2018 WAS TRANSFORMATIONAL FOR PHOENIX AS WE DELIVERED CASH, RESILIENCE AND GROWTH.
WITH THE RESTRUCTURING OF THE LIFE AND PENSIONS INDUSTRY, WE ARE IN A POSITION TO TAKE ADVANTAGE OF FURTHER OPPORTUNITIES.
THE SUCCESSFUL ACQUISITION OF THE STANDARD LIFE ASSURANCE BUSINESSES HAS ALLOWED US TO EVOLVE FROM BEING A HERITAGE BUSINESS TO ONE THAT EXTENDS TO OPEN BUSINESS AND EUROPE.
WHAT WE DO As the largest life and pensions consolidator in Europe, Phoenix specialises in the acquisition and management of closed life insurance and pension funds. We call this our Heritage business.
Alongside this, we have an Open business which manufactures and underwrites new products and policies to support people saving for their future in areas such as workplace pensions and self-invested personal pensions. This Open business is supported by the Strategic Partnership with Standard Life Aberdeen plc following our acquisition of Standard Life Assurance Limited in 2018. We also have a market leading brand – SunLife – which sells a range of financial products specifically for the over 50s market.
Read more on our operating structure and business model on P8 and 14
All amounts throughout the report market with ‘REM’ are KPIs linked to Executive Remuneration.
Read more on P230 1 Phoenix Life score only. 2 On a pro forma post tax basis assuming the acquisition of the Standard Life businesses took place on 1 January 2018.
THE ACQUISITION OF THE STANDARD LIFE ASSURANCE BUSINESSES IN 2018 WAS TRANSFORMATIONAL FOR PHOENIX. WE ARE NOW EUROPE’S LARGEST LIFE AND PENSIONS CONSOLIDATOR.”
Finally, the Group extended its track record of meeting and exceeding all of its publicly stated financial targets by surpassing the upper end of its two-year cash generation target range of £1.0 – £1.2 billion, delivering £1.3 billion of cash generation over 2017 and 2018.
CAPITAL MARKETS DAY In November Phoenix held a very well-attended Capital Markets Day to provide an update on the Standard Life Assurance acquisition. The presentation illustrated how Phoenix has evolved from being a ‘closed’ business to a consolidator of both Open and Heritage life businesses.
DIVIDEND POLICY The additional cash flows acquired as part of the acquisition of the Standard Life Assurance businesses enhance the sustainability of our dividend. Therefore, in line with previously stated expectations the Board recommends raising the dividend to an annualised amount of £338 million from the time of the 2018 final dividend. This corresponds to a final 2018 dividend per share of 23.4p and constitutes a c. 3.5% uplift in dividend per share (rebased to take into account the bonus element of the rights issue completed in July 2018), resulting in a new annualised dividend per share level of 46.8p going forward.
Given the long-term run-off nature of the Group’s Heritage business, the Board continues to consider it prudent to maintain a stable and sustainable dividend policy.
RECENT BOARD CHANGES Against a backdrop of macroeconomic uncertainty in light of Brexit, the Board aims to maintain the breadth and depth of experience required to continue delivering shareholder value and improving customer outcomes. Therefore, we were delighted to welcome Campbell Fleming and Barry O’Dwyer from Standard Life Aberdeen to the Board. Both bring with them substantial experience and executive skills complementary to those of our existing Directors and very related to our evolving strategy.
LOOKING AHEAD Despite our expectation that market conditions will remain turbulent leading up to and beyond Brexit, we look ahead with optimism as Phoenix’s hedging programme brings resilience to the Group’ solvency position and cash generation. Additionally, the Group’s capital-light new business capability brings added sustainability to Phoenix’s cash generation.
Focuses on enabling Head Office functions such as HR, Legal and Risk to enhance process efficiency and remove duplication. This phase will also deliver a single Risk Management Framework and three lines of defence model.
Cost and capital synergies Upon announcement of the transaction in February 2018, we set a total cost and capital synergy target for the transition of the Standard Life Assurance business within Phoenix of £720 million.
It is clear to me that Phoenix will be forever strengthened by the breadth of skills that our new colleagues bring. I am extremely grateful for the hard work across all locations in the Group that has ensured that our transition programme has ‘the best of both’. As a result of this collaboration, I am pleased to announce an increase of 70% to a new total synergy target of £1,220 million.
In addition, the programme will also bring together our two internal models. This has never been done before and the timeline we outline today targeting PRA approval by the end of 2020 remains indicative as we work through a number of key decisions and work with our regulators to assess achievability.
FINANCIAL PERFORMANCE Cash generation is resilient and sustainable Phoenix delivered £664 million cash generation in the year taking total cash generation in 2017 and 2018 to £1.3 billion and exceeding the upper end of the target range for this period of £1.0–£1.2 billion.
The Group has set new short and longer-term cash generation targets for the enlarged business. In 2019 we expect to generate £600 – £700 million of cash net of the cost of capitalising our Irish subsidiary for Brexit and our target for 2019 to 2023 is £3.8 billion. In addition we expect to generate a further £8.2 billion of cash from 2024 onwards.
The combined cash guidance of £12.0 billion reflects the cash for our in-force business only and does not include the additional cash flows that may be generated on new business. As our Open business grows, it will help to offset the run-off of our Heritage business and bring improved sustainability to our cash generation which in turn supports our stable and sustainable dividend policy.
Phoenix Group capital position During 2018, the Group strengthened the resilience of its capital position, increasing the Solvency II surplus from a pro forma1 of £2.5 billion as at 31 December 2017 to £3.2 billion as at 31 December 2018.
Operating Profit The Group delivered total operating profit of £708 million and reports for the first time operating profit across its three main business segments. The increase compared to the prior year is primarily driven by the inclusion of Standard Life
Assets under administration As at 31 December 2018, the Group had £226 billion of assets under administration, reduced from the £240 billion pro forma position at 31 December 2017. This fall is primarily driven by market movements experienced in the fourth quarter of 2018 when markets were particularly negative. During the year, strong net inflows on our UK Open and European businesses have partially offset net outflows on our UK Heritage business.
With regard to annuities sales, both Standard Life and Abbey Life agreed with the FCA to undertake a past business review and both programmes are well advanced. Both of these reviews were known issues at the time of acquisition and we expect the costs arising from these reviews to be covered by the indemnities agreed at the time of the acquisition.
Phoenix invests in its online capabilities and we connect digitally with as many of our customers as possible.
For Phoenix Life, this digital journey is being shaped through our outsourcing arrangement with Diligenta. 80% of our Diligenta pension customers can now log on to our digital platform and during 2018 we saw over 40% of eligible customers taking advantage of our online encashment functionality. In absolute numbers this would be 80% of around 1 million customers.
Since auto-enrolment we have supported 11,000 schemes into a qualifying workplace pension scheme with 1.7 million new joiners auto-enrolled into them by employers.
