STRATEGIC REPORT What we do 2 Why invest in us? 3 Our purpose and strategy 4 Delivering cash 6 Delivering resilience 8 Delivering growth 10 Chairman’s statement 12 Group Chief Executive Officer’s report 14 Market trends 18 Our business model 20 Our strategic priorities and KPIs 26 Business review 46 Stakeholder engagement 58 Task Force on Climate-related Financial Disclosures 67 SECR statement 77 Risk management 79 Viability statement 90
Board activities for 2020 96 Board composition, experience and biographies 98
Executive management team 101 The Board’s COVID-19 response 102 The Board Sustainability Committee 103 Board engagement with colleagues 104 ReAssure case study – our M&A strategy in action 106 Our stakeholders and the Board’s application of section 172 108
Board education 113 Board Risk Committee report 114 Board Audit Committee report 116 Nomination Committee report 122 Directors’ remuneration report 124 Directors’ report 159 Statement of Directors’ responsibilities 163
IFRS profit after tax £13.4bn 2020 pro forma* (2019 pro forma: £14.1bn)
All amounts throughout the report marked with REM are KPIs linked to Executive remuneration. See Directors’ remuneration report on page 124.
* 2020 pro forma Group long-term free cash includes £(0.2)bn adverse impact of disposal of Wrap SIPP, Onshore Bond and TIP products to Standard Life Aberdeen and £(0.3)bn adverse impact in relation to the expected increase in the rate of corporation tax from April 2023 to 25% announced in the March 2021 budget.
Read more about our strategic priorities and KPIs page 26 to 45
We will focus on delivering against our strategic priorities and managing the business to deliver cash, resilience and growth.
We are a constituent of the FTSE 100 with c.7,500 colleagues and offer a broad range of products to support people across all stages of the savings life cycle.
OPEN Our Open business operates products that are actively marketed to new and existing customers.
The Open business comprises five separate business units including our Workplace pensions and Customer Savings & Investments (‘CS&I’) units both of which operate under the Standard Life brand, the Retirement Solutions unit that includes both vesting annuities and our Bulk Purchase Annuity (‘BPA’) business, as well as our over-50s brand ‘SunLife’ and our European business operating in Ireland and Germany.
Read more about our operating structure page 22 2 Phoenix Group Holdings plc Annual Report & Accounts 2020
Growth of our Open business will offset the run-off of our in-force business
CASH We deliver high levels of dependable cash generation which supports our dividend over the long term.
RESILIENCE Our unique risk management framework delivers resilience across all of our in-force business.
GROWTH We also generate surplus capital with excess cash to invest in growth options which are aligned to the industry drivers of change.
MARKET-LEADING COST EFFICIENCY Our optimised operating model delivers an enhanced customer experience and significant cost efficiencies within our business.
BROAD, DIVERSIFIED PRODUCT RANGE A diversified insurance business drives capital efficiency across both our Heritage and Open businesses.
PASSION Making a positive impact by caring about customers, colleagues and communities.
DIFFERENCE Collaborating and finding strength through respecting and embracing new perspectives.
‘Cash is king’ at Phoenix, with cash generated by our Life Companies and remitted to Group our key performance metric.
The majority of our ‘organic’ cash generation comes from the emergence of surplus as our in-force business runs off over time and capital unwinds. However, we also have a strong track record of delivering management actions which increase free surplus and therefore enhance this organic cash generation.
Phoenix operates a dynamic risk management framework which seeks to manage our exposure to each of the risks that the Group faces within its risk appetite.
This is achieved through a combination of asset liability management and risk-reduction actions like hedging and reinsurance.
This approach to risk management results in Phoenix being less sensitive to risk events than the majority of its peers.
We articulate our risk appetite through a target Shareholder Capital Coverage Ratio range of 140% to 180% and manage our key individual risk sensitivities within this range also.
Phoenix has a range of growth options across both its Heritage and Open businesses that bring sustainability and the potential for future growth to long-term cash generation.
Our growing Open business is focused on both deepening the relationship with our existing customers and acquiring new customers.
A YEAR OF SIGNIFICANT PROGRESS Under Andy’s leadership, Phoenix is evolving from being a financial consolidator to a purpose-led business with a clear role in society.
The Board recognises that Phoenix has a pivotal role to play as the country navigates the shifting pensions and savings landscape and is committed to fulfilling our purpose of helping people secure a life of possibilities.
LOOKING AHEAD After a very successful year, we look towards the future with optimism. Phoenix’s market leading Heritage and thriving Open businesses, combined with a strategy that is closely aligned to our industry’s trends, ensure the Group is well positioned to take advantage of emerging opportunities. Phoenix is growing a strong and resilient business to help more people on their journey to and through retirement.
THANK YOU Finally, I would like to take the opportunity to thank the Board, my colleagues, our partners and our stakeholders for their hard work and dedication in what has been another successful, albeit challenging, year.
DELIVERING CASH, RESILIENCE AND GROWTH Phoenix has continued its 11-year unbroken track record of delivering against all of its publicly stated financial targets. With £1.7 billion of cash generation in 2020, we exceeded the upper end of our target range of £1.5 to £1.6 billion. We also maintained our strong capital position reflected in a Solvency II surplus of £5.3 billion and a Shareholder Capital Coverage Ratio (SCCR) of 164%.
The growth of our Open business has continued at pace, with strong new business generating £766 million of incremental long-term cash, a 59% increase from 2019 and significant progress towards proving ‘the wedge’. Retirement Solutions was the largest contributor during the year at £522 million, where our Bulk Purchase Annuity (BPA) business growth is accelerating and we also made further progress in reducing our external deal capital strain having reduced it to 8%.
SUPPORTING OUR CUSTOMERS, COLLEAGUES AND COMMUNITIES 2020 has been an unprecedented year for all of us due to the global health crisis caused by the COVID-19
The resilience of our business model and the dependable cashflows we generate enabled the Board to approve the payment of our planned dividends throughout 2020, against a backdrop of paused or cancelled dividends across the wider market. This positions Phoenix in the top-30 largest ‘dividend payers’ in the FTSE 100 and is testament to our sustainable dividend.
A CLEAR ROLE TO PLAY IN SOCIETY It is clear that there is a significant shift in macro and demographic trends that is driving profound change in the UK’s long-term savings and pensions market. The market is increasingly complex and people need more support than ever as they journey to and through retirement.
Phoenix therefore has a pivotal role to play as the country navigates the shifting pensions landscape. That is why our purpose is helping people secure a life of possibilities. This means providing the right guidance and products, at the right time, to support the right choices, across the savings life cycle.
I passionately believe that businesses with the best people, focused on their purpose and their role in society, deliver better customer outcomes, and in turn, stronger returns for shareholders.
A key part of this is our commitment to achieving net-zero carbon using science-based techniques across the Group’s operations by 2025 and our investment portfolio by 2050. You can find out more about what we are doing here in the case study on page 17.
This will support the ongoing development of a range of ESG products across the savings life cycle and follows the launch of a workplace ESG passive default fund in December.
Alongside this, as individuals increasingly incorporate ESG considerations into their long-term savings decisions, we are also focused on fostering responsible investment through the active stewardship of assets on behalf of our clients.
In July we completed the acquisition of ReAssure Group plc and were delighted to welcome c.3,000 new colleagues to our Group. The transaction significantly enhanced Phoenix’s cash generation profile and scale with £7 billion of additional long-term cash generation, £75 billion of AUA and c.4 million customers. The acquisition makes Phoenix the UK’s largest long-term savings and retirement business.
Within our Heritage business we have been improving customer outcomes through ensuring we deliver good value for money for our customers, making continuous improvements to our customer communications to increase engagement, and by proactively tracing and repatriating unclaimed life insurance policies. Our focus on the customer has seen us continue to provide excellent customer service as evidenced by having met or exceeded all of our key customer satisfaction scores in 2020, despite the pandemic challenges.
Meanwhile, the trend to ‘digital first’ is set to further accelerate and become the preferred method of interaction for our customers. We have made significant digital enhancements across
EVOLVING THE PHOENIX STRATEGY Our strategy, which we announced at our Capital Markets Day in December 2020, is one of evolution, not revolution. It builds on the strong foundations that underpin Phoenix’s market leading capabilities and responds to the shifting pensions landscape to deliver future growth.
Phoenix’s strategy is therefore focused on optimising our in-force business to deliver resilient cash generation, deepening the relationships with our c.14 million existing customers by engaging with them and meeting their broader needs, and acquiring new customers through both our Open businesses and M&A as we leverage the industry drivers of change.
Lower for longer interest rates and turbulent equity markets are resulting in insurers continuing to look to free up capital by divesting their legacy or ‘heritage’ books of business to scale players such as Phoenix. As the market leader in the acquisition and management of closed-book life and pensions insurance businesses, Heritage will remain the bedrock of our business. Here we will continue to focus on delivering improved customer outcomes and managing our in-force book for cash and resilience. In addition, our market-leading M&A and integration expertise provide a differentiated capability that will allow us to deliver value from industry consolidation. There is a huge M&A opportunity for us to explore with the UK Heritage market worth £440 billion alone and we have the integration capacity to do the next transaction when it emerges.
OUTLOOK Phoenix is well positioned to leverage the key industry drivers of growth while continuing to optimise its market-leading share of in-force business in the UK long-term savings and retirement market.
Phoenix’s differentiated operating model epitomises the whole being greater than the sum of the parts. Our Open business benefits from a unique set of advantages from operating alongside our Heritage business.
M&A, we would also consider the acquisition of Open books of business if they offered a clear strategic fit.
Within our Open business, we are building on our strong foundations to deliver growth by further strengthening our proposition, deepening the engagement with our large existing customer base and acquiring new customers through our Workplace and BPA businesses. All of which is now enhanced by our ownership of the Standard Life brand, marketing and distribution.
Climate change is one of the biggest global issues we face and in support of the goals of the 1.5° Paris Agreement, Phoenix is committed to becoming net-zero carbon in our operations by 2025 and in our investment portfolio by 2050.
We have devised a clear emission reduction plan for our operations and by the end of 2021 we expect to have 100% renewable energy contracts across all sites, 100% of waste diverted away from landfill and we have set a target to reduce our Scope 1 & 2 emissions by 20% in 2021.
We are also committed to decarbonising our investment portfolios. Through our membership of the Institutional Investors Group on Climate Change (IIGCC), we took part in a pilot to build and test Paris Agreement-aligned portfolios and this has provided valuable insight into how we can look to implement our net-zero investment strategy.
We also see the recommendations of the Task Force on Climate-related Financial Disclosures (‘TCFD’) as an enabler of our net-zero carbon commitment and of the transition to a low-carbon economy.
of the UK population will be >65 by 2043 up from 18% in 2018 8x the number of defined contribution scheme members compared to defined benefit scheme members £24bn of annual flows into workplace schemes in 2019 having tripled since 2012
There is increasing demand from customers for digital solutions for financial management, with digital set to become the normal method of interaction and a key differentiator for attracting new customers.
Uncertainty is forcing people not simply to live for today, but to look further ahead. However, pensions are unsurprisingly seen as complex, and not everyone is saving enough to secure the future they would like.
We are seeing strong growth in auto-enrolment pension contributions following its launch in the UK in 2012 as more people start saving for retirement.
Interest in sustainability is increasingly shaping decisions, as people want their money being put to good use. This includes a focus on climate change and how businesses are responding and taking steps to reduce emissions.
Macro trends are driving profound change and growth in the UK long-term savings and retirement market. We identify six significant trends that inform our strategy: 18 Phoenix Group Holdings plc Annual Report & Accounts 2020
INSURERS ARE CONSOLIDATING Pressure on insurer balance sheets to free up capital trapped in heritage books makes more consolidation likely. This represents a £440 billion M&A opportunity for our Heritage business in the UK market alone.
Phoenix response We remain focused on identifying value-accretive M&A opportunities, where we can leverage our market-leading capabilities in successfully completing transactions, integrating businesses and delivering cost and capital synergies.
INDIVIDUALS ARE RETIRING As responsibility for managing retirement income continues to shift to the individual, people are seeking guidance on their journey to and through retirement, with additional market flows of £30 billion per annum.
Phoenix response By engaging our c.14 million customers to better understand their savings needs we can invest in our proposition to provide innovative solutions that encourage customers to consolidate their pension pots with Phoenix and enables us to retain them after they reach retirement.
STRONG AUTO-ENROLMENT WORKPLACE GROWTH The workplace market has flows of £40 billion per annum and this is growing rapidly, driven by auto-enrolment, an ageing population and the move from defined benefit schemes to defined contribution schemes.
Phoenix response We are an established player in the BPA market and are investing further to develop a market-leading franchise to enable us to grow and expand our business. This will be supported by building a best-in-class asset management capability and improving our capital efficiency.
Looking forward, we see four major market trends which represent significant growth opportunities for Phoenix: 19Phoenix Group Holdings plc Annual Report & Accounts 2020
Phoenix has a simple business model and operating structure which underpin our financial framework of cash, resilience and growth.
EXPERTISE Our experienced team of colleagues are experts in managing our in-force business for cash and resilience, and the delivery of management actions. We also have a growing team dedicated to driving Open business growth.
OPTIMISED OPERATING MODEL Delivers an enhanced customer experience and market-leading cost efficiency across both our Heritage and Open businesses.
RISK MANAGEMENT FRAMEWORK We operate a unique risk management framework that makes us less sensitive to market fluctuations and delivers a resilient balance sheet.
CREATE VALUE AND DELIVER DEPENDABLE CASH GENERATION Read more page 30
PUT SUSTAINABILITY AT THE HEART OF OUR BUSINESS Read more page 38 90%+ customer satisfaction scores all met or exceeded group targets
Read more page 63 net-zero carbon commitment for our operations by 2025 and investments by 2050
Read more page 62 colleague engagement score up 10ppts in 2020 21Phoenix Group Holdings plc Annual Report & Accounts 2020
AN EFFICIENT OPERATING STRUCTURE To set ourselves up for future growth and success, Phoenix is organised into customer-oriented business units, shared services and functions
SHARED SERVICES Asset management We are building a best-in-class asset management function that operates as a shared service and provides investment solutions into each of the business units. This comprises both a market-leading in-house function and a range of external partners including our core strategic partner ASI.
Operations Our cost-efficient hybrid operating model for customer administration uses both in-house and out-sourced solutions with a unique flexibility provided by the two platforms we operate, with both ReAssure’s ALPHA platform and Tata Consulting Services (‘TCS’) BANCS platform key to our model.
Customer function Our customer function is responsible for the customer journey for all of our c.14 million customers and is focused on improving customer outcomes and providing strong customer service.
• Finance • General Counsel • Risk • HR • Internal Audit • Corporate Affairs and
Our Heritage business comprises products that are no longer actively marketed to customers. Our strategy is to deliver improved customer outcomes and manage our in-force business for resilience and cash.
Phoenix is the market leader in the safe and efficient management of Heritage in-force business and has a strong track record of delivery.
The business has been built from two decades of consolidation and comprises over 100 legacy brands including Britannic, Pearl, Scottish Mutual, AXA and Abbey Life, as well as the heritage customers of Standard Life Assurance Limited. It also includes the recently acquired ReAssure business that currently operates as a business unit.
Our growing Open business comprises products that are actively marketed to customers. Our strategy seeks to capitalise on the industry drivers of change through helping customers’ journey to and through retirement by providing longterm solutions to their savings needs.
Our Open business comprises five business units: Workplace, Customer Savings & Investments, Retirement Solutions, Europe and SunLife.
Organic cash generation runs off at c.6% per annum depending on the particular features of each book.
RETIREMENT SOLUTIONS This business unit includes both vesting annuities and our BPA business, where we acquire annuities and deliver the financial stability required to secure pensions currently provided by UK corporates. We are an established player in the BPA market with a c.6% market share in 2020. We are building a market-leading team to deliver our strategy to grow and expand this business. Key to this will be broadening our market proposition, developing a best-in-class asset management capability and improving our capital efficiency.
SUNLIFE SunLife continues to hold a strong position in the over-50s market, generating new business across its life cover, equity release and funeral plans.
Assets under administration £162bn £176bn 23Phoenix Group Holdings plc Annual Report & Accounts 2020
Less Capital Policy The Life Companies hold internal capital buffers above the regulatory capital requirement for prudence.
Management actions These can either increase Own Funds or reduce capital requirements.
Opening cash at holding company level 24 Phoenix Group Holdings plc Annual Report & Accounts 2020
WHAT IS THE CASH REMITTED FROM THE LIFE COMPANIES USED FOR?
Mergers and acquisitions As well as providing a clear strategic fit, M&A transactions must meet our three key criteria of being value accretive, supporting the dividend level and maintaining the Group’s investment grade rating.
Dividends The Group currently operates a stable and sustainable dividend policy.
Opening cash at holding company level 25Phoenix Group Holdings plc Annual Report & Accounts 2020
Our approach to risk management brings resilience to our Solvency II balance sheet which in turn brings dependability to the timing of our cash generation.
This differentiated approach to risk management means that we are comparatively more resilient to market stresses than the majority of our peers.
• Proactive management of our credit portfolio saw us prudently rotate out of UK BBB assets into USD A or better credit assets to enhance our risk profile and deliver capital benefits.
PRIORITIES FOR 2021 • Implement further management actions to enhance the Group’s capital position.
• Reduce the capital strain associated with writing external BPAs from the 8% achieved in 2020 further towards our target of 5%.
• Optimise our debt funding in line with our maturity profile.
We manage capital within a target shareholder capital coverage ratio of 140% to 180% and manage our Fitch leverage ratio within a target range of 25% to 30%.
• We proactively manage our shareholder capital coverage ratio within our target range and by maintaining this throughout the year we were able to fund the ReAssure deal efficiently whilst also being able to pay our interim dividend and increase our final dividend.
• Capital synergies associated with the acquisition of the Standard Life Assurance businesses benefited the Group Solvency II surplus by £75 million in 2020.
• The Group’s dynamic hedging approach led to limited economic 28 Phoenix Group Holdings plc Annual Report & Accounts 2020
The Shareholder Capital Coverage Ratio demonstrates the extent to which shareholders’ Eligible Own Funds cover the Solvency Capital Requirements.
The Group’s Solvency II surplus of £5.3 billion has significantly increased compared to prior year (2019: £4.4 billion). Surplus emergence and the strong delivery of management actions was partly offset by interest, dividends and costs, as well as the BPA capital strain and economic variances.
The Board has proposed a final dividend of 24.1 pence per share which is a 3% increase on the 2020 interim dividend of 23.4 pence per share reflecting the significant value generated by the ReAssure transaction.
“Our active approach to risk management limited the impact of the unprecedented market volatility seen in the first half of 2020 as markets swung violently in response to the pandemic news. Phoenix reported only a £0.2bn reduction in its Solvency II surplus at H1 2020 due to economic variances and this is testament to the strengths of both our dynamic hedging approach and our prudent risk appetite.”
In order to create value, the Group looks to maximise the economic performance of its in-force business and to deliver management actions which increase and accelerate cash flows, while identifying and executing on organic and inorganic growth opportunities.
• ReAssure completed the Part VII transfer of the L&G business during 2020 creating capital synergies of £0.1 billion and also completed the acquisition of Old Mutual Wealth which delivered £290 million of cash generation during the year.
• Seek further investment opportunities in the BPA market and improve our capital efficiency further.
Cash generated by our Life companies and remitted to Group is our key performance metric.
