IMPROVE CUSTOMER OUTCOMES Improving customer outcomes is central to our vision of being Europe’s Leading Life Consolidator�
It is our colleagues who will deliver these commitments and Phoenix’s shared values of Passion, Responsibility, Growth, Courage and Difference act as the guiding principles in everything we do� Our focus on creating a rich and diverse working environment is reflected in our continued status as one of the UK’s Top Employers�
Our strategic priorities are the safe transition of both the Standard Life Assurance and ReAssure businesses� Phase 3 of the Standard Life Assurance transition is the most complex� Our enlarged partnership with the leading technology provider Tata Consulting Services (‘TCS’), announced in 2019, will support our long-term growth plans for our Open business and enhance our customers’ and advisers’ digital experience across both our Open and Heritage businesses�
UK Workplace is our most valuable Open business product line, contributing nearly 65% of long-term cash generation� It is the primary channel of customer acquisition; it is our “engine for growth”�
The Group’s financial discipline and the compelling strategic rationale for the transaction were recognised by Fitch Ratings who revised the Group’s rating outlook from “Stable” to “Positive” upon announcement�
The Standard Life brand currently holds a 23% market share for workplace pensions (Source: Broadridge Defined Contribution and Retirement Income Report 2018 – Q4 2017 figures), and is a leading brand in this market� We continue to invest in our workplace proposition, enhancing our product range and expanding our digital service offering to meet the changing needs of our customers�
“It has never been more important for individuals to take control of their pension savings and we are here to help people on their journey to a secure and sustainable retirement.”
As a business we are uniting behind our sustainability vision ‘Committing to a sustainable future’, which is underpinned by four key commitments including fostering responsible investment and reducing our environmental impact� You can read about this further in the Group’s Sustainability Report�
Read more about the business segments on pages 24 to 25�
These are insurance or investment contracts (savings and pensions) without guarantees�
Bulk purchase annuities Phoenix is now an established player in the buy-in market with over £4 billion of new annuity business delivered in the past few years across a combination of internal and external buy-ins� The bulk purchase annuity market is a source of value accretive annuity liabilities and we will continue to participate in this market in a proportionate and selective manner�
This is an externally calculated measure of how satisfied customers are with Phoenix’s servicing proposition.
1 FOS overturn rate shown as H2 2018 and H1 2019 as FY 2019 information is unavailable at time of production. 2 This measures the satisfaction of a sample of Phoenix Life customers surveyed who contacted the call centre. It is calculated as the % of all questions responded in the survey that customers scored 4 or 5.
The closed life funds within our Heritage business provide predictable fund maturity and liability profiles, creating stable long-term cash flows for distribution to shareholders and repayment of outstanding debt�
1 Historic dividends per share rebased to take into account the bonus element of the rights issue completed in November 2016 and the rights issue completed in July 2018�
• Provide a common grading structure and benefit proposition for all colleagues within the Group�
paid to close out derivative instruments entered into by the holding companies to hedge the Group’s exposure to currency risk as well as equity risk arising from the Group’s acquisition of the ReAssure Group�
Base case five-year target 3.9 Following a 20% fall in equity markets 4.0
Own Funds1 10.8 10�3 SCR2 (7.7) (7�1) Surplus3 3.1 3�2 1 Own Funds includes the net assets of the life and holding companies calculated under Solvency II rules, pension scheme surpluses calculated on an IAS19 basis not exceeding the holding companies’ contribution to the Group SCR and qualifying subordinated liabilities� It is stated net of restrictions for assets which are non-transferable and fungible between Group companies within a period of nine months�
(2018: £524 million), reflecting the full 12 months contribution from the Standard Life Assurance businesses and the impact of BPA transactions entered into in the period� This has been partly offset by the lower positive impact of management actions and the delivery of actuarial modelling enhancements in the prior period� Updating actuarial assumptions had a net positive impact of £183 million on the result for the year (2018: £205 million) and included the impact of updating longevity base and improvement assumptions to reflect latest experience analyses and the most recent Continuous Mortality Investigation 2018 core projection tables�
• a forward looking, internal assessment of the Group’s solvency position in respect of its risk profile and how it is likely to change given business plans and strategy�
RISK STRATEGY AND CULTURE Risk Strategy Our risk strategy is to take rewarded risks that are understood, managed effectively and are consistent with our overall Group Vision, Purpose and Mission�
Indicators of risk culture include focus on customers, encouragement of challenge, willingness to talk about and learn from mistakes, effectiveness of governance, and rewarding good risk management�
Examples of emerging risks the Group considers are outlined in the table on page 56�
The identification and assessment of strategic risks is an integrated part of the RMF; strategic risk is a Level 1 Risk Category in the Group’s Risk Universe�
RISK CONTROL PROCESSES AND REPORTING Identification, assessment, management and reporting of risks is undertaken across the three lines of defence, and reported through business and management governance to the relevant Boards and Committees�
The current assessment of the residual risk in respect of each of the Group’s Level 1 Risk Universe categories is illustrated in the chart opposite� The residual risk is the remaining risk after controls and mitigating actions have been taken into account�
