Summary directors' remuneration report

Below is a summary of the information contained in the Directors’ remuneration report which shareholders will be asked to approve at the forthcoming Annual General Meeting. The Directors’ Remuneration report, contained in the Company’s Annual Report and Accounts for 2005, provides full details of the Company’s remuneration policy, practices, pension arrangements and incentive plans including a description of the performance conditions which apply to the incentive plans, as well as details of all the awards and options held by the directors. It also contains details of proposed changes to the executives’ pension arrangements resulting from a comprehensive review which took place in 2005. A copy of the Annual Report and Accounts is available from the Company’s Registrar, Lloyds TSB Registrars.

Remuneration policy

The Company’s remuneration policy seeks to provide remuneration packages appropriate for each particular market in which the Company operates in order to attract and retain high calibre employees and encourage and reward superior performance in a manner which is consistent with the interests of shareholders. The policy is aimed at ensuring senior executives are rewarded fairly for their individual and collective contributions to the Company’s performance.

A number of material changes were made to the packages for 2005, as described in last year’s Annual Report. New share incentive and bonus plans were approved by shareholders at the 2005 Annual General Meeting.

New regulations come into effect on 6 April 2006 that apply to all members of United Kingdom pension schemes including, a limit (Lifetime Allowance) on the value of pension that can be taken from a tax approved pension scheme.

As a result, significant changes have been made to the way in which pension provision is made for those employees whose benefits exceed, or are likely to exceed, the Lifetime Allowance. Generally, senior employees who are currently members of the defined benefit section of the Aviva Staff Pension Scheme will continue to accrue pension benefits under the Scheme until the value of their benefits reach the Lifetime Allowance. At this point, they will cease membership of the Scheme. The review was undertaken against the principle that the cost of providing the new arrangements would be no greater than the cost of the current pension arrangements nor would employees be compensated for any additional tax arising from the new regulations. New employees, including senior executives, will receive pension benefits through the defined contribution section of the scheme. To provide a long-term savings opportunity for those senior executives whose pension benefits are restricted by the lifetime allowance, the Company will consider making a discretionary contribution into a capital accumulation plan. Further details are contained in the Annual Report.

The remuneration package

The Company believes that senior executives should align their own interests with those of the Company’s shareholders. It therefore believes that, whilst paying a competitive basic salary, the majority of the remuneration package should be closely linked to the performance of the business and delivered in the form of shares. During 2005, the remuneration package for the Company’s executive directors comprised the following elements:

A basic salary.
An annual bonus plan – to encourage executives to meet annual targets relating to business and agreed personal performance targets. Two-thirds of any bonus is paid in the form of shares and deferred for three years.
A long-term incentive plan – to align executives’ longer term interests with those of shareholders.
A pension entitlement.
A car allowance, private medical insurance and participation in the all-employee share plans.

Awards granted under the long-term incentive plan are subject to performance conditions based on the Company’s Total Shareholder Return (TSR) and the return on capital employed (ROCE). TSR is ranked against the TSR of the major European financial services companies in the Company’s comparator group over a three year period. The following graph shows the Company’s TSR, over the past five years, against the average TSR of the companies in the said comparator group and the FTSE 100.

Graph: Aviva 5 year TSR performance against the FTSE 100 index and the median of the comparator group

ROCE is measured against the context of the Company’s three year business plan, the trading conditions and shareholder expectations at the time each award is made.

All executive directors have a service contract which can be terminated by the Company upon giving 12 months’ notice. Non-executive appointments can be terminated by either party at any time upon giving one month’s written notice.

In addition to the remuneration set out in the table overleaf the following shares were awarded to executive directors in 2005 under the Company’s incentive plans. The shares granted under the long-term incentive plan will only vest if certain conditions relating to the Company’s performance over the three financial years commencing 1 January 2005 are met.

	Deferred Bonus Plan shares	Long-Term Incentive Plan shares
Richard Harvey	109,764	207,437
Andrew Moss	61,408	102,803
Philip Scott	68,690	116,822
Patrick Snowball	67,068	107,943

In addition to the above, directors have interests in awards and options granted in previous years. No directors made any gains on the exercise of share options during the year.

Directors’ remuneration 2005

The remuneration payable to directors who held office for any part of the financial year is shown in the table below.

