through an investigation. The investigation surfaced a number of grave issues, exacerbated by some client losses, shareholder dissatisfaction and a widespread culture of fear that was endemic to the organisation.

As a result, in September 2018, we terminated the services of Mr AA Darfoor as chief executive officer. This decision was not taken lightly, and we believe our actions were in the best interests of the company. Ms N Ford-Hoon resigned shortly thereafter as chief financial officer, and six other executives subsequently resigned. The board appointed Mr DJ de Villiers as chief executive officer in November 2018. Under the leadership of Mr DJ de Villiers the company initiated a strategic review in December 2018 to ensure relevance in its core markets, assess growth opportunities and unlock the value potential of the company. The review culminated in certain bold decisions, such as the cancellation of the IT modernisation programme, which resulted in a R287 million write-off and R50 million termination cost, which naturally had a negative impact on our results this year. But, despite such impact, we know it to have been the correct decision.


8

Our proactive responseThe board was quick to engage meaningfully with key stakeholders and shareholders following these developments. We provided them with constant updates regarding our decisions to stabilise the company and to minimise the impact of the internal difficulties on our customers and investors following these developments.

We addressed our leadership challenge by appointing two key executives, in the roles of chief executive officer and chief financial officer respectively, who bring an excellent balance of external and internal experience respectively.

As we rebuild the institutional expertise of the executive team, following additional changes and decisions made, we will focus on strengthening the diversity and skills of this team. We will also be mindful of the calibre of people we select to lead our company. Alexander Forbes focused on refining its strategy to address issues raised through the review process. The revised strategic plan has resulted in the decision to exit the manufacturing of insurance products and focus on our core role as a trusted adviser, best-in-class employee benefit provider and retirement fund administrator.

We have also changed our approach within our emerging markets strategy. Our clients across Africa will continue to benefit from our proven advice and expertise and we will continue servicing them through an advice-led framework in collaboration with Mercer. However, there are no further plans for in-country investments in the rest of Africa and sub-scale markets such as Uganda and Zambia will be exited.

The review and optimisation of the group’s capital position and balance sheet has resulted in an acceleration of processes that will further strengthen the balance sheet. We have also considered our complex legal entity and governance structures and we are taking steps to transition to a simpler, integrated organisational structure. Exiting the insurance segment will contribute towards achievement of the intended capital-light and simplified business model. The new target operating model will further assist in simplifying the current structure and legal entities.

We are aligning our client-centric business model with an organisational culture that prioritises and respects people. That is why Mr DJ de Villiers is rebuilding a leadership team that understands our strengths – our clients and our people. Attracting, developing and retaining a talented and motivated group of employees is a focal point for the board and executive as we work to rebuild the intellectual strength and culture of the

organisation. Together we will succeed and deliver the results expected by our clients and our shareholders.

Future-proofed outlookThe board has learned hard, but valuable lessons in the past year. We need to balance a higher level of professional scepticism against re-establishing a culture of respect, integrity, collaboration and innovation and rebuilding relationships with the executive, to enable them to effectively execute the client-centric strategy.

This type of culture relies on diversity and openness. To achieve this and to deliver on the socio-economic benefit we can offer to the country through financial well-being, it is imperative that we prioritise our transformation efforts both internally and more broadly.

By understanding our past challenges and implementing bold remedies to future-proof the organisation, we have entered a new chapter with optimism and confidence to provide best advice and best-in-class solutions for our clients, helping them along their path to financial well-being. Starting with cultural renewal internally and getting back to being truly client-centric and trusted advisers will ensure we are able to deliver greater value for all our stakeholders. Moreover, the board has undertaken to adopt organisational culture as a key focus area on its agenda. It is also important that in our efforts as a company we impact positively on the well-being of communities.

AppreciationThe board played a key role as a stabilising force during the past year, actively engaging with shareholders, management and employees to steer the business towards a steadier footing and set it back upon its journey towards growth. I am hugely appreciative of their dedication, contribution, personal sacrifice and support which extended beyond the norm. Specifically, I would like to express my sincere appreciation to Ms M Ramplin, who stepped in as acting chief executive officer on 1 October 2018 until Mr DJ de Villiers was appointed on 1 November 2018.

N NyembeziNon-executive Chairman

Sandton 24 July 2019

9

MESSAGE FROM THE CEO

It is a great privilege to lead Alexander Forbes at a time of renewal, following a process of honest reflection and a strategic review. It has also refocused our attention on our clients and our people, with the objective of fulfilling our pledge to help improve the financial well-being of our clients.

A renewed team effort is enabling us to rebuild our culture, reconnect with our clients and shareholders and to set our path to achieve our long-term strategic objectives. Our revised strategy and target operating model will ensure that Alexander Forbes delivers sustainable growth and value to our clients and shareholders.

Context for changeOur performance this year occurred within the context of tough domestic and global economic conditions, which has affected our ability to grow revenue and, ultimately, profit. Our results reflect this low-growth environment but also demonstrate our resilience and strength of character, which is evident in our ability to adapt and improve our strategies while continuing to provide excellent service to our customers.

The departure in 2018 of the previous chief executive officer and many of the executive team came at a low point internally. Following my appointment as chief executive officer in November 2018, an interim team of Alexander Forbes experts helped to rebuild the business. Initially these changes were tough on our people and, ultimately, they rose to the challenge and brought solutions and energy that have started to signal a renewed culture. They have proven their commitment to our client-centric business model and their role as best-in-class investment advisers, consultants and administrators.

It is through the breadth and depth of experience of this team and our people that we quickly developed a revised strategy in a short period of time. The impact of this – and our enhanced strategic vision – has enabled us to start a new journey of growth and will ensure that our clients benefit from our improved service offering. Change will not happen overnight and will take place within the context of understanding what strategies and service offerings have and have not worked well in previous years. We announced during our interim results the shutdown of our IT modernisation programme following a board review of the IT strategic roadmap. We remain committed to enhancing our IT platform for our employee benefits fund administration and enhance the end-user experience for our individual members. The current platform is a great base from which to work and we will continue to implement incremental enhancements to this platform, which will provide positive improvements for our clients. This will incur a more balanced commercial spend and measured execution than the previous project.

We are excited about our new onboarding red carpet experience, which is a leapfrog initiative that will provide our new clients with meaningful information and guidance as they discover the variety of benefits that will improve their financial well-being.


10

A strategic shiftIn December 2018 we initiated a strategic review to ensure relevance in our core markets, assess growth opportunities and unlock value potential. It revealed that aspects of the operating model and strategy were hindering our ability to grow.

We developed a future growth vision that entails providing best advice for clients and measurable client benefits, pan-Africa solutions, a focused business model, and a capital-light operation. This required a transition to a new operating model, in which we have strengthened the ‘client-centric – one company' approach through the integration of the different business lines.

The model will include one client-facing team, with divisional experts; a hub for innovative solutions development and product enablement; and a joint platform for support services, including fund administration and shared services. By addressing our internal complexity, we will be able to reinvest our capacity in client-facing activities, strengthening our competitive edge as adviser of choice and fuelling future growth opportunities.

While our primary market of South Africa will remain our core focus, we will continue to service clients across Africa through the advice-led solution platform ‘Arrive' in close collaboration with Mercer.

By making these changes, we are focusing on what we are good at and where we can take a commanding position in the industry. These changes are also an important step to realising our vision of having a significant social impact by influencing the socio-economic well-being of South Africans. By educating corporate employees, individuals across all income groups, about financial well-being and by offering them a broad range of retirement and savings products, our reach can extend far beyond our direct clients. We want to change the mindset of the corporations we work with by providing them with assistance to bring about behavioural change. In so doing, we would position savings and investments within a full financial well-being journey and make it meaningful to all South Africans.

The best peopleWhile many might try to avoid challenges like the ones we faced, I believe that this year will ultimately have a positive effect on our company’s culture and will translate to our clients’ benefit. While there is work to be done to repair our culture, there are already signs of optimism and energy. New leaders have been appointed who are passionate about the business, have the depth and breadth of experience and who understand our clients. They are trusted by our clients and are well poised to address identified deficiencies. People who

want Alexander Forbes to succeed have stood up and voiced their opinion. I am grateful and value their participation in the company. Alexander Forbes has some of the best people, whose skills, experience and learning orientation are key differentiators in the market.

Placing clients at the very centreOur revised strategy is focused entirely on providing an optimal service offering to our client base, in our belief that this will yield future rewards for our investors and stakeholders. The strategic review took a grassroots approach that resulted in a decision to remove the silo structures and integrate our business lines placing clients at the centre. We are developing and transitioning to one organisation and are structuring ourselves in a functional delivery way, moving away from product silos. We expect this to be a 12 to 18-month journey as we rebuild our credibility as an organisation that can execute, set the right priorities and deliver. By reducing complexity, we aim to focus on client engagement, while improving efficiency. In every action that we take, we will ask ourselves whether we are doing the right thing for our clients.

Down to business going forwardWe want to be a company that people can trust and are comfortable doing business with. Through our proven strength, expertise and in-depth experience in our core activities, we have a solid foundation from which to we are able to continue to be the best at providing advice and solutions to our customers.

Our focus going forward will be on embedding the target operating model to ensure we deliver on our strategy and change the way we interact with our clients. As we turn the ship around, we will focus on retaining and adding value to our existing clients, while working hard to grow the client base. This will require a focus on improving our own culture of excellence.

As we embark on this new chapter, we do so in an economic environment that will likely remain constrained in the coming year. We expect a stable year but with relatively flat growth in profit, while we correct some of the previous inefficiencies and invest to grow. We are positioned for a low-growth economic environment and will be even better placed once the economy begins its revival.

DJ de VilliersChief Executive Officer

Sandton 24 July 2019

11

Indu

stry

le

ader

ship

Res

tore

sta

bilit

y

nriv

alle

d ex

pert

ise

and

trus

ted

rela

tions

hips

Simplify the business

We aim to do fewer

things better

Save costs

Value for shareholders

Reduce surplus capital

New operating

modelClient-centric

what we do best

Engaging ourbest people

Limited credit risk

We deliver

measurable

client benefits

Advice-led

Poised for

growth


Focused business model

Cap

ital l

ight

Measurable client

benefits

Five key deliverables –helping us

achieve growth

Grit

Mature industry

OUR REVISED STRATEGY


12

Indu

stry

le

ader

ship

Res

tore

sta

bilit

y

nriv

alle

d ex

pert

ise

and

trus

ted

rela

tions

hips


We aim to do fewer

things better

Save costs



New operating

modelClient-centric

what we do best

Engaging ourbest people

Limited credit risk

We deliver

measurable

client benefits

Advice-led

Poised for

growth



Cap

ital l

ight

Measurable client

benefits

Five key deliverables –helping us

achieve growth

Grit

Mature industry

BACKGROUND 14

OUR STRATEGIC RESET 15

FIVE KEY DELIVERABLES – HELPING US ACHIEVE GROWTH 16

13

We are committed to maintaining our resilience and creating an agile operation that is poised for growth within the context of South Africa’s macroeconomic environment, which remains challenging.

The 2019 budget review showed a deterioration in the fiscal outlook. Eskom’s debt burden and rolling electricity blackouts added increased risks for the fiscus and the economy. The pronouncement of land expropriation without compensation and the potential nationalisation of the South African Reserve Bank (SARB) negatively affected market sentiment and business confidence during 2018. The South African economy grew by 0.8% on an annualised basis, with the unemployment rate remaining high, low employment growth of 2.2% year on year reported for the calendar year, while business confidence indices also regressed. High unemployment and interest rates coupled with a weak rand put consumers under considerable pressure.

Our business is dependent on our clients’ business performance. Poor performance by companies resulted in job losses, retrenchments and low salary growth and this affected inflows and preservation rates. Owing to the current environment, clients and individual members will remain vigilant to the impact of costs on their disposable income. For members, this often means poor financial decisions in the short term, such as cash withdrawals at exits. The role that we can play to provide access to trusted advice and guidance to our members has, therefore, become even more critical.

Economic growth, which had been expected to rise to 1.5% in 2019, was revised downwards to 1%. A more significant recovery is likely to become evident in 2020 and beyond, meaning job growth is likely to remain subdued and will continue to impact our business.

We are aiming to differentiate ourselves through best advice in a maturing industry, by creating value through a client-centric operating model.

We have experienced competitive pressure on our ability to retain clients. This competitive landscape compels us to provide a higher quality of service and focus on providing innovative cost-effective solutions that help our clients and members.

Despite the industry being mature, it is estimated that about half of all employed South Africans have no retirement savings arrangements. There are also individuals who are informally employed but unable to access adequate income protection. Our challenge remains in closing this retirement savings and risk benefit gap.

In our experience, only about 50% of retirement savings are kept invested for retirement at exit in South Africa. Low participation in retirement savings mechanisms means that fewer than 10% of South Africans have enough funds to maintain their lifestyles after retirement. Research suggests that the average employee is ill-equipped to make financial decisions that adequately balance their needs and risks over the period of their employment. As a result most employed individuals today will be significantly worse off once retired.

Amid this maturing market, the environment around our member base and their networks is changing. Regulations are shifting to protect members and the most significant are the default regulations (for more information see page 42 – material issues section). These regulations have increased the role of advice, to require that members have access to financial information and advice at various points in their life cycle. These shifts often provide the tailwinds from which opportunities for value creation can be seized.


