The Group calculates its basic earnings per share based on the present shares in issue using the earnings attributable to ordinary equity holders of the parent, divided by the weighted average number of ordinary shares in issue during the year. Diluted earnings per share are calculated based on the potential future shares in issue assuming the conversion of all potentially dilutive ordinary shares. The weighted average number of ordinary shares in issue is adjusted to assume conversion of dilutive share awards granted to employees and warrants.
Following the completion of the rights issue in July 2018 the earnings per share calculations, for all periods up to the date the rights issue shares were issued, have been adjusted for the bonus element of the rights issue. The bonus factor used was 1.11. Further details of the rights issue are included in note D1.
B3.1 Basic earnings per share The result attributable to ordinary equity holders of the parent for the purposes of determining earnings per share has been calculated as set out below: £m £m
Profit/(loss) attributable to ordinary equity holders of the parent 367 (27)
The weighted average number of ordinary shares outstanding during the period is calculated as detailed below: million million
Issued ordinary shares at beginning of the period (restated for bonus element of rights issue) 437 436
Diluted earnings per share (restated for bonus element of rights issue) 66.7 (6.3)
Final dividends on ordinary shares are recognised as a liability and deducted from equity when they are approved by the Group’s owners. Interim dividends are deducted from equity when they are paid. Prior to the creation of the new UK-registered holding company (see note A1), dividends were charged within equity against the share premium account, as permitted by Cayman Islands Companies Law. From the date of the scheme of arrangement, dividends will be charged to retained earnings in accordance with the UK Companies Act 2006. Dividends for the year that are approved after the reporting period are dealt with as an event after the reporting period. Declared dividends are those that are appropriately authorised and are no longer at the discretion of the entity.
On 22 August 2018, the Board declared an interim dividend of 22.6p per share for the half year ended 30 June 2018. The dividend amounted to £163 million and was paid on 1 October 2018.
Fee income from investment contracts without DPF 171 – – 171
Remaining performance obligations The practical expedient under IFRS 15 has been applied and remaining performance obligations are not disclosed as the Group has the right to consideration from customers in amounts that correspond with the performance completed to date. Specifically management charges become due over time in proportion to the Group’s provision of investment management services.
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, financial liabilities and investment property at fair value and impairment losses on loans and receivables. Interest income is recognised in the consolidated income statement as it accrues using the effective interest method.
Administrative expenses Administrative expenses are recognised in the consolidated income statement as incurred. Deferred acquisition costs For insurance and investment contracts with DPF, acquisition costs which include both incremental acquisition costs and other direct costs of acquiring and processing new business, are deferred. For investment contracts without DPF, incremental costs directly attributable to securing rights to receive fees for asset management services sold with unit-linked investment contracts are deferred. Trail or renewal commission on investment contracts without DPF where the Group does not have an unconditional legal right to avoid payment is deferred at inception of the contract and an offsetting liability for contingent commission is established. Deferred acquisition costs are amortised over the life of the contracts as the related revenue is recognised. After initial recognition, deferred acquisition costs are reviewed by category of business and are written off to the extent that they are no longer considered to be recoverable.
Movement in PA(GI) provision, net of reimbursement (see note G1) (2) (18)
Stamp duty payable on acquisition of Standard Life Assurance businesses 15 –
During the year the Group obtained the following services from its auditor at costs as detailed in the table below.
Audit of the consolidated financial statements includes certain amounts in respect of the audit of the acquisition balance sheet of the acquired Standard Life Assurance businesses together with amounts in respect of reporting to the auditor of SLA plc given their status as a significant investor.
Reporting accountant services relate to assurance reporting on historical information included within investment circulars. In 2018, this includes public reporting associated with the issuance of equity as part of the acquisition of the Standard Life Assurance businesses and issuance of the Group’s Tier 1 Notes. In 2017, this included assurance reporting on historical information included within investment circulars.
C. OTHER INCOME STATEMENT NOTES continued C4. Auditor’s remuneration continued Corporate finance services fees were £3.7 million (2017: £0.7 million). These fees principally relate to services provided in connection with the acquisition of the Standard Life Assurance businesses and the Premium Listing of the Company undertaken as part of the Group’s on-shoring activities. £1.6 million of the fees relates to the engagement of the external auditors to perform actuarial and finance due diligence procedures where synergies were anticipated to arise with subsequent audit work. The remaining balance of £2.0 million relates to the provision of assurance to the Board and the sponsoring banks in support of disclosures made in the public transaction documentation relating to the acquisition and the Premium Listing. The 2017 balance reflects fees in respect of the provision of assurance services to the Board and sponsoring banks in support of disclosures made in public transaction documentation relating to debt issuances undertaken in the year.
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 68 to 71.
Tax charge/(credit) at standard UK rate of 19.0% (2017: 19.25%)1 89 (5)
Movement on acquired in-force amortisation at less than 19.0% (2017: 19.25%) – 3
Total tax (credit)/charge for the period (151) 20 1 Old PGH became tax resident in the UK on 31 January 2018. As the majority of the Group’s business operated predominately in the UK prior to this date, the reconciliation of the tax (credit)/charge in the comparative period was completed by reference to the standard rate of UK tax rather than by reference to the Jersey income tax rate of 0% previously applicable to Old PGH.
2 Includes non-taxable dividends and gains, non-taxable pension scheme items, and non-taxable gain on the acquisition of the Standard Life Assurance businesses.
4 The prior year credit relates to the impact of reaching agreement with HMRC in respect of the Group’s prior year tax returns.
5 This predominately relates to IFRS transitional adjustments which are being recognised at the full shareholder rate rather than marginal policyholder tax rates.
On 10 July 2018, the Group issued 183,581,978 shares following a rights issue undertaken in association with the acquisition of the Standard Life Assurance businesses where 7 rights issue shares were issued at 518 pence per new share for every 15 existing Old PGH shares held. The rights issue raised £951 million and proceeds, net of deduction of commission and expenses, were £934 million.
During the year, 270,142 shares were issued at a premium of £2 million in order to satisfy obligations to employees under the Group’s sharesave schemes (see note I1).
Shares in issue at 31 December 393,232,644 39,323,264 1 Comparative figures have been restated for the scheme of arrangement as detailed in note A1.
On 26 April 2018, Old PGH issued £500 million of Tier 1 Notes, the proceeds of which were used to fund a portion of the cash consideration for the acquisition of the Standard Life Assurance businesses. The Tier 1 Notes bear interest on their principal amount at a fixed rate of 5.75% per annum up to the ‘First Call Date’ of 26 April 2028. Thereafter the fixed rate of interest will be reset on the First Call Date and on each fifth anniversary of this date by reference to a 5 year gilt yield plus a margin of 4.169%. Interest is payable on the Tier 1 Notes semi-annually in arrears on 26 October and 26 April.
The non-controlling interests of £265 million recognised on acquisition of the Standard Life Assurance businesses reflects third party ownership of Standard Life Private Equity Trust (‘SLPET’) determined at the fair 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 2018, the Group held 55.2% of the issued share capital of SLPET.
Summary financial information showing the interest that non-controlling interests have in the Group’s activities and cash flows is shown below: SLPET
Associates Investments in associates that are held for investment purposes are accounted for under IAS 39 Financial Instruments: Recognition and Measurement as permitted by IAS 28 Investments in Associates and Joint Ventures. These are measured at fair value through profit or loss. There is no investment in associates which are of a strategic nature.
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). Subsequent to initial recognition, financial liabilities (except for liabilities under investment contracts without DPF and other liabilities designated at FVTPL) are measured at amortised cost using the effective interest method. Financial liabilities are designated upon initial recognition at FVTPL and where doing so results in more meaningful information because either: • it eliminates or significantly reduces accounting mismatches that would otherwise arise from measuring assets or liabilities or recognising the gains and losses on them on different bases; or
Receipts and payments on investment contracts without DPF are accounted for using deposit accounting, under which the amounts collected and paid out are recognised in the statement of consolidated financial position as an adjustment to the liability to the policyholder. The valuation of liabilities on unit-linked contracts is held at the fair value of the related assets and liabilities. The liability is the sum of the unit-linked liabilities plus an additional amount to cover the present value of the excess of future policy costs over future charges. Movements in the fair value of investment contracts without DPF are included in the ‘change in investment contract liabilities’ in the consolidated income statement. Investment contract policyholders are charged for policy administration services, investment management services, surrenders and other contract fees. These fees are recognised as revenue over the period in which the related services are performed. If the fees are for services provided in future periods, then they are deferred and recognised over those periods. ‘Front end’ fees are charged on some non-participating investment contracts. Where the non-participating investment contract is measured at fair value, such fees which relate to the provision of investment management services are deferred and recognised as the services are provided. Deposits from reinsurers It is the Group’s practice to obtain collateral to cover certain reinsurance 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 ‘deposits received from reinsurers’ in the statement of consolidated financial position. Net asset value attributable to unitholders The net asset value attributable to unitholders represents the non-controlling interest in collective investment schemes which are consolidated by the Group. This interest is classified at FVTPL and measured at fair value, which is equal to the bid value of the number of units of the collective investment scheme not owned by the Group. 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. Derecognition of financial liabilities A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires.
E1. Fair values continued The table below sets out a comparison of the carrying amounts and fair values of financial instruments as at 31 December 2018: Carrying value
Financial assets measured at amortised cost: Loans and deposits at amortised cost 423 77 423
Following application of the temporary exemption granted to insurers in IFRS 4 Insurance Contracts from applying IFRS 9 Financial Instruments (see note A4) the table below separately identifies financial assets with contractual cash flows that are solely payments of principal and interest (‘SPPI’) (excluding those held for trading or managed on a fair value basis) and all other financial assets, measured at fair value through profit or loss.
Financial liabilities at fair value through profit or loss: Held for trading – derivatives 1,093 936 1,093
Financial liabilities at fair value through profit or loss: Held for trading – derivatives 1,242 1,170 1,242
Total financial liabilities 32,922 31,177 1 These assets and liabilities have no expected settlement date. 2 Total financial assets includes £1,115 million of assets held in a collateral account pertaining to the PGL pension scheme buy-in agreement.
See note G6.2 for further details. 3 These liabilities have no expected settlement date. As the obligations relate to the repayment of collateral received in the form of cash, the liability is stated at the value of the consideration received and therefore no fair value has been disclosed.
Financial assets designated at FVTPL upon initial recognition: Loans and deposits – – 3,189 3,189
Total financial liabilities for which fair values are disclosed – 6,190 259 6,449
Financial liabilities designated at FVTPL upon initial recognition: Net asset value attributable to unitholders 840 – – 840
Fixed and variable rate income securities categorised as Level 3 investments are predominately valued using broker quotes with the exception of unquoted corporate bonds. Although such valuations are sensitive to estimates, it is believed that changing one or more of the assumptions to reasonably possible alternative assumptions would not change the fair value significantly. These assets are typically held to back investment contract liabilities and participating investments contracts and therefore fair value movements in such financial assets will typically be offset by corresponding movements in liabilities.
Fixed and variable rate income securities The Group holds unquoted corporate bonds comprising investments in local authority loans, private placements and infrastructure loans with a total value of £1,167 million (2017: £301 million). These unquoted corporate bonds are secured on various assets and are valued using a discounted cash flow model. The discount rate is made up of a risk-free rate and a spread. The risk-free rate is taken from an appropriate gilt of comparable duration. The spread is taken from a basket of comparable securities. The valuations are sensitive to movements in this spread. An increase of 35bps would decrease the value by £50 million (2017: an increase of 25bps would decrease the value by £8 million) and a decrease of 35bps would increase the value by £52 million (2017: a decrease of 25bps would increase the value by £9 million).
Loans and deposits Included within loans and deposits are investments in equity release mortgages with a value of £2,020 million (2017: £1,255 million). The loans are valued using a discounted cash flow model and a Black-Scholes model for valuation of the No-Negative Equity Guarantee (‘NNEG’). The NNEG caps the loan repayment in the event of death or entry into long-term care to be no greater than the sales proceeds from the property.
Cash flows are discounted using a risk free curve plus a spread determined at inception based on the purchase price. This is monitored against prevailing market conditions to determine whether updates are required. To date, no updates to the spread have been necessary.
