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 at www.thephoenixgroup.com.
After joining Phoenix in October 2012 the overriding message I heard from our shareholders was the need for the Group to re‑term its bank debt facilities. We have now achieved that and can look forward to the future with confidence.
This transaction has taken a great deal of work and a substantial commitment from our key stakeholders and it is to their credit that we have been able to deliver it successfully. We benefited from valuable advice from our prudential regulators. Phoenix has the operating platform in place for the next stage of the Group’s development and from which to explore, in due course, further consolidation opportunities.
The scale and predictability of the Group’s cash flows underpin our ability to deliver value to our shareholders. Since the financial restructuring in 2009, Phoenix has consistently achieved its cash generation and other financial targets, and has continued to deliver on its programme of management actions.
On behalf of the Board, I would also like to thank all of our employees for their contribution to the significant successes of the past 12 months and I look forward to 2013 with confidence.
Howard Davies Chairman 02 Phoenix Group Holdings Annual Report and Accounts 2012
Phoenix delivered strong financial performance in 2012. The debt re‑terming and equity raising announced in January 2013 has significantly strengthened our balance sheet, improved our capital structure and allows for increased dividends.
Under the existing methodology, gearing was calculated using net shareholder debt (i.e. net of Holding Companies’ cash) and also included the future profits of Ignis Asset Management. Under our new gearing calculation, we use gross shareholder debt and no longer include the future profits of Ignis.
We generated cash flows of £690 million from our operating companies. At the time of our interim results, we announced a £100 million increase in our cash generation target to £600 million – £700 million for 2012 so I am pleased that we have achieved a full year result at the upper end of this increased target range.
Our year end MCEV remained stable at £2,122 million and included an incremental £167 million delivered through management actions, compared to our average annual target of £100 million. The equity raising and debt re-terming has further increased MCEV by £211 million in 2013.
We achieved our target to reduce our level of gearing under our existing methodology to 43% or below by the end of 2012.
The debt re-terming and equity raising reduced the IGD surplus by £0.2 billion in 2013, reflecting the impact of using existing cash resources held in the Holding Companies of the PLHL subgroup to part-fund the prepayment.
Group assets under management Group assets under management were £68.6 billion as at 31 December 2012, compared to £72.1 billion as at 31 December 2011. In addition, it is anticipated that a further £1.6 billion of assets will transition to Ignis from Guardian during 2013. The remaining decline was due to the natural run-off of the life company assets and the restructuring of Ignis’ former joint ventures.
In addition to this important transaction, Phoenix Life made strong progress across several other areas in 2012. The Part VII transfer of the business of NPI Limited into Phoenix Life Limited (‘PLL’) was completed in the first half, strengthening the Group’s IGD position by £84 million and consolidating all the UK life business in the Impala silo within PLL. In the second half of the year, the transfer of the business of London Life Limited to Pearl Assurance Limited was completed, with the enlarged Pearl Assurance Limited being renamed Phoenix Life Assurance Limited following completion of the business transfer. This increased the Phoenix Life free surplus by £192 million and increased the IGD surplus by £157 million.
Following these funds mergers, Phoenix Life now comprises three UK life companies: PLL, Phoenix Life Assurance Limited and National Provident Life Limited.
During 2012, the Group made considerable progress with its strategy to exit from its residual, non-core general insurance business. In January 2012, the business of PA(GI) Limited was transferred under a Part VII scheme to RSA, to whom the business had previously been reinsured. In April 2012, the general insurance business of Phoenix Life Assurance Limited was transferred under a Part VII scheme to BA(GI) Limited (‘BAGI’), a fellow group company – which resulted in all of the Group’s residual general insurance liabilities being held in the same entity. The Group expects to complete a sale of its entire interest in BAGI during 2013 which will remove the Group’s remaining general insurance liability exposure of £39 million, net of reinsurance.
During 2012, preparations for the implementation of Solvency II made significant progress until October, when the FSA announced changes to the timetable for bringing this into force. Since then, the Group has been monitoring the FSA’s proposals for development of the existing ICA regime into an ‘ICA+’ regime to leverage the investment made in preparing for Solvency II. At the same time, the Group has been continuing to progress its Actuarial Systems Transformation programme to drive efficiency improvements in its financial reporting processes.
Ignis Asset Management highlights In a year of significant change, Ignis delivered an IFRS operating profit of £43 million for 2012 (2011: £46 million). Operating profit was impacted by lower performance fees generated by one of the joint ventures managing life company assets, the restructuring of the former joint ventures and life company run off, partly offset by growth in third party business.
Ignis finished 2012 with AUM of £66.0 billion, down on 2011 (£70.7 billion) owing mainly to life company run-off and the restructuring of former joint ventures. Ignis will retain an interest in the former joint ventures which will, in future, be managed independently with their own sales and administration functions. In addition, it is anticipated that a further £1.6 billion of assets will transition to Ignis from Guardian during 2013.
Overall investment performance was good, with 79% of assets under management performing above benchmark for the year driven by fixed income, property and advisors.
The Ignis Absolute Return Government Bond Fund (‘ARGBF’) continues to perform strongly with 128 clients from 14 countries investing a net amount of £436 million and impressive performance – the Sterling I share class returned 6.28% over benchmark in 2012. ARGBF won best performing fund over two years at the Hedge Fund Journal UCITS Hedge awards in 2013. Alongside this Ignis launched its second product in this suite: the Ignis Absolute Return Credit fund.
A critical milestone for the business was the formal transfer of back office functions, including approximately 140 roles, to its new partner HSBC Bank plc. As with Phoenix Life, the use of scalable outsource partners allows Ignis to focus on its key areas of investment management and distribution, whilst providing a more predictable and lower cost operating model for the Group. Ignis also continued its strategy of moving away from joint ventures, enabling it to focus on its core activities more effectively.
Customers ‘Treating Customers Fairly’ is crucial to how we run our business. We are always seeking, where possible, to improve returns for our policyholders through the distribution of the estate within the life funds. For example, maturity payouts are being enhanced in the Pearl with-profit fund of Phoenix Life Assurance Limited by up to 16%. This is 7% higher than the previous year.
We also launched a new website for a number of our life funds to enhance the online customer experience, which includes a new Customer Centre Area with ‘how to’ guides and online forms. Furthermore, we continue to seek initiatives that may be of benefit to our customers and, in 2012, we identified a number of small, externally-managed unit-linked funds for closure where it is in the customers’ interest so to do. This programme was completed, with 66 small external funds closed and £51 million of customers’ investments switched into internally managed funds benefiting from lower fees.
People Phoenix Group’s achievements are the result of the skill and hard work of all its 1,200 employees.
The UK Government is in the process of implementing its reform of the framework for financial regulation in the UK through the Financial Services Act, which comes into force on 1 April 2013. The Financial Services Act provides for the dual supervision of UK insurance companies by two new regulators: the Prudential Regulation Authority (‘PRA’) and the Financial Conduct Authority (‘FCA’). The Group’s UK insurance subsidiaries will be regulated by both the PRA and the FCA. Whilst there are uncertainties as to how the two bodies will interact with each other, I believe our good relationship with our regulators will help us manage this transition.
During 2012, the Association of British Insurers (‘ABI’) launched a compulsory Code of Conduct on Retirement Choices which aims to ensure people approaching retirement receive greater support in the annuity process and get the best possible retirement income. Representatives of Phoenix Life were active members of the working group implementing the code which was put into effect on 1 March 2013.
The combination of cash flow generation and enhancement to MCEV will allow us to reduce gearing. We have set ourselves a new target to reduce gearing as calculated under our new methodology to 40% by the end of 2016.
Conclusion I look to the future with confidence and believe that we can continue to build and deliver value for all our stakeholders through continued organic improvements and a renewed focus on growth.
On behalf of the Board, I was delighted to welcome Howard as Chairman of the Group. His intellect and judgement are great assets.
Successful debt re-terming and equity raising of £250 million announced in January 2013 significantly enhanced strategic and financial flexibility
Bank debt reduced from £2.5 billion at end 2011 to £1.9 billion on a pro forma basis at 31 December 2012. Gearing reduced under our new methodology from 57% at 31 December 2011 to 48% on a pro forma basis taking into account the debt re-terming and equity raising £690 million cash generation – at the upper-end of the target range 27% increase in recommended final dividend to 26.7p per share
Agreed to transfer approximately £5 billion of annuity in-payment liabilities to Guardian
Continued investment outperformance at Ignis with 79% of funds under management performing above benchmark for the year
Transferred a further 780,000 in-force policies onto the BaNCS administration platform
Made considerable progress in strategy to exit from residual, non-core general insurance business
Phoenix Group combines the financial and operational expertise of Phoenix Life with the investment management capabilities of Ignis to create value for policyholders and shareholders.
– Value generated by Phoenix Life and Ignis is distributed to the Holding Companies in the form of cash. The Holding Companies use this cash to fund group expenses, pension contributions, debt interest and repayments and shareholder dividends.
External outsource partners are used for policy administration thereby minimising fixed costs.
To support future strategy, Ignis has transformed its operating model through the completion of outsourcing of back office functions to HSBC Bank plc.
Our structure is aligned to the market sectors in which we operate.
Used by the management services companies to provide policy administration 14 Phoenix Group Holdings Annual Report and Accounts 2012
These outsource partners have scale and common processes, often across multiple clients, which provide several benefits for the Group, including converting fixed costs to variable costs, reducing investment requirements, improving the technology used within our administrative capability, and reducing our operational risk.
It provides investment management services to the Group’s life companies as well as to third party clients, including both retail and institutional investors in the UK and overseas. Ignis is responsible for £66.0 billion of assets, including £54.1 billion of assets of the Group’s life and Holding Companies.
An important part of The Phoenix Way involves addressing legacy issues to improve capital and operational efficiency.
As a result, the Group benefits from: – Improved capital efficiency, arising from greater diversification/offsetting of risks
Following those fund mergers, all policyholders are now part of the Phoenix brand.
Deploying The Phoenix Way: Fund mergers 16 Phoenix Group Holdings Annual Report and Accounts 2012
With offices in London and Glasgow, and just under 400 employees (with approximately 140 additional roles outsourced to HSBC Bank plc in 2012), Ignis has investment capabilities across multiple asset classes organised into four investment business units and its former joint ventures, which have been restructured as a series of investments – now called Ignis Partners.
The business strategy to develop this vision has four goals: – Meeting or exceeding the investment performance expectations of Ignis’ clients
– As a result, developing further as a leading asset manager.
This strategy is underpinned by: Innovative people focused on Ignis’ clients and provided with the freedom to perform
During the year Ignis realigned its distribution capability to better fit with its chosen channels and markets. It has also built upon its third party proposition by strengthening its sales teams and adding Global Accounts. There has been good progress in International over the year, with solid sales in Italy and Germany in particular. Meanwhile, the UK Wholesale channel has been driving strong net sales in Real Estate.
A key strand of The Phoenix Way is effective investment management, which Ignis Asset Management seeks to deliver for its customers leveraging its expertise in managing Phoenix Life’s assets.
To date, the highest profile of the absolute return funds is the Absolute Return Government Bond Fund (‘ARGBF’). Its success has set a template for the development of the rest of the fund range.
2012 saw ARGBF’s acceleration via Ignis distribution – notably in the international space and built upon strong performance.
– Sterling I share class returned 6.28% over benchmark in 2012.
To complement ARGBF, the Absolute Return Credit fund (‘ARC’) was launched in August 2012.
Our strategy Phoenix Group’s strategic journey continues to build on its recent achievements. Phoenix aims to be the saver‑friendly solution for the safe, innovative and profitable management of closed life funds.
Reduced gearing under our existing methodology to 42%, below our 43% target. Gearing reduced under our new methodology from 57% at 31 December 2011 to 55%
Delivered £167 million of MCEV enhancements during 2012 through management actions
Maintain high employee engagement and achieve employee retention above benchmark for each business unit
Employee engagement survey result of 73% compared favourably with the Financial Services benchmark of 70%. Achieved employee retention above benchmark for each business unit
Commence ‘Use Test’ period running Solvency II conformant processes in advance of the Internal Model Application
Continue to deliver strong investment performance 79% of assets under management performed above benchmark
Continue to deliver strong investment performance Maintain focus on developing proposition for third party clients, including institutional market place Continue operations transformation and technology enhancements while maintaining well-controlled operating platform
Develop proposition for third party clients, including for the institutional marketplace
“ The Group has produced a strong operating performance in 2012, successfully delivering against all of its financial targets. Cash generation has been achieved at the top end of the target range, whilst the execution of the value enhancing management actions has seen embedded value remain resilient.”
Management actions in themselves generated cash flows of £209 million, mainly relating to fund mergers and other de-risking activities.
Quantified target The cumulative cash flow target for 2011 to 2016 is £3.5 billion, against which £1.5 billion had been achieved by 31 December 2012.
£650 million to £750 million of these cash flows are expected to be generated in 2013.
£690m 2011: £810m £2,122m 1 Phoenix Group Holdings is subject to Cayman Islands Companies Law. Under Cayman Islands Companies Law, distributions can be made out of profits or share premium subject, in each case, to a prescribed solvency test. The solvency test is broadly consistent with the Group’s going concern assessment criteria.
Definition and calculation The basis of calculation of Group IFRS operating profit is set out in note 5 of the IFRS financial statements.
IGD capital policy: The Group maintains group capital resources at the PLHL level at an amount in excess of 105% of the with-profit insurance capital component (‘WPICC’), being an additional capital requirement of with-profit funds, plus 145% of the group capital resource requirement less the WPICC.
PLHL ICA surplus is the economic regulatory assessment of capital adequacy on a Group-wide basis: Analysis The PLHL ICA surplus increased in the second half of the year reflecting a £0.3 billion benefit from the new funding arrangements entered into with the Trustee of the Pearl Group Staff Pension Scheme, capital generation and positive market movements of £0.4 billion, partly offset by the payment of dividends, debt interest and debt repayments of £0.1 billion.
Definition and calculation PLHL ICA surplus represents an assessment on an economic basis of the capital resources and requirements arising from the obligations and risks which exist outside the life companies.
As agreed with the FSA, the Group aims to ensure that PLHL maintains an ICA surplus of at least £150 million.
Analysis The Board has recommended a final dividend of 26.7 pence per share bringing the total dividend for the year to 47.7 pence. The final dividend is due to be paid on 3 May 2013, subject to compliance with the processes set out in the Group’s main credit facilities and shareholder approval at the Company’s AGM.
Assets under management are a key driver of operating profit: Analysis Total Group assets under management decreased by £3.5 billion to £68.6 billion.
The decrease was driven by the run-off of the closed life business, the joint venture restructure and the annuity transaction, under which £5.1 billion of assets were transferred to Guardian Assurance Limited (‘Guardian’) under the terms of the reinsurance agreement during the period. Ignis have been selected to manage £4.7 billion of these assets and £3.1 billion had already been recaptured as at 31 December 2012 under agreed mandates. The remaining £1.6 billion is expected to be transferred to Ignis during 2013.
Partially offsetting the above reductions are net third party inflows of £1.6 billion (excluding inflows from Guardian) and the impact of positive market movements.
Definition and calculation Group assets under management represent life company assets (excluding collateral on stock-lending arrangements), Holding Company cash, and third party assets managed by Ignis.
Analysis Ignis’ IFRS operating profit of £43 million (2011: £46 million) was impacted by lower performance fees generated by one of the joint ventures managing life company assets, the restructuring of the joint ventures and life company run-off, partly offset by growth in third party business.
The Group’s gearing was 42% under its existing methodology as at 31 December 2012 (2011: 46%), and the Group met its previously announced target of reducing gearing to below 43% on that basis.
Definition and calculation The Group calculates its gearing under its new methodology as gross shareholder debt1 as a percentage of the sum of the Group MCEV and the value of the shareholder and hybrid debt as included in the MCEV.
Quantified target The Group’s target is to reduce the gearing ratio under its new methodology to 40% by the end of 2016.
Cash and cash equivalents at 1 January 837 486 Operating companies’ cash generation: Cash receipts from Phoenix Life 661 778 Cash receipts from Ignis Asset Management 29 32 Total receipts of cash by Holding Companies1 690 810 Uses of cash: Operating expenses 37 52 Pension scheme contributions 50 35 Debt interest 115 122 Total recurring outflows 202 209 Non-recurring outflows 21 24 Uses of cash before debt repayments and shareholder dividend 223 233 Debt repayments 165 171 Shareholder dividend 73 55 Total uses of cash 461 459 Cash and cash equivalents at 31 December2 1,066 837 1 Includes amounts received by the Holding Companies in respect of tax losses surrendered to the operating companies.
2 Closing balance at 31 December 2012 includes required prudential cash buffer of £150 million (2011: £150 million).
Operating companies’ cash generation Cash remitted by Phoenix Life during 2012 was £661 million (2011: £778 million), reflecting the benefit of management actions implemented during the period. When combined with the £29 million of cash remitted by Ignis Asset Management (2011: £32 million), the Group has succeeded in achieving cash generation towards the top end of its target range of £600 million to £700 million for the year ended 31 December 2012.
Phoenix Life free surplus The generation of free surplus, net of movements in required capital, underpins the cash remittances from Phoenix Life. The table below analyses the movement in free surplus of Phoenix Life: Year ended 2012 £m
Contributing to the total free surplus generated in the period is the positive impact of management actions, including the Guardian annuity transfer transaction (£252 million) and the transfer of the business of London Life Limited to Phoenix Life Assurance limited (£192 million). The remainder of the free surplus generated in the period principally reflects the inherent release of capital requirements from the run-off of the life funds and the annual ICA refresh.
Operating expenses of £37 million (2011: £52 million) decreased as a result of reduced corporate costs, reflecting the impact of cost management initiatives.
Non-recurring cash outflows Non-recurring cash outflows reflect investment in the Group’s transformation programmes.
Debt repayments and shareholder dividend Debt repayments of £165 million in the period comprise a £15 million voluntary debt prepayment and scheduled repayments totalling £150 million in respect of the Group’s two main credit facilities.
Target cash flows The Group is targeting operating companies’ cash generation of £3.5 billion for the period from 1 January 2011 to 31 December 2016: Sources of cash flows 31 December 2016 £bn
£650 million to £750 million of these targeted cash flows are expected to be generated in 2013.
The resilience of the cash generation target is demonstrated by the following stress testing: Stress testing 31 December 2016 £bn
Life MCEV operating earnings2 360 556 Management services operating profit 28 17 Ignis Asset Management operating profit 43 46 Group costs (25) (54) Group MCEV operating earnings before tax 406 565 Tax on operating earnings (99) (148) Group MCEV operating earnings after tax 307 417 1 The Phoenix Group Market Consistent Embedded Value methodology (referred to herein and in the supplementary information as MCEV) is set out in note 1 in the MCEV supplementary information.