BACKGROUND

Macroeconomic environment Mature industry


14

OUR STRATEGIC RESET

In March 2019 we announced a revised strategy that refocuses the business on providing advice-led integrated retirement solutions and holistic wealth management. This followed a review to ensure continued relevance in our core markets, assess growth opportunities and unlock the value potential of the company.

We analysed the operating environment and the changing world around our members to identify opportunities to improve their financial well-being. We considered feedback from our stakeholders, whose concerns we aimed to address in the revised strategy. We discovered significant opportunities for us to meet their needs by changing the way we operate.

We then revisited our strategies from 2010 to ensure we retained the elements that worked. At the core of our strategies since 2010 has been a focus on keeping our clients at the centre, looking after our people, as well as growth. In developing the

revised strategy, we focused on what would make us different this time round, and this came down to the simplification, implementation and focus to drive the desired levels of growth.

The review revealed opportunities for better capital management and efficiencies, as well as ways we could improve financial well-being with the aim of narrowing the retirement savings and risk benefit gap.

The following pages outline our revised strategy and describe our five key deliverables in achieving this strategy.

Strategy reset follows client-centric principles

Engaging our best people

Integrated business model Simplified

De-risked pan-Africa coverage Focused on core business

Financial well-being key differentiator Innovative

CLIENTS

Advice-led

15


Measurable client benefits

Pan-Africa solution


Capital light

Our growth strategy is predicated on providing best advice for clients, together with measurable client benefits, pursue low-risk pan-Africa opportunities, implementing a focused business model, and maintaining a capital-light operation.

This also entails reducing our presence or exiting those areas that are non-core. In some cases these are areas that are profitable but where we do not foresee an opportunity for us to scale up. The decision to dispose of these businesses is based on the need to focus on our leading market position in the consulting, administration, employee benefits and investment businesses.


FIVE KEY DELIVERABLES – HELPING US ACHIEVE GROWTH


16

OUR REVISED STRATEGY [CONTINUED]

BEST ADVICE FOR CLIENTS

Providing best advice for our clients is one of two deliverables that reflect our focus on our clients and members, providing excellent advice and the right financial solutions for them.

We advise our clients on the best solutions for their unique needs based on the level of financial needs among their employees, its impact on the workplace and how their company compares to others. We also advise individuals to help them make better financial decisions at key moments in their financial journey.

This advice-led approach fits into our overall ecosystem and represents the holistic approach we follow to help drive:

better employee benefit outcomes;

more productive and engaged employees; and

improved financial well-being.

Our key focus in the future will be to reduce the administrative tasks required to onboard members and to enhance the ways we provide information and advice to members. If we want employees to engage in their well-being journey and value financial protection, we need to help them address their entire financial journey, not just at exit or retirement.

We have found that to be client-centric means to lead with advice and solutions, instead of products. Simply cross-selling products that might benefit a client or offering advice through intermediaries does not meet client needs the way that advice-led models can. Alexander Forbes owns the problem space – we provide advice and we innovate to create the solutions that meet our clients’ needs.

We have two initiatives that aim to address these client and member needs:

Education in making the right choice: This helps members make better decisions by providing meaningful information, counselling to help understand the information and advice to help make good decisions – all at the right time.

Improving financial well-being through digital technology: This empowers members through a simpler and more engaging customer experience to help achieve their financial well-being. This will also reduce the paperwork and administration required to onboard and manage members.

Retirement benefit counselling1

The default regulations require that retirement benefit counselling be made available to members before any withdrawal benefits or transfers are paid to another fund and at least three months before a member’s normal retirement age. Our current approach is to make this information available to employees throughout their career and at retirement through documentation, telephonic inbound contact, group training and digital solutions. We have enhanced this to offer employees counselling and access to advice on site and to proactively contact those nearing retirement. We have found that adding retirement benefit counselling improves outcomes for individuals and shows tangible behavioural change in individuals. We found that employees preserved 8% more in funds that had an appointed adviser than in those that didn’t.

Digital platform – red carpet experienceWe aim to engage members at the right time and in the right way by understanding their needs, presenting them with the solutions that meet those needs, making it simple and showcasing their progress and success. We are in the process of taking member engagement to the next level through our digital platform – red carpet experience. The solution turns the onboarding moment into a financial well-being experience, maximising value for our corporate clients, their employees, their HR representatives and the member’s family. The platform incorporates a host of concepts to digitise the experience, reduce administration and provide meaningful information and guidance to the member. It also enables touchpoints throughout the member’s financial journey.

1. Government's amendment of the Pension Funds Act in 2017 aims to improve the outcomes for members by ensuring that they get good value for their savings and retire comfortably.

17

Providing measurable client benefits is the second deliverable that reflects our focus on our clients and members.

Our success should be measured on the ability of our members to retire comfortably. The ability to retire comfortably is achieved through best advice and solutions. So, the member outreach we are doing through our advice-led model will only be effective if the best advice is linked to solutions that work.

Our focus for the future is to enhance and improve our offering to ensure that the advice and solutions are accessible in various forms and at relevant points in our clients’ and members’ journeys. This will improve client engagements and service levels through feedback-based actions and strengthen our reputation as a trusted adviser. This emphasis is designed to ensure that we have opportunities to engage with new and existing clients. It is focused on the top line and aims to yield an improved performance in operating income.

We’ve taken a design approach to co-create with our clients, getting feedback throughout the process. For us, this is embracing a new way of work. It is a more client-focused approach to deliver, which includes what we do from a solutions and advice perspective and from a digital experience. The best advice that we provide is linked to the solution and the combination results in measurable client benefits. Where we have piloted, we’ve had great feedback from clients and have evidence of meaningful outcomes.


MEASURABLE CLIENT BENEFITS

Alexander Forbes Retirement Income Solution (AFRIS)Launched in FY2018, AFRIS is a unique life and legacy solution that crossed the R3 billion mark for assets under management at June 2019.

How AFRIS has helped its membersOur data has also demonstrated that where funds have adopted AFRIS, the retirement outcomes of members improved

Why AFRIS has grown AFRIS has been developed to

allow pension funds to meet their obligations under new regulations1

Provides a simple and cost-effective solution for trustees to meet complex regulatory requirements

Single set of portfolios consistently priced (at levels similar to that paid by retirement funds)

Institutional rates instead of retail rates, benefiting members

Provides simplicity to members in making decisions about their retirement savings and ensures better retirement outcomes for members

The AFRIS

RETIREMENT ANNUITY FUND

The AFRIS

PRESERVATION FUND

The AFRIS

LIVING ANNUITY

201920182017

AFRIS preservation rate2

56.07%54.56%48.28%

119

How AFRIS has grown

Delivers leading retirement outcomes to

1 300 individual clients

R3 billion

Assets under management

Clients using AFRIS

1. The default regulations require trustees to implement an annuity strategy for funds, which AFRIS enables.2. The percentage value of retirement funds that are transferred to preservation or retirement solutions after an employee resigns or retires from a company.


18

PAN-AFRICA SOLUTION

Our clients across Africa want to benefit from our proven advice and expertise wherever they are present. To address this in the past, we invested in obtaining a physical presence in several markets with the goal to ramp up our physical presence in emerging markets and replicate the traditional South African pension fund administration model in those markets.

However, our advice-led approach allows us to serve the needs of our clients across Africa without an in-country presence. We can achieve this by pursuing low-risk opportunities through the recently launched Arrive platform (which is an advise-led framework).

The Arrive platform is the first employee benefit solution of its kind in our industry and responds to multinational clients from

Alexander Forbes and Mercer who have challenges developing appropriate employee benefit solutions for the countries in which they operate. The challenge for many of our clients is the complexity of implementing solutions across multiple operations, markets and regulatory environments. The Arrive platform delivers a comprehensive in-country employee benefit solution through a single point of contact for the client. It leverages our strategic partnerships across the African continent. The solution reduces complexity, standardises the benefit offering and enables a cost-effective benefit solution for employees in every country while aligning with local regulations. We are already seeing success with this initiative and are well positioned to transform our current model.

The revised pan-Africa strategy provides Alexander Forbes with a solution for geographic diversification and the option to continue to tap into growth opportunities across Africa. The current combined client opportunity represents about 6 000 clients between Alexander Forbes and Mercer. We aim to prioritise c.300 clients in the short to medium term.

Moving from a sub-scale in-country model towards a client-centric pan-Africa solutions platform without physical presence

Nigeria

Uganda

Zambia

BotswanaNamibia

South Africa

Alexander Forbes’ traditional model But our clients are asking for ...

< 4% of operating profit

Pan-African advice and solutions

Single point of contact across all African countries

Pan-Africa access to experts covering regulation, retirement, health and investments

In-country insight and knowledge

Global best in breed

19


FOCUSED BUSINESS MODEL – A SIMPLIFIED WAY OF DOING BUSINESS

With the implementation of the target operating model, we will transition into a leaner, more coherent and integrated company.

This revised strategy is important for us, as stakeholders indicated that they found our business and governance structures to be complex. Simplification will help them better understand how we create and sustain value.

Through the target operating model, collaboration will be driven across the organisation bringing together the various businesses and support services across three functional platforms with the aim of placing the client at the centre. This will ensure that everyone in the organisation is focused on servicing our clients and members. Through a single Alexander Forbes brand we

will strengthen the ‘client-centric – one company’ approach through the integration of the different business lines: corporate & employee benefits (comprising consulting, retirements and health), investments, retail (financial planning consultants and individual client administration) and emerging markets.

It is the interconnectedness and strategic fit of our various businesses that will unlock the company’s value. The target operating model is expected to deliver efficiencies through rationalisation and structural change. It also entails a further reduction and optimisation of current legal entities to better align with the target operating model and to reduce costs and effort expended in non-value-adding statutory corporate activities and requirements.

Our new way of working

A simplified, integrated way of working

2 A hub for innovative solutions development and product enablement

1 One jointly orchestrated client-facing team, with divisional experts

3A joint platform for services, including fund administration, governance functions and shared services

Clients

Products and enablement

Services

Our historical way of working


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CAPITAL LIGHT

The strategy reaffirms our intent to remain capital light. Our ongoing measurement under the prudential standards as an insurance entity has increased our regulatory capital by almost 100% over the past five years. The decision to exit our insurance businesses and the legal entity restructuring, which is in process, will reduce the regulatory capital requirement across the group. We plan to reduce this surplus capital position within prudent capital parameters and do not intend to hold excess cash on our balance sheet, as evidenced in the special dividend of 30 cents per share which was declared at year-end.

Our capital journey over the next 24 months aims to release inefficient capital and reduce the surplus capital held. This will include the following:

the payment of the special dividend;

maintaining the dividend cover within the target range of 1.5 to 2.0 times;

Looking forward The priorities for the executive team in the near term are the following:

Embed the target operating model.

Change the way we interact with clients to demonstrate tangible benefits for them and our members.

Significantly improve our customer experience and journey with Alexander Forbes.

Re-establish Alexander Forbes as an employer of choice with a keen focus on an enabling and supportive culture.

Executing these priorities will require a restructure of our business and a shift in the mindsets of our people to a more client-centric way of thinking.

We are well advanced in the process to dispose of our short-term insurance business and have accepted a binding offer. We expect to conclude the sale by the end of the 2020 financial year. The disposal of these premium businesses is based on a value proposition that balances appropriate solutions for our clients, protects and values the employees who have contributed to the success of the business and realises fair value for our shareholders.

the sale of the insurance businesses;

restructuring various operations and entities in the group; and

implementing innovative and practical solutions to address capital inefficiency.

The available surplus cash released will be used to reduce short-term borrowings, invest in core businesses and any surplus will be returned to shareholders.

Our measure of success over the medium term will be to deliver an improvement in our return on equity to above 14% (including intangible net assets in the calculation of equity value).

21

Poised for growth


JSE: -8.4%

Tough markets


Manual processes

Start early today

Tough markets

Savecosts

Restore stability

our people

Our business focuses

on what w

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Restorestability

New

ope

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odel

SavecostsImprove RoE

Foc

us

Ret

urn

surp

lus

cash

to s

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hold

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Fierce competitionDividend

policy 1.5 – 2.0 times cover

Disposal of

insurance businesses

OURPERFORMANCE


22

Poised for growth


JSE: -8.4%

Tough markets


Manual processes

Start early today

Tough markets

Savecosts

Restore stability

our people

Our business focuses

on what w

e do bestReduce surplus

capitalRestorestability

New

ope

ratin

g m

odel

SavecostsImprove RoE

Foc

us

Ret

urn

surp

lus

cash

to s

hare

hold

ers

Fierce competitionDividend

policy 1.5 – 2.0 times cover

Disposal of

insurance businesses

CHIEF FINANCIAL OFFICER’S REVIEW 24

OPERATING PERFORMANCE 30

23

CHIEF FINANCIAL OFFICER’S REVIEW

A transparent disclosure of our financial performance and outlook is a crucial step in our process of moving forward with our revised strategy, knowing full well where we can strengthen our performance to realise our goals of being client-centric and people focused. As part of this strategic revision we remain committed to restoring stability, pursuing growth and creating value for our shareholders. Key to this is my aim to reinvigorate the strategic aspects of the finance function to ensure the preservation and growth of shareholder value.

In developing our revised strategy, we have been clear in our intent to simplify the business with greater focus on our core businesses and to maintain a capital-light business model. The finance team will play a vital role in ensuring that Alexander Forbes delivers on its promises.