The majority of the Group’s cash generation stems from the run-off of in-force business. We harness its key characteristics of predictable fund maturity and liability profiles to deliver a high level of sustainable cash generation. This in turn is used to cover operating costs, fund dividends to shareholders, as well as service and repay outstanding debt. We then look to deploy any surplus cash into value-accretive growth opportunities to bring sustainability and future growth to our cash generation.
And finally, value-accretive M&A can yield significant additional cash generation and provide the opportunity to deliver incremental cost and capital synergies.
KEY INITIATIVES AND PROGRESS IN 2020 • At £1.7 billion, the Group delivered record cash generation in the year, exceeding the upper end of its £1.5 to £1.6 billion target range.
• Our BPA business was the largest new business contributor at £522 million with seven bulk purchase annuity transactions successfully completed with total contracted liabilities of £2.5 billion. The Group invested £228 million of capital to facilitate these transactions.
• In aggregate, the Group delivered £1.3 billion of Solvency II management actions, with £1.1 billion increasing Own Funds and this included £0.5 billion of capital synergies associated with the acquisition of ReAssure (see page 28), cost synergies arising from the Part VII transfer of the L&G business, strategic asset allocation activities including further investment in ERM and the optimisation of matching adjustment portfolios.
Our strategy seeks to leverage the industry drivers of growth to deliver incremental new business cash generation that can offset the run-off of our in-force business. Delivering on our growth aspirations will bring enhanced long-term sustainability to the Group’s organic cash generation and also has the potential to support future dividend growth.
Operating profit is a non-GAAP measure used by management and is considered a more representative measure of performance than IFRS profit or loss after tax as it provides long-term performance information unaffected by short-term economic volatility.
• To generate £1.5 to 1.6 billion of cash in 2021
We will continue to improve customer outcomes, broadening the focus of our business so that we can help customers as they journey to and through retirement. This means developing new propositions and services, filling the guidance gap faced by millions of savers, and investing in market leading technology to provide the digital service customers expect. We will build a powerful brand, based on superior consumer insights and engagement, which will be the foundation for future growth.
• We will further enhance how we analyse and act upon feedback to develop our insight approach and help us improve key communications and customer journeys.
More than ever, people need help and guidance from a company which is simple to deal with and which they trust. We deliver this to our customers through strong service delivery and by ensuring we remain relevant, engaging and easy to deal with.
As a result of the ReAssure transaction we were proud to welcome an additional c.4 million customers to the Group. We are continuing to work with ReAssure colleagues to align our approach and learn from best practice to enhance our offering and deliver the best possible experience for all customers across the Group.
KEY INITIATIVES AND PROGRESS IN 2020 • We extended drawdown capability across the Group so more customers can access their pension benefits in a flexible way, offering SLAL’s non-advised drawdown to Phoenix Life customers.
• We implemented in-scheme drawdown functionality to allow Master Trust customers over 55 to 36 Phoenix Group Holdings plc Annual Report & Accounts 2020
During 2020 we evolved the way in which we measured customer satisfaction in SLAL. This is the first year of reporting in this manner.
This measure highlights how satisfied customers are with Standard Life’s telephony servicing proposition.
Twelve days, in line with the industry stated target for Origo Pension Transfers.
To maintain a customer satisfaction score which is 90% or above.
Insight 1 2018 figures, Phoenix Life only. 2 2019 figures, combined Phoenix Life and SLAL. 3 FOS overturn rate shown as H2 2019 and H1 2020.
As the UK’s largest long-term savings and retirement business we have a clear role to play in society. We will be driven by our purpose in the decisions we take, by putting sustainability at the heart of our business. We are focused on delivering for our c. 14 million customers and investing our £338 billion of assets under administration in a sustainable manner. We are committed to reducing our environmental impact, investing in our people and culture, supporting our communities and working responsibly with suppliers.
solution for our workplace business. • Launching a new four pillar Diversity and Inclusion strategy to create the culture that reflects the nature of our business and ensures that every colleague is treated with dignity and respect.
PRIORITIES FOR 2021 • Undertake customer research for product innovation and increase the ESG fund content offering to customers.
• Integrate material ESG elements into our investment management process and establish regular reporting to our Board on known and emerging ESG risks.
• Implement our net-zero carbon plans and deliver target footprint reduction for 2021.
• Enhance our diversity data to support the aims of our people agenda, enrich our reporting, and tailor our actions.
Read more about our Sustainability strategy, aspirations and progress to date please refer to our separate 2020 Sustainability Report
OVERVIEW Our sustainability strategy is fully aligned to our purpose, to our enterprise strategy and to our corporate values. Our strategy has evolved during 2020, as the world we operate in and the needs of our stakeholders’ change.
We reassessed the materiality of Environmental, Social and Governance (‘ESG’) issues which highlighted a growth in the importance of financial literacy and inclusion, digitalisation and responsible investment.
We aim to deliver product optionality to enable improved financial wellbeing across our differing customer needs, and remove barriers to inclusion through well developed and targeted education programmes.
We have set a net-zero carbon commitment in our operations by 2025 and a net-zero commitment in our investment portfolio by 2050.
Investment funds offered to pension savers, including an ESG Default 40 Phoenix Group Holdings plc Annual Report & Accounts 2020 www.thephoenixgroup.com/sustainability/reports
“We are embedding sustainability into everything that we do, and have enhanced our strategy to address the critical trends impacting our industry including societal issues such as an ageing population, financial uncertainty, the evolving digitisation of businesses, and the responsibility to address global environmental challenges.”
How we measure delivery 2021 target: Review responsible investment content of workplace default solutions (Active Plus and Passive Plus)
2021 target: 60% of shareholder illiquid asset origination in sustainable investments (excluding ERM)
Responsible investment is at the core of our strategy and will deliver benefits to policyholders, investors and society. Expansion into sustainable assets is a core part of our responsible investment strategy. We will increase investment in sustainable assets within the shareholder and policyholder business. We look forward to playing a key role in society over the coming years; putting our assets to good use and supporting our Company purpose of helping people secure a life of possibilities.
We are committed to the need to reduce greenhouse gas emissions and accelerate the transition to a low-carbon future, and have committed to achieving net-zero across all emission scopes by 2050. We have begun the work of identifying the best approach for this by setting our first milestone to bring our operations to net-zero carbon by 2025. We are currently implementing net-zero plans including developing our sciencebased targets.
We are committed to making Phoenix the best place any of us have ever worked. This includes embedding our culture, engaging colleagues and holding everyone accountable for creating a truly diverse workforce. We are also dedicated to adapting to the changing way of working in the best interests of all colleagues.
skills, money, time and resources: we donated £1 million to charities supporting those most vulnerable from coronavirus. In total, support to charities in UK and Europe amounted c. £2 million across 2020. Due to the pandemic, existing UK corporate partnerships were extended to year end. In the absence of fundraising we widened our charity matching programme.
• All status and length of servicerelated benefits have been removed to focus on rewarding all colleagues equally based on their own contribution to our business.
• Our upper-quartile family policy offers all new parents 52 weeks’ leave, with six months fully paid.
• Deliver new ways of working that support our culture and colleague wellbeing and delivers flexibility for our colleagues.
• Maintain support for our communities through volunteering, fundraising and engagement.
• An IT subsidy for parents and guardians to support them with home schooling.
KEY INITIATIVES AND PROGRESS IN 2020 • Our new Phoenix Story was launched in July 2020 and was developed collaboratively with our colleagues to reflect our purpose-led culture and the values that we strive for.
• The October colleague engagement survey demonstrated that despite the challenges of the pandemic, overall engagement was recorded as 75%, an increase of 10% on the previous year.
• We also saw a 16-point rise to 71% in advocacy of Phoenix as a place to work and 87% of colleagues are committed to the success of Phoenix.
• We launched the ‘Who We Are’ application which allows colleagues to share their diversity data confidentially, showing an accurate demographic make-up of the Group.
• The number of colleagues on our mentoring scheme doubled to over 200, and we participated in the 30% Club.
“We want to make Phoenix the best place any of us have ever worked. Building a strong culture and creating an engaging environment that drives empowerment and accountability for our colleagues, supports changing ways of working and genuinely embraces diversity of thought and perspective, are fundamental to achieving this.”
Insight 1 Excludes Group CEO and Group CFO, who are recorded as Directors. 2 Based on information disclosed by employees. Data not recorded for SunLife and Germany/Austria employees (26.3% workforce). 3 Based on information disclosed by employees. Data not recorded for SunLife and Standard Life Assurance Limited employees (55% workforce).
Workforce that is of Black, Asian or Minority Ethnic (‘BAME’) background 5572 2073
RESILIENCE The Group’s capital position of £5.3 billion (2019: £4.4 billion pro forma) remained resilient in the year, and our shareholder capital coverage ratio of 164% (2019: 152% pro forma) remains comfortably in the middle of our target range of 140% to 180%. Despite the market volatility experienced in the year, we have seen only a £0.2 billion strain from economics, reflecting the impact of the Group’s hedging programme and active approach to credit portfolio management. The closing surplus has been positively impacted by the delivery of capital synergies following the acquisition of the ReAssure businesses, together with management actions delivered in the year and the issuance of capital qualifying subordinated debt.
GROWTH The Group’s Assets under Administration (‘AUA’) increased to £337.7 billion in the year (2019: £248.3 billion). The increase in the year is largely driven by the acquisition of the ReAssure businesses on 22 July, net inflows from the Group’s Open business, and net positive market movements. These factors have been partly offset by net outflows from the Group’s Heritage businesses.
The Group’s cash generation of £1,713 million in the year allowed the Group to exceed the upper end of its £1,500 to £1,600 million target range for that period, and includes £690 million of cash remitted by the ReAssure Life Companies in the period prior to completion of the acquisition.
The IFRS profit after tax attributable to owners for the year is £834 million (2019: £116 million). The increase primarily reflects the increased operating profit together with a gain recognised on the acquisition of the ReAssure businesses of £372 million and gains on hedging positions held in the shareholder funds.
LOOKING AHEAD Phoenix remains on track to achieve its long-term cash generation target for the five-year period 2019 to 2023 of £6.8bn. The target has been upgraded to reflect the acquisition of ReAssure, together with the impact of new business and management actions delivered in 2019 and 2020. The Group looks forward to the future from a position of financial strength.
ALTERNATIVE PERFORMANCE MEASURES The Group assesses its financial performance based on a number of measures, some of which are not defined or specified in accordance with Generally Accepted Accounting Principles (‘GAAP’) or statutory reporting framework. These metrics are known as Alternative Performance Measures (‘APMs’).
As such, the key performance indicators for the Group mainly focus on cash generation and capital strength. Further information on the Group’s APMs can be found on page 309, including definitions, why the measure is used and if applicable, how the APM can be reconciled to the nearest GAAP measure.
Please see the APM section on page 309 for further details of this measure. Maintaining strong cash flow delivery underpins debt servicing and repayments, shareholder dividends as well as opportunities for further M&A and investment in new business.
USES OF CASH The operating expenses of £42 million (2019: £43 million) principally comprise corporate office costs, net of income earned on holding company cash and investment balances.
Debt interest of £184 million (2019: £112 million) increased in the year as a result of the cash settlement of a full annual coupon on the €500 million Tier 2 bond issued in September 2018, the first coupons on the US$750 million Tier 1 bond issued in January and the US$500 million Tier 2 bond issued in June. Additionally debt interest includes a semi-annual coupon paid in the post completion period on three debt instruments which were substituted to the Group as part of the acquisition of the ReAssure businesses (£250 million Tier 2, £500 million Tier 2 and £250 million Tier 3). Coupons on the £500 million Tier 2 bond issued in April are not due until 2022.
All amounts in the Business Review section marked with an ’APM’ are alternative performance measures. See ’Alternative Performance Measures’ section on page 309 for further details of these measures. All amounts in the Business Review section marked with a ’REM’ are KPIs linked to executive remuneration. See ’Directors’ Remuneration Report’ on page 124 for further details of executive remuneration including the financial and non-financial performance measures on which it is based.
4 Credit stress varies by rating and term and is equivalent to an average 120bps spread widening (full range of spread widening is 49bps to 204bps). It assumes the impact of a dynamic recalculation of transitionals and makes no allowance for the cost of defaults/downgrades.
COST OF ACQUISITIONS Cost of acquisitions of £1,265 million relates to the cash consideration settlement to finance the acquisition of the ReAssure businesses.
REASSURE HOLDING COMPANY CASH ACQUIRED Cash within the ReAssure holding companies of £580 million was recognised on acquisition of those entities on 22 July.
SUPPORT OF BPA ACTIVITY £228 million (2019: £98 million) of funding has been provided to the life companies to support BPA new business, including the buy-in transaction with the Pearl Group Scheme.
This takes the target up to £6.8 billion, of which £4.4 billion remains to be delivered over 2021 to 2023. The resilience of the target is demonstrated by the illustrative stress testing in the table to the left.
EXPECTED CASH FLOWS AFTER 2024 There is an expected £13.3 billion of cash to emerge from 2024. This does not include any management actions from 2024 onwards or any additional value from future new business from the Group’s Open business and BPA transactions. It also does not reflect the impact of any future M&A.
The other movement of £0.1 billion includes the cash settlement with SLA in relation to historic legacy items and a small net impact from economics and assumption changes.
The impact of the expected increase in the rate of corporation tax from April 2023 to 25% announced in the March 2021 budget is expected to result in a £0.3 billion reduction in Group LTFC.
The Group’s ambition is to replenish cash that it uses year-on-year through growth in long-term cash generation and management actions.
Long-term in-force cash generation 17.7 19.0 Less M&A and transition costs (0.3) (0.2)
Plus closing Holding Company cash 1.0 0.3 Long-term Group cash 18.4 19.1 Less shareholder debt (5.0) (5.0) Group Long-Term Free Cash 13.4 14.1 £13.4bn Group Long-Term Free Cash APM
1 Stated on a pro forma basis as if the acquisition of the ReAssure businesses took place on 31 December 2019. 2 Stated on a pro forma basis to reflect the £0.2 billion reduction in future long-term cash generation as a result of the disposal of Wrap SIPP, Onshore Bond and TIP and £0.3 billion for the adverse impact of the expected increase in the rate of corporation tax from April 2023 to 25% announced in the March 2021 budget.
ASSETS UNDER ADMINISTRATION AND NEW BUSINESS The Group’s AUA represent assets administered by or on behalf of the Group, covering both policyholder funds and shareholder assets. This includes assets recognised in the Group’s IFRS statement of consolidated financial position together with certain assets administered by the Group but for which beneficial ownership resides with customers.
AUA provides an indication of the potential earnings capability of the Group arising from its insurance and investment business, whilst AUA flows provide a measure of the Group’s ability to deliver new business growth.
A reconciliation from the Group’s IFRS statement of consolidated financial position to the Group’s AUA is provided on page 305. Please see the Alternative Performance Measure (‘APM’) section on page 309 for further details of this measure.
GROUP AUA Group AUA as at 31 December 2020 was £337.7 billion (2019: £248.3 billion). The increase in the year is largely driven by the acquisition of the ReAssure businesses on 22 July, net inflows from the Group’s UK Open business, and net positive market movements. These factors have been partly offset by net outflows from the Group’s UK Heritage businesses.
Gross inflows in Retirement Solutions, which encompasses our Annuity and BPA business, experienced £3.2 billion (2019: £1.9 billion) of inflows. This includes £0.7 billion arising from buy-in transactions with the Group’s Pension Schemes and £1.8 billion (2019: £1.1 billion) of new business inflows arising from BPA transactions completed in the year.
Gross inflows in the Customer Savings & Investment (‘CS&I’) business unit, which encompasses our Wrap and Retail products, of £4.2 billion (2019: £4.9 billion) were also adversely impacted by challenging market conditions relating to COVID-19, resulting in reduced volumes of inflows.
Outflows for the UK Open business were £(9.6) billion (2019: £(9.8) billion1) mainly due to run-off, resulting in net inflows of £2.8 billion (2019: £1.9 billion).
1 2019 has been restated to reflect the revised definition of the UK Open segment which now includes the Group’s annuity and BPA business.
AUA as at 31 Dec 50 Phoenix Group Holdings plc Annual Report & Accounts 2020
Seven BPA transactions (including the buy-in transaction mentioned below) were completed in the year, reflecting the Group’s selective and proportionate approach to its participation in this market.
For our Workplace business unit incremental long-term cash generation has remained resilient despite the effects of COVID-19.
CS&I and Europe incremental longterm cash generation were impacted by the effects of COVID-19 on gross inflows with sales volumes lower than the prior year.
OTHER MOVEMENTS INCLUDING MARKETS AUA increased by £18.5 billion (2019: £26.4 billion) as a result of other movements, largely driven by the net positive impacts of market movements, with the impact of falling yields on the value of the Group’s debt security portfolios, rises in several overseas equity markets and a weakening of sterling, more than offsetting the impact of declining UK equities performance.
NEW BUSINESS CONTRIBUTION We monitor new business contribution as the Group’s measure of the future value delivered through the writing of new business.
The new business contribution metric now includes all business written by the Group’s Open business units, including Retirement Solutions, having previously excluded the Group’s annuity and BPA activity.
GROUP SOLVENCY II SURPLUS A Solvency II capital assessment involves a valuation in line with Solvency II principles of the Group’s Own Funds and a risk-based assessment of the Group’s Solvency Capital Requirement (‘SCR’). The Group’s Own Funds differ materially from the Group’s IFRS equity for a number of reasons, including the recognition of future shareholder transfers from the with-profit funds and future management charges on investment contracts, the treatment of certain subordinated debt instruments as capital items, and a number of valuation differences, most notably in respect of insurance contract liabilities, taxation and intangible assets.
The SCR is calibrated so that the likelihood of a loss exceeding the SCR is less than 0.5% over one year. This ensures that capital is sufficient to withstand a broadly ‘1-in-200 year event’.
The Group has approval from the PRA for the use of its Internal Model (‘Phoenix Internal Model’) to assess capital requirements, the scope of which was extended to include the acquired AXA Wealth and Abbey Life businesses in March 2017 and March 2018 respectively.
The Standard Life Assurance businesses determine their capital requirements in accordance with an approved Internal Model (‘Standard Life
As a result, the Group currently uses a Partial Internal Model to calculate Group SCR, aggregating outputs from the existing Phoenix Internal Model, the Standard Life Internal Model and the Standard Formula, without further diversification. A harmonisation programme to combine the two Internal Models into a single Internal Model is ongoing.
Surplus generation and the impact of the reduction in capital requirements for the Group added £0.6 billion to the surplus during the year.
Management actions undertaken increased the surplus by £1.3 billion. This includes £0.5 billion in respect of capital synergies associated with the acquisition of the ReAssure businesses, primarily resulting from the implementation of additional hedging to protect the value of the acquired business and harmonisation of methodologies for the calculation of transitional measures on technical provisions. The £0.8 billion of other management actions includes expense synergies arising upon the Part VII transfer of the L&G Mature Savings business, further investment in Equity Release Mortgage (‘ERM’) assets, additional strategic asset allocation activities and the optimisation of matching adjustment portfolios.
The Group Solvency II surplus position at 31 December is set out in the table below: Estimated position as at £bn
Pro forma4 31 December 2019 £bn 1 Own Funds includes the net assets of the life and holding companies calculated under Solvency II rules, pension scheme surpluses calculated on an IAS19 basis not exceeding the holding companies’ contribution to the Group SCR and qualifying subordinated liabilities. It is stated net of restrictions for assets which are non-transferable and fungible between Group companies within a period of nine months.
The impact of new business written during the year reduced the surplus by £0.2 billion. This primarily reflects the capital strain associated with Bulk Purchase Annuity (‘BPA’) transactions executed in the year.
