STRATEGIC REPORT Group at a Glance 02 Chairman’s Statement 04 Group Chief Executive Officer’s Report
The Marketplace 11 Operating Structure 12 Our Key Products 13 Our Business Model 14 Cash Generation Process 16 Our Strategy and KPIs 18 Business Review 26 Cash Generation 26 Capital Management 28 IFRS Results 30 Risk Management 32 Stakeholder Engagement 38
Restructuring Simplifying the Group’s operating structure through life company consolidation and fund mergers reduces complexity and releases capital.
LOOKING AHEAD The proposed Standard Life Assurance transaction is testament to the current re-shaping of the UK life insurance industry. Economic and regulatory pressures have resulted in the break-up of the traditional life insurance model, with certain players refocusing their efforts on asset management and others concentrating on specific areas of new business whilst divesting legacy portfolios. This development was also discussed in the independent ‘Meaning of Life 2’ report published last November by the Pensions Institute, which Phoenix is proud to have sponsored.
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Enhanced oversight of the business and its outsource arrangements was put in place quickly, including new governance and management structures. This has been particularly important given the ongoing enforcement action relating to Abbey Life that is being undertaken by the FCA.
Fundamental to our strength as a team is the continued ability to draw on our established succession plans for key resourcing decisions as they arise. Reviewing and developing succession remains a regular part of our corporate governance and management discipline.
Approval granted to incorporate Abbey Life into the Group’s Internal Model
OUTSOURCE PARTNERS The management services companies manage relationships with the outsource partners. Without further acquisitions, the number of policies declines over time and the cost of our operations as a proportion of policies will increase. This risk is managed by paying a fixed price per policy to our outsource partners for policy administration services, which reduces this fixed cost element of our operations and converts it to a variable cost structure.
Reduced capital requirements As closed funds no longer actively sell new life or pensions products, the number of policies held within the funds will reduce over time. The related Solvency Capital Requirements will also run-off over a similar period
Management actions These can either increase Own Funds or reduce capital requirements
– Explore investment opportunities in the bulk purchase annuity market as a complementary source of annuity back books.
KEY INITIATIVES AND PROGRESS IN 2017 – Incorporation of the AXA Wealth businesses into the Group’s Internal Model in March delivered capital synergies arising from the diversification of AXA Wealth’s mortality risk with the Group’s existing longevity risk.
– Additional diversification benefits arose on completion of the Part VII transfer of the AXA Wealth business into Phoenix Life Limited, with an effective date of September.
PRIORITIES FOR 2018 – Complete Part VII transfer of Abbey Life into Phoenix Life Limited.
WHY IS IT IMPORTANT? The Shareholder Capital Coverage Ratio demonstrates the extent to which shareholders’ eligible Own Funds cover the Solvency Capital Requirements.
The Group has reviewed its actuarial assumptions to reflect the slow down of mortality improvements experienced in the industry, which has had a favourable impact on the results. This has been offset by changes to the Group’s expectations of persistency for products with valuable guarantees given the continued low interest rate environment and an increase in people retiring later. Positive expense assumption changes as a result of operational synergies, together with the delivery of management actions has resulted in a positive impact on the Group’s operating profit.
DEBT REPAYMENTS AND SHAREHOLDER DIVIDEND External debt repayments of £1,053 million comprise full settlement of the £850 million revolving credit facility balance outstanding at 31 December 2016 and repayment of £178 million of the £300 million senior bonds which were redeemed at a premium of £25 million.
The increase includes surplus generation and reduction in capital requirements of £0.2 billion over the period. Management actions undertaken, including reductions in expenses from operating synergies and the impact of strategic asset allocation and hedging activities, increased the surplus by £0.4 billion.
Investment return variances and economic assumption changes on long-term business (6) (207)
Finance costs have increased by £14 million, comprising a £8 million decrease in bank finance costs driven by the repayment of bank debt; and a £22 million increase in other finance costs driven by hybrid debt issuances in the year, together with the impacts of the acceleration of deferred issue cost recognition on senior debt repaid in the year.
Read more on page 43 5.6 million policyholders with £74 billion of assets held by the Group’s life companies. Key products include with-profit, unit-linked, non-profit (annuities) and non-profit (protection).
The Group has a zero tolerance towards bribery and corruption in all its forms and adheres to the 2010 Bribery Act. Service Providers are advised of and engaged in the zero tolerance approach to bribery and corruption and are expected to comply with Phoenix’s minimum control standards.
Phoenix has circa 800 suppliers of which 16 are considered the most Strategic and Critical Service Providers¹ representing circa 70% of total spend.