The asset management and management services businesses are included in the Group MCEV at the value of IFRS net assets. The Group MCEV does not include the future earnings from their businesses.
Non-economic experience variances and assumption changes Non-economic experience variances and assumption changes increased MCEV by £68 million after tax (2011: £142 million). The main driver of this increase is other operating variances of £92 million (2011: negative £21 million), reflecting the benefits of modelling improvements and policy harmonisations undertaken in the period.
Group costs Group costs were £25 million before tax in the period (2011 restated: £54 million) reflecting lower costs relating to group functions of £29 million (2011: £39 million) driven by a focus on cost management, partly offset by miscellaneous income. The 2011 Group costs comparative also included a £14 million net interest cost on the Pearl Group Staff Pension Scheme. As this scheme was in a surplus position as at 1 January 2012, no interest cost has been recognised in operating earnings in the current period in respect of this scheme.
Economic variances on life business Positive economic variances on life business of £24 million (2011: negative £426 million) reflect the positive impacts of narrowing credit spreads on corporate bonds, falling yields and rising equity markets. This has been partly offset by negative property returns and the difference between actual short-term rates and the long-term investment return assumption on which operating earnings is based.
Other non-operating variances on life business Other non-operating variances on life business of positive £39 million before tax primarily relate to the net benefit of the annuity transfer transaction of £38 million, together with benefits from the fund merger and restructuring activities undertaken in the period. This has been partly offset by regulatory change, systems transformation and restructuring costs incurred by the life companies.
Non-recurring items on non-life business Non-recurring items on non-life business reduced embedded value by £39 million before tax (2011: £9 million reduction). Non-recurring items include restructuring costs of £16 million (2011: £51 million) and regulatory change and systems transformation costs of £13 million (2011: £12 million). The comparative period included a gain of £19 million arising from closing the Pearl Group Staff Pension Scheme to future accrual and a gain of £35 million following the recovery of historic costs under the management services agreements with the life division.
Group MCEV at 1 January 2,118 2,104 Group MCEV earnings after tax 202 54 Other comprehensive income: Actuarial (losses)/gains on defined benefit pension scheme (net of tax) (131) 9
Actuarial losses after tax of £108 million were recognised in the year reflecting the movement of the Pearl Group Staff Pension Scheme to an IAS 19 deficit as at 31 December 2012. As detailed above, pension contributions on Group schemes in surplus are now recognised in other comprehensive income and accordingly an amount of £23 million has been recognised in 2012 in respect of the PGL scheme (2011: £23 million).
With-profit 75 69 With-profit where internal capital support provided (14) 66 Non-profit and unit-linked 288 206 Longer-term return on owners’ funds 22 37 Management services 28 17 Phoenix Life operating profit before tax 399 395
The with-profit funds where internal capital support has been provided experienced an operating loss of £14 million (2011: £66 million operating profit).The main driver of the loss is the impact of a reduction in the assumed surrender rates in funds with valuable policyholder guarantees of £28 million adverse (2011: £5 million adverse). The 2011 comparative result benefitted from the positive impacts of one-off modelling improvements (£21 million) and data cleansing activities (£18 million) recognised in that period.
Life fund revenue 108 114 Third party 32 29 Other income 3 3 Total revenues 143 146 Staff costs (64) (64) Other operating expenses (36) (36) Total expenses (100) (100) Ignis Asset Management operating profit before tax 43 46
Revenue of £143 million was lower in the period (2011: £146 million) primarily due to lower performance fees generated by one of the joint ventures managing life company assets, the restructuring of the joint ventures and life company run-off, partly offset by growth in third party business. Expenses remain flat and the reduction in staff costs following the transfer of the back office functions to HSBC Bank plc was offset by investment in additional management capability to support growth in third party business.
Operating profit before adjusting items 410 387 Investment return variances and economic assumption changes on long-term business 1 (338) Variance on owners’
Amortisation of acquired in-force business and other intangibles (127) (139) Non-recurring items 130 14 Profit/(loss) before finance costs attributable to owners 401 (67) Finance costs attributable to owners (111) (110) Profit/(loss) before the tax attributable to owners 290 (177) Tax credit attributable to owners 119 79 Profit/(loss) for the period attributable to owners 409 (98)
Non-recurring items Non-recurring items include £177 million in respect of the gain recognised upon entering into the reinsurance agreement with Guardian to transfer approximately £5 billion of annuity liabilities. This gain which reflects the prudence in the IFRS liabilities has been partly offset by regulatory change and systems transformation costs of £28 million (2011: £21 million) and restructuring costs of £19 million (2011: £37 million). The 2011 result was also impacted by a gain of £37 million arising from closing the Group’s pension schemes to future accrual and implementing a pension increase exchange programme, and a £35 million recovery of historic costs under the management services agreements with the life division.
With effect from the acquisition of the Pearl businesses in the third quarter of 2009, the Company has been managed and controlled from Jersey, where its permanent office premises are located. As a Jersey resident holding company the Company is subject to a zero percent tax rate on its income. Consequently, tax charged in these accounts primarily represents UK tax on profits earned in the UK, where the principal subsidiaries, excluding Opal Re, have their centre of operations.
Total including stock lending collateral £bn 1 Includes £0.7 billion of third party assets under management in respect of Argonaut Capital Partnership which transferred from
Of the assets in the table above, Ignis manages, provides oversight and advisory services on or administers the following: Ignis assets under management
– Optimise the overall gearing ratio to ensure an efficient capital base
The capital policy of the Holding Companies ensures sufficient liquidity to meet creditor obligations. This is monitored at both Executive Committee and Board level.
– The movement to an IAS 19 deficit on the Pearl Group Staff Pension Scheme of £0.2 billion from a surplus position in 2011 and
£1.0bn 1 Further details on the regulatory capital requirements of the individual life companies are included within note 41 of the IFRS financial statements.
The Group’s headroom at 31 December 2012 was £0.6 billion (2011: £0.4 billion).
At 31 December 2012 the aggregate unadjusted Pillar 1 Phoenix Life capital resources are £6.5 billion (2011: £6.8 billion) and the aggregate unadjusted Pillar 1 Phoenix Life capital requirements are £5.1 billion (2011: £5.3 billion). Due to the closed fund nature of the Phoenix Life business and the Pillar 1 rules for withprofits funds, the surplus estate of the Phoenix Life with-profit funds is treated as a policyholder liability. This has the effect of increasing capital requirements. If the funds were open to new business, it is estimated that the Phoenix Life Pillar 1 capital requirement would reduce to £3.5 billion (2011: £3.7 billion) and the capital coverage for Phoenix Life would be 186% (2011: 184%).
PLHL ICA surplus (estimated) In accordance with FSA requirements, the Group undertakes an Individual Capital Assessment (‘ICA’) at the level of the ultimate insurance parent undertaking within the EEA, which is PLHL. This involves an assessment, on an economic basis, of the capital resources2 and requirements arising from the obligations and risks which exist outside the life companies.
As agreed with the FSA, the Group aims to ensure that PLHL maintains an ICA surplus of at least £150 million. PLHL’s ICA position at 31 December 2012 is set out below: December £bn 30 June £bn
Capital resources2 1.3 0.8 Capital resource requirements3 (0.3) (0.4) PLHL ICA surplus (estimated) 1.0 0.4 2 Capital resources includes the surplus over capital policy in the life companies, a prudent assessment of the present value of future profits of Ignis Asset Management and the net assets of the Holding Companies less pension scheme obligations calculated on an economic basis.
3 Capital requirements relate to the risks arising outside of the life companies including those in relation to the Group’s staff pension schemes, offset by Group diversification benefits.
– Capital generation items and positive market movements of £0.4 billion, which includes the impact of the transfer of the London Life Limited business into PLAL partly offset by
Sensitivity and scenario analysis As part of the Group’s internal risk management processes, the regulatory capital requirements are tested against a number of financial scenarios. The results of that stress testing are provided below: Estimated IGD surplus
The relative insensitivity of the Group’s IGD surplus reflects the nature of Pillar 1 rules for with-profit funds which stipulate that the surplus estate is treated as policyholder liabilities. The PLHL ICA surplus sensitivities reflect the impact of market movements not only on the Group’s life companies but also on its staff pension schemes. The sensitivity of the Group’s PLHL ICA surplus to external market stresses is reduced as a consequence of the new agreement reached with the with the Trustee of the Pearl Group Staff Pension Scheme. The life companies’ surpluses are most sensitive to movements in equity markets, property values and credit spreads.
Solvency II The Group’s Solvency II programme continued to make substantial progress during the year in developing its readiness for the implementation of the Solvency II regime in general and, more specifically, preparations for obtaining FSA approval of its planned partial internal model. In October 2012, the FSA announced that the implementation date for Solvency II was likely to be deferred until at least 1 January 2016 – with the result that the Group has revised its project plans accordingly. It will maintain dialogue with the FSA going forward as to how and when the Group’s Solvency II model might be used to meet existing ICA requirements and when it will re-enter the internal model approval process (‘IMAP’). In the interim period, the Group will continue to progress delivery of a single actuarial modelling platform across the business in order to drive improvements to its processes for all financial reporting bases.
4 Gross shareholder debt as a percentage of the sum of the Group MCEV and the value of the shareholder and hybrid debt as included in the MCEV.
Bank debt – Pearl facility 351 375 – Pearl loan notes 75 73 – Impala facility 1,852 1,993 Royal London PIK notes and facility 116 111 Unsecured loan notes – 7 PLL subordinated debt 143 135 Tier 1 Notes at 50% of IFRS carrying value (see note 18 to the IFRS financial statements) 204 204 Shareholder debt (including hybrid debt) 2,741 2,898
The Group has two main credit agreements (the Pearl and Impala facilities), which have separate security arrangements
Had this transaction occurred on 31 December 2012, the Group’s gearing calculated in accordance with the new definition would have reduced from 55% to 48%. Further details on the re-terming transaction can be found in note 48 to the IFRS financial statements.
The Group’s target is to reduce the gearing ratio in accordance with the new methodology to 40% by the end of 2016.
“ Risk management lies at the heart of what we do and is a source of value creation, making it a key component of the Group’s strategic agenda.”
The Board seeks to ensure that the Group identifies and manages all risks either to create additional value for its stakeholders or to mitigate any potentially adverse effects. A summary of the principal risks and uncertainties facing the Group is provided on page 46.
During the year, the Group has continued to strengthen and embed the components of the RMF to ensure that they are aligned with the evolving regulatory requirements and external best practice. This has included, for example, independent reviews by the Group Risk function of specific risk types and individual components of the overall RMF.
Risk strategy The Group’s risk strategy provides an overarching view of how risk management is incorporated consistently across all levels of the business, from decision-making to strategy implementation. It also sets out how overall risk management within the Group is proportionate to the nature, scale and complexity of the risks faced by the business.
– Cash flow – The Group will seek to ensure that it has sufficient cash flow to meet its financial obligations and will continue to do this in a volatile business environment
– Embedded value – The Group will take action to protect embedded value
– Regulation – The Group, and each life company, will, at all times, operate a strong control environment to ensure compliance with all internal policies and applicable laws and regulations, in a commercially effective manner.
Risk universe A key element of effective risk management is to ensure that the business has a complete and robust understanding of the risks it faces. Within the Group, these are set out, categorised and defined in the risk universe.
External communication and stakeholder management The Group has a number of internal and external stakeholders, each of whom has an active interest in the Group’s performance, including how it is managing its risks. Significant effort is made to ensure that our stakeholders have appropriate, timely and accurate information to support them in forming views of the Group. Governance, organisation and policies Overall responsibility for approving, establishing and maintaining the RMF rests with the Board. The Board recognises the critical importance of having an efficient and effective RMF and appropriate oversight of its operation. There is a clear organisational structure in place with documented, delegated authorities and responsibilities from the Group Board to the Board of Phoenix Life Holdings Limited (‘PLHL’), the Boards of Phoenix Life, Ignis Asset Management and the Executive Committee.
First line: management of risk is delegated from the Board to the Group Chief Executive Officer, Executive Committee members and through to business managers. A series of business unit management oversight committees operate within the Group. They are responsible for ensuring the risks associated with the business’s activities are identified, assessed, controlled, monitored and reported.
A Group level risk assessment process determines the most significant risks to the Group and the options available for their management.
People and reward Effective risk management is central to the Group’s culture and its values. Processes are operated that seek to measure both individual and collective performance and discourage incentive mechanisms which could lead to undue risk taking. Training and development programmes are in place to support employees in their understanding of the operation of the RMF and during 2012, Group Risk delivered training and awareness sessions across the Group.
The Group has ongoing obligations to meet payments to creditors which are funded by the release of capital and profits from its business units. The emerging cash flows of the Group may be impacted during periods of extreme market turbulence by the need to maintain appropriate levels of regulatory capital. The impact of market turbulence may also result in a material adverse impact on the Group’s embedded value, financial condition and prospects.
The Group puts considerable effort into managing relationships with its regulators so that it is able to maintain a forward view regarding potential changes in the regulatory landscape. The Group assesses the risks of regulatory change and their impact on its operations and lobbies where appropriate.
Assets held to meet obligations to policyholders include debt securities. Phoenix Life is exposed to deterioration in the actual or perceived creditworthiness or default of issuers of relevant debt securities or its trading counterparties failing to meet all or part of their obligations, such as reinsurers failing to meet obligations assumed under reinsurance arrangements or derivative counterparties or stock borrowers failing to pay as required. An increase in credit spreads on such securities, particularly if it is accompanied by a higher level of actual or expected issuer defaults, could have a material adverse impact on the Group’s financial condition.
The Group may not be able to refinance the outstanding amount on its debt facilities as they mature on terms which are as favourable as the existing terms or it may be unable to refinance those obligations at all.
The equity raising and debt re-terming announced in January 2013 removed the re-financing risk associated with the Impala facility bullet repayments that were previously due in 2014, 2015 and 2016.
“ Strong and effective governance is crucial to the Group’s aim of delivering value to shareholders and policyholders. The Group’s Board is committed to high standards of corporate governance.”
Clive Bannister joined the Group in February 2011 as Group Chief Executive Officer. Prior to this, he was Group Managing Director of Insurance and Asset Management at HSBC. He joined HSBC in 1994 and held various leadership roles in Planning and Strategy in the Investment Bank (USA) and was Group General Manager and CEO of HSBC Group Private Banking. He started his career at First National Bank of Boston and prior to working at HSBC was a partner in Booz Allen Hamilton in the Financial Services Practice providing strategic support to financial institutions including leading insurance companies, banks and investment banks. Mr Bannister was appointed to the Board of Directors of the Company on 28 March 2011.
Jim McConville was appointed to the Board of Directors of the Company as Group Finance Director on 28 June 2012. Between April 2010 and December 2011, he was Chief Financial Officer of Northern Rock plc. Prior to that, between 1988 and 2010, he worked for Lloyds Banking Group plc (formerly Lloyds TSB Group plc) in a number of senior finance and strategy related roles latterly as Finance Director of Scottish Widows Group plc and Director of Finance for the Insurance and Investments Division. Mr McConville qualified as a Chartered Accountant whilst at Coopers and Lybrand.
Alastair Lyons CBE was appointed to the Board of Directors of the Company as Senior Independent Director on 29 March 2010. He is also Chairman of Admiral Group plc, the FTSE 100 direct motor insurer, Chairman of Serco Group plc, the FTSE 100 international services company, Deputy Chairman of Bovis Homes Group plc and Chairman of the Towergate Insurance Group. In his executive career he was Chief Executive Officer of the National Provident Institution, Executive Director of Abbey National responsible for the insurance division and Chief Executive Officer of the National & Provincial Building Society. He is a Fellow of the Institute of Chartered Accountants and has been a Non-Executive Director of both the Department for Work and Pensions and the Department for Transport. He was awarded the CBE in the 2001 Birthday Honours for services to social security. Mr Lyons is Chairman of the Board Audit Committee.
Charles Clarke is a Jersey-resident Chartered Accountant who spent some 30 years with KPMG. Having qualified in London, he was a financial sector audit partner/principal in London, Kuala Lumpur and Jersey. He was also senior partner of the KPMG Channel Island firm for seven years and, during his final year, Chairman of the grouping of KPMG member firms in offshore jurisdictions. Since retiring from KPMG at the end of 2005, he has acted as an independent Non-Executive Director (‘NED’) and established an offshore governance consultancy and NED recruitment service. His current NED appointments include SG Hambros Bank and Aberdeen Asian Income Fund Limited. Mr Clarke was appointed to the Board of Directors of the Company on 18 February 2010. He is a member of the Board Audit and Board Investment Committees.
Ian Cormack is Non-Executive Chairman of Maven Income & Growth VCT 4 plc and is a Non-Executive Director of Bloomsbury Publishing plc, Aspen Insurance Holdings, Arria NLG Limited and Xchanging plc. Mr Cormack was Chief Executive Officer of AIG, Inc. in Europe from 2000 to 2002 and was Chairman of Citibank International plc and co-head of the Global Financial Institutions Client Group at Citigroup. Mr Cormack served on the Board of Directors of the former Pearl Group Limited from May 2005 to September 2009. He was appointed to the Board of Directors of the Company on 2 September 2009. Mr Cormack is Chairman of the Board Remuneration Committee and a member of the Board Nomination Committee.
Tom Cross Brown was Global Chief Executive of ABN AMRO Asset Management (which managed some €160 billion of assets, with offices in 30 countries around the world) from 2000 to 2003, as well as Chairman of ABN AMRO Asset Management in the UK from 1997 to 2003. Prior to this, he spent 21 years with Lazard Brothers in London, latterly as Chief Executive Officer of Lazard Brothers Asset Management. Mr Cross Brown is Non-Executive Chairman of Just Retirement (Holdings) Limited and is a Non-Executive Director of Artemis Alpha Trust plc, as well as of other private companies and charities. Mr Cross Brown served on the Board of Directors of the former Pearl Group Limited from May 2005 until September 2009. He was appointed to the Board of Directors of the Company on 24 September 2009. He is Chairman of the Board Investment Committee and a member of the Board Nomination and Board Risk Committees.
Manjit Dale is a founding partner of TDR Capital, a private equity firm established in 2002. TDR Capital manages over €2.6 billion of assets on behalf of a variety of institutional pension funds, university endowments and wealthy private individuals. Mr Dale has over 20 years’ experience in private equity, finance and consulting gained with Deutsche Bank, Bankers Trust, 3i plc, NM Rothschild and Andersen Consulting. Mr Dale graduated from Cambridge University with an Honours Degree in Economics. He served on the Board of Directors of the former Pearl Group Limited from December 2004 to September 2009. He has also served on the Boards of Pizza Express and Center Parcs and currently serves on the Board of Algeco Scotsman and Stonegate Pub Company. He was appointed to the Board of Directors of the Company on 2 September 2009 and is a member of the Board Investment Committee.