Assumption changes and experience variances increased the surplus by £0.1 billion. This includes the positive impact of changes to longevity assumptions, partially offset by an increase to the provision for the expected costs associated with the delivery of the Standard Life transition programme and the strengthening of actuarial assumptions in respect of ERM and persistency.
The adverse impact of economic and other variances reduced the surplus by £0.2 billion, driven by the net adverse impact of economic and market movements in the year, notably falling yields and credit downgrades experienced during the period.
Following a 20% fall in equity markets 5.3 Following a 12% fall in property values2 5.1 Following a 73bps interest rates rise3 5.4 Following a 88bps interest rates fall3 5.2 Following credit spread widening4 5.1 Following credit downgrade: immediate full letter downgrade on 20% of portfolio5 4.8 Following 6% decrease in annuitant mortality rates6 4.4 Following a 10% change in lapse rates7 5.0 1 Assumes stress occurs on 1 January 2021 and that there is no market recovery. 2 Represents an average fall in property values of 12%. 3 Assumes the impact of a dynamic recalculation of transitionals and an element of dynamic hedging which is performed on a continuous basis to minimise exposure to the interactions of rates with other correlated risks including longevity.
6 Equivalent of six months increase in longevity applied to the annuity portfolio. 7 Assumes most onerous impact of a 10% increase/decrease in lapse rates across different product groups.
The Group targets a shareholder capital coverage ratio in the range of 140% to 180%. As at 31 December 2020, the Group Shareholder Capital Coverage ratio is 164% (2019 pro forma: 152%).
SENSITIVITY AND SCENARIO ANALYSIS As part of the Group’s internal risk management processes, the regulatory capital requirements are tested against a number of financial scenarios.
The results of that stress testing are provided on the previous page and demonstrate the resilience of the Group’s Solvency II surplus.
LIFE COMPANY FREE SURPLUS (ESTIMATED) Life Company 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 2020, the Life Company Free Surplus is £2.9 billion (2019 pro forma: £2.6 billion). The table below analyses the movement during the period.
OPERATING PROFIT Operating profit is a non-GAAP financial performance measure based on expected long-term investment returns. It is stated before amortisation and impairment of intangibles, other non-operating items, finance costs and tax.
Please see the APM section on page 309 for further details of this measure.
The IFRS profit after tax attributable to owners is £834 million (2019: £116 million). The increase primarily reflects the increased operating profit described above together with a gain recognised on acquisition of the ReAssure businesses of £372 million and gains on hedging positions held in the shareholder funds.
Operating profit includes the effect of variances in experience for noneconomic 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. Operating profit is net of policyholder finance charges and policyholder tax.
The with-profit funds where internal capital support has been provided generated an operating loss of £(1) million (2019: £18 million). The loss in the current year is driven by a net negative impact of updating actuarial assumptions, notably persistency, compared to a net positive impact in the prior year, principally reflecting updates to longevity assumptions.
UK Heritage 278 350 ReAssure 444 – UK Open 472 417
£834m IFRS profit after tax 55Phoenix Group Holdings plc Annual Report & Accounts 2020
The non-profit and unit-linked funds operating profit is £148 million (2019: £224 million). The reduction reflects the impact of short-term expense overruns and project costs, adverse model and methodology changes and the inclusion of one-off positive impacts from balance sheet reviews in the prior period comparative.
REASSURE OPERATING PROFIT The ReAssure business segment comprises operating profit for the ReAssure businesses for the full five- month period, post-completion of the acquisition on 22 July. The result includes a £214 million benefit from positive actuarial assumption changes in the period principally longevity.
EUROPE OPERATING PROFIT The Europe business segment which comprises business written in Ireland, Germany and Austria and a mix of Heritage and Open products, generated an operating profit of £44 million during the year (2019: £52 million).
With-profit 129 135 With-profit where internal capital support provided (1) 18 Non-profit and unit linked 148 203 Long-term return on owners’ funds 2 (6) UK Heritage operating profit before tax 278 350 1 During the year, the Group reassessed its operating segments as a result of strategic developments. Specifically, the categorisation of the provision of annuities to existing policyholders with vesting products and from Bulk Purchase Annuity contracts has been revised such that this business is now included within the UK Open segment instead of within the UK Heritage segment. Comparative information has been restated to reflect this new presentation.
positive variance includes gains on foreign currency swaps held by the holding companies to hedge exposure of future life company profits to movements in exchange rates.
OTHER NON-OPERATING ITEMS Other non-operating items of £281 million positive (2019: £169 million negative) includes a gain recognised on acquisition of the ReAssure business of £372 million, and also an £85 million gain arising on completion of the Part VII transfer of the mature savings liabilities and associated assets from the L&G Group (see note H2.2 of the IFRS financial statements for further details). These positive non-operating items are partially offset by a net cost of £43 million associated with the delivery of the Group Target Operating Model for IT and Operations, costs of £37 million associated with the acquisition of the ReAssure businesses, £19 million incurred under the subsequent integration programme.
The balance also includes costs of £20 million associated with the on-going integration of the Old Mutual Wealth business acquired by ReAssure Group plc in December 2019, incurred since the Group’s acquisition of ReAssure Group plc in July 2020, costs of £16 million associated with the transfer and integration of the L&G mature savings business, £34 million of other corporate project costs and net other one-off items totalling a cost of £7 million.
The prior period result of £169 million negative included an £80 million benefit arising from updated expense assumptions for insurance contracts, reflecting reduced future servicing costs as a result of transition activity.
The Group’s insurance operations are primarily based in the UK and are liable to tax in accordance with applicable UKlegislation. Following the acquisition of the Standard Life Assurance businesses, the Group’s overseas operations have increased, in Ireland and Germany in particular. The ReAssure businesses acquired in July 2020 are also primarily based in the UK. The Group complies with the local tax obligations in the jurisdictions in which it operates.
Financial leverage is calculated as debt as a percentage of the sum of debt and equity. Debt is defined as the IFRS carrying value of shareholder borrowings. Equity is defined as the sum of equity attributable to the owners of the parent, the unallocated surplus, the Tier 1 Notes and noncontrolling interests.
COMMUNITY We are committed to making a difference in the communities in which we are based, including interacting with schools, charities, and community groups.
• Trust, competence and integrity. • Product innovation and service creativity.
We have a comprehensive annual communications and engagement programme, which includes investor meetings, results presentations, conferences and Capital Markets Days. This year we successfully moved our interactions on-line, achieving high levels of engagement with 412 external live viewers having watched our Capital Markets Day presentation.
• Launched revised Diversity and Inclusion strategy focusing on: Gender, Ethnicity, Disability, and Social Mobility.
• Clear communications on working and support arrangements in response to COVID-19, including multiple surveys to gather feedback to inform action.
• The Board’s strategy was set out at Capital Markets Day.
All of our interactions are governed by the Group’s Code of Business Ethics and Ethical Conduct which sets out how we can maintain a high standard of integrity across all engagements.
Key stakeholder groups 1 This excludes ReAssure acquired during the year.
CUSTOMERS The Group has c.14 million policies with £338 billion of assets under administration. Key products and services include with-profit, unit linked, annuities, protection and workplace pensions.
INVESTORS We maintain an active dialogue with our financial audiences who include institutional investors, private investors, rating agencies and research analysts.
• Prompt payment in accordance with agreed terms. • Clear mutual expectations and requirements on standards and processes, including modern slavery and human rights, climate and the environment, and health and safety.
• Educational support to our local schools. • Taking action on key societal and environmental concerns.
• Collaboration with a range of trade associations relevant to sector.
The Group has procurement and relationship management teams which, using our governance framework, defines the engagement with our strategic and critical suppliers to build and develop mutually beneficial partnerships.
We hold regular meetings with ‘charity partners’ and partnership schools, and stay connected with other good causes. We invite our colleagues to input on matters important to them in their communities. Surveys and feedback is routinely captured.
• Enhanced access to wellbeing tools and resources across the Group.
• £2 million donated to registered charities. • Donation initiatives in response to
COVID-19, including iPads to community hospitals, fruit baskets to front-line workers, paper reams for a local primary school, Personal Protection Equipment and perishable food items to local charities.
• The Group delivered on all its publicly announced financial targets, including exceeding the cash generation target.
• The Group maintained its Fitch Insurer Financial Strength Ratings of A+ and increased several ESG ratings.
• Taken a lead role in supporting the Pensions Scams Industry Group to prevent instances of pension fraud.
Phoenix Group Holdings plc Annual Report & Accounts 2020 www.thephoenixgroup.com/sustainability/communities www.thephoenixgroup.com/investor-relations www.thephoenixgroup.com/sustainability/reports
In doing so the Directors have paid due regard to the matters set out in section 172(1)(a) to (f). Examples of key decisions (amongst others), linked to our strategic priorities, considered by the Board include: • the payment of the PGH plc final dividend during the COVID-19 pandemic; • the formation of the Board Sustainability Committee; and
customers better has shown us how we can support and guide them more, whilst using the knowledge to educate our colleagues across the Group.
Phoenix has a vulnerable customer framework which enables a flexible and adaptive customer experience to respond to vulnerable circumstances. It is a living set of principles that helps us remain aware, to recognise and respond to vulnerability and be mindful that our actions don’t create vulnerability.
PUTTING THINGS RIGHT FOR OUR CUSTOMERS Complaint activity including those referred to the Financial Ombudsman Service or the Pensions Ombudsman Service is monitored and a significant proportion of complaints are resolved across the Group, in less than three days. This is a key performance indicator for the complaints team and results in a better experience for customers.
We our proud of our strong service delivery, always ensuring we remain relevant, engaging and easy to deal with. The Group continually improves communications with customers to make it easy for them to interact with us in connection with their policy and go on to make an informed decision should they wish to take any action. This includes enhancing customer experience and vulnerable customer support.
Vulnerability will affect the majority of our customers during their lives. For some, COVID-19 has heightened existing vulnerabilities or made them vulnerable for the first time. During the year, we completed a Group-wide research programme looking at customer vulnerability which helped us to further understand the functional and emotional needs of our customers experiencing challenging circumstances. Understanding our 60 Phoenix Group Holdings plc Annual Report & Accounts 2020
* Key suppliers include: strategic (those that we work closely with due to the strategic nature of the services they provide), critical (suppliers where the goods or services provided is limited in the market and barriers to change are complex) and financially important with spend ≥£1m (suppliers which are numerous but where value to Phoenix is significant).
OUR SUPPLIERS We work closely with our service providers and partners to support the delivery of our strategic objectives. We are committed to focusing on key issues associated with modern slavery and human rights, climate and environment and health and safety.
SUPPLIER MANAGEMENT FRAMEWORK Our sourcing and procurement goes beyond the initial evaluation and selection processes and includes implementing and managing a good working relationship with all suppliers. The Group’s Sourcing and Procurement Policy sets the operating standards for the management of sourcing and procurement risk throughout the Group, and forms part of the control framework.
Suppliers must comply with the UK Modern Slavery Act 2005 (applicable if turnover is over £36 million) or meet the local equivalent standard/Act and the International Labour Organisation (ILO) standards. At Phoenix Group there is zero tolerance for child labour throughout the supply chain and employment of young workers adheres to UK regulations regardless of location.
ENVIRONMENT AND CLIMATE CHANGE We will be working with our key suppliers to develop best practice carbon management, including net-zero targets, and robust waste minimisation including reduction of single-use plastic strategies.
Adherence to this policy is managed by the Group’s HR function via quarterly assessment of the minimum control standards. There were no material issues raised during the year.
Colleagues are required to complete annual computer-based training around both financial crime prevention and adherence with the Code of Business Ethics and Ethical Conduct. Colleagues are also required to complete a Gifts and Hospitality Register which is overseen and managed by the Financial Crime team.
HEALTH AND SAFETY The Group operates a Health and Safety policy which helps manage risks and adverse effects. The Group had no accidents during 2020 which were reportable to the Health and Safety Executive under the Reporting of Incidents, Disease and Dangerous Occurrence Regulations (‘RIDDOR’).
Read more about our colleague engagement activities in the Group’s Sustainability Report www. thephoenixgroup.com/ sustainability/reports them, with the understanding that confidentiality will be maintained. The Group is committed to ensuring that human rights are respected and processes are in place to remove any human rights issues both internally and externally via outsourced relationships.
Read more about our community initiatives in the Group’s Sustainability Report www. thephoenixgroup.com/ sustainability/reports
The Group also donated to The COVID-19 Support Fund launched by the UK insurance and long-term savings industry.
Our UK partnerships were extended across 2020 in direct response to the pandemic and its impact on fundraising. In the period 2014 to 2020, £1.4 million was donated across the UK to our air ambulance partnerships.
VOLUNTEERING Colleagues Group-wide are entitled to take two days for individual volunteering and a further one day with their team. The opportunity to volunteer in the year was understandably affected by the pandemic, but where possible we moved opportunities online and continued to support our literacy programmes remotely. 1,747 hours were donated in support of our local communities.
OUR COMMUNITY The past year has been difficult for our communities and the pandemic has disrupted the normal ways we support our various charities, schools and other community stakeholders. Phoenix has adapted its engagement approach to make sure it keeps people safe by observing social distancing and stay-at-home guidance whilst providing support where it is needed.
All Group monetary donations are in line with our charity donations approach, only benefiting registered charities and nothing deemed religious or political is supported.
We are committed to the need to reduce greenhouse gas emissions and accelerate the transition to a low-carbon future. We have set a target of achieving net-zero across all emission scopes by 2050. We have begun the work of identifying the best approach for this and set our first milestone to bring our operations to net-zero carbon by 2025.
We are a Business Ambition for 1.5°C signatory, and we will set and pursue an ambitious science-based emissions reduction target, with any remaining hard-to-decarbonise emissions compensated using certified greenhouse gas removal projects.
OUR INVESTORS Phoenix operates a comprehensive investor relations programme and values an active dialogue with the Group’s financial audiences including institutional investors, private investors, rating agencies and research analysts.
EQUITY INVESTORS Throughout the year the Group CEO, Group CFO and the Investor Relations team held virtual meetings with investors to provide updates on the Group’s strategy and operations. This involved 15 virtual shareholder roadshows and a total of 168 virtual meetings with institutions based primarily in the UK and North America but also across various other regions.
The Chairman and Non-Executive Directors are available for investor meetings on subjects such as strategy, financial performance, remuneration policy and environmental, social and governance (‘ESG’) aspects in order to share perspectives and ensure a mutual understanding of the Group’s objectives.
The Board also receives feedback on shareholder views through a biennial anonymous shareholder consultation and is kept regularly updated through the distribution of equity research notes, broker briefings and meeting summaries.
DEBT INVESTORS The Debt Investor Relations programme is led by the Group Treasury department and supported by the Investor Relations department. The Board is kept informed of the current views of debt investors through regular debt capital markets updates and summaries of meeting feedback.
RESEARCH ANALYSTS AND SALES TEAMS Phoenix maintains an active dialogue with its equity and debt research analysts who, in addition to results presentations, are invited to attend investor events such as the Capital Markets Day. Senior management and Investor Relations also held a total of 24 presentations to equity and debt sales teams to promote the Phoenix investment case. In addition, they participated in seven reverse roadshows organised by various equity research institutions.
Contact details for the investor relations team can be found on Phoenix Group’s website.
ANNUAL GENERAL MEETING (’AGM’) The Group’s AGM is an opportunity to communicate with shareholders who are invited to ask questions during the meeting and then are able to meet with members of the management team and Directors. Business to be discussed at the meeting is notified to shareholders in advance through the Notice of Meeting and comprises topics such as the annual election of Directors, the appointment of the Auditor and the dividend declaration.
The Group will also hold Extraordinary General Meetings (‘EGMs’) as needed to address matters that arise in between AGMs that require a shareholder vote. An EGM in 2020 was held to obtain shareholder approval to the ReAssure transaction.
GOVERNMENT, TRADE BODIES AND REGULATORS We communicate the views and concerns of customers to our regulators, government and wider policymakers. We have a comprehensive programme of proactive engagement across all regulators. The Group regularly engages with political stakeholders at Westminster and Holyrood, along with key trade bodies representing the industry, to communicate the views and concerns of its customers to government and wider policymakers.
Andy Briggs is a member of the Association of British Insurers’ (‘ABI’) Board, which helps inform public policy debates, promoting the value of the UK insurance and long-term savings industry products, encourages consumer understanding, and supports a competitive insurance industry.
During the year, we joined TheCityUK, an industry-led body representing UK-based financial and related professional services, and also the Geneva Association, a leading think tank of the insurance industry conducting research and organising debates on a number of political, economic and societal issues.
As a major employer in Scotland, the Group is a signatory to the Scottish Business Pledge, a voluntary initiative between the Scottish Government and business to help build a fairer Scotland. Key elements include paying the Living Wage and a commitment to investing in a skilled and diverse workforce.
Stakeholder engagement continued 66 Phoenix Group Holdings plc Annual Report & Accounts 2020
This report gives an overview of our progress and future priorities across this framework.
The impact of climate change is one of the biggest global challenges facing our colleagues, customers, partners, communities and the Group. Phoenix’s success in fulfilling its purpose of helping people secure a life of possibilities will in part be defined by how well we address this challenge.
• Complete a strategic implication assessment of identified climate risks and opportunities.
August Establishment of a dedicated TCFD project overseen by senior leadership
BOARD OVERSIGHT The Board oversees the delivery of the Group sustainability strategy, a key priority of which is the management of climate-related risk and opportunities. Andy Briggs, the Group Chief Executive Officer (‘CEO’), is the Executive Board Director responsible for implementation and delivery of the Group’s sustainability strategy.
During 2020 the Board discussed climate-related matters on three occasions: • sustainability and climate-related matters were considered at the Board’s annual strategy session; • a sustainability education session was held with Board members; and
The Phoenix Group Holdings plc Board (‘the Board’) recognises the importance of addressing climate change and during the year, the Group’s Corporate Governance framework has been enhanced to ensure clear oversight and ownership of the management of climate-related risk and opportunity impacts.
In 2020, a review of the Terms of Reference for the Board Committees was conducted to ensure they included appropriate oversight of sustainability and climate-related matters. The Board Sustainability Committee engages with the following Board Committees as required: The Board Audit Committee oversees the internal controls and financial reporting procedures and recommends for approval the Annual Report and Accounts, including the TCFD Report, and other ESG disclosures for compliance with relevant regulations, legislation and reporting standards.
The Board Risk Committee oversees the identification, assessment, management and reporting of climate- related risks within the Group Risk Management Framework including climate-related stress and scenario testing; and the reporting of risk disclosures in respect of climaterelated risks.
The Board Committees considered sustainability (including climate-related matters) during 2020 and during 2021 to the date of this report to fulfil their relevant duties in accordance with their approved terms of reference.
The Board Sustainability and Board Risk Committees also reviewed the TCFD Report before approval by the Board Audit Committee.
Both Rakesh Thakrar and Jonathan Pears have been formally appointed as joint Senior Managers responsible for climate-related financial risk under the Senior Managers Regime.
KEY NEXT STEPS • Implement and embed the climaterelated agenda in accordance with the Group Sustainability Strategy.
• Further enhance the governance framework across the Group to address climate-related risks and opportunities.
IDENTIFICATION OF CLIMATE-RELATED RISK AND OPPORTUNITIES During 2020, an exercise was undertaken (with support from
Phoenix is the UK’s largest long-term savings and retirement business. We have a strategically important role in supporting global efforts to transition to a low-carbon economy. This requires an understanding of how climaterelated impacts could affect the Group’s business, corporate strategy and financial planning in the short, medium and long term.
third-party consultants) to help identify and understand the climate-related risks and opportunities which may impact the Group. Phoenix will be impacted by physical climate impacts, low carbon transition risks and potential opportunities. These impacts, as defined by TCFD, are summarised below.