EXPERIENCE Kory Sorenson is currently a Non-Executive Director and Chairman of the Audit Committee of SCOR SE, and a Non-Executive Director of Pernod Ricard SA, a member of the Supervisory Board of Uniqa Insurance Group AG, a member of Supervisory Board of the privately-owned Bank Gutmann AG and Non-Executive Director of Aviva Insurance Limited (from which Ms Sorenson has resigned with effect from 31 March 2018). Ms Sorenson has over 25 years of experience in the financial services sector, most of which has been focused on insurance and banking. She was Managing Director, Head of Insurance Capital Markets of Barclays Capital and held senior positions in the financial institutions divisions of Credit Suisse, Lehman Brothers and Morgan Stanley. She began her career in the finance department of Total SA.
– Leads the development of the Group’s strategy for agreement by the Board
– Provides guidance and support on all HR matters to the Group Chief Executive Officer, ExCo and the Group Board and Remuneration Committee
– Leads the development and delivery of the Phoenix Life business strategy, including the continued integration of life businesses
The Board considers that the following Directors are independent: Alastair Barbour, Ian Cormack, Karen Green, Wendy Mayall, John Pollock, Belinda Richards, Nicholas Shott and Kory Sorenson. The Board has considered the criteria proposed by the Code in assessing the independence of the Directors.
Changes during 2017: – John Pollock was appointed to the Committee with effect from 11 May 2017.
– Considering and approving the remit of the Internal Audit Function and reviewing its effectiveness.
– Reviewed the internal audit control environment opinion which included Internal Audit’s view of the risk management framework across the Group.
– Pension assumptions for use in the IAS 19 Employee Benefits valuations were reviewed and approved by the Audit Committee prior to the finalisation of the valuation reports.
Viability Statement – The Audit Committee reviewed the process to support, and the contents of, the Viability Statement. The Committee concluded that the period covered by the Viability Statement should continue to be five years to align it to the Group’s strategic plan.
Changes during 2017: – David Woods was Chair of the Committee up to his resignation from the Board on 11 May 2017. – John Pollock was appointed Chair of the Committee with effect from 11 May 2017. – Belinda Richards was appointed to the Committee on 1 October 2017.
REVIEW OF SYSTEM OF INTERNAL CONTROLS The Code requires Directors to review the effectiveness of the Company’s risk management and internal control systems which includes financial, operational and compliance controls. The Board has overall responsibility for the Group’s risk management and internal control systems and for reviewing their effectiveness. The Group’s systems of internal controls are designed to manage rather than eliminate the risk of failure to achieve business objectives and can provide only reasonable and not absolute assurance against material misstatement or loss. The Board’s review of the period covered by this report, which was undertaken with the assistance of the Audit and Risk Committees, was completed on 14 March 2018. Where any significant weaknesses were identified, corrective actions have been taken, or are being taken and monitored.
– Further improved Financial Ombudsman Service overturn rate to 16.7%, well below the industry benchmarks.
– Benefits measured as benefits paid in 2017 as set out in the Single Figure Table.
– LTIP: consists of the threshold level of vesting (50% of base salary). In addition, the potential value of Sharesave and Share Incentive Plan (‘SIP’) participation is also recognised.
SHARE-BASED AWARDS As at 31 December 2017, Directors’ interests under long-term share-based arrangements were as follows: LTIP
3 Gains of Directors from share options exercised and vesting shares under the LTIP in 2017 were £2,533,277 (2016: £1,121,682). Clive Bannister’s gain was £1,136,810 arising from an LTIP award exercised on 29 March 2017 at a share price of £7.744097; James McConville’s gain totalled £1,396,467 arising from an LTIP award exercised on 5 January 2017 at a share price of £7.532102 (£681,919) and an LTIP award exercised on 29 March 2017 at a share price of £7.744097 (£714,548).
DIRECTORS’ INTERESTS The number of shares and share plan interests held by each Director are shown below: Name
– Share Incentive Plan (‘SIP’) – the Remuneration Committee has the facility to allow individuals to have the opportunity to purchase, out of their pre-tax salary, shares in the Company and receive up to two matching shares for every purchased share. Maximum saving is £150 each month (or up to such level as permitted by the Company in line with HMRC legislation). SIP also has the facility to allow for reinvestment of dividends in further shares, or the award of additional free shares (up to the limits as permitted by HMRC legislation).
– For the avoidance of doubt, such buy-out awards are not subject to a formal cap.
– A new Non-Executive Director would be recruited on the terms explained in the Remuneration Policy for such Directors.
CONSIDERATION OF SHAREHOLDERS’ VIEWS Each year the Remuneration Committee takes into account the approval levels of remuneration-related matters at our AGM in determining that the current Remuneration Policy remains appropriate for the Company.
