External Fund Link assets have been reclassified from collective investment schemes to reinsurers’ share of investment contract liabilities also as a level 1 asset. This has had an associated impact within the consolidated income statement as shown above. Following on from this change, the previously reported reinsurers’ share of investment contract liabilities balance of £5,381 million was reclassified from level 2 to level 1.
The Group considers all relevant facts and circumstances in assessing whether it has power over an investee, including relevant activities, substantive and protective rights, voting rights and purpose and design of an investee. The Group reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control. Further details about the consolidation of subsidiaries, including collective investment schemes, are included in note H1.
Critical accounting estimates are those which involve the most complex or subjective judgements or assessments. The areas of the Group’s business that typically require such estimates are the measurement of insurance and investment contract liabilities, determination of the fair value of financial assets and liabilities, valuation of pension scheme assets and liabilities, valuation of intangibles on initial recognition and measurement of provisions.
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. Noneconomic assumptions, such as future expenses, longevity and mortality are set based on past experience, market practice, regulations and expectations about future trends.
A. SIGNIFICANT ACCOUNTING POLICIES continued A3. Critical Accounting Estimates and Judgements continued A3.2 Fair value of financial assets and liabilities continued Further details of the estimates made are included in note E2. In relation to the Level 3 financial instruments, sensitivity analysis is performed in respect of the key assumptions used in the valuation of these financial instruments. The details of this sensitivity analysis are included in note E2.3.
Further detail of these estimates and the sensitivity of the defined benefit obligation to key assumptions is provided in note G1.
A3.5 Operating profit Operating profit is the Group’s non-GAAP measure of performance and gives stakeholders a better understanding of the underlying performance of the Group. The Group is required to make judgements as to the appropriate longer-term rates of investment return for the determination of operating profit, as detailed in note B2, and as to what constitutes an operating or non-operating item in accordance with the accounting policy detailed in note B1.
A3.6 Acquisition of the Standard Life Assurance businesses The identification and valuation of identifiable intangible assets, such as acquired in-force business or brand intangibles, arising from the Group’s acquisition of the Standard Life Assurance businesses in 2018, required the Group to make a number of judgements and estimates. Further details are included in notes G2 ‘Intangible assets’ and H2 ‘Acquisitions’.
• Annual Improvements Cycle 2015-2017: Amendments to IAS 12 Income Taxes, IAS 23 Borrowing Costs and IFRS 3 Business combinations/IFRS 11 Joint Arrangements. These amendments do not currently have any impact on the Group.
• IFRS 9 Financial Instruments (2018 – recommended implementation date extended to 2022). 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. 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 2021 (recommended deferral period extended by IASB to 2022) 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 Standard Life Assurance businesses on 31 August 2018, this assessment was re-performed and the Group’s activities were still considered to be predominantly connected with insurance.
• Amendments to IFRS 3 Business Combinations (2020). The amendments have revised the definition of a business and aim to assist companies to determine whether an acquisition made is of a business or a group of assets. The amended definition emphasises that the output of a business is to provide goods and services to customers, whereas the previous definition focused on returns in the form of dividends, lower costs or other economic benefits to investors and others. These amendments do not currently have any impact on the Group.
• IFRS 17 Insurance contracts (2021 – IASB recommended extension of implementation date to 2022). Once effective IFRS 17 will replace IFRS 4 the current insurance contracts standard and it is expected to significantly change the way the Group measures and reports its insurance contracts. The overall objective of the new standard is to provide an accounting model for insurance contracts that is more useful and consistent for users. The new standard uses three measurement approaches and the principles underlying two of these measurement approaches will significantly change the way the Group measures its insurance contracts and investment contracts with Discretionary Participation Features (‘DPF’). These changes will impact profit emergence patterns and add complexity to valuation processes, data requirements and assumption setting. The Group’s IFRS 17 project continued through 2019 with an increasing focus on implementation activities alongside ongoing financial and operational impact assessments and methodology development.
A. SIGNIFICANT ACCOUNTING POLICIES continued A5. New Accounting Pronouncements not yet Effective continued
• Classification of Liabilities as Current and Non-current (Amendments to IAS 1 Presentation of Financial Statements) (2022). 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. This amendment is currently not applicable to the Group.
All of the above have been endorsed by the EU with the exception of the following: • IFRS 17 Insurance contracts; • Amendments to IFRS 3 Business Combinations; and
• Classification of Liabilities as Current and Non-current (Amendments to IAS 1 Presentation of Financial Statements).
On 31 January 2020, the UK left the EU and consequently EFRAG will no longer endorse IFRSs for use in the UK. Legislation is already in place that will onshore and freeze EU-adopted IFRSs from the date of the exit, and the European Commission’s powers to endorse and adopt IFRSs will be delegated by the Secretary of State to a UK endorsement board which will be set up by the UK Financial Reporting Council. IFRSs in the UK will be known as ‘UK-adopted International Accounting Standards’.
A6. Change in Accounting Policy – IFRS 16 Leases IFRS 16 introduced a single, on-balance sheet accounting model for lessees effective from 1 January 2019. IFRS 16 supersedes IAS17 ‘Leases’, IFRIC 4 ‘Determining whether an Arrangement contains a Lease’, SIC-15 ‘Operating Leases – Incentives’ and SIC-27 ‘Evaluating the Substance of Transactions Involving the Legal Form of a Lease’. As a result, the Group as a lessee has recognised rightof -use assets representing its rights to use underlying assets and lease liabilities representing its obligation to make lease payments in respect of both its operating and finance leases. Lessor accounting remains similar to previous accounting policies.
At 1 January 2019, the carrying value of the right of use assets and lease liabilities for the Group’s finance leases is measured in accordance with IAS 17, as permitted by IFRS 16, and the new standard will be applied to these leases from 1 January 2019.The details of the changes in accounting policies are discussed below.
Definition of a lease Previously, the Group determined at contract inception whether an arrangement was or contained a lease under IFRIC 4 ‘Determining Whether an Arrangement contains a Lease’. The Group now assesses whether a contract is or contains a lease based on IFRS16 which states that ‘a contract is, or contains, a lease if the contract conveys a right to control the use of an identified asset for a period of time in exchange for consideration’.
On transition to IFRS 16, the Group elected to apply the practical expedient to grandfather the assessment of which transactions are leases. It applied IFRS 16 only to contracts that were previously identified as leases. Contracts that were not identified as leases under IAS 17 and IFRIC 4 were not reassessed. Therefore, the definition of a lease under IFRS 16 has been applied only to contracts entered into or changed on or after 1 January 2019.
Lease liabilities are presented as a separate line item and right-of-use assets are presented within ‘property, plant and equipment’ and ‘investment property’ in the statement of consolidated financial position.
The Group has elected not to recognise right-of-use assets and lease liabilities for leases of low value assets, including IT equipment. The Group recognises the lease payments associated with these leases as an expense on a straight-line basis over the lease term.
The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the Group’s incremental borrowing rate as the interest rate implicit in the lease cannot be readily determined. For leases classified as finance leases, the incremental borrowing rate of investment funds holding the associated investment properties is used as the discount rate.
The Group used a further practical expedient when applying IFRS 16 to leases previously classified as operating leases under IAS 17 to exclude initial direct costs from measuring the right-of-use asset at the date of initial application.
The Group’s weighted average incremental borrowing rate applied to operating lease liabilities in the statement of consolidated financial position at the date of initial application was 2.84%. For leases classified as finance leases, the weighted average incremental borrowing rate of investment funds holding the associated investment properties applied at the date of initial application was 2.91%.
The table below reconciles closing operating lease commitments at 31 December 2018 to opening lease liabilities as classified under IFRS16 at 1 January 2019.
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 Standard Life Assurance businesses in 2018, the Group reassessed its operating segments to reflect the way the business was subsequently being managed. The Group now has four reportable segments comprising UK Heritage, UK Open, Europe and Management Services, as set out in note B1.1.
Segmental measure of performance: Operating Profit The Company uses a non-GAAP measure of performance, being operating profit, to evaluate segment performance. Operating profit 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. This measure incorporates an expected return, including a longer-term return on financial investments backing shareholder and policyholder funds over the period, with consistent allowance for the corresponding expected movement in liabilities. Annuity new business profits are included in operating profit using valuation assumptions consistent with the pricing of the business (including the Company’s expected longer-term asset allocation backing the business).
Furthermore, the hedging strategy of the Group is calibrated to protect the Solvency II capital position and cash generation capability of the operating companies, as opposed to the IFRS financial position. This can create additional volatility in the IFRS result which is excluded from the operating profit metric.
Investment return variances and economic assumption changes on long-term business B2.2 (177) 283
Other non-operating items in respect of 2018 include: • a provision for £68 million in respect of a commitment to reduce ongoing and exit charges for non-workplace pension products; • costs of £43 million associated with the acquisition of the Standard Life Assurance businesses, and £7 million incurred under the ongoing transition programme; • costs of £59 million associated with the equalisation of accrued Guaranteed Minimum Pension (‘GMP’) benefits within the Group’s pension schemes (see note G1 for further details); • a net benefit of £45 million reflecting anticipated costs savings associated with process improvements and continued investment in the digitalisation of the customer journey; • a gain on acquisition of £141 million reflecting the excess of the fair value of the net assets acquired over the consideration paid for the acquisition of the Standard Life Assurance businesses (see note H2 for further details); and
• net other one-off items totalling a cost of £47 million, including other corporate project costs of £42 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.
B. EARNINGS PERFORMANCE continued B1 Segmental Analysis continued B1.2 Segmental revenue
Revenue from external customers: Less: premiums ceded to reinsurers (528) – (28) – – (556)
Revenue from external customers: Less: premiums ceded to reinsurers (478) (1) (2) – – (481)
Of the revenue from external customers presented in the table above, £3,131 million (2018: £2,199 million) is attributable to customers in the United Kingdom (‘UK’) and £1,051 million (2018: £350 million) to the rest of the world. The Europe operating segment comprises business written in Ireland and Germany to customers in both Europe and the UK. No revenue transaction with a single customer external to the Group amounts to greater than 10% of the Group’s revenue.
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.
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-
B2.3 Owners’ funds For non-long-term business including owners’ funds, the total investment income, including fair value gains, is analysed between a calculated longer-term return and short-term fluctuations.