In December, Phoenix announced its acquisition of ReAssure Group plc; this brings additional scale to Phoenix’s Heritage business and enhances our key attributes of cash generation, resilience and growth� This transaction meets all of our acquisition criteria: it is value accretive; it supports our dividend; and it is consistent with maintenance of our investment grade rating� On completion, the acquisition would be expected to heighten existing risks that the Group is exposed to, in particular this principal risk�
The risk could materialise through increased outflows or reduced new business levels�
While the industry is susceptible to new regulatory deliverables, the Group continually reviews the PRA and FCA 2019/2020 business plan and there are currently no large, unexpected changes that the Group has to manage�
Periods of uncertainty can result in a loss of critical corporate knowledge, unplanned departures of key individuals or the failure to attract individuals with the appropriate skills to help deliver our strategy�
The Group and its customers are exposed to the implications of adverse market movements� This can impact the Group’s capital, solvency and liquidity position, fees earned on assets held, the certainty and timing of future cash flows and long-term investment performance for shareholders and customers�
Markets have recently stabilised; whilst yields have recovered, they remain at low levels� We continue to take management actions to provide resilience against unanticipated market movements�
EMERGING RISKS The Group’s senior management and Board also take emerging risks into account when considering potentially adverse outcomes and appropriate management actions prior to the risk crystallising�
2� Longevity stress – longevity and yield stress broadly equivalent to a 1-in-10-year event, which implies a 1�2 year increase in life expectancy for a 65 year old male and 1�0 year increase for a 65 year old female, alongside a fall in yields�
• Liability Risks – related to both transition and physical risks� There are also legal risks associated with the actions we take or fail to take now (such as failing to mitigate the financial risks of climate change for our customers) and how these are viewed in the future�
STAKEHOLDER ENGAGEMENT AND HOW THE BOARD HAS DISCHARGED ITS SECTION 172 DUTIES
All of our interactions are governed by the Group’s Code of Business Ethics and Ethical Conduct which sets out how we can maintain a high standard of integrity across all engagement.
COLLEAGUES Over 4,400 colleagues based across Europe supporting Phoenix Group, Phoenix Life, Standard Life Assurance and SunLife. In operational sites: Wythall, London, Basingstoke, Bristol, Edinburgh, Glasgow, Dublin and Frankfurt.
• Through meetings, research and attendance at industry groups and relationship managers.
Read more about key customer engagement activities undertaken during the year on page 30.
Adherence to this policy is managed by the Group’s HR department via quarterly assessment of the minimum control standards. There were no material issues raised during the year.
The largest fundraiser of 2019 was the festive run in London which involved 46 teams of colleagues, air ambulance staff and suppliers� This event raised in excess of £24,000 after Company matching�
London colleagues participated in City Giving Day 2019 in aid of Lord Mayor’s Appeal, supporting the Chairman in his role of Alderman� The Group’s CEO holds the position of Chairman at the Museum of London, providing pro-bono support�
INSPIRING CONFIDENCE THROUGH RESPONSIBLE INVESTING In 2019, we continued to diversify our investment portfolio by completing another green deal� Over £43 million was funded in long-term debt to help finance an operational wind farm in southwest Scotland, providing a long-term reliable income stream from a clean energy investment�
2 Our intensity measurement calculations currently only include our Wythall estate and leased floor of Juxon House�
ENVIRONMENTAL, SOCIAL AND GOVERNANCE (‘ESG’) RATING AGENCIES Phoenix responds to certain questionnaires from non-financial rating agencies and is a constituent of the FTSE4Good index which is designed to measure the performance of companies demonstrating strong ESG practices�
Our Group Finance Director Jim McConville retires at our May 2020 AGM after eight very successful years as Group Finance Director� The succession for Jim has been carefully planned and I am confident that Rakesh Thakrar, our Deputy Group Finance Director since July 2014, will be a worthy successor to Jim�
• Board allocation of agenda time • Operation of the Board • Culture, values and their link to Companies Act Section 172 • How the Board has discharged its Section 172 duties • Bringing the Employee Voice to the boardroom
Communication with investors The Company places considerable importance on communication with investors and regularly engages with them on a wide range of topics�
Employees The Board received presentations on the Group’s Colleague Insight Survey undertaken in the second half of 2019 as well as a presentation on the Group’s Values which had been developed through substantial input from colleagues across the business�
During my visits, I gained further insight into the diverse range of cultural ‘ecosystems’ we have across our various office locations� SunLife with its emphasis on digital innovation is a good example of this�
The Senior Independent Director, appointed by the Board, is Alastair Barbour� His role is to be available to shareholders whose concerns are not resolved through the normal channels or when such channels are inappropriate� He is also responsible for leading the annual appraisal of the Chairman’s performance by the NonExecutive Directors�
The Nomination Committee has been instrumental in increasing gender diversity on the Board and in 2019 took an active role in oversight and guidance of the executive diversity and inclusion process including a focus on the development of a diverse succession pipeline� Details of the policy of diversity and inclusion for executives is contained in the colleagues section on page 36 to 37 of this Annual Report including the gender balance of those in senior management�
“The Committee has delivered on it's key responsibilties against the changing political and economic environment. The Committee will continue to focus on ensuring that there is a robust internal control environment further to the acquistion of ReAssure Group plc."
