Glossary 225 £225m Operating companies’ cash generation £324m IFRS operating profit £2,513m Group MCEV
MANAGEMENT SERVICES COMPANIES Responsible for providing life companies with all required management services
Phoenix Group Holdings Annual Report and Accounts 2015 05 Strategic report
What we do HOW WE CREATE VALUE We create value for our customers by maximising policyholder returns through our specialist expertise and innovative management of closed life funds. We create value for our shareholders by generating profits from the growth of our funds and releasing excess capital as dividends.
HOW WE GOVERN OUR BUSINESS We operate a robust governance structure embedded in an experienced management team, with independent Boards and Committees for the Group.
The following shows the Group’s original entities, their various acquisitions and key achievements over the years: 1782 Phoenix Assurance established 1806 London Life established 1835 NPI established 1836 Edinburgh & Glasgow Assurance established 1837 Scottish Provident established 1857 Pearl Loan Company established 1905 Britannic Assurance Company established 1996 Royal & Sun Alliance established 1999 Britannic acquires Alba Life 2001 Abbey National acquires Scottish Provident 2004 Resolution Life Group acquires UK life operations of Royal & Sun Alliance Britannic acquires life operations of Allianz Cornhill 2005 Pearl Group created Resolution Life Group acquires Swiss Life (UK) plc Britannic acquires Century Group and merges with Resolution Life Group to form Resolution plc 2006 Resolution plc acquires Abbey National’s life business 2008 Pearl Group acquires Resolution plc 2009 Liberty Acquisition Holdings (International) acquires Pearl Group 2010 Pearl Group renamed Phoenix Group Holdings and achieves Premium Listing on London Stock Exchange 2012 Transferred approximately £5 billion annuity liabilities to Guardian Assurance Transferred business of NPI Limited to Phoenix Life Limited and London Life Limited to Phoenix Life Assurance Limited 2013 Successful debt re-terming and equity raising of £250 million 2014 Divestment of Ignis Asset Management Refinanced the Group’s remaining senior bank debt and PIK notes into a single £900 million facility Issued £300 million unsecured 7 year bond 2015 Investment grade credit rating achieved from Fitch Ratings Solvency II full internal model approved Exchange of Tier 1 bonds into new subordinated notes
ENGAGE PEOPLE Our people underpin everything that we do. The Group specifically targets, recruits and develops top quality people to support the achievement of its strategic and operational objectives.
Phoenix Group Holdings Annual Report and Accounts 2015 07 Strategic report
I have joined Phoenix Group as Chairman at a time of great change for the UK life insurance sector. Over the past few months, the Group has seen the introduction of the new Solvency II capital regime as well as the publication of the Financial Conduct Authority’s (‘FCA’) thematic review of the fair treatment of long-standing customers in life insurance. Adapting to this regulatory change has involved a considerable amount of work for the Group, in particular in relation to Solvency II. It was therefore very pleasing when the Group received regulatory approval for its Internal Model application under the new capital regime.
Phoenix Group has also remained focused on financial delivery and has continued its record of meeting or exceeding publicly stated targets. The Group has been particularly successful in continuing to add value for both customers and shareholders through management actions and I look forward to further progress in the coming years.
The Board has recommended a final dividend for 2015 of 26.7p per share. This brings the total dividend for the 2015 financial year to 53.4p per share, in line with the dividend paid in respect of the 2014 financial year. Given the long-term run-off nature of the Group’s business, the Board believes it is prudent to maintain a stable, sustainable dividend while the Group builds its financial flexibility to execute its growth strategy and meet external challenges.
FinalIy, I would like to thank all my colleagues at Phoenix for their hard work and commitment. The ability of the Group to continue to meet its targets for cash generation and value creation is a testament to their dedication. I believe that the Group can look forward to 2016 with great confidence as it seeks to be a leading player in the consolidation of the UK closed life market.
Second, in December the Prudential Regulation Authority (‘PRA’) approved the Group’s Internal Model application under Solvency II. The application was the result of significant effort across multiple areas of our business and the PRA approval provides the Group with greater clarity and control over its future capital position. As part of our 2015 financial results, we have provided our estimated capital position under the new Solvency II regime which shows the Group to be in robust financial health.
This positive activity for the Group has been completed against a backdrop of uncertainty for the broader insurance industry, with the introduction of new pension freedom rules from 6 April 2015 providing greater flexibility for our customers in their retirement planning but also increasing the complexity of their decision making process.
Phoenix Group Holdings Annual Report and Accounts 2015 09 Strategic report
2015 was a transitional year to the new Solvency II capital regime and our 2015 cash generation target incorporated assumptions regarding how the final Solvency II regulations were likely to be implemented. Against a full year cash generation target of £200 million to £250 million, the Group has generated £225 million of cash in 2015, meeting the target range. Against our long-term cash generation target of £2.8 billion for the period from 2014 to 2019, we have already delivered £1.2 billion.
Our estimated Solvency II surplus as at 31 December 2015 is £1.3 billion. This is the surplus over the Group’s Solvency Capital Requirement and demonstrates the resilience of the Group’s capital position under the new regime. Unlike open life businesses, we do not need to hold significant additional capital to support the writing of new insurance products. The Group’s Solvency II position is also relatively insensitive to market movements.
In addition, we have £706 million of cash at the holding company level, providing further support for our stable and sustainable dividend policy.
Ɛ The simplification of the Group’s corporate structure following the single silo bank facility put in place during 2014, with Impala Holdings Limited now 100% owned by PLHL. This Group simplification provided a more appropriate Group structure for the Solvency II capital regime.
Ɛ The divestment of the Group’s Irish subsidiary, Scottish Mutual International (‘SMI’), for £14 million. The small scale of SMI, which had only 3,000 remaining policyholders, had become inefficient and the divestment further simplified the Group’s structure.
Ɛ The acquisition of a £0.3 billion portfolio of equity release mortgages, in line with the strategy to diversify the asset portfolio by investing in new asset classes to support the Group’s annuity liabilities.
REGULATORY AND LEGISLATIVE CHANGES 2015 saw a number of key regulatory changes to the UK life insurance sector.
The ending of compulsory annuitisation of pension pots, announced at the time of the 2014 Budget, continues to have a significant impact across the UK life insurance industry. Phoenix Group only provides annuities for its own vesting policyholders and wrote a total of £485 million of annuities in 2015 compared with £545 million in 2014, a decline of 11%. £344 million of the annuities written in 2015 had guaranteed annuity rates (‘GARs’) that are often well above currently available market rates, with the remaining £141 million being non-GAR annuities. We continue to believe that the life-long certainty of income provided by annuities will remain an attractive option for certain customers and Phoenix Group aims to offer our customers an average non-GAR annuity rate that is at least 97.5% of the average of the top five open market providers.
There are also a number of ongoing reviews, including the recently announced FCA consultation on early exit charges. Over 80% of our unitised policies have no exit charge at all and to date we have seen no evidence that any of our customers incurring an exit charge is deterred from taking advantage of pension freedoms before their selected retirement date. However, we will work closely with the FCA as part of their consultation on the implementation of an appropriate cap on exit charges. In total, these charges amount to approximately £22 million for Phoenix policyholders over the age of 55, an average of only around 0.25% of unitised assets.
Finally, Phoenix Life has fully embraced the establishment of an Independent Governance Committee for contract-based workplace pensions. Consistent with the continuing focus on product governance within Phoenix, the Committee is reviewing data and considering proposals to ensure that customers in our workplace pension schemes are being treated fairly.
As expected, the number of customer calls increased upon the introduction of the new rules. However, we were very pleased that the actions we took in advance to increase our capacity such as increasing resource levels, extending contact centre opening hours, providing online retirement packs and outbound calling ensured a good customer experience was maintained.
During 2015, around 43,000 customers requested full encashment of their pension savings, with an average pot size of £13,000. Phoenix Life provided detailed information to customers on their options as well as promoting the availability of the Government’s Pension Wise service. In addition, we continue to remind customers of the value of guaranteed annuity rates within their products and encourage them to take financial advice before making important decisions on their pension savings.
To ensure that Phoenix Life customers have access to the range of options available under the new pension freedom rules, Phoenix Life agreed a wider partnership agreement with Just Retirement. This provides customers with a range of products, including the ability to ‘shop around’ for standard and enhanced annuities as well as offering a drawdown pension product. Access to enhanced annuities can increase the annuity income received by up to 40% and customers are strongly encouraged to investigate these and other options before making a final decision. The new partnership therefore also offers customers the ability to access financial advice as they plan for their retirement.
There remains the risk of fraudsters targeting our customers and we therefore continue to take action to identify possible incidences of pension fraud where possible. Phoenix Group prevented policyholders from losing around £10 million to fraudulent schemes during 2015 and we have also been active in publicising the risk of pension fraud through specific campaigns in the media.
The customer strategy at Phoenix Group is focused on improving customer outcomes. Security of our customer assets is foremost, followed by our aim to maximise returns wherever possible but primarily through enhanced distribution of the estate within the life funds. We delivered an additional £68 million of distributable estate through management actions, £18 million above our 2015 target, and have therefore directly benefited our with-profit policyholders through increased future bonuses.
The Group’s Corporate Responsibility programme continues to be a key component of our business proposition. Employees take great personal responsibility and involve themselves in many varied initiatives. I am pleased to report that in excess of £174,000 was raised by the Group for charities in 2015. Of this, over £168,000 was donated to the Group’s main corporate charity partners – Midlands Air Ambulance Charity and London’s Air Ambulance – which has made a significant contribution to support their vital life-saving work. We very much look forward to working with the Air Ambulance charities during our third partnership year. The Group’s future Corporate Responsibility programme will continue to focus on the physical and mental wellbeing of our employees and our community programme will also play a key role in the engagement of staff, who can volunteer their time to a wide range of community projects.
CONCLUSION I believe that the impact of regulatory developments will change the landscape of the UK life insurance industry, providing Phoenix with a number of acquisition opportunities. Open life companies will reappraise their business models and strategies for their legacy policies. Following the achievement of the investment grade credit rating and continued financial delivery against our targets, the Group is well positioned to take advantage of these industry changes. I believe there are a number of potential acquisition and consolidation opportunities in the UK closed life sector and we will continue to review options within the framework of our existing commitment to stakeholders.
I would like to thank my colleagues for their hard work during an exceptionally busy year. They have delivered strong financial performance, at the same time achieving a number of key milestones that have enhanced the Group’s strategic position. I look forward to capitalising on our renewed strength and firmly believe that we can continue to deliver value for all our stakeholders.
MANAGEMENT SERVICES COMPANIES Provides our life companies with all required management services
GROUP FUNCTIONS The Group functions provide services to Phoenix Life and manage corporate and strategic activity. The Group functions include Group Finance, Treasury, Group Tax, Group Actuarial, Group Risk, Legal Services, HR, Corporate Communications, Strategy and Corporate Development, Investor Relations, Company Secretariat and Internal Audit. Based both in Wythall, Birmingham and Juxon House, London, the Group is led by the Group Chief Executive Officer, Clive Bannister.
PHOENIX LIFE Phoenix Life is responsible for the management of the Group’s life funds. Its experienced and focused management team is led by its Chief Executive Officer, Andy Moss. Based in Wythall, Birmingham, it has a track record of successfully integrating life assurance businesses and has developed a leading-edge model and infrastructure into which future acquired funds can be integrated.
LIFE COMPANIES Following a series of life company consolidations, the latest of which being the transfer of the business of National Provident Life Limited into Phoenix Life Assurance Limited in the first half of 2015, the Group now has two operating UK life companies, being Phoenix Life Limited and Phoenix Life Assurance Limited. Together, they comprise 14 with-profit funds and 2 non-profit funds. The Group will examine the possible merger of the remaining two life companies in due course. The Group also completed the divestment of an Irish operating life company, Scottish Mutual International Limited (‘SMI’), in December 2015.
OUTSOURCE PARTNERS A key role of the management service companies is the management of relationships with the outsource partners on behalf of the life companies. As the number of policies held by the Group gradually declines over time, the fixed cost base of our operations as a proportion of policies will increase. Our management services team manages this risk by putting in place long-term arrangements for third party policy administration. By paying a fixed price per policy to our outsource partners, we reduce this fixed cost element of our operations and convert to a variable cost structure. This allows our management services companies to generate profits by managing costs efficiently.
Phoenix Group Holdings Annual Report and Accounts 2015 13 Strategic report
SUMMARY Overall, the potential remains for our business to be impacted by economic headwinds and the uncertain and evolving regulatory and legislative environment. Whilst the impact of these changes will change the landscape of the UK life insurance industry, it will also provide Phoenix with a number of consolidation opportunities, as open life companies are forced to reappraise their business models and strategies for their legacy policies.
Economic landscape Whilst the first half of 2015 showed positive investment market returns due to improving economic performance and an expectation of an eventual normalisation of monetary policy, gains seen in the first six months of the year were offset in the second half by a slowdown in the Chinese economy, falling oil prices and concerns over a potential rise in interest rates in the United States. The UK equity market index (FTSE All Share Total Return) closed 1.0% ahead of the 2014 position reflecting a relatively flat return.
The persistently low interest rate environment remained a challenge for the industry in 2015 but the Group has been proactive in mitigating against this by for example, matching the duration of assets and liabilities where practicable and entering into interest rate hedging arrangements where appropriate. In practice, the Group maintains a mix of fixed and variable rate instruments which it reviews regularly to ensure the overall exposure to interest rate risk is kept within the agreed profile for each fund.
Competitive landscape The Group estimates the market size of the UK closed life industry to be over £300 billion. One conclusion noted in the Pensions Institute’s independent report, titled “The Meaning of Life”, was that there will be further consolidation in the UK life sector as existing providers struggle with issues such as heightened regulatory scrutiny, increased capital requirements and shortages of skilled personnel to manage complex legacy products. Clearly, the traditional life company business model must continue to adapt and Phoenix Group has the expertise and business model in place to take advantage of this changing environment.
The FCA released its thematic review of the fair treatment of long-standing customers in life insurance earlier this month. As the UK’s largest specialist closed life fund consolidator, we welcome the focus the review brings to the fair treatment of policyholders as our customers and the outcomes of their policies are fundamental to our business model.
OPERATIONAL MANAGEMENT Standardising, streamlining and innovating the key processes and platforms across the Group improves efficiency and generates value.
CLOSED LIFE FUND Strategic focus on our closed life fund specialism.
PUBLICLY QUOTED Publicly quoted Group with proven access to debt and equity markets.
Phoenix Group Holdings Annual Report and Accounts 2015 15 Strategic report
PHOENIX GROUP’S ACQUISITION STRATEGY Phoenix Group is well placed to find solutions for a range of sellers of life insurance businesses due to the Group’s flexible approach to acquisitions, in particular the Group’s appetite to acquire either life companies, funds or portfolios of businesses, and all product types across the with-profit, non-profit and unit-linked spectrums.
The UK life insurance sector is evolving and we believe the changing environment may result in sellers looking to dispose of various portions of their business. We are able to be flexible about the size and structure of any acquisition, which should provide us with a variety of opportunities.
Ɛ When a life company makes an acquisition, part of the purchase price represents the value of the insurance contracts which are anticipated to be released over a period of time.
Ɛ Cash flow is generated from the emergence of VIF into free surplus and the release of capital as the risk profile reduces over time.
VALUE GENERATION THROUGH MANAGEMENT ACTIONS Management actions are one of the key areas of focus for Phoenix Life and another key source of value generation.
Phoenix Group’s value generation model Potential value and source of cash acceleration and value generation will vary depending on specific target or management action
Additional value can be generated from further acquisitions of closed life books of business.
Ɛ We delivered £205 million of incremental embedded value in 2015, giving a cumulative figure of £466 million since 2014. The Group has therefore exceeded its target of £400 million between 2014 and 2016 one year early.
Phoenix Group Holdings Annual Report and Accounts 2015 17 Strategic report
WHY IS IT IMPORTANT? MCEV has provided a consistent means of assessing our ability to increase value through the delivery of incremental management actions.
ANALYSIS With cumulative incremental embedded value from management actions of £466 million, the Group has exceeded the cumulative incremental embedded value target of £400 million from 2014 – 2016.
How we measure delivery £225m 2014: £567m £2,513m 2014: £2,647m £324m 2014: £483m
KEY INITIATIVES AND PROGRESS IN 2015 Ɛ In January 2015, we completed an exchange offer of the Group’s Tier 1 notes into new subordinated notes with a maturity of 2025, with a 99% take-up rate by noteholders. The new notes meet the requirements of Tier 2 capital under Solvency II, at the PLHL level.
Ɛ We completed a Part VII transfer of the business of National Provident Life Limited into Phoenix Life Assurance Limited. This fund merger reduces the number of UK life insurance companies to two, resulting in greater capital efficiencies within the Group.
Ɛ In December 2015, the Group received PRA approval of our Solvency II full internal model, transitional adjustment and matching adjustment applications. In line with approvals received from the PRA, the Group will continue to monitor and measure its solvency position at the PLHL level.
Ɛ We resolved a number of legacy tax issues during the year which have further reduced risk and uncertainty and facilitated the release of capital.
PRIORITIES FOR 2016 Ɛ Continued enhancement of the Group’s capital position under Solvency II through the implementation of new management actions and further review of the investment portfolio allocation.
WHY IS IT IMPORTANT? The Solvency II surplus is the regulatory assessment of capital adequacy at the PLHL level, implemented on 1 January 2016.
WHY IS IT IMPORTANT? The Pillar I regulatory assessment of capital adequacy at the PLHL level until 31 December 2015. Again, this measure is replaced by the Solvency II surplus from 1 January 2016.
Ɛ Improving value and effective with-profits fund run-off: through accelerating estate distribution where possible and providing appropriate investment exposure.
Ɛ Our Financial Ombudsman Service (‘FOS’) overturn rate was the lowest yearly overturn rate to date. The FOS overturn rate is the percentage of resolved cases where the FOS, upon reviewing a complaint, make a change to our original decision in favour of the customer.
Ɛ We beat the industry target related to the speed of pension transfer payouts in 2015. This is measured in the time in calendar days taken from when a transfer request is put on Origo (an electronic pension transfer system) to when the transfer is cleared and the receiving scheme receives the money in its bank account.
Ɛ Continue to take actions to support customers as they approach retirement age, so that they are able to make fully informed decisions at the right time.
Phoenix Group Holdings Annual Report and Accounts 2015 21 Strategic report
ANALYSIS The Group achieved a satisfaction score of 96% reflecting our commitment to ensuring customers are satisfied with our products and services.
ANALYSIS The FOS overturn rate of 18% is the lowest yearly FOS overturn rate to date.
Ensuring our workforce is engaged is central to the success of the Group. In 2015, we maintained our focus on ensuring our people were challenged, motivated and rewarded through opportunities for growth, both professionally and personally. For the fourth consecutive year, we were listed as one of the UK’s Top Employers, an accreditation awarded to the best companies to work for in the UK. We also achieved fourth place in the mid-sized category in Britain’s Healthiest Workplace (a benchmark in association with Pru Health, Mercer and The Telegraph).
Ɛ Over 1,000 learning requests were supported by the Group which included professional qualifications, coaching and continuing professional development.
Ɛ Our Corporate Responsibility agenda played a key part in the engagement of our people and in 2015, we expanded our community programme to provide opportunities for teamwork and leadership development.
Ɛ Maintain support to our communities through employee volunteering, fundraising and engagement with community projects.
