THIS OPERATING MODEL AND THE EXPERTISE OF OUR EMPLOYEES PROVIDE THE PLATFORM AND SKILLS TO SUCCEED IN OUR MARKET.
OUR CAPITAL POSITION AND SOLVENCY II The Group’s PLHL ICA surplus is calculated for Phoenix Life Holdings Limited (‘PLHL’), the same level at which we perform our IGD calculation. This is an assessment on an economic basis of the capital resources and requirements arising from the obligations and risks which exist outside the life companies. At 31 December 2014, our PLHL ICA surplus was estimated to be £0.7 billion, with headroom of £0.6 billion (2013: £1.2 billion surplus, £1.1 billion headroom). The reduction over the course of the year was driven by the repayment of Group debt and a strengthening of ICA stress assumptions related to longevity, credit and correlations coupled with the economic impact of falling yields.
– We continued to make progress in consolidating our investment fund accounting, unit pricing and custody arrangements from multiple providers to a single outsource partner, HSBC. Our investment fund accounting services have materially completed their migration to HSBC, streamlining our operations and increasing efficiency
Finally, the FCA announced a thematic review of the fair treatment of long-standing customers in life insurance as part of their 2014-2015 business plan. The FCA work is ongoing, but they have confirmed that the scope of the review will cover firms’ strategies with regard to their legacy product portfolios, the performance of legacy products, the allocation of expenses between closed and open books of business, customer communication and the level of exit charges.
We will be fully supporting the Government’s new PensionWise service and will be encouraging our customers to make full use of this new guidance service and to seek independent advice on what we think is a very important decision. The changes bring about many new options for customers and we will either facilitate these as part of their existing products or, where appropriate, help our customers seek more appropriate solutions elsewhere.
We aim to ensure that unrewarded exposure to market volatility is minimised or the risks from market movements are managed through hedging.
– A further £390 million was received from the divestment of Ignis.
of employees would recommend this company as a great place to work
DURING 2014, THE GROUP HAS MADE SIGNIFICANT PROGRESS IN SIMPLIFYING ITS DEBT STRUCTURE AND IMPROVING FINANCIAL FLEXIBILITY. IN PARTICULAR, THE DIVESTMENT OF IGNIS, SENIOR BOND ISSUE AND COMPREHENSIVE DEBT REFINANCING HAVE REPOSITIONED THE GROUP TO CONSIDER ACQUISITION OPPORTUNITIES.
TARGET CASH FLOWS The cumulative cash flow target for 2014 to 2019 is £2.8 billion, against which £957 million has been achieved by 31 December 2014. This includes the proceeds received from the divestment of Ignis.
Debt finance costs1 64 114 Tier 1 notes coupon 26 26 Finance costs attributable to owners 90 140 1 Finance costs in respect of bank debt (and associated swap interest).
Operating profit includes the effect of variances in experience for non-economic items, such as mortality and persistency, and the effect of changes in non-economic assumptions. Changes due to economic items, for example market value movements and interest rate changes, which give rise
GROUP COSTS Group costs were £21 million (2013: £24 million) in the period. The decrease in Group costs compared to the prior period relates to lower pension scheme costs, reflecting a lower opening IAS 19 pension scheme liability for the Pearl Staff Pension Scheme and a higher opening IAS 19 pension scheme asset for the PGL Pension Scheme. Group costs in the period have also benefited from lower staff costs.
IFRS RESULT AFTER TAX The IFRS operating result is reconciled to the IFRS result after tax, as follows: Year ended 31 £m
INVESTMENT RETURN VARIANCES AND ECONOMIC ASSUMPTION CHANGES ON LONG-TERM BUSINESS Positive investment return variances of £12 million in 2014 (2013: £64 million) include the minority share of the result of the consolidated UKCPT property investment structure of £75 million (2013: £42 million). The remaining negative variance of £63 million is principally driven £21 million associated with the re-terming of the Impala loan facility.
