CORPORATE GOVERNANCE Chairman’s Introduction 48 Board Structure 49 Board of Directors 50 Executive Management Team 52 Corporate Governance Report 53 Directors’ Remuneration Report 63 Directors’ Report 88 Statement of Directors’ Responsibilities
Parent Company Accounts 182 Notes to the Parent Company Financial Statements
Providing an effective service to our policyholders is critical to our strategy Our role as steward of our customers’ funds is one we take very seriously. This year we achieved 92% customer satisfaction and we continue to seek ways to improve. We invest in IT systems and customer communication initiatives and aspire to deliver high levels of customer service.
£380bn of assets are held in closed life funds in the UK
Our mission is to improve returns for policyholders while delivering value to shareholders.
...together with a specialist business model delivered through the Phoenix Way...
Operational Management Standardising, streamlining and innovating the key processes and platforms across the Group improves efficiency and generates value.
Employee engagement index score £653m Operating companies’ cash generation £1.8bn PGH Solvency II surplus (estimated)
Note: All amounts marked with an ‘APM’ are alternative performance measures. See ‘Alternative Performance Measures’ note on page 200 for further details of these measures. All amounts marked with ‘REM’ are KPIs linked to executive remuneration. See ‘Directors Remuneration Report’ on page 63 for further details of executive remuneration including the financial and non-financial performance measures on which it is based.
In June 2017 the Group held an Investor Day which focused on the improvement of the Phoenix customer journey, the Group’s integration process and plans to deploy surplus capital for selective acquisitions in the Bulk Purchase Annuity (‘BPA’) market. There is a current lack of capacity in the BPA space to absorb potential demand and Phoenix’s existing operating model offers the capability to compete in this market. BPA transactions constitute a complementary source of potential growth, alongside the Group’s key focus on closed fund consolidation.
Phoenix will continue to target consolidation opportunities in the closed life market. The acquisition of Standard Life Assurance will also provide an existing base in Europe, extending the market opportunity from £380 billion of closed life assets in the UK to £540 billion including Germany and Ireland.
Furthermore, Phoenix will have growth opportunities through its Strategic Partnership with Standard Life Aberdeen under which it will manufacture and administer workplace pension, SIPP and drawdown business for Standard Life Aberdeen.
“ Phoenix has delivered on its objectives in 2017 and the proposed acquisition of Standard Life Assurance will make Phoenix the pre-eminent closed life fund consolidator in Europe”
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Phoenix has delivered strong financial performance during the year, generating £653 million of cash from Phoenix Life and strengthening the Group’s capital position through the issue of subordinated bonds to replace senior debt. The improved financial position of Phoenix resulted in a credit ratings upgrade by Fitch Ratings in July 2017.
These achievements during 2017 position us to deliver further value from the proposed acquisition of Standard Life Assurance which we announced on 23 February 2018.
The Group’s operating model provides a solid basis for the integration of acquisitions. A key part of the operating model is the use of our outsource partners to undertake policy administration. These relationships allow us to move additional policies to our outsourcers on the same contractual terms, delivering cost synergies and also allowing us to utilise the outsourcers’ transformation expertise. The Group’s operating platform is therefore scalable and fully supports acquisitions. Phoenix retains a financial management skillset that delivers value creation through management actions.
The Abbey Life acquisition comprised unit-linked policies and annuities in payment, together with two small with-profit funds. Abbey Life was already run as a separate business with an existing outsource agreement in place with Capita. Therefore, compared to the integration of the AXA Wealth businesses, it was relatively less complex to transition the business to Phoenix Life.
Integration costs incurred to 31 December 2017 were £10 million before tax.
OPERATING PROFIT The Group achieved an operating profit of £368 million in 2017 including £79 million from management actions, compared to £351 million in 2016, which included £157 million of management actions.
REGULATORY AND LEGISLATIVE CHANGES Following the publication of the thematic review of the fair treatment of long-standing customers, Abbey Life received specific feedback and was informed of the actions that the Financial Conduct Authority (‘FCA’) expected Abbey Life to take to address specific issues. Good progress is being made to address these issues and Phoenix Life has rolled out its Customer Oversight Framework and Risk Management Framework to the Abbey Life business.
In addition, Abbey Life was referred to the FCA enforcement division to consider whether any of the issues identified in the thematic review warrant further intervention from the FCA and we continue to work with the FCA on the ongoing investigation.
Both of these reviews were known issues at the time of acquisition and we expect that costs arising from these reviews to be covered by the indemnity agreed at the time of the acquisition of Abbey Life.
CUSTOMERS Phoenix is currently investing in new online capabilities to connect digitally with as many of our customers as possible. Our vision is to offer customers access to information and services on a platform that is scalable for any future businesses we acquire.
We have already initiated our Digital Vision by offering online encashment for smaller pension pots, without needing to complete any paperwork. Currently, we see around 5,000 customers with non-GAR pension pots under £10,000 encash each month. The majority of these customers have taken advantage of pension freedoms to access smaller pots before their selected retirement date. We have seen an encouraging response from our customers, with current experience being that 23% of eligible customers with under £10,000 pots have transacted online. Along with being one of the early members of the Government-led Pensions Dashboard working group, Phoenix is driving forward with its Digital Vision and making significant investments to expand this digital offering in the future.
Phoenix Group provides annuities for vesting policyholders and wrote a total of £529 million of annuities in 2017, compared to £542 million in 2016. The majority of these are annuities with attractive guaranteed annuity rates (‘GARs’). For policyholders looking to buy a nonguaranteed rate annuity, Phoenix has initiated a new programme which ensures customers have the opportunity to review the ‘best deal’ for their annuity via a whole-of-market panel of third party annuity providers. This is particularly important for customers with lifestyle and medical conditions who may be better served by an enhanced annuity. This action ensures that customers fully understand the financial implications of buying an annuity as part of their retirement planning and is in line with the regulator’s position on the market.
Phoenix Life continues to be committed to delivering a high level of customer service. We recognise the importance of timely payments to our customers and have continued to deliver our pensions payments made through the Origo Faster Transfers system in 11.03 days on average, below the industry target of 12 days. Complaint handling is also a key area of focus and this is demonstrated by our strong performance as measured by the Financial Ombudsman Service with an overturn rate of 17%. We are pleased to note this is significantly below the most recently published industry average of 36%. We also continue to monitor customer satisfaction, with the vast majority of our customers surveyed being satisfied with the service they receive.
PROPOSED ACQUISITION OF STANDARD LIFE ASSURANCE AND STRATEGIC PARTNERSHIP WITH STANDARD LIFE ABERDEEN The proposed £2.9 billion acquisition of Standard Life Assurance, representing 84% of Own Funds, will result in a ‘bigger and better’ Phoenix. The enlarged Group will have £240 billion of assets under management and 10.4 million policyholders. This greater scale and alignment with Phoenix’s existing product mix strengthens the Group’s capacity to generate shareholder value through the delivery of management actions and future accretive acquisitions.
The Strategic Partnership covers two key areas: firstly, Standard Life Aberdeen will continue to manage the majority of Phoenix’s assets and secondly, Phoenix will underwrite workplace pensions and SIPP products which Standard Life Aberdeen will continue to market under its own brand.
We expect to generate a total of £5.5 billion of additional aggregate cash flows from the acquired in-force book, of which £1.0 billion is expected to be generated between 2018 and 2022 and £4.5 billion from 2023 onwards. The long-term nature of these cash flows enhances the sustainability of our dividend and allows us to increase our 2018 final dividend to an annualised level of £338 million, which is equivalent to a 3% uplift in dividend per share based on the share price on the day of announcement of the transaction. In addition, Fitch Ratings reaffirmed the Group’s credit rating following our announcement of the proposed acquisition.
Our expectations of cash generation from the proposed acquisition includes expected cost savings and capital synergies of £720 million. Given our experience from integrating previous acquisitions I am confident that we will once again successfully deliver value for shareholders and policyholders.
Two members of the Group’s Executive Committee will leave the Group in 2018, Fiona Clutterbuck and Wayne Snow. I would like to thank them both for their commitment to Phoenix over the past years and wish them well in the future. We have already recruited internally to cover their responsibilities, demonstrating the strength and depth of Phoenix’s management.
I would also like to thank all my colleagues for their continued hard work during a year that has seen Phoenix deliver its strategy for the benefit of both shareholders and policyholders.
UK equity markets rose, with the FTSE All Share Index closing approximately 9% ahead of the 31 December 2016 position. Phoenix seeks to hedge its life company solvency from declines in equity markets through the use of derivatives. The increase in equity markets over the period led to a decline in value of these put options which has been recognised in the IFRS results, with the solvency position unchanged as expected.
Swap yields were broadly unchanged over the period. Credit spreads narrowed across ratings and implied future inflation rates increased during the year.
The decision of the UK to leave the European Union (‘Brexit’) is not expected to have any material direct impact on the existing Group. However, Phoenix may be affected by the indirect impact on investment markets from the ongoing Brexit negotiations during 2018. In addition, the proposed Standard Life Assurance acquisition includes branch operations in Ireland and Germany which we expect will be transferred to an Irish subsidiary (acquired as part of the transaction) by way of a Part VII transfer.
Phoenix has key competitive advantages in generating value from acquiring and managing closed life funds. The Group’s scale provides the ability to generate capital efficiencies through the diversification of risks and the wide range of product types that Phoenix currently manages provides a scalable platform for integrating further closed funds. The Group’s outsourcing partners provide policy administration services and allow Phoenix to run a variable cost model, whereas the Group’s approved Solvency II Internal Model provides greater clarity over capital requirements and the benefits of undertaking management actions.
COMPETITIVE LANDSCAPE Phoenix sponsored a report by the Pensions Institute in November 2017 called ‘The Meaning of Life 2’. This report updated the findings of a previous report published in 2015 on the UK life company business model and found that the life industry is bifurcating, with a number of players moving away from the traditional riskbased model to an asset management strategy that is less capital intensive. Consolidation is a key feature of this process as players look to restructure their businesses by disposing of their traditional capital intensive products and Phoenix seeks to be an important player in this industry process.
Phoenix Group’s operating structure is integral to its success in the closed life fund market.
GROUP FUNCTIONS The Group operates centralised functions that provide Groupwide and corporate-level services and manage corporate and strategic activity.
Based both in Wythall, Birmingham and Juxon House, London, the Group is led by the Group Chief Executive Officer, Clive Bannister.
PHOENIX LIFE Phoenix Life is responsible for the management of the Group’s life funds. Based in Wythall, Birmingham, Phoenix Life is led by its Chief Executive Officer, Andy Moss.
LIFE COMPANIES The life companies are regulated entities that hold the Group’s policyholder assets. The Group simplifies its business model by bringing together separate life companies and funds, making more efficient use of the capital and liquidity in its life companies. This results in administrative expense savings and increased consistency of management practices and principles across the Group.
DISTRI BUTION We have restructured the SunLife business, a leader in the over 50s protection sector, as a distribution company, with the mortality risk being underwritten by Phoenix Life Limited. The allows the ring-fenced management team based in Bristol to focus on their key skills of marketing and sales.
INVESTMENT MANAGEMENT Investment management services are provided to the life companies by a number of external asset management companies, with the main partner being Aberdeen Standard Investments.
The features of each policy influences whether it is the policyholders or the shareholders who are exposed to the risks and rewards of a policy.
In the ‘supported’ with-profit funds, the shareholders’ capital is exposed to all economic movements until the estate is rebuilt to cover the required capital, at which point the fund becomes ‘unsupported’. In the ‘unsupported’ with-profit funds, typically shareholders receive 10% of declared bonuses (90:10 structure) or nil (100:0 structure).
These are insurance or investment contracts (savings and pensions) without guarantees. The policyholders bear all of the investment risk. Policyholders buy units with their premiums which are invested in funds. Units are sold when a claim is made.
Shareholders benefit from fees earned through management charges, bid/offer spreads and/or policy fees.
Our strategic priorities help enhance the value we create through our business model
Community and Environment Support for local communities and charity partners and reduced environmental impact 92% REM
Bulk Purchase Annuity transactions The Bulk Purchase Annuity market offers a complementary source of assets and growth
Life Company Own Funds Life companies hold capital in accordance with Solvency II regulations, providing appropriate security for policyholders. This capital is known as Solvency II Own Funds less Solvency Capital Requirement The level of regulatory capital required is known as the Solvency Capital Requirement less Capital Policy The life companies hold additional internal capital buffers above the regulatory capital requirement for prudence
Mergers and acquisitions Transactions must be value accretive and cash flow generative and needs to support the dividend level
– We have been raising awareness and equipping our staff with the skills to actively identify customers in potentially vulnerable circumstances, understanding the issues they face, and deal with them appropriately. We have been engaging with a number of charities including RNIB, Age UK and Alzheimer’s Society to help us in enhancing our offering for dealing with vulnerable customers.
Improving customer outcomes is central to our vision of being the saver-friendly ‘industry solution’ for closed life funds.
– An extensive research programme with some of our customers has been undertaken to help us make further improvements to our communications. It has identified some valuable improvement opportunities which are being included into new communications to ensure our customers have all the information they need to make fully informed decisions. This work will continue on all of our mailings throughout 2018.
– A scheme to buy back certain annuities-inpayment has been introduced, allowing those in scope customers with small annuities the option and flexibility to take a lump sum payment. This will complete during 2018.
– Continued improvements of customer communications, making sure they are engaging; and with particular focus on ensuring they are clear and easy to understand and cover all the information they need to make fully informed choices.
Read more about customer engagement activities undertaken during the year on page 39
How we measure delivery CUSTOMER SATISFACTION SCORE1 % FINANCIAL OMBUDSMAN SERVICE (‘FOS’)
OVERTURN RATE % SPEED OF PENSION TRANSFER PAYOUTS – ORIGO DAYS
WHY IS IT IMPORTANT? This is an externally calculated measure of how satisfied customers are with Phoenix’s servicing proposition based on the results of a satisfaction survey managed by the external research firm Ipsos MORI.
ANALYSIS Customers surveyed were asked to give a satisfaction rating between 1 and 5 to a number of questions asked (with a rating of 4 or 5 regarded as satisfied) and 92% of all questions scored a rating of 4 or above. The Group satisfaction score of 92% reflects our commitment to ensuring customers are satisfied with our products and services.
WHY IS IT IMPORTANT? This is an independent view of how firms are handling complaints. It provides us with an opportunity to review and adjust our complaint handling proposition in line with best industry practice.
TARGET To maintain a FOS overturn target of less than 30%.
2016: 11.31 days 1 Excludes the acquired AXA Wealth and Abbey Life businesses.
– The integration of the two acquisitions made in 2016 is substantially complete, with the AXA Wealth and Abbey Life businesses delivering run-rate synergies of approximately £17 million per year and £10 million per year respectively. This represents increases on our estimates which were originally £10 million for AXA Wealth and £7 million for Abbey Life.
PRIORITIES FOR 2018 – Complete the proposed acquisition of Standard Life Assurance.
– Complete the final stages of the AXA Wealth and Abbey Life integration activities.
Management actions can reduce complexity, cost and optimise risk, thereby enhancing value generation
A reconciliation of operating profit to the IFRS loss after tax of £(27)million (2016: £(100) million) is included in the Business Review section.
ANALYSIS Operating profit has increased by £17 million compared to prior year reflecting the inclusion of a full year’s performance of the acquired AXA Wealth and Abbey Life businesses and net positive actuarial assumption changes. This has been partly offset by lower management actions with an operating profit impact and the benefit of model and methodology changes recognised in 2016.
Read more about cash generation on page 26 and link to executive remuneration on page 64
We aim to optimise our capital structure while addressing the diverse needs of various stakeholders, including policyholders, shareholders, lending banks, bondholders and regulators.
To ensure that unrewarded exposure to market volatility is minimised or the risks from market movements are managed, we execute our hedging strategy.
– Credit rating upgrade of the Group’s main life company ratings to A+ (strong) was received from Fitch Ratings in July, thereby enhancing the Group’s position in the debt capital markets and improving its financial flexibility to fund future acquisitions.
– The Group’s Internal Model was extended to Phoenix Group Holdings (‘PGH’) in 2017 and the Solvency II Capital adequacy assessment and Group supervision is now undertaken at the level of the ultimate parent.
WHY IS IT IMPORTANT? The Solvency II surplus is the regulatory assessment of capital adequacy at PGH level.
ANALYSIS A coverage ratio of 164% reflects the increase in the Solvency II surplus in the period and represents a resilient capital position, well within the Group’s risk appetite.
During 2017, we increased our focus on ensuring our people were challenged, motivated and rewarded through opportunities for growth, both professionally and personally.
KEY INITIATIVES AND PROGRESS IN 2017 LEARNING AND DEVELOPMENT (‘L&D’) – We designed and piloted a range of people management, talent and leadership development programmes, notably the Life Accounting Talent Programme, the People Manager Programme and the Leading Integration Programme. All programmes were aimed at developing the skills of management and the pilots were all successful. The programmes will now feature on our L&D offering for 2018.
– Following the success of our Open University Executive Education programme, we supported a third cohort of people who successfully completed the programme in 2017. The delegates worked on current business challenges and presented their findings and recommendations to the Executive Committee in October.
– We have partnered with Moving Ahead and the Institute and Faculty of Actuaries as one of the first ten organisations to take part in a new Actuarial Mentoring Programme for newly qualified female actuaries. This cross organisational programme is sponsored by our Chief Actuary with six mentors and six mentees currently participating.
– In partnership with the Chartered Management Institute, we launched an online self-development tool and created learning to support the new programmes. We now have over 200 people signed up and utilising the content, with a 94% satisfaction rate.
VOLUNTEERING – 61% of staff participated in the 2017 volunteering programme contributing a total of 3,162 volunteering hours, an 11% increase on 2016.
– The Group continues to use the Midlands and London Air Ambulance charity partnerships to engage staff in fund raising activities,
Our people are at the heart of our business and key to the successful growth of Phoenix Group.
REWARD – Participation figures for Flexit, the Phoenix Group Flexible Benefits scheme, are now at 86%.
DIVERSITY AND INCLUSION – The Group continues to work towards the targets it set as part of The Women in Finance (‘WIF’) Charter and is raising further awareness of an inclusive workforce through the launch of a number of focused staff networks including the Professional Working Women’s Network; Lesbian, Gay, Bisexual and Transgender (‘LGBT’) Network and the Working Parents’ Network.
– The Group now has mandatory unconscious bias training, to further contribute towards an inclusive workplace.