In August, I was delighted to announce that we would be introducing caps on ongoing charges across our Phoenix Life nonworkplace unitised pensions business and removing exit charges on small unitised pensions policies. This change will benefit c. 250,000 policies and reduce the average Phoenix Life ongoing charge for unitised non-workplace pension policies to 1.1%.
We recognise the importance of customer service and monitor our performance through a number of metrics. We have exceeded all of our customer service targets in 2018.
CONCLUSION In 2018, Phoenix delivered on its existing strategic priorities alongside a material acquisition. We completed the integration of both the AXA Wealth and Abbey Life during the year and to date have generated cash from both transactions of £968 million or over 70% of consideration. We also completed our on-shoring programme replacing the previous Cayman Islands registered holding company with a UK-incorporated one.
We look forward to 2019 with excitement. Whilst we will of course remain focused on the safe transition of our combined businesses, we have the management bandwidth to deliver on our growth strategy.
Phoenix has the skill set, scale and financial strength to be at the forefront of the UK and European life consolidation market. We remain optimistic about the opportunities that 2019 will bring and we are ready to move forward with transactions that add value to our investors.
I have been delighted to welcome former Standard Life colleagues to the Phoenix family and thank all of my colleagues throughout the Group for their hard work during a year that has seen Phoenix deliver its strategy for the benefit of both shareholders and policyholders.
FCA closes Abbey Life enforcement investigation. €500 million Tier 2 bond issued. Fitch Ratings affirms ratings and places Phoenix on ‘stable’ outlook.
New UK holding company in place. On-shoring complete. Abbey Life Part VII complete.
include the following: Manage the financial assets for policyholders across our UK Heritage; UK Open and European main business segments
PHOENIX GROUP’S OPERATING STRUCTURE IS EVOLVING AS WE TRANSITION TO A NEW END STATE OPERATING MODEL FOR THE COMBINED GROUP.
GROUP FUNCTIONS The Group operates centralised functions that provide Group-wide and corporate-level services and manage corporate and strategic activity. Based in Edinburgh, Wythall near Birmingham and Juxon House, London, the Group is led by the Group Chief Executive Officer, Clive Bannister.
Life companies The life companies are regulated entities that hold the Group’s policyholder assets. The Group simplifies its business model by bringing together separate life companies and funds, making more efficient use of the capital and liquidity in its life companies.
This results in administrative expense savings and increased consistency of management practices and principles across the Group.
Outsource partners have scale and common processes to benefit the Group, including reducing investment requirements, improving technology and reducing our operational risk. Finance, actuarial, information technology, risk and compliance and oversight of the outsource partners are retained in-house, ensuring that Phoenix Life retains full control over the core capabilities necessary to manage and integrate closed life funds.
WE HAVE A WIDE RANGE OF PRODUCTS WHICH ARE WRITTEN ACROSS DIFFERENT FUNDS.
Unit linked £145bn Assets under administration at 31 Dec 2018 65%
Policyholders’ benefits are in the form of unit price growth (based on the investment income and gains, but subject to management charges and investment transaction costs).
Phoenix specialises in the safe and efficient management of UK Heritage business and has a strong track record of delivery.
Our UK Heritage business comprises products that are no longer actively marketed to customers and has £118 billion of assets under administration.
In Force The UK Heritage business has been built from two decades of consolidation and comprises over 100 legacy brands including Britannic, Pearl,Scottish Mutual, AXA, Abbey Life and Standard Life. It has a broad range of life and pensions products which provide Phoenix with natural diversification and includes business from both Phoenix Life and Standard Life.
Integral to our efficient management of the UK Heritage business is ensuring that our cost base reduces more quickly than our policy count runs off.
New business The Group generates new business in the Heritage business segment through vesting annuities and bulk purchase annuities, or from incremental contributions from existing pensions.
Vesting annuities We offer annuities to existing policyholders when their pension policies vest across both the Phoenix Life and Standard Life product ranges. The majority of our vesting annuities are from pension policies which included guaranteed annuity options on maturity.
Bulk purchase annuities In 2018 we successfully entered into the bulk purchase annuity market completing three transactions during the year. The bulk purchase annuity market is a potential source of value accretive annuity liabilities and we will continue to participate in this market in a proportionate and selective manner.
Ireland A unit linked investment proposition for both the pre and post retirement market, the Irish business is also capital-light in nature and is distributed through adviser channels.
The international bond is sold by Standard Life Aberdeen through the retail market and the investment platform. All other open products are sold by the European units themselves.
In Force Open business mainly relates to those products being sold under the Standard Life brand but also includes those aimed at the over 50’s market distributed by SunLife.
Assets under administration in our open business are held in three product lines: Workplace, Retail pensions and Wrap. These are predominantly unitised products which have no guarantees and where investment risk sits with the customer. Our Open business therefore comprises capital-light products.
Under this agreement, Standard Life Aberdeen is responsible for the distribution, branding and marketing of products. They do this through their existing networks of Retail and Independent Advisors and for some products using their successful investment platform. The exception to this are Workplace pensions products where distribution is performed by the Phoenix Group.
Where a customer needs or wants advice it can be delivered by Standard Life Aberdeen’s in house advice arm.
Changes in customer behaviour, market dynamics and the regulatory environment resulted in insurers closing their old style capital-heavy insurance product lines to new business, replacing them with capitallight investment style products.
The size of the BPA market is significant, with in excess of £20 billion of transactions completed in 2018 and a similar volume of transactions expected in 2019.
Opportunities and outlook Having successfully completed three bulk purchase annuity transactions in 2018, Phoenix has the acquisition experience and proven skills set to compete in this market and is targeting winning BPA liabilities of £0.5 – 1.0 billion per annum.
Recent trends have included scheme reviews and employers shifting from unbundled to bundled arrangements.
Retail pensions The retail pensions book is in part built up by the Strategic Partnership with Standard Life Aberdeen selling retail pensions products via independent advisers and has 750,000 customers with 14,000 new drawdown customers in 2018.
By offering a solution for both accumulation and decumulation, customers can keep their assets in the decumulation phase of their life and consolidate pension pots with other providers into one vehicle.
Wrap The Wrap platform is owned and operated by Standard Life Aberdeen offering a range of Standard Life branded products provided by Phoenix to circa 100,000 customers. The Wrap platform offers a high level of functionality which differentiates it from other platforms and the strong and integrated relationship with advisers gives it a marketleading position.
Opportunities and outlook Whilst the platform market is very crowded and highly competitive, the Wrap platform remains number one in the market based on both advised gross and net volumes and is well placed to grow in the future.
Our European business is specifically targeted to the more affluent population via broker distribution channels.
Over 50s market SunLife specialises in the distribution of insurance products to the over 50s. Phoenix underwrites and administers the life and pensions products within their range including life cover, equity release and funeral plans.
Opportunities and outlook The SunLife brand holds a dominant position in the over 50s market with a 57.8% market share of all whole of life guaranteed acceptance plans bought directly. (Source: ABI statistics issued in November 2018 for 12 month period to 30 September 2018 based on new Phoenix Life policy sales trading as SunLife).