E2. Fair value hierarchy continued E2.3 Level 3 financial instrument sensitivities continued Considering the fair valuation uses certain inputs that are not market observable, the fair value measurement of these loans has been categorised as a Level 3 fair value. The key non-market observable input is the voluntary redemption rate, for which the assumption varies by the origin, age and loan to value ratio of each portfolio. Experience analysis is used to inform this assumption, however where experience is limited for more recently originated loans, significant expert judgement is required.
Also included within loans and deposits are investments in commercial real estate loans of £449 million (2017: £77 million). The loans are valued using a model which discounts the expected projected future cash flows at the risk-free rate plus a spread derived from a basket of comparable securities. The valuation is sensitive to changes in the discount rate. An increase of 35bps in the discount rate would decrease the value by £7 million (2017: an increase of 100bps would decrease the value by £5 million) and a decrease of 35bps would increase the value by £8 million (2017: a decrease of 100bps would increase the value by £5 million).
Also included within loans and deposits are income strips with a value of £654 million (2017: nil). Income strips are transactions where an owner-occupier of a property has sold a freehold or long leasehold interest to the Group, and has signed a long lease (typically 30-45 years) or a ground lease (typically 45-175 years) and retains the right to repurchase the property at the end of the lease for a nominal sum (usually £1). The income strips are valued using an income capitalisation approach, where the annual rental income is capitalised using an appropriate yield. The yield is determined by considering recent transactions involving similar income strips. The valuation is sensitive to movements in yield. An increase of 35bps would decrease the value by £70 million and a decrease of 35bps would increase the value by £79 million.
Borrowings Included within borrowings measured at fair value and categorised as Level 3 financial liabilities are property reversion loans with a value of £114 million (2017: £131 million), measured using an internally developed model. The valuation is sensitive to key assumptions of the discount rate and the house price inflation rate. An increase in the discount rate of 1% would increase the value by £2 million (2017: £3 million) and a decrease of 1% would decrease the value by £2 million (2017: £3 million). An increase of 1% in the house price inflation rate would decrease the value by £2 million (2017: £3 million) and a decrease of 1% would increase the value by £1 million (2017: £3 million).
Derivatives Included within derivative liabilities are forward local authority loans and forward private placements with a value of £nil. These investments include a commitment to acquire or provide funding for fixed rate debt instruments at specified future dates. These investments are valued using a discounted cash flow model that takes a comparable UK Treasury stock and applies a credit spread to reflect reduced liquidity. The credit spreads are derived from a basket of comparable securities. The valuations are sensitive to movements in this spread. An increase of 35bps would decrease the value by £16 million and a decrease of 35bps would increase the value by £17million.
E. FINANCIAL ASSETS & LIABILITIES continued E2. Fair value hierarchy continued E2.4 Transfers of financial instruments between Level 1 and Level 2
Financial assets designated at FVTPL upon initial recognition: Fixed and variable rate income securities 86 162
Financial assets designated at FVTPL upon initial recognition: Derivatives – 6
Financial Liabilities designated at FVTPL upon initial recognition: Derivatives – 3
The application of the Group’s fair value hierarchy classification methodology at an individual security level, in particular observations with regard to measures of market depth and bid-ask spreads, resulted in an overall net movement of financial assets from Level 2 to Level 1 in both the current and comparative period.
E2.5 Movement in Level 3 financial instruments measured at fair value
Net gains/ (losses) in income statement £m Purchases £m Sales £m
Financial assets designated at FVTPL upon initial recognition: Investment in joint venture
Fixed and variable rate income securities 146 8 281 (18) (6) 411 5
E3.1 Summary The fair values of derivative financial instruments are as follows: Assets 2018 £m
E3.2 Corporate transactions The Group has in place longevity swap arrangements with corporate pension schemes which do not meet the definition of insurance contracts under the Group’s accounting policies. Under these arrangements the majority of the longevity risk has been passed to third parties. Derivative assets of £162 million and derivative liabilities of £96 million have been recognised as at 31 December 2018 (2017: £144 million and £77 million respectively).
In addition, the Group has entered into a transaction under which it has accepted reinsurance on a portfolio of single and regular premium life insurance policies and retroceded the majority of the insurance risk. Taken as a whole, this transaction does not give rise to the transfer of significant insurance risk to the Group and therefore does not meet the definition of an insurance contract under the Group’s accounting policies. The fair value of amounts due from the cedant are recognised within loans and deposits (see note E1). The fair value of amounts due to the retrocessionaire are recognised as a derivative liability and totalled £13 million at 31 December 2018 (2017: £21 million). A loan liability has been recognised in respect of financing obtained for the initial reinsurance premium (see note E5).
E3.3 Warrants over shares On 2 September 2009, Old PGH issued 5 million warrants over its shares to the Lenders. These warrants entitled the holder to purchase one ‘B’ ordinary share at a price of £15 per share, subject to adjustment. Following the achievement of the Company’s Premium Listing on 5 July 2010, the Lenders’ warrants related to ordinary shares rather than ‘B’ ordinary shares.
On 23 August 2018, the Group redeemed and cancelled all outstanding warrants for £56,000. The carrying value of the warrants as at 31 December 2017 was £56,000.
The Group receives and pledges collateral in the form of cash or non-cash assets in respect of stock lending transactions, derivative contracts and reinsurance arrangements in order to reduce the credit risk of these transactions. The amount and type of collateral required where the Group receives collateral depends on an assessment of the credit risk of the counterparty. Collateral received in the form of cash, where the Group has contractual rights to receive the cash flows generated, is recognised as an asset in the statement of consolidated financial position with a corresponding liability for its repayment. Non-cash collateral received is not recognised in the statement of consolidated financial position, unless the counterparty defaults on its obligations under the relevant agreement. Non-cash collateral pledged where the Group retains the contractual rights to receive the cash flows generated is not derecognised from the statement of consolidated financial position, unless the Group defaults on its obligations under the relevant agreement. Cash collateral pledged, where the counterparty has contractual rights to receive the cash flows generated, is derecognised from the statement of consolidated financial position and a corresponding receivable is recognised for its return.
The amounts recognised as financial assets and liabilities from cash collateral received at 31 December 2018 are set out below.
Credit risk on exchange traded derivative assets of £363 million (2017: £29 million) is mitigated through regular margining and the protection offered by the exchange.
The fair value of financial assets accepted as such collateral but not recognised in the statement of financial position amounts to £2,746 million (2017: £623 million).
The Group classifies the majority of its interest bearing borrowings as financial liabilities carried at amortised cost and these are recognised initially at fair value less any attributable transaction costs. The difference between initial cost and the redemption value is amortised through the consolidated income statement over the period of the borrowing using the effective interest method. Certain borrowings are designated upon initial recognition at fair value through profit or loss and measured at fair value where doing so provides more meaningful information due to the reasons stated in the financial liabilities accounting policy (see note E1). Transaction costs relating to borrowings designated upon initial recognition at fair value through profit or loss are expensed as incurred. Borrowings are classified as either policyholder or shareholder borrowings. Policyholder borrowings are those borrowings where there is either no or limited shareholder exposure, for example, borrowings attributable to the Group’s with-profit operations.
E. FINANCIAL ASSETS & LIABILITIES continued E5. Borrowings continued E5.1 Analysis of borrowings continued 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 £48 million (2017: £60 million) have an average remaining life of 1 year and mature in 2022. Phoenix Life Assurance Limited (‘PLAL’) has provided collateral of £21 million (2017: £26 million) to provide security to the holders of the recourse bonds in issue. During 2018, repayments totalling £12 million were made (2017: £12 million).
b. The Property Reversions loan from Santander UK plc (‘Santander’) was recognised in the consolidated financial statements at fair value. It relates to the sale of Extra-Income Plan policies that Santander finances to the value of the associated property reversions. As part of the arrangement Santander receive an amount calculated by reference to the movement in the Halifax House Price Index and the Group is required to indemnify Santander against profits or losses arising from mortality or surrender experience which differs from the basis used to calculate the reversion amount. Repayment will be on a policy-by-policy basis and is expected to occur over the next 10 to 20 years. During 2018, repayments totalling £25 million were made (2017: £24 million). Note G9 contains details of the assets that support this loan.
e. On 7 July 2014, the Group’s financing subsidiary, PGH Capital plc (‘PGHC’), issued a £300 million 7 year senior unsecured bond at an annual coupon rate of 5.75% (‘£300 million senior bond’). On 20 March 2017, Old PGH was substituted in place of PGHC as issuer of the £300 million senior bond. On 5 May 2017, Old PGH completed the purchase of £178 million of the £300 million senior bond at a premium of £25 million in excess of the principal amount. Accrued interest on the purchased bonds was settled on this date.
g. On 23 February 2018, Old PGH entered into an acquisition facility with an aggregate principal amount of £600 million. The acquisition facility has a termination date of 31 August 2019. The Group is entitled to request two six month extensions to the term of the facility (which would together extend the termination date to 31 August 2020). The interest period may be selected by the Group and the interest rate for the initial six month period is LIBOR plus a margin of 0.5%. On 12 December 2018, the Company became an additional borrower and guarantor under the acquisition facility.
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. 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.
Cash movements Non-cash movements £m £m £m £m £m £300 million senior unsecured bond 121 – – – – – 121 £900 million unsecured revolving credit facility – 295 (295) – – – –
E. FINANCIAL ASSETS & LIABILITIES continued E5. Borrowings continued E5.2 Reconciliation of liabilities arising from financing continued
Cash movements Non-cash movements £m £m £m £m £m £900 million unsecured revolving credit facility 843 – (850) – – 7 –
The Group’s overall exposure to market and credit risk is monitored by appropriate committees, which agree policies for managing each type of risk on an ongoing basis, in line with the investment strategy developed to achieve investment returns in excess of amounts due in respect of insurance contracts. The effectiveness of the Group’s ALM framework relies on the matching of assets and liabilities arising from insurance and investment contracts, taking into account the types of benefits payable to policyholders under each type of contract. Separate portfolios of assets are maintained for with-profit business funds (which include all of the Group’s participating business), non-linked non-profit funds and unit-linked funds.
E6. Risk Management – financial risk continued E6.2 Financial risk analysis Transactions in financial instruments result in the Group assuming financial risks. These include credit risk, market risk and financial soundness risk. Each of these are described below, together with a summary of how the Group manages the risk, along with sensitivity analysis where appropriate. The sensitivity analysis does not take into account second order impacts of market movements, for example, where a market movement may give rise to potential indicators of impairment for the Group’s intangible balances.
There are two principal sources of credit risk for the Group: • credit risk which results from direct investment activities, including investments in fixed and variable rate income securities, derivatives counterparties, collective investment schemes and the placing of cash deposits; and
Credit risk is managed by the monitoring of aggregate Group exposures to individual counterparties and by appropriate credit risk diversification. The Group manages the level of credit risk it accepts through credit risk tolerances. Credit risk on derivatives and securities lending is mitigated through the use of collateral. The credit risk borne by the shareholder on with-profit policies is dependent on the extent to which the underlying insurance fund is relying on shareholder support.
E. FINANCIAL ASSETS & LIABILITIES continued E6. Risk Management – financial risk continued E6.2 Financial risk analysis continued Quality of credit assets An indication of the Group’s exposure to credit risk is the quality of the investments and counterparties with which it transacts. The following table provides information regarding the aggregate credit exposure split by credit rating.
For financial assets that do not have credit ratings assigned by external rating agencies but where the Group has assigned an internal rating for use in managing and monitoring credit risk, the assets are classified as ‘internally rated’. If a financial asset is neither rated by an external agency nor ‘internally rated’, it is classified as ‘not rated’: AAA
Reinsurers’ share of insurance contract liabilities – 6,227 1,292 – – 45 – 7,564
2 £39 million of AAA, £146 million of AA, £418 million of A, and £123 million of BBB fixed and variable rate income securities are internally rated. 3 Non-rated loans and deposits of £2,783 million (2017: £1,271 million) Includes equity release mortgages with a value of £2,020 million (2017: £1,255 million).
Fixed and variable rate income securities 3,867 12,853 5,571 3,586 360 546 215 26,998
Reinsurers’ share of investment contract liabilities – – – – – – 6,085 6,085 1 As noted above for financial assets that do not have credit ratings assigned by external ratings the Group assigns internal ratings for use in management and monitoring credit risk. £33 million of AAA, £218 million of AA, £103 million of A, £5 million of BBB and £1 million of BB and below of fixed and variable rate income securities are internally rated.