The variances excluded from operating profit in relation to owners’ funds are as follows: Variances on owners' funds of subsidiary undertakings 13 (193)
Coupon payable in respect of Tier 1 Notes, net of tax relief (23) (12)
The weighted average number of ordinary shares outstanding during the period is calculated as detailed below: 2019 Number million 2018 Number million
Profit for the period attributable to owners 647 (531) 116 579 (169) 410
Share of result attributable to non-controlling interests – (31) (31) – (31) (31)
Coupon payable in respect of Tier 1 Notes, net of tax relief – (23) (23) – (12) (12)
Profit for the period attributable to ordinary equity holders of the parent 647 (585) 62 579 (212) 367
The basic and diluted weighted average number of ordinary shares outstanding during the year are the same as those included in B3.1 and B3.2 above. Basic operating earnings per share and diluted operating earnings per share are as follows: pence
B4. Dividends Final dividends on ordinary shares are recognised as a liability and deducted from equity when they are approved by the Group’s owners. Interim dividends are deducted from equity when they are paid.
Dividends for the year that are approved after the reporting period are dealt with as an event after the reporting period. Declared dividends are those that are appropriately authorised and are no longer at the discretion of the entity.
On 4 March 2019, the Board recommended a final dividend of 23.4p per share in respect of the year ended 31 December 2018. The dividend was approved at the Group’s Annual General Meeting, which was held on 2 May 2019. The dividend amounted to £169 million and was paid on 7 May 2019.
On 6 August 2019, the Board declared an interim dividend of 23.4p per share for the half year ended 30 June 2019. The dividend amounted to £169 million and was paid on 30 September 2019.
The table below details the ‘Disaggregation of Revenue’ disclosures required by IFRS15 Revenue from contracts with customers.
Fee income from investment contracts without DPF 354 268 70 692
Fee income from investment contracts without DPF 271 84 25 380
C2. Net Investment Income Net investment income comprises interest, dividends, rents receivable, net interest income/(expense) on the net defined benefit asset/(liability), fair value gains and losses on financial assets (except for reinsurers’ share of investment contract liabilities without DPF, see note E1), financial liabilities and investment property at fair value and impairment losses on loans and receivables.
Net interest expense on Group defined benefit pension scheme (liability)/asset (29) (6)
Deferred acquisition costs For insurance and investment contracts with DPF, acquisition costs which include both incremental acquisition costs and other direct costs of acquiring and processing new business, are deferred.
For investment contracts without DPF, incremental costs directly attributable to securing rights to receive fees for asset management services sold with unit linked investment contracts are deferred.
Trail or renewal commission on investment contracts without DPF where the Group does not have an unconditional legal right to avoid payment is deferred at inception of the contract and an offsetting liability for contingent commission is established.
Stamp duty payable on acquisition of Standard Life Assurance businesses – 15
C. OTHER CONSOLIDATED INCOME STATEMENT NOTES continued C4. Auditor’s Remuneration continued Corporate finance services fees were £3.3 million (2018: £3.7 million). These fees principally relate 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 relates to the provision of assurance services to the Board and the sponsoring banks in support of disclosures made in the public transaction documents. The 2018 fees principally related to services provided in connection with the acquisition of the Standard Life Assurance businesses and the Premium Listing of the Company undertaken as part of the Group’s on-shoring activities. £1.6 million of the fees related to the engagement of the external auditors to perform actuarial and finance due diligence procedures where synergies were anticipated to arise with subsequent audit work. The remaining balance of £2.0 million related to the provision of assurance to the Board and the sponsoring banks in support of disclosures made in the public transaction documentation relating to the Standard Life Assurance acquisition and the Premium Listing.
No other non-audit services were provided by the Company’s auditors in 2019 (2018: £0.3 million). The 2018 fees related to services provided to Standard Life Assurance where the engagement occurred prior to completion of the acquisition and which were terminated within the three-month grace period.
The Group, as a proxy for policyholders in the UK, is required to pay taxes on investment income and gains each year. Accordingly, the tax credit or expense attributable to UK life assurance policyholder earnings is included in income tax expense. The tax charge attributable to policyholder earnings was £365 million (2018: £211 million credit).
Deferred tax charge on share schemes – 2 168 PHOENIX GROUP HOLDINGS PLC ANNUAL REPORT & ACCOUNTS 2019
1 The Phoenix operating segments are predominantly in the UK. The reconciliation of tax (credit)/charge has, therefore, been completed by reference to the standard rate of UK tax.
2 2019 non-taxable income, gains and losses includes non-taxable dividends and gains and non-taxable pension scheme valuation movement.
3 2019 disallowable deductions are primarily in relation to a consolidation adjustment on the PGL Pension scheme ‘buy-in’ agreement of £14 million, company acquisition costs of £1 million and a FCA thematic review provision in Standard Life Assurance Limited of £6 million.
6 The 2019 tax credit represents the recognition of tax losses in the Group companies £(12) million and intangible assets within Standard Life International DAC £(35) million.
During the year, 315,730 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).
On 31 August 2018, the Group issued 144,114,450 shares to SLA plc, giving them a 19.98% equity stake in the Group valued at £1,023 million, based on the share price at that date.
D. EQUITY continued D2. Shares Held by the Employee Benefit Trust continued The EBT holds shares to satisfy awards granted to employees under the Group’s share-based payment schemes.
During the year 508,639 (2018: 518,322) shares were awarded to employees by the EBT and 614,193 (2018: 1,188,435) shares were purchased. The number of shares held by the EBT at 31 December 2019 was 1,096,356 (2018: 990,802).
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. Coupon paid in the year was £29 million (2018: £14 million).
At the issue date, the Tier 1 Notes were unsecured and subordinated obligations of Old PGH. On 12 December 2018 the Company was substituted in place of Old PGH as issuer.
D4. Non-Controlling Interests Non-controlling interests are stated at the share of net assets attributed to the non-controlling interest holder at the time of acquisition, adjusted for the relevant share of subsequent changes in equity.
The Group’s interest in SLPET is held in the with-profit and unitlinked funds of the Group’s life companies. Therefore the shareholder exposure to the results of SLPET is limited to the impact of those results on the shareholder share of distributed profits of the relevant fund.
Derecognition of financial assets A financial asset (or part of a group of similar financial assets) is derecognised where: • the rights to receive cash flows from the asset have expired; • the Company retains the right to receive cash flows from the assets, but has assumed an obligation to pay them in full without material delay to a third party under a ‘pass-through’ arrangement; or
Amounts previously recognised in other comprehensive income and accumulated in equity are reclassified to profit or loss in the periods when the hedged item affects profit or loss, in the same line as the recognised hedged item.
Hedge accounting is discontinued when the Group revokes the hedging relationship, when the hedging instrument expires or is sold, terminated, or exercised, or when it no longer qualifies for hedge accounting. Any gain or loss recognised in other comprehensive income and accumulated in equity at that time is recycled to profit or loss over the period the hedged item impacts profit or loss.
E1.1 Fair values analysis The table below sets out a comparison of the carrying amounts and fair values of financial instruments as at 31 December 2019: Carrying value £m
Financial assets at fair value through profit or loss: Held for trading – derivatives 4,454 4,023 4,454
Designated upon initial recognition: Investment in associate1 (see note H3) 513 – 513
Financial assets measured at amortised cost: Total financial assets2 218,871 218,871
Designated upon initial recognition: Net asset value attributable to unitholders1 3,149 – 3,149
Financial liabilities measured at amortised cost: Deposits received from reinsurers 4,213 3,751 4,213
E. FINANCIAL ASSETS & LIABILITIES continued E1. Fair Values continued E1.1 Fair values analysis continued Carrying value 2018 restated Total £m
Financial assets measured at amortised cost: Total financial assets3 204,821 204,821
Total financial liabilities 127,484 127,436 1 These assets and liabilities have no expected settlement date.
2 Comparative figures have been restated to ensure a consistent presentation for all similar items across the Group’s subsidiaries, following the acquisition of the Standard Life Assurance businesses in 2018. See note A1 for further details.
Financial assets with contractual cash flows that are SPPI excluding those held for trading or managed on a fair value basis: Loans and deposits 516 423
All other financial assets that are measured at fair value through profit or loss2 218,355 204,398 1 Other receivables excludes deferred acquisition costs.
2 The change in fair value during 2019 of all other financial assets that are measured at fair value through profit or loss is a £20,231 million gain (2018: £12,962 million loss).
An analysis of credit ratings of financial assets with contractual cash flows that are SPPI, excluding those held for trading or managed on a fair value basis, is provided below: 2019 Carrying value
Financial assets designated at FVTPL upon initial recognition: Investment in associate 513 – – 513
Financial liabilities designated at FVTPL upon initial recognition: Net asset value attributable to unit-holders 3,149 – – 3,149
Financial assets designated at FVTPL upon initial recognition: Investment in associate 496 – – 496
Financial liabilities designated at FVTPL upon initial recognition: Net asset value attributable to unitholders 2,659 – – 2,659
Total financial liabilities for which fair values are disclosed – 6,190 259 6,449 1 See note A1 for details of the restatements.
The Group holds unquoted corporate bonds comprising investments in local authority loans, private placements and infrastructure loans with a total value of £1,750 million (2018 restated: £1,171 million). These unquoted corporate bonds are secured on various assets and are valued using a discounted cash flow model. The discount rate is made up of a risk-free rate and a spread. The risk-free rate is taken from an appropriate gilt of comparable duration. The spread is taken from a basket of comparable securities. The valuations are sensitive to movements in this spread. An increase of 35bps would decrease the value by £81 million (2018: £50 million) and a decrease of 35bps would increase the value by £87 million (2018: £52 million).
An increase of 10% in house prices would increase the value by £15 million (2018: £6 million) and a decrease of 10% would decrease the value by £25 million (2018: £14 million). An increase of 5% in mortality would decrease the value by £8 million (2018: £5 million) and a decrease of 5% in mortality would increase the value by £5 million (2018: £3 million). An increase of 15% in the voluntary redemption rate would decrease the value by £17 million (2018: £9 million) and a decrease of 15% in the voluntary redemption rate would increase the value by £15 million (2018: £7 million).
Also included within debt securities are income strips with a value of £690 million (2018: £654 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 £66 million (2018: £70 million) and a decrease of 35bps would increase the value by £79 million (2018: £79 million).
E2.3.4 Derivatives Included within derivative liabilities are forward local authority loans, forward private placements and forward infrastructure loans with a value of £41 million (2018: £nil). These investments include a commitment to acquire or provide funding for fixed rate debt instruments at specified future dates. These investments are valued using a discounted cash flow model that takes a comparable UK Treasury stock and applies a credit spread to reflect reduced liquidity. The credit spreads are derived from a basket of comparable securities. The valuations are sensitive to movements in this spread. An increase of 35bps would decrease the value by £25 million (2018: £16 million) and a decrease of 35bps would increase the value by £28 million (2018: £17 million).