SERVICE Quality service to our customers and their intermediaries is critical to our strategy
DRIVE VALUE In order to drive value, the Group looks to identify and undertake management actions, which increase and accelerate cash flow.
ENGAGE COLLEAGUES Our people are at the heart of our business and key to the successful growth of Phoenix Group.
IMPROVE CUSTOMER OUTCOMES Improving customer outcomes is central to our vision of being Europe’s Leading Life Consolidator, and to inspire confidence in the future.
Reduced capital requirements As our heritage business runs off, the Solvency Capital Requirements reduce.
WHAT IS THE REMAINING CASH USED FOR? Mergers and acquisitions Transactions must be value accretive and cash flow generative and needs to support the dividend level.
Bulk purchase annuity transactions Generate increased cash flows over the longer term and are value accretive.
COMMUNITY & ENVIRONMENT Support for local communities and charity partners and reduced environmental impact
Read more on P54 £770k DONATED TO MIDLANDS AND LONDON AIR AMBULANCE CHARITY PARTNERS
BULK PURCHASE ANNUITY TRANSACTIONS The bulk purchase annuity market offers a complementary source of assets and growth
IMPACT OF NEW BUSINESS? Capital-light open business New business written across our open product range is capital-light.
Less Solvency Capital Requirement The level of regulatory capital required is known as the Solvency Capital Requirement.
Less Capital Policy The life companies hold additional internal capital buffers above the regulatory capital requirement for prudence.
WHAT IS THE REMAINING CASH USED FOR? Mergers and acquisitions Transactions must be value accretive and cash flow generative and need to support the dividend level.
Improving customer outcomes is central to our vision of being Europe’s Leading Life Consolidator.
• Improving Value and Effective With Profit fund run-off – Delivering improved value to customers and effectively managing With-Profits fund run-off.
• We have refined the requirements under our death claims payment process for benefits valued at £10,000 or less, ensuring a more simplified customer journey.
Operating Model for Customer Services, which will give full digital self-serve capability and increase the ability of customers to interact with us digitally. This will deliver straight through customer journeys for Pension Transfers, Policy Enquiries, Life Surrenders (Quotes
• Good progress has been made to improve our key point and regular communications, ensuring letters are engaging, clear and provide all required information for customer.
Read more about customer engagement activities undertaken during the year on P48
Note: 1 The most recent published industry average overturn rate across the industry in the Life and Pensions and Decumulation’ category, in which the majority of our business sits was 22%.
Analysis The Group achieved a satisfaction score of 93% reflecting our commitment to ensuring customers are satisfied with our products and services.
Why is it important? This is an independent view of how firms are handling complaints. It provides us with an opportunity to review and adjust our complaint handling proposition in line with best industry practice.
Target 12 days in line with the industry stated target for Origo Pension Transfers.
• Face-to-face retirement roadshows were run throughout 2018 to help our customers plan for their retirement. This year we have hosted 44 events in 19 locations, attended by around 2,000 customers and their guests. Following the success of the nationwide retirement roadshows we have introduced a digital option for retirement webinars.
• Our vulnerable customer policy and programme remains a key focus. An extensive training programme has taken place over 2018. This has been done through face-to-face training and via E-learning modules and 100% of our colleagues who have contact with customers have completed their training by the end of 2018. This training programme won ‘Excellence in skills in Learning and Development’ at the 2018 Contact Centre Association (‘CCA’) Awards.
• Enhancing the proposition available for our workplace clients, listening and acting on the feedback they have given us on what is important to them. We will also be re-designing our Voice of Customer programme, to capture feedback more efficiently and demonstrate how we act on it.
• Helping workplace clients through auto enrolment phasing increases that take effect in April 2019.
• Investing in digital capability for financial advisers, as well as introducing save and replay functionality on our digital retirement journey. We will also be looking to make improvements to the investment switching journey online, for a majority of schemes.
Why is it important? This is an internally calculated measure of how easy our customers find it to interact with our business. It asks one question ‘Please tell us how easy it was to get what you needed today between 0 and 10, with 0 being very difficult and 10 being very easy’.
Analysis The Net Easy customer effort score of 72% reflects that overall customers are finding us easy to deal with when they contact us.
Why is it important? This is a recognised industry measure for the speed of processing Pension Transfers, Open Market Options and Immediate Vesting Personal Pensions. It allows us to benchmark performance and our overall servicing and claims proposition against our peers.
Analysis The pension transfer times are better than the industry target of 12 days.
The closed life funds within our Heritage business provide predictable fund maturity and liability profiles, creating stable long-term cash flows for distribution to shareholders and repayment of outstanding debt.
• £409 million of management actions were delivered in the year that increased Solvency II Own Funds. This includes anticipated cost savings arising from the planned move to a single, digitally enhanced outsourcer platform, together with the impact of strategic asset allocation actions such as investment in illiquid assets which offer improved matching adjustment benefits in the annuity portfolios. A total of £1.4 billion was invested in illiquid assets during the year, including equity release mortgage portfolios, commercial real estate and private placements.
• The Group successfully entered the bulk purchase annuity market with three transactions completed in 2018 and total contracted liabilities of £800 million. The Group has invested c. £100 million of capital to facilitate these transactions, reflecting the day 1 capital strain arising from the assets received. The bulk purchase annuity investments increase the Group’s expected longer term cash generation by c. £300 million, to be delivered over the lifetime of the policies.
Why it is important? Operating companies cash generation represents cash remitted by the Group’s operating companies to the holding companies. Maintaining strong cash flow delivery underpins debt servicing and repayment as well as shareholder dividends.
Target To generate cash flows of between £600 to £700 million in 2019 and £3.8 billion of cash between 2019 and 2023.
Why it is important? Operating profit is a non-GAAP measure used by management and is considered a more representative measure of performance than IFRS profit or loss after tax as it provides long-term performance information unaffected by short-term economic volatility.
Analysis The final dividend per share of 23.4p is a 3.5% increase on the 2017 final dividend.
£664m 2017: £653m £708m 2017: £368m 23.4p FINAL DIVIDEND PER SHARE
Note: 1 Historic dividends per share rebased to take into account the bonus element of the rights issue completed in November 2016 and the rights issue completed in July 2018.
• The Group delivered £161 million of management actions that decreased SCR in the year, including the impacts of the Abbey Life actions detailed above and other activities such as interest rate hedging.
• Capital synergies associated with the acquisition of the Standard Life Assurance businesses benefited the PGH Solvency II surplus by £0.5 billion primarily as a result of implementing Phoenix’s equity and currency hedging strategy.
• The on-shoring of the Group completed at the end of the year. PGH became UK resident for tax purposes in January 2018 and a new UK – registered holding company, Phoenix Group Holdings plc, was put in place for the Group in December 2018.
PRIORITIES FOR 2019 • Implement further management actions to enhance the Group’s capital position.
