HELPING PEOPLE SECURE A LIFE OF POSSIBILITIES PHOENIX GROUP HOLDINGS PLC ANNUAL REPORT & ACCOUNTS 2020
CUSTOMER ACQUISITION We will acquire customers and grow our in-force business by leveraging the industry drivers of change.
Our modern IT platform enabled us to equip 99% of our colleagues to work from home within 10 days of the first lockdown and still maintain customer satisfaction at prepandemic levels with call answer rates >95% and customer satisfaction scores at 90%+.
The transaction also reflects the highly cash generative nature of legacy consolidation businesses. The relatively front-loaded acquired cashflows significantly bolster the amount of surplus cash we have available to fund future M&A and to reinvest in our Open business growth strategy.
At the same time, the world of pensions has radically shifted with individuals now expected to take the lead in planning and funding their longer retirements.
WORKPLACE Workplace is our engine for growth in customer acquisition and is marketed through our Standard Life brand. We are a top-three workplace pensions provider with £44 billion of AUA across 36 thousand schemes and 1.8 million members. Our proposition includes contract-based, trust-based and the increasingly popular master-trust schemes. Our strategy here is to protect and grow our business by continuing to invest in strengthening our proposition and digital platform.
Cash at the holding company level provides resources for future growth and resilience for the Group
Operating profit has increased by £389 million compared to prior year, principally reflecting the contribution of ReAssure following completion of the acquisition.
During 2020, we became a signatory to the UN-supported Principles of Responsible Investment which, as the largest UK asset owner signatory in the UK, demonstrates our commitment to embed ESG factors in investment decision-making and stewardship activities.
We have set a target of 60% of illiquid asset origination as sustainable investments for the shareholder portfolio.
You can find out more about how we are delivering on our ambitious sustainability commitments in our comprehensive 2020 Sustainability Report at: www.thephoenixgroup. com/sustainability/reports
• Additional five days’ parental emergency leave and carer’s leave made available.
IFRS The Group generated an increased operating profit of £1,199 million for the year (2019: £810 million), reflecting the contribution of the ReAssure businesses for the five-month period post-completion of the acquisition on 22 July and increased Bulk Purchase Annuity (‘BPA’) transaction activity in the period.
Base case three-year cash guidance 4.4 Following a 20% fall in equity markets 4.4
New business contribution for 2020 was £362 million (2019: £199 million1), which benefited significantly from the increase in new BPA deals written, partially offset by the impacts from COVID-19 on gross inflows where sales volumes within both the CS&I (Wrap SIPP product) and European business were lower than the prior year.
2020 has benefited from improved BPA performance with record incremental long-term cash generation of £350 million (2019: £235 million) reflecting an increase in volume of transactions but also improved deal economics. The average payback period reduced from 6–7 years in 2019 to 5–6 years.
MANAGEMENT SERVICES COMPANIES OPERATING PROFIT The operating profit for management services of £6 million (2019: £26 million) comprises income from the life and holding companies in accordance with the respective management services agreements less fees related to the outsourcing of services and other operating costs. The decrease compared to the prior period reflects a re-phasing of income from the life companies under revised management services agreements and the impacts of run-off.
The Group tax charge for the period attributable to owners is £110 million (2019: £130 million tax credit) based on a profit (after policyholder tax) of £944 million (2019: loss of £14 million). The tax adjustments to the Owners’ profit before tax are primarily due to a deferred tax charge for the impact of the retention of the 19% corporate tax rate and impact of the L&G Mature Savings business Part VII transfer of £(37) million, non-taxable income and gains of £(78) million, amortisation on acquired in-force business at a rate other than 19% of £77 million, a prior year credit for shareholders £(17) million, deferred tax credit for recognition of previously unrecognised tax losses of £(25) million, the impact of non-tax deductible costs of £9 million and profits taxed at a rate other than the 19% statutory corporate tax rate of £(10) million.
• Implemented various initiatives to support customers with the impact of COVID-19.
• Clearly communicating our investment proposition to enable investors to appropriately evaluate Phoenix as an investment.
• Communicating the views and concerns of customers and other stakeholders.
• Our regulated subsidiaries have approved capital and policies for distributions which protect customers.
OUR COLLEAGUES The Group’s Human Resources (‘HR’) policy defines people risk, which, if unmanaged, could result in a reduction in earnings or value, through financial or reputational loss.