The Group operates an Internal Credit Rating Committee to perform oversight and monitoring of internal credit ratings for internally rated assets. Internally rated assets are those that do not have a public rating from an external credit assessment institution. The internal credit ratings used by the Group are provided by fund managers or for certain assets (in particular, equity release mortgages) determined by the Life Companies. A variety of methods are used to validate the appropriateness of the internal credit ratings. The Internal Credit Rating Committee reviews the policies, processes and practices to ensure the appropriateness of the internal ratings assigned to asset classes.
E6. Risk Management – financial risk continued E6.2 Financial risk analysis continued A further indicator of the quality of the Group’s financial assets is the extent to which they are neither past due nor impaired. All of the amounts in the table above for the current and prior year are neither past due nor impaired.
In the non-participating funds, policy liabilities’ sensitivity to interest rates are matched primarily with fixed and variable rate income securities and hedging if necessary to match duration, with the result that sensitivity to changes in interest rates is very low. The Group’s exposure to interest rates principally arises from the Group’s hedging strategy to protect the regulatory capital position, which results in an adverse impact on profit on an increase in interest rates.
A decrease of 1% in interest rates, with all other variables held constant, would result in an increase in profits after tax in respect of a full financial year, and in equity, of £211 million (2017: £196 million).
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 £15 million (2017: £11 million).
E6. Risk Management – financial risk continued E6.2 Financial risk analysis continued A 10% increase in property prices, with all other variables held constant, would result in an increase in profits after tax in respect of a full financial year, and in equity, of £7 million (2017: £5 million).
The sensitivity to changes in equity prices is primarily driven by the Group’s equity hedging arrangements over the value of future management charges that are linked to asset values.
Currency risk With the exception of Standard Life business sold in Germany and the Republic of Ireland, and some historic business written in the latter, the Group’s principal transactions are carried out in sterling. The assets for these books of business are generally held in the same currency denomination as their liabilities, therefore, any foreign currency mismatch is largely mitigated. Consequently, the foreign currency risk relating to this business mainly arises when the assets and liabilities are translated into sterling.
Some of the Group’s commercial property investments are held through collective investment schemes. The collective investment schemes have the power to restrict and/or suspend withdrawals, which would, in turn, affect liquidity. This was invoked as a result of the market volatility experienced following the result of the referendum on membership of the European Union in 2016 in line with other firms across the industry. In 2017 and 2018, all unit trusts processed investments and realisations in a normal manner and have not imposed any restrictions or delays.
Some of the Group’s cash and cash equivalents are held through collective investment schemes. The collective investment schemes have the power, in an extreme stress, to restrict and/or suspend withdrawals, which would, in turn, affect liquidity. To date, the collective investment schemes have continued to process both investments and realisations in a normal manner and have not imposed any restrictions or delays.
Payables related to direct insurance contracts 902 – – – 902
E6. Risk Management – financial risk continued E6.2 Financial risk analysis continued Investment contract policyholders have the option to terminate or transfer their contracts at any time and to receive the surrender or transfer value of their policies. Although these liabilities are payable on demand, and are therefore included in the contractual maturity analysis as due within one year, the Group does not expect all these amounts to be paid out within one year of the reporting date.
F. INSURANCE CONTRACTS, INVESTMENT CONTRACTS WITH DPF AND REINSURANCE F1. Liabilities under insurance contracts
Where policyholders have valuable guarantees, options or promises in respect of the with-profit business, these costs are generally valued using a stochastic model. In calculating the realistic liabilities, account is taken of the future management actions consistent with those set out in the Principles and Practices of Financial Management (‘PPFM’). Standard Life Assurance Limited (‘SLAL’), a wholly-owned subsidiary of the Group, includes the Heritage With Profits Fund (‘HWPF’). In 2006, the Standard Life Assurance Company demutualised. The demutualisation was governed by its Scheme of Demutualisation (‘the Scheme’). Under the Scheme substantially all of the assets and liabilities of the Standard Life Assurance Company were transferred to SLAL. The Scheme of Demutualisation (‘the Scheme’) provides that certain defined cash flows (recourse cash flows) arising in the HWPF on specified blocks of UK and Ireland business, both participating and non-participating, may be transferred out of that fund when they emerge, being transferred to the Shareholder Fund (‘SHF’) or the Proprietary Business Fund (‘PBF’) of SLAL, and thus accrue to the ultimate benefit of equity holders of the Company. Under the Scheme, such transfers are subject to certain constraints in order to protect policyholders. The Scheme also provides for additional expenses to be charged by the PBF to the HWPF in respect of German branch business in SLAL. Under the realistic valuation, the discounted value of expected future cash flows on participating contracts not reflected in the WPBR is included in the cost of future policy-related liabilities (as a reduction where future cash flows are expected to be positive). The discounted value of expected future cash flows on non-participating contracts not reflected in the measure on non-participating liabilities is recognised as a separate asset (where future cash flows are expected to be positive). The Scheme requirement to transfer future recourse cash flows out of the HWPF is recognised as an addition to the cost of future policy-related liabilities. The discounted value of expected future cash flows on non-participating contracts can be apportioned between those included in the recourse cash flows and those retained in the HWPF for the benefit of policyholders. Applying the policy noted above for the HWPF: • The value of participating investment contract liabilities on the consolidated statement of financial position is reduced by future expected (net positive) cash flows arising on participating contracts.
• Future expected cash flows on non-participating contracts are not recognised as an asset of the HWPF on the consolidated statement of financial position. However, future expected cash flows on non-participating contracts that are not recourse cash flows under the Scheme are used to reduce the value of participating insurance and participating investment contract liabilities on the consolidated statement of financial position.
Life assurance business: Investment contracts with DPF 24,339 – 10,954 1
In relation to the HWPF, amounts are considered to be allocated to shareholders when they emerge as recourse cash flows within the HWPF. The unallocated surplus of the HWPF comprises the value of future recourse cash flows in participating contracts (but not the value of future cash flows on non-participating contracts), the value of future additional expenses to be charged on German branch business and the effect of any measurement differences between the realistic value and the IFRS accounting policy value of all assets and liabilities other than participating contract liabilities recognised in the HWPF. The recourse cash flows are recognised as they emerge as an addition to shareholders’ profits if positive or as a deduction if negative. As the additional expenses are charged in respect of the German branch business they are recognised as an addition to equity holders’ profits.
F3. Reinsurance continued F3.2 Collateral arrangements It is the Group’s practice to obtain collateral to mitigate the counterparty risk related to reinsurance transactions usually in the form of cash or marketable financial instruments.
F3.3 Net income under arrangements with reinsurers The Group has reinsured the longevity and investment risk related to a portfolio of annuity contracts held within the HWPF. At inception of the reinsurance contract the reinsurer was required to deposit an amount equal to the reinsurance premium with the Group. Interest is payable to the reinsurer on the deposit at a floating rate. The Group maintains a ring fenced pool of assets to back this deposit liability. Annuity payments under the reinsured contracts are made by the Group from the ring fenced assets and the deposit liability is reduced by the amount of these payments. Periodically the Group is required to pay to the reinsurer or receive from the reinsurer Premium Adjustments defined as the difference between the fair value of the ring fenced assets and the deposit amount, such that the deposit amount equals the fair value of the ring fenced assets. This has the effect of ensuring that the investment risk on the ring fenced pool of assets falls on the reinsurer. The investment return on the ring fenced assets included in investment return in the consolidated income statement is equal to an equivalent amount recognised in expenses under arrangements with reinsurers.
F. INSURANCE CONTRACTS, INVESTMENT CONTRACTS WITH DPF AND REINSURANCE continued F4. Risk Management – Insurance risk continued Sensitivities Insurance liabilities are sensitive to changes in risk variables, such as prevailing market interest rates, currency rates and equity prices, since these variations alter the value of the financial assets held to meet obligations arising from insurance contracts and changes in investment conditions also have an impact on the value of insurance liabilities themselves. Additionally, insurance liabilities are sensitive to the assumptions which have been applied in their calculation, such as mortality and lapse rates. Sometimes allowance must also be made for the effect on future assumptions of management or policyholder actions in certain economic scenarios. This could lead to changes in assumed asset mix or future bonus rates. The most significant non economic sensitivities arise from mortality, longevity and lapse risk.
An increase of 5% in assurance mortality, with all other variables held constant, would result in a decrease in the profit after tax in respect of a full year, and a decrease in equity of £54 million (2017: £34 million).
A decrease of 5% in annuitant longevity, 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 £265 million (2017: £137 million).
1 The 2017 comparative has been restated as the Group now applies a 10% sensitivity for calculating lapse rate sensitivities for consistency with the stress and scenario testing monitored by the Group on an ongoing basis (2017: 25%).
The assumptions used to determine the liabilities, under these valuation methods are updated at each reporting date to reflect recent experience. Material judgement is required in calculating these liabilities and, in particular, in the choice of assumptions about which there is uncertainty over future experience. The principal assumptions are as follows: Discount rates The Group discounts participating and non-participating insurance contract liabilities at a risk-free rate derived from the swap yield curve, plus an illiquidity premium of 10bps.
For certain non-participating insurance contract liabilities (eg annuities), the Group makes a further explicit adjustment to the risk-free rate to reflect illiquidity in respect of the assets backing those liabilities.
For the Standard Life Assurance businesses, the assumptions for future policy expense levels are determined from the most recent expense analyses. No allowance is made for potential future expense improvement. The assumed expense level incorporates an annual inflation allowance determined by reference to RPI.
Mortality and longevity rates Mortality rates are based on company experience and published tables, adjusted appropriately to take account of changes in the underlying population mortality since the table was published, company experience and forecast changes in future mortality. Where appropriate, a margin is added to assurance mortality rates to allow for adverse future deviations. Annuitant mortality rates are adjusted to make allowance for future improvements in pensioner longevity.
F4. Risk Management – Insurance risk continued F4.1 Assumptions continued Discretionary participating bonus rate For realistic basis companies, the regular bonus rates assumed in each scenario are determined in accordance with each company’s PPFM. Final bonuses are assumed at a level such that maturity payments will equal asset shares subject to smoothing rules set out in the PPFM.
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 £298 million (2017: £334 million) and £7 million (2017: £48 million) respectively.
With-profit deferred annuities participate in profits only up to the date of retirement. At retirement, a guaranteed cash option allows the policyholder to commute the annuity benefit into cash on guaranteed terms.
The £12 million and £16 million positive impact of changes in persistency and mortality assumptions respectively reflects the results of the latest experience investigations.
2017: The £148 million positive impact of changes in longevity assumptions reflects updates to base and improvement assumptions to reflect latest experience analyses and the most recent Continuous Mortality Investigation 2016 projection tables.
The £120 million adverse impact of changes in persistency assumptions is principally driven by the strengthening of actuarial assumptions to reflect the impact of the continued low interest rate environment on the Group’s expectations of persistency for products with variable guarantees.
With-profit funds: Pensions: Deferred annuities – with guarantees 8,329 69 807 – Deferred annuities – without guarantees 1,111 – – – Immediate annuities 7,583 – 4,808 – Unitised with-profit 11,717 22,449 (3) –
1 £4,605 million (2017: £3,770 million) of liabilities are subject to longevity swap arrangements.
Non-profit funds: Deferred annuities – without guarantees 121 – – – Immediate annuities 11,303 – 1,854 –
F4. Risk Management – Insurance risk continued F4.2 Managing product risk continued With-profit fund (unitised and traditional) The Group operates a number of with-profit funds in which the with-profit policyholders benefit from a discretionary annual bonus (guaranteed once added in most cases) and a discretionary final bonus. Non-participating business is also written in some of the with-profit funds and some of the funds may include immediate annuities and deferred annuities with Guaranteed Annuity Rates (‘GAR’).
The bonuses are designed to distribute to policyholders a fair share of the return on the assets in the with-profit funds together with other elements of the experience of the fund. The shareholders of the Group are entitled to receive one-ninth of the cost of bonuses declared for some funds and £nil for others. For the HWPF, under the Scheme, shareholders are entitled to receive certain defined cash flows arising on specified blocks of UK and Irish business.