Why it is important? The Solvency II surplus is the regulatory assessment of capital adequacy at PGH plc level.
Analysis A coverage ratio of 167% reflects the increase in the Solvency II surplus in the period and represents a resilient capital position.
Notes: 1 The position at 31 December 2016 included pro forma adjustments to illustrate the impacts of the issuance in January 2017 of the £300 million Solvency II qualifying Tier 3 bond and the receipt of the PRA’s approval in March 2017 to include the acquired AXA Wealth businesses within the Group’s Internal Model.
Our Values • The Big Conversation was a significant listening exercise that was undertaken within Phoenix Group and Phoenix Life at the start of the year to raise the level of dialogue around the Group’s values, and provided greater clarity around associated behaviours. The outcomes were shared with colleagues, and provided a clear framework for how individuals are recognised, developed and recruited.
Volunteering and Charity • 58% of colleagues participated in the 2018 volunteering programme contributing 3,547 hours.
• We continued to utilise our Corporate Responsibility agenda to provide opportunities for skills development and team building.
Diversity and Inclusion • The Group remains committed towards creating an inclusive and attractive environment for all potential employees.
PRIORITIES FOR 2019 • Remain an Employer of Choice, offering rewarding careers and opportunities across all sites within Phoenix.
• Phoenix is a signatory to the Women in Finance (‘WIF’) Charter and continues to strive for an inclusive culture which enables all of our colleagues to reach their full potential.
• Phoenix statutory pay figures are published on the Group’s website. The gender pay figure for the WIF Charter target is based on an internal calculation looking at base salary only; it is not based on the statutory gender pay gap calculations.
Lower Quartile 55% 45% Lower Middle Quartile 44% 56% Upper Middle Quartile 38% 62% Upper Quartile 25% 75%
• Maintain support of our communities across the Enlarged Group through employee volunteering, fund raising and engagement.
Read more about employee engagement activities undertaken during the year on P51
Due to the Standard Life acquisition, no engagement survey was commissioned by the Group in 2018. There is an anticipated change to our engagement survey provider for 2019, to enable one engagement provision across the combined Group.
Notes: 1 The 2018 figure of 4,088 does not include workforce based in Germany/Austria.
The Group’s Solvency II capital surplus position of £3.2 billion (2017: £2.5 billion pro forma1) has been positively impacted by the delivery of capital synergies following the acquisition of the Standard Life Assurance businesses, together with management actions delivered in the year and the issuance of capital qualifying subordinated debt. Implementation of the Group’s hedging programme to the acquired business has ensured the surplus remains resilient to equity movements.
The Group generated an IFRS profit after tax of £410 million for the year (2017: £27 million loss), reflecting the contribution of the Standard Life Assurance businesses for the four month period post completion of the acquisition and the positive impact of updates made to actuarial assumptions in the period, notably the continued slowdown of mortality improvements. As expected, the IFRS results continue to be impacted by investment variances arising from the Group’s hedging programme, which is calibrated to protect the Group’s Solvency II surplus. Declining equity markets in the second half of 2018 generated gains on these hedging instruments that have benefited the Group’s IFRS results this year.
The measure excludes any risk margin and restrictions recognised under Solvency II for contract boundaries and is considered a prudent proxy for future cash generation from new business written. Assuming the acquisition of the Standard Life Assurance businesses took place on 31 December 2017, the Group delivered a new business contribution of £154 million (net of tax).
Note: Presentation of financial information Following the acquisition of the Standard Life Assurance businesses, the Group now has three main business segments: UK Heritage, UK Open and Europe. Within the Group’s IFRS results, operating profit for each business segment is now reported.
The cash flow analysis that follows reflects the cash paid by the operating companies to the Group’s holding companies, as well as the uses of those cash receipts.
Cash receipts Cash remitted by the operating companies was £664 million (2017: £653 million).
Pension scheme contributions of £49 million (2017: £92 million) are made on a monthly basis and include total contributions of £40 million into the Pearl Group Scheme and £9 million into the Abbey Life Scheme, including £4 million paid into Charged Accounts and held in escrow.
Note: 1 Includes amounts received by the holding companies in respect of tax losses surrendered to the operating companies of £39 million (2017: £20 million).
All amounts in the Business Review section marked with an ‘APM’ are alternative performance measures. See ‘Alternative Performance Measures’ section on page 230 for further details of these measures.
Cash and cash equivalents at 31 December 346 535 £664m OPERATING COMPANIES’ CASH GENERATION
Debt repayments and shareholder dividend External debt repayments of £1,053 million in 2017 include the full settlement of the £850 million revolving credit facility balance outstanding at 31 December 2016 and repayment of £178 million of the £300 million senior bonds which were redeemed at a premium of £25 million.
Debt issuance (net of fees) The £932 million debt issuance comprises the net proceeds of the Tier 1 Notes of £500 million completed in April and the £445 million (€500 million) Tier 2 bond issuance in September.
Support of BPA activity £101 million of funding has been provided to the life companies to support the bulk purchase annuity new business (based on the assets received on day 1).
Target cash flows The Group has previously announced a five-year cumulative target cash flow for 2016 to 2020 of £2.8 billion, of which £1.0 billion to £1.2 billion was expected to be achieved in 2017 and 2018. With £664 million of cash generation in 2018 taking total cash generation for 2017 to 2018 to £1.3 billion, the Group has exceeded its £1.0 to £1.2 billion target range for 2017 and 2018.
UK Open flows The UK Open segment experienced gross inflows of £10.7 billion during 2018, of which £7.4 billion was received in respect of new contracts transacted in the year.
Europe net flows The European business contributed a small positive net inflow of £0.2 billion to the Group’s AUA.
New business contribution In respect of our Open and Europe business segments, we monitor new business contribution as the Group’s measure of the future value delivered through the writing of new business.
The Solvency II surplus excludes the surpluses arising in the Group’s unsupported with-profits funds and the PGL Pension Scheme of £2.1 billion (2017: £2.2 billion pro forma4). In the calculation of the Solvency II surplus, the SCR of the with-profits funds and the PGL Pension Scheme is included, but the related Own Funds are recognised only to a maximum of the SCR amount.
Surpluses that arise in with-profits funds and the PGL Pension Scheme, whilst not included in the Solvency II surplus, are available to absorb economic shocks. This means that the headline surplus is resilient to economic stresses.
CHANGE IN PGH PLC SOLVENCY II SURPLUS (ESTIMATED) The PGH plc Solvency II surplus has increased to £3.2 billion (2017 pro forma: £2.5 billion). In this section, we focus on an explanation of the movements in the PGH plc Solvency II surplus on a pro forma basis as if the acquisition of the Standard Life Assurance businesses took place on 31 December 2017. Further details regarding the comparative actual position as at 31 December 2017 are set out in the additional capital disclosures section of this report on page 228.
