• The Group will honour the vesting of all awards granted under previous policies in accordance with the terms of such awards.
• The Remuneration Committee retains discretion to adjust the weightings or substitute metrics but would expect to consult with its major shareholders regarding any material changes of the current performance measures applied for LTIP awards made to Executive Directors or the relative weightings between these performance measures.
• For every LTIP award, appropriate disclosures regarding the proposed performance conditions will be made in the annual Implementation Report.
Element and purpose All-employee share plans To encourage share ownership by employees, thereby allowing them to participate in the long-term success of the Group and align their interests with those of the shareholders.
Maximum • Sharesave – the Remuneration Committee has the facility to allow individuals to save up to a maximum of £500 each month (or such other level as permitted by HMRC legislation) for a fixed period of three or five years. At the end of the savings period, individuals may use their savings to buy ordinary shares in the Company at a discount of up to 20% of the market price set at the launch of each scheme.
• Share Incentive Plan (‘SIP’) – the Remuneration Committee has the facility to allow individuals to have the opportunity to purchase, out of their pre-tax salary, shares in the Company and receive up to two matching shares for every purchased share. Maximum saving is £150 each month (or up to such level as permitted by the Company in line with HMRC legislation). SIP also has the facility to allow for reinvestment of dividends in further shares, or the award of additional free shares (up to the limits as permitted by HMRC legislation).
Element and purpose Shareholding guidelines To encourage share ownership by the Executive Directors over the long-term, including post cessation of employment, and ensure interests are aligned
• Post cessation of employment, Executive Directors are expected to retain the lower of their full level of employment shareholding guideline or their actual shareholding at termination for a period of two years.
Policy and operation • The fees paid to the Chairman and the fees of the other Non-Executive Directors are set to be competitive with other listed companies of equivalent size and complexity.
• Additional fees are paid to Non-Executive Directors who chair a Board committee, or sit on the board of a subsidiary company or on the Solvency II Model Governance Committee, and to the Senior Independent Director (‘SID’) and dedicated Workforce Director of Engagement. No separate Board committee membership fees are currently paid.
• Fees are paid monthly in cash. • Fee levels for Non-Executive Directors are reviewed annually with any changes normally taking effect from 1 January.
Additional reviews may take place in exceptional circumstances, such as following major corporate events, to ensure that fees remain appropriate in the context of the Group’s size and complexity.
Maximum • The aggregate fees of the Chairman and Non-Executive Directors will not exceed the limit from time to time prescribed within the Company’s Articles of Association for such fees (currently £2 million per annum in aggregate). • The Company reserves the right to vary the structure of fees within this limit including, for example, introducing timebased fees or reflecting the establishment of new Board committees.
• LTIP – our most senior employees participate in the LTIP currently based on the same performance conditions as those for Executive Directors, although the Committee reserves the discretion to vary the performance conditions for awards made to employees below the Board for future awards.
2. Stating maximum amounts for the Remuneration Policy The DRR regulations and related investor guidance encourages companies to disclose a cap within which each element of remuneration policy will operate. Where maximum amounts for elements of remuneration have been set within the Remuneration Policy, these will operate simply as caps and are not indicative of any aspiration.
Group member or the Company; or • any other circumstances that have a sufficiently significant impact on the reputation of the Company or Group.
4. Travel and hospitality While the Remuneration Committee does not consider this to form part of benefits in the normal usage of that term, it has been advised that corporate hospitality (whether paid for by the Company or another) and certain instances of business travel (including any related tax liabilities settled by the Company or another Group company) for Directors may technically be considered as benefits and so the Remuneration Committee expressly reserves the right to authorise such activities and reimbursement of associated expenses within its agreed policies.
RECRUITMENT REMUNERATION POLICY The Group’s recruitment remuneration policy aims to give the Remuneration Committee sufficient flexibility to secure the appointment and promotion of high calibre executives to strengthen the management team and secure the skill sets to deliver our strategic aims.
In terms of the principles for setting a package for a new Executive Director, the starting point for the Remuneration Committee will be to apply the general policy for Executive Directors as set out above and structure a package in accordance with that policy.
All such buy-out awards, whether under the AIP, LTIP or otherwise (for example, specific arrangements made under Listing Rule 9.4.2), will take account of the service obligations and performance requirements for any remuneration relinquished by the individual when leaving a previous employer. The Remuneration Committee will seek to make buy-out awards subject to what are, in its opinion, comparable requirements in respect of service and performance. However, the Remuneration Committee may choose to relax this requirement in certain cases (such as where the service and/or performance requirements are materially completed), and where the Remuneration Committee considers it to be in the interests of shareholders and where such factors are, in the view of the Remuneration Committee, reflected in some other way, such as a significant discount to the face value of the awards forfeited. Exceptionally, where necessary, this may include a guaranteed or non pro-rated annual incentive in the year of joining.
• For the avoidance of doubt, such buy-out awards are not subject to a formal cap.
DIRECTORS’ SERVICE CONTRACTS Executive Directors Executive Director service contracts, which do not contain expiry dates, provide that compensation provisions for termination without notice will only extend to 12 months of salary, certain fixed benefits and pension (which may be payable in instalments and subject to mitigation). By excluding any entitlement to compensation for loss of the opportunity to earn variable pay, the Remuneration Committee believes the contracts to be consistent with best practice. The Remuneration Committee also has discretion to mitigate further by paying on a phased basis with unpaid instalments ceasing after the initial period of six months if the Executive Director finds alternative employment. Contracts do not contain change of control provisions. The template contract is reviewed from time to time and may be amended provided it is not overall more generous than the terms described above.
A participant would typically be considered a Bad Leaver following a voluntary resignation or leaving for disciplinary reasons
No awards made Either the AIP will continue for the year or there will be a pro-rated annual incentive. Performance metrics determined by the Remuneration Committee
Consistent with previous practice, the Remuneration Committee did not consult with employees in preparing the 2020 Remuneration Policy although has established further employee engagement in 2019 in accordance with the requirement under the Corporate Governance Code.
The Remuneration Committee also seeks to build an active and productive dialogue with investors on developments in the remuneration aspects of corporate governance generally and any changes to the Company’s executive pay arrangements in particular. The Remuneration Committee consulted with shareholders prior to submission of this policy. The previous Remuneration Policy was submitted to shareholders at the 2019 AGM due to the completion of a Scheme of Arrangement in 2018 and this was approved with 99.7% support.
At 31 December 2020, the issued ordinary share capital totalled 999,232,144. Subsequently, 2,029 ordinary shares have been issued in 2021 in connection with the Group’s Sharesave Scheme to bring the total in issue to 999,234,173 at the date of this Directors’ Report.
At the Company’s 2020 AGM, shareholders approved the renewal of the Company’s authority to make purchases of up to 72,152,329 of its own shares and make payment for the redemption or purchase of its own shares in any manner permitted by the Companies Act 2006 including without limitation, out of capital, profits, share premium or the proceeds of a new issue of shares. The authority was not used and none of the Company’s ordinary shares were purchased by the Company during 2020. The authority will expire at the 2021 AGM. A resolution to renew this authority shall be proposed in the 2021 AGM Notice of Meeting. The Company held no treasury shares during the year or up to the date of this Directors’ Report.
Restrictions on transfer of shares Under the Company’s Articles, the Directors may in certain circumstances refuse to register transfers of shares. Certain restrictions on the transfer of shares may be imposed from time to time by applicable laws and regulations (for example, insider trading laws), and pursuant to the Listing Rules of the Financial Conduct Authority (‘FCA’) and the Group’s own share dealing rules whereby Directors and certain employees of the Group require individual authorisation to deal in the Company’s ordinary shares.
Annual General Meeting (‘AGM’) The AGM of the Company will be held at Juxon House, 100 St Paul’s Churchyard, London, EC4M 8BU on Friday 14 May 2021 at 10.00am.
Investor Communications The Company’s Annual Report and Accounts, together with the Company’s Interim Report and other public announcements and presentations, are designed to present a fair, balanced and understandable view of the Group’s activities and prospects. These are available on the Company’s website at www.thephoenixgroup.com, along with a wide range of relevant information for private and institutional investors, including the Company’s financial calendar.
BOARD Board of Directors The membership of the Board of Directors during 2020 is given within the Corporate Governance Report on pages 98 to 100, which is incorporated by reference into this Directors’ Report. During 2020 and up to the date of this Directors’ Report, the following changes to the Board took place: During the year, the following Board resignations and appointments occurred: • Clive Bannister, Group Chief Executive resigned from the Board on 10 March 2020 • Jim McConville, Group Finance Director resigned from the Board on 15 May 2020 • Campbell Fleming, SLA Nominated Director resigned from the Board on 23 July 2020 • Andy Briggs, Group Chief Executive was appointed to the Board on 10 February 2020 • Rakesh Thakrar, Group Chief Financial Officer was appointed to the Board on 15 May 2020 • Hiro Iioka, MS&AD Nominated Director was appointed to the Board on 23 July 2020 • Christopher Minter, Swiss Re Nominated Director was appointed to the Board on 23 July 2020
In accordance with the UK Corporate Governance Code, Directors must stand for election/re-election annually.
The Board of Directors will be unanimously recommending that all of the Directors should be put forward for election/ re-election at the forthcoming AGM to be held on 14 May 2021.
Directors’ indemnities The Company has entered into deeds of indemnity with each of its Directors whereby the Company has agreed to indemnify each Director against all losses incurred by them in the exercise, execution or discharge of their powers or duties as a Director of the Company, provided that the indemnity shall not apply when prohibited by any applicable law.
Directors’ conflicts of interest The Board has established procedures for handling conflicts of interest in accordance with the Companies Act 2006 and the Company’s Articles.
On an ongoing basis, Directors are responsible for informing the Company Secretary of any new, actual or potential conflicts that may arise.
The Board has followed the requirements of the UK Financial Reporting Council’s (‘FRC’) ‘Guidance on Risk Management, Internal Control and Related Financial and Business Reporting (September 2014)’ and taken into account the requirements of the recent pronouncement from the FRC’s Financial Reporting Lab, ‘COVID-19 – Going concern, risk and viability’, when performing its going concern assessment. As part of its comprehensive assessment of whether the Group and the Company are a going concern, the Board has considered financial projections over the period to 31 March 2022, which demonstrate the ability of the Group to withstand market shocks in a range of scenarios, under severe but plausible scenarios. Further details of these stress scenarios are included in the viability statement on pages 90 to 91.
In assessing the appropriateness of the going concern basis, the Board considered base case liquidity and solvency projections that incorporated an estimated view of the potential economic downturn that is anticipated to be experienced due to the impacts of COVID-19. In addition, a more onerous economic downturn was also modelled. These scenarios have been validated against latest available external benchmarks, including International Monetary Fund and Bank of England forecasts. The projections demonstrate that appropriate levels of capital would remain in the Life Companies under both the base and more onerous economic downturn scenarios, thus supporting cash generation in the going concern period, and note the Group’s access to additional funding through it’s undrawn £1.25 billion Revolving Credit Facility.
The Directors have acknowledged their responsibilities in the Statement of Directors’ Responsibilities in relation to the IFRS financial statements for the year ended 31 December 2020.
The UK Corporate Governance Code (the ‘Code’) applies to the Company and full details on the Company’s compliance with the Code are included in the Corporate Governance Report on pages 94 to 123. The Code is available on the website of the Financial Reporting Council – www.frc.org.uk.
The disclosures required by the Companies Act 2006 in respect of the following matters are set out in the Strategic Report, as below: • Our strategy and future developments – the
Company’s strategy and priorities for 2021 are highlighted in the Strategy and KPIs section of the Strategic Report on pages 26 to 45.
• Our people and diversity – the Company’s policy and strategy for diversity and inclusion is highlighted in the Strategic Report on pages 16, 42 to 45 and 62.
• Disability – The Group has an Equal Opportunities and Diversity Framework which ensures full and fair consideration is given to applications from, and the continuing employment and training of, disabled people. Reasonable adjustments, as required under the Equality Act 2010, are made for disabled employees, including seeking redeployment in the event that reasonable adjustments are not possible. During 2020 we extended our colleague inclusion networks to include a new group ‘Enable’ promoting the interests of colleagues with disabilities and other long-term health conditions.
Task Force on Climate-related Financial Disclosures (‘TCFD’) In accordance with LR 9.8.6R, all climate-related financial disclosures consistent with the TCFD Recommendations and Recommended Disclosures are contained in the TCFD report forming part of the Strategic Report on pages 67 to 78. Such disclosures have been included in the Strategic Report due to their strategic importance.
Energy usage and Carbon Emissions under the Companies (Directors’ Report) and Limited Liability Partnerships (Energy and Carbon Report) Regulations 2018 (SI 2018/1155) All disclosures relating to the Group’s energy usage and carbon emissions are contained in the TCFD report forming part of the Strategic Report on pages 67 and 78.
Articles of Association Changes to the Company’s Articles require prior shareholder approval by special resolution.
CONTRACTUAL/OTHER Significant agreements impacted by a change of control of the Company The £1.25 billion revolving credit facility has provisions which would enable the lending banks to require repayment of all amounts borrowed following a change of control.
Disclosures under Listing Rule 9.8.4R For the purposes of Listing Rule 9.8.4C, the information required to be disclosed under Listing Rule 9.8.4R can be found within the following sections of the Report and Accounts: Section Requirement Location
Publication of unaudited financial information Not applicable 3 Deleted Not applicable
STATEMENT OF DIRECTORS’ RESPONSIBILITIES IN RESPECT OF THE ANNUAL REPORT AND ACCOUNTS OF PHOENIX GROUP HOLDINGS PLC The Directors are responsible for the preparation of the Annual Report and Accounts, the Strategic Report, the Directors’ Report, the Directors’ Remuneration Report, the corporate governance statement, the consolidated financial statements and the Company financial statements in accordance with applicable United Kingdom law and regulations.
The Board has prepared a Strategic Report which provides an overview of the development and performance of the Group’s business for the year ended 31 December 2020, covers the future developments in the business of Phoenix Group Holdings plc and its consolidated subsidiaries and provides details of any important events affecting the Company and its subsidiaries after the year-end. For the purposes of compliance with DTR 4.1.5R(2) and DTR 4.1.8R, the required content of the ‘Management Report’ can be found in the Strategic Report and this Directors’ Report, including the sections of the Annual Report and Accounts incorporated by reference.
The Directors have prepared the consolidated financial statements and the Company financial statements in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006. The Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and the Company and of the profit or loss of the Group and the Company for that period.
Under the Financial Conduct Authority’s Disclosure Guidance and Transparency Rules, the consolidated financial statements are required to be prepared in accordance with international financial reporting standards (‘IFRSs’) adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union.
In preparing these financial statements the Directors are required to: • select suitable accounting policies and then apply them consistently; • make judgements and accounting estimates that are reasonable and prudent; • in respect of the consolidated financial statements, state whether international accounting standards in conformity with the requirements of the Companies Act 2006 and IFRSs adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union have been followed, subject to any material departures disclosed and explained in the financial statements; • in respect of the Company financial statements, state whether international accounting standards in conformity with the requirements of the Companies Act 2006, have been followed, subject to any material departures disclosed and explained in the financial statements; and
In addition, the Directors as at the date of this Directors’ Report consider that the Annual Report and Accounts, taken as a whole, provides users (who have a reasonable knowledge of business and economic activities) with the information necessary for shareholders to assess the Group’s position, performance, business model and strategy, and is fair, balanced and understandable.
Rakesh Thakrar Group Chief Financial Officer 163Phoenix Group Holdings plc Annual Report & Accounts 2020
OPINION In our opinion: • Phoenix Group Holdings plc’s consolidated financial statements and parent company financial statements (the ’financial statements’) give a true and fair view of the state of the Group’s and of the Parent Company’s affairs as at 31 December 2020 and of the Group’s profit for the year then ended; • the consolidated financial statements have been properly prepared in accordance with International Accounting Standards in conformity with the requirements of the Companies Act 2006 and International Financial Reporting Standards adopted pursuant to Regulation (EC) No.1606/2002 as it applies in the European Union; • the parent company financial statements have been properly prepared in accordance with International Accounting Standards in conformity with the requirements of the Companies Act 2006 as applied in accordance with section 408 of the Companies Act 2006; and
The statement of consolidated changes in equity for the year then ended
Related notes A1 to I7 to the consolidated financial statements (except for note I3 where it is marked as unaudited), including a summary of significant accounting policies
CONCLUSIONS RELATING TO GOING CONCERN In auditing the financial statements, we have concluded that the Directors’ use of the going concern basis of accounting in the preparation of the financial statements is appropriate. To evaluate management’s assessment of the Group and parent company’s ability to continue to adopt the going concern basis of accounting, we have: • confirmed our understanding of management’s going concern assessment process and obtained management’s assessment which covers the period to 31 March 2022; • with support from our actuarial team, challenged the key actuarial assumptions used in management’s five-year Annual Operating Plan (‘AOP’) and determined that the models are appropriate to enable management to make an assessment on the going concern of the Group. We have observed that assumptions used in the five-year AOP form the basis for management’s going concern projections; • assessed the accuracy of management’s analysis by testing the inputs and the clerical accuracy of the models used; • evaluated the liquidity and solvency position of the Group by reviewing base case liquidity and solvency projections that incorporate an estimated view of the potential future economic downturn that is anticipated to be experienced due to the impacts of COVID-19; • challenged the key assumptions, such as expense assumptions underlying mandatory obligations of the Group and property market forecasts up to 31 March 2022, used in management’s stress scenarios based on our understanding of the Group and the available external data, respectively; • evaluated management’s forecast analysis to understand how severe the downside scenarios would have to be to result in the elimination of solvency headroom and concluded it to be remote; INDEPENDENT AUDITOR’S REPORT
• assessed management’s considerations of operational risks, including those related to Outsourced Service Providers (‘OSPs’) and its impact on the going concern assessment; • assessed the plausibility of available management actions to mitigate the impact of the key risks by comparing them to our understanding of the Group; • checked that all mandatory debt and interest payments are forecast to be met under the base case and adverse stress scenarios and that, the Group is able to maintain target debt repayments throughout the going concern period; • performed enquiries of management and those charged with governance to identify risks or events that may impact the Group’s ability to continue as a going concern. We also reviewed management’s assessment approved by the Board, minutes of meetings of the Board and its committees, and made enquiries as to the impact of COVID-19 on the business; and
• assessed the appropriateness of the going concern disclosures by comparing the disclosures with management’s assessment and for compliance with the relevant reporting requirements.