Our priority areas and plans include the following:

Simplicity – driven through a simpler corporate structure. Our history has left a legacy of numerous subsidiaries, some of which need to be collapsed and rationalised. The legal entity review that commenced in 2018 is expected to result in simplifying the corporate structure. It will also enable efficient allocation of capital as we implement these changes.

Focus – through clearly defined and measurable performance metrics that are aligned to the revised strategy. In line with the aim to simplify, these targets will be limited and have a direct impact on our results.

Capital-light business – this will be measured by the successful conclusion of the disposal of the insurance businesses. It will also ensure the appropriate allocation of any surplus capital. Excess capital will be returned to shareholders after taking cognisance of the investment needs of the group.

OverviewThe 2019 financial year marked a turning point for Alexander Forbes. We were resilient in the face of weak trading conditions and a tough macroeconomic environment. We addressed our internal challenges and aligned our resources to capitalise on our core strengths and set a course to deliver value from our market-leading positions. The 4% increase in operating income (from continuing operations) to R3 136 million demonstrates our business’s resilience.

The decisions taken during the past financial year have had a significant bearing on our results. The termination of the IT contract relating to the modernisation programme resulted in a significant write-off of the software in development of R287 million and a R50 million termination cost.


24

The strategic review and consequent evaluation and assessment of the strategic fit of our portfolio of businesses has resulted in the decision to exit the insurance businesses as well as sub-scale businesses in Africa.

We have built credible and sustainable operations within our insurance businesses which are highly valued in the insurance market. The decision to dispose of these businesses is based on:

a need to focus on our leading market position in the employee benefits industry – which is our core strength;

the growing capital intensity of these businesses, which is not aligned to our capital-light model; and

an appreciation of the synergistic benefits which a large insurer may gain from the acquisition of the businesses.

The operations that we intend to dispose of in the new financial year are shown as discontinued in line with our accounting standards.

The 2018 financial year results have been restated to reflect this change.

The impact of this change is summarised as follows:

Operating income net of direct expenses

Profit from operations before non-trading and capital items

Rm 2019 % 2018 2019 % 2018

Continuing operations 3 136 4 3 010 678 (19) 833

Discontinued operations 727 14 637 237 55 153

Total group 3 863 6 3 647 915 (7) 986

Review of financial performance

Operating incomeThe growth in operating income in the continuing operations of 4% to R3 136 million reflects the resilience of the company amid a challenging current economic climate and the internal challenges faced during the year.

investments, up 7% in operating income owing to extended product offerings, which include an offshore product and the introduction of alternative asset classes;

consulting and retirements, up 6% driven by strong performance from the healthcare consulting business (up 10%); and

retail wealth and investments, up 4% owing to new business through improved retention rates.

Operating income from discontinued operations increased 14% to R727 million. The discontinued businesses include:

group risk delivered an improvement of 42% in operating income, off a low base, to R92 million. The business participated in a profit-sharing arrangement for the first time in several years, which is linked to a lower claims experience in one segment of its reinsurance treaties;

retail insurance increased operating income by 12% to R573 million, largely attributable to an increase in gross written premium and a decrease in the loss ratio; and

operating income from emerging markets businesses (Uganda, Zambia and the short-term insurance business in Namibia) remained flat at R62 million.

25

CHIEF FINANCIAL OFFICER’S REVIEW [CONTINUED]

Quality and sustainability of operating income and profit

The following charts demonstrate the nature of the group’s operating income based on the year ended 31 March 2019.

contributions, we benefit from the macroeconomic drivers affecting employment and wage inflation, which have been low but positive in recent years.

Alexander Forbes has limited working capital requirements with high cash flow generation and limited credit risk exposure in the business, as a significant proportion of our income is collected from the retirement funds and investments it administers. Our exposure to debtors remains limited since fees are collected from investment and from pension payments made by our clients.

Operating expensesOperating expenses from continuing operations increased 13% to R2 458 million. The increase in operating expenses is, in part, due to a number of non-recurring items such as the termination penalty on the IT contract and various consulting expenses related to the implementation of the previous strategy. These expenses are not expected to recur. In addition, the group incurred increased technology and regulatory costs as well as a higher number of errors and omissions claims for the year under review.

Our technology costs increased 25%, with a large part of the increase relating specifically to maintenance support costs. We have had some disruption in the IT area, with a change in senior leadership and we incurred additional costs for external suppliers and contractors, which have been quite expensive. The improvement process and cost management of our technology spend is structural. This means that it is going to take time to get it right. Our IT costs are currently above benchmark relative to our revenue and we are aware of this. Management intends to ensure we structurally change the IT department over time with the aim of getting this cost within the financial services industry benchmark.

Another contributor to the higher operating expenses relates to the increase in our errors and omissions claims. Historically, our run rate on errors and omissions claims has been about R7 million. However, over the last two years we have seen an increase in those claims, reporting R50 million in the current year. We have completed root cause analysis and the increase is largely due to disengaged employees and disruptions in senior leadership in this area of the business. Management’s focus within this area is to refocus and re-engage employees and improve our processes to ensure that we reduce the number of errors and omissions claims.

The cost-to-income ratio for continuing operations for the period of 78.4% has deteriorated from 72.3% in the prior year. The increase in costs is an area of concern for the executive

Analysis of operating income (net of direct expenses) Operating income by ‘type’ reflects the revenue

based on services provided

Operating income by ‘driver’ reflects the basis upon which the fees are calculated

Retail advice and administration fees are driven by assets under management

Key dependencies for growth in income are:

– new business;

– growth in formal employment and employee payroll inflation;

– cash flows: contributions, preservation and withdrawals; and

– market growth.

Disaggregation of operating income (continuing operations)

20% Consulting and advice 32% Administration 10% Commission 38% Investment management

26% Payroll expense 7% Members 10% Commission 56% Asset based 1% Ad hoc

By driver

R3 136m

By type

R3 136m

Other than the indirect exposure to equity markets, there is limited volatility in the group’s revenues owing to the relatively low proportion of one-off consulting fees, ad hoc retirement fund administration services and underwriting income. As a material proportion of the group’s income is linked to pension


26

team and the new strategy incorporates plans to address the inefficiencies structurally.

There are two factors that should be considered going forward:

The revised strategy provides for a target operating model which is client-centric. The assessment for driving efficiencies and improving our cost-to-income ratio, requires simplification and process improvement. The existing operating structures within the group are complex, which has been largely dealt with by manual and inefficient processes. It is anticipated that we will need to address the root cause of this inefficiency before we see a real improvement in the trading margins in our business. Our senior management teams are working diligently to address this issue, which should result in an improvement in the 2021 financial year and beyond.

We are currently managing the disposal of our insurance businesses. This constitutes approximately 15% of our operating income net of direct expenses. Many of our central services are designed to provide an efficient operating structure for the overall business, however the tight integration of these services provides complexity and stranded costs in this disposal. Although we are already managing this cost exposure, it is likely that stranded costs will place pressure on our cost-to-income ratio in the short term.

Capital and cash management and return on equity (RoE)Capital allocation is a material issue for us owing to the rapidly increasing capital holdings to comply with increasing regulatory capital requirements. We also need to optimise capital in the best interests of the company while balancing the interests of all stakeholders.

The group’s cash flows continue to remain strong, with cash generated from continuing operations of R821 million. During the year the company bought back shares in AFGH to the value of R151 million (at an average price of R5.11 per share) as part of the general buyback approved by shareholders at the previous annual general meeting. In addition, total dividends paid to shareholders during the year amounted to R531 million. Since the implementation of the Insurance Act in July 2018 the group and its insurance subsidiaries are regulated under the Insurance Act, whereby it is required to maintain regulatory solvency. The level of solvency is assessed by comparing the amount and quality of resources available (as measured through own funds) to cover the group’s risks (as estimated through the solvency capital requirement (SCR)). The SCR cover ratio is therefore monitored to assess the group and insurance entities’ solvency

at any time. At 31 March 2019 the consolidated regulatory capital requirement of the group was R1 839 million, which increased 12% from the prior year (2018: R1 643 million). Using the measures and interpretations under the Insurance Act 18 of 2017 and Prudential Standards implemented during 2018, the group has a surplus capital of R1 128 million (before the proposed dividend distribution declared at year-end).

This reflects a capital cover ratio of 1.61 times (2018: 1.74 times). The cover ratios for the group and insurance entities are above target levels as at 31 March 2019. The board has approved the group cover ratio of 1.2 times going forward.

At 31 March 2019, the SCR held by the group’s insurance subsidiaries is shown below on a solo basis.

Entity

SCR (Rm)

2019 2018

AF Investments 458 450

AF Life 635 619

AF Insurance 162 155

Each entity maintains sufficient own funds to cover regulatory capital requirements. The SCR cover ratios (Own Funds/SCR) for the various solo entities are as follows:

Entity

SCR cover ratio

2019 2018

AF Investments 1.35 2.18

AF Life 1.51 1.15

AF Insurance 2.20 1.70

The group maintained own funds backing the SCR per the following tiers:

Tier 1 2 769

Tier 2 –

Tier 3 259

Eligibility adjustment (18)

Shareholding adjustment (43)

Total 2 967

The group maintains the vast majority of its capital in tier 1 resources, indicating the quality of resources backing capital requirements. There is room to raise tier 2 debt if we seek to do so.

Material issue

27

CHIEF FINANCIAL OFFICER’S REVIEW [CONTINUED]

Our strategy to be ‘capital light’ requires that we look at all available capital within the group and ensure that this is being deployed appropriately. Our capital journey over the next 24 months will be to reduce the surplus capital held in the group as well as ensure that we address areas where we have capital trapped which is not delivering returns. We do not intend to hold excess cash on our balance sheet above what is envisaged by our strategy, as evidenced in the special dividend of 30 cents which was declared at year-end.

We continue to look for organic as well as inorganic growth opportunities in our core businesses, and this will require the deployment of capital. Our decision to be capital light is key in the allocation of capital in pursuit of this goal. With respect to potential acquisitions, we expect to expand our core businesses of consulting, administration and investments to realise synergies and scale opportunities. We will continue to explore opportunities to acquire a similarly focused employee benefit business that supports our strategy. We will look to raise capital-efficient funding as part of any anticipated acquisition.

Our measure of success over the medium term will be to deliver an improvement in our RoE to above 14% (including the intangible net assets in the calculation of equity).

Dividend policyThe company’s dividend policy is to consider an interim and a final dividend in respect of each financial year. The dividend is set with reference to underlying core operating earnings taking cognisance of the need to:

maintain regulatory capital solvency with an appropriate margin which anticipates regulatory developments and economic and market volatility;

ensure the legislative requirements with regard to solvency, liquidity and good corporate governance; and

retain earnings and cash flows to support capital investments and future growth.

After consideration of the above, the board intends to target a dividend cover of between 1.5 and 2.0 times each year based on normalised headline earnings but, recognising that some earnings fluctuations are to be expected, the annual dividend will reflect the board’s view of the earnings prospects over the entire cycle.

At its discretion, the board may consider special dividends, where appropriate.

Depending on the perceived need to retain funds for expansion or operating purposes, the board may pass on the payment of dividends.


28

OPERATING PERFORMANCE

Our business is managed through four operating divisions – corporate & employee benefits, investments, retail and emerging markets. In addition, there are three support functions – operations and administration, information technology and shared services. The costs associated with these support functions are allocated across the operating divisions in the presentation of our segmental results. Our segmental analysis is aligned with the way that we operated through the year under review. The diagram below depicts the contribution of our divisions. As part of the revised strategy we will be transitioning to a client-centric target operating model which is currently under way and will be reflected in our interim results for the new financial year. In our next integrated annual report we will report performance in line with our target operating model.

Corporate & employee benefits

Retail Emerging markets

Investments

Profit from operations1 (Rm)

Operating profit (Rm)



Operatingincome (Rm)

1 380


1 464


255


764

130

575

402

32

1. Profit from operations before share scheme costs, property lease adjustments and non-binding and capital items.


30

provides retirement fund consulting, actuarial consulting, healthcare consulting and retirements solutions through our umbrella fund offering to our institutional clients.

CORPORATE AND EMPLOYEE BENEFITS (C&EB)

Major achievements Sustained growth in operating income from healthcare

consulting (up 10%) owing to the annualised value of new business from the prior financial year and some significant wins early in the current year. New business also improved owing to the collaboration with our strategic partners

Operating income from consultants and actuaries up 4%, despite macroeconomic and internal challenges, which impacted on new business prospects

Retention rates remained high in a tough market

Improved our corporate and engagement strategies, offering new solutions to position our clients for regulatory change (e.g. AFRIS, retirement benefit counselling and improved member outcomes)

Accelerated our pan-Africa growth initiative through the Arrive platform

Major challenges Profit was down 40%, driven by higher operating expenses

incurred by consulting and retirements, partly off-set by a strong performance from group risk

Costs for consulting and retirements increased 13% to R1 195 million (2018: R1 055 million). This increase in operating expenses is driven by higher personnel, IT, compliance and regulatory costs, and targeted capacity build-up to strengthen the core

Strategic objectives for FY2020 We aim to improve and enhance, upskilling for new client

requirements and improving internal efficiency. This will be achieved through our key account management and client-centric operating model

Rebuild the team through improved leadership, people engagement and talent management

Redefine and demonstrate our value proposition

Strengthen market awareness and presence through enhanced marketing initiatives

Operating income R1 380 million (+5%)

Profit from operations R130 million (-40%)

Standalone retirement funds AuA1 R359 million (+2%)

Number of members 938 533 (-6%)

Umbrella fund AuM2 R81 million (+10%)

1. Assets under Administration.2. Assets under Management.

31

OPERATING PERFORMANCE [CONTINUED]

provides investment services to our institutional clients, including a range of investment portfolios, advice-led solutions and alternative investments.

