PHOENIX HAS MADE AN IMPORTANT INVESTMENT IN ITS SPECIALIST PLATFORM TO MANAGE CLOSED LIFE FUNDS, WHICH ENABLES IT TO ACQUIRE CLOSED LIFE FUNDS MORE EFFECTIVELY.” CLIVE BANNISTER GROUP CHIEF EXECUTIVE OFFICER
In order to drive value, the Group looks to undertake management actions which increase and accelerate cash flows or enhance value.
2017 The Group obtains PRA’s approval to incorporate AXA Wealth’s pension and protection businesses into the Group’s Solvency II Internal Model
Agreed a revised unsecured revolving credit facility offering greater flexibility to make acquisitions 2015 Investment grade credit rating achieved from Fitch Ratings
Refinanced the Group’s remaining senior bank debt and PIK notes into a single £900 million facility
Issued £300 million unsecured seven-year bond 2013 Successful debt re-terming and equity raising of £250 million 2012 Transferred approximately £5 billion of annuity liabilities to Guardian Assurance
Britannic acquires Century Group and merges with Resolution Life Group to form Resolution plc 2004 Resolution Life Group acquires UK life operations of Royal & Sun Alliance
In line with our strategy, we have acquired new businesses which have become part of the Phoenix Group. The acquisitions of AXA Wealth’s pension and protection businesses and Abbey Life reinforce Phoenix’s position as the UK’s leading closed life fund consolidator.
Key performance indicators £486m Operating companies’ cash generation £351m Operating profit 23.9p Final dividend per share £1.9bn PLHL Solvency II
S trategic report 2016 was a pivotal year for Phoenix Group. The acquisitions of AXA Wealth’s pension and protection businesses for £373 million and Abbey Life for £933 million have together transformed the size of the Group. Life company assets have increased to £76 billion, managed on behalf of over 6 million policyholders. The transactions met Phoenix’s strict acquisition criteria, allowing an increase in the dividend per share whilst strengthening the Group’s balance sheet. The Group also received significant support from both its shareholders and its lending banks in relation to the acquisitions, with the £735 million rights issue to finance the Abbey Life acquisition achieving a 98% take-up by shareholders.
Phoenix is currently focused on the efficient integration of the acquired businesses to deliver the planned synergies whilst ensuring policyholders remain protected. The Group has already realised significant benefits, delivering £282 million of cash from the AXA Wealth acquisition to date.
Phoenix has also remained focused on the evolving regulatory landscape. The Solvency II regime came into force on 1 January 2016 and the Group has demonstrated the benefits of our Internal Model, a key tool in assessing acquisitions that provides more accurate pricing and understanding of synergy and diversification benefits. In addition, Phoenix has navigated a number of regulatory reviews with regards to long-standing customers and annuity sales. Being able to demonstrate how the Group adds value for our customers is a critical advantage for a closed life fund consolidator and Phoenix will continue to invest in its customer proposition.
As we announced at the time of the AXA Wealth acquisition, the Board is proposing a final dividend for 2016 of 23.9p per share, an equivalent 5% increase to the 2015 level (rebased to take into account the bonus element of the rights issue completed in November 2016). The Abbey Life acquisition supports a further expected increase of 5% with respect to the 2017 interim dividend to 25.1p per share, or 50.2p per share on an annualised basis. The Directors believe this is a sustainable level at which to rebase the dividend going forward. Given the long-term run-off nature of the Group’s business, the Board believes it is prudent to maintain a stable, sustainable dividend while the Group builds its financial flexibility to execute its growth strategy and meet external challenges.
It is likely that the uncertain market environment will prevail for a while longer. However, I believe the changing regulatory landscape and macroeconomic pressures will lead to further consolidation in the UK life industry sector. Phoenix is primed to take advantage of further opportunities as they arise.
PHOENIX MET ITS CASH GENERATION TARGET AND ACHIEVED TWO ACQUISITIONS IN A YEAR THAT HAS SEEN SIGNIFICANT MARKET CHALLENGES.”
The Group delivered a total of £486 million of cash generation from its operating companies, against a full year cash generation target of £350 million to £450 million. Of the cash generation in 2016, £117 million was from the acquisition of the AXA businesses.
Acquisition of AXA Wealth’s pensions and protection businesses DETAILS OF THE ACQUISITION The acquisition comprises a pensions and investments business (‘Embassy’), offering a range of propositions catering to both individual and corporate requirements and SunLife, a leader in the over 50s protection sector. The acquisition increased assets under management by £12 billion and added over 910,000 policies to the Group.
The consideration of £373 million was funded through the combination of the net proceeds of £190 million from an equity placing on 27 May and a new short-term debt facility of £182 million.
GROUP CAPITAL POSITION The Group’s surplus under Solvency II, as calculated at the level of Phoenix Life Holdings Limited (‘PLHL’), is estimated to be £1.9 billion as at 31 December 2016, pro forma for the impact of the new Tier 3 bond issued in January 2017 and moving the AXA businesses onto the Group’s Solvency II Internal Model. The increase in the PLHL Solvency II surplus from £1.3 billion as at 31 December 2015 also reflects the acquisitions made in 2016 together with management actions completed during the year, offset partly by the negative impact of lower long-term interest rates. The Shareholder Capital coverage ratio has increased from 154% as at 31 December 2015 to 170% as at 31 December 2016, on a pro forma basis.
BENEFITS OF THE ACQUISITION Phoenix expects to generate capital and cost benefits through a series of management actions. These will include the migration of Abbey Life to the Phoenix Solvency II Internal Model and capital management policies, an application for Transitional Measures, implementation of changes to Abbey Life’s existing asset strategy and improvements in operating efficiency (delivering approximately £7 million savings per annum).
Abbey Life already operated as a largely standalone business within Deutsche Bank. This should allow for a straightforward approach to separation with limited transitional services being required from Deutsche Bank to Abbey Life for a period following completion.
PROGRESS MADE SO FAR Phoenix has supplemented the existing Abbey Life management and put in place new governance and oversight structures.
An integration plan has been established and the provision of customer administration and IT is expected to remain with Capita, one of the Group’s existing outsource providers.
Acquisition of Abbey Life DETAILS OF THE ACQUISITION Abbey Life predominantly comprises unit-linked life and pensions policies and annuities in payment, together with two small with-profit funds. Abbey Life adds 735,000 policyholders and £10 billion of assets under management to the Group. Abbey Life closed to new retail business in 2000.
The current holding company structure was formed at the time of the Group’s restructuring in 2009, with Phoenix Group Holdings being a Cayman Island-registered company domiciled in Jersey. This structure is complex for our stakeholders and imposes additional burdens on our internal governance processes. As part of the ongoing Group simplification process, Phoenix intends to put in place a new UK-registered holding company for the Group in 2018. This will provide Phoenix with a streamlined and cost efficient internal governance structure as well as greater clarity for the Group’s stakeholders, including shareholders, debt investors and regulators.
OPERATIONAL HIGHLIGHTS Phoenix Group continued to undertake management actions to release cash and create value. Key actions taken during 2016 included: – Completion of a Part VII transfer of an annuity portfolio to ReAssure Life Limited, which was previously covered by a reinsurance agreement. The transfer reduced the Group’s capital requirements for counterparty credit default and released expense reserves.
– Further optimisation of Matching Adjustment portfolios, matching long-term liabilities with eligible assets in order to optimise the capital position of the Group’s life companies.
These management actions have been critical in meeting the Group’s cash targets in a year that has seen significant market volatility. Given the enhanced scale of the Group we believe there will be further opportunities for management actions during 2017.
CUSTOMERS Delivering improved customer outcomes and ensuring that we provide an effective service for policyholders is critical to support our strategy of acquiring and managing closed life funds. It is essential for the Group to demonstrate that it can deliver enhanced benefits for customers by bringing them within the Phoenix Group.
The customer strategy at Phoenix Group is focused on improving customer outcomes. Security of our customer assets is foremost, followed by our aim to maximise returns wherever possible but primarily through enhanced distribution of the estate within the life funds. We delivered an additional £103 million of distributable estate through management actions, more than twice our 2016 target, and have therefore directly benefited our with-profit policyholders through increased payouts. We have improved the strength of our with-profit funds over several years which has led to an increased ability to pay bonuses. Our emphasis has been on improving final bonuses, but many funds are now strong enough to allow us to also re-introduce annual bonuses. Almost 80% of our withprofits policyholders are now receiving an annual bonus, compared to less than 40% in 2012.
To support our work we have created a forum for a group of our customers to provide us direct feedback on a range of topics. This has improved the clarity of our communications, including developing a more engaging web platform and digitising parts of the customer journey. Along with our significant investment in enhancing our web offering we have also joined the ABI’s pension dashboard initiative. We believe this will help both existing and new customers keep track of their policies and be better prepared for their retirement as a result.
We will work closely with the FCA on the ongoing investigation into the conduct of Abbey Life in the period before the business was acquired by Phoenix. This work will continue during 2017 but Phoenix Life has already applied its own governance and customer model to the Abbey Life business and will take further action as required.
With regards to contract-based workplace pensions, Phoenix Life’s Independent Governance Committee has considered proposals to ensure that customers in our workplace pension schemes are being treated fairly. Our joint work has identified that there were some members of schemes who, if their fund was below a certain level, could be at risk of a poor outcome should they not choose some of the options available to them. For these customers we have reduced monthly charges in an effort to ensure the growth on their policy is not adversely affected by charges.
The Group will continue to work closely with the regulators as the long-term impacts of recent changes to the retirement market become clearer. This is underpinned by the actions we have taken with regards to our own customers.
S trategic report 2017 OUTLOOK AND PROSPECTS Cash generation remains the key metric for the Group and we have set new targets which incorporate the impact of the two acquisitions made during the year.
Furthermore, we expect a further £4.4 billion of cash generation from 2021 onwards. This illustrative cash generation includes the impact of the run-off of transitionals over 16 years to 2032 but does not assume any additional management actions during the period from 2021. Therefore, in total, we expect future cash generation for the existing business of £6.7 billion from the start of 2017. This is a clear demonstration of the long-term cash flow potential of the Group.
Finally, I would like to thank 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.
The UK life and pensions market is undergoing fundamental change, driven by changes in regulation and customer behaviour. Phoenix expects further consolidation within the market and is well positioned to undertake acquisitions in future. Phoenix estimates that the market opportunity is over £300 billion in terms of assets held within UK closed life funds (excluding Phoenix).
DRIVERS FOR CONSOLIDATION We believe there are a number of key drivers that will lead to future consolidation of closed life funds: Significant capital held within closed funds that owners may wish to redeploy
More intrusive regulation is leading to pressure on owners to invest in systems and customer service
The wide range of product types that Phoenix currently manages provides a scalable platform for integrating further closed funds
The Group’s approved Solvency II Internal Model provides greater clarity over capital requirements and the benefits of undertaking management actions
A UK life companies 39% B Foreign owned 48% C Bank owned 13%
– They comprise endowments, whole of life and pensions products and (some) guaranteed annuity options which guarantee the annuity that a pension pot will be able to buy.
– The policyholders and shareholders share in the risks and rewards of the policy, depending on the structure of the fund.
– Excess assets created over time (‘estate’) provide a buffer to absorb cost of guarantees and capital requirements.
– In the ‘supported’ with-profit funds, the shareholders provide capital support to the fund.
– The bonuses are designed to distribute to policyholders a fair share of the return on the assets in the fund, together with other elements of experience in the fund.
– In the ‘unsupported’ with-profit funds, typically shareholders receive 10% of declared bonuses (90:10 structure) or nil (100:0 structure).
– Policyholders’ benefits are in the form of unit price growth (based on the investment income and gains, but subject to management charges and investment transaction costs).
– Policyholders receive regular payments which start immediately (immediate annuity) or at some time in the future (deferred annuity).
– Shareholders earn a spread on the assets supporting the annuity payments.
– The shareholders are directly exposed to all investment and demographic risks.
£0.5 billion – Term assurance policies which pay a lump sum on death if death occurs within a specified period.
– Whole of life policies which cover the entire life and pay a lump sum on death, whenever it occurs.
A With-profit 41% B Unit-linked 42% C Non-profit – annuities 16% D Non-profit – protection and other
Part of “The Phoenix Way” is the application of the Group’s Internal Model for effective and efficient capital management.
PROVEN ACCESS TO DEBT AND EQUITY MARKETS: The Group seeks a level of leverage that helps it maintain its investment grade rating and optimise its funding costs and financial flexibility for further acquisitions.
Our value generation strategy seeks to improve policyholders’ returns and enhance shareholders’ profits from participation in investment returns, charges and management fees earned on assets.
DISCIPLINED APPROACH TO M&A Value accretive acquisitions generate increased cash flows and provide synergy opportunities through scale advantages. We target the following criteria when assessing acquisition opportunities: – closed fund focus
MANAGEMENT ACTIONS AND SYNERGIES Implementation of management actions, such as fund mergers and de-risking, optimises the Group’s capital position and cash flows.
Growth through acquisitions provides opportunities for further management actions to drive operational efficiencies through the application of “The Phoenix Way”.
PREDICTABLE LONG TERM CASH FLOWS FROM IN-FORCE BOOK Cash flows are generated from the build-up of Free Surplus within the life companies reflecting the emergence of shareholder profits on the in-force book and the release of capital as the risk profile reduces and the policies mature. This Free Surplus can be distributed to the Group’s holding companies as cash.
SHAREHOLDERS A track record of creating shareholder value and delivering stable and sustainable dividends.
5% increase in the 2016 final dividend per share The 5% increase takes into account the bonus element of the rights issue completed in November 2016.
EMPLOYEES Creating a challenging work environment, career development opportunities and commensurate reward and benefits.
SOCIETY Reduced environmental footprint, support for local communities and our charity partners.
MANAGEMENT SERVICES COMPANIES Provide our life companies with all required management services
The Phoenix Group’s operating structure is integral to its success in the closed life fund market.
MANAGEMENT SERVICES COMPANIES The Group’s management services companies are charged with the efficient provision of financial and risk management services, sourcing strategies and delivering all administrative services required by the Group’s life companies. By using management services companies, the life companies benefit from price certainty and a transfer of some operational risks.
Specialist roles such as finance, actuarial, information technology, risk and compliance and oversight of the outsource partners are retained in-house, ensuring that Phoenix Life retains full control over the core capabilities necessary to manage and integrate closed life funds.
LIFE COMPANIES The life companies are regulated entities that hold the Group’s policyholder assets. Over time, the Group has reduced the number of its individual life companies through insurance business transfers. By bringing together separate life companies and funds, the Group’s business model is simplified. Fund transfers enable the Group to make more efficient use of the capital and liquidity in its life companies and result in administrative expense savings and increased consistency of management practices and principles across the Group.
The Group now has four operating life companies, being Phoenix Life Limited, Phoenix Life Assurance Limited and the recently acquired AXA Wealth Limited and Abbey Life Assurance Company Limited. Together, they comprise 16 with-profit funds and 4 non-profit funds. The Group will examine the possibility of mergers to reduce the number of life companies in due course.
“The Phoenix Way” comprises of four key areas: OPERATIONAL MANAGEMENT Standardising, streamlining and innovating the key processes and platforms across the Group improves efficiency and generates value.
“The Phoenix Way” is a consistent framework applied across the Group for the efficient and effective structuring, integration and management of closed life funds. This framework reduces risk, complexity and cost, improves investment performance, enhances customer service through efficient cooperation with the Group’s outsourced partners and underpins achievement of our strategic priorities.
We have six key areas of focus related to our customer offering: – Security: ensuring all policy promises and guarantees are delivered.
– Product governance: including a rolling review of our products to ensure they continue to deliver appropriate outcomes for our customers.
– We have created a forum for a group of our customers to provide us direct feedback on a range of topics. This has led to improving the clarity of our communications, including input into the changes we have made to our digital offering.
PRIORITIES FOR 2017 – Making ongoing improvements to ensure that we are continuing to provide an effective service for all our policyholders, including the delivery of digital journeys in key areas.
– Continue to ensure that our products deliver appropriate outcomes for our customers.
– For the minority of customers who complain, we will continue to ensure that the process of complaining remains a straightforward, transparent and fair process, with particular focus on the speed of resolution and the quality of our responses.
ANALYSIS The FOS overturn rate of 18% is significantly below the industry average of 30%.
WE CONTINUE TO FOCUS ON IMPROVING OUTCOMES FOR OUR CUSTOMERS WITHIN A CHALLENGING AND FAST PACED EXTERNAL ENVIRONMENT. WE RECOGNISE THE IMPORTANCE OF GOOD, RELIABLE SERVICE DELIVERED IN A WAY THAT SUITS OUR CUSTOMERS. DURING 2017, WE WILL CONTINUE TO BUILD ON OUR DIGITAL PROPOSITION, ENHANCING THE SERVICES AVAILABLE TO CUSTOMERS.”
In order to drive value, the Group looks to identify and undertake management actions, which increase and accelerate cash flows or enhance value.
These actions are undertaken across four areas: operational management, risk management, restructuring and effective partnerships. There are significant opportunities to increase and accelerate cash flows through the continued implementation of “The Phoenix Way” which reduces complexity and cost and optimises risk, which in turn maximises the potential for value creation.
With the exception of the SunLife business acquired during 2016, the life companies are closed and generally do not write new business, although they accept additional policyholder contributions on in-force policies and allow pension savings plans to be reinvested at maturity into annuities. The closed life funds provide predictable fund maturity and liability profiles, creating stable long-term cash flows for distribution to shareholders and repayment of outstanding debt.
– On 30 December 2016, we completed the acquisition of Abbey Life from Deustche Bank.
– Despite a challenging economic climate, the Group delivered £486 million in cash generation in the period against a target of £350 million to £450 million. This includes £117 million from the acquired AXA business.