Executive management of the Group is led by the Group Chief Executive Officer, Clive Bannister, who is supported by the Executive Committee (‘ExCo’). ExCo oversees matters relating to the implementation of the Group’s strategy.
Clive Bannister Group Chief Executive Officer – Leads the development of the Group’s strategy for agreement by the Board
– Ensures the Group has effective processes in place to ensure all reporting obligations are met
– Supports the Group Chief Executive Officer in managing the Group’s external stakeholders
– Maximises shareholder value through clear, rigorous assessment of business opportunities.
Mike Merrick Chief Executive Officer, Phoenix Life – Leads development and delivery of the Phoenix Life business strategy, including the continued integration of life businesses
Chris Samuel Chief Executive Officer, Ignis Asset Management – Leads development of Ignis’ business strategy and plans
– Delivers, over the longer term, Ignis’ vision of becoming a leading asset management business committed to performance excellence and innovation
Fiona Clutterbuck Head of Strategy, Corporate Development and Communications – Supports the Group Chief Executive Officer in the formulation of the strategy and the business planning for the Group
Alan Jones Group Human Resources Director – Delivers high quality human resources (‘HR’) services to the Group
– Leads the implementation of the Group’s employee strategy in order to recruit, retain, motivate and develop high quality employees
– Provides guidance and support on all HR matters to the Group Chief Executive Officer, ExCo and Group Board.
– Oversees the operation of the legal risk framework within the Group including compliance by Group companies and staff with relevant legal obligations.
Jean Park Chief Risk Officer – Leads the Group’s risk management function, embracing changes in best practice and regulation
It is the Board’s view that the Company has been fully compliant during 2012 with the provisions set down in the Code.
Established a Combined Code compliant Board consisting of at least 50% independent Non-Executive Directors
Adopted annual re-election of all Directors in accordance with the UK Corporate Governance Code
Undertook the Board’s first evaluation of the Board, Board Committees and individual Directors
The Board The Board comprises the Non-Executive Chairman, the Group Chief Executive Officer, the Group Finance Director and eleven other Non-Executive Directors, seven of whom are independent. Biographical details of all Directors are provided on pages 48 to 51. The Board considers that the following Directors are independent as they do not have any interest or business and other relationship which could, or could be perceived to, interfere materially with their ability to act in the best interests of the Company: David Barnes, Charles Clarke, Ian Cormack, Tom Cross Brown, Isabel Hudson, Alastair Lyons and David Woods. The Board has considered the criteria proposed by the Code in assessing the independence of the Directors.
All the Directors of the Company are FSA Approved Persons in respect of the Company’s FSA regulated subsidiaries.
The Chairman, Group Chief Executive Officer and Senior Independent Director Howard Davies succeeded Ron Sandler as Chairman of the Board of Directors of the Company with effect from 1 October 2012. There is a division of responsibility, approved by the Board, between the Chairman, who is responsible for the leadership and effective operation of the Board and the Group Chief Executive Officer, Clive Bannister, who is responsible to the Board for the overall management and operation of the Group. The Chairman’s other significant commitments are set out in his biographical details on page 48.
The Senior Independent Director, appointed by the Board, is Alastair Lyons. His role is to be available to shareholders whose concerns are not resolved through the normal channels or when such channels are inappropriate. He is also responsible for leading the annual appraisal of the Chairman’s performance by the Non-Executive Directors and for leading the process for appointment of a new Chairman, as he did in 2012 for the appointment of Howard Davies.
The output from the Board and individual Director reviews informed the review of the Board composition and structure undertaken by the Board Nomination Committee in January 2013, leading to the Board’s recommendations to shareholders regarding re-election of directors at the 2013 AGM.
Attendance by each of the Directors at Board meetings and at Committee meetings for Committees of which they were a member during 2012 was: Board meetings Audit
Executive Directors Clive Bannister 8 7 – – – – – – – – – – Jim McConville3 5 5 – – – – – – – – – – Non-Executive Directors Alastair Lyons 8 6 6 6 1 1 – – – – – – Ian Ashken 8 7 – – – – – – – – – –
3 Jim McConville was appointed to the Board on 28 June 2012 having started his executive duties on 6 June 2012.
The Board attendance in 2012 was impacted by the inability of many Directors to attend the 28 June meeting, on account of travel difficulties to Jersey, and the 11 December meeting being called at short notice. Those Directors with lower attendance records in 2012 will be required to improve their attendance at Board meetings in 2013.
Board Committees The Board has delegated specific responsibilities to five standing Committees of the Board. The terms of reference of the Committees can be found on the Company’s website.
Audit Committee’s principal activities during 2012 – Reviewed the Company’s 2011 Annual Report and Accounts, 2012 interim financial statements and 2012 interim management statements, recommending their approval to the Board, as well as related disclosures and the financial reporting process, supported by reports from management and the external auditors
– Reviewed the financial forecasts prepared by management, supported by the sensitivity analysis on the key assumptions underpinning the forecasts, in support of the assumption that the Group will continue as a going concern and in support of dividend payments
– Reviewed the self-assessment of the internal audit function, undertaken in accordance with the Institute of Internal Auditors’ International Standards
– Reviewed the effectiveness, engagement and remuneration of the external auditors, recommending their re-appointment to the Board and thence to shareholders
– Reviewed the Committee’s performance, constitution and terms of reference, noting that all its duties had been addressed in accordance with its terms of reference.
– Review of the time spent by Directors in fulfilling their duties, noting that it was substantial in comparison with the FTSE 250 average but that certain Directors will be required to improve their attendance at Board meetings in 2013
– Review of the Committee’s performance, constitution and terms of reference, noting that the Committee had performed its recruitment role successfully in 2012 and that all its duties had been addressed in accordance with its terms of reference
Phoenix remains committed to increasing Board diversity following the proposed reduction in Board numbers at the 2013 AGM subject to the overriding aim of enhancing Board skills, experience and balance. A key factor in ensuring that there are women ready to fulfil Board roles generally is a sufficient number of women being in senior executive roles. At Phoenix three out of eight members of the Executive Committee are female, and two of them hold external appointments on listed company boards.
The composition of the Remuneration Committee accords with the requirements of the Code that the Remuneration Committee should consist of at least three independent non-executive directors. The Remuneration Committee met seven times during 2012.
The Remuneration Committee is responsible for making recommendations to the Board on the Company’s remuneration and compensation plans, policies and practices and for determining, within agreed terms of reference, specific remuneration packages for the Executive Directors. These include pension rights and executive incentive schemes to encourage superior performance. Details of the remuneration structure and the Committee’s activities in 2012 are provided in the Remuneration report on pages 62 to 78.
FIT Remuneration Consultants provided advice to the Remuneration Committee in 2012 and are independent of the Company.
The Risk Committee advises the Board on risk appetite and tolerance in setting the future strategy, taking account of the Board’s overall degree of risk aversion, the current financial situation of the Company and the Company’s capacity to manage and control risks within the agreed strategy. It advises the Board on all high level risk matters. Details of the Risk Management Framework, for which the Risk Committee has oversight, are provided in the Risk Management section on pages 42 to 46.
– Recommending to the Board the Group’s overall risk management strategy
– Consideration of risks, issues and matters escalated from principal business unit risk committees to ensure adequate coverage of the Group’s significant business risks and systems of internal control
The Investment Committee was formed in May 2011 in response to a recommendation from the Board evaluation undertaken at the end of 2010 to provide greater focus on investment strategy and performance. It met five times in 2012, focusing on its key activities of reviewing investment performance and strategic asset allocation proposals. The Committee also received regular reports on actions being taken in respect of the Group’s Eurozone exposure and reviewed how the Group monitored and managed its largest investment and counterparty exposures.
Communication with shareholders The Company places considerable importance on communication with shareholders and regularly engages with them on a wide range of issues.
The Directors consider it important to understand the views of the market and in particular any issues which concern them. Board members regularly receive copies of the latest analysts’ reports on the Company and the sector, as well as market feedback to further develop their knowledge and understanding of external views about the Company. The Chairman and the Non-Executive Directors provide feedback to the Board on topics raised with them by major shareholders. In addition, investor days are conducted periodically. The Company also undertakes perception studies designed to determine the investment community’s view of the core business from both institutional fund managers and sell-side analysts.
The Company’s AGM provides another opportunity to communicate with its shareholders. At the 2012 meeting, the Company complied with the Code provisions relating to voting and the separation of resolutions. Shareholders were invited to ask questions during the meeting. It is intended that the same processes will be followed at the 2013 AGM. In line with the Code, details of proxy voting by shareholders will be made available at the meeting and will be posted on the Company’s website following the meeting.
The Company’s Annual Report and Accounts, together with the Company’s Interim Report, Interim Management Statements and other public announcements and presentations are designed to present a balanced and understandable view of the Group’s activities and prospects. These are available on the Company’s website at www.thephoenixgroup.com, along with a wide range of relevant information for private and institutional investors, including the Company’s financial calendar.
Financial reporting and going concern The Directors have acknowledged their responsibilities in the Statement of Directors’ Responsibilities in relation to the IFRS financial statements for the year ended 31 December 2012 (as noted on page 91).
Review of system of internal controls The Code requires Directors to review the effectiveness of the Company’s risk management and internal control systems which includes financial, operational and compliance controls. The Board has overall responsibility for the Group’s risk management and internal control systems and for reviewing their effectiveness. The Group’s systems of internal controls are designed to manage rather than eliminate the risk of failure to achieve business objectives and can provide only reasonable and not absolute assurance against material misstatement or loss. The Board’s review of the period covered by this report, which was undertaken with the assistance of the Audit and Risk Committees, was completed on 21 March 2013. Where any significant weaknesses were identified, the actions required to address them have been taken, or are being taken and monitored.
I am pleased to introduce the Remuneration report for 2012. Following the changes to the senior executive remuneration arrangements made in 2010 as a result of the Company’s Premium Listing in that year, the Remuneration Committee (‘the Committee’) has reaffirmed that the overall structure remains appropriate for 2013.
In considering the remuneration arrangements, the Committee has been mindful of developments in both regulatory and best practice. At the time of writing, implementation of Solvency II (with associated insurance specific remuneration guidelines) has been deferred although the Committee has regard to the Financial Services Authority (‘FSA’) Remuneration Code as being reflective of best practice. Similarly, the final position regarding the Department for Business, Innovation and Skills’ (‘BIS’) proposed changes to the disclosure of executive remuneration remains outstanding although we have sought to include additional disclosures to comply with its recommendations as appropriate. The Committee will clearly review the current arrangements and relevant disclosures in light of such guidance.
– Participation in a long-term incentive plan (‘the LTIP’) which uses embedded value and cash generation performance metrics in line with the Group’s strategy. In addition, Total Shareholder Return (‘TSR’) was introduced as an element of the 2012 award. The current expectation is that awards to be granted in April 2013 will be at similar levels and be based on similar performance metrics to those granted in April 2012, with the precise targets set just prior to the awards being granted
The Committee has decided to voluntarily adopt a number of the key new reporting formats which will become mandatory in the Remuneration Report for 2013 under the BIS government proposals. We hope that the additional information which we have provided (including a ‘single figure’ for all Directors’ emoluments, charts showing potential pay in different performance scenarios, the presentation of a summary of our remuneration policy within a table format, and a summary of the annual bonus out-turn for 2012) is useful for our shareholders.
Introduction Although not required by a non-UK incorporated company, this report has been prepared in accordance with the requirements of the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 and, where feasible, to the proposed BIS regulations. The report also meets the relevant requirements of the FSA’s Listing Rules and describes how the Board has complied with the provisions set out in the UK Corporate Governance Code relating to remuneration matters. This report sets out the policy for the financial year just ended, for the forthcoming year and, subject to ongoing review, for subsequent financial years.
The auditors have reported on certain parts of the Remuneration report and stated whether, in their opinion, those parts of the report have been properly prepared in accordance with the Companies Act 2006. The report has therefore been divided into separate sections for unaudited and audited information.
– Determine an appropriate package for Jim McConville, the new Group Finance Director
– Select, appoint, and determine the terms of reference for independent remuneration consultants to advise the Committee
Ian Cormack (Committee Chairman) 18 February 2010 To date David Barnes 18 February 2010 To date Isabel Hudson 18 February 2010 To date
Advice The Committee received independent remuneration advice during the year from its appointed adviser, FIT Remuneration Consultants (‘FIT’), which provides no other services to the Group. FIT is a member of the Remuneration Consultants Group (the professional body for consultants) and adheres to its code of conduct. FIT’s fees in respect of 2012 were £117,188 (exclusive of VAT).
– Are competitive but not excessive, in relation to the UK life insurance and asset management markets
– Take into account Group-wide pay and employment conditions. The Committee reviews the average Group-wide base salary increase and bonus costs and is responsible for all discretionary and all-employee share arrangements.
Potential rewards under various scenarios The potential total rewards available to the Executive Directors, ignoring any change in share price and roll-up of dividends are: The above chart aims to show how the remuneration policy set out above for Executive Directors is applied using the following assumptions: Minimum
Threshold performance is achieved, resulting in an AIP of 7.5% of base salary being earned
For the LTIP awards, threshold performance results in 25% of the total award vesting
Total fixed pay comprises of base salary, benefits and pension contributions.
Base salaries are reviewed each year against companies of similar size and complexity and set by reference to the median data of suitable comparators
The Committee does not slavishly follow data but uses it as a reference point in considering, in its judgement, the appropriate level having regard to other relevant factors including corporate and individual performance and any changes in an individual’s role and responsibilities
No base salary increases were implemented for Executive Directors in January 2012 or in January 2013
No changes were made to this element of remuneration during 2012
The Executive Directors (as at the date of this report) receive a contribution equal to 20% of base salary which they may choose to receive as a contribution or in cash if they are impacted by the relevant lifetime or annual limits
The AIP potential is 150% of base salary with target levels at 75% of salary
AIP levels and the appropriateness of measures are reviewed annually to ensure they continue to support the strategy
For the other 80%, performance over the financial year is measured against embedded value operating profit, cash flow, Market Consistent Embedded Value and cost management sliding scale targets
The bonus out-turn for the 2012 financial year in respect of the Group CEO and Group FD was £725,970, and £237,052 (both being 69.14% of the maximum)
The previous claw-back provisions have been amended to widen the circumstances permitting claw-back to cover wider reputational issues facing the Group
Long-term incentives To motivate and incentivise delivery of sustained performance over the longterm, the Group operates the LTIP
The policy is to award Executive Directors shares with an initial face value equal to no more than 200% of base salary each year (within a formal limit of 300% and 400% in exceptional cases)
Annual awards set at the initial face value level of 200% of salary per annum
Element and purpose Policy and opportunity Operational and performance measures Implementation of policy in year
In principle, the pay of any new recruit would be assessed following the same principles as for the current Executive Directors
The fees paid to the Chairman and the fees of the other Non-Executive Directors aim to be competitive with other listed companies of equivalent size and complexity
Additional fees are paid to Non-Executive Directors who chair or sit on a Board Committee, to the Senior Independent Director (‘SID’) and for serving on the Model Governance Committee
In 2013, fee levels remain at the same levels as in 2012 at £325,000 for the Chairman of the Board, £90,000 for the role of Non-Executive Director with additional fees of: (i) £5,000 payable for the role of SID; and/or (ii) £10,000 payable where an individual also chairs the Audit, Investment, Remuneration or Risk Committee; and/or (iii) £20,000 payable where a Non-Executive Director also sits on the Board of a subsidiary company and/or (iv) sits on the Model Governance Committee. Non-Executive Directors in place in 2012, who are not paid for serving on subsidiary company Boards, had their base fees set at £100,000
Clive Bannister Group CEO £700,000 £700,000 Jim McConville1 Group FD £400,000 £400,000
Pension The Executive Directors (as at the date of this report) receive a contribution equal to 20% of base salary to a defined contribution GPPP or a salary supplement in lieu.
Group MCEV 30% 4.5% Operating Companies’ Cash Generation 30% 30.0% Group MCEV Operating Earnings after Tax 20% 20.0% Expense Management 20% 16.3%
In addition to the above targets and in order for any incentive payment to be paid, the Committee confirmed that it was satisfied that management had identified and managed material business risks in an appropriate manner.
Details of the actual AIP payments awarded in respect of the 2012 financial year (due to be paid in March 2013) are presented in the emoluments table and notes on page 73. In summary, the AIP corporate out-turn was 70.8% of maximum. The table below shows the actual out-turn against the annual incentive maximum.
The Committee’s policy is to award Executive Directors with an initial face value equal to no more than 200% of their respective base salary. This is below the formal plan limits of 300% of base salary or 400% in exceptional circumstances.
The LTIP awards made to the Executive Directors in April 2012 have performance measures of which 40% is based on MCEV growth and 40% is based on net cumulative cash generation (i.e. after taking into account certain operating and financing costs), with both targets measured over the three financial years commencing 1 January 2012. The remaining 20% is subject to TSR performance against the constituents of the FTSE 250 (excluding investment trusts) over the three years following grant. The LTIP awards are underpinned by a debt management assessment. A summary of the targets is set out below: MCEV growth (40% of awards)
25% of the MCEV related component of the award will vest for MCEV growth in excess of the risk-free rate by 3% per annum rising on a pro rata basis until 100% vests for MCEV growth in excess of the risk-free rate by 6% per annum.
25% of the cash generation component of the award will vest for cumulative cash generation of £1.330 billion rising on a pro rata basis until 100% vests for cash generation of £1.830 billion.
25% of the TSR component of the award will vest for median performance against the constituents of the FTSE 250 (excluding investment trusts) rising on a pro rata basis until 100% vests for upper quintile performance.
Debt underpin Notwithstanding the MCEV, cash generation and TSR performance targets, if the Committee determines that the Group’s debt levels and associated interest costs have not remained within parameters acceptable to the Committee over the performance period and that the Group has not made progress considered to be reasonable by it in executing any strategy agreed by the Board on debt management and capital structuring, the level of awards vesting will either be reduced or lapse in full.
All-employee share plans The Group operates a Sharesave scheme which is approved by HM Revenue & Customs (‘HMRC’). All eligible employees, including Executive Directors, are invited to participate on similar terms to save up to a maximum of £250 each month for a fixed period of three or five years. At the end of the savings period, individuals may use their savings to buy ordinary shares in the Company at a discount currently capped at 15% (although the rules permit 20%) of the market price set at the launch of each scheme.
Subject to Board approval, Executive Directors are permitted to accept outside appointments on external boards or committees as long as these are not deemed to interfere with the business of the Group. In 2012, following his appointment to the Board of the Group, Jim McConville earned £11,250 as a Non-Executive Director of the UK life companies of AEGON N.V.