Financial liabilities designated at FVTPL upon initial recognition: PHOENIX GROUP HOLDINGS PLC ANNUAL REPORT & ACCOUNTS 2019 179
Financial liabilities designated at FVTPL upon initial recognition: 1 See note A1 for details of the restatements.
Derivative financial instruments are largely classified as held for trading. Such instruments are recognised initially at fair value and are subsequently remeasured to fair value. The gain or loss on remeasurement to fair value is recognised in the consolidated income statement. Derivative financial instruments are not classified as held for trading where they are designated as a hedging instrument and where the resultant hedge is assessed as effective. For such instruments, any gain or loss that arises on remeasurement to fair value is initially recognised in other comprehensive income and is recycled to profit or loss as the hedged item impacts the profit or loss. See note E1 for further details of the Group’s hedging accounting policy.
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 £134 million and derivative liabilities of £70 million have been recognised as at 31 December 2019 (2018: £162 million and £96 million respectively).
E. FINANCIAL ASSETS & LIABILITIES continued 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.
E4.1 Financial instrument collateral arrangements The Group has no financial assets and financial liabilities that have been offset in the statement of consolidated financial position as at 31 December 2019 (2018: none).
Net amount £m 182 PHOENIX GROUP HOLDINGS PLC ANNUAL REPORT & ACCOUNTS 2019
The maximum exposure to credit risk in respect of OTC derivative assets is £3,908 million (2018: £3,435 million) of which credit risk of £3,585 million (2018: £3,259 million) is mitigated by use of collateral arrangements (which are settled net after taking account of any OTC derivative liabilities owed to the counterparty).
Credit risk on exchange traded derivative assets of £546 million (2018: £363 million) is mitigated through regular margining and the protection offered by the exchange.
The fair value of financial assets accepted as such collateral but not recognised in the statement of consolidated financial position amounts to £3,306 million (2018: £2,746 million).
b. The Property Reversions loan from Santander UK plc (‘Santander’) was recognised in the consolidated financial statements at fair value. It relates to the sale of Extra-Income Plan policies that Santander finances to the value of the associated property reversions. As part of the arrangement Santander receive an amount calculated by reference to the movement in the Halifax House Price Index and the Group is required to indemnify Santander against profits or losses arising from mortality or surrender experience which differs from the basis used to calculate the reversion amount. Repayment will be on a policy-by-policy basis and is expected to occur over the next 10 to 20 years. During 2019, repayments totalling £22 million were made (2018: £25 million). Note G4 contains details of the assets that support this loan.
c. In July 2012, AXIA Insurance Limited (‘AXIA’) provided financing to Abbey Life, a Group company, for Abbey Life to in turn provide the financing for the securitisation of the future surplus arising on a block of 1.7 million life insurance policies originating from the wholly owned Spanish and Portuguese insurance subsidiaries of Banco Santander, S.A. (the ‘Cedants’). This transaction was executed in the form of a reinsurance and retrocession arrangement that, taken as a whole, does not meet the definition of an insurance contract under the Group’s accounting policies (see note E3.2). Abbey Life received an upfront reinsurance commission from AXIA and makes monthly repayments based on the surplus emerging from the securitised policies as defined in the contracts. The repayments comprise a minimum guaranteed surplus amount and a share of any excess surplus, net of a fee and certain other amounts. Any excess amount serves to accelerate the repayment of the principal. Repayments are contingent on the receipt of payments due from the Cedants. Repayment of the loan principal is expected to occur by 2021. The contracts are recognised in the consolidated financial statements at fair value. On 31 December 2018, the retrocession contracts were transferred from Abbey Life to Phoenix Life Limited (‘PLL’), another Group company, under the terms of a scheme under Part VII of the Financial Services and Markets Act 2000.
d. Scottish Mutual Assurance Limited issued £200 million 7.25% undated, unsecured subordinated loan notes on 23 July 2001 (‘PLL subordinated debt’). The earliest repayment date of the notes is 25 March 2021 and thereafter on each fifth anniversary so long as the notes are outstanding. With effect from 1 January 2009, following a Part VII transfer, these loan notes were transferred into the shareholder fund of PLL. In the event of the winding-up of PLL, the right of payment under the notes is subordinated to the rights of the higher-ranking creditors (principally policyholders). As a result of the acquisition of the Phoenix Life businesses in 2009, these subordinated loan notes were acquired at their fair value and as such, the outstanding principal of these subordinated loan notes differs from the carrying value in the statement of consolidated financial position. The fair value adjustments, which were recognised on acquisition, will unwind over the remaining life of these subordinated loan notes. With effect from 23 December 2014, minor modifications were made to the terms of the notes to enable them to qualify as Tier 2 capital for regulatory reporting purposes. Expenses incurred in effecting these modifications amounted to £10 million. Given the modifications were not substantial, the carrying amount of the liability was adjusted accordingly and the expenses are being amortised over the life of the notes.
f. In 2018, the Group had in place an unsecured revolving credit facility (‘the facility’), maturing in June 2022. Old PGH drew down £295 million under the facility on 31 August 2018. Following the issuance of €500 million Tier 2 bond on 24 September 2018, the facility was fully repaid and remained undrawn at 31 December 2018. On 12 December 2018, the Company became an additional borrower and guarantor under the facility. On 27 June 2019, the Company replaced this facility with a new £1.25 billion unsecured revolving credit facility (see item l).
g. On 23 February 2018, Old PGH entered into an acquisition facility with an aggregate principal amount of £600 million and the Company became an additional borrower and guarantor under the acquisition facility on 12 December 2018. On 27 June 2019, the facility was cancelled.
j. On 6 July 2017, Old PGH issued US $500 million Tier 2 bonds due 2027 with a coupon of 5.375%. Fees associated with these notes of £2 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.
k. 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.
E. FINANCIAL ASSETS & LIABILITIES continued E5 Borrowings continued E5.1 Analysis of borrowings continued l. On 27 June 2019, the Company replaced its £900 million unsecured revolving credit facility (see item f) with a new £1.25 billion unsecured revolving credit facility (the ‘revolving facility’), maturing in June 2024. 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. On 23 October 2019 the Company drew down £100 million under the revolving facility, the balance was fully repaid on 25 November 2019 and the facility remains undrawn as at 31 December 2019.
At 31 December £300 million senior unsecured bond 121 – – – – – 121 £900 million unsecured revolving credit facility – 295 (295) – – – –
There is an exposure to spread changes affecting the prices of corporate bonds and derivatives. This exposure applies to with-profit funds (to the extent that risks and rewards fall wholly to shareholders), non-profit funds and shareholders’ funds.
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 of 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 Group operates an Internal Credit Rating Committee to perform oversight and monitoring of internal credit ratings for externally rated and internally rated assets. A variety of methods are used to validate the appropriateness of credit assessments from external institutions and fund managers. Internally rated assets are those that do not have a public rating from an external credit assessment institution. The internal credit ratings used by the Group are provided by fund managers or for certain assets (in particular, equity release mortgages) determined by the Life Companies. The Committee reviews the policies, processes and practices to ensure the appropriateness of the internal ratings assigned to asset classes.
A further indicator of the quality of the Group’s financial assets is the extent to which they are neither past due nor impaired. All of the amounts in the table above for the current and prior year are neither past due nor impaired.
Please refer to page 255 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.
Collateral The credit risk of the Group is mitigated, in certain circumstances, by entering into collateral agreements. The amount and type of collateral required depends on an assessment of the credit risk of the counterparty. Guidelines are implemented regarding the acceptability of types of collateral and the valuation parameters. Collateral is mainly in respect of stock lending, certain reinsurance arrangements and to provide security against the daily mark to model value of derivative financial instruments. Management monitors the market value of the collateral received, requests additional collateral when needed, and performs an impairment valuation when impairment indicators exist and the asset is not fully secured (and is not carried at fair value). See note E4 for further information on collateral arrangements.
The Group is mainly exposed to market risk as a result of: • the mismatch between liability profiles and the related asset investment portfolios; • the investment of surplus assets including shareholder reserves yet to be distributed, surplus assets within the with-profit funds and assets held to meet regulatory capital and solvency requirements; and
An increase of 1% in interest rates, with all other variables held constant would result in a decrease in profits after tax in respect of a full financial year, and in equity, of £114 million (2018: £141 million).
A decrease of 1% in interest rates, with all other variables held constant, would result in an increase in profits after tax in respect of a full financial year, and in equity, of £233 million (2018: £211 million).
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 £254 million (2018: £202 million).
A 10% increase in equity prices, with all other variables held constant, would result in a decrease in profits after tax in respect of a full financial year, and in equity, of £200 million (2018: £197 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 (2018: £7 million).
Currency risk With the exception of Standard Life business sold in Germany and the Republic of Ireland, and some historic business written in the latter, the Group’s principal transactions are carried out in sterling. The assets for these books of business are generally held in the same currency denomination as their liabilities; therefore, any foreign currency mismatch is largely mitigated. Consequently, the foreign currency risk relating to this business mainly arises when the assets and liabilities are translated into sterling.
The Group’s financial assets are primarily denominated in the same currencies as its insurance and investment liabilities. Thus, the main foreign exchange risk arises from recognised assets and liabilities denominated in currencies other than those in which insurance and investment liabilities are expected to be settled and, indirectly, from the non-UK earnings of UK companies.
The Group has hedged the currency risk on its foreign currency hybrid debt ($500 million Tier 2 bonds and €500 million Tier 2 bonds as set out in note E5) through cross currency interest rate swaps.
The Group has a formal tax risk policy, which sets out its risk appetite in relation to specific aspects of tax risk, and which details the controls the Group has in place to manage those risks. These controls are subject to a regular review process. The Group’s subsidiaries have exposure to tax risk through the annual statutory and regulatory reporting and through the processing of policyholder tax requirements.
