In November we sponsored an independent report by the Pensions Institute, titled ‘The Meaning of Life’, that considered the future of the traditional life company business model in the UK. As described in the report, recent changes to the regulation of pension provision, including the new pension freedom rules, were unanticipated and market participants have had little time to adapt. It is therefore far from certain what the future market will look like from the perspective of the industry as a whole, for the individual providers and for our customers. As the UK’s largest specialist consolidator of closed life funds, we believe that Phoenix has a key role to play in supporting customers through these changes.
Ɛ We continued to simplify the Group’s corporate structure following the single silo bank facility put in place during 2014, with Impala Holdings Limited now 100% owned by PLHL. This Group simplification provides a more appropriate Group structure for the Solvency II capital regime.
GROUP IFRS OPERATING PROFIT The Group has generated an IFRS operating profit of £324 million (2014: £483 million).
The simplification of the Group structure did not impact the PLHL ICA surplus as the risk-based calculation has historically recognised 100% of the capital resources and requirements of Impala Holdings Limited and its subsidiaries.
2 Gross MCEV is defined as the sum of Group MCEV and the value of shareholder and hybrid debt as included in the MCEV.
In January 2015, the Group announced the exchange of 99% of the Group’s Tier 1 notes for £428 million of new subordinated notes, issued by PGH Capital. As the new notes mature in 2025, the notes will be included in the financial leverage calculation at their notional face value of £396 million, excluding notes with a face value of £32 million held by Group companies.
“The Group has a balanced risk culture, supportive of commercial risk-taking coupled with strong execution in line with its risk appetite.
During the year, the Group continued to strengthen our RMF to meet evolving regulatory requirements including Solvency II and the UK Corporate Governance Code. I was pleased to see our approach to risk management was recognised in the investment grade rating awarded by Fitch Ratings.
Changes in the regulatory and legislative landscape may impact the way that Phoenix Life engages with its customers.
Emissions reported above normalised to per m2 0.09 tonnes CO2e/m2 0.10 tonnes CO2e/m2
REMUNERATION COMMITTEE Group remuneration framework Executive Director remuneration Employee share schemes
Phoenix Group Holdings Annual Report and Accounts 2015 45 Corporate governance
Ɛ Leads provision of legal advice to the Group Board, other Group company Boards, ExCo and senior management
Provide clearer direction/priorities in Board papers which should be simplified and shortened where possible.
The composition of the Remuneration Committee accords with the requirements of the Code that the Remuneration Committee should consist of at least three independent Non-Executive Directors. The Remuneration Committee met six times during 2015.
The Risk Committee advises the Board on risk appetite and tolerance in setting the future strategy, taking account of the Board’s overall degree of risk aversion, the current financial situation of the Group and the Group’s capacity to manage and control risks within the agreed strategy. It advises the Board on all high level risk matters. Details of the Risk Management Framework, for which the Risk Committee has oversight, are provided in the Risk Management section on pages 34 to 39.
The Phoenix business strategy involves corporate actions that can be considered price-sensitive activity. Indeed, much of 2013, 2014 and 2015 was spent in either a ‘closed’ or ‘prohibited’ period due to such potential activity (not all of which led to publicly announced actions but which included the sale of Ignis and the refinancing of the Group to secure investment grade status) which results in the Company not being able to transact or make decisions relating to shares.
Accordingly, the Company has made a number of minor technical changes to the rules of the DBSS to make it more formulaic. Commencing with the 2015 awards, DBSS awards will automatically vest on the dealing day following the third anniversary of the announcement of the Company’s results. The share price at the actual time of grant continues to be used to determine the number of shares awarded. This means that DBSS awards will vest on a consistent cycle, even if regulatory constraints delay the making of DBSS awards in any year. These changes can be made to the DBSS as it is a formulaic arrangement under which one-third of the AIP out-turn per individual is deferred. Equivalent changes to the LTIP have not been made.
The review will look at the structure of executive pay within Phoenix Group in the light of these ongoing regulatory developments and, whilst it is not proposed to increase the overall quantum of pay, will consider whether current structures remain appropriate in the new regulatory environment. Any outcomes from this review will be discussed with key shareholders and then disclosed in full in the 2016 Directors’ remuneration report.