To provide a more comprehensive view of risks and opportunities across Phoenix’s business areas, a series of workshops with representatives across the business was held, supported by external research. This informed a qualitative assessment of risks and opportunities facing the business in the short, medium and long term; the result of which is illustrated in a heatmap opposite.
Quantitative scenario analysis will be used to provide further insight into the risks and opportunities from climate change.
Physical Risks related to the physical impacts of climate change Acute
• Risk to the workforce due to illness and mortality or disrupted working patterns due to changing climatic conditions
Transition Risks associated with the transition to a low carbon economy Policy and
• Increased compliance costs, stranded assets,asset impairment, restrictions and limitations on carbon intensive assets and asset depreciation
• Adverse impact on company valuation, asset impairment, viability of business model and credit rating implications
• Write-offs of investments in disrupted technologies, required investment in new technologies and process change costs to accommodate new technologies
Opportunities Produced through efforts to adapt to climate change Internal and
• Development of new products, investment and market opportunities 70 Phoenix Group Holdings plc Annual Report & Accounts 2020
Physical risks are more likely to impact the Group over the medium to long term.
The Group and its customers are exposed to a number of transition risks arising from policy and legal changes, market and economic factors and the implications for our reputation.
Phoenix will be exposed to conduct and reputational risks associated with managing these risks. If Phoenix fails to improve its climate-related activity in investments and/or operations, customers may choose to look elsewhere and Phoenix will lose business and face reputational damage. Growth in the Open Division is likely to be adversely impacted if climate-related considerations are not embedded in new propositions.
Risks relating to policy changes, legal implications and reputational damage are most material at Group level. They evolve around potential future litigation and capital charges against the Group for failure to meet regulatory deadlines, green taxes on the financial services sector and not meeting our net-zero carbon targets.
Opportunities available to Phoenix may include improving energy efficiency and reducing energy consumption in offices, data centres and home working environments.
As awareness of climate change increases among customers, there may be opportunities for Phoenix to offer ‘green’ products and services to meet increasing demand. Additional opportunities will be available if Phoenix moves faster than peers and gains competitive advantage.
Investments Market / Credit Most material risk area. Risks determined by sectors and geographies. N/A VH
Indicative materiality of climate-related risks and opportunities to Phoenix * Assessment has been structured by Phoenix business areas to help drive internal discussion. ** Predominant risk type as defined in Phoenix’s Risk Management Framework. *** Although physical and transition risks lead to changes in mortality and persistency changes, the predominant risks are driven by market and customer risks in these business areas.
INVESTMENT ASSET EXPOSURES Further analysis was carried out to assess the climate risks within investments, the most material risk area.
The potential climate risk exposure of an investment asset depends on a number of factors: • the characteristics of the asset class itself, for example a physical asset, such as real estate, will be more exposed to physical climate risks; • the sector the asset operates in, for example high-carbon sectors such as oil and gas will be more impacted by the transition to a low-carbon economy; and
• geography, for example certain countries are more vulnerable to or less prepared for climate events. Transition pathways and associated policies will differ by country and alter their transition risks.
From a policyholder perspective, the greater exposure is in the equity holdings under both physical and transition. There is a greater level of uncertainty within the policyholder equity holdings due to the wide range of stocks, including managed funds and we have therefore assumed a high financial exposure.
Policyholder investments in passive funds (e.g. FTSE trackers) may have high climate risk exposure and our ability to restrict investment in passive funds is limited.
CLIMATE SCENARIO ANALYSIS Climate scenario analysis is a key tool which allows the Group to better understand the impact of the identified physical and transition risks on the Group in future possible scenarios.
The key findings from the Group’s IST exercise were as follows: • the proportion of assets mapped to higher climate risk sectors was relatively low (15% to 20%); • the greater exposures were in the policyholder funds, given their greater exposure to riskier assets.; • the overall reduction in market value is relatively low compared to the overall size of the stresses; and
The heatmap scores above are not comparable to the Phoenix business-wide heatmap scores as each risk rating is based on the combined sector, geography and exposure scores for each asset category. Phoenix and publicly available data were used to develop this heatmap. Undertaking asset level quantification will help to verify and improve these initial heatmap results.
RESPONSIBLE INVESTMENT PHILOSOPHY The Group has developed a Responsible Investment Philosophy (available on the Group website) as the first step towards embedding climate change risk and ESG considerations within the Investment Management process. The philosophy serves as a framework that sets out a high level commitment and focus to both internal and external stakeholders.
Scenarios 1.5oC N/A Orderly – 1.5˚C with Carbon Dioxide Removal 2oC RCP2.6 (Assumes global temperature rise below 2 °C by 2100)
Data: We are developing our strategy regarding climate data, including asset data, counterparty data and external climate data (for both physical and transition risks).
Calibration: We are developing our methodology and approach to translate these data into the factors required to assess the impacts on our business.
Capability building: We are taking steps to enhance our capabilities to allow us to participate in the upcoming Bank of England’s Climate Biennial Exploratory Scenario (‘CBES’) regulatory stress test exercise starting in the second half of 2021 and to develop the necessary framework to allow us to run climate scenario analysis and stress testing for future risk management and strategic decision-making.
system through the incorporation of ESG factors into investment decision making and ownership. As a PRI member, Phoenix joins a network of over 3,000 organisations committing to the PRI’s six key principles and regularly reporting through the TCFD disclosure.
KEY NEXT STEPS • Undertake pilot quantitative scenario exercise to develop methodology. • Develop internal climate scenario modelling capabilities for most material asset classes.
• Use results of scenario analysis to identify additional risk management actions and assist in strategic decision-making.
The Group’s RMF sets out how the Group identifies, manages, monitors and reports on the risks to which it is, or could be exposed (including climaterelated risks). Please see page 79 to read more in the Group’s Risk Management Report.
In 2020, we have continued to embed the assessment of climate-related risks into our RMF.
Risk universe: Phoenix treats climate change risk as a cross-cutting risk that impacts all aspects of the risk universe.
Risk policies: The Group has developed a Sustainability Risk Policy and work is in progress to fully embed material climate-related risks into the Group Risk Policies by the end of 2021.
RISK MANAGEMENT The Group has continued to embed the identification, assessment, management, monitoring and reporting of climate-related risks within the Risk Management Framework.
The physical, transitional, legal and reputational risks of climate change are viewed by the Group as cross-cutting the risk universe; with strategic, financial, operational and customer implications should we fail to successfully embed the management of climate-related risk.
MANAGEMENT OF CLIMATE-RELATED RISKS We have made progress to understand the most material risk areas that may impact the Group as highlighted in the heatmaps illustrated earlier. The table below summarises these material risk areas and outlines the action we are taking or planning to take to mitigate these risks.
Physical Operations • Continue to ensure that robust business continuity and operational resilience frameworks consider all office locations, staff, systems and processes
• Conduct regular reviews of energy efficiency of offices, business travel guidelines, etc. • Develop and implement required actions to meet interim net-zero carbon commitment by 2025
Property assets • Develop and include climate considerations within investment mandates to limit/avoid exposures to high risk geographies and locations
Transition Policy/legal • Ensure appropriate consideration of climate change within existing regulatory horizon scanning framework
Reputational • Evidence increasing consideration of climate change risk management as a key part of strategy
Investments* • Develop more granular consideration of investment climate risks by asset class/ sector/geography
• Assess ESG capabilities of new asset managers and regularly review existing managers
Open business • Actively engage with customers to understand requirements and expectations to offer credible ESG funds and solutions
NET-ZERO CARBON In December 2020, the Group committed to becoming net-zero carbon across all emission scopes by 2050. A high level roadmap to net-zero is included within the Group’s Sustainability Report.
We have initiated work to identify the best approach to deliver this commitment by setting our first milestone to bring our operations (Scopes 1, 2 and selected scope 3 business travel) to net-zero carbon by 2025.
KEY NEXT STEPS • Identify and source appropriate climate data to measure the carbon intensity of the investment portfolio.
Emissions considered relate to activities both in the UK and globally for which Phoenix Group is responsible, and include as applicable: combustion of any fuel and operation of its facilities; fugitive emissions released from refrigerants purchased (based on refrigerant top-ups); and annual emissions from the purchase of electricity, heat, steam or cooling by Phoenix Group for its own use. In this statement Phoenix has also chosen to include estimated employee homeworking emissions (Scope 3), using the EcoAct Homeworking Emissions Whitepaper 2020, in order to recognise the indirect emissions resulting from the move to home-working in 2020 due to COVID-19.
2 Energy Units: 1 GWh = 1,000,000 kWh. 3 The ReAssure Group plc portfolio is not included in the 2019 data, as the acquisition was completed on the 22 July 2020.
METHODOLOGY Phoenix Group has used the main requirements of the GHG Protocol Corporate Standard (revised edition), together with International Energy Agency (‘IEA’) and DEFRA UK Government Conversion Factors 2020, as the basis to report on any GHG emissions in tonnes of carbon dioxide equivalent (‘tCO2e’). This expresses multiple greenhouse gases in terms of carbon dioxide based on their global warming potential (including methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons and sulphur hexafluoride).
• a market-based method that reflects emissions from electricity specific to each supply/contract. Where electricity supplies are known to be from a certified renewable source, a zero emissions factor is used, otherwise residual mix factors are used.
Separately, in 2020 we have estimated (for information purposes only) that 21.5 GWh can be attributed to employee home-working energy consumption, of which 90% occurred within the UK. In GHG emissions terms (Scopes 1, 2 and 3), 91% of Phoenix Group emissions occurred at UK sites.
In 2020, despite the acquisition of the ReAssure Group plc portfolio, absolute emissions (location-based Scope 1 and 2) have decreased by 13%. This reduction is largely attributed to the COVID-19 world health crisis, which has resulted in significant disruption to the conventional way of working, and meant that almost all employees have had to work from home for the duration of the year. This change to home working has also caused a 20% reduction in the like-for-like building emissions of Phoenix Group as per the intensity metric of tonnes per floor area in Table 2.
Approximately 85% of electricity consumption is from certified renewable sources, accounting for why the market-based emissions for Scope 2 are significantly less than the location-based emissions, as shown in Table 1. This is a reduction in percentage of renewable sources compared to 2019 due to the addition of ReAssure Group plc. This has increased the proportion of marketbased emissions compared to locationbased emissions in 2020 versus 2019.
• heat pumps are being considered (to replace gas boilers) in applicable properties.
Where practical, the consolidation of offices will take place to help to reduce Phoenix Group’s operational footprint and increase efficiency of area usage. Due to these actions being carried out in 2020, any subsequent energy reduction will be accounted for and commented on in the Group’s SECR statement.
Emissions, tonnes of CO2e per chosen intensity metric: (locationbased ) (locationbased )
Scope 1 and 2 Emissions from occupied premises per floor area intensity2 80 kg CO2e/m2 101 kg CO2e/m2
Scope 1 and 2 Emissions from occupied premises per full-time equivalent employee (‘FTE’) intensity3 1.2 tonnes CO2e/FTE
RISK ENVIRONMENT The overall risk environment is heightened since March 2020; this predominantly reflects prolonged uncertainty relating to COVID-19 and the resulting impacts on the economy, our customers and our colleagues, in addition to the scale of internal demands from the extent of change in the organisation.
The Group utilised its RMF to respond effectively to the rapidly changing pandemic; we continue to adapt a range of COVID-19 stresses to assess the resilience of the Group to a range of potential adverse outcomes from the pandemic. A number of mitigating actions have been taken since March
As a result of pre-emptive action, the Group was well placed to deal with the operational consequences arising from the end of the Brexit transition period. The Group continues to monitor the implications for our operations in light of the new trading relationship agreed between the UK and EU and will take mitigating action if required.
In July 2020, the Group successfully completed its acquisition of ReAssure Group plc bringing additional scale to Phoenix’s Heritage business and enhancing our key attributes of cash generation, resilience and growth. The impact of the ReAssure Group plc acquisition on the enlarged Group’s risk profile is considered within the Group’s principal risks and uncertainties on pages 83 to 89.
We regularly assess ourselves against our risk culture vision, doing this through a comprehensive dashboard with a suite of measures on people, governance, customers and leadership.
The following risk appetite statements are adopted by the Group: Capital – The Group and each Life Company will hold sufficient capital to meet business requirements including those of key stakeholders in a number of Board-approved asset and liability stress scenarios.
Control – The Group and each Life Company will, at all times, operate a strong control environment to ensure compliance with all internal policies, applicable laws and regulations, in a commercially effective manner.
Sustainability – The Group will deliver on its sustainability commitments to foster responsible investment, reduce our environmental impact, follow our corporate purpose and be a good corporate citizen.
The Group treats climate change risk and conduct risk as cross-cutting risks that impact all aspects of the Risk Universe.
RISK POLICIES The Group Risk Policy Framework supports the delivery of the Group’s social purpose and enterprise strategy by establishing the operating principles and expectations for managing the key risks to the Group’s business. Each of the risk policies define: • the individual risks the policy is intended to manage; • the degree of risk the Group is willing to accept, which is set out in the policy risk appetite statements; • the minimum control standards required in order to manage the risk to an acceptable level; and
The risk policies are mapped to each of the Level 2 Risk Universe categories to ensure complete coverage of all material risks.
Group Risk conducts an annual assessment of the effectiveness of each function in the business in adhering to the requirements of the RMF. This provides assurance to management and the Boards that the RMF has been implemented consistently and is operating effectively across the Group.
First line: Management Management of risk is delegated from the Board to the Group Chief Executive Officer, Executive Committee members and through to business managers. The first line is responsible for implementation of the RMF, ensuring risks to the Group and its customers, shareholders, colleagues and society are identified, assessed, controlled, monitored, managed and reported.
Second line: Risk oversight Independent oversight of risk management is provided by the Group Risk Function through advice, guidance, review, challenge, opinion and assurance; their views are reported to the Board Risk Committee. Group Risk’s purpose and responsibilities are set out in the Risk Mission, Mandate and Plan, which is presented to the Board Risk Committee for approval annually.
Third line: Independent assurance Independent verification of the adequacy and effectiveness of internal controls and risk management is provided by the Group Internal Audit function, reporting their output to the Group Board Audit Committee.
The governance framework in operation throughout the Group can be found in the chart above.
EMERGING RISK The Group defines an emerging risk (or opportunity) as an event that is perceived to be potentially significant but is not yet fully understood. Mitigating action may not be necessary until further information is known about the possible impact. Emerging risks could either be completely new risks or connected with existing risks in unfamiliar conditions.
STRATEGIC RISK MANAGEMENT Strategic risks threaten the achievement of the Group’s social purpose and enterprise strategy. The Group recognises that core strategic activity brings with it exposure to strategic risk.
RISK AND CAPITAL MODELS A continuous process is followed for identification and assessment of risk types and the corresponding resilience of the Group’s capital position. The Group continually strives to enhance its internal risk and capital models and the related modelling must be sufficiently accurate to enable appropriate ranking and management of risks.
Under Solvency II, the development and production of any Internal Model output contributing to regulatory capital requirements must comply with validation standards. This is supported by a Model Governance Policy, which sets out the standards that must be satisfied to demonstrate meeting Solvency II requirements. The Internal Model output is used within the ORSA process to provide insight into risks associated with Group objectives.
Our Stress and Scenario Testing Programme uses the Internal Model to assess the capital impact of a range of plausible and extreme stresses.
Management and the Board Risk Committee have carried out a robust assessment of principal risks and emerging risks. As a result of this, two new strategic risks around ‘Open business’ and ‘Delivery of change’ have been introduced. This recognises the growing importance of managing risk in these areas to enable the Group to effectively deliver its strategic objectives.
In addition, a principal risk in the Group’s 2019 Annual Report and Accounts involving customer proposition development has been combined with our ‘customer outcomes’ principal risk. This reflects the importance of delivering propositions that meet the evolving needs of our customers across our Heritage and Open businesses.
Further details of the Group’s exposure to financial and insurance risks and how these are managed are provided in note E6 and F4 (to the IFRS consolidated financial statements).
The Group is exposed to the risk of failing to drive value through inorganic growth opportunities, including acquisitions of life and pensions books of businesses.
The Group continues to assess new inorganic growth opportunities and applies a clear set of criteria to assessing these opportunities.
Our acquisition strategy is supported by the Group’s financial strength and flexibility, its strong regulatory relationships and its track record of managing customer outcomes and generating value.
Integration plans are developed and resourced with appropriately skilled staff to ensure target operating models are delivered in line with expectations.
The Group continues to actively manage operational capacity required to deliver its strategy, including transition activities.
Following the ReAssure Group plc acquisition, we have completed the Part VII transfer of business acquired from L&G and migrated customers to our in-house administration platform.
Our strategic partnerships are a core enabler for delivery of the Group’s strategy; they allow us to meet the needs of our customers and clients and deliver value for our shareholders. The Group’s end state operating model will leverage the strengths of our strategic partners whilst retaining in-house key skills which differentiate us.
The Group has in place established engagement processes with SLA plc to oversee and develop the strategic partnership. These processes will be adapted to reflect the new simplified extended strategic partnership between the Group and SLA plc that was announced in February 2021.
We have in place established processes to oversee services provided by HSBC.
Each Business Unit will hold an annual strategy setting exercise to consider customer needs, the interests of shareholders, the competitive landscape and the Group’s overall purpose and objectives.
The Group is established in the Bulk Purchase Annuity (‘BPA’) market and continues to invest in its operating model to further strengthen its capability to support its growth plans.
For new BPA business, the Group continues to be selective and proportionate, focusing on value not volume, by applying the Group’s rigorous Capital Allocation Framework.
In addition, there are long-term market, insurance, reputational, propositional and operational implications of physical risks resulting from climate change (e.g. the impact of physical risks on the prospects of current and future investment holdings, along with potential impacts on future actuarial assumptions).
COVID-19 has amplified expectations for delivery of the Group’s social purpose and sustainability vision. A failure to deliver could result in adverse customer outcomes, reduced colleague engagement, reduced proposition attractiveness and reputational risks.
A Group-wide project is underway to enhance our approach to managing the financial risks of climate change, including embedding climate risk considerations within the Group’s RMF, which will meet the requirements of Supervisory Statement 3/19.
In March 2020, the Group became a signatory to the Task Force on Climate-related Financial Disclosures (‘TCFD’). Our disclosures in line with TCFD recommendations, including planned future priorities across each of the TCFD focus areas are outlined on page 67.
Work is in progress to fully embed material climate-related risks into the Group risk policies. The Group Board has also approved a new Sustainability Risk Appetite Statement.
Our new sustainability strategy has evolved to respond to the changing needs of our stakeholders and we have set targets to monitor progress towards our sustainability commitments. Further details on our sustainability strategy are available in our Sustainability Report.
The Group does not have sufficient capacity and capability to fully deliver its significant change agenda which is required to execute the Group’s strategic objectives
The Group’s ability to deliver change on time and within budget could be adversely impacted by insufficient resource and capabilities as well as inefficient prioritisation, scheduling and oversight of projects. The risk could materialise both within the Group and our strategic partners.
This could result in the benefits of change not being realised by the Group in the timeframe assumed in our business plans and may result in the Group being unable to deliver its strategic objectives.
Information setting out the levels of resource demand and supply, both a current and forecast view, will continue to be provided to accountable senior management so that informed decision-making can take place, with all risks to delivery appropriately identified, assessed, managed, monitored and reported.