Workforce that is of Black, Asian or Minority Ethnic background 107 1182 1 The number of Executive Committee members excludes Executive Committee members who are also members of the Board of Directors.
ANALYSIS The Group has remained stable with an employee engagement index of 80%. This year’s survey was completed by 89% of Phoenix employees.
Note: All amounts in the Business Review section marked with an ‘APM’ are alternative performance measures. See ‘Alternative Performance Measures’ note on page 200 for further details of these measures. All amounts in the Business Review section marked with an ‘REM’ are KPIs linked to executive remuneration. See ‘Directors Remuneration Report’ on page 63 for further details of executive remuneration including the financial and non-financial performance measures on which is it based.
CAPITAL STABILITY We have strengthened the Group’s Solvency II capital surplus position through actions such as the restructuring of the Group’s debt from senior to subordinated instruments and the delivery of management actions. The Solvency II capital surplus of £1.8 billion remains resilient as a result of the Group’s hedging programme.
Uses of cash before debt repayments and shareholder dividend (272) (287)
Debt interest increased to £60 million (2016: £58 million) reflecting the higher coupon payable on hybrid debt issued in the year which has more than offset the impact of lower debt principal balances following repayments.
EQUITY RAISE (NET OF FEES) The £908 million in 2016 was in relation to proceeds, net of fees, from the equity placement and the rights issue associated with the financing of the acquisition of the AXA Wealth and Abbey Life businesses respectively.
TARGET CASH FLOWS The Group has previously announced a five-year cumulative target cash flow for 2016 to 2020 of £2.8 billion, of which £1.0 billion to £1.2 billion is expected to be achieved in 2017 and 2018. With cash generation of £653 million for the year ended 31 December 2017, the Group expects to be at the top end of the £1.0 to £1.2 billion range for 2017 and 2018.
The resilience of the cash generation target is demonstrated by the following illustrative stress testing in the table below.
2 Assumes recalculation of Transitionals (subject to PRA approval). 3 Credit stress equivalent to an average 150bps spread widening across ratings, 10% of which is due to defaults/downgrades. 4 Equivalent of six months increase in longevity applied to the annuity portfolio. 5 Assumes most onerous impact of a 10% increase/decrease in lapse rates across different product groups.
The PGH Solvency II surplus position at 31 December 2017 is set out in the table below: Estimated position as at £bn
Own Funds1 6.6 6.0 1 Own Funds includes the net assets of the life and holding companies calculated under Solvency II rules, pension scheme surpluses calculated on an IAS19 basis not exceeding the holding companies’ contribution to the Group SCR and qualifying subordinated liabilities. It is stated net of restrictions for assets which are non-transferable and fungible between Group companies within a period of nine months.
2 The SCR reflects the risks and obligations to which Phoenix Group Holdings is exposed. 3 The surplus equates to a regulatory coverage ratio of 139% as at 31 December 2017. (2016: 122% pro forma). 4 The position at 31 December 2016 included pro forma adjustments to illustrate the impacts of the issuance in January 2017 of the £300 million Solvency II qualifying Tier 3 bond and the receipt of the PRA’s approval in March 2017 to include the acquired AXA Wealth business within the Group’s Internal Model.
Assumption, experience and modelling changes were net neutral on a Solvency II basis, with the net impact of changes to longevity assumptions being offset by the impact of the continued low interest rate environment on the Group’s expectations of persistency for products with valuable guarantees and the trend toward later retirements.
Please see the Alternative Performance Measures note on page 200 for further details of this measure.
PHOENIX LIFE FREE SURPLUS (ESTIMATED) Phoenix Life Free Surplus represents the Solvency II surplus of the Life Companies that is in excess of their Board-approved capital management policies.
(subject to PRA approval). 3 Credit stress equivalent to an average 150bps spread widening across ratings, 10% of which is due to defaults/downgrades.
5 Assumes most onerous impact of a 10% increase/ decrease in lapse rates across different product groups.
Please see the APM note on page 200 for further details of this measure.
The with-profit operating profit of £84 million (2016: £81 million) represents the shareholders’ one-ninth share of the policyholder bonuses, and is in line with the comparative period.
The with-profit funds where internal capital support has been provided generated an operating loss of £108 million (2016: £72 million loss). The loss is principally driven by the strengthening of actuarial assumptions to reflect the impact of the continued low interest rate environment on the Group’s expectations of persistency for products with valuable guarantees and the associated assumptions in relation to late retirements.
The non-profit and unit-linked funds operating profit increased to £386 million (2016: £283 million), principally driven by the impact of updating actuarial assumptions, which had a net positive impact of £166 million on the result for the period (2016: £85 million). This includes the positive impact of updating longevity base and improvement assumptions to reflect latest experience analyses and the most recent Continuous Mortality Investigation 2016 core projection tables. The non-profit and unit-linked operating profit has also benefited from updates made to expense assumptions from operational synergies and the inclusion of the expected return of the acquired AXA Wealth and Abbey Life businesses.
The 2016 Phoenix Life operating profit benefited from the £31 million favourable impact of updates made to the IFRS reserving methodology to align more closely with the requirements of Solvency II.
Amortisation of acquired in-force business, customer relationships and other intangibles (119) (82)
GROUP COSTS Group costs in the period were £20 million (2016: £6 million). The increase compared to the prior period principally reflects a lower return on the scheme surplus of the PGL Pension Scheme following the buy-in transaction entered into with Phoenix Life Limited in the second half of 2016, the recognition of the net interest cost on the Abbey Life Pension Scheme and the impact of higher project recharges from the service companies.
INVESTMENT RETURN VARIANCES AND ECONOMIC ASSUMPTION CHANGES ON LONG-TERM BUSINESS The net adverse investment return variances and economic assumption changes on longterm business of £6 million (2016: £207 million adverse) primarily arise on hedging positions held by the life funds following equity market gains during the year. The Group’s exposure to equity movements arising from future profits in relation to with-profit bonuses and unit-linked charges is hedged to benefit the regulatory capital position. The impact of equity market movements on the value of the hedging instruments is reflected in the IFRS results, but the corresponding change in the value of future profits is not. Losses on these hedging positions have been partly offset by the positive impact of strategic asset allocation activities, including investment in higher yielding illiquid assets.
VARIANCE ON OWNERS’ FUNDS The adverse variance on owners’ funds of £87 million (2016: £5 million negative) is principally driven by interest rate swaption positions held in the life companies’ shareholder funds. Such positions are held to hedge the impact of interest rate risk on the Group’s Solvency I surplus position. With swap yields remaining relatively stable during the period, option value associated with these contracts has fallen due to expected option expiry and reduced volatility.
The acquired in-force business is being amortised in line with the run-off of the life companies. Amortisation of acquired in-force business during the year totalled £102 million (2016: £68 million). Amortisation of other intangible assets totalled £17 million in the year (2016: £14 million).
The prior period result included a £14 million gain following completion of data review procedures associated with the reassurance of PLAL annuities in 2015 and a £26 million gain arising from a longevity swap reassurance contract, offset by the recognition of a £33 million cost of providing for PA(GI) Limited creditor insurance claims, £30 million of acquisition integration costs, £42m of corporate project costs, £10 million of pension exit charges and a £20 million adverse impact of other one-off items.
Implicit in the Group’s Tax Strategy and the management of its tax affairs is a desire for greater transparency and openness that will help the Group’s stakeholders better understand the published tax numbers. In this way the Group aims to participate in a substantive manner with HMRC and other insurance industry stakeholders on consultative documents and tax law changes that potentially impact on the insurance sector.
The Group tax credit for the period attributable to owners is £1 million (2016: £28 million) based on a loss (after policyholder tax) of £(28) million (2016: £(128) million). The significant tax adjustments to loss before the tax attributable to owners are primarily due to the impact of non-taxable income of £(16) million offset by the impacts of current year tax losses not being recognised of £15 million and the valuation of current year losses at future lower tax rates of £4 million. See note C5 to the IFRS consolidated financial statements for further analysis.
During the year, adoption of the Risk Management Framework to the Abbey Life business has strengthened oversight and management of the legacy issues and the ongoing FCA enforcement investigations. The Group Risk function played a key role in the successful application to bring AXA Wealth, PGH and Abbey Life into the Group’s Internal Model. The function has also led contingency planning activities in the event of an adverse outcome to the UK’s exit from the EU. The key risk management skillsets and processes across the business support the Group in targeting transactions in the bulk annuity market. Finally, I was delighted to see our credit rating upgraded by Fitch Ratings, reflecting the Group’s strong capitalisation, reduced leverage and the progress made in integrating the acquired businesses.
“By putting risk at the heart of what we do, Phoenix has safely and successfully on-boarded both the AXA Wealth and Abbey businesses.” WAYNE SNOW GROUP CHIEF RISK OFFICER
To support this goal, the Group defined a Risk Culture Statement which sets out the Group’s aspirations for risk management: ‘The Group has a balanced risk culture, supportive of commercial risk-taking coupled with strong execution in line with its risk appetite.
Collectively this means people understand the Group’s approach to risk, take personal responsibility to manage risk in everything they do and encourage others to follow their example.’
During 2017, Group Risk conducted its latest annual Risk Culture survey. The results of this survey enable us to assess and measure the Group’s Risk Culture over time as well as being able to tailor training programmes to ensure the continued engagement and development of our employees.
OWN RISK AND SOLVENCY ASSESSMENT (ORSA) The Group carries out an ORSA process to assess its risk profile on an ongoing basis. The ORSA considers risk, capital and return within the context of the business strategy on a forward-looking basis.
RISK APPETITE The Group’s risk appetite is the level of risk the Group is willing to accept in pursuit of its strategic objectives. The statements below encapsulate our risk appetite for policyholder security and conduct, earnings volatility, liquidity and our control environment: – Capital – The Group and each life company will hold sufficient capital to meet regulatory requirements in a number of asset and liability stress scenarios.
– 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.
– Conduct – Phoenix has zero appetite for deliberate acts of misconduct, including omissions, that result in customer detriment, reputational damage and/or pose a risk to the FCA statutory objectives.
GOVERNANCE, ORGANISATION AND POLICIES GOVERNANCE Overall responsibility for approving, establishing and embedding 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 Life Company Boards and the Executive Committee.
POLICIES The Group policy framework comprises a set of policies that supports the delivery of the Group’s strategy by establishing operating principles and expectations for managing the key risks to our business. The policy set contains the minimum control standards to which each business unit must adhere to and against which they report compliance.
The policies define: – the individual risks the policy is intended to manage; – the degree of risk the Group is willing to accept, which is set out in the policy risk appetite statements; – the minimum controls required in order to manage the risk to an acceptable level; and
The Life and Group Board Risk Committees receive a consolidated risk report on a quarterly basis, detailing the risks facing the Group and the overall position against risk appetite limits. The Risk Committees are also provided with regular reports on the activities of the Group Risk function.
RISK MANAGEMENT EFFECTIVENESS The provisions of the UK Corporate Governance Code require an annual review of the effectiveness of the Group’s risk management and internal control systems.
This assessment, described on page 60, provides assurance to management and the Boards that the RMF has been implemented consistently and is operating effectively across the Group.
The Group undertakes regular monitoring activities in relation to market risk exposure, including limits in each asset class, cash flow and liquidity forecasting, and stress and scenario testing. In response to this, the Group has implemented de-risking strategies to mitigate against adverse customer and shareholder outcomes from certain market movements such as equities and interest rates. The Group also maintains cash buffers in its holding companies and has access to a credit facility to reduce reliance on emerging cash flows. The Group’s excess capital position continues to be closely monitored and managed, particularly in the low interest environment and any potential impact on financial markets as a result of Brexit.
RISK IMPROVING Despite the uncertainty and delay in agreeing the terms of the UK’s exit from the EU, equity markets continued to rise over 2017. The expected increase in the UK base rate occurred in November. The Group’s financial strength has benefited from its hedging strategy, the extension of the Internal Model to cover the AXA Wealth and Abbey Life businesses and the refinancing of debt from senior to subordinated facilities.
The 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 these securities. This risk is reflected in the higher expected return, or spread, over less risky assets. An increase in credit spreads on debt securities, particularly if it is accompanied by a higher level of actual or expected issuer defaults, could adversely impact the value of the Group’s assets. The Group is also exposed to trading counterparties failing to meet all or part of their obligations, such as reinsurers failing to meet obligations assumed under reinsurance arrangements.
The Group regularly monitors its counterparty exposure and has specific limits relating to individual exposures, counterparty credit rating, sector and geography. Where possible, exposures are diversified through the use of a range of counterparty providers. All material reinsurance and derivative positions are appropriately collateralised and guaranteed.
PRINCIPAL RISKS AND UNCERTAINTIES FACING THE GROUP The Group’s top principal risks and uncertainties are detailed in the table below, together with their potential impact, mitigating actions which are in place, links to the Group’s strategic objectives and changes in the risk profile from last year. As economic changes occur and the industry and regulatory environment evolves, the Group will continue to monitor their potential impact.
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 and legislative change and the impact on our operations and lobbies where appropriate. Although not material in the context of the overall Group, we are exploring a range of options to ensure we can continue to service our Irish policyholders and manage the financial implications as part of Brexit contingency planning.
NO CHANGE Phoenix implemented its customer model and Risk Management Framework to the Abbey Life business prior to commencing the transfer of operations to Phoenix Life. Although FCA investigations remain ongoing, warranties and indemnities are in place to mitigate against an adverse outcome. The Group’s capital position is managed and reported at the PGH level following expiry of the Group regulatory supervision waiver at 30 June 2017.
Completion of the proposed purchase of Standard Life Assurance, as announced on 23 February 2018, is subject to regulatory approval. On completion, the challenge of transitioning Standard Life Assurance into the Group could introduce structural or operational challenges that result in Phoenix failing to generate the expected outcomes for policyholders or value for shareholders.
RISK HEIGHTENED Integration of the AXA Wealth and Abbey Life acquired businesses has progressed well, with the Group’s Internal Model extended to include both businesses. The heightened trend reflects the expected risks of integrating Standard Life Assurance upon completion.
The Group has established efficient processes to review complaints received, and where appropriate, provide redress to the policyholder. The Group continues to monitor the level of complaints and emerging experience to ensure that the provisions remain appropriate. The Group has sought to recover incurred costs from third parties. (Further details in note G1 to the IFRS financial statements).
In making the viability assessment, the Board has undertaken the following process: – It considered Group prospects, taking into account current position and the principal risks and uncertainties that it is facing; – it defined that viability is maintaining the capability to satisfy mandatory liabilities as they fall due and track towards targets; – it reviewed the AOP which considers profits, liquidity, solvency and strategic objectives and the impacts of management actions on the Group. The AOP was finalised in November 2017 and reaffirmed the Group’s strategy; – it completed stress testing to assess viability under severe but plausible scenarios, including two adverse stresses which represent the key financial risks to the Group as follows: 1. Market stress – a 1-in-10 year event combined market stress incorporating a fall in equity, property values and yields, with a widening of credit spreads.
2. Longevity stress – a 1-in-10 year event longevity, persistency and yield stress, which implies a 1.5 year increase in life expectancy for a 65 year old male and 1.2 year increase for a 65 year old female, alongside an increase in persistency and a fall in yields.
– it reviewed the financials, synergies and risks associated with the proposed acquisition of Standard Life Assurance, taking into account its current position and under a market stress.
The Board has also made certain assumptions when making the assessment and these include the following: – the stress occurs on 1 January 2018 with no allowance for any recovery, but do take into account the impact of transitionals recalculation; – that whilst the actual impacts of Brexit on the Group are still unknown, the Group has plans in place to ensure it is able to service all policyholders in the event of a Hard Brexit; and
– that future acquisitions, including BPAs, are not relevant, as any transaction would only be progressed on the basis it was value accretive, in line with the stated criteria.
Some of the current emerging risks the Group considers are listed in the table below.
The impact of alternative providers in the market or those with more comprehensive digital propositions.
OVERVIEW Balancing the needs of all our stakeholders is key to the Group’s success in meeting its strategic priorities. To help with this, the Group has a set of policies which provide a clear risk and governance framework and which must be complied with. Key policies and relevant outcomes for each stakeholder group along with engagement activities are outlined within this report.
The Group is committed to managing and reducing its environmental impact.
The Group’s mission is to improve returns for policyholders, whilst delivering value for shareholders. The Group has responsibilities to a number of stakeholders, including its investors, customers, suppliers, employees and community partners. Stakeholders’ needs are therefore considered in everything we do.
Phoenix has c.800 suppliers of which 16 are considered Strategic and Critical Service Providers.
The Group recognises the responsibility it has to all of its customers, as both custodian of their financial assets and supplier of their pension needs or life cover. Treating Customers Fairly is at the heart of the business, aiming to provide a responsible, fair and helpful service.
LISTENING TO CUSTOMERS Listening to the needs and wants of customers is helpful in delivering good customer outcomes, whilst underpinning this with a positive customer journey. Feedback is gathered through automated telephone surveys, individual research projects and most recently through talking with the wider ‘customer community’ about their experiences and how they like to engage with the Group. These interactions help to shape communications and future propositions that may be of interest.
DIGITAL PROPOSITION During the year the Group has continued to develop its digital offering for customers to enhance the value of customer relationships with Phoenix. The Phoenix Life website allows visitors greater access to information regarding policy information, whilst reducing the volume of paperwork routinely issued.
To help raise awareness internally an online training module on customer vulnerability was designed and delivered by Money Advice Trust. The completion of this training is a mandatory requirement for staff and the increased awareness and understanding from this training will influence the Group’s approach to design solutions for customers. The digital team is currently working on an online solution, providing accessibility to as many customers as possible, irrespective of any impairment they might have.
PROTECTING CUSTOMERS FROM PENSION SCAMS The Group is dedicated to protecting its customers from pension scams. The Group continues to engage with Regulatory Authorities and Industry Working Groups on pension scams and looks at ways to better protect customers from becoming victims of pension scams. A dedicated phone line was set up with The Pension Advisory Service to refer customers when concerns were raised around wanting to transfer their pension funds. The Group continues to raise awareness of scams and warns its policyholders to remain vigilant of the evolving methods of fraudsters.
The Association of British Insurers (‘ABI’) has appointed our Customer Director Susan McInnes as chair to its Long-Standing Customers Committee. Created in 2015, the Committee focuses on addressing the challenges to ensure all long-standing pension products are fit for purpose for customers and has provided input into the work of the Dormant Assets Commission, including work to help customers find policies which have transferred to other companies. The Committee also plays a critical role in developing the ABI’s overall retirement and savings policy.