	Basic salary/fees		Bonuses¹		Benefits²		Total
	2005 £000	2004 £000	2005 £000	2004 £000	2005 £000	2004 £000	2005 £000	2004 £000
Chairman
Pehr Gyllenhammar	345	300	–	–	20	20	365	320
Executive directors
Richard Harvey	790	752	1,028	355	104	96	1,922	1,203
Andrew Moss	470	283	589	200	20	10	1,079	493
Philip Scott	515	491	583	223	54	35	1,152	749
Patrick Snowball	503	456	693	218	104	21	1,300	695
Non-executive directors (3)
Guillermo de la Dehesa	77	67	–	–	–	–	77	67
Wim Dik	59	42	–	–	–	–	59	42
Mary Francis*	13	–	–	–	–	–	13	–
Richard Karl Goeltz	63	28	–	–	–	–	63	28
George Paul	160	160	–	–	4	–	164	160
Carole Piwnica	56	42	–	–	–	–	56	42
Lord Sharman*	48	–	–	–	–	–	48	–
Derek Stevens	91	77	–	–	–	–	91	77
Elizabeth Vallance	59	42	–	–	–	–	59	42
André Villeneuve	59	42	–	–	–	–	59	42
Russell Walls	56	28	–	–	–	–	56	28
Total emoluments of directors	3,364	2,810	2,893	996	306	182	6,563	3,988

*From date of appointment: Lord Sharman (14 January 2005) and Mary Francis (1 October 2005).

Notes

1.	“Bonuses” include the value of shares granted under the free share part of the Aviva All-Employee Share Ownership Plan (maximum £3,000) and the total amounts earned in respect of the 2005 performance under the Annual Bonus Plan (i.e. including the amounts deferred and granted in the form of shares). The Annual Bonus Plan which was approved by shareholders in 2005, came into effect for the 2005 financial year replacing the Deferred Bonus Plan which operated in 2004. The disclosure of the awards made under these plans differs. Under the Deferred Bonus Plan participants were encouraged to defer their cash bonuses (35% of salary for “Target” performance) into shares by the Company providing matching shares on a 1 for 1 basis, thus effectively doubling the value of the bonus. The bonus awarded was disclosed in the table showing directors’ remuneration and the matching shares were disclosed in the table showing the share awards. Under the Annual Bonus Plan, a larger cash bonus is awarded (75% of salary at “Target” performance). Recipients are required to defer two thirds of their bonus into shares. However, under the Annual Bonus Plan, the deferred shares are not matched. As explained at the time the Annual Bonus Plan was introduced, at “Target” performance the Annual Bonus Plan would provide a bonus broadly 5% higher than that provided by the Deferred Bonus Plan when the value of the matching shares was taken into account. However, to encourage and incentivise outperformance the Annual Bonus Plan provides the potential to pay out significantly higher bonuses at Stretch level of outperformance. When calculating the level of bonus under the Annual Bonus Plan, 70% is based on financial measures and 30% is based on personal targets. The constitution of the financial measures varies between directors. For example, in respect of the Group Chief Executive and the Group Finance Director the performance measures used are those relating to the Group, whereas for the other executive directors bonuses are based partly on the Group’s performance and partly on the performance measures relating to the business units for which the directors have responsibility. Performance measures are reviewed in order to determine the financial bonuses for all the executive directors. For 2005, the performance measures for the Group included new business contribution, operating profit, combined operating ratio (COR), total expenses and the return on capital employed. Overall performance against these measures in 2005 was better than the targets set. In addition to the Group and business unit performance measures, the directors were set individual personal targets.
2.	“Benefits”. All the executive directors received the benefit of private medical insurance and, along with the Chairman, a car allowance. The above disclosure also includes, in respect of Richard Harvey, an amount relating to the cost incurred by the Company of insuring the life assurance and spouses’ benefits which, had he died during the year, could not have been paid by the pension scheme as a result of the ‘earnings cap’ and which would therefore have been met by the Company. In respect of Mr Snowball the disclosure includes an allowance of £66,000 incurred as a result of him being required to relocate from Norwich to London following a change in his responsibilities. The disclosure also includes a benefit relating to accompanied travel (Mr Harvey £10,000, Mr Snowball £22,000 and Mr Scott £32,000). All the numbers disclosed include the tax charged on the benefits. The directors did not receive an expense allowance during the year.
3.	Non-executive directors. The benefit disclosed for Pehr Gyllenhammar refers to a car allowance. The fee for George Paul reflects his duties as deputy chairman, chairman of the Remuneration Committee and for acting as the senior independent director. The fee for Derek Stevens includes an additional amount for serving as the chairman of the Board’s Audit Committee and of the trustee of the Aviva Staff Pension Scheme. The fee for Guillermo de la Dehesa includes an amount for serving as the non-executive chairman of the Group’s operations in Spain. No non-executive director accrued retirement benefits during the year.
4.	No compensation payment for loss of office was made to any director, or former director, during the year.
5.	For the purposes of the disclosure required by Schedule 6 to the Companies Act 1985 the total aggregate emoluments of the directors in respect of 2005 was £6.6 million. (2004: £4.2 million).
6.	Payments to former directors. Since his retirement as a director in 2003, Anthony Wyand has served as a consultant and as a director on the boards of some of the Group’s European operations. Under this arrangement, a fee of £126,000 was paid to him in 2005. During the year, shares granted to certain former executive directors under the Company’s incentive plans vested. Details of these awards were fully disclosed in the year of grant.
7.	No executive director served on the board of an external company in a personal capacity during the year for which he was remunerated.

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Aviva plc Annual report and accounts 2005