Liquidity and funding risk is defined as the failure of the Group to maintain adequate levels of financial resources to enable it to meet its obligations as they fall due. The Group has exposure to liquidity risk as a result of servicing its external debt and equity investors, and from the operating requirements of its subsidiaries. The Group’s subsidiaries have exposure to liquidity risk as a result of normal business activities, specifically the risk arising from an inability to meet short-term cash flow requirements. The Board of Phoenix Group Holdings plc has defined a number of governance objectives and principles and the liquidity risk frameworks of each subsidiary are designed to ensure that: • liquidity risk is managed in a manner consistent with the subsidiary company boards’ strategic objectives, risk appetite and Principles and Practices of Financial Management (‘PPFM’); • cash flows are appropriately managed and the reputation of the Group is safeguarded; and
The vast majority of the Group’s derivative contracts are traded OTC and have a two-day collateral settlement period. The Group’s derivative contracts are monitored daily, via an end-of-day valuation process, to assess the need for additional funds to cover margin or collateral calls.
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 2018 and 2019, all unit trusts processed investments and realisations in a normal manner and have not imposed any restrictions or delays.
Payables related to direct insurance contracts 890 – – – 890 1 year or less or on demand £m 1–5 years £m
Net asset value attributable to unitholders 2,659 – – – 2,659
Payables related to direct insurance contracts 902 – – – 902 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.
F. INSURANCE CONTRACTS, INVESTMENT CONTRACTS WITH DPF AND REINSURANCE F1. Liabilities Under Insurance Contracts Classification of contracts Contracts are classified as insurance contracts where the Group accepts significant insurance risk from the policyholder by agreeing to compensate the policyholder if a specified uncertain event adversely affects the policyholder.
Under the realistic valuation, the discounted value of expected future cash flows on participating contracts not reflected in the WPBR is included in the cost of future policy related liabilities (as a reduction where future cash flows are expected to be positive). The discounted value of expected future cash flows on non-participating contracts not reflected in the measure on non-participating liabilities is recognised as a separate asset (where future cash flows are expected to be positive). The Scheme requirement to transfer future recourse cash flows out of the HWPF is recognised as an addition to the cost of future policy related liabilities. The discounted value of expected future cash flows on non-participating contracts can be apportioned between those included in the recourse cash flows and those retained in the HWPF for the benefit of policyholders.
• 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 statement of consolidated financial position.
Where it is not possible to apportion the future profits on this nonparticipating 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).
Reinsurance Amounts recoverable from reinsurers are estimated in a manner consistent with the outstanding claims provision or settled claims associated with the reinsured policy.
Reinsurance ceded The Group cedes insurance risk in the normal course of business. Reinsurance assets represent balances due from reinsurance providers. Reinsurers’ share of insurance contract liabilities is dependent on expected claims and benefits arising under the related reinsured policies.
F. INSURANCE CONTRACTS, INVESTMENT CONTRACTS WITH DPF AND REINSURANCE continued F1. Liabilities Under Insurance Contracts continued The table below shows a summary of the liabilities under insurance contracts and the related reinsurers’ share included within assets in the statement of consolidated financial position.
Acquisition of Standard Life Assurance businesses – – 51,487 4,264 1 Other changes in liabilities principally comprise changes in economic and non-economic assumptions and experience. Other changes in liabilities also includes the recognition of an additional £44 million (2018: £22 million) of policyholder liabilities on the crystallisation of obligations initially included within the FCA thematic reviews provision.
• The unallocated surplus of the HWPF comprises the value of future recourse cash flows in participating contracts (but not the value of future cash flows on non-participating contracts), the value of future additional expenses to be charged on German branch business and the effect of any measurement differences between the realistic value and the IFRS accounting policy value of all assets and liabilities other than participating contract liabilities recognised in the HWPF.
Where the Group receives collateral on reinsurance transactions in the form of cash it is recognised in the statement of consolidated financial position along with a corresponding liability to repay the amount of collateral received, disclosed as ‘Deposits received from reinsurers’. Where there is interest payable on such collateral, it is recognised within ‘Net income under arrangements with reinsurers’ (see note F3.3). The amounts recognised as financial assets and liabilities from cash collateral received at 31 December 2019 are set out below.
F3.3 Net (expense)/income under arrangements with reinsurers The Group has reinsured the longevity and investment risk related to a portfolio of annuity contracts held within the HWPF. At inception of the reinsurance contract the reinsurer was required to deposit an amount equal to the reinsurance premium with the Group. The amount recognised in the statement of consolidated financial position in respect of this deposit is £3.9 billion as at 31 December 2019 (31 December 2018: £4.1 billion). Interest is payable to the reinsurer on the deposit at a floating rate. The Group maintains a ring fenced pool of assets to back this deposit liability. Annuity payments under the reinsured contracts are made by the Group from the ring fenced assets and the deposit liability is reduced by the amount of these payments. Periodically the Group is required to pay to the reinsurer or receive from the reinsurer Premium Adjustments defined as the difference between the fair value of the ring fenced assets and the deposit amount, such that the deposit amount equals the fair value of the ring fenced assets. This has the effect of ensuring that the investment risk on the ring fenced pool of assets falls on the reinsurer. The investment return on the ring fenced assets included in investment return in the consolidated income statement is equal to an equivalent amount recognised in expenses under arrangements with reinsurers.
Insurance risk refers to the risk that the frequency or severity of insured events may be worse than expected and includes expense risk. The contracts for the Life businesses include the following sources of insurance risk: Mortality higher than expected death claims on assurance products or lower than expected improvements in mortality; Longevity lower than expected number of deaths experienced on annuity products or greater than expected improvements in annuitant mortality; Morbidity higher than expected number of serious illness claims or more sickness claims which last longer on income protection policies; Expenses unexpected timing or value of expenses incurred; Lapses adverse movement in surrender rates, GAO surrender rates, GAO take-up rates, policyholder retirement dates or the occurrence of a mass lapse event leading to losses; and
F. INSURANCE CONTRACTS, INVESTMENT CONTRACTS WITH DPF AND REINSURANCE continued F4. Risk Management – Insurance Risk continued Sensitivities Insurance liabilities are sensitive to changes in risk variables, such as prevailing market interest rates, currency rates and equity prices, since these variations alter the value of the financial assets held to meet obligations arising from insurance contracts and changes in investment conditions also have an impact on the value of insurance liabilities themselves. Additionally, insurance liabilities are sensitive to the assumptions which have been applied in their calculation, such as mortality and lapse rates. Sometimes allowance must also be made for the effect on future assumptions of management or policyholder actions in certain economic scenarios. This could lead to changes in assumed asset mix or future bonus rates. The most significant non-economic sensitivities arise from mortality, longevity and lapse risk.
An increase of 5% in assurance mortality, with all other variables held constant, would result in a decrease in the profit after tax in respect of a full year, and a decrease in equity of £58 million (2018: £54 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 £288 million (2018: £265 million).
For certain non-participating insurance contract liabilities (eg. annuities), the Group makes a further explicit adjustment to the risk-free rate to reflect illiquidity in respect of the assets backing those liabilities.
Expense inflation Expenses are assumed to increase at either the rate of increase in the Retail Price Index (‘RPI’), or a rate derived from the UK inflation swaps curve, plus fixed margins in accordance with the various management service agreements (‘MSAs’) the Group has in place with outsource partners. For with-profit business the rate of RPI inflation is determined within each stochastic scenario. For other business it is based on the Bank of England inflation spot curve. For MSAs with contractual increases set by reference to national average earnings inflation, this is approximated as RPI inflation plus 1%. In instances in which inflation risk is not mitigated, a further margin for adverse deviations may then be added to the rate of expense inflation.
The £19 million and £17 million negative impact of changes in persistency and mortality assumptions respectively reflects the results of the latest experience investigations.
F. INSURANCE CONTRACTS, INVESTMENT CONTRACTS WITH DPF AND REINSURANCE continued F4. Risk Management – Insurance Risk continued F4.2 Managing product risk The following sections give an assessment of the risks associated with the Group’s main life assurance products and the ways in which the Group manages those risks.
1 £5,320 million (2018: £4,605 million) of liabilities are subject to longevity swap arrangements.
With-profit funds: Pensions: Deferred annuities – with guarantees 8,329 69 807 –
Non-profit funds: Deferred annuities – without guarantees 844 – – –
Defined benefit pension schemes The net surplus or deficit (the economic surplus or deficit) in respect of the defined benefit pension schemes is calculated by estimating the amount of future benefit that employees have earned in return for their service in the current and prior years; that benefit is discounted to determine its present value and the fair value of any scheme assets is deducted.
The movement in the net defined benefit asset/liability is analysed between the service cost, past service cost, curtailments and settlements (all recognised within administrative expenses in the consolidated income statement), the net interest cost on the net defined benefit asset/liability, including any reimbursement assets (recognised within net investment income in the consolidated income statement), remeasurements of the net defined asset/liability (recognised in other comprehensive income) and employer contributions.
An analysis of the defined benefit asset/(liability) for each pension scheme is set out below: £m
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 – (151)
G. OTHER STATEMENT OF CONSOLIDATED FINANCIAL POSITION NOTES continued G1. Pension Schemes continued Information on each of these schemes is set out below.
On 27 November 2012 the principal employer and the Trustee of the Pearl Scheme entered into a revised pensions funding agreement (the ‘Pensions Agreement’), the principal terms of which were not altered following finalisation of the 30 June 2018 triennial valuation. The principal terms of the Pensions Agreement are: • annual cash payments into the Scheme of £70 million in 2013 and 2014 payable on 30 September, followed by payments of £40 million each year from 2015 to 2021. The timing of payment of contributions changed during 2017 so that the contributions are paid on a monthly basis following the last annual payment of £40 million completed in September 2016. The Pensions Agreement includes a sharing mechanism, related to the level of dividends paid out of PGH2, that in certain circumstances allows for an acceleration of the contributions to be paid to the Pearl Scheme; • additional contributions may become payable if the Scheme is not anticipated to meet the two agreed funding targets: (i) to reach full funding on the technical provisions basis by 30 June 2022; and
It should be noted that the terms of the £1.25 billion facility agreement (see note E5) restrict the Group’s ability, with certain exceptions, to transfer assets into the secured companies over which the Trustee holds a charge over shares.
An additional liability of £24 million (2018: £37 million) has been recognised, reflecting a charge on any refund of the resultant IAS 19 surplus that arises after adjustment for discounted future contributions of £69 million (2018: £106 million) in accordance with the minimum funding requirement. A deferred tax asset of £12 million (2018: £18 million) has also been recognised to reflect tax relief at a rate of 17% (2018: 17%) that is expected to be available on the contributions, once paid into the Scheme.
Contributions totalling £40 million were paid into the Pearl Scheme in 2019 (2018: £40 million) reflecting the monthly instalments.