The Group fails to deliver fair outcomes for its customers or fails to deliver propositions that continue to meet the evolving needs of customers
The Group is exposed to the risk that it fails to deliver fair outcomes for its customers, leading to adverse customer experience and potential customer detriment. This could also lead to reputational damage for the Group and/ or financial losses.
In addition a failure to deliver propositions that meet the evolving needs of our customers may result in a failure to deliver our purpose of helping people secure a life of possibilities.
The Group Conduct Risk Framework, which overarches our Risk Universe and all risk policies, is designed to detect where our customers are at risk of poor outcomes, minimise conduct risks, and respond with timely and appropriate mitigating actions.
We maintain a strong and open relationship with the FCA and other regulators, particularly on matters involving customer outcomes.
The Group’s Proposition Development Process ensures consideration of customer needs and conduct risk when developing propositions.
Throughout the pandemic the Group has continued to provide ongoing support to customers, including those most vulnerable, both when paying out on their protection plans and when making decisions about their life savings during this period of uncertainty.
In 2020, the Group continued to make significant investments in our propositions, driven by customer insight, with the completion of an enhanced client analytics tool, in-scheme drawdown functionality and the launch of a workplace ESG passive default fund.
Following the ReAssure Group plc acquisition, we have completed the Part VII transfer of business acquired from L&G and migrated customers to our in-house administration platform. Work is ongoing to ensure that customer service for the transferring customers meets our internal standards.
Political uncertainty or changes in the government could see changes in policy that could impact the industry in which we operate.
The Group undertakes proactive horizon scanning to understand potential changes to the regulatory and legislative landscape. This allows the Group to understand the potential impact of these changes to amend working practices to meet the new requirements by the deadline.
There is some uncertainty as to whether the UK government will change the current regulatory and legislative requirements in a post-Brexit environment but it is anticipated that any such change will include a sufficiently long lead in time to allow the Group to react appropriately.
There are three core drivers for the heightened risk assessment: COVID-19 could still adversely impact the operational resilience of the Group and its operations both in the UK and globally, in regions where some our outsource partners have a presence. Whilst many potential exposures can be effectively mitigated, a large-scale loss of colleagues on a temporary or more permanent basis is more challenging to resolve in the short-term.
The scale of strategic customer transformation activity across the Group over the coming two to three years creates increased potential for operational disruption to occur.
The Group fails to retain or attract a diverse and engaged workforce with the skills needed to deliver its strategy
Delivery of the Group’s strategy is dependent on a talented, diverse and engaged workforce.
We regularly benchmark terms and conditions against the market. We maintain and review succession plans for key individuals.
Following the transition to working from home due to COVID-19, the Group has conducted regular Colleague Snapshot Surveys to monitor colleague engagement levels and identify any concerns; appropriate actions are taken following analysis of the results.
The Group continues to actively manage operational capacity required to deliver our strategy. This is particularly pertinent given the increasing demands on our workforce at this time.
There has been a significant increase in engagement scores in our colleague surveys during 2020. However, there remains the potential for colleague engagement, wellbeing and resilience to be adversely affected by ongoing COVID-19 restrictions, prolonged home working and organisational design changes.
The increased scale and presence of the Group, and our success in multi-site and remote working, gives us greater access to a larger talent pool to attract in the future.
The Group’s excess capital position continues to be closely monitored and managed. The Group regularly discusses market outlook with our asset managers.
Markets reacted favourably to the positive news on the COVID-19 vaccines, but there remains significant uncertainty over the timing and extent of any recovery and the medium to longer term economic consequences of the pandemic.
Our exposure to residential property continues to increase as a result of our BPA investment strategy, however, exposures are currently relatively small in the context of the Group’s AUM and remain within our risk appetite.
The Group may be exposed to adverse demographic experience which is out of line with expectations
The amount of additional capital required to meet additional liabilities could have a material adverse impact on the Group’s ability to meet its cash flow targets.
Where required the Group continues to take capital management actions to mitigate against adverse demographic experience.
The heightened risk exposure reflects increased uncertainty around future demographic experience as a result of COVID-19 impacts, particularly mortality, longevity and persistency risk. The long-term impact of COVID-19 on both longevity and persistency experience is not yet clear.
The Group has monitoring and triggers in place to ensure current assumptions remain representative of our view on future experience.
Pensions dashboard An industry-wide dashboard giving customers a single view of their defined benefit, defined contribution and State pensions. There is an opportunity to play a leading role in the development of the dashboard and to attract pension pot consolidation and deliver good customer outcomes.
Addressing UK savings gap Generations of UK savers face projected funding shortfalls in retirement. The Group is seeking to address this gap through investment and growth in the Open business.
COVID-19 aftershocks Multiple political, economic, social, technological and global impacts emerged as COVID-19 pushed the global economy into a recession.
The Group is exposed to the risk of downgrades and a deterioration in the creditworthiness or default of investment, reinsurance or banking counterparties. This could cause immediate financial loss or a reduction in future profits.
The Group regularly monitors its counterparty exposures and has specific limits relating to individual exposures, counterparty credit rating, sector and geography.
The Group undertakes regular stress and scenario testing of the credit portfolio. Where possible, exposures are diversified through the use of a range of counterparty providers. All material reinsurance and derivative positions are appropriately collateralised.
Throughout 2020, the Group took de-risking action to increase the overall credit quality of the portfolio and mitigate the impact of future downgrades on risk capital.
In accordance with provision 31 of the 2018 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 2025.
Progress against the AOP is reviewed monthly by both the Group’s Executive Committee and the Board.
The Board has also made certain assumptions when making the assessment and these include the following: • no change in stated stable and sustainable dividend policy; • that corporate acquisitions are not relevant, as any acquisition would only be progressed on the basis it meets the Group’s stated criteria and capital allocation framework; and
• the stresses calculated occur on 1 January 2021 with no allowance for any recovery or contingent actions available, but do take into account the impact of any appropriate Solvency II transitionals recalculation.
ASSESSMENT OF VIABILITY In making the viability assessment, the Board has undertaken the following process: • It considered Group prospects, taking into account current position and the principal risks and uncertainties that it is facing as outlined above; • It defined that viability is maintaining the capability to satisfy mandatory liabilities and meet external targets; • It reviewed the AOP which considers profits, liquidity, solvency and strategic priorities and the impacts of management actions on the Group. The AOP was finalised in January 2021 and reaffirmed the Group’s strategy; • It completed stress testing to assess viability under severe but plausible scenarios, including two adverse stresses, with no recovery or contingent actions, which are deemed to be representative of the key financial risks to the Group as follows: 1. Market stress – a combined market stress broadly equivalent to a 1 in 10-year event, calibrated to the Phoenix internal model, incorporating a fall in equity, property values and yields, with a widening of credit spreads.
2. Longevity stress – longevity and yield stress broadly equivalent to a 1 in 10-year event, which implies a 1.2 year increase in life expectancy for a 65-year-old male and 1.0 year increase for a 65-year-old female, alongside a fall in yields.
The results of the stress testing, including a combination of individual scenarios, as disclosed in the Business Review Section, demonstrated that due to the Group’s strong capital position, the resilience of the Group and the access to additional funding (including the Group’s undrawn £1.25 billion unsecured revolving credit facility), the Group is able to withstand the impact in each case with regards to meeting all mandatory liabilities as they fall due, and continue to track towards meeting external targets assuming a partial recovery from the stress.
COVID-19 The Group’s business has remained resilient during the COVID-19 pandemic. The Group has successfully been able to maintain its operational capability with almost all colleagues working from home. Operational capacity across the Group, and within our outsourcing partners, continues to be actively monitored by management and Boards. This ensures the Group is effectively prioritising activity and sufficient capacity exists to continue to meet business demands and prevent any adverse impact to customer outcomes and business performance.
COVID-19 has exposed the Group to increased mortality risk. Given the relative size of the business, this risk is less onerous than the longevity stress applied within the viability assessment, and hence no additional stress testing was deemed required in this regard.
COVID-19 has had a significant impact on the macro-economic conditions in which the Group operates. Whilst the Group’s hedging strategy provides resilience in this regard, the Group’s financial position retains exposure to volatile economic conditions.
Additional economic stress testing has been performed to demonstrate the impact of further downside scenarios on the Group’s financial position, including severe and prolonged recessionary scenarios and a significant credit loss event (incorporating a full letter downgrade on 50% of the Group’s bond portfolio). Although the assumptions applied in these scenarios are possible, they are considered low likelihood and do not represent our view of the likely outturn. Furthermore, whilst economic recovery under such scenarios is delayed compared to the base scenario applied in the AOP, it is assumed to take place before the end of the Group’s five-year projection period.
STATEMENT OF VIABILITY Based on the results of the procedures outlined above, the Board has a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the five-year period of assessment.
“ During this extraordinary year, our governance has stood up strongly, underpinning the protection of our customers, colleagues and shareholders and the enhancement of our performance as we increasingly look to our wider role in society.”
Christopher Minter and Hiroyuki Iioka as nominees of new strategic shareholders, Swiss Re and MS&AD respectively. Chris and Hiro have brought substantial experience and executive skills to our Board as well as additional international perspectives. At that time, Standard Life Aberdeen’s shareholding in Phoenix reduced to a level where they were entitled to nominate one director instead of two to the Phoenix Board. As a result, Campbell Fleming left the Board. I wish to thank Campbell for his excellent, insightful contribution over two years on our Board.
Given the executive directorship changes and rotation of Non-Executive Directors over the last few years, the Board evaluation review undertaken towards the end of 2019 concluded that a period of Board stability would be preferable going forward (excluding the nominees from our strategic shareholders). So we undertook no non-executive recruitment in 2020.
AGM votes in favour of all resolutions May 2020 contribute beyond the formal meetings.”
My last comment, though, is to thank our people for their remarkable contributions and resilience in the face of great adversity. We look to the future with great optimism.
During 2020, the Board has overseen the redefining of the Company’s purpose, values and strategic priorities. These are set out below and described in more detail on pages 4 to 5 and 26 to 45 of the Strategic Report.
The Board’s activities in 2020, which are linked to our strategic priorities, are described on pages 96 to 97.
• The Board’s role in redefining our purpose is highlighted on page 96 • The Board’s commitment to our values and the promotion thereof is illustrated throughout this report.
BOARD LEADERSHIP AND COMPANY PURPOSE Purpose and values pages 94 & 96 Strategic priorities pages 94 & 96 to 97 Operation of the Board and conflicts of interest page 95 Board activities during 2020 pages 96 to 97 Employee engagement pages 104 to 105 Stakeholder engagement pages 108 to 109 The Board’s section 172 Companies Act 2006 duty pages 109 to 111 Whistleblowing arrangements page 118
Skills, knowledge and experience pages 98 and 113 • Board composition pages 98 to 100 • Board education page 113
Auditor independence and external auditor Policy • Consideration of Significant Matters relating to the Financial Statements
These matters include: • Group strategy and business plans; • oversight of the Group’s culture; • major acquisitions, investments and capital expenditure; • financial reporting and controls; • dividend policy; • capital structure; • the constitution of Board committees; • appointments to the Board and Board committees; • senior executive appointments; and • key Group policies.
specific responsibilities to its five standing Board committees, as shown below. The terms of reference of each of the committees can be found on the Company’s website.
Responsible for: • Sustainability strategy • ESG reporting • Culture monitoring
Responsible for: • Financial reporting • Internal controls • External audit • Internal audit • Whistleblowing 95Phoenix Group Holdings plc Annual Report & Accounts 2020
BOARD LEADERSHIP AND COMPANY PURPOSE During a year of change and unprecedented global events, the Board has remained steadfast in ensuring Phoenix Group’s commitment to high standards of corporate governance, leading the Group to continue to generate cash, maintain resilience, and foster the growth and long-term success of Phoenix for our stakeholders.
During 2020, we redefined our purpose to: helping people secure a life of possibilities. The strategic priorities approved by the Board and core to the achievement of the Group’s purpose are highlighted on page 94, with further detail available on pages 4 to 5 and 26 to 45 of the Strategic Report.
Our Board in action – what the Board did this year
• Approving and monitoring 2020 targets • Consideration and challenge of CEO updates on strategic performance • Driving the future sustainability of our business – growth of long-term cash generation focused on the expansion of our Open business, including Bulk Purchase Annuities (‘BPA’)
• Monitoring of the Group’s solvency and liquidity positions • Recommendation of the 2019 Final Dividend payment and 2020 Interim Dividend – following detailed scenario testing in light of COVID-19
• Approval of funding arrangements for the ReAssure acquisition • Support for long-term cash generation through Open business expansion • Approval of capital allocation for the expansion of BPA activity
COVID-19 and its projected impact on stakeholders • Approval of announcement on Capital Markets Day, including new purpose of helping people secure a life of possibilities and net-zero carbon targets
• PRA/FCA meeting with the Board • Interaction with colleagues through the Colleague Advisory
• Monitoring of investor feedback and analyst reports 96 Phoenix Group Holdings plc Annual Report & Accounts 2020
• COVID-19 – workforce impact and working from home operating model
• CFO succession • Appointment of Swiss Re and MS&AD nominee Directors • Board inductions and education/deep-dive sessions • Reviewing changes to the Executive Management Team and succession planning • Deep dive on talent, capability, diversity and succession
Inspire our people 97Phoenix Group Holdings plc Annual Report & Accounts 2020
Appointed: 31 October 2018 “As Chairman of Phoenix, I have plenty of opportunity to utilize experience gained over nearly 40 years in financial services; setting strategy, overseeing the implementation of our short and medium term plans and leading the Board on governance matters for the benefit of the Group and all our stakeholders. That experience was gained whilst investment banking at JP Morgan (in debt and equity capital markets and M&A); Lehman Brothers (as Managing Director in the European financial institutions group); the Pension Insurance Corporation (as Senior Independent Director); Catlin Group Limited, Miller Insurance Services Ltd (as Chair); Friends Life Group Limited and Friends Life Holdings plc amongst others.”
External appointments: Board of the British United Provident Association Limited (BUPA), Miller Insurance Services LLP and Convex Group Limited. Chairman of Clipstone Industrial REIT plc (due to cease on 1 April 2021); and Alderman in the City of London Corporation.
Appointed: 10 February 2020 “I was thrilled at the opportunity to become Group CEO of Phoenix during 2020. I have a passion for our Group purpose and believe that my 30-plus years of experience in the insurance industry will help support our achievement thereof. I was most recently CEO, UK Insurance at Aviva plc; and prior to that worked as Group Chief Executive of Friends Life; Managing Director of Scottish Widows; Chief Executive of the Retirement Income division at Prudential; and Chair of the ABI.”
External appointments: Board member of the Association of British Insurers, Trustee of the NSPCC and Chair of their Income Generation Committee. Also the government’s Business Champion for Older Workers and for the Ageing Society Grand Challenge. Awarded an MBE in the 2021 New Year Honours.
Outer Ring – Excludes shareholder nominees Inner ring – Full Board including shareholder nominees
Appointed: 15 May 2020 “I was delighted to have been appointed Group CFO in May 2020, following six years as Deputy CFO and 20 years with Phoenix. My experience has spanned a breadth of finance and strategy-related roles, as well as numerous acquisitions and integrations. This has enabled me to develop a deep understanding of the insurance business and the clear financial framework that we operate within, allowing me to create value, deliver dependable cash generation and bring consistency to the next phase of our journey.”
External appointments: Chairman of Liontrust Asset Management plc, Director of RSA Insurance Group plc and Director of The Bank of N. T. Butterfield & Son Limited.
Appointed: 1 July 2017 “I have over 30 years’ experience in financial services and insurance, which encompasses M&A, corporate finance and private equity (Baring Brothers, Schroders, GE Capital and MMC Capital) and senior executive roles in the insurance industry (Aspen Insurance Holdings) including strategy, corporate development and as CEO of Aspen UK, comprising the Group’s principal UK (re)-insurance companies. I am also a Non-Executive Director at Admiral Insurance Group PLC, a Council Member of Lloyd’s of London and a Vice President of the Insurance Institute of London. My knowledge of the insurance industry from the perspective of both investment banking/corporate development and as a senior executive, enables me to contribute broadly to the development and execution of the Group’s strategy.”
External appointments: Senior General Manager, Head of Business Development Department for MS&AD Insurance Group Holdings, Inc. Alternate Non-Executive director of Challenger Limited, listed on the Australian Stock Exchange
Changes to the composition of the Board are detailed in the Directors’ Report on page 159, which names all persons who were, at any time during the financial year, Directors of the Board.
Appointed: 1 September 2016 “After 35 years in insurance with Legal & General, ultimately as CEO of LGAS, Phoenix was a very natural next step for me. It has been extremely rewarding, helping Phoenix grow from the FTSE250 when I joined. Chairing the Risk Committee has allowed me to be closely involved in helping govern this growth to ensure sustainability for customers and shareholders and enabling the Executive to draw upon my experience of 12 years on a FTSE100 board.”
External appointments: Head of Principal Investments & Acquisitions for Swiss Re.
External appointments: Non-Executive Director, currently on the boards of Avast plc, The Monks Investment Trust plc and Schroder Japan Growth Fund plc. Also the Audit Chair and a Trustee of Youth Sport Trust.
Appointed: 1 September 2016 “I’ve spent 30 years as an investment banker at Lazard. Initially I ran the European Media franchise, but for several years I’ve been a generalist, doing deals in a wide range of sectors and countries; I became European Vice Chairman in 2007 and Head of UK Investment Banking in 2009.
Appointed: 1 July 2014 “Serving Phoenix and its stakeholders as a Non-Executive Director and Chair of Remuneration leverages my expertise in insurance, finance and human capital. As Managing Director, Head of Insurance Capital Markets, at Barclays Capital, I led a highly qualified team of finance, actuarial and accounting experts focused on the optimisation of capital resources via equity, hybrid and debt capital management as well as M&A, risk management, and life insurance securitisation. My 8 years on the board of SCOR SE, the world’s 4th largest reinsurer, provide a deep perspective on the wider insurance market. My remuneration committee roles at Pernod Ricard SA and SGS SA give me a broader view of key considerations across geography and sector.”
External appointments: Non-Executive Director and Chair of the Audit Committee of SCOR SE, a Non-Executive Director and Chair of the Remuneration Committee of Pernod Ricard SA, a Non-Executive Director and member of the Audit Committee and Remuneration Committee of SGS SA and a member of the supervisory board of the privately-owned bank Gutmann AG.
• leads the development of the Group’s strategy for agreement by the Board, to create a purpose-led organisation with sustainability at the heart and a brand that reflects a leading industry voice for savers and pensioners; • leads and directs the Group’s businesses in delivery of the Group strategy and business plan, to create a customer-obsessed organisation that can profitably grow organically and through M&A; • creates a diverse team connected by common values, with market-leading capability and talent that is engaged and empowered to deliver, and performance manages the senior executive team; • manages the Group’s risk profile and sets clear standards and policies by making informed decisions and controlling risks in line with appetites, supported by an effective risk culture and strong regulatory relationships; • leads the Group to deliver strong, dependable cash generation, underpinned by a resilient balance sheet, which delivers a safe and sustainable dividend with the potential for progression; • oversees the evolution of the operating model through effective delivery of transformation and change, delivering target benefits and underpinned by operational excellence; and
• embeds a risk-conscious Group which recognises policyholder obligations in terms of service and security within the ReAssure businesses.
• leads the development and delivery of Group asset management and investment strategy; • responsible for managing the Group asset risk to within the stated risk appetite; OUR BUSINESS, LED BY THE EXECUTIVE MANAGEMENT COMMITTEE The Executive Management of the Group is led by the Group Chief Executive Officer, who is supported by the Executive Committee (‘ExCo’). 2020 was a year of change within ExCo and the executive management team, creating a stronger leadership team equipped to achieve the longterm success of our business. The roles and responsibilities of each ExCo member are set out below.