– In December 2016, the Group completed the pension buy-in under which Phoenix Life insured pensions in payment from the PGL pension scheme. This transaction provides the Group with potential for further value creation through investing assets in line with the Group’s strategic asset allocation.
WHY IS IT IMPORTANT? Operating companies cash generation represents cash remitted by the Group’s operating companies to the holding companies.
TARGET To generate cash flows of £2.8 billion between 2016 and 2020, of which £486 million has been generated in 2016.
We focus on optimising our capital structure while addressing the diverse needs of various stakeholders, including policyholders, shareholders, lending banks, bondholders and regulators.
– We have actively continued hedging our market risks in response to ongoing market turbulence, with the Group’s capital position remaining resilient despite the continued uncertainties.
– The AXA and Abbey Life acquisitions were financed in a capital efficient manner, balancing the debt/equity structure in line with the expected cash generation from the acquired businesses. The AXA acquisition was funded by a combination of the net proceeds from an equity placing and a new short-term debt facility that was fully repaid within two months of completion. The Abbey Life acquisition was funded through a fully underwritten rights issue and a new short-term bank facility which has since been refinanced into the £650 million unsecured revolving credit facility to create an enlarged revolving credit facility of £900 million.
– Implementation of new management actions to enhance the Group’s capital position.
ANALYSIS Our pro forma PLHL Solvency II surplus of £1.9 billion has increased due to surplus emergence, management actions undertaken during the period and the impact of the acquisitions, partly offset by the adverse impacts of assumptions and methodology changes and economic movements.
ANALYSIS A pro forma coverage ratio of 170% represents a robust and resilient capital position and reflects the increase in the PLHL Solvency II surplus in the period.
WE HAVE PROGRESSED THE INTEGRATION OF THE ACQUIRED BUSINESSES AND REMAIN ON TARGET TO DELIVER THE EXPECTED SYNERGIES THAT WILL FURTHER STRENGTHEN THE GROUP’S CAPITAL POSITION, PROVIDING ADDITIONAL RESILIENCE TO FUTURE MARKET VOLATILITY.”
An engaged workforce, one that feels committed to the goals of the organisation, is fundamental to the success of the Group. In 2016, we increased our focus on ensuring our people were challenged, motivated and rewarded through opportunities for growth, both professionally and personally.
For the fifth consecutive year, we were listed as one of the UK’s Top Employers, an accreditation awarded to the best companies to work for in the UK.
Our employee engagement index has increased to 81%, a 3% increase on the scores we achieved in 2014 and 2015. This index is an aggregation of scores against a number of questions considered the most important for staff engagement and was completed by 92% of employees.
– We continued to utilise our Corporate Responsibility agenda to provide opportunities for skills development and team building.
– Our new intranet, launched in 2016, provides employees with a modern communication and collaboration platform. Our work on the intranet was rewarded with the Gold Award in the category ‘Best Intranet’ at the 2016 Digital Impact Awards.
– Our Corporate Responsibility agenda continued to play a central part in the engagement of our people and during 2016 the programme was re-launched with a specific focus on wellbeing. The financial, physical and mental wellbeing of our employees is at the heart of our strategy to develop initiatives that benefit our staff, policyholders and our community partners.
– Employees engaged in a large number of charitable and community initiatives this year, contributing a total of 2,840 volunteering hours, a 46% increase on 2015.
– Participation figures for Flexit, the Phoenix Group Flexible Benefits scheme, have increased 3% to 89% from the previous year. Our new initiative ‘Pennies from Heaven’, through which staff can donate their outstanding pence from monthly net salary to our corporate charity has, already seen 35% participation.
– The Group signed the HM Treasury Women in Finance Charter and has publicly committed to the following targets: – Minimum of 30% of our top 100 roles (as defined by base salary) to be occupied by women by end 2018.
– Minimum of 40% of successors to be women by end 2018.
WHY IS IT IMPORTANT? We aim to ensure employees understand the purpose of their role and feel that their contribution is valued. The index provides an indicator of how well we are performing against these aims.
Workforce that is of Black, Asian or Minority Ethnic background 1183 115 1 Includes 524 staff (262 male, and 262 female) in connection with the acquired AXA and Abbey Life businesses.
2 The number of Executive Committee members excludes Executive Committee members who are also members of the Board of Directors. The 2015 figures have been restated accordingly.
PRIORITIES FOR 2017 – Continue to attract and retain the very best talent by focusing on developing our people and strengthening our internal succession pipeline through targeted management and leadership development interventions, with particular emphasis on increasing the number of high potential female managers undertaking formal management and development activity. There is a formal review of succession plans semi-annually which ensures a continual appraisal of readiness both for emergency successors as well as longer-term strategic planning, this uses the disciplines of up to 6 months and 6-24 months readiness for internal candidates. All identified successors receive targeted development to enable them to progress.
– Utilise the Apprenticeship Levy to recruit Actuarial and Accountancy apprentices. We intend to work in partnership with local colleges to attract A-level individuals and graduates to Phoenix.
– Extend the Diversity and Inclusion programme, embedding changes to existing practices to deliver a diverse and inclusive workforce.
– Maintain support to our communities through employee volunteering and fund raising and engagement with our community projects.
– Support community activities through continued focus and development of our long-term partnerships with Ark Kings Academy, Midlands Air Ambulance Charity and London’s Air Ambulance.
The continued low interest rate environment has also triggered changes to the Group’s expectations of persistency for products with valuable guarantees and this has adversely impacted the Group’s results in the period. This has been more than offset by the delivery of management actions and the positive impact of amendments to IFRS actuarial reserving estimates and assumptions to more closely align to the Solvency II requirements, leading to an increase in the Group’s operating profit.
Operating companies’ cash generation: Cash receipts from Phoenix Life 486 225
Cash and cash equivalents at 31 December2 570 706 1 Includes amounts received by the holding companies in respect of tax losses surrendered to the operating companies of £84 million (2015: £71 million).
2 The required prudential cash buffer of £150 million at 31 December 2015 is no longer required.
CASH RECEIPTS Cash remitted by the operating companies was £486 million (2015: £225 million) including £117 million generated from the acquired AXA businesses.
RECURRING CASH OUTFLOWS The operating expenses of £33 million (2015: £26 million) principally comprise corporate office costs, net of income earned on holding company cash and investment balances. The increase compared to prior year is due to lower interest earned on bank balances and excess cash balances being used to repay debt.
Debt interest decreased to £58 million (2015: £91 million) reflecting lower principal balances following repayments made in 2015. The 2015 debt interest included payment of the £20 million coupon on the Tier 1 bonds prior to their exchange for the PGH Capital subordinated notes.
NON-RECURRING CASH OUTFLOWS Non-recurring cash outflows of £141 million are significantly higher compared to the prior period reflecting costs associated with hedging and acquisition activity undertaken during 2016. Outflows also include £68 million of capital support provided to a subsidiary of the Group, PA (GI) Limited, with regard to the cost of providing for potential claims and associated capital requirements relating to creditor insurance underwritten prior to 2006.
The shareholder dividend of £126 million comprises the payment of the 2015 final dividend of £60 million and the payment of the 2016 interim dividend of £66 million, reflecting the impact of shares issued in May 2016 as part of the AXA acquisition.
EQUITY ISSUANCE (NET OF FEES) The £908 million is in relation to proceeds, net of fees of £22 million, from the equity placement and the rights issue associated with the financing of the respective acquisitions of the AXA and Abbey Life businesses.
– £373 million for the acquisition of AXA Wealth’s pensions and protection businesses.
TARGET CASH FLOWS The five-year cumulative target cash flow for 2016 to 2020 is £2.8 billion, of which £486 million has been generated in 2016.
3 Credit stress equivalent to an average 150bps spread widening across ratings, 10% of which is due to defaults/downgrades.
EXPECTED CASH FLOWS AFTER 2020 The expected cash generation post 2020 is expected to be £4.4 billion. This assumes no management actions after 2020 and reflects the net impact arising from the run-off of the Risk Margin and Transitionals up to 2032 (see page 31).
CAPITAL MANAGEMENT FRAMEWORK The Group’s capital management framework is designed to achieve the following objectives: – to provide appropriate security for policyholders and meet all regulatory capital requirements under the Solvency II regime while not retaining unnecessary excess capital.
– to optimise the Fitch Rating’s financial leverage ratio to maintain an investment grade credit rating.
PLHL SOLVENCY II CAPITAL POSITION (PRO FORMA) In accordance with European Insurance and Occupational Pension Authority (‘EIOPA’) and PRA requirements, from 1 January 2016 the Group undertakes a Solvency II capital adequacy assessment at the level of the highest EEA insurance group holding company, which is PLHL.
This involves a valuation in line with Solvency II principles of PLHL’s Own Funds and a risk-based assessment of PLHL’s Solvency Capital Requirements (‘SCR’).
The PLHL Solvency II surplus position at 31 December 2016 is set out in the table below. As explained in detail on page 23, a pro forma PLHL Solvency II surplus position has also been presented to illustrate the impacts of the issuance of a Solvency II qualifying Tier 3 bond in January 2017 and the receipt of the PRA’s approval in March 2017 to include the acquired AXA businesses within the scope of the Group’s Internal Model.
3 The pro forma surplus equates to a coverage ratio of 140% as at 31 December 2016.
PLHL SOLVENCY II SURPLUS (PRO FORMA) The pro forma Solvency II surplus at 31 December 2016 of £1.9 billion (2015: £1.3 billion, actual) has increased by £0.6 billion as a result of: – £0.2 billion of surplus emerging from the life companies (excluding the acquired AXA and Abbey Life businesses) and the expected run-off of capital requirements; – achieved management actions of £0.5 billion including completion of a Part VII transfer of a portfolio of annuities, the execution of a longevity swap with an external reinsurer, and the extension of Matching Adjustment benefits to new asset classes; – £0.3 billion impact of the acquisitions completed during the period; – £0.1 billion pro forma benefits of including the acquired AXA businesses within the scope of the Group’s Internal Model; and
– £(0.2) billion adverse impact of actuarial assumption strengthening, experience and modelling changes; – dividend payments and financing costs of £(0.2) billion; and
– the adverse impact of market and other movements of £(0.2) billion, primarily falling yields which have had an adverse impact on risk capital in the period.
Unsupported with-profit funds and the PGL Pension Scheme consist of £2.4 billion of Own Funds and £2.0 billion of SCR. Of the £2.4 billion of Own Funds, £1.8 billion consists of estate within the unsupported with-profit funds and £0.6 billion of Own Funds within the PGL Pension Scheme.
The pro forma shareholder capital position is further analysed between the contributions of the holding companies and the life companies as follows: Own funds Surplus
Own funds within the holding companies of £0.8 billion (2015: £1.0 billion) principally comprises cash and other financial assets held in the holding companies.
PHOENIX LIFE FREE SURPLUS (PRO FORMA) Phoenix Life Free Surplus represents the Solvency II surplus of the life companies that is in excess of their Board-approved capital management policies.
As at 31 December 2016, the pro forma Phoenix Life Free Surplus is £0.7 billion (2015: £0.1 billion). The table below analyses the movement during the period: Year ended 31 December 2016 £bn
Impact of incorporating the AXA businesses in the Group’s Internal Model 0.2
SENSITIVITY AND SCENARIO ANALYSIS As part of the Group’s internal risk management processes, the regulatory capital requirements are tested against a number of financial scenarios. The results of that stress testing1 are provided below and demonstrate the resilience of the pro forma PLHL Solvency II surplus.
PGH SOLVENCY II SURPLUS (PRO FORMA) As previously noted, the Solvency II capital assessment and Group’s regulatory supervision is performed at the PLHL level as this is the highest EEA insurance holding company. A waiver is currently in place which permits Group supervision to take place at the level of the ultimate parent, PGH, via other methods, as opposed to full Group supervision. This waiver is due to expire on 30 June 2017.
As part of the on going simplification of the Group structure, Phoenix intends to put in place a new UK-registered holding company for the Group. The new company will be the ultimate parent company and the highest EEA insurance Group holding company. When complete, the Solvency II capital assessment and Group supervision will only be performed at this level.
From 1 July 2017 and pending the completion of the simplification of the Group structure, regulatory supervision and the Solvency II capital adequacy assessment is expected to be performed at the PLHL and PGH level.
The key difference between the pro forma capital position of PLHL and the pro forma position at the PGH level is the inclusion of the Group’s current senior debt and the revolving credit facility within the Own Funds calculation.
The table below illustrates the pro forma Solvency II position at the PGH level at 31 December 2016.
TRANSITIONAL MEASURES ON TECHNICAL PROVISIONS AND RISK MARGIN The Group has obtained the PRA’s approval to apply Transitional Measures on Technical Provisions (‘TMTP’). This allows for a transitional deduction on technical provisions which is the difference between the net technical provisions calculated in accordance with the Solvency II rules and the net technical provisions calculated in accordance with the previous regime. The transitional deduction is expected to decrease over 16 years from 1 January 2016 to 1 January 2032 in line with business run-off.
Investment return variances and economic assumption changes on long-term business (207) 13
Operating profit includes the effect of variances in experience for non-economic items, such as mortality and persistency, and the effect of changes in non-economic assumptions. Changes due to economic items, for example market value movements and interest rate changes, which give rise to variances between actual and expected investment returns, and the impact of changes in economic assumptions on liabilities, are accounted for outside of operating profit. Phoenix Life operating profit is net of policyholder finance charges and policyholder tax.
The with-profit operating profit of £81 million (2015: £92 million). represents the shareholders’ one-ninth share of the policyholder bonuses, and has reduced due to lower bonus rates.
The operating profit on non-profit and unit-linked funds increased to £283 million (2015: £124 million) primarily reflecting the outcomes of management actions of £117 million undertaken during the period, and positive experience which has more than offset some adverse one-off impacts of actuarial modelling enhancements undertaken in the period.
Following the implementation of Solvency II, certain changes have been made to the assumptions and estimates used in the valuation of insurance contract liabilities to more closely align the IFRS reserving methodology with Solvency II requirements. As the Group manages its capital on a Solvency II basis, the changes mean that the IFRS results now more closely reflect the way the business is managed. The implementation of the changes at 1 January 2016 resulted in an overall favourable impact of £31 million to Phoenix Life operating profit. The overall profile for the emergence of future operating profit is expected to be materially unchanged as a result of these updates. More details on the changes are provided in note F4 to the IFRS consolidated financial statements.
The operating profit for management services of £27 million (2015: £30 million) comprises income from the life companies in accordance with the respective management service agreements less fees related to the outsourcing of services and other operating costs. The decrease compared to the prior period reflects the impact of life company run-off and increased project costs incurred during the year.
The majority of the negative variance is driven by the adverse impact of falling yields on the life funds which has increased the margin held within insurance liabilities in respect of longevity risk.
The prior period positive other non-operating result of £49 million included a gain of £49 million arising on the reassurance of a portfolio of PLAL annuities with an external reinsurer and a £17 million release of cost provisions associated with external regulatory changes, partly offset by £11 million of corporate project costs and negative £3 million of net other items.
TAX CREDIT ATTRIBUTABLE TO OWNERS The Group’s approach to the management of its tax affairs is set out in its Tax Strategy document which will shortly be available in the governance section of the Group’s website. The Group’s tax affairs and tax controls are managed by an in-house tax team who report on them to the Board and the Audit Committee on a regular basis throughout the year. The Board believes that its Tax Strategy accords with the Group’s approach to its wider Corporate Social Responsibility.
During the year, the Group strengthened its RMF to meet evolving regulatory requirements including Solvency II and the UK Corporate Governance Code. I was pleased to see our approach to risk management recognised in the investment grade rating reaffirmed by Fitch Ratings following our two acquisitions.
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.”
The ORSA is a fundamental part of the strategic risk and capital management processes of the business to prompt consideration of management actions and help shape strategic decision-making.
To ensure that all risks are managed effectively the Group is committed to: – embedding a risk aware culture; – maintaining a strong system of internal controls; – enhancing and protecting customer and shareholder value by continuous and proactive risk management; – maintaining an efficient capital structure; and
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.
– Cash flow – The Group will seek to ensure that it has sufficient cash flow to meet its financial obligations and will continue to do this in a volatile business environment.
– Shareholder Value – The Group will take action to protect its shareholder value.
RISK UNIVERSE A key element of effective risk management is ensuring that the business has a complete understanding of the risks it faces. These risks are defined in the Group’s risk universe.
The Group has developed a PGH Board-approved risk appetite statement to manage conduct risk. The appetite statement is supported by the assessment of all conduct related risks faced by the Group on a quarterly basis. This regular assessment and reporting enables us to be forward-looking and proactive in the management of conduct risk.
Independent verification of the adequacy and effectiveness of the internal controls and risk management is provided by the Group Internal Audit function, which is supported by the Board Audit Committee.
ORGANISATION The Group Chief Risk Officer manages the Group Risk function and has responsibility for the implementation and oversight of the Group’s RMF. The Group Risk function has responsibility for oversight over financial, operational and regulatory risk. The PRA/FCA relationship team manages the relationship and interactions with our primary regulators and reports to the Group Chief Risk Officer.
Independent reviews conducted by Group Risk provide further assurance to management and the Board that individual risk exposures and changes to our risk profile are being effectively managed.
MANAGEMENT INFORMATION Overall monitoring and reporting against the risk universe takes place in business unit management committees and Boards. This is then reported to the Executive Committee, PLHL Board and the Group Board via regular risk reporting.
The Board Risk Committee receives a consolidated risk report on a quarterly basis, detailing the risks facing the Group and the overall position against risk appetite limits. The Board Risk Committee is also provided with regular reports on the activities of the Group Risk function.
This assessment provides assurance to management and the Boards that the RMF has been implemented consistently and is operating effectively across the Group.