Based on the work we have performed, we have not identified any material uncertainties relating to events or conditions that, individually or collectively, may cast significant doubt on the Group and parent company’s ability to continue as a going concern for the period to 31 March 2022.
In relation to the Group and parent company’s reporting on how they have applied the UK Corporate Governance Code, we have nothing material to add or draw attention to in relation to the Directors’ statement in the financial statements about whether the Directors considered it appropriate to adopt the going concern basis of accounting.
Audit scope • We performed an audit of the complete financial information of the Group Function, Phoenix Life Division, Standard Life Assurance Limited and ReAssure Limited and audit procedures on specific balances for Other Companies (the ‘reporting components’). Our scope is explained further on pages 166 to 167.
• The components where we performed full or specific audit procedures accounted for more than 99% of the equity and profit before tax of the Group.
• Valuation of insurance contract liabilities, comprising the following risk areas: – actuarial assumptions; – actuarial modelling; and – data.
Materiality Overall Group materiality of £140 million (2019: £100 million) which represents 2% (2019: 2.1%) of total equity attributable to owners of the parent (‘Group equity’).
AN OVERVIEW OF THE SCOPE OF THE PARENT COMPANY AND GROUP AUDITS Tailoring the scope Our assessment of audit risk, our evaluation of materiality and our allocation of performance materiality determine our audit scope for each reporting component within the Group. Taken together, this enables us to form an opinion on the consolidated financial statements. We take into account size, risk profile, the organisation of the Group and effectiveness of group-wide controls, changes in the business environment and other factors when assessing the level of work to be performed at each reporting component. As disclosed in the Risk Management section of the Annual Report and Accounts, integration of ReAssure Group plc into the wider Group is underway, with completion expected at the end of 2022. In our current year assessment of audit risk and the level of work to be performed at the ReAssure component, we considered its risk profile and effectiveness of entity-level controls.
In assessing the risk of material misstatement to the consolidated financial statements, and to ensure we had adequate quantitative coverage of significant accounts in the financial statements, we identified five reporting components of the Group. The Group reporting components consist of Phoenix Life Division, Standard Life Assurance Limited, ReAssure Limited, the Group Function and Other Companies.
In the Phoenix Life Division component, the most significant insurance companies are Phoenix Life Assurance Limited and Phoenix Life Limited. Standard Life Assurance Limited and ReAssure Limited are the most significant companies of those respective components. The Group Function consists of Group entities that primarily hold external debt and the pension schemes of the Group. The Other Companies include the Phoenix Life and Standard Life service companies, ReAssure Life Limited, ReAssure UK Services Limited, ReAssure MidCo Limited, Ark Life Assurance Company, ERIP Limited Partnership and Standard Life International Designated Activity Company (‘SLIDAC’).
Of the five reporting components selected, we performed an audit of the complete financial information of four components (‘full scope components’) which were selected based on their size or risk characteristics. For the remaining Other Companies, we performed audit procedures on specific accounts of Phoenix Life and Standard Life service companies (provisions, accruals and deferred income, administrative expenses excluding acquisition costs), ReAssure Life Limited (collective investment schemes), ReAssure MidCo Limited (pension scheme surplus), ReAssure UK Services Limited (administrative expenses excluding acquisition costs), Ark Life Assurance Company (reinsurers’ share of insurance contract liabilities) and ERIP Limited Partnership (derivative liabilities). We also instructed the SLIDAC component audit team to perform specified procedures over insurance contract liabilities relating to the contracts in the entity prior to the business transfer from SLAL in 2019.
The reporting components where we performed audit procedures accounted for more than 99% (2019: 99%) of the Group’s equity and the Group’s profit before tax. For the current year, the full scope components contributed 84% (2019: 87%) of the Group’s equity and 88% (2019: 90%) of the Group’s profit before tax. The specific scope components, including the component with specified procedures contributed 15% (2019: 12%) of the Group’s equity and 11% (2019: 9%) of the Group’s profit before tax. The audit scope of these components may not have included testing of all significant accounts of the component but will have contributed to the coverage of significant accounts tested for the Group.
KEY AUDIT MATTERS Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) that we identified. These matters included those which had the greatest effect on: the overall audit strategy, the allocation of resources in the audit; and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements as a whole, and in our opinion thereon, and we do not provide a separate opinion on these matters.
In the current year, our Auditor’s Report includes an additional key audit matter in relation to accounting for the acquisition of ReAssure Limited and other associated entities as the acquisition transaction was completed in the 2020 financial year.
Refer to the Audit Committee Report (page 116); Critical accounting estimates (page 185); Accounting policies and note F1 of the consolidated financial statements (pages 227 to 230)
We considered the valuation of insurance contract liabilities to be a significant risk for the Group. Specifically, we considered the actuarial assumptions and modelling that are applied, as these involve complex and significant judgments about future events, both internal and external to the business for which small changes can result in a material impact to the resultant valuation. Additionally, the valuation process is reliant upon the accuracy and completeness of the data.
Economic assumptions are set by management taking into account market conditions as at the valuation date and require minimal judgment. Noneconomic assumptions are set based on the Group’s past experience, market experience and practice, regulations and expectations about future trends.
The assumptions that we consider to have the most significant impact are the base and trend longevity, persistency, assured mortality and expenses.
As stated in note F4 of the consolidated financial statements, some allowance has been made in the valuation and capital calculations for the potential short-term effects of COVID-19 on timing of cash flows relating to the insurance risks to which the Group is exposed. However, management has not adjusted the assumptions to reflect the impact of COVID-19 on the basis that the longer term impact on mortality and morbidity is uncertain at the current time.
To obtain sufficient audit evidence to conclude on the appropriateness of actuarial assumptions, using EY actuaries as part of our audit team, we performed the following procedures: • obtained an understanding and tested the design and operating effectiveness of key controls over management’s process for setting and updating key actuarial assumptions; • challenged and assessed whether the methodology and assumptions applied were appropriate based on our knowledge of the Group, industry standards and regulatory and financial reporting requirements; • reviewed and challenged the results of management’s experience analysis, including the base longevity, persistency and assured mortality, to assess whether these justified the adopted assumptions. This has incorporated specific challenge of management’s consideration of COVID-19 in the setting of these assumptions and whether it was appropriate for management not to adjust the key assumptions for the longer term impact of COVID-19 and provide an allowance for the potential short-term effects of COVID-19; • in respect of longevity improvements, we evaluated the results of management’s analysis on longevity trend, challenged the judgments applied by management in setting the parameters and benchmarked the output against other industry participants and the results from the industry standard Continuous Mortality Investigation (‘CMI’); • assessed the expense assumptions adopted by management with reference to the management service agreement (‘MSA’) with the Service companies; • assessed the assumptions applied for ReAssure and benchmarked them against the existing Phoenix Group; • performed procedures to test that the assumptions used in the year end valuation were consistent with the approved basis; and
– With-profits asset shares – we tested the roll forward of asset shares between time periods that was performed by management and evaluated the appropriateness of inputs against source data. In addition, we compared the rolled forward asset shares to management’s modelled asset shares to assess reasonableness of the model.
We determined that the models used are appropriate, that changes to the models were implemented as intended and that controls over management’s processes for modelling insurance contract liabilities using the core actuarial modelling systems were operating effectively.
• performed the comparison of policy level data between data in the actuarial models and that contained within the policy administration systems. Evaluated the accuracy of policyholder data by testing a sample to the policyholder documents.
We performed full scope audit procedures over this risk area in four components representing 99% of the risk amount.
Refer to the Audit Committee Report (page 116); Critical accounting estimates (page 185); Accounting policies and notes E1 and E2 of the consolidated financial statements (pages 200 to 211).
We consider that the key risks on the valuation of ERM financial investments relates to: i) assumptions as these are largely based on non-observable inputs and are highly judgmental, and ii) the completeness and accuracy of data feeding the valuation model.
We consider that the key risks related to valuation of modelled debt securities to be the (i) use of complex valuation methodologies as opposed to observable prices; ii) significant judgments involved in setting the spread above risk-free rate; iii) the subjectivity surrounding the selection of the comparable bonds to derive that spread; and iv) reasonableness of credit ratings considering the impact of COVID-19.
Additionally, the valuation of the modelled debt securities for the Phoenix Life Division and Standard Life Assurance Limited components has been outsourced by its OSP to a third party during the year which increases the risk of management’s oversight over the valuation processes for these financial investments.
We used EY valuation specialists and actuaries to test the valuation of ERMs and modelled debt securities. To obtain sufficient audit evidence to conclude on the valuation of ERMs, we: • tested the design and operating effectiveness of key controls over management’s assumption setting processes for valuing these instruments; • tested the completeness of the ERM financial investments and underlying data at the period end through independent confirmation from the OSPs; • tested the accuracy of mortgage data used in the valuation model by agreeing a sample of new loans to supporting evidence and validating any movements on static data over the period; • evaluated the methodology, inputs and assumptions used to value the ERM financial investments including the No Negative Equity Guarantee (‘NNEG’) (such as house price inflation, residential house price volatility, longevity improvement and base mortality, as well as economic assumptions such as discount rate); • validated the key assumptions including relevant COVID-19 considerations by comparing them to published market benchmarks and demographic and economic assumptions used by other industry participants, to confirm that key valuation inputs were consistent with industry norms and our understanding of the instrument type; and
• developed our own independent model to value the ERM loans and compared the output to the results produced by the Group.
To obtain sufficient audit evidence to conclude on the valuation of modelled debt securities, we: • reviewed the SOC1 report of the OSPs covering the period to 30 September 2020, including those controls over the valuation of modelled debt securities outsourced to the third party, and determined the impact of any identified control exceptions. This included an assessment of the operational impacts of COVID-19 on the applicable controls; • obtained the bridging letter for the period 1 October 2020 to 31 December 2020 to confirm that the controls over the valuation of modelled debt securities were operating during the period. In addition, we tested a sample of these controls in the bridging period to confirm they were operating effectively; • inspected evidence of the operation of management’s oversight controls over the OSPs, including an assessment of the operational impacts of COVID-19 on the applicable oversight controls; • understood the valuation process of modelled debt securities applied by the OSP of the Phoenix Life Division and Standard Life Assurance Limited components and assessed the appropriateness of any methodology and assumption changes during the year; • for modelled debt securities overseen by in-house Independent Pricing Valuation (‘IPV’) and Credit and Valuation Committee, we have obtained an understanding of the valuation methodology and tested the design and operating effectiveness of the key controls; • engaged EY valuation specialists to evaluate the appropriateness of valuation methodology, calculate an independent range of comparable values for a sample of modelled debt securities using an independent valuation model and considered reasonable alternative key assumptions based on comparable securities. Our valuation procedures were designed to take into account the impact of the COVID-19 pandemic.
• performed independent calibration based on securities implied rate and sector credit spreads to validate the reasonableness of credit ratings used in the comparable values assessment; and
• considered the downgrade of credit ratings or changes of spread in management’s credit watchlist and known market risks in our independent comparable values assessment.
Based on our procedures performed on the ERM financial investments and the modelled debt securities, we are satisfied that the valuation of these complex and illiquid assets is reasonable.
Refer to the Audit Committee Report (page 116); Critical accounting estimates (page 186); Accounting policies and notes H2.1 of the consolidated financial statements (pages 267 to 268).
We consider the identification and valuation of identifiable intangible assets, such as acquired in-force business (‘AVIF’) and other intangibles, and the gain arising from the acquisition of the ReAssure businesses to be significant risks due to the nature of judgments and estimates involved. We also recognise a risk of disclosure non-compliance with the applicable reporting framework.
Under the Group’s accounting policy, acquired value of in-force insurance contracts is measured as the difference between the Generally Accepted Accounting Practice (‘GAAP’) value of the insurance contract liabilities and the determined fair value.
As a result, we focused on significant judgments in respect of the identification of the intangible assets acquired, GAAP valuation of the ReAssure Limited insurance contract liabilities as at the date of acquisition, and the fair value adjustments required in the insurance contract liabilities and their impact on the calculation of goodwill and AVIF.
The primary element of the valuation exercise assessed the fair value of the identifiable intangible asset in the form of AVIF (£1,831 million), gross of tax. This resulted in a gain on acquisition of £372 million that was recognised in the Group’s income statement for the year ended 31 December 2020, reflecting the excess of the fair value of the net assets acquired over the consideration paid for the acquisition of ReAssure.
Based on our procedures performed on the acquisition of ReAssure, we are satisfied that, on an overall basis, the fair value of the assets and liabilities acquired lies within a reasonable range of what a market participant in an orderly transaction would pay for the identifiable assets and liabilities and there is a justification for the gain on acquisition.
Recoverability of intangible assets arising from the acquisition of Standard Life Assurance Limited and other associated entities (AVIF £2,262m; 2019: £2,538m); (CSPA intangible asset £30m; 2019: £33m)
There has been no change in our assessment of this risk from the prior year.
Refer to the Audit Committee Report (page 116); Accounting policies and note G2 of the consolidated financial statements (pages 253 to 255).
Recoverability assessment of these intangible assets involves consideration of a number of judgmental and sensitive assumptions such as: • market movements and their impact on economic assumptions such as cost of capital; • significant changes to core valuation assumptions, being: lapses, longevity, late retirements; • any change in the assessment of AVIF and CSPA intangible asset value in use as a result of the Group and SLA plc agreement signed in February 2021 (as stated in note I7 of the consolidated financial statements).
As a result, we consider valuation of the acquired intangible assets to have a higher risk of material misstatement.
• understood the terms and conditions of the Group and SLA plc agreement and considered all aspects of the transaction to assess whether it was an indication of an impairment as at 31 December 2020.
Materiality An omission or misstatement in the financial statements could reasonably be expected to influence the economic decisions of the users of the financial statements, depending on its magnitude. Materiality provides a basis for determining the nature and extent of our audit procedures. • We determined materiality for the Group to be £140 million (2019: £100 million), which is 2% (2019: 2.1%) of Group equity. COVID-19 has not impacted significantly the Group equity and therefore, our consideration of materiality calculation. Whilst profit before tax or operating profit are common bases used across the life insurance industry and might be an appropriate measure for an open business, we believe that the use of equity as the basis for assessing materiality remains more appropriate given that the Group is primarily a closed life assurance consolidator and as such equity provides a more stable, long-term measure of value. We note also that equity more closely correlates with key Group performance metrics such as Solvency II capital requirements and Own Funds. However, as these measures are non-GAAP measures, we consider equity to be more appropriate.
• We determined materiality for the parent company to be £143 million (2019: £109 million), which is 2% (2019: 2%) of the parent company equity attributable to owners. We have used a capital based measure for determining materiality considering the nature of the parent company as a holding company. This is also consistent with the approach taken for the Group where we consider equity to be the most appropriate basis when considering against other measures such as IFRS profit before tax. For the Group audit purposes, we performed our audit procedures to the lower of the parent company and the Group allocated performance materiality.
During the course of our audit, we reassessed initial materiality of £130 million and updated it to £140 million due to an increase in the Group equity between the interim and year end period.
Performance materiality Performance materiality is the application of materiality at the individual account or balance level. It is set at an amount to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality.
Audit work at component locations for the purpose of obtaining audit coverage over significant financial statement accounts is undertaken based on a percentage of total performance materiality. The performance materiality set for each component is based on the relative scale and risk of the component to the Group as a whole and our assessment of the risk of misstatement at that component. In the current year, the range of performance materiality allocated to components was £14 million to £38 million (2019: £13 million to £30 million).
Reporting threshold Reporting threshold is an amount below which identified misstatements are considered as being clearly trivial.
We evaluate any uncorrected misstatements against both the quantitative measures of materiality discussed above and in light of other relevant qualitative considerations in forming our opinion.
OTHER INFORMATION The other information comprises the information included in the Annual Report set out on pages 1 to 163 and 303 to 318, other than the financial statements and our Auditor’s Report thereon. The Directors are responsible for the other information contained within the annual report.
CORPORATE GOVERNANCE STATEMENT The Listing Rules require us to review the directors’ statement in relation to going concern, longer-term viability and that part of the Corporate Governance Statement relating to the Group and Company’s compliance with the provisions of the UK Corporate Governance Code specified for our review.
• The fraud risk was considered to be higher within the valuation of insurance contract liabilities and accounting for the acquisition of ReAssure Limited and other associated entities. We considered management override risk to be higher in these areas due to the significant judgments and estimates involved. Our procedures, as detailed in the key audit matters above, included: – Reviewing accounting estimates for evidence of management bias. Supported by our actuarial team and valuation specialists, we assessed if there were any indicators of management bias in the valuation of insurance contract liabilities.
• We designed our audit procedures to identify noncompliance with both direct and other laws and regulations including those at the components impacting the Group. Our procedures involved: making enquiries of those charged with governance and senior management for their awareness of any non-compliance of laws or regulations, enquiring about the policies that have been established to prevent non-compliance with laws and regulations by officers and employees, enquiring about the company’s methods of enforcing and monitoring compliance with such policies, inspecting significant correspondence with the FCA and PRA.
A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council’s website at auditorsresponsibilities. This description forms part of our auditor’s report.
OTHER MATTERS WE ARE REQUIRED TO ADDRESS • We were appointed by the Company Directors on 13
December 2018 and signed an engagement letter on 20 February 2019 to audit the financial statements for the period ending 31 December 2018 and subsequent financial periods. The period of total uninterrupted engagement including previous renewals and reappointments is three years, covering the years ending 31 December 2018 to 2020.