• leads on the Sustainable Investing agenda for the Group, including net-zero carbon for assets by 2050; • ensures strategic asset allocation and delivering ongoing performance of the portfolio; and
• supports the Group’s requirements with investors, rating agencies, regulators, external directors on the asset management platform.
• challenges the development of the Group’s social purpose and strategy; • develops an appropriate Investor Relations strategy that raises the profile of the Group and ensure engagement with investors and analysts; • develops a market-leading sustainability strategy with plans to drive delivery across the Group; • defines the public relations and public affairs strategy for external stakeholder groups; and
• leads the Group’s customer function to drive operational and experience delivery for the Group’s customer base; • sets standards and policies for customer management and interaction; and
• leads the Group’s risk function, promoting informed decision-making and controlled risktaking; • oversees and manages the Group’s relationship with the FCA and PRA; and
• supports the Group Board Risk Committee in the oversight of the Group’s risk framework, in line with risk strategy and appetite.
• enhances shareholder value through clear, rigorous assessment of growth opportunities and M&A in line with the Group’s capital allocation framework.
• leads provision of legal advice to the Board, other Group company boards, the Executive Committee and senior management; • oversees and coordinates maintenance of, and adherence to, appropriate corporate governance procedures across the Group; • designs and implements a framework to manage legal risk within the Group, including compliance by Group companies and staff with relevant legal obligations; and
PASSIONATE ABOUT DOING THE BEST FOR OUR CUSTOMERS, COLLEAGUES AND INVESTORS 2020 was a year of unprecedented events that have impacted everyone. COVID-19 has changed our world and the way we live our lives. The Board has worked hard to ensure the continued robustness of our business – delivering cash, resilience and growth for the benefit of our stakeholders.
THE BOARD’S RESPONSE TO COVID-19 During 2020, the Board held weekly briefing meetings (changing to fortnightly after May 2020) to monitor management’s continued ability to operate the business, robustly upholding customer service; and to ensure continued focus for the achievement of our strategic priorities and high standards of governance.
KEY AREAS OF BOARD FOCUS DURING THE PANDEMIC • The Group’s ability to support and protect customers, colleagues and the community, whilst protecting the long-term value of the Group. OUTCOME: Continued delivery of strong customer service with extra support initiatives provided, including out of normal hours’ service for NHS staff. Regular monitoring of the health and wellbeing of colleagues.
• Business continuity planning in action, to mobilise homeworking and ensure our sustained delivery of high standards of service to customers. OUTCOME: 99% of employees could work remotely within 10 days of the first 2020 lockdown being announced, supported by the deployment of over 4,500 individual pieces of IT equipment.
• Close monitoring of the Group’s solvency and liquidity positions, including our Solvency II surplus and shareholder capital coverage ratio. OUTCOME: The Group’s capital position was materially strengthened, despite COVID-19, from a combined Group pro forma surplus of £4.4 billion at 30 June 2020, to £5.3 billion at 31 December 2020 – a shareholder capital coverage ratio of 164%.
• Close monitoring of the Group’s performance against its cash generation target of £800–900 million to YE20. OUTCOME: The Group exceeded its revised target (£1.5 – £1.6 billion set in August 2020), achieving cash generation of £1.7 billion.
• Addressing the need to reorganise the Annual General Meeting format to react to rapidly changing Government guidelines. OUTCOME: A webcast Annual General Meeting was held in May 2020 with all resolutions passed with 96.5% or more votes in favour.
The Group has been involved in a wide variety of sustainability-related activities during the year. This activity resulted in our net-zero carbon commitment (Operations by 2025 and Investment Portfolio by 2050) and confirmation of our status as a signatory of the UN-supported Principles of Responsible Investment, announced in December 2020. More detail about these activities can be found in our Sustainability Report for the year ended 31 December 2020.
Committee is responsible for ensuring the appropriateness of the Group’s sustainability strategy. The sustainability strategy is aligned with, and forms part of, the overall Corporate Strategy. It sets out the Group’s six key pillars of sustainability – customer, responsible investment, environment, suppliers, people and culture, and community engagement; with key performance indicators (‘KPIs’) set for each pillar.
PUTTING SUSTAINABILITY AT THE HEART OF OUR BUSINESS Our contribution to a more sustainable world is fundamental to our purpose of helping people secure a life of possibilities.
information about the Group’s sustainability reporting, including matters relating to climate risk see pages 40 to 41 and 67 to 78 of the Strategic Report.
• Sustainability oversight – The Committee reviews and challenges activities carried out within the business aligned with the sustainability strategy (approved by the Board) and associated risk appetites (set by the Board Risk Committee), ensuring that the strategy is embedded throughout the organisation.
THE BOARD SUSTAINABILITY COMMITTEE MEMBERSHIP • Karen Green (Chair) • Wendy Mayall • Nicholas Shott • Kory Sorenson • Mike Tumilty
“ I am very enthusiastic about the new Board Sustainability Committee, its role within the Phoenix Group and the positive impact it aims to provide – contributing to a more sustainable world for the benefit of our stakeholders.”
FOCUS FOR THE YEAR AHEAD: • Oversight of progress to embed the
Group sustainability strategy and strides towards the Group’s 2021 sustainability commitments.
• Holistic oversight of Group sustainability reporting in conjunction with the Board Audit and Risk Committees.
• Monitoring our corporate culture; and the Group’s people, Diversity and Inclusion policies and practices.
In my role as the Designated Director for Workforce Engagement, I undertook a programme of virtual visits across the business, including our new ReAssure colleagues, and representatives of our colleague-led networks. Discussions were focused around the following topics: 1. The organisation’s response to
COVID-19 and colleagues’ well-being 2. The current and likely future impacts of COVID-19 3. The volume and scope of organisational change within the Group after the acquisitions of Standard Life Assurance and ReAssure.
4. The Group’s evolving approach to Sustainability 5. Options for the future world of work
OUR 2020 VIRTUAL COLLEAGUE ADVISORY FORUM Our Colleague Advisory Forum in 2020 took place virtually in November and, as with our inaugural event in 2019, sought to build on discussions from my virtual visits and key priorities for the Group to allow for broad based discussion around three main areas: culture, people and employee wellbeing; the Group’s ongoing strategic evolution, and organisational change/ integration activity. Specific agenda items included: • 2020 Board focus and activity • The output from the Group’s bi-annual Colleague Insights Survey • Diversity and Inclusion • Change and integration updates • Our approach to Sustainability • The workplace of the future
Colleagues were joined by Andy Briggs, Group CEO, other members of the Group Executive Committee and a number of Non-Executive Directors.
The Group’s bi-annual survey highlighted an improved engagement score of 75% and the Forum focused on understanding the drivers behind this and some key focus areas for colleagues. These included options around continued home working; continuing communications around future business planning; and improving colleagues’ work/life balance. There is clear support from colleagues for the Group’s ambition to become a more diverse and inclusive workforce with the introduction of the ‘Who We Are’ app. This is a simple and confidential way for colleagues to share their data and help us build a picture of where we are today and is seen as a positive step. Additional information on our commitments to colleagues can be found within the ‘Inspire our people’ section of the Strategic Report.
HOW THE BOARD MONITORS AND ASSESSES CULTURE AND KEY THEMES ACROSS THE GROUP Sara Thompson, the Group’s HR Director, reports regularly to the Board on our people agenda. The Board has also held fortnightly update calls with Andy Briggs and members of the Executive Committee for most of 2020 alongside its regular meeting schedule with frequent updates on colleague wellbeing and organisational resilience generally. Following the acquisition of Standard Life Assurance in 2018 and ReAssure in 2020, embedding and reinforcing a common culture throughout the business is a strategic priority for both the Executive Committee and the Board. 2020 saw the launch of ‘The Phoenix Story’, which presents our strategic narrative, places focus on our unified set of values and embeds a common cultural thread throughout the Group (read more about The Phoenix Story on page 44 of the Strategic Report).
Colleague engagement is integral to our strategy and our ambition to be the best company that colleagues have worked for. Continuing to develop two-way communication with colleagues and the Board is a key element of this.
MAY 2020 Introduction to ReAssure – the Board received education from ReAssure’s Chief Executive Officer covering its purpose; business model and business plan; organisational history; legal entity structure; products and policy counts; customer focus; assets, key relationships; and people and culture.
SEPTEMBER 2020 ReAssure asset management – the Group Chief Investment Officer provided an induction for the Board including: ReAssure asset management team and strategy; an overview of ReAssure investments portfolio; ReAssure key strategic initiatives; response to COVID-19; ReAssure Separation Programme and Asset Manager Oversight.
Always looking to grow, as individuals, as a team and as a business.
Colleagues Our colleagues glue our common values together, working to achieve our strategic priorities in our pursuit of the Phoenix purpose. The Group’s success would not be possible without the dedication and commitment of our talented colleagues.
Our communities We connect with our local communities and community partnerships. These communities comprise our colleagues, customers, suppliers and many other stakeholders. We understand the importance of building trust and inspiring confidence through community engagement and partnerships.
BOARD STAKEHOLDER ENGAGEMENT COVID-19 and the restrictions associated with it created challenges for the Board’s engagement with stakeholders during the year. Those challenges were overcome through improved digital capabilities and commitment to our purpose and values.
Company’s investor relations department is dedicated to facilitating communication with investors and analysts and maintains an active investors relations programme. See pages 59 and 64 of the Strategic Report for details regarding the Company’s engagement with investors. The Board, supported by the CEO and Executive Committee successfully engaged with investors, analysts and proxy advisers through: meetings (including virtual meetings), the Group’s Annual General Meeting and the virtually held Capital Markets Day. The Board experienced an increased scrutiny on the Group’s ability to pay the 2019 final dividend, which required clear and regular engagement with our investors and regulators.
The Board ensured appropriate oversight and monitoring of our colleagues wellbeing and health during a very challenging and uncertain situation. The Board engaged with colleagues via the Designated NonExecutive Director for Workforce Engagement through the virtual Colleague Advisory Forum (also attended by two other Non-Executive Directors); our annual Colleague Insights survey; and regular updates
from the HR Director and Chief Operating Officer. The ability of the Group to continue its service for customers was central to Board discussions (held weekly and then fortnightly during the first months of the UK COVID-19 pandemic), with particular focus on vulnerable customers and those most in need during the pandemic. The Board received feedback on customer satisfaction and closely monitored customer service performance,
Examples of key decisions of the Board, their link to our strategic priorities, how the matters set out in section 172 have been considered and the outcome of those considerations is set out in the table on the pages 110 to 111 below, demonstrating how the directors of Phoenix Group Holdings plc have carried out their duties under section 172 of the Companies Act 2006. To support the fulfilment of the Directors’ duties outlined above, each paper prepared for consideration by the Board contains an analysis of the potential impact of proposals to be considered by the Board in light of the factors contained in section 172.
• A large proportion of our employees are Phoenix shareholders as a result of participation in the Group’s employee share schemes. The payment of the dividend therefore enabled returns for those shareholder employees.
• In reviewing the appropriateness of the payment or non-payment of the dividend, the Board spent time discussing the impact of its decision on the wider economy.
• The Board focused on the Group’s liquidity and solvency in light of the impact of COVID-19, by considering the stress scenarios referred to above. Those scenarios were also reviewed against the Bank of England’s Financial Stability Report and Monetary Policy Report during May to assess the likelihood of the scenarios materialising. The Board was focused on ensuring a robust review was carried out before making its final decision to ensure the highest standards of business conduct were maintained, as expected by all our stakeholders.
• The Board considered the impact of the formation of the BSC on Phoenix’s employees and it was agreed that one consequence of the establishment of the Committee would be a clear signal to our colleagues that the Group was strongly committed to sustainability at the highest level of governance. The Board discussed the positive effects of this clear commitment for colleague engagement as feedback collated during the year suggested that the Group’s approach to sustainability was a priority for colleagues.
• The Board considered the importance of the establishment of the BSC in driving forward the Group’s ability to contribute to a more sustainable environment for the benefit of all stakeholders, including future generations.
• The Board also considered the impact of the decision on our ability to better support communities, noting that the BSC would provide enhanced oversight and challenge for sustainability initiatives within the business thus ensuring support for our communities was available and consistent across the Group.
• The Board considered the evolving expectations of Phoenix Group Holdings plc’s shareholders when looking at the need for the BSC. During the Board’s sustainability deep-dive session, referred to above, the expected levels of scrutiny on climate and sustainability agendas by investors was discussed.
• Throughout 2020, the Board discussed the long-term strategic direction of the organisation – recognising both its position as the market leader in managing Heritage businesses but also focusing on the opportunities to expand our Open business and Bulk Purchase Annuities (‘BPA’) activity. When considering the opportunity to expand our BPA business, the Board aimed to balance the future long-term benefits for the Company with the short-term expense of material upfront capital allocation. In doing so, the Board considered improvements to capital efficiency to grow the Group’s market share and the long-term consequences of sustainable long-term cash generation aligned with the Group’s ‘wedge’ concept. More detail about the ‘wedge’ can be found in the Strategic Report on pages 14, 17, 32 and 84. The Board also considered other long-term benefits associated with expanding our Open and BPA businesses, including related investments in illiquid assets supporting our ESG agenda and proposition wherever possible.
• The Board approved investment in assets which support our BPA business and support our communities and the sustainability of our environment.
• By providing the Board with detailed plans and implementation roadmaps for driving the execution of strategic plans for expansion of our Open and BPA businesses, the Directors were able to consider and monitor potential impacts on the Group’s reputation for high standards of business conduct and ensure that high standards of business conduct and governance standards were maintained following the decision to enable such expansion.
Board meeting attendance The Board met formally 10 times during 2020, including for a two-day strategy setting meeting. The Board met additionally for regular briefing meetings (over 15) to monitor the evolving pandemic situation. The Board considered it necessary to meet weekly and then fortnightly to ensure appropriate oversight of operations during the COVID-19 pandemic, to achieve the Group’s strategic objectives and protect policyholders. The Non-Executives met with the Chairman three times without the Executive Directors present.
Independence of Board members and appointment terms The Board considers the following Directors to be independent: Alastair Barbour, Karen Green, Wendy Mayall, John Pollock, Belinda Richards, Nicholas Shott and Kory Sorenson. The Board has considered the criteria proposed by the Code in assessing the independence of the Directors. The terms and conditions of appointment of our Non-Executive Directors are on the Group’s website. The remuneration of the Directors is shown in the Directors’ Remuneration Report on pages 124 to 158. 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 and to devote appropriate preparation time ahead of each meeting.
The Senior Independent Director, appointed by the Board, is Alastair Barbour. 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. Descriptions of the roles and responsibilities of the Chairman, Group Chief Executive Officer and Senior Independent Director are available on the Company’s website.
SUSTAINABILITY December 2020 – the Board undertook a deep-dive session including a focus on key changes in 2020 which increased the importance of sustainability such as COVID-19 and the Group’s redefined purpose from a financial consolidator to a purposedriven organisation; the establishment of the new Board Sustainability Committee and its role; delivery of 2020’s sustainability commitments; an overview of the Task Force on Climaterelated Financial Disclosures (‘TCFD’); the evolution of the Group’s sustainability strategy and sustainability benchmarking results.
VALUES AND CULTURE December 2020 – the Board undertook a deep-dive session covering the Phoenix story, defining the common purpose of businesses brought together; the current culture and feedback from colleagues; values at the forefront of the Group’s pandemic response; colleague engagement levels, results and feedback from the 2020 colleagues’ insights survey; and embedding culture as a strategic priority.
BRAND October 2020 – the Board discussed the following during this deep-dive session: building a brand that is understood, trusted and relevant across all stakeholder groups; the building blocks of trust; understanding our stakeholders’ ‘personal agenda’; the brand we want to be; brand architecture and thought leadership.
REASSURE COMPLETION MODULES See page 107 for details of the ReAssure completion modules undertaken by the Board between May and September 2020.
• A set of ‘Operating Principles’ are in place to define the responsibilities and accountabilities of the Risk Committees of Phoenix Group and its subsidiary company boards to mitigate overlap of focus or assurance activity.
• The Chairman of the Phoenix Life and Standard Life Risk Committees and Model Governance Committee, John Lister, is a regular attendee to the Committee and provides members with a regular update on the risk matters pertinent to these key subsidiaries and the matters being dealt with at the Model Governance Committee (which is a Board Committee of the Group’s Life Companies).
• The Chairman of the Phoenix Life and Standard Life Investment Committees, Nick Poyntz-Wright, also periodically attends the Committee meetings to provide key updates, which helps to facilitate discussions relating to investment risk.
• Other regular attendees to the Committee include the Group Chief Actuary, Chief Financial Officer, the Chief Executives of the subsidiary Life Company boards, the Group General Counsel and the Group Head of Internal Audit.
• The Committee received briefing sessions to review the Recovery and Resolution Plan as well as a session on emerging risks and opportunities that could impact the Group post COVID-19.
• The Chief Risk Officer, Jonathan Pears, has full access to the Chair and the Committee and attends all meetings.
• The Committee receives frequent reporting from the Chief Risk Officer and the Group risk function on consolidated risk matters affecting the Group including risk profile assessments and emerging risks.
Committee during the year has been to enhance the existing operational resilience framework to strengthen the control environment due to the impact of COVID-19 and changes in the business operating model.
Own Risk & Solvency Assessment (‘ORSA’) • Consideration, and recommendation for Board approval, of the annual ORSA report for the Group and its regulated subsidiaries. ORSA refresh due to COVID-19 and change in risk profile.
RISK COMMITTEE’S PRINCIPAL ACTIVITIES DURING 2020 In addition to the significant matters discussed in 2020, the Committee also: • Reviewed adherence to the Group
• Monitored compliance with the Group’s principal risk policies, satisfying itself that action plans to address significant breaches of those policies were sufficient.
• Reviewed reverse stress-testing analysis, completed and provided oversight of, and challenge to, the design and execution of the Group’s stress and scenario testing, including any changes of assumptions.
REVIEW OF SYSTEM OF INTERNAL CONTROLS The Board has overall responsibility for the Group’s risk management and internal control systems and for reviewing their effectiveness in accordance with the Code. The Group’s systems of internal controls are designed to manage rather than eliminate the risk of failure to achieve business objectives and can provide only reasonable and not absolute assurance against material misstatement or loss.
• Reviewed and monitored the effectiveness and independence of the Company’s External Auditors.
• Monitoring the overall integrity of the financial reporting by the Company and its subsidiaries and the effectiveness of the Group’s internal controls.
• 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.
• Considering and approving the remit of the Internal Audit function and reviewing its effectiveness.
Annual Report and Accounts, and the 2020 Interim Financial Statements, recommending their approval to the Board, as well as related disclosures and the financial reporting process, supported by reports from management and the external
“ The Committee has continued to deliver on its key responsibilities through taking into account COVID-19, the volatility surrounding the economic environment as well as the impact of the acquisition of the ReAssure Group. The Committee will remain focused on the issues surrounding the pandemic, ensuring that the Group continues to maintain a robust internal control environment. ”
• Reviewed the financial forecasts and target setting prepared by management, supported by the sensitivity analysis on the key assumptions underpinning the forecasts, in support of the assumption that the Group will continue as a going concern, the Group’s ongoing viability and in support of dividend payments.