Since the introduction of Solvency II and a swaps-based discount rate, the Group is more sensitive to movements in swap yields.
The Group undertakes regular monitoring activities in relation to market risk exposure, including limits in each asset class, cash flow forecasting and stress and scenario testing. In response to this, the Group has implemented de-risking strategies to mitigate against unwanted customer and shareholder outcomes. The Group also maintains cash buffers in its holding companies to reduce reliance on emerging cash flows.
The Group undertakes regular reviews of experience and annuitant survival checks to identify any trends or variances in assumptions.
The Group continues to actively manage its longevity risk exposures, which includes the use of reinsurance contracts to maintain this risk within appetite.
Policyholder persistency rates, rates of early and late retirement and the take-up of valuable guarantees were affected by the Pensions Freedoms legislation and the low interest rate environment.
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.
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.
During the year, exposure to reinsurance counterparties increased as the result of the longevity transaction referenced above. The Group also acquired reinsurance contracts with a number of external reinsurers through the AXA Wealth and Abbey Life acquisitions.
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.
Phoenix has focused on activities identified following publication of the ‘Fair Treatment of longstanding Customers’ review to enhance our management of conduct risk.
The financial and operational risks of target businesses were assessed as part of the acquisition phase.
High Court ruling that PA (GI) Limited (‘PAGI’), a Group company, retained liability in relation to creditor insurance originally underwritten by PAGI.
Cost of redress for these complaints may be greater than provisions held, due to uncertainties with regard to the volumes of future complaints, the rates by which those complaints are upheld and the average redress value.
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 is considering options in respect of seeking to recover incurred costs from third parties. (Further details in note G1 to the IFRS consolidated financial statements).
VIABILITY STATEMENT In accordance with the provision of section C.2.2 of the 2014 revision of the UK Corporate Governance Code, the Board has completed an assessment of the prospects and viability of the Group over a five-year period to December 2021. The Board has determined that the five-year period to December 2021 is an appropriate period for the assessment, this being the period covered by the Group’s Board-approved annual operating plan (‘AOP’).
In making the viability assessment, the Board has undertaken the following process: – it defined what is mandatory in the context of viability; – it reviewed the AOP which considers profits, liquidity, solvency and strategic objectives and the impacts of management actions on the Group; – 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 and credit stress, which implies a 1.5 year increase in life expectancy for a 65 year old male alongside a widening of credit spreads.
– it considered the principal risks facing the Group which have the potential to impact on viability as discussed in the Risk report above; and
The residual risk is the remaining risk after controls and mitigating actions have been taken into account.
The Group’s senior management and Board also take emerging risks into account when considering potentially adverse outcomes and appropriate management actions prior to the risk crystallising.
The FCA has noted that they are seeking a ‘voluntary solution’ on exit charges for legacy products.
This section includes mandatory reporting of greenhouse gas (‘GHG’) emissions pursuant to the Companies Act 2006 (Strategic and Directors’ Reports) Regulations 2013. Emissions disclosed relate to facilities and activities where the Group has operational control.
In addition, on 30 December 2016 the Group completed the acquisition of Abbey Life Assurance Company Limited, Abbey Life Trustee Services Limited and Abbey Life Trust Securities Limited from Deutsche Bank Holdings No. 4 Ltd resulting in one property in Bournemouth transferring to our operational control and being included in our carbon footprint on a pro-rata basis.
In 2016 emissions have dropped principally through a reduction in the emission factor for consumption of purchased electricity (Scope 2) and the closure of one property. Approximately 0.4% of 2016 emissions are estimated as full year data is not yet available for all facilities. A sample of emissions from fuel use for company owned transport and back-up generation and fugitive emissions from refrigerants were calculated and were determined to be non-material to the overall footprint, so have not been included.
The data reported is based on the main requirements of the ISO14064 Part 1 and the GHG Protocol Corporate Standard (revised edition). Data was gathered at facility level to compile the carbon footprint. The Government’s 2016 Conversion Factors for GHG Company Reporting have been used to convert energy data into carbon dioxide equivalent (CO2e) emissions.
2016 marks the first time Phoenix Group is reporting Scope 2 emissions using the GHG Protocol dual-reporting methodology. This updated approach states that organisations should provide two figures to reflect the GHG emissions from purchased electricity, using both: – A location-based method that reflects the average emissions intensity of the electricity grids from which consumption is drawn; and
– A market-based method that reflects emissions from electricity specific to each supply/contract
For market-based emissions there is a reporting quality hierarchy and Phoenix Group have used residual mix factors in the absence of contractual instruments.
GREENHOUSE GAS EMISSIONS GLOBAL GHG EMISSIONS DATA IN TONNES OF CO2e
Emissions reported above on a per floor area intensity 81 kg CO2e/
Emissions reported above on a per full-time equivalent employee (FTE) intensity
1 Carbon footprint was restated to account for closure of a property mid-year that had previously been reported for a full 12 month period.
2 Our intensity measurement calculations exclude the newly acquired AXA and Abbey Life subsidiaries to avoid skewed intensity results.
The Directors of Phoenix Group Holdings support the high standards of corporate governance contained in the UK Corporate Governance Code.
– Shareholders supported us at our AGM held on 11 May 2016 with a vote of at least 91% of votes cast for each resolution. The resolution which received the lowest support (91.5%) was in respect of the authority to disapply pre-emption rights of up to 10% of issued share capital. The negative voting reflected the stance being taken by certain shareholders at AGMs generally, pending clarity around the wording of this resolution, and specifically the part of the resolution for the use of 5% of issued share capital for acquisition purposes or a specified capital investment. I am pleased that our use of this resolution in 2016 was as intended – for our share placing in connection with the acquisition of the AXA Wealth businesses. At our May 2017 AGM, we will follow the new guidance from the Pre-Emption Group in respect of the authority to disapply pre-emption rights.
BOARD OF DIRECTORS Our Board of Directors comprises the Chairman, eight independent NonExecutive Directors and two Executive Directors. The Board considers that our optimum number of Directors is nine or ten and that number will occasionally be higher as the Board is gradually renewed.
– John Pollock – Insurance, customer, FTSE 100 financial services board experience.
Our gradual Board renewal will continue in 2017, with the retirements from the Board of Isabel Hudson and David Woods at our AGM in May 2017, both after over seven years on our Board. We are currently in the process of recruiting a further Non-Executive Director, which will bring the Board back to ten Directors.
We responded to the Board’s desire, stated in our previous year’s 2015 Board evaluation review, to spend more time on strategy, which supported the Board’s focus in achieving the AXA and Abbey Life acquisitions in 2016. Our most recent Board Evaluation Review, undertaken towards the end of 2016, revealed a continued desire to keep strategy high up the agenda at each Board meeting, particularly given our growth ambitions. The review also stressed the Board’s desire to provide strong oversight of the operations of our business, especially the importance of the integration of the acquired AXA and Abbey Life businesses, and to ensure that we continue to drive value as best as possible for our shareholders and customers. We are fortunate to have a strong Board for our regulated life and pensions subsidiaries, chaired by Mike Urmston and with a majority of Independent Non-Executive Directors who are not on the Board of our holding company, Phoenix Group Holdings. This extra level of independence is an important aspect of our governance.
UK CORPORATE GOVERNANCE CODE As detailed in the Corporate Governance Report on pages 47 to 57, we complied in 2016 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 non-compliance 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.
Experience Ian Cormack was appointed to the Board of Directors of the Company on 2 September 2009 and was appointed Senior Independent Director on 1 October 2013. Mr Cormack is Non-Executive Chairman of Maven Income & Growth VCT 4 plc and a Non-Executive Director of JRP Group plc and Hastings Group Holdings plc. Mr Cormack was Chief Executive Officer of AIG, Inc. in Europe from 2000 to 2002 and prior to that he spent 32 years at Citibank where he was Chairman of Citibank International plc and Co-Head of the Global Financial Institutions Client Group at Citigroup.
Experience Clive Bannister joined the Group in February 2011 as Group Chief Executive Officer. Prior to this, Mr Bannister was Group Managing Director of Insurance and Asset Management at HSBC Holdings plc. He joined HSBC in 1994 and held various leadership roles in planning and strategy in the Investment Bank (USA) and was Group General Manager and CEO of HSBC Group Private Banking. He started his career at First National Bank of Boston and prior to working at HSBC was a partner in Booz Allen Hamilton in the Financial Services Practice providing strategic support to financial institutions including leading insurance companies, banks and investment banks. Mr Bannister is also Chairman of the Museum of London.
Experience Kory Sorenson is currently a Non-Executive Director of SCOR SE and its US subsidiaries, Pernod Ricard SA, Uniqa Insurance Group AG and Aviva Insurance Limited. Ms Sorenson has over 20 years of experience in the financial services sector, most of which has been focused on insurance and banking. She was Managing Director, Head of Insurance Capital Markets of Barclays Capital from 2005 to 2010, and also held senior positions in the financial institutions divisions of Credit Suisse, Lehman Brothers and Morgan Stanley.
Experience Wendy Mayall has over thirty 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 the non-executive Senior Independent Director of the Aberdeen UK Tracker Trust plc.
Experience David Woods is a Fellow of the Institute of Actuaries, Non-Executive Chairman of Standard Life UK Smaller Companies Trust plc and a Non-Executive Director of Murray Income Trust plc. He is also Chairman of the pension fund trustee companies responsible for the governance of all the UK defined benefits/pension schemes in the Sopra Steria Group.
– Ensures the Group has effective processes in place to enable all reporting obligations to be met
– Identifies and delivers opportunities to enhance shareholder value across the Group.
The Board responded to the skills audit undertaken in 2015 by recruiting three new Non-Executive Directors (Wendy Mayall, John Pollock and Nicholas Shott, all appointed from 1 September 2016) to replace skills and experience being lost during 2016 and 2017 on account of expected Board departures as follows: Tom Cross Brown (May 2016 AGM), RenePierre Azria (November 2016), David Woods (May 2017 AGM).
The 2016 recruitment provided a strong mix of experience and skills (as outlined in the Chairman’s Corporate Governance introduction on page 42) and demonstrated the effectiveness of the succession planning.
The Nomination Committee and Board are now undertaking a skills audit at two-year intervals. The latest skills audit was undertaken in February 2017 and is being utilised in respect of expected 2017 and 2018 Board changes (including Isabel Hudson who is also retiring from the Board at the May 2017 AGM).
The output from the November 2016 Board and individual Director reviews informed the review of the Board composition and succession planning undertaken by the Board Nomination Committee in February 2017, leading to the Board’s recommendations to shareholders regarding re-election of Directors at the 2017 Annual General Meeting (‘AGM’).
The Senior Independent Director, appointed by the Board, is Ian Cormack. His role is to be available to shareholders whose concerns are not resolved through the normal channels or when such channels are inappropriate. He is also responsible for leading the annual appraisal of the Chairman’s performance by the Non-Executive Directors, which occurred in November 2016.
The terms of appointment for the Directors state that they are expected to attend in person regular (at least six per year) and additional Board meetings of the Company and to devote appropriate preparation time ahead of each meeting. In February 2017, the Nomination Committee reviewed the time spent by Directors and concluded that the time required of (and given by) the Company’s Directors is considered at least at the level expected in their appointment terms and is believed to be high in comparison with other FTSE 250 companies.
Alastair Barbour, on account of being on the boards of a number of public companies listed in the UK and/or Bermuda and the USA and chairing the audit committee for all, has provided an analysis of his work commitments to the Nomination Committee, which shows the relatively low level of time commitment required for certain of his other roles and the complementary nature of his roles and the time committed to Phoenix (40 days in 2016, his equal largest commitment). The Nomination Committee and Board confirmed their absolute satisfaction with the time and overall commitment given to Phoenix by Mr Barbour and all other Directors.
Wendy Mayall, John Pollock and Nicholas Shott were appointed to the Board from 1 September 2016 with pre-existing commitments which affected their Board attendance during their first few months on the Board. All attended the final Board meeting in 2016 (30 November) and it is their intention to attend all Board meetings going forward.
2 Wendy Mayall, John Pollock and Nicholas Shott were appointed to the Board on 1 September 2016.
AUDIT COMMITTEE’S ROLE – Receiving and reviewing the Annual Report and Accounts and other related financial disclosures, although the ultimate responsibility for these matters remains with the Board.
– Provision of advice to the Board to enable the Board to report on whether the Annual Report and Accounts, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Group’s performance, business model and strategy.
– Responsible for making recommendations to the Board on the appointment of the external auditors and their terms of engagement including approval of external auditor fees and non-audit services and for reviewing the performance, objectivity and independence of the external auditors. The terms of reference of the Audit Committee state that it shall meet the external auditor at least once a year without management being present.
– Considering and approving the remit of the internal audit function and reviewing its effectiveness.
– 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 was enhanced in 2016 through the commencement of occasional attendance at the Audit Committee by the Phoenix Life Audit Committee Chairman.
– Considered and addressed a number of significant matters in relation to the IFRS consolidated financial statements for 2015 (annual), 2016 (interim) and 2016 (annual) as summarised in the table on page 53. 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 page 91.
– 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, in conjunction with the Phoenix Life Audit Committee on cyber risk and controls.
– 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., whose Chairman reported further on this matter through attendance at the Audit Committee.
– Considered and noted the independence of KPMG in relation to postacquisition audit work undertaken with regard to Abbey Life.
– 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 52.
– Assessed the effectiveness of Internal Audit, supported by the April 2016 follow-up review by Independent Audit to their 2015 External Quality Assessment, noting the positive actions taken in response to the recommendations from the 2015 assessment.
– Approved the annual update of the Group Internal Audit Charter (which was aligned to the CIIA Code for ‘Effective Internal Audit in Financial Services’) and the Group Internal Audit Plan (including its link to the Risk Management Framework), receiving regular reports to monitor progress against the plan.
AUDIT COMMITTEE’S PERFORMANCE – The Committee’s performance was reviewed by the Board in November 2016 as part of its overall Board Evaluation Review. The Board concluded that the Committee undertakes a difficult role very well and that the reporting from the Committee Chairman to the Board is good. The Committee undertook a self-effectiveness review in early 2017, concluding that it contained an appropriate balance of skills and that the interaction with the Phoenix Life Audit Committee should continue to be enhanced.
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 new whistleblowing rules and the introduction of a prescribed responsibility of a Whistleblowing Champion under the Senior Insurance Managers Regime. The Audit Committee Chairman was appointed to this role.
– Reviewed and approved updates to the Group Tax Policy and the Group Liquidity & Funding Policy.
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 2015 financial reporting cycle to provide a more detailed analysis and to support the imminent tender process. The review was supported by the utilisation of an online questionnaire based tool provided by a third party supplier. The output from the review demonstrated the positive action taken in respect of recommendations from the previous year’s review and enabled management to identify key areas of focus to further facilitate the audit process. The Audit Committee contributed feedback to the exercise, considered the effectiveness of the process and reviewed the overall findings.
AUDITOR’S APPOINTMENT The current auditors, EY, were appointed in September 2009. However, EY have been auditors to significant parts of the Group for a longer period. In accordance with the requirements of The Statutory Audit Services for Large Companies Market Investigation (Mandatory Use of Competitive Tender Processes and Audit Committee Responsibilities) Order 2014, the Audit Committee undertook a competitive audit tender in 2016 to take effect for the 2017 statutory audit, which it considered to be in the best interests of its shareholders in light of the length of association with the current auditors.
The current audit partner is Ed Jervis, who has held that role from the 2014 statutory audit and will rotate off that role after the 2018 statutory audit.
The Audit Committee is satisfied that the non-audit services performed during 2016 have not impaired the independence of EY in its role as external auditor. Further information on non-audit fees is provided in Auditor’s Remuneration in Notes to the IFRS Consolidated Financial Statements on page 117.
Significant matters in relation to the 2016 IFRS financial statements How these issues were addressed
– Management presented papers to the Phoenix Life Audit Committee detailing recommendations for the actuarial assumptions and methodologies to be used for the interim and year-end reporting periods with justification and benchmarking as appropriate. These assumptions and methodologies were debated and challenged by the Phoenix Life Audit Committee, focusing on longevity and persistency in relation to demographics and on credit in relation to economics, prior to their approval. Papers were also presented outlining changes to assumptions proposed to align the IFRS basis of reserving more closely with the requirements of Solvency II.
– A summary of these papers was presented for oversight review by the Audit Committee, and the Phoenix Life Audit Committee’s conclusions were reported to the Audit Committee through minutes of its meeting and a discussion between the Chairmen of the two committees. The Audit Committee discussed, and questioned management and EY on, the content of the summary papers and the Phoenix Life Audit Committee’s conclusions.
– The Audit Committee received and considered detailed written and verbal reporting from the external auditors setting out their observations and conclusions in respect of the assumptions, methodologies and actuarial models. Pension assumptions for use in the IAS 19 Employee Benefits valuations were reviewed and approved by the Audit Committee prior to the finalisation of the valuation reports.
– Management presented papers detailing the basis of fair value adjustments made to the acquisition balance sheets including the recognition of intangible assets. The key assumptions and methodologies applied in determining such adjustments were reviewed and approved by the Audit Committees.
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. In 2016, the Committee approved a Remuneration Policy Statement in accordance with the PRA’s Solvency II Remuneration Guidance. Details of the remuneration structure and the Remuneration Committee’s activities in 2016 are provided in the Directors’ Remuneration Report on pages 58 to 84.
FIT Remuneration Consultants provided advice to the Remuneration Committee in 2016 and are independent of the Group.
“ The Remuneration Committee continues to be focused on alignment of reward to execution of strategy as will be reflected in our Remuneration Policy being presented to shareholders for approval at our May 2017 AGM.”
Kory Sorenson 6 5 1 Appointed to the Committee on 20 October 2016.