Ɛ Our Remuneration Policy benchmarks the total target remuneration for the Executive Directors between FTSE 31-100 and FTSE 250 data sets, and remuneration for both Executive Directors are positioned appropriately between these data sets.
At our 2016 Annual General Meeting (‘AGM’) we will be holding an advisory vote on the Directors’ remuneration report.
MCEV growth 25% of this part vests at threshold performance rising on a pro rata basis until 100% vests.
Gains of Directors from share options exercised under Sharesave 2015 were £nil (2014: £3,878). Sharesave options are granted with an option price that is a 15% discount to the three-day average share price when invitations are made. This is permitted by HMRC regulations for such options. For options in 2016 this discount will be 20%. Sharesave options are not subject to performance conditions. The Sharesave options granted to James McConville represent options granted for the then maximum monthly savings of £250 per calendar month for three years.
DIRECTORS’ INTERESTS The number of shares held by each Director is shown below: Name
Total share plan interests as at 31 December 2015 – Sharesave
Name Date of letter of appointment Date of Joining the Board Appointment end date Unexpired term
Ɛ The maximum annual incentive level for an Executive Director is 150% of base salary per annum
Ɛ The aggregate fees of the Chairman and Non-Executive Directors will not exceed the limit from time to time prescribed within the Company’s Articles of Association for such fees (currently £2 million per annum in aggregate)
A new Non-Executive Director would be recruited on the terms explained above in respect of the main policy for such Directors.
On-target Based on what the Director would receive if performance was on-target
The Directors have been authorised to allot and issue securities and grant options over or otherwise dispose of shares under Article 14.
FINANCIAL RISK MANAGEMENT The Group operates a Risk Management Framework (‘RMF’) consisting of several components, as detailed in the Risk management section of the Strategic Report. The RMF provides a consistent approach to highlighting and controlling key risks throughout the organisation. This is achieved primarily through review and compliance, at a functional level, with the risk universe and related policies (and the risk appetites therein). At its highest level the RMF considers the following risks: strategic, market, credit, insurance, financial soundness , customer and operational. As a result, in preparing the consolidated financial statements, assessment is given to a broad range of risk categories.
DISCLOSURES UNDER LISTING RULE 9.8.4R For the purposes of Listing Rule 9.8.4C R, the information required to be disclosed under Listing Rule 9.8.4 R can be found within the following sections of the Report and Accounts: Section Requirement Location 1 Statement of interest capitalised
STATEMENT OF DIRECTORS’ RESPONSIBILITIES IN RESPECT OF THE ANNUAL REPORT AND ACCOUNTS
The Directors are responsible for: Ɛ keeping adequate accounting records that are sufficient to show and explain the Group’s and the Company’s transactions and disclose, with reasonable accuracy at any time, the financial position of the Group and the Company; Ɛ safeguarding the assets of the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities; and
The Directors as at the date of this report, whose names and functions are listed in the Board of Directors section on pages 44 and 45, confirm that, to the best of their knowledge: Ɛ the Group’s consolidated financial statements and the Company financial statements, which have been prepared in accordance with IFRS as issued by the IASB, give a true and fair view of the assets, liabilities, financial position and profit of the Group and the Company; and
Audit scope Ɛ We performed an audit of the complete financial information of the Group Function and Insurance Companies and audit procedures on specific balances for Other Companies. These are explained further on page 91.
This report is made solely to the Company’s members, as a body, in accordance with our engagement letter dated the 1 August 2014 and subsequent engagement letter dated the 10 March 2016. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed.
Net investment income C1 1,064 6,034 Total revenue, net of reinsurance payable 685 5,317
Proceeds from issuing shares in subsidiaries to non-controlling interests D3 35 82
Total comprehensive income for the year – – – 10 561 571 96 667
Coupon paid to non-controlling interests, net of tax relief – – – – – – (21) (21)
Intangible assets are subject to regular impairment reviews as detailed in the accounting policy in note G7. Impairments are measured as the difference between the carrying value of a particular asset and its recoverable amount. Impairments are recognised in the consolidated income statement in the period in which they occur. Further details of judgements made in testing intangible assets for impairment are included in note G7.