Termination policy summary In practice, the facts surrounding any termination do not always fit neatly into defined categories for good or bad leavers. Therefore, it is appropriate for the Committee to consider the suitable treatment on a termination having regard to all of the relevant facts and circumstances available at that time. This policy applies both to any negotiations linked to notice periods on a termination and any treatment which the Committee may choose to apply under the discretions available to it under the terms of the AIP and LTIP plans. The potential treatments on termination under these plans are summarised below.
Former Executive Directors In December 2011, the Company announced that Jonathan Yates would leave the Group at the end of February 2012 having resigned as an Executive Director of Phoenix Group Holdings on 21 December 2011. As reported last year for 2012, he received his normal salary and benefits for the period he continued to be employed. He was not eligible for an AIP award for any part of 2012 and did not receive any termination payment in respect of his departure. However, the Committee confirmed that he was to be treated as a good leaver and, therefore, was entitled to early release, on departure, of the 16,259 shares held under the Deferred Bonus Share Scheme plus the associated shares earned in
Remuneration report continued respect of dividend roll-up (being the deferred element of the AIP) together with all of his 2011 AIP award being paid in cash. He retains his 2010 and 2011 LTIP awards which continue to vest until the normal vesting date (with performance conditions and time pro-rating applying).
Non-Executive Directors’ contracts The Non-Executive Directors, including the Group Chairman, have letters of appointment which set out their duties and responsibilities. Appointment is for a fixed term of three years, terminable by one month’s notice on either side. NonExecutive Directors are not eligible to participate in incentive arrangements or receive pension provision or other benefits such as private medical insurance and life assurance.
26 January 2010 29 March 2010 One month 2 May 2013
23 December 2009 18 February 2010 One month 2 May 2013
21 December 2009 18 February 2010 One month 2 May 2013
Mr Sandler retired as Chairman on 30 September 2012, having received a pro-rated amount of his annual fee of £450,000 and nothing in respect of his termination. Howard Davies was appointed as Chairman on 1 October 2012 with an annual fee of £325,000.
In 2012, fee levels were set at £90,000 for the role of Non-Executive Director with additional fees of: (i) £5,000 payable for the role of SID; and/or (ii) £10,000 payable where an individual also chairs the Audit, Investment, Remuneration or Risk Committee; and/or (iii) £20,000 payable where a Non-Executive Director also sits on the Board of a subsidiary company. Non-Executive Directors in place in 2012, who are not paid for serving on subsidiary company Boards, had their base fees set at £100,000. In addition, David Woods receives a temporary fee of £10,000 per annum until 30 June 2013 for being a member of the Group’s Model Governance Committee. No changes to these fee levels are proposed for 2013.
June 2013. Clive Bannister and Jim McConville each receive a Company contribution of 20% of base salary, which may at their own choice, be paid to a GPPP or received in cash. Pension contributions paid to a GPPP are disclosed on page 74.
The emoluments of the Executive Directors for 2012 based on the new disclosure requirements were as follows: Name Salaries/fees £ AIP
1 Prepared in accordance with the methodology outlined in draft BIS regulations.
2 The comparative figure for 2011 has been prepared on a consistent basis.
4 ‘Other’ represents dividends accrued over the period to vesting under the LTIP.
6 Clive Bannister joined the Phoenix Group on 7 February 2011 and was appointed to the Board as a Director on 28 March 2011. The detail shown for 2011 only relates to the period from his appointment as a Director to 31 December 2011, except for the AIP which includes the amount earned in respect of the period 7 February 2011 to 28 March 2011.
8 The Executive Directors are entitled to adjust their salary/benefit combination under flexible benefits arrangements and the figures shown are before individual elections.
Share-based awards As at 31 December 2012, Directors’ interests under long-term share-based arrangements were as follows: Date of grant
Following the year end, the Committee has discretion to adjust the number shares subject to outstanding awards under the various share-based plans (including the deferred bonus shares in the next table) to reflect the open offer which occurred in February 2013 in accordance with the HMRC’s established formulae for such events and is considering the impact, if any, on the LTIP performance conditions.
Deferred bonus shares Date of award Shares awarded Share price on award Lapsed Outstanding Vesting date
This is the arrangement pursuant to which one-third of the AIP for any year is deferred into the Company’s shares. No performance conditions apply therefore other than generally being subject to continued employment.
During the year ended 31 December 2012, the highest mid-market price of the Company’s shares was 590p and the lowest mid-market price was 405.3p. At 31 December 2012, the Company’s share price was 545p.
Jim McConville – – – – – – – – –
David Woods – – – Notes: 1 Clive Bannister holds options in respect of ordinary shares under the LTIP, the Deferred Bonus Share Scheme and the Sharesave Scheme, details of which are included in the ‘Share-based awards‘ notes on page 74.
3 Manjit Dale is a director of TDR Capital Nominees Limited, Jambright Limited, Jambright Midco Limited and TDR Shares Limited and as such these companies are all considered as connected persons. Total interests held by these entities amount to 35,923,409.
Whilst not all of Phoenix Group’s activities are covered by the FSA Remuneration Code, the Committee anticipates broadly equivalent provisions will apply, in due course, via Solvency II. The Committee considers the FSA Code to reflect best practice and has due regard to it across the Group.
Code Staff criteria The following groups of employees have been identified within the code firms as meeting the FSA’s criteria for Code Staff: – Certain members of the Group Board and Executive Committee
Taking into account the expected value of long-term incentives, the performance-related elements of the package make up a considerable proportion of the total remuneration of Code Staff, while maintaining an appropriate balance between fixed and variable elements.
Phoenix Group Holdings also operates a fully flexible bonus policy which allows zero bonus payments to be made when appropriate.
For all Code Staff in control functions (Internal Audit, Regulatory Compliance and Risk) reward is linked to individual achievement against personal objectives and excludes any direct link to financial performance. A similar approach is also adopted in respect of the With-Profits Actuary.
In each case target levels of individual reward have regard to market levels for comparable roles internally and externally.
Long-term incentives Group To encourage the creation of value over the long-term and to align the rewards of the participants with the returns to shareholders, the Group provides employees in senior roles (executive level and selected senior management) the opportunity to receive annual awards of long-term incentives. The full details of the LTIP are given on page 70 of the report.
Ignis Selected employees (executive level and selected senior management) are eligible to receive awards subject to the rules of the Ignis Long Term Phantom Option Plan (“LTOP”). Awards may be made annually but are typically one-off in nature and reward the growth in the notional value of Ignis over a six-year period (with one-third of the award vesting on the fourth, fifth and sixth anniversaries of the grant date). Awards take the form of a cash settled option. Where it has been necessary and as a part of the recruitment process, the Committee has provided an underpin to the value of the award to reflect the value forfeited, by employees due to leaving previous employers.
Approval This report in its entirety has been approved by the Committee and the Board of Directors and signed on its behalf by
Shareholders Dividends Dividends for the year are as follows: Ordinary shares
Paid interim dividend of 21p per share (2011: 21p per share) Recommended final dividend of 26.7p per share (2011: 21p per share) Total ordinary dividend of 47.7p per share (2011: 42p per share)
Full details of the authorised, issued and fully paid share capital as at 31 December 2012 and movements in share capital during the period are presented in note 15 to the IFRS financial statements.
Restrictions on transfer of shares The orderly market arrangements which were entered into by certain shareholders and the Company on 22 June 2010 ended on 5 July 2012. For a period of 24 months from 5 July 2010 the orderly market arrangements restricted trading for certain shares if the disposal negatively affected the orderly market in ordinary shares.
In connection with the recent £250 million equity raising, TDR Capital Entities and Sun Capital Entities (as referred to in the Prospectus issued by the Company on 30 January 2013) have irrevocably and unconditionally agreed, in lock up deeds executed in favour of the Company, not to sell, transfer or otherwise dispose of their respective holdings of ordinary shares that they legally or beneficially held on 30 January 2013 for a period of six months from that date. The lock up deeds contain certain exceptions in respect of sales, transfers or other dispositions to relatives, holding companies, subsidiaries, other members of the same group of companies, affiliates and connected persons.
Certain restrictions on the transfer of shares may be imposed from time to time by applicable laws and regulations (for example, insider trading laws), and pursuant to the Listing Rules of the Financial Services Authority (‘FSA’) and the Group’s own share dealing rules whereby Directors and certain employees of the Group require the approval of the Company to deal in the Company’s ordinary shares.
TDR Capital Nominees Limited1 35,923,409 15.99% OZ Management LP and Och-Ziff Management Europe Ltd2 18,899,551 8.41% Hugh Osmond3 13,229,201 5.89% Xercise2 Limited4 11,952,611 5.32% William Alan McIntosh 9,597,493 4.27% Royal London Asset Management Limited 8,035,252 3.58% Martin E Franklin 7,047,238 3.14% Nicolas Berggruen Charitable Trust 7,028,190 3.13% 1 TDR Capital Nominees Limited is controlled by TDR Capital LLP, of which Manjit Dale is a Partner. The stated shareholding includes ordinary shares held by Jambright Limited,
2 The number of voting rights in the shares held by OZ Management LP and Och-Ziff Management Europe Ltd presented in the table above includes voting rights attached to shares held by those entities as well as voting rights in relation to swap transactions in the shares notified by those entities.
3 7,787,459 ordinary shares held by Hugh Osmond are also included in the figure for Xercise2 Limited shown above.
Annual General Meeting (‘AGM’) The AGM of the Company will be held at 32 Commercial Street, St Helier, Jersey JE2 3RU on Thursday, 2 May 2013 at 1pm.
A separate notice convening this meeting will be distributed to shareholders in due course and will include an explanation of the items of business to be considered at the meeting.
– Jim McConville was appointed to the Board on 28 June 2012 as Group Finance Director.
Details of related party transactions which took place during the year with Directors of the Company and entities where Directors are deemed to have significant influence, are provided in the Remuneration report and in note 45 to the IFRS financial statements.
In accordance with the UK Corporate Governance Code, Directors must stand for re-election annually. Ian Ashken and Charles Clarke will, as stated in the Chairman’s statement, not be offering themselves for re-election at the AGM on 2 May 2013. The Board of Directors is unanimously recommending the re-election of the remainder of the Board and, in the case of Howard Davies and Jim McConville, their election to the Board.
Subject to obtaining shareholder approval for the renewal of this authority at the forthcoming AGM, the Company is authorised to make purchases of its own shares under Article 20 and make payment for the redemption or purchase of its own shares in any manner permitted by the Cayman Islands Companies Law (as amended), applicable law or regulation, including without limitation, out of capital, profits, share premium or the proceeds of a new issue of shares. The Company held no treasury shares during the year or up to the date of this report.
Directors’ remuneration and interests A report on Directors’ remuneration is presented on pages 62 to 78 including details of their interests in shares and share options or any rights to subscribe for shares in the Company.
Directors’ conflicts of interest The Board has established procedures for handling conflicts of interest in accordance with Cayman Islands law and the Company’s Articles.
Governance Going concern The Group’s business activities, together with the factors likely to affect its future development, performance and position are set out in the Business review. The Business review includes details on the Group’s cash flow and capital management. Principal risks and their mitigation are detailed on page 46. In addition, the financial statements include, amongst other things, notes on the Group’s borrowings (note 21), management of its financial and insurance risk including market, credit and liquidity risk (note 42), its commitments and contingent liabilities (notes 44 and 46) and its capital position and management (note 41).
Corporate governance statement The disclosures required by section 7.2 of the FSA’s Disclosure and Transparency Rules can be found in the Corporate governance report on pages 53 to 61 which is incorporated by reference into this Directors’ report.
Memorandum and Articles Changes to the Company’s Memorandum and Articles require prior shareholder approval and in some cases, approval of the Group’s main lenders.
The Memorandum and Articles are available on the Company’s website at www.thephoenixgroup.com/aboutus /corporate-governance/articles-of-association.aspx.
Details of fees paid to Ernst & Young during 2012 for audit and non-audit work are disclosed in note 10 to the IFRS financial statements.
Disclosure of information to Auditors The Directors who held office at the date of approval of this Directors’ report confirm that, so far as they are aware, there is no relevant audit information of which the Company’s auditor is unaware and that each Director has taken all the steps that they ought to have taken as a Director to make themselves aware of any relevant audit information and to establish that the Company’s auditor is aware of that information.
In addition, certain provisions of the Articles relating to the City Code on Takeovers and Mergers apply in connection with a takeover bid. The Articles are available on the Company’s website at www.thephoenixgroup.com/about-us/corporategovernance /articles-of-association.aspx.
The Group recognises the need to treat people with disabilities fairly and equally. Full and fair consideration is given to applications for employment by people with a disability. Applicants are asked if they have any special requirements when invited to attend an interview and reasonable provisions are made to meet the applicant’s request. Applicants are considered on the basis of the job requirements and the individual’s ability and competencies, also taking into consideration any appropriate reasonable workplace adjustments.
Political donations No political donations were made during the year ended 31 December 2012. The Company and its subsidiaries do not intend to make donations to political parties or independent election candidates nor have they made or do they intend to make any donations to EU political organisations or incur EU political expenditure.
In this section 85 Corporate responsibility 85 Environment 86 Workplace 87 Community 88 External stakeholders
All staff can access the Group’s CR Policy and accompanying Code of Business Ethics and Ethical Conduct, and complete annual refresher training in this regard.
2012 summary Following a Group-wide employee CR survey in 2011, it was communicated that the focus for 2012 would be to raise the profile of CR internally. Considerable progress was made during 2012.
The Group employed over 1,200 staff at the end of 2012. The Group’s core sites are Wythall, near Birmingham, Glasgow, and two offices in London. CR is reported collectively, however initiatives are driven by site, and relevant to the local community.
The Group has forged links with Cass Business School, part of City University London. One of Cass’s MBA students undertook an internship within the Group, to work on a real-life business project focusing on environmental reporting. The Group subsequently launched an ‘Environmental Statement’ and ‘Environmental and Sustainability Tracker’ for its core sites, measuring energy consumption, print statistics, and a variety of recycling data. Once the Group has tracked a full year, measures can then be put in place to identify areas for improvement.
In 2011 the Group committed to sourcing paper from sustainable, managed forests. This is paper that has been accredited ‘Programme for the Endorsement of Forest Certification’ (‘PEFC’) and ‘Forest Stewardship Council’ (‘FSC’). The Group achieved this, and reduced the number of suppliers in this area. In addition to the costsaving and environmental benefits, this simplifies the supply chain and reduces the quantity of invoices and deliveries.
Video conferencing facilities have been improved at all sites, reducing the extent of business travel, and a conferencing facility has opened at Wythall lessening the need for hiring offsite meeting facilities. Staff will shortly have the added benefit of instant messaging and teleconferencing facilities available from their desktops. All former IT equipment has been re-used, recycled or disposed of via a registered ‘Waste Electrical and Electronic Equipment’ scheme.
A one-day CR event, focusing on employee wellbeing was held at the Wythall site. It included a low-impact exercise class, free cholesterol testing and blood pressure monitoring, and access to an array of information on diet, health and exercise.
The Group values the contribution its employees make to the business, so in return offers a wide range of policies and benefits, designed to attract, develop and retain the best and most talented individuals. Staff have access to: A robust reward and remuneration framework, ensuring market-related pay whilst enabling flexibility to recognise individual contribution; A flexible benefits scheme for Phoenix Group and Life employees involving 24 options. Last year 80% of staff opted for at least one benefit. Ignis has a similar scheme in operation. Alongside this, staff can sign up to ‘Give as you Earn’, to donate a portion of their monthly salary to charitable causes; A Share Save Scheme and / or Share Incentive Plan. At the end of 2012, 53% of staff participated in the Share Save Scheme, and 22% of eligible staff participated in the Share Incentive Plan; An Annual Incentive Plan. Phoenix Group and Life reward both personal and Company performance. It looks at ‘what’ has been achieved by the individual, and ‘how’ they achieved it. The weighting of personal versus Company performance varies by grade. This scheme is discretionary and does not form part of an individual’s contract. A similar plan is also in operation within Ignis; A recognition scheme within Phoenix Group and Life actively encourages and recognises performance that is above and beyond an individual’s remit, or considers the manner in which they conducted a piece of work worthy of recognition; and
An employee assistance scheme within Phoenix Group and Life, which incorporates legal, financial and medical assistance.
The Group supports a range of flexible working arrangements, both formal and informal, including homeworking. In a recent employee survey 80% of respondents agreed with the statement, ‘My work-life balance is acceptable to me’ against a Financial Services benchmark of 73%.
The Group recognises the importance of continued staff development and manages a variety of external and in-house training programmes, ranging from induction, through to coaching and leadership skills. Voluntary staff turnover and absence rates compare very favourably with industry benchmarks.
Total staff across all sites 1,229 1,394 1,298 Total full time equivalent across all sites 1,191 1,351 NC Workforce that is of non-white British origin 16% 11% 13% Workforce that is female 44% 40% NC Staff turnover (employees choosing to leave voluntarily) 7.1% 7.5% 9.9% Annual new starter turnover (employees leaving voluntarily within 12 months of starting) 10% 10% 13% Percentage of days lost through sickness 1.8% 1.4% 1.3% Percentage of employees sponsored on a professional qualification 25.2% 22.6% 17.4% Total number of external staff training days 2,266 1,961 NC Total spend on external staff training £0.7m £1.1m NC NC – not collected
The Group continues to work with existing contacts, whilst forging new links with local charities, educational establishments and youth groups to give greater support to the communities in which we are based.
Charitable donations The Group actively encourages its staff to support local charities, and makes clear the types of charity it will support, and those with which it does not actively engage. The Group does not support any religious or political causes. It primarily supports local charities that are registered in the UK, and which are chosen by employees.
Charitable donations include: – staff fundraising events held at our offices
Two fundraising events were supported Group-wide, engaging staff across all business divisions. Movember raised awareness and funds for men’s health partners – Prostate Cancer UK and Institute of Cancer Research. In excess of £7,500 was donated by the Group. Macmillan Cancer Research coffee mornings were also held during September at offices in Glasgow and London, raising £2,500.
Community links Ignis staff in Glasgow have forged close links with Glasgow Arts School. Activities have included resident artist Anna Sundt producing artwork for the workplace, and student mentoring. A staff photography competition took place with12 winning entries being included in a 2013 charity calendar. Proceeds from calendar sales were donated to Yorkhill Children’s Foundation – a charity providing medical equipment and resources to sick children and babies being treated at Yorkhill Hospital within NHS Greater Glasgow and Clyde. Ignis plans to continue its support over the next few years by raising funds for a new ‘play and dining room’ at the new children’s hospital, part of the New South Glasgow Hospitals Project.