HUMAN RIGHTS In line with the Equality Act 2010 and in order to ensure that the Group is aligned to relevant Articles of the United Nations Universal Declaration of Human Rights, the Group has a Dignity at Work policy in place. The policy covers bullying and harassment of and by managers, employers, contractors, suppliers, agency staff and other individuals engaged with the Group.
Our focus this year has been providing support to those considered most at risk to coronavirus; the elderly, vulnerable and individuals experiencing homelessness and food-poverty. Details of the support provided can be found in our 2020 Sustainability Report.
• Further embed climate risk considerations within the Group’s Risk Management Framework.
As illustrated above, at an investment class level, Phoenix’s debt portfolio in the shareholder funds faces the greatest climate-related risks.
Time horizon for analysis To be determined – within 2030 to 2050
• Complete a strategic implication assessment of climate risks and opportunities.
Risk identification: We have undertaken a qualitative assessment of the aspects of Phoenix’s business which are most exposed to these potential climate-related risks and opportunities. These are summarised above in the Strategy section. Quantitative analysis, building on the PRA’s IST, will be developed over 2021.
KEY NEXT STEPS • Develop internal climate risk appetites linked to metrics and targets framework • Embed climate risk considerations within the Group’s Risk Management Framework • Develop internal climate risk reporting
• Identify, assess and manage risks associated with the transition to a low carbon economy
• Consider potential opportunities for developing new ‘green’ products and services • Monitor persistency reporting to identify and understand any increase in climate risk drivers * This applies to the whole portfolio (heritage and open business).
GHG EMISSIONS Within Table 1 of the Streamlined and Energy Consumption Report (‘SECR’) overleaf, we have included GHG emissions disclosures for Scopes 1 and 2 (operations) and selected Scope 3 (tenanted properties, business travel and home-working emissions).
The Science Based Target Initiative (‘SBTi’) framework will be used to validate the delivery of our ambition to pursue a 1.5°C aligned emissions reduction target. This will involve setting specific science based targets for our net-zero carbon targets and milestones.
Scopes 1 and 2 – Mandatory carbon footprint disclosure 8,178 14,978 7,905 17,255
ENERGY INTENSITY METRICS As shown above in Table 2, Phoenix Group’s Operations Intensity Metrics detail carbon emissions per floor area (‘m2’) and per full-time equivalent employee (‘FTE’) in occupied premises. The intensity for both m2 and FTE has decreased from 2019 to 2020, largely driven by the move to home-working for most of the Group’s employees as a result of COVID-19.
THE GROUP’S RISK MANAGEMENT FRAMEWORK The Group’s Risk Management Framework (‘RMF’) embeds proactive and effective risk management across the Group. It seeks to ensure that all material risks are identified, assessed, controlled, monitored, managed within approved risk appetites and reported through agreed governance routes in line with delegated authorities.
The nine components of the RMF are outlined in the diagram, with further information given in the sections that follow. Following the acquisition of ReAssure Group plc, the Group is working to complete the integration of the Phoenix RMF into ReAssure in the second half of 2021.
The well-being of colleagues remains critical, particularly as lockdown measures continue, compounded by periods of home schooling and caring responsibilities. The Group has managed this carefully since the start of the pandemic through crossorganisational collaboration and health and well-being support.
HSBC: The Group is continuing its plan to transfer all fundaccounting services to HSBC, enlarging and enhancing our current partnership.
The Group continues to effectively develop the partnership with TCS as they support our strategic deliverables. Most notably, in 2020 the blueprint for Phase 3 of the Group’s Standard Life Assurance transition activity was finalised and signed with TCS; this was a significant milestone in progressing transition activity. Other strategic activity involving both parties continues to be assessed for COVID-19 impacts with actions being taken to protect strategic and BAU activity.
There is a lack of clarity in relation to how the post-Brexit environment will impact former UK customers who are now resident in EEA countries. The Group is working with UK regulators who are, in turn, working with European regulators, to better understand the situation. The Group view is that it planned appropriately and as a result has communicated, and will continue to communicate with these customers to ensure they are fully aware of any potential implications.
Potential areas of uncertainty include the transition of the Standard Life Assurance and ReAssure businesses into the Group and the expanded strategic partnership with TCS.