A5. NEW ACCOUNTING PRONOUNCEMENTS NOT YET EFFECTIVE The IASB has issued the following new or amended standards and interpretations which apply from the dates shown. The Group has decided not to early adopt any of these standards, interpretations or amendments where this is permitted. The impact on the Group of adoption is subject to evaluation: Ɛ IFRS 9 Financial Instruments (2018). This standard will replace IAS 39 Financial Instruments: Recognition and Measurement. IFRS 9 was originally issued in November 2009 and introduced new requirements for the classification and measurement of financial assets. The standard was subsequently amended in October 2010 to include requirements for the classification and measurement of financial liabilities and for derecognition and in November 2013 to include new requirements for general hedge accounting. Another revised version was issued in July 2014 to include a) an expected credit loss impairment model (to replace the incurred loss model of IAS 39) and b) limited amendments to the classification and measurement requirements by introducing a ‘fair value through other comprehensive income’ option for certain simple debt instruments. Under IFRS 9, all financial assets will be measured either at amortised cost or fair value and the basis of classification will depend on the business model and the contractual cash flow characteristics of the financial assets. The Group expects to continue to value the majority of its financial assets at fair value through profit or loss on initial recognition, so as to eliminate or reduce any potential accounting mismatch. The expected impact remains subject to completion of a detailed review.
Non-recurring items include: Ɛ gain of £49 million (net of a £64 million impairment of associated acquired in-force business) arising as a result of the reassurance arrangement entered into with RGA International (see note F3.1); Ɛ release of provisions associated with external regulatory changes, including the cap on workplace pension charges and the pension guidance levy, of £17 million; Ɛ corporate project costs of £13 million; and
Positive investment return variances and economic assumption changes on long-term business of £13 million (2014: £12 million) include the minority share of the result of the consolidated UKCPT property investment structure of £46 million (2014: £75 million) and a £19 million gain on the purchase of a portfolio of equity release mortgages arising from the yield uplift on assets available to back annuity liabilities. Increases in yields during the period have also had a positive impact reflecting short asset positions held relative to the longer term IFRS basis liabilities. These positive items have been partly offset by the adverse impacts of changes in asset portfolios undertaken in preparation for the implementation of the new Solvency II regime, together with the impact of widening credit spreads during the period.
As permitted by Cayman Islands Companies Law, dividends have been charged within equity against the share premium account. Where shareholders exercise a scrip dividend option, the amount of the related dividend is credited to share premium in the statement of consolidated changes in equity and an amount equal to the nominal value of the shares issued is transferred from share premium to share capital.
On 19 August 2015, the Board declared an interim dividend of 26.7p per share for the half year ended 30 June 2015. The dividend amounted to £60 million and was paid on 1 October 2015.
Reporting accountant assurance services relate to assurance reporting on historical information included within investment circulars.
2 The prior year tax credit represents the impact of reaching agreement with HMRC in respect of the Group’s uncertain tax positions for the years 2007 to 2014. This includes the increased utilisation of tax losses previously unrecognised, the effect of the reduction in corporate tax rates across the years and a release of tax provisions.
On 23 January 2015, the Group exchanged 99% of the Notes for £428 million of new subordinated notes, issued by PGH Capital Limited, and £3 million of cash (see note E5 for further details). £32 million of the new notes are held by Group companies and are therefore eliminated in the preparation of the consolidated financial statements. The exchange resulted in a loss of £12 million which has been recognised in equity. The remaining Notes outstanding at 31 December 2015 had a principal amount outstanding of £6 million.
Obligations for repayment of collateral received It is the Group’s practice to obtain collateral in stock lending and derivative transactions, usually in the form of cash or marketable securities. Where cash collateral is available to the Group for investment purposes, it is recognised as a ‘financial asset’ and the collateral repayable is recognised as ‘obligations for repayment of collateral received’ in the statement of consolidated financial position. The ‘obligations for repayment of collateral received’ are measured at amortised cost, which in the case of cash is equivalent to the fair value of the consideration received.