Deferred annuities Deferred annuity policies are written to provide either a cash benefit at retirement, which the policyholder can use to buy an annuity on the terms then applicable, or an annuity payable from retirement. The policies contain an element of guarantee expressed in the form that the contract is written in, i.e. to provide cash or an annuity. Deferred annuity policies written to provide a cash benefit may also contain an option to convert the cash benefit to an annuity benefit on guaranteed terms; these are known as GAR policies. Deferred annuity policies written to provide an annuity benefit may also contain an option to convert the annuity benefit into cash benefits on guaranteed terms; these are known as Guaranteed Cash Option (‘GCO’) policies. In addition, certain unit prices in the HWPF are guaranteed not to decrease.
The option provisions on GAR policies are particularly sensitive to downward movements in interest rates, increasing life expectancy and the proportion of customers exercising their option. Adverse movements in these factors could lead to a requirement to increase reserves which could adversely impact profit and potentially require additional capital. In order to address the interest rate risk (but not the risk of increasing life expectancy or changing customer behaviour with regard to exercise of the option), insurance subsidiaries within the Group have purchased derivatives that provide protection against an increase in liabilities and have thus reduced the sensitivity of profit to movements in interest rates (see note E6.2.2).
F. INSURANCE CONTRACTS, INVESTMENT CONTRACTS WITH DPF AND REINSURANCE continued F4. Risk Management – Insurance risk continued F4.2 Managing product risk continued The pricing assumption for mortality risk is based on both historic internal information and externally-generated information on mortality experience, including allowances for future mortality improvements. Pricing will also include a contingency margin for adverse deviations in assumptions.
Acquisition of Standard Life Assurance during the year (see note H2.1) – 7 37 – 225 – – – 269
Staff related Staff related provisions include provisions for unfunded pensions of £5 million (2017: £6 million), private medical and other insurance costs for former employees of £9 million (2017: £2 million).
At 31 December 2018, a reimbursement asset of £8 million (2017: £32 million) has been recognised in other receivables in connection with the Group’s exposure to these complaints. This represents recoveries due from third parties under contractual arrangements. Recoveries of £18 million (2017: £7 million) have been received during the year.
G. OTHER STATEMENT OF CONSOLIDATED FINANCIAL POSITION NOTES continued G1. Provisions continued In respect of the non-advised annuity sales, £10 million of the provision was utilised and £7 million was released during the year.
Under the terms of the Abbey Life acquisition, Deutsche Bank provided Phoenix Life Holding Limited (‘PLHL’) with an indemnity, with a duration of up to eight years, in respect of exposures that may arise in Abbey Life as a result of the FCA’s final thematic review findings. The maximum amount that can be claimed under the indemnity is £175 million and it applies to all regulatory fines and to 80% to 90% of the costs of customer remediation. The indemnity would be expected to mitigate any additional costs not covered by the existing provision, arising in the event of a crystallisation of exposures deemed not to trigger the recognition of a provision based on current information, or a deterioration in management’s estimate of the liabilities associated with present obligations. At 31 December 2018, a reimbursement asset of £14 million (2017: £23 million) has been recognised in other receivables under this indemnity. Recoveries of £9 million have been received during the year.
FCA thematic reviews provision – SLAL Standard Life Assurance was also a participant in the thematic review of non-advised annuity sales issued by the FCA on 14 October 2016.
Under the terms of the Standard Life Assurance acquisition, SLA plc provided the Company with a deed of indemnity, with a duration of up to four years from the date of the acquisition, in respect of certain liabilities arising out of the FCA-mandated, and SLA plc’s voluntary, review and redress programme in respect of SLAL’s historical non-advised sales of pension annuities, and the FCA’s ongoing investigation of historical non-advised annuity sales practices. To the extent that total costs post 31 August 2018 exceed £225 million, such amounts will be recoverable under the deed of indemnity and related caps up to a maximum of £155 million. To the extent that total costs are less than £225 million, Old PGH is required to pay the balance to SLA plc, together with any interest that may have accrued on such sum.
Of the £225 million recognised upon acquisition, £44 million has been utilised since the acquisition date, and £181 million remains as at 31 December 2018.
Following the acquisition of Abbey Life on 30 December 2016, a similar restructuring provision of £13 million was recognised in 2017 in respect of committed Abbey Life integration activities. During 2017, £8 million of this provision was utilised with the remaining £5 million utilised during 2018.
A large majority of the Group’s policy administration is outsourced to Diligenta Limited (‘Diligenta’), a UK-based subsidiary of Tata Consultancy Services (‘TCS’). Diligenta provide life and pension business process services to a large number of the Group’s policyholders. During 2018, the Group announced its intention to move to a single outsourcer platform and as a result a further 2 million of the Group’s policies will be transferred to Diligenta by 31 December 2021.
Other provisions Other provisions include litigation and onerous contract provisions, obligations arising under a gift voucher scheme operated by the SunLife business and a commission clawback provision which represents the expected future clawback of commission income earned by the SunLife business as a result of assumed lapses of policies or associated benefits.
Deferred tax is provided for on temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not provided in respect of temporary differences arising from the initial recognition of goodwill and the initial recognition of assets or liabilities in a transaction that is not a business combination and that, at the time of the transaction, affects neither accounting nor taxable profit. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates and laws enacted or substantively enacted at the period end. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised.
Expenses and deferred acquisition costs carried forward 24 20 – 6 50
Deferred tax assets have not been recognised in respect of: Tax losses carried forward 53 37
Deferred tax assets not recognised on capital losses1 21 16 1 These can only be recognised against future capital gains and have no expiry date.
On 29 March 2017, the UK Government triggered Article 50 initiating a two-year process for leaving the EU. There is some uncertainty about how the existing tax legislation will apply after the UK’s exit. No changes are required to the measurement of tax in these consolidated financial statements but this will be monitored and reassessed at each reporting period as negotiations continue.
Defined contribution pension schemes Obligations for contributions to defined contribution pension schemes are recognised as an expense in the consolidated income statement as incurred.
This note describes the Group’s three main staff pension schemes for its employees, the Pearl Group Staff Pension Scheme (‘the Pearl Scheme’), the PGL Pension Scheme, and the Abbey Life Staff Pension Scheme (‘Abbey Life Scheme’) and explains how the pension asset/liability is calculated.
Provision for tax on that part of the economic surplus available as a refund on a winding-up of the Scheme (157) (200)
Economic surplus (including £432 million (2017: £420 million) available as a refund on a winding-up of the Scheme) 506 500
Inflation risk – a significant proportion of the schemes’ benefit obligations are linked to inflation, and higher inflation will lead to higher liabilities (although in most cases, caps on the level of inflationary increases are in place to protect against extreme inflation). The majority of the assets are held with a liability driven investment strategy which allows for movements in inflation, meaning that changes in inflation should not materially affect the surplus.
Life expectancy – the majority of the schemes’ obligations are to provide benefits for the life of the member, so increases in life expectancy will result in an increase in the liabilities. For the PGL scheme, this is partially offset by the buy in policies that move in line with the liabilities. These buy in policies are eliminated on consolidation (see section G6.2 for further details)
Guaranteed Minimum Pension (‘GMP’) Equalisation GMP is a portion of pension that was accrued by individuals who were contracted out of the State Second Pension prior to 6 April 1997. Historically, there was an inequality of benefits between male and female members who have GMP. A High Court case concluded on 26 October 2018 and confirmed that GMPs need to be equalised. The Group has undertaken an initial assessment, and has included an allowance for the potential cost of equalising GMP for the impact between males and females in its IAS 19 actuarial liabilities as at 31 December 2018, pending further discussions with the scheme Trustees and the issuance of guidance as to how equalisation should be achieved. The cost of GMP equalisation across all schemes of £59 million (Pearl Scheme: £32 million; PGL Scheme: £23 million; and Abbey Scheme £4 million) has been recognised as a past service cost in the consolidated income statement. Any future changes to this estimate will be recognised in Other Comprehensive Income.
G6.1 Pearl Group Staff Pension Scheme Scheme details The Pearl Scheme comprises a final salary section, a money purchase section and a hybrid section (a mix of final salary and money purchase). The final salary and hybrid sections of the Pearl Scheme are closed to new members, and since 1 July 2011 are also closed to future accrual by active members.
Funding A triennial funding valuation of the Pearl Scheme as at 30 June 2015 was completed in September 2016. This showed a deficit as at 30 June 2015 of £300 million, on the agreed technical provisions basis. The triennial funding valuation of the Scheme as at 30 June 2018 commenced during the year and is expected to be completed by September 2019. The cash flows utilised in the IFRS valuation as at 31 December 2018 have been updated to reflect the latest data available from the 30 June 2018 funding valuation and together with the impact of modelling enhancements implemented during the year, this has resulted in the recognition of an experience loss of £145 million in the year (2017: £15 million loss).
The funding and IFRS accounting bases of valuation can give rise to different results for a number of reasons. The funding basis of valuation is based on general principles of prudence whereas the accounting valuation is based on best estimates. Discount rates are gilt-based for the funding valuation whereas the rate used for IFRS valuation purposes is based on a yield curve for high-quality AA-rated corporate bonds. In addition, the values are prepared at different dates which will result in differences arising from changes in market conditions and employer contributions made in the subsequent period.
On 27 November 2012, the principal employer and the Trustee of the Pearl Scheme entered into a revised pensions funding agreement (the ‘Pensions Agreement’), the principal terms of which were not altered following finalisation of the 30 June 2015 triennial valuation. The principal terms of the Pensions Agreement are: • annual cash payments into the Scheme of £70 million in 2013 and 2014 payable on 30 September, followed by payments of £40 million each year from 2015 to 2021. The timing of payment of contributions changed during 2017 so that the contributions are paid on a monthly basis following the last annual payment of £40 million completed in September 2016. The Pensions Agreement includes a sharing mechanism, related to the level of dividends paid out of PGH2, that in certain circumstances allows for an acceleration of the contributions to be paid to the Pearl Scheme; • additional contributions may become payable if the Scheme is not anticipated to meet the two agreed funding targets: (i) to reach full funding on the technical provisions basis by 30 June 2022; and
• covenant tests relating to the Embedded Value of certain companies with the Group.
An additional liability of £37 million (2017: £50 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 £106 million (2017: £143 million) in accordance with the minimum funding requirement. A deferred tax asset of £18 million (2017: £24 million) has also been recognised to reflect tax relief at a rate of 17% (2017: 17%) that is expected to be available on the contributions, once paid into the Scheme.
Liability management exercise In June 2018, the Group commenced a pension increase exchange (‘PlE’) exercise in respect of the Pearl Scheme. Existing in-scope pensioners were offered the option to exchange future non-statutory pension increases for a one-off uplift to their current pension, thereby reducing longevity and inflation risk for the Group. The financial effect of all acceptances received in the period has been recognised in the consolidated financial statements as a reduction in scheme liabilities of £2 million shown as past service credit in the consolidated income statement.
Defined benefit obligation The calculation of the defined benefit obligation can be allocated to the scheme’s members as follows: • Deferred scheme members: 40% (2017: 37%); and
It has been assumed that post-retirement mortality is in line with a scheme-specific table which was derived from the actual mortality experience in recent years based on the SAPS standard tables for males and for females based on year of use. Future longevity improvements from 1 January 2017 are based on CMI 2017 Core Projections (2017: CMI 2016 Core Projections) and a long-term rate of improvement of 1.75% per annum for males and 1.50% per annum for females up to and including age 85 then decreasing linearly to 0% per annum at age 110 (unchanged from 2017). Under these assumptions, the average life expectancy from retirement for a member currently aged 40 retiring at age 60 is 29.9 years and 32.2 years for male and female members respectively (2017: 30.0 and 32.0 respectively).
Impact on the defined benefit obligation (£m) 2,182 (82) 85 65 (76) 79 (79)
Impact on the defined benefit obligation (£m) 2,150 (82) 88 57 (54) 85 (84)
G. OTHER STATEMENT OF CONSOLIDATED FINANCIAL POSITION NOTES continued G6. Pension schemes continued G6.2 PGL Pension Scheme The PGL Pension Scheme comprises a final salary section and a defined contribution section.
The PGL Scheme is administered by a separate trustee company, PGL Pension Trustee Ltd. The trustee company is comprised of two representatives from the Group, three member nominated representatives and one independent trustee in accordance with the trustee company’s articles of association. The Trustee is required by law to act in the interest of all relevant beneficiaries and is responsible for the investment policy with regard to the assets plus the day-today administration of the benefits.