• Reviewed the Line 1 risk and controls report from management, the Line 2 internal control assessment from Group Risk, and the annual Line 3 internal control environment opinion report (and the half-year update) from Internal Audit prior to its consideration by the Board and received reports regarding consequential actions; • Considered the financial position and risks associated with the acquisition of ReAssure Group plc, supported by reports from management and the Group’s External Auditors. 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.
• Received regular updates from Company management, Internal Audit and External Audit as to the impacts of COVID-19 and the implementation of remote working practices on the Company’s accounting, reporting and internal control activities. Assessed that those processes remained fit for purpose in supporting the Company’s financial reporting and disclosure obligations throughout 2020.
The external auditor partner attended all Audit Committee meetings during 2020, presenting reports on the external audit process, 2020 year end and 2020 interim results, a hot-topics survey and assessments on methodology and actuarial assumptions. The external auditor provided details on benchmarking with regard to assumptions setting as well as challenging and providing guidance on reporting matters and disclosure requirements. There were instances where the external auditor challenged management’s view on certain assumptions and reporting requirements which were clarified by the Committee.
The Audit Committee also considered matters pertaining to the mandatory rotation of the external audit firm – see Auditor’s Appointment on page 119.
GENERAL The other areas that the Audit Committee covered throughout 2020 included the following: • Whistleblowing arrangements within the Group as well as any whistleblowing activity where an employee raised concerns, in confidence, about any possible improprieties. An update to the Whistleblowing policy was approved which took into account the wider geographical presence of the Group and complied with the FCA and PRA’s whistleblowing rules.
Alastair Barbour Chair of Audit Committee 118 Phoenix Group Holdings plc Annual Report & Accounts 2020
AUDITOR’S APPOINTMENT During 2020, the Audit Committee continued to review the requirements for tendering of Audit Services for the Group and its subsidiary companies. It is the Audit Committee’s current intention that the Group will tender its audit services prior to 2024 reflecting the mandatory rotation timing for EY as auditor of one of the Group’s major life companies.
The current lead audit engagement partner is Stuart Wilson, who has held the role from the 2019 statutory audit.
• The Committee considered the findings of external evaluations of EY, notably the findings from the Financial Reporting Council’s Audit Quality Inspection Report.
Management presented papers to the Life Company Audit Committees 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. This included assumptions related to longevity, mortality, persistency, expenses and policyholder behaviour, as well as economic assumptions. These assumptions and methodologies were debated and challenged by the Life Company Audit Committees, prior to their approval.
A summary of these papers was presented for oversight review by the Audit Committee, and the Life Company Audit Committees’ conclusions were reported to the Audit Committee through minutes of its meeting and a discussion between the Chairmen of the committees. The Audit Committee discussed, and questioned management and EY on, the content of the summary papers and the Life Company Audit Committee’s conclusions.
Management presented papers detailing the results of annual impairment testing carried out in respect of goodwill balances and reviews for indicators of impairment performed in respect of finite life intangibles.
Management presented papers detailing the basis of fair value adjustments made to the acquisition balance sheets including the valuation of tangible net assets, the valuation of intangibles including the Acquired Value of In-Force business and the gain on bargain purchase. The key methodologies and assumptions applied in determining such adjustments were reviewed and approved by the Audit Committee.
Provisions Management presented papers detailing the basis of recognition and measurement of accounting provisions recognised by the Group. The Audit Committee considered the results of the analysis performed, the uncertainties surrounding measurement adopted and confirmed the appropriateness of the conclusions reached.
The Nomination Committee has been very active in non-executive recruitment over the last few years. Recruitment since 2016 has included the role of Group Chair in 2018, with new Non-Executive Directors as follows: • September 2016 – Wendy Mayall,
John Pollock, Nicholas Shott • July 2017 – Karen Green • October 2017 – Belinda Richards • October 2018 – Nicholas Lyons
There have, in addition, been the following appointments through strategic shareholder nomination under their shareholding rights: • August 2018 – SLA nominees,
Corporate governance report continued 122 Phoenix Group Holdings plc Annual Report & Accounts 2020
• The Board’s overriding aim is to appoint the right Directors to the Board to drive forward the Group’s strategy within a robustly compliant framework.
• The Board will undertake regular skills audits to ensure the Board’s skills remain appropriate for its strategy and providing diversity where possible.
The Nomination Committee has been instrumental in increasing gender diversity on the Board and in 2020 took an active role in oversight and guidance of the executive diversity and inclusion process including a focus on the development of a diverse succession pipeline. Details of the diversity and inclusion initiatives for executives are contained in the Inspire Our People section on page 42 to 45 of this Annual Report including the gender balance of those in senior management.
A further activity for the Nomination Committee was to review the time spent by Directors in fulfilling their duties. This concluded that the time given by Directors in 2020 exceeded the level expected in their appointment terms, particularly given the time devoted by the Board to oversee the Group during a year dominated by COVID-19 and its impact on society.
To ensure that the Directors maintain up-to-date skills and knowledge of the Group, all Directors receive regular presentations on different aspects of the Group’s business and on financial, legal and regulatory issues. All Directors receive a tailored induction on joining the Board in accordance with a process approved by the Board. In 2020, Chris Minter and Hiroyuki Iioka, the new non-executive directors nominated by strategic shareholders, Swiss Re and MS&AD respectively, undertook a comprehensive induction, including detailed strategic and operational briefings and information, before and following their appointments.
In accordance with the provisions of the Articles and the Code, all Directors will submit themselves for election or re-election at the Company’s AGM on 14 May 2021.
BOARD EVALUATION REVIEW In accordance with the Code, an evaluation of the performance of the Board and that of its Committees and individual Directors was undertaken in the latter part of 2020. The process was externally facilitated by Consilium Board Review, who have no other connection with Phoenix or individual directors. The process included the following: • A review of the full year’s Board and
• Questionnaires and interviews with all 13 directors and the Company Secretary; and interviews with four further executives.
Consilium’s report was presented to, and discussed at, the Board meeting on 2 December 2020. Its conclusion was very positive about the Board’s performance, particularly in the light of the COVID-19 environment. Extracts from the report (agreed with the reviewer) are contained in the Chairman’s Governance Introduction on page 93. Consilium provided the
Nicholas Lyons Chairman 123Phoenix Group Holdings plc Annual Report & Accounts 2020
SUSTAINABILITY Phoenix has made significant progress on its sustainability journey in 2020. We announced the commitment for our operations to become net-zero carbon by 2025 and our investment portfolio to do so by 2050, and we signed the UN-supported Principles of Responsible Investment. Sustainability is at the heart of our purpose of helping people secure a life of possibilities. Reducing our environmental impact will be integral to delivering long-term value for all of our stakeholders.
The 2018 Long Term Incentive Plan (‘LTIP’) award covering the years 2018–2020 will vest at 99.9% of the maximum opportunity for Rakesh Thakrar. The performance conditions for the buyout award granted to Andy Briggs in lieu of his forfeited 2018 LTIP from Aviva have not been met and this award will lapse in full.
For both the AIP and the 2018 LTIP, the relevant targets were adjusted to account for the impact of the ReAssure transaction on our metrics as assumed in the pricing of the transaction. This is the principle set in place in 2017 to adapt performance metrics to our dynamic M&A activity for events closing in a given year. In addition to adjusting the targets, we also adjust the target ranges on cash generation to maintain a stretch comparable to that originally set. Details of the adjustments to the targets are set out on pages 136 and 137.
The resulting single total figure of remuneration for Andy Briggs was £1,706k, for Rakesh Thakrar £930k, for Clive Bannister £321k and for Jim McConville £403k. Full details are set out on page 130.
The Committee did not exercise any discretion in respect of remuneration outcomes during the year. We believe the numbers are an accurate reflection of the year’s performance and the trajectory of the business.
IMPLEMENTATION OF PAY IN 2021 The Committee regularly reviews the performance measures of the incentive plans to ensure they remain aligned with our strategy. Following review of the AIP metrics in the light of our developing new business ambitions, the Committee determined that Workplace Net Flows should be replaced by Incremental Long-term Cash Generation after deduction of New Business Strain. This metric will provide a more complete assessment of management’s achievement of our strategic aims by including in particular BPA performance in addition to new business from the other Open business units, including Workplace. It is robust, transparent and measurable. This metric will be weighted at 16% of the assessment and the Shareholder Value metric will be reweighted from 24% to 20%.
LOOKING FORWARD The Committee greatly values the high level of feedback and support from our shareholders. We are continuously refining our remuneration assessment to adapt to our dynamically growing business. We hope the in-policy modifications as outlined above and detailed in this DRR, will meet our shareholders’ high standards of discipline and rigour and will be voted for favourably in the resolution proposed at the 2021 AGM.
Incremental Long Term Cash Generation less New Business Strain Shareholder Value
2020 SINGLE FIGURE The outcomes under the AIP and LTIP resulted in a single figure outcome for Andy Briggs of £1,706k and for Rakesh Thakrar of £930k. The figure for Rakesh Thakrar reflects the period from when he was appointed to the Board of Phoenix Group Holdings plc apart from his 2018 LTIP award which is included in full per the regulations.
Read more page 130 127Phoenix Group Holdings plc Annual Report & Accounts 2020
HOW WE PERFORMED IN 2020 Group performance measures Long Term Incentive Plan (‘LTIP’): Below we show outturn against the measures which applied for the 2018 LTIP awards which are reflected in the Single Figure Table on page 130. Cumulative Cash Generation, Return on Adjusted Shareholder Solvency II Own Funds and Total Shareholder Return (‘TSR’) performance are shown over the three-year performance period (financial years 2018, 2019 and 2020). TSR is measured against the constituents of the FTSE 250 (excluding Investment Trusts), with median being the 50th percentile and upper quintile being the 80th percentile. Cash Generation continues to be one of our key corporate strategic objectives, while TSR provides a direct linkage to shareholder interests.
Group performance measures Annual Incentive Plan (‘AIP’): Below we show the target ranges and outturn against the metrics within the 2020 AIP. More details of the 2020 AIP can be found on pages 131 to 133. AIP metrics that are stated Group KPIs are flagged below and evidences the direct link between Group strategy and remuneration outcomes. Those metrics that are not stated KPIs were felt by the Committee to be appropriate metrics which are reflective of the shareholder experience. Further information on how the Committee determined the AIP outcomes in the context of the wider stakeholder experience this year is set out on page 133.
SHAREHOLDING GUIDELINES (‘SOGS’) A significant proportion of executive remuneration is delivered in shares which are released over a period of five years. In combination with our shareholding guidelines, this aligns Executive Directors with shareholders over the long-term. As at 31 December 2020 Andy Briggs and Rakesh Thakrar have not reached their shareholding requirements as both were newly appointed in 2020. The outgoing Executive Directors, Clive Bannister and James McConville had both exceeded their shareholding requirements and are now subject to post-cessation shareholding requirements.
Group Finance Director James McConville Shareholding guidelines 200% Shares held at date of leaving 472%
Shareholding Guidelines percentage shown for Andy Briggs and Rakesh Thakrar includes the value of shares held based on a share price of £7.014 (as at close of business on 31 December). The share price for Clive Bannister (£7.498) and James McConville (£6.1736) has been calculated based on the three-month average closing price prior to them leaving the Group. Shares included are those shares held directly and beneficially, any vested LTIP awards that have not been exercised and unvested DBSS options taking into account tax liabilities.
ALIGNMENT TO SHAREHOLDERS Our Executive remuneration is designed to align with shareholder interests to deliver long-term sustainable value. The diagram below shows how a significant portion of Executive remuneration under the remuneration policy is delivered in shares and deferred for up to five years. Under the maximum scenario, 65% of the Group CEO’s maximum remuneration is delivered in shares.
INTRODUCTION This report contains the material required to be set out as the Directors’ remuneration report (‘Remuneration Report’) for the purposes of The Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2008 (as amended) (‘the DRR regulations’).
DIRECTORS’ REMUNERATION POLICY The Remuneration Policy approved by the shareholders at the 2020 AGM is attached in full as Appendix to this report.
65% of total maximum remuneration for CEO is paid in shares
Benefits 1 year performance period deferral period 50% awarded in shares
Former Executive Directors 1 Andy Briggs joined the Board of Phoenix Group Holdings plc on 10 February 2020 as Group CEO Designate and became CEO on 10 March 2020. 2 Rakesh Thakrar joined the Board of Phoenix Group Holdings plc on 15 May 2020. 3 Clive Bannister resigned from the Board of Phoenix Group Holdings plc on 10 March 2020.
Bannister and James McConville comprise car allowance and private medical totalling £6,607, £3,177 and £6,103 respectively. 7 Andy Briggs and Rakesh Thakrar are entitled to each receive a Company pension contribution of 12% which may be paid as a cash supplement, reduced for the effect of employers’ National Insurance contributions. Andy Briggs received his whole contribution as a cash supplement (10.5%) and Rakesh Thakrar received a combination of cash supplement and contribution (10.6%). Clive Bannister and James McConville were entitled to each receive a Company pension contribution which was paid in cash so reduced for the effect of employers’ National Insurance contributions to 17.6%. No Director participated in a defined benefit pension arrangement in the year and none have any prospective entitlement to a defined benefit pension arrangement.
8 Annual incentive amounts are presented inclusive of any amounts which must be deferred into shares for three years (ie 50% of the AIP award for 2020). In 2020 £443,653 of Andy Briggs’s incentive payment is subject to three-year deferral delivered in shares, and £161,713 of Rakesh Thakrar’s incentive payment is subject to a similar deferral. In 2020 and 2019, £80,898 and £387,660 respectively of Clive Bannister’s incentive payment is subject to three-year deferral delivered in shares, and £101,216 and £230,472 of James McConville’s incentive payment is subject to a similar deferral. Deferred amounts are subject to continued employment or good leaver status. The Remuneration Committee confirmed good leaver status for both Clive Bannister and James McConville.
9 In accordance with the requirements of the DRR regulations, the 2020 value for long-term incentives is an estimate of the vesting outcomes for LTIP awards granted in 2018 and which are due to vest on 21 March 2021 for Rakesh Thakrar. This vesting level is at 99.9% reflecting outcomes against the Cumulative cash generation, return on adjusted shareholder Solvency II own funds and TSR performance measures to 31 December 2020 (see page 133). This vesting outcome is then applied to the average share price between 1 October 2020 and 31 December 2020 (718.08p) to produce the estimated long-term incentives figures shown for 2020 in the above table. The assumptions will be trued up for actual share price at the day of vesting in the report for 2021. For Rakesh Thakrar, the disclosed LTIP figure of £308,666 comprises the disclosed LTIP figure of £254,854 for the value of the proportion of the original LTIP award, which ultimately vested, plus the value of dividend roll-up on those shares of £53,812. All values are calculated using the three month average share price to 31 December 2020 (718.08p). There was no increase in the value of Rakesh’ vested LTIPs due to share price movement with the award based on a share price of £7.825. Clive Bannister and James McConville will receive shares in respect of the 2018 LTIP. The final number of shares and value at vesting will be disclosed in next year’s DRR.
11 The disclosed LTIP figure of £0, relates to the 2018 Aviva LTIP buy-out award granted to Andy Briggs, which the Company has been advised by Aviva has a performance outturn of 0% over the performance period. This award was due to vest on 26 March 2021 at which date the award will lapse.
3 Digital customer satisfaction surveys are offered to customers on the Customer Dashboard, asking them to rate their experience after completing a key transaction. Digital Journeys measured include Payments, Retirement, Subsequent Withdrawal and Fund Switch. CSAT is measured as the % of responses rating their experience as ‘good’ or ‘excellent’.
To drive a continuous improvement of performance against the customer targets, the outturn of the 2019 performance was used as the on target anchor point for all customer metrics in the 2020 scheme. This approach effectively reset the companies target ensuring that the achievement above ‘on-target’ would require a tangible improvement in performance against the customer metrics. To reflect the increasing importance of the digital channel to customers, a new customer satisfaction measure for digital journeys was introduced. It should be also noted that no adjustment to the customer metrics and targets has been made as a result of the disruption caused by COVID-19.
Following the acquisition of ReAssure by the Group on 22 July 2020, the AIP targets for Cash Generation and Shareholder Value performance measures were amended to reflect the new organisation. The adjustments were made in line with the Remuneration Committee’s established principles for target setting in the event of an acquisition and the Committee was satisfied that the revised targets were equally stretching as those originally set. The original targets for the Cash Generation performance measure were £866 million, £916 million and £966 million for threshold, target and maximum performance respectively. The target has been amended by £690 million and the threshold and maximum targets amended +/-£35 million each. The original targets for the Shareholder Value were £5,500 million, £5,600 million and £5,800 million for threshold target and maximum performance respectively. These were increased by £2,368 million at the threshold, target and maximum levels to reflect the estimated adjustment to Shareholder Value arising on completion of the ReAssure transaction.
As described in the Group Chairman’s and Group CEO’s reports (pages 12 to 17), 2020 has been a year of significant achievement for the Phoenix Group in which all strategic and financial targets were met, and cash, resilience and growth were delivered, which is reflected in the outcomes of the corporate measures above. Prior to confirming the outcomes for the 2020 AIP, the Committee reviewed in detail the extent to which the Group had operated within its stated risk appetite during the year and determined that no moderation of the 2020 formulaic outcome was necessary.
Percentage of females in top 100 >= 30% by 2021 (positive trend by 2020)
Percentage of females named as green or amber successors >= 40% (maintain)
Resolution of customer incidents has been managed at lead times well within target levels.
Risk and internal control 10% 20% Maintain effective operation of the Risk management Framework and deliver risk framework harmonisation
The Group’s financial resilience has been demonstrated in volatile macro-economic conditions.
Transaction completed in July 100% The transaction was completed on time and excellent progress has been in integration activities and on delivery against publicly stated synergy targets.
Complete Group Head Office integration By end 2020 Completed Complete Group Head Office integration By end 2020 Completed
The former Executive Directors were subject to the same Strategic Scorecard measures and the Committee determined it was appropriate to pay the following outcomes to them under this element: % outturn of maximum 20% opportunity
The table below shows the actual outturn against the annual incentive maximum.
As a % of maximum Corporate element As a % of salary
As described in the Remuneration Policy, 50% of 2020 AIP outcomes will be delivered as an award of deferred shares under the DBSS which will vest after a three-year deferral period subject to continued employment or good leaver status.
Target range between 4% CAGR and 6% CAGR. 11.6 100.0% 35.0%
£1.824 billion at threshold (where 25% of this part of the award vests) and £2.024 billion at maximum (full vesting of this part of the award).
PAYMENTS FOR LOSS OF OFFICE – AUDITED INFORMATION Payments made to Directors who departed during the year are disclosed below: In the 2019 Directors’ remuneration report we announced that Clive Bannister would step down as Group CEO following the publication of our 2019 full year results and after nine very successful years with the business, and that James McConville would step down from his position as Group Finance Director and leave the Group on 15 May 2020. Arrangements for the departure of both Executive Directors were in line with the Remuneration Policy.
James McConville left the Group on 15 May 2020. His departure arrangements were in line with the Remuneration Policy. He received pay in lieu of notice for the period starting on this date and ending on 9 March 2021, comprising salary, pension allowance and insurance benefits. This was paid in three instalments: £211,250 was paid in May 2020 and £105,625 paid in November 2020. The final payment of £105,625 will be paid in March 2021. He received no compensation for loss of car allowance. As is standard practice, payment for unused holiday is added to final salary for all leavers in Phoenix Group, which resulted in a payment of £29,193. James’s 2019 AIP was paid in the normal way and subject to 40% deferral in line with the policy in force at the time of his departure. He will be eligible for a 2020 AIP award for the portion of the year in which he remained employed by the Group, which will be payable in March 2021 and subject to 50% deferral in line with the remuneration policy adopted in 2020. James’s in-flight LTIP awards were time pro-rated to his end date. James is retaining his unvested DBSS awards and LTIP awards, subject to a holding period, as disclosed in the 2019 Directors´ remuneration report.