Notes: 1 Own Funds includes the net assets of the life and holding companies calculated under Solvency II rules, pension scheme surpluses calculated on an IAS19 basis not exceeding the holding companies’ contribution to the Group SCR and qualifying subordinated liabilities. It is stated net of restrictions for assets which are non-transferable and fungible between Group companies within a period of nine months.
2 The SCR reflects the risks and obligations to which Phoenix Group Holdings plc is exposed.
3 The surplus equates to a regulatory coverage ratio of 146% as at 31 December 2018 (2017: 132% pro forma for the Enlarged Group).
Management actions undertaken, including further investment in illiquid assets within annuity portfolios, reductions in investment expenses and anticipated cost savings associated with a move to a single outsourcer and continued investment in digitalisation increased the surplus by £0.6 billion.
The pro forma surplus for the Enlarged Group included an assumed £0.6 billion of capital qualifying debt issued in relation to the acquisition of the Standard Life Assurance businesses. Following the issuances of the £500 million Tier 1 Notes in April 2018 and €500 million of Tier 2 bonds in September 2018, actual debt raised in the year was £0.9 billion, resulting in a £0.3 billion increase to the surplus compared to the pro forma position.
The adverse impact of economic and other variances reduced the surplus by £0.2 billion. This includes a provision in respect of a commitment to reduce ongoing and exit charges for unitised non-workplace pensions. As detailed above, extending the Group’s hedging strategy to Standard Life Assurance has ensured the Group remains resilient to equity market movements.
Financing costs, pension contributions and dividend payments (including accrual for the 2018 final dividend) amount to £0.5 billion and reduced the surplus in the period.
Standard Life Assurance Limited obtained regulatory approval to recalculate the benefits associated with Transitional Measures on Technical Provisions (‘TMTP’) as at 31 December 2018 and the impact of this recalculation is included within the PGH Solvency II surplus as at that date. The Phoenix Life entities will not undertake a mandatory recalculation of TMTP until 31 December 2019. Had a dynamic recalculation been assumed as at 31 December 2018 for Phoenix Life entities, the PGH plc Solvency II surplus would have been £0.1 billion higher.
SHAREHOLDER CAPITAL COVERAGE RATIO (ESTIMATED) The Group focuses on a shareholder view of the capital coverage ratio which is considered to give a more accurate reflection of the capital strength of the Group. The Shareholder Capital Coverage Ratio is calculated as the ratio of Eligible Own Funds to SCR adjusted to exclude Own Funds and the associated SCR relating to the unsupported with-profit funds and the PGL Pension Scheme.
The Group targets a shareholder capital coverage ratio in the range of 140% to 180%.
Please see the Alternative Performance Measures section on page 230 or further details of this measure.
Unsupported with-profit funds and the PGL Pension Scheme consist of £4.4 billion of Own Funds and £2.3 billion of SCR. The related Own Funds are only recognised in the PGH plc Solvency II surplus up to the value of the SCR in respect of these funds. Of the £4.4 billion of Own Funds, £3.9 billion consists of estate within the unsupported with- profit funds and £0.5 billion of Own Funds within the PGL Pension Scheme.
Surpluses in these funds do not contribute to the PGH plc Solvency II surplus.
Excluding the SCR and Own Funds relating to the unsupported with-profit funds and the PGL Pension Scheme, the Solvency II Shareholder Capital Coverage ratio is 167% as at 31 December 2018 (2017: 147% on a pro forma basis for the Enlarged Group).
As at 31 December 2018, the Life Company Free Surplus is £1.0 billion (2017: £0.7 billion). The table opposite analyses the movement during the period.
Notes: 1 Assumes the acquisition of the Standard Life Assurance businesses and the implementation of the Group’s equity and currency hedging strategy by those acquired businesses took place on 31 December 2017. 2 Assumes stress occurs on 1 January 2019. 3 Assumes recalculation of transitionals (subject to PRA approval).
IFRS RESULTS OPERATING PROFIT Operating profit is a non-GAAP financial performance measure based on expected long-term investment returns. It is stated before amortisation and impairment of intangibles, other non-operating items, finance costs and tax.
IFRS PROFIT AFTER TAX The IFRS profit after tax attributable to owners is £410 million (2017: £(27) million). The increase primarily reflects the improved operating profit together with net positive economic variances arising on hedging positions held by the life companies to protect the Group’s Solvency II surplus position and a gain recognised on acquisition of the Standard Life Assurance businesses of £141 million.
Operating profit for the life companies is based on expected investment returns on financial investments backing shareholder and policyholder funds over the reporting period, with consistent allowance for the corresponding expected movements in liabilities (being the release of prudential margins and the interest cost of unwinding the discount on the liabilities).
Operating profit includes the effect of variances in experience for noneconomic items, such as mortality and persistency, and the effect of changes in non-economic assumptions. Changes due to economic items, for example market value movements and interest rate changes, which give rise to variances between actual and expected investment returns, and the impact of changes in economic assumptions on liabilities, are accounted for outside of operating profit. Life company operating profit is net of policyholder finance charges and policyholder tax.
Profit/(loss) before the tax attributable to owners of the parent 439 (28)
UK HERITAGE OPERATING PROFIT The Group’s UK Heritage business segment does not actively sell new life or pension policies and runs-off gradually over time.
UK OPEN OPERATING PROFIT The Group’s UK Open business segment delivered an operating profit of £41 million, including a £31 million contribution from the Standard Life Assurance businesses. This includes operating profits generated across the Workplace, Retail and SIPP product lines, including new business distributed through our Strategic Partnership with Standard Life Aberdeen plc.
EUROPE OPERATING PROFIT The European business which comprises business written in Ireland, Germany and Austria and a mix of Heritage and Open products, generated an operating profit of £22 million during the year.
MANAGEMENT SERVICES COMPANIES OPERATING PROFIT The operating profit for management services of £25 million (2017: £21 million) comprises income from the life and holding companies in accordance with the respective management services companies agreements less fees related to the outsourcing of services and other operating costs.
VARIANCE ON OWNERS’ FUNDS The adverse variance on owners’ funds of £193 million (2017: £87 million negative) is principally driven by realised losses on derivative instruments entered into by the holding companies to hedge exposure to equity risk arising from the Group’s acquisition of the Standard Life Assurance businesses. Losses of £143 million were incurred on these instruments, together with option premiums of £22 million.
AMORTISATION OF ACQUIRED IN-FORCE BUSINESS AND OTHER INTANGIBLES The carrying amount of the Group’s acquired in-force business and other intangibles was £4.3 billion at the end of the year (gross of deferred tax), of which £2.8 billion relates to the Standard Life Assurance businesses.