Designated upon initial recognition: Net asset value attributable to unitholders 1 4,659 – 4,659
Level 3 investments in fixed and variable income securities include a property investment structure with a value of £36 million (2014: £59 million). This investment was restructured during the year and inputs to the valuation have changed.
Phoenix Group Holdings Annual Report and Accounts 2015 133 Financials i. On 23 January 2015, PGH Capital Limited issued £428 million of subordinated notes (‘PGH Capital subordinated notes’) due 2025 at a coupon of 6.625%. Upon exchange £32 million of these notes were held and continued to be held as at 31 December 2015 by Group companies. Fees associated with these notes of £3 million have been deferred and amortised over the life of the notes in the condensed statement of consolidated financial position. The notes are subject to a subordinated guarantee by the Company.
Reinsurers’ share of insurance contract liabilities – 1,969 1,983 2 – – – – 3,954
Certain Phoenix Life with-profit funds have an exposure to overseas assets which is not driven by liability considerations. The purpose of this exposure is to reduce overall risk whilst maximising returns by diversification. This exposure is limited and managed through investment mandates which are subject to the oversight of the investment committees of the Boards of each life company. Fluctuations in exchange rates from certain holdings in overseas assets are hedged against currency risks.
Insurance risk refers to the risk that the frequency or severity of insured events may be worse than expected and includes expense risk. The Phoenix Life segment contracts include the following sources of insurance risk: Mortality higher than expected number of death claims on assurance products and occurrence of one or more large claims; Longevity faster than expected improvements in life expectancy on immediate and deferred annuity products; Morbidity higher than expected number of serious illness claims or more sickness claims which last longer on income protection policies; Expenses policies cost more to administer than expected; Lapses the numbers of policies terminating early is different to that expected in a way which increases expected claims costs or expenses or reduces future profits; and
For participating business, which is with-profit business (insurance and investment contracts), the insurance contract liability is calculated on a realistic basis, adjusted to exclude the shareholders’ share of future bonuses and the associated tax liability. This is a market consistent valuation, which involves placing a value on liabilities similar to the market value of assets with similar cash flow patterns.
Some pensions contracts include guaranteed annuity options (see deferred annuities in note F4.2 for details). The total amount provided in the with-profit and non-profit funds in respect of the future costs of guaranteed annuity options are £1,710 million (2014: £1,809 million) and £5 million (2014: £6 million) respectively.
Adjustment for insurance policies held with related parties in respect of the PGL pension scheme (5) 1 – – (4)
A further 1% reduction, to 17%, effective from April 2020 has been announced in the 2016 Budget and will be introduced by future legislation. The benefit to the Group’s net assets arising from the further 1% reduction in the tax rate is estimated at £8 million in total and will be recognised when the legislation is substantively enacted.
G4. ACCRUALS AND DEFERRED INCOME This note analyses the Group’s accruals and deferred income at the end of the year.
Provision for tax on that part of the economic surplus available as a refund on a winding-up of the Scheme (199) (184)
Gain from changes in demographic assumptions – 19 – – 19
Cash and other 21 – 354 – Obligations for repayment of stock lending collateral received (113) – (417) –
Defined benefit obligation The calculation of the defined benefit obligation can be allocated to the scheme’s members as follows: Ɛ deferred scheme members: 39% (2014: 39%); and
During the year, an impairment charge of £64 million has been recognised in respect of acquired in-force business originally allocated to contracts issued by PLAL and reinsured to the Group’s Bermudan reinsurance captive, Opal Re. As detailed in note F3.1, the Opal Re reassurance was recaptured during the year and replaced with a new agreement with an external reinsurer, RGA International. Accordingly, the value of the acquired in-force business associated with these contracts has been fully impaired.
Cash and cash equivalents comprise cash balances and short-term deposits with an original maturity term of three months or less at the date of placement. Bank overdrafts that are repayable on demand and form an integral part of the Group’s cash management are deducted from cash and cash equivalents for the purpose of the statement of consolidated cash flows.