• The non-audit services prohibited by the FRC’s Ethical Standard were not provided to the Group or the parent company and we remain independent of the Group and the parent company in conducting the audit.
• The audit opinion is consistent with the additional report to the Audit Committee.
USE OF OUR REPORT This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed.
Stuart Wilson (Senior statutory auditor) for and on behalf of Ernst & Young LLP, Statutory Auditor London 1 The maintenance and integrity of the Phoenix Group Holdings plc website is the responsibility of the Directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the website.
Net investment income C2 16,935 24,876 Other operating income 121 106
Items that will not be reclassified to profit or loss: Remeasurements of net defined benefit asset/liability G1 (21) (24)
Non-controlling interests D5 36 31 178 Phoenix Group Holdings plc Annual Report & Accounts 2020
Cash and cash equivalents G6 10,998 4,466 179Phoenix Group Holdings plc Annual Report & Accounts 2020
Total equity and liabilities 334,325 242,677 180 Phoenix Group Holdings plc Annual Report & Accounts 2020
Issue of ordinary share capital, net of associated commissions and expenses 28 2 – – 1,819 – – 1,849 – – 1,849
Shares distributed by the employee benefit trust – – 8 – – – (8) – – – –
Coupon paid on Tier 1 Notes, net of tax relief – – – – – – (23) (23) – – (23)
Issue of ordinary share capital, net of associated commissions and expenses – 2 – – – – 2 – – 2
Dividends paid on ordinary shares – – – – – (338) (338) – – (338)
Credit to equity for equity-settled share based payments – – – – – 11 11 – – 11
Shares distributed by employee benefit trust – – 3 – – (3) – – – –
Transfer of reserve (note A1) – (3,077) – – – 3,077 – – – –
Coupon paid on Tier 1 Notes, net of tax relief – – – – – (23) (23) – – (23)
STATEMENT OF CONSOLIDATED CASH FLOWS For the year ended 31 December 2020 £m
Acquisition of ReAssure businesses, net of cash acquired H2.1 (979) –
Proceeds from issuing ordinary shares, net of associated commission and expenses 2 2
A. SIGNIFICANT ACCOUNTING POLICIES A1. Basis of Preparation The consolidated financial statements for the year ended 31 December 2020 set out on pages 177 to 289 comprise the financial statements of Phoenix Group Holdings plc (‘the Company’) and its subsidiaries (together referred to as ‘the Group’), and were authorised by the Board of Directors for issue on 7 March 2021.
The scheme of arrangement had the effect of the Company being inserted above Old PGH in the Group legal entity organisational structure and constituted a group reconstruction. It was accounted for in accordance with the principles of a reverse acquisition under IFRS 3 Business Combinations.
The consolidated financial statements have been prepared on a historical cost basis except for investment property, owner-occupied property and those financial assets and financial liabilities (including derivative instruments) that have been measured at fair value.
Statement of compliance The consolidated financial statements have been prepared in accordance with International Accounting Standards in conformity with the requirements of the Companies Act 2006 and also in accordance with International Financial Reporting Standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union.
The Directors have, at the time of approving the consolidated financial statements, a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence over the period covered by the assessment.
A3.1 Insurance and investment contract liabilities Insurance and investment contract liability accounting is discussed in more detail in the accounting policies in note F1 with further detail of the key assumptions made in determining insurance and investment contract liabilities included in note F4. Economic assumptions are set taking into account market conditions as at the valuation date. Non-economic assumptions, such as future expenses, longevity and mortality are set based on past experience, market practice, regulations and expectations about future trends.
Further details of these estimates and the sensitivity of the defined benefit obligation to key assumptions are provided in note G1.
• Interest Rate Benchmark Reform (Amendments to IFRS 9, IAS 39 and IFRS 7) Phase 1: The amendments have arisen following the phasing out of interest-rate benchmarks such as interbank offered rates (‘IBOR’). Specific hedge accounting requirements have been modified to provide relief from potential effects of the uncertainty caused by IBOR reform. In addition, these amendments require entities to provide additional information to investors about their hedging relationships which are directly affected by these uncertainties. The Group terminated its hedge accounting relationships at the start of the period and consequently the Group has not needed to use the relief provided in these amendments.
• Amendments to the References to the Conceptual Framework in IFRS Standards.
A5. New Accounting Pronouncements not yet Effective The IASB has issued the following standards or amended standards and interpretations which apply from the dates shown. The Group has decided not to early adopt any of these standards, amendments or interpretations where this is permitted.
• IFRS 9 Financial Instruments (1 January 2023): Under IFRS 9, all financial assets will be measured either at amortised cost or fair value and the basis of classification will depend on the business model and the contractual cash flow characteristics of the financial assets. In relation to the impairment of financial assets, IFRS 9 requires the use of an expected credit loss model, as opposed to the incurred credit loss model required under IAS 39 Financial Instruments: Recognition and Measurement. The expected credit loss model will require the Group to account for expected credit losses and changes in those expected credit losses at each reporting date to reflect changes in credit risk since initial recognition.
The Group has taken advantage of the temporary exemption granted to insurers in IFRS 4 Insurance Contracts from applying IFRS 9 until 1 January 2023 as a result of meeting the exemption criteria as at 31 December 2015. As at this date the Group’s activities were considered to be predominantly connected with insurance as the percentage of the total carrying amount of its liabilities connected with insurance relative to the total carrying amount of all its liabilities was greater than 90%. Following the acquisition of the ReAssure businesses on 22 July 2020, this assessment was re-performed and the Group’s activities were still considered to be predominantly connected with insurance.
IFRS 9 will be implemented at the same time as the new insurance contracts standard (IFRS 17 Insurance Contracts) effective from 1 January 2023. During the year, the Group continued its implementation activities in respect of IFRS 9 and expects to continue to value the majority of its financial assets as at fair value through profit or loss on initial recognition, either as a result of these financial assets being managed on a fair value basis or as a result of using the fair value option to irrevocably designate the assets at fair value through profit or loss. A number of additional disclosures will be required by IFRS 7 Financial Instruments: Disclosures as a result of implementing IFRS 9. Additional disclosures have been made in note E1.2 to the consolidated financial statements to provide information to allow comparison with entities who have already adopted IFRS 9.
• IAS 37 Provisions, Contingent Liabilities and Contingent Assets (1 January 2022): The amendments specify which costs a company includes when assessing whether a contract will be lossmaking. These amendments are not expected to have any impact on the Group.
In June 2020, the IASB issued its narrow-scope amendments to IFRS 17 to address a number of the concerns and issues identified in the original version of the standard. Whilst the changes have given clarity in some areas there remain a number of implementation challenges which the Group will need to address. Development of the Group’s methodologies and accounting policies continues to progress with increasing focus on the application of these methodologies. Progress has been made in data and systems implementations, with development of business processes running in parallel. Following the acquisition of ReAssure Group plc in July 2020 work is progressing to align the IFRS 17 processes. During 2021 the focus is on completing systems build and preparing for the transition date, including business readiness activities.
• Classification of Liabilities as Current and Non-current (Amendments to IAS 1 Presentation of Financial Statements) (1 January 2023). The amendments clarify rather than change existing requirements and aim to assist entities in determining whether debt and other liabilities with an uncertain settlement date should be classed as current or non-current. It is currently not expected that there will be any reclassifications as a result of this clarification.
• Sale or Contribution of Assets between an Investor and its Associate or Joint Venture (Amendments to IFRS 10 and IAS 28) (Effective date deferred). The amendments address the conflict between IFRS 10 and IAS 28 in dealing with the loss of control of a subsidiary that is sold or contributed to an associate or joint venture. These amendments are not expected to have any impact on the Group.
On 31 January 2020, the UK left the EU and effective from 1 January 2021, the European Commission will no longer endorse IFRSs for use in the UK. Legislation is in place to onshore and freeze EUadopted IFRSs and from 1 January 2021 the Group will apply UKadopted International Accounting Standards. The powers to endorse and adopt IFRSs will be delegated by the Secretary of State to the UK Endorsement Board once the draft statutory instrument, which was laid before Parliament on 1 February 2020, is approved. The following amendments to standards listed above have been endorsed for use in the UK by the Secretary of State: • Interest Rate Benchmark Reform – Phase 2 (Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16); and
Considerations as to valuation uncertainty and other specific impacts of COVID-19 have been included within the notes to the consolidated financial statements that provide further detail on pension schemes, investment property, liabilities under insurance contracts and financial instruments.
B. EARNINGS PERFORMANCE B1. Segmental Analysis The Group defines and presents operating segments in accordance with IFRS 8 Operating Segments which requires such segments to be based on the information which is provided to the Board, and therefore segmental information in this note is presented on a different basis from profit or loss in the consolidated financial statements.
Following the acquisition of the ReAssure businesses in 2020, the Group reassessed its operating segments to reflect the way the business was subsequently being managed. The Group now has five reportable segments comprising UK Heritage, UK Open, Europe, ReAssure and Management Services, as set out in note B1.1.
The UK Open segment includes new and in-force life insurance and investment policies in respect of products that the Group continues to actively market to new and existing policyholders. This includes products such as workplace pensions and Self-Invested Personal Pensions (‘SIPPs’) distributed through the Group’s Strategic Partnership with Standard Life Aberdeen plc (‘SLA plc’), products sold under the SunLife brand, and annuities, including Bulk Purchase Annuity contracts.
Following the acquisition of the ReAssure businesses during the year the acquired business is included in a separate segment. This reflects the way that the ReAssure business is currently reported for management purposes.
Inter-segment transactions are set on an arm’s length basis in a manner similar to transactions with third parties. Segmental results include those transfers between business segments which are then eliminated on consolidation.
Operating profit includes the effect of variances in experience for non-economic items, such as mortality and expenses, and the effect of changes in non-economic assumptions. It also incorporates the impacts of significant management actions where such actions are consistent with the Group’s core operating activities (for example, actuarial modelling enhancements and data reviews). Operating profit is reported net of policyholder finance charges and policyholder tax.
Operating profit excludes the impact of the following items: • the difference between the actual and expected experience for economic items and the impacts of changes in economic assumptions on the valuation of liabilities (see notes B2.2 and B2.3); amortisation and impairments of intangible assets (net of policyholder tax); • finance costs attributable to owners; • gains or losses on the acquisition or disposal of subsidiaries
(net of related costs); • the financial impacts of mandatory regulatory change; • the profit or loss attributable to non-controlling interests; • integration, restructuring or other significant one-off projects; and
• any other items which, in the Directors’ view, should be disclosed separately by virtue of their nature or incidence to enable a full understanding of the Group’s financial performance. This is typically the case where the nature of the item is not reflective of the underlying performance of the operating companies.
Comparative segmental performance information has been restated to reflect this new presentation. UK Heritage operating profit has been reduced by £344 million to £350 million and the UK Open operating profit has been increased by the same amount to £417 million. UK Heritage segmental revenue has been reduced by £1,628 million to £729 million and the UK Open segmental revenue has been increased by the same amount to £2,135 million.
Investment return variances and economic assumption changes on long-term business B2.2 (47) (177)
Profit/(loss) before the tax attributable to owners of the parent 908 (45)
• net other one-off items totalling a cost of £7 million.
• net other one-off items totalling a cost of £13 million.
Further details of the investment return variances and economic assumption changes on long-term business, and the variance on owners’ funds are included in note B2.
Revenue from external customers: Less: premiums ceded to reinsurers (210) (367) (29) (190) – – (796)
Income from other segments – – – – 737 (737) –
B. EARNINGS PERFORMANCE continued B2. Investment Return Variances and Economic Assumption Changes The long-term nature of much of the Group’s operations means that, for internal performance management, the effects of short-term economic volatility are treated as non-operating items. The Group focuses instead on an operating profit measure that incorporates an expected return on investments supporting its long-term business. The accounting policy adopted in the calculation of operating profit is detailed in note B1. The methodology for the determination of the expected investment return is explained below together with an analysis of investment return variances and economic assumption changes recognised outside of operating profit.
The long-term risk-free rate used as a basis for deriving the long-term investment return is set by reference to the swap curve at the 15year duration plus 10bps at the start of the year. A risk premium of 349bps is added to the risk-free yield for equities (2019: 350bps), 249bps for properties (2019: 250bps), 55bps for corporate bonds (2019: 120bps) and 15bps for gilts (2019: 50bps).
The principal assumptions underlying the calculation of the long-term investment return are: B2.2 Life assurance business Operating profit for life assurance business is based on expected investment returns on financial investments backing owners’ and policyholder funds over the reporting period, with consistent allowance for the corresponding expected movements in liabilities. Operating profit includes the effect of variance in experience for noneconomic items, for example mortality, persistency and expenses, and the effect of changes in non-economic assumptions. Changes due to economic items, for example market value movements and interest rate changes, which give rise to variances between actual and expected investment returns, and the impact of changes in economic assumptions on liabilities, are disclosed separately outside operating profit.
The investment return variances and economic assumption changes excluded from the long-term business operating profit are as follows: Investment return variances and economic assumption changes on long-term business (47) (177)
The variances excluded from operating profit in relation to owners’ funds are as follows: Variances on owners’ funds of subsidiary undertakings 148 13 192 Phoenix Group Holdings plc Annual Report & Accounts 2020
The basic and diluted earnings per share calculations are also presented based on the Group’s operating profit net of financing costs. Operating profit is a non-GAAP performance measure that is considered to provide a comparable measure of the underlying performance of the business as it excludes the impact of short-term economic volatility and other one-off items.
Profit/(loss) for the year attributable to owners 1,000 (143) 857 (23) 834
Coupon paid on Tier 1 notes, net of tax relief – (23) (23) – (23)
Deduct: Share of result attributable to non-controlling interests – – – (36) (36)
Profit/(loss) for the year attributable to ordinary equity holders of the parent 647 (115) 532 (470) 62 193Phoenix Group Holdings plc Annual Report & Accounts 2020
On 5 August 2020, the Board declared an interim dividend of 23.4p per share for the half year ended 30 June 2020. The dividend amounted to £234 million and was paid on 4 September 2020.
Fee income from investment contracts without DPF 292 293 58 137 780
Initial fees deferred during the year – – (8) – (8)
Other revenue from contracts with customers 4 10 – 8 22
In the period no amortisation or impairment losses were recognised in the statement of comprehensive income.
Rental income from investment property is recognised in the consolidated income statement on a straight-line basis over the term of the lease. Lease incentives granted are recognised as an integral part of the total rental income.
C. OTHER CONSOLIDATED INCOME STATEMENT NOTES continued C3. Administrative expenses Administrative expenses Administrative expenses are recognised in the consolidated income statement as incurred.
Audit of the consolidated financial statements includes amounts in respect of reporting to the auditor of SLA plc given their status as a significant investor in both 2020 and 2019. The 2020 balance also includes amounts in respect of the audit of the acquisition balance sheet of the acquired ReAssure businesses.
Audit related assurance services includes fees payable for services where the reporting is required by law or regulation to be provided by the auditor, such as reporting on regulatory returns. It also includes fees payable in respect of reviews of interim financial information and services where the work is integrated with the audit itself.
Reporting accountant services relate to assurance reporting on historical information included within investment circulars. In both 2020 and 2019, this includes public reporting associated with the acquisition of the ReAssure businesses.
Corporate finance services fees were £nil (2019: £3.3 million). The 2019 fees principally related to services provided in connection with the acquisition of ReAssure. £1.6 million of the fees related to actuarial and finance due diligence procedures conducted in relation to the acquisition where synergies were anticipated to arise with subsequent audit work. The remaining balance of £1.7 million related to the provision of assurance services to the Board and the sponsoring banks in support of disclosures made in the public transaction documents.
Movement on acquired in-force amortisation at rates other than 19%5 77 9
3 Disallowable expense deductions are primarily in relation to the acquisition of the ReAssure businesses.
4 The 2020 prior year credit primarily relates to overseas deferred acquisition costs in Standard Life International Designated Activity Company of £(8) million and a 2019 tax provision true-up in Standard Life Assurance Limited of £(5) million.
6 The 2020 profits taxed at rates other than 19% relates to overseas profits and UK life company profits subject to marginal shareholder tax rates.
7 The 2020 tax credit represents the recognition of tax losses in the Group companies of £(3) million, intangible assets in Standard Life International Designated Activity Company of £(6) million and capital losses within ReAssure businesses of £(16) million.
8 The 2020 deferred tax rate change relates to the impact of retaining the 19% corporation tax rate and impact of the L&G Part VII transfer.
9 The 2020 charge for current year tax losses not valued relates to Standard Life International Designated Activity Company.
During the year, 440,062 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 721,514,944 72,151,494 198 Phoenix Group Holdings plc Annual Report & Accounts 2020
D2. Shares held by the Employee Benefit Trust Where the Phoenix Group Employee Benefit Trust (‘EBT’) acquires shares in the Company or obtains rights to purchase its shares, the consideration paid (including any attributable transaction costs, net of tax) is shown as a deduction from owners’ equity. Gains and losses on sales of shares held by the EBT are charged or credited to the own shares account in equity.
The Company provided the EBT with an interest-free facility arrangement to enable it to purchase the shares.
D3. Other reserves The other reserves comprises the owner-occupied property revaluation reserve and the cash flow hedging reserve.
Cash flow hedging reserve Where a cash flow hedging relationship exists, the effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in other comprehensive income and accumulated under the heading of cash flow hedging reserve. The gain or loss relating to the ineffective portion is recognised immediately in consolidated income statement, and is reported in net investment income.
D4. Tier 1 Notes The Fixed Rate Reset Perpetual Restricted Tier 1 Contingent Convertible Notes (‘Tier 1 Notes’) meet the definition of equity and accordingly are shown as a separate category within equity at the proceeds of issue. The coupons on the instruments are recognised as distributions on the date of payment and are charged directly to the statement of consolidated changes in equity.