The establishment of a Risk Committee is not a requirement of the Code. However, the Board believes such a Committee is important to ensure the robust oversight of the management of risk within the Group. The composition of the Risk Committee, comprised totally of independent Non-Executive Directors, is in accordance with the final recommendations of the report by Sir David Walker titled ‘A review of corporate governance in UK banks and other financial industry entities’. The Risk Committee met six times in 2016. Its meetings are attended by the Chairman of the Audit Committee (who is also a member of the Risk Committee), the Chief Risk Officer, the Group Head of Internal Audit and occasionally also by the Group Chairman and the Group Chief Executive Officer.
RISK COMMITTEE’S PRINCIPAL ACTIVITIES DURING 2016 – Reviewed the Group’s risk appetite and recommended to the Board the Group’s overall risk management strategy.
– Considered risks, issues and matters that are escalated from the Phoenix Life Risk Committee.
John Pollock3 1 1 1 Member of Committee up to 30 Nov 2016.
The standard process used by the Committee for Board appointments involves the use of an external search consultancy to source candidates external to the Group (and in the case of executive appointments also considers internal candidates). Detailed assessments of shortlisted candidates are undertaken by the search consultancy, followed by interviews with Committee members and other Directors and the sourcing of references before the Committee recommends the appointments to the Board. This process was used for the appointment of Wendy Mayall, John Pollock and Nicholas Shott in 2016. The search consultancy used in 2016 for Director appointments was Korn Ferry which has no other connection with the Company.
– Reviewed the succession plan for Executive and Non-Executive Directors and recommended its approval to the Board.
David Woods2 3 3 1 Member of Committee to 11 May 2016.
COMMUNICATION WITH SHAREHOLDERS The Company places considerable importance on communication with shareholders and regularly engages with them on a wide range of issues.
– 5 institutional conferences holding one-on-one or group meetings with investors.
In 2016, there was a marked increase in roadshow activity due to the AXA and Abbey Life acquisitions which involved an equity placing and rights issue respectively.
At these meetings a wide range of relevant issues including strategy, performance, management and governance were discussed. The Chairman, Senior Independent Director and Executive Directors are available to meet investors and analysts when required. Should major shareholders wish to meet newly appointed Directors, or any of the Directors generally, they are welcome to do so.
FINANCIAL REPORTING AND GOING CONCERN The Directors have acknowledged their responsibilities in the Statement of Directors’ Responsibilities in relation to the IFRS consolidated and parent company financial statements for the year ended 31 December 2016.
The financial position of the Group, its cash flows and liquidity position are described in the financial statements.
The Board’s going concern assessment is included within the Directors’ Report on page 87.
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 2016, in accordance with the ‘Guidance on Risk Management, Internal Control and Related Financial and Business Reporting’ published by the Financial Reporting Council.
REWARD ADOPTS A PRUDENT VIEW ON EXECUTIVE PAY BALANCED WITH APPROPRIATE ALIGNMENT TO A STRATEGY WELL DELIVERED BY THE GROUP IN A COMPLEX YEAR.”
COMPANY PERFORMANCE 2016 was a year of accomplishment for Phoenix Group as set out in more detail in the Group Chief Executive Officer’s report at the beginning of this Annual Report and Accounts. Particular operational and financial highlights for the year included: – Completion of the acquisition of AXA Wealth’s pensions and protection businesses financed in part by a £194 million capital raise
– Agreement with the Group’s lending banks on a new Revolving Credit Facility of £900 million
– Development of the Phoenix Life website in order to digitise parts of the customer journey
These factors represent an effective performance by the Company and its management team and, accordingly, the Remuneration Committee (‘Committee’) concluded that the out-turn of the Annual Incentive Plan (‘AIP’) and Long-Term Incentive Plan (’LTIP’) (after increasing the targets to reflect the impact of the AXA acquisition) is appropriate, as more fully described below.
– The precise metrics for the AIP will be set each year in line with strategic priorities. For 2017, we have removed the profit–based measures in favour of increasing the weighting on both cash generation (the core financial metric for the Company) and the customer experience. The simplified AIP scorecard will thus comprise a 50% weighting on cash generation, 20% on customer outcomes, and 30% on strategic/personal objectives. As now, the AIP policy includes an appropriate power for the Committee to take a holistic view of performance and, as appropriate, moderate outcomes.
– For the LTIP, we have retained the current policy of 200% of base salary annual grant levels. The performance measures for the 2017 LTIP will again be relative TSR and cash generation with an equal weighting on both. The LTIP also includes a 2-year post-vesting holding period for Executive Directors.
To address this issue we have amended the rules of the LTIP and Deferred Bonus Share Scheme (‘DBSS’) (the deferral vehicle for the AIP) to provide that grants will be made on the fourth dealing day following the announcement of results regardless of whether the Company is then in a prohibited period. While recognising that this is unusual it will have a significant impact internally on the ability to operate the plans effectively. While awards will vest on the respective anniversary dates the exercise of awards or the sale of shares will remain possible only in open periods.
SHAREHOLDER APPROVAL At the AGM on 11 May 2017, shareholders will be asked to approve two resolutions related to Directors remuneration matters: – to approve the Directors’ Remuneration Policy as set out in Part A of this Directors’ Remuneration Report; and
– to approve the Implementation Report sections of this Directors’ Remuneration Report (excluding the Directors’ Remuneration Policy).
The Committee continues to seek to reflect developments in practice as deemed appropriate for the Phoenix Group.
e p o rt an d A cco u nts 2 th p er ce nt ile th p er ce nt ile 80 th p er ce nt ile TOTAL SHAREHOLDER RETURN (%)
DIRECTORS’ REMUNERATION REPORT Continued At a glance HOW WE PERFORMED IN 2016 GROUP PERFORMANCE MEASURES
The charts below compare the maximum levels of Total Remuneration Opportunity in the remuneration policy (see page 70) and the actual payments for 2016 detailed in the Single Figure Table. For the 2016 actual LTIP values, the share price growth and dividend element is shown separately.
1 Target and maximum levels include increase of £20m (see page 76)
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’). The Company intends to comply with the DRR regulations as a matter of good practice although as a non-UK incorporated quoted company it is not strictly required to do so and is not subject to the technical consequences of non-compliance with the DRR regulations.
Part A represents the Directors’ Remuneration Policy. This policy will take effect, subject to the approval of the shareholders, immediately after the 2017 AGM.
Part B constitutes the implementation sections of the Remuneration Report (‘Implementation Report’).
PART A: DIRECTORS’ REMUNERATION POLICY The Directors’ Remuneration Policy (‘Remuneration Policy’) as set out in this section of the Remuneration Report will, if approved by shareholders, take effect for all payments made to Directors from the date of the AGM on 11 May 2017.
GENERAL POLICY The Remuneration Policy for Executive Directors is summarised in the table below along with the position of the Chairman’s and the Non-Executive Directors’ fees: Overall Positioning*
– Confirming the automatic grant of deferred shares on the fourth dealing day following the announcement of annual results each year.
– Confirming the automatic grant of LTIP awards on the fourth dealing day following the announcement of annual results each year.
– Base salaries are reviewed each year against companies of similar size and complexity. Both salary levels and overall remuneration are set by reference to the median data of comparators which the Remuneration Committee considers to be suitable using both the FTSE 31-100 and the FTSE 250 as a whole, and positioning the Executive Directors’ salaries around the average of the median positions in these pan-sector groups. Consideration is also given to other relevant insurance company data.
– 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.
– Where appropriate, the Company will meet certain costs relating to Executive Director relocations.
– 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.
– The Group provides a competitive employer sponsored defined contribution pension plan.
– A contribution limit of 20% of base salary per annum per Executive Director has been set for the duration of this policy.
– AIP levels and the appropriateness of measures are reviewed annually to ensure they continue to support the Group’s strategy.
– At least 40% of any annual AIP award is to be deferred into shares for a period of three years although the Remuneration Committee reserves discretion to alter the current practice of deferral (whether by altering the portion deferred, the period of deferral or whether amounts are deferred into cash or shares). Such alterations may be required to ensure compliance with regulatory guidelines for pay within the insurance sector, but will not otherwise reduce the current deferral level or the period of deferral.
– The maximum annual incentive level for an Executive Director is 150% of base salary per annum.
– Provides for the automatic making of DBSS awards on the fourth dealing day following the announcement of annual results.
– Awards under the LTIP may be in any of the forms of awards to receive shares for nil-cost (as described for DBSS above).
– The vesting period will be at least three years and run until the third anniversary of the award date (unless a longer vesting period is introduced).
– Dividend entitlements will accrue until the end of the holding period in respect of performance-vested shares and be delivered as additional vesting shares.
– Malus/clawback provisions apply on a basis consistent with the equivalent provisions in the AIP and DBSS and as explained in the notes to this table.
– The Company will honour the vesting of all awards granted under previous policies in accordance with the terms of such awards.
– The formal limit under the LTIP is 300% of base salary per annum (and 400% per annum in exceptional cases).
– For each part of an LTIP award subject to a specific performance condition, the threshold level of vesting is 25% of that part of the LTIP award. The Remuneration Committee reserves the discretion to make changes to these levels which it considers non-material.
– The performance period for LTIP awards will be at least three years, but the Remuneration Committee reserves discretion to lengthen the applicable performance periods for LTIP awards.
– Provides for the automatic making of LTIP awards on the fourth dealing day following the announcement of annual results.
– Confirms that material changes to either the current performance measures or the relative weightings of such measures would be subject to consultation with major shareholders.
– Sharesave – the Remuneration Committee has the facility to allow individuals to save up to a maximum of £500 each month (or such other level as permitted by HMRC legislation) for a fixed period of three or five years. At the end of the savings period, individuals may use their savings to buy ordinary shares in the Company at a discount of up to 20% of the market price set at the launch of each scheme.
– 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.
– Only beneficially owned shares and vested share awards (discounted for anticipated tax liabilities) may be counted for the purposes of the guidelines. Share awards do not count prior to vesting (including DBSS awards).
– 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).
NOTES TO THE REMUNERATION POLICY TABLE 1. Differences between the Policy on Remuneration for Directors and the Policy on Remuneration of other employees
When determining Executive Directors’ remuneration, the Committee takes into account pay throughout the Group to ensure that the arrangements in place remain appropriate.
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.
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
The Remuneration Committee will operate the AIP, DBSS and LTIP according to their respective rules and the above Remuneration Policy table. The Remuneration Committee retains certain discretions, consistent with market practice, in relation to the operation and administration of these plans including: – (as described in the Remuneration Policy table) the determination of performance measures and targets and resultant vesting and pay-out levels; – (as described in the Remuneration Policy table) the ability to adjust performance measures and targets to reflect events and/or to ensure the performance measures and targets operate as originally intended; – (as described in the Termination Policy section below) determination of the treatment of individuals who leave employment, based on the rules of the incentive plans, and the treatment of the incentive plans on exceptional events, such as a change of control of the Company; and
– The AIP and LTIP will operate (including the maximum award levels) as detailed in the general policy in relation to any newly appointed Executive Director.
Subject to Board approval, Executive Directors are permitted to accept outside appointments on external boards as long as these are not deemed to interfere with the business of the Group.
The Non-Executive Directors, including the Chairman, have letters of appointment which set out their duties and responsibilities. Appointment is for an initial fixed term of three years (which may be renewed), terminable by one month’s notice from either side (six months in the case of the Chairman). Non-Executive Directors are not eligible to participate in incentive arrangements or receive pension provision or other benefits such as private medical insurance and life insurance.
LTIP Will receive a pro-rated award subject to the application of the performance conditions at the normal measurement date and, generally, any holding period will continue to apply
– LTIP: consists of the threshold level of vesting (50% of base salary). The benefit of a single year’s participation in the Sharesave scheme is recognised using an expected value for the Sharesave options of 30%. The benefit of a single year’s participation in the SIP is recognised using one matching share for every three shares invested on the maximum value which can be invested.
– LTIP: assumes maximum vesting of awards and valued as on the date of grant (normal award 200% of base salary) Sharesave and SIP valued on the same basis as in the on-target row.
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.
The Remuneration Committee also seeks to build an active and productive dialogue with investors on developments in the remuneration aspects of corporate governance generally and any changes to the Company’s executive pay arrangements in particular. The Remuneration Committee consulted with its largest shareholders before proposing the changes reflected in this Remuneration Policy.
Element of Remuneration Policy Detail of Implementation of Policy for 2017
Base Salary Salaries in 2017 will remain unchanged at £700,000 for the Group Chief Executive Officer (unchanged from 2011) and £440,000 for the Group Finance Director (unchanged from 2014).
Benefits There are no proposed changes to the benefits offered to Executive Directors in 2017.
Pension There are no proposed changes to the pension benefits offered to Executive Directors in 2017.
– The number of shares for DBSS awards will be calculated using the average share price for the three dealing days before the grant of awards.
– The three-year deferral period will run to the three-year anniversary of the making of the DBSS award.
From March 2017, awards under the LTIP will be made under a procedure similar to that described above for awards under the DBSS: – The LTIP award will be made automatically on the fourth dealing day following the announcement of the Company’s annual results.
– The number of shares for LTIP awards will be calculated using the average share price for the three dealing days before the grant of awards.
– The initial three-year vesting period will run to the three-year anniversary of the making of the LTIP award. At this time, the performance conditions will be determined.
The relative TSR measure is calculated against the constituents of the FTSE 250 (excluding Investment Trusts), with vesting commencing at median (25% of this part of the award vests) and full vesting at upper quintile levels, subject to an underpin regarding underlying financial performance.
All-Employee Share Plans Executive Directors have the opportunity to participate in HMRC tax advantaged Sharesave and Share Incentive Plans (‘SIP’) on the same basis as all other UK employees. To increase the potential benefit to be available to all staff under SIP, from 2017 the matching ratio will be increased to one free matching share for every three partnership shares purchased (the previous ratio was one free matching share for every six partnership shares purchased).
The fee levels for 2017 are £325,000 for the Chairman, £105,000 for the role of Non-Executive Director with additional fees of: (i) £5,000 payable for the role of Senior Independent Director; and/or (ii) £10,000 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.
Note: All incentive plans are subject to malus/clawback. See page 67 ‘Notes to the Remuneration Policy’ for details.
Profits distributed by way of dividend (% change +33%) Overall expenditure on pay (% change +22%)
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. The current year figure includes £8 million in respect of the acquired AXA businesses. Expenditure on pay from existing businesses has increased by 12%, primarily due to increased staff payroll, recruitment and training costs associated with the increased project activity within the Group during the year, increased share-based payment costs (see note I2 for further details) and higher AIP costs due to higher year end accrual than compared to the prior year.
PERFORMANCE GRAPH AND TABLE The graph below shows the value to 31 December 2016, on a TSR basis, of £100 invested in Phoenix Group Holdings on 5 July 2010 (the date of the Company’s Premium Listing) compared with the value of £100 invested in the FTSE 250 Index (excluding Investment Trusts).
2 The long-term incentive vesting rate for 2013 is shown at 67% and for 2014 is shown as 57%. In both years the Group Chief Executive Officer decided to waive voluntarily any entitlement in excess of two-thirds of the shares which would otherwise have vested.
Overall the data shows minimal change in the level of remuneration for the Group Chief Executive; the small increase in annual incentive being due to a higher outcome under the personal element of the AIP. Staff more generally have experienced a small overall increase, due in part to higher outcomes under the personal element of annual incentive reflective of their personal achievements over the year. The median salary increase for staff was 2.25%; this is lower than the figures above which are based on averages.
VOTING OUTCOMES FROM THE 2016 AGM The table below shows the votes cast to approve the Directors’ Remuneration Report for the year ended 31 December 2015 at the 2016 AGM held on 11 May 2016.
To approve the Directors’ Remuneration Report for the year ended 31 December 2015 136,362,734 98.981 1,395,487 1.011 9,589,645 1 The small balance to 100% was for Chairman’s discretionary votes not voted.
3 Annual incentive amounts are presented inclusive of any amounts which must be deferred into shares for three years (i.e. one-third of the AIP award). In 2016 and 2015, £294,490 and £287,000 respectively of Clive Bannister’s incentive payment is subject to three-year deferral delivered in shares, and £185,108 and £188,650 of James McConville’s incentive payment is subject to a similar deferral. Details of the performance measures and targets applicable to the AIP for 2016 are set out below.
5 For 2013’s LTIP awards which are reflected in the 2015 long-term incentives column above, the performance conditions were met as to 57% of maximum. The 2015 long-term incentives values in the above table reflect the value of the Company’s shares on the date of vesting which was 15 November 2016 (736.5p 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 2015 and 31 December 2015 (873.4924p per share) and certain assumptions regarding the cumulative value of dividends on the number of shares vesting. The number of shares vesting has been increased to take into account the impact of the rights issue; this adjustment has been based on the Theoretical Ex-RightsPrice (‘TERP’) and approved by the Remuneration Committee.
6 Clive Bannister and James McConville are entitled to each receive a Company pension contribution of 20% of base salary, which may at their own choice, be paid to their Group Personal Pension (‘GPP’) or received in cash. Pension contributions paid as cash supplements are reduced for the effect of employers’ National Insurance contributions. No Director participated in a defined benefit pension arrangement in the year.
The aggregate remuneration of all Executive and Non-Executive Directors under salary, fees, benefits, cash supplements in lieu of pensions and annual incentive was £4.041 million (2015: £3.937 million).
Servicing complaints as a percentage of transactions2 0.50% 0.40% 0.30% 0.32% 10% 9.0%
– Ensuring that Treating Customers Fairly is embedded in our culture
– Delivery of financial KPIs, including in relation to expense management
– Maintaining staff engagement at, or more than, 78% (the outcome was 81%; the 78% objective representing an increase from our target of 72% for 2015)
Taking account of the attainment of objectives across the four quadrants, each of the Group Chief Executive Officer and the Group Finance Director received an 87.5% payout for this element, consistent with their ratings for 2016.