The IGD surplus has remained stable during the year as a result of the following offsetting factors: – positive impact of the divestment of Ignis of £0.2 billion; – dividend payments, debt financing and repayments of £0.6 billion, including the £206 million debt prepayment associated with the £900 million debt facility refinancing and the £250 million payment associated with the divestment of Ignis; offset by
Adjustments to include the following items at fair value: PLL subordinated debt 63 54 PGH Capital senior bond 24 –
RISK APPETITE The Group’s risk appetite framework consists of a set of statements and targets that articulate the level of risk the Group is willing to accept, in pursuit of shareholder value and achievement of the Group’s strategic objectives. The statements encapsulate policyholder security, earnings volatility, liquidity and the internal control environment as follows: – Capital – The Group and each life company will hold sufficient capital to meet regulatory requirements in a number of asset and liability stress scenarios.
In addition to these activities, Group Risk has conducted a number of independent reviews of the management of the most material risks to which the Group is exposed.
The full Corporate Responsibility Report is available on the Group’s website at www.thephoenixgroup.com/CRreport2014
– Leads and delivers the Group’s debt strategy and other treasury matters
– Designs and implements a framework to manage the legal risk within the Group, including compliance by Group companies and staff with relevant legal obligations.
BOARD OF DIRECTORS When I became Chairman of the Board of Phoenix Group Holdings in October 2012, a theme of recent Board evaluation reports was that the Board, with 14 Directors, was too large. The size was mainly due to the presence of several non-independent directors representing significant shareholders, and the consequent need to appoint a relatively large number of independent directors to provide balance to the Board and comply with governance code guidelines. At that point, only half the Board (seven directors) were independent and there was only one female director.
– Responsible for reviewing the effectiveness of the internal audit function
– Considered and agreed the timing for a tendering exercise for the external audit engagement in the light of emerging legislative developments – see ‘Auditor’s appointment’ below.
OPERATING PROFIT – The Audit Committee reviewed the allocation of key items to operating profit to ensure the allocations were in line with the Group’s operating profit framework and consistent with previous practice.
The assessment process also informed the recommendation by the Audit Committee to the Board for the re-appointment of Ernst & Young Accountants LLP (Netherlands) as the Group’s auditors which was approved by shareholders at the AGM on 30 April 2014.
AUDITOR’S APPOINTMENT The current auditors, EY, were appointed in September 2009. However, EY have been auditors to significant parts of the Group for a longer period. The Audit Committee has decided to undertake an audit tender during the tenure of the current Group audit partner, Ed Jervis, which will result in the tender being undertaken between six and nine years after the current (September 2009) appointment commenced.
The Board’s policy on diversity was outlined by the statement of former Chairman, Ron Sandler, released on the Phoenix Group website in October 2011 in response to the Lord Davies review of ‘Women on Boards’, as follows: “As we already have a large Board of 14 Directors (including one female Director) and are unlikely to want to increase its size, it is difficult at this stage to commit to firm percentages regarding the number of women on our Board in 2013 and 2015. Nonetheless, we have set targets of two female Directors by 2013 and a further female Director by 2015. Our overriding aim remains the appointment of the most appropriate candidates to the Board.”
– Incremental MCEV from management actions of £261 million, a significant proportion of our target of £300 million over the period 2014 – 2016
The Company’s full Remuneration Policy is available within the Remuneration Committee section of the website at www.thephoenixgroup.com/about-us/ corporate-governance.aspx. For information and ease of reference, the main summary policy tables from the Remuneration Policy are included in the Appendix to this Directors’ remuneration report. The information in the Appendix is not subject to the advisory vote on the Directors’ remuneration report at the 2015 AGM.
The weightings of the financial and strategic measures remain unchanged from 2014 and are as follows: Performance Metric Weighting of Corporate
SHAREHOLDING GUIDELINES Guideline levels have been increased so that the 200% of base salary level which applied to the Group Chief Executive Officer in 2014 is now also extended to the Group Finance Director.
The options awarded under the LTIP are awarded as nil cost options.
2 Manjit Dale is a director of TDR Capital Nominees Limited and Jambright Limited and as such these companies were all considered as connected persons up to the date of his resignation on 30 April 2014. Total interests held by these entities amount to 13,923,409 as at this date.