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 coupon paid in the year was £29 million (2019: £29 million).
interest payment is not made, it is cancelled and it shall not accumulate or be payable at any time thereafter.
D. EQUITY continued D4. Tier 1 Notes continued The Tier 1 Notes may be redeemed at par on the First Call Date or on any interest payment date thereafter at the option of the Company and also in other limited circumstances. If such redemption occurs prior to the fifth anniversary of the Issue Date, such redemption must be funded out of the proceeds of a new issuance of, or exchanged into, Tier 1 Own Funds of the same or a higher quality than the Tier 1 Notes. In respect of any redemption or purchase of the Tier 1 Notes, such redemption or purchase is subject to the receipt of permission to do so from the PRA.
The non-controlling interests of £341 million (2019: £314 million) reflects third party ownership of Standard Life Private Equity Trust (‘SLPET’) determined at the proportionate value of the third party interest in the underlying assets and liabilities. SLPET is a UK Investment Trust listed and traded on the London Stock Exchange. As at 31 December 2020, the Group held 55.2% of the issued share capital of SLPET (2019: 55.2%).
Statement of financial position: Income statement: Profit after tax 36 31
Loans and deposits are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and only include assets where a security has not been issued. These loans and deposits are initially recognised at cost, being the fair value of the consideration paid for the acquisition of the investment. All transaction costs directly attributable to the acquisition are also included in the cost of the investment. Subsequent to initial recognition, these investments are carried at amortised cost, using the effective interest method.
Fair value estimation The fair values of financial instruments traded in active markets such as publicly traded securities and derivatives are based on quoted market prices at the period end. The quoted market price used for financial assets is the applicable bid price on the period end date. The fair value of investments that are not traded in an active market is determined using valuation techniques such as broker quotes, pricing models or discounted cash flow techniques. Where pricing models are used, inputs are based on market related data at the period end. Where discounted cash flow techniques are used, estimated future cash flows are based on contractual cash flows using current market conditions and market calibrated discount rates and interest rate assumptions for similar instruments.
For units in unit trusts and shares in open-ended investment companies, fair value is determined by reference to published bidvalues. The fair value of receivables and floating rate and overnight deposits with credit institutions is their carrying value. The fair value of fixed interest-bearing deposits is estimated using discounted cash flow techniques.
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.
Derecognition of financial liabilities A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires.
Offsetting financial assets and financial liabilities Financial assets and liabilities are offset and the net amount reported in the statement of financial position only when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or to realise the asset and settle the liability simultaneously. When financial assets and liabilities are offset any related interest income and expense is offset in the income statement.
Financial assets at fair value through profit or loss: Held for trading – derivatives 6,880 6,429 6,880
Designated upon initial recognition: Investment in associate1 (see note H3) 400 – 400
Financial liabilities at fair value through profit or loss: Held for trading – derivatives 1,001 727 1,001
Financial liabilities measured at amortised cost: Deposits received from reinsurers 4,080 3,381 4,080
Total financial liabilities 183,750 184,283 1 These assets and liabilities have no expected settlement date.
E1.2 IFRS 9 Temporary exemption disclosures Following application of the temporary exemption granted to insurers in IFRS 4 Insurance Contracts from applying IFRS 9 Financial Instruments (see note A5) 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 assets with contractual cash flows that are SPPI excluding those held for trading or managed on a fair value basis: Loans and deposits 647 516
Non-rated1 £m Unit-linked £m Total £m 1 The Group has assessed its non-rated assets as having a low credit risk.
E. FINANCIAL ASSETS & LIABILITIES continued E2. Fair Value Hierarchy E2.1 Determination of fair value and fair value hierarchy of financial instruments Level 1 financial instruments The fair value of financial instruments traded in active markets (such as exchange traded securities and derivatives) is based on quoted market prices at the period end provided by recognised pricing services. Market depth and bid-ask spreads are used to corroborate whether an active market exists for an instrument. Greater depth and narrower bid-ask spread indicate higher liquidity in the instrument and are classed as Level 1 inputs. For collective investment schemes, fair value is by reference to published bid prices.
Loans and deposits at amortised cost – 632 15 647 £m
Financial liabilities designated at FVTPL upon initial recognition: Net asset value attributable to unit-holders 3,791 – – 3,791
Total financial liabilities for which fair values are disclosed – 8,795 301 9,096 206 Phoenix Group Holdings plc Annual Report & Accounts 2020
Total financial assets measured at fair value 172,725 37,187 8,443 218,355
Loans and deposits at amortised cost – 516 – 516 £m
Financial liabilities designated at FVTPL upon initial recognition: Net asset value attributable to unitholders 3,149 – – 3,149
Total financial liabilities measured at fair value 3,225 121,357 173 124,755
A proportion of the Group’s level 3 financial assets are held to back unit linked business and unsupported with-profit funds. As such, movements in the fair value of those assets will typically be offset by corresponding movements in insurance and investment contract liabilities. From a financial reporting perspective, valuation risk is centered on those assets held in the shareholder funds or to back liabilities in the non-profit or supported with-profit funds. The table below shows the shareholder exposure to Level 3 assets as at 31 December 2020: Shareholder, NPF &
Level 3 investments in equities (including private equity and unlisted property investment vehicles) and collective investment schemes (including hedge funds) are valued using net asset statements provided by independent third parties, and therefore no sensitivity analysis has been prepared.
Included within debt securities are investments in equity release mortgages with a value of £3,484 million (2019: £2,781 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.
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.
The significant sensitivities arise from movements in the yield curve, inflation rate, house prices, mortality and voluntary redemption rate. An increase of 100bps in the yield curve would decrease the value by £351 million (2019: £265 million) and a decrease of 100bps would increase the value by £397 million (2019: £296 million). An increase of 1% in the inflation rate would increase the value by £29 million (2019: £26 million) and a decrease of 1% would decrease the value by £48 million (2019: £43 million).
E2.3.3 Corporate transactions Included within financial assets and liabilities are related debt securities of £29 million (2019: £43 million) and derivative liabilities of £2 million (2019: £4 million) pertaining to a reinsurance and retrocession arrangement (see note E3.2 for further information on these arrangements). These assets and liabilities are valued using a discounted cash flow model that includes valuation adjustments in respect of liquidity and credit risk. At 31 December 2020, the net of these balances was an asset of £27 million (2019: asset of £39 million). The valuation is sensitive to movements in the euro swap curve. An increase of 100bps in the swap curve would decrease the aggregate value by £1 million (2019: £2 million) and a decrease of 100bps would increase the aggregate value by £1 million (2019: £2 million).
An increase of 10% in house prices would increase the value by £16 million (2019: £15 million) and a decrease of 10% would decrease the value by £26 million (2019: £25 million). An increase of 5% in mortality would decrease the value by £11 million (2019: £8 million) and a decrease of 5% in mortality would increase the value by £7 million (2019: £5 million). An increase of 15% in the voluntary redemption rate would decrease the value by £24 million (2019: £17 million) and a decrease of 15% in the voluntary redemption rate would increase the value by £22 million (2019: £15 million).
Also included within debt securities are income strips with a value of £692 million (2019: £690 million). 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 £68 million (2019: £66 million) and a decrease of 35bps would increase the value by £86 million (2019: £79 million).
Included within derivative assets and derivative liabilities are longevity swap contracts with corporate pension schemes with a fair value of £155 million (2019: £134 million) and £85 million (2019: £70 million) respectively. These derivatives are valued on a discounted cash flow basis, key inputs to which are the EIOPA interest rate swap curve and RPI and CPI inflation rates.
E2.3.4 Derivatives Included within derivative assets are forward local authority loans, forward private placements and forward infrastructure loans with a value of £43 million (2019: £41 million). 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 £19 million (2019: £25 million) and a decrease of 35bps would increase the value by £20 million (2019: £28 million).
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 for debt securities resulted in assets being moved from Level 2 to Level 1, and from Level 1 to Level 2.
Financial liabilities designated at FVTPL upon initial recognition: Gains and losses on Level 3 financial instruments are included in net investment income in the consolidated income statement. There were no gains or losses recognised in other comprehensive income in either the current or comparative period.
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 £155 million and derivative liabilities of £85 million have been recognised as at 31 December 2020 (2019: £134 million and £70 million respectively).
E3.3 Equity Release Income Plan ('ERIP') total return swap ERIP contracts are an equity release product under which the Group holds a reversionary interest in the residential property of policyholders who have been provided with a lifetime annuity in return for the legal title to their property (see note G4). The Group is party to an ERIP total return swap under which a share of the future generated cash flows arising under the ERIP contracts is payable to a third party. Over time, as the property reversions are realised, the relevant share of disposal proceeds is transferred to a third party who also holds a beneficial interest in these residential properties. The carrying amount of the derivative liability is the present value of all future cash flows due to the third party under the total return swap.
E4. Collateral Arrangements 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.
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.
Net amount £m 213Phoenix Group Holdings plc Annual Report & Accounts 2020
E4.2 Derivative collateral arrangements Assets accepted It is the Group’s practice to obtain collateral to mitigate the counterparty risk related to over-the-counter (‘OTC’) derivatives usually in the form of cash or marketable financial instruments.
The amounts recognised as financial assets and liabilities from cash collateral received at 31 December 2020 are set out below.
The fair value of financial assets accepted as such collateral but not recognised in the statement of consolidated financial position amounts to £2,686 million (2019: £3,306 million).
Carrying value Fair value £m £200 million 7.25% unsecured subordinated loan (note c) 200 196 204 211 £300 million senior unsecured bond (note d) 122 121 125 130 £428 million Tier 2 subordinated notes (note e) 426 426 517 503 £450 million Tier 3 subordinated notes (note f) 449 449 470 473
US $500 million Tier 2 bonds (note g) 364 376 416 396
US $750 million Contingent Convertible Tier 1 notes (note i) 545 – 585 –
£500 million 5.867% Tier 2 subordinated notes (note l) 556 – 620 –
£250 million Fixed Rate Reset Callable Tier 2 subordinated notes (note m) 272 – 280 –
£250 million 4.016% Tier 3 subordinated notes (note n) 259 – 266 –
Amount due for settlement after 12 months 4,245 2,107 a. In 1998, Mutual Securitisation plc raised £260 million of capital through the securitisation of Embedded Value on a block of existing unit-linked and unitised with-profit life and pension policies. The bonds were split between two classes, which ranked pari passu and were listed on the Irish Stock Exchange. The £140 million 7.39% class A1 limited recourse bonds matured in 2012 with no remaining outstanding principal. The £120 million 7.59% class A2 limited recourse bonds with an outstanding principal of £36 million as at 31 December 2019 were due to mature in 2022. During 2019, repayments totalling £12 million were made. As at 31 December 2019, Phoenix Life Assurance Limited (‘PLAL’) had provided collateral of £14 million to provide security to the holders of the recourse bonds in issue. On 4 August 2020, Mutual Securitisation plc redeemed all the outstanding class A2 limited recourse bonds in issue.
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 2020, repayments totalling £19 million were made (2019: £22 million). Note G4 contains details of the assets that support this loan.
e. On 23 January 2015, PGHC issued £428 million of subordinated notes due 2025 at a coupon of 6.625%. Fees associated with these notes of £3 million were deferred and are being amortised over the life of the notes in the statement of consolidated financial position. Upon exchange £32 million of these notes were held by Group companies. On 27 January 2017, £17 million of the £428 million subordinated notes held by Group companies were sold to third parties and a further £15 million were sold to third parties on 31 January 2017, thereby increasing external borrowings by £32 million. On 20 March 2017, Old PGH was substituted in place of PGHC as issuer of the £428 million subordinated notes and then on 12 December 2018 the Company was substituted in place of Old PGH as issuer.
f. On 20 January 2017, PGHC issued £300 million Tier 3 subordinated notes due 2022 at a coupon of 4.125%. On 20 March 2017, Old PGH was substituted in place of PGHC as issuer of the £300 million Tier 3 subordinated notes. On 5 May 2017, Old PGH completed the issue of a further £150 million of Tier 3 subordinated notes, the terms of which are the same as the Tier 3 subordinated notes issued in January 2017. The Group received a premium of £2 million in excess of the principal amount. Fees associated with these notes of £5 million were deferred and are being amortised over the life of the notes. On 12 December 2018 the Company was substituted in place of Old PGH as issuer.
h. On 24 September 2018, Old PGH issued €500 million Tier 2 notes due 2029 with a coupon of 4.375%. Fees associated with these notes of £7 million were deferred and are being amortised over the life of the notes. On 12 December 2018 the Company was substituted in place of Old PGH as issuer.
i. On 29 January 2020, the Company issued US $750 million fixed rate reset perpetual restricted Tier 1 contingent convertible notes (the ‘Contingent Convertible Tier 1 Notes’) which are unsecured and subordinated. The Contingent Convertible Tier 1 Notes have no fixed maturity date and interest is payable only at the sole and absolute discretion of the Company. The Contingent Convertible Tier 1 Notes bear interest on their principal amount at a fixed rate of 5.625% per annum up to the ‘First Reset Date’ of 26 April 2025. Thereafter the fixed rate of interest will be reset on the First Reset Date and on each fifth anniversary of this date by reference to the sum of the yield of the Constant Maturity Treasury (‘CMT’) rate (based on the prevailing five year US Treasury yield) plus a margin of 4.035%, being the initial credit spread used in pricing the notes. Interest is payable on the Contingent Convertible Tier 1 Notes semi-annually in arrears on 26 April and 26 October. If an interest payment is not made it is cancelled and it shall not accumulate or be payable at any time thereafter.
The Contingent Convertible Tier 1 Notes may be redeemed at par on the First Reset Date or on any interest payment date thereafter at the option of the Company and also in other limited circumstances. If such redemption occurs prior to the fifth anniversary of the Issue Date such redemption must be funded out of the proceeds of a new issuance of, or exchanged into, Tier 1 Own Funds of the same or a higher quality than the Contingent Convertible Tier 1 Notes. In respect of any redemption or purchase of the Contingent Convertible Tier 1 Notes, such redemption or purchase is subject to the receipt of permission to do so from the PRA. Furthermore, on occurrence of a trigger event, linked to the Solvency II capital position and as documented in the terms of the Contingent Convertible Tier 1 Notes, the Contingent Convertible Tier 1 Notes will automatically be subject to conversion to ordinary shares of the Company at the conversion price of US $1,000 per share, subject to adjustment in accordance with the terms and conditions of the notes and all accrued and unpaid interest will be cancelled. Following such conversion there shall be no reinstatement of any part of the principal amount of, or interest on, the Contingent Convertible Tier 1 Notes at any time.
On the same date, the Company was substituted in place of ReAssure Group plc as issuer of the notes. The £500 million 5.867% Tier 2 subordinated notes have a maturity date of 13 June 2029 and were initially recognised at their fair value as at the date of acquisition of £559 million. The fair value adjustment will be amortised over the remaining life of the notes. Interest is payable semi-annually in arrears on 13 June and 13 December.
m. On 22 July 2020, as part of the acquisition of ReAssure Group plc, the Group assumed the £250 million fixed rate reset callable Tier 2 subordinated notes. On the same date, the Company was substituted in place of ReAssure Group plc as issuer of the notes. The £250 million fixed rate reset callable Tier 2 subordinated notes have a maturity date of 13 June 2029 and were initially recognised at their fair value as at the date of acquisition of £275 million. The fair value adjustment will be amortised over the remaining life of the notes. The notes include an issuer par call right exercisable on 13 June 2024. Interest is payable semi-annually in arrears on 13 June and 13 December. These notes initially bear interest at a rate of 5.766% on the principal amount and the rate of interest will reset on 13 June 2024, and on each interest payment date thereafter, to a margin of 5.17% plus the yield of a UK Treasury Bill of similar term.
US $500 million Fixed Rate Reset Tier 2 notes – 396 – – – (32) – 364 £250 million Fixed Rate Reset Callable Tier 2 subordinated notes – – – 275 – – (3) 272 218 Phoenix Group Holdings plc Annual Report & Accounts 2020
E. FINANCIAL ASSETS & LIABILITIES continued E6. Risk Management – Financial and Other Risks 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 debt securities, derivatives counterparties, collective investment schemes, hedge funds and the placing of cash deposits; and
There is an exposure to spread changes affecting the prices of corporate bonds and derivatives. This exposure applies to with-profit funds (where risks and rewards fall wholly to shareholders), non-profit funds and shareholders’ funds.
A 100bps widening of credit spreads, with all other variables held constant and no change in assumed expected defaults, would result in a decrease in the profit after tax in respect of a full financial year, and in equity, of £5 million (2019: £70 million).
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 with appropriate haircuts. 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.
Attributable to: Owners of the parent 798 85 Non-controlling interests D5 36 31 834 116
Credit quality of 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.
Reinsurers’ share of insurance contract liabilities – 6,524 2,966 – – 52 – 9,542
Reinsurers’ share of investment contract liabilities – – – – – – 8,881 8,881 1 For financial assets that do not have credit ratings assigned by external ratings agencies, the Group assigns internal ratings for use in management and monitoring credit risk. £51 million of AAA, £433 million of AA, £1,354 million of A, £272 million of BBB and £90 million of BB and below debt securities are internally rated. If a financial asset is neither rated by an external agency nor internally rated, it is classified as ‘non-rated’.
The risk of unexpected downgrades and defaults within the Group’s credit risk portfolio is heightened as a result of market volatility and wider economic and social impacts arising from COVID-19. Throughout 2020, the Group took de-risking action to increase the overall credit quality of the portfolio and mitigate the impact of future downgrades on risk capital.
Please refer to page 303 for additional life company asset disclosures which include the life companies’ exposure to peripheral Eurozone debt securities. Peripheral Eurozone is defined as Portugal, Spain, Italy, Ireland and Greece. The Group’s exposure to peripheral Eurozone debt continues to be relatively small compared to total assets. The additional life company asset disclosures also include the Group’s market exposure analysed by credit rating for the shareholder debt portfolio.