During 2019, the Audit Committee continued to review the requirements for tendering of Audit Services for the Group and its subsidiary companies� It is the Audit Committee’s current intention that the Group will tender its audit services prior to 2024 reflecting the mandatory rotation timing for EY as auditor of one of the Group's major life companies�
ASSESSMENT OF THE EFFECTIVENESS OF THE EXTERNAL AUDIT PROCESS The effectiveness of the external audit process is reviewed throughout the year by the Committee and included the following activities: • The Committee reviewed the detailed audit plan and considered its coverage and approach to identified risks; • The Committee considered the basis and calculation of Group materiality and how this was applied to individual business units; • The quality of interactions between the Audit team and the Committee, including the provision of technical and industry knowledge, was assessed; • The Committee considered the level of insight provided by the audit findings in the key areas of judgment, including quality of benchmarking and analysis, and the ability of the audit team to demonstrate that they had applied professional scepticism in their dealings with management; • The results of an internal evaluation of the performance of the auditor, including respondents from the Committee, subsidiary Committees and key members of management, were reviewed; and
The remaining fees of £3�3 million are classified as non-audit services under the EU Directive and Regulations, and give rise to a non-audit to audit fee ratio of 64% within the limits prescribed in the Group’s policy�
Going concern analysis A comprehensive going concern assessment was undertaken by the Audit Committee for the 2019 year-end and 2019 interim reporting periods, based on an assessment by management of the Group’s liquidity for the going concern review period together with forecasts and a stress and sensitivity analysis� The analysis also confirmed that all regulatory and working capital requirements would be met under the base case and adverse stress scenarios throughout the going concern review period�
The role of the Risk Committee is to advise 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�
The performance of the Committee during 2019 was assessed as part of both an overall internal annual Board effectiveness review and a Committee-specific effectiveness review� The conclusions demonstrate that the Committee continues to operate effectively�
The Remuneration Committee’s principal activities in the year were: • The triennial remuneration policy review reflecting the 2018 Corporate Governance Code and developments in best practice�
TRIENNIAL REMUNERATION POLICY FOR APPROVAL IN 2020 (FURTHER INFORMATION ON PAGES 108 TO 113) The Remuneration Policy was submitted to shareholders in 2019 due to the establishment of a new parent company� This was largely a roll forward of the previously approved Policy, with the exception of two changes in recognition of the 2018 UK Corporate Governance Code: alignment of pension contributions for new Executive Directors with those provided to the wider workforce, and the introduction of post-cessation shareholding requirement for both new and current Executive Directors�
As per the announcement on 9 March 2020, the Committee also warmly welcomes Rakesh Thakrar to the Board as Group Chief Financial Officer ('CFO'), subject to regulatory approval� The Committee is delighted with this appointment as a reflection of succession planning within the Group, enabling this promotion from within the organisation�
LOOKING FORWARD Many of our shareholders provided valuable feedback during the consultation on our triennial remuneration policy review and I thank them for their contribution� I look forward to continuing our dialogue in 2020�
New Executive Directors aligned with wider workforce (12% of salary – or 10�5% of salary when taken as a cash payment)�
2020 performance measures: • Operating Companies’ Cash Generation (24% of overall AIP); • Cash Generation1 (24% of overall AIP); • Adjusted Shareholder Solvency II Own Funds (24%); • Shareholder Value1 (24%); • Solvency II Management Actions (12%); • Net Flows (Workplace) (12%); • Customer Experience (20%); and • Customer Experience (20%); and
Risk • The Committee undertakes an annual review of risk before confirming the outcomes for the AIP to ensure that there are no risk-related concerns that require the moderation of AIP outcomes�
Element and purpose in supporting strategic objectives Benefits To provide other benefits valued by recipient
Policy and operation • The Group provides market competitive benefits in kind� Details of the benefits provided in each year will be set out in the Implementation Report�
Maximum • It is not possible to prescribe the likely change in the cost of insured benefits or the cost of some of the other reported benefits year-to-year, but the provision of benefits will normally operate within an annual limit of 10% of an Executive Director’s base salary� • The Remuneration Committee will monitor the costs in practice and ensure that the overall costs do not increase by more than the