Funding A triennial funding valuation of the PGL Pension Scheme as at 30 June 2015 was completed in June 2016. This showed a surplus as at 30 June 2015 of £164 million. The triennial funding valuation of the Scheme as at 30 June 2018 commenced during the year and is expected to be completed by September 2019. The IFRS valuation cash flows have been updated to reflect the latest valuation data.
No contributions were paid in 2018 (2017: £10 million). Contributions amounting to £59 million in total were paid into the Scheme over the period from October 2013 to August 2017. There are no further committed contributions to pay in respect of the defined benefit section of the Scheme.
In December 2016, the PGL Pension Scheme entered into a ‘buy-in’ agreement with PLL, which converted the longevity swap contract into a bulk annuity contract. The Scheme transferred certain additional risks in respect of the benefits payable to the deferred members covered by the longevity swap arrangement, including the investment risk associated with the assets covering those benefits. The Scheme transferred £1,164 million of plan assets to a collateral account and this transfer constituted the payment of premium to PLL, and was net of a £23 million prepayment by PLL to the Scheme in respect of benefits up to 31 May 2017. The assets transferred to PLL are recognised in the relevant line within financial assets in the statement of consolidated financial position (see note E1). An adjustment of £6 million to the value of the premium was paid by PLL to the PGL Scheme in 2017. The economic effect of the ‘buy-in’ transaction in the Scheme is to replace the plan assets transferred with a single line insurance policy reimbursement asset which is eliminated on consolidation. The value of this insurance policy at 31 December 2018 was £856 million (2017: £895 million).
Included within insurance policies with Group entities of £877 million (2017: £916 million) is a further insurance policy reimbursement asset of £21 million (2017: £21 million) which was also eliminated on consolidation.
Gain from changes in financial assumptions – 62 – – 62
Change in provision for tax on economic surplus available as a refund – – (8) – (8)
The Group ensures that the investment positions are managed within an ALM framework that has been developed to achieve long-term investments that are in line with the obligations under the pension scheme. Within this framework, an allocation of 85% of the scheme assets is invested in a combination of supranational debt and a liability hedging portfolio. The Liability Driven Investment (‘LDI’) portfolio is passively managed against a liability benchmark in order to hedge the duration and inflation risks.
Defined benefit obligation The calculation of the defined benefit obligation can be allocated to the scheme’s members as follows: • Deferred scheme members: 36% (2017: 39%); and
The weighted average duration of the defined benefit obligation at 31 December 2018 is 16 years (2017: 18 years). The prior year value has been restated following refinements made to the modelling used in the calculation.
Impact on the defined benefit obligation (£m) 1,622 (69) 74 47 (50) 61 (60)
G6.3 Abbey Life Staff Pension Scheme Scheme details On 30 June 2017, the Abbey Life Scheme was transferred from Abbey Life to Pearl Life Holdings Limited (‘PeLHL’), a fellow subsidiary. PeLHL assumed the scheme covenant together with all obligations of the scheme following implementation of the transfer. The Abbey Life Scheme is a registered occupational pension scheme, set up under Trust, and legally separate from the employer PeLHL. The scheme is administered by Abbey Life Trust Securities Limited (the ‘Trustee’), a corporate trustee. There are three Trustee Directors, one of whom is nominated by the Abbey Life Scheme members and two of whom are appointed by PeLHL. The Trustee is responsible for administering the scheme in accordance with the Trust Deed and rules and pensions laws and regulations. The Abbey Life Scheme is closed to new entrants. The last active member ceased employment with the Group during the year and consequently the Abbey Life Scheme no longer recognises a current service cost.
Funding The last funding valuation of the Abbey Life Scheme was carried out by a qualified actuary as at 31 March 2018 and showed a deficit of £74 million.
Prior to 19 November 2018, the following schedule of contribution was applicable from 1 July 2017 and PeLHL was required to pay 39.5% of gross pensionable earnings and the following amounts in respect of deficit contributions: • a lump sum of £25 million into the Scheme settled on 31 July 2017; • fixed monthly contributions of £400,000 payable up to 30 June 2026 and monthly contributions of £83,552 in respect of administration expenses which are payable up to 30 June 2028 and will increase annually in line with the Retail Prices Index assumption; and
• annual payments of £4 million into the 2016 Charged Account by 31 July each year, with the first payment being made on 31 July 2017, and the last payment due by 31 July 2025.
G. OTHER STATEMENT OF CONSOLIDATED FINANCIAL POSITION NOTES continued G6. Pension schemes continued G6.3 Abbey Life Staff Pension Scheme continued Under the terms of the 2013 Funding Agreement dated 28 June 2013, the funding position of the Abbey Life Scheme will be assessed as at 31 March 2021. A payment will be made from the 2013 Charged Account to the Abbey Life Scheme if the results of the assessment reveal a shortfall calculated in accordance with the terms of the 2013 Funding Agreement. The amount of the payment will be the lower of the amount of the shortfall and the amount held in the 2013 Charged Account.
Under the terms of the 2016 Funding Agreement dated 23 June 2016, the funding position of the Abbey Life Scheme will be assessed as at 31 March 2027. A payment will be made from the 2016 Charged Account to the Scheme if the results of the assessment reveal a shortfall calculated in accordance with the terms of the 2016 Funding Agreement. The amount of the payment will be the lower of the amount of the shortfall and the amount held in the 2016 Charged Account.
Remeasurements: Return on plan assets excluding amounts included in interest income (13) – (13)
Remeasurements: Return on plan assets excluding amounts included in interest income 6 – 6
G6. Pension schemes continued G6.3 Abbey Life Staff Pension Scheme continued Derivative values above include interest rate and inflation rate swaps and foreign exchange forward contracts. The Abbey Life Scheme has hedged its inflation risk through an inflation swap. It is currently exposed to interest rate risk to the extent that the holdings in bonds are mismatched to the scheme liabilities. The long-term intention is to fully hedge this risk through an interest rate swap. Further key risks that will remain are longevity and credit spread exposures.
Defined benefit obligation The calculation of the defined benefit obligation can be allocated to the Abbey Life Scheme’s members as follows: • Active scheme members: nil% (2017: 5%)
It has been assumed that post-retirement mortality is in line with a scheme-specific table which was derived from the actual mortality experience in recent years, performed as part of the actuarial funding valuation as at 31 March 2015, using the SAPS S2 ‘Light’ tables for males and for females based on year of use. Future longevity improvements are based on CMI 2017 Core Projections (2017: CMI 2016 Core Projections) and a long-term rate of improvement of 1.75% per annum for males and 1.50% per annum for females up to and including age 85 then decreasing linearly to 0% per annum at age 110 (unchanged from 2017). Under these assumptions the average life expectancy from retirement for a member currently aged 45 retiring at age 65 is 25.7 years and 27.2 years for male and female members respectively (2017: 25.8 years and 27.2 years respectively).
Impact on the defined benefit obligation (£m) 307 (12) 13 9 (9) 12 (11)
Impact on the defined benefit obligation (£m) 321 (15) 15 11 (11) 10 (9)
G. OTHER STATEMENT OF CONSOLIDATED FINANCIAL POSITION NOTES continued G7. Intangible assets
In certain acquisitions, an excess of the acquirer’s interest in the net fair value of the acquiree’s identifiable assets, liabilities, contingent liabilities and non-controlling interests over cost may arise. Where this occurs, the surplus of the fair value of net assets acquired over the fair value of the consideration is recognised in the consolidated income statement.
Present value of future profits on non-participating business in the with-profit fund The present value of future profits is determined on a realistic basis.
The remaining £10 million relates to the goodwill recognised on the acquisition of AXA Wealth during 2016 and has been allocated to the UK Open segment. This represents the value of the workforce assumed and the potential for future value creation, which relates to the ability to invest in and grow the SunLife brand. Value in use has been determined as the present value of certain future cashflows associated with that business. The cash flows used in the calculation are consistent with those adopted by management in the Group’s operating plan, and for the period 2023 and beyond, assume a zero growth rate. The underlying assumptions of these projections include market share, customer numbers, commission rates and expense inflation. The cashflows have been valued at a risk-adjusted discount rate of 11% that makes prudent allowance for the risk that future cash flows may differ from that assumed.
G7.3 Customer relationships The customer relationships intangible at 31 December 2018 relates to vesting pension premiums which captures the new business arising from policies in-force at the acquisition date, specifically top-ups made to existing policies and annuities vested from matured pension policies. The total value of this customer relationship intangible at acquisition was £297 million and has been allocated to the UK Heritage segment. This intangible is being amortised over a 20-year period.
G. OTHER STATEMENT OF CONSOLIDATED FINANCIAL POSITION NOTES continued G7. Intangible assets continued G7.4 Present value of future profits on non-participating business in the with-profit fund The principal assumptions used to calculate the present value of future profits are the same as those used in calculating the insurance contract liabilities given in note F4.1. Revaluation of the present value of future profits is charged or credited to the consolidated income statement as appropriate.
G7.5 Other intangibles Other intangibles include £20 million which was recognised at cost on acquisition of the AXA Wealth businesses and £36 million recognised at cost on acquisition of the Standard Life Assurance businesses.
The amount recognised in respect of AXA Wealth represents the value attributable to the SunLife brand as at 1 November 2016. The intangible asset was valued on a ‘multi-period excess earnings’ basis. Impairment testing was performed in a combined test with the AXA goodwill (see section G7.1). The value in use continues to exceed its carrying value.
This intangible was valued on a ‘multi-period excess earnings’ basis and is being amortised over a period of 15 years. Further details are set out in note H2.
The following table shows reconciliation from the opening to the closing fair value for the Level 3 owner-occupied properties at valuation: £m 2017 £m
(Losses)/gains on adjustments to fair value (recognised in consolidated income statement) (18) 9
Unrealised (losses)/gains on properties held at end of period (28) 5
The residential property reversions, an interest in customers’ properties which the Group will realise upon their death, are valued using a DCF model based on the Group’s proportion of the current open market value, and discounted for the expected lifetime of the policyholder derived from published mortality tables. The open market value is measured by independent local property surveyors having appropriate recognised professional qualifications with reference to the assumed condition of the property and local market conditions. The individual properties are valued triennially and indexed using regional house price indices to the year end date.
The discount rate is a risk-free rate appropriate for the duration of the asset, adjusted for the deferred possession rate of 3.6%. Assumptions are also made in the valuation for future movements in property prices, based on a risk free rate. The residential property reversions have been substantially refinanced under the arrangements with Santander as described in note E5.
RICS valuation Expected income per sq. ft. £3.71 – £132.72 (£36.66) £5.39 – £100.40 (£23.85)
G. OTHER STATEMENT OF CONSOLIDATED FINANCIAL POSITION NOTES continued G9. Investment property continued The estimated fair value of commercial properties would increase (decrease) if: • the expected income were to be higher (lower); or
Direct operating expenses (offset against rental income in the consolidated income statement) in respect of investment properties that generated rental income during the year amounted to £11 million (2017: £1 million). The direct operating expenses arising from investment property that did not generate rental income during the year amounted to £2 million (2017: £4 million).
Later than 1 year and not later than 5 years 884 61
Deposits are subject to a combination of fixed and variable interest rates. The carrying amounts approximate to fair value at the period end. Cash and cash equivalents in long-term business operations and consolidated collective investment schemes of £4,572 million (2017: £1,878 million) are primarily held for the benefit of policyholders and so are not generally available for use by the owners.
• Pearl Life Holdings Limited (‘PeLHL’) is required to make payments of contributions into charged accounts on behalf of the Abbey Life Scheme. These amounts do not form part of the pension scheme assets and at 31 December 2018, PeLHL held £46 million (2017: £40 million) within fixed and variable rate income securities and £1 million (2017: £5 million) within cash and cash equivalents in respect of these charged accounts. Further details of when these amounts may become payable to the pensions scheme are included in note G6.
H2. Acquisitions H2.1 Acquisition of Standard Life Assurance businesses On 31 August 2018, the Group acquired 100% of the issued share capital of Standard Life Assurance Limited, Standard Life Pensions Fund Limited, Standard Life International Designated Activity Company, Vebnet (Holdings) Limited, Vebnet Limited, Standard Life Lifetime Mortgages Limited, Standard Life Assets and Employee Services Limited and Standard Life Investment Funds Limited (together known as ‘the Standard Life Assurance businesses’) from SLA plc for total consideration of £2,994 million. The consideration consisted of £1,971 million of cash funded by a fully underwritten rights issue of £950 million, with the remaining balance of £1,021 million funded by a mix of new debt and Phoenix’s own resources. In addition, SLA plc took a 19.99% equity stake in the Enlarged Group on completion valued at £1,023 million, based on the share price at 31 August 2018.