COMPLIANCE WITH THE UK CORPORATE GOVERNANCE CODE IN 2020 The following report illustrates how Phoenix Group Holdings plc has applied the principles and complied with the provisions of the 2018 UK Corporate Governance Code (the ‘Code’) during 2020. It is the Board’s view that during 2020 the Company has been fully compliant with the principles and provisions set out in the Code. The following schedule provides a summary of where this report illustrates Phoenix Group Holdings plc’s compliance with the Code.
COMMITTED TO THE HIGHEST STANDARDS OF GOVERNANCE The Phoenix Group Holdings Board focuses on the Group’s strategy and performance, with input from its Board Committees.
• COVID-19 monitoring and stress and scenario testing • Approval of the Group’s Risk Appetite Statement,
0–3 years 46% 3–6 years 39% 6–9 years or more 15%
Appointed: 23 July 2020 “I was privileged to become a Non-Executive Director of Phoenix in July 2020. The Group’s vision, purpose and mission strongly resonate with me and I am excited to work to materialise them, to which I believe my experience in the global insurance industry will be devoted. I have worked for MS&AD, an insurance group operating globally, where I held various executive and director positions including at its UK businesses”
• drives entity-wide financial performance, solvency and capital efficiency with due regard to regulatory requirements, risk appetite and risk strategy.
The Board Sustainability Committee receives regular MI and updates on progress against the sustainability strategy through the Group’s ExCo
Feedback from these sessions was provided to the Board, which allowed the Board to gain additional perspective and insights on the impact of the pandemic on colleagues and their well-being; in assessing change capability and capacity, and the evolution of the Group’s strategy as a sustainable and growing business underpinned by a clear purpose to help people secure a lifetime of possibilities. A key theme in relation to the Group’s response to the pandemic and in evaluating options for the future world of work was the need to adapt from the cultural ‘ecosystems’ around physical offices and finding ways to replicate this in an entirely virtual or hybrid environment.
“ The speed with which the Group was able to transition to a fully remote working environment and adapt to the continuing challenges from COVID-19 whilst maintaining very high levels of customer satisfaction is a tribute to the extraordinary commitment shown by our colleagues. I have also been struck by the enthusiasm and passion from Colleagues in support of our internal and external communities, including the establishment of Enable, a network which focuses on Disability.”
During the year, the Board has applied section 172 of the Companies Act 2006 in a manner consistent with the Group’s purpose, values and strategic priorities (detailed on page 94 of this Corporate Governance report) having due regard to the Group’s ongoing regulatory responsibilities as a financial services operation.
OUTCOME Following due consideration of all the matters set out in section 172, the Board determined that the payment of the 2019 Final Dividend was consistent with the Group’s risk appetite having assessed the likely impact on the business and its stakeholders (including in the long term).
Risk Management Framework and considered the appropriateness of the Group’s overall risk appetite statements including the addition of a new sustainability risk appetite statement
• Received a number of updates and briefing sessions which covered issues such as operational risk in light of COVID-19; the consideration of emerging risks and opportunities that could impact the Group post COVID-19; and the Recovery and Resolution plan.
• Reviewed the final accounting adopted in the 2020 consolidated financial statements for the acquisition of the ReAssure businesses, including the valuation of tangible net assets, the valuation of intangibles and other acquisition related balances, supported by reports from management and the external auditor.
The Audit Committee considered throughout 2020 the effectiveness, engagement and remuneration of the current external auditors. These reviews and presentations supported the recommendation of the reappointment of Ernst & Young (‘EY’), which was approved by the Board and subsequently approved by shareholders at the May 2020 AGM – see ‘Assessment of the effectiveness of the external audit process’ and ‘Auditor’s Appointment’ on page 119.
• Reviewed and approved updates to the Group Tax policy, Group Tax strategy, Group External Auditor policy and the Group Liquidity & Funding policy.
(Executive Director role) • Board and senior executive succession planning • Talent, capability, diversity and inclusion reviews • Review of Directors’ time commitment to Phoenix
The Board’s policy on diversity is as follows: • The Board promotes the enhancement of diversity, including gender, as a consideration when recruiting new Directors.
“ I am very pleased with the successful outcome from the Nomination Committee’s work on the succession planning for the vital executive positions of Group Chief Executive Officer and Group Chief Financial Officer, resulting in the appointments of Andy Briggs to succeed Clive Bannister, and Rakesh Thakrar to succeed Jim McConville, both occurring during 2020.”