From the Wythall site, support has continued with Wythall Community Association, and £3,000 was donated to a local Scout Group to assist them with extending their Scout HQ, within Wythall Park’s grounds.
In December, links were forged with a local hotel and Age UK branches in Redditch & District, Solihull and Bromsgrove & District to offer Christmas lunches for their clients and support workers. Three lunches were paid for and co-ordinated by the Group with around 320 attending.
External stakeholders – our relationships with customers, investors, lenders, outsource and other business partners, suppliers, regulators, Government and the media Customers The Group continues to recognise the responsibility it has to all customers. In today’s difficult financial climate it remains committed to providing a safe and helpful environment upon which customers can rely.
A programme of customer research continues – in particular telephone surveys are used which reach an average of 1,500 customers each month. The results are positive, with customers scoring all aspects of service highly. Research of this type is invaluable as it helps the Group provide a responsible, fair and helpful service, and creates an opportunity for customers to recommend improvement.
Procurement During the year, the Group signed up to the UK Government’s Prompt Payment Code. The Code was introduced four years ago, with the aim of transforming the culture of late payment in the business community. The Group undertakes to pay suppliers on time, provide clear guidance to suppliers, and encourages good practice.
The due diligence process for suppliers has been enhanced and now includes Health and Safety, Information Security and CR criteria.
At the Wythall site the procurement of consumables for the staff restaurant continues to support local businesses as part of its ‘buy local initiative’.
Investors Investors are kept informed of the Group’s financial results and announcements with regular communications through the Investor Relations team.
91 Statement of Directors’ responsibilities 92 Independent Auditor’s report 93 Consolidated financial statements 100 Notes to the consolidated financial statements
Board Responsibility Statement according to section 5:25c(2)(c) of the Dutch Financial Markets Supervision Act.1
The Board of Directors of Phoenix Group Holdings hereby declares that, to the best of its knowledge: − the Directors are responsible for the preparation of the Annual Report and Accounts; − the IFRS financial statements for the year ended 31 December 2012 give a true and fair view of the assets, liabilities, financial position and results of Phoenix Group Holdings and its consolidated subsidiaries taken as a whole; − the Annual Report and Accounts gives a true and fair view of the state of affairs of Phoenix Group Holdings and its consolidated subsidiaries as at 31 December 2012 and their development in the financial year to which the Annual Report and Accounts relate; and
Clive Bannister James McConville Group Chief Executive Officer Group Finance Director
Report on the consolidated financial statements We have audited the accompanying consolidated financial statements 2012 of Phoenix Group Holdings, Cayman Islands, and its subsidiaries (‘the Group’), which comprise the statement of consolidated financial position as at 31 December 2012, the consolidated income statement, the statement of consolidated comprehensive income, the proforma reconciliation of Group operating profit to result attributable to owners, the statement of consolidated changes in equity and the statement of consolidated cash flows for the year then ended, and notes, comprising a summary of the significant accounting policies and other explanatory information.
Directors’ responsibility The Directors are responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards as adopted by the European Union and for the preparation of the Directors’ report. Furthermore the Directors are responsible for such internal control as they determine necessary to enable the preparation of the consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Opinion with respect to the consolidated financial statements In our opinion, the consolidated financial statements give a true and fair view of the financial position of the Group as at 31 December 2012 and of its result and its cash flows for the year then ended in accordance with International Financial Reporting Standards as adopted by the European Union.
− certain elements of the Directors’ report to the shareholders on Directors’ remuneration.
Opinion on other matters because of voluntary compliance with the UK Companies Act 2006 − The part of the Directors’ remuneration report to be audited has been properly prepared in accordance with the Companies Act 2006.
− In our opinion the information given in the Directors’ report for the financial year for which the Group financial statements are prepared is consistent with the Group consolidated financial statements.
Matters on which we report by exception because of voluntary compliance with the UK Companies Act 2006 We have nothing to report in respect of the following items that we are required to report to you under the UK Companies Act 2006 if, in our opinion: − adequate accounting records have not been kept by the Group, or returns adequate for our audit have not been received from branches not visited by us; or
− certain disclosures of Directors’ remuneration specified by law are not made; or
− we have not received all the information and explanations we require for our audit.
Gross premiums written 1,609 1,473 Less: premiums ceded to reinsurers 6 (5,173) (85) Net premiums written (3,564) 1,388
Earnings per ordinary share Basic earnings per ordinary share 14 226.3p (76.2p) Diluted earnings per ordinary share 14 226.2p (76.2p)
Statement of consolidated comprehensive income For the year ended 31 December 2012 £m 2011 £m
Tax credit on actuarial (losses)/gains of defined benefit pension schemes 12 110 1
Pro forma reconciliation of Group operating profit to result attributable to owners For the year ended 31 December 2012 £m 2011 £m
Investment return variances and economic assumption changes on long-term business 5 1 (338) Variance on owners’ funds 5 (13) 9 Amortisation of acquired in-force business (109) (121) Amortisation of customer relationships (18) (18) Non-recurring items 4.2 130 14 Profit/(loss) before finance costs attributable to owners 401 (67)
Equity attributable to owners of the parent Share capital 15 – – Share premium 982 1,054 Other reserves 5 5 Shares held by employee trust and Group entities 16 (10) (11) Foreign currency translation reserve 85 93 Retained earnings 596 511
Net asset value attributable to unit holders 4,671 3,209 Obligations for repayment of collateral received 24 10,458 13,005
Liabilities classified as held for sale 3 5,479 – Total liabilities 83,712 87,135
Acquired in-force business 1,622 1,882 Customer relationships 384 402 Present value of future profits 23 23
Cash and cash equivalents 39 9,028 11,723 Assets classified as held for sale 3 5,310 –
Statement of consolidated cash flows For the year ended 31 December 2012
Cash flows from operating activities Cash (utilised)/generated by operations 40 (2,291) 3,692 Taxation paid (70) (16)
Cash flows from investing activities Purchase of property, plant and equipment – (7)
Cash flows from financing activities Proceeds from issuing shares in subsidiaries to non-controlling interests 33 1 Proceeds of new policyholder borrowings 90 98 Ordinary share dividends paid (72) (55) Coupon on Perpetual Reset Capital Securities paid (26) (26) Dividends paid to non-controlling interests (23) (21) Repayment of policyholder borrowings (43) (825) Repayment of shareholder borrowings (172) (174) Interest paid on policyholder borrowings (18) (21) Interest paid on shareholder borrowings (103) (111)
Net (decrease)/increase in cash and cash equivalents (2,695) 2,535 Cash and cash equivalents at the beginning of the year 11,723 9,188
Cash and cash equivalents at the end of the year 39 9,028 11,723
Profit for the year – – – – – 392 392 17 409 Other comprehensive income
Statement of consolidated changes in equity For the year ended 31 December 2011
Coupon paid to non-controlling interests, net of tax relief – – – – – – – (19) (19) Shares issued in lieu of dividends – 17 – – – – 17 – 17 Credit to equity for equity-settled share-based payments – – – – – 6 6 – 6 Shares in subsidiaries subscribed for by non-controlling interests – – – – – – – 1 1 Shares distributed by employee trust – – – 2 – (2) – – –
Retained earnings comprise the owners’ interest in the post acquisition retained earnings of the subsidiary companies and the retained earnings of the Company. Distribution of the retained earnings held within the long-term business funds and surplus assets held within the owners’ funds of the life companies is subject to retaining sufficient funds to protect policyholders’ interests.
Notes to the consolidated financial statements 1. Accounting policies (a) Basis of preparation The consolidated financial statements for the year ended 31 December 2012 comprise the financial statements of Phoenix Group Holdings (‘the Company’) and its subsidiaries (together referred to as ‘the Group’).
Subsidiary undertakings are consolidated from the date that effective control is obtained by the Group and are excluded from consolidation from the date they cease to be subsidiary undertakings.
Insurance and investment contract liabilities Insurance and investment contract liability accounting is discussed in more detail in accounting policies (e) and (f) with further detail of the key assumptions made in determining insurance and investment contract liabilities included in note 42
Fair value of financial assets and liabilities Financial assets and liabilities are measured at fair value and accounted for as set out in accounting policies (r) and (g) respectively. Where possible, financial assets and liabilities are valued on the basis of listed market prices by reference to quoted market bid prices for assets and offer prices for liabilities. These are categorised as Level 1 financial instruments and do not involve estimates. If prices are not readily determinable, fair value is determined using valuation techniques including pricing models, discounted cash flow techniques or broker quotes. Financial instruments valued where valuation techniques based on observable market data at the period end are categorised as Level 2 financial instruments. Financial instruments valued using valuation techniques based on non-observable inputs are categorised as Level 3 financial instruments. Level 2 and Level 3 financial instruments therefore involve the use of estimates. Further details of the estimates made are included in note 36.
Income tax assets and liabilities Deferred tax assets are recognised to the extent that they are regarded as recoverable, that is to the extent that, on the basis of all the available evidence, it can be regarded as more likely than not that there will be suitable taxable profits against which the losses can be relieved. The UK taxation regime applies separate rules to trading and capital profits and losses. The distinction between temporary differences that arise from items of either a capital or trading nature may affect the recognition of deferred tax assets. Any judgements made, and uncertainties considered, in arriving at the carrying value of deferred tax in the financial statements are discussed in note 27.
The results and financial position of all Group companies that have a functional currency different from the presentation currency are translated into the presentation currency as follows: − assets and liabilities are translated at the closing rate at the period end; − income, expenses and cash flows denominated in foreign currencies are translated at average exchange rates; and
− reinsurance recoveries are measured on a basis that is consistent with the valuation of the liability to policyholders to which the reinsurance applies.
The with-profit bonus reserve for an individual contract is determined by either a retrospective calculation of ‘accumulated asset share’ approach or by way of a prospective ‘bonus reserve valuation’ method. The cost of future policy related liabilities is determined using a market consistent approach, mainly based on a stochastic model calibrated to market conditions at the end of the reporting period. Non-market related assumptions (for example, persistency, mortality and expenses) are based on experience adjusted to take into account of future trends.
The realistic liability for any contract is equal to the sum of the with-profit bonus reserve and the cost of future policyrelated liabilities.
The value of the PVFP is determined in a manner consistent with realistic measurement of liabilities. In particular, the methodology and assumptions involve adjustments to reflect risk and uncertainty, are based on current estimates of future experience and current market yields and allow for market consistent valuation of any guarantees or options within the contracts. The value is also adjusted to remove the value of capital backing the non-profit business if this is included in the realistic calculation of PVFP. The principal assumptions used to calculate the PVFP are the same as those used in calculating the insurance contract liabilities given in note 42.
− a group of financial assets, financial liabilities or both is managed and its performance is evaluated and managed on a fair value basis, in accordance with a documented risk management or investment strategy, and information about the investments is provided internally on that basis to the Group’s key management personnel.
(k) Obligations for repayment of collateral received It is the Group’s practice to obtain collateral in stock lending and derivative transactions, usually in the form of cash or marketable securities. Where cash collateral is available to the Group for investment purposes, it is recognised as a ’financial asset’ and the collateral repayable is recognised as ‘obligations for repayment of collateral received’ in the statement of consolidated financial position. The ‘obligations for repayment of collateral received’ are measured at amortised cost, which in the case of cash is equivalent to the fair value of the consideration received.
The tax charge is analysed between tax that is payable in respect of policyholders’ returns and tax that is payable on owners’ returns. This allocation is calculated based on an assessment of the effective rate of tax that is applicable to owners for the year.
(m) Employee Benefits Defined contribution pension plans Obligations for contributions to defined contribution pension plans are recognised as an expense in the consolidated income statement as incurred.
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 discount rate is the yield at the period end on AA credit rated bonds that have maturity dates approximating to the terms of the Group’s obligations. The calculation is performed by a qualified actuary using the projected unit credit method. As required by IFRIC 14, IAS 19 –The limit on a Defined Benefit Asset, minimum Funding Requirements and their Interaction to the extent that the economic surplus will be available as a refund, the scheme assets are stated after a provision for tax that would be borne by the scheme administrators when the refund is made.
Part of the cost of changes in the longevity assumptions of the PGL Pension Scheme is recoverable from certain withprofit funds to the extent that cash contributions are made to the pension scheme. Recoveries are recognised when the related cash contributions are agreed with the Trustee of the pension scheme and are accounted for as a transfer to other comprehensive income from insurance contract liabilities.
(r) Financial assets Purchases and sales of financial assets are recognised on the trade date, which is the date that the Group commits to purchase or sell the asset.
Reinsurance assets are reviewed for impairment at each reporting date or more frequently when an indication of impairment arises during the reporting period. Impairment occurs when there is objective evidence, as a result of an event that occurred after initial recognition of the reinsurance asset, that the Group may not receive all outstanding amounts due under the terms of the contract and the event has a reliably measurable impact on the amounts that the Group will receive from the reinsurer. The impairment loss is recognised in the consolidated income statement. The reinsurers’ share of investment contract liabilities is measured on a basis that is consistent with the valuation of the liability to policyholders to which the reinsurance applies.
A provision is recognised for onerous contracts in which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it. The unavoidable costs reflect the net cost of exiting the contract, which is the lower of the cost of fulfilling it and any compensation or penalties arising from failure to fulfil it.
(v) Earnings per share Basic earnings per share is calculated using the earnings attributable to ordinary equity holders of the parent, divided by the weighted average number of ordinary shares in issue during the year.
(x) Income recognition Gross premiums In respect of insurance contracts and investment contracts with DPF, premiums are accounted for on a receivable basis and exclude any taxes or duties based on premiums. Funds at retirement under individual pension contracts converted to annuities with the Group are, for accounting purposes, included in both claims incurred and premiums within gross premiums written.
(aa) Non-current assets held for sale Non-current assets or disposal groups are classified separately as held for sale in the balance sheet when their carrying amount will be recovered through a sale transaction rather than through continuing use. This condition is met only when the sale is highly probable, the asset or disposal group is available for immediate sale in its present condition, and management is committed to the sale, which should be expected to qualify for recognition as a completed sale within one year from the date of classification. Liabilities directly associated with the assets classified as held for sale and expected to be included as part of the sale transaction are correspondingly also classified separately. The net assets and liabilities of a disposal group classified as held for sale are measured at the lower of their carrying amount and fair value less costs to sell.
(ee) Events after the reporting period The financial statements are adjusted to reflect significant events that have a material effect on the financial results and that have occurred between the period end and the date when the financial statements are authorised for issue, provided they give evidence of conditions that existed at the period end. Events that are indicative of conditions that arise after the period end that do not result in an adjustment to the financial statements are disclosed.
The IASB has issued the following standards, interpretations and amendments which, subject to adoption for use by the EU, apply from the dates shown. The Group has decided not to early adopt any of these standards, interpretations or amendments where this is permitted. The impact on the Group of adopting them is subject to evaluation: − IFRS 9 Financial Instruments (2015). This is the first two parts of a replacement standard for IAS 39 Financial Instruments: Recognition and Measurement and deals with the classification and measurement of financial assets and financial liabilities, including some hybrid contracts.
− IFRS 10 Consolidated Financial Statements (2013) provides a single consolidation model that identifies control as the basis for consolidation for all types of entities.
− IFRS 11 Joint Arrangements (2013) establishes principles for financial reporting by parties to a joint arrangement.
− IFRS 12 Disclosure of Interests in Other Entities (2013) combines, enhances and replaces the disclosure requirements for subsidiaries, joint arrangements, associates and unconsolidated structured entities.
− IFRS 13 Fair Value Measurement (2013) defines fair value and sets out in a single IFRS a framework for measuring fair value.
− IAS 19 Employee Benefits (Amendment) (2013). The IASB has issued numerous amendments to IAS 19. These range from fundamental changes like removing the corridor mechanism and the concept of expected returns on plan assets to simple clarifications and re-wording. The impact of adopting this standard would be to reduce the net pension expense in the consolidated income statement with a corresponding increase in expense in other comprehensive income. There would be no impact on net assets.
− Disclosures – Offsetting Financial Assets and Financial Liabilities (Amendments to IFRS 7) (2013). The new disclosure requirements are intended to help users of financial statements better assess the effect or potential effect of offsetting arrangements on an entity’s financial position.
− Offsetting Financial Assets and Financial Liabilities (Amendments to IAS 32) (2014). The amendments address inconsistencies in current practice when applying the offsetting criteria in IAS 32.
− Annual Improvements to IFRS 2009-2011 cycle (2013). This makes a number of minor improvements to existing standards and interpretations.
− Transition Guidance (Amendments to IFRS 10, IFRS 11 and IFRS 12) (2013).
Notes to the consolidated financial statements continued 2. Financial information (continued) In addition, the following standards, interpretations and amendments have been issued but are not currently relevant to the Group: − Severe Hyperinflation and Removal of Fixed Dates for First-time Adopters (Amendments to IFRS 1) (2012).
− IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine (2013).
3. Assets and liabilities held for sale The balances transferred to assets and liabilities classified as held for sale in the statement of consolidated financial position in 2012 relate to the anticipated Part VII transfer of a portfolio of wholly reinsured annuity liabilities to Guardian Assurance Limited (‘Guardian’) and the proposed sale of BA(GI) Limited (‘BAGI’) which comprise: Carrying amount £m
Under the terms of this reinsurance agreement Guardian holds assets in a collateral account over which the Group has a fixed charge as disclosed in note 37.
As the annuity liabilities include prudential margins under IFRS a non-recurring gain of £177 million gross of tax was recognised on entering into the reinsurance agreement and emerges as the difference between the premium ceded to reinsurers and the reinsurers’ share of insurance contract liabilities recognised.
Other operating income: External customers 13 – – – 13 Other segment – 5 – (5) –
Other operating expenses: Profit/(loss) before finance costs and tax 517 38 (17) – 538
Profit/(loss) before tax 413 38 (128) – 323 Tax attributable to policyholders’ returns (33) – – – (33) Segmental result before the tax attributable to owners 380 38 (128) – 290
Other operating income: External customers 12 – – – 12 Other segment – 1 – (1) –
Offset interest income on interest swaps against interest expense1 – – 19 – 19
Profit/(loss) before tax 98 39 (141) – (4) Tax attributable to policyholders’ returns (173) – – – (173) Segmental result before the tax attributable to owners (75) 39 (141) – (177) 1 The Group has entered into derivatives to protect its net exposure to interest rate fluctuations and this reallocation reflects the net economic interest exposure of the Group.
Non-recurring items include: − a gain of £177 million recognised upon entering into the reinsurance agreement with Guardian to transfer certain portfolios of annuity liabilities; − regulatory change and systems transformation costs of £28 million; and
Non-recurring items include: − restructuring costs of £37 million; − regulatory change and systems transformation costs of £21 million; − a gain of £37 million arising from closing the Group’s pension schemes to future accrual and implementing a pension increase exchange programme; and
− a £35 million recovery of historic costs under the management services agreements with the life division.