Remeasurements: Return on plan assets excluding amounts included in interest income (81) – – – (81)
Change in provision for tax on economic surplus available as a refund – – 48 – 48
Obligations for repayment of stock lending collateral received (522) – (1,115) –
Defined benefit obligation The calculation of the defined benefit obligation can be allocated to the scheme’s members as follows: • Deferred scheme members: 40% (2018: 40%); and
It has been assumed that post-retirement mortality is in line with a scheme-specific table which was derived from the actual mortality experience in recent years based on the SAPS standard tables for males and for females based on year of use. Future longevity improvements from 1 January 2017 are based on amended CMI 2018 Core Projections (2018: CMI 2017 Core Projections) and a long-term rate of improvement of 1.60% (2018: 1.75%) per annum for males and 1.30% (2018: 1.50%) per annum for females. Under these assumptions, the average life expectancy from retirement for a member currently aged 40 retiring at age 60 is 29.8 years and 32.2 years for male and female members respectively (2018: 29.9 and 32.2 respectively).
In December 2016, the PGL Pension Scheme entered into a ‘buy-in’ agreement with PLL, which converted the longevity swap contract into a bulk annuity contract. The Scheme transferred certain additional risks in respect of the benefits payable to the deferred members covered by the longevity swap arrangement, including the investment risk associated with the assets covering those benefits. The Scheme transferred £1,164 million of plan assets to a collateral account and this transfer constituted the payment of premium to PLL, and was net of a £23 million prepayment by PLL to the Scheme in respect of benefits up to 31 May 2017. The assets transferred to PLL are recognised in the relevant line within financial assets in the statement of consolidated financial position (see note E1). An adjustment of £6 million to the value of the premium was paid by PLL to the PGL Scheme in 2017. The economic effect of the ‘buy-in’ transaction in the Scheme is to replace the plan assets transferred with a single line insurance policy reimbursement asset which is eliminated on consolidation. The value of this insurance policy in December 2016 was £892 million.
The value of the insurance policies with Group entities at 31 December 2019 is £1,687 million (2018: £877 million).
Remeasurements: Return on plan assets excluding amounts included in interest income 10 – – 10
Change in provision for tax on economic surplus available as a refund – – 156 156
Assets transferred as premium for 2019 scheme buy-in (1,115) – – (1,115)
Remeasurements: Return on plan assets excluding amounts included in interest income (41) – – (41)
Add back: Insurance policies eliminated on consolidation 1,687 1,687 877 877
Defined benefit obligation The calculation of the defined benefit obligation can be allocated to the scheme’s members as follows: • Deferred scheme members: 36% (2018: 36%); and
A quantitative sensitivity analysis for significant actuarial assumptions is shown below: 2019 Assumptions Base Discount rate RPI Life expectancy
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 liability recognised within the statement of consolidated financial position.
G1.3 Abbey Life Staff Pension Scheme Scheme details On 30 June 2017, the Abbey Life Scheme was transferred from Abbey Life to Pearl Life Holdings Limited (‘PeLHL’), a fellow subsidiary. PeLHL assumed the scheme covenant together with all obligations of the scheme following implementation of the transfer. The Abbey Life Scheme is a registered occupational pension scheme, set up under Trust, and legally separate from the employer PeLHL. The scheme is administered by Abbey Life Trust Securities Limited (the Trustee), a corporate trustee. There are three Trustee Directors, one of whom is nominated by the Abbey Life Scheme members and two of whom are appointed by PeLHL. The Trustee is responsible for administering the scheme in accordance with the Trust Deed and rules and pensions laws and regulations. The Abbey Life Scheme is closed to new entrants. The last active member ceased employment with the Group during the year and consequently the Abbey Life Scheme no longer recognises a current service cost.
Following the completion of the triennial funding valuation a revised schedule of contributions was agreed effective from 19 November 2018, for PeLHL to pay the following amounts in respect of deficit contributions: • fixed monthly contributions of £400,000 payable up to 30 June 2026; • monthly contributions in respect of administration expenses of £85,640 payable up to 31 March 2019, then £100,000 payable up to 30 June 2028 increasing annually in line with the Retail Prices Index assumption; and
It has been assumed that post-retirement mortality is in line with a scheme-specific table which was derived from the actual mortality experience in recent years, performed as part of the actuarial funding valuation as at 31 March 2015, using the SAPS S2 ‘Light’ tables for males and for females based on year of use. Future longevity improvements are based on amended CMI 2018 Core Projections (2018: CMI 2017 Core Projections) and a long-term rate of improvement of 1.60% (2018: 1.75%) per annum for males and 1.30% (2018: 1.50%) per annum for females. Under these assumptions the average life expectancy from retirement for a member currently aged 45 retiring at age 65 is 25.7 years and 27.2 years for male and female members respectively (2018: 25.7 years and 27.2 years respectively).
Goodwill is measured on initial recognition at cost. Following initial recognition, goodwill is stated at cost less any accumulated impairment losses. It is tested for impairment annually or when there is evidence of possible impairment. Goodwill is not amortised. For impairment testing, goodwill is allocated to relevant cash generating units. Goodwill is impaired when the recoverable amount is less than the carrying value.
The intangible asset is amortised on a straight-line basis over its useful economic life and assessed for impairment whenever there is an indication that the recoverable amount of the intangible asset is less than its carrying value. The customer relationship intangible asset is allocated to relevant cash generating units for the purposes of impairment testing.
Brands and other contractual arrangements Brands and other contractual arrangements acquired in a business combination are recognised at fair value at the acquisition date, and measured on initial recognition at cost. Amortisation is calculated using the straight-line method to allocate the cost of brands and other contractual arrangements over their estimated useful lives. They are tested for impairment whenever there is evidence of possible impairment. For impairment testing, they are allocated to the relevant cash generating unit. Brands and other contractual arrangements are impaired when the recoverable amount is less than the carrying value.
G. OTHER STATEMENT OF CONSOLIDATED FINANCIAL POSITION NOTES continued G2. Intangible Assets continued G2.1 Goodwill The carrying value of goodwill has been tested for impairment at the year end. No impairment has been recognised because the value in use of this intangible continues to exceed its carrying value.
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 2025 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.
G2.2 Acquired in-force business Acquired in-force business on insurance contracts and investment contracts with DPF represents the difference between the fair value of the contractual rights under these contracts and the liability measured in accordance with the Group’s accounting policies for such contracts. This intangible is being amortised in accordance with the run-off of the book of business.
The amount recognised in respect of the Standard Life Assurance businesses represents the value attributable to the Client Services and Proposition Agreement (‘CSPA’) with SLA plc and the Group’s contractual rights to use the Standard Life brand. The CSPA formalises the Strategic Partnership between the two companies and establishes the contractual terms by which SLA plc will continue to market and distribute certain products that will be manufactured by Group companies.
The right-of-use assets are initially measured at cost, and subsequently at cost less any accumulated depreciation and impairments, and adjusted for certain remeasurements of the lease liability. The right-of-use assets are depreciated over the remaining lease term which is between 1 and 11 years.
G. OTHER STATEMENT OF CONSOLIDATED FINANCIAL POSITION NOTES continued G4. Investment Property Investment property, including right-of-use assets, is stated 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. Gains and losses arising from the change in fair value are recognised in the consolidated income statement.
Losses on adjustments to fair value (recognised in consolidated income statement) (55) (18)
Investment properties also include £101 million (2018: £119 million) of property reversions arising from sales of the NPI Extra Income Plan (see note E5 for further details).
Certain investment properties held by the life companies possess a ground rent obligation which gives rise to both a right-of-use asset and a lease liability under IFRS 16. Under IAS 17, these leases were accounted for as finance leases. The right-of-use asset associated with the ground rent obligation is valued at fair value and is included within the total investment property valuation. The IAS 17 value of the ground rent right-of-use asset on the date of transition to IFRS 16 totalled £80 million (see note A6 for further details) and the remeasurement of this balance gives rise to a reduction of £15 million. There were disposals of right-of-use assets of £47 million. The value of the ground rent right-of-use asset as at 31 December 2019 was £18 million.
The residential property reversions, an interest in customers’ properties which the Group will realise upon their death, are valued using a DCF model based on the Group’s proportion of the current open market value, and discounted for the expected lifetime of the policyholder derived from published mortality tables. The open market value is measured by independent local property surveyors having appropriate recognised professional qualifications with reference to the assumed condition of the property and local market conditions. The individual properties are valued triennially and indexed using regional house price indices to the year end date. The discount rate is a risk-free rate appropriate for the duration of the asset, adjusted for the deferred possession rate of 3.6%. Assumptions are also made in the valuation for future movements in property prices, based on a risk free rate. The residential property reversions have been substantially refinanced under the arrangements with Santander as described in note E5.
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 2019 Weighted average 2018
The estimated fair value of the residential property reversions would increase (decrease) if: • the deferred possession rate were to be lower (higher); • the mortality rate were to be higher (lower).
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 £22 million (2018: £11 million). The direct operating expenses arising from investment property that did not generate rental income during the year amounted to £1 million (2018: £2 million).
Future minimum lease rental receivables in respect of non-cancellable operating leases on investment properties were as follows: £m
G5. Other Receivables Other receivables are recognised when due and measured on initial recognition at the fair value of the amount receivable. Subsequent to initial recognition, these receivables are measured at amortised cost using the effective interest rate method.
Leasehold properties The leasehold properties provision includes a £3 million (2018: £3 million) dilapidations provision in respect of obligations under operating leases and £1 million (2018: £2 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.
On acquisition of the Standard Life Assurance businesses on 31 August 2018, obligations arising as a result of the areas described above were recognised at £37 million on a fair value basis. Additional incidents were identified during the year and the provision was increased by £19 million. The balance at 31 December 2019 is £42 million.
FCA thematic reviews provision – Abbey Life On 3 March 2016, the FCA published a thematic review report on the fair treatment of long-standing customers in the life insurance sector. Following completion of the review, Abbey Life was subject to additional investigations. Specifically, the FCA explored whether remedial and/or disciplinary action was necessary or appropriate in respect of exit or paid-up charges being applied. Additionally, Abbey Life was investigated for potential contravention of regulatory requirements across a number of other areas assessed in the thematic review. On 14 December 2018 the Group was informed by the FCA that it had closed its investigation into Abbey Life, having found that the conduct of Abbey Life did not warrant enforcement action. Accordingly the remaining provision was released in 2018.
In addition, on 14 October 2016, the FCA published its thematic review of non-advised 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. The Group has recognised provisions in respect of its best estimate of the likely costs associated with its obligations in this regard and the opening provision of £27 million was increased by £5 million during 2019. During the year, £18 million was utilised and the balance of the provision was released.