In addition, whilst the performance measures for the AIP for 2017 have been disclosed (see Implementation of Remuneration Policy for 2017), the performance targets for these measures are regarded as commercially sensitive at the current time and accordingly are not disclosed. However, the Company intends to disclose the performance targets for 2017’s AIP retrospectively in next year’s Directors’ remuneration report on a similar basis to the disclosures made above in respect of 2016’s AIP.
Target range between cumulative cash generation of £1.368 billion (previously £1.348 billion) and cumulative cash generation of £1.568 billion (previously £1.548 billion).
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 2014 LTIP awards (three-year performance period ends 31 December 2016) 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 two financial years to 31 December 2015 as reported, and then deriving the growth rate for the 2016 financial year by using the percentage growth in Solvency II own funds, which has been adjusted for Solvency II specific items (‘Adjusted Solvency II Own Funds). Adjusted Solvency II Own Funds is considered appropriate as it is the economic value of an entity calculated on a Solvency II basis, and therefore is more conservative than MCEV and is based on Phoenix’s own funds as reported. With the addition of dividends paid over the period to 31 December 2016, the MCEV growth achieved for the 2014 LTIP awards was 6.1%.
In making these amendments for the 2014 and 2015 LTIP awards, the Remuneration Committee has acted in line with the Directors’ Remuneration Policy by ensuring that the amended performance condition is not easier than the original performance condition was intended to be, with Adjusted Solvency II Own Funds being viewed as the most appropriate proxy for the balance sheet growth element within the LTIP measure of MCEV growth.
3 Gains of Directors from share options exercised and vesting shares under the LTIP in 2016 were £1,121,682 (Clive Bannister’s gain was £1,121,682 arising from an LTIP award exercised on 1 December 2016 at a share price of £7.079588; James McConville did not exercise any share options under the LTIP in the year) (2015: £3,037,992).
6 As detailed earlier, for LTIP awards made from 2015 onwards, a holding period applies so that any LTIP awards for which the performance vesting requirements are satisfied will not be released for a further two years from the third anniversary of the original award date.
2015 award (40% Embedded value growth, 40% Cumulative cash generation and 20% TSR)
For this award, an additional £50 million was added to the base Embedded value figure to increase the level of challenge.
This was increased to £1.032 billion to £1.182 billion to reflect the AXA and Abbey acquisitions (£191 million increase to the range).
This was increased to £1.311 billion to £1.511 billion to reflect the AXA and Abbey acquisitions (£362 million increase to the range).
Target range between median performance against the constituents of the FTSE 250 (excluding Investment Trusts) rising on a pro rata basis until full vesting for upper quintile performance.
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’s awards, the underpin has been extended to include consideration of customer satisfaction and, to meet Solvency II requirements, in exceptional cases, personal performance.
Total share plan interests as at 31 December 2016 – LTIP
1 James McConville exercised an LTIP award of 90,535 shares on 5 January 2017.
The extent to which Executive Directors have achieved the requirements by 31 December 2016 (using the share price on 31 December 2016) can be summarised as follows: Position
Value of shares held at 31 December 2016 (% of salary)
DIRECTORS’ SERVICE CONTRACTS The dates of contracts and letters of appointment and the respective notice periods for Directors are as follows: EXECUTIVE DIRECTORS’ CONTRACTS
Ian Cormack 25 May 2016 2 September 2009 11 May 2017 2
John Pollock 24 August 2016 1 September 2016 1 September 2019 30
Nicholas Shott 24 August 2016 1 September 2016 1 September 2019 30
Kory Sorenson 9 May 2014 1 July 2014 1 July 2017 4
Henry Staunton 19 August 2015 1 September 2015 1 September 2018 18
David Woods 25 May 2016 18 February 2010 11 May 2017 2
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 2016 in respect of the application of the Remuneration Policy are summarised in the Committee Chairman’s letter to shareholders at the start of the Directors’ remuneration report.
Consistent with the requirements of Solvency II, the Committee is responsible for establishing, implementing, overseeing and reviewing the firmwide remuneration policy in the context of business strategy and changing risk conditions. The firm-wide remuneration policy focuses on ensuring sound and effective risk management so as not to encourage risk-taking outside of the Company’s risk appetite. None of the Committee members has any personal financial interest (other than as shareholders), conflicts of interests arising from cross-directorships or day-to-day involvement in running the business.
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 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 accordingly the Committee was satisfied that the advice provided by FIT was objective and independent. FIT’s fees in respect of 2016 were £239,665, 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.
APPROVAL This report in its entirety has been approved by the Remuneration Committee and the Board of Directors and signed on its behalf by: IAN CORMACK REMUNERATION COMMITTEE CHAIRMAN
As a result of regulatory changes applicable to the Group under Solvency II, dividends declared in respect of the Company’s Ordinary Shares must be capable of being cancelled and withheld or deferred at any time prior to payment. This is in order that the Company’s Ordinary Shares be counted towards Group capital. Accordingly, the final dividend will be declared on a conditional basis and the Directors reserve the right to cancel or defer the recommended dividend. The Directors do not expect to exercise this right other than where they believe that it may be necessary to do so as a result of legal or regulatory requirements. The Company is also proposing to amend its Articles of Association so as to make clear that any dividend declared in respect of the Company’s Ordinary Shares may be cancelled or deferred by the Directors before payment in circumstances where this is required.
Where the 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.
SUBSTANTIAL SHAREHOLDINGS Information provided to the Company pursuant to the FCA’s Disclosure and Transparency Rules is published on a Regulatory Information Service and on the Company’s website. As at 17 March 2017, the Company had been notified of the following significant holdings of voting rights in its shares.
1 Number of voting rights and percentage notified are pre-rights issue. Prudential plc have not provided an update post rights issue.
ANNUAL GENERAL MEETING (‘AGM’) The AGM of the Company will be held at 1st Floor, 32 Commercial Street, St Helier, Jersey JE2 3RU on Thursday, 11 May 2017 at 12.30pm.
Details of related party transactions which took place during the year with Directors of the Company and consolidated entities where Directors are deemed to have significant influence, are provided in the Directors’ Remuneration Report and in note I5 to the IFRS consolidated financial statements.
EMPLOYEE ENGAGEMENT Phoenix Group continues to communicate with staff across a wide variety of channels, including regular news bulletins via the intranet, Executive Committee presentations and other face-to-face briefings. The staff briefings and Executive Committee presentations typically include updates on the Company’s strategy and plans, progress against key financial and operational targets, regulatory and risk management updates and review of economic or other factors which could affect the Company’s strategy and performance. Regular feedback mechanisms are also in place, ensuring communication at Phoenix is a continuous two-way dialogue.
CORPORATE GOVERNANCE STATEMENT The disclosures required by section 7.2 of the FCA’s Disclosure Guidance and Transparency Rules can be found in the Corporate Governance Report on pages 47 to 57 which is incorporated by reference into this Directors’ Report and comprises the Company’s Corporate Governance Statement. The UK Corporate Governance Code (the ‘Code’) applies to the Company and full details on the Company’s compliance with the Code are included in the Corporate Governance Report. The Code is available on the website of the Financial Reporting Council – www.frc.org.uk.
FINANCIAL RISK MANAGEMENT The Group operates a Risk Management Framework (‘RMF’) consisting of several components, as detailed in the Risk Management section of the Strategic Report. The RMF provides a consistent approach to highlighting and controlling key risks throughout the organisation. This is achieved primarily through review and compliance, at a functional level, with the risk universe and related policies (and the risk appetites therein).
At its highest level the RMF considers the following risks: strategic, market, credit, insurance, financial soundness, customer and operational. As a result, in preparing the consolidated financial statements, assessment is given to a broad range of risk categories.
MEMORANDUM AND ARTICLES Changes to the Company’s Memorandum and Articles require prior shareholder approval. Changes proposed at the 11 May 2017 AGM will be set out in the notice for that meeting.
Details of fees paid to EY during 2016 for audit and non-audit work are disclosed in note C3 to the IFRS consolidated financial statements.
GROUP COMPANY SECRETARY The Group Company Secretary throughout the 2016 financial period was Gerald Watson.
STRATEGIC AND DIRECTORS’ REPORT APPROVAL 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 2016, 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.
The Directors of Phoenix Group Holdings are responsible for the preparation of the Annual Report and Accounts, the Strategic Report, the Directors’ Report, the Directors’ remuneration report, the Group consolidated financial statements and the Company financial statements in accordance with applicable law and regulations.
– prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group and the Company will continue in business.
– preparing a Strategic Report, Directors’ Report, Directors’ Remuneration Report and Corporate Governance Statement in compliance with applicable laws and regulations.
The Directors have elected to comply with certain Companies Act and Listing Rules (‘LR’) which would otherwise only apply to companies incorporated in the UK – namely: – the Directors’ statement under LR 9.8.6R(3) (statement by the Directors that the business is a going concern); – the Directors remuneration disclosures made under LR 9.8.4R(5) and (6); and
– the requirements of Schedule 8 to The Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 of the United Kingdom pertaining to Directors’ remuneration that UK quoted companies are required to comply with.
OUR OPINION ON THE FINANCIAL STATEMENTS In our opinion: – Phoenix Group Holdings’ consolidated financial statements and parent company financial statements (the ‘financial statements’) give a true and fair view of the state of the Group’s and of the parent company’s affairs as at 31 December 2016 and of the Group’s loss and of the parent company’s profit for the year then ended; and
WHAT WE HAVE AUDITED We have audited the consolidated financial statements of Phoenix Group Holdings and its subsidiaries (collectively ‘the Group’) and the parent company for the year ended 31 December 2016, included within the Annual Report and Accounts, which comprise: Group Parent company
– The statement of financial position as at 31 December 2016
– The statement of changes in equity for the year then ended
– Related notes A1 to I9 to the consolidated financial statements
– The reporting units where we performed full or specific audit procedures accounted for more than 99% of the equity and operating profit of the Group.
INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF PHOENIX GROUP HOLDINGS Continued
OUR ASSESSMENT OF RISK OF MATERIAL MISSTATEMENT We identified the risks of material misstatement described below as those that had the greatest effect on our overall audit strategy, the allocation of resources in the audit and the direction of the efforts of the audit team. In addressing these risks, we have performed the procedures below which were designed in the context of the financial statements as a whole and, consequently, we do not express any opinion on these individual areas.
We assessed management’s analysis of movements in insurance contract liabilities and obtained evidence to support large or unexpected movements. This provided important audit evidence over the valuation of insurance contract liabilities. Further additional audit procedures performed to respond to the specific risk areas are set out below: Risk area Our response to the risk Key observations communicated to the Audit Committee
The assumptions that we consider to have the most significant impact are the rate of interest used for discounting liabilities, the life expectancy of policyholders (including improvement rates), the lapse rates of polices and expenses.
We determined that the actuarial assumptions used by management are reasonable based on the analysis of the experience to date, industry practice and the financial and regulatory requirements.
Over £43.1 billion of the £46.7 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.
– assessed, on a sample basis, the rationale for modelling certain insurance contract liabilities outside the actuarial modelling systems, including evaluating the underlying methodology and accuracy of the calculations for valuations modelled outside the actuarial modelling systems.
Refer to the Audit Committee Report (page 53); Critical accounting estimates (page 107); Accounting policies and notes E1 and E2 of the consolidated financial statements (pages 122 to 131).
We focused our audit procedures on the financial investments 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.
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 investments, including those operated by OSPs via the relevant SOC1 reports; – evaluated the methodology, inputs and assumptions used for a sample of mark to model investments, by comparing yields, spreads, earnings, house prices and market rents to published market benchmarks and other demographic and economic assumptions (such as voluntary early redemption and house price inflation) against those of other industry participants, to confirm that key valuation inputs were consistent with industry norms and our understanding of the asset type; – recalculated a sample of modelled valuations to assess their reasonableness; – obtained net asset valuation (‘NAV’) statements provided by third party administrators in respect of private equity and fund of fund structures and compared them with management’s valuations. We performed ‘back-testing’ of recent realisations to confirm that the NAV continues to be an appropriate proxy for fair value; – used our real estate valuation specialists to assess the reasonableness of investment property valuations; – assessed the fair value of the fixed and variable rate income securities valuations versus comparable bonds and, where applicable, broker quotes; and
Based on our procedures performed on the marked to model assets and manually priced investments we are satisfied that the valuation of these complex and illiquid assets is reasonable.
Refer to the Audit Committee Report (page 53); Critical accounting estimates (page 107); Accounting policies and notes H1 and H2 of the consolidated financial statements (pages 175 to 177).
On 1 November 2016, the Group acquired AXA Wealth Limited, AXA Wealth Services Limited, AXA Sun Life Direct Limited, Winterthur Life UK Holdings Limited and AXA Trustee Services Limited (collectively the ‘AXA entities’) for £373 million. AXA Wealth Limited is material to the Group.
The purchase price allocation exercise has been performed by management, assisted by an external expert. The primary elements of the valuation exercise assessed the fair value of the identifiable intangible assets in the form of acquired value of in-force business (‘AVIF’) (£218 million) and brands (£20 million).
– read relevant contracts, agreements and board minutes which supported the final conclusions in respect of the acquisition accounting.
Based on our procedures performed on the acquisition of AXA Wealth Limited and Abbey Life Assurance Company Limited, we are satisfied that the valuation of the assets and liabilities acquired, including the identification and initial measurement of intangible assets is reasonable.
In assessing the risk of material misstatement to the consolidated financial statements, and to ensure we had adequate quantitative coverage of significant accounts in the financial statements, we selected all four reporting components of the Group. The Group reporting components consists of Phoenix Life Division, Abbey Life Assurance Company Limited, Group Function and Other Companies. In the Phoenix Life Division component the most significant insurance companies are Phoenix Life Assurance Limited, Phoenix Life Limited, and in the current year includes the acquired AXA Wealth Limited. The Group Function consists of Group entities that primarily hold external debt, PA(GI) Limited and certain pension schemes of the Group. The Other Companies are the service companies and Opal Reassurance Limited.
The Group audit team provided detailed audit instructions to the component teams which included guidance on areas of focus, including the relevant risks of material misstatement detailed above, and set out the information required to be reported to the Group team.
MATERIALITY The magnitude of an omission or misstatement that, individually or in the aggregate, could reasonably be expected to influence the economic decisions of the users of the financial statements. Materiality provides a basis for determining the nature and extent of our audit procedures.
We determined materiality for the Group to be £67 million (2015: £46 million), which is 2.0% (2015: 1.9%) of Group equity. Our aim is that materiality should not exceed 2.0% of year-end Group equity. Whilst profit before tax or operating profit are common bases used across the life insurance industry, we believe that the use of equity as the basis for assessing materiality is more appropriate given that the Group is a closed life assurance consolidator and as such equity provides a more stable, long-term measure of value. We note also that equity more closely correlates with key Group performance metrics such as Solvency II capital requirements and Own Funds. However, as these measures are non-GAAP measures, we consider equity to be most appropriate.
RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITOR As explained more fully in the Statement of Directors’ Responsibilities set out on page 90, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors.
Phoenix Group Holdings is a non-UK company and as such is not required to comply with the UK Companies Act 2006. As the Group is listed on the UK Stock Exchange, the Directors have voluntarily chosen to comply with the Companies Act 2006 and listing rules that apply to UK Companies and have engaged us to provide an opinion as if they were. Accordingly, we have been engaged to: – report as to whether the Strategic Report and Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements; – report as to whether the information given in the Corporate Governance Statement with respect to internal control and risk management systems in relation to financial reporting processes is consistent with the financial statements; – report as to whether the section in the Directors’ remuneration report that is described as audited has been properly prepared in accordance with the basis of preparation described therein; and
– report if we are not satisfied that: – adequate accounting records have been kept (including returns from those branches which have not been visited); or
– we have obtained all the information and explanations which we consider necessary for the purposes of the audit.
This report is made solely to the Company’s members, as a body, in accordance with our engagement letter dated 10 March 2016. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed.
– 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.
– apparently materially incorrect based on, or materially inconsistent with, our knowledge of the Group acquired in the course of performing our audit; or
– the part of the Corporate Governance Statement relating to the Company’s compliance with the provisions of the UK Corporate Governance Code specified for our review.
– the financial statements are not in agreement with the accounting records and returns; or
– we have not received all the information and explanations which we require for the audit.
STATEMENT ON THE DIRECTORS’ ASSESSMENT OF THE PRINCIPAL RISKS THAT WOULD THREATEN THE SOLVENCY OR LIQUIDITY OF THE ENTITY
We are required to give a statement as to whether we have anything material to add or to draw attention to in relation to: – the Directors’ confirmation in the Annual Report and Accounts that they have carried out a robust assessment of the principal risks facing the entity, including those that would threaten its business model, future performance, solvency or liquidity; – the disclosures in the Annual Report and Accounts that describe those risks and explain how they are being managed or mitigated; – the Directors’ statement in the Annual Report and Accounts about whether they considered it appropriate to adopt the going concern basis of accounting in preparing them, and their identification of any material uncertainties to the entity’s ability to continue to do so over a period of at least twelve months from the date of approval of the financial statements; and
Notes: 1 The maintenance and integrity of the Phoenix Group Holdings website is the responsibility of the Directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the website.