The prior period result included a premium of £25 million paid on redemption of £178 million principal of the senior unsecured bond, costs of £21 million in respect of integration and restructuring of the Abbey Life and AXA Wealth businesses, costs of £20 million in respect of short-term expense overruns arising from the AXA Wealth businesses prior to the completion of the implementation of the Phoenix operating model, a provision of £27 million in respect of a commitment to the reduction of ongoing charges for workplace pension products, a £21 million increase in the provision for costs for claims relating to historic creditor insurance underwritten by a subsidiary of the Group, PA (GI) Limited, offset by the recognition of reimbursements of £39 million in respect of recoveries due or received from third parties under contractual arrangements; and net other one-off items totalling a cost of £5 million, including corporate project costs.
FINANCE COSTS Finance costs have increased by £10 million, comprising a £5 million decrease in bank finance costs driven by the repayment of bank debt and a £15 million increase in other finance costs reflecting debt issuances during the year.
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 is available in the corporate responsibility section of the Group’s website. The Group’s tax affairs and tax controls are managed by an in-house tax team who report on them to the Board and the Audit Committee on a regular basis throughout the year. The Board believes that its Tax Strategy accords with the Group’s approach to its wider Corporate Social Responsibility. In the first half of 2018, the Tax Strategy was refreshed and published in accordance with the relevant statutory requirements.
The Group’s insurance operations are primarily based in the UK and are liable to tax in accordance with applicable UK legislation. Following the acquisition of the Standard Life Assurance businesses, the Group’s overseas operations have increased, in Ireland and Germany in particular. The Group complies with the local tax obligations in the jurisdictions in which it operates. Phoenix Group Holdings was a Jersey resident holding company until 31 January 2018 when it became tax resident in the UK.
FINANCIAL LEVERAGE The Group seeks to manage the level of debt on its balance sheet by monitoring its financial leverage ratio. This is to ensure the Group maintains its investment grade credit rating as issued by Fitch Ratings and optimises its funding costs and financial flexibility for future acquisitions. The financial leverage ratio as at 31 December 2018 (as calculated by the Group in accordance with Fitch Ratings’ stated methodology) is 22% (2017: 27%). This is below the target range management considers to be associated with maintaining an investment grade rating of 25% to 30%.
Financial leverage is calculated as debt as a percentage of the sum of debt and equity. Debt is defined as the IFRS carrying value of shareholder borrowings. Equity is defined as the sum of equity attributable to the owners of the parent (excluding goodwill), the unallocated surplus and the Tier 1 Notes.
Further detail on the ten components of our RMF and the principal risks facing the Group are provided below. This includes consideration of how the Enterprise Risk Management (ERM) Framework operated by the acquired Standard Life Assurance businesses aligns with the Phoenix RMF.
After announcing its intention to enter the bulk annuity market, the Group successfully executed three deals over 2018 totalling £0.8 billion. The Group generates value through the use of reinsurance and its illiquid asset sourcing capabilities.
Collectively this means our people understand the Group’s approach to risk, take personal responsibility to manage risk in everything they do and encourage others to follow their example.
During 2018, Group Risk conducted its annual Risk Culture survey. The results of this survey enable us to assess and measure the Group’s Risk Culture over time as well as being able to tailor training programmes to ensure the continued engagement and development of our employees.
Strategic risk management is one of the five components of the ERM framework in Standard Life Assurance.
Cash flow – The Group will seek to ensure that it has sufficient cash flow to meet its financial obligations and will continue to do this in a volatile business environment.
Regulation – The Group and each Life Company will, at all times, operate a strong control environment to ensure compliance with all internal policies and applicable laws and regulations, in a commercially effective manner.
Conduct – Phoenix has no appetite for deliberate acts of misconduct or omissions that result in poor customer outcomes, reputational damage and/or pose a risk to the Financial Conduct Authority (‘FCA’) statutory objectives.
The risk universe allows the Group to deploy a common risk language, allowing for meaningful comparisons to be made across the business. There are three levels of risk universe categories. The highest risk universe category is Level 1 and includes: • strategic risk; • customer risk; • financial soundness risk; • market risk; • credit risk; • insurance risk; and
THE GROUP’S RISK MANAGEMENT FRAMEWORK HAS SUPPORTED THE ACQUISITION OF STANDARD LIFE AND WILL EVOLVE TO MANAGE THE RISKS THAT THE ENLARGED GROUP WILL FACE.”
GOVERNANCE, ORGANISATION AND POLICIES Governance Overall responsibility for approving, establishing and embedding the RMF rests with the Board. The Board recognises the critical importance of having an efficient and effective RMF and appropriate oversight of its operation. There is a clear organisational structure in place with documented, delegated authorities and responsibilities from the Group Board to the Life Company Boards and the Executive Committee.
Second line: Risk Oversight Risk oversight is provided by the Group Risk function and the Board Risk Committee. The Board Risk Committee comprises four independent NonExecutive Directors. It is supported by the Group Chief Risk Officer and met six times during 2018. During 2018, the Risk Committee of the Phoenix Life Board met five times and provided additional Board Committee focus on risk matters at Phoenix Life. The existing Standard Life Assurance Risk Committee has been brought alongside that of Phoenix Life to enable consideration of common matters.
TECHNOLOGY AND INFRASTRUCTURE The Group employs a number of risk systems to support the assessment and reporting of the risks it faces. This enables management to document key risks and controls and evidence the assessment of them at a frequency appropriate to the operation of the control.
The Group fails to make further value adding acquisitions or effectively transition acquired businesses
The Group applies a clear set of assessment criteria to assess opportunities. Acquisition strategy supported by the Group’s financial strength and flexibility, its strong regulatory relationships and its track record of managing conduct issues and generating value. The financial and operational risks of target businesses are assessed in the acquisition phase. Integration plans are developed and resourced with appropriately skilled staff to ensure target operating models are delivered in line with expectations.
The heightened trend reflects the transformational nature of the acquisition of Standard Life Assurance. Significant progress has been made with the transition and £500 million of capital synergies delivered. The integration of Standard Life Assurance into Phoenix will include a consolidation of two Solvency II internal models which is amongst the first in the industry.
The Joint Operating Forum between SLA plc and Phoenix will develop the partnership in existing areas, and identify areas for future growth and partnership, for the benefit of customers and shareholders of each Group. Through the Client Service and Proposition Agreement Phoenix and SLA plc will actively collaborate across a number of areas, including proposition development and distribution.
Our propositions are designed with our customers and clients at the heart. We regularly seek customer feedback on our propositions; this helps prioritise future developments. We actively review and invest in our propositions to ensure they remain competitive and meet expectations.
The Group’s principal risks and uncertainties are detailed in the table below, together with their potential impact, mitigating actions which are in place, links to the Group’s strategic objectives and changes in the risk profile from last year.
Our Customer policies help to ensure that the standards and outcomes we set are implemented consistently across the business. We maintain a strong and open relationship with the FCA and other regulators.
The Group is impacted by significant changes in the regulatory, legislative or political environment
The conduct-focused regulator has a greater focus on customer outcomes. This may continue to challenge existing approaches and/or may result in remediation exercises where the life companies cannot demonstrate that it met the expected customer outcomes in the eyes of the regulator. Changes in legislation such as the implications of Brexit can also impact the Group’s operations or financial position. Political uncertainty or changes in the government could see changes in policy that could impact the industry in which we operate.