Workforce that is of Black, Asian or Minority Ethnic background 115 107
HOLDING COMPANIES’ CASH FLOWS The statement of cash flows prepared in accordance with IFRS combines cash flows relating to shareholders and cash flows relating to policyholders, but the practical management of cash within the Group maintains a distinction between the two. For this reason, the following analysis of cash flows focuses on the holding companies’ cash flows, which reflect cash flows relating only to shareholders and which are, therefore, more representative of the cash that could potentially be distributed as dividends or used for the prepayment of debt, the payment of debt interest, Group expenses and pension contributions (subject to the Group’s liquidity policy, regulatory and other restrictions on the availability and transferability of capital). This cash flow analysis reflects the cash paid by the operating companies to the holding companies, as well as the uses of those cash receipts.
Cash remitted by Phoenix Life during 2015 was £225 million (2014: £567 million excluding Ignis divestment proceeds) including the £20 million impact of management actions implemented in the period. The reduction from the prior period reflects the retention of capital in the life companies in advance of the transition to the new Solvency II capital regime. The prior period also included cash receipts from Ignis Asset Management of £32 million which was disposed of in the second half of 2014 and other cash receipts of £89 million which included the sale of BA(GI) Limited and a one-off benefit relating to the restructure of the PGL pension scheme.
The Group met its cash generation target range of between £200 million to £250 million for the year ended 31 December 2015.
RECURRING CASH OUTFLOWS Operating expenses of £26 million (2014: £29 million) decreased as a result of reduced corporate office costs, primarily staff costs.
Pension scheme contributions of £55 million (2014: £88 million) are in line with the latest triennial funding agreement, the decrease reflects that 2014 included a one-off £5 million payment to the PGL Pension Scheme and a scheduled step-down in the funding of the Pearl Group Staff Pension Scheme.
DEBT REPAYMENTS AND SHAREHOLDER DIVIDEND Debt repayments of £190 million were made in respect of the PGH Capital facility, including prepayments of £70 million in respect of payments due in 2016 and £30 million in respect of payments due in 2017.
Cash and cash equivalents at 31 December 2 706 988 1 Includes amounts received by the holding companies in respect of tax losses surrendered to the operating companies of £71 million (2014: £43 million). 2 Closing balance at 31 December 2015 includes required prudential cash buffer of £150 million (31 December 2014: £150 million).
TARGET CASH FLOWS The previous cumulative cash flow target for 2014 to 2019 is £2.8 billion, against which £1.2 billion had been achieved by 31 December 2015. This includes the proceeds received from the divestment of Ignis. The Group has announced a new five year cumulative cash flow target for 2016 to 2020 of £2.0 billion, of which £350 million to £450 million is expected to be achieved in 2016.
Operating companies’ cash generation target 2.0 1 Includes cash flows from management actions. 2 Assumes transitionals run-off on a linear basis.
The resilience of the cash generation target is demonstrated by the following stress testing: Stress testing1 £bn
Following 5% decrease in annuitant mortality rates3 1.8 1 Assumes recalculation of transitionals (subject to PRA approval). 2 Credit stress equivalent to an average 100bps spread widening across ratings, 10% of which is due to defaults/downgrades.
The with-profit operating profit of £92 million represents the shareholders’ one-ninth share of the policyholder bonuses, which shows an increase compared to the prior year due to higher bonus rates (2014: £89 million).
The with-profit funds where internal capital support has been provided generated an operating profit of £84 million (2014: £33 million). This increase in profit reflects the positive impact of modelling enhancements undertaken in the period of £49 million (2014: £2 million), including the implementation of the Group’s new actuarial modelling system by the NPLL with-profit fund.
Also contributing to the reduction in the non-profit and unit-linked IFRS operating profits is a loss of £4 million generated on annuity new business (2014: £24 million profit). The loss reflects a decrease in volumes and the adverse impact on profit margins of market pricing pressures that followed the implementation of the new rules on Pension Freedoms from 1 April 2015.
The longer-term return on owners’ funds of £6 million (2014: £9 million) reflects the asset mix of owners’ funds, primarily cash-based assets and fixed interest securities. The investment policy for managing these assets remains prudent.
Phoenix Group Holdings Annual Report and Accounts 2015 27 Strategic report
IFRS RESULT AFTER TAX The IFRS operating result is reconciled to the IFRS result after tax: Year ended 31 December 2015 £m
Amortisation of acquired in-force business and customer relationship intangibles (90) (103)
Profit before the tax attributable to owners: From continuing operations 185 336
Bank finance costs have decreased by £28 million, reflecting lower debt principal balances following the repayments and restructuring activity in the second half of 2014.
TAX CREDIT ATTRIBUTABLE TO OWNERS The Group’s approach to the management of its tax affairs is set out in its Tax Strategy document which has been shared with the UK Tax Authority and approved by the Board. The Group welcomes the Government’s initiative for companies to publish their Tax Strategy which it believes accords with the Group’s own approach to Corporate Social Responsibility.
Whilst the Company is a Jersey resident holding company (and therefore subject to a 0% tax rate), its primary source of income is its UK subsidiaries. Therefore the tax residency of the parent company has little impact on the tax payable by the Group.
Phoenix Group Holdings Annual Report and Accounts 2015 29 Strategic report
2 Life MCEV operating earnings are derived on an after tax basis. For presentational purposes, Life MCEV operating earnings before tax have been calculated by grossing up the after tax Life MCEV operating earnings. Life MCEV operating earnings before tax of £274 million (2014: £341 million) are therefore calculated as £220 million operating earnings (2014: £268 million) grossed up for tax at 20.25% (2014: 21.50%).
New business value generated from vesting annuities without guarantees was £2 million (2014: £11 million) after tax. New business value represents the value of vesting pension policies not reflected in the opening MCEV. These arise from pension policies which have no attaching annuity guarantees. The reduction reflects a decrease in volumes and lower margins following the implementation of the new rules on Pension Freedoms from 1 April 2015.
The MCEV also includes the value of future profits expected to be earned on annuities with guaranteed rates, based on long-term profit margins and projected take-up rate assumptions. As at 31 December 2015, the Group MCEV included £165 million in respect of these policies (2014: £180 million).
Non-economic experience variances and assumption changes increased MCEV by £109 million after tax in the period. The main driver of the increase is other operating variances of £110 million (2014: £82 million) which principally comprised the positive impacts of modelling enhancements undertaken in the period, including the extended roll-out of the Group’s new actuarial system and the refinement of actuarial methodologies in a number of areas. Assumption changes have increased MCEV by £20 million during the period (2014: £15 million reduction). Changes in expense assumptions to reflect the implementation of revised agreements with the Management Services companies and the impact of corporate tax rate reductions have positively impacted the MCEV. These changes have more than offset the adverse impacts of the strengthening of longevity and persistency assumptions. Experience variances in the year were negative £21 million (2014: £53 million positive), principally reflecting an increase in claims and a reduction in the value of future profits expected to be earned on guaranteed rate annuity vestings following the implementation of the new Pensions Freedoms.
MANAGEMENT SERVICES Commentary on the management services companies is provided in the Group IFRS operating profit section.
GROUP COSTS The Group costs of £26 million (2014: £28 million) have remained broadly in line with the prior period.
ECONOMIC VARIANCES ON NON-LIFE BUSINESS Economic variances on non-life business are negative £8 million (2014: negative £64 million), principally driven by a net increase in the market value of the PGH Capital debt instruments of £4 million (2014: £24 million). The prior period result included losses of £27 million relating to an increase in the market value of the Tier 1 notes, which were exchanged for new PGH Capital subordinated notes in January 2015.
NON-RECURRING ITEMS ON NON-LIFE BUSINESS Non-recurring items on non-life business decreased MCEV by £39 million before tax (2014: increase £317 million). Non-recurring items include a loss of £22 million recognised on the exchange of the Tier 1 notes and related transaction expenses, together with corporate project costs of £13 million. Net negative other one-off items total £4 million.
Non-recurring items in the comparative period included a gain of £288 million on the divestment of Ignis and £68 million income received by PGH1 from the with-profit funds in relation to the close-out of the PGL Pension Scheme longevity indemnity agreement. Partly offsetting these items was £11 million of Group corporate project costs, debt issue costs of £16 million, with net other one-off items having a negative impact of £12 million.
Bank finance costs have decreased by £28 million, reflecting lower debt principal balances following repayments made and the restructuring activity completed in the second half of 2014.
Other comprehensive expense of £40 million includes pension contributions of £12 million (net of tax) in respect of the PGL Pension Scheme (2014: £16 million) and £32 million (net of tax) in respect of the Pearl Group Staff Pension Scheme (2014: £54 million), partly offset by a revaluation gain of £4 million on owner occupied property. The prior year comparative included an actuarial gain of £43 million (net of tax) in respect of the Pearl Group Staff Pension Scheme that was capped at the point at which the scheme returned to surplus on an IFRS basis.
Planned future contributions will cause a strain to the MCEV as pension surpluses are not recognised under the Group’s MCEV basis.
Capital and dividend flows in the period include external dividend payments of £120 million (2014: £120 million).
Phoenix Group Holdings Annual Report and Accounts 2015 31 Strategic report
Ɛ To optimise the overall financial leverage ratio to maintain an investment grade credit rating.
Ɛ To meet the dividend expectations of shareholders as set by the Group’s dividend policy.
Since 1 January 2016, regulatory capital adequacy for the Group is no longer monitored under the European Union Insurance Groups’ Directive (‘IGD’) or the PRA requirement for an Individual Capital Assessment (‘ICA’). The Group will now monitor its regulatory capital adequacy under the new Solvency II regime, details of which are included below.
PLHL ICA SURPLUS (ESTIMATED) In accordance with PRA requirements, effective prior to 1 January 2016, the Group undertook an ICA at the level of the highest EEA insurance group holding company, which is PLHL. This involved an assessment, on an economic basis, of the capital resources and requirements arising from the obligations and risks which exist outside the life companies.
As agreed with the PRA, the Group aimed to ensure that PLHL maintained an ICA surplus of at least £150 million. The estimated PLHL ICA position at 31 December 2015 is set out below: Year ended 31 December £bn
This involves a valuation in line with Solvency II principles of the Group’s own funds and a risk based assessment using an internal model of the Group’s solvency capital requirements (‘SCR’).
The Group’s own funds differ materially from IFRS equity for a number of reasons, including the exclusion of the Group’s bank debt held outside of the PLHL sub-group, the recognition of future shareholder transfers from the with-profit funds (but not the shareholder share of the estate), the treatment of certain subordinated debt instruments as capital items, and a number of valuation differences, most notably with regard to insurance liabilities and intangible assets.
The estimated PLHL Solvency II surplus position at 31 December 2015 is set out below: Year ended 31 December £bn
Solvency II surplus (estimated) 3 1.3 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-transferrable and fungible between Group companies within a period of nine months.
3 Equates to a coverage ratio of 130% as at 31 December 2015.
Excluding the SCR and own funds relating to unsupported withprofit funds and Group pension schemes, the estimated Solvency II Shareholder Capital coverage ratio is 154% as at 31 December 2015.
SENSITIVITY AND SCENARIO ANALYSIS As part of the Group’s internal risk management processes, the regulatory capital requirements are tested against a number of financial scenarios. The results of that stress testing are provided below and demonstrate the resilience of the PLHL Solvency II surplus.
Following 5% decrease in annuitant mortality rates3 1.1 1 Assumes recalculation of transitionals subject to PRA approval. 2 Credit stress equivalent to an average 100bps spread widening across ratings, 10% of which is due to defaults/downgrades.
Phoenix Group Holdings Annual Report and Accounts 2015 33 Strategic report
The financial leverage ratio as at 31 December 2015 decreased to 37.8% reflecting debt repayments in the period.
Gross shareholder debt and shareholder debt (including hybrid debt) included in MCEV at 31 December 2015 are set out in the table below: Year ended 31 December £m
In August 2015, Fitch Ratings assigned the Group an investment grade credit rating, which triggered a further 50bps margin reduction on the outstanding bank facility effective from 28 August 2015.
The Group has an embedded Risk Management Framework that is forward-looking and proactive to manage risk within risk appetite. Strong risk governance founded on the three lines of defence supports policyholder security and the safe execution of the Group’s strategy.” WAYNE SNOW GROUP CHIEF RISK OFFICER
Further detail on the 10 components of our RMF and the principal risks facing the Group are provided below.
It assists the business achieve its strategic objectives by supporting a more stable, well managed business with improved customer and shareholder outcomes.
To ensure that all risks are managed effectively the Group is committed to: Ɛ embedding a risk aware culture; Ɛ maintaining a strong system of internal controls; Ɛ enhancing and protecting customer and shareholder value by continuous and proactive risk management; Ɛ maintaining an efficient capital structure; and
Ɛ ensuring that risk management is embedded into day-to-day management and decision-making processes.
Ɛ Embedded value – The Group will take action to protect embedded value.
Ɛ Regulation – The Group and each life company will, at all times, operate a strong control environment to ensure compliance with all internal policies and applicable laws and regulations, in a commercially effective manner.
The risk appetite and control framework supports the Group in operating within the boundaries of these statements by limiting the volatility of key parameters under a range of adverse scenarios agreed with the Board. Risk appetite limits are chosen which specify the maximum acceptable likelihood for breaching the agreed limits. Assessment against these limits is undertaken through extensive scenario and reverse stress testing.
GOVERNANCE, ORGANISATION AND POLICIES GOVERNANCE Overall responsibility for approving, establishing and embedding the RMF rests with the Board. The Board recognises the critical importance of having an efficient and effective RMF and appropriate oversight of its operation. There is a clear organisational structure in place with documented, delegated authorities and responsibilities from the Group Board to the PLHL Board, the Boards of Phoenix Life and the Executive Committee.
POLICIES The Group policy framework comprises a set of 30 policies that support the delivery of the Group’s strategy by establishing operating principles and expectations for managing the key risks to our business. The policy set contains the minimum control standards to which each business unit must adhere to and against which they report compliance.
The policies define: Ɛ the individual risks the policy is intended to manage; Ɛ the degree of risk the Group is willing to accept, which is set out in the policy risk appetite statements; Ɛ the minimum controls required in order to manage the risk to an acceptable level; and
BUSINESS PERFORMANCE AND CAPITAL MANAGEMENT The Annual Operating Plan is assessed to ensure that the Group operates within our stated risk appetite. Business performance is routinely monitored with consolidated reporting against performance targets.
RISK AND CAPITAL ASSESSMENT The Group operates a standardised assessment framework for the identification and assessment of the risk it may be exposed to and how much capital should be held in relation to those exposures. This framework is applicable across the Group and establishes a basis, not only for the approach to risk assessment, management and reporting but also for determining and embedding capital management at all levels of the Group in line with Solvency II requirements.
Risk assessment activity is a continuous process and is performed on the basis of identifying and managing the significant risks to the achievement of the Group’s objectives.
Further details of the Group’s exposure to financial and insurance risks and how these are managed are provided in note E6 of the IFRS consolidated financial statements.
The recent decline in yields on UK Government debt has put pressure on the Group’s excess capital position. Hedging strategies have been implemented to limit this impact and the position is closely managed. However, under the Solvency II regime the life companies remain exposed to further reductions in yields and swap rates.
An increase in credit spreads on debt securities, particularly if it is accompanied by a higher level of actual or expected issuer defaults, could adversely impact the Group’s embedded value.
The Group regularly monitors its counterparty exposure and has specific limits relating to individual exposures, counterparty credit rating, sector and geography.
Where possible, exposures are diversified through the use of a range of counterparty providers. All material reinsurance and derivative positions are appropriately collateralised and guaranteed.
During 2015, the Group recaptured a reinsurance arrangement between Phoenix Life Assurance Limited and the Group’s Bermudian subsidiary Opal Re. The arrangement was replaced with a similar reinsurance agreement with Reinsurance Group of America (RGA), ISFR AA- by S&P.
There has been no adverse change in experience over the year. However, material strengthening of actuarial assumptions over 2015 increased longevity risk capital requirements and improved resilience. The arrangement with RGA referenced above reinsured £1.3 billion of annuity liabilities out of the Group.
RISK A Market Volatility B Counterparty Exposure C Actuarial Assumptions D Regulatory and Legislative Changes
Political Risk Unexpected changes driven by political agenda in the run up to, and following, the European referendum during 2016.
The move to the conduct-focused regulator may see a continued move away from rules-based regulation with a greater focus on customer outcomes. This may challenge the existing approach and/or may result in remediation exercises where Phoenix Life cannot demonstrate that it met the expected customer outcomes in the eyes of the regulator.
Customers in Closed Books’ review, the FCA has set out their expectation of firms in relation to managing conduct risk. This has enabled Phoenix to benchmark itself against these expectations and focus on activities to enhance its management of conduct risk.
Phoenix Life has made a number of changes to its retirement processes to take account of the changes. These include ensuring that appropriate risk warnings are provided to customers in advance of them taking a course of action. This is aligned to the new rules that the FCA has outlined in PS15/4.
Phoenix was operational on day 1 and has been able to offer customers a range of options. Phoenix has actively encouraged customers to utilise Pension Wise. In addition Phoenix implemented the FCA risk warnings thus ensuring that customers have made informed choices.
Phoenix Group Holdings Annual Report and Accounts 2015 39 Strategic report
In making the viability assessment, the Board has undertaken the following process: Ɛ it reviewed what is mandatory in the context of viability; Ɛ it reviewed the AOP which considers profits, liquidity, solvency and strategic objectives and the impacts of management actions on the Group; Ɛ it completed stress testing to assess viability under severe but plausible scenarios, including two adverse stresses which represent the key financial risks to the Group as follows: 1. Market stress – a 1 in 10 year event combined market stress incorporating a fall in equity, property values and yields, with a widening of credit spreads.
2. Longevity stress – a 1 in 10 year event longevity and credit stress, which implies a 1.3 year increase in life expectancy for a 65 year old male alongside a widening of credit spreads.
Ɛ it completed a qualitative assessment of all strategic risks to the Group and contingent actions available that could be implemented should any risk materialise that threatens the Group’s resilience.
The Board has also made certain assumptions when making the assessment and these include the following: Ɛ the stress occurs on 1 January 2016 with no allowance for any recovery; and
Ɛ that corporate acquisitions are not relevant, as any acquisition would only be progressed on the basis it was value accretive.
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.
Emissions reported above normalised to kg per m2 90 kg CO2e/m2 103 kg CO2e/m2
E The Directors of Phoenix Group Holdings support the high standards of corporate governance contained in the UK Corporate Governance Code.
BOARD OF DIRECTORS Our Board of Directors comprises 10 directors, which has consistently been the number of Directors the last few Board evaluations have recommended as the right number for our Board to function at its optimum level. The Board comprises the Chairman, seven independent Non-Executive Directors and two Executive Directors. The increasing independence across the Board over the last few years is demonstrated on the chart opposite.
In response to a recommendation from the November 2014 externally facilitated Board evaluation, a Board skills audit was undertaken in early 2015 and this informed our succession planning by considering the skills and experience required in differing degrees across our Board to pursue our strategy and govern the Group. In accordance with our Board succession plan, approved by the Board in April 2015, we are currently recruiting two Non-Executive Directors to prepare for those scheduled to leave the Board by the middle of 2017. This includes (as reported in my opening Chairman’s statement) Tom Cross Brown who will be leaving the Board at our May 2016 Annual General Meeting following a long period of excellent service to the Group.
Since my arrival, we have undertaken (in November 2015) an internally facilitated Board evaluation from which it was concluded that the Board could function well with between 9 and 11 Directors and that some overlap between new and departing Directors may be desirable as the new Directors increase their familiarity with Phoenix Group.