INVESTMENTS Major achievements Operating income grew by 7% year on year, owing to the

execution of several strategic initiatives

The business has focused on extending its product offering, which includes private markets and fund-of-hedge funds, not otherwise accessible in its investment universe. In addition, clients have access to a distinctive global product offering through our strategic partner, Mercer. The extended product offering enhances our value proposition to clients

Built a strong internal team with the right structure for best-in-class client service

Strengthened our control and governance, adding a dedicated head of risk

Our flagship portfolio, Performer, continues to do well, with 16% growth in AuM to R124.8 billion at year-end and achieving superior returns; it is adding significant value in a tough market

Major challenges The total assets under administration and management

(AuA and AuM) were R342 billion, a 4% decrease year on year, impacted by lower-than-expected new business and client losses, mainly from the withdrawal of assets from our platform business

We did not achieve a significant amount of new business due to market factors, distribution challenges and insufficient communication of the benefits of our products

Strategic objectives for FY2020 To enable ‘best advice for clients’ and ‘measurable client benefits’ we plan to:

Unlock our full potential by optimising the client experience and our improving interactions with them

Enhance the digital client experience, thought leadership and client servicing

Drive accumulation of assets through targeted products and channel share growth

Operating income R764 million (+7%)

Profit from operations R402 million (+1%)

Total AuA and AuM R342 billion (-4%)


32

provides wealth management advice and solutions to individuals.

RETAIL Major achievements Operating income increased 4% mainly due to a 16%

improvement in new business flows from financial planning consultants (FPCs)

The improvement in new business flows reflects the effectiveness of our member engagement and intervention efforts

The preservation rate1 remained constant at 55%, largely owing to a 60% increase in our member engagement despite the weak economic environment

In addition, the retention rate (the percentage of preserved assets that is retained by Alexander Forbes) improved by 5% to 43% thanks to the presence and focused effort of the FPC business within the institutional member base

Major challenges The rapidly evolving regulatory environment increased

compliance costs, while requiring additional management time

The retail team struggled to attract and retain talent, which impacted our divisional metrics, customer service and business development

Strategic objectives for FY2020 To enable ‘best advice for members’ and ‘measurable client benefits’ we will do the following:

Right-size our team to current business volumes and new regulatory requirements

Improve member reach and access to advice and solutions for the members of our funds, by extending our financial well-being offering through initiatives such as our enhanced retirement benefit counselling solution and extending our AFRIS product suite

Evolve our advice-led business, to respond to the changing regulatory and competitive environment and enable broader access to advice and education for members of our funds

Improve overall operational efficiencies by simplifying business processes, reducing complexity and product consolidation

1. The percentage value of retirement funds that are transferred to preservation or retirement solutions after an employee resigns or retires from a company.


Profit from operations R383 million (-2%)

Preservation rate 55% (unchanged)

Retention rate 43% (+5%)

33

provides retirement, consulting, insurance and investment management products and services.

EMERGING MARKETS

Major achievements Strong growth in operating income from Botswana, up 23%

year on year (largely owing to the retirements business)

Aligned governance processes

The appointment of key employees, including a managing director in Botswana, was well received by stakeholders

Major challenges Namibia, our largest contributor to revenue, continues

to operate in a recessionary economic environment with increased competitive pressure, both of which have adversely impacted the retirements and investments businesses respectively. Retirement fund membership has decreased as a result of client retrenchments and member exits

Leadership challenges: Finding appropriately skilled and experienced in-country resources in certain instances

Protracted and complex exit from certain of the sub-scale countries

Strategic objectives for FY2020 In line with the revised strategy, Alexander Forbes will

service its clients across Africa through its advice-led solution platform ‘Arrive’ in close collaboration with Mercer


Profit from operations R32 million (3%)

OPERATING PERFORMANCE [CONTINUED]


34

Retail insurance: is a personal lines and commercial direct insurer providing several personal insurance and business insurance products to retail and small to medium-sized business customers. It also provides insurance administration services to corporates in a cell-captive structure.

Group risk: provides group risk solutions to institutional clients.

INSURANCE Major achievementsRetail insurance New business has increased by 13% in the motor and

household portfolio. The loss ratio for the period under review improved to 62.2% from 64.0% (with personal lines recording an improvement to 65.8% from 68.1% in the prior year) largely attributable to enhanced underwriting interventions. This is well below the targeted annual loss ratio of 71%

Group risk For the first time in recent years the group risk business

participated in a reinsurance profit share as a result of improved reinsurers' underwriting results. The profit share was the biggest contributor to the increase in net operating income in the current year and offset the higher claims experience and increased reserves

Major challenges Managing the impact of the decision not to proceed with

the IT modernisation programme, which had been directed to address specific system deficiencies in the short-term insurance space

Managing the impact of the decision to place retail life in run-off

Managing business as usual, while being intimately involved in the due diligence process relating to the disposal of the short-term insurance business

Strategic objectives for FY2020 Maintaining business unity during the process to dispose of

these separate businesses, which include several regulatory approvals

Concluding the disposal transactions by the end of 2020

Operating income

Group risk

R92 million (+42%)

Retail insuranceR573 million (+12%)

Profit from operations

Group risk

R37 million (+95%)

Retail insuranceR192 million (+66%)

35

Dig

ital

AFRIS: flagship annuity product

Focused marketing

Bounce back

Save now and for

the future

Bounceback

Team spirit

Inclusive

Car

ing

lead

ers Invest responsibly

ne client facing team

Develop our people

No

mor

e si

los

income inInclusive

Track complaints

B-BBEEscorecard

Diverse

Toptalent

Default regulations

Income Protector

Caring leaders

Develop our people

RBC

Customer experience

Give advice, not just info

RB

C Top talent

Leadership change

Culture

Our goal is to make

Alexander Forbes an employer

of choice


36

Dig

ital

AFRIS: flagship annuity product

Focused marketing

Bounce back

Save now and for

the future

Bounceback

Team spirit

Inclusive

Car

ing

lead

ers Invest responsibly

ne client facing team

Develop our people

No

mor

e si

los

income inInclusive

Track complaints

B-BBEEscorecard

Diverse

Toptalent

Default regulations

Income Protector

Caring leaders

Develop our people

RBC

Customer experience

Give advice, not just info

RB

C Top talent

Leadership change

Culture

Our goal is to make

Alexander Forbes an employer

of choice

MATERIALISSUESKEY MATTERS RAISED BY OUR STAKEHOLDERS 40

REGULATION 42

LEADERSHIP 43

OUR CLIENTS 44

OUR PEOPLE 48

TRANSFORMATION 52

37

Those issues that have the potential to substantially affect our commercial viability, social relevance and stakeholder relationships are considered material. The expectations and concerns of stakeholders, as well as the economic, social and environmental context in which we operate, guide our determination of what is material.

MATERIAL ISSUES

Our materiality analysis involved members of our board and executive team, ensuring that the interests of our major stakeholder groups were represented. Key issues of greatest interest and concern to these stakeholders were identified and categorised into six material issues. These issues are similar to the previous reporting year but have shifted to reflect the operating circumstances during 2019.

Our material issues informed our revised strategy. The following sections outline the issues, our performance and our strategic response.


38

Attracting and retaining top talent, rebuilding our culture and embedding revised remuneration policies.

Our people

Addressing our own transformation and contributing to the socio-economic transformation of the country.

Transformation

Managing the impact of recent leadership changes on performance and strategy, and regaining momentum and trust. For more information, please refer to the messages from the chairman and the chief executive officer, respectively.

Leadership

Retaining and growing our client base by rebuilding trust.

Our clients

Compliance with regulatory capital requirements and optimising capital in the best interest of the company while balancing the interests of all stakeholders (pages 21, 28 and 29).

Capital allocation

Management attention in advance of regulatory changes and managing the cost of compliance. Evaluating risks and exploring opportunities to differentiate our service offering in response to regulation.

Regulation

39

KEY MATTERS RAISED BY OUR STAKEHOLDERSWe consider our current and future resource needs and our stakeholders’ needs in our strategic and operational decision-making. The key matters raised by our stakeholders were critical in how we considered, evaluated and responded to material issues, as especially in refining our strategy. We protect what is important to our stakeholders through robust governance and risk management.

Their role in our company Their concerns Our response

Clients

Our clients are the cornerstone of our strategy: as loyal advocates of the brand, they partner with us, through our advice framework, to buy our solutions and services and provide our revenue. If we add value to our clients, by understanding their unique requirements and aspirations and delivering holistic and integrated solutions, we are able to add value to each of our other key stakeholders.

Investment returns

Fair treatment according to or exceeding legislation

Protection of information

Continuity of service and relationships

Ethical provider of services

Trust that the company will continue to provide appropriate advice, quality of service and investment returns

Pricing and value for money

Our members want to be continuously updated about financial well-being

Client-centric strategy and operating model

Adjusted portfolios for low-return market

Increased trustee and client engagement

Met required customer service standards

Succession planning for continuity and strong leadership

Strategic and operational shift towards client-centric model

Currently embedding our key account model for better client accountability

Improved reach through financial well-being initiatives

Introduction of products meeting new legislation

Employees

Our employees are critical to fulfilling our commitment to clients. Through their skills, experience and hard work we are able to deliver on our customer value proposition.

Work for an organisation that complies with regulation and does the right thing

Knowing what to expect

Stability of leaders

Low morale caused by company instability

Culture of fear

Fair and equitable treatment in remuneration and promotion

Engagement and trust in the organisation and its leaders

Development in career advancement

Trained employees on the relevant legislation through group-wide training initiatives

Appointed leaders who represented exemplary leadership behaviours and re-emphasised a collaborative culture

Conducted culture, engagement and resilience workshops

Implemented pay for performance

Implemented a wide range of leadership and employee development programmes


40

Their role in our company Their concerns Our response

Investors

Our investors are the owners of Alexander Forbes.

Their confidence and capital is what allows us to grow and to realise our strategic ambitions.

Performance in low-growth, low-return market

Return on capital

Trust that the leadership will achieve strategic and financial objectives

Certain elements of the previous Ambition 2022 strategy

Company is governed and managed in an ethical manner

Strategy reset in March 2019 refocusing on the core businesses

Simplified, capital-light operating model positions us for market turnaround

Focus on capital management

Initiated governance roadshows, frequent engagements

Governance committees regularly review progress of compliance

Regulators

Our regulators ensure that we treat our clients fairly, protect their information and assets, and act in the best interests of our stakeholders.

Compliance with regulatory amendments and legislation

Governance

Leadership vacuum

Regular, transparent and proactive engagement

Integrated compliance project to ensure holistic approach and sustainable execution

Appointment of new chief executive officer and chief financial officer

Society

Alexander Forbes is part of broader society and various communities. Beyond being a responsible corporate citizen, we view society – from where we draw many of our business resources – as our partner in creating value.

Responsible investing

Financial well-being

Retire comfortably

Environmental, social and governance (ESG) forms part of our due diligence process and engagement with asset managers

Portfolio shift towards alternatives which support initiatives by small and medium-sized enterprises (SMEs)

Increased financial well-being education efforts

Benefits barometer and other advocacy initiatives

41

REGULATION

The South African financial services sector is regulated by the Financial Sector Conduct Authority (FSCA) and Prudential Authority (PA). As a responsible financial services company, we aim to comply and keep abreast of updates to relevant regulations and legislation in all the countries in which we operate.

The regulatory environment in the financial services sector is complex and dynamic. It is imperative to adapt proactively to changes and go beyond ticking boxes. Although there are associated costs with the changes, they ultimately drive our business performance and improve client service. Our emphasis extends to the intent of the regulation and doing the right thing, rather than focusing only on the mechanisms.

Our first-line and second-line compliance teams assist the board and executive in managing the organisation with integrity. The teams co-ordinate, implement and report on compliance policies, procedures and standards. They also provide assurance to the company and its subsidiaries on the status of compliance within the group. Each division has a compliance officer in place as the second line of defence. The compliance officers drive compliance awareness, independent monitoring, and reporting throughout the business and provide practical solutions or recommendations.

Our performanceThe regulatory environment has had a significant impact on the business in the past year, with changes affecting many business functions. Several projects are under way to address this and significant progress has since been made. We are absorbing the increasing costs of compliance rather than passing them on to our clients and this has affected our bottom line.

In the second half of 2019 we enhanced the business’s capability to adapt to regulatory change. We established a specialised central task team to implement appropriate methodologies and governance structures. This will enable us to respond proactively to emerging regulatory changes. The team’s

Looking forward We aim to be more proactive in responding to expected regulatory changes. We will roll out communication and training on all upcoming requirements to ensure that our businesses take action much further in advance. Specific actions we commit to in 2020 include:

Reinvigorate our privacy programme to ensure proactive compliance. This includes a centralised privacy office, implementation of governance requirements, and business and management information analytics

Implement the compliance update project on FICA, which requires changes to processes and documentation

Further roll-out of retirement benefit counselling and AFRIS solutions

priorities are financial crime control, privacy and market conduct programmes. We are also ensuring that employees are sufficiently trained and aware of the changing requirements.