Other receivables The financial assets acquired include other receivables with a fair value of £613 million. The gross amount due under the contracts is £613 million, of which no balances are expected to be uncollectible.
The cash consideration for the acquisition was fixed and determined using a ‘locked box’ pricing mechanism based on the position as at 31 December 2017, and recalibrated to reflect market conditions upon announcement of the transaction in February 2018. The net assets acquired were recognised in the consolidated financial statements at their fair values on 31 August 2018. Market movements and the impact of business written during 2018 increased the value of the in-force business as at the acquisition date compared to that assumed in the pricing basis, most notably equity market gains in the period from February to August 2018. Accordingly, a gain on acquisition has arisen on the transaction.
Impact of the acquisition on results From the date of acquisition, the Standard Life Assurance businesses contributed £775 million of total revenue, net of reinsurance payable, and £208 million of the profit after the tax attributable to owners of the parent. If the acquisition of the Standard Life Assurance businesses had taken place at the beginning of the year, total revenue net of reinsurance payable, would have been £4,186 million and the profit after the tax attributable to owners of the parent would have been £439 million.
H3. Associates: investment in UK commercial property trust limited (‘UKCPT’) UKCPT is a property investment company which is domiciled in Guernsey and is admitted to the official list of the UK Listing Authority and to trading on the London Stock Exchange.
Summary financial information (at 100%) for UKCPT is shown below: 2018 £m 2017 £m
A structured entity is an entity that has been designed so that voting or similar rights are not the dominant factor in deciding who controls the entity, such as when any voting rights relate to administrative tasks only, and the relevant activities are directed by means of contractual arrangements. A structured entity often has some or all of the following features or attributes: (a) restricted activities; (b) a narrow and well-defined objective, such as to provide investment opportunities for investors by passing on risks and rewards associated with the assets of the structured entity to investors; (c) insufficient equity to permit the structured entity to finance its activities without subordinated financial support; and (d) financing in the form of multiple contractually linked instruments to investors that create concentrations of credit or other risks (tranches).
As at the reporting date, the Group has no intention to provide financial or other support in relation to any other consolidated structured entity.
H4.2 Interests in unconsolidated structured entities The Group has interests in unconsolidated structured entities. These investments are held as financial assets in the Group’s consolidated statement of financial position held at fair value through profit or loss. Any change in fair value is included in the consolidated income statement in ‘net investment income’. Dividend and interest income is received from these investments.
A summary of the Group’s interest in unconsolidated structured entities is included below. These are shown according to the financial asset categorisation in the consolidated statement of financial position. Directly held collective investment schemes are further analysed by the predominant asset class in which the entity is invested.
Fixed and variable rate income securities: Asset backed securities 2,843 607 1 Directly held collective investment schemes refer to those structured entities directly invested in by Group companies. Such investments have been analysed by reference to the predominant asset class the structure is investing in.
H5. Group entities The table below sets out the Group’s subsidiaries (including collective investment schemes that have been consolidated within the Group’s financial statements), associates and significant holdings in undertakings (including undertakings where holding amounts to 20% or more of the nominal value of the shares or units and they are not classified as a subsidiary or associate).
SLACOM (No. 8) Limited (loan provider company) Edinburgh27 Ordinary Shares 100.00% Standard Life Assets and Employee Services Limited (service company)
Century Group Limited (investment company) Wythall1 Ordinary Shares 100.00% Inesia SA (investment company) Luxembourg21 Ordinary Shares 100.00% Alcobendas Entrust Limited (investment company) Wythall1 Ordinary Shares 100.00% Axial Fundamental Strategies (US Investments) LLC Wilmington19 N/A 100.00% IH (Jersey) Limited (investment company) Jersey16 Ordinary Shares 100.00% Pearl (WP) Investments LLC (investment company) Wilmington19 Limited Liability
PGMS (Glasgow) Limited (investment company) Edinburgh27 Ordinary Shares 100.00% PGS 2 Limited (investment company) Wythall1 Ordinary Shares 100.00% Phoenix SCP Limited (investment company) Wythall1 Ordinary Shares 100.00% Phoenix SPV1 Limited (investment company) Wythall1 Ordinary Shares 100.00% Phoenix SPV2 Limited (investment company) Wythall1 Ordinary Shares 100.00% Phoenix SPV3 Limited (investment company) Wythall1 Ordinary Shares 100.00% Phoenix SPV4 Limited (investment company) Wythall1 Ordinary Shares 100.00% SPL (Holdings) Limited (investment holding company) Glasgow12 Ordinary Shares 100.00% Standard Life Private Equity Trust plc (investment company) Edinburgh26 Ordinary Shares 55.20% CH Management Limited (investment company) Delaware20 Ordinary Shares 100.00% 3 St Andrew Square Apartments Limited (property management company)
Abbey Life Trust Securities Limited (pension trustee company) Wythall1 Ordinary Shares 100.00% G Park Management Company Limited (property management company)
Hundred S.à r.l. (property management company) Luxembourg25 Ordinary Shares 100.00% Lake Meadows Management Company Limited (property management company)
Iceni Nominees (No. 2) Limited (dormant company) London18 Ordinary Shares 100.00% Impala Loan Company 1 Limited (dormant company) Edinburgh27 Ordinary Shares 100.00% Inhoco 3107 Limited (dormant company) London18 Ordinary Shares 100.00% London Life Trustees Limited (dormant company) Wythall1 Ordinary Shares 100.00% National Provident Institution (dormant company) Wythall1 Unlimited without
Standard Life Investment Funds Limited (dormant company) Edinburgh27 Ordinary Shares 100.00% Standard Life Master Trust Co. Ltd (dormant company) Wythall1 Ordinary Shares 100.00% Standard Life Property Company Limited (dormant) Edinburgh27 Ordinary Shares 100.00% The Heritable Securities and Mortgage Investment Association Ltd (dormant company)
The Pearl Martineau Limited Partnership (dormant company) Lynch Wood22 Limited Partnership 100.00% The Phoenix Life SCP Institution (dormant company) Edinburgh27 Limited by Guarantee 100.00% The Scottish Mutual Assurance Society (dormant company) Glasgow10 Limited by Guarantee 100.00% Welbrent Property Investment Company Limited (dormant company)
Zilmer Limited (dormant company) Wythall1 Ordinary Shares 100.00% 28 Ribera del Loira SA (dormant company) Madrid40 Ordinary Shares 100.00% Phoenix Group Employee Benefit Trust Jersey17 Trust 100.00% Standard Life Assurance (HWPF) Luxembourg SARL Luxembourg25 Ordinary Shares 100.00% SLA Germany No.1 S.A.R.L Luxembourg25 Ordinary Shares 100.00% SLA Germany No.2 S.A.R.L Luxembourg25 Ordinary Shares 100.00% SLA Germany No.3 S.A.R.L Luxembourg25 Ordinary Shares 100.00% SLA Ireland No.1 S.A.R.L Luxembourg25 Ordinary Shares 100.00% Pilangen Logistik AB Stockholm23 Ordinary Shares 100.00% Pilangen Logistik I AB Stockholm23 Ordinary Shares 100.00% Pearl Private Equity LP Edinburgh26 Limited Partnership 100.00% Pearl Strategic Credit LP Edinburgh26 Limited Partnership 100.00% PUTM Bothwell Asia Pacific (Excluding Japan) Fund Wythall1 Authorised Unit Trust 99.49% PUTM Bothwell Emerging Market Debt Unconstrained Fund Wythall1 Authorised Unit Trust 100.00% PUTM Bothwell Emerging Markets Equity Fund Wythall1 Authorised Unit Trust 99.91% PUTM Bothwell Euro Sovereign Fund Wythall1 Authorised Unit Trust 87.78% PUTM Bothwell Europe Fund Wythall1 Authorised Unit Trust 98.63% PUTM Bothwell European Credit Fund Wythall1 Authorised Unit Trust 82.78% PUTM Bothwell Floating Rate ABS Fund Wythall1 Authorised Unit Trust 100.00% PUTM Bothwell Global Bond Fund Wythall1 Authorised Unit Trust 99.90% PUTM Bothwell Global Credit Fund Wythall1 Authorised Unit Trust 99.99%
Seabury Assets Fund – Standard Life Investments The Sterling VNAV Liquidity Fund
Standard Life Investment Company II – Corporate Debt Fund Edinburgh26 OEIC, sub fund 100.00% Standard Life Trust Management – European Trust Edinburgh26 Unit Trust 92.69% Standard Life Trust Management – Japanese Trust Edinburgh26 Unit Trust 81.74% Standard Life Trust Management – North American Trust Edinburgh26 Unit Trust 81.00% Standard Life Trust Management – Pacific Trust Edinburgh26 Unit Trust 92.68% Standard Life Trust Management – Standard Life Global Equity Trust II
Standard Life Trust Management – Pan European Trust Edinburgh26 Unit Trust 99.97% Standard Life Trust Management – UK Equity General Trust Edinburgh26 Unit Trust 99.76% Standard Life Investment Company III – MyFolio Managed III Fund
Standard Life Trust Management – Standard Life Short Dated UK Government Bond Trust
Standard Life Investments Global SICAV – Global Equities Luxembourg31 SICAV, sub fund 88.84%
Standard Life Investments Global SICAV – Japanese Equities Luxembourg31 SICAV, sub fund 75.74% Standard Life Investments Global SICAV – Global Bond Luxembourg31 SICAV, sub fund 76.59% Standard Life Investments Global SICAV – Global High Yield Bond
Standard Life Investments Global SICAV – Global REIT Focus Luxembourg31 SICAV, sub fund 91.43% Standard Life Investments Global SICAV – China Equities Luxembourg31 SICAV, sub fund 75.33% Standard Life Investments Global SICAV – Global Emerging Markets Unconstrained
Aberdeen Capital Trust Inc London18 Authorised Unit Trust 99.26% ASI Phoenix Fund Financing SCSp (PLFF) Luxembourg36 Special Limited
UKCPT Limited Partnership Guernsey14 Ordinary Shares 44.73% UK Commercial Property Finance Holdings Limited Guernsey14 Ordinary Shares 44.73% UK Commercial Property Estates (Reading) Limited London18 Ordinary Shares 44.73% Brixton Radlett Property Limited London18 Ordinary Shares 44.73% Significant holdings: Brent Cross Partnership London15 Limited Partnership 24.00% Castlepoint LP Birmingham42 Ordinary Shares 35.00% Gallions Reach Shopping Park Unit Trust Jersey13 Unit Trust 50.00% Janus Henderson Institutional Global Responsible Managed Fund
Standard Life Investment Company – UK Equity Growth Fund Edinburgh26 OEIC, sub fund 24.29% Standard Life Investment Company – UK Equity High Income Fund
Standard Life Investment Company – UK Opportunities Fund Edinburgh26 OEIC, sub fund 63.93% Standard Life Investment Company – Short Duration Credit Fund
Standard Life Investment Company III – MyFolio Managed Income III Fund
1 1 Wythall Green Way, Wythall, Birmingham, West Midlands, B47 6WG, United Kingdom 2 Juxon House, 100 St. Paul’s Churchyard, London, EC4M 8BU, United Kingdom 3 Avenue Louise 326, bte 33 1050 Brussels, Belgium 4 Ugland House, Grand Cayman, KY1-1104, Cayman Islands 5 90 St. Stephen’s Green, Dublin, D2, Ireland 6 Goodbody Secretarial Limited, International Financial Services Centre, 25/28 North
Wall Quay, Dublin 1, Ireland 7 Arthur Cox Building, 10 Earlsfort Terrace, Dublin 2, Dublin, Ireland 8 25/28 North Wall Quay, Dublin 1, Dublin, Ireland 9 Telestone 8, Teleport, Naritaweg 165, 1043 BW, Amsterdam, Netherlands 10 301 St Vincent Street, Glasgow, G2 5HN, United Kingdom 11 50 Bothwell Street, Glasgow, G2 6HR, United Kingdom 12 110 Queen Street, Glasgow, G1 3BX, United Kingdom 13 Ogier House, The Esplanade, St Helier, JE4 9WG, Jersey 14 Trafalgar Court, Les Banques, St Peter Port, GY1 3QL, Guernsey 15 Kings Place, 90 York Way, London, N1 9GE, United Kingdom 16 22-24 New Street, St Pauls Gate, 4th Floor, JE1 4TR, Jersey 17 32 Commercial Street, St Helier, Jersey, Channel Islands, JE2 3RU, Jersey 18 Bow Bells House, 1 Bread Street, London, EC4M 9HH, United Kingdom 19 Corporation Service Company, 2711 Centerville Rd Suite 400, Wilmington, DE
2NY, United Kingdom 38 J.P. Morgan House, International Financial Services Centre, Dublin 1, Ireland 39 35a Avenue J.F. Kennedy, L-1855, Luxembourg 40 Avenida de Aragon 330 – Building 5, 3rd Floor, Parque Empresarial Las Mercedes, 28022 – Madrid, Spain 41 Elizabeth House, 9 Castle Street, St Helier, JE4 2QP, Jersey 42 2 Snowhill, Birmingham, B4 6WR, United Kingdom
AXA Global High Income Fund London33 OEIC, sub fund 25.68% AQR UCITS Funds – AQR Global Risk Parity C4 UCITS Fund USA24 UCITS, sub fund 48.37% Aberdeen Global Emerging Markets Quantitative Equity Fund London18 OEIC, sub fund 27.08%
H5. Group entities continued The following subsidiaries were dissolved during the period. The subsidiaries were deconsolidated from the date of dissolution: • SMA (Jersey) Limited; • ILC1 (Jersey) Limited; • PGH1 (Jersey) Limited; and
The following subsidiaries were fully disposed of during the period. The subsidiaries were deconsolidated from the date of disposal: • PUTM Bothwell Fixed ABS Sterling Hedged Fund; • PUTM Bothwell Credit Financial Sterling Hedged Fund; • PUTM Bothwell Global Equity Fund; • PUTM Bothwell Credit Non Financial Sterling Hedged Fund; • PUTM Bothwell UK Equity Smaller Companies Fund; • BlackRock LBG DC ‘A’ Fund; and
• AB SICAV I – ESG Responsible Global Factor Portfolio AB.