As reported last year, during 2014, certain responsibilities of the Committee were assumed by the remuneration committee of the board of Phoenix Life Holdings Limited (PLHL committee), the highest EEA insurance holding company within the Group. This structure had been introduced initially to help manage the oversight of Ignis’ remuneration with the PLHL committee being responsible for that (as well as some aspects of pay for UK based employees below Board level). The members of the two committees were the same and this did not impact the governance of remuneration from any external perspective, but it did simplify the oversight of remuneration matters affecting Ignis and other UK based employees. Meetings of this committee were in addition to the seven meetings of the Phoenix Group Holdings Committee referred to above. Following the sale of Ignis, the additional committee was disbanded on 20 November 2014 with its responsibilities returned to the Phoenix Group Holdings Committee.
– Once set, performance measures and targets will generally remain unaltered unless events occur which, in the Remuneration Committee’s opinion, make it appropriate to make adjustments to the performance conditions, provided that any adjusted performance condition is, in its opinion, neither materially more nor less difficult to satisfy than the original condition
FOOTNOTES TO THE ABOVE REMUNERATION POLICY TABLE 1. Benefits in 2014 and 2015 For details of benefits in 2014, please see note 1 to the ‘Single Figure of Remuneration Table’ on page 67.
Benefits measured as benefits paid in 2013 as set out in the single figure table but excluding relocation payments for James McConville
The powers of the directors are determined by Cayman Islands Company Law, Cayman Islands common law, the provisions of the Company’s Memorandum and Articles and by any valid directions given by shareholders by way of special resolution.
Notes Refer to pages 127 to 128 and 140 to 141
OVERVIEW OF THE SCOPE OF OUR AUDIT The Group comprises of Group functions and Phoenix Life Division. Phoenix Life Division comprises of insurance companies and other companies that provide services to those companies. The charts to the right illustrate the split of the Group equity and operating profit as at 31 December 2014: 1 Insurance Companies (Full Scope) 84% 2 Group Function (Full Scope) 14% 3 Other Companies (Specific Scope) 2%
Net income attributable to unitholders (8) (331) Total operating expenses (4,709) (3,801)
Tax attributable to policyholders’ returns 13 (129) 27 Profit before the tax attributable to owners 336 268
Finance costs attributable to owners (88) (126) Profit before the tax attributable to owners From continuing operations 336 268 From discontinued operations 80 (51)
Net (decrease)/increase in cash and cash equivalents (4,227) 209 Cash and cash equivalents at the beginning of the year 9,294 9,085 Cash and cash equivalents at the end of the year 37 5,067 9,294
The value of the PVFP is determined in a manner consistent with realistic measurement of liabilities. In particular, the methodology and assumptions involve adjustments to reflect risk and uncertainty, are based on current estimates of future experience and current market yields and allow for market consistent valuation of any guarantees or options within the contracts. The value is also adjusted to remove the value of capital backing the non-profit business if this is included in the realistic calculation of PVFP. The principal assumptions used to calculate the PVFP are the same as those used in calculating the insurance contract liabilities given in note 40.
(l) INCOME TAX 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.
Net investment income Net investment income comprises interest, dividends, rents receivable, net interest income/expense on the net defined benefit asset/liability, fair value gains and losses on financial assets and investment property at fair value and impairment losses on loans and receivables.
Statement of consolidated financial position Total assets: Derivatives 18 Equities 2,602 Investment in joint ventures 125 Fixed and variable rate income securities 198 Collective investment schemes (2,623) Cash and cash equivalents 70 Prepayments and Accrued Income 2 Other receivables 4
The impact of presentational changes made in respect of discontinued operations is detailed in note 4.1.
Net consideration received, satisfied in cash 384 Less: net assets and liabilities disposed of (254) Less: transaction costs (5) Less: capitalised VAT costs (18) Add: tax credit on irrecoverable VAT 3 Gain on disposal (net of tax) 110
The variances excluded from operating profit in relation to owners’ funds are as follows: 2014 £m 2013 £m
On 31 July 2014, the Company entered into a business transfer agreement with Guardian (see note 4.3). The transfer has been initially effected under a reinsurance agreement effective from 1 January 2014.