Element and purpose in supporting strategic objectives Long-Term Incentive Plan (‘LTIP’) To motivate and incentivise delivery of sustained performance over the long-term in line with our strategy and purpose, and to promote alignment with shareholders’ interests, the Group operates the Phoenix Group Holdings plc LTIP�
TERMINATION POLICY SUMMARY In practice, the facts surrounding any termination do not always fit neatly into defined categories for good or bad leavers� Therefore, it is appropriate for the Remuneration Committee to consider the suitable treatment on a termination having regard to all of the relevant facts and circumstances available at that time� This policy applies both to any negotiations linked to notice periods on a termination and any treatment which the Remuneration Committee may choose to apply under the discretions available to it under the terms of the AIP, DBSS and LTIP plans� The potential treatments on termination under these plans are summarised below�
4 In accordance with the requirements of the DRR regulations, the 2019 value for long-term incentives is an estimate of the vesting outcomes for LTIP awards granted in 2017 and which are due to vest on 24 March 2020 for Clive Bannister and James McConville� These vesting levels are at 68�5% reflecting outcomes against the Cumulative cash generation and TSR performance measures to 31 December 2019 (see page 118) and assumptions regarding dividends for the period until vesting� This vesting outcome is then applied to the average share price between 1 October 2019 and 31 December 2019 (717�09p) to produce the estimated long-term incentives figures shown for 2019 in the above table� These assumptions will be trued up for actual share prices and dividends on vesting in the report for 2020� The disclosed LTIP figure of £1,168k for Clive Bannister reflects the proportion of the original award which ultimately vested (£971k) plus the value of dividend roll-up on those shares (£197k)� For James McConville the equivalent values are £734k as the disclosed LTIP figure, comprising £610k for the value of the proportion of the original LTIP award which ultimately vested plus the value of dividend roll-up on those shares (£124k)� All values are calculated using the three month average share price to 31 December 2019 (717�09p)�
5 For 2016’s LTIP awards which are reflected in the 2018 long-term incentives column above, the performance conditions were met as to 49�5% of maximum� The 2018 long-term incentives values in the above table reflect the value of the Company’s shares on the date of vesting which was 2 June 2019 (671�1p per share) multiplied by the number of shares vesting whereas the equivalent figure within the published 2018 Single Figure Table was an estimate which reflected the average share price between 1 October 2018 and 31 December 2018 (600�04p per share) and certain assumptions regarding the cumulative value of dividends on the number of shares vesting�
Deliver on Diversity targets Diversity targets are set for year end 2021 and while progress has been made in respect of succession and talent development, acquisitions often challenge progress and our published targets for both our gender pay gap and senior female representation have not progressed satisfactorily for the year 2019� However a solid framework is in place for diversity in relation to hiring and development of our colleagues�
In addition to the above targets, the Committee confirmed that the underpin performance condition relating to debt levels and associated interest costs, and management of debt, capital restructuring and Risk Management within the Group, customer satisfaction and, in exceptional cases, personal performance (as described more fully on page 119, had been achieved in the performance period�
The aggregate remuneration of all Executive and Non-Executive Directors under salary, fees, benefits, cash supplements in lieu of pensions and annual incentive was £4�120 million (2018: £4�055million)�
James McConville will leave the Company on 15 May 2020� His departure arrangements will be in line with the Remuneration Policy� He will receive pay in lieu of notice for the period starting on this date and ending on 9 March 2021, comprising salary, pension allowance and insurance benefits� He will receive no compensation for loss of car allowance� James' 2019 AIP will be paid in the normal way and subject to 40% deferral in line with the current policy� He will be eligible for a 2020 AIP award for the portion of the year in which he remains employed by the Group, which will be payable in March 2021 and subject to 50% deferral in line with the proposed policy� James' in-flight LTIP awards will be time pro-rated to his end date� A summary of the arrangements is set out in the table below� Actual figures will be disclosed in the 2020 Remuneration Report�
Rakesh Thakrar (proposed director) 15 May 2020 6 March 2020 12
Subject to Board approval, Executive Directors are permitted to accept outside appointments on external boards as long as these are not deemed to interfere with the business of the Group� The Executive Directors are entitled to retain any external fees� During 2019, Clive Bannister received £45,000 from Punter Southall Group in respect of an external directorship� He is also Chairman of the Museum of London for which he receives no payment� James McConville received £112,000 from Tesco Personal Finance plc�
Details of fees paid to EY during 2019 for audit and non-audit work are disclosed in note C4 to the IFRS consolidated financial statements�
CONTRACTUAL/OTHER Significant agreements impacted by a change of control of the Company There are change of control clauses contained in certain of the Group’s financing agreements� The £1�25 billion revolving credit facility and £500 million acquisition facility have provisions which would enable the lending banks to require repayment of all amounts borrowed following a change of control�
• make judgements and accounting estimates that are reasonable and prudent�
• repare the financial statements on the going concern basis unless it is inappropriate to presume that the Group and the Company will continue in business�
The consolidated statement of comprehensive income for the year then ended
Materiality • Overall Group materiality of £100 million (2018: £100 million) which represents 2�1% (2018: 1�9%) of total equity attributable to owners of the parent (‘Group equity’)�
To obtain sufficient audit evidence to assess the integrity of policyholder data we performed the following procedures: • obtained an understanding of and tested the design and operating effectiveness of the key controls, including information technology general controls, over management’s data collection, extraction and validation process; • for Outsourced Service Providers (‘OSP’) where we have placed reliance on the Service Organisation Controls (‘SOC1’) report, we have reviewed the SOC1 report and determined the impact of any identified control exceptions; • for OSPs where we do not receive a SOC1 report we have obtained an understanding of the process over data extraction and input into the actuarial models and performed direct testing of the design and operating effectiveness of the key controls; • performed substantive procedures including agreeing policyholder documentation to the policyholder data used in the actuarial model based on a sample of policies; • assessed the integrity of policy level data, performing corroborative testing on i) changes to static data during the period; ii) unexpected policy count movements between reporting periods; and iii) unusual trends and anomalies in the data, based upon our knowledge of the Group’s products, industry standards and through using data analytics; • confirmed that the actuarial model data extracts provided by the OSPs were those used as an input to the actuarial model; • assessed the appropriateness of management’s grouping of data for input into the actuarial model; and
• We consider that the key risks on the valuation of ERM financial investments relates to: i) assumptions as these are largely based on non-observable inputs and are highly judgmental, and ii) the completeness and accuracy of data feeding the valuation model�
Recoverability of intangible assets arising from the acquisition of Standard Life Assurance Limited and other associated entities (£2.57bn; 2018: £2.87bn) This is a new key audit matter for 31 December 2019.
• obtained management’s expectations of future profitability of the acquired entities and challenged the assumptions applied by management by comparing key assumptions and judgments with experience of the wider market and that of Phoenix�
Phoenix Life Division Full EY Standard Life Assurance Limited (‘SLAL’) Full EY Group Function Full EY Other Companies Specific EY
In our opinion, based on the work undertaken in the course of the audit: • the information given in the Strategic Report and the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements; and
• In November 2019 we identified that non-audit services which are prohibited under the FRC’s Ethical Standard, had been undertaken outside of the UK during the period December 2018 to March 2019� These related to assisting 4 non-UK investment funds with their EU withholding tax claims – these funds are consolidated by the Phoenix Group� Currently no withholding tax has been recovered by the funds as the claims are pending� Therefore, there is no impact on the consolidated financial statements of Phoenix Group Holdings plc for the year ended 31 December 2019� We therefore consider this to be a minor breach of the Ethical Standard and we do not consider our independence to be impaired� We notified the Audit Committee of this breach in November 2019� The Audit Committee agreed with our conclusion that the breach is minor and that our independence is not impaired� The Audit Committee’s discussion of this breach is set out on page 95� The evaluation of whether our independence was impaired included consideration of the safeguards to independence in connection with the services� We considered an appropriate safeguard is that the year-end tax balances were audited by a separate UK tax team to the tax team that provided the non-audit services�
Reclassification adjustments for amounts recognised in profit or loss 41 (28)
The long-term risk-free rate used as a basis for deriving the long-term investment return is set by reference to the swap curve at the 15year duration plus 10bps at the start of the year. A risk premium of 350bps is added to the risk-free yield for equities (2018: 350bps), 250bps for properties (2018: 250bps), 120bps for other fixed interest assets (2018: 150bps) and 50bps for gilts (2018: 50bps).