The FCA’s review has now completed and SLAL received a final notice in July 2019 which imposed a financial penalty on the entity of £31 million. SLAL agreed to settle in accordance with the final notice and accordingly a provision of that amount was recognised. As at 31 December 2019, the amount has been settled.
During the period, in addition to the payment of the £31 million noted above, £96 million has been utilised, £79 million has been released, and £6 million remains as at 31 December 2019.
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 nonadvised 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. During the period recoveries of £31 million were received from SLA plc in respect of the financial penalty referred to above.
G. OTHER STATEMENT OF CONSOLIDATED FINANCIAL POSITION NOTES continued 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.
The Finance Act 2016 reduced the rates of corporation tax from 20% to 19% in April 2017 and to 17% from April 2020. Consequently a blended rate of tax has been used for the purposes of providing for deferred tax in these consolidated financial statements.
Deferred tax assets not recognised on capital losses1 2 21 1 These can only be recognised against future capital gains and have no expiry date.
HMRC issued a communication to taxpayers who are affected by the dividend GLO but not direct participants of it, in January 2020, 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 HMRC 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 c£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.
G. OTHER STATEMENT OF CONSOLIDATED FINANCIAL POSITION NOTES continued 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.
G10. Lease Liabilities The operating lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the Group’s incremental borrowing rate as the interest rate implicit in the lease cannot be readily determined. For leases classified as finance leases, the incremental borrowing rate of investment funds holding the associated investment properties is used as discount rate. The lease liability is subsequently increased by the interest cost on the lease liability and decreased by lease payments made. It is remeasured when there is a change in future lease payments arising from, for example, rent reviews or from changes in the assessment of whether a termination option is reasonably certain not to be exercised. The Group has applied judgement to determine the lease term for some lease contracts with break clauses.
Termination of finance leases following the disposal of associated investment properties (47)
In 2018, leases where a significant portion of the risks and rewards of ownership are retained by the lessor were classified as operating leases. Where the Group is the lessee, payments made under operating leases, net of any incentives received from the lessor were charged to the consolidated income statement on a straight-line basis over the period of the lease.
Operating lease rentals charged within administrative expenses in 2018 amounted to £10 million.
Later than 1 year and not later than 5 years 31
Amount due for settlement after 12 months 42 97 224 PHOENIX GROUP HOLDINGS PLC ANNUAL REPORT & ACCOUNTS 2019
H. INTERESTS IN SUBSIDIARIES AND ASSOCIATES H1. Subsidiaries Subsidiaries are consolidated from the date that effective control is obtained by the Group (see basis of consolidation in note A1) and are excluded from consolidation from the date they cease to be subsidiary undertakings. For subsidiaries disposed of during the year, any difference between the net proceeds, plus the fair value of any retained interest, and the carrying amount of the subsidiary including non-controlling interests, is recognised in the consolidated income statement.
Directly attributable acquisition costs are included within administrative expenses, except for acquisitions undertaken prior to 2010 when they are included within the cost of the acquisition. Costs directly related to the issuing of debt or equity securities are included within the initial carrying amount of debt or equity securities where these are not carried at fair value. Intra-group balances and income and expenses arising from intra-group transactions are eliminated in preparing the consolidated financial statements.
The Group has invested in a number of collective investment schemes such as Open-ended Investments 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.
H1.1 Significant restrictions The ability of subsidiaries to transfer funds to the Group in the form of cash dividends or to repay loans and advances is subject to local laws, regulations and solvency requirements.
Each UK Life company and the Group must retain sufficient capital at all times to meet the regulatory capital requirements mandated by or otherwise agreed with the PRA. Further information on the capital requirements applicable to Group entities are set out in the Capital Management note (I3). Under UK company law, dividends can only be paid if a UK company has distributable reserves sufficient to cover the dividend.
In addition, contractual requirements may place restrictions on the transfer of funds as follows: • the Pearl Pension Scheme funding agreement includes certain covenants which restrict the transfer of funds within the Group. Details are provided in note G1.1.
The fair values of the identifiable assets acquired, liabilities assumed and the resultant gain arising on acquisition of £141 million determined at the date of acquisition have not been adjusted within the 12 month period since the date of acquisition.
During the year, the Group granted further loans to the EBT of £4 million (2018: £8 million). Further loans are expected to be granted in 2020.
A summary of the Group’s interest in unconsolidated structured entities is included below. These are shown according to the financial asset categorisation in the consolidated statement of financial position.
Collective investment schemes1 69,415 67,692 1 See note A1 for details of the restatement.
2 The Group’s interests in unconsolidated structured entities within debt securities in 2018 has been restated following a re-assessment of the nature of the Group’s interests in certain investment structures.
Standard Life Assurance Limited (life assurance company – directly owned by the Company)
SLACOM (No. 8) Limited (loan provider company) Edinburgh26 Ordinary Shares 100.00%
The Standard Life Assurance Company of Europe B.V. (financial holding company)
Pearl (WP) Investments LLC (investment company) Wilmington18 Limited Liability Company 100.00%
Phoenix Group Holdings (holding company – directly owned by the Company)
Phoenix Life Holdings Limited (holding company – directly owned by the Company)
SLIF Property Investment GP Limited (General Partner to SLIF Property Investment)
SLIF Property Investment LP Limited (General Partner to SLIF Property Investment)
Janus Henderson Strategic Investment Funds – Janus Henderson Institutional Asia Pacific ex Japan Index Opportunities Fund
PUTM Bothwell Asia Pacific (Excluding Japan) Fund Wythall2 Unit Trust 99.54%
PUTM Bothwell UK All Share Listed Equity Fund Wythall2 Unit Trust 99.17%
PUTM Bothwell Sub-Sovereign Bd B GBP Acc Wythall2 Unit Trust 100.00%
PUTM ACS UK All Share Listed Equity Fund Wythall2 Unit Trust 100.00%
Standard Life Trust Management Standard Life Short Dated UK Government Bond Trust
Standard Life Investments Global SICAV II Global Short Duration Corporate Bond Fund
Standard Life Investments Global SICAV Global Bond Luxembourg30 SICAV, sub fund 75.98%
North American Strategic Partners (Feeder) 2006 L.P. Edinburgh25 Limited Partnership 70.00%
AB SICAV I – ESG Responsible Global Factor Portfolio SF1 GBP (Acc)
Standard Life Investments UK Retail Park Trust Jersey37 Unit Trust 56.60%
BMO Barclays 1-3 Year Global Corporate Bond (GBP Hedged) UCITS ETF
Nomura Funds Ireland American Century Concentrated Global Growth Equity Fund (Acc )
Amundi UCITS Funds – Amundi Global Multi-Factor Equity Fund C Cap
1 These subsidiaries have been granted audit exemption by parental guarantee.
40 1st Floor, 2 Ballsbridge Park, Ballsbridge, Dublin, D04 YW83, Ireland 41 5, Allée Scheffer, 2520 Luxembourg, Luxembourg 42 33 Sir John Rogerson’s Quay, Dublin 2, Ireland
The following subsidiaries were dissolved during the period. The subsidiaries were deconsolidated from the date of dissolution: • Alcobendas Entrust Limited; • Century Group Limited; • Clearfol Investment Limited; • Corunna Limited; • NPI Limited; • Pearl RLH Limited; • Pearl Life Services Limited; • Phoenix Life Insurance Services Limited; • Phoenix Pensions Limited; • Scottish Mutual Customer Care Limited; • SPL (Holdings 1) Limited; • SPL (Holdings) Limited; • Zilmer Limited.
The Group no longer has significant holdings in the following undertakings: • Scottish Widows Tracker and Specialist Investment Funds – International Bond Fund; • AXA Sterling Index Linked Bond Fund; • iShares MSCI Taiwan UCITS ETF; • Scottish Widows UK and Income – Scottish Widows Ethical Fund; • AQR UCITS Funds – AQR Global Risk Parity C4 UCITS Fund; • Standard Life Investment Company American Equity Unconstrained Fund; • Standard Life Investment Company III MyFolio Managed Income II Fund; • Standard Life Investment Company III MyFolio Managed Income III Fund; • Standard Life Investments Global SICAV Global Corporate Bond; • Standard Life Investments Global SICAV Global Focused Strategies.
The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight-line basis over the vesting period, based on the Group’s estimate of equity instruments that will eventually vest. At each period end, the Group revises its estimate of the number of equity instruments expected to vest as a result of the effect of non-market-based vesting conditions. The impact of the revision of the original estimates, if any, is recognised in the consolidated income statement such that the cumulative expense reflects the revised estimate with a corresponding adjustment to equity.
I1.2 Share-based payment schemes 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. Following the scheme of arrangement on 12 December 2018, participants in the Old PGH LTIP plan had their outstanding awards automatically exchanged for equivalent awards over PGH plc ordinary shares.
On 21 December 2018 LTIP awards were granted to certain employees under the terms of the new PGH plc scheme rules. There are discreet vesting periods for these awards and the first tranche of awards vested on 24 March 2019. The remaining awards vest on 27 March 2020 and 28 March 2021. These grants of shares are conditional on the employees remaining in employment with the Group for the vesting period.
Each year, the Group issues a Chairman’s share award under the terms of the LTIP which is granted to a small number of employees in recognition of their outstanding contribution in the previous year. On 11 March 2019, awards were granted and are expected to vest on 11 March 2022. The 2017 and 2018 awards are expected to vest on 24 March 2020 and 21 March 2021 respectively. These grants of shares are conditional on the employees remaining in employment with the Group for the vesting period and achieving an established minimum performance grading.
Deferred Bonus Share Scheme (‘DBSS’) Each year, part of the annual incentive for certain executives is deferred into shares of the parent company. As noted for the LTIP, following the Scheme of Arrangement, participants in the Old PGH DBSS plan had their outstanding awards automatically exchanged for equivalent awards over PGH plc ordinary shares. The grant of these shares is conditional on the employee remaining in employment with the Group for a period of three years from the date of grant. Dividends will accrue for DBSS awards over the three year deferral period.
The 2019 DBSS was granted on 11 March 2019 and is expected to vest on 11 March 2022. The number of shares for all outstanding DBSS awards as at 10 July 2018 were increased to take into account the impact of the Group’s rights issue (see note D1). This adjustment has been based on the Theoretical Ex-Rights Price. The 2016 DBSS awards vested during the year. The 2017 awards are expected to vest on 20 March 2020 and the 2018 awards are expected to vest on 15 March 2021.