Reinsurance The Group is exposed to credit risk as a result of insurance risk transfer contracts with reinsurers. This also gives rise to concentration of risk with individual reinsurers, due to the nature of the reinsurance market and the restricted range of reinsurers that have acceptable credit ratings. The Group manages its exposure to reinsurance credit risk through the operation of a credit policy, collateralisation where appropriate, and regular monitoring of exposures at the Reinsurance Management Committee.
E6.2.2 Market risk Market risk is defined as the risk of reductions in earnings and/or value, through financial or reputational loss, from unfavourable market movements. The risk typically arises from exposure to equity, property and fixed income asset classes and the impact of changes in interest rates, inflation rates and currency exchange rates.
• the income flow of management charges derived from the value of invested assets of the business.
The Group manages the levels of market risk that it accepts through the operation of a market risk policy and an approach to investment management that determines: • the constituents of market risk for the Group; • the basis used to fair value financial assets and liabilities; • the asset allocation and portfolio limit structure; • diversification from and within benchmarks by type of instrument and geographical area; • the net exposure limits by each counterparty or group of counterparties, geographical and industry segments; • control over hedging activities; • reporting of market risk exposures and activities; and
• monitoring of compliance with market risk policy and review of market risk policy for pertinence to the changing environment.
Interest rate and inflation risk Interest rate risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate relative to the respective liability due to the impact of changes in market interest rates on the value of interest-bearing assets and on the value of future guarantees provided under certain contracts of insurance. The paragraphs in this section also apply to inflation risk, but references to fixed rate assets and liabilities would be replaced with index-linked assets and liabilities.
Interest rate risk is managed by matching assets and liabilities where practicable and by entering into derivative arrangements for hedging purposes where appropriate. This is particularly the case for the non-participating funds and supported participating funds. For unsupported participating business, some element of investment mismatching is permitted where it is consistent with the principles of treating customers fairly. The with-profit funds of the Group provide capital to allow such mismatching to be effected. In practice, the life companies of the Group maintain an appropriate mix of fixed and variable rate instruments according to the underlying insurance or investment contracts and will review this at regular intervals to ensure that overall exposure is kept within the risk profile agreed for each particular fund. This also requires the maturity profile of these assets to be managed in line with the liabilities to policyholders.
In the non-participating funds, policy liabilities’ sensitivity to interest rates are matched primarily with debt 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 10% decrease in equity 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 £281 million (2019: £254 million).
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 £16 million (2019: £16 million).
Some of the Group’s with-profit funds have an exposure to overseas assets which is not driven by liability considerations. The purpose of this exposure is to reduce overall risk whilst maximising returns by diversification. This exposure is limited and managed through investment mandates which are subject to the oversight of the investment committees of the boards of each life company. Fluctuations in exchange rates from certain holdings in overseas assets are hedged against currency risks. Over the course of 2020 the Matching Adjustment Portfolios (MAPs) have increased investment in overseas investment grade credit (primarily US) again with the purpose of increasing returns whilst reducing overall risk through diversification. The currency risk arising from these investments is hedged back into sterling, therefore not increasing the Group’s currency exposure.
The Group’s liquidity risk management strategy is based on a very low risk appetite of having insufficient liquid or tangible assets to meet financial obligations as they fall due and is supported by: • Holding appropriate assets to meet liquidity buffers; • Holding high quality liquid assets to support day to day operations; • An effective stress testing framework to ensure survival horizons are met under different plausible scenarios; • Effective liquidity portfolio management; and
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 March 2020, property collective investment schemes were suspended due to Material Valuation Uncertainty clauses being applied by independent property valuers immediately prior to the COVID-19 lockdown. In line with contractual terms, certain transactions, including transfers-out, surrenders and switches were not permitted while funds were in deferral. However, claims in respect of retirement transactions, policy maturities, deaths and regular maturities are deemed ‘nondiscretionary ’ and were paid based on available daily prices. All funds have since had suspensions lifted and no further restrictions apply.
E. FINANCIAL ASSETS & LIABILITIES continued E6. Risk Management – Financial and Other Risks continued E6.2 Financial risk analysis continued E6.2.3 Financial soundness risk continued 1 year or less or on demand £m 1–5 years £m
Obligations for repayment of collateral received 5,205 – – – 5,205
Payables related to direct insurance contracts 1,669 – – – 1,669 1 year or less or on demand £m 1–5 years £m
Net asset value attributable to unitholders 3,149 – – – 3,149
Payables related to direct insurance contracts 890 – – – 890 1 These financial liabilities are disclosed at their undiscounted value and therefore differ from amounts included in the statement of consolidated financial position which discloses the discounted value.
E6.2.4 Strategic risk Strategic risks threaten the achievement of the Group strategy through poor strategic decision-making, implementation or response to changing circumstances. The Group recognises that core strategic activity brings with it exposure to strategic risk. However, the Group seeks to proactively review, manage and control these exposures.
A Strategic Risk Policy is maintained and reported against regularly, with a particular focus on risk management, stakeholder management, corporate activity and overall reporting against the Group’s strategic ambitions.
E6.2.5 Operational risk Operational risk is the risk of reductions in earnings and/or value, through financial or reputational loss, from inadequate or failed internal processes and systems, or from people related or external events. Operational risk arises due to failures in one or more of the following aspects of our business: • indirect exposures through outsourcing service providers (OSPs) and suppliers; • direct exposures through internal practices, actions or omissions; • external threats from individuals or groups focused on malicious or criminal activities, or on external events occurring which are not within the Group’s control; and
E6.2.6 Customer risk Customer risk is the risk of reductions in earnings and/or value through inappropriate or poor customer treatment (including poor advice). It can arise as a result of: • Customer Treatment: Failure to have a customer centric culture which drives appropriate behaviours and decisions leading to customer interactions and outcomes which meet or exceed reasonable customer and regulator expectations and which take account of potential customer vulnerability.
• Customer Transformation: The design, governance and oversight of Strategic Customer Transformation Activity in retained functions and service providers, fails to deliver on reasonable customer expectations, taking account of the Group’s customer treatment risk appetites and regulatory requirements.
• Product and Propositions: Failure to design and/or manage products/propositions appropriately, or failure of the manufacturer to ensure that products/ propositions are distributed to the appropriate target market, perform as intended and in line with the expectations set.
Some insurance and investment contracts contain a Discretionary Participation Feature (‘DPF’). This feature entitles the policyholder to additional discretionary benefits as a supplement to guaranteed benefits. Investment contracts with a DPF are recognised, measured and presented as insurance contracts.
• negligence, mal-practice or failure of employees, or suppliers to follow good practice in delivering operational processes and practices.
It is accepted that it is neither possible, appropriate nor cost effective to eliminate operational risks from the business as operational risk is inherent in any operating environment particularly given the regulatory framework under which the Group operates. As such the Group will tolerate a degree of operational risk subject to appropriate and proportionate levels of control around the identification, management and reporting of such risks.
• in the periods where guaranteed surrender values do not apply even though guaranteed surrender values are applicable after a specified period of time.
F. INSURANCE CONTRACTS, INVESTMENT CONTRACTS WITH DPF AND REINSURANCE continued F1. Liabilities Under Insurance Contracts continued For participating business, the liabilities under insurance contracts and investment contracts with DPF are calculated in accordance with the following methodology: • liabilities to policyholders arising from the with-profit business are stated at the amount of the realistic value of the liabilities, adjusted to exclude the owners’ share of projected future bonuses; • acquisition costs are not deferred; and
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.
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
Where it is not possible to apportion the future profits on this non-participating business to policyholders, the PVFP on this business is recognised as an intangible asset and changes in its value are recorded as a separate item in the consolidated income statement (see note G2).
At each reporting date, the Group assesses whether there are any indications of impairment. When indications of impairment exist, an impairment test is carried out by comparing the carrying value of the asset with the estimate of the recoverable amount. When the recoverable amount is less than the carrying value, an impairment charge is recognised as an expense in the consolidated income statement. Reassurance assets are also considered in the liability adequacy test for each reporting period.
Life assurance business: Investment contracts with DPF 30,895 – 24,958 –
Acquisition of ReAssure businesses (see note H2.1) 24,606 2,782 – –
• 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.
F3.1 Premiums ceded to reinsurers Premiums ceded to reinsurers during the period were £796 million (2019: £556 million).
F4. Risk Management – Insurance Risk This note forms one part of the risk management disclosures in the consolidated financial statements. An overview of the Group’s approach to risk management is outlined in note I3 and the Group’s management of financial and other risks is detailed in note E6.
New business pricing inappropriate pricing of new business that is not in line with the underlying risk factors for that business.
F. INSURANCE CONTRACTS, INVESTMENT CONTRACTS WITH DPF AND REINSURANCE continued F4. Risk Management – Insurance Risk continued It is therefore necessary for the Directors of each life company to make decisions, based on actuarial advice, which ensure an appropriate accumulation of assets relative to liabilities. These decisions include investment policy, bonus policy and, where discretion exists, the level of payments on early termination.
A decrease of 5% in assurance mortality, with all other variables held constant, would result in an increase in the profit after tax in respect of a full year, and an increase in equity of £70 million (2019: £58 million).
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 £70 million (2019: £58 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 £619 million (2019: £288 million).
An increase of 10% in lapse rates, with all other variables held constant, would result in an increase in the profit after tax in respect of a full year, and an increase in equity of £44 million (2019: £20 million).
The non-participating insurance contract liabilities are determined using either a net premium or gross premium valuation method.
Lapse and surrender rates (persistency) The assumed rates for surrender and voluntary premium discontinuance depend on the length of time a policy has been in force and the relevant company. Surrender or voluntary premium discontinuances are only assumed for realistic basis funds.
Discretionary participating bonus rate For realistic basis funds, 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 and the value of guaranteed benefits.
Some pensions contracts include guaranteed annuity options. The total amount provided in the with-profit and non-profit funds in respect of the future costs of guaranteed annuity options are £2,590 million (2019: £1,986 million) and £131 million (2019: £109 million) respectively.
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 £374 million (2019: £225 million) and £6 million (2019: £6 million) respectively.
F. INSURANCE CONTRACTS, INVESTMENT CONTRACTS WITH DPF AND REINSURANCE continued F4. Risk Management – Insurance Risk continued F4.1 Assumptions continued Assumption changes During the year a number of changes were made to assumptions to reflect changes in expected experience or to reflect transition activity. The impact of material changes during the year was as follows: (Decrease)/ increase in insurance liabilities
2020: The £369 million positive impact of changes in longevity assumptions reflects updates to base and improvement assumptions to reflect latest experience analyses and where applicable the most recent Continuous Mortality Investigation 2019 projection tables.
The £6 million and £31 million negative impact of changes in persistency and mortality assumptions respectively reflects the results of the latest experience investigations.
The £36 million positive impact of changes in expense assumptions principally reflects synergies generated upon the completion of the Part VII transfer of the L&G Mature Savings business, partially offset by an increase in reserves in respect of expected costs associated with the delivery of the Group Target Operating Model for IT and Operations and updates to investment expense assumptions, principally reflecting changes to asset mix.
2019: The £186 million positive impact of changes in longevity assumptions reflects updates to base and improvement assumptions to reflect latest experience analyses and where applicable the most recent Continuous Mortality Investigation 2018 projection tables.
1 £7,883 million (2019: £5,320 million) of liabilities are subject to longevity swap arrangements.
Non-profit funds: Deferred annuities – without guarantees 824 – – –
G. OTHER STATEMENT OF CONSOLIDATED FINANCIAL POSITION NOTES G1. Pension Schemes Defined contribution pension schemes Obligations for contributions to defined contribution pension schemes are recognised as an expense in the consolidated income statement as incurred.
Adjustment for amounts due to subsidiary eliminated on consolidation – 13
Provision for tax on that part of the economic surplus available as a refund on a winding-up of the Scheme (5) –
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 needed to be equalised. In 2018, the Group undertook an initial assessment, and included an allowance for the potential cost of equalising GMP for the impact between males and females in its IAS 19 actuarial liabilities at 31 December 2018, pending further discussions with the scheme Trustees and the issuance of guidance as to how equalisation should be achieved. During the year, following a review of the current methodology and assumptions the allowance for the potential cost of equalising GMP has been updated and the resulting reductions in the defined benefit obligation of £26 million for the Pearl Scheme, £16 million for the PGL Scheme and £4 million for the Abbey Life Scheme have been recognised in other comprehensive income as an experience gain.
On 25 November 2020, the GMP equalisation ruling covering transfers out was released and this confirmed that pension schemes are required to equalise all transfers with 17 May 1990 to 5 April 1997 GMPs even if they were taken as far back as 1990. A further exercise was undertaken to estimate the additional costs of allowing for GMP equalisation on transfers out and during the year a further cost of £1 million for the Pearl Scheme and £1 million for the PGL Scheme was recognised as a past service cost in the consolidated income statement. No adjustments were required for either the Abbey Life Scheme or the ReAssure Scheme.
G. OTHER STATEMENT OF CONSOLIDATED FINANCIAL POSITION NOTES continued G1. Pension Schemes continued G1.1 Pearl Group Staff Pension Scheme continued The valuation has been based on an assessment of the liabilities of the Pearl Scheme as at 31 December 2020, undertaken by independent qualified actuaries. The present values of the defined benefit obligation and the related interest costs have been measured using the projected unit credit method.
A triennial funding valuation of the Pearl Scheme as at 30 June 2018 was completed in 2019. This showed a surplus as at 30 June 2018 of £104 million, on the agreed technical provisions basis. The cash flows utilised in the IFRS valuation as at 31 December 2018 were updated to reflect the latest data available from the 30 June 2018 funding valuation. 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.
Pension Scheme Commitment Agreement and buy-in On 17 November 2020, the Pearl Scheme entered into a Commitment Agreement with PGH2 to complete a series of buy-ins that are scheduled to be executed by 31 December 2023. At the same time, the Pearl Scheme completed the first buy-in with Phoenix Life Limited (‘PLL’) covering 25% of the Scheme’s pensioner in-payment and deferred member liabilities, transferring the associated risks of longevity improvement to PLL effective from 30 September 2020.
• Contingent Contributions: These represent a new form of security for the Trustee. The amount of these contributions is initially capped at £200 million, with the cap running off in line with completion of the buy-ins.
• Failure to pay any contributions to the Scheme due under the terms of the Commitment Agreement.
Gain from changes in demographic assumptions – 51 – – 51
Loss from changes in financial assumptions – (205) – – (205)
Change in provision for tax on economic surplus available as a refund – – 2 – 2
G. OTHER STATEMENT OF CONSOLIDATED FINANCIAL POSITION NOTES continued G1. Pension Schemes continued G1.1 Pearl Group Staff Pension Scheme continued
Remeasurements: Return on plan assets excluding amounts included in interest income 202 – – – 202
Loss from changes in financial assumptions – (206) – – (206)
G. OTHER STATEMENT OF CONSOLIDATED FINANCIAL POSITION NOTES continued G1. Pension Schemes continued G1.1 Pearl Group Staff Pension Scheme continued A quantitative sensitivity analysis for significant actuarial assumptions is shown below: 2020 Assumptions Base Discount rate RPI Life expectancy
Impact on the defined benefit obligation (£m) 2,384 (95) 98 76 (87) 86 (86)
Sensitivity level 25bps increase 25bps decrease 25bps increase 25bps decrease 1 year increase 1 year decrease
Impact on the defined benefit obligation (£m) 2,313 (85) 93 71 (65) 84 (84)
The above sensitivity analyses are based on a change in an assumption while holding all other assumptions constant. In practice, this is unlikely to occur, and changes in some of the assumptions may be correlated. When calculating the sensitivity of the defined benefit obligation to significant actuarial assumptions the same method has been applied as when calculating the pension asset recognised within the statement of consolidated financial position.
Scheme details Defined contribution scheme On 1 July 2020 the Group closed the defined contribution section of the PGL Scheme and ceased making contributions from this date. Contributions in the period to 1 July 2020 were £5 million (2019: £7 million).
Defined benefit scheme The defined benefit section of the PGL Pension Scheme is a final salary arrangement which is closed to new entrants and to future accrual for active members.
The valuation has been based on an assessment of the liabilities of the PGL Pension Scheme as at 31 December 2020, undertaken by independent qualified actuaries.
There are no further committed contributions to pay in respect of the defined benefit section of the Scheme.
The value of the insurance policies with Group entities at 31 December 2020 is £1,749 million (2019: £1,687 million).
Remeasurements: Return on plan assets excluding amounts included in interest income (4) – (4)
Defined benefit obligation The calculation of the defined benefit obligation can be allocated to the scheme’s members as follows: • Deferred scheme members: 36% (2019: 36%); and
The weighted average duration of the defined benefit obligation at 31 December 2020 is 16 years (2019: 16 years).
The discount rate and inflation assumptions have been determined by considering the shape of the appropriate yield curves and the duration of the PGL Pension Scheme liabilities. This method determines an equivalent single rate for each of the discount and inflation rates, which is derived from the profile of projected benefit payments.
It has been assumed that post-retirement mortality is in line with 86%/94% of S1PL base tables with future longevity improvements from 1 January 2017 based on modified CMI 2019 Core Projections (2019: CMI 2018 Core Projections) and a long-term rate of improvement of 1.70% (2019: 1.60%) per annum for males and 1.20% (2019: 1.30%) per annum for females. Under these assumptions, the average life expectancy from retirement for a member currently aged 40 retiring at age 62 is 28.4 years (2019: 28.3 years) and 29.3 years (2019: 29.6 years) for male and female members respectively.
Impact on the defined benefit obligation (£m) 1,691 (65) 67 53 (51) 63 (63)
The valuation has been based on an assessment of the liabilities of the Abbey Life Scheme as at 31 December 2020 undertaken by independent qualified actuaries. The present values of the defined benefit obligation and the related interest costs have been measured using the projected unit credit method.