At 31 December 2017, the issued ordinary share capital totalled 393,232,644. Subsequently, 18,792 ordinary shares have been issued in 2018 in connection with the Company’s Sharesave Scheme to bring the total in issue to 393,251,436 at the date of this report.
In accordance with the UK Corporate Governance Code, Directors must stand for re-election annually. The Board of Directors will be unanimously recommending that all of the Directors, except for Ian Cormack who is standing down from the Board, should be put forward for election/reelection at the forthcoming AGM to be held on 2 May 2018.
DISCLOSURES UNDER LISTING RULE 9.8.4R For the purposes of Listing Rule 9.8.4C, the information required to be disclosed under Listing Rule 9.8.4R can be found within the following sections of the Report and Accounts: Section Requirement Location 1 Statement of interest capitalised
– The statement of financial position as at 31 December 2017
– Related notes A1 to I8 to the consolidated financial statements
Details of the four components which were audited by component teams are set out below: Component Scope Auditor
During the course of our audit, we reassessed initial materiality and concluded that materiality assessed at planning stages of our audit remained appropriate.
Our opinion on the financial statements does not cover the other information and , except to the extent otherwise explicitly stated in this report, we do not express any form of assurance conclusion thereon.
In preparing the financial statements, the Directors are responsible for assessing the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Directors either intend to liquidate the Company or to cease operations, or have no realistic alternative but to do so.
The Group considers all relevant facts and circumstances in assessing whether it has power over an investee, including relevant activities, substantive and protective rights, voting rights and purpose and design of an investee. The Group re-assesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control. Further details about the consolidation of subsidiaries, including collective investment schemes, is included in note H1.
The application of these amendments has had no impact on the Group’s consolidated financial statements as the Group’s existing approach to assessing the sufficiency of future taxable profits is consistent with that required under the amended standard.
The Group has taken advantage of the temporary exemption granted to insurers in IFRS 4 Insurance Contracts from applying IFRS 9 until 1 January 2021 as a result of meeting the exemption criteria as at 31 December 2015. As at this date the Group’s activities were considered to be predominantly connected with insurance as the percentage of the total carrying amount of its liabilities in relation to insurance relative to the total carrying amount of all its liabilities was greater than 90%. There have been no changes to the activities of the Group that require this assessment to be re-performed. IFRS 9 will instead be implemented at the same time as the new insurance contracts standard (IFRS 17 Insurance Contracts). The Group expects to continue to value the majority of its financial assets as at fair value through profit or loss on initial recognition, so as to eliminate or reduce any potential accounting mismatch. When applying the exemption, IFRS 4 requires that a number of disclosures be made in 2018 to provide information to allow comparison with entities adopting the standard in 2018.
The Group calculates its basic earnings per share based on the present shares in issue using the earnings attributable to ordinary equity holders of the parent, divided by the weighted average number of ordinary shares in issue during the year.
B3.1 Basic earnings per share The result attributable to owners of the parent for the purposes of computing earnings per share has been calculated as set out below. This is after adjusting for the result attributable to non-controlling interests.
Administrative expenses are recognised in the consolidated income statement as incurred.
Derecognition of non-controlling interest following loss of control – (564) (564)
Total financial liabilities 32,922 31,177 1 These assets and liabilities have no expected settlement date.
Financial assets designated at fair value through profit or loss upon initial recognition: Fixed and variable rate income securities 146 8 281 (18) – (6) 411 5
E6.2 Financial risk analysis Transactions in financial instruments result in the Group assuming financial risks. These include credit risk, market risk and financial soundness risk. Each of these are described below, together with a summary of how the Group manages them.
The Group holds £5,640 million (2016: £6,253 million) of corporate bonds which are used to back annuity liabilities in non-profit funds. These annuity liabilities include an aggregate credit default provision of £225 million (2016: £322 million) to fund against the risk of default.
Capital management risk is defined as the failure of the Group, or one of its separately regulated subsidiaries, to maintain sufficient capital to provide appropriate security for policyholders and meet all regulatory capital requirements whilst not retaining unnecessary capital. The PLHL Group has exposure to capital management risk through the requirements of the Solvency II capital regime, as implemented by the PRA, to calculate regulatory capital adequacy at a Group level. The Group’s UK life subsidiaries have exposure to capital management risk through the Solvency II regulatory capital requirements mandated by the PRA at the solo level. The Group’s approach to managing capital management risk is described in detail in note I3.
A provision is recognised for onerous contracts when the expected benefits to be derived from the contracts are less than the related unavoidable costs. The unavoidable costs reflect the net cost of exiting the contract, which is the lower of the cost of fulfilling it and any compensation or penalties arising from failure to fulfil it.