Read more about key customer engagement activities undertaken during the year on page 18
SUPPLY CHAIN MANAGEMENT Phoenix relies heavily on its Strategic Service Providers to support the delivery of its corporate objectives and management actions, whilst satisfying the outcomes required for all stakeholder groups. A key part of ensuring this takes place is managing the Group’s supply chain in a sustainable and ethical manner.
Sourcing and Procurement at Phoenix is far broader than the initial evaluation and selection process in that it ensures that a beneficial relationship for our key stakeholders is implemented and managed. The Group works closely with its partners in order to closely monitor the operational and financial performance from Strategic Service Providers for any indications of instability and steps are taken where necessary and appropriate to mitigate risks to Phoenix or its stakeholders.
For Strategic and Critical Service Providers, Phoenix has a dedicated professional relationship manager assigned. Their role is to govern the relationship, measure and monitor performance and work to continually improve outcomes for all stakeholders.
MODERN SLAVERY Phoenix Group takes active steps to ensure its supply chain is not engaging in any form of modern slavery or human trafficking. In March 2017 a statement was published on the Group website pursuant to Section 54, Part 6 of the Modern Slavery and Human Trafficking Act 2015, which has been adopted by all subsidiaries. The statement details the policies Phoenix has in place and the ongoing actions that will be taken to continue to support the combating of modern slavery and human trafficking in supply chains.
The Group’s Modern Slavery and Human Trafficking Statement is available on the Group’s website: www.thephoenixgroup.com/mss
The Group’s Anti-Bribery Statement is available on the Group’s website: www.thephoenixgroup.com/abs
1 A Strategic Service Provider is classified as a supplier who the Group has made a conscious decision to work closely with due to the strategic nature of the services they provide. Critical Supply are service providers where the nature of the service provision is limited to few suppliers, and barriers to change are complex.
We are an employer of choice offering rewarding careers and opportunities, promoting physical and mental wellbeing in the workplace and empowering a wholly inclusive workforce.
The Group’s Human Resources (‘HR’) policy defines people risk, which, if unmanaged, could result in a reduction in earnings or value, through financial or reputational loss. The minimum control standards in place enable effective management around the attraction, recruitment, development and engagement of staff, whilst ensuring compliance with any legislation and external regulatory requirements.
Adherence to this policy is managed by the Group Human Resources department via quarterly assessment of the minimum control standards. There were no material issues raised during the year.
This section will detail the actions taken and outcomes achieved across the year.
EMPLOYEE SURVEY 88% of employees across Phoenix Group participated in the annual employee engagement survey. The 2017 survey results included responses from former Abbey and AXA Wealth employees and revealed an Employee Engagement Index value of 80%, which compares positively to the Financial Services benchmark.
EMPLOYEE NETWORKS The Group values the power of its employee voice and has several networks in operation. The ‘Engagement Forum’ is the longest standing network, which welcomes members from all functions and levels of seniority. This group is invited to meet with Phoenix Management team members on a quarterly basis to share views and shape future engagement activity across sites.
More recently the Group has launched a ‘Professional Women’s Network’, a ‘LGBT Network’ and a ‘Working Parents’ Network’. The purpose of each network is to encourage connections, skills development and provide a safe place to share common experiences, issues or challenges. The network groups meet regularly in work hours.
Relationships with business schools such as Ashridge and the London Business School and with The Open University continue to develop the Group’s most senior talent pipeline.
73% of staff positively noted they have the ‘opportunity for personal development and growth’ in the 2017 engagement survey.
REWARD The Group continues to attract, develop and retain talented staff by offering a comprehensive range of benefits and development opportunities. All employees are paid at least the Living Wage as set by the Living Wage Foundation.
EMPLOYEE WELLBEING The Group’s wellbeing programme covers physical, mental and financial matters, offering staff and their dependents information and support across a range of areas. A programme of wellbeing activity took place during the year which included onsite health-checks, flu vaccinations, nutritional information talks and stress management sessions.
HUMAN RIGHTS The Group is committed to ensuring that human rights are respected and processes are in place to remove any human rights issues both internally and externally via outsourced relationships.
In line with the Equality Act 2010 and in order to ensure that the Group is aligned to relevant Articles of the United Nations Universal Declaration of Human Rights, the Group has a Dignity at Work policy in place. The policy covers bullying and harassment of and by managers, employers, contractors, suppliers, agency staff and other individuals engaged with the Group. All staff are required to comply with the policy and take appropriate measures to ensure harassment and bullying does not occur. Adherence to the policy is managed by the Group Human Resources department via assessments of the minimum control standards, which ensure effective resolution of employee disputes. In addition all staff are required to complete annual computer based training in business ethics and ethical conduct.
To date, 1 in 4 women have joined the network and over 100 employees attended the launch event.
HEALTH AND SAFETY The Group operates a Health and Safety policy which helps the organisation to effectively manage risks and any adverse effects. Health and Safety risks that are not properly managed could lead to a reduction in earnings and / or value through financial or reputation loss associated with adverse impacts on the health and safety of employees, customers and third parties in the workplace.
All staff are required to complete annual Health and Safety training which includes a review of their individual workstation. The Group had no reportable accidents under the Reporting of Incidents, Disease and Dangerous Occurrence Regulations (‘RIDDOR’) during 2017.
We contribute to our local communities – providing donations, skills, time and resources to the cause.
PHOENIX GROUP’S CHARITY PARTNERS OF THE YEAR Now into its fourth year of the six-year partnership with Midlands Air Ambulance Charity and London’s Air Ambulance, the Group is continuing to use this collaboration to engage staff in fundraising, volunteering and events for the cause.
Since partnering in 2014 the Group has donated in excess of £690,000 to the charities.
OTHER CHARITABLE DONATIONS Through the Group’s ‘Our Community, Your Choice’ programme staff are able to fundraise for any UK registered charity, providing the cause meets the Group’s charity criteria. The Group does not support any political or religious causes.
Over £22,000 was donated to other charities across the year, helping causes from within the communities in which our employees are based. Examples include: Birmingham St Mary’s Hospice, Guide Dogs for the Blind, Macmillan Cancer Support, Ark Cancer Centre Charity, Dorset and Somerset Air Ambulance and Jessie May Trust.
The Group also offers a staff-matched fundraising scheme whereby staff can participate in charitable activity in their own time and request matching of the amount they raise. Over £25,000 has been donated across the year.
With the assistance of The Money Charity, Phoenix sponsored 40 financial workshops in local secondary schools, reaching 1,100 pupils across academic term 2016-2017. The workshops explained the difference between credit and interest along with manageable and unmanageable debt. The main objective was to get young people thinking about real-life budgeting and how to make difficult decisions around prioritisation of money.
Our Wythall office continues its partnership with Ark Kings Academy in Kings Norton and sessions were run onsite for all year-11 pupils to attend GCSE maths revision, as well as a second session focussing on CV writing, interview skills and social media presence – both helping pupils prepare for their future. The school launched a new library during the year, which was designed and supported by Phoenix, and fully supports the work of the 2017 Vision for Literacy Business Pledge.
Various staff-led initiatives took place during the year, focusing largely on internal resource-use, and the 3 R’s – reduce, re-use and recycle.
Staff actively take an interest in outdoor environmental-based volunteering projects and have supported the Canal and River Trust, Warwickshire Wildlife Trust, London Wildlife Trust and Bromsgrove District Council across the year. Onsite at the Wythall office, a nature walk was launched, highlighting biodiversity elements.
With technological advances and greater availability to online content the Group’s print and paper consumption is moving in the right direction.
Staff helped thin woodland at Millennium Wood, within Arrow Valley Country Park, in Redditch and subsequently used fallen branches to create a natural hedge-way and hibernaculum to house local wildlife onsite. In addition, at Sanders Park, Bromsgrove teams assisted with removing Himalayan balsam from the water-ways, an invasive weed which if left would overly consume the natural stream habitat. A third team assisted with removing overgrowth from the water-ways at Lickey End Park, near Bromsgrove helping to protect the resident water vole.
Volunteering opportunities such as these give staff the opportunity to team-build, provide networking opportunities and a chance to boost wellbeing. This volunteering encouraged healthy exercise whilst taking part in environmentally-focused activities which will benefit future generations.
To download a copy of the Group’s complete Economic, Social and Governance measures, please visit the Corporate Responsibility section of the Group website. www.thephoenixgroup.com/esg
GREENHOUSE GAS EMISSIONS GLOBAL ABSOLUTE GHG EMISSIONS DATA IN TONNES OF CO2e
Electricity, heat, steam and cooling purchased for own use (Scope 2) 2,754 3,119 2,286
Emissions reported above on a per floor area intensity 64 kg CO2e/m2 81 kg CO2e/m2
Go online for the Group’s full Corporate and Social Responsibility Report www.thephoenixgroup.com/CRreport2017
WASTE MANAGEMENT All core sites continue to divert 100% of its waste from landfill. The London office which is shared tenancy achieved two accolades for its achievements in waste management, waste minimisation and re-use in the form of the Green Apple Awards and Clean City Awards Scheme. Donations of old furniture, carpet tiles and electrical equipment were distributed to various community partners in the London and Wythall areas, reducing the requirement for waste removal, but adding value by creating a new lease of life for the items being donated. In addition, following the city-centre office move for staff based at SunLife in Bristol, any unwanted furniture and accessories were donated to the Julian Trust for the Homeless.
ENVIRONMENTAL REPORTING This section includes an update on our annual greenhouse gas emissions. Emissions disclosed relate to facilities and activities where the Group has operational control.
The Group reports Scope 2 emissions using the GHG Protocol dual-reporting methodology, stating two figures to reflect the GHG emissions from purchased electricity, using both: – A location-based method that reflects the average emissions intensity of the UK electricity grids from which consumption is drawn; and
– A market-based method that reflects emissions from electricity specific to each supply / contract. Currently, the Group has used residual mix factors in the absence of contractual instruments.
Intensity reduced from 2016 to 2017 due to a reduction in electricity and natural gas consumption at the Juxon House and Wythall offices as well as the reduction in emissions factors from the UK electricity grid.
MEETINGS WITH INSTITUTIONAL EQUITY INVESTORS Throughout the year members of the Executive Committee and the Investor Relations department held meetings with investors to provide updates on the Group’s strategy and operations. This involved a total of 23 shareholder roadshows conducted in the UK, Continental Europe and the US. The Investor Relations department, together with the Executive Committee thus met with 211 investors, holding circa 72% of the Group’s outstanding share capital.
The Chairman and Non-Executive Directors are available for investor meetings to discuss subjects such as strategy, corporate governance and Director’s remuneration as required.
ANALYSTS AND EQUITY SALES FORCES Phoenix maintains an active dialogue with its equity and debt research analysts who, in addition to results presentations, are invited to attend investor events such as the Investor Day. The Executive Directors also held seven presentations to the sales force teams at major investment banks to promote the Phoenix investment case.
DEBT INVESTORS The debt investor relations programme is managed by the Investor Relations department in collaboration with the Group Treasury department.
PRIVATE SHAREHOLDERS Private shareholders are encouraged to engage with the Group through the Investor Relations department and Company Secretariat.
ANNUAL GENERAL MEETING (‘AGM’) The Group uses its AGM as an opportunity to communicate with shareholders. Business to be discussed at the meeting is notified to shareholders in advance through the Notice of Meeting and comprises topics such as the annual election of Directors, the appointment of the Auditor and the dividend declaration.
We value an active dialogue with the Group’s financial audiences including institutional investors, private investors, buy and sell-side analysts and prospective investors. Phoenix therefore conducts a comprehensive investor relations programme coordinating the interaction with these stakeholders.
In May of this year, the Group engaged HSBC to undertake an independent, indepth shareholder consultation focused particularly on investor attitudes toward management actions, balance sheet strength as well as M&A and financing of acquisitions. HSBC spoke to 14 institutions through face to face and telephone interviews between May to June.
I am also pleased with our increasing gender diversity, such that our independent NonExecutive Directors are anticipated to be majority female from our May 2018 AGM. We are also giving considerable attention to increasing the proportion of female senior executives. Please see pages 24 and 42 for details of the initiatives being undertaken.
UK CORPORATE GOVERNANCE CODE As detailed in the Corporate Governance Report on pages 53 to 62, we complied in 2017 with all the provisions of the UK Corporate Governance Code (‘the Code’), such that in the last five years we have had only one matter of noncompliance with the Code.
The following sections provide more detail on our Board of Directors, Executive Management team, operation of governance and remuneration practices as follows: – Board and committee structure; – Board of Directors; – Executive Management Team; – Corporate Governance Report; – Directors’ Remuneration Report; and
BOARD OF DIRECTORS I would like to start my introduction to this Governance section by commenting on the renewal of our Board membership over the last 18 months, which has focused on the skills required to drive the Group forward in its M&A strategy and generating value for our shareholders and policyholders.
Our recent Board appointees, who have a strong mix of experience and skills gained at senior industry level (please see biographies on pages 50 to 51 for further information), are: – Wendy Mayall (appointed September 2016) – Asset management; – John Pollock (appointed September 2016) – Life insurance and pensions, customer, FTSE 100 financial services board experience; – Nicholas Shott (appointed September 2016) – M&A, corporate finance; – Karen Green (appointed July 2017) – Insurance, M&A, corporate finance; and
The appointments in 2017 responded to a Board skills audit we undertook at the start of 2017, which took account of anticipated retirements from our Board, and followed a thorough recruitment process. Isabel Hudson and David Woods left our Board at the May 2017 AGM, both after over seven years of sterling service.
Our Senior Independent Director, Ian Cormack, will retire from the Board at the AGM in May 2018. Ian has been on the Board since September 2009 and prior to that from 2005 was on the Pearl Group Board when Pearl acquired Resolution in 2008 to form what is now the Phoenix Group. He has been the Senior Independent Director since October 2013 and Chairman of the Remuneration Committee from 2010 until the 2017 AGM. During his tenure, Ian’s logical approach, huge financial services experience and strategic expertise have been central to the success of the Board and the Group. I am very grateful to him for his support to me since my appointment as Chairman from September 2015.
I am very pleased that our recruitment has set our Board up to continue to successfully drive the Group forward. It is our intention that the Board will, from our May 2018 AGM, comprise of ten directors, which for several years has been considered by the Board as its optimum number.
Phoenix Group Holdings Board and Committees The main focus of the Phoenix Group Holdings Board is on Group strategy and performance, with input from Board committees. The chart below sets out the composition and main activities of the Phoenix Group Holdings Board and its committees. More detailed operational and customer-focused matters are addressed at the subsidiary board and committee level.
Risk Appetite and high-level Risk Matters The Group’s Risk Management Framework
EXPERIENCE Between April 2010 and December 2011, Mr McConville was Chief Finance 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 and Director of Finance for the Insurance and Investments Division. During 2011 and 2012, Mr McConville was a Non-Executive Director of the life businesses of Aegon UK. In 2014, Mr McConville joined the board of Tesco Personal Finance plc as a Non-Executive Director. Mr McConville qualified as a Chartered Accountant whilst at Coopers and Lybrand.
Prior to that, she held various senior private equity and corporate finance roles from 1997 to 2005 at GE Capital and then MMC Capital, gaining substantial M&A experience, having worked previously at Baring Brothers and Schroders. Ms Green is a Council Member of Lloyd’s of London. She is also a Vice President of the Insurance Institute of London.
EXPERIENCE Wendy Mayall has over 30 years of asset management experience, including as Group Chief Investment Officer and later consultant at Liverpool Victoria from 2012 to 2015, having previously been Chief Investment Officer for Unilever’s UK pension fund from 1996 to 2011 and holding management responsibility for Unilever’s pension funds globally. From 2006 to 2009, Mrs Mayall was the Chair of the Investment Committee of the Mineworkers Pension Scheme, a British government appointment to one of the largest government backed pension schemes in the UK. Mrs Mayall is a Non-Executive Director of Aberdeen Global Funds (Luxembourg) and Old Mutual Wealth Oversight Council. She is also the Senior Independent Director and Audit Committee Chair of Fidelity Investments Life Insurance Company and Chair of the Funding Committee for TPT Retirement Solutions. Limited and Chair of the Funding Committee for TPT Retirement Solutions.
– Leads and directs the Group’s businesses in delivery of the Group’s strategy and business plan
– Leads the Phoenix Life business to optimise outcomes for customers in terms of both value and security
– Oversees and co-ordinates maintenance of, and adherence to, appropriate corporate governance procedures across the Group
Executive management of the Group is led by the Group Chief Executive Officer, Clive Bannister, who is supported by the Executive Committee (‘ExCo’).
THE BOARD The Board comprises the Non-Executive Chairman, the Group Chief Executive Officer, the Group Finance Director and eight independent Non-Executive Directors. Biographical details of all Directors are provided on pages 50 to 51.
AGM votes in favour of all resolutions May 2017 – 95% May 2016 – 91%
UK Corporate Governance Code Fully compliant in 2017 Fully compliant in 2016
The Board is committed to high standards of corporate governance and the Group’s Corporate Governance policy is aligned to compliance with the UK Corporate Governance Code (‘the Code’) which sets standards of good practice for UK listed companies. It is the Board’s view that the Company has been fully compliant during 2017 with the provisions set down in the Code.
All actions related to matters of Board process to support the Board’s focus of successfully taking forward the Group’s strategy.
– In terms of Board composition, the review stated: “You all think that the Board is greatly improved in terms of composition, and has the right balance in terms of experience and skills to be an effective Board. It is clear that Board members are highly committed and actively enjoy being part of this group of Directors.”
– In terms of challenge and culture for the future, the review stated: “It is clear that your Board members feel that, given the scale of challenge you have faced in the not-so-distant past, this Board with its strong culture and healthy dynamic is well placed to take PGH to its next stage.”
To ensure that the Directors maintain up-todate skills and knowledge of the Company, all Directors receive regular presentations on different aspects of the Company’s business and on financial, legal and regulatory issues. All Directors receive a tailored induction on joining the Board in accordance with a process approved by the Board. The new Non-Executive Directors in 2017, Karen Green and Belinda Richards, undertook a comprehensive induction, including detailed strategic and operational briefings and information, before and following their appointments in July and October 2017 respectively. Their comments on the induction process are shown below.
BOARD SUCCESSION PLANNING AND CHANGES The Board undertakes regular reviews of executive and non-executive succession planning, as it did on several occasions in 2017, to ensure that robust plans are in place. Succession planning for executive directors and other senior management takes consideration of both external and internal markets. Please refer to the Chairman’s Introduction on page 48 for details of how the Board succession planning has worked over the last two years.