KEY REMUNERATION COMMITTEE ACTIVITIES IN 2020 • Group CEO and CFO
No changes are proposed to the LTIP metrics for 2021. The Committee is of the view that these remain well aligned with the Group’s long-term strategy. As detailed on page 142, the underpin relating to the formulaic outturn of the LTIP has been revised to better reflect the extent to which the Group has operated within its stated Risk Appetite
The Strategic Scorecard represents 20% of the overall incentive opportunity with the Corporate (financial and customer) measures representing 80%. The table below details the outcome against targets of the Strategic Scorecard together with respective weightings for the Group CEO and Group CFO .
Our people 20% 10% Engagement survey results >= 65% 75% 95% Excellent progress in the year, especially employee engagement during a difficult period due to COVID-19. Allowing for contracted hires who will join the business in early 2021, promising progress has been made towards diversity targets with work still to do to meet the Group’s ambitions in this regard.
Standard Life 10% 10% Tracking to deliver 2019/21 cost synergies £105m £105m 75% The Group remains on target to meet or exceed publicly stated synergy targets.
The above targets were all measured over the period of three financial years 1 January 2018 to 31 December 2020.
James McConville, who resigned from the Board on 15 May 2020, will receive shares in respect of the 2018 LTIP. The final number of shares and value at vesting will be disclosed in the 2021 DRR.
3 The 2017 LTIP award vested at 68.5% of maximum. The 2018 LTIP award vested at 99.9% of maximum. 4 All LTIP awards are now subject to a holding period so that any LTIP awards for which the performance vesting requirements are satisfied will not be released for a further two years from the third anniversary of the original award date.
LTIP TARGETS The performance conditions for the 2018, 2019 and 2020 awards are set out below. These targets now reflect adjustments made following the acquisition of ReAssure in July 2020 and are described below. The adjustments were made in line with the Committee’s established principles for target setting in the event of an acquisition.
The initial three-year vesting period will run to the three-year anniversary of the making of the LTIP awards. At this time, the performance conditions will be determined.
1 Clive Bannister left the role of Group Chief Executive Officer on 10 March 2020 therefore the above information has been annualised as per his time in the role. 2 James McConville left the role of Group Chief Financial Officer on 15 May 2020 therefore the above information has been annualised as per his time in the role.
REMUNERATION COMMITTEE GOVERNANCE The terms of reference of the Committee are available at www.thephoenixgroup.com. The main determinations of the Committee in 2020 in respect of the application of the Remuneration Policy are summarised in the Committee Chairman’s letter to shareholders at the start of the Remuneration Report.
Under the Committee’s Terms of Reference, the Committee meets at least twice a year but more frequently if required. During 2020, eight Committee meetings were held and details of attendance at meetings are set out in the Corporate Governance Report on page 112.
* This section does not form part of the Remuneration Policy and is for information only.
CFO and 275% of base salary for CEO. Sharesave and SIP valued on the same basis as in the on-target row.
Maximum • The formal limit under the LTIP is 300% of base salary per annum (and 400% per annum in exceptional cases). • The Remuneration Committee’s practice is to make LTIP awards to Executive Directors each year over shares with a value
Performance measures • Consistent with normal practice, such awards are not subject to performance conditions.
• All-employee share plans – the Committee considers it is important for all employees to have the opportunity to become shareholders in the Company. The Company offers two HMRC tax advantaged arrangements in which all UK employees can participate and acquire shares on a discounted and tax advantaged basis (Sharesave and SIP), and equivalent arrangements in foreign jurisdictions (including on a tax advantaged basis permitted under local laws). In addition, selected individuals may receive ad-hoc share awards under the Chairman’s Award programme in recognition of exceptional commercial outcomes and is contingent on continued employment.
5. Discretions reserved in operating incentive plans The Remuneration Committee will operate the AIP, DBSS and LTIP according to their respective rules and the above Remuneration Policy table. The Remuneration Committee retains certain discretions, consistent with market practice, in relation to the operation and administration of these plans including: • (as described in the Remuneration Policy table) the determination of performance measures and targets and resulting vesting and pay-out levels; • (as described in the Remuneration Policy table) the ability to adjust performance measures and targets to reflect events and/or to ensure the performance measures and targets operate as originally intended; • (as described in the Termination Policy) determination of the treatment of individuals who leave employment, based on the rules of the incentive plans, and the treatment of the incentive plans on exceptional events, such as a change of control of the Company; and
Group plc; and • shares issued under the Company’s Sharesave Scheme.