I am very pleased to have been appointed Chairman of the Board of a Group in which strong governance is embedded and supported from top to bottom. My fellow Directors and I realise that governance evolves and we must continue to be proactive in ensuring that robust governance in Phoenix remains a priority.” HENRY STAUNTON CHAIRMAN
SHAREHOLDERS I am gratified that our shareholders responded positively to the actions we took in response to the votes at our 2014 AGM of 81% and 84% in favour of our remuneration report and policy respectively. At our 2015 AGM, votes in favour of all 18 resolutions were over 98% of votes cast. This is our best result since our 2010 London listing and we have therefore returned to a positive trajectory of AGM resolution approvals as shown in the table opposite.
The following sections provide more detail on our Board of Directors, Executive Management team, operation of governance and remuneration practices as follows: Ɛ Board and committee structure
Phoenix Group Holdings Board and Committees The main focus of the Phoenix Group Holdings Board is on Group strategy and performance, with input from board committees. The chart below sets out the composition and main activities of the Phoenix Group Holdings Board and its committees. More detailed operational and customer-focused matters are addressed at the subsidiary board and committee level.
AUDIT COMMITTEE Alastair Barbour (Chair) Isabel Hudson Kory Sorenson David Woods
PHOENIX GROUP HOLDINGS BOARD Henry Staunton (Chair) Ian Cormack – SID Rene-Pierre Azria Clive Bannister* Alastair Barbour Tom Cross Brown Isabel Hudson James McConville* Kory Sorenson David Woods * Executive Directors
Experience René-Pierre Azria is a senior partner at LionTree LLC, a US private advisory firm based in New York and specialising in strategic analysis and mergers and acquisitions. Prior to joining LionTree LLC, Mr Azria founded and managed Tegris LLC, also a mergers and acquisitions firm based in New York. Prior to founding Tegris LLC, Mr Azria was a worldwide partner with Rothschild & Co., based in New York. Prior to joining Rothschild & Co. in 1996, Mr Azria served as Managing Director of Blackstone Indosuez and President of the Financiere Indosuez Inc. in New York.
Experience Alastair Barbour has over 30 years audit experience with KPMG where he worked across the full spectrum of financial services clients from large general insurers and reinsurers to the life assurance and investment management sector, working on a range of operational and strategic issues. Mr Barbour is the former Head of Financial Services, Scotland for KPMG. He retired from KPMG in 2011 to build a Non-Executive career. He is a Director and Audit Committee Chairman of RSA Insurance Group plc, Standard Life European Private Equity Trust plc and Liontrust Asset Management plc (all London Stock Exchange listed companies). He is also a Director and Audit Committee Chairman of CATCo Reinsurance Opportunities Fund Ltd, a Bermuda-based investment company listed on the London Stock Exchange and of The Bank of N. T. Butterfield & Son Limited, a company listed in Bermuda.
From 2004 until 2013, Henry Staunton was a NonExecutive Director, Chairman of the Audit Committee and latterly Senior Independent Director and Vice Chairman of Legal & General Group plc, where he gained significant insight into the life and pensions industry. From 2008 to 31 December 2014 he was a Non-Executive Director of Merchants Trust plc, where he was the Senior Independent Director.
During his executive career he was Finance Director of ITV plc from 2003 to 2006, and Finance Director of Granada plc from 1993 to 2003. Prior to that he joined Price Waterhouse as a graduate trainee, rising to become a Senior Partner of the audit practice.
Experience Between April 2010 and December 2011, Mr McConville was Chief Financial Officer of Northern Rock plc. Prior to that, between 1988 and 2010, he worked for Lloyds Banking Group plc (formerly Lloyds TSB Group plc) in a number of senior finance and strategy related roles, latterly as Finance Director of Scottish Widows Group and Director of Finance for the Insurance and Investments Division. During 2011 and 2012, Mr McConville was a Non-Executive Director of the life businesses of Aegon UK. In 2014, Mr McConville joined the board of Tesco Personal Finance plc as Non-Executive Director. Mr McConville qualified as a Chartered Accountant whilst at Coopers and Lybrand.
Experience Mr Cormack is Non-Executive Chairman of Maven Income & Growth VCT 4 plc, a Senior Independent Director of both Partnership Assurance Group plc and Xchanging plc and a Non-Executive Director of Hastings Insurance Holdings plc. Mr Cormack was Chief Executive Officer of AIG, Inc. in Europe from 2000 to 2002 and prior to that he spent 32 years at Citibank where he was Chairman of Citibank International plc and Co-Head of the Global Financial Institutions Client Group at Citigroup.
Experience David Woods is a Fellow of the Institute of Actuaries, Non-Executive Chairman of Standard Life UK Smaller Companies Trust plc and a Non-Executive Director of Murray Income Trust plc. He is also Chairman of the pension fund trustee companies responsible for the governance of all the UK defined benefits/pension schemes in the Sopra Steria Group and is a Director of Santander (UK) Group Pension Trustees Ltd.
Experience Tom Cross Brown was Global Chief Executive of ABN AMRO Asset Management from 2000 to 2003, as well as Chairman of ABN AMRO Asset Management in the UK from 1997 to 2003. Prior to this, he spent 21 years with Lazard Brothers in London, latterly as Chief Executive Officer of Lazard Brothers Asset Management. Mr Cross Brown is Non-Executive Chairman of Just Retirement Group plc and is a Non-Executive Director of Artemis Alpha Trust plc.
Experience Isabel Hudson is Non-Executive Chairman of the National House Building Council and a Non-Executive Director of Standard Life PLC and BT Group plc. Ms Hudson is a former Non-Executive Director of MGM Advantage, The Pensions Regulator and QBE Insurance. Other roles previously held by Ms Hudson include Chief Financial Officer at Eureko BV and Executive Director of Prudential Assurance Company. Ms Hudson is an ambassador to Scope, a UK charity, and has 34 years of experience in the insurance industry in the UK and mainland Europe.
Ɛ Develops and delivers the Group’s debt capital strategy and other treasury matters
Ɛ Ensures the Group has effective processes in place to enable all reporting obligations to be met
Ɛ Supports the Group Chief Executive Officer in managing the Group’s key external stakeholders
Ɛ Leads the development and delivery of the Phoenix Life business strategy, including the continued integration of life businesses
Ɛ Ensures Phoenix Life deploys capital efficiently and effectively, with due regard to regulatory requirements, the risk universe and strategy.
Ɛ Leads external Group Communications in liaison with the Group Finance Director and Head of Investor Relations.
Ɛ Leads the implementation of the Group’s employee strategy in order to recruit, retain, motivate and develop high quality employees
Ɛ Oversees and co-ordinates maintenance of, and adherence to, appropriate corporate governance procedures across the Group
Ɛ Designs and implements a framework to manage legal risk within the Group, including compliance by Group companies and staff with relevant legal obligations.
Ɛ Leads the Group’s risk management function, embracing changes in best practice and regulation including Solvency II
The Board skillset must be aligned to the Group strategy of enhancing value for shareholders and policyholders and taking forward the Group’s M&A agenda. The Board undertook a skills audit in the first half of 2015, evaluating the Directors’ skills against strategic requirements. The output has been used to inform succession and recruitment of Directors. A further skills audit will be undertaken in the first half of 2017, to ensure the Board skillset continues to be appropriate to the Group’s strategy and the external environment.
The Board considers that the following Directors are independent: Rene-Pierre Azria, Alastair Barbour, Ian Cormack, Tom Cross Brown, Isabel Hudson, Kory Sorenson and David Woods. The Board has considered the criteria proposed by the Code in assessing the independence of the Directors, in particular the following: Ɛ The Board had previously considered Rene-Pierre Azria not to be independent as a firm he was connected with had undertaken services for two shareholders, each holding more than 3% of the Company’s issued share capital. Those two shareholders have each sold down their shareholding to less than 0.5% and are no longer significant shareholders. Therefore, the Board has concluded that Mr Azria can be considered independent as (a) he acts in a wholly independent manner in character and judgement and (b) none of the relationships or circumstances listed in provision B1.1 of the Code apply to Mr Azria.
Ɛ Isabel Hudson is a non-executive director of Standard Life PLC which has investment management arrangements with the Phoenix Life subsidiary companies. The decisions regarding these arrangements are not made by the Board of Phoenix Group Holdings and the relationship is not considered to impact the independent status of Isabel Hudson.
The remuneration of the Directors is shown in the Directors’ Remuneration Report on pages 57 and 80. The terms and conditions of appointment of Non-Executive Directors are on the Group’s website. In accordance with the provisions of the Articles and the Code, all Directors (except Tom Cross Brown, who is standing down from the Board) will submit themselves for election or re-election at the Company’s AGM on 11 May 2016.
BOARD EFFECTIVENESS 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 2015. The process was led by the Chairman and internally facilitated by the Company Secretary. The process involved completion by Directors of a questionnaire covering various aspects of Board, Committee and Director effectiveness followed by individual meetings between the Chairman and each Director, concluding in a Board report which was discussed by the Board in November 2015. Key outputs from the review are shown below: KEY OUTPUTS FROM THE 2015 BOARD EFFECTIVENESS REVIEW: Ɛ A strong theme was the desire to spend more time on strategy.
Ɛ Much of the discussion related to proposals to improve Board processes and operations to facilitate better use of Directors’ time.
An action list, with senior executive accountability, has been established to address the recommendations from the November 2015 evaluation.
All Directors receive a tailored induction on joining the Board in accordance with a process approved by the Board. The new Group Chairman, Henry Staunton, undertook a comprehensive induction before and following his appointment in September 2015. This included a focus on the new Solvency II reporting environment, applicable from 1 January 2016, as well as detailed strategic and operational briefings and information.
To ensure that the Directors maintain up-to-date skills and knowledge of the Company, all Directors receive regular presentations on different aspects of the Company’s business and on financial, legal and regulatory issues.
OPERATION OF THE BOARD The terms of appointment for the Directors state that they are expected to attend in person regular (at least six per year) and additional Board meetings of the Company and to devote appropriate preparation time ahead of each meeting. In January 2016, the Nomination Committee reviewed the time spent by Directors and concluded that the time required of (and given by) the Company’s Directors is considered at least at the level expected in their appointment terms and is believed to be high in comparison to other FTSE 250 companies.
Alastair Barbour, on account of being on the boards of a number of public companies listed in the UK and/or Bermuda and chairing the audit committee for all, has provided an analysis of his work commitments to the Nomination Committee, which shows the relatively low level of time commitment required for certain of his other roles and the complementary nature of his roles and the time committed to Phoenix (40 days in 2015, his second biggest role). The Nomination Committee and Board confirmed their satisfaction with the time and overall commitment given to Phoenix by Mr Barbour and all other directors.
The Board met seven times during 2015 and is scheduled to meet seven times in 2016 including for a two day strategy-setting meeting. Additional meetings will be held as required, and the Non-Executive Directors will hold meetings with the Chairman, without the Executive Directors being present, as they did on several occasions in 2015.
PROGRESS AGAINST ACTIONS FROM THE EXTERNALLY-FACILITATED 2014 BOARD EFFECTIVENESS REVIEW: Action Status
Ɛ Provision of advice to the Board to enable the Board to report on whether the Annual Report and Accounts, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Group’s performance, business model and strategy.
Ɛ Responsible for making recommendations to the Board on the appointment of the external auditors and their terms of engagement and for reviewing the performance, objectivity and independence of the external auditors. The terms of reference of the Audit Committee state that it shall meet the external auditor at least once a year without management being present.
Ɛ Considering and approving the remit of the internal audit function and reviewing its effectiveness.
Ɛ Oversight of activities of subsidiary audit committees through receipt and review of minutes, discussions between the Chairmen of the Audit Committee and subsidiary audit committees, and the Audit Committee Chairman’s attendance at the Phoenix Life Audit Committee on an occasional basis, as well as his receipt of all papers going to the Phoenix Life Audit Committee.
Ɛ Reviewed the Company’s 2014 Annual Report and Accounts, 2015 Interim Financial Statements and 2015 Interim Management Statements, recommending their approval to the Board, as well as related disclosures and the financial reporting process, supported by reports from management and the external auditors.
Ɛ Reviewed the annual internal controls effectiveness report (and the half-year interim update) prior to its consideration by the Board and received reports regarding consequential actions.
Ɛ Reviewed reports from Internal Audit and EY (as part of their audit assurance) on the control environment in the Group’s outsource service providers, noting that this was addressed in more detail at the Phoenix Life Audit Committee.
The composition of the Audit Committee is in accordance with the requirements of the Code that the Audit Committee should consist of at least three independent Non-Executive Directors of whom at least one has recent and relevant financial experience. Both Alastair Barbour and Isabel Hudson have that experience. The Audit Committee met seven times during 2015. Its meetings are attended by the Chairman of the Risk Committee (who is also a member of the Audit Committee), the Group Finance Director, the Deputy Group Finance Director, the Group Head of Internal Audit, the external auditors and usually also by the Group Chairman and the Group Chief Executive Officer. The Audit Committee holds private meetings at least annually with each of the Group Finance Director, the Group Head of Internal Audit and the external auditors.
Phoenix Group Holdings Annual Report and Accounts 2015 51 Corporate governance
EXTERNAL AUDIT Ɛ Reviewed the effectiveness, engagement and remuneration of the external auditors, recommending their re-appointment to the Board and thence to shareholders.
Ɛ Reviewed and monitored the independence of the external auditors including their provision of non-audit services.
Ɛ Approved the Group Internal Audit Proposition for 2015–2016 which had been updated to reflect the recommendations of the EQA.
AUDIT COMMITTEE’S PERFORMANCE Ɛ Reviewed the Audit Committee’s performance, constitution and terms of reference, noting that all its duties had been addressed in accordance with its terms of reference, and that the Board would undertake its own review of the performance of the Board committees. The Audit Committee agreed, and recommended to the Board, a change to its terms of reference to reflect responsibility for reviewing the internal controls and assurance framework and remove duplication with the Risk Committee.
AUDITOR’S INDEPENDENCE The Company has adopted a Charter of Statutory Auditor Independence, which requires the Company and the external auditors to take measures to safeguard the objectivity and independence of the external auditors. These measures include a prohibition regarding non-audit services in respect of specific areas, such as secondments to management positions, or those which could create a conflict or perceived conflict. It also includes details of the procedures for the rotation of the external engagement partner. The Charter can be found on the Group’s website.
Significant matters in relation to the 2015 IFRS financial statements and MCEV supplementary information How these issues were addressed
Ɛ Management presented papers to the Phoenix Life Audit Committee detailing recommendations for the actuarial assumptions and methodologies to be used for the interim and year-end reporting periods with justification and benchmarking as appropriate. These assumptions and methodologies were debated and challenged by the Phoenix Life Audit Committee, focusing on longevity and persistency in relation to demographics and on credit in relation to economics, prior to their approval. The assumptions reflected methodology and model improvements from the new actuarial reporting system referred to in the 2014 Annual Report and largely implemented during 2015.
Ɛ The Audit Committee requested and received a dedicated training session to enhance its knowledge of the different bases of assumptions setting.
Ɛ Management presented papers setting out the basis of valuation of financial assets, including changes in methodology and assumptions, for the interim and year-end reporting periods to the Phoenix Life Audit Committee. The assumptions, valuations and processes, particularly for financial assets determined by valuation techniques using significant non-observable inputs (Level 3), were debated and challenged by the Phoenix Life Audit Committee prior to being approved.
Operating Profit Ɛ The Audit Committee reviewed the allocation of key items to operating profit to ensure the allocations were in line with the Group’s operating profit framework and consistent with previous practice.
Phoenix Group Holdings Annual Report and Accounts 2015 53 Corporate governance
Ɛ Reviewed the Group’s risk profile, monitoring it against the risk categories of Market, Insurance, Credit, Financial Soundness, Customer and Operational with particular attention to risk appetite, risk trends, risk concentrations, provisions, experience against budget and key performance indicators for risk.
Ɛ Undertook horizon scanning to consider emerging risks that could impact the Group including more prominent badging of forwardlooking work in risk papers as proposed by the November 2014 Board Evaluation Report.
Ɛ Agreed a set of operating principles for the Group and Phoenix Life Board Risk Committees to support their work in providing effective risk oversight of the Group.
Ɛ Delivered a recommendation to the Board for the appointment of Henry Staunton as Chairman following a comprehensive search process led by the Nomination Committee with Zygos search consultancy.
Ɛ Reviewed the time spent by Directors in fulfilling their duties, concluding that the time spent appeared to be high in comparison with other FTSE 250 companies.
Ɛ Reviewed, prior to their appointments, the proposed new NonExecutive Director appointments to the subsidiary Phoenix Life Board. This included succession planning for the Phoenix Life Board Chairman.
The Board’s policy on diversity is as follows: Ɛ The Board supports the enhancement of diversity, including gender, as a consideration when recruiting new Directors.
Ɛ 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.
During 2015, a special-purpose Nomination Committee, consisting of independent Non-Executive Directors, Tom Cross Brown (Chairman), Alastair Barbour, Kory Sorenson and David Woods, was appointed for the recruitment of the new Chairman.
The Nomination Committee (including the Chairman-selection Committee) met eight times in 2015. The Chairman-selection Committee undertook a detailed process for the recruitment of the Chairman, including several briefing sessions with the search consultants.
The Company’s Investor Relations department is dedicated to facilitating communication with investors and analysts and an active investor relations programme is maintained.
In addition, continued engagement is undertaken with shareholders and proxy advisers on evolving governance issues.
The Board’s going concern assessment is included within the Directors’ report on page 82.
Phoenix Group Holdings Annual Report and Accounts 2015 57 Corporate governance
Dear Shareholder, On behalf of the Board, I am pleased to present our Directors’ remuneration report for the year ended 31 December 2015. This report covers remuneration for Executive and Non‑Executive Directors of the Company. IAN CORMACK REMUNERATION COMMITTEE CHAIRMAN
Ɛ The approval of the Group’s Solvency II Internal Model by the Prudential Regulation Authority
Ɛ Managing the new pension freedom changes introduced in April 2015, providing customers with greater choice with regard to their retirement options.
Against each of these objectives, this was an exceptional year for the Company. To deliver this performance, management were asked not only to deliver on the targets originally set at the commencement of the year but also to deliver additional goals set by the Board during the year, primarily securing an investment grade credit rating (which, while an aspiration, had not been factored in the annual target setting process) and to revise the asset mix to reduce assets which carried a higher capital charge thereby permitting approval of our Solvency II Internal Model.
While fully committed to maintaining the integrity of the Company’s incentive arrangements at all times, the Committee considered the impact of these additional priorities set for management by the Board and concluded that, while not separately rewarding management for the delivery of these achievements (other than through the normal assessment of personal performance in respect of 30% of the Annual Incentive Plan (‘AIP’) opportunity), the Committee should equally ensure that such additional priorities should not inadvertently disadvantage the very high level of achievement from management in respect of the targets set at the start of the year.
Ɛ Cash distributed from the life company to the Company was included as a measure on the basis that it is both an effective measure of the capital strength of the life companies (distributions will only be approved by its independent Board if they are satisfied of its capital strength after meeting obligations to policyholders and elsewhere) and of the Company’s ability to pay dividends to its own shareholders. Although less cash was actually paid in the year, to ensure that risks are effectively managed and that the position on distributions is considered in light of the post-year end final accounts, the Committee’s practice has been to look at both the distributions made in the year, and also to credit potential distributions that were deferred to the following year where the cash generated related to the AIP year. Such potential distributions are then added to any target for the subsequent year to avoid double-counting.
In prior years, the Committee has defaulted to making as few adjustments as possible and has not excluded the negative impact on some elements of the AIP of a number of management actions which, while in the interests of shareholders overall, reduced some element of the AIP as such actions have more typically been reflected in the budget process. While the exercise of any judgment is inherently subjective and should be used sparingly, the Committee believes that the three adjustments above were both sufficiently significant as to warrant adjustment and that, without those adjustments, the AIP out-turn would not have reflected the true level of corporate and management performance.