The induction comprised a good mix of formal introductory sessions with the Executive team and other key Group function holders supplemented by less formal sessions and meetings at the Group’s principal operating company in Wythall. Through this, I was able to get a very good feel for how the Group thinks about strategy, the risk management framework and capital/solvency considerations which underpin it at the centre, before spending a day with the life company management team in Wythall and seeing how this is executed in practice.
I spent three days meeting senior managers at the Group’s head office in London in order to understand the structure and operation of the Group functions and the risk and solvency model. Following this I spent a full day at the life company in Wythall, meeting the management team and understanding more about the business operations.
OPERATION OF THE BOARD The Board is responsible to the shareholders for the overall performance of the Group. The Board’s role is to provide entrepreneurial leadership within a framework of prudent and effective controls, which enables risk to be assessed and managed. The Board has a schedule of matters reserved for its consideration and approval supported by a set of operating principles. These matters include: – Group strategy and business plans; – Major acquisitions, investments and capital expenditure; – Financial reporting and controls; – Dividend policy; – Capital structure; – The constitution of Board committees; – Appointments to the Board and Board committees; – Senior executive appointments; and
The Nomination Committee has confirmed it’s absolute satisfaction with the time and overall commitment given to Phoenix by all Directors.
B 30% Strategy and Planning Strategic and Operational planning; consideration of corporate transactions
– Isabel Hudson was a member of the Committee up to 11 May 2017. – David Woods was a member of the Committee up to 11 May 2017.
AUDIT COMMITTEE’S ROLE – Receiving and reviewing the Annual Report and Accounts and other financial results, statements and disclosures, although the ultimate responsibility for these matters remains with the Board.
– Oversight of activities of subsidiary audit committees through receipt and review of minutes, discussions between the Chairmen of the Audit Committee and subsidiary audit committees, and the Audit Committee Chairman’s attendance at the Phoenix Life Audit Committee on an occasional basis, as well as his receipt of all papers going to the Phoenix Life Audit Committee. This has been enhanced through the occasional attendance at the Audit Committee by the Phoenix Life Audit Committee Chairman.
– Reviewed and monitored the independence of the external auditors including their provision of non-audit services and fees– see Auditor’s Independence and External Auditor Policy on page 58.
INTERNAL AUDIT – Assessed the effectiveness of Internal Audit, noting the positive responses received from Management.
AUDIT COMMITTEE’S PERFORMANCE – The Committee’s performance was reviewed as part of the overall Board Evaluation Review by external facilitators, Equity Communications who stated that the Committee was “seen as highperformance. ”
GENERAL – Reviewed arrangements for whistleblowing (and whistleblowing activity) should an employee wish to raise concerns, in confidence, about any possible improprieties; and approved an updated whistleblowing policy which complied with the FCA and PRA’s whistleblowing rules and the appointment of the Phoenix Life Audit Committee Chairman as Whistleblowing Champion under the Senior Insurance Managers Regime.
– Considered and addressed a number of significant matters in relation to the IFRS consolidated financial statements for 2016 (annual), 2017 (interim) and 2017 (annual) as summarised in the table on page 59. These matters were considered by the Audit Committee to be areas subject to the most significant levels of judgement or estimation, and identified with regard to the significant risks assessed by the Group’s external auditors as set out in their audit opinion on pages 95 to 97.
– Reviewed the Line 1 risk and controls report from management, the annual internal controls effectiveness report (and the half year update) prior to its consideration by the Board and received reports regarding consequential actions; and received a dedicated briefing on acquisition accounting and continued consideration of the future impact of IFRS17.
– Reviewed reports from Internal Audit on the control environment in the Group’s outsource service providers and on the effectiveness of the internal audit work undertaken within the outsource service providers, noting that this was addressed in more detail at the Phoenix Life Audit Committee.
– Considered and noted the independence of KPMG in relation to post-acquisition audit work undertaken with regard to Abbey Life for the year ended 31 December 2016.
ASSESSMENT OF THE EFFECTIVENESS OF THE EXTERNAL AUDIT PROCESS The effectiveness of the external audit process was assessed through the completion of a questionnaire by the key divisions and Group functions within Phoenix Group covering EY’s performance during the 2016 financial reporting cycle.
AUDITOR’S INDEPENDENCE AND EXTERNAL AUDITOR POLICY The Company has an external auditor policy which requires the Company and the external auditors to take measures to safeguard the objectivity and independence of the external auditors. These measures include a prohibition regarding non-audit services in respect of specific areas, such as secondments to management positions, or those which could create a conflict or perceived conflict. It also includes details of the procedures for the rotation of the external engagement partner.
The Audit Committee is satisfied that the nonaudit services performed during 2017 have not impaired the independence of EY in its role as external auditor. Further information on nonaudit fees is provided in Auditor’s Remuneration in Notes to the IFRS Consolidated Financial Statements on page 119.
SIGNIFICANT MATTERS CONSIDERED BY THE AUDIT COMMITTEE IN RELATION TO THE FINANCIAL STATEMENTS
– The valuation information was then presented for oversight review by the Audit Committee who considered and confirmed the appropriateness of the basis of valuation.
Acquisition Accounting – The Audit Committee considered the impact of the acquisitions of the AXA Wealth businesses and Abbey Life on the Group consolidated IFRS financial statements including consideration as to whether any adjustments were required to the initial acquisition fair values recognised. This included consideration of the adoption of Group accounting policies and methodologies by the acquired businesses.
– The Audit Committee considered and confirmed the appropriateness of the result of annual impairment testing carried out in respect of goodwill balances and reviews for indicators of impairment performed in respect of definite life intangibles.
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 Group and the Group’s capacity to manage and control risks within the agreed strategy. It advises the Board on all high-level risk matters. Details of the Risk Management Framework, for which the Risk Committee has oversight, are provided in the Risk Management section on pages 32 to 34.
RISK COMMITTEE’S PRINCIPAL ACTIVITIES DURING 2017 – Reviewed the Group’s risk appetite and recommended to the Board the Group’s overall risk management strategy.
– Reviewed the Group’s risk profile, monitoring it against the risk categories of Market, Insurance, Credit, Financial Soundness, Customer and Operational with particular attention to risk appetite, risk trends, risk concentrations, provisions, experience against budget and key performance indicators for risk as well as contingency planning.
– Implemented recommendations from the Oliver Wyman Financial Risk Framework review.
– Provided oversight of, and challenge to, the design and execution of the Group’s stress and scenario testing, including any changes of assumptions.
– Informed the Remuneration Committee regarding the management of the Group’s material risks to support their consideration of executive’s Annual Incentive Plan rewards.
– Provided oversight and due diligence on risk issues relating to material transactions and strategic proposals.
– Held a joint briefing session with the Phoenix Life Risk Committee.
The Board (and its subsidiary company boards) monitor internal controls on a continual basis, in particular through Audit and Risk Committees. There is an ongoing process for identifying, evaluating and managing the significant risks faced by the Group, which has been in place throughout the period covered by this report and up to the date of approval of the Annual Report and Accounts for 2017, in accordance with the ‘Guidance on Risk Management, Internal Control and Related Financial and Business Reporting’ published by the Financial Reporting Council.
“I am very pleased with the Nomination Committee’s role in the continual and effective renewal of skills and experience, and enhanced gender diversity, on our Board through the appointment of two new NonExecutive Directors in 2017 following three new Non-Executive Directors in 2016.” HENRY STAUNTON NOMINATION COMMITTEE CHAIRMAN
Changes during 2017: – David Woods was a member of the Committee up to 11 May 2017.
– Delivered recommendations to the Board for Kory Sorenson to be appointed Board Remuneration Committee Chair and John Pollock Board Risk Committee Chair, having considered their skills and experience for the roles.
– Undertook a skills audit to re-assess the ideal blend of skills and knowledge on the Board, aligned to the Group’s strategy, and taking account of Board departures. The output of this audit informed the requirements for the two new Non-Executive Director appointments in 2017.
– In conjunction with the skills audit and taking account of the Board Evaluation Review, reviewed the balance of skills, diversity, experience, independence and knowledge on the Board.
Changes during 2017: – Kory Sorenson was appointed Chair with effect from
– Ian Cormack resigned as Chairman with effect from 11 May 2017 although remained on the Committee until 1 July 2017. – Karen Green was appointed to the Committee with effect from 1 July 2017.
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 Remuneration Committee’s activities in 2017 are provided in the Directors’ Remuneration Report on pages 63 to 87.
On behalf of the Board, I am pleased to present our Directors’ Remuneration Report for the year ended 31 December 2017. This report covers remuneration for Executive Directors and Non-Executive Directors of the Company.
Particular highlights for the year which were considered by the Committee included: Corporate highlights – Cash generation of £653 million in 2017, with the Group on track to achieve towards the top end of the 2017 to 2018 target range for cash generation of £1.0 billion to 1.2 billion.
– Issuance of over £800 million of subordinated debt, increasing the Group’s Solvency II surplus to £1.8 billion as at 31 December 2017.
– The upgrading of the Group’s credit rating by Fitch Ratings in July 2017, with its two principal operating life companies, Phoenix Life Limited and Phoenix Life Assurance Limited being assigned Insurer Financial Strength ratings of ‘A+’.
– Recognition for the sixth successive year, that Phoenix has been formally acclaimed as one of ‘Britain’s Top Employers’.
Customer highlights – Delivery of a secure environment for the encashment of smaller policies, which allows customers to submit their application online, reducing the overall time taken for them to receive their funds.
REMUNERATION POLICY FOR 2018 Key points are as follows: – Shareholders gave over 99% approval to the renewal of our Directors’ Remuneration Policy at the 2017 AGM.
– Following the review, however, the Committee determined that a broader range of metrics for both the AIP and LTIP should be introduced given the evolving nature of the Company. This will ensure that management incentives continue to be aligned to the success of the Company and the experience felt by the shareholder.
– To this end, the Committee has included two new metrics in the AIP to complement the existing cash generation metric: • Adjusted Shareholder Solvency II Own Funds to balance short-term cash release with the preservation of long-term value. Calculated as Shareholder Solvency II Own Funds minus subordinated debt, it is a transparent proxy measure of value, based on publicly disclosed information that can be used to determine value generation.
– With respect to the LTIP, the Committee has also included the Adjusted Shareholder Solvency II Own Funds metric, again to reflect the more balanced scorecard between year-on-year cash generation and longterm value that we are aiming to achieve.
The metrics for 2018 onwards are set out below. The metrics for 2017 have been provided for reference only.
These modifications are permitted within our current policy, so no formal resolution is required. However, we engaged with our largest shareholders and their representative bodies to validate this approach before introducing these changes and received positive feedback.
The Committee values greatly the support that we have received from our shareholders in recent years, and hopes that the modifications that we have made within the scope of our policy, as explained in this Directors’ Remuneration Report, will receive their support and they will vote in favour of the resolutions proposed at the 2018 AGM.
HOW WE PERFORMED IN 2017 GROUP PERFORMANCE MEASURES Annual Incentive Plan (‘AIP’): Below we show the target ranges and outturn against the metrics within the 2017 AIP. More details of the 2017 AIP can be found on page 71. AIP metrics that are stated Group KPIs are flagged below and evidences the direct link between Company strategy and remuneration outcomes.
Threshold level for AIP Target level for AIP Maximum level for AIP Performance
ORIGO TIMESCALES (DAYS) FOS OVERTURN RATE (%)1 SERVICING COMPLAINT CLOSURE (%)
Threshold level for AIP Target level for AIP Maximum level for AIP Performance 1 See Note 5 on page 71 for detail of the FOS Overturn Rate used in the AIP.
Long-Term Incentive Plan (‘LTIP’): Below, we show outturn against the measures which apply for the 2015 LTIP awards which are reflected in the Single Figure Table on page 70. Embedded value growth, cumulative cash generation and TSR performance are shown over the 3-year performance period (financial years 2015, 2016 and 2017). TSR is measured against the constituents of the FTSE 250 (excluding Investment Trusts), with median being the 50th percentile and upper quintile the 80th percentile.
GROWTH IN EMBEDDED VALUE (%) CUMULATIVE CASH GENERATION (£bn) TOTAL SHAREHOLDER RETURN (Percentile)
Group Chief Executive Officer – Clive Bannister Group Finance Director – James McConville
Minimum Consists of base salary, benefits and pension: – Base salary is the salary to be paid in 2018 (unchanged from 2017).
On-target Based on what the Executive Director would receive if performance was on-target: – AIP: consists of the on-target annual incentive (75% of base salary).
Maximum Based on the maximum remuneration receivable: – AIP: consists of the maximum annual incentive (150% of base salary).
ANNUAL IMPLEMENTATION REPORT – UNAUDITED INFORMATION IMPLEMENTATION OF REMUNERATION POLICY IN 2018
The AIP maximum potential and on-target levels remain unchanged at 150% of base salary and at 50% of maximum levels (75% of base salary) respectively.
The overall weightings between Corporate and Personal performance measures for AIP in 2018 are: – Corporate (financial and strategic) performance measures – 80% (2017: 70%).
Adjusted Shareholder Solvency II Own Funds (30% of Corporate component) 24%
The changes made from 2017’s Corporate performance measures for AIP are designed to provide a more balanced scorecard that better aligns remuneration to the success of the Company and the experience felt by the shareholder: – Adjusted Shareholder Solvency II Own Funds has been added as a new performance measure to balance short-term cash release with the preservation of long-term value. Calculated as Shareholder Solvency II Own Funds minus subordinated debt, it is a transparent proxy measure of value based on publicly disclosed information that can be used to determine value generation.
INTRODUCTION This report contains the material required to be set out as the Directors’ Remuneration Report (‘Remuneration Report’) for the purposes of Part 4 of The Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013, which amended The Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 (‘the DRR regulations’).
DIRECTORS’ REMUNERATION POLICY The Directors’ Remuneration Policy (‘Remuneration Policy’) was approved by the Company’s shareholders at the Company’s AGM on 11 May 2017 and has been in effect for all payments made to Directors from that date. The Remuneration Policy is included at the end of this Remuneration Report for information and ease of reference – it is not subject to the advisory vote on the Remuneration Report at the 2018 AGM. Within the Remuneration Policy, the ‘scenario charts’ have been deleted as this material is now reproduced in the ‘At a Glance’ section of this report on page 64.
The Remuneration Policy is also available within the Remuneration Committee (‘Committee’) section under Board Committees on the Company’s website.
– To reflect feedback received from our shareholders during our consultation at the end of 2017, we have also increased the weighting on corporate measures within the AIP to 80% (from 70% in 2017) and correspondingly reduced the weighting on personal measures to 20% (from 30% in 2017).
Outcomes from performance measures for 2018’s AIP may be moderated by the Committee in line with the approved Remuneration Policy. This will include a review by the Committee that the Company has operated within its stated risk appetite and that there are no other risk-related concerns before any 2018 AIP outcomes are confirmed.
The targets for the specific performance measures for AIP in 2018 are regarded as commercially sensitive by the Company but will be disclosed retrospectively in the Remuneration Report for 2018.
DBSS awards made in 2018 (in respect of 2017’s AIP outcome) will be made automatically on the fourth dealing day following the announcement of the Company’s 2017 annual results in accordance with the Remuneration Policy.
Dividend entitlements for the shares subject to DBSS awards will accrue over the three-year deferral period.
The performance measures are measured over a period of three financial years, commencing with financial year 2018.
The performance targets for the return on Adjusted Shareholder Solvency II Own Funds measure are 4% in excess of the risk-free rate (where 25% of this part of the award vests) and 6% in excess of the risk-free rate (full vesting of this part of the award).
Shareholding requirements Requirement levels are 200% of base salary for the Executive Directors.
Where any performance vested LTIP awards are subject to a holding period requirement, the relevant LTIP award shares (discounted for anticipated tax liabilities) will count towards the shareholding requirements. Unvested awards under the LTIP and DBSS are not included in this assessment. Details of current shareholding levels are shown on page 77.
Element of Remuneration Policy Detail of Implementation of Policy for 2018
Fee levels for the Chairman are £325,000. Whilst the base for Non-Executive Directors remains unchanged, following a market review carried out in 2017, it was considered appropriate to make certain increases. As a result, with effect from 1 July 2017, the fees for serving as Senior Independent Director (‘SID’) increased from £5,000 to £10,000 and the fee for chairing each of the Audit, Remuneration and Risk Committees increased from £10,000 to £20,000.
The fee levels for 2018 are £325,000 for the Chairman (although as part of our normal governance process this fee will be reviewed in 2018), £105,000 for the role of Non-Executive Director with additional fees of: (i) £10,000 payable for the role of SID; and/or (ii) £20,000 payable where an individual also chairs the Audit, Remuneration or Risk Committee; and/or (iii) £20,000 payable where a Non-Executive Director also serves on the board of a subsidiary company; and/or (iv) £10,000 payable for service on the Solvency II Model Governance Committee.
Profits distributed by way of dividend (% change +24%) Overall expenditure on pay (% change +29%)
Profit distributed by way of dividend has been taken as the dividend paid and proposed in respect of the relevant financial year. For 2017 this is the interim dividend paid (£99 million) and the recommended final dividend of 25.1p per share multiplied by the total share capital issued at the date of the Annual Report as set out in note D1 in the notes to the consolidated financial statements. No share buy-backs were made in either year.
Overall expenditure on pay has been taken as the employee costs as set out in note C2 ‘Administrative expenses’ in the notes to the consolidated financial statements. Expenditure on pay has increased by 29%, primarily due to the current year expenditure including a full year of costs for both the acquired AXA Wealth and Abbey Life businesses, whereas 2016 included only two months of costs for AXA Wealth and none for Abbey Life. This expenditure excludes redundancy costs which are included within ‘restructuring and integration costs’ in note C2. The year-on-year increase excluding the AXA Wealth and Abbey Life costs is 7%, which reflects small increases in share-based payment costs (see note I2) and AIP costs, and also the impact of the salary increase for staff during the year.
1 The single figure of total remuneration for 2016 has been restated and now reflects the actual price of shares on the day the 2014 LTIP vested (26 March 2017: 787.5p per share) rather than the three-month average share price to 31 December 2016 (730.0761p per share) which was required to be used last year for the single figure of total remuneration.
3 Long-term incentive vesting rates against maximum opportunity values are not applicable for 2011 and 2012 due to no awards vesting in those financial years. 4 Jonathan Moss left the role of Group Chief Executive Officer on 7 February 2011 and left Phoenix Group on 29 March 2011. Clive Bannister joined Phoenix Group on 7 February 2011 and was appointed to the Board as a Director on 28 March 2011. 5 Jonathan Moss’ 2011 single figure of total remuneration does not include compensation for loss of office.