PAYMENTS TO PAST DIRECTORS – AUDITED INFORMATION Payments made to former Directors are disclosed below: Clive Bannister, who resigned from the Board on 10 March 2020, will receive shares in respect of the 2018 LTIP. The final number of shares and value at vesting will be disclosed in the 2021 DRR.
NON-EXECUTIVE FEES – AUDITED INFORMATION The emoluments of the Non-Executive Directors for 2020 based on the current disclosure requirements were as follows: Name
2 Hiroyuki IIoka and Chris Minter joined the Board of Phoenix Group Holdings plc on 23 July 2020 and as nominated appointed directors of MS&AD and SwissRe respectively, waived all current and future emoluments with regard to their Directors’ fees.
3 On 23 July 2020 Campbell Fleming resigned from the Board. Mike Tumilty has waived all current and future emoluments with regard to his Directors fees.
SHARE-BASED AWARDS – AUDITED INFORMATION As at 31 December 2020, Directors’ interests under long-term share-based arrangements were as follows: LTIP
Andy Briggs LTIP Buyout Award 7 Nov 2019 7.515p 174,443 – – – (87,222) 87,221 27 Mar 2020 LTIP Buyout Award 7 Nov 2019 7.515p 101,158 – – – – 101,158 26 Mar 2021
The Committee reviewed the grant price of the 2020 LTIP awarded to Andy Briggs and Rakesh Thakrar and determined that the grant price of 620.5p was not below 20% of the grant price of 700.4p for the 2019 LTIP and was therefore satisfied that the award would not be subject to windfall gains and no adjustments were required to the awards. During the year, certain shareholders provided feedback that the level of threshold vesting for the Group CEO’s LTIP award (68.75% of salary) was considered excessive and that it should be no higher than 50% of salary. The Committee considered this feedback and decided that the level of threshold vesting for the Group CEO’s LTIP award will therefore be capped at the lower of 25% of maximum vesting or 50% of salary. With the agreement of Andy Briggs, this has also been implemented retrospectively to his 2020 LTIP award.
Cash Generation/Net Operating Cash Receipts – targets under the 2018, 2019 and 2020 LTIP have been adjusted to reflect the cashflow assumptions made as part of the ReAssure transaction pricing and to appropriately reflect activity and circumstances arising in the period between announcement and completion. Additional cash released was anticipated to be £676 million in 2020 (£690 million less £14 million additional operating expenses), and is anticipated to be £811 million (£828 million less £17 million additional operating expenses) in 2021, and £549 million (£564 million less £15 million additional operating expenses) in 2022. The stretch target for each award has been adjusted in the same proportions as the impact ReAssure has on the base target. The resulting impact on the Cumulative Cash Generation and Net Operating Cash Receipts targets is as follows: 2018 LTIP: Cumulative Cash generation threshold increased from £1.824 billion to £2.500 billion with maximum target increased from £2.024 billion to £2.735 billion. 2019 LTIP: Cumulative Cash generation threshold increased from £2.097 billion to £3.584 billion with maximum target increased from £2.397 billion to £3.949 billion. 2020 LTIP: Net Operating Cash Receipts threshold increased from £2.375 billion to £4.411 billion with maximum target increased from £2.725 billion to £ 4.966 billion.
Persistency (2020 LTIP only) – no changes to this target have been made as Persistency relates to the Open business only and is therefore not impacted by the ReAssure transaction.
2020 award (35% Net Operating Cash Receipts, 25% Return on Shareholder Value, 20% Relative TSR, 20% Persistency)
Cumulative cash generation 25% of this part vests at threshold performance rising on a pro rata basis until 100% vests. Measured over three financial years commencing with the year of award.
Return on Adjusted Shareholder Solvency II Own Funds 25% of this part vests at threshold performance rising on a pro rata basis until 100% vests. Measured over three financial years commencing with the year of award.
Return on Shareholder Value 25% of this part vests at threshold performance rising on a pro rata basis until 100% vests. Measured over three financial years commencing with the year of award.
Target range as for 2018. Target range between median performance against the constituents of the FTSE 350 (excluding Investment Trusts) rising on a pro rata basis until full vesting for upper quintile performance.
Persistency 25% of this part vests at threshold performance rising on a pro rata basis until 100% vests. Measured over three financial years commencing with the year of award.
n/a n/a Target range between 8.0% and 6.5%1 1 This was incorrectly stated as ‘Target range between 6.5% and 8.0%’ in the 2019 DRR.
For the 2021 LTIP award, the underpin has been revised to better reflect the extent to which the Group has operated within its stated Risk Appetite.
James McConville 1 In addition to the shares awarded under the DBSS presented above, participants receive an additional number of shares (based on the number of DBSS awards which actually vest) to reflect the dividends paid during the vesting period.
2 Gains of Directors from share options exercised and vesting shares under the DBSS in 2020 were £532,034 (2019: £590,721). Clive Bannister’s gain was £279,510 arising from an award exercised on 22 April 2020 at a share price of £5.592, James McConville’s gain was £198,227 (2019: 240,217) arising from an award exercised on 9 July 2020 at a share price of £6.309559 and Rakesh Thakrar’s gain was £54,297 arising from an award exercised on 27 May 2020 at a share price of £6.376609.
The DBSS is the share scheme used for the deferral of AIP. No performance conditions apply therefore, although awards are subject to continued employment or good leaver status.
Nil Cost option 13 March 2023 See page 137 13 March 2020 DBSS
13 March 2023 None 1 The DBSS awards have no threshold performance level. 2 The buyout awards are based on the following Aviva’s related metrics: 2017 Award (vesting 27 March 2020), 50% TSR and 50% Return on Equity; 2018 Award (vesting 26 March 2021), 50% TSR and 50% Earnings per Share
The face value represents the maximum vesting of awards granted (but before any credit for dividends over the period to vesting) and is calculated using a share price of the average of the closing middle market prices of Phoenix shares for the three dealing days preceding the award date (2020 LTIP and DBSS award share price was 620.54p).
During the year ended 31 December 2020, the highest mid-market price of the Company’s shares was 803.05 pence and the lowest mid-market price was 467.675 pence. At 31 December 2020, the Company’s share price was 701.4 pence.
DIRECTORS’ INTERESTS – AUDITED INFORMATION The number of shares and share plan interests held by each Director and their connected persons are shown below: Share interests as at or date of appointment if later
Total share plan interests as at 31 December 2020 – Vested but unexercised scheme interest
Alastair Barbour 9,716 9,716 – – – Campbell Fleming – – – – – Karen Green – – – – – Hiroyuki Iioka2 – – – – – Nicholas Lyons 20,000 65,990 – – – Wendy Mayall 30,000 40,000 – – – Chris Minter – – – – – John Pollock 14,666 14,666 – – – Belinda Richards – – – – – Nicholas Shott 7,333 38,995 – – – Kory Sorenson 20,704 26,600 – – – Michael Tumilty – – – – –
The Directors’ share interests of the following Directors have increased between 31 December 2020 and 1 March 2021 (being one month prior to the date of the notice of the AGM) following purchases under the Group’s Share Incentive Plan: Andy Briggs 56 shares and Rakesh Thakrar 56 shares. There were no other changes between these dates.
Value of shares held at 31 December 2020 or date of leaving (% of salary)
IMPLEMENTATION OF REMUNERATION POLICY IN 2021 – NON-AUDITABLE A summary of the packages of the new Executive Directors is set out in the table below.
Annual bonus 150% of base salary at maximum. Details of the 2020 AIP are set out below.
Where any performance vested LTIP awards are subject to a holding period requirement, the relevant LTIP award shares (discounted for anticipated tax liabilities) will count towards the shareholding requirements. Unvested awards under the DBSS which are not subject to performance conditions are included in this assessment on a net of tax basis. Unvested awards under the LTIP are not included in this assessment.
Executive Directors are expected to retain the lower of their shareholding on termination or their full in-employment shareholding requirement for two years.
Annual Incentive Plan (‘AIP’) As described in the Committee Chairman’s covering letter on page 124, the Committee regularly reviews the performance measures of the incentive plans to ensure they remain aligned with our strategy. In light of our developing new business ambitions, the Committee determined that Workplace Net Flows should be replaced by Incremental Long-term Cash Generation after deduction of New Business Strain. This metric will provide a more complete assessment of management’s achievement of our strategic aims by including in particular BPA performance in addition to new business from the other Open business units, including Workplace. It is robust, transparent and measurable. This metric will be weighted at 16% of the assessment and the Shareholder Value metric will be reweighted from 24% to 20%.
The overall weightings between Corporate measures and Strategic Scorecard for AIP in 2021 are: • Corporate (financial and customer) performance measures – 80% (2020: 80%). • Strategic Scorecard (strategic company priorities 20% (2020: 20%).
Outcomes from performance measures for 2021’s AIP may be moderated by the Remuneration Committee in line with the approved Remuneration Policy. This will include a review by the Remuneration Committee on the extent to which the Group has operated within its stated risk appetite and that there are no other risk-related concerns that would necessitate moderation before any 2021 AIP outcomes are confirmed.
The number of shares for DBSS awards will be calculated using the average share price for the three dealing days before the grant of the DBSS awards.
The performance measures are measured over a period of three financial years, commencing with financial year 2021.
2% in excess of the risk-free rate 4% in excess of the risk-free rate
The rules of the Company’s LTIP reserves discretion for the Committee to adjust the outturn for any LTIP performance measures (from zero to any cap) should it consider that to be appropriate. The Committee may operate this discretion having regard to such factors as it considers relevant, including the performance of the Group, any individual or business.
The fee levels as at 1 January 2021 are: £325,000 for the Chairman, £75,000 for the role of NonExecutive Director with additional fees of: (i) £20,000 payable for the role of SID; and/or (ii) £30,000 payable where an individual also chairs the Audit, Remuneration, Risk or Sustainability Committee; and £18,000 for the other members of those committees and the Model Governance Committee. We anticipate a review of the Chairman’s fee in September 2021 on the third anniversary of his appointment. Additionally, in line with the Directors’ Remuneration Policy, fee levels will be reviewed during the year to ensure that they remain competitive with other listed companies of equivalent size and complexity.
Number % of votes cast Number % of votes cast Number
To approve the Directors’ remuneration report for the year ended 31 December 2019 (2020 AGM) 549,297,773 96.54 19,674,360 3.46 35,951 To approve the Directors’ Remuneration Policy (2020 AGM) 563,455,466 99.31 3,899,742 0.69 744,467
DILUTION The Company monitors the number of shares issued under the Group’s employee share plans and their impact on dilution limits. The Company’s practice is for all the executive share plans to use market purchase shares on exercise of any awards. For the Company’s all-employee Sharesave scheme only, new shares are issued. Therefore the usage of shares compared to the 10% dilution limits (in any rolling ten-year period) set by the Investment Association in respect of all share plans as at 31 December 2020 is 0.60% and no shares count towards the dilution limit for executive plans only (5% in any rolling ten-year period).
ReAssure businesses 70 143Phoenix Group Holdings plc Annual Report & Accounts 2020
This ratio has decreased from 2019 as a result of Andy Briggs’s buyout award which vested at 0% in accordance with 2018 Aviva LTIP. We expect this ratio to change over forthcoming years as we integrate ReAssure colleagues into our pay principles and remuneration framework and reflecting the CEO’s variable pay outcome each year.
Phoenix Group’s principles for pay setting and progression in our wider workforce are the same as for our executives – total reward being sufficiently competitive to attract and retain high calibre individuals without over-paying and providing the opportunity for individual development and career progression. The pay ratios reflect how remuneration arrangements differ as accountability increases for more senior roles within the organisation and in particular the ratios reflect the weighting towards long-term value creation and alignment with shareholder interests for the Group CEO. We are satisfied that the median pay ratio reported this year is consistent with our wider pay, reward and progression policies for employees. All employees have the opportunity for annual pay increases, annual performance payments and career progression and development opportunities.
The FTSE 100 Index (excluding Investment Trusts) is considered to be an appropriate comparator for this purpose as it is a broad equity index of which the Company is a constituent.
TOTAL SHAREHOLDER RETURN Value of a 100 unit investment made on 5 July 2010.
The DRR regulations also require that a performance graph is supported by a table summarising aspects of the Group CEO’s remuneration for the period covered by the above graph (which will in due course be for a period of ten years).
9 Jonathan Moss’ 2011 single figure of total remuneration does not include compensation for loss of office.
Non-Executive Directors Alastair Barbour 0.0% (60.0)% – Campbell Fleming 0.0% 0.0% – Karen Green 6.8% (100)% – Hiroyuki Iioka – – – Nicholas Lyons 0.0% (100)%
Wendy Mayall 0.0% (100)% – Chris Minter – – – John Pollock 0.7% (100)% – Belinda Richards 0.0% (100)% – Nicholas Shott 0.0% (80)% – Kory Sorenson 0.0% (100)% – Mike Tumilty 0.0% (100)% – Wider Employee Population 3.94% 7.4% 5.2%
As Andy Briggs and Rakesh Thakrar are new Executive Directors in 2020, there is no year-on-year change included in the table above. With regard to the departing Executive Directors, Clive Bannister and James McConville, there has been no movement in the level of salary and benefits; there has been a decrease in the Annual Incentive figure as the outcome under the strategic scorecard was lower than the 2019 outcome under the previous element related to personal objectives.
• The Standard Life Assurance businesses continued operating a performance related pay structure for 2020 and therefore annual salary increases varied, however the median salary increase across the overall Phoenix Group was 2.3%.
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 Executive Directors are entitled to retain any external fees. During his employment with Phoenix in 2020, Clive Bannister did not receive any fees from external directorships. James McConville received £42,222 from Tesco Personal Finance plc during his employment with Phoenix in 2020. Rakesh Thakrar is a director of Mythili Megha Limited for which he receives no payment. Andy Briggs has no external directorships.
Alastair Barbour 1 November 2018 1 October 2013 15 May 2021 2 Karen Green 1 November 2018 1 July 2017 15 May 2021 2 Hiroyuki Iioka 23 July 2020 23 July 2020 23 July 2023 28 Nicholas Lyons 1 November 2018 31 October 2018 31 October 2021 7 Wendy Mayall 1 November 2018 1 September 2016 15 May 2021 2 Chris Minter 23 July 2020 23 July 2020 23 July 2023 28 John Pollock 1 November 2018 1 September 2016 15 May 2021 2 Nicholas Shott 1 November 2018 1 September 2016 15 May 2021 2 Belinda Richards 1 November 2018 1 October 2017 15 May 2021 2 Kory Sorenson 1 November 2018 1 July 2014 15 May 2021 2 Mike Tumilty 14 August 2019 1 September 2019 1 September 2022 17 1 All Directors above, other than Chris Minter, Hiroyuki Iioka and Mike Tumilty, joined the Phoenix Group Holdings plc Board on 15 October 2018 and services are considered to have commenced with effect from 13 December 2018.
The above tables have been included to comply with UKLA Listing Rule 9.8.8. In the event of cessation of a Non-Executive Director’s appointment (excluding the Chairman) they would be entitled to a one-month notice period. The Chairman, as detailed in his letter of appointment, would be entitled to a six-month notice period.
Consistent with the requirements of Solvency II, the Committee is responsible for establishing, implementing, overseeing and reviewing the Company-wide remuneration policy in the context of business strategy and changing risk conditions. The Company-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.
Directors’ remuneration policy triennial review Senior management remuneration Review remuneration proposals on recruitment and on termination of senior employees
PwC’s fees for work relating to the Committee for 2020 were £97,870. These were charged on the basis of the firm’s standard terms of business for advice provided.
The Committee assesses the performance of its advisers regularly, the associated level of fees and reviews the quality of advice provided to ensure that it is independent of any support provided to management.
HOW OUR POLICY ADDRESSES THE FOLLOWING FACTORS SET OUT IN THE UK CORPORATE GOVERNANCE CODE 2018
Proportionality • A high percentage of rewards are delivered in the form of shares, meaning Executive Directors are strongly aligned with shareholders. We have increased the share ownership guidelines to 300% for the CEO and 250% for the CFO and introduced a post-employment shareholding requirement for our Executive Directors to ensure that they are aligned to the long-term performance of the Group.
• Executive Directors are required to hold shares from LTIP awards for two years following vesting which provides focus on sustainable share price growth. We have also extended deferral levels under the AIP to further align to shareholders.
Minimum, on-target and maximum represent the scenario charts required under the Directors’ Remuneration Policy – see the data assumptions below.
‘Maximum with growth’ is the maximum scenario, but with the LTIP element increased to reflect a 50% share price growth assumption over the three-year period until LTIP vesting. The element of the total representing the value from these assumptions on share price growth and dividends is shown separately.
On-target Based on what the Executive Director would receive if performance was on-target: • AIP: consists of the on-target annual incentive (75% of base salary). • LTIP: consists of the threshold level of vesting (50% of base salary for CEO and CFO). The threshold level of vesting for the CEO was previously 68.75% of salary but following shareholder feedback, a cap to the threshold vesting was introduced which the Remuneration Committee has agreed will be 50% of salary. In addition, the potential value of Sharesave and Share Incentive Plan (‘SIP’) participation is also recognised.
Maximum Based on the maximum remuneration receivable: • AIP: consists of the maximum annual incentive (150% of base salary). • LTIP: assumes maximum vesting of awards and valued as on the date of grant (award of 200% of base salary for
Total fixed pay AIP LTIP Share price growth and dividends 151Phoenix Group Holdings plc Annual Report & Accounts 2020
• The Remuneration Committee uses this data as a key reference point in considering the appropriate level of salary. Other relevant factors including corporate and individual performance and any changes in an individual’s role and responsibilities, and the level of salary increases awarded to other employees of the Group are also considered.
• Base salary is paid monthly in cash. • Changes to base salaries normally take effect from 1 April.
• However, when reviewing salaries for Executive Directors, the Remuneration Committee will also review the salaries, and salary increases, for senior management and employees in relevant countries to maintain consistency. Percentage increases for Executive Directors will not exceed that of the broader employee population, other than in specific circumstances identified by the Remuneration Committee (e.g. in response to a substantial change in responsibilities).
• Where appropriate, the Group will meet certain costs relating to Executive Director relocations and other exceptional expenses.
• Relocation expenses are subject to a maximum limit of £50,000.
• In respect of the financial and non-financial performance measures, attaining the threshold performance level produces a £nil annual incentive payment.
• The AIP operates subject to three levels of moderation: i. The Committee seeks to set suitable ranges for each measure in the context both of the Group’s own internal budgets and of external projections (whether through management guidance or consensus forecasts). Recognising that the business of the Group is to engage in corporate activity, the Remuneration Committee may adjust targets during the year to take account of such activity and ensure the targets continue to reflect performance as originally intended.
ii. There is a specific adjustment factor of 80%–120% of the provisional outturn whereby the Remuneration Committee may adjust the provisional figure (but subject to any over-riding cap) to take account of its broad assessment of performance both against pre-set targets, risk considerations, and more generally, of the wider universe of stakeholders. With respect to financial performance measures, this assessment will include consideration of the quality of how particular outcomes were achieved.
Policy and operation • Awards under the LTIP may be in any of the forms of awards to receive shares for nil-cost (as described for DBSS above). • LTIP awards are made automatically each year on the fourth dealing day following the announcement of annual results, using the average of the preceding three dealing days’ share prices to calculate the number of shares in awards. • The 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.