Following the application of such steps the Corporate measure factor for 2015 (i.e. the AIP before assessment of the personal performance element) was determined on a formulaic basis at 85% of maximum.
REMUNERATION POLICY FOR 2016 Looking ahead to 2016, the Committee concluded that: Ɛ Neither Executive Director will receive a salary increase (this means that the Group Chief Executive Officer has not had any increase in salary since his date of joining approximately five years ago)
Ɛ No changes will be made to the target or maximum levels under our AIP or to the award levels under our LTIP.
The Committee has therefore not made any changes to the overall remuneration levels detailed in our Directors’ remuneration policy which was approved by our shareholders at the 2014 Annual General Meeting (‘AGM’).
This can impact the Group’s ability to manage its incentive plans effectively as, during such periods, we have been unable to allocate shares under the Deferred Bonus Share Scheme (‘DBSS’), and impacted employees were unable to exercise any vested DBSS share award. The same restrictions apply to our LTIP arrangements with grants under both plans (DBSS and LTIP) not being made until the Group emerged from the restrictions in September 2015.
The Committee has commissioned a broader review of incentives during 2016 to consider whether alternative approaches will be more suitable for Phoenix Group given the constraints outlined above. As part of that review, the Committee will also look at the developing approach of financial services regulators towards the design of executive remuneration. Specifically within the insurance industry, this includes the remuneration aspects of Solvency II and, in the wider regulated financial sector, the continuing development of regulators’ views towards the implementation of the remuneration aspects of CRD IV (the EU’s Capital Requirements Directive for regulated financial businesses).
As detailed on pages 60 and 61, important changes are also being made to the performance measures for 2016 AIP and for the 2016 LTIP award. In light of Solvency II, embedded value is expected to be a less relevant measure within the insurance industry and Phoenix will no longer be reporting MCEV; accordingly measures based on MCEV have been removed for 2016’s incentive plans and the other measures re-balanced.
The Board has noted that in the period since the Group’s Premium Listing on the London Stock Exchange in July 2010, the fee levels for Non-Executive Directors across the sector have increased significantly in recognition of the increased time commitment of Directors in regulated businesses. There has been no increase in the base fee levels for Non-Executive Directors since July 2010 and the Board has decided to increase the base fee for all Non-Executive Directors to £105,000 in 2016 to reflect these factors. This is against a background of significant time commitment and increasingly complex and onerous financial services requirements and related responsibilities. All other fees remain unchanged (i.e. Board Committee Chairmanship fees of £10,000 and no separate Board Committee membership fees).
Phoenix Group Holdings Annual Report and Accounts 2015 59 Corporate governance
Element of Remuneration Policy Detail of Implementation of Policy for 2016
Overall positioning The Company’s overall positioning on remuneration for Executive Directors remains unchanged from 2015: Ɛ An appropriate balance is maintained between fixed and variable components of remuneration.
Pension There are no proposed changes to the pension benefits offered to Executive Directors in 2016.
The auditors have reported on certain parts of the Directors’ remuneration report and stated whether, in their opinion, those parts of the Directors’ remuneration report have been properly prepared in accordance with the Companies Act 2006. Those sections of the Directors’ remuneration report which have been subject to audit are clearly indicated.
Annual Incentive Plan (‘AIP’)¹ The AIP for 2016 will operate on a basis that is consistent with how the AIP operated in 2015, although there have been changes to the precise measures and weightings of the Corporate (financial and strategic) performance measures for 2016’s AIP to reflect our evolving business focus.
The AIP maximum potential and on-target levels remain unchanged at 150% of base salary and at 50% of maximum levels (75% of base salary) respectively. As in previous years, one-third of AIP outcomes for 2016 will be delivered as an award of deferred shares under the Deferred Bonus Share Scheme.
The overall weightings between Corporate and Personal performance measures for AIP in 2016 are unchanged from 2015: Ɛ Corporate (financial and strategic) performance measures – 70%.
The changes made from 2015’s Corporate performance measures for AIP can be summarised as follows: Ɛ In 2016, the highest weighting will be given to operating companies’ cash generation which remains core to our business and is linked directly to Phoenix Life free surplus under Solvency II. The overall weighting for cash generation has increased from 2015.
Ɛ 2015’s Corporate performance measures included both a Group Market Consistent Embedded Value (Group ‘MCEV’) and a Group MCEV operating earnings after tax measure. Due to Solvency II, embedded value metrics are expected to be less relevant measures within the insurance industry and Phoenix will no longer be reporting MCEV; accordingly MCEV will be removed as a measure under AIP 2016, and IFRS operating earnings will replace MCEV operating earnings.
Ɛ Specific targets of employee engagement and expense management have been removed as Corporate performance measures, but are included as part of the objectives for the Personal performance element. Assessment of these items under the Personal element permits a more rounded assessment.
One-third of AIP outcomes for 2016 will be delivered as an award of deferred shares under the DBSS which will vest after a three-year period of deferral. For DBSS awards made in 2015 (in respect of 2014’s AIP outcome) and for DBSS awards to be made in subsequent years: Ɛ The 3-year deferral period will run to the dealing day following the three-year anniversary of the announcement of the annual results by reference to which the relevant AIP outcome was determined.
Ɛ Dividend entitlements for the DBSS shares will accrue over the three-year deferral period.
Ɛ When DBSS awards are made, the number of shares will be calculated using the average share price for the 3 dealing days before the actual grant of awards.
Ɛ The DBSS awards will be made as soon as practicable following the announcement of the annual results by reference to which the relevant AIP outcome was determined, and whilst the granting of awards may be delayed due to ‘closed’ or ‘prohibited’ period constraints, the deferral period will begin as described above (i.e. three years from March).
Phoenix Group Holdings Annual Report and Accounts 2015 61 Corporate governance
Long-Term Incentive (‘LTIP’)¹ Award levels for Executive Directors for 2016 are unchanged at 200% of base salary. When awards are made, the number of shares within awards is calculated using the average share price for the three dealing days before the grant of awards.
Additionally, all 2016 LTIP awards are subject to a further underpin measure relating to debt and risk management within the Group, as detailed on page 68. This ’underpin’ will be extended for 2016 LTIP awards to include consideration of customer satisfaction and, to meet Solvency II requirements, in exceptional cases, personal performance. These measures and the relative weightings are considered to be appropriate for 2016’s LTIP awards. The application of a three-year performance period for each measure, is unchanged from 2015’s LTIP awards.
All-Employee Share Plans Executive Directors have the opportunity to participate in HMRC tax advantaged Sharesave and Share Incentive Plans (‘SIP’) on the same basis as all other UK employees. To align with market practice, the 2016 Sharesave grant will be offered at a 20% discount to market value rather than the previous 15%.
Requirement levels are 200% of base salary level for the Group Chief Executive Officer and the Group Finance Director.
Where any vested LTIP awards are subject to a holding period requirement, the vested LTIP award shares (discounted for anticipated tax liabilities) will count towards the shareholding requirements.
Fee levels for the Chairman will be at the same levels as for 2015. The new Chairman who was appointed in 2015 was appointed at the same level of fees as the outgoing Chairman. This level of Chairman’s fee is accordingly unchanged from October 2012.
Base fees for Non-Executive Directors have previously been set at £90,000 or £100,000 based on a range of factors. The Board decided to increase the base fee to a common £105,000. While the headline fee is relatively high, overall fee levels are appropriate as Board Committee chairmanship fees at Phoenix remain amongst the lowest in the insurance sector and, unusually, no separate Board Committee membership fees are paid.
Overall expenditure on pay has been taken as the employee costs for continuing operations as set out in note C2 ‘Administrative expenses’ in the notes to the consolidated financial statements. The 2014 figure also includes £31 million from discontinued operations which relate to Ignis, which was disposed of on 1 July 2014. Expenditure on pay from continuing operations has decreased by 6% year on year.
Phoenix Group Holdings Annual Report and Accounts 2015 63 Corporate governance
3 The single figure of total remuneration for 2014 has been restated and now reflects the actual price of shares on the day the 2012 LTIP vested (23 September 2015: 836p per share) rather than the three-month average share price to 31 December 2014 (769.93p per share) which was required to be used last year for the single figure of total remuneration, and also reflects the actual dividends accrued on the award until the date of vesting.
4 Long-term incentive vesting rates against maximum opportunity values are not applicable for 2011 and 2012 due to no awards vesting in those financial years. 5 Jonathan Moss left the role of Group Chief Executive Officer on 7 February 2011 and left the Group on 29 March 2011. Clive Bannister joined Phoenix Group on 7 February 2011 and was appointed to the Board as a Director on 28 March 2011. 6 Jonathan Moss’ 2011 single figure of total remuneration does not include compensation for loss of office.
Overall, the data shows virtually unchanged levels of salary and benefits for the Group Chief Executive Officer; the increase in annual incentive is primarily due to him being awarded a higher rating on the Personal performance measures for AIP than in previous years, which has resulted in a higher AIP out-turn. Staff more generally have received higher overall remuneration due mainly to higher AIP outcomes than in 2014. The median level of salary increase for staff was 2.5% and is lower than the figure shown above which is based on averages.
To approve the Directors’ remuneration report for the year ended 31 December 2014 138,914,473 98.12 2,645,386 1.87 352,328
A vote to approve the Remuneration Policy was passed at the 2014 AGM held on 30 April 2014. Details of the votes cast in relation to this resolution were disclosed in the Company’s Directors’ remuneration report for 2014 which is available as part of the Phoenix Group Holdings Annual Report and Accounts 2014.
1 The Executive Directors are entitled to adjust their salary/benefit combination under flexible benefits arrangements and the figures shown are before individual elections. 2 Benefits for Clive Bannister comprise car allowance and private medical insurance totalling £16,175. Benefits for James McConville comprise car allowance and private medical insurance totalling £15,940. 3 Annual incentive amounts are presented inclusive of any amounts which must be deferred into shares for three years (i.e. one-third of the AIP award). In 2015 and 2014, £287,000 and £238,700 respectively of Clive Bannister’s incentive payment is subject to 3-year deferral delivered in shares, and £188,650 and £158,290 of James McConville’s incentive payment is subject to similar deferral. Details of the performance measures and targets applicable to the AIP for 2015 are set out below.
AIP OUTCOMES FOR 2015 The Committee seeks to set suitable ranges for each measure in the context both of the Company’s own internal budgets and of external projections (whether through management guidance or consensus forecasts). As an entirely closed life business, targets are significantly impacted by management actions and year on year growth is not an inherent objective. The ranges are considered appropriate in that context.
As explained in the Committee Chairman’s letter, and as permitted under the AIP rules, in relation to the MCEV-based measures the Committee excluded the additional direct MCEV implications of securing an investment grade credit rating together with related Solvency II steps, the full negative impacts of which on MCEV were not reflected in the original AIP target setting process for 2015. The achievement of an investment grade rating was a significant step for the Company and had been a long-standing aspiration and the increase in liabilities for MCEV from the Company being required to value its listed bonds on a market value basis would have operated counter-intuitively if not excluded.
Group MCEV is a measure of the consolidated value of shareholders’ interests in an insurance group and the key components are net worth plus the value of in-force covered business, based on a market-consistent methodology where assets and liabilities are valued in line with market prices. Accordingly, listed debt is valued at the market value quoted on the reporting date. One consequence of achieving an investment grade rating was that the market value of the Group’s listed bonds increased even though there was no additional liability for the Group (as the market perceived our strength and, therefore, the likelihood of repayment to be higher). Consequently, as this increase in market value of debt reduced MCEV, the Committee concluded that it would be appropriate to exclude such impact from the AIP out-turn by adjusting the targets, otherwise the impact of such a significant step for the Group would have inadvertently penalised management.
Phoenix Group Holdings Annual Report and Accounts 2015 65 Corporate governance
Maximum performance level for 2015 AIP Performance level attained for 2015 AIP
Total 85% 1 Consistent with past practice, the performance level for operating companies’ cash generation has been credited with £50million which was generated within Phoenix Life. This ensures that, at all times, management maintains sufficient capital in Phoenix Life given the implementation of Solvency II. 2 Represents reported Group MCEV after adding back ordinary dividends. 3 The rating is a score based on questions answered by customers in a satisfaction survey managed by Ipsos MORI. Customers surveyed were asked to give a satisfaction rating of between 1 and 5 to a number of questions (with a rating of 3 or above regarded as satisfied). The 4.7 rating (out of 5) in 2015 is the average score of all questions answered.
The table below shows the actual out-turn against the annual incentive maximum. For 2015 AIP, Corporate (financial and strategic) measures applied to 70% of incentive opportunity and Personal (individual objectives) measures applied to 30% of incentive opportunity.
The above targets were all measured over the period of three financial years 1 January 2013 to 31 December 2015.
In addition to the above targets, the Committee confirmed that the underpin performance condition relating to management of debt, capital restructuring and risk management within the Group (as described more fully on page 68) had been achieved in the performance period.
NON-EXECUTIVE FEES The emoluments of the Non-Executive Directors for 2015 based on the current disclosure requirements were as follows: Name
Manjit Dale5 – 33 – – – 33 1 The amounts within the benefits columns reflect the fact that the reimbursement of expenses to Non-Executive Directors for travel and accommodation costs incurred in attending
Phoenix Life Holdings Limited Board and associated meetings represent a taxable benefit. This position has been clarified with HMRC and the amounts shown are for reimbursed travel and accommodation expenses (and the related tax liability which is settled by the Group).
2 Howard Davies retired from the Board 31 August 2015. 3 Henry Staunton joined the Board 1 September 2015. 4 David Barnes retired from the Board 22 October 2014. 5 Manjit Dale retired from the Board 30 April 2014. 6 Kory Sorenson joined the Board 1 July 2014.
Phoenix Group Holdings Annual Report and Accounts 2015 67 Corporate governance
SHARE-BASED AWARDS As at 31 December 2015, Directors’ interests under long-term share-based arrangements were as follows: LTIP
2 The shares outstanding at the start of the year related to dividend roll-up and were exercised on 7 January 2015. 3 The 2012 LTIP award vested at 84.24%, although the Group Chief Executive Officer decided to waive voluntarily any entitlement in excess of two-thirds of the shares which would otherwise have vested. 4 Gains of Directors from share options exercised and vesting shares under the LTIP in 2015 were £3,037,992 (Clive Bannister’s gains were £47,599 exercised on 7 January 2015 at a share price of £7.92 and £1,528,424 exercised on 25 September 2015 at a share price of £8.257558; James McConville’s gain was £1,461,969 exercised on 29 September 2015 at a share price of £8.13) (2014: £1,295,305).
5 The face value of awards granted in 2015 represents the maximum vesting of awards (but before any credit for dividends over the period to vesting) and is calculated using a share price of 827.667p being the average of the closing middle market prices of Phoenix shares for the 3 dealing days preceding the award date, being £1,399,999 for Clive Bannister and £879,992 for James McConville. The vesting % at threshold performance (2015 awards) for Clive Bannister and James McConville is 25%. As detailed on page 61 for LTIP awards made in 2015 a holding period applies so that any LTIP awards for which the performance vesting requirements are satisfied will not be released for a further 2 years from the third anniversary of the original award date.
The performance conditions for the 2013, 2014 and 2015 awards are set out below: Performance measure 2013 award (40% MCEV growth, 40% Cumulative cash generation and 20% TSR)
Target range between MCEV growth in excess of the risk-free rate by 4% per annum and MCEV growth in excess of the risk-free rate by 6% per annum.
For this award, an additional £50 million was added to the base MCEV figure to increase the level of challenge.
Target range between MCEV growth in excess of the risk-free rate by 3% per annum and MCEV growth in excess of the risk-free rate by 5% per annum.
The Committee remains committed to applying the performance conditions on the LTIP awards detailed above without adjustment to the extent this is practicable. In light of Solvency II, embedded value metrics are expected to be less relevant measures within the insurance industry and Phoenix will no longer be reporting MCEV. The Committee will ensure that any necessary amendments to this part of the relevant LTIP awards are, consistent with the shareholder approved Remuneration Policy, made on the basis of the Committee ensuring that any substitute performance measure for MCEV growth does not make the performance condition easier to satisfy than the original was intended to be. Any alterations to the performance measures for outstanding LTIP awards will be reported in the relevant Directors’ remuneration report and be subject to due engagement with key shareholders.
Phoenix Group Holdings Annual Report and Accounts 2015 69 Corporate governance
James McConville 1 The face value of awards granted in 2015 is equivalent to 50% of the cash element of the 2014 AIP and is calculated using a share price of 827.667p, being the average closing market price on the 3 days preceding the award date giving £238,699 for Clive Bannister and £158,283 for James McConville.
3 Gains of Directors from share options exercised and vesting shares under the DBSS in 2015 were £438,626, exercised on 29 September 2015 at a share price of £8.139129. This was the first vesting of the DBSS for Clive Bannister since its inception.
During the year ended 31 December 2015, the highest mid-market price of the Company’s shares was 922p and the lowest mid-market price was 783.5p. At 31 December 2015, the Company’s share price was 917p.
As at 1 January 2015 or date of appointment if later
SHAREHOLDING REQUIREMENTS As explained in the Remuneration Policy under the Shareholding Guidelines section, the Executive Directors are subject to shareholding requirements.
The extent to which Executive Directors have achieved the requirements by 31 December 2015 (using the share price on acquisition/vesting) can be summarised as follows: Position
Phoenix Group Holdings Annual Report and Accounts 2015 71 Corporate governance
Alastair Barbour 11 September 2013 1 October 2013 1 October 2016 7
Ian Cormack 2 September 2009 2 September 2009 11 May 2016 2
Isabel Hudson 11 December 2009 18 February 2010 11 May 2016 2
Kory Sorenson 9 May 2014 1 July 2014 1 July 2017 14
David Woods 21 December 2009 18 February 2010 11 May 2016 2
REMUNERATION COMMITTEE GOVERNANCE The Group established the Committee in 2010. The terms of reference of the Committee are available at www.thephoenixgroup.com. The main determinations of the Committee in 2015 in respect of the application of the Remuneration Policy are summarised in the Committee Chairman’s letter to shareholders at the start of the Directors’ remuneration report.
Under the Committee’s Terms of Reference, the Committee meets at least twice a year but more frequently if required. During 2015, six Committee meetings were held and details of attendance at meetings are set out in the Corporate Governance Report on page 47.
The Committee makes recommendations to the Board. No Director plays a part in any discussion about his or her own remuneration.
The Committee also consulted with the Group Chief Executive Officer, Group HR Director and General Counsel who attended, by invitation, various Committee meetings during the year although no executive is ever permitted to participate in discussions or decisions regarding his or her own remuneration. Input is also sought from the Chief Risk Officer (without management present) and from representatives from finance, as appropriate.