CONSOLIDATED INCOME STATEMENT For the year ended 31 December 2016 £m £m
Earnings per ordinary share Basic (pence per share) B3.1 (34.3)p 76.1p*
PRO FORMA RECONCILIATION OF GROUP OPERATING PROFIT TO RESULT ATTRIBUTABLE TO OWNERS For the year ended 31 December 2016 £m £m
Investment return variances and economic assumption changes on long-term business B2.2 (207) 13
Tax charge relating to other comprehensive income items C5 (1) (5)
STATEMENT OF CONSOLIDATED FINANCIAL POSITION As at 31 December 2016 Continued £m £m
Acquisition of AXA subsidiaries, net of cash acquired H2.1 (343) –
Proceeds from issuing ordinary shares, net of associated commission and expenses D1 908 2
Proceeds from new policyholder borrowings, net of associated expenses – 99
Cash and cash equivalents at the beginning of the year 3,940 5,067
Cash and cash equivalents at the end of the year G11 1,666 3,940
STATEMENT OF CONSOLIDATED CHANGES IN EQUITY For the year ended 31 December 2016
Dividends paid on ordinary shares – (126) – – – – (126) – (126)
STATEMENT OF CONSOLIDATED CHANGES IN EQUITY For the year ended 31 December 2015
e p o rt an d A cco u nts 2
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.
The consolidated financial statements include the financial statements of the Company and its subsidiaries, 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
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.
Critical accounting estimates are those which involve the most complex or subjective judgements or assessments. The areas of the Group’s business that typically require such estimates are the measurement of insurance and investment contract liabilities, determination of the fair value of financial assets and liabilities, impairment tests for intangible assets, income tax assets and liabilities, and pension scheme assets and liabilities. The determination of operating profit, identification and valuation of intangible assets and the deconsolidation of a property investment company all require management to make judgements, details of which are included below.
Financial assets and liabilities are measured at fair value and accounted for as set out in the accounting policies in note E1. Where possible, financial assets and liabilities are valued on the basis of listed market prices by reference to quoted market bid prices for assets and offer prices for liabilities. These are categorised as Level 1 financial instruments and do not involve estimates. If prices are not readily determinable, fair value is determined using valuation techniques including pricing models, discounted cash flow techniques or broker quotes. Financial instruments valued where valuation techniques based on observable market data at the period end are categorised as Level 2 financial instruments. Financial instruments valued using valuation techniques based on non-observable inputs are categorised as Level 3 financial instruments. Level 2 and Level 3 financial instruments therefore involve the use of estimates. Further details of the estimates made are included in note E2.
The determination of tax provisions included in current tax liabilities involves the use of estimates and judgements.
The accounting policy for income taxes (both current and deferred) is discussed in more detail in the accounting policy in notes C5 and G2.
The valuation of pension scheme assets and liabilities is determined using actuarial valuations that include a number of assumptions. As defined benefit pension schemes are long-term in nature, such assumptions are subject to significant uncertainty. Details of the key assumptions used are shown in note G6.
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.
A3.8 Loss of control of investment in UK Commercial Property Trust Limited (‘UKCPT’)
UKCPT is a property investment company which the Group deconsolidated during the year. Judgement was applied in determining that the Group no longer controlled its investment in UKCPT. The Group’s investment in UKCPT is now classified as an associate and held at fair value. Further details of the judgement made are included in note H3.
– Disclosure initiative (Amendments to IAS 1). The adoption of these amendments had no impact on the disclosures or amount recognised in the consolidated financial statements.
– IFRS 9 Financial Instruments (2018). Under IFRS 9, all financial assets will be measured either at amortised cost or fair value and the basis of classification will depend on the business model and the contractual cash flow characteristics of the financial assets. The Group expects to continue to value the majority of its financial assets at fair value through profit or loss on initial recognition, so as to eliminate or reduce any potential accounting mismatch. The Group expects to take advantage of the temporary exemption granted to insurers in IFRS 4 Insurance Contracts from applying IFRS 9 until 1 January 2021 as a result of meeting the exemption criteria. A number of disclosures will be made as a result of applying this temporary exemption. The expected impact of applying IFRS 9 remains subject to completion of a detailed review.
– 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 lowvalue assets are exempt from the requirements. The Group anticipates that the application of IFRS 16 in the future will have limited impact on amounts reported in the Group’s financial statements as the Group has a limited number of operating leases (see note I6).
– Classification and Measurement of Share-based Payment Transactions (Amendments to IFRS 2) (2018).
For management purposes, the Group is organised into business units based on their products and services and comprised of the Phoenix Life and Abbey Life operating segments during the reporting period. No segmental result has been shown for the Abbey Life segment as the subsidiary was acquired on 30 December 2016.
Segmental 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.
Group financing (including finance costs) and owners’ taxes are managed on a Group basis and are not allocated to individual operating segments.
Amortisation and impairment: Amortisation and impairment of acquired in-force business (148) – (148)
Impacts arising from the difference between the actual and expected experience for economic items (on both assets and liabilities) and the impacts of changes in economic assumptions on the valuation of liabilities are excluded from operating profit and are presented in profit before the tax attributable to owners (see note B2). Phoenix Life operating profit is net of policyholder finance charges and policyholder tax.
– other non-operating items which include: – gains or losses on the disposal of subsidiaries, associates or joint ventures (net of related costs of disposal); – the financial impacts of mandatory regulatory change; – integration, restructuring or other significant one-off projects; and
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 (see note H2); – a provision for costs of £30 million associated with the integration and restructuring of the acquired AXA businesses (see note G1); – 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 (‘PA(GI)’), of £33 million (see note G1); – 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 will come 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
Segmental result before the tax attributable to owners 276 (91) 185
– net other one-off items (including Solvency II implementation and systems transformation costs) totalling a cost of £4 million.
The expected return on investments for both owner and policyholder funds is based on opening economic assumptions applied to the funds under management at the beginning of the reporting period. Expected investment return assumptions are derived actively, based on risk-free yields at the start of each financial year. In line with changes made to align assumptions and estimates used in the valuation of insurance contracts with the requirements of the Solvency II regime (see note F4.1), the assumptions used in the calculation of the long-term investment return have also been updated.
The principal assumptions underlying the calculation of the long-term investment return are: Other fixed interest 3.8 3.3
Following the completion of the rights issue in November 2016 the earnings per share calculations, for all periods up to the date the rights issue shares were issued, have been adjusted for the bonus element of the rights issue. The bonus factor used was 1.18. Further details of the rights issue are included in note D1.
Basic earnings per share (restated for bonus element of rights issue) (34.3) 76.1
Diluted earnings per share is as follows: 2016 pence 2015 pence
On 24 August 2016, the Board declared an interim dividend of 26.7p per share for the half year ended 30 June 2016. The dividend amounted to £66 million and was paid on 3 October 2016.
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 include both realised and unrealised gains and losses.
Net interest income on Group defined benefit pension scheme asset/liability 21 17
Financial assets and financial liabilities at fair value through profit or loss: Designated upon initial recognition 3,236 (1,178)
No services were provided by the Company’s auditors to the Group’s pension schemes in either 2016 or 2015.
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 52.
On financial liabilities at fair value through profit or loss 13 14
Income tax comprises current and deferred tax. Income tax is recognised in the consolidated income statement except to the extent that it relates to items recognised in the statement of consolidated comprehensive income or the statement of consolidated changes in equity, in which case it is recognised in these statements.
Movement on acquired in-force amortisation at less than 20%5 (2015: 20.25%) 2 15
1 The Phoenix Life operating segment operates predominantly in the UK. The reconciliation of the tax charge/(credit) 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 is applicable to Phoenix Group Holdings.
2 Includes non-taxable dividends and gains and non-taxable pension scheme items.
6 2015 included non-taxable profits arising in Opal Re of £23 million and UKCPT of £10 million. The 2016 element for both is de minimis.
8 Represents the effect of the 1% reduction in the tax rate from April 2020 which was substantively enacted in the year (2015: 2% reduction).
Issued and fully paid: 392.8 million (2015: 225.4 million) ordinary shares of €0.0001 each 33,112 18,463
On 1 June 2016, the Group completed an equity placing of 22,542,000 new ordinary shares in association with the proposed acquisition of the AXA businesses (see note H2) which raised gross proceeds of £194 million. The proceeds from the equity placing, net of deduction of commissions and expenses, were £190 million.
On 9 November 2016, the Group issued 144,727,282 shares following a rights issue undertaken in connection with the proposed 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 2015, the Company issued 329,162 shares at a premium of £2 million in order to satisfy its obligations to employees under the Group’s sharesave schemes.
Shares awarded to employees by the PGH EBT in year (5) (9)
The Company provides the PGH EBT with an interest-free facility arrangement to enable it to purchase the shares. Details of this loan are included in note 9 to the parent company financial statements.
On 1 January 2010, Pearl Group Holdings (No.1) Limited (‘PGH1’) had in issue £500 million of Perpetual Reset Capital Securities (‘the Notes’). Following amendments made to the Notes during 2010, the aggregate amount payable on redemption of the Notes was £425 million. On 23 January 2015, the Group exchanged 99% of the Notes for £428 million of new subordinated notes, issued by PGH Capital plc, and £3 million of cash. £32 million of the new notes were held by Group companies. The exchange resulted in a loss of £12 million which was recognised in equity. On 23 January 2015, the coupon that was due on the Notes was settled with the noteholders that exchanged their Notes. On 25 April 2015, the 2015 coupon was settled in full with the remaining noteholders.
On 25 April 2016 the coupon that was due on the remaining Notes was settled and PGH1 redeemed the remaining £6 million of Notes at par.
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% (2015: 50.0%) 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).
Purchases and sales of financial assets are recognised on the trade date, which is the date that the Group commits to purchase or sell the asset.
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. For the majority of the Group’s loans and receivables these investments are initially recognised at cost, being the fair value of the consideration paid for the acquisition of the investment. All transaction costs directly attributable to the acquisition are also included in the cost of the investment. Subsequent to initial recognition, these investments are carried at amortised cost, using the effective interest method. The Group holds a portfolio of loans that are designated at fair value through profit or loss.
Fair value estimation The fair value of financial instruments traded in active markets such as publicly traded securities and derivatives is based on quoted market prices at the period end. The quoted market price used for financial assets is the applicable bid price on the period end date. The fair value of investments that are not traded in an active market is determined using valuation techniques such as broker quotes, pricing models or discounted cash flow techniques. Where pricing models are used, inputs are based on market-related data at the period end. Where discounted cash flow techniques are used, estimated future cash flows are based on contractual cash flows using current market conditions and market-calibrated discount rates and interest rate assumptions for similar instruments.
– a group of financial assets, financial liabilities or both is managed and its performance is evaluated and managed on a fair value basis, in accordance with a documented risk management or investment strategy, and information about the investments is provided internally on that basis to the Group’s key management personnel.
Net asset value attributable to unitholders The net asset value attributable to unitholders represents the non-controlling interest in collective investment schemes which are consolidated by the Group. This interest is classified at 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.
The table below sets out a comparison of the carrying amounts and fair values of financial instruments as at 31 December 2016: Carrying value
Less amounts classified as held for sale (see note I1) (149) – (149)
Fair value hierarchy information for non-financial assets measured at fair value is included in note G8 for property held at valuation and in note G9 for investment property.
For financial instruments that are recognised at fair value on a recurring basis, the Group determines whether transfers have occurred between levels in the hierarchy by re-assessing categorisation (based on the lowest level input that is significant to the fair value measurement as a whole) at the start of each reporting period.
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 48,507 26,351 1,771 76,629
Less amounts classified as held for sale (see note I1) – – (149) (149)
Total financial assets measured at fair value 35,192 13,279 1,286 49,757
The investment included within equities is valued based on its listed market price adjusted for a discount spread to reflect reduced liquidity. The fair value of the debt in the structure is valued using a calculation model that takes a comparable overseas bond issue and applies a credit spread to reflect reduced liquidity.
An increase of 100bps in the yield curve would decrease the value by £42 million (2015: £22 million) and a decrease of 100bps would increase the value by £47 million (2015: £25 million). An increase of 1% in the inflation rate would increase the value by £3 million (2015: £2 million) and a decrease of 1% would decrease the value by £4 million (2015: £3 million). An increase of 10% in house prices would increase the value by £1 million (2015: £1 million) and a decrease of 10% would decrease the value by £2 million (2015: £1 million).
An increase of 100bps in the swap curve would decrease the aggregate value by £4 million and a decrease of 100bps would increase the aggregate value by £4 million.
Also included within derivative assets and derivative liabilities are longevity swap contracts with corporate pension schemes assumed following the acquisition of Abbey Life with a fair value of £53 million and £17 million respectively (see note E3.2). These derivatives are valued on a discounted cash flow basis, key inputs to which are the overnight interest swap curve and RPI and CPI inflation rates.
An increase of 1% in the RPI and CPI inflation rates would increase the value by £5 million and a decrease of 1% would decrease the value by £5 million.
The application of the Group’s fair value hierarchy classification methodology at an individual security level, in particular observations with regard to measures of market depth and bid-ask spreads, resulted in an overall net movement of financial assets from Level 1 to Level 2 in the current period and a net movement of financial assets from Level 2 to Level 1 in the comparative period.
Fixed and variable rate income securities 330 (2) 20 (209) 31 (24) 146 7
Less amounts classified as held for sale (see note I1) (149) – – 149 – – – –
Less amounts classified as held for sale (see note I1) (133) (16) – – – – (149) –
Financial liabilities designated at fair value through profit or loss upon initial recognition: Updates to the Group’s observations with regard to measures of market depth, bid-ask spreads and the extent to which inputs to the valuation of fixed and variable rate income securities are market observable resulted in a net transfer of financial assets from Level 1 and 2 to Level 3 for the current period and a net transfer of financial assets from Level 3 to Level 1 and 2 in the comparative period.
The fair values of derivative financial instruments are as follows: Assets 2016 £m
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 and are therefore recognised as derivative financial instruments. Under these arrangements the majority of the longevity risk has been passed to third parties. Derivative assets of £53 million and derivative liabilities of £17 million have been recognised as at 31 December 2016 (2015: both £nil).
In addition, Abbey Life has entered into a transaction under which it has accepted reinsurance on a portfolio of single and regular premium life insurance policies and retroceded the majority of the insurance risk. Taken as a whole, this transaction does not give rise to the transfer of significant insurance risk to the Group and therefore does not meet the definition of an insurance contract under the Group’s accounting policies. The fair value of amounts due from the cedant are recognised within loans and receivables. The fair value of amounts due to the retrocessionaire are recognised as a derivative liability and totalled £255 million at 31 December 2016 (2015: £nil). A loan liability has been recognised in respect of financing obtained for the initial reinsurance premium (see note E5).
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 2016 are: – the share price as at 31 December 2016 of £7.35; – volatility of 25%; – the warrants are not adjusted for dividends; and
The value of the warrants at the year-end was £143,000 (2015: £100,000).
Collateral received in the form of cash, where the Group has contractual rights to receive the cash flows generated, is recognised as an asset in the statement of consolidated financial position with a corresponding liability for its repayment. Non-cash collateral received is not recognised in the statement of consolidated financial position, unless the counterparty defaults on its obligations under the relevant agreement.
The Group has no financial assets and financial liabilities that have been offset in the statement of consolidated financial position as at 31 December 2016 (2015: none).
The amounts recognised as financial assets and liabilities from cash collateral received at 31 December 2016 are set out below.
The maximum exposure to credit risk in respect of OTC derivative assets is £2,927 million (2015: £1,483 million) of which credit risk of £2,733 million (2015: £1,408 million) is mitigated by use of collateral arrangements (which are settled net after taking account of any OTC derivative liabilities owed to the counterparty).
Credit risk on exchange traded derivative assets of £76 million (2015: £15 million) is mitigated through regular margining and the protection offered by the exchange.
Abbey Life, a Group company, and certain of the Group’s consolidated collective investment schemes lend financial assets held in their investment portfolios to other institutions.
The fair value of financial assets accepted as such collateral but not recognised in the statement of consolidated financial position amounts to £474 million (2015: £272 million).
The maximum exposure to credit risk in respect of stock lending transactions is £446 million (2015: £254 million) of which credit risk of £446 million (2015: £254 million) is mitigated through the use of collateral arrangements.
£200 million 7.25% unsecured subordinated loan (note e) 167 158 207 212 £300 million senior unsecured bond (note f) 298 298 332 324 £450 million revolving credit facility (note g) – 443 – 450 £450 million amortising term loan (note g) – 199 – 200 £900 million unsecured revolving credit facility (note g) 843 – 850 –
b. The Property Reversions loan from Santander UK plc (‘Santander’) was recognised in the consolidated financial statements at fair value. It relates to the sale of Extra-Income Plan policies that Santander finances to the value of the associated property reversions. As part of the arrangement Santander receives an amount calculated by reference to the movement in the Halifax House Price Index and the Group is required to indemnify Santander against profits or losses arising from mortality or surrender experience which differs from the basis used to calculate the reversion amount. Repayment will be on a policy-by-policy basis and is expected to occur over the next 10 to 20 years. During 2016, repayments totalling £27 million were made (2015: £27 million). Note G9 contains details of the assets that support this loan.
f. 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% (‘PGH Capital senior bond’). The senior bond is subject to guarantee by the Company.
g. In March 2016 the Group agreed an amendment of its £900 million 5-year unsecured bank facility (‘PGH Capital facility’), which comprised a £450 million revolving credit facility and a £450 million amortising term loan, into a £650 million unsecured revolving credit facility (‘PGH Capital revolving credit facility’), maturing in June 2020. On 9 November 2016, this facility was fully repaid using proceeds from the rights issue before being drawn down again on 28 December 2016. On the same date the Group drew down a futher £250 million tranche of this facility to finance part of the Abbey Life acquisition, increasing borrowing on the PGH Capital revolving credit facility to £900 million. On 29 December 2016, £50 million of the PGH Capital revolving credit facility was repaid, leaving £850 million outstanding as at 31 December 2016. There are no mandatory or target amortisation payments associated with this facility but prepayments are permissible. The facility accrues interest at LIBOR plus 1.35% p.a., which would change if there were a change in the guarantor’s credit rating. A utilisation fee of 0.40% p.a. is payable in respect of the facility, which would reduce if the amount outstanding under the facility reduced to 67% or below.
h. On 23 January 2015, PGH Capital plc issued £428 million of subordinated notes (‘PGH Capital subordinated notes’) due 2025 at a coupon of 6.625%. Fees associated with these notes of £3 million have been deferred and amortised over the life of the notes in the statement of consolidated financial position. The notes are subject to a subordinated guarantee by the Company. Upon exchange £32 million of these notes were held by Group companies. These Group holdings have subsequently been disposed of during January 2017.