The Group no longer has significant holdings in the following undertakings: • BlackRock Market Advantage X GBP Acc; • Aberdeen UK Smaller Companies Equity Fund; • Architas MA Active Dynamic Fund Class R Net Accumulation.
• American Century SICAV – Concentrated Global Growth Equity; • Standard Life Investments – Sterling Liquidity Fund; and
For all LTIP awards, a holding period applies so that any LTIP awards to Executive Committee members for which the performance vesting requirements are satisfied will not be released for a further two years from the third anniversary of the original award date. Dividends will accrue on LTIP awards until the end of the holding period. There are no cash settlement alternatives.
2018 LTIP awards were granted on 21 March 2018. The number of shares for all outstanding LTIP awards as at 10 July 2018 were increased to take into account the impact of the Group’s rights issue (see note D1). This adjustment was based on the Theoretical Ex-Rights Price. The 2015 LTIP awards vested during the year. The 2016 awards will vest on 30 March 2019 and 2 June 2019, the 2017 awards will vest on 24 March 2020 and the 2018 awards will vest on 21 March 2021.
On 21 December 2018, LTIP awards were granted to certain employees under the terms of the new PGH plc scheme rules. There are three discreet vesting periods for these awards ending on 24 March 2019, 27 March 2020 and 28 March 2021. These grants of shares are conditional on the employees remaining in employment with the Group for the vesting period.
Each year, the Group issues a Chairman’s share award under the terms of the LTIP which is granted to a small number of employees in recognition of their outstanding contribution in the previous year. On 21 March 2018, awards were granted and are expected to vest on 21 March 2021. The 2017 awards are expected to vest on 24 March 2020. These grants of shares are conditional on the employees remaining in employment with the Group for the vesting period and achieving a ‘CC’ performance grading or above.
Sharesave scheme The sharesave scheme allows participating employees to save up to £500 each month over a period of either three or five years.
The following information was relevant in the determination of the fair value of the 2014 to 2018 sharesave options: sharesave sharesave 2016 sharesave 2015 sharesave 2014 sharesave
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
Outstanding at the end of the year 2,992,327 1,264,992 630,489 1 Updated to incorporate number of Chairman’s awards within the table.
The weighted average remaining contractual life for the rewards outstanding as at 31 December 2018 is six years (2017: six years).
Non-cash movements in profit for the year before tax: Gain on acquisition (141) –
Premium paid on partial redemption of £300 million unsecured bond – 25
Net interest expense on Group defined benefit pension scheme asset/liability 6 11
Acquisition related expenses to be included within cash flows from investing activities 43 –
The Group’s capital management is based on the Solvency II framework. This involves a valuation in line with Solvency II principles of the Group’s Own Funds and risk-based assessment of the Group’s Solvency Capital Requirement (‘SCR’). This note sets out the Group’s approach to managing capital and provides an analysis of Own Funds and SCR.
Risk and capital management objectives The risk management objectives and policies of the Group are based on the requirement to protect the Group’s regulatory capital position, thereby safeguarding policyholders’ guaranteed benefits whilst also ensuring the Group can meet its various cash flow requirements. Subject to this, the Group seeks to use available capital to achieve increased returns, balancing risk and reward, to generate additional value for policyholders and shareholders.
The risk management disclosures in the consolidated financial statements set out the major risks that the Group businesses are exposed to and describe the Group’s approach to managing these. The section on financial risk is included in note E6, the section on insurance risk is included in note F4 and the sections on risk and capital management objectives and other risks are included below. The Group’s risk management framework is described in the risk management commentary on pages 39 to 46 of the Annual Report and Accounts.
A Solvency II capital assessment involves valuation in line with Solvency II principles of the Group’s Own Funds and a risk-based assessment of the Group’s Solvency Capital Requirement (‘SCR’). Solvency II surplus is the excess of Own Funds over the SCR.
The Group aims to maintain a Solvency II surplus at least equal to its Board approved capital policy, which reflects Board risk appetite for meeting prevailing solvency requirements.
The SCR is calibrated so that the likelihood of a loss exceeding the SCR is less than 0.5% over one year. This ensures that capital is sufficient to withstand a broadly ‘1 in 200 year event’.
In December 2015, the Group was granted the PRA’s approval for use of its Internal Model to assess capital requirements. Following the 2016 acquisitions of the AXA Wealth and Abbey Life businesses, the Group obtained the PRA’s approval to incorporate the acquired AXA Wealth and Abbey Life businesses within the scope of the Group’s Internal Model in March 2017 and March 2018 respectively. The capital assessment of the Abbey Life business remained on a Standard Formula basis as at 31 December 2017. Therefore, the Solvency II position of the Group at that date was based partially on the Group’s Internal Model and partially on Standard Formula.
Additional information on the PGH plc Own Funds, SCR and MCR is included in the additional capital disclosures on pages 228 to 229.
Details of the shareholdings and emoluments of individual Directors are provided in the Remuneration report on pages 76 to 105.
The principal operating lease commitments for 2018 concern office space located at St Vincent Street, Glasgow, Juxon House, London, Redcliff Street, Bristol, Lyoner Straße, Frankfurt, and Arche Noah, Graz (2017: St Vincent Street, Glasgow and Juxon House, London and Redcliff Street, Bristol).
To subscribe to private equity funds and other unlisted assets 655 543
I7.1 Annuity sales As set out in note G1, at the request of the Financial Conduct Authority (‘FCA’), SLAL are conducting a past business review of non-advised annuity sales. The purpose of the review is to identify whether relevant customers received sufficient information about enhanced annuities to make the right decisions about their purchase, and where appropriate provide redress to customers who have suffered loss as a result of not having received sufficient information. The Group has recognised provisions with regard to its obligations identified as a result of this activity to date. In relation to this review, the FCA is carrying out an investigation and it is possible that the FCA may impose a financial penalty on the Group. At this stage it is not possible to determine a reliable estimate of the financial impact of this contingent liability and the determination of any liability arising remains dependent on the occurrence of uncertain future events, including finalisation of the FCA’s review. Any financial impact on the Group would be expected to be mitigated by the indemnity agreement that exists with SLA plc, subject to the liability caps that exist within the agreement. Further details are provided in note G1.
On 4 March 2019, the Board recommended a final dividend of 23.4p per share (2017: 25.1p per share) for the year ended 31 December 2018. Payment of the final dividend is subject to shareholder approval at the AGM. The cost of this dividend has not been recognised as a liability in the financial statements for 2018 and will be charged to the statement of changes in equity in 2019.
Cash and cash equivalents at the beginning of the period –
STATEMENT OF CASH FLOWS FOR THE PERIOD FROM 5 OCTOBER 2018 TO 31 DECEMBER 2018
1. ACCOUNTING POLICIES (a) Basis of preparation Phoenix Group Holdings plc (the ‘Company’) was incorporated on 5 October 2018 under the UK Companies Act 2006 and is domiciled in England and Wales. The financial statements for the period ended 31 December 2018 are the first set of financial statements prepared by the Company. Accordingly, there is no comparative information to disclose in the individual financial statements.
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.
These financial assets are initially recognised at cost, being the fair value of the consideration paid for the acquisition of the financial asset. All transaction costs directly attributable to the acquisition are also included in the cost of the financial asset. Subsequent to initial recognition, these financials asset are carried at amortised cost, using the effective interest method.
Impairment of financial assets The Company assesses the expected credit losses associated with its loans and receivables, other amounts due from Group entities and cash carried at amortised cost. The measurement of credit impairment is based on an Expected Credit Loss (‘ECL’) model and depends upon whether there has been a significant increase in credit risk.
For those credit exposures for which credit risk has not increased significantly since initial recognition, the Company measures loss allowances at an amount equal to the total expected credit losses resulting from default events that are possible within 12 months after the reporting date (‘12-month ECL’). For those credit exposures for which there has been a significant increase in credit risk since initial recognition, the Company measures and recognises an allowance at an amount equal to the expected credit losses over the remaining life of the exposure, irrespective of the timing of the default (‘Lifetime ECL’). If the financial asset becomes ‘creditimpaired ’ (following significant financial difficulty of issuer/ borrower, or a default/breach of a covenant), the Company will recognise a Lifetime ECL. ECLs are derived from unbiased and probability-weighted estimates of expected loss.
Note A5 outlines that the Group has taken advantage of the temporary exemption granted to insurers in IFRS 4 Insurance Contracts from applying IFRS 9 until 1 January 2021 as a result of meeting the exemption criteria as at 31 December 2015. As detailed above, such an exemption is not applicable to the Company given it is not an insurer. Therefore, IFRS 9 has been adopted by the Company and the relevant disclosures are included in these financial statements.
On 31 October 2018, all issued redeemable preference shares were cancelled.
Under a scheme of arrangement in accordance with section 86 of the Cayman Islands Companies Law between Phoenix Group Holdings (‘Old PGH’), the former ultimate parent company of the Group, and its shareholders, all of the issued shares in Old PGH were cancelled and an equivalent number of new shares in Old PGH were issued to the Company in consideration for the allotment to the Old PGH shareholders of one ordinary share in the Company for each ordinary share in Old PGH that they held on the scheme record date, 12 December 2018.
Carrying value Fair value 2018 £m 2018 £m £428 million subordinated loans (note a) 439 441 £450 million Tier 3 subordinated notes (note b) 447 447
US $500 million Tier 2 bonds (note c) 343 342 €500 million Tier 2 notes (note d) 405 390
b. On 12 December 2018, the Company was substituted in place of Old PGH as issuer of the £450 million Tier 3 subordinated notes due 2022 at a coupon of 4.125%, which were initially recognised at fair value of £447 million.
c. On 12 December 2018, the Company was substituted in place of Old PGH as issuer of the US$500 million Tier 2 bonds due 2027 with a coupon of 5.375%, which were initially recognised at fair value of £349 million.
Movement in foreign exchange £m £428 million subordinated notes – 439 – 439 £450 million Tier 3 subordinated notes – 447 – 447 1 Loans issued via substitution are a non-cashflow item as consideration was the transfer of loans and receivables (refer to note 9).