We are exposed to the risk of being unable to maintain provision of services in the event of major operational disruption, either within our own organisation or those of our outsourcers. Our Enlarged Group now relies on a wide range of IT systems and also greater use of online functionality to meet customer preferences. This exposes us to the risk of failure of key systems and cyber-attacks. The Group also now provides IT services to SLA plc through the terms of the sale of Standard Life Assurance. Regulators expectations of the speed and effectiveness of firms’ responses to business resilience incidents are increasing.
The Group fails to retain or attract a diverse workforce with the skills needed to deliver its strategy
In times of severe market volatility, the Group may not have sufficient capital or liquid assets to meet its cash flow targets or may suffer a loss in value
The emerging cash flows of the Group may be impacted during periods of severe market turbulence by the need to maintain appropriate levels of regulatory capital. The impact of market turbulence may also result in a material adverse impact on the Group’s capital position, on fees earned on assets held and on customers and client sentiment.
The life companies are exposed to deterioration in the actual or perceived creditworthiness or default of counterparties we hold money, bonds or commercial real estate loans with. This can cause immediate financial loss or a reduction in future profits. An increase in credit spreads (particularly if accompanied by a higher level of actual or expected issuer defaults) could adversely impact the value of the Group’s assets. The Group is also exposed to trading counterparties, such as reinsurers or service providers failing to meet all or part of their obligations.
Counterparty exposures continue to be managed and monitored across the Group. Phoenix continues to increase exposure to illiquid credit assets, such as equity release mortgages, commercial real estate and fund financing. This is accompanied by corresponding enhancements to our control framework and is in line with industry trends.
EMERGING RISKS The Group’s senior management and Board also take emerging risks into account when considering potentially adverse outcomes and appropriate management actions prior to the risk crystallising.
Some of the current emerging risks the Group considers are listed in the table opposite.
VIABILITY STATEMENT In accordance with the provision of section C.2.2 of the 2014 revision of the UK Corporate Governance Code, the Board has completed an assessment of the prospects and viability of the Group over a five-year period to December 2023.
ASSESSMENT PROCESS & KEY ASSUMPTIONS The Group’s prospects are assessed primarily through its strategic and financial planning process, which included a detailed annual review of the Group’s strategy following the acquisition of the Standard Life Assurance businesses. This strategy is outlined within the Strategic Report of this Annual Report and Accounts. The Board fully participates in the annual strategic planning process by means of a Board meeting to review and approve the annual operating plan (‘AOP’).
The Board has determined that the five-year period to December 2023 is an appropriate period for the assessment, this being the period over which the Directors have reasonable confidence and set internal and external targets, and the period covered by the Group’s Board-approved AOP.
The Board has also made certain assumptions when making the assessment and these include the following: • no change in stated dividend policy; • that corporate acquisitions are not relevant, as any acquisition would only be progressed on the basis it meets the Group’s stated criteria; • that whilst the actual impacts of Brexit on the Group are still unknown, the Group has plans in place to ensure it is able to service all policyholders in the event of a hard Brexit. These management actions are reflected in the AOP; and
ASSESSMENT OF VIABILITY In making the viability assessment, the Board has undertaken the following process: • It considered Group prospects, taking into account current position and the principal risks and uncertainties that it is facing as outlined above; • It defined that viability is maintaining the capability to satisfy mandatory liabilities and meet external targets and confirmed this was still appropriate following the acquisition of the Standard Life Assurance businesses; • It reviewed the AOP which considers profits, liquidity, solvency and strategic objectives and the impacts of management actions on the Group. The AOP was finalised in November 2018 and reaffirmed the Group’s strategy; • It completed stress testing to assess viability under severe but plausible scenarios, including two adverse stresses, with no recovery or contingent actions, which are deemed to be representative of the key financial risks to the Group as follows: 1. Market stress – a combined market stress broadly equivalent to a 1 in 10-year event, calibrated to the Phoenix internal model, incorporating a fall in equity, property values and yields, with a widening of credit spreads.
2. Longevity stress – longevity and yield stress broadly equivalent to a 1 in 10year event, which implies a 1.2 year increase in life expectancy for a 65 year old male and 1.0 year increase for a 65 year old female, alongside a fall in yields.
• It completed reverse stress testing for the pre-acquisition Group and the Standard Life Assurance businesses by reference to the Group’s current and expected levels of solvency and liquidity; • It performed Brexit stress testing including additional analysis under a no deal Brexit and considered the implications of a range of Brexit outcomes as regularly monitored and presented to the Board and risk committees; • It considered the principal medium to long term risks facing the Group which have the potential to impact on viability as discussed in the Risk report above; and
• 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 results of the stress testing, including a combination of individual scenarios, as disclosed in the Business Review Section, demonstrated that due to the significant excess capital in the life companies, the Group’s high cash generation and access to additional funding, the Group is able to withstand the impact in each case with regards to meeting all mandatory liabilities as they fall due, and continue to track towards meeting external targets assuming a partial recovery from the stress.
OUR CUSTOMERS 10 million policies with £226 billion of assets under administration. Key products and services include with-profits, unit-linked, non-profit (annuities), non-profit (protection) and workplace pensions.
OUR COLLEAGUES Over 4,000 colleagues based across Europe supporting Phoenix Group, Phoenix Life, Standard Life Assurance and SunLife, and within its operational sites: Wythall, London, Basingstoke, Bristol, Edinburgh, Glasgow, Dublin and Frankfurt.
OUR ENVIRONMENT The Group is committed to managing and reducing its environmental impact and considers the ongoing effects of climate change on its operations.
THE GROUP’S MISSION IS TO IMPROVE OUTCOMES FOR CUSTOMERS, WHILST DELIVERING VALUE FOR SHAREHOLDERS. THE GROUP HAS RESPONSIBILITIES TO A NUMBER OF OTHER STAKEHOLDERS INCLUDING ITS SUPPLIERS, COLLEAGUES, COMMUNITY PARTNERS AND THE ENVIRONMENT. THE MANAGEMENT OF STAKEHOLDER ENGAGEMENT IS THEREFORE CONSIDERED KEY TO LONG-TERM SUCCESS.
OVERVIEW The Group has four areas of strategic focus which support the fulfilment of our mission, including improving customer outcomes, driving value, managing capital and engaging our people. Further detail can be viewed within ‘Our Strategy and Key Performance Indicators’ from page 18.
By continuing to engage with our key stakeholders on a regular basis, the Group is able to balance the needs of all, taking into account different perspectives, whilst delivering against the Group’s strategic priorities. Policies are in place to provide a clear risk and governance framework, as outlined in more detail for each stakeholder group.
Go online for the full Corporate and Social Responsibility Report www.thephoenixgroup.com/CRreport2018
OUR CUSTOMERS The Group recognises the responsibility it has to all of its customers, as both custodian of their financial assets and supplier of their pension needs or life cover. Treating Customers Fairly is at the heart of the business, and we aim to provide a responsible, fair and helpful service.