The variances excluded from operating profit in relation to owners’ funds are as follows: £m £m
The variances on owners’ funds of the Company of £nil (2011: £2 million gain) comprise fair value gains arising from movements in the fair value of warrants in issue over the Company’s shares.
The principal assumptions underlying the calculation of the longer-term investment return are: %
The Company paid a reinsurance premium of £5,104 million to Guardian. The agreement with Guardian includes provision for adjustment to the premium as part of an on-going data validation exercise. Under the terms of the agreement Guardian holds assets in a collateral account over which the Company has a fixed charge as disclosed in note 37.
Fund management based fees 63 75 Investment contract income 94 95 8. Net investment income £m 2011 £m
Certain prior year disclosures in note 9 have been amended to conform to current year presentation.
Average number of persons employed Phoenix Life 809 804 Ignis Asset Management 456 551 10. Auditors’ remuneration The remuneration of the Company’s auditors, including their associates, in respect of services supplied to members of the Group was £7.6 million (2011: £6.7 million). No services were provided by the Company’s auditors to the Group’s pension schemes in either 2012 or 2011.
Attributable to: – policyholders 104 122 12. Tax (credit)/charge 12.1 Current year tax (credit)/charge £m 2011 £m
Recognition of deferred tax assets not previously valued (42) (13) Reversal/origination of temporary differences: On amortisation of acquired in-force business (40) (44) On amortisation of customer relationship intangible (4) (5) On capital allowances in excess of depreciation (1) 6 On accrued interest (33) 7 On excess expenses and deferred acquisition costs 9 – Pension scheme movements 12 30 On provisions for future expenditure 2 2 Other temporary differences 1 3
Deferred tax on actuarial losses/gains of defined benefit schemes (110) (1)
Profit/(loss) before tax 323 (4) Policyholder tax charge (33) (173) Profit/(loss) before the tax attributable to owners 290 (177)
Tax at standard UK1rate of 24.5% (2011: 26.5%) 71 (47) Untaxed income and gains (29) (7) Disallowable expenses 2 3 Adjustment to shareholders tax charge in respect of prior years 21 (57) Movement in non-profit surplus taxed at less than 24.5% (2011: 26.5%) – 13 Movement on acquired in-force amortisation at less than 24.5% (2011: 26.5%) – 3 Profits taxed at rates other than 24.5% (2011: 26.5%) (35) 19 Recognition of previously unrecognised deferred tax assets (85) (11) Prior year deferred tax (3) 20 Deferred tax rate change (36) (41) Current year losses not valued – 3 Temporary differences not valued (7) 27 Impact of new life tax regime (12) –
On 22 March 2012, the Board recommended a final dividend of 21p per share in respect of the year ended 31 December 2011. A scrip dividend option was available to shareholders at that time and the total dividend that was settled on 8 May 2012, following shareholders’ approval at the AGM, amounted to £37 million of which £1 million was settled via the scrip dividend option.
Notes to the consolidated financial statements continued 14. Earnings per share The profit attributable to owners for the purposes of calculating earnings per share has been calculated as set out below. This is after adjusting for profits attributable to non-controlling interests.
Profit/(loss) for the year 409 (98) Share of result attributable to non-controlling interests (17) (33) Profit/(loss) attributable to owners 392 (131)
The basic earnings per share of 226.3p (2011: (76.2p)) has been based on the profit attributable to owners of the parent of £392 million (2011: loss £131 million) and a weighted average number of ordinary shares outstanding during the year of 173 million (2011: 171 million), calculated as follows: million
Issued ordinary shares at beginning of the year 174 171 Effect of ordinary shares issued/redeemed – 1 Own shares held by employee trust and Group entities (1) (1) Weighted average number of ordinary shares 173 171
The following instruments could potentially dilute basic earnings per share in the future but have not been included in the diluted earnings per share figure because, due to their exercise price, they did not have a dilutive effect for the periods presented: − 5 million warrants issued to certain entities providing finance to the Group (‘the Lenders’) on 2 September 2009; − 12.36 million warrants issued to Royal London on 2 September 2009; and
Authorised: 410 million (2011: 410 million) ordinary shares of €0.0001 each 31,750 31,750
Vested to employees in year – (2) Shares sold in year (1) –
Notes to the consolidated financial statements continued 17. Share-based payment (continued) 17.2 Share-based payment schemes in issue Long-term incentive plan (‘LTIP’) In 2009, 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. Assuming no good leavers or other events which would trigger early vesting rights, these awards will be subject to performance conditions tied to the Company’s financial performance in respect of growth in embedded value, cumulative cash generation over a three year period and, with respect to the 2012 LTIP only, total shareholder return (‘TSR’). There are no cash settlement alternatives. The 2009 LTIP awards vested in 2010. Further awards were made in 2010 which will vest on 28 May 2013, in 2011 which will vest on 12 April 2014 and in 2012 which will vest on 2 April 2015.
Expected volatility (%) based on the Company’s share price volatility to date
Bonus share plan (‘BSP’) In 2009, certain employees were granted nil-cost options to acquire an allocated number of ordinary shares. There were no performance criteria associated with these awards and no cash settlement alternatives. The contractual life of the awards was two years and the fair value of these awards was estimated at the share price at the grant date, taking into account the terms and conditions upon which the options were granted. The majority of awards vested in 2011 with the remainder vesting in 2012.
The awards vested on 2 September 2012 and £1 million was paid out to employees. The carrying amount of the liability relating to the cash-settled options at 31 December 2012 is therefore £nil (2011: £2 million).
Deferred bonus share plan (‘Deferred BSP’) With effect from 31 December 2010, part of the annual incentive for certain executives, for any year, is deferred into Phoenix Group Holdings’ shares. This grant of shares is conditional on the employee remaining in employment with the Group for a period of 3 years. The 2011 Deferred BSP shares are expected to vest on 6 April 2014 and the 2012 Deferred BSP shares are expected to vest on 2 April 2015.
Outstanding at the beginning of the year 2,558,480 1,128,617 88,729 229,370 20,000 Granted during the year 1,608,102 473,463 112,668 – – Forfeited during the year (303,143) (179,504) – – – Cancelled during the year – (412,625) – – – Exercised during the year – – (16,259) (229,370) (20,000) Outstanding at the end of the year 3,863,439 1,009,951 185,138 – –
Outstanding at the beginning of the year 1,424,549 1,037,214 – 229,370 326,250 Granted during the year 1,405,116 310,366 88,729 – Forfeited during the year (271,185) (206,851) – – – Exercised during the year – (12,112) – – (306,250) Outstanding at the end of the year 2,558,480 1,128,617 88,729 229,370 20,000
The weighted average fair value of options granted during the year was £4.53 (2011: £5.65).
Notes to the consolidated financial statements continued 18. Non-controlling interests (continued) 2011
The Notes have no fixed maturity date and coupon payments may be deferred at the option of PGH1; accordingly the Notes meet the definition of equity for financial reporting purposes. Under the rules of the FSA, the Notes also meet the conditions to be included in Tier 1 capital in the calculation of the group capital resources. As the Notes are not held by the Company, these are disclosed as a non-controlling interest in the consolidated financial statements.
For so long as a deferred coupon payment has not been satisfied PGH1 may not declare, pay or distribute a dividend on any of its securities in issue ranking junior to the Notes including the ordinary shares of PGH1 or any parity securities or, except in particular circumstances, redeem, purchase or otherwise acquire any of its securities in issue ranking junior to the Notes, including its ordinary shares or any parity securities. These restrictions would also apply to the Company until the deferred coupon payment is satisfied.
On 25 April 2012, the 2012 coupon was settled in full by PGH1, other than to two companies within the Group which waived their right to receive that coupon.
Following a bookbuilding process, the Group disposed of an aggregate of 47,826,087 shares in UKCPT (amounting to 4% of the issued share capital of UKCPT) at a price of 69p per share on 21 March 2012. Following completion of the sale the Group now holds 62% (2011: 66%) of the issued share capital of UKCPT.
Property Reversions loan (note b) 194 217 194 217 £200 million 7.25% unsecured subordinated loan (note e) 143 135 173 154 Unsecured loan notes (note f) – 7 – 7 £2,260 million syndicated loan facility (note g) 1,852 1,993 1,797 1,843 £100 million PIK notes and facility (note h) 116 111 98 85 £75 million secured loan note (note i) 75 73 35 33
Notes to the consolidated financial statements continued 21. Borrowings (continued) Debenture loans a. In 1998, National Provident Institution raised £260 million of capital through the securitisation of embedded value on a block of existing unit-linked and unitised with-profit life and pension policies. Following the demutualisation of National Provident Institution, these were transferred to National Provident Life Limited (‘NPLL’). The bonds were split between two classes, which rank pari passu. The £140 million 7.39% class A1 limited recourse bonds (2011: £11 million) matured in 2012. The final principal repayment of £11 million was made in September 2012 as per the terms of the agreement. The £120 million 7.59% class A2 limited recourse bonds with an outstanding principal of £116 million (2011: £120 million) have an average remaining life of 6 years maturing in 2022. NPLL has provided collateral of £50 million (2011: £65 million) to provide security to the holders of the NPLL recourse bonds in issue.
f. Unsecured loan notes of £72 million were issued by Impala Holdings Limited (‘Impala’) at par on 14 May 2008 at an interest rate of LIBOR minus 1% per annum which matured at the end of 2012. During the year the loan notes were settled in full and the remaining outstanding balance of £7 million (2011: £5 million payment made) was paid.
− Tranche C loan of £492.5 million is repayable on 30 November 2016 and attracts interest at LIBOR plus a cash margin of 1.75% and a PIK margin of 0.25% for the first four years and LIBOR plus a cash margin of 3.75% for the subsequent years.
h. On 14 May 2008, PGH (MC1) Limited issued PIK notes to the value of £154.5 million to Royal London and PGH (MC2) Limited obtained a £154.5 million PIK facility from Royal London. The PIK notes and facility were subsequently amended on 2 September 2009, leaving a total of £100 million outstanding. Interest accrues on the PIK notes and facility at LIBOR plus a margin of 2% unless an election is made by PGH (MC1) Limited or PGH (MC2) Limited to capitalise the interest, in which case the margin increases to 3.5%. During 2012, interest of £5 million (2011: £5 million) was capitalised on the PIK notes and facility. The final maturity date on the PIK notes and facility is 30 June 2019.
i. On 15 November 2006, PGH (LCA) Limited and PGH (LCB) Limited jointly became a party to a £905 million loan facility from a syndicate of external banks (the ‘Pearl Facility’). This loan was subsequently amended on 2 September 2009, leaving £425 million outstanding on this facility and £75 million of secured C loan notes.
Notes to the consolidated financial statements continued 22. Deposits received from reinsurers £m 2011 £m
Amount due for settlement after 12 months 420 439 23. Derivatives The Group purchases derivative financial instruments in connection with the management of its insurance contract and investment contract liabilities based on the principles of reduction of risk and efficient portfolio management. The Group does not typically hold derivatives for the purpose of selling or repurchasing in the near term or with the objective of generating a profit from short-term fluctuations in price or margin.
The fair values of derivative financial instruments are as follows: Assets £m £m £m
At 1 January 2011, 31 December 2011 and 31 December 2012 8,169,868 5,000,000 12,360,000
IPO warrants The IPO warrants originally entitled the holder to purchase one ordinary share at a price of €7.00 per share, subject to adjustment, at any time commencing on the consummation of a business combination. On 2 September 2009 the exercise price was increased to €11. At 31 December 2012, the terms of the IPO warrants entitled the holder to purchase 1.027873 (2011: 1.0272) ordinary shares per IPO warrant, for an exercise price of €10.70 (2011: €10.71).
The exercise period for the IPO warrants commenced on 2 September 2009, and will expire at the close of trading on the LSE on 3 September 2014 or earlier upon redemption or liquidation. The Company may call the warrants for redemption: − in whole but not in part; − at a price of €0.01 per warrant; − upon not less than 30 days’ prior written notice of redemption to each warrant holder; and
− If the foregoing conditions are satisfied and the Company issues notice of redemption of the warrants, each warrant holder shall be entitled to exercise their warrant prior to the scheduled redemption date. However, the price of the shares may fall below the redemption trigger price or the warrant exercise price after the redemption notice is issued.
− the valuation incorporates the impact of amending some of the terms of the warrants on 8 May 2012.
At 31 December 2012 the IPO warrants were valued at £1 million (2011: £1 million).
All outstanding Lenders’ warrants may be redeemed at the option of the Company at any time after they become exercisable and prior to their expiration at a price of €0.01 per warrant provided that the last closing bid price of the ordinary shares is equal to or exceeds £18.97 (2011: £18.98) on each of 20 consecutive trading days. The Company must give not less than 30 days notice of the redemption date. Each warrant may then be exercised by the warrant holder (in whole or any part) at its option.
Notes to the consolidated financial statements continued 23. Derivatives (continued) Royal London warrants On 2 September 2009, the Company issued 12.36 million warrants (2 million transferable and 10.36 million nontransferable ) over its shares to Royal London as part consideration for acquiring the benefit of £250 million of the PIK notes and facility outstanding (comprising principal and capitalised interest). These warrants entitled the holder to purchase one ‘B’ ordinary share at a price of €11 per share, subject to adjustment. Following the achievement of the Company’s Premium Listing, the Royal London warrants relate to ordinary shares rather than ‘B’ ordinary shares. At 31 December 2012 the terms of the Royal London warrants entitled the holders to purchase 1.027873 (2011: 1.0272) ordinary shares per Royal London warrant for an exercise price of €10.70 (2011: €10.71).
The exercise period terminates on the first to occur of: − 5th anniversary of the date issued; − date fixed for the redemption of the warrants; and
The key assumptions used to ascertain a value as at 31 December 2012 are as for the IPO warrants (see above). The value of the warrants at the year end was £2 million (2011: £2 million).
Amount due for settlement after 12 months 1,002 1,552 25. Financial liabilities Carrying value Fair value £m £m
The leasehold properties provision has been made for amounts 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. The discount rate used ranged between 2.6% and 5.5% (2011: 3.92% and 5%) and it is expected that the provision will be utilised over the next 12 years (2011: 13 years).
Staff related provisions include provisions for unfunded pensions of £6 million (2011: £5 million) and private medical insurance costs for former employees of £3 million (2011: £3 million). These provisions have been calculated on a realistic basis.
Current tax receivables 6 8 Net deferred tax assets – – Total tax assets 6 8 Current tax payables 71 105 Net deferred tax liabilities 409 673 Total tax liabilities 480 778
Trading losses 107 37 Expenses and deferred acquisition costs carried forward 5 14 Provisions and other temporary differences 9 11 Pension scheme deficit 97 – Accelerated capital allowances 17 18 Unpaid interest 62 34 Gross deferred tax assets 297 114 Less: offset against deferred tax liabilities (297) (114) Net deferred tax assets – –
Deferred tax assets have not been recognised in respect of: Tax losses carried forward 52 102 Excess expenses and deferred acquisition costs carried forward – 22 Provisions and other temporary differences 7 14 Deferred tax assets not recognised on capital losses1 229 262 1 These can only be recognised against future capital gains and have no expiry date.
Accruals and deferred income 171 175 Less amounts classified as held for sale (note 3) (5) –
Amount due for settlement after 12 months 3 6 30. Other payables £m £m
Less amounts classified as held for sale (note 3) (5) –
31. Pension schemes The Group operates two main staff pension schemes, the Pearl Group Staff Pension Scheme and the PGL Pension Scheme.
Notes to the consolidated financial statements continued 31. Pension schemes (continued) The total net actuarial (losses)/gains recognised in the statement of consolidated comprehensive income is set out below.
Pearl Group Staff Pension Scheme (252) 81 PGL Pension Scheme (170) 170 Total actuarial (losses)/gains (422) 251
31.1 Pearl Group Staff Pension Scheme The Pearl Group Staff Pension Scheme (‘the Pearl Scheme’) comprises a final salary section, a money purchase section and a hybrid section (a mix of final salary and money purchase). The final salary and hybrid sections of the Pearl Scheme are closed to new members.
Defined benefit scheme The defined benefit scheme is funded by payment of contributions to a separately administered trust fund. A Group company, PGH2, is the principal employer of the Pearl Scheme. The principal employer meets the administration expenses of the Pearl Scheme.
The valuation has been based on an assessment of the liabilities of the Pearl Scheme as at 31 December 2012, undertaken by independent qualified actuaries. The present values of the defined benefit obligation and the related current service costs have been measured using the projected unit credit method.
The scheme has been closed to future accrual by active members since 1 July 2011. Thus, the active members became deferred members of the scheme and their future service will not qualify for benefits under the scheme.
In November 2011, following formal consultation, the Group carried out a pension increase exchange (‘PIE’) exercise where existing in-scope pensioners were offered the option to exchange future non-statutory pension increases for benefits accrued before 6 April 1997 for a higher, non-increasing pension, thereby reducing longevity and inflation risk for the Group. The offer period for this exercise formally closed in February 2012.The financial effect of all acceptances received in the period and any reversals of acceptances received in the prior period, has been recognised in the consolidated financial statements and the reduction in scheme liabilities of £3 million (2011: £16 million) is shown as a negative past service cost in the consolidated income statement.
The expected rate of return on scheme assets is derived after considering historical returns and assuming that asset classes with higher volatility generate higher returns (consistent with widely accepted capital market principles). The overall expected return on assets is then derived by aggregating the expected return for each asset class over the actual asset allocation.
A triennial funding valuation of the Pearl Scheme as at 30 June 2009 was completed in June 2010. This showed a deficit on the funding basis as at 30 June 2009 of £755 million. The triennial funding valuation of the Pearl Scheme as at 30 June 2012 is currently being performed and the initial estimate prepared by the actuary for the Pearl Scheme is that the deficit as at 30 June 2012 was £480 million, on the agreed technical provisions basis.
(ii) to reach full funding on a gilts flat basis by 30 June 2031; − the Trustee continues to benefit from a first charge over shares in Phoenix Life Assurance Limited, London Life, National Provident Life Limited, Pearl Group Services Limited and PGS2 Limited. The value of the security claim granted under the share charges is, since 30 June 2012, capped at the lower of £600 million and 60% of the Pearl Scheme deficit (calculated on a basis linked to UK government securities) revalued every three years thereafter. Immediately following the repayment of the £425 million loan facility and £75 million of secured C loan notes (see note 21) the value of the security claim increases to 100% of the Pearl Scheme deficit (on a basis linked to UK government securities) revalued every three years, subject to a £600 million cap; and
− covenants test relating to the embedded value of certain companies within the Group.