VOTING OUTCOMES FROM THE 2017 AGM The table below shows the votes cast to approve the Directors’ Remuneration Report for the year ended 31 December 2016 and to approve the Directors’ Remuneration Policy at the 2017 AGM held on 11 May 2017.
To approve the Directors’ Remuneration Report for the year ended 31 December 2016 296,340,105 99.70 883,405 0.30 95,909
To approve the Directors’ Remuneration Policy 296,336,785 99.67 976,191 0.33 2,243
DILUTION The Company monitors the number of shares issued under the Phoenix Group employee share plans and their impact on dilution limits. The Company’s practice is for all the executive share plans to use market purchase shares on exercise of any awards. For the Company’s Sharesave scheme only, new shares are issued. Therefore the usage of shares compared to the relevant dilution limits set by the Investment Association in respect of all share plans as at 31 December 2017 is 0.68%, and no shares count towards the dilution limit for executive plans only (5% in any rolling ten-year period).
– LTIP – our most senior employees participate in the LTIP currently based on the same performance conditions as those for Executive Directors, although the Committee reserves the discretion to vary the performance conditions for awards made to employees below Board level or to grant restricted stock for future awards to such employees. In addition, selected individuals may receive ad-hoc share awards contingent on continued employment. More bespoke incentive plans may be operated in stand-alone subsidiaries.
– All-employee share plans – the Committee considers it important for all employees to have the opportunity to become shareholders in the Company. The Company offers two HMRC tax advantaged arrangements in which all UK employees can participate and acquire shares on a discounted and tax advantaged basis (Sharesave and SIP).
The Remuneration Committee acknowledges requests from, amongst others, the Investment Association, for companies to publish ratios comparing CEO to employee pay in remuneration reports. Once a common methodology is determined the Company’s expectation is that it will publish ratios showing comparisons in future years.
3 Annual incentive amounts are presented inclusive of any amounts which must be deferred into shares for three years (i.e. 40% of the AIP award for 2017; 33.33% for 2016). In 2017 and 2016, £360,835 and £294,490 respectively of Clive Bannister’s incentive payment is subject to three-year deferral delivered in shares, and £226,810 and £185,108 of James McConville’s incentive payment is subject to a similar deferral. Details of the performance measures and targets applicable to the AIP for 2017 are set out below.
4 In accordance with the requirements of the DRR regulations, the 2017 value for long-term incentives is an estimate of the vesting outcomes for LTIP awards granted in 2015 and which are due to vest on 28 September 2018 for Clive Bannister and James McConville. These estimated vesting levels are at 64.28% reflecting outcomes against the embedded value growth, cumulative cash generation and TSR performance measures to 31 December 2017 (see page 72) and assumptions regarding dividends for the period until vesting. This vesting outcome is then applied to the average share price between 1 October 2017 and 31 December 2017 (759.8462p) to produce the estimated long-term incentives figures shown for 2017 in the above table. These assumptions will be trued up for actual share prices and dividends on vesting in the report for 2018. For James McConville the total also includes the intrinsic gain made on a Sharesave option granted on 13 April 2017 when the share price was 747p.
5 For 2014’s LTIP awards which are reflected in the 2016 long-term incentives column above, the performance conditions were met as to 55% of maximum. The 2016 long-term incentives values in the above table reflect the value of the Company’s shares on the date of vesting which was 26 March 2017 (787.5p per share) multiplied by the number of shares vesting, whereas the equivalent figure within the published 2015 Single Figure Table was an estimate which reflected the average share price between 1 October 2016 and 31 December 2016 (730.0761p per share) and certain assumptions regarding the cumulative value of dividends on the number of shares vesting.
AIP OUTCOMES FOR 2017 The Committee seeks to set suitable ranges for each measure in the context both of the Company’s own internal budgets and of external projections (whether through management guidance or consensus forecasts). As an entirely closed life business, targets are significantly impacted by management actions and year-on-year growth is not an inherent objective. The ranges are considered appropriate in that context.
Against the specific Corporate measures, outturns were as follows: Performance measure
Operating companies’ cash generation £450m £525m £600m £ 653m 71.43 71.43%
1 The rating is a customer satisfaction score based on the results of a satisfaction survey managed by Ipsos MORI (an external research firm). Customers surveyed were asked to give a satisfaction rating of between 1 and 5 to a number of questions (with a rating of 4 or 5 regarded as satisfied). 92% of all questions asked scored a rating of 4 or above.
3 This measure looks at the resolution of incidents for which there could be customer detriment (financial or non-financial). It measures the timeliness of actions when things go wrong. 4 This measure looks at servicing (i.e. not product or advice) complaints which are closed within three days. 5 This measure looks at the proportion of cases where the Financial Ombudsman Service disagrees with our decision making in dealings with customers or an aspect of it. For the AIP the FOS
Before confirming these outcomes for the 2017 AIP, the Committee undertook a review which confirmed that the Company had operated within its stated risk appetite during the year and that there were no other risk-related concerns that required the moderation of 2017 AIP outcomes.
Personal objectives were agreed by the PGH Board and shared with the Remuneration Committee at the start of the year.
• Sustaining a strategy that balances opportunity, value, and price discipline in reviewing assets in the Closed Life sector.
– James McConville: • Strengthened the Group’s investor coverage with an increase from 9 to 12 in the number of analysts covering Phoenix; • Delivery of the Group’s debt strategy including over £800m of subordinated debt issuance; • Securing an improved credit rating for the Group; and
As a % of maximum personal element of salary of salary of salary
As described in the Annual Implementation Report for AIP 2018 on page 67, 40% of 2017 AIP outcomes will be delivered as an award of deferred shares under the Deferred Bonus Share Scheme which will vest after a three-year deferral period.
1 As disclosed on page 68 of the 2015 Directors’ remuneration report, with the introduction of Solvency II, Phoenix no longer reports MCEV. MCEV growth for the Company’s LTIP is measured using a combination of the growth in balance sheet values plus the value of dividends paid over a three-year performance period.
As MCEV is no longer reported by Phoenix from 31 December 2015, for the proportion of the 2015 LTIP awards subject to an MCEV growth measure, the Remuneration Committee considered it appropriate to measure the balance sheet element of MCEV growth using growth in MCEV over the period of one financial year to 31 December 2015 as reported, and then deriving the growth rate for the 2016 and 2017 financial years by using the percentage growth in Solvency II Own Funds, which has been adjusted for Solvency II specific items (‘Adjusted Shareholder Solvency II Own Funds’). Adjusted Shareholder Solvency II Own Funds is considered appropriate as it is the economic value of an entity calculated on a Solvency II basis. With the addition of dividends paid over the period to 31 December 2017, the MCEV growth achieved for the 2015 LTIP awards was 7.9%.
The above targets were all measured over the period of three financial years 1 January 2015 to 31 December 2017.
In addition to the above targets, the Committee confirmed that the underpin performance condition relating to debt levels and associated interest costs, and management of debt, capital restructuring and risk management within the Group (as described more fully on page 75 had been achieved in the performance period.
NON-EXECUTIVE FEES The emoluments of the Non-Executive Directors for 2017 based on the current disclosure requirements were as follows: Name
The aggregate remuneration of all Executive and Non-Executive Directors under salary, fees, benefits, cash supplements in lieu of pensions and annual incentive was £4.082 million (2016: £4.041 million).
2 In addition to the shares awarded under the LTIP presented above, participants receive an additional number of shares (based on the number of LTIP awards which actually vest) to reflect the dividends paid during the vesting period (and which for awards made from 2015, will include dividends paid during any applicable holding period).
The performance conditions for the 2015, 2016 and 2017 awards are set out below: Performance measure 2015 award (40% Embedded value growth, 40% Cumulative cash generation and 20% TSR)
Embedded value growth1 25% of this part vests at threshold performance rising on a pro rata basis until 100% vests.
Cumulative cash generation 25% of this part vests at threshold performance rising on a pro rata basis until 100% vests.
25% of this part vests at threshold performance rising on a pro rata basis until 100% vests. In addition, the Committee must consider whether the TSR performance is reflective of the underlying financial performance of the Company.
Measured over three financial years commencing with the year of award.
Underpin: Notwithstanding the Embedded value growth, Cumulative 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, capital structuring and risk management, the level of awards vesting will either be reduced or lapse in full. For 2016 and 2017 awards, the underpin has been extended to include consideration of customer satisfaction and, to meet Solvency II requirements, in exceptional cases, personal performance.
2 Gains of Directors from share options exercised and vesting shares under the DBSS in 2017 were £595,978 (2016: £530,014). Clive Bannister’s gain was £372,499 arising from an award exercised on 29 March 2017 at a share price of £7.744097. James McConville’s gain was £223,479 arising from an award exercised on 29 March 2017 at a share price of £7.744097.
Gains of Directors from share options exercised under Sharesave during 2017 were nil (2016: £4,998). Sharesave options are granted with an option price that is a 20% discount to the three-day average share price when invitations are made. This is permitted by HMRC regulations for such options.
During the year ended 31 December 2017, the highest mid-market price of the Company’s shares was 798.5p and the lowest mid-market price was 723.0p. At 31 December 2017, the Company’s share price was 782.0p.
Total share plan interests as at 31 December 2017 – LTIP
There have been no changes in the Directors’ share interests between 31 December 2017 and 27 February 2018 (being one month prior to the date of the notice of the AGM).
The Executive Directors are required to sign a declaration that they have not and will not at any time during their employment with Phoenix Group, enter into any hedging contract in respect of their participation in the AIP, LTIP, Sharesave, SIP or any other incentive plan of the Company, or pledge awards in such plans as collateral, and additionally that they will neither enter into a hedging contract in respect of, nor pledge as collateral, any shares which are required to be held for the purposes of the Company’s Shareholding requirements or any vested LTIP award shares subject to a LTIP holding period.
Name Date of appointment Date of contract Notice period from either party (months)
Alastair Barbour 30 September 2016 1 October 2013 2 May 2018 2
Ian Cormack 25 May 2016 2 September 2009 2 May 2018 2
Karen Green 29 June 2017 1 July 2017 1 July 2020 28
Wendy Mayall 24 August 2016 1 September 2016 1 September 2019 18
Belinda Richards 29 June 2017 1 October 2017 1 October 2020 31
Kory Sorenson 9 May 2014 1 July 2014 2 May 2018 2
Henry Staunton 19 August 2015 1 September 2015 1 September 2018 6
REMUNERATION COMMITTEE GOVERNANCE The Group established the Committee in 2010. The terms of reference of the Committee are available at www.thephoenixgroup.com. The main determinations of the Committee in 2017 in respect of the application of the Remuneration Policy are summarised in the Committee Chairman’s letter to shareholders at the start of the Remuneration Report.
Under the Committee’s Terms of Reference, the Committee meets at least twice a year but more frequently if required. During 2017, six Committee meetings were held and details of attendance at meetings are set out in the Corporate Governance Report on page 55.
ADVICE The Committee received independent remuneration advice during the year from its appointed adviser, FIT Remuneration Consultants LLP (‘FIT’). FIT is a member of the Remuneration Consultants Group (the professional body for remuneration consultants) and adheres to its code of conduct. This appointment was made by the Committee following consideration of FIT’s experience in this sector. FIT provided no other services to the Group and the Committee was satisfied that the advice provided by FIT was objective and independent. FIT’s fees in respect of 2017 were £190,945, all of which were attributed to work relating to the Committee. FIT’s fees were charged on the basis of the firm’s standard terms of business for advice provided.
Input is also sought from the Chief Risk Officer (without management present) and from representatives from finance, as appropriate. The Chief Risk Officer is asked to confirm each year that the Company has operated within its stated risk appetite during the year and also to confirm whether there were otherwise any risk-related concerns that required the Committee to consider using its judgement to moderate incentive plan outcomes. There were no such concerns in 2017.
Element and purpose Base salary This is the core element of pay and reflects the individual’s role and position within the Group with some adjustment to reflect their capability and contribution
– Changes to base salaries normally take effect from 1 January.
Maximum – The Remuneration Committee will apply the factors set out in the previous column in considering any salary adjustments during the duration of this policy. No increase will be made if it would take an Executive Director’s salary above £780,000 (being the median level of salaries for CEOs in the FTSE 31-100), provided that this figure may be increased in line with UK RPI inflation for the duration of this policy.
Changes from previous policy – No material changes. ‘Cap’ for base salaries re-expressed as a monetary amount and relative positioning is confirmed.
The information in this supplement is the Directors’ Remuneration Policy as approved by the Company’s shareholders at the Company’s 2017 AGM on 11 May 2017. It does not form part of the Directors’ Remuneration Report for 2017 and is not subject to the advisory vote at the 2018 AGM on the Directors’ Remuneration Report for 2017.
Base salary – Confirmation of caps for each element of the policy, including base salary. For base salaries, we have clarified the target positioning of Executive Directors’ base salaries as between the FTSE 31-100 and FTSE 250 data sets.
– Confirming the application of holding periods (which have applied to LTIP awards from 2015 onwards).
Element and purpose Benefits To provide other benefits valued by recipient
Policy and operation – The Group provides market competitive benefits in kind. Details of the benefits provided in each year will be set out in the Implementation Report. The Remuneration Committee reserves discretion to introduce new benefits where it concludes that it is in the interests of Phoenix Group to do so, having regard to the particular circumstances and to market practice.
Maximum – It is not possible to prescribe the likely change in the cost of insured benefits or the cost of some of the other reported benefits year-to-year, but the provision of benefits will normally operate within an annual limit of 10% of an Executive Director’s base salary.
– Relocation expenses are subject to a maximum limit of £150,000.
Element and purpose Pension To provide retirement benefits and remain competitive within the market place
Policy and operation – The Group provides a competitive employer sponsored defined contribution pension plan.
– All Executive Directors are eligible to participate in the Group Personal Pension (‘GPP’). Executive Directors receive a contribution to GPP or they may opt to receive the contribution in cash if they are impacted by the relevant lifetime or annual limits. Any such cash payments are reduced for the effect of employers’ National Insurance Contributions.
Element and purpose Annual Incentive Plan (‘AIP’) and Deferred Bonus Share Scheme (‘DBSS’) To motivate employees and incentivise delivery of annual performance targets
Policy and operation – AIP levels and the appropriateness of measures are reviewed annually to ensure they continue to support the Group’s strategy.
– DBSS awards are made automatically each year on the fourth dealing day following the announcement of annual results, using the average of the preceding three dealing days’ share prices to calculate the number of shares in awards.
– The three-year period of deferral will run to the third anniversary of the award date.
– On-target performance on all measures produces an outcome of 50% of maximum annual incentive opportunity. However, the Remuneration Committee reserves the right to adjust the threshold and target levels for future financial years in light of competitive practice.
– The AIP operates subject to three levels of moderation: i. The Remuneration Committee sets targets for relevant AIP metrics. Recognising that the business of the Company is to engage in corporate activity, the Remuneration Committee may adjust targets during the year to take account of such activity and ensure the targets continue to reflect performance as originally intended.
Increased the minimum level of compulsory deferral from 33% to 40%.
Confirmed that financial performance measures will always have at least a 50% weighting for any year.
Element and purpose Long-Term Incentive Plan (‘LTIP’) To motivate and incentivise delivery of sustained performance over the long term, and to promote alignment with shareholders’ interests, the Group operates the Phoenix Group Holdings Long-Term Incentive Plan
– A holding period will apply so that Executive Directors may not normally exercise vested LTIP awards until the fifth anniversary of the award date.
– Dividend entitlements will accrue until the end of the holding period in respect of performance vested shares and be delivered as additional vesting shares.
Changes from previous policy – Provides for the automatic making of LTIP awards on the fourth dealing day following the announcement of annual results.
Element and purpose All-employee share plans To encourage share ownership by employees, thereby allowing them to participate in the long-term success of the Group and align their interests with those of the shareholders
Policy and operation – Executive Directors are expected to retain all shares (net of tax) which vest under the DBSS and under the LTIP (or any other discretionary long-term incentive arrangement introduced in the future) until such time as they hold a minimum of 200% of their base salary in shares.
– Fee levels are periodically reviewed. The Company does not adopt a quantitative approach to pay positioning and exercises judgement as to what it considers to be reasonable in all the circumstances as regards quantum.
Maximum – The aggregate fees of the Chairman and Non-Executive Directors will not exceed the limit from time to time prescribed within the Company’s Articles of Association for such fees (currently £2 million per annum in aggregate).
– All-employee share plans – the Committee considers it is important for all employees to have the opportunity to become shareholders in the Company. The Company offers two HMRC tax advantaged arrangements in which all UK employees can participate and acquire shares on a discounted and tax advantaged basis (Sharesave and SIP). In recent years, the terms of both plans have been made more generous to encourage employee take-up (increasing the Sharesave discount to 20% and in 2017 increasing the SIP match from 1 for 6 to 1 for 3). In addition, selected individuals may receive ad hoc share awards contingent on continued employment.
2. Stating maximum amounts for the Remuneration Policy The DRR regulations and related investor guidance encourages companies to disclose a cap within which each element of remuneration policy will operate. Although the Company is not subject to these provisions, the Remuneration Committee has decided to set and disclose limits in this report on a voluntary basis. Where maximum amounts for elements of remuneration have been set within the Remuneration Policy, these will operate simply as caps and are not indicative of any aspiration.
3. Malus and clawback Malus (being the forfeiture of unvested awards) and clawback (being the ability of the Company to claim repayment of paid amounts as a debt) provisions apply to the AIP, DBSS and LTIP. These provisions may be applied where the Remuneration Committee considers it appropriate to do so following: – a review of the conduct, capability or performance of an individual; – a review of the performance of the Company or a Group member; – any material misstatement of the Company’s or a Group member’s financial results for any period; – any material failure of risk management by an individual, a Group member or the Company; or
– For external and internal appointments, the Remuneration Committee may agree that the Company will meet certain relocation expenses as it considers appropriate.
A participant is considered a Good Leaver if leaving through redundancy, serious ill health or death or otherwise at the discretion of the Remuneration Committee
CONSIDERATION OF EMPLOYMENT CONDITIONS ELSEWHERE IN THE GROUP As explained in the notes to the Remuneration Policy table, the Remuneration Committee takes into account Group-wide pay and employment conditions. The Remuneration Committee reviews the average Group-wide base salary increase and annual incentive costs and is responsible for all discretionary and all-employee share arrangements.