Phoenix Group Holdings Annual Report and Accounts 2015 73 Corporate governance
APPENDIX TO DIRECTORS’ REMUNERATION REPORT: FOR INFORMATION ONLY: THE SUMMARY REMUNERATION POLICY TABLE FROM THE DIRECTORS’ REMUNERATION POLICY APPROVED AT THE 2014 AGM Remuneration Policy table Element and purpose Policy and operation Maximum Performance measures
Ɛ Base salaries are reviewed each year against companies of similar size and complexity and set by reference to the median data of comparators which the Remuneration Committee considers to be suitable, with consideration given to both relevant insurance companies and the FTSE 31-100 as a whole
Ɛ The Remuneration Committee does not strictly follow data but uses it as a reference point in considering, in its judgement, the appropriate level of salary having regard to other relevant factors including corporate and individual performance and any changes in an individual’s role and responsibilities, and the level of salary increase awarded to other employees of the Group
Ɛ Base salary is paid monthly in cash Ɛ Changes to base salaries normally take effect from 1 January
Ɛ The Group provides market competitive benefits in kind. Details of the benefits provided in 2013 and 2014 are set out in the section below1. The Remuneration Committee reserves discretion to introduce new benefits where it concludes that it is in the interests of Phoenix Group to do so, having regard to the particular circumstances and to market practice
Ɛ It is not possible to prescribe the likely change in the cost of insured benefits or the cost of some of the other reported benefits year-toyear, but the provision of benefits will normally operate within an annual limit of 10% of an Executive Director’s base salary
Ɛ The Remuneration Committee will monitor the costs in practice and ensure that the overall costs do not increase by more than the Remuneration Committee considers to be appropriate in all the circumstances
Ɛ Relocation expenses are subject to a maximum limit of £150,000
Ɛ A contribution limit of 20% of base salary per annum per Executive Director has been set for the duration of this policy
Ɛ One third of any annual AIP award is to be deferred into shares for a period of three years although the Remuneration Committee reserves discretion to alter the current practice of deferral (whether by altering the portion deferred, the period of deferral or whether amounts are deferred into cash or shares). Such alterations may be required to ensure compliance with regulatory guidelines for pay within the insurance sector, but will not otherwise reduce the current portion deferred or the period of deferral
Ɛ During the period until vesting of DBSS awards, the number of shares within such awards are cumulatively increased by the value of dividends notionally payable in respect of the vesting shares
Ɛ The performance measures applied to AIP will be set by the Remuneration Committee and may be financial or non-financial and corporate, divisional or individual and in such proportions as it considers appropriate
Ɛ In respect of the financial performance measures, attaining the threshold performance level produces a £nil annual incentive payment and for non-financial performance measures the threshold level of performance produces an annual incentive outcome that is 10% of the weighting given to these measures
Ɛ On-target performance on all measures produces an outcome of 50% of maximum annual incentive opportunity. However, the Remuneration Committee reserves the right to adjust the threshold and target levels for future financial years in light of competitive practice
ii. For 2014 onwards, there is a specific multiplier of 80%-120% of the provisional out-turn 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 and more generally, of the wider shareholder experience. With respect to financial performance measures, this assessment will include consideration of the quality of how particular outcomes were achieved iii. The AIP remains a discretionary arrangement and the Remuneration Committee reserves discretion to adjust the out-turn (from zero to any cap) should it consider that to be appropriate. In particular, the Remuneration Committee may operate this discretion in respect of any risk concerns
Ɛ Awards are made following the announcement of annual results in accordance with the LTIP rules
Ɛ During the period until vesting of LTIP awards, the number of shares within such awards is cumulatively increased by the value of dividends notionally payable in respect of the vesting shares
Ɛ The Company will honour the vesting of all awards granted under previous policies in accordance with the terms of such awards
Ɛ The Remuneration Committee may set such performance conditions for LTIP awards as it considers appropriate (whether financial or non-financial and whether corporate, divisional or individual)
Ɛ Once set, performance measures and targets will generally remain unaltered unless events occur which, in the Remuneration Committee’s opinion, make it appropriate to make adjustments to the performance conditions, provided that any adjusted performance condition is, in its opinion, neither materially more nor less difficult to satisfy than the original condition
Ɛ Executive Directors are able to participate in all-employee share plans on the same terms as other Group employees as required by HMRC legislation
Phoenix Group Holdings Annual Report and Accounts 2015 77 Corporate governance
Shareholding Guidelines To encourage share ownership by the Executive Directors and ensure interests are aligned
Ɛ Executive Directors are expected to retain all shares (net of tax) which vest under the DBSS and under the LTIP (or any other discretionary long-term incentive arrangement introduced in the future) until such time as they hold a specified value of shares
Ɛ Once shareholding guidelines have been met, individuals are expected to retain these levels as a minimum. The Remuneration Committee will review shareholdings annually in the context of this policy
Ɛ 200% of base salary for the Group Chief Executive Officer, 100% of base salary for all other Executive Directors3
Ɛ The fees paid to the Chairman and the fees of the other Non-Executive Directors are set to be competitive with other listed companies of equivalent size and complexity (both relevant insurance companies and the FTSE 31-100 as a whole)
Ɛ Additional fees are paid to NonExecutive Directors who chair or sit on a board committee, or on boards of subsidiary entities or on the Solvency II Model Governance Committee and to the Senior Independent Director (‘SID’)
Footnotes to the above Remuneration Policy table 1. Benefits in 2015 For details of benefits in 2015, please see note 1 to the ‘Single Figure of Remuneration Table’ on page 64.
2. Holding Period for LTIP awards from 2015 For LTIP awards from 2015 a two-year holding period has been introduced as explained in the ‘Implementation of Remuneration Policy in 2015’ table on page 61.
Ɛ In terms of the principles for setting a package for a new Executive Director, the starting point for the Remuneration Committee will be to apply the general policy for Executive Directors as set out above and structure a package in accordance with that policy. Consistent with the new UK regulations, the caps contained within the policy for fixed pay do not apply to new recruits, although the Remuneration Committee would not envisage exceeding these caps in practice.
Ɛ For external and internal appointments, the Remuneration Committee may agree that the Company will meet certain relocation expenses as it considers appropriate.
Ɛ For external candidates, it may be necessary to make additional awards in connection with the recruitment to replace awards forfeited by the individual on leaving a previous employer. For such replacement awards, Phoenix Group will not pay more than is, in the view of the Remuneration Committee, necessary and will in all cases seek, in the first instance, to deliver any such awards under the terms of the existing incentive pay structure. It may, however, be necessary in some cases to make such awards on terms that are more bespoke than the existing annual and equity-based pay structures in Phoenix in order to secure a candidate. Details of any recruitment-related awards will be appropriately disclosed.
Ɛ All such replacement awards, whether under the AIP, LTIP or otherwise, will take account of the service obligations and performance requirements for any remuneration relinquished by the individual when leaving a previous employer. The Remuneration Committee will seek to make replacement awards subject to what are, in its opinion, comparable requirements in respect of, service and performance. However, the Committee may choose to relax this requirement in certain cases (such as where the service and/or performance requirements are materially completed), and where the Remuneration Committee considers it to be in the interest of shareholders or where such factors are, in the view of the Remuneration Committee, reflected in some other way, such as a significant discount to the face value of the awards forfeited. Exceptionally, where necessary, this may include a guaranteed or non pro-rated annual incentive in the year of joining.
Phoenix Group Holdings Annual Report and Accounts 2015 79 Corporate governance
Remuneration Committee discretion to disapply pro-rating or to accelerate vesting to the date of leaving (subject to pro-rating and performance conditions)
All awards will normally lapse Will receive a pro-rated award subject to the application of the performance conditions at the date of the event. Remuneration Committee discretion to disapply pro-rating
Ɛ LTIP: consists of the threshold level of vesting (50% of base salary). The benefit of a single year’s participation in the Sharesave scheme is recognised using an expected value for the Sharesave options of 30%. The benefit of a single year’s participation in the SIP is recognised using one matching share for every six shares invested on the maximum value which can be invested.
Ɛ LTIP: assumes maximum vesting of awards and valued as on the date of grant (200% of base salary). Sharesave and SIP valued on the same basis as in the on-target column.
Full details of the authorised, issued and fully paid share capital as at 31 December 2015 and movements in share capital during the period are presented in note D1 to the IFRS consolidated financial statements.
SUBSTANTIAL SHAREHOLDINGS Information provided to the Company pursuant to the FCA’s Disclosure and Transparency Rules is published on a Regulatory Information Service and on the Company’s website. As at 22 March 2016, the Company had been notified of the following significant holdings of voting rights in its shares.
During 2015 and up to the date of this report, the following changes to the Board took place: Ɛ Howard Davies resigned from the Board on 31 August 2015
In accordance with the UK Corporate Governance Code, Directors must stand for re-election annually. The Board of Directors will be unanimously recommending that all of the Directors, except Tom Cross Brown who is standing down from the Board, should be put forward for election/re-election at the forthcoming AGM to be held on 11 May 2016.
The Articles give details of the circumstances in which Directors will be treated as having automatically vacated their office and also state that the Company’s shareholders may remove a Director from office by passing an ordinary resolution.
DIRECTORS’ REMUNERATION AND INTERESTS A report on Directors’ remuneration is presented within the Directors’ remuneration report including details of their interests in shares and share options or any rights to subscribe for shares in the Company.
The Board has followed the new requirements of the UK Financial Reporting Council’s ‘Guidance on Risk Management, Internal Control and Related Financial and Business Reporting (September 2014) when performing its going concern assessment. As part of its comprehensive assessment of whether the Group and the Company are a going concern, the Board has undertaken a review of the liquidity and solvency of the Group under both normal and stressed conditions as at the date of preparation of the statement of consolidated financial position.
RE-APPOINTMENT OF THE AUDITORS Ernst & Young LLP (‘EY’) has indicated its willingness to continue in office and a resolution that it is re-appointed will be proposed at the AGM on 11 May 2016.
There is no cap on auditor liability in place in relation to audit work carried out on the consolidated IFRS financial statements, MCEV supplementary information and the Group’s UK subsidiaries’ individual financial statements.
Not applicable 3 Deleted Not applicable 4 Details of long-term incentive schemes
Not applicable 12 Shareholder dividend waiver Not applicable 13 Shareholder dividend waiver – future periods
The Strategic Report and the Directors’ Report were approved by the Board of Directors on 22 March 2016.
The Directors have prepared the Group consolidated financial statements and the Company financial statements in accordance with International Financial Reporting Standards (‘IFRSs’) as issued by the International Accounting Standards Board (‘IASB’). The Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and the Company and of the profit or loss of the Group and the Company for that period.
In preparing these financial statements the Directors are required to: Ɛ select suitable accounting policies and then apply them consistently; Ɛ make judgements and accounting estimates that are reasonable and prudent; Ɛ state whether IFRS, as adopted by the IASB, have been followed, subject to any material departures disclosed and explained in the Group and the Company financial statements; and
Ɛ preparing a Strategic Report, Directors’ Report, Directors’ Remuneration Report and Corporate Governance Statement in compliance with applicable laws and regulations.
Ɛ the requirements of Schedule 8 to The Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 of the United Kingdom pertaining to Directors’ remuneration that UK quoted companies are required to comply with.
OUR OPINION ON THE FINANCIAL STATEMENTS In our opinion: Ɛ Phoenix Group Holdings’ consolidated financial statements and parent company financial statements (the ‘financial statements’) give a true and fair view of the state of the Group’s and of the parent company’s affairs as at 31 December 2015 and of the Group’s and of the parent company’s profit for the year then ended; and
Ɛ the financial statements have been properly prepared in accordance with International Financial Reporting Standards (‘IFRSs’) as issued by the International Accounting Standards Board (‘IASB’).
Ɛ The consolidated statement of comprehensive income for the year then ended
Ɛ The pro forma reconciliation of Group operating profit to results attributable to owners for the year then ended
Ɛ The statement of cash flows for the year then ended
Ɛ The statement of consolidated cash flows for the year then ended Ɛ Related notes 1 to 17 to the financial statements
Ɛ The statement of consolidated changes in equity for the year then ended
Ɛ The reporting units where we performed full or specific audit procedures accounted for more than 99% of the equity and operating profit of the Group.
Ɛ Valuation of insurance contract liabilities, comprising of the following risk areas: Ɛ actuarial assumptions; Ɛ actuarial modelling; and
Valuation of insurance contract liabilities (£40.9bn value of the risk; 2014: £43.9bn) Refer to the Audit Committee Report (page 50 to 52); Critical accounting estimates (page 103); Accounting policies and notes F1 and F2 of the consolidated financial statements (pages 140 to 142) We considered the valuation of insurance contract liabilities to be a significant risk for the Group. Specifically we considered the actuarial assumptions which are applied, as these involve complex and significant judgements about future events, both internal and external to the business, for which small changes can result in a material impact to the valuation. We considered the actuarial modelling used in the valuation process which should model the results appropriately based on the methodology and in accordance with the regulations. Additionally, the valuation process is conditional upon on the accuracy and completeness of the data used.
We have therefore split the risks relating to the valuation of insurance contract liabilities into the following risk areas: Ɛ actuarial assumptions; Ɛ actuarial modelling; and
We assessed management’s analysis of movements in insurance contract liabilities and obtained evidence to support large or unexpected movements. This provided important audit evidence over the valuation of insurance contract liabilities. Further additional audit procedures performed to respond to the specific risk areas are set out below: Risk Our response to the risk What we concluded to the Audit Committee
Actuarial assumptions There has been no change in our assessment of this risk from the prior year. Economic assumptions are set by management taking into account market conditions as at the valuation date. Non-economic assumptions such as future expenses, longevity and mortality are set based on past experience, market experience, market practice, regulations and expectations about future trends.
These assumptions are used as inputs into a valuation model which uses standard actuarial methodologies.
Actuarial modelling We consider that this risk has decreased in the current year following the successful implementation of the new actuarial modelling system in the prior year. Whilst the risk associated with actuarial models has decreased, we still consider the integrity and appropriateness of models to be critical to the overall valuation of insurance contract liabilities.
Over £39bn of the £41bn of insurance contract liabilities are modelled using the new actuarial modelling system with the residual balance modelled outside this system to cater for ancillary business. The key risk is therefore associated with the new modelling system but risks also exist in the calculation of amounts outside this system.
Ɛ tested, on a sample basis, the appropriateness of the valuations modelled outside the core system by comparing the results to our own calculations.
In obtaining sufficient audit evidence to assess the integrity of actuarial data we: Ɛ tested the adequacy of outsourced service provider (‘OSP’) controls regarding the maintenance of policyholder data, and where applicable reviewed the Service Organisation Controls (‘SOC1’) Reports produced by the OSPs; Ɛ confirmed that the actuarial model data extracts provided by the OSPs were those used as an input to the actuarial model; Ɛ tested the design and operating effectiveness of key controls including information technology general controls over management’s data collection, extraction and validation process; Ɛ assessed the appropriateness of management’s grouping of data for input into the actuarial model; and
We focused our audit procedures on the financial investments which require judgment to be applied and for which quoted market prices are not readily available and consequently where management use models and other inputs to estimate their value.
Ɛ assessed the fair value of the fixed and variable rate income securities valuations. This included benchmarking the fair value against comparable bonds and where applicable obtaining broker quotes to assess the reasonableness of management’s price.
In the prior year, our auditor’s report included a significant risk in relation to the provision of taxation and the recoverability of deferred tax assets. In the current year, the Group settled the majority of their uncertain tax positions with HM Revenue and Customs (‘HMRC’). Refer to note C5 on pages 114 and 115 of the consolidated financial statements. The residual exposure to the Group for outstanding tax issues has decreased significantly and thus we no longer deem this to be a significant risk. The risk attaching to recoverability of the deferred tax assets has also reduced following the settlement with the HMRC and thus we no longer deem the recoverability of deferred tax as a significant risk.
THE SCOPE OF OUR AUDIT There were no material scope changes from the prior year.
REPORTING THRESHOLD An amount below which identified misstatements are considered as being clearly trivial.
We agreed with the Audit Committee that we would report all uncorrected audit differences in excess of £2.3 million (2014: £2 million), which is set at 5% of planning materiality, as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds.
SCOPE OF THE AUDIT OF THE FINANCIAL STATEMENTS An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of whether the accounting policies are appropriate to the Group’s and the parent company’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the Directors; and the overall presentation of the financial statements. In addition, we read all the financial and nonfinancial information in the Annual Report and Accounts to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.
RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITOR As explained more fully in the Statement of Directors’ Responsibilities set out on page 86, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors.
Phoenix Group Holdings is a non-UK company and as such is not required to comply with the UK Companies Act 2006. As the Group is listed on the UK Stock Exchange, the Directors have voluntarily chosen to comply with the Companies Act 2006 and listing rules that apply to UK Companies and have engaged us to provide an opinion as if they were. Accordingly we have been engaged to: Ɛ report as to whether the Strategic Report and Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements; Ɛ report as to whether the information given in the Corporate Governance Statement with respect to internal control and risk management systems in relation to financial reporting processes is consistent with the financial statements; Ɛ report as to whether the section in the Directors’ remuneration report that is described as audited has been properly prepared in accordance with the basis of preparation described therein; and
Ɛ report if we are not satisfied that: Ɛ adequate accounting records have been kept (including returns from those branches which have not been visited); or
Ɛ we have obtained all the information and explanations which we consider necessary for the purposes of the audit.
Ɛ the part of the Corporate governance report relating to the company’s compliance with the provisions of the UK Corporate Governance Code specified for our review.
Ɛ we have not received all the information and explanation which we require for the audit.
We are required to give a statement as to whether we have anything material to add or to draw attention to in relation to: Ɛ the Directors’ confirmation in the Annual Report and Accounts that they have carried out a robust assessment of the principal risks facing the entity, including those that would threaten its business model, future performance, solvency or liquidity; Ɛ the disclosures in the Annual Report and Accounts that describe those risks and explain how they are being managed or mitigated; Ɛ the Directors’ statement in the Annual Report and Accounts about whether they considered it appropriate to adopt the going concern basis of accounting in preparing them, and their identification of any material uncertainties to the entity’s ability to continue to do so over a period of at least twelve months from the date of approval of the financial statements; and
Ɛ the Directors’ explanation in the Annual Report and Accounts as to how they have assessed the prospects of the entity, over what period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the entity will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions.
Notes: 1. The maintenance and integrity of the Phoenix Group Holdings website is the responsibility of the Directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the website. 2. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
Policyholder claims (3,931) (3,724) Less: reinsurance recoveries 326 341 Change in insurance contract liabilities 2,959 (1,990) Change in reinsurers’ share of insurance contract liabilities 1,003 1,651 Transfer from/(to) unallocated surplus F2 84 (11) Net policyholder claims and benefits incurred 441 (3,733)
Change in investment contract liabilities (232) (408) Acquisition costs (7) (9) Change in present value of future profits G7 (6) (9) Amortisation and impairment of acquired in-force business G7 (148) (98) Amortisation of customer relationships G7 (15) (15) Administrative expenses C2 (430) (429) Net income attributable to unitholders (7) (8) Total operating expenses (404) (4,709)
Finance costs C4 (136) (156) Profit for the year before tax 152 465
Discontinued operations Profit from discontinued operations, net of tax I1.1 – 92 Profit for the year attributable to owners 249 406
Attributable to: Owners of the parent 201 310 Non-controlling interests D3 48 96
Earnings per ordinary share Basic (pence per share) B3.1 89.8p 137.7p Diluted (pence per share) B3.2 89.6p 137.5p Earnings per share from continuing operations Basic (pence per share) B3.1 89.8p 96.7p Diluted (pence per share) B3.2 89.6p 96.5p
Other comprehensive income/(expense): Items that are or may be reclassified to profit or loss: Foreign exchange rate movements – 10 Reclassification adjustments relating to foreign collective investment schemes disposed of in the period (10) – Items that will not be reclassified to profit or loss: Owner-occupied property revaluation gains G8 4 – Remeasurements of net defined benefit asset/liability G6 11 240 Tax (charge)/credit relating to other comprehensive income items C5 (5) 11 Total other comprehensive income for the year – 261
Attributable to: Owners of the parent 201 571 Non-controlling interests D3 48 96
PRO FORMA RECONCILIATION OF GROUP OPERATING PROFIT TO RESULT ATTRIBUTABLE TO OWNERS For the year ended 31 December 2015
Group costs (12) (21) Total operating profit before adjusting items 324 483
Tax credit/(charge) attributable to owners from continuing operations 64 (22) Tax credit attributable to owners from discontinued operations – 12 Profit for the year attributable to owners 249 406
Share capital D1 – – Share premium 861 979 Shares held by employee benefit trust and Group entities D2 (5) (8) Foreign currency translation reserve 96 103 Owner-occupied property revaluation reserve 4 – Retained earnings 1,478 1,291 Total equity attributable to owners of the parent 2,434 2,365
Insurance contract liabilities Liabilities under insurance contracts F1 39,983 42,930 Unallocated surplus F2 877 981
Net asset value attributable to unitholders 5,120 4,659 Obligations for repayment of collateral received 725 954
Reinsurance payables 19 9 Payables related to direct insurance contracts G3 364 358 Current tax G2 7 165 Accruals and deferred income G4 128 130 Other payables G5 677 360 Liabilities classified as held for sale I1.2 1,587 1,776
Proceeds from disposal of businesses, net of cash disposed of I1 – 332
Proceeds from new shareholder borrowings, net of associated expenses – 1,184
Cash and cash equivalents at the end of the year G11 3,940 5,067
Separate disclosure of the cash flows relating to discontinued operations is provided in note I1.1.2.