The ‘default regulations’ of the Pension Funds Act (PFA) had the most impact on our business, which required funds to implement a default investment strategy, default preservation and portability, and an annuity strategy. They also require that retirement benefit counselling be made available to members before any withdrawal of benefits or transfers are paid to another fund at least three months before a member’s normal retirement age. In response we have updated our sponsored funds and will update further annuity strategies where necessary. We have also engaged with clients to assist them in updating their annuity strategies. Our flagship annuity solution, AFRIS, provides competitive portfolios and pricing for annuity options.

In line with the Protection of Personal Information Act (POPI) and the Retail Distribution Review (RDR), we treat customers fairly and aim to protect their information. Our new client-centred operating model responds appropriately to the RDR, with a focus on advisory services and improved customer outcomes.


42

LEADERSHIP

The cultural make-up and strategic direction of Alexander Forbes are essential elements of our value-creation journey. They require the right leadership structure and team to be sustained and strengthened. It was for this reason that we embarked on a momentous year of leadership renewal. It resulted in an unprecedented degree of change and disruption internally within a challenging external environment.

The changes in our leadership over the past several years have had far-reaching effects on our performance, our people and our clients. It also offered us the opportunity to restructure our leadership team while being more mindful of new leadership appointments.

At the close of the year, the board is pleased to report that we are establishing a firmer footing and our leadership is energised and ready to lead the company to a bright future. However, we first need to acknowledge what happened and address the circumstances that led to the changes.

Our performanceWe recognise the negative impact of frequent leadership changes since listing in 2014. The discontinuity created some uncertainty among our employees, our clients and our shareholders. It also led to strategic shifts, some positive and others less so.

The board took time to reflect on the desired leadership attributes required at Alexander Forbes at this time. This informed the subsequent selection of the right chief executive officer to stabilise the company and establish a more positive culture as well as reignite employee engagement to form the base from which to grow.

In the short term, uncertainty and speculation negatively affected our employees and clients. We are starting to see promising signs of positive change although undoubtedly there is still more work to do.

A committed group of people within the organisation stepped up to keep the company moving forward. They are brand ambassadors who are trusted by clients and who were able to quickly intervene and stabilise.

Looking forward The board will continue being involved in ‘co-creating’ the strategic direction. But the board is stepping back again and will re-establish traditional board oversight and management boundaries.

The board’s priority is to rebuild the leadership team to take forward this new thinking and rebuild.

We will continue to seek high-calibre, results-oriented leaders with the appropriate mix of experience but with a balanced focus on employees as our most important assets.

We will continue to rebuild our depth and breadth of competencies.

43

Alexander Forbes has two strengths: our

people and our clients. Our clients are at the

centre of what we do. In a tough competitive

environment, along with our internal

challenges, client retention has become

more acute as a material issue and is being

addressed as a critical priority. Our clients

need to feel comfortable in dealing with us and

assured that we will act in their best interests.

Under our new leadership and strategy we are

refocusing and getting closer to our clients to

truly respond to their needs.

OUR CLIENTS

We aim to reaffirm our trusted adviser and partner of choice status with our corporate clients and individual members. Helping people achieve a lifetime of financial well-being remains the foundation for our strategy and client approach. ‘For a lifetime’ goes to the heart of helping members protect themselves financially; it means helping them save now and for the future; and helping them to use the assets they have built up over their lifetimes to ensure they can retire with peace of mind. When we get this right, not only will results follow, but through our clients’ well-being we will be contributing more broadly to the financial well-being of society at large.

Financially well people are healthier, happier and more engaged with their families, employers and society. Financial well-being means different things to different people. We aim to help people achieve what matters most to them. To do this we address their appetite or financial behaviours and potential to be more financially well. As described in our revised strategy (pages 17 and 18), we have placed greater focus on going beyond providing information to providing advice. We have developed a design-led process to help members choose the right solutions at points throughout their financial journey.

Our innovations are informed by research that includes our annual Benefits Barometer publication and ethnographic research to gain a deep understanding of the needs and pain points of our clients. This approach has enabled us to offer clients and members solutions and services that make a difference.

Total retail clients – Emerging marketsTotal retail clients – South Africa

201920182017

147151145

242625

Retail segment customer numbers by region

(’000)

Retirements Emerging marketsHealth South Africa

Retirements South Africa

201920182017

939996986

128125107

218211205

Institutional client members by type

(’000)

InvestmentsEmerging markets

Corporate & employee benefits

201920182017

3 6993 5553 350

2 0942 1002 114

695540500

Institutional client numbers by type


44

Quality of service In the spirit of getting back to basics, we spent the second half of the year putting the building blocks in place to focus on the individual. We needed to address areas where our quality of service was not at the required levels and we are now getting back on track. This was a necessary step to form the foundation of our revised client-centric approach.

We assess the quality of our service through three measures of performance:

1 Net promoter score (NPS)

2 Customer satisfaction

3 Complaints management tracking

NPS is a measure of customer loyalty and is based on independent customer feedback. We use it to obtain a holistic understanding of our clients and their loyalty drivers. While in 2018 we were broadly in line with the industry and leading in some areas, our scores declined in 2019. The areas in which we had declining loyalty were indicative of our internal business challenges. We have identified specific areas of improvement and incorporated actions into our divisional strategies.

Our channels for client complaints are well publicised. We have an ‘omnichannel’ approach to logging complaints: online, telephone, social media platforms, e-mail, fax and post. We treat customers fairly by removing any post-sale barriers and enabling them to easily log complaints. The number of complaints we receive is tracked and we aim to continuously improve. We achieved our 2019 target of acknowledging complaints within one business day and resolving 80% of complaints within four working days. Customer satisfaction is measured on the resolution of complaints and we achieved a 79% customer satisfaction rating this year. Our insurance divisions and head office reception exceeded client satisfaction targets and their insights will be used to improve customer experience. We will also place an emphasis on technology development for customer service and the handling of complaints.

Complaints management and interventions is now a standing agenda item of our social, ethics and transformation committee.

Our research has highlighted feedback that our customers feel valued when we give them proactive feedback. This year’s research indicated that this is an area where we need to improve. When we can offer new or value-added products and services to our clients, we need to go back to basics, ensuring that we simply

Our performance

keep our clients informed and resolve their queries. We refreshed and rolled out our service standards to drive consistency and proactivity in our customer interactions. Our next step is to implement a consistent system to monitor query resolution and hold our businesses accountable.

Alexander Forbes Investment established a dedicated client enablement team, which provides in-depth customer insights, allowing the servicing team to better understand and service clients across the company. The client servicing team deepened the focus on client engagement and key account management as part of the strategic client engagement strategy. Alexander Forbes Investments aims to be a preferred service provider for our top institutional clients. We have noted progress from this strategic initiative in terms of our engagement with clients at risk and with our top clients.

We made some structural changes within our corporate & employee benefits division to better understand the capacity required to service each segment of the market. A critical part of this process was the implementation of a key account management approach, ensuring that one person is accountable for our offerings to a corporate client. This was a first step towards implementing the target operating model for enhanced client experience.

We also engage our clients regularly through independent surveys to obtain feedback on our service levels. The results feed back to our training material to ensure we address incorrect behaviour and that our service levels are constantly being monitored.

Total number of client complaints

RetailEmerging markets

Institutional

201920182017

8 0456 2069 366

3 743

2 361

2 123

35

43

40

45

OUR CLIENTS [CONTINUED]

Financial well-beingWe believe in the power of the employer to help grow financial well-being. We engage our corporate clients about the financial well-being, including indebtedness, of their employees. To assist them in understanding the range of solutions that we provide, we deployed a financial well-being ‘first aid kit’, an interactive informational tool. This kit showcases the ways we partner with clients and their employees to help them get the most out of their employee benefits and achieve a lifetime of financial well-being. With Alexander Forbes providing a holistic employee benefits and financial well-being solution, it frees clients’ employees to focus on their core human resources responsibilities.

The financial well-being ‘first aid kits’ we deployed to employers will help them to assist their employees in improving their financial outcomes. In conjunction with our digital onboarding platform (page 17), employees will have access to the right tools at the right time in their careers to make the best financial decisions. They will also reduce reliance on employers to be the source of information and guidance on employee benefits and will reduce administration.

We showcased our unique retirement benefit counselling offering as the priority initiative to achieve our ‘Best advice for clients’ strategic deliverable (page 17). This offering includes worksite consulting for members and proactive outbound contact, which are enhancements to our previous reactive approach. We also provide training directly to our members on a range of relevant topics. Our member education unit held 1 381 member financial literacy sessions.

The advice-led approach goes hand in hand with our innovative solutions, and design-led approach to packaging solutions for clients and members. The ‘Measurable client benefits’ section on page 18 explains the design-led approach and the tangible benefits we have produced at this early stage.

In line with our philosophy of growing our solutions at home, our employees now have access to payroll-enabled savings. Our expanding digital capability will support our financial well-being objectives for clients in the coming year by increasing access to relevant information that supports decision-making at the right time and place.

Brand and thought leadershipQuality experience supports our brand and we need to communicate the positive aspects of our client experience to rebuild and grow our business. We recognised the need to implement structural changes in this area by appointing marketing heads aligned with our business lines. We now have better engagement and alignment between our clients, divisions and marketing function, addressing the need for accountability and communication.

Maintaining our reputation for thought leadership remains key to securing client and investor trust, as well as to strengthen our brand in a rapidly evolving environment. We pride ourselves in offering our customers education, best advice and solutions that are in line with global best practice and which will secure their financial well-being. We provided thought leadership through the continuation of our industry-leading pieces such as the Benefits Barometer, Member Watch and Hot Topics Seminars and through some new initiatives. We hosted the Alexander Forbes Investments Indaba in September 2018 and plan to continue similar holistic Alexander Forbes events. At this event, South African and international speakers gave a global perspective on the retirement and investment universe. They shared insights on the latest developments in investing retirement fund assets and seeking better outcomes for fund members. They also shared expertise on the world of investor behaviour, such as why investors go astray and what they can do to overcome their own biases.

It is imperative that we continually adapt our solutions and services to changing client needs and deliver innovative solutions to meet new opportunities. There is substantial collaboration between our operating segments in the development of products and services, co-ordinated by our client solutions function. During the year we enhanced existing offerings, developed and delivered new offerings, and increased our technological capabilities to provide superior client services and experience.


46

DigitisationDigitisation continues to be a priority for our clients. We are committed to providing a ‘red carpet’ onboarding and digital user experience for new employees of our institutional clients. It is easy to use, paperless and engaging, with a VIP feel that helps new recruits get excited about their new job.

LifeGauge Comprehensive provides analytics which determine the impact of poor financial well-being on corporates.

Our ability to provide a superior digital client experience for the short term was constrained by the cancellation of our IT modernisation project. Despite the temporary set-back we immediately started reviewing and enhancing our current technology platforms to improve the quality of our client service.

Several initiatives were completed within the investments division to improve the overall client experience for administrators, advisers and investors. We aim to provide an automated, client-centric platform that allows our clients to self-service their investments. To this effect we upgraded our website for an improved look, better functionality and easier navigation, and we launched our self-service analytics and reporting tool.

Our industry-leading

retirement consulting tool,

LifeGauge, was revamped

in 2019. It now includes a

wider array of funds, and

the suite was expanded with

the addition of LifeGauge

Comprehensive.

Looking forward We aim to improve and establish longer-lasting client relationships by strengthening the Alexander Forbes brand and developing our business. Our priority this year will be to implement our target operating model. However, this will be accompanied by the following initiatives:

Client accountability, which includes embedding the key account structure

Retain existing clients and secure new clients

Continue to expand the reach of our financial well-being initiatives

Higher consciousness around efficiencies

Demonstrate the value-add of our approach through focused marketing initiatives

Continue to invest in research and innovation to position ourselves as thought leaders

47

OUR PEOPLE

Our business is based on people. The capabilities, mindsets and attitudes of our 3 120 people enable us to deliver our quality client service. The morale and well-being of our people is a particularly salient concern for us. Our culture hit a low point during 2018 with historically low engagement and morale, high attrition rates and an environment driven by fear instead of optimism. Our people have felt the impact of the business changes that characterised the company over the past two years. The cultural shift has tested the resilience of our people.

It is especially pleasing to see a number of critical employees return to the company. Having left during the last 18 to 24 months,they now feel remotivated, committed and aligned with the company’s leadership and values.

Despite the challenges we are proud that we have committed people who have acted as leaders to carry us through this difficult period and drive progress towards a new culture. The leadership changes that were implemented during the year have already shown a positive impact on our employee morale, trust and performance. We are committed to driving stability, entrenching the positive changes and rebuilding. Our goal is to make Alexander Forbes a joy to work for. These changes are essential for us to turn around our performance and achieve our strategic deliverables.

SA

IN

STI

TUTI

ON

AL

SA

RE

TAIL

OP

ER

ATIO

NS

A

ND

TE

CH

NO

LOG

Y

SH

AR

ED

SE

RVI

CE

S

EM

ER

GIN

G M

AR

KE

TS

ALE

XAN

DE

R F

OR

BE

S

INTE

RN

ATIO

NA

L LI

MIT

ED

2019 689 954 859 331 260 27

2018 628 950 898 309 280 27

% change 10% – (4%) 7% (7%) –

Employee number breakdown (total operations)


48

Our performanceAt year-end Alexander Forbes employed 3 120 individuals (up 1% from 3 092 in 2018, with an employee turnover of 13%). A hiring freeze in previous years resulted in an overcorrection in 2019. Total payroll (for total operations) increased by 4% to R1 662 million (2018: R1 591 million).