The Directors present their report for the year ended 31 December 2020 Phoenix Group Holdings plc is incorporated in the United Kingdom (registered no. 11606773) and has a Premium Listing on the London Stock Exchange.
The powers of the Directors are determined by the Companies Act 2006, the provisions of the Company’s Articles and by any valid directions given by shareholders by way of special resolution.
• Greenhouse gas emissions – all disclosures concerning the Group’s greenhouse emissions are contained in the Environmental Report forming part of the Strategic Report on pages 67 and 76 to 78.
Details of fees paid to EY during 2020 for audit and non-audit work are disclosed in note C4 to the IFRS consolidated financial statements.
All of the Company’s employee share and incentive plans contain provisions relating to a change of control. Outstanding awards and options would normally vest and become exercisable on a change of control, subject to the satisfaction of any performance conditions and pro rata reduction as may be applicable under the rules of the employee share incentive plans.
Apart from the aforementioned, there are a number of agreements that take effect, alter or terminate upon a change of control of the Company, such as commercial contracts. None is considered to be significant in terms of their potential impact on the business of the Group.
Parent participation in any placing of a subsidiary Not applicable 10 Contracts of significance Not applicable
The Strategic Report and the Directors’ Report were approved by the Board of Directors on 7 March 2021.
Reporting Standards adopted pursuant to Regulation (EC) No. 1606/2002 as it applies in the European Union and as regards the parent company financial statements, as applied in accordance with section 408 of the Companies Act 2006.
We have split the risks relating to the valuation of insurance contract liabilities into the following component parts: • actuarial assumptions; • actuarial modelling; and • data.
• obtained the outputs of the Standard Life Assurance Limited model migration programme. For each of the modelling differences identified as part of this programme we challenged management’s assessment of whether they represented an error in the current approach or a refinement leading to a change in estimate; • assessed the results of management’s analysis of movements in insurance contract liabilities to corroborate that the actual impact of changes to models was consistent with that expected when the model change was implemented; and
The insurance contract data held on policy administration systems (‘the policyholder data’) is a key input into the valuation process. The valuation of insurance contract liabilities is therefore reliant upon the accuracy and completeness of the data used.
Based on our procedures performed on the recoverability of intangible assets arising from the acquisition of Standard Life, we are satisfied that there is no impairment necessary as at 31 December 2020.
Earnings per ordinary share Basic (pence per share) B3 91.8p 8.7p Diluted (pence per share) B3 91.5p 8.6p 177Phoenix Group Holdings plc Annual Report & Accounts 2020
Other comprehensive income/(expense) for the year – – – 33 – 50 (58) 25 – – 25
A3.7 Control and consolidation The Group has invested in a number of collective investment schemes and other types of investment where judgement is applied in determining whether the Group controls the activities of these entities. These entities are typically structured in such a way that owning the majority of the voting rights is not the conclusive factor in the determination of control in line with the requirements of IFRS 10 Consolidated Financial Statements. The control assessment therefore involves a number of further considerations such as whether the Group has a unilateral power of veto in general meetings and whether the existence of other agreements restrict the Group from being able to influence the activities. Further details of these judgements are given in note H1.
• Interest Rate Benchmark Reform – Phase 2 (Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16) (1 January 2021). The changes introduced in Phase 2 of the Interest Rate Benchmark Reform project relate to the modification of financial assets, financial liabilities and lease liabilities (introducing a practical expedient for modifications required by the IBOR reform), specific hedge accounting requirements to ensure hedge accounting is not discontinued solely because of the IBOR reform, and disclosure requirements applying IFRS 7 to accompany the amendments regarding modifications and hedge accounting. The IASB also amended IFRS 4 to require insurers that apply the temporary exemption from IFRS 9 to apply the amendments in accounting for modifications directly required by IBOR reform. There is not expected to be an impact for the Group from implementing these amendments but a review will be undertaken in 2021 to confirm this.
• IFRS 3 Business Combinations (1 January 2022): The amendments update a reference in IFRS 3 to the Conceptual Framework for Financial Reporting without changing the accounting requirements for business combinations. There are no impacts from this amendment.