The (deficit)/surplus recognised in the statement of financial position is as follows: £m 2011 £m
Fair value of scheme assets 1,870 1,865 Present value of defined benefit obligation (1,984) (1,809) Provision for tax on the economic surplus available as a refund – (19) Irrecoverable amount of deficit reduction contributions (83) –
Expected return on scheme assets 75 81 Actual return less expected return on scheme assets (7) 110
Current service cost 1 1 Interest cost 85 95 Past service cost (3) (16) Curtailment gain – (3) Actuarial losses 181 9 Benefits paid (89) (79)
The change in the fair value of the scheme assets is as follows: £m 2011 £m
The distribution of the scheme assets at the end of the year was as follows: £m £m
Private equities 35 – Hedge fund 801 – Cash and other 135 149
31.2 PGL Pension Scheme The PGL Pension Scheme comprises a final salary section and a defined contribution section.
Defined contribution scheme Contributions in the year amounted to £1 million (2011: £2 million).
The valuation has been based on an assessment of the liabilities of the PGL Pension Scheme as at 31 December 2012, undertaken by independent qualified actuaries.
In November 2011, the Group commenced an Enhanced Transfer Value (‘ETV’) exercise which offered in-scope deferred members of the PGL Pension Scheme the option to take an Equivalent Cash Transfer Value to exit the Scheme, thereby extinguishing any future liability and risk for the Group with respect to these members. The financial effect of all completed transfers has been recognised in the consolidated financial statements in 2012. As at 31 December 2012, ETVs of £36 million have been paid out, reducing scheme assets, and there was a resulting reduction in the scheme liabilities of £29 million. The net settlement cost of £7 million has been recognised in the consolidated income statement.
The principal financial assumptions of the PGL Pension Scheme are set out below.
Rate of increase for pensions in payment 2.85 3.00 Rate of increase for deferred pensions (‘CPI’) 2.25 2.10 Discount rate 4.50 4.90 Inflation – RPI 3.00 3.10 Inflation – CPI 2.25 2.10 Expected rate of return on scheme assets 3.90 3.90
It has been assumed that post-retirement mortality is in line with standard tables PNA00 with a scaling factor of 105% being applied, allowing for future improvements in line with the long cohort improvement factors, subject to a minimum improvement from 2007 onwards of 1.25% p.a. and 0.75% p.a. for males and females respectively. Under these assumptions, the average life expectancy from retirement for a member currently aged 40 retiring at age 60 is 31.7 years and 34.1 years for male and female members respectively.
Actual return less expected return on scheme assets (51) 327 Experience loss arising on scheme liabilities (64) (15) Loss due to changes in assumptions underlying scheme liabilities (92) (25)
The cumulative net actuarial gains recognised in other comprehensive income amounted to £83 million (2011: £253 million).
The surplus recognised in the statement of financial position is as follows: £m £m
Current service cost 1 3 Interest cost 56 63 Past service cost (1) (11) Curtailment gain – (7) Actuarial losses 156 40 Settlement – ETV (29) – Benefits paid (57) (47)
Expected return on scheme assets 62 66 Actual return less expected return on scheme assets (51) 327 Contributions by the employer 31 30 Settlement – ETV (36) – Benefits paid (57) (47)
Contributions totalling £23 million are expected to be paid into the scheme in 2013.
Charge for the year – 122 18 – 140 Amounts classified as held for sale (note 3) – (27) – – (27)
The carrying amount of goodwill allocated to the Phoenix Life segment is £39 million (2011: £58 million) and to the Ignis Asset Management segment is £57 million (2011: £57 million).
Acquired in-force business Acquired in-force business represents the difference between the fair value of the contractual rights acquired and obligations assumed under insurance and investment contracts with and without DPF 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 within the Phoenix Life segment.
The second part of the customer relationships intangible relates to the investment management contracts (‘IMCs’) held within Ignis Asset Management. These are further split into IMCs held with open ended funds and institutional mandates. The open ended IMCs had a value at acquisition of £130 million and an indefinite useful economic life (‘UEL’). The reason for the indefinite UEL is that funds are open ended and indefinite in nature. An impairment review has been completed for these intangibles at the period end with an indefinite life and no impairment has arisen. Under this impairment review, value in use has been determined as the present value of future cash flows associated with the open-ended IMCs. The cash flows used in this calculation are consistent with those adopted by management in the Group’s operating plan, with a declining growth rate assumed for the extended forecast period beyond the period of this plan. Future cash flows have been valued using a discount rate of 10.1% (2011: 10.0%). The institutional mandate IMCs had a value at acquisition of £18 million and a UEL of between 5 and 7 years.
These IMC customer relationships have been allocated to the Ignis Asset Management segment.
The valuation of land and buildings is carried out at least every three years as at 31 December by external surveyors in accordance with the Royal Institution of Chartered Surveyors’ requirements under an open market valuation basis. The Group’s main operating site in Wythall is owned by one of the Group’s management services companies following its purchase from one of the Group’s with-profit funds during 2012.
Direct operating expenses (offset against rental income in the income statement) in respect of investment properties that generated rental income during the year amounted to £8 million (2011: £4 million). The direct operating expenses arising from investment property that did not generate rental income during the year amounted to £2 million (2011: £2 million).
Less amounts classified as held for sale (note 3) (61) –
Financial assets at fair value Derivatives 37 3,616 12 3,665 Financial assets designated at fair value through profit or loss upon initial recognition
Less amounts classified as held for sale (note 3) (61) – – (61)
Total financial liabilities at fair value 3,040 12,487 169 15,696 36.3 Level 3 financial instrument sensitivities Included in Level 3 investments is a property investment structure with a value of £102 million (2011: £102 million). It has been valued by taking the fair value of the property within the structure, which has been independently valued, less the fair value of the debt within the structure. The valuation is sensitive to movements in yields on the underlying property portfolio. An increase in yields of 25bps would reduce the value of the investment by £22 million (2011: £23 million) and a reduction in yields of 25bps would increase the value by £25 million (2011: £25 million).
Notes to the consolidated financial statements continued 36. Financial instrument fair value hierarchy (continued) 36.4 Significant transfers of financial instruments between Level 1 and Level 2 2012
The Group generally saw an improvement in the liquidity of the fixed and variable rate securities market throughout 2012, which resulted in a number of securities moving from Level 2 into Level 1.
36.5 Movement in Level 3 financial instruments measured at fair value 2012
Fixed and variable rate income securities 862 (67) (171) (124) 500 (72)
37. Stock lending and collateral The Group lends listed financial assets held in its investment portfolio to other institutions. The Group conducts its stock lending programme only with well-established, reputable institutions in accordance with established market conventions.
Where the Group receives collateral 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 the collateral received. The amount recognised as a financial asset and a financial liability at 31 December 2012 is £9,269 million (2011: £10,823million) and £9,249 million (2011: £10,916 million) respectively.
The maximum exposure to credit risk in respect of OTC derivative assets is £3,619 million (2011: £6,045 million) of which credit risk of £3,492 million (2011: £5,871 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 £46 million (2011: £54 million) is mitigated through regular margining and the protection offered by the exchange.
Where the Group pledges collateral in the form of cash or marketable securities and retains all the risks and rewards of the transferred assets, they continue to be recognised in the statement of consolidated financial position. The value of assets pledged at 31 December 2012 in respect of OTC derivative liabilities of £3,002 million (2011: £4,268 million) amounted to £1,048 million (2011: £236 million).
Collateral has also been pledged and charges granted in respect of certain of the Group’s borrowings as set out in note 21 In addition, the Trustee of the Pearl Group Staff Pension Scheme has been granted certain charges as set out in note 31.
Bank and cash balances 1,764 1,713 Short-term deposits (including demand and time deposits) 7,264 10,010
Profit/(loss) for the year before tax 323 (4) Non-cash movements in profit for the year before tax
Change in fair value of borrowings 11 20 Depreciation of property, plant and equipment 3 3 Impairment of owner occupied property 4 8 Amortisation of intangible assets 140 152 Change in PVFP – 19 Change in unallocated surplus 45 (16) Share-based payment charge 5 4 Interest expense on borrowings 215 251 Net expected return on pension assets 3 11 Other losses/(gains) on pension schemes 2 (37)
− optimise the overall gearing to ensure an efficient capital base.
Notes to the consolidated financial statements continued 41. Capital statement (continued) Capital Management Framework (continued) The capital policy of each Group holding company is designed to ensure that there is sufficient liquidity to meet creditor obligations through the combination of cash buffers and cash flows from the Group’s operating companies.
Further details on the Group’s gearing calculation (unaudited) is printed in the Business review on page 39.
Regulatory capital requirements of the Group Insurance Groups’ Directive (‘IGD’) FSA regulated insurance groups (including their holding companies) are also required to assess capital adequacy on a Group wide basis to enable the FSA to assess both the level of insurance and financial risk within the Group and the capital resources available to cover that risk. The assessment is known as the IGD.
For this measure the capital resources include the surplus over capital policy in the life companies, a prudent assessment of the present value of future profits of Ignis Asset Management and the net assets of the Holding Companies, less the pension scheme obligations on an economic basis. The capital requirements relate to the risks arising outside of the life companies including those in relation to the Group’s staff pension schemes, offset by Group diversification benefits. Further detail of the PLHL ICA position is provided in the business review (unaudited) on page 38.
Pillar 2 The Pillar 2 capital requirements are based on a self-assessment methodology, called the ‘Individual Capital Assessment’ (‘ICA’). This methodology determines the capital requirement to ensure that the life company’s realistic liabilities can be met in one year’s time with a 99.5% confidence level, or in other words to be able to withstand a one in 200 year event. The FSA reviews each life company’s ICA and may impose additional capital requirements if necessary in the form of ‘Individual Capital Guidance’ (‘ICG’).
Other qualifying capital: Subordinated debt – – – – – – – Contingent loans – – – – – 350 350 Total available capital
Owners’ funds held outside long-term fund – – 1,688 1,688 (763) 925 Owners’ funds held in long-term fund – 727 – 727 – 727
Other qualifying capital: Subordinated debt3 – – 645 645 Contingent loans 412 (73) (209) 130
Owners’ funds held in long-term fund – – – – – – –
Other qualifying capital: Contingent loans – – – – – 412 412
An analysis of the movement in available capital resources for the period 1 January 2012 to 31 December 2012 is shown below: With-profit
Phoenix Life – – – – – – – (494) (494) New business and other factors: Intragroup capital
Notes to the consolidated financial statements continued 42. Risk management The Group’s overall approach to risk management is described in the Risk management commentary on pages 41 to 46 of the Annual Report and Accounts.
42.1 Risk and capital management objectives The risk management objectives and policies of the Group are based on the requirement to protect the Group’s regulatory capital position, thereby safeguarding policyholders’ guaranteed benefits whilst also ensuring the Group can meet its various cash flow requirements. Subject to this, the Group seeks to use available capital to achieve increased returns, balancing risk and reward, to generate additional value for policyholders and shareholders.
More detail on the Group’s exposure to financial risk is provided in note 42.3 below.
The Group is also exposed to insurance risk arising from its Phoenix Life segment. Life insurance risk in the Group arises through its exposure to mortality, longevity and to other variances between assumed and actual experience. These variances can be in factors such as persistency levels and management and administrative expenses. More details on the Group’s exposure to insurance risk are provided in note 42.5 below.
42.3 Financial risk analysis Transactions in financial instruments result in the Group assuming financial risks. These include credit risk, market risk and financial soundness risk. Each of these are described below, together with a summary of how the Group manages them.
There are two principal sources of credit risk for the Group: − Credit risk which results from direct investment activities, including investments in fixed and variable rate income securities, derivatives, collective investment schemes and the placing of cash deposits; and
− Credit risk which results indirectly from activities undertaken in the normal course of business. Such activities include premium payments, outsourcing contracts, reinsurance, exposure from material suppliers and the lending of securities.
The impact of non-government fixed and variable rate income securities and, inter alia, the change in market credit spreads during the year is fully reflected in the values shown in these financial statements. Credit spreads are the excess of corporate bond yields over gilts yields to reflect the higher level of risk. Similarly, the value of derivatives that the Group holds takes into account fully the changes in swap rates.
A 100 basis point narrowing of credit spreads, with all other variables held constant and no change in assumed expected defaults, would result in an increase in the profit after tax in respect of a full financial year, and in equity, of £72 million (2011: £95 million).
Quality of credit assets An indication of the Group’s exposure to credit risk is the quality of the investments and counterparties with which it transacts. The following table provides information regarding the aggregate credit exposure split by credit rating (ratings obtained from reputable rating agencies are used in deriving the table below): AAA
Notes to the consolidated financial statements continued 42. Risk management (continued) 42.3 Financial risk analysis (continued) 2011
Reinsurance receivables 257 – – – – – 257 Prepayments and accrued
Please refer to page 177 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.
Assets backing unit-linked business have not been analysed in these tables as the credit risk on such financial assets is borne by the policyholders. However, these assets have been included as a separate column in these tables to reconcile the information to the statement of consolidated financial position. Shareholder credit exposure on unit-linked assets is limited to the level of asset manager fee which is dependent on the underlying assets.
Concentration of credit risk Concentration of credit risk might exist where the Group has significant exposure to an individual counterparty or a group of counterparties with similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic and other conditions. The Group has most of its counterparty risk within its life business and this is monitored by the counterparty limits contained within the investment guidelines and investment management agreements, overlaid by regulatory requirements and the monitoring of aggregate counterparty exposures across the Group.
− the income flow of management charges from the invested assets of the business.
All operations comply with regulatory requirements relating to the taking of market risk.
With-profit business and non-participating business within the with-profit funds are exposed to interest rate risk as guaranteed liabilities are valued relative to market interest rates and investments include fixed interest securities and derivatives. For with-profit business the profit or loss arising from mismatches between such assets and liabilities is largely offset by increased or reduced discretionary policyholder benefits dependent on the existence of policyholder guarantees. The contribution of these funds to the Group result is determined primarily by either the shareholders’ share of the declared annual bonus or by the shareholders’ interest in any change in value in the capital advanced to the Group’s with-profit funds.
Equity, property and inflation risk The Group has exposure to financial assets and liabilities whose values will fluctuate as a result of changes in market prices other than from interest rate and currency fluctuations. This is due to factors specific to individual instruments, their issuers or factors affecting all instruments traded in the market. Accordingly, the Group limits its exposure to anyone counterparty in its investment portfolios and to any one foreign market.
A 10% decrease in equity prices, with all other variables held constant, would result in an increase in the profit after tax in respect of a full financial year and, in equity, of £12 million (2011: an increase of £16 million).
A 10% decrease in property prices, with all other variables held constant, would result in a decrease in the profit after tax in respect of a full financial year, and in equity, of £19 million (2011: £43 million).
Certain Phoenix Life with-profit funds have an exposure to overseas assets which is not driven by liability considerations. The purpose of this exposure is to reduce overall risk whilst maximising returns by diversification. This exposure is limited and managed through investment mandates which are subject to the oversight of the Investment Committees of the Boards of each life company. Fluctuations in exchange rates from certain holdings in overseas assets are hedged against currency risks.
Notes to the consolidated financial statements continued 42. Risk management (continued) 42.3 Financial risk analysis (continued) Financial control and reporting risk is defined as the failure of the Group to appropriately record, report or disclose financial information. The Group has exposure to financial control and reporting risk through the production of its Interim and Annual Report and Accounts. The Group’s subsidiaries have exposure to financial control and reporting risk through their annual entity statutory and regulatory reporting.
Capital management risk is defined as the failure of the Group, or one of its separately regulated subsidiaries, to maintain sufficient capital to provide appropriate security for policyholders and meet all regulatory capital requirements whilst not retaining unnecessary capital. The PLHL Group has exposure to capital management risk through the requirements of the IGD and ICA, as implemented by the FSA, to calculate regulatory capital adequacy at a Group level. The Group’s UK life subsidiaries have exposure to capital management risk through the regulatory capital requirements mandated by the FSA. The Group’s approach to managing capital management risk is described in detail in note 41.
Net asset value attributable to unitholders 4,671 – – – 4,671 Obligations for repayment of collateral received 9,456 157 845 – 10,458 Reinsurance payables 47 – – – 47 Payables related to direct insurance contracts 393 – – – 393 Accruals and deferred income 163 2 – 1 166 Other payables 509 – – – 509 1 year or less or on demand £m 1–5 years £m
Net asset value attributable to unitholders 3,209 – – – 3,209 Obligations for repayment of collateral received 11,453 255 1,297 – 13,005 Reinsurance payables 33 – – – 33 Payables related to direct insurance contracts 668 39 – – 707 Accruals and deferred income 169 4 – 2 175
A significant proportion of the Group’s financial assets are held in gilts, cash, supranationals and highly rated securities which the Group considers sufficient to meet the liabilities as they fall due. The vast majority of these investments are readily realisable immediately since most of them are quoted in an active market.
42.4 Unit-linked contracts For unit-linked contracts the Group matches all the liabilities with assets in the portfolio on which the unit prices are based. There is therefore no interest, price, currency or credit risk for the Group on these contracts.
The estimation of the provisions for the ultimate cost of claims for asbestos and environmental pollution is subject to a range of uncertainties that is generally greater than those encountered for other classes of insurance business and as a consequence of this uncertainty the eventual costs of settlement of outstanding claims and unexpired risks can vary substantially from the estimates.
A decrease of 5% in assurance mortality, with all other variables held constant, would result in an increase in the profit after tax in respect of a full year, and an increase in equity of £25 million (2011: £24 million).
An increase of 5% in assurance mortality, with all other variables held constant, would result in a decrease in the profit after tax in respect of a full year, and a decrease in equity of £25 million (2011: £24 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 £132 million (2011: £191 million).
A decrease of 25% in lapse rates, 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 £51 million (2011: £56 million).
Change in longevity assumptions (5) (72) Change in persistency assumptions 32 18 Change in expenses assumptions (1) (25)
Valuation interest rate For realistic basis companies the liabilities are determined stochastically using an appropriate number of risk neutral scenarios produced by an economic scenario generator calibrated to market conditions and gilt yields as at the valuation date.
In common with other life companies in the UK which have written pension transfer and opt-out business, the Group has set up provisions for the review and possible redress relating to personal pension policies. These provisions, which have been calculated from data derived from detailed file reviews of specific cases and using a certainty equivalent approach, which give a result very similar to a market consistent valuation, are included in liabilities arising under insurance contracts. The total amount provided in the with-profit funds and non-profit funds in respect of the review and possible redress relating to pension policies, including associated costs, are £338 million (2011: £409 million) and £16 million (2011: £22 million) respectively.