The Remuneration Committee is cognisant of the requests from, amongst others, the Investment Association, for companies to publish ratios comparing CEO to employee pay. The Remuneration Committee has not however published this data in the Directors’ Remuneration Report given the absence of a common methodology for these comparisons; the Company’s expectation is that it will publish ratios showing comparisons in future years when, as can be expected, UK regulations or guidance develop a common methodology.
SHAREHOLDERS DIVIDENDS Dividends for the year are as follows: Ordinary shares
SHARE CAPITAL The issued share capital of the Company was increased by 382,827 ordinary shares during 2017 which related to shares issued under the Company’s Sharesave Scheme.
At the Company’s AGM held on 11 May 2017, shareholders granted the Company authority to purchase up to 10% of its issued ordinary shares. Any ordinary shares purchased under the authority would, subject to the Cayman Islands Companies Law (as amended), either be cancelled by operation of law or held in treasury.
Subject to obtaining shareholder approval for the renewal of this authority at the forthcoming AGM on 2 May 2018, 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), 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.
Where the Phoenix Group Employee Benefit Trust (‘EBT’) holds shares for unvested awards, the voting rights for these shares are exercisable by the trustees of the EBT at their discretion, taking into account the recommendations of the Group.
RESTRICTIONS ON TRANSFER OF SHARES Under the Company’s Articles, the Directors may in certain circumstances refuse to register transfers of shares. In particular, the Board of Directors may refuse to register the transfer of shares to a person who is a NonQualified Person (as defined in the Company’s Articles).
ANNUAL GENERAL MEETING (‘AGM’) The AGM of the Company will be held at Stationers’ Hall Ave, Maria Lane, London, ECM4 7DD on Wednesday 2 May 2018 at 10.00am.
The Company’s Investor Relations department is dedicated to facilitating communication with investors and analysts and an active investor relations programme is maintained. Please see page 46 for further details regarding the Company’s engagement with investors.
The Company’s AGM provides another opportunity to communicate with its shareholders. At the 2017 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 2018 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 powers of the Directors are determined by Cayman Islands Company Law (amended), Cayman Islands common law, the provisions of the Company’s Memorandum and Articles and by any valid directions given by shareholders by way of special resolution.
DIRECTORS’ INDEMNITIES Following shareholder approval on 15 March 2010, the Company entered into a deed of indemnity by way of deed poll with its Directors whereby the Company has agreed to indemnify each Director against all losses incurred by them in the exercise, execution or discharge of their powers or duties as a Director of the Company, provided that the indemnity shall not apply to the extent prohibited by any applicable law.
The deed of indemnity remains in-force as at the date of signature of this Directors’ Report.
EMPLOYEES DIVERSITY AND INCLUSION The Group is committed to creating a work environment free of discrimination where everyone is treated with dignity and respect.
The views and opinions of staff are sought through Phoenix’s annual Engagement Survey and more regular interim surveys and employee communication and engagement forums. Phoenix undertakes meaningful consultation with staff representatives on all major organisational changes and other matters affecting employees engagement.
The Board has followed the requirements of the UK Financial Reporting Council’s ‘Guidance on Risk Management, Internal Control and Related Financial and Business Reporting, (September 2014) when performing its going concern assessment. As part of its comprehensive assessment of whether the Group and the Company are a going concern, the Board has undertaken a review of the liquidity and solvency of the Group under both normal and stressed conditions as at the date of preparation of the statement of consolidated financial position.
VIABILITY STATEMENT The Viability Statement, as required by section C.2.2 of the Code, has been undertaken for period of five years to align to the Group’s business planning and is contained in the Risk Management section on page 37.
GREENHOUSE GAS EMISSIONS All disclosures concerning the Group’s greenhouse emissions are contained in the Environmental Report forming part of the Strategic Report on page 45.
MEMORANDUM AND ARTICLES Changes to the Company’s Memorandum and Articles require prior shareholder approval. Changes proposed at the 2 May 2018 AGM will be set out in the notice for that meeting.
The Memorandum and Articles are available on the Company’s website at www.thephoenixgroup.com/about-us/corporate-governance/articlesof -association.aspx.
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.
GROUP COMPANY SECRETARY The Group Company Secretary throughout the 2017 financial period was Gerald Watson.
Note E5 to the Consolidated Financial Statements 2 Publication of unaudited financial information
Not applicable 6 Waiver of any future emoluments by a Director
Not applicable 8 As per 7, but for major subsidiary undertakings
The Board has prepared a Strategic Report which provides an overview of the development and performance of the Group’s business for the year ended 31 December 2017, covers the future developments in the business of Phoenix Group Holdings and its consolidated subsidiaries, and provides details of any important events affecting the Company and its subsidiaries after the year-end. For the purposes of compliance with DTR 4.1.5R(2) and DTR 4.1.8R, the required content of the ‘Management Report’ can be found in the Strategic Report and this Directors’ Report, including the sections of the Annual Report and Accounts incorporated by reference.
In preparing these financial statements the Directors are required to: – Select suitable accounting policies and then apply them consistently; – Make judgements and accounting estimates that are reasonable and prudent; – State whether IFRS, as adopted by the IASB have been followed, subject to any material departures disclosed and explained in the Group and the Company financial statements; and
The Directors as at the date of this report, whose names and functions are listed in the Board of Directors section on pages 50 to 51, confirm that, to the best of their knowledge: – The Group’s consolidated financial statements and the Company financial statements, which have been prepared in accordance with IFRS as issued by the IASB, give a true and fair view of the assets, liabilities, financial position and profit of the Group and the Company; and
CLIVE BANNISTER JAMES MCCONVILLE GROUP CHIEF EXECUTIVE OFFICER GROUP FINANCE DIRECTOR
– The statement of consolidated financial position as at 31 December 2017
– The statement of consolidated changes in equity for the year then ended
REPORT ON MATTERS PRESCRIBED BY OUR ENGAGEMENT LETTER In our opinion: – the information given in the Strategic Report and the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements; – the information given in the Corporate Governance Report set out on pages 53 to 62 with respect to internal control and risk management systems in relation to financial reporting processes is consistent with the financial statements; and
– the part of the Directors’ Remuneration Report that has been described as audited has been properly prepared in accordance with the basis of preparation as described therein.
– the Directors’ explanation set out on page 37 in the Annual Report as to how they have assessed the prospects of the entity, over what period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the entity will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions.
OVERVIEW OF OUR AUDIT APPROACH Materiality – Group materiality is £63 million (2016: £67 million) which represents 2.0% (2016: 2.0%) of total equity attributable to owners of the parent (‘Group equity’).
– The reporting units where we performed full or specific audit procedures accounted for more than 99% of the equity and loss before tax of the Group.
Key audit matters – Valuation of insurance contract liabilities, comprising of the following risk areas: • actuarial assumptions; • actuarial modelling; and
KEY AUDIT MATTERS Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) that we identified. These matters included those which had the greatest effect on: the overall audit strategy, the allocation of resources in the audit; and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements as a whole, and in our opinion thereon, and we do not provide a separate opinion on these matters. This is not a complete list of all the risks identified in our audit.
We have split the risks relating to the valuation of insurance contract liabilities into the following component parts: – actuarial assumptions; – actuarial modelling; and
There has been no change in our assessment of this risk from the prior year. Economic assumptions are set by management taking into account market conditions as at the valuation date. Noneconomic assumptions such as future expenses, longevity and mortality are set based on past experience, market experience, market practice, regulations and expectations about future trends.
– reviewed the disclosures made in the consolidated financial statements regarding the sensitivity of the valuation of insurance contract liabilities to changes in the key actuarial assumptions.
Over £41.3 billion of the £45.4 billion of insurance contract liabilities are modelled using the actuarial modelling systems with the residual balance modelled outside these systems to cater for ancillary business. The key risk is therefore associated with the modelling systems but risks also exist in the calculation of amounts outside these systems.
– tested the design, implementation and operating effectiveness of key controls over management’s process for modelling insurance contract liabilities outside the actuarial modelling systems.
We determined that the models used are appropriate and that changes to the models were implemented as intended and that controls over management’s processes for modelling insurance contract liabilities outside of the actuarial modelling system were operating effectively.
There has been no change in assessment of this risk from the prior year. The actuarial data is a key input into the valuation process. The valuation of insurance contract liabilities is therefore conditional upon the accuracy and completeness of the data used.
– tested the reconciliations of premiums and claims information from the actuarial data extract to the general ledger, where applicable.
We performed full scope audit procedures over this risk area in two locations, which covered 100% of the risk amount.
Valuation of complex and illiquid financial investments (£1.4 billion; 2016: £1.8 billion)
We performed additional audit procedures on the ERM and IRS financial investments as well as the longevity contracts which require judgement to be applied and for which quoted market prices are not readily available and consequently where management use models and other inputs to estimate their value.
These investments are referred to as Level 3 assets in the financial statements.
To obtain sufficient audit evidence to conclude on the valuation of complex and illiquid financial investments, we: – tested the design and operating effectiveness of key controls over management’s process in respect of the valuation of complex and illiquid financial investments such as ERMs, IRSs and Corporate Transactions; – evaluated the methodology, inputs and assumptions used (such as voluntary early repayment, house price inflation and mortality improvement), and compared them to published market benchmarks and other demographic and economic assumptions used by other industry participants, to confirm that key valuation inputs were consistent with industry norms and our understanding of the asset type; – considered the results of management’s experience analysis and assessed the reasonableness of the movement in valuation during the year; – tested the completeness and accuracy of data used in the valuation model; – assessed the reasonableness of a sample of property valuations within the IRS model; and
– reviewed that disclosures have been made in the financial statements regarding the sensitivity of the valuation of certain illiquid and complex assets to changes in the key assumptions.
We performed full scope audit procedures over this risk area in two locations, which covered 99% of the risk amount.
Based on our procedures performed on the ERM and IRS models and Corporate Transactions, we are satisfied that the valuation of these complex and illiquid assets is reasonable.
We have removed the significant risk identified in the prior year in relation to ‘Acquisition of AXA Wealth Limited and Abbey Life Assurance Company Limited’, as this related to the one-off risk arising in the year of acquisition.
Independent Auditor’s Report to the Members of Phoenix Group Holdings continued
THE SCOPE OF OUR AUDIT TAILORING THE SCOPE Our assessment of audit risk, our evaluation of materiality and our allocation of performance materiality determine our audit scope for each reporting unit (‘component’) within the Group. Taken together, this enables us to form an opinion on the consolidated financial statements. We take into account size, risk profile, the organisation of the group and effectiveness of Group-wide controls, changes in the business environment and other factors when assessing the level of work to be performed at each entity.
For the Other Companies component, we performed audit procedures on provisions, accruals and deferred income, and administrative expenses for the service companies. The extent of audit work in respect of Other Companies component was based on our assessment of the risks of material misstatement at a financial statement line level.
The reporting components where we performed audit procedures accounted for more than 99% of the Group equity and the Group’s operating profit. For the current year, the full scope components contributed 98% (2016: 98%) of the equity and 99% (2016: 92%) of the Group’s loss before tax. The specific scope component contributed 2% (2016: 1%) of the Group’s equity and 1% (2016: 7%) of the Group’s loss before tax. The audit scope of these components may not have included testing of all significant accounts of the component but will have contributed to the coverage of significant accounts tested for the Group.
CHANGES FROM THE PRIOR YEAR During the year, we were appointed as the auditor of ALAC. This component continues to be designated as a full scope component. AXA Wealth Limited was incorporated into the Phoenix Life Division component during the year, and is no longer a separate identifiable component of the Group.
The Group audit team continued to follow a programme of planned visits that has been designed to ensure that the Senior Statutory Auditor visited each of the locations where the Group audit scope was focused at least once every year and the most significant of them more than once a year. For all full audit components, in addition to the location visit, the Group audit team reviewed key working papers and participated in the component team’s planning, including the component team’s discussion of fraud and error. The Group team attended the closing meetings with the management of the Phoenix Life Division and ALAC and attended key Audit Committee meetings.
On the basis of our risk assessments, together with our assessment of the Group’s overall control environment, our judgement was that performance materiality was 50% (2016: 50%) of our planning materiality, namely £31 million (2016: £34 million).
Audit work at component locations for the purpose of obtaining audit coverage over significant financial statement accounts is undertaken based on a percentage of total performance materiality. The performance materiality set for each component is based on the relative scale and risk of the component to the Group as a whole and our assessment of the risk of misstatement at that component. In the current year, the range of performance materiality allocated to components was £6 million to £24 million (2015: £7 million to £25 million).
IN CONNECTION WITH OUR AUDIT OF THE FINANCIAL STATEMENTS Our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement in the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of the other information, we are required to report that fact.
MATTERS ON WHICH WE ARE REQUIRED TO REPORT BY EXCEPTION In the light of the knowledge and understanding of the Group and the parent company and its environment obtained in the course of the audit, we have not identified material misstatements in the strategic report or the Directors’ Report.
– report if we are not satisfied that: • adequate accounting records have been kept (including returns from those branches which have not been visited); or
• the financial statements are in agreement with the records and returns; or
Our approach was as follows: – we obtained a general understanding of the legal and regulatory frameworks that are applicable to the Company and its subsidiaries and determined that the relevant laws and regulations related to elements of company law and tax legislation, and the financial reporting framework. Our considerations of other laws and regulations that may have a material effect on the financial statements included permissions and supervisory requirements of the Prudential Regulation Authority (‘PRA’) and the Financial Conduct Authority (‘FCA’) and UK Listing Authority (‘UKLA). We obtained a general understanding of how Phoenix Group Holdings is complying with those frameworks by making enquiries of management and those responsible for legal and compliance matters. We also reviewed correspondence between the Company and UK regulatory bodies; reviewed minutes of the Board and Executive Committee; and gained an understanding of the Company’s approach to governance, demonstrated by the Board’s approval of the Company’s governance framework.
– for direct laws and regulations, we considered the extent of compliance with those laws and regulations as part of our procedures on the related financial statement items.
– the Company operates in the insurance industry which is a highly regulated environment. As such the Senior Statutory Auditor considered the experience and expertise of the engagement team to ensure that the team had the appropriate competence and capabilities, which included the use of specialists where appropriate.
A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council’s website at This description forms part of our auditor’s report.
– the period of total uninterrupted engagement including previous renewals and reappointments is nine years, covering the years ending 31 December 2009 to 31 December 2017.
– the non-audit services prohibited by the FRC’s Ethical Standard were not provided to the Company and we remain independent of the Company in conducting the audit.
Statement of Comprehensive Income For the year ended 31 December 2017
Other comprehensive (expense)/income: Items that are or may be reclassified to profit or loss: Cash flow hedges: Fair value losses arising during the year (13) –
Statement of Consolidated Financial Position As at 31 December 2017 continued £m £m
Acquisition of AXA subsidiaries, net of cash acquired H2.1 – (343)
Acquisition of Abbey Life subsidiaries, net of cash acquired H2.2 – (886)
Proceeds from issuing ordinary shares, net of associated commission and expenses D1 2 908
Fees associated with the amendment of existing bank facility – (3)
Proceeds from new shareholder borrowings, net of associated expenses 830 1,079
Proceeds from sale of internal holding in £428 million subordinated notes 32 –
Cash and cash equivalents at the beginning of the year 1,666 3,940
Credit to equity for equity-settled share-based payments – – – – – – 8 8
Shares acquired by the employee benefit trust – – (4) – – – – (4)
(Loss)/profit for the year – – – – – (101) (101) 1 (100)
Other comprehensive income for the year – – – – – 218 218 – 218
Total comprehensive income for the year – – – – – 117 117 1 118
Issue of ordinary share capital, net of associated commissions and expenses – 908 – – – – 908 – 908
Credit to equity for equity-settled share-based payments – – – – – 7 7 – 7
Elimination of non-controlling interest following loss of control – (564) (564)
Shares distributed by the employee benefit trust – – 5 – – (5) – – –
Shares acquired by the employee benefit trust – – (7) – – – (7) – (7)
A. SIGNIFICANT ACCOUNTING POLICIES A1. BASIS OF PREPARATION The consolidated financial statements for the year ended 31 December 2017 comprise the financial statements of Phoenix Group Holdings (‘the Company’) and its subsidiaries (together referred to as ‘the Group’).
Statement of compliance The consolidated financial statements have been prepared, in accordance with International Financial Reporting Standards (‘IFRSs’) as issued by the International Accounting Standards Board (‘IASB’). The financial statements are presented in sterling (£) rounded to the nearest million except where otherwise stated.
Basis of consolidation The consolidated financial statements include the financial statements of the Company and its subsidiary undertakings, including collective investment schemes, where the Group exercises overall control. In accordance with the principles set out in IFRS 10 Consolidated Financial Statements, the Group controls an investee if and only if the Group has all the following: – power over the investee; – exposure, or rights, to variable returns from its involvement with the investee; and
A2.1 Foreign currency transactions Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (the ‘functional currency’). The consolidated financial statements are presented in Sterling, which is the Group’s presentation currency.
A3. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS The preparation of financial statements requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. Disclosures of judgements made by management in applying the Group’s accounting policies include those that have the most significant effect on the amounts that are recognised in the Group’s financial statements. Disclosures of estimates and associated assumptions include those that have a significant risk of resulting in a material change to the carrying value of assets and liabilities within the next year. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
The application of critical accounting judgements that could have the most significant effect on the recognised amounts include recognition of pension surplus, the determination of operating profit and the recognition of an investment as an associate. There were no acquisitions during the current year and consequently the identification of intangibles is no longer considered to be a critical accounting judgement. Details of all critical accounting estimates and judgements are included below.
A3.5 Recognition of pension scheme surplus A pension scheme surplus can only be recognised to the extent that the sponsoring employer can utilise the asset through a refund of surplus or a reduction in contributions. A refund is available to the Group where it has an unconditional right to a refund on a gradual settlement of liabilities over time until all members have left the scheme. A review of the Trust Deeds of the Group’s pension schemes that recognise a surplus has highlighted that the Scheme Trustees are not considered to have the unilateral power to trigger a wind-up of the Scheme and the Trustees’ consent is not needed for the sponsoring company to trigger a wind-up. Where the last beneficiary died or left the scheme, the sponsoring company could close the Scheme and force the Trustees to trigger a wind-up by withholding its consent to continue the Scheme on a closed basis. This view is supported by external legal opinion and is considered to support the recognition of a surplus. Further details of the Group’s pension schemes are provided in note G6.
A3.6 Operating profit Operating profit is the Group’s non-GAAP measure of performance. The Group is required to make judgements as to the appropriate longer-term rates of investment return for the determination of operating profit, as detailed in note B2, and as to what constitutes an operating or non-operating item in accordance with the accounting policy detailed in note B1.2.