The net positive variance on owners’ funds of £148 million (2019: £13 million positive) is principally driven by gains on interest rate hedging positions held within the shareholder funds of the life companies, together with gains arising on the hedge entered into on announcement of the ReAssure acquisition to protect the Group’s exposure to equity risk in the period prior to completion. The net positive variance also includes gains on the close out of foreign currency swaps held by the holding companies to hedge exposure of future life company profits and non-sterling denominated shareholder borrowings to foreign currency movements. The prior year result included gains on foreign currency swaps held by the holding companies to hedge exposure of future life company profits to movements in exchange rates.
Diluted earnings per share are calculated based on the potential future shares in issue assuming the conversion of all potentially dilutive ordinary shares. The weighted average number of ordinary shares in issue is adjusted to assume conversion of dilutive share awards granted to employees.
Profit/(loss) before the tax attributable to owners 1,199 (191) 1,008 (64) 944
On 6 March 2020, the Board recommended a final dividend of 23.4p per share in respect of the year ended 31 December 2019. The dividend was approved at the Group’s Annual General Meeting, which was held on 15 May 2020. The dividend amounted to £169 million and was paid on 19 May 2020.
No services were provided by the Company’s auditors to the Group’s pension schemes in either 2020 or 2019.
Attributable to: C6. Tax charge Income tax comprises current and deferred tax. Income tax is recognised in the consolidated income statement except to the extent that it relates to items recognised in the statement of consolidated comprehensive income or the statement of consolidated changes in equity, in which case it is recognised in these statements.
Movements in issued share capital during the year: Shares in issue at 1 January 721,514,944 72,151,494
The Tier 1 Notes have no fixed maturity date and interest is payable only at the sole and absolute discretion of the Company; accordingly the Tier 1 Notes meet the definition of equity for financial reporting purposes and are disclosed as such in the consolidated financial statements. If an 199Phoenix Group Holdings plc Annual Report & Accounts 2020
The Group’s interest in SLPET is held in the with-profit and unit-linked funds of the Group’s life companies. Therefore, the shareholder exposure to the results of SLPET is limited to the impact of those results on the shareholder share of distributed profits of the relevant fund.
Designated upon initial recognition: Net asset value attributable to unitholders1 3,791 – 3,791
Level 2 financial instruments Financial instruments traded in active markets with less depth or wider bid-ask spreads which do not meet the classification as Level 1 inputs, are classified as Level 2. The fair values of financial instruments not traded in active markets are determined using broker quotes or valuation techniques with observable market inputs. Financial instruments valued using broker quotes are classified at Level 2, only where there is a sufficient range of available quotes. The fair value of over the counter derivatives is estimated using pricing models or discounted cash flow techniques. Collective investment schemes where the underlying assets are not priced using active market prices are determined to be Level 2 instruments. Where pricing models are used, inputs are based on market related data at the period end. Where discounted cash flows are used, estimated future cash flows are based on management’s best estimates and the discount rate used is a market related rate for a similar instrument.
Total financial liabilities measured at fair value 3,910 165,826 246 169,982
Financial assets designated at FVTPL upon initial recognition: Collective investment schemes 1 –
k. On 4 June 2020, the Company issued US $500 million fixed rate reset callable Tier 2 notes (the ‘Fixed Rate Reset Tier 2 Notes’) which are unsecured and subordinated. The Fixed Rate Reset Tier 2 notes have a maturity date of 4 September 2031 with an optional issuer par call right on any day in the three month period up to and including 4 September 2026. The Fixed Rate Reset Tier 2 Notes bear interest on the principal amount at a fixed rate of 4.75% per annum up to the interest rate reset date of 4 September 2026. If the Fixed Rate Reset Tier 2 Notes are not redeemed before that date, the interest rate resets to the sum of the applicable CMT rate (based on the prevailing five year US Treasury yield) plus a margin of 4.276%, being the initial credit spread used in pricing the notes. Interest is payable on the Fixed Rate Reset Tier 2 Notes semiannually in arrears on 4 March and 4 September each year.
With-profit business and non-participating business within the withprofit funds are exposed to interest rate risk as guaranteed liabilities are valued relative to market interest rates and investments include fixed interest securities and derivatives. For unsupported with-profit business the profit or loss arising from mismatches between such assets and liabilities is largely offset by increased or reduced discretionary policyholder benefits dependent on the existence of policyholder guarantees. The contribution of unsupported participating business to the Group result is largely limited to the shareholders’ share of the declared annual bonus. The contribution of the supported participating business to the Group result is determined by the shareholders’ interest in any change in value in the capital advanced to the with-profit funds.