The Company has entered into a cross currency swap to hedge against adverse currency movements in respect of the €500 million Tier 2 notes.
8. INVESTMENTS IN GROUP ENTITIES continued On 12 December 2018, the Company became the ultimate parent undertaking of the Group by acquiring the entire share capital of Old PGH via a share for share exchange. The cost of investment in old PGH, reflected in the table above, was determined as the carrying amount of the Company’s share of the equity of Old PGH on the date of the transaction. The difference between the cost of investment and the market capitalisation of Old PGH immediately before the share for share exchange of £4 million has been recognised as an Other reserve, and is shown as a separate component of equity.
b. On 12 December 2018, the Company entered into a new £825 million loan agreement with Old PGH as consideration for the substitution of the Company as issuer of the Tier 1 Notes and €500 million Tier 2 notes. The loan accrues interest at a rate of 6 month LIBOR plus 1.22% and matures on 31 December 2023.
For the purposes of the additional fair value disclosures for assets recognised at amortised cost, all loans and receivables are categorised as Level 3 financial instruments. The fair value of loans and receivables with no external market is determined by internally developed discounted cash flow models using a risk adjusted discount rate corroborated with external market data where possible.
Adjustments to reconcile profit for the year to cash flows from operating activities: Investment income from other Group entities (5)
12. CAPITAL AND RISK MANAGEMENT The Company’s capital comprises share capital, the Tier 1 Notes and all reserves as calculated in accordance with IFRSs, as set out in the statement of changes in equity. Under English company law, dividends must be paid from distributable profits. As the ultimate parent undertaking of the Group, the Company manages its capital to ensure that it has sufficient distributable profits to pay dividends in accordance with its dividend policy.
Details of the Group’s financial risk management policies are outlined in note E6 to the consolidated financial statements.
12. CAPITAL AND RISK MANAGEMENT continued Credit risk management practices The Company’s current credit risk grading framework comprises the following categories: Category Description Basis for recognising ECL
Other amounts due from Group entities (note 15) N/A Performing 12 month ECL 20 – 20
Cash and cash equivalents (note 10) AAA N/A 12 month ECL 1 – 1
Amounts due from other Group entities – The credit risk from activities undertaken in the normal course of business is considered to be extremely low risk. Given their low risk and the short time period since inception of the loan, the loss allowance has been set at less than £1 million. The Company assesses whether there has been a significant increase in credit risk since initial recognition by assessing past credit impairments, history of defaults and the long-term stability of the Group.
13. SHARE-BASED PAYMENTS Following the scheme of arrangement on 12 December 2018 (see note 3), participants in the Old PGH share plans had their outstanding awards automatically exchanged for equivalent awards over PGH plc ordinary shares. On 21 December 2018, LTIP awards were granted to certain employees under the terms of the new PGH plc scheme rules. As the new grant of LTIP awards and replacement of all existing awards occurred near the end of the reporting period, no share-based payment entries have been recognised in the Company accounts.
17. EVENTS AFTER THE REPORTING PERIOD Details of events after the reporting date are included in note I8 to the consolidated financial statements.
The following table provides a reconciliation of the total life company assets to the Assets under Administration (‘AUA’) as at 31 December 2018 detailed in the Business Review on page 31: £bn
The life companies’ debt portfolio was £92.3 billion at 31 December 2018. Shareholders had direct exposure to £17.9 billion of these assets (including supported participating funds), of which 99% of rated securities were investment grade. The shareholders’ credit risk exposure to the non-supported participating funds is primarily limited to the shareholders’ share of future bonuses. Shareholders’ credit risk exposure to the unit-linked funds is limited to the level of asset management fee, which is dependent on the underlying assets.
Sovereign and supranational debt represented 29% of the debt portfolio in respect of shareholder exposure, or £5.2 billion, at 31 December 2018. The vast majority of the life companies’ exposure to sovereign and supranational debt holdings is to UK gilts.
PGH PLC SOLVENCY II SURPLUS The PGH plc surplus at 31 December 2018 is £3.2 billion (2017: £1.8 billion).
CALCULATION OF GROUP SOLVENCY The Solvency II regulations set out two methods for calculating Group solvency, ‘Method 1’ (being the default accounting based consolidation method) and ‘Method 2’ (the deduction and aggregation method). 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.
COMPOSITION OF OWN FUNDS Own Funds items are classified into different Tiers based on the features of the specific items and the extent to which they possess the following characteristics, with Tier 1 being the highest quality.
PGH plc’s unrestricted Tier 1 capital accounts for 76% (2017: 76%) of total Own Funds and comprises ordinary share capital, surplus funds of the unsupported with-profit funds which are recognised only to a maximum of the SCR, and the accumulated profits of the remaining business.
Restricted Tier 1 capital comprises the Tier 1 Notes issued in April 2018, the terms of which enable it to qualify as restricted Tier 1 capital for regulatory reporting purposes.
Tier 3 items include the Tier 3 subordinated notes of £0.4 billion (31 December 2017: £0.5 billion) and the deferred tax asset of £0.1 billion (2017: £0.1 billion).
BREAKDOWN OF SCR Following the acquisition, the Group now operates two PRA approved Internal Models, a Phoenix Internal Model covering all the pre-acquisition Phoenix entities and a Standard Life Internal Model which covers the acquired Standard Life Assurance entities, with the exception of the Irish entity, Standard Life International Designated Activity Company. Standard Life International Designated Activity Company calculates its capital requirements in accordance with Standard Formula. An analysis of the undiversified SCR of PGH plc is presented below: %
Own Funds within the Life Companies of £7.5 billion (2017: £4.0 billion) comprise £4.5 billion (2017: £0.8 billion) in the shareholders’ funds, £2.0 billion (2017: £2.1 billion) in the non-profit funds, £0.5 billion (2017: £0.5 billion) in the supported with-profit funds and future shareholder transfers of £0.5 billion (2017: £0.6 billion).
Own Funds within the holding companies of £0.5 billion (2017: £0.6 billion) principally comprises cash and other financial assets held in the holding companies, net of shareholder borrowings which do not qualify as capital under the Solvency II regulations.
• the Eligible amounts of Tier 2 items shall not exceed 20% of the MGSCR.
The MCR for the Method 2 part of the Group is £1.1 billion, with Eligible Own Funds of £4.2 billion, leaving an excess of Eligible Own Funds over MCR of £3.1 billion, which translates to an MCR coverage ratio of 377%.
A list of the APMs used in our results as well as their definitions, why they are used and, if applicable, how they can be reconciled to the nearest equivalent GAAP measure is provided below. Further discussion of these measures can be found in the business review on page 28 and the definitions of all APMs are included in the glossary on page 234.
AUA indicates the potential earnings capability of the Group arising from its insurance and investment business. AUA flows provide a measure of the Group’s ability to deliver new business growth.
The debt and equity figures are directly sourced from the Group’s IFRS consolidated statement of financial position on pages 123 and 124 and the analysis of borrowings note on page 155 .
This measure is considered a prudent proxy for the future cash generation that is expected to emerge over the life of contracts written in the period.
The statement of consolidated cash flows prepared in accordance with IFRS combines cash flows relating to shareholders with cash flows relating to policyholders, but the practical management of cash within the Group maintains a distinction between the two. The Group therefore focuses on the cash flows of the holding companies which relate only to shareholders. Such cash flows are considered more representative of the cash generation that could potentially be distributed as dividends or used for debt repayment and servicing, group expenses and pension contributions.
Operating companies’ cash generation is a key performance indicator used by management for planning, reporting and executive remuneration.
Further details of holding companies’ cash flows are included within the business review on page 28 and a breakdown of the Group’s cash position by type of entity is provided in the additional life company asset disclosures section on page 222.
Operating profit is a financial performance measure based on expected long-term investment returns. It is stated before tax and non-operating items including amortisation and impairments of intangibles, finance costs attributable to owners and other non-operating items which in the Director’s view should be excluded by their nature or incidence to enable a full understanding of financial performance.
This measure provides a more representative view of the Group’s performance than the IFRS result after tax as it provides long-term performance information unaffected by short-term economic volatility and one-off items, and is stated net of policyholder finance charges and tax.
This figure provides a view of the level of surplus capital in the Life companies that is available for distribution to the holding companies, and the generation of Free Surplus underpins future operating cash generation.
Please see business review section page 28 for further analysis of the solvency positions of the life companies.
The Group therefore focuses on a shareholder view of the capital coverage ratio which is considered to give a more accurate reflection of the capital strength of the Group.
SHAREHOLDER PROFILE AS AT 31 DECEMBER 2018 Range of shareholdings No. of shareholders % No. of shares %
Warning to shareholders Over recent years, many companies have become aware that their shareholders have received unsolicited phone calls or correspondence concerning investment matters� These are typically from overseas-based ’brokers’ who target UK shareholders, offering to sell them what often turn out to be worthless or high-risk shares in US or UK investments� These operations are commonly known as ’boiler rooms’�
Shareholders are advised to be very wary of any unsolicited advice, offers to buy shares at a discount or offers of free reports about the Company�
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�
• the impact of changes in capital, solvency or accounting standards, and tax and other legislation and regulations in the jurisdictions in which members of the Group operate�
The Group undertakes no obligation to update any of the forward-looking statements contained within the 2018 Annual Report and Accounts or any other forward-looking statements it may make or publish�
The 2018 Annual Report and Accounts has been prepared for the members of the Company and no one else� The Company, its Directors or agents do not accept or assume responsibility to any other person in connection with this document and any such responsibility or liability is expressly disclaimed�
Nothing in the 2018 Annual Report and Accounts is or should be construed as a profit forecast or estimate�
An Alternative Performance Measure (’APM’) is a financial measure of historic or future financial performance, financial position or cash flows, other than a financial measure defined under IFRS or under Solvency II regulations� The Group uses a range of these metrics to provide a better understanding of the underlying performance of the Group� All APMs are defined within this glossary and the APM section on page 230
ANNUITY POLICY A policy that pays out regular benefit amounts, either immediately and for the remainder of a policyholder’s lifetime (immediate annuity), or deferred to commence at some future date (deferred annuity)
ACQUISITION The acquisition by Phoenix of the Standard Life Assurance businesses from Standard Life Aberdeen, which completed on 31 August 2018
EBT Employee Benefit Trust – A trust set up to enable its Trustee to purchase and hold shares to satisfy employee share-based incentive plan awards� The Company’s EBT is the Phoenix Group Holdings plc Employee Benefit Trust
FOS Financial Ombudsman Service – An ombudsman established in 2000, and given statutory powers in 2001 by the Financial Services and Markets Act 2000, to help settle disputes between consumers and UK-based businesses providing financial services
Refers to Phoenix Group Holdings plc, Phoenix Group Holdings, PGH Capital plc, Phoenix Life Holdings Limited, Pearl Group Holdings (No� 2) Limited, Impala Holdings Limited, Pearl Group Holdings (No� 1) Limited, PGH (LCA) Limited, PGH (LCB) Limited and Pearl Life Holdings Limited
Eligible Own Funds are the amount of Own Funds that are available to cover the Solvency Capital Requirements after applying prescribed tiering limits and transferability restrictions to Basic Own Funds
A policy which provides benefits payable on certain events� The benefits may be a single lump sum or a series of payments and may be payable on death, serious illness or sickness
RIGHTS ISSUE The rights issue announced by Phoenix on 30 May 2018 and completed on 10 July 2018 in connection with the part financing of the acquisition of the Standard Life Assurance businesses
SCR relates to the risks and obligations to which the Group is exposed, and is calibrated so that the likelihood of a loss exceeding the SCR is less than 0�5% over one year� This ensures that capital is sufficient to withstand a broadly ’1-in-200-year event’
Standard Life Assurance Limited, Standard Life Pensions Fund Limited, Standard Life International Designated Activity Company, Vebnet (Holdings) Limited, Vebnet Limited, Standard Life Lifetime Mortgages Limited, Standard Life Assets and Employee Services Limited and Standard Life Investment Funds Limited (together known as the Standard Life Assurance businesses) acquired by the Group on 31 August 2018
WITH-PROFIT FUND A fund where policyholders are entitled to a share of the profits of the fund� Normally, policyholders receive their share of the profits through bonuses� Also known as a participating fund as policyholders have a participating interest in the with-profit funds and any declared bonuses� Generally, policyholder and shareholder participation in the withprofit funds in the UK is split 90:10
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