Other comprehensive (expense)/ income for the year – – – (10) 4 6 – – –
Issue of ordinary share capital, net of associated commissions and expenses – 2 – – – – 2 – 2
Exchange of non-controlling interests for subordinated notes – – – – – – – (388) (388)
Loss on exchange of non-controlling interests – – – – – (12) (12) – (12)
Shares distributed by employee benefit trust – – 9 – – (9) – – –
Shares acquired by employee benefit trust – – (6) – – – (6) – (6)
Other comprehensive income for the year – – – 10 251 261 – 261
Issue of ordinary share capital, net of associated commissions and expenses – 1 – – – 1 – 1
Dividends paid on ordinary shares held by the employee trust and Group entities – 1 – – – 1 – 1
Credit to equity for equity-settled share-based payments – – – – 7 7 – 7
The consolidated financial statements have been prepared, in accordance with International Financial Reporting Standards (‘IFRSs’) as issued by the International Accounting Standards Board (‘IASB’). The financial statements are presented in sterling (£) rounded to the nearest million except where otherwise stated.
A3. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS The preparation of financial statements requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
In preparing the consolidated financial statements, the Group has adopted the following amendments effective from 1 January 2015: Ɛ Annual Improvements 2010 – 2012 cycle; and
Ɛ Recognition of Deferred tax assets for unrealised losses (Amendments to IAS 12) (2017).
Predominantly all non-current assets are located in the UK. There are no differences between the measurement of the assets and liabilities reflected in the primary statements and that reported for the segments.
Net policyholder claims and benefits incurred (3,733) – – – – (3,733)
Amortisation: Amortisation of acquired in-force business (98) – – – – (98)
Tax attributable to policyholders’ returns (129) – – – – (129)
Segmental result before the tax attributable to owners 309 11 96 – (80) 336
B1.2 Reconciliation of operating profit before adjusting items to the segmental result
The Group has chosen to report a non-GAAP measure of performance being operating profit. Operating profit is considered to provide a comparable measure of the underlying performance of the Group’s business as it excludes the impact of short-term economic volatility and other one-off items. This measure incorporates an expected return, including a longer term return on financial investments backing shareholder and policyholder funds over the period, with consistent allowance for the corresponding expected movements in liabilities. Operating profit includes the effect of variances in experience for non-economic items, such as mortality and expenses, and the effect of changes in non-economic assumptions. It also incorporates the impacts of significant management actions where such actions are consistent with the Group’s core operating activities (for example, actuarial modelling enhancements and data reviews).
Impacts arising from the difference between the actual and expected experience for economic items (on both assets and liabilities) and the impacts of changes in economic assumptions on the valuation of liabilities are excluded from operating profit and are presented in profit before the tax attributable to owners (see section B2). Phoenix Life operating profit is net of policyholder finance charges and policyholder tax.
Operating profit also excludes the impact of the following items: Ɛ amortisation and impairments of intangible assets; Ɛ finance costs attributable to owners; Ɛ gains or losses on the disposal of subsidiaries, associates or joint ventures (net of related costs of disposal); Ɛ the financial impacts of mandatory regulatory change; Ɛ integration, restructuring or other significant one-off projects; and
Ɛ net other one-off items (including Solvency II implementation and systems transformation costs) totalling a cost of £4 million.
Investment return variances and economic assumption changes on long-term business 12 – – 12
Adjust for: Profit before the tax attributable to owners from discontinued operations (see note I1.1.1) (80)
Ɛ net other one-off items (including Solvency II implementation and systems transformation costs) totalling a cost of £17 million.
The principal assumptions underlying the calculation of the long-term investment return are: Gilts (15 year gilt) 2.3 3.6
Operating profit for life assurance business is based on expected investment returns on financial investments backing owners’ and policyholder funds over the reporting period, with consistent allowance for the corresponding expected movements in liabilities. Operating profit includes the effect of variance in experience for non-economic items, for example mortality, persistency and expenses, and the effect of changes in non-economic assumptions. Changes due to economic items, for example market value movements and interest rate changes, which give rise to variances between actual and expected investment returns, and the impact of changes in economic assumptions on liabilities, are disclosed separately outside operating profit.
The negative variance on owners’ funds of subsidiary undertakings of £12 million (2014: £19 million) is principally driven by fair value losses on investments and hedging positions held by the shareholder funds and holding companies.
Profit attributable to owners of the parent from discontinued operations – 92
Dividends for the year that are approved after the reporting period are dealt with as an event after the reporting period.
Net investment income comprises interest, dividends, rents receivable, net interest income/(expense) on the net defined benefit asset/(liability), fair value gains and losses on financial assets and investment property at fair value and impairment losses on loans and receivables.
Fair value gains and losses on financial assets designated at fair value through profit or loss are recognised in the consolidated income statement. Fair value gains and losses includes both realised and unrealised gains and losses.
Interest income on loans and receivables at amortised cost 3 4
Interest income on financial assets designated at fair value through profit or loss on initial recognition 1,076 1,156
Net interest income on Group defined benefit pension scheme asset/liability 17 4
Corporate finance services fees were £0.1 million (2014: £0.6 million). Fees for 2014 primarily related to services performed in association with the divestment of Ignis, where management concluded that significant efficiencies would arise as a result of engaging the Group’s auditors to perform the work.
Other non-audit services of £0.3 million (2014: £0.3 million) primarily includes fees payable in respect of assurance services related to applications made to the regulator with regard to the Group’s implementation of Solvency II. In 2014, the fees principally related to a Solvency II preparedness review required in response to an industry-wide request from the Prudential Regulation Authority (‘PRA’).
The Group, as a proxy for policyholders in the UK, is required to pay taxes on investment income and gains each year. Accordingly, the tax credit or expense attributable to UK life assurance policyholder earnings is included in income tax expense. The tax (credit)/charge attributable to policyholder earnings was £(33) million (2014: £129 million).
Profits taxed at rates other than 20.25% (2014: 21.5%) (36) (21)
The Group has issued ordinary shares which are classified as equity. Incremental external costs that are directly attributable to the issue of these shares are recognised in equity, net of tax.
Authorised: 410 million (2014: 410 million) ordinary shares of €0.0001 each 31,750 31,750
During the year, the Company issued 329,162 shares at a premium of £2 million in order to satisfy its obligations to employees under the Group’s sharesave schemes (see note I2).
During 2014, the Company issued 271,983 shares at a premium of £1 million in order to satisfy its obligations to employees under the Group’s sharesave schemes.
Where the Phoenix Group Holdings Employee Benefit Trust (‘PGH EBT’) or other Group entity acquires shares in the Company or obtains rights to purchase its shares, the consideration paid (including any attributable transaction costs, net of tax) is shown as a deduction from owners’ equity. Gains and losses on sales of shares held by the PGH EBT and Group entities are charged or credited to the own shares account in equity.
Shares awarded to employees by the PGH EBT in year (9) (10)
Shares in subsidiaries subscribed for by non-controlling interests – 82 82
The remaining Notes may be redeemed at par at the option of PGH1 on the first reset date of 25 April 2016 or on any coupon payment date thereafter. Redemption is subject to the agreement of the PRA. In certain circumstances PGH1 has the right to substitute the Notes or to redeem the Notes before the first reset date.
If PGH1 opts to defer a coupon payment, then PGH1 has the option to either leave the coupon outstanding or satisfy the deferred coupon payment through the alternative coupon satisfaction mechanism (the ‘ACSM’), which involves the issue by PGH1 of ordinary shares in order to fund payment of the deferred coupon.
On 23 January 2015, the coupon that was due on the Notes was settled with the noteholders that exchanged their Notes. On 25 April 2015, the 2015 coupon was settled in full with the remaining noteholders.
UK Commercial Property Trust Limited (‘UKCPT’) is a property investment subsidiary which is domiciled in Guernsey and is admitted to the Official List of the UK Listing Authority and to trading on the LSE.
Fair value estimation The fair value of financial instruments traded in active markets such as publicly traded securities and derivatives are based on quoted market prices at the period end. The quoted market price used for financial assets is the applicable bid price on the period end date. The fair value of investments that are not traded in an active market is determined using valuation techniques such as broker quotes, pricing models or discounted cash flow techniques. Where pricing models are used, inputs are based on market related data at the period end. Where discounted cash flow techniques are used, estimated future cash flows are based on contractual cash flows using current market conditions and market calibrated discount rates and interest rate assumptions for similar instruments.
For units in unit trusts and shares in open-ended investment companies, fair value is determined by reference to published bid-values. The fair value of receivables and floating rate and overnight deposits with credit institutions is their carrying value. The fair value of fixed interest-bearing deposits is estimated using discounted cash flow techniques.
Joint ventures Investments in joint ventures that are held for investment purposes are accounted for under IAS 39 Financial Instruments: Recognition and Measurement as permitted by IAS 28 Investments in Associates and Joint Ventures. These are measured at fair value through profit or loss. There are no investments in joint ventures which are of a strategic nature.
Subsequent to initial recognition, financial liabilities (except for liabilities under investment contracts and other liabilities designated at fair value through profit or loss) are measured at amortised cost using the effective interest method.
Investment contracts without DPF Contracts under which the transfer of insurance risk to the Group from the policyholder is not significant are classified as investment contracts and accounted for as financial liabilities.
Designated upon initial recognition: Net asset value attributable to unitholders 1 5,120 – 5,120
Financial assets at fair value through profit or loss: Held for trading – derivatives 2,558 2,112 2,558
Designated upon initial recognition: Investment in joint venture 1 133 – 133
Financial liabilities at fair value through profit or loss: Held for trading – derivatives 2,192 2,122 2,192
Financial liabilities measured at amortised cost: Deposits received from reinsurers 408 375 408
Total financial liabilities 18,426 17,592 1 These assets and liabilities have no expected settlement date. 2 These liabilities have no expected settlement date. As the obligations relate to the repayment of collateral received in the form of cash, the liability is stated at the value of the consideration received and therefore no fair value has been disclosed.
Level 1 financial instruments The fair value of financial instruments traded in active markets (such as exchange traded securities and derivatives) is based on quoted market prices at the period end provided by recognised pricing services. Market depth and bid-ask spreads are used to corroborate whether an active market exists for an instrument. Greater depth and narrower bid-ask spread indicates higher liquidity in the instrument and are classed as Level 1 inputs. For collective investment schemes, fair value is by reference to published bid prices.
Level 3 financial instruments The Group’s financial instruments determined by valuation techniques using non-observable market inputs are based on a combination of independent third party evidence and internally developed models. In relation to investments in hedge funds and private equity investments, non-observable third party evidence in the form of net asset valuation statements are used as the basis for the valuation. Adjustments may be made to the net asset valuation where other evidence, for example recent sales of the underlying investments in the fund, indicates this is required. Securities that are valued using broker quotes which could not be corroborated across a sufficient range of quotes are considered as Level 3. For a small number of investment vehicles and debt securities, standard valuation models are used, as due to their nature and complexity they have no external market. Inputs into such models are based on observable market data where applicable. The fair value of loans and some borrowings with no external market is determined by internally developed discounted cash flow models using appropriate assumptions corroborated with external market data where possible.
For financial instruments that are recognised at fair value on a recurring basis, the Company determines whether transfers have occurred between levels in the hierarchy by re-assessing categorisation (based on the lowest level input that is significant to the fair value measurement as a whole) at the start of each reporting period.
Less amounts classified as held for sale (see note I1.2) – – (149) (149)
Financial liabilities designated at fair value through profit or loss upon initial recognition: Net asset value attributable to unitholders 5,120 – – 5,120
Financial assets designated at fair value through profit or loss upon initial recognition: Investment in joint venture – – 133 133
Total financial assets measured at fair value 39,551 12,622 1,653 53,826
Financial liabilities designated at fair value through profit or loss upon initial recognition: Net asset value attributable to unitholders 4,659 – – 4,659
Fixed and variable rate securities categorised as Level 3 investments, with the exception of a property investment structure and certain local authority loans, are valued using broker quotes. Although such valuations are sensitive to estimates, it is believed that changing one or more of the assumptions to reasonably possible alternative assumptions would not change the fair value significantly.
Also included within fixed and variable rate securities are investments in local authority loans. These investments are valued using a simple calculation model taking a comparable UK Treasury stock and applying a credit spread to reflect reduced liquidity. The credit spread is derived from a sample broker quote. The valuations are sensitive to movements in this spread, an increase of 25bps would decrease the value by £1 million (2014: £1 million) and a decrease of 25bps would increase the value by £1 million (2014: £1 million).
Included within loans and receivables are investments in equity release mortgages with a value of £268 million, acquired in January 2015. The loans are valued using a discounted cash flow model, the key inputs to which include demographic assumptions, economic assumptions (including house price index) and the use of a Black-Scholes model for valuation of the no-negative equity guarantee. The no-negative equity guarantee caps the loan repayment in the event of death or entry into long-term care to be no greater than the sales proceeds from the property. The significant sensitivities arise from movements in gilt curve, inflation rate and house prices.
Borrowings measured at fair value and categorised as Level 3 financial liabilities comprise the property reversion loans, measured using an internally developed model. The valuation is sensitive to key assumptions of the discount rate and the house price inflation rate. An increase in the discount rate of 1% would decrease the value by £5 million and a decrease of 1% would increase the value by £5 million. An increase of 1% in the house price inflation rate would increase the value by £6 million and a decrease of 1% would decrease the value by £6 million. Details of the valuation of the underlying residential property reversions are included in note G9.
Fixed and variable rate income securities 735 (34) 378 (724) – (25) 330 (26)
Less amounts classified as held for sale (see note I1.2) (133) (16) – – – – (149) –
Financial assets designated at fair value through profit or loss upon initial recognition: Investment in joint venture 125 8 – – – – 133 8
Financial liabilities designated at fair value through profit or loss upon initial recognition: Updates to the Group’s observations with regard to measures of market depth, bid-ask spreads and the extent to which inputs to the valuation of fixed and variable rate income securities are market observable resulted in a net transfer of financial assets from Level 3 to Level 1 and 2 in both periods.
Derivative financial instruments are classified as held for trading. They are recognised initially at fair value and subsequently are remeasured to fair value. The gain or loss on remeasurement to fair value is recognised in the consolidated income statement.
Lenders’ warrants On 2 September 2009, the Company issued 5 million warrants over its shares to the Lenders. These warrants entitled the holder to purchase one ‘B’ ordinary share at a price of £15 per share, subject to adjustment. Following the achievement of the Company’s Premium Listing on 5 July 2010, the Lenders’ warrants relate to ordinary shares rather than ‘B’ ordinary shares. At 31 December 2015 the terms of Lenders’ warrants entitled the holders to purchase 1.027873 (2014: 1.027873) ordinary shares per Lenders’ warrant for an exercise price of £14.59 (2014: £14.59).
The exercise period terminates on the first to occur of: Ɛ 15th anniversary of the date issued; Ɛ date fixed for the redemption of the warrants; and
All outstanding Lenders’ warrants may be redeemed at the option of the Company at any time after they become exercisable and prior to their expiration at a price of €0.01 per warrant provided that the last closing bid price of the ordinary shares is equal to or exceeds £18.97 (2014: £18.97) on each of 20 consecutive trading days. The Company must give not less than 30 days’ notice of the redemption date. Each warrant may then be exercised by the warrant holder (in whole or any part) at its option.
These Lenders’ warrants are not traded in an active market and have therefore been valued using an extended Black-Scholes valuation model to capture the embedded barrier feature. The key assumptions used to ascertain a value as at 31 December 2015 are: Ɛ the share price as at 31 December 2015 of £9.17; Ɛ volatility of 30%; Ɛ the warrants are not adjusted for dividends; and
Ɛ the valuation incorporates the impact of amending some of the terms of the warrants on 8 May 2012.
Royal London and IPO warrants The exercise period for the Royal London and IPO warrants expired on 3 September 2014.
The table below contains disclosures related to financial assets and financial liabilities recognised in the statement of consolidated financial position that are subject to enforceable master netting arrangements or similar agreements. Such agreements do not meet the criteria for offsetting in the statement of consolidated financial position as the Group has no current legally enforceable right to offset recognised financial instruments. Furthermore, certain related assets received as collateral under the netting arrangements will not be recognised in the statement of consolidated financial position as the Group does not have permission to sell or re-pledge, except in the case of default. Details of the Group’s collateral arrangements in respect of these recognised assets and liabilities are provided below.
Assets pledged The Group pledges collateral in respect of its OTC derivative liabilities. The value of assets pledged at 31 December 2015 in respect of OTC derivative liabilities of £1,325 million (2014: £2,152 million) amounted to £738 million (2014: £961 million).
The fair value of financial assets accepted as collateral for OTC derivatives but not recognised in the statement of consolidated financial position amounts to £259 million (2014: £405 million).
The amounts recognised as financial assets and liabilities from cash collateral received at 31 December 2015 are set out below.
Collateral provided did not qualify for derecognition as the Group retained the risk and rewards, although the counterparty had the right to sell or repledge the assets. The carrying value of the listed financial assets transferred that were not derecognised as at 31 December 2014 was £84 million of fixed and variable interest rate securities.
Collateral has also been pledged and charges granted in respect of certain of the Group’s borrowings. The details of these arrangements are set out in note E5.
The Group classifies the majority of its interest bearing borrowings as financial liabilities carried at amortised cost and these are recognised initially at fair value less any attributable transaction costs. The difference between initial cost and the redemption value is amortised through the consolidated income statement over the period of the borrowing using the effective interest method.
Property Reversions loan (note b) 194 184 194 184 £80 million facility agreement (note c) – 80 – 80 £100 million facility agreement (note e) 99 – 99 –
E5. BORROWINGS continued a. In 1998, Mutual Securitisation plc raised £260 million of capital through the securitisation of embedded value on a block of existing unit-linked and unitised with-profit life and pension policies. The bonds were split between two classes, which rank pari passu, and were listed on the Irish Stock Exchange The £140 million 7.39% class A1 limited recourse bonds matured in 2012 with no remaining outstanding principal. The £120 million 7.59% class A2 limited recourse bonds with an outstanding principal of £83 million (2014: £94 million) have an average remaining life of 3 years maturing in 2022. PLAL has provided collateral of £34 million (2014: £39 million) to provide security to the holders of the recourse bonds in issue. During 2015, repayments totalling £11 million were made (2014: £11 million).
b. The Property Reversions loan from Santander UK plc (‘Santander’) was brought into the consolidated financial statements at fair value. It relates to the sale of Extra-Income Plan policies that Santander finances to the value of the associated property reversions. As part of the arrangement Santander receive an amount calculated by reference to the movement in the Halifax House Price Index and the Group is required to indemnify Santander against profits or losses arising from mortality or surrender experience which differs from the basis used to calculate the reversion amount. Repayment will be on a policy-by-policy basis and is expected to occur over the next 10 to 20 years. During 2015, repayments totalling £27 million were made (2014: £24 million). Note G9 contains details of the assets that support this loan.