Reporting accountant services relate to assurance reporting on historical information included within investment circulars. In 2019, this includes public reporting associated with the acquisition of ReAssure Group. In 2018, this included public reporting associated with the acquisition of the Standard Life Assurance businesses and issuance of the Group’s Tier 1 Notes.
Further information on auditor’s remuneration and the assessment of the independence of the external auditor is set out in the Audit Committee report on pages 92 to 96.
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.
The non-controlling interests of £314 million (2018: £294 million) reflects third party ownership of Standard Life Private Equity Trust (‘SLPET’) determined at the proportionate value of the third party interest in the underlying assets and liabilities. SLPET is a UK Investment Trust listed and traded on the London Stock Exchange. As at 31 December 2019, the Group held 55.2% of the issued share capital of SLPET (2018: 55.2%).
Financial liabilities On initial recognition, financial liabilities are recognised when due and measured at the fair value of the consideration received less directly attributable transaction costs (with the exception of liabilities at FVTPL for which all transaction costs are expensed).
The significant sensitivities arise from movements in the yield curve, inflation rate and house prices. An increase of 100bps in the yield curve would decrease the value by £265 million (2018: £183 million) and a decrease of 100bps would increase the value by £296 million (2018: £205 million). An increase of 1% in the inflation rate would increase the value by £26 million (2018: £11 million) and a decrease of 1% would decrease the value by £43 million (2018: £21 million).
E2.3.3 Corporate transactions Included within financial assets and liabilities are related debt securities of £43 million (2018: £66 million), borrowings of £nil (2018: £13 million) and derivative liabilities of £4 million (2018: £13 million) pertaining to a reinsurance and retrocession arrangement (see note E3.2 for further information on these arrangements). These assets and liabilities are valued using a discounted cash flow model that includes valuation adjustments in respect of liquidity and credit risk. At 31 December 2019, the net of these balances was an asset of £39 million (2018: asset of £40 million). The valuation is sensitive to movements in the euro swap curve. An increase of 100bps in the swap curve would decrease the aggregate value by £2 million (2018: £2 million) and a decrease of 100bps would increase the aggregate value by £2 million (2018: £2 million).
The fair value of financial assets accepted as collateral for OTC derivatives but not recognised in the statement of consolidated financial position amounts to £437 million (2018: £374 million).
US $500 million Tier 2 bonds (note j) 376 390 396 342
Amount due for settlement after 12 months 2,107 2,174 a. In 1998, Mutual Securitisation plc raised £260 million of capital through the securitisation of Embedded Value on a block of existing unit-linked and unitised with-profit life and pension policies. The bonds were split between two classes, which ranked pari passu and were listed on the Irish Stock Exchange. The £140 million 7.39% class A1 limited recourse bonds matured in 2012 with no remaining outstanding principal. The £120 million 7.59% class A2 limited recourse bonds with an outstanding principal of £36 million (2018: £48 million) have an average remaining life of 1 year and mature in 2022. Phoenix Life Assurance Limited (‘PLAL’) has provided collateral of £14 million (2018: £21 million) to provide security to the holders of the recourse bonds in issue. During 2019, repayments totalling £12 million were made (2018: £12 million).
Changes to the Group’s borrowings since 31 December 2019 have been detailed in note I7.
E5.2 Reconciliation of liabilities arising from financing The table below details changes in the Group’s liabilities arising from financing activities, including both cash and non-cash changes (with the exception of lease liabilities, which have been included in note G10). Liabilities arising from financing activities are those for which cash flows were, or future cash flows will be, classified in the Group’s consolidated statement of cash flows as cash flows from financing activities.
E. FINANCIAL ASSETS & LIABILITIES continued E6. Risk Management – Financial Risk continued E6.2 Financial risk analysis continued E6.2.2 Market risk continued Interest rate and inflation risk Interest rate risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate relative to the respective liability due to the impact of changes in market interest rates on the value of interest-bearing assets and on the value of future guarantees provided under certain contracts of insurance. The paragraphs in this section also apply to inflation risk, but references to fixed rate assets and liabilities would be replaced with index-linked assets and liabilities.
A 10% decrease in property 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 £26 million (2018: £15 million).
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 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.