Our People strategy that was launched in 2018 is even more relevant to achieving the group’s revised strategic deliverables. Rebuilding our culture in order to attract and retain the best people is vital to the implementation of the revised strategy. Developing our talent will more effectively achieve our transformation commitment, particularly in supporting succession planning. Rewarding performance is key to delivering results. Building an agile and collaborative organisation supports our target operating model where we have fewer divisional barriers and will have to engage more effectively across teams.

In the second half of the year we began to make progress on our strategic focus areas. Although we started initiatives that were appropriate at the time, we will be realigning these drives to our new direction.

Our goal is to make Alexander Forbes an employer of choice.

Create a culture of results, learning

and caring

Build an agile, collaborative organisation

Reward performance

Develop our talent

49

Reward performanceWe changed our performance philosophy to reduce subjectivity in performance appraisals and align remuneration with performance. This will continue to receive focus in 2020 and especially addressing the identified deficiencies in our role and remuneration benchmarking in the past. We also embarked on ‘job architecture’ which assessed and standardised roles, titles, accountabilities, and KPIs so there is more equity and transparency in our reward structure. While the initial roll-out of these initiatives was challenging for employees to adapt to, they are critical to creating a financially sustainable company, shareholder-approved remuneration practices, and to attracting and retaining capable people in the long term. This element of our strategy links directly with the culture element in that, once employees are in a trusting and transparent reward environment, they have the freedom to share ideas and collaborate. The remuneration report contained within our governance report available on our website provides detail of the changes to our policy and its implementation.

CultureOur previous leadership’s single-minded focus on a results-oriented culture created an unbalanced environment that lacked the caring characteristic of our culture. This was demonstrated by our turnover rate and the comparative results of our engagement survey from February 2018 and February 2019, shown alongside.

The employee engagement score reflects the general state of mind of employees towards their employer. Our 2018 score of 47.7% decreased from 54.4% in 2017, and then improved to 53.4% in 2019. While employee engagement has not returned to its previous level, we view the improvement versus 2018 as positive encouragement that our efforts to repair our culture have started to take root.

We recognised the need to build our change capability and assist our people to prepare, make sense of the change and adapt. We addressed the change ‘fatigue’ among our people with resilience workshops and other efforts. We aim to cultivate a culture of engagement, where people feel that they have a voice and are not afraid to express their opinion. This objective links to the company ethic to which we aspire, which is a trusted partner. Our first initiative this year was to conduct culture and engagement workshops with top leaders and line managers to understand and action the poor 2018 engagement survey findings. Every single line manager was trained and was required to develop and share an action plan to address engagement. A granular level was imperative to ensure that all levels of employees were engaged and their needs addressed. The 2019 engagement results show that there is a closer connection between senior employees and lower levels, which we attribute to managers who were equipped with the skills and held accountable for action plans.

Some of the results and feedback were incorporated into our People Promise, which was introduced in the first quarter. The promise is a shared commitment between employer and employee across financial, developmental and

environmental factors. We, as the company, promise to provide equitable reward for performance, development opportunities and growth, fairness and transparency, and a fun modern work environment. The promise is also about the employee’s promise to deliver and contribute in return.

To entrench a new culture we rolled out our ‘Power of One’ recognition scheme to recognise behaviours that support our values to help shape the culture of the organisation. We also enhanced our promise to our people in terms of respecting and enhancing their wellness. For example, we offer employee wellness clinics, on-site health facilities and paid clinic visits over and above medical aid.

This is a journey that will continue to receive focus as we implement the new operating model and execute the strategy.

OUR PEOPLE [CONTINUED]

201920182017

Employee engagement

53.4%47.7%54.4%


50

Develop diverse talentAlexander Forbes operates in a highly competitive market for skilled employees. High attrition rates can damage the trust built between our employees and our customers that is critical for our client-centric model to deliver results. Our attrition rates led to some client losses during the year. Therefore, people development and succession planning are especially important in order to attract and retain employees to rebuild continuity and trust with our clients.

To achieve our strategic objectives we need a diverse workforce with employees of different racial backgrounds, gender, age, experience and expertise. With the majority of our previous executive team having departed, we were faced with a gap in our succession planning, particularly within employment equity candidates. Consequently, succession planning and the development of our people was a major emphasis in the second half of the year. We hold biannual talent exercises to identify top talent and key successors within our business. An emphasis was placed on the identification, selection and development of internal and external candidates with potential for future senior management and executive roles. Our employment equity at junior roles is strong, at 72% black, but we have more work to do at the middle and senior levels where the percentage of black employees is 41% and 48% respectively. We have an opportunity to target the appointment of a diverse team and are putting measures in place to use this opportunity.

We developed and launched two leadership development programmes: the first programme prepares employees for their next role and the second programme promotes leadership behaviour within a role. We assessed the leadership competencies of 67 employees as part of development and succession planning, and talent pool maintenance. All employees have access to a shared competency-based learning framework via e-learning platforms and our leadership programmes are biased towards African and African female candidates.

Through our bursary, learnership and internship programmes we provide work experience for young people and they provide a pipeline for us.

We also enhanced our Empower e-learning platform in partnership with Degreed. It is algorithm-based with search functions and pushed content. Similar to social media, it also bonds people socially with self-organised interest group functionality. We are also proud to offer this comprehensive learning system to our corporate clients to assist them in promoting a learning culture within their organisations.

Build an agile collaborative organisationWe aim to drive agility and collaboration by moving away from a hierarchical environment and towards a flatter structure that is project based. An agile organisation maximises institutional knowledge and provides a rounded view to approach situations, clients and products. It is crucial to achieving the client-centricity we aim for through our simplified operating model. This initiative is still in its early stages and our goal is to entrench it more formally.

Looking forward We are on year two of a three-year journey to implement and entrench the major initiatives identified in our people strategy, which has been reviewed to align with the revised strategy. The next financial year will be about embedding the initiatives we implemented during the year. We will focus on stabilising as well as allowing people to adjust to and embrace the changes. Building resilience will be part of our focus next year.

To support our organisation-wide transformation to create a simpler business model and to drive a customer-centric company, we are mandated to rebuild our company’s high-performance culture, which means helping our employees learn new ways of thinking and acting. We have embarked on initiatives to entrust front-line employees with the critical task of generating loyalty and enthusiasm among customers, and we have started activities to teach our employees the skills they need to achieve those results.

Awarded 150 bursaries to employees

500 individuals participated in learnership and internship programmes (94% of individuals in learnerships were black and all interns were black)

51

TRANSFORMATION

As a responsible corporate citizen, we have a transformation strategy in place. This enables us to transform our own workforce and contribute to transformation within the South African context.

The social, ethics and transformation committee is mandated by the board to oversee transformation. The execution of the empowerment and transformation matters is managed by the executive committee. The strategy takes a broad view of transformation: internally by empowering our employees through share ownership and employment opportunities,

Our performanceAfter falling to a level 3 B-BBEE status in 2018, we are pleased with our return to a level 2 in 2019. Despite a challenging operational environment, we showed strong performance in key pillars such as ownership, enterprise and supplier development, socio-economic development and consumer education, which resulted in a solid level 2 status.

B-BBEE scorecard Amended

FSC target 2019

Ownership % 23.00 27.00

Management control 8.00 4.83

Employment equity 12.00 7.29

Skills development 20.00 10.44

Preferential procurement 20.00 8.95

Enterprise development 5.00 10.00

Supplier development 10.00 7.00

Socio-economic development 3.00 3.00

Consumer education 2.00 3.00

Access to financial services 12.00 10.40

Overall score 115.00 91.91

Equivalent score 109.00 96.97

Contribution level 2

1 Not included as they are not material.

across our value chain through procurement and supplier development, and for society through financial well-being and community initiatives.

On 1 December 2017, the Financial Sector Code (FSC) was amended and this required us to review our strategies and processes. We decided that going back to basics in 2019 will lay the foundation that we need to reach a more substantive impact.

As a service-based business that primarily operates a network of offices, our direct environmental impact is limited. Nonetheless, we strive to track our impacts and efficiently use natural resources. The group’s footprint is primarily driven by electricity and water usage as well as the paper consumed and general office waste1 generated in our buildings.


52

Black representation at board level dropped to an expected 42% (2018: 50%) with the appointments of the chief executive officer and chief financial officer. However, a more diverse executive team improved from 50% black representation in 2018, to 57% in 2019. Executive, senior and middle management continue to be key areas to focus attraction and retention strategies for black talent. We are therefore taking a more holistic approach to our performance with regard to diversity and inclusion in the workplace.

In order to address the risk of losing diverse talent, we need to provide support and development opportunities to all, and to provide the ‘right’ support to employment equity employees and candidates. We ensured that black women were offered participation in newly developed leadership programmes.

We hold a verified black ownership of 51.64%, which granted us full points for this element. Our empowerment equity partners are African Rainbow Capital Financial Services Holdings Proprietary Limited (ARC), the Alexander Forbes FSP, the Isilulu and Community Trusts, the last of which is categorised as a broad-based scheme in terms of the B-BBEE legislation. Collectively, these control an 11.2% direct black shareholding. As at 31 March 2019 ARC holds 8.9% of Alexander Forbes Group Holdings Limited. In addition, ARC also owns 10% of Alexander Forbes Limited (see ownership on page 5). The Alexander Forbes Community Trust holds a 0.3% equity stake in the group, translating into shares worth approximately R22 million. Our employee share ownership scheme, which owns 2.9% of the group, is managed under the Alexander Forbes Isilulu Trust.

Recruitment and promotion practices represent the majority of our challenges, and thus is under our control. Although we had set targets they were not directly aligned to the requirements needed for us to maintain a competitive level 1 or 2. We have now put more stringent targets and practices in place such as an executive sign-off process for non-employment equity hires.

To rectify critical skills losses and compete against other financial services companies providing extremely competitive packages, we had to compromise on our objective to only recruit equity candidates in instances where the critical skill was required immediately.

R36 million spent on skills development for black people, of which

R21 million spent on skills development for women

53

Transformation in communities and societyFocus areasWe manage our corporate social initiatives through the Alexander Forbes Community Trust (AFCT). The group contributed R5.5 million to the trust (2018: R4.6 million). This contribution, along with other income generated by the AFCT is directed toward the In 4 Life projects, bursary programmes as well as voluntarism initiatives. The AFCT’s focus areas provide consistent and holistic support to orphans and vulnerable children and their families, from early childhood development to tertiary education.

Flagship programmeAt the end of 2019 the trustees renamed our flagship In 4 Life programme ‘CoHubs’ to reflect the new positioning as community pillars or hubs that collaboratively deliver on socio-economic programmes. We supported 3 000 beneficiaries across all the centres, providing over 800 meals daily. We also had 400 persons with disabilities and their families who benefited from programmes run at two of our centres, providing therapeutic, physical and educational care. Comprehensive planning sessions were conducted with the centres that provide this care, aligning them to the new strategy that will be implemented in the new year. The new strategy will be focused on social impact outcomes rather than pure grant-giving.

VolunteerismThe Community Trust also supported the Alexander Forbes volunteering programmes in 2019, which saw a marked increase in participation from an average 225 participants to 1 000 volunteers. Each focus area in our corporate social investment (CSI) model offers a range of volunteering opportunities for employees to get involved in through organised group events, team initiatives or as individuals. Employees can nominate additional beneficiaries they wish to support, and we may offer support if initiatives are aligned to our focus areas. In 2019 our main programme was our partnership with the Rise Against Hunger initiative where 800 volunteers packed more than 130 000 meals for communities.

TRANSFORMATION [CONTINUED]

Enterprise developmentWe continue to be recognised for our investment of R14.0 million into the ASISA Enterprise Development Fund (ASISA ESD), which counts towards enterprise and supplier development initiatives. When the supplier development pillar was introduced, we made further investments to the ASISA ESD Fund to meet these targets. However, we committed to growing and empowering SMEs.

Alexander Forbes is committed to empowering and facilitating the growth and sustainability of SMEs through eradicating financial, social and circumstantial barriers under the Alexander Forbes Enterprise Development pillar. Hence the establishment of CoLabs (labs for great innovative ideas through collaboration and in collaborative spaces) in April 2018 with four growing and impactful enterprises. The enterprises provide diverse services ranging from: investments; supplier development; growth capital; private equity; advisory services; certification and licencing; consulting; audits; content development; facilitation (speaking, moderation and other); and providing access to markets for other entrepreneurs.

Access to space has always formed part of our access to markets strategy, with 11 companies hosted at our Sandton and Durban offices. The CoLabs beneficiaries had access to office space, access to boardrooms, corporate market days and catering, marketing and internet access, financial support and subsidies, networking and learning opportunities. The enterprises collectively created 24 jobs and generated approximately R6 850 000 for the year, with the lowest individual revenue being over R245 000 for the year.


54

Well-being for allWith well-being positioned as central to Alexander Forbes, we had a holistic principles-based approach to the projects supported. This principle extends to the well-being of both our immediate beneficiaries and those that dedicate their time to care for them. In 2019 we piloted a programme entitled ‘caring for our caregivers’. The initiative prioritised the needs of the caregivers to our beneficiaries and provided emotional support and care which further amplified our holistic approach to humanitarian work.