The Group has significant discretion regarding investment policy, bonus policy and early termination values. The process for exercising discretion in the management of the with-profit funds is set out in the PPFM for each with-profit fund and is overseen by With-Profit Committees. Advice is also taken from the with-profit actuary of each with-profit fund. Compliance with the PPFM is reviewed annually and reported to the FSA and policyholders.
The main risks associated with this product are longevity and investment risks. Longevity risk arises where the annuities are paid for the lifetime of the policyholder, and is managed through the initial pricing of the annuity and through reinsurance (appropriately collateralised) or transfer of existing liabilities. Annuities may also be a partial ‘natural hedge’ against losses incurred in protection business in the event of increased mortality (and vice versa) although the extent to which this occurs will depend on the similarity of the demographic profile of each book of business.
The main risk associated with this product is the claims experience and this risk is managed through the initial pricing of the policy (based on actuarial principles), the use of reinsurance and a clear process for administering claims.
Not later than 1 year 10 15 Later than 1 year and not later than 5 years 41 56 Later than 5 years 28 35
Transactions with pension schemes During the year the Group entered into the following transactions with its pension schemes: Transactions 2012 £m
Information on other transactions with the pension schemes is included in note 31.
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 £m
Phoenix Life Limited (life assurance company) UK Ordinary shares of £1 Scottish Mutual International Limited (life assurance company) ROI Ordinary shares of €1.25
Non-insurance companies Ignis Asset Management Limited (holding company) UK Ordinary shares of £1
Impala Holdings Limited (holding company) UK ‘A’ ordinary shares of £1, ‘B’ ordinary shares of £1
Mutual Securitisation plc (finance company) ROI Quasi subsidiary NP Life Holdings Limited (holding company) UK ‘A’ ordinary shares of £1 and ‘B’
Preference shares of £1 PGH (MC1) Limited (finance company) UK Ordinary shares of £1 and
Notes to the consolidated financial statements continued 48. Events after the reporting period In January 2013 the Group announced the re-terming of the Impala facility and an equity raising of £250 million. The equity raising comprised equity placings with certain Och-Ziff funds and an open offer to raise aggregate gross proceeds of £250 million through the issuance on 21 February 2013 of 50 million ordinary shares. The proceeds of the equity raising net of deduction of commissions, fees and expenses were £232 million.
This equity raising enabled the re-terming of the Impala facility and contributed to the £450 million prepayment on 22 February 2013. Following the re-terming the bullet repayments which were due in 2014, 2015 and 2016 have been replaced by a single tranche repayable by June 2019 (assuming the option to extend to this date is validly exercised). The mandatory repayments on the Impala facility have been reduced from £125 million per annum to £60 million per annum. The terms of this new facility are: − repayment instalments of £30 million are due semi-annually on 30 June and 31 December each year; − the facility maturity date is 31 December 2017, with the option for the Group to extend this date to 30 June 2019; and
− the facility bears interest at LIBOR plus a margin of 4.75% per annum which would increase by: (i) 2.25% per annum after 31 December 2017 if the option to extend the final maturity date to 30 June 2019 is exercised; and
The rate will be reduced by 0.25% per annum with effect from 1 January 2015 if by that date the borrowers have made voluntary repayments of not less than £200 million in addition to all mandatory and target repayments.
On 21 March 2013 the Board recommended a final dividend of 26.7p per share (2011: 21p per share) for the year ended 31 December 2012. Payment of the final dividend is subject to compliance with the processes set out in the Group’s main credit facilities and shareholder approval at the AGM. The cost of this dividend has not been recognised as a liability in the financial statements for 2012 and will be charged to the statement of changes in equity in 2013.
Collective investment schemes 4,087 UKCPT 518 Cash held in other Group entities 314 General insurance business 17 Corporate derivative liabilities (52) Adjustments on consolidation (17) Total Group consolidated assets 78,214 Comprised of: Investment property 1,816 Financial assets 68,967 Cash and cash equivalents 11,723 Derivative liabilities (4,292)
2 Includes assets where policyholders bear most of the investment risk. In the second half of 2012 one with-profit fund has moved from ‘Participating non-supported’ to ‘’Participating supported’.
4 As a result of the reinsurance agreement entered into with Guardian Assurance Limited (‘Guardian’) effective 1 July 2012, £5.1 billion of shareholder financial assets were transferred to Guardian. These assets were made up of £610 million of cash and cash equivalents, £1,934 million of gilts and £2,580 million of bonds. Subsequent to this transfer £292 million of gilts were purchased to rebalance the remaining portfolio of financial assets.
5 Includes repurchase loans of £1,683 million (2011: £3,003 million), policy loans of £16 million (2011: £15 million), other loans of £22 million (2011: £41 million), net derivatives of £647 million (2011: £1,797 million) and other investments of £839 million (2011: £960 million).
Indirect exposure The £2,555 million shareholder exposure to financial institution corporate debt comprised £1,445 million (2011: £1,554 million) bank debt and £1,110 million (2011: £1,342 million) non-bank debt.
185 Statement of Directors’ responsibilities 186 Independent Auditor’s report 187 Summarised consolidated income statement – Group MCEV basis 187 MCEV earnings per ordinary share 188 Statement of consolidated comprehensive income – Group MCEV basis 188 Reconciliation of movement in equity – Group MCEV basis 189 Group MCEV analysis of earnings 190 Reconciliation of Group IFRS equity to MCEV net worth 191 Notes to the MCEV financial statements
The MCEV methodology adopted by the Group is in accordance with these MCEV principles with the exception of: – risk-free rates have been defined as the annually compounded UK Government bond nominal spot curve plus 10 basis points rather than as the swap rate curve; – the value of the asset management and the management service companies has been included on an IFRS basis; and
Further detail on these exceptions is included in note 1, Basis of preparation.
We have audited the Consolidated Phoenix Group MCEV (‘Phoenix Group MCEV’) supplementary information for the year ended 31 December 2012, which comprises the Summarised consolidated income statement – Group MCEV basis, MCEV earnings per ordinary share, Statement of consolidated comprehensive income – Group MCEV basis, Reconciliation of movement in equity – Group MCEV basis, Group MCEV analysis of earnings, Reconciliation of Group IFRS equity to MCEV net worth and related notes. The Phoenix Group MCEV supplementary information has been prepared by the Directors of Phoenix Group Holdings in accordance with the basis of preparation set out on pages 191 to 194.
Directors’ responsibilities for the Phoenix Group MCEV supplementary information The Directors are responsible for the preparation of this Phoenix Group MCEV supplementary information in accordance with the basis of preparation set out on pages 191 to 194 and for such internal control as the Directors determine is necessary to enable the preparation of supplementary information that is free from material misstatement, whether due to fraud or error.
Basis of accounting and restriction on use Without modifying our opinion, we draw attention to pages 191 to 194 of the Phoenix Group MCEV supplementary information, which describe the basis of preparation. The Phoenix Group MCEV supplementary information is prepared to comply with the basis of preparation set out on pages 191 to 194. As a result, the Phoenix Group MCEV supplementary information may not be suitable for another purpose. This report, including the opinion, has been prepared for and only for the Group’s Directors as a body in accordance with our letter of engagement dated 15 June 2011 and for no other purpose. We do not, in giving this opinion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.
Summarised consolidated income statement – Group MCEV basis For the year ended 31 December 2012 £m
Group MCEV earnings after tax Basic1 116.5p 31.5p 1 Based on 173 million shares (2011: 171 million) as set out in note 14 of the IFRS consolidated financial statements.
The earnings on life business are calculated on a post-tax basis and are grossed up at the effective rate of shareholder tax for presentation in the income statement. The tax rate used is the UK corporate tax rate of 24.5% (2011: 26.5%).
Other comprehensive income Actuarial (losses)/gains on defined benefit pension schemes (net of tax)
Operating MCEV earnings (after tax) 272 22 32 (19) 307 Non-operating MCEV earnings (after tax) 48 (2) 3 (154) (105)
Other comprehensive income – – – (131) (131) Capital and dividend flows – internal (861) 13 (17) 865 – Capital and dividend flows – external – – – (67) (67)
Operating MCEV earnings (after tax) 409 13 34 (39) 417 Non-operating MCEV earnings (after tax) (322) 15 (1) (55) (363)
Other comprehensive income – – – 9 9 Capital and dividend flows – internal (800) (26) (19) 845 – Capital and dividend flows – external – – – (49) (49)
Reconciliation of Group IFRS equity to MCEV net worth For the year ended 31 December 2012 £m
Group net assets attributable to owners of the parent as reported under IFRS 1,658 1,652 Goodwill and other intangibles in accordance with IFRS removed (net of tax) (431) (440) Value of in-force business in accordance with IFRS removed (net of tax) (1,234) (1,289) Adjustments to IFRS reserving1 (203) (47) Tax adjustments 6 8 Revalue listed debt to market value 123 161 Eliminate value of contingent loan asset2 – (160) Fair value adjustments3 4 (43) Eliminate after tax pension scheme surpluses (including IFRIC 14 adjustments)4 (186) (380) Other adjustments 8 27 MCEV net worth attributable to owners of the parent (255) (511) MCEV value of in-force business included (net of tax) as set out in note 2 2,377 2,629 Closing Group MCEV 2,122 2,118 1 Adjustments are made to the IFRS insurance liabilities to bring them into line with the reserving basis assumed in the MCEV value of in-force calculations. This impacts the allocation of MCEV between net worth and value of in-force and does not impact the total MCEV.
3 Investments carried at amortised cost under IFRS are revalued at market value.
4 Pension scheme surpluses valued on an IFRS basis are removed. This includes the IFRIC 14 adjustments as described in note 31 to the IFRS consolidated financial statements.
Notes to the MCEV financial statements 1. Basis of preparation Overview The supplementary information on pages 187 to 199 has been prepared on a Market Consistent Embedded Value (‘MCEV’) basis except for the items described further below.
The MCEV methodology adopted by the Group is in accordance with the MCEV principles and guidance published by the CFO Forum in June 2008 and amended in October 2009, except that: – risk-free rates have been defined as the annually compounded UK Government nominal spot curve plus 10 basis points rather than as a swap rate curve; – no allowance for the cost of residual non-hedgeable risk (‘CNHR’) has been made because, in the opinion of the Directors, the Group operates a robust outsourcer model in terms of operational risk, does not write new business, is focused entirely on the back book, and has succeeded in closing out significant legacy risks. The theoretical value of CNHR is disclosed separately in note 1 (b); and
Notes to the MCEV financial statements continued 1. Basis of preparation (continued) a) Net worth For the Group’s life companies, net worth is defined as the market value of shareholder funds plus the shareholders’ interest in surplus assets held in long-term business funds less the market value of any outstanding debt of the life companies.
– stochastic techniques have been used to value cash flows that have an asymmetric effect on cash flows to shareholders. Here, the calculation involves the use of stochastic models developed for the purposes of realistic balance sheet reporting.
Solvency II aims to introduce a new capital regime for insurers, these disclosures do not take account of the impact of the expected change in regime as this is still under development. In October 2012, the FSA announced that the implementation date for Solvency II will likely be deferred until at least 1 January 2016.
However, the CNHR calculated in accordance with the CFO Forum principles and guidance, and therefore without anticipating further risk management actions, has been disclosed below.
The National Provident Life Limited recourse bonds are backed by surpluses that are expected to emerge on blocks of its unit-linked and unitised with-profits business. This securitisation has been valued on a cash flow basis, allowing for payments expected to be due based on the projected level of securitised surpluses emerging. The full VIF of the securitised unit-linked and unitised with-profits business is expected to be payable to bondholders; therefore, no additional value accrues to the embedded value.
Notes to the MCEV financial statements continued 1. Basis of preparation (continued) e) New business The MCEV places a value on the profits expected to be earned on annuities arising from policies vesting with guaranteed annuity terms. These policies are excluded from the definition of new business on the basis that the annuity being provided is an obligation under an existing policy and the life companies are already reserving for the cost of these guarantees.
The 2011 comparatives have been restated in this regard. The impact of the 2011 restatement is to reduce ‘Group costs’ by £30 million from £84 million to £54 million, to increase ‘Tax on operating earnings’ by £7 million from £141 million to £148 million and other comprehensive income reduces by £23 million. There is no net impact on the closing 2011 MCEV.
2. Components of the MCEV of covered business 2012 £m 2011 £m
1 Expected existing business contribution (reference rate) represents the expected return on the opening MCEV at the long-term risk-free rate.
Notes to the MCEV financial statements continued 4. New business The value generated by new business written during the period is calculated as the present value of the projected stream of after-tax distributable profits from that business. This contribution has been valued using economic and non-economic assumptions at the point of sale. The value of new business is shown after the effect of frictional costs of holding required capital on the same basis as for the in-force covered business.
Present value of future profits (PVFP) 1-5 £m 6-10 £m 11-15 £m 20+ £m
The risk-free rates assumed for a sample of terms were as follows: Term Gilt yield + 10 bps Swap yield
The liabilities to which a liquidity premium is applied include immediate annuities, pensions policies with benefits defined as an annuity or in-the-money guaranteed annuity options. The liquidity premium is determined by reference to the yield on the bond portfolios held after allowing for credit risk by deducting margins for best estimate defaults and unexpected default risk premiums. The additional yield above risk-free rates implied by the calculated liquidity premium is as follows: Additional yield over risk-free rates 0.60% 0.90%
The Group holds £3.6 billion of corporate bonds which are used to back annuity in-payment liabilities in non-profit funds. The MCEV includes an aggregate credit default provision of £312 million, to fund against the risk of default on these corporate bonds.
Stochastic economic assumptions The time value of options and guarantees is calculated using an economic scenario generator. The model is calibrated to market conditions as at 31 December 2012. The scenario generator and calibration are consistent with that used for realistic balance sheet reporting.
Equity volatility is calibrated to replicate the prices on a range of FTSE equity options, and extrapolated beyond terms available in the market. The equity volatility model used allows volatility to vary with both term and the level of the equity index.
The table below summarises the value of these debt obligations: Face value (including accrued interest)
7. Sensitivity to assumptions The table below summarises the key sensitivities of the MCEV of covered business at 31 December 2012: Life MCEV
Annual General Meeting Our Annual General Meeting (‘AGM’) will be held on 2 May 2013 at 1pm.
Feb 13Jan 13Dec 12Nov 12Oct 12Sep 12Aug 12Jul 12Jun 12May 12Apr 12Mar 12Feb 12Jan 12
Registrar details Computershare Investor Services (Cayman) Limited c/o Queensway House Hilgrove Street St Helier Jersey JE1 1ES
Scrip dividend alternative The Company does not currently offer a scrip dividend alternative.
Warning to shareholders Over recent years, many companies have become aware that their shareholders have received unsolicited phone calls or correspondence concerning investment matters. These are typically from overseas-based ‘brokers’ who target UK shareholders, offering to sell them what often turn out to be worthless or high-risk shares in US or UK investments. These operations are commonly known as ‘boiler rooms’.
If you deal with an unauthorised firm, you would not be eligible to receive payment under the Financial Services Compensation Scheme. The FSA can also be contacted by completing an online form available at www.fsa.gov.uk/pages/doing/Regulated/Law/Alerts/form.shtml.
Forward-looking statements The 2012 Annual Report and Accounts contains, and we may make other statements (verbal or otherwise) containing, forward-looking statements about the Group’s current plans, goals and expectations relating to future financial conditions, performance, results, strategy and/or objectives.
– 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 FSA’s planned ‘ICA +’ regime and ultimate transition to the European Union’s ‘Solvency II’ on the Group’s capital maintenance requirements
– The impact of changes in capital, solvency or accounting standards, and tax and other legislation and regulations in the jurisdictions in which members of the Group operate.
As a result, the Group’s actual future financial condition, performance and results may differ materially from the plans, goals and expectations set out in the forward-looking statements within the 2012 Annual Report and Accounts. The Group undertakes no obligation to update any of the forward-looking statements contained within the 2012 Annual Report and Accounts or any other forward-looking statements it may make.
The 2012 Annual Report and Accounts has been prepared for the members of the Company and no one else. The Company, its Directors or agents do not accept or assume responsibility to any other person in connection with this document and any such responsibility or liability is expressly disclaimed. Nothing in the 2012 Annual Report and Accounts should be construed as a profit forecast.
Net shareholder debt as a percentage of the sum of Group MCEV, net shareholder debt and the present value of future profits of Ignis Asset Management. Net shareholder debt is defined as shareholder debt (including the Tier 1 Notes) less Holding Company cash and cash equivalents
Group AUM Group assets under management – This represents life company assets (excluding collateral on stock lending arrangements), Holding Company cash and third party assets managed by Ignis Asset Management
IFRS International Financial Reporting Standards – Accounting standards, Interpretations and the Framework adopted by the International Accounting Standards Board
LDI Liability Driven Investment – Refers to investing in assets which move in line with the value of liabilities. Ignis LDI strategies typically involve purchasing a mix of government bonds and other instruments which have similar sensitivity to interest rates and inflation as the liabilities, to protect against changes in the deficit between asset and liability values
LTIP Long-Term Incentive Plan – The part of an executive’s remuneration designed to incentivise longterm value for shareholders through an award of shares with vesting contingent on employment and the satisfaction of stretching performance conditions linked to Group strategy
Shareholder debt (including the Tier 1 Notes) less Holding Company cash and cash equivalents
Pearl businesses PGH (LCA) Limited, PGH (LCB) Limited, PGH (TC1) Limited, PGH (TC2) Limited and Opal Reassurance Limited, together with their subsidiaries, being the five companies acquired by Phoenix Group Holdings on 2 September 2009
Pillar 2 The FSA’s Pillar 2 risk-based capital requirements for insurance companies that have been implemented in the UK. The Pillar 2 surplus is the excess of available capital resources over capital calculated on an economic basis required to ensure entities can meet their liabilities. It is based on a self-assessment methodology called the ICA (Individual Capital Assessment)
PLHL ICA PLHL ICA is an assessment, on an economic basis, of the capital resources and requirements arising from the obligations and risks which exist outside the Group’s life companies
RCR Resilience Capital Requirement – Additional amounts of capital required to be held by certain life companies for regulatory purposes as a result of 2 stress tests under Pillar 1
Scrip issue The issue of new shares to existing shareholders in lieu of a cash dividend
TCF Treating Customers Fairly – A central FSA principle that aims to ensure fair outcomes for customers
Unit-linked policy A policy where the benefits are determined by the investment performance of the underlying assets in the unit linked fund
Phoenix has made significant progress in strengthening its balance sheet and simplifying the Group’s structure. The Group has also delivered against its demanding financial targets.
Our business model Our business manages closed life funds in an efficient and secure manner, protecting and enhancing policyholders’ interests whilst maximising value for the Group’s shareholders.
Targets superior investment performance and client service 2012 Key performance indicators Operating companies’ cash generation