Of which not quoted in an active market £m Total £m
Principal assumptions The principal financial assumptions of the Abbey Life Scheme are set out in the table below: Rate of increase for pensions in payment (5% per annum or RPI if lower) 2.85 2.90
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 2018, using the SAPS S2 ‘Light’ tables for males and for females based on year of use. Future longevity improvements are based on amended CMI 2019 Core Projections (2019: CMI 2018 Core Projections) and a long-term rate of improvement of 1.70% (2019: 1.60%) per annum for males and 1.20% (2019: 1.30%) per annum for females. Under these assumptions the average life expectancy from retirement for a member currently aged 45 retiring at age 65 is 25.4 years and 26.5 years for male and female members respectively (2019: 25.7 years and 27.2 years respectively).
Defined benefit obligation The calculation of the defined benefit obligation can be allocated to the Abbey Life Scheme’s members as follows: • Deferred scheme members: 49% (2019: 49%); and
G. OTHER STATEMENT OF CONSOLIDATED FINANCIAL POSITION NOTES continued G1. Pension Schemes continued G1.3 Abbey Life Staff Pension Scheme continued A quantitative sensitivity analysis for significant actuarial assumptions is shown below: Assumptions Base Discount rate RPI Life expectancy
Impact on the defined benefit obligation (£m) 341 (14) 15 10 (11) 13 (13)
Following the completion of the last triennial funding valuation a Recovery Plan was agreed between the Trustee and the Group in order to make good the deficit. Under the Recovery Plan, a further £17 million was paid into a Custody Account in 2019 and no further amounts have since been paid. The amounts held in this account do not form part of the Scheme’s plan assets and are instead included within financial assets in the statement of consolidated financial position.
The total amount held in the Custody Account will be assessed at future valuations and additional payments will be made by the Group if this is deemed insufficient to meet the balance of the funding shortfall as at 31 December 2025. If the assumptions documented in the Statement of Funding Principles are borne out in practice, the amount expected to be held in the Custody Account as at 31 December 2025 would be more than sufficient to remove any remaining deficit at 31 December 2025.
There were no contributions made in respect of current service for the current and prior years. The Group agrees to cover those expenses incurred by the ReAssure Scheme and the cost of the death-in-service benefits for those members of the scheme who are entitled only to those benefits. Payments of £1 million were made since 22 July 2020 to cover these costs.
Acquisition of ReAssure businesses (see note H2.1) 459 (424) (12) 23
Defined benefit obligation The calculation of the defined benefit obligation can be allocated to the ReAssure Scheme’s members as follows: • Deferred scheme members: 74%; and
The discount rate and inflation assumptions have been determined by considering the shape of the appropriate yield curves and the duration of the ReAssure Scheme liabilities. This method determines an equivalent single rate for each of the discount and inflation rates, which is derived from the profile of projected benefit payments.
Under these assumptions the average life expectancy from retirement for a member currently aged 45 retiring at age 60 is 29.8 years and 31.4 years for male and female members respectively.
Impact on the defined benefit obligation (£m) 461 (25) 25 21 (21) 18 (18)
An impairment review is performed whenever there is an indication of impairment. When the recoverable amount is less than the carrying value, an impairment loss is recognised in the consolidated income statement. Acquired in-force business is also considered in the liability adequacy test for each reporting period.
Reclassification to investment contract liabilities – – – (82) – (82) (82)
Amortisation charge for the year – (469) (14) – (4) (18) (487)
G2.5 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.
G4. Investment property Investment property, including right of use assets, is initially recognised at cost, including any directly attributable transaction costs. Subsequently investment property is measured at fair value. Fair value is the price that would be received to sell a property in an orderly transaction between market participants at the measurement date. Fair value is determined without any deduction for transaction costs that may be incurred on sale or disposal. Gains and losses arising from the change in fair value are recognised as income or an expense in the Statement of comprehensive income.
Unrealised losses on properties held at end of year (43) (124)
Investment properties also include £86 million (2019: £101 million) of property reversions arising from sales of the NPI Extra Income Plan (see note E5 for further details) and from the Group’s interest in the residential property of policyholders who have previously entered into an Equity Release Income Plan (‘ERIP’) policy.
The NPI 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 3.7% (2019: 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.
The open market values of the properties are independently revalued every two years by members of the Royal Institution of Chartered Surveyors and in the intervening period are adjusted by reference to the Nationwide Building Society regional indices of house prices. The discount period is based on the best estimates of the likely date the property will become available for sale and the discount rate applied is determined by the general partner as its best estimate of the appropriate discount rate. The mortality rates are projected using future mortality improvements from the CMI Mortality Projection Model. No explicit allowance is made for house price inflation in the year through to their realisation.
The fair value measurement of the investment properties has been categorised as Level 3 based on the inputs to the valuation techniques used. The following table shows the valuation techniques used in measuring the fair value of the investment properties, the significant non-observable inputs used, the inter-relationship between the key non-observable inputs and the fair value measurement of the investment properties: Description Valuation techniques Significant non-observable inputs Weighted average 2020 Weighted average 2019 restated
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 £13 million (2019: £22 million). The direct operating expenses arising from investment property that did not generate rental income during the year amounted to £1 million (2019: £1 million).
Later than 1 year and not later than 5 years 959 850
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 £10,584 million (2019: £4,201 million) are primarily held for the benefit of policyholders and so are not generally available for use by the owners.
G7. Provisions A provision is recognised when the Group has a present legal or constructive obligation, as a result of a past event, which is likely to result in an outflow of resources and where a reliable estimate of the amount of the obligation can be made. If the effect is material, the provision is determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability.
G. OTHER STATEMENT OF CONSOLIDATED FINANCIAL POSITION NOTES continued G7. Provisions continued Restructuring provisions
Acquisition of ReAssure businesses (see note H2.1) 2 – – – 17 – 6 – – 11 2 38
Leasehold properties The leasehold properties provision includes a £9 million (2019: £3 million) dilapidations provision in respect of obligations under leases and £1 million (2019: £1 million) in respect of the excess of lease rentals and other payments on properties that are currently vacant or are expected to become vacant, over the amounts to be recovered from subletting these properties.
Staff related Staff related provisions include provisions for unfunded pensions of £13 million (2019: £13 million), and private medical and other insurance costs for former employees of £4 million (2019: £3 million).
Known incidents The known incidents provision was created for historical data quality, administration systems problems and process deficiencies on the policy administration, financial reconciliations and operational finance aspects of business outsourced. These balances represent the best estimates of costs payable to customers. As at 1 January 2020, £3 million of the balance has been reclassified as a ‘customer remediation for operational tax’ provision and a further £7 million as an ‘input VAT recovery provision, see notes below for further details. Additional information has been given below in respect of the significant balances within this provision.
The balance also includes a provision of £10 million (2019: £12 million) which reflects the Group’s exposure in relation to a historical underpayment of guaranteed payments to certain pension customers as a result of a systems error. £2 million was utilised in the year and it is expected that the balance will be fully utilised within one year.
The PA(GI) provision of £1 million (2019: £7 million) represents the Group’s best estimate of the likely future costs. Following the passing of the FCA deadline for submission of complaints the level of uncertainty with respect to the remaining exposure has reduced. At 31 December 2020, £nil (2019: £15 million) of reimbursement asset 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 £11 million (2019: £10 million) have been received during the year.
FCA thematic reviews provision – SLAL On 14 October 2016, the FCA published its thematic review of nonadvised annuity sales. In its findings, the FCA identified concerns in a small number of firms relating to significant communications that took place orally, usually on the telephone. The FCA also identified other areas of possible concern, including in relation to the recording and maintenance of records of calls. The FCA encouraged all firms to consider its feedback and take appropriate action to address the points raised.
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, and subject to recovery of any lost tax relief on the £225 million. In light of the release from the thematic review provision in the year, a liability of £68 million (2019: £64 million) has been recognised within other payables at 31 December 2020 to reflect obligations to SLA plc in this regard.
FCA thematic reviews provision – ReAssure On acquisition of the ReAssure businesses on 22 July 2020, £17 million of obligations were recognised on a fair value basis. In 2018, ReAssure Limited performed an internal thematic review and consequently recognised a provision in respect of charges for the attached benefits of paid-up policies. A provision for the remaining expected costs of £8 million was recognised on 22 July 2020 which has since been utilised during the year. A further £9 million was recognised in respect of ReAssure Life Limited (‘RLL’) to reflect the costs of voluntary remediation to customers of certain legacy products. During the year, £3 million of this provision was utilised, a further £3 million was released and there was an increase of £1 million, resulting in a balance at 31 December 2020 of £4 million.
Customer remediation for operational tax provision The customer remediation for operational tax provision relates to tax penalties payable to HMRC following failure to notify certain customers of changes to their lifetime allowance usage. The Group is currently in discussion with HMRC in respect of these items and the provision represents the Group’s best estimate of the likely future costs.
G. OTHER STATEMENT OF CONSOLIDATED FINANCIAL POSITION NOTES continued G7. Provisions continued Restructuring provisions Transfer of policy administration A significant proportion 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 legacy policies will be transferred to Diligenta by 31 December 2021.
An initial provision of £76 million was recognised in 2018 for the expected cost of the platform migration and for severance and other costs associated with exiting from the current arrangements. The migration elements of the provision are subject to limited uncertainty as a consequence of the signed agreements that are in place. There is a higher degree of uncertainty in relation to the severance and associated exit costs which will be impacted by the number of staff that ultimately transfer to Diligenta. During the year the provision was increased by £12 million, £36 million of the balance was utilised and the remaining £35 million is expected to be utilised within one year.
The remaining other provisions of £8 million (2019: £2 million) consist of a number of small balances all of which are less than £2 million in value.
The impact of discounting on all provisions during the year from either the passage of time or from a change in the discount rate is not material.
G8. Tax Assets and Liabilities 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.
Expenses and deferred acquisition costs carried forward 20 (90) – 102 10 – 42
Provisions and other temporary differences 32 (27) – 124 – – 129
Expenses and deferred acquisition costs carried forward 50 (30) – 20
Following the cancellation of the planned tax rate reduction from 19% to 17% announced in the March 2020 Budget, UK deferred tax assets and liabilities, where provided, are reflected at a rate of 19%.
Deferred income tax assets are recognised for tax losses carried forward only to the extent that realisation of the related tax benefit is probable.
Deferred tax assets have not been recognised in respect of: Tax losses carried forward 52 30
The Group in conjunction with a number of other companies has challenged HMRC’s position on the corporation tax treatment of overseas portfolio dividends from companies resident in the EU (‘EU dividends') using a Group Litigation Order (‘GLO’). The issue relates to whether the UK tax rules, which taxed EU dividends received prior to 1 July 2009, was contrary to EU law given that dividends received from UK companies were exempt from tax. In 2009 UK tax law was changed with both overseas and UK dividends being treated as exempt from corporation tax.
In July 2018, the Supreme Court concluded in favour of the tax payer and a tax benefit of £13 million was recognised at the end of 2018 in relation to enhanced double tax relief claims which the Group is entitled to in accordance with the Court judgement. As a result of the insurance business transfer from Legal and General Assurance Society during the year, the tax refund for the benefit of the Group’s with-profit and unit linked funds increased to £45 million (2019: £11 million) and £23 million (2019: £2 million) respectively. In the case of the with-profit funds there was an increase in unallocated surplus and for the unit linked funds there was a corresponding increase in investment contract liabilities as a result of the recognition of the tax asset.
In January 2020, HMRC issued a communication to taxpayers who are affected by the dividend GLO but are not direct participants of it, setting out HMRC’s intended approach to settling enquiries into the amount of double tax relief available for statutory protective or other claims. In view of the large number of cases involved, HMRC are currently unable to offer a specific date by which they will be able to deal with the various claims outstanding.
Some companies of the Group were late joiners or not members of the GLO but have made statutory protective tax claims totalling circa £14 million for the benefit of unit linked life funds based on the Supreme Court decision. HMRC has challenged the validity of such claims and is currently considering further tax litigation in this area against other third parties. Due to the uncertainty around the potential success of the claims a tax asset has not been recognised in respect of these claims.
G9. Payables Related to Direct Insurance Contracts Payables related to direct insurance contracts primarily include outstanding claims provisions. Outstanding claims under insurance and investment contracts with DPF are valued using a best estimate method under IFRS 4 Insurance Contracts. Outstanding claims under investment contracts without DPF are measured at full settlement value in accordance with IAS 39 Financial Instruments: Recognition and Measurement.
The Group has elected not to apply the measurement requirements of IFRS 16 to its low value leases and as such costs of these leases are recognised on a straight-line basis within administrative expenses. The expense for the year was £1 million (2019: £1 million).
Amount due to SLA plc on deed of indemnity (see note G7) 68 64
The Group has invested in a number of collective investment schemes such as Open-ended Investment Companies (‘OEICs’), unit trusts, Société d’Investissement à Capital Variable (‘SICAVs’), investment trusts and private equity funds. These invest mainly in equities, bonds, property and cash and cash equivalents. The Group’s percentage ownership in these collective investment schemes can fluctuate according to the level of Group and third party participation in the structures.
When assessing control over collective investment schemes, the Group considers those factors described under the ‘Basis of consolidation’ in note A1. In particular, the Group considers the scope of its decisionmaking authority, including the existence of substantive rights (such as power of veto, liquidation rights and the right to remove the fund manager) that give it the ability to direct the relevant activities of the investee. The assessment of whether rights are substantive rights, and the circumstances under which the Group has the practical ability to exercise them, requires the exercise of judgement. This assessment includes a qualitative consideration of the rights held by the Group that are attached to its holdings in the collective investment schemes, rights that arise from contractual arrangements between the Group and the entity or fund manager and the rights held by third parties. In addition, consideration is made of whether the Group has de facto power, for example, where third party investments in the collective investment schemes are widely dispersed.
The Pearl Pension Scheme funding agreement included certain covenants which restricted the transfer of funds within the Group. As detailed further in note G1.1, these covenants were terminated under the Commitment Agreement entered into with the Pearl Pension Scheme in November 2020.
On 23 February 2021, the Group entered into an agreement with SLA plc to simplify the arrangements of the Strategic Partnership. As part of the changes, the CSPA entered into following the acquisition of the Standard Life Assurance businesses will be dissolved. As a consequence, the carrying value of the CSPA as at 31 December 2020 is expected to be recoverable within 12 months. Further details have been provided in Note I7.
The table below summarises the fair value of identifiable assets acquired and liabilities assumed as at the date of acquisition.
H. INTERESTS IN SUBSIDIARIES AND ASSOCIATES continued H2. Acquisitions and Portfolio Transfers continued H2.1 Acquisition of ReAssure businesses continued Acquired Value in-Force (‘AVIF’) An asset of £1,831 million arises reflecting the present value of future profits associated with the acquired in-force business. The AVIF has been determined by reference to the fair value of insurance contract liabilities and investment contract rights acquired.
Under the Group’s accounting policy (see note G2), AVIF arising on acquired insurance contracts and investment contracts with DPF is measured as the difference between the fair value of contracted rights acquired and obligations assumed and the liability measured in accordance with the Group’s accounting policies for such contracts. AVIF relating to investment contracts without DPF is recognised at its fair value.
Gain on acquisition A gain on acquisition of £372 million has been recognised in the Group’s consolidated income statement for the year ended 31 December 2020, reflecting the excess of the fair value of the net assets acquired over the consideration paid for the acquisition of the ReAssure businesses.
Additionally, in accordance with IFRS 3 Business Combinations, the acquired defined benefit pension schemes have been measured on acquisition in accordance with the Group’s accounting policies as set out in note G1, as opposed to a fair value basis.
Transaction costs Transaction costs of £37 million have been expensed and are included in administrative expenses in the consolidated income statement. All of these costs were paid during the year.
Impact of the acquisition on results From the date of acquisition, the ReAssure businesses contributed £182 million of total revenue, net of reinsurance payable, and £108 million of the profit after the tax attributable to owners of the parent. If the acquisition of the ReAssure group of companies had taken place at the beginning of the year, total revenue net of reinsurance payable, would have been £4,930 million and the profit after the tax attributable to owners of the parent would have been £1,316 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.
H. INTERESTS IN SUBSIDIARIES AND ASSOCIATES continued H3. Associates: Investment in UK Commercial Property Trust Limited (‘UKCPT’) continued As at 31 December 2020, the Group held 44.6% (2019: 44.6%) of the issued share capital of UKCPT and the value of this investment, measured at fair value and included within financial assets, was £400 million (2019: £513 million). Management has concluded that the Group did not control UKCPT in either the current or comparative periods. The Group does not hold a unilateral power of veto in general meetings and voting is subject to certain restrictions in accordance with the terms of an existing relationship agreement it has with UKCPT.
The Group’s holdings in the investments listed above are susceptible to market price risk arising from uncertainties about future values. Holdings in investment funds are subject to the terms and conditions of the respective fund’s prospectus and The Group holds redeemable shares or units in each of the funds. The funds are managed by internal and external fund managers who apply various investment strategies to accomplish their respective investment objectives. All of the funds are managed by fund managers who are compensated by the respective funds for their services. Such compensation generally consists of an asset-based fee and a performance-based incentive fee and is reflected in the valuation of each fund.
During the year, the Group granted further loans to the EBT of £7 million (2019: £4 million).
As at the reporting date, the Group has no intention to provide financial or other support to any other consolidated structured entity.
Collective investment schemes 89,248 69,415 1 Comparative figures have been restated to include £2,817 million asset backed securities and £199 million infrastructure loans that have been classified as interests in structured entities.
H5. Group Entities The table below sets out the Group’s subsidiaries (including consolidated collective investment schemes), associates and significant holdings in undertakings (including undertakings in which the 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).