CH Management Limited Ordinary shares 100.00% Castle Hill Enhanced Floating Rate Opportunities Limited Republic of
I1.2 Assets and liabilities of operations classified as held for sale
I1.2.2 Sale of Pearl Breakfast Unit Trust At 31 December 2015 the Group invested in an investment property joint venture which was held by the Pearl Breakfast Unit Trust. In 2015 the Group committed to selling the Pearl Breakfast Unit Trust (and consequently its investment in the joint venture) and on 25 February 2016 the units in the Pearl Breakfast Unit Trust were sold to Tesco Property Holdings (No.2) Limited and Tesco Property Holdings Limited. As part of the sale agreement Tesco plc also purchased the Group’s investment in Tesco Property Partner (GP) Limited.
The following information was relevant in the determination of the fair value of the 2011 to 2015 sharesave awards in the year: 2015 sharesave 2014 sharesave 2013 sharesave 2012 sharesave 2011 sharesave
0.4 (for 3.25 year scheme) and 0.8 (for 5.25 year scheme)
IGD PRA regulated insurance groups (including their holding companies) are 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, and was in force until 31 December 2015.
Phoenix has obtained PRA approval to calculate the SCR of its UK life companies using an Internal Model. This model has been calibrated to ensure that the life company’s liabilities could be met in one year’s time with a 99.5% confidence level, or in other words to be able to withstand a one in 200 year event.
6. BORROWINGS The accounting policy for borrowings is included in note E5.
On 12 December 2011, the Company, PGH (LCA) Limited and PGH (LCB) Limited, became party to a joint £77 million loan agreement to formalise an inter-company balance which had arisen in 2009 relating to fees payable to a syndicate of external banks. The loan accrues interest at a rate of LIBOR plus a margin of 1.25% and matures on 30 June 2016. Interest of £0.1 million was capitalised during the year (2014: £0.1 million) and £nil was repaid (2014: £nil). At 31 December 2015, £5 million was due (2014: £4 million).
Phoenix Group Holdings Annual Report and Accounts 2015 197 Financials 15. RELATED PARTY TRANSACTIONS The Company has related party transactions with Group entities and its key management personnel. Details of the total compensation of key management personnel, being those having authority and responsibility for planning, directing and controlling the activities of the Group, including the Executive and Non-Executive Directors, are included in note I5 of the consolidated financial statements.
Ɛ provided additional disclosures when compliance with the specific requirements of the MCEV principles is insufficient to enable users to understand the impact of particular transactions, other events and conditions and the Group’s financial position and financial performance.
STATEMENT OF CONSOLIDATED COMPREHENSIVE INCOME – GROUP MCEV BASIS For the year ended 31 December 2015
RECONCILIATION OF MOVEMENT IN EQUITY – GROUP MCEV BASIS For the year ended 31 December 2015 £m £m
Issue of ordinary share capital, net of associated commissions and expenses 2 1
Time value of financial options and guarantees (‘TVFOGs’) The Group’s embedded value includes an explicit allowance for the TVFOGs embedded within insurance contracts, including investment performance guarantees on participating business and guaranteed vesting annuity rates. The cost of these options and guarantees to shareholders is calculated using market‑consistent stochastic models calibrated to the market prices of financial instruments as at the period end.
Phoenix Group Holdings Annual Report and Accounts 2015 215 Financials e) New business
In October 2009, the CFO Forum published an amendment to the MCEV principles to reflect the inclusion of a liquidity premium. The changes affirm that the reference rate may include a liquidity premium over and above the risk‑free yield curve for liabilities which are not liquid, given that the matching assets are able to be held to maturity.
INFLATION For purposes of the MCEV calculation, the rate of increase in the UK Retail Price Index (‘RPI’) as at 31 December 2015, was taken from the implied inflation curve at a term appropriate to the liabilities. The rate of increase in UK National Average Earnings inflation is assumed to be RPI plus 100bps as at 31 December 2015 (2014: RPI plus 100bps).
OPERATING COMPANIES Refers to the trading companies within Phoenix Life (which includes Opal Reassurance Limited)