With effect from 23 December 2014, minor modifications were made to the terms of the notes to enable them to qualify as Tier 2 capital for regulatory reporting purposes. Expenses incurred in effecting these modifications amounted to £10 million. Given the modifications were not substantial, the carrying amount of the liability was adjusted accordingly and the expenses are being amortised over the life of the notes.
During 2015, a £190 million repayment was made in respect of targeted and mandatory repayments on the £450 million amortising term loan including prepayments of £70 million in respect of payments due in 2016 and £30 million in respect of payments due in 2017.
In March 2016, the Group agreed an amendment of the PGH Capital facility into a revolving credit facility (the ‘PGH Capital revolving credit facility’), details of which are included in note I9.
E6. RISK MANAGEMENT – FINANCIAL RISK This note forms one part of the risk management disclosures in the consolidated financial statements. The Group’s management of insurance risk is detailed in note F4.
Derivatives are used in many of the Group’s funds, within policy guidelines agreed by the Board of each life company and overseen by investment committees of the Boards of each life company supported by management oversight committees. Derivatives are primarily used for risk hedging purposes or for efficient portfolio management, including the activities of the Group’s Treasury function.
More detail on the Group’s exposure to financial risk is provided in note E6.2 below.
The Group is also exposed to insurance risk arising from its Phoenix Life segment. Life insurance risk in the Group arises through its exposure to longevity, persistency, mortality and to other variances between assumed and actual experience. These variances can be in factors such as persistency levels and management and administrative expenses. More detail on the Group’s exposure to insurance risk is provided in note F4.
The Group’s overall exposure to market and credit risk is monitored by appropriate committees, which agree policies for managing each type of risk on an ongoing basis, in line with the investment strategy developed to achieve investment returns in excess of amounts due in respect of insurance contracts. The effectiveness of the Group’s ALM relies on the matching of assets and liabilities arising from insurance and investment contracts, taking into account the types of benefits payable to policyholders under each type of contract. Separate portfolios of assets are maintained for with-profit business funds, (which includes all of the Group’s participating business), non-linked non-profit funds and unit-linked funds.
Ɛ credit risk which results indirectly from activities undertaken in the normal course of business. Such activities include premium payments, outsourcing contracts, reinsurance, exposure from material suppliers and the lending of securities.
A 100bps widening of credit spreads, with all other variables held constant and no change in assumed expected defaults, would result in a decrease in the profit after tax in respect of a full financial year, and in equity, of £55 million (2014: £97 million).
Fixed and variable rate income securities 3,976 14,774 8,469 3,548 425 229 388 5 31,814
Fixed and variable rate income securities 34,325 – – – – 59 34,384
Prepayments and accrued income 405 – – – – – 405
Assets backing unit-linked business have not been analysed in these tables as the credit risk on such financial assets is borne by the policyholders. However, these assets have been included as a separate column in these tables to reconcile the information to the statement of consolidated financial position. Shareholder credit exposure on unit-linked assets is limited to the level of fee income to the extent it is dependent on the underlying assets.
Collateral The credit risk of the Group is mitigated, in certain circumstances, by entering into collateral agreements. The amount and type of collateral required depends on an assessment of the credit risk of the counterparty. Guidelines are implemented regarding the acceptability of types of collateral and the valuation parameters. Collateral is mainly in respect of stock lending, certain reinsurance arrangements and to provide security against the maturity proceeds of derivative financial instruments. Management monitors the market value of the collateral received, requests additional collateral when needed, and performs an impairment valuation when impairment indicators exist and the asset is not fully secured (and is not carried at fair value). See note E4.1 for further information on collateral arrangements.
The Group is mainly exposed to market risk as a result of: Ɛ the mismatch between liability profiles and the related asset investment portfolios; Ɛ the investment of surplus assets including shareholder reserves yet to be distributed, surplus assets within the with-profit funds and assets held to meet regulatory capital and solvency requirements; and
The Group manages the levels of market risk that it accepts through an approach to investment management that determines: Ɛ the constituents of market risk for the Group; Ɛ the basis used to fair value financial assets and liabilities; Ɛ the asset allocation and portfolio limit structure; Ɛ diversification from and within benchmarks by type of instrument and geographical area; Ɛ the net exposure limits by each counterparty or group of counterparties, geographical and industry segments; Ɛ control over hedging activities; Ɛ reporting of market risk exposures and activities; and
With-profit business and non-participating business within the withprofit funds are exposed to interest rate risk as guaranteed liabilities are valued relative to market interest rates and investments include fixed interest securities and derivatives. For with-profit business the profit or loss arising from mismatches between such assets and liabilities is largely offset by increased or reduced discretionary policyholder benefits dependent on the existence of policyholder guarantees. The contribution of these funds to the Group result is determined primarily by either the shareholders’ share of the declared annual bonus or by the shareholders’ interest in any change in value in the capital advanced to the Group’s with-profit funds.
As part of preparation for the new Solvency II regime, management has reviewed the matching position of assets and liabilities resulting in changes to the hedging position for certain asset portfolios. As a result an increase of 1% in interest rates, with all other variables held constant, would now result in a decrease in the profit after tax in respect of a full financial year, and in equity, of £89 million (2014: an increase of £24 million).
A 10% decrease in equity prices, with all other variables held constant, would result in an increase in the profit after tax in respect of a full financial year, and in equity, of £48 million (2014: an increase of £36 million).
A 10% increase in equity prices, with all other variables held constant, would result in a decrease in the profit after tax in respect of a full financial year, and in equity, of £46 million (2014: a decrease of £36 million).
A 10% increase in property prices, with all other variables held constant, would result in an increase in the profit after tax in respect of a full financial year, and in equity, of £21 million (2014: an increase of £28 million).
Financial soundness risk is a broad risk category encompassing capital management risk, tax risk and liquidity and funding risk.
The Board of Phoenix Group Holdings has defined a number of governance objectives and principles and the liquidity risk frameworks of each subsidiary are designed to ensure that: Ɛ liquidity risk is managed in a manner consistent with the subsidiary company Boards’ strategic objectives, risk appetite and Principles and Practices of Financial Management (‘PPFM’); Ɛ cash flows are appropriately managed and the reputation of the Group is safeguarded; and
Ɛ appropriate information on liquidity risk is available to those making decisions.
Some of the Group’s commercial property investments are held through collective investment schemes. The collective investment schemes have the power to restrict and/or suspend withdrawals, which would, in turn, affect liquidity. To date, the collective investment schemes have continued to process both investments and realisations in a normal manner and have not imposed any restrictions or delays.
The following table provides a maturity analysis showing the remaining contractual maturities of the Group’s undiscounted financial liabilities and associated interest. Liabilities under insurance contract contractual maturities are included based on the estimated timing of the amounts recognised in the statement of consolidated financial position in accordance with the requirements of IFRS 4 Insurance contracts: 1 year or less or on demand £m 1–5 years £m
Obligations for repayment of collateral received 954 – – – 954
Payables related to direct insurance contracts 358 – – – 358
Investment contract policyholders have the option to terminate or transfer their contracts at any time and to receive the surrender or transfer value of their policies. Although these liabilities are payable on demand, and are therefore included in the contractual maturity analysis as due within one year, the Group does not expect all these amounts to be paid out within one year of the reporting date.
F. INSURANCE CONTRACTS, INVESTMENT CONTRACTS WITH DPF AND REINSURANCE F1. LIABILITIES UNDER INSURANCE CONTRACTS
Contracts under which the transfer of insurance risk to the Group from the policyholder is not significant are classified as investment contracts, and accounted for as financial liabilities (see note E1).
Ɛ in the periods where guaranteed surrender values do not apply even though guaranteed surrender values are applicable after a specified period of time.
Ɛ reinsurance recoveries are measured on a basis that is consistent with the valuation of the liability to policyholders to which the reinsurance applies.
Present value of future profits on non-participating business in the with-profit funds For UK with-profit life funds, an amount may be recognised for the present value of future profits (‘PVFP’) on non-participating business written in a with-profit fund where the determination of the realistic value of liabilities in that with-profit fund takes account, directly or indirectly, of this value.
Liability adequacy At each reporting date, liability adequacy tests are performed to assess whether the insurance contract and investment contract with DPF liabilities are adequate. Current best estimates of future cash flows are compared to the carrying value of the liabilities. Any deficiency is charged to the consolidated income statement.
The Group cedes insurance risk in the normal course of business. Reinsurance assets represent balances due from reinsurance providers. Reinsurers’ share of insurance contract liabilities is dependent on expected claims and benefits arising under the related reinsured policies.
Reinsurance assets are reviewed for impairment at each reporting date, or more frequently, when an indication of impairment arises during the reporting period. Impairment occurs when there is objective evidence, as a result of an event that occurred after initial recognition of the reinsurance asset, that the Group may not receive all outstanding amounts due under the terms of the contract and the event has a reliably measurable impact on the amounts that the Group will receive from the reinsurer. The impairment loss is recognised in the consolidated income statement. The reinsurers’ share of investment contract liabilities is measured on a basis that is consistent with the valuation of the liability to policyholders to which the reinsurance applies.
Life assurance business: Investment contracts with DPF 10,420 1 11,124 1
Less amounts classified as held for sale (note I1.2) (1,587) (1,521) (1,776) (1,713)
Less amounts classified as held for sale (note I1.2) at 31 December (1,587) (1,521) (1,776) (1,713)
On 9 November 2015 the Group entered into an agreement with RGA International, effective from 1 November 2015, to reinsure substantively all of the Phoenix Life Assurance Limited (‘PLAL’) annuity liabilities previously ceded to Opal Reassurance Limited (‘Opal Re’), a subsidiary undertaking of the Company. The Group paid a reinsurance premium of £1,346 million to RGA International. Under the terms of the arrangement, RGA International holds assets in a collateral account over which the Group has a floating charge as disclosed in note F3.2.
In accordance with the business transfer agreement, it is intended that the reinsurance agreement will be replaced by a transfer of the business using a scheme under Part VII of the Financial Services and Markets Act 2000 by the end of 2016 subject to the necessary regulatory and Court approvals.
The Group paid a reinsurance premium of £1,736 million to Guardian. Under the terms of the agreement, in order to mitigate the risk of counterparty default, Guardian holds assets in a collateral account over which the Group has a fixed charge as disclosed in note F3.2.
Where the Group receives collateral on reinsurance transactions in the form of cash it is recognised in the statement of consolidated financial position along with a corresponding liability to repay the amount of collateral received, disclosed as ‘Deposits received from reinsurers’. The amounts recognised as financial assets and liabilities from cash collateral received at 31 December 2015 are set out below.
Options unanticipated changes in policyholder option exercise rates giving rise to increased claims costs.
The Group uses several methods to assess and monitor insurance risk exposures both for individual types of risks insured and overall risks. These methods include internal risk measurement models, experience analyses, external data comparisons, sensitivity analyses, scenario analyses and stress testing.
Sensitivities Insurance liabilities are sensitive to changes in risk variables, such as prevailing market interest rates, currency rates and equity prices, since these variations alter the value of the financial assets held to meet obligations arising from insurance contracts and changes in investment conditions also have an impact on the value of insurance liabilities themselves. Additionally, insurance liabilities are sensitive to the assumptions which have been applied in their calculation, such as mortality and lapse rates. Sometimes allowance must also be made for the effect on future assumptions of management or policyholder actions in certain economic scenarios. This could lead to changes in assumed asset mix or future bonus rates. The most significant non- economic sensitivities arise from mortality, longevity and lapse risk.
A decrease of 5% in assurance mortality, with all other variables held constant, would result in an increase in the profit after tax in respect of a full year, and an increase in equity of £12 million (2014: £14 million).
A decrease of 5% in annuitant longevity, with all other variables held constant, would result in an increase in the profit after tax in respect of a full year, and an increase in equity of £99 million (2014: £135 million).
A decrease of 25% in lapse rates, with all other variables held constant, would result in a decrease in the profit after tax in respect of a full year, and a decrease in equity of £76 million (2014: £53 million).
An increase of 25% in lapse rates, with all other variables held constant, would result in an increase in the profit after tax in respect of a full year, and an increase in equity of £76 million (2014: £46 million).
Change in longevity assumptions (3) (14) Change in persistency assumptions 1 (13) Change in mortality assumptions 3 – Change in expenses assumptions 5 –
Mortality and longevity rates Mortality rates are based on published tables, adjusted appropriately to take account of changes in the underlying population mortality since the table was published, company experience and forecast changes in future mortality. Where appropriate, a margin is added to assurance mortality rates to allow for adverse future deviations. Annuitant mortality rates are adjusted to make allowance for future improvements in pensioner longevity.
Lapse and surrender rates (persistency) The assumed rates for surrender and voluntary premium discontinuance depend on the length of time a policy has been in force and the relevant company. Surrender or voluntary premium discontinuances are only assumed for realistic basis companies. Withdrawal rates used in the valuation of with-profit policies are based on observed experience and adjusted when it is considered that future policyholder behaviour will be influenced by different considerations than in the past. In particular, it is assumed that withdrawal rates for unitised with-profit contracts will be higher on policy anniversaries on which Market Value Adjustments do not apply.
With-profit funds: Pensions: Deferred annuities – with guarantees 9,298 157 595 –
Non-profit funds: Deferred annuities – with guarantees 15 – – –
With-profit fund (unitised and traditional) The Group operates a number of with-profit funds in the UK in which the with-profit policyholders benefit from a discretionary annual bonus (guaranteed once added in most cases) and a discretionary final bonus. Non-participating business is also written in some of the with-profit funds and some of the funds may include immediate annuities and deferred annuities with Guaranteed Annuity Rates (‘GAR’).
Protection These contracts are typically secured by the payment of a regular premium payable for a period of years providing benefits payable on certain events occurring within the period. The benefits may be a single lump sum or a series of payments and may be payable on death, serious illness or sickness.
The leasehold properties provision has been made for amounts in respect of the excess of lease rentals and other payments on properties that are currently vacant or are expected to become vacant, over the amounts to be recovered from subletting these properties. The discount rate used was 1.7% (2014: 1.7%) and it is expected that the provision will be utilised over the next 3 years (2014: 4 years).
Staff related provisions include provisions for unfunded pensions of £6 million (2014: £6 million) and private medical insurance costs for former employees of £3 million (2014: £3 million).
Adjustment for insurance policies held with related parties in respect of the PGL pension scheme (19) 14 – – (5)
The Finance Act 2014 set the rate of corporation tax at 20% from 1 April 2015. Finance (No. 2) Act 2015 reduces the rate of corporation tax to 19% in April 2017 and 18% from April 2020. Consequently a blended rate of tax has been used for the purposes of providing for deferred tax in these financial statements.
Deferred tax assets not recognised on capital losses1 89 116 1 These can only be recognised against future capital gains and have no expiry date.
The net surplus or deficit (the economic surplus or deficit) in respect of the defined benefit pension schemes is calculated by estimating the amount of future benefit that employees have earned in return for their service in the current and prior years; that benefit is discounted to determine its present value and the fair value of any scheme assets is deducted.
As required by IFRIC 14, IAS 19 –‘The limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction’, to the extent that the economic surplus will be available as a refund, the economic surplus is stated after a provision for tax that would be borne by the scheme administrators when the refund is made. The Group recognises a pension surplus on the basis that it is entitled to the surplus of each scheme in the event of a gradual settlement of the liabilities, due to its ability to order a winding up of the Trust.
The movement in the net defined benefit asset/liability is analysed between the service cost, past service cost, curtailments and settlements (all recognised within administrative expenses in the consolidated income statement), the net interest cost on the net defined benefit asset/ liability, including any reimbursement assets (recognised within net investment income in the consolidated income statement), remeasurements of the net defined asset/liability (recognised in other comprehensive income) and employer contributions.
Inflation risk – a significant proportion of the schemes’ benefit obligations are linked to inflation, and higher inflation will lead to higher liabilities (although in most cases, caps on the level of inflationary increases are in place to protect against extreme inflation). Assets in both schemes are invested so as to hedge a significant proportion of the inflation risks, further details of which are included in this note.
Life expectancy – the majority of the schemes’ obligations are to provide benefits for the life of the member, so increases in life expectancy will result in an increase in the liabilities.
Scheme details The Pearl Group Staff Pension Scheme (‘the Pearl Scheme’) comprises a final salary section, a money purchase section and a hybrid section (a mix of final salary and money purchase). The final salary and hybrid sections of the Pearl Scheme are closed to new members, and since 1 July 2011 are also closed to future accrual by active members.
Defined contribution scheme Contributions in the year amounted to £1 million (2014: £1 million).
Defined benefit scheme The defined benefit scheme is funded by payment of contributions to a separately administered trust fund. The Pearl Scheme is established under, and governed by, the trust deeds and rules. A Group company, Pearl Group Holdings No.2 Limited (‘PGH2’), is the principal employer of the Pearl Scheme. The principal employer meets the administration expenses of the Pearl Scheme. The Pearl Scheme is administered by a trustee company, P.A.T. (Pensions) Limited, which is separate from the company. The trustee company is comprised of two representatives from the Group, three member nominated representatives and one independent trustee in accordance with the trustee company’s articles of association. The trustee is required by law to act in the interest of all relevant beneficiaries and is responsible for the investment policy with regard to the assets.
The valuation has been based on an assessment of the liabilities of the Pearl Scheme as at 31 December 2015, undertaken by independent qualified actuaries. The present values of the defined benefit obligation and the related interest costs have been measured using the projected unit credit method.
On 27 November 2012 the principal employer and the Trustee of the Pearl Scheme entered into a revised pensions funding agreement (the ‘Pensions Agreement’), which forms the basis of the 30 June 2012 triennial valuation. The principal terms of the Pensions Agreement are: Ɛ annual cash payments into the scheme of £70 million in 2013 and 2014 payable on 30 September, followed by payments of £40 million each year from 2015 to 2021. The Pensions Agreement includes a sharing mechanism, related to the level of dividends paid out of PGH2, that in certain circumstances allows for an acceleration of the contributions to be paid to the Pearl Scheme; Ɛ increased and further contributions may become payable if the scheme is not anticipated to meet the two agreed funding targets: (i) to reach full funding on the technical provisions basis by 30 June 2022; and
(ii) to reach full funding on a gilts flat basis by 30 June 2031; Ɛ the Trustee continues to benefit from a first charge over shares in Phoenix Life Assurance Limited, National Provident Life Limited, Pearl Group Services Limited and PGS2 Limited. Following the repayment of the £425 million loan facility and £75 million of secured C loan notes on 23 July 2014 (see note E5) the value of the security claim granted under the share charges is capped at the lower of £600 million and 100% of the Pearl Scheme deficit (calculated on a basis linked to UK government securities) revalued every three years thereafter, increasing from 60% of the Pearl Scheme deficit; and
Ɛ covenant tests relating to the embedded value of certain companies with the Group.
The triennial funding valuation of the scheme as at 30 June 2015 commenced during the year and is expected to be completed by September 2016.
An additional liability of £74 million (2014: £86 million) has been recognised, reflecting a charge on any refund of the resultant IAS 19 surplus that arises after adjustment for discounted future contributions of £213 million (2014: £245 million) in accordance with the minimum funding requirement. A deferred tax asset of £38 million (2014: £49 million) has also been recognised to reflect tax relief at a rate of 18% (2014: 20%) that is expected to be available on the contributions, once paid into the scheme.