Gross benefits and claims Claims on insurance contracts and investment contracts with DPF reflect the cost of all claims arising during the period, including policyholder bonuses allocated in anticipation of a bonus declaration. Claims payable on maturity are recognised when the claim becomes due for payment and claims payable on death are recognised on notification. Surrenders are accounted for at the earlier of the payment date or when the policy ceases to be included within insurance contract liabilities. Where claims are payable and the contract remains in-force, the claim instalment is accounted for when due for payment. Claims payable include the costs of settlement.
A decrease of 5% in assurance mortality, 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 £58 million (2018: £54 million).
An increase of 10% 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 £20 million (2018: £26 million).
The Group ensures that the investment positions are managed within an Asset Liability Matching (‘ALM’) framework that has been developed to achieve long-term investments that are in line with the obligations under the Pearl Scheme. Within this framework an allocation of 25% of the scheme assets is invested in collateral for interest rate and inflation rate hedging where the intention is to hedge greater than 90% of the interest rate and inflation rate risk measured on the Technical Provisions basis.
Principal assumptions The principal financial assumptions of the Pearl Scheme are set out in the table below: Rate of increase for pensions in payment (5% per annum or RPI if lower) 2.90 3.10
It has been assumed that post-retirement mortality is in line with 86%/94% of S1PL base tables with future longevity improvements from 1 January 2017 are based on modified CMI 2018 Core Projections (2018: CMI 2017 Core Projections) and a long-term rate of improvement of 1.60% (2018: 1.75%) per annum for males and 1.30% (2018: 1.50%) per annum for females. Under these assumptions, the average life expectancy from retirement for a member currently aged 40 retiring at age 62 is 28.3 years (2018: 28.3 years) and 29.6 years (2018: 29.6 years) for male and female members respectively.
On acquisition of Standard Life Assurance businesses – 2,931 – – 36 36 2,967
Later than 1 year and not later than 5 years 850 884
A provision of £76 million was recognised in 2018 for the expected cost of the platform migration. During the year £14 million of this balance was utilised and the remaining £59 million is expected to be utilised within two years.
On 31 January 2020, the UK formally left the EU. There is some uncertainty about how the existing tax legislation will evolve following the UK's exit. No changes are required to the measurement of tax in these financial consolidated statements but this will be monitored and reassessed at each reporting period.
AQR UCITS Funds – AQR Global Risk Parity C5 GBP (Acc)
20 8 Boulevard Royal, L-2449, Luxembourg, Luxembourg 21 The Pearl Centre, Lynch Wood, Peterborough, PE2 6FY, England 22 Citco (Sweden) Ab Stureplan 4c 4 Tr 114 35 Stockholm 23 Aqr Capital Management LLC, Greenwich, 06830, United States 24 6B, rue Gabriel Lippmann, Parc d’Activité Syrdall 2, L-5365 Münsbach, Luxembourg 25 1 George Street, Edinburgh, EH2 2LL, United Kingdom 26 Standard Life House, 30 Lothian Road, Edinburgh, EH1 2DH, United Kingdom 27 4th Floor, 25-28 Adelaide Road, Dublin 2, D02RY98, Ireland 28 70 Sir Rogerson’s Quay, Dublin 2, Republic of Ireland 29 201 Bishopsgate, London, EC2M 3AE, United Kingdom 30 88 2-4, Rue Eugène Ruppert, L-2453 Luxembourg, Luxembourg 31 7 Newgate Street, London EC1A 7NX, United Kingdom 32 Springfield Lodge, Colchester Road, Chelmsford, Essex CM2 5PW, United Kingdom 33 49, Avenue J.F. Kennedy, L-1855 Luxembourg 34 BMO Global Asset Management, Exchange House, Primrose Street, London EC2A 2NY, United Kingdom 35 35a Avenue J.F. Kennedy, L-1855, Luxembourg 36 Avenida de Aragon 330 – Building 5, 3rd Floor, Parque Empresarial Las Mercedes, 28022 – Madrid, Spain 37 Elizabeth House, 9 Castle Street, St Helier, JE4 2QP, Jersey 38 2 Snowhill, Birmingham, B4 6WR, United Kingdom 39 12 Throgmorton Avenue, London EC2N 2DL
Following the scheme of arrangement, participants in the Old PGH sharesave plan exchanged their options over Old PGH shares for equivalent options over PGH plc ordinary shares. All sharesave options were increased in November 2016 and again in July 2018 following the Group’s rights issues (see note D1) and the exercise price of these awards was also amended as a result of these issues.
The following information was relevant in the determination of the fair value of the 2015 to 2019 UK sharesave options: sharesave
The weighted average share price at the date of exercise for the rewards exercised is £6.81 (2018: £6.82).