Subsidiaries: Phoenix Life Limited (life assurance company) Wythall2 Ordinary Shares 100.00%
Phoenix Life Assurance Limited (life assurance company) Wythall2 Ordinary Shares 100.00%
Standard Life International Designated Activity Company (life assurance company – directly owned by the Company) Dublin6 Ordinary Shares 100.00%
Standard Life Assets and Employee Services Limited (management services company) Edinburgh26 Ordinary Shares 100.00%
ReAssure Companies Services Limited (management services company) Telford41 Ordinary Shares 100.00%
Britannic Finance Limited (finance and insurance services company)1 Wythall2 Ordinary Shares 100.00%
Pearl Customer Care Limited (financial services company)1 Wythall2 Ordinary Shares 100.00%
Phoenix Customer Care Limited (financial services company)1 Wythall2 Ordinary Shares 100.00%
Phoenix Wealth Services Limited (financial services company) Wythall2 Ordinary Shares 100.00%
Phoenix Wealth Trustee Services Limited (trustee company) Wythall2 Ordinary Shares 100.00%
Standard Life Lifetime Mortgages Limited (mortgage provider company) Edinburgh26 Ordinary Shares 100.00%
The Standard Life Assurance Company of Europe B.V. (financial holding company) Amsterdam10 Ordinary Shares 100.00%
Britannic Money Investment Services Limited (investment advice company)1 Wythall2 Ordinary Shares 100.00%
103 Wardour Street Retail Investment Company Limited (investment company) Telford41 Ordinary Shares 100.00%
Abbey Life Assurance Company Limited (non-trading company) Wythall2 Ordinary Shares 100.00%
Alba LAS Pensions Management Limited (dormant company) Glasgow11 Ordinary Shares 100.00%
G Park Management Company Limited (property management company) London17 Ordinary Shares 100.00%
Gresham Life Assurance Society Limited (dormant company) Telford41 Ordinary Shares 100.00%
Iceni Nominees (No. 2) Limited (dormant company) London17 Ordinary Shares 100.00%
National Provident Institution (dormant company) Wythall2 Unlimited without 272 Phoenix Group Holdings plc Annual Report & Accounts 2020
Acquired in-force business of £1,831 million was recognised during the year upon acquisition of the ReAssure businesses (see note H2.1).
Following the repayment of the limited recourse bonds during the year, the PVFP can be shown as fully attributable to policyholders and it has therefore been reclassified as investment contract liabilities.
Pearl (Moor House 1) Limited (dormant company) Wythall2 Ordinary Shares 100.00%
Pearl Group Holdings (No. 2) Limited (holding company) Wythall2 Ordinary Shares 100.00%
PG Dormant (No 4) Limited (dormant company) Wythall2 Ordinary Shares 100.00%
PG Dormant (No 5) Limited (dormant company) Wythall2 Ordinary Shares 100.00%
PG Dormant (No 6) Limited (dormant company) Wythall2 Ordinary Shares 100.00%
PGMS (Ireland) Holdings Unlimited Company (holding company) Dublin7 Unlimited with Shares 100.00%
Phoenix & London Assurance Limited (dormant company) Wythall2 Ordinary Shares 100.00%
Phoenix Pension Scheme (Trustees) Limited (dormant company) Wythall2 Ordinary Shares 100.00%
Phoenix Pensions Trustee Services Limited (dormant company) Wythall2 Ordinary Shares 100.00%
Phoenix SCP Pensions Trustees Limited (trustee company) Wythall2 Ordinary Shares 100.00%
ReAssure Group plc (holding company − directly owned by the Company) Telford41 Ordinary Shares 100.00%
ReAssure Life Pension Trustees Limited (dormant company) Telford41 Ordinary Shares 100.00%
ReAssure UK Life Assurance Company Limited (dormant company) Telford41 Ordinary Shares 100.00%
ERIP General Partner Limited (General Partner to ERIP Limited Partnership) Telford41 Ordinary Shares 80.00%
SLIF Property Investment GP Limited (General Partner to SLIF Property Investment) Edinburgh25 Ordinary Shares 100.00%
Standard Life Agency Services Limited (dormant company) Edinburgh26 Ordinary Shares 100.00%
Standard Life Investment Funds Limited (dormant company) Edinburgh26 Ordinary Shares 100.00%
Standard Life Property Company Limited (dormant company) Edinburgh26 Ordinary Shares 100.00%
Standard Life Trustee Company Limited (trustee company) Edinburgh26 Ordinary Shares 100.00%
The Heritable Securities and Mortgage Investment Association Ltd (dormant company) Edinburgh26 Ordinary Shares 100.00%
The Pathe Building Management Company Limited (dormant company) Telford41 Ordinary Shares 100.00%
The Pearl Martineau Galleries Limited Partnership (dormant company) Wythall2 Limited Partnership 100.00%
Welbrent Property Investment Company Limited (dormant company) London17 Ordinary Shares 100.00%
330 Avenida de Aragon SL (property management company) Madrid34 Ordinary Shares 100.00%
Janus Henderson Institutional Mainstream UK Equity Trust London28 Unit Trust 100.00%
Janus Henderson Institutional UK Equity Tracker Trust London28 Unit Trust 100.00%
Janus Henderson Global Funds − Janus Henderson Institutional Overseas Bond Fund London28 OEIC, sub fund 98.92%
Janus Henderson Strategic Investment Funds – Janus Henderson Institutional North American Index Opportunities Fund London28 OEIC, sub fund 84.78%
PUTM Bothwell Asia Pacific (Excluding Japan) Fund Wythall2 Unit Trust 99.51%
PUTM Bothwell Emerging Market Debt Unconstrained Fund Wythall2 Unit Trust 100.00%
PUTM Bothwell Uk All Share Listed Equity Fund Wythall2 Unit Trust 99.17%
PUTM ACS UK All Share Listed Equity Fund Wythall2 Unit Trust 99.49%
PUTM ACS Lothian European Ex UK Fund Wythall2 Unit Trust 100.00%
ASI (SLI) Emerging Markets Equity Fund Edinburgh25 OEIC, sub fund 96.56%
ASI Europe Europe ex UK Ethical Equity Fund Edinburgh25 OEIC, sub fund 79.22%
Standard Life Standard Life Short Dated UK Government Bond Trust Edinburgh25 Unit Trust 99.96%
Standard Life Standard Life Active Plus Bond Trust Edinburgh25 Unit Trust 99.99%
ASI Short Dated Corporate Bond Fund Edinburgh25 OEIC, sub fund 76.92%
G2.1 Goodwill The carrying value of goodwill has been tested for impairment at the year end. No impairment has been recognised as the value in use of this intangible continues to exceed its carrying value.
G2.4 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 (‘PVFP’) are the same as those used in calculating the insurance contract liabilities given in note F4.1.
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 G2.1). The value in use continues to exceed its carrying value.
Standard Life Investments Global SICAV Global Equities Fund Luxembourg29 SICAV, sub fund 73.13%
Standard Life Investments Global SICAV Global REIT Focus Fund Luxembourg29 SICAV, sub fund 86.52%
Standard Life Investments Global SICAV Global Emerging Markets Unconstrained Fund Luxembourg29 SICAV, sub fund 99.86%
Standard Life Investments Global SICAV Global Emerging Markets Local CCY Debt Fund Luxembourg29 SICAV, sub fund 89.62%
Standard Life Investments Global SICAV Emerging Market Debt Fund Luxembourg29 SICAV, sub fund 93.71%
Standard Life Investments Global SICAV II − MyFolio Multi-Manager III Fund Luxembourg29 SICAV, sub fund 55.87%
Standard Life Investments Global SICAV II − MyFolio Multi-Manager V Fund Luxembourg29 SICAV, sub fund 62.15%
Standard Life Investments Global SICAV − European Equities Fund Luxembourg29 SICAV, sub fund 99.15%
Standard Life Managed Trust − American Equity Unconstrained Edinburgh25 Unit Trust 76.42%
Standard Life Managed Trust − Standard Life Sterling Intermediate Credit Fund Edinburgh25 Unit Trust 99.99%
Aberdeen Standard Liquidity Fund (Lux) − Seabury Sterling Liquidity 2 Fund Dublin27 UCITS, sub fund 100.00%
North American Strategic Partners (Feeder) 2008 Limited Partnership Wilmington18 Limited Partnership 100.00%
HSBC Investment Funds − Balanced Fund London46 OEIC, sub fund 76.68%
iShares 350 UK Equity Index Fund UK London37 OEIC, sub fund 81.86%
Legal & General Real Income Builder Fund London44 Unit Trust 89.41%
Quilter Investors High Yield Bond Fund London49 OEIC, sub fund 89.74%
Quilter Investors UK Equity Large-Cap Value Fund London49 OEIC, sub fund 95.94%
Associates: UK Commercial Property Estates Limited (property investment company) Guernsey13 Ordinary Shares 44.59%
UK Commercial Property Estates Holdings Limited (property investment company) Guernsey13 Ordinary Shares 44.59%
Janus Henderson Institutional UK Index Opportunities Fund London28 OEIC, sub fund 58.78%
ASI Investment Grade Corporate Bond Fund Edinburgh25 OEIC, sub fund 31.89%
Standard Life Investments Global SICAV European Corporate Bond Fund Luxembourg29 SICAV, sub fund 31.52%
Standard Life Investments Global SICAV Global Absolute Return Strategies Fund Luxembourg29 SICAV, sub fund 43.36%
ASI Global Absolute Return Strategies Retail Acc Edinburgh25 OEIC, sub fund 66.76%
ASI Europe ex UK Income Equity Fund Edinburgh25 OEIC, sub fund 23.28%
ASI UK Income Unconstrained Equity Fund Edinburgh25 OEIC, sub fund 47.52%
Standard Life Investments UK Retail Park Trust Jersey35 Unit Trust 56.60%
ASI Emerging Markets Equity Enhanced Index Fund London17 OEIC, sub fund 20.35%
Aberdeen Standard SICAV I − GDP Weighted Global Government Bond Fund Luxembourg33 SICAV, sub fund 81.29%
Aberdeen Standard SICAV I − Global Government Bond Fund Luxembourg33 SICAV, sub fund 22.71%
Aviva Investors UK Property Feeder Inc Fund 1 London42 OEIC, sub fund 35.12%
AXA Sterling Index Linked Bond Fund London30 OEIC, sub fund 20.31%
Goldman Sachs SICAV − Emerging Markets Total Return Bond Portfolio Luxembourg32 SICAV, sub fund 94.48%
HSBC FTSE EPRA NAREIT Developed UCITS ETF London46 UCITS, sub fund 48.88%
L&G Emerging Markets Short Duration Bond Fund Luxembourg51 SICAV, sub fund 22.88%
Legal & General Authorised Contractual Scheme − L&G Real Income Builder Fund London44 UCITS, sub fund 50.35%
Legal & General Emerging Markets Government Bond (Local Currency) Index Fund London44 Unit Trust 25.63%
Legal & General Global Real Estate Dividend Index Fund London44 Unit Trust 30.57%
L&G Euro High Alpha Corporate Bond Fund Luxembourg51 SICAV, sub fund 51.99%
Legal & General UK Smaller Companies Trust London44 Unit Trust 28.98%
Quilter Investors Cirilium Moderate Blend Portfolio London49 OEIC, sub fund 50.35%
Quilter Investors Global Equity Growth Fund London49 OEIC, sub fund 39.84%
Quilter Investors Sterling Corporate Bond Fund London49 OEIC, sub fund 31.54%
1 Under s479a of the Companies Act 2006 these subsidiaries have been granted audit exemption by parental guarantee.
45 Beech Gate, Millfield Lane, Lower Kingswood, Tadworth, Surrey, England, KT20 6RP
48 Beresford Court, Beresford Place, Dublin 1, Ireland 49 Millennium Bridge House, 2 Lambeth Hill, London, United Kingdom, EC4V 4AJ
The following associate was dissolved during the period. The investment in associate was derecognised from the date of dissolution: • The Moor House Limited Partnership.
The Group no longer has significant holdings in the following undertakings: • AXA Global High Income Fund; • Nomura Funds Ireland American Century Concentrated Global Growth Equity Fund (Acc ); • Amundi Index Solutions SICAV Funds − AIS Amundi Index Msci World SRI I14 HG Cap; • Standard Life Investment Company UK Equity High Alpha Fund; • Standard Life Investment Company Short Duration Credit Fund; • Standard Life Investment Company UK Equity Recovery Fund; • Standard Life Investment Company UK Equity Growth Fund; • Aberdeen Liquidity Fund (Lux) Sterling Fund; • Aberdeen Liquid (Lux) Ultra Short Duration Sterling Fund; • Standard Life Investments Global SICAV Indian Equity Midcap Opportunities Fund; and
I1.1 Share-based payment expense The expense recognised for employee services receivable during the year is as follows: £m
I1.2 Share-based payment expense Long-Term Incentive Plan (‘LTIP’) The Group implemented a long-term incentive plan to retain and motivate its senior management group. The awards under this plan are in the form of nil-cost options to acquire an allocated number of ordinary shares.
Dividends are received by holders of the awards therefore no adjustment to fair value is required
LTIP Buy Out awards were granted to the Group Chief Executive Officer in 2019, and finalised in 2020, following forfeiture of a proportion of his long-term incentive awards held with Aviva plc that had been awarded in March 2017 and May 2018. The Aviva March 2017 LTIP vested on 27 March 2020 with a performance outturn of 50%. The Aviva May 2018 LTIP is due to vest on 26 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 discreet vesting periods for these awards and the second tranche of awards vested on 27 March 2020. The remaining awards vest on 28 March 2021. These grants of shares are conditional on the employees remaining in employment with the Group for the vesting period.
The fair value of these awards is estimated at the average share price in the three days preceding the date of the grant, taking into account the terms and conditions upon which the options were granted.
Following the scheme of arrangement, participants in the Old PGH sharesave plan exchanged their options over Old PGH shares for equivalent options over PGH plc ordinary shares. All sharesave options were increased in November 2016 and again in July 2018 following the Group’s rights issues and the exercise price of these awards was also amended as a result of these issues.
The following information was relevant in the determination of the fair value of the 2016 to 2020 UK sharesave options: sharesave
Risk-free rate (%) – based on UK government gilts commensurate with the expected term of the award 0.5 (for 3.25 year scheme) and 0.5
Expected volatility (%) based on the Company’s share price volatility to date 30.0 30.0 30.0 30.0 30.0 284 Phoenix Group Holdings plc Annual Report & Accounts 2020
The information for determining the fair value of the 2020 Irish sharesave options differed from that included in the table above as follows: • Share price (€): 6.462
The weighted average fair value of options granted during the year was £3.88 (2019: £4.10).
The weighted average share price at the date of exercise for the rewards exercised is £6.74 (2019: £6.81).
The weighted average remaining contractual life for the rewards outstanding as at 31 December 2020 is 5.6 years (2019: 5.0 years).
I2. Cash Flows From Operating Activities The following analysis gives further detail behind the ‘cash generated/ (utilised) by operations’ figure in the statement of consolidated cash flows.
Cash generated by operations 7,316 273 285Phoenix Group Holdings plc Annual Report & Accounts 2020
I. OTHER NOTES continued I3. Capital Management 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.
In pursuing these objectives, the Group deploys financial and other assets and incurs insurance contract liabilities and financial and other liabilities. Financial and other assets principally comprise investments in equity securities, debt securities, collective investment schemes, property, derivatives, reinsurance, trade and other receivables, and banking deposits. Financial liabilities principally comprise investment contracts, borrowings for financing purposes, derivative liabilities and net asset value attributable to unit holders.
The Group’s risk management framework is described in the risk management commentary on pages 79 to 89 of the Annual Report and Accounts and the risk universe component of this framework summarises the comprehensive set of risks to which the Group is exposed. These major risks (‘Level 1’ risks) that the Group’s businesses are exposed to and the Group’s approach to managing those risks are outlined in the following notes: • Note E6: Credit risk, market risk, financial soundness risk, strategic risk, customer risk and operational risk; and
The section on risk and capital management objectives is included below.
The capital policy of each Life Company is set and monitored by each Life Company Board. These policies ensure there is sufficient capital within each Life Company to meet regulatory capital requirements under a range of stress conditions. The capital policy of each Life Company varies according to the risk profile and financial strength of the company.
Own Funds and SCR Basic Own Funds represents the excess of assets over liabilities from the Solvency II balance sheet adjusted to add back any relevant subordinated liabilities that meet the criteria to be treated as capital items.
Eligible Own Funds to cover the SCR are obtained after applying the prescribed Tiering limits and availability restrictions to the Basic Own Funds.
The ReAssure businesses, acquired during 2020, also apply the Standard Formula to determine capital requirements.
Solvency II surplus – unaudited An analysis of the PGH plc Solvency II surplus as at 31 December 2020 is provided in the business review section on page 52 to 54. The Group has complied with all externally imposed capital requirements during the year.
Additional information on the PGH plc Own Funds, SCR and MCR is included in the additional capital disclosures on pages 307 and 308.
I. OTHER NOTES continued I4. Related Party Transactions In the ordinary course of business, the Group and its subsidiaries carry out transactions with related parties as defined by IAS 24 Related party disclosures.
I4.1 Related party transactions During the year, the Group entered into the following transactions with related parties. Following the acquisition of the Standard Life Assurance businesses in 2018, SLA plc took a 19.98% equity stake in the Enlarged Group, and as a result became a related party of the Group. As at 31 December 2020 the SLA plc holding is 14.42%. SLA plc is considered to have a significant influence over the Group due to their equity stake, representation on the Board of Directors and the existence of a strategic partnership between the two parties.
Net receipts under Client Service Proposition Agreement 16 36 18 23
Details of the shareholdings and emoluments of individual Directors are provided in the Remuneration report on pages 124 to 158.
To purchase, construct or develop investment property and income strips 89 161
Agreements with Standard Life Aberdeen In 2019, the Group noted that it was engaged in ongoing discussions with members of the Standard Life Aberdeen group in respect of disagreements over the operation of certain aspects of the SLA Share Purchase Agreement relating to services and expenses, and the scope and cost of services provided pursuant to the Transitional Services agreement (‘TSA’), the Client Service and Proposition Agreement (‘CSPA’), and certain other agreements between the Group and members of the Standard Life Aberdeen group. On 23 February 2021, the Group announced that it had entered into a new agreement with SLA which simplifies the arrangements of their Strategic Partnership and resolves the legacy issues outlined above. For further details of the new agreement see note I7.