Contributions totalling £40 million were paid into the scheme in 2015 (2014: £68 million) and contributions totalling £40 million are currently expected to be paid into the scheme in 2016.
Obligations for repayment of stock lending collateral received (1,227) – (1,167) –
The weighted average duration of the defined benefit obligation at 31 December 2015 is 17 years (2014: 17 years).
Principal assumptions The principal financial assumptions of the Pearl Scheme are set out in the table below: Rate of increase for pensions in payment (5% per annum or RPI if lower) 2.95 2.90
The discount rate and inflation rate assumptions have been determined by considering the shape of the appropriate yield curves and the duration of the Pearl Scheme’s liabilities. This method determines an equivalent single rate for each of the discount and inflation rates, which is derived from the profile of projected benefit payments.
It has been assumed that post-retirement mortality is in line with a scheme-specific table which was derived from the actual mortality experience in recent years, performed as part of the actuarial funding valuation as at 30 June 2012, based on the SAPS standard tables for males and for females based on year of use. Future longevity improvements are in line with current Group best estimate longevity improvements, which are based on CMI 2014 Core Projections and a long-term rate of improvement of 2% p.a. up to and including age 75 then decreasing linearly to 0% p.a. at age 110. Under these assumptions, the average life expectancy from retirement for a member currently aged 40 retiring at age 60 is 30.8 years and 33.0 years for male and female members respectively.
Impact on the defined benefit obligation (£m) 1,937 (71) 75 54 (52) 54 (54)
The PGL Pension Scheme comprises a final salary section and a defined contribution section.
Scheme details Defined contribution scheme Contributions in the year amounted to £6 million (2014: £6 million).
Defined benefit scheme The defined benefit section of the PGL Pension Scheme is a final salary arrangement which is closed to new entrants and has been closed to future accrual by active members since 1 July 2011.
The PGL Scheme is administered by a separate trustee company, PGL Pension Trustee Ltd. The trustee company is comprised of two representatives from the Group, three member nominated representatives and one independent trustee in accordance with the trustee company’s articles of association. The trustee is required by law to act in the interest of all relevant beneficiaries and is responsible for the investment policy with regard to the assets plus the day to day administration of the benefits.
The valuation has been based on an assessment of the liabilities of the PGL Pension Scheme as at 31 December 2015, undertaken by independent qualified actuaries.
Funding A triennial funding valuation of the PGL Pension Scheme as at 30 June 2012 was completed in September 2013. This showed a deficit as at 30 June 2012 of £39 million. Following discussions with the Trustee of the PGL Pension Scheme it was agreed that the existing schedule of cash contributions to the scheme amounting to £59 million would continue to be paid over the period from October 2013 to August 2017. Contributions totalling £15 million were paid into the scheme in 2015 (2014: £20 million) and contributions totalling £15 million are expected to be paid into the scheme in 2016. Total scheduled future contributions amount to £25 million at 31 December 2015.
The triennial valuation of the scheme as at 30 June 2015 commenced during the year and is expected to be completed by September 2016.
An additional liability has been recognised of £9 million (2014: £13 million) reflecting a charge on any refund of the resultant IAS 19 surplus that arises after adjustment for discounted future contributions of £24 million (2014: £38 million) in accordance with the minimum funding requirement. A deferred tax asset of £4 million (2014: £8 million) has also been recognised to reflect tax relief at a rate of 18% (2014: 20%) that is expected to be available on the contributions, once paid into the scheme.
Gain from change in demographic assumptions – 54 – – 54
Change in provision for tax on economic surplus available as a refund – – (84) – (84)
The economic value of the PGL Pension Scheme assets as at 31 December 2015, amounted to £2,028 million (2014: £2,047 million). For financial reporting purposes, the carrying value of the insurance policies effected by the PGL Pension Scheme with the Group have been eliminated on consolidation, resulting in reported assets of the PGL Pension Scheme as at 31 December 2015 of £2,006 million (2014: £2,024 million).
It has been assumed that post-retirement mortality is in line with 86%/94% of S1PA base tables with future longevity improvements in line with CMI 2014 Core Projections and a long-term rate of improvement of 2% p.a. up to and including age 75 then decreasing linearly to 0% at age 110. Under these assumptions, the average life expectancy from retirement for a member currently aged 40 retiring at age 62 is 28.4 years and 30.4 years for male and female members respectively.
Goodwill is measured on initial recognition at cost. Following initial recognition, goodwill is stated at cost less any accumulated impairment losses. It is tested for impairment annually or when there is evidence of possible impairment. Goodwill is not amortised. For impairment testing, goodwill is allocated to the Phoenix Life cash-generating unit. Goodwill is impaired when the recoverable amount is less than the carrying value.
Present value of future profits on non-participating business in the with-profit fund
The value of the present value of future profits is determined on a realistic basis and is allocated in full to the Phoenix Life segment.
The carrying value of goodwill has been tested for impairment at the period end. No impairment has resulted as the value in use of this intangible continues to exceed its carrying value. Value in use has been determined as the present value of certain future cash flows associated with the management services business of the Phoenix Life segment. The cash flows used in this calculation are consistent with those adopted by management in the Group’s operating plan and, for the period 2020 and beyond, reflect the anticipated run-off of the Phoenix Life insurance business. The underlying assumptions of these projections include management’s best estimates with regards to longevity, persistency, mortality and morbidity.
Future cash flows have been valued using a discount rate of 9.0% (2014: 8.1%) for the management services business of the Phoenix Life segment.
Goodwill disposed of during the prior year relates to the disposal of the discontinued operations of Ignis on 1 July 2014 (see note I1.1).
Acquired in-force business represents the difference between the fair value of the contractual rights acquired and obligations assumed under insurance contracts with and without DPF and the liability measured in accordance with the Group’s accounting policies for such contracts. This intangible is being amortised in accordance with the run-off of the book of business within the Phoenix Life segment.
The customer relationships intangible at 31 December 2015 relates to vesting pension premiums which captures the new business arising from policies in-force at the acquisition date, specifically top-ups made to existing policies and annuities vested from matured pension policies. The total value of this customer relationship intangible at acquisition was £297 million and has been allocated to the Phoenix Life segment. This intangible is being amortised over a 20 year period.
No impairment has resulted as the value in use of the intangible is considered to exceed its carrying value. The value in use was determined as the present value of certain future cash flows associated with annuities vesting from matured pension policies. The cash flows used in this calculation are consistent with those adopted by management in the Group’s operating plan for the next five years, and for the period 2020 and beyond, and reflect the anticipated run-off of the Phoenix Life insurance business. The cash flows are based on long-term future profit margins and risk-free projections of with-profits maturity payments that are largely consistent with the Group’s MCEV basis. The cash flows also include an allowance for future profits earned by the service companies on the administration of vesting policies. The cash flows reflect management’s best estimate of future take-up rates on guaranteed annuity rate business and non-guaranteed annuity rate business. Future cash flows have been valued using a discount rate of 11.2%.
The customer relationships intangible disposed of during 2014 related to the investment management contracts (‘IMCs’) held within Ignis, the disposal of which was completed on 1 July 2014 (see note I1.1). Other intangibles of £3 million relating to capitalised software costs held within Ignis were also disposed of during 2014.
The principal assumptions used to calculate the present value of future profits are the same as those used in calculating the insurance contract liabilities given in note F4.1. Revaluation of the present value of future profits is charged or credited to the consolidated income statement as appropriate.
The following table shows a reconciliation from the opening to the closing fair value for the Level 3 owner-occupied property at valuation: 2015 £m
The fair value of the owner-occupied property at valuation was derived using the investment method supported by comparable evidence. The significant non-observable inputs used in the valuation are the expected rental value per square foot and the capitalisation rate.
The fair value of the owner-occupied property valuation would increase (decrease) if the expected rental value per square foot were to be higher (lower) and the capitalisation rate were to be lower (higher).
Commercial investment property is measured at fair value by independent property valuers having appropriate recognised professional qualifications and recent experiences in the location and category of the property being valued. The valuations are carried out in accordance with the Royal Institute of Chartered Surveyors (‘RICS’) guidelines with expected income and capitalisation rate as the key non observable inputs.
The residential property reversions, an interest in customer’s properties which the Group will realise upon their death, are valued using a DCF model based on the Group’s proportion of the current open market value, and discounted for the expected lifetime of the policyholder. The open market value is measured by independent local property surveyors having appropriate recognised professional qualifications with reference to the condition of the property and local market conditions. The individual properties are valued triennially and indexed using regional house price indices to the 31 December 2015. The discount rate is a risk-free rate appropriate for the duration of the asset, adjusted for liquidity and mortality risk. Assumptions are also made in the valuation for future movements in property prices. The residential property reversions have been substantially refinanced under the arrangements with Santander as described in note E5.
DCF Model and RICS valuation Mortality 130% IFL92C15 – Female 130% IML92C15 – Male
Future growth in house prices 5 year RPI estimate + 1% margin
The estimated fair value of the commercial properties (held by life companies and UK Commercial Property Trust) would increase (decrease) if: Ɛ the expected income were to be higher (lower); or
The fair value of the residential property reversions (held by life companies) would increase (decrease) if the market value of the property were to be higher (lower) or the life expectancy of the policyholders were to increase (decrease). The fair value is also sensitive to discount rate and house prices as follows: Ɛ an increase (decrease) of 1% in house price inflation would increase (decrease) the fair value by £11 million; Ɛ an increase of 1% in the discount rate would decrease the fair value by £10 million; and
Future minimum lease rental receivables in respect of non-cancellable operating leases on investment properties were as follows: 2015 £m 2014 £m
Bank and cash balances 773 1,007 Short-term deposits (including demand and time deposits) 3,167 4,060
All deposits are subject to fixed interest rates. The carrying amounts approximate to fair value at the period end. Cash and cash equivalents in long-term business operations and collective investment schemes of £3,836 million (2014: £4,821 million) are primarily held for the benefit of policyholders and so are not generally available for use by the owners.
The ability of subsidiary undertakings to transfer funds to the Group in the form of cash dividends or to repay loans and advances is subject to local laws, regulations and solvency requirements.
Each UK Life company and the Group must retain sufficient capital at all times to meet the regulatory capital requirements mandated by or otherwise agreed with the PRA. Further information on the capital requirements applicable to Group entities are set out in the Capital Management note (I4). Under UK company law, dividends can only be paid if a UK company has distributable reserves sufficient to cover the dividend.
In addition, contractual requirements may place restrictions on the transfer of funds as follows: Ɛ the Pearl Pension Scheme funding agreement includes certain covenants which restrict the transfer of funds within the Group. Details are provided in note G6; Ɛ as disclosed in note D3.1, deferral of the coupon payable on the Notes may restrict the payment of dividends by certain Group companies; and
Ɛ in the first half of 2014 there was a restriction on the ability of certain subsidiary undertakings to distribute funds to Phoenix Group Holdings as a result of restrictions imposed by the Group’s two credit agreements, namely the Pearl Facility and the Impala Facility. These facilities were replaced with a single debt facility in July 2014 thereby removing these restrictions. Details of restrictions on the payment of dividends imposed by this facility are provided in note E5.
The Group has determined that all of its investments in collective investment schemes are structured entities. In addition, a number of debt security structures, private equity funds and the Group’s joint venture have been identified as structured entities. The Group has assessed that it has interests in both consolidated and unconsolidated structured entities as shown below: Ɛ unit trusts; Ɛ OEICs; Ɛ SICAVs; Ɛ private equity funds (‘PEF’s); Ɛ asset-backed securities; Ɛ collateralised debt obligations (‘CDO’s); and
The Group has determined that where it has control over funds, these investments are consolidated structured entities.
At 31 December 2015 the Group has granted loans to the PGH EBT of £6 million (2014: £6 million). Further loans are expected to be granted in 2016. Details are provided in note D2.
Collective investment schemes: Directly held collective investment schemes1: Diversified 3 – Short-term liquidity 1,932 873 Indirectly held collective investment schemes2 760 1,319 Fixed and variable rate income securities: Asset-backed securities 669 517 1 Directly held collective investment schemes refer to those structured entities directly invested in by Group companies. Such investments have been analysed by reference to the predominant asset class the structure is investing in.
Details of commitments to subscribe to private equity funds and other unitised assets are included in note I7.
H3. GROUP ENTITIES The table below sets out the Group’s subsidiary undertakings (including collective investment schemes that have been consolidated within the Group’s financial statements), joint ventures, associates and significant holdings in undertakings (including undertakings where holding amounts to 20% or more of the nominal value of the shares or units and they are not classified as a subsidiary undertaking, joint venture or associate).
Subsidiary undertakings: National Provident Life Limited (Life assurance company) Ordinary shares 100.00%
Phoenix Unit Trust Managers Limited (Unit trust manager) Ordinary shares 100.00% Pearl Customer Care Limited (Financial services company) Ordinary shares 100.00% Pearl Life Services Limited (Property landlord) Ordinary shares 100.00% Pearl (WP) Investments LLC (Investment company) US Ordinary shares 100.00% Phoenix SCP Limited (Investment company) Ordinary shares 100.00% Scottish Mutual Assurance Limited (Investment company) Ordinary shares 100.00%
Britannic Group Services Limited (Dormant company) Ordinary shares 100.00% Phoenix Pensions Trustee Services Limited (Dormant company) Ordinary shares 100.00% Pearl (Covent Garden) Limited (Dormant company) Ordinary shares 100.00% NPI (Westgate) Limited (Dormant company) Ordinary shares 100.00% NPI (Printworks) Limited (Dormant company) Ordinary shares 100.00% Pearl (Barwell 2) Limited (Dormant company) Ordinary shares 100.00% Pearl (Chiswick House) Limited (Dormant company) Ordinary shares 100.00% Pearl (Printworks) Limited (Dormant company) Ordinary shares 100.00% Pearl (Stockley Park) Limited (Dormant company) Ordinary shares 100.00% London Life Trustees Limited (Dormant company) Ordinary shares 100.00% Pearl Trustees Limited (Dormant company) Ordinary shares 100.00% Pearl Group Secretariat Services Limited (Dormant company) Ordinary shares 100.00% Phoenix Life Pension Trust Limited (Dormant company) Ordinary shares 100.00% Century Trustee Services Limited (Dormant company) Ordinary shares 100.00% Pearl AL Limited (Dormant company) Ordinary shares 100.00% Phoenix Pensions Limited (Dormant company) Ordinary shares 100.00% Bradford Insurance Company Limited (Dormant company) Ordinary shares 100.00% Clearfol Investment Limited (Dormant company) Ordinary shares 100.00% Pearl PLP Limited (Dormant company) Ordinary shares 100.00% SL Liverpool PLC (Dormant company) Ordinary shares 100.00% SPL (Holdings 1) Limited (Non-trading company) Ordinary shares 100.00% Zilmer Limited (Dormant company) Ordinary shares 100.00% Alba Life Trustees Limited (Non-trading company) Ordinary shares 100.00% Scottish Mutual Customer Care Limited (Dormant company) Ordinary shares 100.00% BA (FURBS) Limited (Dormant company) Ordinary shares 100.00% PG Dormant No. 1 Limited (Dormant company) Ordinary shares 100.00% Phoenix Annuities Limited (Dormant company) Ordinary shares 100.00%
Phoenix Pension Scheme (Trustees) Limited Ordinary shares 100.00% Evergreen Trustee Limited (Dormant company) Ordinary shares 100.00% Corunna Limited (Dormant company) Ordinary shares 100.00% Pearl ULA Limited (Dormant company) Ordinary shares 100.00% Scottish Mutual Nominees Limited (Dormant company) Ordinary shares 100.00% National Provident Institution (Dormant company) Unlimited without shares N/A
Henderson Global Funds – Institutional Emerging Markets Fund London 3 OEIC, sub fund 89.55% Henderson Multi-Manager Investment Fund – Henderson Diversified Growth UK Fund
Henderson Institutional Credit Fund London 3 Authorised unit trust 99.93% Henderson Global Funds – Henderson Institutional Overseas Bond Fund London 3 OEIC, sub fund 83.97% Henderson Institutional UK Enhanced Equity Trust London 3 Authorised unit trust 75.54% Henderson Institutional Mainstream UK Equity Trust London 3 Authorised unit trust 99.87% Henderson Strategic Investment Funds – Henderson Institutional European Enhanced Equity Fund
Henderson Strategic Investment Funds – Henderson Institutional North American Enhanced Equity Fund
Henderson Strategic Investment Funds – Henderson Institutional Asia Pacific Ex Japan Enhanced Equity Fund
Henderson Institutional UK Equity Tracker Trust London 3 Authorised unit trust 99.95% Henderson Short Duration Bond Fund London 3 Authorised unit trust 100.00% PUTM Bothwell Floating Rate ABS Fund Wythall 4 Authorised unit trust 100.00% PUTM Bothwell Global Credit Fund Wythall 4 Authorised unit trust 100.00% PUTM Bothwell Fixed ABS Sterling Hedged Fund Wythall 4 Authorised unit trust 100.00% PUTM Bothwell Asia Pacific (Excluding Japan) Fund Wythall 4 Authorised unit trust 100.00% PUTM Bothwell Emerging Market Debt Unconstrained Fund Wythall 4 Authorised unit trust 100.00% PUTM Bothwell Emerging Markets Equity Fund Wythall 4 Authorised unit trust 100.00% PUTM Bothwell European Credit Fund Wythall 4 Authorised unit trust 100.00% PUTM Bothwell Europe Fund Wythall 4 Authorised unit trust 100.00% PUTM Bothwell Credit Financial Sterling Hedged Fund Wythall 4 Authorised unit trust 100.00% PUTM Bothwell Global Bond Fund Wythall 4 Authorised unit trust 100.00% PUTM Bothwell Global Equity Fund Wythall 4 Authorised unit trust 100.00% PUTM Bothwell Index-Linked Sterling Hedged Fund Wythall 4 Authorised unit trust 100.00% PUTM Bothwell Japan Tracker Fund Wythall 4 Authorised unit trust 100.00% PUTM Bothwell Long Gilt Sterling Hedged Fund Wythall 4 Authorised unit trust 100.00% PUTM Bothwell North America Fund Wythall 4 Authorised unit trust 100.00% PUTM Bothwell Credit Non Financial Sterling Hedged Fund Wythall 4 Authorised unit trust 100.00% PUTM Bothwell UK Equity Smaller Companies Fund Wythall 4 Authorised unit trust 100.00% PUTM Bothwell Sterling Government Bond Fund Wythall 4 Authorised unit trust 100.00% PUTM Bothwell Euro Sovereign Fund Wythall 4 Authorised unit trust 100.00% PUTM Bothwell Sterling Credit Fund Wythall 4 Authorised unit trust 100.00% PUTM Bothwell Tactical Asset Allocation Fund Wythall 4 Authorised unit trust 100.00% PUTM Bothwell UK Equity 350 Fund Wythall 4 Authorised unit trust 100.00% PUTM Bothwell UK Equity Income Fund Wythall 4 Authorised unit trust 100.00% PUTM UK All-Share Index Unit Trust Wythall 4 Authorised unit trust 99.97% PUTM Cautious Unit Trust Wythall 4 Authorised unit trust 99.46%
Significant holdings: Henderson Global Funds – World Select Fund London 3 OEIC, sub fund 28.00% Henderson Global Care Funds – Henderson Global Care Growth Fund London 3 OEIC, sub fund 22.78% Henderson Global Care Funds – Henderson Institutional Global Care Managed Fund
Henderson Institutional High Alpha UK Equity Fund London 3 Authorised unit trust 37.99% Henderson UK & Europe Funds – Henderson Institutional UK Gilt Fund London 3 OEIC, sub fund 70.56%