A 10% increase in equity prices, with all other variables held constant, would result in a decrease in profits after tax in respect of a full financial year, and in equity, of £263 million (2019: £200 million).
Forecasts are prepared regularly to predict required liquidity levels over both the short and medium-term allowing management to respond appropriately to changes in circumstances. These forecasts incorporate an estimated view of the potential economic downturn that is anticipated to be experienced due to the impacts of COVID19. Further details are included within the Viability Statement on page 90.
• reinsurance recoveries are measured on a basis that is consistent with the valuation of the liability to policyholders to which the reinsurance applies.
Expense inflation Expenses are assumed to increase at either the rate of increase in the Retail Price Index (‘RPI’), or a rate derived from the UK inflation swaps curve, plus fixed margins in accordance with the various management service agreements (‘MSAs’) the Group has in place with outsource partners. For with-profit business the rate of RPI inflation is determined within each stochastic scenario. For other business it is based on the Bank of England inflation spot curve. For MSAs with contractual increases set by reference to national average earnings inflation, this is approximated as RPI inflation or RPI inflation plus 1%. In instances in which inflation risk is not mitigated, a further margin for adverse deviations may then be added to the rate of expense inflation.
The movement in the net defined benefit asset/liability is analysed between the service cost, past service cost, curtailments and settlements (all recognised within administrative expenses in the consolidated income statement), the net interest cost on the net defined benefit asset/liability, including any reimbursement assets (recognised within net investment income in the consolidated income statement), remeasurements of the net defined benefit asset/liability (recognised in other comprehensive income) and employer contributions.
The Commitment Agreement replaced the 2012 Pensions Agreement, which had previously included provisions covering contribution payments, additional contributions payable should agreed funding targets not be met, share charge over certain Group entities and covenant tests. The main terms of the Commitment Agreement are outlined below.
Defined benefit obligation The calculation of the defined benefit obligation can be allocated to the scheme’s members as follows: • Deferred scheme members: 40% (2019: 40%); and
Under the terms of the 2013 Funding Agreement dated 28 June 2013, the funding position of the Abbey Life Scheme will be assessed as at 31 March 2021. A payment will be made from the 2013 Charged Account to the Abbey Life Scheme if the results of the assessment reveal a shortfall calculated in accordance with the terms of the 2013 Funding Agreement. The amount of the payment will be the lower of the amount of the shortfall and the amount held in the 2013 Charged Account.
Provision for tax on the economic surplus available as a refund £m
The weighted average duration of the defined benefit obligation at 31 December 2020 is 21 years.
Goodwill is measured on initial recognition at cost. Following initial recognition, goodwill is stated at cost less any accumulated impairment losses. Goodwill is not amortised but is tested for impairment annually or when there is evidence of possible impairment. For impairment testing, goodwill is allocated to relevant cash generating units. Goodwill is impaired when the recoverable amount is less than the carrying value.
G. OTHER STATEMENT OF CONSOLIDATED FINANCIAL POSITION NOTES continued G4. Investment property continued Therefore, the key assumptions used in the valuation of the reversionary interests are the interest discount rate and the mortality assumption. The interest discount rate was 5%.
The FCA’s review has now completed and SLAL received a final notice in July 2019 which imposed a financial penalty on the entity of £31 million. This was subsequently settled in 2019. During the year, £3 million of the provision was utilised and the remaining £3 million provision was released.
There is an ongoing tax dispute with HMRC in relation to the tax treatment of an asset formerly held by Guardian Assurance Limited (before the business was transferred to ReAssure Limited). The current tax liability includes an accrual for the total tax under dispute on the basis that there is sufficient risk that the tax treatment will not be accepted.
H. INTERESTS IN SUBSIDIARIES AND ASSOCIATES continued H1. Subsidiaries continued Directly attributable acquisition costs are included within administrative expenses, except for acquisitions undertaken prior to 2010 when they are included within the cost of the acquisition. Costs directly related to the issuing of debt or equity securities are included within the initial carrying amount of debt or equity securities where these are not carried at fair value. Intra-group balances and income and expenses arising from intra-group transactions are eliminated in preparing the consolidated financial statements.