A. SIGNIFICANT ACCOUNTING POLICIES continued A3.7 Recognition of the investment in UK Commercial Property Trust Limited (‘UKCPT’) as an associate UKCPT is a property investment company which the Group deconsolidated in 2016 and now classifies as an associate held at fair value. Judgement continues to be applied in determining whether the Group controls the activities of UKCPT. The Group held 47.9% of the issued share capital of UKCPT as at 31 December 2017 and deemed that it did not control its investment in UKCPT throughout the year ending on that date. The Group does not hold a unilateral power of veto in general meetings and is restricted by the terms of an existing relationship agreement it has with UKCPT.
A4. ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS IN 2017 The consolidated financial statements for the year ended 31 December 2017, set out on pages 103 to 181, were authorised by the Board of Directors for issue on 14 March 2018.
The Group’s liabilities arising from financing activities consist of borrowings (for which further details are provided in note E5). A reconciliation between the opening and closing balances of these items is provided in that note. Consistent with the transition provisions of the amendments, the Group has not disclosed comparative information for the prior period. Apart from the additional disclosure in note E5 the application of these amendments has had no impact on the Group’s consolidated financial statements.
Annual Improvements to IFRSs 2014-2016 Cycle The Group has applied the amendments to IFRS 12 Disclosure of Interests in Other Entities included in the Annual Improvements to IFRSs 2014-2016 Cycle for the first time in the current year. The other amendments included in this package are not yet mandatorily effective and have not been early adopted by the Group (see note A5).
– IFRS 15 Revenue from contracts with Customers (2018). IFRS 15 establishes a single comprehensive framework for determining whether, how and when revenue is recognised. The standard does not apply to insurance contracts or financial instruments within the scope of IAS 39 Financial Instruments: Recognition and Measurement. Accordingly, a detailed impact assessment has been performed to consider the impact of IFRS 15 in relation to revenue streams from the Group’s investment contracts and the provision of investment management services. As a result of the outcome of the assessment, the Group considers that the application of IFRS 15 will not have a significant impact on the financial position and/or financial performance of the Group. IFRS 15 introduces additional disclosure requirements which will be reflected in the 2018 consolidated financial statements.
– Classification and measurement of share-based payment transactions (Amendments to IFRS 2) (2018). The Group does not anticipate that the application of the amendments in the future will have a significant impact on the Group’s consolidated financial statements as the Group does not have any cash-settled share-based payment arrangements or any withholding tax arrangements with tax authorities in relation to share-based payments.
– Transfers of Investment Property (Amendments to IAS 40) (2018). The amendments clarify that a transfer to, or from, investment property necessitates an assessment of whether a property meets, or has ceased to meet, the definition of investment property, supported by observable evidence that a change in use has occurred. The amendments further clarify that situations other than the ones listed in IAS 40 may evidence a change in use, and that a change in use is possible for properties under construction (i.e. a change in use is not limited to completed properties). The Group anticipates that the application of these amendments may have an impact on the Group’s consolidated financial statements in future periods should there be a change in use of any of its properties.
– IFRS 16 Leases (2019). IFRS 16 will replace IAS 17 Leases. The new standard removes the classification of leases as either operating or finance leases for the lessee, thereby treating all leases as finance leases. This will result in the recognition of a right-to-use asset and a lease liability for all of the Group’s previously classified operating leases. Short-term leases (less than 12 months) and leases of low-value assets are exempt from the requirements. The Group anticipates that following the application of IFRS 16 the Group will need to amend the accounting for its operating leases (see note I5). Given the limited number of these contracts and their relative values, we expect the impact on the Group’s consolidated financial statements to be immaterial.
– IFRIC 23 Uncertainty over Income Tax Treatments (2019). This interpretation clarifies the accounting for income tax treatments that have yet to be accepted by tax authorities, whilst also aiming to enhance transparency.
– IFRS 17 Insurance Contracts (2021). IFRS 17 is expected to significantly change the way the Group measures and reports its insurance contracts. The new standard uses three measurement approaches and the principles underlying these measurement approaches will significantly change the way the Group measures its insurance contracts and investment contracts with DPF. These changes will impact profit emergence patterns and add complexity to valuation processes, data requirements and assumption setting. As a consequence, during 2017 the Group commenced a project to perform an assessment of the impact of the standard on the Group and to produce a detailed implementation plan. Implementation activities will continue in 2018/19.
Segment performance is evaluated based on profit or loss which, in certain respects, is presented differently from profit or loss in the consolidated financial statements. Revenues or expenses that are not directly attributable to a particular segment are allocated between segments where there is a reasonable basis for doing so.
B. EARNINGS PERFORMANCE continued B1. SEGMENTAL ANALYSIS continued B1.1 Segmental result
Operating profit includes the effect of variances in experience for non-economic items, such as mortality and expenses, and the effect of changes in non-economic assumptions. It also incorporates the impacts of significant management actions where such actions are consistent with the Company’s core operating activities (for example, actuarial modelling enhancements and data reviews). Operating profit is reported net of policyholder finance charges and policyholder tax.
Investment return variances and economic assumption changes on long-term business (6) – (6)
Investment return variances and economic changes on long-term business (207) – (207)
B. EARNINGS PERFORMANCE continued B1. SEGMENTAL ANALYSIS continued Other non-operating items include: – a gain of £26 million on the implementation of a longevity swap reassurance contract on a portfolio of the Group’s annuities; – a gain of £14 million arising as a result of a premium adjustment on the 2015 reassurance arrangement with RGA International following completion of a data review; – acquisition related costs of £31 million, comprising £12 million of transaction costs related to the acquisition of AXA Wealth’s pensions and protection business and £19 million of transaction costs related to acquisition of Abbey Life; – a provision for costs of £30 million associated with the integration and restructuring of the acquired AXA Wealth businesses; – the costs of providing for claims and associated costs relating to creditor insurance underwritten prior to 2016 by a subsidiary of the Group, PA(GI) Limited, of £33 million; – recognition of costs of £10 million associated with the introduction of regulations that cap early exit charges for pension customers aged over 55 at 1%, which came into force from 2017; – costs of £6 million associated with the transfer of non-profit annuities from with-profit funds to non-profit matching adjustment funds; – the costs of £4 million on PGL pension scheme buy-in; – other corporate project costs of £19 million; and
The long-term risk-free rate used as a basis for deriving the long-term investment return is set by reference to the swap curve at the 15 year duration plus 10bps at the start of the year. A risk premium of 350bps is added to the risk-free yield for equities (2016: 350bps), 250bps for properties (2016: 250bps), 150bps for other fixed interest assets (2016: 150bps) and 50bps for gilts (2016: 50bps).
The principal assumptions underlying the calculation of the long-term investment return are: Other fixed interest 3.0 3.8
The movement in liabilities included in operating profit reflects both the change in liabilities due to the expected return on investments and the impact of experience variances and assumption changes for noneconomic items.
The effect of differences between actual and expected economic experience on liabilities, and changes to economic assumptions used to value liabilities, are taken outside operating profit. For many types of longterm business, including unit-linked and with-profit funds, movements in asset values are offset by corresponding changes in liabilities, limiting the net impact on profit. For other long-term business, the profit impact of economic volatility depends on the degree of matching of assets and liabilities, and exposure to financial options and guarantees.
The investment return variances and economic assumption changes excluded from the long-term business operating profit are as follows: £m £m
The adverse variance on owners’ funds of £87 million (2016: £5 million adverse) is principally driven by interest rate swaption positions held in the life companies’ shareholder funds. Such positions are held to hedge the impact of interest rate risk on the Group’s Solvency II surplus position. With swap yields remaining relatively stable during the period, option value associated with these contracts has fallen due to expected option expiry and reduced volatility.
Diluted earnings per share is as follows: 2017 pence 2016 pence
On 17 March 2017, the Board recommended a final dividend of 23.9p per share in respect of the year ended 31 December 2016. The dividend was approved at the Company’s Annual General Meeting, which was held on 11 May 2017. The dividend amounted to £94 million and was paid on 15 May 2017.
On 23 August 2017, the Board declared an interim dividend of 25.1p per share for the half year ended 30 June 2017. The dividend amounted to £99 million and was paid on 2 October 2017.
Net investment income comprises interest, dividends, rents receivable, net interest income/(expense) on the net defined benefit asset/(liability), fair value gains and losses on financial assets, financial liabilities and investment property at fair value and impairment losses on loans and receivables.
Fair value gains and losses on financial assets and financial liabilities designated at fair value through profit or loss are recognised in the consolidated income statement. Fair value gains and losses includes both realised and unrealised gains and losses.
Interest income on loans and deposits at amortised cost 1 1
Net interest (expense)/income on Group defined benefit pension scheme liability/asset (11) 21
Financial assets and financial liabilities at fair value through profit or loss: Designated upon initial recognition 2,754 3,236
Movement in PA(GI) provision, net of reimbursement (see note G1) (18) 33
During the year the Group obtained the services from its auditor at costs as detailed in the table below.
No services were provided by the Company’s auditors to the Group’s pension schemes in either 2017 or 2016.
Audit-related assurance services includes fees payable for services where the reporting is required by law or regulation to be provided by the auditor, such as reporting on regulatory returns. It also includes fees payable in respect of reviews of interim financial information and services where the work is integrated with the audit itself.
Reporting accountant assurance services relate to assurance reporting on historical information included within investment circulars. In 2016, this included public reporting associated with the issuance of equity as part of the acquisition of Abbey Life and the issuance of a Medium Term Note Programme.
Other non-audit services of £0.5 million (2016: £0.1 million) include £0.4 million of fees associated with a review of Abbey Life past business practices undertaken at the request of the regulator. This engagement was entered into prior to the firm’s appointment as auditors of Abbey Life. The remaining fees were incurred in connection with other assurance activities. The 2016 fees for other non-audit services were primarily in respect of assurance provided over aspects of the Group’s Solvency II internal model.
Further information on auditor’s remuneration and the assessment of the independence of the external auditor is set out in the Audit Committee report on page 58.
On financial liabilities at fair value through profit or loss 14 13
Movement on acquired in-force amortisation at less than 19.25% (2016: 20%) 3 2
Total tax charge for the period 20 30 1 The Phoenix Life operating segment operates predominantly in the UK. The reconciliation of the tax charge has, therefore, been completed by reference to the standard rate of UK tax rather than by reference to the Jersey income tax rate of 0% which was applicable to Phoenix Group Holdings during the period.
5 Represents current year losses carried forward on which the recognition of an asset cannot be supported by current short-term tax projections.
Authorised: 410 million (2016: 410 million) ordinary shares of €0.0001 each 31,750 31,750
The holders of ordinary shares are entitled to one vote per share on matters to be voted on by owners and to receive such dividends, if any, as may be declared by the Board of Directors in its discretion out of legally available profits. Movements in issued share capital during the year: Shares in issue at 1 January 392,849,817 33,112
During the year, the Company issued 382,827 shares at a premium of £2 million in order to satisfy its obligations to employees under the Group’s sharesave schemes (see note I1).
On 9 November 2016, the Group issued 144,727,282 shares following a rights issue undertaken in connection with the acquisition of Abbey Life, where 7 rights issue shares were issued at 508 pence per share for every 12 existing Phoenix Group Holdings shares held. The rights issue raised gross proceeds of £735 million and proceeds, net of deduction of commission and expenses, were £717 million.
During 2016, the Company issued 161,089 shares at a premium of £1 million in order to satisfy its obligations to employees under the Group’s sharesave schemes.
D. EQUITY continued D2. SHARES HELD BY THE EMPLOYEE BENEFIT TRUST
Shares awarded to employees by the EBT in year (9) (5)
Non-controlling interests are stated at the share of net assets attributed to the non-controlling interest holder at the time of acquisition, adjusted for the relevant share of subsequent changes in equity. The Group did not recognise any non-controlling interests as at 31 December 2016 or 31 December 2017.
At 31 December 2016 and 31 December 2017 – – –
D3.2 UK Commercial Property Trust Limited UK Commercial Property Trust Limited (‘UKCPT’) is a property investment company which is domiciled in Guernsey and is admitted to the Official List of the UK Listing Authority and to trading on the London Stock Exchange. In February 2016, the Group reduced its holdings to 48.9% of the issued share capital of UKCPT. The Group deems that it no longer exercises control over UKCPT and as a result UKCPT has been deconsolidated from the effective date of this loss of control. The Group’s remaining interest in UKCPT is recognised as an associate and held at fair value (see note H3 for further details).
Equities, fixed and variable rate income securities, collective investment schemes and certain loans and deposits are designated at fair value through profit or loss and accordingly are stated in the statement of consolidated financial position at fair value. They are designated at fair value through profit or loss because this is reflective of the manner in which the financial assets are managed and reduces a measurement inconsistency that would otherwise arise with regard to the insurance liabilities that the assets are backing.
Reinsurers share of investment contract liabilities without DPF are valued on a basis consistent with investment contract liabilities without DPF as detailed under Financial liabilities below.
Impairment of financial assets The Group assesses at each period end whether a financial asset or group of financial assets held at amortised cost is impaired. The Group first assesses whether objective evidence of impairment exists. If it is determined that no objective evidence of impairment exists for an individually assessed financial asset, the asset is included in a group of financial assets with similar credit risk characteristics and that group of financial assets is collectively assessed for impairment. Assets that are individually assessed for impairment and for which an impairment loss is, or continues to be, recognised are not included in the collective assessment of impairment.
Associates Investments in associates that are held for investment purposes are accounted for under IAS 39 Financial Instruments: Recognition and Measurement as permitted by IAS 28 Investments in Associates and Joint Ventures. These are measured at fair value through profit or loss. There are no investments in associates which are of a strategic nature.
Subsequent to initial recognition, financial liabilities (except for liabilities under investment contracts without DPF and other liabilities designated at fair value through profit or loss) are measured at amortised cost using the effective interest method.
Receipts and payments on investment contracts without DPF are accounted for using deposit accounting, under which the amounts collected and paid out are recognised in the statement of consolidated financial position as an adjustment to the liability to the policyholder.
The valuation of liabilities on unit-linked contracts is held at the fair value of the related assets and liabilities. The liability is the sum of the unit-linked liabilities plus an additional amount to cover the present value of the excess of future policy costs over future charges.
Investment contract policyholders are charged for policy administration services, investment management services, surrenders and other contract fees. These fees are recognised as revenue over the period in which the related services are performed. If the fees are for services provided in future periods, then they are deferred and recognised over those periods. ’Front end’ fees are charged on some non-participating investment contracts. Where the non-participating investment contract is measured at fair value, such fees which relate to the provision of investment management services are deferred and recognised as the services are provided.
Deposits from reinsurers It is the Group’s practice to obtain collateral to cover certain reinsurance transactions, usually in the form of cash or marketable securities. Where cash collateral is available to the Group for investment purposes, it is recognised as a ’financial asset’ and the collateral repayable is recognised as ’deposits received from reinsurers’ in the statement of consolidated financial position.
Net asset value attributable to unitholders The net asset value attributable to unitholders represents the noncontrolling interest in collective investment schemes which are consolidated by the Group. This interest is classified at fair value through profit or loss and measured at fair value, which is equal to the bid value of the number of units of the collective investment scheme not owned by the Group.
Obligations for repayment of collateral received It is the Group’s practice to obtain collateral in stock lending and derivative transactions, usually in the form of cash or marketable securities. Where cash collateral is available to the Group for investment purposes, it is recognised as a ’financial asset’ and the collateral repayable is recognised as ’obligations for repayment of collateral received’ in the statement of consolidated financial position. The ’obligations for repayment of collateral received’ are measured at amortised cost, which in the case of cash is equivalent to the fair value of the consideration received.
The table below sets out a comparison of the carrying amounts and fair values of financial instruments as at 31 December 2017: Carrying value
Financial assets measured at amortised cost: Loans and deposits at amortised cost 368 13 368
Designated upon initial recognition: Net asset value attributable to unitholders1 840 – 840
Financial liabilities measured at amortised cost: Deposits received from reinsurers 368 339 368
2 Total financial assets includes £1,115 million (2016: £1,196 million) of assets held in a collateral account pertaining to the PGL pension scheme buy-in agreement. See note G6.2 for further details.
Designated upon initial recognition: Net asset value attributable to unitholders1 1,040 – 1,040
Total financial liabilities 33,990 32,480 1 These assets and liabilities have no expected settlement date.
E2.2 Fair value hierarchy of financial instruments The tables below separately identify financial instruments carried at fair value from those measured on another basis but for which fair value is disclosed.
Total financial assets measured at fair value 54,316 17,001 2,655 73,972
Total financial liabilities measured at fair value 879 27,836 282 28,997
E2. FAIR VALUE HIERARCHY continued E2.2 Fair value hierarchy of financial instruments continued 2016 Restated1 £m £m £m
Total financial assets measured at fair value 52,194 22,664 1,771 76,629
Financial liabilities designated at fair value through profit or loss upon initial recognition: Net asset value attributable to unitholders 1,040 – – 1,040
Total financial liabilities measured at fair value 1,065 28,602 542 30,209
Total financial liabilities for which fair values are disclosed – 1,140 1,131 2,271 1 Comparative figures have been restated following a re-assessment of the lowest level input that is significant to the fair value measurement of collective investment schemes on the Abbey Life acquisition balance sheet. This resulted in £3,687 million of collective investment schemes being reclassified from Level 2 to Level 1.
Fixed and variable rate income securities categorised as Level 3 investments are valued using broker quotes with the exception of a property investment structure, certain local authority loans and private placements. Although such valuations are sensitive to estimates, it is believed that changing one or more of the assumptions to reasonably possible alternative assumptions would not change the fair value significantly.
Level 3 investments in equities and fixed and variable rate income securities include equity and debt holdings in a property investment structure with a value of £1 million (2016: £22 million) and £41 million (2016: £22 million) respectively.
During the period, the investment was restructured affecting the weighting between the Group’s debt and equity holdings and prompting an amendment to the valuation methodology. The valuation is now performed for the structure as a whole on a discounted cash flow basis and allocated to the debt and equity components in order of priority. The valuation is sensitive to the discount rate applied. A decrease in the discount rate of 175bps would increase the value by £5 million whilst an increase of 200bps would decrease the value by £7 million. Due to the restructuring of the investment in the period, no comparative sensitivities have been disclosed.