Sharesave scheme The sharesave scheme allows participating employees to save up to £500 each month for the UK scheme and up to €500 per month for the Irish scheme over a period of either three or five years. The Irish sharesave scheme commenced with the 2019 grant. The 2019 sharesave options were granted on 1 April 2019.
Under the sharesave arrangement, participants remaining in the Group’s employment at the end of the three or five year saving period are entitled to use their savings to purchase shares at an exercise price at a discount to the share price on the date of grant. Employees leaving the Group for certain reasons are able to use their savings to purchase shares if they leave less than six months before the end of their three or five year periods.
The information for determining the fair value of the 2019 Irish sharesave options differed from that included in the table above as follows: • share price (€): 7.946
Share Incentive Plan The Group operates two Share Incentive Plans (‘SIPs’) open to UK and Irish employees which allows participating employees to purchase ‘Partnership shares’ in the Company through monthly contributions. In respect of the UK SIP, the contributions are limited to the lower of £150 per month and 10% gross monthly salary. During the year the matching element of the UK SIP was amended to give the employee one ‘Matching share’ for each ‘Partnership share’ purchased limited to £50. Contributions above £50 are not matched. The Irish SIP was launched during the year and this plan gives the employee 1.4 ‘Matching shares’ for each ‘Partnership share’ purchased. For this plan monthly contributions are limited to the lower of €40 per month and 7.5% of gross monthly salary.
The fair value of the Matching shares granted is estimated as the share price at date of grant, taking into account terms and conditions upon which the instruments were granted. At 31 December 2019, 146,769 matching shares (including unrestricted shares) were conditionally awarded to employees (2018: 57,918).
I. OTHER NOTES continued 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.
Non-cash movements in profit for the period before tax: Gain on acquisition – (141)
Net interest expense on Group defined benefit pension scheme liability/asset 29 6
The Group aims to maintain a Solvency II surplus at least equal to its Board-approved capital policy, which reflects Board risk appetite for meeting prevailing solvency requirements.
The Basic Own Funds are classified into three Tiers based on permanency and loss absorbency (Tier 1 being the highest quality and Tier 3 the lowest). The Group’s Own Funds are assessed for their eligibility to cover the Group SCR with reference to both the quality of capital and its availability and transferability. Surplus funds in with-profit funds of the Life companies and in the pension schemes are restricted and can only be included in Eligible Own Funds up to the value of the SCR they are used to support.
The acquired Standard Life Assurance businesses also determine their capital requirements in accordance with an approved partial Internal Model. In accordance with the approvals received from the PRA, the Enlarged Group operates a partial Internal Model to calculate Group SCR, aggregating outputs from both the existing Phoenix Internal Model and the Standard Life Internal Model with no diversification between the two. A harmonisation programme to combine the two models into a single Internal Model has commenced. The Irish life entity, Standard Life International Designated Activity Company, determines its capital requirements in accordance with the Standard Formula.
Group capital resources – unaudited The Group capital resources are based on the Group's Eligible Own Funds adjusted to remove amounts pertaining to unsupported withprofit funds and Group pension schemes: Unaudited 2019 £bn
Solvency II surplus – unaudited An analysis of the PGH plc Solvency II surplus as at 31 December 2019 is provided in the business review section on pages 42 to 44. 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 262 and 263.
I4.1 Related party transactions During the year, the Group entered into the following transactions with related parties. As set out in note H2, SLA plc took a 19.98% equity stake in the Enlarged Group, and as a result became a related party of the Group. SLA plc is considered to have a significant influence over the Group due to their equity stake and representation on the Board of Directors.
Net receipts under Client Service Proposition Agreement 18 23 5 2
I4.2 Transactions with key management personnel The total compensation of key management personnel, being those having authority and responsibility for planning, directing and controlling the activities of the Group, including the Executive and Non-Executive Directors, are as follows: £m
During the year to 31 December 2019 key management personnel and their close family members contributed £16,395 (2018: £28,000) to Pensions and Savings products sold by the Group. At 31 December 2019, the total value of key management personnel’s investments in Group Pensions and Savings products was £2,590,240 (2018: £1,639,000).
I6. Contingent Liabilities Where the Group has a possible future obligation as a result of a past event, or a present legal or constructive obligation but it is not probable that there will be an outflow of resources to settle the obligation or the amount cannot be reliably estimated, this is disclosed as a contingent liability.
Agreements with Standard Life Aberdeen On 23 February 2018, the Group entered into the share purchase agreement with Standard Life Aberdeen plc (the ‘SLA SPA’), in connection with the Group’s acquisition of the Standard Life Assurance businesses. In connection with the acquisition, certain members of the Group entered into the SLA Transitional Services Agreement (‘the TSA’) with certain members of the Standard Life Aberdeen group, pursuant to which certain services were agreed to be provided from one group to the other group for a specified period. In addition, certain members of the Group entered into the SLA Client Service and Proposition Agreement (‘the CSPA’) with certain members of the Standard Life Aberdeen group, which set out the terms under which the parties would provide services and support to each other with respect to certain client propositions, products and services. The Group is currently 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 SPA relating to services and expenses, and the scope and cost of services provided pursuant to the TSA, the CSPA and certain other agreements between the Group and members of the Standard Life Aberdeen group. Whilst Phoenix and Standard Life Aberdeen are currently seeking a commercial resolution in respect of such disagreements, it is possible that all or some of these matters could be escalated to a dispute resolution process provided for in the relevant agreements, or result in legal or arbitration proceedings. There is no certainty as to how the current disagreements will be resolved and the extent to which an outflow of resources will be required to settle any obligation, should it arise.
On 6 December 2019, the Company announced the proposed acquisition of the entire issued share capital of ReAssure Group plc from Swiss Re Finance Midco (Jersey) Limited (‘Swiss Re’). The acquisition was approved at a general meeting of the Company’s shareholders on 13 February 2020 and is subject to regulatory approvals. Total consideration of £3.2 billion payable to Swiss Re upon completion will be satisfied through cash consideration of £1.2 billion, subject to certain customary adjustments, and the issuance to Swiss Re (or a nominated member of its group) of ordinary shares with a value of £2.0 billion.
N LYONS C BANNISTER J MCCONVILLE A BARBOUR A BRIGGS C FLEMING K GREEN W MAYALL J POLLOCK B RICHARDS N SHOTT K SORENSON M TUMILTY
For the period from 5 October 2018 to 31 December 2018
On incorporation at 5 October 2018 – – – – – – –
Cash and cash equivalents at the beginning of the period 1 –
Statement of compliance The Company’s financial statements have been prepared in accordance with International Financial Reporting Standards (‘IFRSs’) as adopted by the European Union (‘EU’) and in accordance with the provisions of the UK Companies Act 2006.
(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 147 to 243 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.
Financial assets Classification of financial assets Financial assets are measured at amortised cost where they: • have contractual terms that give rise to cash flows on specified dates, that represent solely payments of principal and interest on the principal amount outstanding; and
Financial assets measured at amortised cost are included in notes 10 and 13.
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.
2. FINANCIAL INFORMATION continued New Accounting Pronouncements not yet Effective continued Note A5 outlines that the Group has taken advantage of the temporary exemption granted to insurers in IFRS 4 ‘Insurance Contracts’ from applying IFRS 9 until 1 January 2021 (recommended deferral period extended by IASB to 2022) as a result of meeting the exemption criteria as at 31 December 2015. As detailed above, such an exemption is not applicable to the Company given it is not an insurer. Therefore IFRS 9 has been adopted by the Company and the relevant disclosures are included in these financial statements.
3. SHARE CAPITAL AND SHARE PREMIUM The Company was incorporated on 5 October 2018 with an issued share capital comprising 2 ordinary shares of £0.10 each and 50,000 redeemable preference shares of £1.00 each.
The shares of the Company are listed on the London Stock Exchange and trading in these shares commenced on 13 December 2018.
Ordinary shares in issue at 31 December 721,199,214 72,119,921 4. TIER 1 NOTES The accounting policy for the Tier 1 Notes is included in note D3 to the consolidated financial statements.
On 12 December 2018 the Company was substituted in place of Old PGH as issuer of the Tier 1 Notes and these were recognised at the £411 million fair value of an intra-group loan that was received as consideration. Details of the terms of the Tier 1 Notes can be found in note D3 to the consolidated financial statements.
US $500 million Tier 2 bonds (note c) 334 343 396 342 £300 million senior unsecured bond (note e) 128 – 130 –
Loan due to Standard Life Assurance Limited (note f) 288 – 288 –
Amount due for settlement after 12 months 2,020 1,634 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 2019 £6 million of interest was capitalised.
The facility accrues interest at a margin over LIBOR that is based on credit rating. On 23 October 2019 the Company drew down £100 million under the facility and the balance was repaid on 25 November 2019. The facility remains undrawn as at 31 December 2019.
6. DERIVATIVES In 2019, the Company entered into a forward currency swap with another group company to hedge against adverse currency movements in respect of the €287 million capital injection into SLIDAC.
The Company also entered into a forward currency swap in 2019 to hedge against adverse currency movements in respect of the equity and debt holding in a property investment structure which was transferred to the Company.
Derivative Collateral Arrangements The accounting policy for collateral arrangements is included in note E4 to the consolidated financial statements.
Assets Accepted The maximum exposure to credit risk in respect of OTC derivative assets is £5 million of which credit risk of £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 2019 in respect of OTC derivative liabilities of £34 million amounted to £3 million.
7. PROVISIONS During 2019 the Company recognised a Standard Life transition restructuring provision of £159 million and other provisions of £13 million. Details are included in note G7 to the consolidated financial statements.
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 Old PGH (note b) – 825 – 808
a) On 12 December 2018, the Company was assigned a £428 million subordinated loan by Phoenix Life Holdings Limited (‘PLHL’). The loan accrues interest at a rate of 6.675% and matures on 18 December 2025. This loan was initially recognised at fair value of £439 million and is accreted to par over the period to 2025. At 31 December 2019, the carrying value of the loan was £438 million (2018: £440 million).
On 12 December 2018, the Company was assigned a US $500 million loan by PLHL due 2027 with a coupon of 5.375%. This loan was initially recognised at fair value of £349 million and is accreted to par over the period to 2027. Movement in foreign exchange during the period decreased the carrying value by £13 million (2018: £6 million). At 31 December 2019, the carrying value of the loan was £334 million (2018: £343 million).
c) On 18 June 2019, the Company was assigned an interest free facility arrangement with Phoenix Group Employee Benefit Trust (‘EBT’) of £6 million. During 2019, an additional £4 million was drawn down against this facility. The loan is fully recoverable until the point the awards held in the EBT vest to the participants, at which point the loan is reviewed for impairment. Any impairments are determined by comparing the carrying value to the estimated recoverable amount of the loan. Following the vesting of awards in 2019 £3 million of the loan has been written off. At 31 December 2019, the carrying value of the loan was £7 million.