Phoenix Life Assurance Europe DAC (dormant company) Dublin9 Ordinary Shares 100.00%
Standard Life Investments Global SICAV Global High Yield Bond Fund Luxembourg29 SICAV, sub fund 86.09%
UK Commercial Property Nominee Limited (property investment company) Guernsey13 Ordinary Shares 44.59%
Standard Life UK Investments Real Estate Income Feeder Fund London17 Unit Trust 46.04%
Aberdeen Standard Liquidity Fund (Lux) Euro Fund Luxembourg33 UCITS, sub fund 43.54%
Amundi UCITS Funds − Amundi Global Multi-Factor Equity Fund C Cap Luxembourg39 UCITS, sub fund 59.73%
AQR UCITS Funds – AQR Global Risk Parity C5 GBP (Acc) USA23 UCITS, sub fund 45.63%
AB SICAV I − Emerging Markets Low Volatility Equity Portfolio Luxembourg29 SICAV, sub fund 71.54%
Legal & General UK Special Situations Trust London44 Unit Trust 47.97%
Issue of ordinary share capital, net of associated commissions and expenses – 2 – – 2 – 2
The Company has taken advantage of the exemption in section 408 of the Companies Act 2006 not to present its own income statement in these financial statements. Profit attributable to owners for the year ended 31 December 2020 was £256 million (2019: £1,643 million).
i. On 4 June 2020, the Company issued US $500 million fixed rate reset callable Tier 2 notes (the ‘Fixed Rate Reset Tier 2 Notes’) which are unsecured and subordinated. The Fixed Rate Reset Tier 2 notes have a maturity date of 4 September 2031 with an optional issuer par call right on any day in the three month period up to and including 4 September 2026. The Fixed Rate Reset Tier 2 Notes bear interest on the principal amount at a fixed rate of 4.75% per annum up to the interest rate reset date of 4 September 2026. If the Fixed Rate Reset Tier 2 Notes are not redeemed before that date, the interest rate resets to the sum of the applicable CMT rate (based on the prevailing five year US Treasury yield) plus a margin of 4.276%, being the initial credit spread used in pricing the notes. Interest is payable on the Fixed Rate Reset Tier 2 Notes semi-annually in arrears on 4 March and 4 September each year.
For the purposes of the additional fair value disclosures for liabilities recognised at amortised cost, all borrowings have been categorised as Level 2 financial instruments.
All loans and deposit balances are due from Group entities and are measured at amortised cost using the effective interest method. The fair value of these loans and deposits are also disclosed.
Cash and cash equivalents − The Company’s cash and cash equivalents are held with bank and financial institution counterparties, which have investment grade ‘A’ credit ratings. The Company considers that its cash and cash equivalents have low credit risk based on the external credit ratings of the counterparties and there being no history of default, and therefore the impact to the net carrying amount shown in the table above is not material.
Amounts due from related parties at the end of the year: £m
Debt securities − gilts and foreign government bonds 6,999 386 22,295 14,458 44,138
Tier 3 items include the Tier 3 subordinated notes of £0.7 billion (2019: £0.4 billion) and the deferred tax asset of £0.1 billion (2019: £0.1 billion).
Represents total Eligible Own Funds divided by the Solvency Capital Requirements (‘SCR’), adjusted to a shareholder view through the exclusion of amounts relating to those ring-fenced with-profit funds and Group pension schemes whose Own Funds exceed their SCR.
SHAREHOLDER INFORMATION ANNUAL GENERAL MEETING Our Annual General Meeting (‘AGM’) will be held on 14 May 2021 at 10am.
The voting results for our 2021 AGM, including proxy votes and votes withheld, will be available on the Group’s website shortly after the meeting.
Registrar details Computershare Investor Services PLC The Pavilions, Bridgwater Road, Bristol, BS99 6ZZ Shareholder helpline number +44 (0) 370 702 0181 Fax number +44 (0) 370 703 6116 www.investorcentre.co.uk/contactus
ORDINARY SHARES – 2020 FINAL DIVIDEND Ex-dividend date 1 April 2021
GHGs are atmospheric gases that absorb and emit radiation within the thermal infrared range and that contribute to the greenhouse effect and global climate change
Solvency II A new regime for the prudential regulation of European insurance companies that came into force on 1 January 2016