Included within fixed and variable rate income securities are investments in local authority loans with a value of £185 million (2016: £46 million). These investments are valued using a calculation model that takes a comparable UK Treasury stock and applies a credit spread to reflect reduced liquidity. The credit spread is derived from a sample broker quote. The valuations are sensitive to movements in this spread. An increase of 25bps would decrease the value by £6 million (2016: £1 million) and a decrease of 25bps would increase the value by £7 million (2016: £nil).
Included within loans and deposits are investments in equity release mortgages with a value of £1,255 million (2016: £433 million). The loans are valued using a discounted cash flow model, the key inputs to which include demographic assumptions, economic assumptions (including house price index) and the use of a Black-Scholes model for valuation of the no-negative equity guarantee. The no-negative equity guarantee caps the loan repayment in the event of death or entry into long-term care to be no greater than the sales proceeds from the property. The significant sensitivities arise from movements in the yield curve, inflation rate and house prices.
Included within borrowings measured at fair value and categorised as Level 3 financial liabilities are property reversion loans with a value of £131 million (2016: £183 million), measured using an internally developed model. The valuation is sensitive to key assumptions of the discount rate and the house price inflation rate. An increase in the discount rate of 1% would increase the value by £3 million (2016: £5 million) and a decrease of 1% would decrease the value by £3 million (2016: £5 million). An increase of 1% in the house price inflation rate would increase the value by £3 million (2016: £6 million) and a decrease of 1% would decrease the value by £3 million (2016: £6 million).
E2.4 Transfers of financial instruments between Level 1 and Level 2
Financial liabilities designated at fair value through profit or loss upon initial recognition: Derivatives – 3
Consistent with the prior year, all of the Group’s Level 1 and Level 2 assets have been valued using standard market pricing sources.
E. FINANCIAL ASSETS & LIABILITIES continued E2. FAIR VALUE HIERARCHY continued E2.5 Movement in Level 3 financial instruments measured at fair value
E3.2 Corporate transactions Abbey Life, a Group entity, has in place longevity swap arrangements with corporate pension schemes which do not meet the definition of insurance contracts under the Group’s accounting policies. Under these arrangements the majority of the longevity risk has been passed to third parties. Derivative assets of £144 million and derivative liabilities of £77 million have been recognised as at 31 December 2017 (2016: £53 million and £17 million respectively).
E3.3 Warrants over shares Lenders’ warrants On 2 September 2009, the Company issued 5 million warrants over its shares to the Lenders. These warrants entitled the holder to purchase one ’B’ ordinary share at a price of £15 per share, subject to adjustment. Following the achievement of the Company’s Premium Listing on 5 July 2010, the Lenders’ warrants relate to ordinary shares rather than ’B’ ordinary shares. At 31 December 2017 the terms of Lenders’ warrants entitled the holders to purchase 1.027873 (2016: 1.027873) ordinary shares per Lenders’ warrant for an exercise price of £14.59 (2016: £14.59).
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 (2016: £18.97) 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.
These Lenders’ warrants are not traded in an active market and have therefore been valued using an extended Black-Scholes valuation model to capture the embedded barrier feature. The key assumptions used to ascertain a value as at 31 December 2017 are: – the share price as at 31 December 2017 of £7.82 (2016: 7.35); – volatility of 25% (2016: 25%); – the warrants are adjusted for a dividend yield of 6.3%; and
The value of the warrants at the year end was £56,000 (2016: £143,000).
The amounts recognised as financial assets and liabilities from cash collateral received at 31 December 2017 are set out below.
Credit risk on exchange traded derivative assets of £29 million (2016: £76 million) is mitigated through regular margining and the protection offered by the exchange.
Assets pledged The Group pledges collateral in respect of its OTC derivative liabilities. The value of assets pledged at 31 December 2017 in respect of OTC derivative liabilities of £1,193 million (2016: £1,543 million) amounted to £631 million (2016: £625 million).
E4.3 Stock lending collateral arrangements The Group lends listed financial assets held in its investment portfolio to other institutions.
The Group conducts stock lending only with well-established, reputable institutions in accordance with established market conventions. The financial assets do not qualify for derecognition as the Group retains all the risks and rewards of the transferred assets except for the voting rights.
The fair value of financial assets accepted as such collateral but not recognised in the statement of financial position amounts to £623 million (2016: £474 million).
The maximum exposure to credit risk in respect of stock lending transactions is £578 million (2016: £446 million) of which credit risk of £578 million (2016: £446 million) is mitigated through the use of collateral arrangements.
E4.4 Other collateral arrangements Collateral has also been pledged and charges have been granted in respect of certain Group borrowings. The details of these arrangements are set out in note E5.
e. On 7 July 2014, the Group’s financing subsidiary, PGH Capital plc (’PGHC’), issued a £300 million 7 year senior unsecured bond at an annual coupon rate of 5.75% (’£300 million senior bond’). On 20 March 2017, the Company was substituted in place of PGHC as issuer of the £300 million senior bond. On 5 May 2017, the Company completed the purchase of £178 million of the £300 million senior bond at a premium of £25 million in excess of the principal amount. Accrued interest on the purchased bonds was settled on this date.
i. On 6 July 2017, PGH issued US $500 million Tier 2 bonds due 2027 with a coupon of 5.375%. Fees associated with these notes of £2 million were deferred and are being amortised over the life of the notes.
Changes to the Group’s borrowings since 31 December 2017 have been detailed in note I8.
E. FINANCIAL ASSETS & LIABILITIES continued E6. RISK MANAGEMENT – FINANCIAL RISK This note forms one part of the risk management disclosures in the consolidated financial statements. The Group’s management of insurance risk is detailed in note F4.
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
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 external credit rating: AAA
Fixed and variable rate income securities 3,867 12,853 5,571 3,586 276 84 546 215 26,998
Reinsurers’ share of insurance contract liabilities – 1,406 1,849 – – – 65 – 3,320
Reinsurers’ share of investment contract liabilities – – – – – – – 6,085 6,085
Fixed and variable rate income securities 4,343 13,283 6,358 4,230 326 119 439 192 29,290
Reinsurers’ share of insurance contract liabilities – 1,820 1,865 2 – – 57 – 3,744
The Group maintains accurate and consistent risk ratings across its asset portfolio. This enables management to focus on the applicable risks and to compare credit exposures across all lines of business, geographical regions and products. The rating system is supported by a variety of financial analytics combined with market information to provide the main inputs for the measurement of counterparty risk. All risk ratings are tailored to the various categories of assets and are assessed and updated regularly.
The Group operates an Internal Credit Rating Committee to monitor and control oversight of both externally rated and internally rated assets. A variety of methods are used to validate the appropriateness of credit assessment from external institutions and fund managers. Internally rated assets are those that do not have a public rating from an external credit assessment institution. This Committee reviews the policies, processes and practices to ensure the appropriateness of the internal ratings assigned to asset classes.
The Group has increased exposure to illiquid credit assets (e.g. equity release mortgages and commercial real estate loans) with the aim of achieving greater diversification and investment returns.
Reinsurers’ share of insurance contract liabilities 3,320 – – – – – 3,320
Reinsurers’ share of investment contract liabilities – – – – – 6,085 6,085
Reinsurers’ share of insurance contract liabilities 3,744 – – – – – 3,744
Reinsurers’ share of investment contract liabilities – – – – – 6,808 6,808
Prepayments and accrued income 358 – – – – 3 361
Please refer to page 191 for additional life company asset disclosures which include the life companies’ exposure to peripheral Eurozone debt securities. Peripheral Eurozone is defined as Portugal, Spain, Italy, Ireland and Greece. The Group’s exposure to peripheral Eurozone debt continues to be relatively small compared to total assets.
E6.2.2 Market risk Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market influences. Market risk comprises interest rate risk, currency risk and other price risk (comprising equity risk, property risk, inflation risk and alternative asset class risk).
The Group is mainly exposed to market risk as a result of: – the mismatch between liability profiles and the related asset investment portfolios; – the investment of surplus assets including shareholder reserves yet to be distributed, surplus assets within the with-profit funds and assets held to meet regulatory capital and solvency requirements; and
The sensitivity analysis for interest rate risk indicates how changes in the fair value or future cash flows of a financial instrument arising from changes in market interest rates at the reporting date result in a change in profit after tax and in equity. It takes into account the effect of such changes in market interest rates on all assets and liabilities that contribute to the Group’s reported profit after tax and in equity. Changes in the value of the Group’s holdings in swaptions as the result of time decay or changes to interest rate volatility are not captured in the sensitivity analysis.
Equity and property price risk is primarily borne in respect of assets held in with-profit or unit-linked funds. For unit-linked funds this risk is borne by policyholders and asset movements directly impact unit prices and hence policy values. For with-profit funds policyholders’ future bonuses will be impacted by the investment returns achieved and hence the price risk, whilst the Group also has exposure to the value of guarantees provided to with-profit policyholders. In addition, some equity investments are held in respect of shareholders’ funds. The Group as a whole is exposed to price risk fluctuations impacting the income flow of management charges from the invested assets of all funds.
A 10% decrease in equity prices, with all other variables held constant, would result in an increase in profits after tax in respect of a full financial year, and in equity, of £73 million (2016: £75 million).
A 10% increase in property prices, with all other variables held constant, would result in an increase in profits after tax in respect of a full financial year, and in equity, of £5 million (2016: £2 million).
The Group’s principal transactions are carried out in sterling and therefore its exchange risk is limited principally to historic business that was written in the Republic of Ireland, where the assets are generally held in the same currency denomination as their liabilities, therefore, any foreign currency mismatch is largely mitigated. Consequently, the foreign currency risk relating to this business mainly arises when the assets and liabilities are translated into sterling.
The Group’s financial assets are primarily denominated in the same currencies as its insurance and investment liabilities. Thus, the main foreign exchange risk arises from recognised assets and liabilities denominated in currencies other than those in which insurance and investment liabilities are expected to be settled and, indirectly, from the earnings of UK companies arising abroad.
E6.2.3 Financial soundness risk Financial soundness risk is a broad risk category encompassing capital management risk, tax risk and liquidity and funding risk.
The vast majority of the Group’s derivative contracts are traded OTC and have a two day collateral settlement period. The Group’s derivative contracts are monitored daily, via an end of day valuation process, to assess the need for additional funds to cover margin or collateral calls.
E. FINANCIAL ASSETS & LIABILITIES continued E6. RISK MANAGEMENT – FINANCIAL RISK continued The following table provides a maturity analysis showing the remaining contractual maturities of the Group’s undiscounted financial liabilities and associated interest. Liabilities under insurance contract contractual maturities are included based on the estimated timing of the amounts recognised in the statement of consolidated financial position in accordance with the requirements of IFRS 4 Insurance Contracts: 1 year or less or on demand £m 1–5 years £m
Net asset value attributable to unitholders 840 – – – 840
Payables related to direct insurance contracts 522 – – – 522
Other payables 144 – – – 144 1 year or less or on demand £m 1–5 years £m
Some insurance and investment contracts contain a Discretionary Participation Feature ('DPF'). This feature entitles the policyholder to additional discretionary benefits as a supplement to guaranteed benefits. Investment contracts with a DPF are recognised, measured and presented as insurance contracts.
Insurance contracts and investment contracts with DPF Amounts recoverable from reinsurers are estimated in a manner consistent with the outstanding claims provision or settled claims associated with the reinsured policy.
Reinsurance The Group cedes insurance risk in the normal course of business. Reinsurance assets represent balances due from reinsurance providers. Reinsurers’ share of insurance contract liabilities is dependent on expected claims and benefits arising under the related reinsured policies.
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.
Life assurance business: Investment contracts with DPF 10,954 1 11,058 1
F. INSURANCE CONTRACTS, INVESTMENT CONTRACTS WITH DPF AND REINSURANCE continued F1. LIABILITIES UNDER INSURANCE CONTRACTS continued
The unallocated surplus comprises the excess of the assets over the policyholder liabilities of the with-profit business of the Group’s life operations. For the Group’s with-profit funds this represents amounts which have yet to be allocated to owners since the unallocated surplus attributable to policyholders has been included within liabilities under insurance contracts.
F3. REINSURANCE This section includes disclosures in relation to reinsurance. Further disclosures and accounting policies relating to reinsurance are included in note F1.
F3.1 Premiums ceded to reinsurers Premiums ceded to reinsurers during the period were £205 million (2016: £75 million).
During 2016, the Group entered into a longevity swap arrangement with RGA International in respect of a portfolio of the Group’s in-force immediate annuities of £2.0 billion.
On 30 December 2016, the reinsurance agreement with ReAssure Life Limited (formerly Guardian Assurance Limited) was replaced by a transfer of the business using a scheme under Part VII of the Financial Services and Markets Act 2000. Prior to the business transfer, in order to mitigate the risk of counterparty default, ReAssure Life Limited held assets in a collateral account over which the Group had a fixed charge as disclosed in note F3.2.
F3.2 Collateral arrangements It is the Group’s practice to obtain collateral to mitigate the counterparty risk related to reinsurance transactions usually in the form of cash or marketable financial instruments.
Insurance risk refers to the risk that the frequency or severity of insured events may be worse than expected and includes expense risk. The Phoenix Life segment contracts include the following sources of insurance risk: Mortality higher than expected number of death claims on assurance products and occurrence of one or more large claims; Longevity faster than expected improvements in life expectancy on immediate and deferred annuity products; Morbidity higher than expected number of serious illness claims or more sickness claims which last longer on income protection policies; Expenses policies cost more to administer than expected; Lapses the numbers of policies terminating early is different to that expected in a way which increases expected claims costs or expenses or reduces future profits; Options unanticipated changes in policyholder option exercise rates giving rise to increased claims costs; and
F. INSURANCE CONTRACTS, INVESTMENT CONTRACTS WITH DPF AND REINSURANCE continued F4. RISK MANAGEMENT – INSURANCE RISK continued Objectives and policies for mitigating insurance risk The Group uses several methods to assess and monitor insurance risk exposures both for individual types of risks insured and overall risks. These methods include internal risk measurement models, experience analyses, external data comparisons, sensitivity analyses, scenario analyses and stress testing.
The profitability of the run-off of the closed long-term insurance businesses within the Group depends, to a significant extent, on the values of claims paid in the future relative to the assets accumulated to the date of claim. Typically, over the lifetime of a contract, premiums and investment returns exceed claim costs in the early years and it is necessary to set aside these amounts to meet future obligations. The amount of such future obligations is assessed on actuarial principles by reference to assumptions about the development of financial and insurance risks.
Sensitivities Insurance liabilities are sensitive to changes in risk variables, such as prevailing market interest rates, currency rates and equity prices, since these variations alter the value of the financial assets held to meet obligations arising from insurance contracts and changes in investment conditions also have an impact on the value of insurance liabilities themselves. Additionally, insurance liabilities are sensitive to the assumptions which have been applied in their calculation, such as mortality and lapse rates. Sometimes allowance must also be made for the effect on future assumptions of management or policyholder actions in certain economic scenarios. This could lead to changes in assumed asset mix or future bonus rates. The most significant non economic sensitivities arise from mortality, longevity and lapse risk.
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 £99 million (2016: £38 million).
An increase of 25% in lapse rates, with all other variables held constant, would result in an increase in the profit after tax in respect of a full year, and an increase in equity of £77 million (2016: £36 million).
F4.1 Assumptions Valuation of participating insurance and investment contracts For participating business, which is with-profit business (insurance and investment contracts), the insurance contract liability is calculated on a realistic basis, adjusted to exclude the shareholders’ share of future bonuses and the associated tax liability. This is a market consistent valuation, which involves placing a value on liabilities similar to the market value of assets with similar cash flow patterns.
The amendments to the risk-free reference rate and the approach for adjusting for illiquidity increased insurance contract liabilities by £77 million in the year ended 31 December 2016. This was more than offset by the impact of the change in approach for determining the demographic prudence margin, which reduced insurance contract liabilities by £115 million. After allowing for other second order impacts of the changes (including the revaluation of certain current liabilities using the swap rather than gilt curve), the overall impact of the above changes in the year ended 31 December 2016 was a benefit to profit before tax of £31 million.
Some pensions contracts include guaranteed annuity options (see deferred annuities in note F4.2 for details). The total amount provided in the with-profit and non-profit funds in respect of the future costs of guaranteed annuity options are £1,965 million (2016: £2,239 million) and £131 million (2016: £183 million) respectively.
In common with other life companies in the UK which have written pension transfer and opt-out business, the Group has set up provisions for the review and possible redress relating to personal pension policies. These provisions, which have been calculated from data derived from detailed file reviews of specific cases and using a certainty equivalent approach, which give a result very similar to a market consistent valuation, are included in liabilities arising under insurance contracts. The total amount provided in the with-profit funds and non-profit funds in respect of the review and possible redress relating to pension policies, including associated costs, are £334 million (2016: £376 million) and £48 million (2016: £13 million) respectively.
Assumption changes During the year a number of changes were made to assumptions to reflect changes in expected experience or to harmonise the approach across the enlarged Group. The impact of material changes during the year was as follows: (Decrease)/increase in insurance £m
The £148 million positive impact of changes in longevity assumptions reflects updates to base and improvement assumptions to reflect latest experience analyses and the most recent Continuous Mortality Investigation 2016 projection tables.
The £120 million adverse impact of changes in persistency assumptions is principally driven by the strengthening of actuarial assumptions to reflect the impact of the continued low interest rate environment on the Group’s expectations of persistency for products with valuable guarantees and associated late retirements.
F. INSURANCE CONTRACTS, INVESTMENT CONTRACTS WITH DPF AND REINSURANCE continued F4. RISK MANAGEMENT – INSURANCE RISK continued F4.2 Managing product risk The following sections give an assessment of the risks associated with the Group’s main life assurance products (as shown below gross of longevity swaps) and the ways in which the Group manages those risks.
With-profit funds: Pensions: Deferred annuities – with guarantees 7,458 78 665 – Deferred annuities – without guarantees 1,234 – – – Immediate annuities 1,029 – 699 – Unitised with-profit 4,244 8,936 – –
With-profit funds: Pensions: Deferred annuities – with guarantees 8,576 144 499 – Deferred annuities – without guarantees 1,572 – – – Immediate annuities 1,208 – 609 – Unitised with-profit 1,000 9,005 8 –
The bonuses are designed to distribute to policyholders a fair share of the return on the assets in the with-profit funds together with other elements of the experience of the fund. The shareholders of the Group are entitled to receive one-ninth of the cost of bonuses declared for some funds and £nil for others.
The Group seeks to manage this risk in accordance with both the terms of the issued policies and the interests of customers, and has obtained external advice supporting the manner in which it operates the long-term funds in this respect.