125PHOENIX GROUP HOLDINGS ANNUAL REPORT AND ACCOUNTS 2014 10. ADMINISTRATIVE EXPENSES This note gives further detail on the items included within administrative expenses in the consolidated income statement and an analysis of which operating segment our employees work within.
The remuneration of the Company’s auditors, including their associates, in respect of services supplied to members of the Group was £5.1 million (2013: £7.6 million). No services were provided by the Company’s auditors to the Group’s pension schemes in either 2014 or 2013.
The earnings/(loss) per share is calculated by reference to the profit/(loss) attributable to owners of the parent divided by the weighted average numbers of shares in issue during each period.
Expected life (years) 3.25 and 5.25 3.25 and 5.25 3.25 and 5.25 3.25 and 5.25 3.25 and 5.25 Risk-free rate (%) – based on UK government gilts commensurate with the expected term of the award 1.3 (for 3.25 year scheme) and 1.9 (for 5.25 year scheme)
Summary financial information for the UKCPT is shown below: 2014 £m 2013 £m
Fees associated with this facility have been deferred and amortised over the life of the loan in the consolidated statement of financial position.
During June 2014, scheduled repayments of £30 million and target repayments of £30 million were made. On 1 July, a £250 million debt prepayment was made following the divestment of Ignis. A further prepayment of £296 million was made on 7 July 2014 following the issuance of the senior bond (see note f). On 23 July 2014 the outstanding balance on the £2,260 million Impala facility was fully repaid (see note g).
The fair values of derivative financial instruments are as follows: £m £m
IFRS transitional adjustments (88) 16 – – – (72) Adjustment for insurance policies held with related parties in respect of the PGL pension scheme (23) 4 – – – (19)
The Finance Act 2012 introduced new rules for the taxation of insurance companies, with effect from 1 January 2013. The deferred tax on the non-profit surplus has reversed and is replaced with IFRS transitional adjustments. The deferred tax on the transitional adjustments is being amortised over a 10 year period on a straight line basis commencing in 2013 and ending in 2022 as the IFRS tax transitional adjustment is brought into account in the current year tax computations.
Defined contribution scheme Contributions in the year amounted to £1 million (2013: £1 million).
An additional liability of £86 million (2013: £84 million) has been recognised, reflecting a charge on any refund of the resultant IAS 19 surplus that arises after adjustment for discounted future contributions of £245 million (2013: £241 million) (£294 million of discounted future contributions less a current deficit of £53 million) in accordance with the minimum funding requirement. A deferred tax asset of £49 million (2013: £59 million) has also been recognised to reflect tax relief at a rate of 20% (2013: 20%) that is expected to be available on the contributions, once paid into the scheme.
Employer’s contributions 23 – – – 23 Benefit payments (56) 56 – – –
Fixed interest gilts 1,570 – 1,199 – Index-linked bonds 373 – 508 –
Defined benefit obligation The calculation of the defined benefit obligation can be allocated to the scheme’s members as follows: – Deferred scheme members: 39% (2013: 37%)
The customer relationships intangible disposed of during the year relates to the investment management contracts (‘IMCs’) held within Ignis, the disposal of which was completed on 1 July 2014 (see note 4). The value of the IMCs as at 31 December 2013 was £148 million. Other intangibles of £3 million relating to capitalised software costs held within Ignis were also disposed of during the year.
Discontinued operations disposed of during the year (see note 4.1) (14) – Disposals – (6)
Charge for the year – from discontinued operations – (3) Discontinued operations disposed of during the year (see note 4.1) 4 – Disposals – 6
Commercial investment property is measured at fair value by independent property valuers having appropriate recognised professional qualifications and recent experiences in the location and category of the property being valued. The valuations are carried out in accordance with the Royal Institute of Chartered Surveyors (RICS) guidelines with expected income and capitalisation rate as the key non-observable inputs.