Changes to the Group’s borrowings since 31 December 2016 have been detailed in note I9.
Derivatives are used in many of the Group’s funds, within policy guidelines agreed by the board of each life company and overseen by investment committees of the boards of each life company supported by management oversight committees. Derivatives are primarily used for risk hedging purposes or for efficient portfolio management, including the activities of the Group’s Treasury function.
The Group’s overall exposure to market and credit risk is monitored by appropriate committees, which agree policies for managing each type of risk on an ongoing basis, in line with the investment strategy developed to achieve investment returns in excess of amounts due in respect of insurance contracts. The effectiveness of the Group’s ALM framework relies on the matching of assets and liabilities arising from insurance and investment contracts, taking into account the types of benefits payable to policyholders under each type of contract. Separate portfolios of assets are maintained for with-profit business funds (which includes all of the Group’s participating business), non-linked non-profit funds and unit-linked funds.
Transactions in financial instruments result in the Group assuming financial risks. These include credit risk, market risk and financial soundness risk. Each of these are described below, together with a summary of how the Group manages them.
The impact of non-government fixed and variable rate income securities and, inter alia, the change in market credit spreads during the year is fully reflected in the values shown in these financial statements. Credit spreads are the excess of corporate bond yields over gilt yields to reflect the higher level of risk. Similarly, the value of derivatives that the Group holds takes into account fully the changes in swap rates.
A 100bps widening of credit spreads, with all other variables held constant and no change in assumed expected defaults, would result in a decrease in the profit after tax in respect of a full financial year, and in equity, of £41 million (2015: £55 million).
Quality of credit assets An indication of the Group’s exposure to credit risk is the quality of the investments and counterparties with which it transacts. The following table provides information regarding the aggregate credit exposure split by credit rating (ratings obtained from reputable rating agencies are used in deriving the table below): AAA £m
Reinsurers’ share of insurance contract liabilities 3,954 – – – – – 3,954
Prepayments and accrued income 335 – – – – – 335
During 2016 the Group increased its reinsurance counterparty exposure to RGA International after entering into a £2.0 billion longevity swap arrangement on a portfolio of in-force immediate annuities. The exposure remains within agreed limits.
The reinsurance exposure to ReAssure Life Limited was removed following successful completion of a Part VII Transfer. Further details of this can be found in note F3.1.
The Group manages the levels of market risk that it accepts through the operation of a market risk policy and an approach to investment management that determines: – the constituents of market risk for the Group; – the basis used to fair value financial assets and liabilities; – the asset allocation and portfolio limit structure; – diversification from and within benchmarks by type of instrument and geographical area; – the net exposure limits by each counterparty or group of counterparties, geographical and industry segments; – control over hedging activities; – reporting of market risk exposures and activities; and
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.
In the non-participating funds, policy liabilities’ sensitivity to interest rates are matched primarily with fixed and variable rate income securities and hedging if necessary to match duration, with the result that sensitivity to changes in interest rates is very low.
A decrease of 1% in interest rates, with all other variables held constant, would result in an increase in profits after tax in respect of a full financial year, and in equity, of £319 million (2015: £89 million).
A 10% increase in equity prices, with all other variables held constant, would result in a decrease in profits after tax in respect of a full financial year, and in equity, of £74 million (2015: £46 million).
A 10% decrease in property prices, with all other variables held constant, would result in a decrease in profits after tax in respect of a full financial year, and in equity, of £4 million (2015: £21 million).
Currency risk The Group’s principal transactions are carried out in sterling and therefore its exchange risk is limited principally to historical 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.
Financial soundness risk is a broad risk category encompassing capital management risk, tax risk, and liquidity and funding risk.
Tax risk is defined as the risk of financial or reputational loss arising from a lack of liquidity, funding or capital due to an unforeseen tax cost, or by the inappropriate reporting and disclosure of information in relation to taxation. Tax risk is managed by maintaining an appropriately staffed tax team who have the qualifications and experience to make judgements on tax issues, augmented by advice from external specialists where required. The Group has a formal tax risk policy, which sets out its risk appetite in relation to specific aspects of tax risk, and which details the controls the Group has in place to manage those risks. These controls are subject to a regular review process. The Group’s subsidiaries have exposure to tax risk through the annual statutory and regulatory reporting and through the processing of policyholder tax requirements. The UK government has confirmed restrictions on the rules relating to the loss absorbing capacity of deferred tax will be introduced in 2017. Surplus assets have been retained within the Group to mitigate any potential adverse impact of the change.
Payables related to direct insurance contracts 364 – – – 364
Other payables 677 – – – 677 1 These financial liabilities are disclosed at their undiscounted value and therefore differ from the statement of consolidated financial position which discloses the discounted value.
Contracts are classified as insurance contracts where the Group accepts significant insurance risk from the policyholder by agreeing to compensate the policyholder if a specified uncertain event adversely affects the policyholder.
– reinsurance recoveries are measured on a basis that is consistent with the valuation of the liability to policyholders to which the reinsurance applies.
Where it is not possible to apportion the future profits on this nonparticipating business to policyholders, the PVFP on this business is recognised as an intangible asset and changes in its value are recorded as a separate item in the consolidated income statement (see note G7).
Reinsurance premiums payable in respect of certain reinsured individual and group pensions annuity contracts are payable by quarterly instalments and are accounted for on a payable basis. Due to the period of time over which reinsurance premiums are payable under these arrangements, the reinsurance premiums and related payables are discounted to present values using a pre-tax risk-free rate of return. The unwinding of the discount is included as a charge within the consolidated income statement.
Less amounts classified as held for sale (see note I1) – – (1,587) (1,521)
Amounts due for settlement after 12 months 42,401 3,478 37,337 3,909
On 31 July 2014, the Group entered into a business transfer agreement with ReAssure Life Limited (formerly Guardian Assurance Limited (see note I1.1). The transfer was initially effected under a reinsurance agreement effective from 1 January 2014.
Prior to the Part VII, 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.
Where the Group receives collateral in the form of marketable financial instruments which it is not permitted to sell or re-pledge except in the case of default, it is not recognised in the statement of consolidated financial position. The fair value of financial assets accepted as collateral for reinsurance transactions but not recognised in the statement of consolidated financial position amounts to £3,780 million (2015: £4,909 million). The decrease is largely driven by the Part VII transfer of business previously reinsured to ReAssure Life Limited (see note F3.1).
Where the Group receives collateral on reinsurance transactions in the form of cash it is recognised in the statement of consolidated financial position along with a corresponding liability to repay the amount of collateral received, disclosed as ‘Deposits received from reinsurers’. The amounts recognised as financial assets and liabilities from cash collateral received at 31 December 2016 are set out below.
F4. RISK MANAGEMENT – INSURANCE RISK This note forms one part of the risk management disclosures in the consolidated financial statements. Financial risk is included in note E6.
During 2016, a number of strategic initiatives significantly impacted the Group’s longevity risk exposures. These included the outward longevity swap with RGA International, the Part VII Transfer to ReAssure Life Limited and the acquisition of Abbey Life.
Sensitivities Insurance liabilities are sensitive to changes in risk variables, such as prevailing market interest rates, currency rates and equity prices, since these variations alter the value of the financial assets held to meet obligations arising from insurance contracts and changes in investment conditions also have an impact on the value of insurance liabilities themselves. Additionally, insurance liabilities are sensitive to the assumptions which have been applied in their calculation, such as mortality and lapse rates. Sometimes allowance must also be made for the effect on future assumptions of management or policyholder actions in certain economic scenarios. This could lead to changes in assumed asset mix or future bonus rates. The most significant non-economic sensitivities arise from mortality, longevity and lapse risk.
An increase of 5% in assurance mortality, with all other variables held constant, would result in a decrease in profits after tax in respect of a full year, and a decrease in equity of £41 million (2015: £12 million).
A decrease of 5% in annuitant longevity, with all other variables held constant, would result in an increase in profits after tax in respect of a full year, and an increase in equity of £127 million (2015: £99 million).
An increase of 5% in annuitant longevity, with all other variables held constant, would result in a decrease in profits after tax in respect of a full year, and a decrease in equity of £128 million (2015: £99 million).
An increase of 25% in lapse rates, with all other variables held constant, would result in an increase in profits after tax in respect of a full year, and an increase in equity of £36 million (2015: £76 million).
– For non-participating insurance contract liabilities, the Group has previously used a valuation rate of interest and adjusted the liability discount rate by reference to the yield on the assets backing the liabilities to account for credit, default and reinvestment risk. The Group now makes an explicit adjustment to the risk-free rate to adjust for illiquidity in respect of assets backing illiquid liabilities. The new approach does not take any additional credit for investment margins compared to the previous methodology.
– For non-participating insurance contract liabilities, the Group previously derived demographic assumptions by adding an implicit prudent margin to best estimate assumptions. The Group has amended its approach in this regard and now sets assumptions at management’s best estimates and recognises an explicit margin for demographic risks. For participating business in realistic basis companies, the assumptions about future demographic trends continue to represent ‘best estimates’.
The assumption changes have been made to align the IFRS basis more closely with the requirements of Solvency II removing the volatility that would otherwise arise from the use of reference rates that differ across reporting bases and aligning the calculation of liquidity premiums with that performed under Solvency II.
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 liabilities 2016 £m
Lapse and surrender rates (persistency) The assumed rates for surrender and voluntary premium discontinuance depend on the length of time a policy has been in-force and the relevant company. Surrender or voluntary premium discontinuances are only assumed for realistic basis companies. Withdrawal rates used in the valuation of with-profit policies are based on observed experience and adjusted when it is considered that future policyholder behaviour will be influenced by different considerations than in the past. In particular, it is assumed that withdrawal rates for unitised with-profit contracts will be higher on policy anniversaries on which Market Value Adjustments do not apply.
Most with-profit contracts give a guaranteed minimum payment on a specified date or range of dates or on death if before that date or dates. For pensions contracts, the specified date is the policyholder’s chosen retirement date or a range of dates around that date. For endowment contracts, it is the maturity date of the contract. For with-profit bonds it is often a specified anniversary of commencement, in some cases with further dates thereafter. Annual bonuses when added to with-profit contracts usually increase the guaranteed amount.
With-profit funds: Pensions: Deferred annuities – with guarantees 8,576 144 499 –
The tables above exclude insurance contract liabilities and related reinsurer’s share of insurance contract liabilities classified as held for sale at 31 December 2016 and 31 December 2015.
The Group has significant discretion regarding investment policy, bonus policy and early termination values. The process for exercising discretion in the management of the with-profit funds is set out in the PPFM for each with-profit fund and is overseen by With-Profit committees. Advice is also taken from the with-profit actuary of each with-profit fund. Compliance with the PPFM is reviewed annually and reported to the PRA, Financial Conduct Authority (‘FCA’) and policyholders.
Following the acquisition and reinsurance of AXA Wealth’s pension and protection business, the Group is exposed to increased mortality and new business pricing risk, although this provides a natural hedge to the annuity business.
In 2015, PA(GI), a subsidiary of the Group, was subject to a Companies Court judgement that directed that PA(GI) is liable to claimants for redress relating to creditor insurance policies within a book of insurance underwritten by PA(GI) until 2006. As a consequence, PA(GI) is liable for complaint handling and redress with regard to the complaints.
On 3 March 2016, the FCA published a thematic review report on the fair treatment of long-standing customers in the life insurance sector. Following completion of the review, Abbey Life is subject to additional investigations. Specifically, the FCA is exploring whether remedial and/or disciplinary action is necessary or appropriate in respect of exit or paid-up charges being applied. Additionally, Abbey Life is being investigated for potential contravention of regulatory requirements across a number of other areas assessed in the thematic review. The FCA has confirmed that these investigations have been commenced in order to enable the FCA to establish the reasons for the practices within firms and determine whether customers have suffered detriment as a result. No conclusion has been reached as to whether there have been any breaches of regulatory requirements. The commencement of investigations itself therefore cannot be taken to indicate that disciplinary action against Abbey Life will result nor does it indicate that a penalty will inevitably be imposed or that redress will be payable.
Following the acquisition of the AXA businesses in the period, the Group is committed to the restructuring of these businesses to align their operating model with that of the other Group companies. These activities will involve separation and integration activities associated with the exiting of interim services agreements entered into with the vendor, and costs involved with implementing the Group’s preferred outsourcer model. A provision of £30 million has been recognised in respect of management’s best estimate of these costs as at 31 December 2016. The provision is expected to be utilised within 18 months.
Expenses and deferred acquisition costs carried forward 16 (13) – – 3
The Finance Act 2014 set the rate of corporation tax at 20% from 1 April 2015. Finance (No. 2) Act 2015 reduced the rate of corporation tax to 19% in April 2017 and 18% from 1 April 2020. Finance Act 2016 reduced the corporation rate further to 17% from 1 April 2020. Consequently a blended rate of tax has been used for the purposes of providing for deferred tax in these financial statements.
Deferred tax assets not recognised on capital losses1 18 89 1 These can only be recognised against future capital gains and have no expiry date.
Payables related to direct insurance contracts are recognised when due and are measured on initial recognition at the fair value of the consideration payable. Subsequent to initial recognition, these payables are measured at amortised cost using the effective interest rate method.
As required by IFRIC 14, IAS 19 – ‘The limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction’, to the extent that the economic surplus will be available as a refund, the economic surplus is stated after a provision for tax that would be borne by the scheme administrators when the refund is made. The Group recognises a pension surplus on the basis that it is entitled to the surplus of each scheme in the event of a gradual settlement of the liabilities, due to its ability to order a winding-up of the Trust.
This note describes the Group’s three main staff pension schemes for its employees, the Pearl Group Staff Pension Scheme, the PGL Pension Scheme, and the Abbey Life Staff Pension Scheme and explains how the pension asset/liability is calculated.
Provision for tax on that part of the economic surplus available as a refund on a winding-up of the Scheme (157) (97)
Economic surplus (including £387 million (2015: £570 million) available as a refund on a winding-up of the Scheme) 465 631
Provision for tax on that part of the economic surplus available as a refund on a winding-up of the Scheme (135) (199)
The Group’s defined benefit schemes typically expose the Group to a number of risks, the most significant of which are: – Asset volatility – the value of the schemes’ assets will vary as market conditions change and as such is subject to considerable volatility. The volatility in the schemes’ assets can be caused by both volatility within the markets or variations in the return achieved by the schemes’ investment managers relative to market performance. In particular there is the risk that the variation in asset values will not be in line with the variation in pension liability values, and as such differences in the nature and duration of the assets and liabilities can cause difference in the way that the assets and liabilities vary.
– Life expectancy – the majority of the schemes’ obligations are to provide benefits for the life of the member, so increases in life expectancy will result in an increase in the liabilities.
Contributions in the year amounted to £1 million (2015: £1 million).
On 27 November 2012, the principal employer and the Trustee of the Pearl Scheme entered into a revised pensions funding agreement (the ‘Pensions Agreement’), the principal terms of which have not been altered following the 30 June 2015 triennial valuation. The principal terms of the Pensions Agreement are: – annual cash payments into the scheme of £70 million in 2013 and 2014 payable on 30 September, followed by payments of £40 million each year from 2015 to 2021. It is expected that the timing of payment of contributions will change during 2017 so that the contributions will be paid on a monthly basis. The Pensions Agreement includes a sharing mechanism, related to the level of dividends paid out of PGH2, that in certain circumstances allows for an acceleration of the contributions to be paid to the Pearl Scheme; – additional contributions may become payable if the scheme is not anticipated to meet the two agreed funding targets: (i) to reach full funding on the technical provisions basis by 30 June 2022; and
– covenant tests relating to the embedded value of certain companies with the Group.
Summary of amounts recognised in the consolidated financial statements The amounts recognised in the consolidated financial statements are as follows: Fair value of scheme assets £m
Gain from changes in demographic assumptions – 55 – – 55
Change in minimum funding requirement obligation – – – 15 15
Obligations for repayment of stock lending collateral received (1,221) – (1,227) –
The actual return on plan assets was a gain of £537 million (2015: £3 million loss).
The Group ensures that the investment positions are managed within an asset liability matching (‘ALM’) framework that has been developed to achieve long-term investments that are in line with the obligations under the Pearl Scheme. Within this framework an allocation of 25% of the scheme assets is invested in collateral for interest rate and inflation rate hedging where the intention is to hedge greater than 90% of the interest rate and inflation rate risk measured on the technical provisions basis.
Defined benefit obligation The calculation of the defined benefit obligation can be allocated to the scheme’s members as follows: – Deferred scheme members: 38% (2015: 40%)
Principal assumptions The principal financial assumptions of the Pearl Scheme are set out in the table below: Rate of increase for pensions in payment (5% per annum or RPI if lower) 3.05 2.95
It has been assumed that post-retirement mortality is in line with a scheme-specific table which was derived from the actual mortality experience in recent years based on the SAPS standard tables for males and for females based on year of use. Future longevity improvements are based on CMI 2014 Core Projections and a long-term rate of improvement of 2% p.a. up to and including age 75 then decreasing linearly to 0% p.a. at age 110. Under these assumptions, the average life expectancy from retirement for a member currently aged 40 retiring at age 60 is 31.0 years and 33.1 years for male and female members respectively.