Bursary programmeIn partnership with the Maharishi Institute (MI), the AFCT sponsors 24 students by providing them with bursaries to study for a bachelor’s degree in administration. These students would typically not make it into traditional tertiary institutions because of their disadvantaged backgrounds. The MI philosophy is to bridge this gap and provide a holistic approach to education. This is aligned to our own CSI approach of creating a platform of opportunity to enable better and more impactful outcomes.

The AFCT also provides an additional 10 to 15 bursaries to students who apply from our supported projects in the In 4 Life projects. These projects range from feeding scheme and aftercare programmes to extra academic support.

Financial literacyWe want to ensure that financial well-being stretches beyond our current client base to potential clients and society at large. We believe that financial development delivers measurable benefits when individuals achieve the financial well-being they require. Financial well-being anchors social well-being and facilitates social mobility. This year our activities have been far-reaching, ensuring we reached 2 700 employees of our clients and 800 community-based attendees through financial well-being training interventions. This allows us to be socio-economic catalysts for our clients. Moreover, it contributes to communities that are often neglected and can be exploited because they have limited tools and understanding of how to make optimal financial decisions.

Looking forward In line with the revised business strategy, we are reviewing and refreshing the transformation strategy to align and embed our practices into the business. The upcoming year will be a maintenance year while we analyse critical areas for improvement and to encourage the right leadership sponsorship, commitment and decision-making.

A critical initiative for the upcoming year will be to hold executives and management accountable for the three areas under their control: skills development, employment equity and preferential procurement. Targets are likely to form part of the LTIP strategic initiatives, but won’t form part of the performance scorecard. A second way we will make transformation meaningful is to include a monthly agenda item for the executive committee, ensuring monthly tracking of progress. We believe this approach will position us to target an improved B-BBEE scorecard performance in the next two to three years.

Our primary goal in 2020 will be to achieve socio-economic development and impact because we recognise that compliance is only part of the transformation model. As partners in the transformation journey of South Africa Inc, we will be making sure that the programmes, initiatives and stories that are implemented and that develop will be a true reflection of the essence of socio-economic development and impact for all our stakeholders. Moreover, because transformation is encapsulated in our company vision, we believe this will result in sustainable, tangible and transformative socio-economic well-being.

It has been important for us to have a bird’s eye view as well as grassroots interactions to understand our context and its future direction. Further changes to the Amended FSC are expected from the Financial Sector Transformation Council in early 2020. We have conducted multi-departmental engagements and strategy planning sessions with different external stakeholders to involve them in our transformation process and direction.

55

Bal

ance

ris

k an

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war

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Lea

ders

hip

C

ompl

ianc

e

Whi

stle

-blo

win

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Whi

stle

-blo

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Manage risk

Ethicalculture

Risk appetite

Trusted partner to clients

Ethical culture

Code of

ethics

Board of directors

Compliance

Sustainable

Trust and

integrity

Do right for our clients

Ethics andintegrity

Balance risk and reward Pay for

performance

Checks and

balances

Pay for performance

Contingency plans

Solidgovernance

Eth

ics

in

our

DN

A

Strategicguidance

Risk appetiteOversight

ACCOUNTABILITYAlexander Forbes Group Holdings Limited | Integrated annual report 31 March 2019

56

Bal

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Lea

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hip

C

ompl

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Whi

stle

-blo

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Whi

stle

-blo

win

g

Manage risk

Ethicalculture

Risk appetite

Trusted partner to clients

Ethical culture

Code of

ethics

Board of directors

Compliance

Sustainable

Trust and

integrity

Do right for our clients

Ethics andintegrity

Balance risk and reward Pay for

performance

Checks and

balances

Pay for performance

Contingency plans

Solidgovernance

Eth

ics

in

our

DN

A

Strategicguidance

Risk appetiteOversight

GOVERNANCE 58

MANAGING RISK 64

57

GOVERNANCEAlexander Forbes Group Holdings

Our board of directors

CLASSIFICATION 16.7% Executive 25.0% Non-executive 58.3% Independent

DIVERSITY 33.4% African, Coloured or Indian female 8.3% African, Coloured or Indian male 58.3% White male

TENURE 66.7% 1 to 2 years 8.3% > 2 to 4 years 16.7% > 4 to 7 years 8.3% > 7 years

Nonkululeko Nyembezi (59)

Mark Derrick Collier (65)

Thabo Dloti (50)

Bob Head (60)

Totsie Memela-Khambula (60)

Nigel Payne (59)

Marilyn Ramplin (45)

David John Anderson (50)

William Simon (Simon) O’Regan (60)

Bridget Radebe (39)

Dawie de Villiers (49)

Bruce Bydawell (51)

Independent chairman

Lead independent

Independent Independent Independent Independent Independent Non-executive Non-executive Non-executive Chief Executive Officer

Chief Financial Officer

BSc (Hons) (Electrical Engineering), MSc (Electrical Engineering), MBA

HND/BA Business Studies, DIP M, M Inst

Bachelor of Business Science in Actuarial Science (University of Cape Town), Certificate in Actuarial Techniques (Institute of Actuaries in London), Advanced Management Programme Certificate (Harvard Graduate School of Business)

MA (Politics, philosophy, economics), CA, Associate of the Chartered Insurance Institute, fellow of the Chartered Institute of Bankers

BA (Social Science) in Public Administration

BCom (Hons), Higher Diploma in Accounting, CA (SA), MBL

Derivatives and Regulatory Qualification, Board Leadership, Financial Institution Failure Management

Dip All, Dip SM, FASFA, FAIM, ANZIIF (fellow) CIP, AAMI CPM, MAICD

BusSci (Hons), fellow of the Faculty of Actuaries and fellow of the Institute of Actuaries

BCom (Hons), CA (SA)

BSc Actuarial Science, FASSA, Advanced Management Programme

CA (SA), CFA

JOINED 1 January 2018 1 August 2011 1 August 2018 1 January 2018 1 July 2015 1 May 2018 8 March 2018 10 October 2014 31 July 2014 1 September 2017 1 November 2018 1 April 2019

COMMITTEES C C C C C C

1. Collapsed into audit and risk committee effective 14 June 2019.

Alexander Forbes Group Holdings Board of directors

Governance outcomesEthical culture Good performance Effective control Legitimacy

Material subsidiary boards

Material subsidiary board committees Other subsidiary board committees

Combined insurance board

Combined insurance, audit and risk

Other subsidiary boards

Online governance

report page 2

Audit and risk committee

Online governance

report page 5

Capital oversight

committee

Online governance

report page 9

Nominations committee

Online governance

report page 6

Information technology governance committee1

Online governance

report page 10

Social, ethics and transformation

committee

Online governance

report page 8

Mergers and acquisitions committee

Online governance

report page 13

Remuneration committee

OPERATIONAL GOVERNANCE

CORPORATE GOVERNANCE

Executive committee

Segmental and management committees

Operational risk and compliance implementation (1st line)

Group risk and com

pliance (2nd line) oversight

Internal audit / alternative independent assurance (3rd line)

External audit (4

th line)

Str

ateg

ic a

nd o

vers

ight

Str

ateg

icTa

ctic

al


58

Directorate changes:

Thabo Dloti was appointed on 1 August 2018 as an independent non-executive director.

Dawie de Villiers was appointed as chief executive officer on 1 November 2018.

Bruce Bydawell was appointed as chief financial officer on 1 April 2019.

Nonkululeko Nyembezi (59)

Mark Derrick Collier (65)

Thabo Dloti (50)

Bob Head (60)

Totsie Memela-Khambula (60)

Nigel Payne (59)

Marilyn Ramplin (45)

David John Anderson (50)

William Simon (Simon) O’Regan (60)

Bridget Radebe (39)

Dawie de Villiers (49)

Bruce Bydawell (51)

Independent chairman

Lead independent

Independent Independent Independent Independent Independent Non-executive Non-executive Non-executive Chief Executive Officer

Chief Financial Officer

BSc (Hons) (Electrical Engineering), MSc (Electrical Engineering), MBA

HND/BA Business Studies, DIP M, M Inst

Bachelor of Business Science in Actuarial Science (University of Cape Town), Certificate in Actuarial Techniques (Institute of Actuaries in London), Advanced Management Programme Certificate (Harvard Graduate School of Business)

MA (Politics, philosophy, economics), CA, Associate of the Chartered Insurance Institute, fellow of the Chartered Institute of Bankers

BA (Social Science) in Public Administration

BCom (Hons), Higher Diploma in Accounting, CA (SA), MBL

Derivatives and Regulatory Qualification, Board Leadership, Financial Institution Failure Management

Dip All, Dip SM, FASFA, FAIM, ANZIIF (fellow) CIP, AAMI CPM, MAICD

BusSci (Hons), fellow of the Faculty of Actuaries and fellow of the Institute of Actuaries

BCom (Hons), CA (SA)

BSc Actuarial Science, FASSA, Advanced Management Programme

CA (SA), CFA

JOINED 1 January 2018 1 August 2011 1 August 2018 1 January 2018 1 July 2015 1 May 2018 8 March 2018 10 October 2014 31 July 2014 1 September 2017 1 November 2018 1 April 2019

COMMITTEES C C C C C C

Board and committee meeting attendance

Board Audit and risk committee

Capital oversight

committee

Information technology governance committee

Mergers and acquisitions committee

Nominations committee

Social, ethics and

transformation committee

Remuneration committee

Summary of meetings’ attendance

N Nyembezi 7/7 7/8 4/4 1/1 9/9

DJ Anderson 7/7 4/4 2/3

MD Collier 7/7 4/4 10/10 4/4 7/9

AA Darfoor 3/3 3/3 5/5 1/1

DJ de Villiers 3/3 3/3 4/4 2/2

T Dloti 3/4 3/3 6/8 2/3

N Ford-Hoon 4/4 3/3 6/6

RM Head 7/7 4/4 4/4 6/6 2/2

BJ Memela-Khambula 6/7 4/4 3/3 8/9

WS O’Regan 7/7 4/6 7/10 4/4 9/9

NG Payne 5/5 4/4 4/4 5/6 5/5

NB Radebe 5/7 4/4 3/3

M Ramplin 7/7 4/4 4/4

59

GOVERNANCE [CONTINUED]

Our governance approachWhile Alexander Forbes has experienced a turbulent time of leadership and strategic change, our governance structures and approach remain a solid foundation from which to build the trust of our stakeholders. Our approach is supported by two of our core values, trust and integrity, with the goal of enabling the achievement of our strategy, the long-term sustainability of the company and value creation for our stakeholders.

Our ethicsThe Alexander Forbes Group Holdings Limited (AFGH) board of directors is the highest governing body, ensuring that the company is led in an ethical and responsible manner. The board governs the organisation in a manner that enables and supports the achievement of our strategy, while simultaneously focusing on the long-term sustainability of the group. During the year the board experienced a breakdown of trust with the leadership team and, once it was acknowledged, moved swiftly to make the necessary changes. Its actions in this manner demonstrate its commitment to the integrity and reputation of the company. In substance, the right governance checks and balances are in place and, through the lessons learned during these trying times, have become strengthened.

We remain committed to our code of ethics, which underpins our governance efforts. Our governance efforts are not directed towards merely achieving regulatory and legislative conformance, but also towards ensuring the board performs and adds value to the group through its oversight, leadership and strategic guidance.

The board’s responsibilityAs stated in the board charter, the board assumes responsibility for setting the direction of the company, approving policy and strategy, and overseeing their implementation. The board is satisfied that it has fulfilled its responsibilities in accordance with its charter for the reporting period. The board delegates authority for the management of the group’s activities to the executive and, in the context of lessons learned during the termination of the services of the previous chief executive officer, has reviewed the delegation of authority framework to ensure no executive has been granted authority too wide in scope. This will continue to be improved in 2020 to ensure clarity of roles and the effective exercise of delegated responsibilities.

There is a clear division of responsibilities between the chief executive officer and chairman, and directors generally,

as articulated in the board charter. In addition, there is also a clear division of responsibilities between management and the board as articulated in the delegation of authority framework.

The board subscribes to the principles contained in the King IV Report on Corporate Governance for South Africa, 2016 (King IV1) and our application of the principles and practices are disclosed and explained in our governance report, which is available online. The governance disclosures in this report should be read with our governance report, as only material aspects or key developments in the reporting period have been included here. As indicated in our 2018 integrated report, best-practice governance is an aspirational journey and some areas will take longer to mature. The areas that have improved materially during the year are:

IT governance (since the second half of 2018), which had also led to the technology modernisation board committee’s mandate being extended to IT governance holistically. The bespoke committee was subsequently collapsed into the audit and risk committee following improved maturity.

Development and approval of a group governance framework: full implementation of the framework is still under way, but we have progressed well.

Resulting from resource and capacity constraints, compliance efforts, especially proactive compliance engagements and interventions, started to lag. As also referenced elsewhere, an aggressive regulatory programme was established to course-correct and ensure we mature compliance efficacy and reporting to the board.

Board compositionHaving the appropriate skills and experience on the board is critical to support and direct our leadership team in achieving the group’s strategy. At 1 April 2019 the board consisted of twelve members: seven independent non-executive directors, three non-executive directors and two executive directors. The board is confident that its composition contributes to the balance of skills, experience and diversity necessary to perform its duties.