Financial assets designated at fair value through profit or loss upon initial recognition: Investment in joint ventures – – 133 133 Fixed and variable rate income securities 24,639 9,010 735 34,384
Financial liabilities designated at fair value through profit or loss upon initial recognition: Investment contract liabilities – 8,451 – 8,451
Regulatory capital requirements of the Group Insurance Groups’ Directive (‘IGD’) PRA regulated insurance groups (including their holding companies) are also required to assess capital adequacy on a Group wide basis to enable the PRA to assess both the level of insurance and financial risk within the Group and the capital resources available to cover that risk. The assessment is known as the IGD.
Owners’ funds held outside long-term fund – – 1,741 1,741 (171) 1,570 Owners’ funds held in long-term fund – 339 – 339 – 339
The Group is also exposed to insurance risk arising from its Phoenix Life segment. Life insurance risk in the Group arises through its exposure to longevity, persistency, mortality and to other variances between assumed and actual experience. These variances can be in factors such as persistency levels and management and administrative expenses. More details on the Group’s exposure to insurance risk are provided in note 40.5 below.
The Group holds £3,589 million (2013: £3,319 million) of corporate bonds which are used to back annuity liabilities in non-profit funds (this excludes the liabilities reinsured to Opal Reassurance Limited). These annuity liabilities include an aggregate credit default provision of £266 million (2013: £238 million) to fund against the risk of default.
The Board of Phoenix Group Holdings has defined a number of governance objectives and principles and the liquidity risk frameworks of each subsidiary are designed to ensure that: – liquidity risk is managed in a manner consistent with the subsidiary company Boards’ strategic objectives, risk appetite and Principles and Practices of Financial Management (‘PPFM’); – cash flows are appropriately managed and the reputation of the Group is safeguarded; and
Objectives and policies for mitigating insurance risk The Group uses several methods to assess and monitor insurance risk exposures both for individual types of risks insured and overall risks. These methods include internal risk measurement models, experience analyses, external data comparisons, sensitivity analyses, scenario analyses and stress testing.
An increase of 25% in lapse rates, with all other variables held constant, would result in an increase in the profit after tax in respect of a full year, and an increase in equity of £46 million (2013: £44 million).
In common with other life companies in the UK which have written pension transfer and opt-out business, the Group has set up provisions for the review and possible redress relating to personal pension policies. These provisions, which have been calculated from data derived from detailed file reviews of specific cases and using a certainty equivalent approach, which give a result very similar to a market consistent valuation, are included in liabilities arising under insurance contracts. The total amount provided in the with-profit funds and non-profit funds in respect of the review and possible redress relating to pension policies, including associated costs, are £284 million (2013: £254 million) and £15 million (2013: £15 million) respectively.
Income and expenses are not offset in the statement of comprehensive income unless required or permitted by an IFRS or interpretation, as specifically disclosed in the accounting policies of the Company.
The Company has in issue warrants over its ordinary shares. Details of these warrants are included in note 24.2 to the consolidated financial statements.
Details of the Group risk management policies are outlined in note 40 to the consolidated financial statements.
– credit risk, arising from the default of the counterparty to a particular financial asset and is significantly reduced as assets are primarily inter-company receivables from other group entities.
Loans due from Group entities 270 244 Other amounts due from Group entities 8 5
Operating MCEV earnings (after tax) 308 25 38 (21) 350 Non-operating MCEV earnings (after tax) 79 (8) (2) (257) (188)
Under IFRIC 14, an interpretation of IAS 19, pension funding contributions are considered to be a minimum funding requirement and, to the extent that the contributions payable would result in a surplus that would not be recoverable, a liability is recognised when the obligation arises. The IFRS IFRIC 14 adjustments are not reflected in the Group MCEV as the Group anticipates that its ultimate contributions into the pension schemes would result in a recoverable surplus.
The risk-free rates assumed for a sample of terms were as follows: Term
The Group undertakes no obligation to update any of the forward-looking statements contained within the 2014 Annual Report and Accounts or any other forward-looking statements it may make or publish.
PIK Payment-in-kind – Interest on a bond is paid other than in cash, most commonly by increasing the principal
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