The PGL Scheme is administered by a separate trustee company, PGL Pension Trustee Ltd. The trustee company is comprised of two representatives from the Group, three member nominated representatives and one independent trustee in accordance with the trustee company’s articles of association. The Trustee is required by law to act in the interest of all relevant beneficiaries and is responsible for the investment policy with regard to the assets plus the day to day administration of the benefits.
Administrative expenses (2) – – – (2) Past service costs – (3) – – (3) Included in profit or loss 74 (55) (8) – 11
On 30 June 2017, the Abbey Life Scheme was transferred from Abbey Life to Pearl Life Holdings Limited (‘PeLHL’), a fellow subsidiary. PeLHL assumed the scheme covenant together with all obligations of the scheme following implementation of the transfer. The Abbey Life Scheme is a registered occupational pension scheme, set up under Trust, and legally separate from the employer PeLHL. The scheme is administered by Abbey Life Trust Securities Limited (The Trustee), a corporate trustee. There are three Trustee Directors, one of whom is nominated by the scheme members and two of whom are appointed by PeLHL. The Trustee is responsible for administering the scheme in accordance with the Trust Deed and rules and pensions laws and regulations.
G. OTHER STATEMENT OF CONSOLIDATED FINANCIAL POSITION NOTES continued G6. PENSION SCHEMES continued G6.3 Abbey Life Staff Pension Scheme continued Summary of amounts recognised in the consolidated financial statements The amounts recognised in the consolidated financial statements are as follows: Fair value of scheme assets £m
Internally generated intangible assets are not capitalised and expenditure is reflected in the consolidated income statement in the year in which the expenditure is incurred.
On acquisition of AXA Wealth businesses (see note H2.1) – 6
As at 31 December 2017 the Group held 47.9% (2016: 47.9%) of the issued share capital of UKCPT and the value of this investment, measured at fair value, was £550 million (2016: £525 million). Summary financial information for UKCPT is shown below: 2017 £m 2016 £m
Pearl (Moor House 1) Limited (dormant company) Wythall1 Ordinary shares 100.00%
PUTM UK All-Share Index Unit Trust Wythall1 Authorised unit trust 99.96%
Ignis Strategic Solutions Funds plc – Fundamental Strategies Fund Republic of Ireland8 OEIC, sub fund 100.00%
Janus Henderson UK & Europe Funds – Janus Henderson Institutional UK Gilt Fund
Standard Life Investments – Sterling Liquidity Fund Dublin8 OEIC, sub fund 42.11%
The following information was relevant in the determination of the fair value of the 2013 to 2017 sharesave awards: sharesave sharesave 2015 sharesave 2014 sharesave 2013 sharesave
The weighted average fair value of options granted during the year was £4.75 (2016: £6.11).
Eligible Own Funds to cover the SCR are obtained after applying the prescribed Tiering limits and transferability restrictions to the Basic Own Funds.
I. OTHER NOTES continued Group capital resources – unaudited The Group capital resources is based on the Group’s pro forma Own Funds adjusted for shareholder borrowings as analysed below: Unaudited 2017 £bn
With effect from 31 January 2018 the central management, control and head office of the Company moved from Jersey to the UK. Phoenix Group Holdings is considered to be resident in the UK for tax purposes from this date.
Financial assets held by the non-controlling interest in consolidated collective investment schemes 1,012
Financial assets held by the non-controlling interest in consolidated collective investment schemes 931
PGH’s MCR at 31 December 2017 is £1.2 billion (2016: £1.3 billion) which is a sum of the underlying insurance companies’ MCRs.
Operating companies’ cash generation is not directly reconcilable to an equivalent GAAP measure (IFRS consolidated statement of cash flows) as it includes amounts that eliminate on consolidation. Further details of holding companies’ cash flows are included within the business review on page 27 and a breakdown of the Groups cash position by type of entity is provided in the additional life company asset disclosures note on page 191.
SCRIP DIVIDEND ALTERNATIVE The Company does not currently offer a scrip dividend alternative.
IFRS International Financial Reporting Standards – Accounting standards, interpretations and the framework adopted by the International Accounting Standards Board
Transitional Measures to Technical Provisions (’TMTP’) is an allowance, subject to the PRA’s approval, to apply a transitional deduction to technical provisions. The transitional deduction corresponds to the difference between net technical provisions calculated in accordance with Solvency II principals and net technical provisions calculated in accordance with the previous regime and is expected to decrease linearly over a period of 16 years starting from 1 January 2016 to 1 January 2032. TMTP is subject to a mandatory recalculation every two years or on the occurrence of certain defined events
Principal Place of business Phoenix Group Holdings Juxon House 100 St Paul’s Churchyard London EC4M 8BU