Impact on the defined benefit obligation (£m) 2,237 (86) 91 60 (56) 63 (62)
The defined benefit section of the PGL Pension Scheme is a final salary arrangement which is closed to new entrants and has been closed to future accrual by active members since 1 July 2011.
In December 2016, the PGL Pension Scheme entered into a ‘buy-in’ agreement with PLL, which converted the longevity swap contract into a bulk annuity contract, covering both longevity and investment risk. The Scheme transferred £1,164 million of plan assets to a collateral account over which PLL has a fixed charge. The assets transferred to PLL are recognised in the relevant line within financial assets in the consolidated statement of financial position (see note E1). The transfer of the assets constituted the payment of the premium to PLL and a simultaneous deposit of collateral by PLL, and was net of a £23 million prepayment by PLL to the scheme in respect of benefits up to 31 May 2017. An adjustment of £6 million to the value of the premium is due to be paid by PLL to the PGL Scheme in 2017. The economic effect of the ‘buy-in’ transaction in the Scheme is to replace the plan assets transferred with a single line insurance policy reimbursement asset which is eliminated on consolidation. The value of this insurance policy at 31 December 2016 was £892 million.
Included within insurance policies with Group entities of £913 million is a further insurance policy reimbursement asset of £21 million (2015: £22 million) which was also eliminated on consolidation.
At the same time as the buy-in transaction, there was a rule change made with respect to pre-1997 excess benefits for members of the Phoenix section of the PGL Scheme. Pensions increases will now be increased in line with CPI inflation subject to a maximum of 5% p.a. Prior to this, members received discretionary increases in payment on these benefits with the discretionary increases not allowed for in the defined benefit obligation. The financial impact of this change has been to recognise an increase in the defined benefit obligation of £6 million, and a past service cost in the consolidated income statement.
Loss from changes in financial assumptions – (289) – – (289)
Change in minimum funding requirement obligation – – – 5 5
Scheme assets transferred as premium for buy-in transaction (1,164) – – – (1,164)
The actual return on plan assets was £425 million (2015: £33 million).
Defined benefit obligation The calculation of the defined benefit obligation can be allocated to the scheme’s members as follows: – Deferred scheme members: 39% (2015: 39%)
The principal financial assumptions of the PGL Pension Scheme are set out in the table below: Rate of increase for pensions in payment (7.5% per annum or RPI if lower} 3.25 3.10
It has been assumed that post-retirement mortality is in line with 86%/94% of S1PA base tables with future longevity improvements in line with CMI 2014 Core Projections and a long-term rate of improvement of 2% p.a. up to and including age 75 then decreasing linearly to 0% at age 110. Under these assumptions, the average life expectancy from retirement for a member currently aged 40 retiring at age 62 is 27.7 years and 29.5 years for male and female members respectively.
Scheme details The Abbey Life Staff Pension Scheme (‘the Abbey Life Scheme’) was consolidated into the Group statement of financial position following the acquisition of Abbey Life Assurance Company Limited (‘Abbey Life’) (see note H2.2). The scheme is a defined benefit scheme which is currently open to future accrual. The Abbey Life Scheme is a registered occupational pension scheme, set up under Trust, and legally separate from the employer Abbey Life. The scheme is administered by Abbey Life Trust Securities Limited (‘The Trustee’), a corporate trustee. There are four Trustee Directors, two of whom are nominated by the scheme members and two of whom are appointed by Abbey Life. The Trustee is responsible for administering the scheme in accordance with the trust deed and rules and pensions laws and regulations.
Under the terms of the 2016 Funding Agreement dated 23 June 2016, the funding position of the Scheme will be assessed as at 31 March 2027. A payment will be made from the 2016 Charged Account to the Scheme if the results of the assessment reveal a shortfall calculated in accordance with the terms of the 2016 Funding Agreement. The amount of the payment will be the lower of the amount of the shortfall and the amount held in the 2016 Charged Account.
Principal assumptions The principal financial assumptions of the Abbey Life Scheme are set out in the table below: Rate of increase for pensions in payment 3.05
The discount rate and inflation assumptions have been determined by considering the shape of the appropriate yield curves and the duration of the Abbey Life Scheme liabilities. This method determines an equivalent single rate for each of the discount and inflation rates, which is derived from the profile of projected benefit payments.
Impact on the defined benefit obligation (£m) 324 (14) 15 11 (11) 10 (10)
Insurance and investment contracts with DPF acquired in business combinations and portfolio transfers are measured at fair value at the time of acquisition. The difference between the fair value of the contractual rights acquired and obligations assumed and the liability measured in accordance with the Group’s accounting policies for such contracts is recognised as acquired in-force business. This acquired in-force business is amortised over the estimated life of the contracts on a basis which recognises the emergence of the economic benefits.
The value of acquired in-force business related to investment contracts without DPF is recognised at its fair value and is amortised on a diminishing balance basis.
The present value of future profits is determined on a realistic basis.
Brands acquired in a business combination are recognised at fair value at the acquisition date, and measured on initial recognition at cost. Brands have finite lives and are carried at cost less amortisation. Amortisation is calculated using the straight-line method to allocate the cost of brands over their estimated useful lives. They are tested for impairment annually or when there is evidence of possible impairment. For impairment testing, they are allocated to the relevant cash generating unit. Brands are impaired when the recoverable amount is less than the carrying value.
On acquisition of AXA businesses (see note H2.1) 10 38 – – 20 20 68
On acquisition of Abbey Life (see note H2.2) 8 180 – – – – 188
Amortisation charge for the year – (84) (15) – (15) (99)
Impairment charge for the year – (64) – – – (64)
The carrying value of goodwill has been tested for impairment at the year-end. No impairment has resulted as the value in use of this intangible continues to exceed its carrying value.
£39 million of the goodwill is attributable to the management services business of the Phoenix Life segment. Value in use has been determined as the present value of certain future cash flows associated with this business. The cash flows used in this calculation have been valued using a discount rate of 7.7% (2015: 9.0%) and are consistent with those adopted by management in the Group’s operating plan and, for the period 2021 and beyond, reflect the anticipated run-off of the Phoenix Life insurance business. The underlying assumptions of these projections include management’s best estimates with regards to longevity, persistency, mortality and morbidity.
Acquired in-force business on insurance contracts and investment contracts with DPF represents the difference between the fair value of the contractual rights under these contracts and the liability measured in accordance with the Group’s accounting policies for such contracts. This intangible is being amortised in accordance with the run-off of the book of business.
Investment property is stated at fair value. Fair value is the price that would be received to sell a property in an orderly transaction between market participants at the measurement date. Gains and losses arising from the change in fair value are recognised in the consolidated income statement.
On loss of control of UKCPT (see note H3) (1,308) –
Investment properties also include £202 million (2015: £210 million) of property reversions arising from sales of the NPI Extra Income Plan (see note E5 for further details).
The residential property reversions, an interest in customers’ properties which the Group will realise upon their death, are valued using a DCF model based on the Group’s proportion of the current open market value, and discounted for the expected lifetime of the policyholder. The open market value is measured by independent local property surveyors having appropriate recognised professional qualifications with reference to the condition of the property and local market conditions. The individual properties are valued triennially and indexed using regional house price indices to the 31 December 2016. The discount rate is a risk-free rate appropriate for the duration of the asset, adjusted for liquidity and mortality risk. Assumptions are also made in the valuation for future movements in property prices. The residential property reversions have been substantially refinanced under the arrangements with Santander as described in note E5.
The estimated fair value of the commercial properties held by life companies would increase (decrease) if: – the expected income were to be higher (lower); or
The fair value of the residential property reversions (held by life companies) would increase (decrease) if the market value of the property were to be higher (lower) or the life expectancy of the policyholders were to increase (decrease). The fair value is also sensitive to discount rate and house prices as follows: – an increase of 1% in house price inflation would increase the fair value by £11 million (2015: £11 million); – a decrease of 1% in house price inflation would decrease the fair value by £10 million (2015: £11 million); – an increase of 1% in the discount rate would decrease the fair value by £10 million (2015: £10 million); – a decrease of 1% in the discount rate would increase the fair value by £10 million (2015: £11 million).
Direct operating expenses (offset against rental income in the consolidated income statement) in respect of investment properties that generated rental income during the year amounted to £1 million (2015: £5 million). The direct operating expenses arising from investment property that did not generate rental income during the year amounted to £2 million (2015: £3 million).
Future minimum lease rental receivables in respect of non-cancellable operating leases on investment properties were as follows: 2016 £m
Later than 5 years 48 50 * 2015 balances have been restated following a methodology change in valuation.
All deposits are subject to fixed interest rates. The carrying amounts approximate to fair value at the period end. Cash and cash equivalents in longterm business operations and collective investment schemes of £1,517 million (2015: £3,836 million) are primarily held for the benefit of policyholders and so are not generally available for use by the owners.
For such collective investment schemes, the following circumstances may indicate, in substance that the Group has power over the investee: – where the investee is managed by fund managers outside the Group, the Group has existing substantive rights (such as power of veto and liquidation rights) that give it the ability to direct the current activities of the investee. In assessing the Group’s ability to direct an investee the Group considers its ability relative to other investors.
The ability of subsidiaries to transfer funds to the Group in the form of cash dividends or to repay loans and advances is subject to local laws, regulations and solvency requirements.
In addition, contractual requirements may place restrictions on the transfer of funds as follows: – the Pearl Pension Scheme funding agreement includes certain covenants which restrict the transfer of funds within the Group. Details are provided in note G6.
The table below summarises the fair value of the identifiable assets acquired and liabilities assumed as at the date of acquisition: Notes Fair value £m
The fair value of contractual rights acquired in respect of investment contracts without DPF has been assessed as £116 million and is recognised within AVIF.
Deferred acquisition and origination costs of £237 million and deferred front end fees of £(69) million are derecognised on acquisition, and are replaced by the recognised AVIF balance.
Transaction costs Transaction costs of £12 million have been expensed and are included in administrative expenses in the consolidated income statement. £10 million of these costs were paid during the period.
On 30 December 2016, the Group acquired 100% of the issued share capital of Abbey Life Assurance Company Limited, Abbey Life Trustee Services Limited and Abbey Life Trust Securities Limited from Deutsche Holdings No.4 Ltd (a wholly owned subsidiary of Deutsche Bank AG) for total cash consideration of £933 million. Abbey Life carries on long-term insurance business and has been closed to new retail business since 2000. The acquisition of Abbey Life will benefit the Group by increasing long-term cash generation and strengthening Group solvency.
The table below summarises the fair value of the identifiable assets acquired and liabilities assured as at the date of acquisition: Notes Fair value £m
Analysis of cash flows on acquisition: Net cash acquired with the subsidiaries (included in cash flows from investing activities) 51
Goodwill The residual goodwill of £8 million is not considered to be tax deductible and is primarily attributed to synergies arising from combining the operations with the rest of the Group.
Transaction costs Transaction costs of £19 million have been expensed and are included in administrative expenses in the consolidated income statement. £4 million of these costs were paid during the period.
In February 2016, the Group reduced its holding in the issued share capital of UKCPT to 48.9%. The Group deems that it no longer controls its investment in UKCPT as it no longer has a unilateral power of veto in general meetings and also because the Group is restricted by the terms of the existing relationship agreement it has with UKCPT. Consequently, UKCPT has been deconsolidated from the date of this loss of control. No gain or loss arose on this effective disposal. The Group’s investment in UKCPT is now treated as an associate and held at fair value.
Net assets disposed of were as follows: Carrying amount on the date of loss of control £m
The Group’s holdings in the above investments are subject to the terms and conditions of the respective fund’s prospectus and are susceptible to market price risk arising from uncertainties about future values. The Group holds redeemable shares or units in each of the funds. The funds are managed by internal and external fund managers who apply various investment strategies to accomplish their respective investment objectives. All of the funds are managed by fund managers who are compensated by the respective funds for their services. Such compensation generally consists of an asset-based fee and a performance-based incentive fee and is reflected in the valuation of each fund.
At 31 December 2016, the Group has granted further loans to the PGH EBT of £7 million (2015: £6 million). Further loans are expected to be granted in 2017. Details of this loan are included in note 9 to the parent company financial statements.
Collective investment schemes: Directly held collective investment schemes¹: Short-term liquidity 8,052 1,932
2 Indirectly held collective investment schemes are those interests in structured entities that are held by collective investment schemes over which it has been assessed that the Group exercises overall control and have been consolidated into the financial statements.
H5. GROUP ENTITIES The table below sets out the Group’s subsidiaries (including collective investment schemes that have been consolidated within the Group’s financial statements), joint ventures, associates and significant holdings in undertakings (including undertakings where holding amounts to 20% or more of the nominal value of the shares or units and they are not classified as a subsidiary, joint venture or associate).
Abbey Life Assurance Company Limited (life assurance company) Wythall1 Ordinary shares 100.00%
AXA Wealth Services Limited (management services company) Wythall1 Ordinary shares 100.00%
AXA Trustee Services Limited (management services company) Wythall1 Ordinary shares 100.00%
Pearl Group Holdings (No. 1) Limited (finance company) London7 Ordinary shares 100.00%
PGMS (Ireland) Limited (management services company) Republic of Ireland8 Ordinary shares 100.00%
Britannic Finance Limited (finance and insurance services company) Wythall1 Ordinary shares 100.00%
Phoenix Unit Trust Managers Limited (unit trust manager) Wythall1 Ordinary shares 100.00%
PGMS (Ireland) Holdings (holding company) Republic of Ireland8 Ordinary shares 100.00%
The London Life Association Limited (dormant company) Wythall1 Limited by guarantee N/A
The Phoenix Life SCP Institution (dormant company) Glasgow10 Limited by guarantee N/A
Henderson Institutional Mainstream UK Equity Trust London14 Authorised unit trust 100.00%
Henderson Strategic Investment Funds – Henderson Institutional European Index Opportunities Fund
Henderson Strategic Investment Funds – Henderson Institutional Asia Pacific Ex Japan Index Opportunities Fund
PUTM Bothwell Fixed ABS Sterling Hedged Fund Wythall1 Authorised unit trust 100.00%
PUTM Bothwell Asia Pacific (Excluding Japan) Fund Wythall1 Authorised unit trust 99.27%
PUTM Bothwell Emerging Market Debt Unconstrained Fund Wythall1 Authorised unit trust 100.00%
PUTM Bothwell Credit Financial Sterling Hedged Fund Wythall1 Authorised unit trust 100.00%
PUTM Bothwell UK Equity Smaller Companies Fund Wythall1 Authorised unit trust 99.65%
PUTM Bothwell UK Equity 350 Fund Wythall1 Authorised unit trust 99.52%
Ignis Liquidity Fund plc – Sterling Short Duration Cash Fund Republic of Ireland8 OEIC, sub fund 94.74%
AB SICAV I – Global Factor Portfolio (SF1) Luxembourg17 OEIC, sub fund 52.90%
Significant holdings: Henderson Global Funds – World Select Fund London14 OEIC, sub fund 29.66%
Henderson Institutional High Alpha UK Equity Fund London14 Authorised unit trust 34.72%
15 Ugland House, Grand Cayman, Cayman Islands, KY1-1104 16 12 Throgmorton Avenue, London, EC2N 2DL
The following joint venture and subsidiary were fully disposed of during the period. The subsidiary was deconsolidated from the date of disposal: – Pearl Breakfast Unit Trust (Jersey Property Unit Trust) (Joint Venture).
– decrease in value of fixed and variable rate income securities.
The following UKCPT companies were reclassified as associates due to a loss of effective control (see note H3) in the period: – UK Commercial Property Trust Limited.
Details of subsidiaries acquired during the period are included in note H2.
Assets classified as held for sale: Reinsurers' share of insurance contract liabilities – 1,521
At 31 December 2015 the Group invested in an investment property joint venture which was held by the Pearl Breakfast Unit Trust. In 2015 the Group committed to selling the Pearl Breakfast Unit Trust (and consequently its investment in the joint venture) and on 25 February 2016 the units in the Pearl Breakfast Unit Trust were sold at their fair value to Tesco Property Holdings (No.2) Limited and Tesco Property Holdings Limited. As part of the sale agreement Tesco plc also purchased the Group’s investment in Tesco Property Partner (GP) Limited. No gain or loss arose on this disposal.
The expense recognised for employee services receivable during the year is as follows: £m £m
Long-Term Incentive Plan (‘LTIP’) The Group implemented a long-term incentive plan to retain and motivate its senior management group. The awards under this plan are in the form of nil-cost options to acquire an allocated number of ordinary shares. Assuming no good leavers or other events which would trigger early vesting rights, the 2013, 2014 and 2015 LTIP awards are subject to performance conditions tied to the Company’s financial performance over a three-year period in respect of growth in MCEV (up to 31 December 2015), growth in Own Funds (from 1 January 2016), cumulative cash generation and total shareholder return (‘TSR’). The 2016 LTIP award is subject to performance conditions tied to the Company’s performance in respect of cumulative cash generation and TSR.
For all LTIP awards made from 2015 onwards, a holding period applies so that any LTIP awards for which the performance vesting requirements are satisfied will not be released for a further two years from the third anniversary of the original award date. Dividends will accrue on LTIP awards until the end of the holding period. There are no cash settlement alternatives.
The fair value of these awards is estimated at the share price at the grant date, taking into account the terms and conditions upon which the instruments were granted. The fair value is adjusted in respect of the TSR performance condition which is deemed to be a ‘market condition’.
The 2011 and 2012 sharesave awards were increased during 2013, and the exercise prices updated, as a result of the equity raising on 21 February 2013. All sharesave awards were increased in November 2016 following the Group’s rights issue (see note D1). The exercise price of these awards was also amended as a result of this issue. The 2016 sharesave awards were granted on 25 April 2016.