Legal proceedings In the normal course of business, the Group is exposed to certain legal issues, which can involve litigation and arbitration. At the period end, the Group has a number of contingent liabilities in this regard, none of which are considered by the Directors to be material, with the exception of the Standard Life Aberdeen agreements matters detailed above.
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 2026 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.
This brand intangible is being amortised over a 10 year period.
On 23 February 2021, the Group announced that it had entered into a new agreement with SLA which simplifies the arrangements of their Strategic Partnership, enabling the Group to control its own distribution, marketing and brands, and focusing the Strategic Partnership on using SLA’s asset management services in support of Phoenix’s growth strategy. Under the terms of the transaction, the Group will sell its UK investment and platform-related products, comprising Wrap Self Invested Personal Pension (‘Wrap SIPP’), Onshore Bond and UK Trustee Investment Plan (‘TIP’) to SLA, and acquire ownership of the Standard Life brand. As part of the acquisition of the brand, the relevant marketing, distribution and data team members will transfer to the Group. As a result, the Client Service and Proposition Agreement (‘CSPA’) entered into between the two groups following the acquisition of the Standard Life businesses in 2018, will be dissolved. In addition, Phoenix and SLA resolved all legacy issues in relation to the Transitional Service Agreement (‘TSA’) entered into at the time of the acquisition of the Standard Life businesses and the CSPA.
N LYONS A BRIGGS R THAKRAR A BARBOUR K GREEN H IIOKA W MAYALL C MINTER J POLLOCK B RICHARDS N SHOTT K SORENSON M TUMILITY
STATEMENT OF CHANGES IN EQUITY For the year ended 31 December 2020
Total comprehensive income for the year attributable to owners – – – – 256 256 – 256
Issue of ordinary share capital, net of associated commissions and expenses 28 2 1,819 – – 1,849 – 1,849
Dividends paid on ordinary shares (note B4) – – – – (403) (403) – (403)
Coupon paid on Tier 1 Notes, net of tax relief – – – – (23) (23) – (23)
Coupon paid on Tier 1 Notes, net of tax relief – – – (23) (23) – (23)
Proceeds from new shareholder borrowings, net of associated expenses 5 1,445 100
1. ACCOUNTING POLICIES (a) Basis of preparation The financial statements have been prepared on a going concern and on an historical cost basis except for those financial assets and financial liabilities that have been measured at fair value.
(b) Accounting policies Where applicable, the accounting policies in the separate financial statements are the same as those presented in the consolidated financial statements on pages 177 to 289, with the exception of the two policies detailed below.
The Company’s accounting policy for financial assets is in accordance with the requirements of IFRS 9 Financial Instruments. As the Group has applied the temporary exemption from IFRS 9 available for entities whose activities are predominantly connected with insurance contracts, a different accounting policy has been adopted in the preparation of the consolidated financial statements. In addition, the Company has not adopted the Group’s policy of hedge accounting.
The loss allowance reduces the carrying value of the financial asset and is reassessed at each reporting date. ECLs and subsequent remeasurements of the ECL, are recognised in the income statement. For other receivables, the ECL rate is recalculated each reporting period with reference to the counterparties of each balance.
(c) Impacts of COVID-19 during the year The ‘Group Chief Executive Officer's Report’, ‘Business Review’, ‘Risk Management’, ‘Viability Statement’ and ‘Directors’ Report: Going Concern’ sections of this Annual Report provide information as to the broader effects of COVID-19 on the Group’s financial results, its operations and prospects. Further details of the specific impacts of COVID-19 are detailed in note A6 to the consolidated financial statements.
The Company has applied the relief in section 612 of the Companies Act 2006 to present the difference between the consideration received and the nominal value of the shares issued of £1,819 million in a merger reserve as opposed to in share premium. A merger reserve is required to be used as a result of the Company having issued equity shares as part consideration for the shares of ReAssure Group plc and securing at least a 90% holding in that entity.
On 27 October 2020, the terms of the Tier 1 Notes were amended and the consequences of a trigger event, linked to the Solvency II capital position changed. Previously the Tier 1 Notes were subject to a permanent write-down in value to zero. The amended terms require that the Tier 1 Notes would automatically be subject to conversion to ordinary shares of the Company at the conversion price of £1,000 per share, subject to adjustment in accordance with the terms and conditions of the notes and all accrued and unpaid interest would be cancelled. Following any such conversion there would be no reinstatement of any part of the principal amount of, or interest on, the Tier 1 Notes at any time.
The PVFP held in intangibles represented future profits on specific blocks of business in the NPL with-profit fund that was partly attributable to the holders of the limited recourse bonds (see note E5). As a consequence, the value of future profits was not attributable solely to policyholders and the PVFP was therefore presented as a separate intangible asset.
5. BORROWINGS The accounting policy for borrowings is included in note E5 to the consolidated financial statements.
Carrying value Fair value £m £450 million Tier 3 subordinated notes (note b) 449 448 470 473
US $500 million Tier 2 bonds (note c) 329 334 416 396 £300 million senior unsecured bond (note e) 123 128 125 130
US $750 million Contingent Convertible Tier 1 notes (note g) 545 – 585 –
US $500 million Fixed Rate Reset Tier 2 notes (note i) 364 – 395 –
Amount due for settlement after 12 months 4,398 2,020 a. On 12 December 2018, the Company was substituted in place of Old PGH as issuer of the £428 million subordinated notes due 2025 at a coupon of 6.625%, which were initially recognised at fair value of £439 million.
f. On 22 February 2019, the Company recognised a loan to Standard Life Assurance Limited (‘SLAL’) for £162 million, as consideration for Standard Life International Designated Activity Company (‘SLIDAC’) due 2024. On 28 March 2019 the purchase price was adjusted by £120 million, which resulted in an increase in the loan principal. Interest accrues at LIBOR plus 1.66% and during the year £6 million (2019: £6 million) of interest was capitalised.
h. On 28 April 2020, the Company issued £500 million fixed rate Tier 2 Notes (the ‘Tier 2 Notes’) which are unsecured and subordinated. The Tier 2 Notes have a maturity date of 28 April 2031 and include an issuer par call right for the three month period prior to maturity. The Tier 2 Notes bear interest on the principal amount at a fixed rate of 5.625% per annum payable annually in arrears on 28 April each year.
l. On 22 July 2020, the Company was substituted in place of ReAssure Group plc as issuer of the £250 million 4.016% Tier 3 subordinated notes. The notes have a maturity date of 13 June 2026 and were initially recognised at their fair value of £259 million. The fair value adjustment is being amortised over the remaining life of the notes.
m. The Company has in place a £1.25 billion unsecured revolving credit facility, maturing in June 2025. There are no mandatory or target amortisation payments associated with the facility but the facility does include customary mandatory prepayment obligations and voluntary prepayments are permissible. The facility accrues interest at a margin over LIBOR that is based on credit rating. The facility remains undrawn as at 31 December 2020.
Borrowings initially recognised at fair value are being amortised to par value over the life of the borrowings.
Reconciliation of liabilities arising from financing activities The table below details changes in the Company’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 Company’s statement of cash flows as cash flows from financing activities.
Loan due to Standard Life Assurance Limited 288 – – – – 6 294
2 Loan issued to SLAL, a subsidiary undertaking, was in consideration for the transfer to the Company of its investment in SLIDAC.
During 2020, the Company terminated the derivative instruments that were entered into in 2018 and 2019 and as a result the Company no longer hedges its currency risk exposure arising on foreign denominated investments and borrowings.
Assets Accepted The maximum exposure to credit risk in respect of OTC derivative assets is £nil (2019: £5 million) of which credit risk of £nil (2019: £3 million) is mitigated by use of collateral arrangements (which are settled net after taking account of any OTC derivative liabilities owed by the counterparty).
Assets Pledged The Company pledges collateral in respect of its OTC derivative liabilities. The value of assets pledged at 31 December 2020 in respect of OTC derivative liabilities of £nil (2019: £34 million) amounted to £nil (2019: £3 million).
7. PROVISIONS During 2019 the Company recognised two new provisions, a Standard Life transition restructuring provision of £159 million and £13 million in relation to amounts payable to SLA plc under the terms of the Purchase Price Adjustment. During the year £19 million of the restructuring provision was utilised and a further £31 million was released resulting in a provision as at 31 December 2020 of £109 million. Details are included in note G7 to the consolidated financial statements.
During the year a £50 million capital contribution was paid into SLIDAC which was provided in order to strengthen its capital position following adverse market conditions experienced during the year.
On 21 February 2019, the Company acquired SLIDAC from its subsidiary SLAL, for an initial consideration of £162 million settled in the form of a loan (see note 5) such that its interest in SLIDAC is now directly held. On acquisition, the Company subscribed for an additional share in SLIDAC for a consideration of £250 million. Following the completion of a Part VII transfer of the European branch business from SLAL to SLIDAC, the purchase price for the acquisition of SLIDAC was increased by £120 million, again settled in form of a loan, which increased the carrying value of the Company’s investment in SLIDAC to £532 million.
As at 31 December 2020, the market capitalisation of the Company was lower than the net asset value, which was considered to be an indicator that the Company’s investments in its subsidiaries may have been impaired as at that date. Where such indicators are identified, an impairment test is performed. In 2020, the recoverable amount of the investments in subsidiaries was determined to be greater than carrying value. In 2019, impairments of £4,146 million were recognised to align the carrying value of certain investments to their recoverable amount.
The value in use has been used as the recoverable amount and this has been determined using the present value of the future cash flows of the Company’s subsidiaries including the in-force long-term business and the service companies. The cash flows used in this calculation are consistent with those adopted by management in the operating plan and, beyond the period of this plan, reflect the anticipated run-off of the in-force life insurance business. Future cash flows have been valued using discount rates which reflect the risks inherent to each cash flow. For the other subsidiaries, the value in use has been determined using net assets values.
Loans due from Phoenix Group Employee Benefit Trust (note b) 6 7 6 7
Loans and deposits due from Group entities 1,924 1,227 2,119 1,370
On 12 December 2018, the Company was assigned a £450 million subordinated loan by PLHL. The loan accrues interest at a rate of 4.175% and matures on 20 July 2022. This loan was initially recognised at fair value of £447 million and is accreted to par over the period to 2022. At 31 December 2020, the carrying value of the loan was £449 million (2019: £448 million).
d) Fixed term deposits include holdings in bank deposits with an initial maturity of more than 3 months at the date the deposit was made.
Details of the factors considered in determination of fair value are included in note E2 to the consolidated financial statements.
Financial assets at fair value through profit or loss: Collective investment schemes 194 – – 194 299Phoenix Group Holdings plc Annual Report & Accounts 2020
There were no transfers between levels in both 2020 and 2019.
12. DEFERRED TAX The accounting policy for tax assets and liabilities is included in note G8 to the consolidated financial statements.
The standard rate of UK corporation tax for the accounting period is 19% (2019: 19%).
Following the cancellation of the planned tax rate reduction from 19% to 17% announced in the March 2020 Budget, deferred tax assets, where provided, are reflected at the rate of 19%.
Bank and cash balances 4 45 14. CASH FLOWS FROM OPERATING ACTIVITIES
At 31 December 2020, total capital was £7,541 million (2019: £5,849 million). The movement in capital in the period comprises the total comprehensive income for the period attributable to owners of £256million (2019: £1,643 million income), dividends paid of £403 million (2019: £338 million), coupon paid on Tier 1 Notes, net of tax relief of £23 million (2019: £23 million), credit to equity for equity-settled share-based payments of £13 million (2019: £11 million), and issue of ordinary share capital of £1,849 million (2019: £2 million).
The principal risks and uncertainties facing the Company are interest rate risk, liquidity risk, foreign currency risk and credit risk. During the year, the Company terminated the hedges that were entered into in 2018 and 2019. As a result, the Company no longer hedges its currency risk exposure arising on foreign currency hybrid debt.
Credit risk management practices The Company’s current credit risk grading framework comprises the following categories: Category Description Basis for recognising ECL
Cash and cash equivalents (note 13) A N/A 12 month ECL 4 − 4
Loans and deposits (note 10) N/A Performing 12 month ECL 1,227 − 1,227
Other amounts due from Group entities (note 18) N/A Performing 12 month ECL 198 − 198
Loans and deposits − The Company is exposed to credit risk relating to loans and deposits from other Group companies, which are considered low risk. Given their low risk, 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 whether there have been any historic defaults, by reviewing the going concern assessment of the borrower and the ability of the Group to prevent a default by providing a capital or cash injection. Specific considerations for the loan to the EBT are discussed in note 10.
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, 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.
During the year ended 31 December 2020 the Company entered into the following transactions with Group entities and SLA plc: £m
Financial assets held by the non-controlling interest in consolidated collective investment schemes 4,170
5 Total private placements of £3,644 million include £2,351 million classified as Level 3 debt securities in the fair value hierarchy.
6 Includes policy loans of £10 million, other loans of £344 million, net derivative assets of £6,083 million, reinsurers’ share of investment contracts of £9,559 million and other investments of £563 million.
The following table provides a reconciliation of the total life company assets to the Assets under Administration (‘AUA’) as at 31 December 2020 detailed in the Business Review on page 50: Total Life Company assets 309.9 224.0
2 Assets held within the Standard Life Trustee Investment Plan product are excluded from AUA as materially all profits accrue to third party investment managers.
Collateralised debt obligations − 8 − − − 8 1 The £5,751 million total shareholder exposure to bank debt comprised £4,316 million senior debt and £1,435 million subordinated debt.
Collateralised debt obligations − 9 − − − 9 1 Includes £262 million reported as UK local authority loans in the summary table on page 304.
The following table sets out the debt security exposure by country of the shareholder and non-profit funds of the life companies: Analysis of shareholder debt security exposure by country
Corporate and other £m 306 Phoenix Group Holdings plc Annual Report & Accounts 2020
The Eligible Own Funds reflects a dynamic recalculation of TMTP. Had this not been performed, the surplus would have been £0.1 billion lower.
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: • availability to be called up on demand to fully absorb losses on a going-concern basis, as well as in the case of winding-up (‘permanent availability’); and
Breakdown of SCR The Group 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 (‘SLIDAC’). SLIDAC and the acquired ReAssure businesses calculate their capital requirements in accordance with the Standard Formula. An analysis of the pre-diversified SCR of PGH plc is presented below: Phoenix Internal
MINIMUM CAPITAL REQUIREMENTS Under the Solvency II regulations, the Minimum Capital Requirement (‘MCR’) is the minimum amount of capital an insurer is required to hold below which policyholders and beneficiaries would become exposed to an unacceptable level of risk if an insurer was allowed to continue its operations. For Groups this is referred to as the Minimum Consolidated Group SCR (‘MGSCR’).
• PGH plc’s MGSCR at 31 December 2020 is £1.9 billion (2019: £1.1 billion).
PGH plc’s Method 1 Eligible Own Funds to cover MGSCR is £8.3 billion (2019: £4.3 billion) leaving an excess of Eligible Own Funds over MGSCR of £6.4 billion (2019: £3.2 billion), which translates to an MGSCR coverage ratio of 431% (2019: 386%).
The MCR for the Method 2 part of the Group is £1.4 billion (2019: £1.2 billion), with Eligible Own Funds of £4.9 billion (2019: £4.9 billion), leaving an excess of Eligible Own Funds over MCR of £3.5 billion (2019: £3.7 billion), which translates to an MCR coverage ratio of 359% (2019: 394%).
Financial leverage is calculated by Phoenix (using Fitch Ratings’ stated methodology) as debt as a percentage of the sum of debt and equity. Debt is defined as the IFRS carrying value of shareholder borrowings. Equity is defined as the sum of equity attributable to the owners of the parent, the unallocated surplus and the Tier 1 Notes.
Incremental long-term cash generation represents the operating companies’ cash generation that is expected to arise in future years as a result of new business transacted in the current period within our UK Open and Europe segments, and from the writing of bulk purchase annuities within our Heritage segment. It excludes any costs associated with the acquisition of the new business.
This measure provides an indication of the Group’s performance in delivering new business growth to offset the impact of runoff of the Group’s Heritage business and to bring sustainability to future cash generation.
The Solvency II surplus of the Life Companies that is in excess of their Board approved capital management policies.
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 from page 46 and the definitions of all APMs are included in the glossary on pages 313 to 316.
The individual components of LTFC are disclosed in the Business review, page 49. The metric is not directly reconcilable to the financial statements as it includes a significant component relating to cash that is expected to emerge in the future. Holding company cash included within LTFC is consistent with the holding company cash and cash equivalents as disclosed in the cash section of the business review. Shareholder debt outstanding reflects the face value of the shareholder borrowings disclosed in note E5 of the IFRS financial statements.
Represents the increase in Solvency II shareholder Own funds arising from new business written in the year, adjusted to exclude the associated risk margin and any restrictions in respect of contract boundaries and stated on a net of tax basis.
This measure provides an assessment of the day one value arising on the writing of new business in the UK Open and Europe segments, and is stated after applicable taxation and acquisition costs.
Cash remitted by the Group’s operating companies to the Group’s holding companies.
Further details of holding companies’ cash flows are included within the business review on pages 47 to 58 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 303.
Further details of the components of this measure and the assumptions inherent in the calculation of the long-term investment return are included in note B1.2 to the IFRS consolidated financial statements.
A reconciliation of operating profit to the IFRS result before tax attributable to owners is included in the business review on page 55 and in the notes to the financial statements on page 190.
Dividend mandates Shareholders may find it convenient to have their dividends paid directly to their bank or building society account.
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GROUP FINANCIAL CALENDAR FOR 2021 Annual General Meeting 14 May 2021
The potential positive impacts of climate change on an organisation. Efforts to adapt to climate change can produce opportunities for organisations, such as through resource efficiency and cost savings and the development of new products and services