The weighted average remaining contractual life for the rewards outstanding as at 31 December 2019 is five years (2018: six years).
Other risks Customer risk Customer risk is the risk of reductions in earnings and/or value through inappropriate or poor customer treatment (including poor advice).
To purchase, construct or develop investment property and income strips 161 125
On 27 February 2020, the Company entered into a £500 million bridge facility (the ‘bridge facility’). The bridge facility matures on the first anniversary of the completion of the acquisition of ReAssure Group plc but can be extended by a further six months on two occasions. The bridge facility is available to be used to finance the acquisition of ReAssure Group plc on a customary certain funds basis, and, subject to the agreement of the lenders, may also be available to be utilised after completion of the acquisition for the general corporate purposes of the Group. There are no mandatory or target amortisation payments associated with the bridge facility but the bridge facility does include mandatory prepayment obligations that are customary for a bridge facility of this nature and voluntary prepayments are permissible. The bridge facility accrues interest at a margin over LIBOR that starts at 0.35% per annum and steps up periodically until maturity.
Cash and cash equivalents at the end of the period 45 1 246 PHOENIX GROUP HOLDINGS PLC ANNUAL REPORT & ACCOUNTS 2019
1. ACCOUNTING POLICIES (a) Basis of Preparation The financial statements have been prepared on a going concern and on an historical cost basis except for those financial assets and financial liabilities that have been measured at fair value.
2. FINANCIAL INFORMATION New Accounting Pronouncements not yet Effective Details of the standards, interpretations and amendments to be adopted in future periods are detailed in note A5 to the consolidated financial statements, none of which are expected to have a significant impact on the Company’s financial statements.
On 21 February 2019, the Company acquired SLIDAC from its subsidiary SLAL, for an initial consideration of £162 million settled in the form of a loan (see note 5) such that its interest in SLIDAC is now directly held. On acquisition, the Company subscribed for an additional share in SLIDAC for a consideration of £250 million. Following the completion of a Part VII transfer of the European branch business from SLAL to SLIDAC, the purchase price for the acquisition of SLIDAC was increased by £120 million, again settled in the form of a loan, which increased the carrying value of the Company’s investment in SLIDAC to £532 million.
Loans due from Phoenix Group Employee Benefit Trust (note c) 7 – 7 –
Loans and deposits (note 10) N/A Performing 12 month ECL 1,227 – 1,227
Sovereign and supranational debt represented 31% (2018: 29%) of the debt portfolio in respect of shareholder exposure, or £6.1 billion, at 31 December 2019 (2018: £5.2 billion). The vast majority of the life companies’ exposure to sovereign and supranational debt holdings is to UK gilts.
Under Method 2, the solo Own Funds are aggregated rather than consolidated on a line by line basis. The SCR is also aggregated, with no allowance for diversification. Method 2 is used for all entities within the Standard Life Assurance businesses acquired and Method 1 is used for all other entities of the Group. The Group has approval to use a combination of Methods 1 and 2 for consolidating its Group solvency results.
PGH plc’s Method 1 Eligible Own Funds to cover MGSCR is £4.3 billion (2018: £4.2 billion) leaving an excess of Eligible Own Funds over MGSCR of £3.2 billion (2018: £3.2 billion), which translates to an MGSCR coverage ratio of 386% (2018: 408%).
The MCR for the Method 2 part of the Group is £1.2 billion (2018: £1.1 billion), with Eligible Own Funds of £4.9 billion (2018: £4.2 billion), leaving an excess of Eligible Own Funds over MCR of £3.7 billion (2018: £3.1 billion), which translates to an MCR coverage ratio of 394% (2018: 377%).
Operating companies’ cash generation is not directly reconcilable to an equivalent GAAP measure (IFRS statement of consolidated cash flows) as it includes amounts that eliminate on consolidation�
If you deal with an unauthorised firm, you will not be eligible to receive payment under the Financial Services Compensation Scheme (‘FSCS’)� The FCA can also be contacted by completing an online form available at www�fca�org�uk/consumers/report-scam-unauthorised-firm� Details of any share dealing facilities that the Company endorses will be included in Company mailings�
New business contribution after adjustment to add back ‘day 1’ acquisition costs
INHERITED ESTATE The assets of the long-term with-profit funds less the realistic reserves for nonprofit policies written into the non-profit fund, less asset shares aggregated across the with-profit policies and any additional amounts expected at the valuation date to be paid to in-force policyholders in the future in respect of smoothing costs and guarantees
Registered address Phoenix Group Holdings plc Juxon House 100 St Paul’s Churchyard London EC4M 8BU