For the purposes of the additional fair value disclosures for assets recognised at amortised cost, all loans and deposits are categorised as Level 3 financial instruments. The fair value of loans and deposits with no external market is determined by internally developed discounted cash flow models using a risk adjusted discount rate corroborated with external market data where possible.
Financial assets at fair value through profit or loss: Debt securities 43 –
Determination of Fair Value and Fair Value Hierarchy of Financial Assets Details of the factors considered in determination of the fair value are included in note E2 to the consolidated financial statements.
Non-cash movements in profit/(loss) for the period before tax: Dividend income from other Group entities (5,640) –
Credit Risk Management Practices The Company’s current credit risk grading framework comprises the following categories: Category Description Basis for recognising ECL
Performing The counterparty has a low risk of default and does not have any past-due amounts 12 month ECL
Doubtful There has been a significant increase in credit risk since initial recognition Lifetime ECL – not credit impaired
In default There is evidence indicating the asset is credit-impaired Lifetime ECL – credit impaired
Write-off There is evidence indicating that the counterparty is in severe financial difficulty and the Group has no realistic prospect of recovery
Cash and cash equivalents (note 13) A N/A 12 month ECL 1 – 1
17. DIRECTORS’ REMUNERATION Details of the remuneration of the Directors of Phoenix Group Holdings plc is included in section B of the Directors’ Remuneration Report on pages 114 to 130 of the Annual Report and Accounts.
18. RELATED PARTY TRANSACTIONS The Company has related party transactions with Group entities and its key management personnel. Details of the total compensation of key management personnel, being those having authority and responsibility for planning, directing and controlling the activities of the Group, including the Executive and Non-Executive Directors, are included in note I4 to the consolidated financial statements.
During the year ended 31 December 2019 the Company entered into the following transactions with Group entities and SLA plc: £m
The analysis of the asset portfolio provided below comprises the assets held by the Group’s life companies, and it is stated net of derivative liabilities. It excludes other Group assets such as cash held in the holding and management service companies and the assets held by the non-controlling interests in consolidated collective investment schemes.
Financial assets held by the non-controlling interest in consolidated collective investment schemes 2,990
4 This information is presented on a look through basis to underlying funds where available.
Assets Under Administration 248.3 226.5 1 Off-balance sheet AUA represents assets held in respect of certain Group Self-Invested Personal Pension products where the beneficial ownership interest resides with the customer (and which are therefore not recognised in the consolidated statement of financial position) but on which the Group earns fee revenue.
Participating non-supported £m Unit-linked £m Total £m 258 PHOENIX GROUP HOLDINGS PLC ANNUAL REPORT & ACCOUNTS 2019
The £6,444 million shareholder exposure to financial institution corporate debt comprised £3,673 million (2018: £3,535 million) bank debt and £2,771 million (2018: £2,315 million) non-bank debt.
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
PGH plc’s unrestricted Tier 1 capital accounts for 77% (2018: 76%) of total Own Funds and comprises ordinary share capital, surplus funds of the unsupported with-profit funds which are recognised only to a maximum of the SCR, and the accumulated profits of the remaining business.
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. Standard Life International calculates its capital requirements in accordance with the Standard Formula. An analysis of the pre-diversified SCR of PGH plc is presented below: Phoenix Internal
The MCR is calculated according to a formula prescribed by the Solvency II regulations and is subject to a floor of 25% of the SCR or €3.7 million, whichever is higher, and a cap of 45% of the SCR. The MCR formula is based on factors applied to technical provisions and capital at risk.
PGH plc’s MGSCR at 31 December 2019 is £1.1 billion (2018: £1.0 billion).
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 38 and the definitions of all APMs are included in the glossary on pages 268 to 270�
AUA indicates the potential earnings capability of the Group arising from its insurance and investment business� AUA flows provide a measure of the Group’s ability to deliver new business growth�
A reconciliation from the Group’s IFRS consolidated statement of financial position to the Group’s AUA is provided on page 256�
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�
This measure provides an indication of the Group’s performance in delivering new business growth to offset the impact of run-off of the Group’s Heritage business and to bring sustainability to future cash generation�
This measure provides an assessment of the day 1 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�
The Solvency II surplus of the life companies that is in excess of their Board approved capital management policies�
This figure provides a view of the level of surplus capital in the Life companies that is available for distribution to the holding companies, and the generation of Free Surplus underpins future operating cash generation�
Represents total Eligible Own Funds divided by the Solvency Capital Requirements (‘SCR’), adjusted to a shareholder view through the exclusion of amounts relating to those ringfenced with-profit funds and Group pension schemes whose Own Funds exceed their SCR�
The Group therefore focuses on a shareholder view of the capital coverage ratio which is considered to give a more accurate reflection of the capital strength of the Group�
Further details of the Shareholder Capital Coverage Ratio and its calculation are included in the business review on page 38 and the additional capital disclosures section on page 262�
ANNUAL GENERAL MEETING Our Annual General Meeting (‘AGM’) will be held on 15 May 2020 at 10:00am.
SHAREHOLDER SERVICES Managing your shareholding Our registrar, Computershare, maintains the Company’s register of members� Shareholders may request a hard copy of this Annual Report from our registrar and if you have any further queries in respect of your shareholding please contact them directly using the contact details set out below�
Registrar details Computershare Investor Services PLC The Pavilions, Bridgwater Road, Bristol, BS99 6ZZ
Shareholder helpline number +44 (0) 370 702 0181 Fax number +44 (0) 370 703 6116 www�investorcentre�co�uk/contactus
Access Computershare’s web-based enquiry service www�investorcentre�co�uk to download forms such as a dividend mandate form or submit dividend mandate details online; view details of your Phoenix Group shareholding and recent dividend payments; update your address details and register for shareholder electronic communications to receive notification of Phoenix Group shareholder mailings by email�
Scrip dividend alternative The Company does not currently offer a scrip dividend alternative�
SHARE PRICE You can access the current share price of Phoenix Group Holdings plc on the Group’s website together with electronic copies of the Group’s financial reports and presentations at www�thephoenixgroup�com/investor-relations�aspx�
FREE SURPLUS The amount of capital held in life companies in excess of that needed to support their regulatory Solvency Capital Requirement, plus the capital required under the Board approved capital management policy
An Alternative Performance Measure (’APM’) is a financial measure of historic or future financial performance, financial position or cash flows, other than a financial measure defined under IFRS or under Solvency II regulations� The Group uses a range of these metrics to provide a better understanding of the underlying performance of the Group� All APMs are defined within this glossary and the APM section on page 264
CAGR Compound annual growth rate, or CAGR, is the mean annual growth rate of an investment over a specified period of time longer than one year 268 PHOENIX GROUP HOLDINGS PLC ANNUAL REPORT & ACCOUNTS 2019
Represents the increase in Solvency II shareholder Own Funds arising from new business written in the year (net of associated tax), adjusted to exclude the associated risk margin and any restrictions recognised in respect of contract boundaries� It is stated net of ‘Day 1’ acquisition costs and is calculated as the value of expected cash flows from new business sold, discounted at the risk free rate
Transitional Measures on Technical Provisions (’TMTP’) is an allowance, subject to the PRA’s approval, to apply a transitional deduction to technical provisions� The transitional deduction corresponds to the difference between net technical provisions calculated in accordance with Solvency II principals and net technical provisions calculated in accordance with the previous regime and is expected to decrease linearly over a period of 16 years starting from 1 January 2016 to 1 January 2032� TMTP is subject to a mandatory recalculation every two years or on the occurrence of certain defined events
UK HERITAGE The Group’s business segment where products are no longer marketed to customers, for example with-profits, annuities and many legacy unit linked life and pension products
WITH-PROFIT FUND A fund where policyholders are entitled to a share of the profits of the fund� Normally, policyholders receive their share of the profits through bonuses� Also known as a participating fund as policyholders have a participating interest in the with-profit funds and any declared bonuses� Generally, policyholder and shareholder participation in the with-profit funds in the UK is split 90:10
SOLVENCY A new regime for the prudential regulation of European insurance companies that came into force on 1 January 2016
SCR relates to the risks and obligations to which the Group is exposed, and is calibrated so that the likelihood of a loss exceeding the SCR is less than 0�5% over one year� This ensures that capital is sufficient to withstand a broadly ’1-in-200year event’
Standard Life Assurance Limited, Standard Life Pensions Fund Limited, Standard Life International Designated Activity Company, Vebnet (Holdings) Limited, Vebnet Limited, Standard Life Lifetime Mortgages Limited, Standard Life Assets and Employee Services Limited and Standard Life Investment Funds Limited (together known as the Standard Life Assurance businesses) acquired by the Group on 31 August 2018 270 PHOENIX GROUP HOLDINGS PLC ANNUAL REPORT & ACCOUNTS 2019
REDUCING OUR ENVIRONMENTAL IMPACT In line with our Corporate Responsibility programme, and as part of our desire to reduce our environmental impact, you can view key information on our website�
As such, actual future gains and losses could differ materially from those that we have estimated� Other factors which could cause actual results to differ materially from those estimated by forward-looking statements include but are not limited to: • domestic and global economic and business conditions; • asset prices; • market-related risks such as fluctuations in interest rates and exchange rates, the potential for a sustained low-interest rate environment, and the performance of financial markets generally; • the policies and actions of governmental and/or regulatory authorities, including, for example, new government initiatives related to the financial crisis and the effect of the European Union’s ‘Solvency II’ requirements on the Group’s capital maintenance requirements; • the political, legal and economic effects of the UK’s vote to leave the European Union; • the impact of inflation and deflation; • market competition; • changes in assumptions in pricing and reserving for insurance business (particularly with regard to mortality and morbidity trends, gender pricing and lapse rates); • the timing, impact and other uncertainties of proposed or future acquisitions or combinations within relevant industries, including but not limited to the acquisition of ReAssure Group plc; • risks associated with arrangements with third parties; • inability of reinsurers to meet obligations or unavailability of reinsurance coverage; and
The Group undertakes no obligation to update any of the forward-looking statements contained within the 2019 Annual Report and Accounts or any other forward-looking statements it may make or publish