The nominations committee’s terms of reference state that the board composition should be reflective of diversity in the markets where we operate. Although the board composition does not yet reflect the economically active population of South Africa, the board is satisfied with the progress made on equity representation (41.7%). We achieved our gender representation target of 30% female representation set by the

1. The group recognises and respects the Institute of Directors in Southern Africa NPC’s copyright and trademarks in relation to King IV and reference to and usage of the King IV acronym and/or references to the King IV report, its principles, practices and any other aspects are intended as permitted use in accordance with the Copyright Act 98 of 1978, as amended, for the purpose of review and reporting on Alexander Forbes’ events during the reporting period.


60

board in 2017. Despite half of our directors being independent, including the chairman, we still retained our lead independent director for good governance.

The nominations committee again followed the robust process established in 2018, in accordance with the King IV independence recommendations, to determine these classifications.

Board developmentOwing to the time and effort expended on managing the leadership changes during calendar year 2018, implementing the planned board governance sessions was postponed to calendar year 2019. The first of those planned occurred in May 2019 and, among others, covered:

King IV implementation learning and challenges, in the aftermath of Steinhoff;

financial crimes control;

international market conduct development challenges and learning;

ORSA and risk appetite; and

research and development collaborative efforts in response to South African socio-economic and financial well-being challenges.

Board commitment to executionThe board is confident that the number of meetings, attendance and extent of debate on material issues enabled full execution of the duties and obligations as set out in the board charter and board annual plan. Formal board evaluation was only completed for the combined insurance board as it was deemed too early for the AFGH board as a result of the large number of new directors (refer to the graph on page 58 indicating 67% of directors with a tenure of fewer than two years). However, the areas of improvement identified in the evaluation were universal and could therefore still be applied to improve the board’s processes and oversight.

The board is supported by Ms CH Wessels, who was appointed group secretary on 1 October 2017, general counsel and group secretary on 1 April 2018 and executive: governance, legal and compliance on 1 March 2019. During the annual evaluation of her qualifications, experience and performance, as required by the JSE Listings Requirements, the board expressed a very high level of comfort with the governance guidance and support it receives from Ms CH Wessels.

The board is confident that the number of meetings, attendance and extent of debate on material issues enabled full execution of the duties and obligations as set out in the board charter and board annual plan.

61

Key actions and governance activities during the yearAligned with our material issues, the board spent considerable time, among other governance and strategic issues, on the following:

Finalising non-executive appointments and ensuring appropriate committee coverage

Business transformation to address the cost structure of the company, accelerate revenue generation and reverse market share decline in core markets

Remuneration policy and disclosure (including related shareholder engagement)

Termination of chief executive officer’s services and executive succession planning

Critical evaluation of key decisions and certain governance processes to ensure process improvement, among others, management information disclosure and reporting to the board

Oversight of critical and material projects relating to the modernisation project (including establishing a modernisation board subcommittee) and, ultimately, the decision to terminate the project and impair the full investment

Addressing unintended consequences of strategic focus: material cost-cutting in the absence of sufficient structural change – negatively affecting culture and employees

The company, led by the chairman and lead independent director, for the first time undertook a governance roadshow covering 77.1% of institutional shareholders. It focused on governance matters generally but its primary focus was to respond to the negative vote on remuneration received at the 2018 annual general meeting. The feedback received during the roadshow was extremely positive with regard to the steps taken to address previously identified remuneration policy and disclosure deficiencies. We also received positive feedback recognising the progress the company has made since the appointment of Mr DJ de Villiers as chief executive officer. The engagements further shaped the remuneration policy as disclosed in this report.

Stakeholders applauded the company for this initiative, particularly international shareholders who indicated that few South African companies have engaged with them in this manner.

GOVERNANCE [CONTINUED]

Looking forward The following items will continue to receive board focus in 2020:

Improved disclosure on remuneration and ensuring shareholders are comfortable with principles applied to executive remuneration

Ensuring board alignment, support and enablement of the strategy and oversight of the targeted growth path by focusing on the core and our key market differentiators

Robust governance and oversight in respect of M&A processes

Corporate and governance simplification aligned with articulated strategic objectives – integrated company and enabling capital efficiency aligned to capital-light objective (2020 and beyond)

Increased focus on risk oversight and maturing enterprise risk management

Continuing with governance sessions to ensure directors remain fully abreast of regulatory and industry changes and developments

Material focus on culture – encouraging an organisational DNA and culture aligned with strategic focus and ethical behaviour

Detailed committee reports (including the remuneration report) are available in the governance report online.


62

MANAGING RISK

Sound risk management needs to be part of our DNA as an important enabler of our strategic deliverables. We cannot be a trusted adviser and partner, nor can we provide measurable client benefits, without mature, embedded risk processes and practices. The board holds ultimate accountability for risk management and senior management is responsible for developing and implementing the company’s risk strategy and supporting risk management infrastructure. Risk management

is built into decision-making structures and processes at both executive management and operational levels. Decisions around risk mitigation strategies within our risk appetite measures are reviewed by independent parties – assessment of the robustness of the measures includes stress tests to key variables and systemic shocks. We have contingency plans in place for unexpected or worst-case scenarios.

Enterprise risk managementWe manage our risks, and the achievement of our business strategies and objectives, through our group enterprise-wide risk management framework. The principles outlined in the framework are incorporated into risk management-related policies and procedures to ensure that risk management is embedded into day-to-day management activities. During the financial period, management and the risk management functions began a process of reviewing and updating the key risk management policies across the group to ensure continued relevancy and comprehensiveness, and to support ongoing risk training initiatives across the organisation.

During the year we centralised the second-line risk function to improve the consistency of risk management operations and to achieve co-ordinated risk responses to major changes in the group. We also enhanced the robustness of risk ownership by bolstering the number of first-line risk analysts and managers to assist with risk assessments, consideration of risk treatment, maintenance of risk information and monitoring of actions towards risk mitigation.

Ensuring a viable and effective risk governance model remains a priority as we transition to a new operating model. We will ensure that the risk governance model evolves to accommodate changing best-practice principles and organisational fit.

Independent assurance (internal or bespoke)

Externalaudit

Provides assurance through internal and bespoke external audit concerning the adequacy and effectiveness of risk management governance and internal control.

3

4

We manage risk along four lines of defence: In addition to second-line

assurance and control functions, independent audit and risk committees provide objective oversight. Risks are rigorously evaluated to ensure appropriate mitigation through frequent risk assessment and report-back, continuing engagement and monitoring of the environment.

Accountability for oversight and control

2

Management holds responsibility and accountability for managing risks on a day-to-day basis. Through operational committees, management provides oversight on strategy implementation, performance measurement, risk management, company controls and governance processes.

Accountability for risk management1


64

Risk reportingRisk management reports are formally updated at least quarterly and risks, issues and associated actions are tabled and discussed at divisional excos, with material risks and issues escalated to appropriate board-level oversight committees. Apart from providing independent assurance, the group risk management function also provides guidance on risk-related matters and is involved in specialist risk management issues at a business level. The function also provides transactional approval, where appropriate, such as overperformance testing and validation processes within the product development process.

During the 2019 financial year we re-established the foundations of our enterprise risk management programme, including the formal establishment of first-line risk committees, updating key risk policies and rolling out risk training across various management levels.

Looking forward To further support the progress made this year towards risk maturity, next year’s risk efforts will focus on the following:

Supporting our stakeholders in change management efforts while developing stronger risk capabilities for the future

Continued embedment of the risk management framework towards achieving risk-adjusted organisational performance

Targeting simpler risk reporting and the delivery of risk insight or intelligence for better-quality decision-making

Improvements in the risk methodologies and tools to ensure deeper risk assessments across the organisation

Continuing to build risk culture awareness

We will continue to evolve our approach to determine the appropriate risk-reward balance within the group.

Key business risksAlexander Forbes identifies and classifies its key risks according to a three-level system. The three-level taxonomy is based on the Basel classification of operational risk, with further enhancements for risk classification made by taking into consideration the FSCA’s Quantitative Impact Studies over the last few years.

While our risk appetite statements have been expressed quantitatively and qualitatively, they seek to ensure that our organisation is responsibly managed in its pursuit of value. The risk appetite statements are used to drive our strategic decisions, facilitate the setting of boundaries for decision-making based on the organisation’s strategy and ensure that the level of risk taken on is being monitored.

Our risk categories consider what the organisation wants to include in its discussion of risk and how they are defined. Risk categorisation assists in grouping risks in a structured risk management process that then allows the group to more intelligently address different risk categories. This includes the building of strategies to avoid or minimise impact.

Key risks are identified and ranked by our group risk division in terms of our risk management strategy and in consultation with subsidiary and group management. Our top risks (across all three levels) for the year under review are listed and discussed on pages 66 and 67.

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MANAGING RISK [CONTINUED]

Key business risks

Summarised risk description and rating Management mitigation Link to

material issues

1 General failure in strategic execution resulting in a loss of confidence in the organisation, and especially the leadership team:

(a) Inability to manage change effectively and overcome resistance to change, leading to failure to execute strategic intent

Active and visible leadership buy-in and support for change

Capabilities gap assessments performed and corrective action taken

Resource allocation plans allow for adaptation to changing business conditions

Ongoing monitoring, with corrective action taken, of the above strategies and plans

Approved incentives strategies, schemes and programmes

Leadership

(b) Value erosion and loss of confidence in leadership due to a failure in organisational redesign efforts

Creation of a strategy programme management office

Legal entity rationalisation

The group’s governance model is being simplified to enhance lines of oversight

Performance metrics are being defined

Employee value proposition review and optimisation

Our people

2 Material loss in empowerment status (and/or perceptions of reluctance to transform)

Plans to progressively regain level 2 and 1 contribution

B-BBEE plans to address gaps refined and communicated

The transformation team assisting management and staff to revise related policies

Monthly employment equity reporting and signing off on all non-EE appointments

Considering monitoring software to track against targets monthly

Transformation

3 Material regulatory censure due to a failure to appropriately handle regulatory changes and initiatives

Skilled and experienced legal or regulatory experts (internal and external) maintain regulatory relationships and conduct environmental scanning

Regulatory change management structure and processes established at the centre

Regulatory requirements considered within organisational capabilities

Management and board oversight

Regulation

4 Unanticipated delays in the disposal of the insurance businesses may delay the repositioning of the group’s business model and achievement of medium-term targets

Deal team identified and supported by external specialists

Documented deal flow process and roadmap from strategy to execution

Established reporting dashboards

Presale due diligence set up to assess transaction value and ensure effective risk management

Early identification of key employee concerns and strategies for maintaining employee engagement

Mergers and acquisitions committee oversight

Capital allocation

Our people

High risk Medium risk


66

High risk Medium risk

Summarised risk description and rating Management mitigation Link to

material issues

5 Loss of clients resulting in a failure to meet performance targets

Client engagement and communication strategy and programme

Management monitoring of clients at risk

Sales frameworks to be integrated

Client reacquisition programmes and measures to be considered

Our clients

Loss of revenue potential due to ongoing losses in the formal employment sector, deflation in real wage terms and strained financial markets

Stress testing frameworks, policies, methodologies and tools developed and enhanced

Expense strategies and analyses deepened

Active and ongoing management of prospects with associated analysis of revenue potential per client and key risk indicators

Contingency plans developed

Capital allocation

6 Inability to attract and manage critical talent and skills

Continuing with skills development initiatives and internship programme

Regular monitoring of attrition rates in key areas

Dedicated project on remuneration approach and structures, including benchmark review

Implementation of the talent mapping pipeline management

Career mapping and internal promotions toward increasing career mobility

Leadership

Our people

7 Destabilisation of corporate standing and financial losses due to failure to actively and properly manage cyber risks

Existing controls are layered throughout the organisation, including management, system, network and data security controls, gateway protection and a security operations centre

Materially increased focus

Resource allocation

Capital allocation

8 Internally or externally triggered damage to the corporate reputation in any area of the business could damage the firm as a whole

A member of the executive is specifically assigned responsibility for the company’s reputation

Both formal and informal reputation management processes are in place

Ethics policy and programme under review

Our clients

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ALEXANDER FORBES GROUP HOLDINGS LIMITEDRegistration number: 2006/025226/06Tax reference number: 9404/921/15/8JSE share code: AFHISIN: ZAE000191516(Incorporated in the Republic of South Africa)

Independent directorsN Nyembezi (Chairman), MD Collier, RM Head, M Ramplin, NG Payne, BJ Memela-Khambula, T Dloti

Non-executive directorsDJ Anderson, WS O’Regan, NB Radebe

Executive directorsDJ de Villiers (chief executive officer)BP Bydawell (chief financial officer) (appointed effective 1 April 2019)

Executive: governance, legal and compliance (company secretary)CH Wessels

Investor relationsZ Amra

Registered officeAlexander Forbes, 115 West Street, Sandown, 2196

Transfer secretariesComputershare Investor Services Proprietary LimitedRosebank Towers, 15 Biermann Avenue, Rosebank, 2196PO Box 61051, Marshalltown, 2107

SponsorRand Merchant Bank (A division of FirstRand Bank Limited)1 Merchant Place, corner of Fredman Drive and Rivonia Road, Sandton, 2196

Websitewww.alexanderforbes.co.za

CORPORATE INFORMATION

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Alexander Forbes Group Holdings Limited (the company)

Tel: +27 (0)11 269 0000 115 West Street, Sandown

PO Box 787240, Sandton 2146, South Africawww.alexanderforbes.co.za

Images: Getty Images

ALEXANDER FORBES GROUP HOLDINGS LIMITED INTEGRATED … Alexander Forbes is a market-leading provider...

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