Read more about key customer engagement activities undertaken during the year on P18 and 20
The Group’s Customer Treatment Risk policy covers risks arising from the design or management of products, or from the failure to meet or exceed reasonable customer expectations, taking account of regulatory requirements. Customer treatment risks are aligned to the areas of focus in the Phoenix Group Customer Strategy.
POLICYHOLDERS HAVE DILIGENTLY SAVED FOR MANY YEARS IN THEIR POLICIES, AND IT IS UNFORTUNATE THAT THE BENEFITS MAY HAVE BEEN LEFT UNCLAIMED. WE ARE DELIGHTED TO HAVE BEEN ABLE TO REPATRIATE SO MANY OF THESE LOST POLICIES WITH THEIR RIGHTFUL OWNERS.”
Within Standard Life Assurance improvements for workplace members and clients included extended opening hours, implementation of a new voice recognition system, a new online registration process and amendments to the investment switching journey online for trust schemes. Face-to-face retirement roadshows were held nationwide, reaching c. 2,000 individuals in 19 locations. Following the roadshow success, retirement webinars were launched.
Within Standard Life Assurance over 11,000 customers moved into drawdown in the year. Digital was the channel of choice for the majority of these customers, followed by telephony service. Over 3 million logins were recorded across 2018, with the 24/7 mobile app being the easiest way for customers to interact. For customers in non-advised Active Money Pension Plan drawdowns, the Group developed an online retirement review to help customers assess their investment choices based on objectives.
CUSTOMER COMPLAINTS The Group acknowledges that mistakes can happen, but where they do it aims to put things right as soon as it can. A robust oversight model is in place to continually monitor complaint activity including those complaints that are referred to the independent services of the Financial Ombudsman Service or the Pensions Ombudsman Service. Best practice is shared with colleagues across the industry to improve complaint-handling services. Work is carried out with internal teams to ensure that causes of complaints are addressed in a timely manner. A significant proportion of complaints are resolved across the Group, in less than three days, which is a key performance indicator for the complaints team and results in a better experience for customers.
The Group introduced a proactive campaign to ensure the customer or their estate benefited. They enlisted the help of external tracing companies and obtained copies of death certificates, probate and wills in the process. Phoenix Life has also recently implemented an enhanced ‘gone-away’ process across its outsource partners to allow the Group to re-engage and communicate with more Phoenix Life customers.
LONG-TERM SAVINGS COMMITTEE APPOINTMENT The Association of British Insurers (‘ABI’) has appointed Susan McInnes, CEO of Standard Life Assurance Limited and Director of Open Business as chair to its Long-term Savings Committee. In addition she has taken a seat on the ABI Board and previously held the role of chair to the Long-Standing Customers Committee. The Long-term Savings Committee oversees the direction of all the ABI policy work in relation to pension savings and retirement. Current priorities include the delivery of the pension dashboard and supporting customers to make the most of their new choices at retirement.
The Group’s key objective is to be able to recognise vulnerability and then be equipped to take the appropriate action to address it. This is being achieved by having frameworks and practical guidance in place to support the strategy, whilst ensuring there is an appropriate awareness and positive culture instilled throughout the Group in respect of vulnerability.
The Group’s Modern Slavery and Human Trafficking Statement is available at www.thephoenixgroup.com/mss
The Group’s Anti-Bribery Statement is available on the Group’s website at www.thephoenixgroup.com/abs
Act 2015. The statement details the policies Phoenix has in place and the ongoing actions that will be taken to continue to support the combating of modern slavery and human trafficking in supply chains.
The Group has a zero tolerance towards bribery and corruption in all its forms and adheres to the 2010 Bribery Act. Service providers are advised of and engaged in the zero tolerance approach to bribery and corruption and are expected to comply with Phoenix’s minimum control standards.
Phoenix is organised so that the Commercial Partnerships team manages a decentralised procurement model for low value/low volume spend, to enable the business to operate flexibly but within the controls of the Sourcing and Procurement policy. This has a robust oversight and governance model, administered and managed by the Commercial Partnerships team.
MODERN SLAVERY Phoenix Group takes active steps to ensure its supply chain is not engaging in any form of modern slavery or human trafficking. In March 2018 a statement was published on the Group website pursuant to Section 54, Part 6 of the Modern Slavery and Human Trafficking c. 1,000 SUPPLIERS
LEARNING AND DEVELOPMENT The Talent and Development team designs and delivers a varied programme of learning and development activities including leadership development, talent programmes, skills training, online learning, coaching and mentoring.
As part of the Group’s HR processes, there is an established succession plan which tracks internal succession across all material roles and enables appropriate assessment of skills gaps.
The plan identifies talent across the broader organisation. Growing talent continues to deliver the Group’s most senior appointments and talent programmes in Accounting, Actuarial and Change help to identify future leaders.
The Professional Women’s Network launched a mentoring scheme with Moving Ahead which is available to colleagues across the Group and at any level. Over 100 mentoring pairs are currently working together, breaking down silos and developing a culture of mentoring, learning and knowledge sharing.
In addition, the Group participated for a second year in the Actuarial Mentoring Programme, providing support and guidance to newly qualified female actuaries.
As part of the Early Careers proposition, Standard Life Assurance currently has 24 graduates who form part of the Graduate Development Programme based in Edinburgh, in cohorts from 2017 and 2018. In addition 10 mentors are actively engaged in providing monthly mentoring sessions to young people across the Edinburgh area, through the Career Ready development programme.
The Group’s Human Resources (‘HR’) policy defines people risk, which, if unmanaged, could result in a reduction in earnings or value, through financial or reputational loss.
The minimum control standards in place enable effective management around the attraction, recruitment, development and engagement of colleagues, whilst ensuring compliance with any legislation and external regulatory requirements.
The Group operates a Whistleblowing policy, prompting colleagues to disclose information where they believe wrongdoing, malpractice or risk exists across any of Phoenix’s operations. Colleagues are encouraged to speak up about matters that concern them, with the understanding that confidentiality will be maintained.
OVER HALF OF THE PHOENIX GROUP AND PHOENIX LIFE POPULATION ARE VOLUNTARILY PARTICIPATING IN ONE OR MORE OF THE SHARE-SAVE OR SHARE INCENTIVE PLANS, BENEFITING IN THE GROUP’S INCREASED SHARE PERFORMANCE.”
CULTURAL SURVEY In the absence of an engagement survey for 2018, the Group issued a cultural survey to colleagues across the Enlarged Group. A series of questions were asked concerning what individuals would like to see in the future. This insight will help the Group shape its values and understand more about what is required to create a high-performing organisation.
EMPLOYEE NETWORKS The Group values the power of its employee voice. Various networks are in operation across the Enlarged Group, with a common goal of collaboration. Work has commenced to merge and replicate some of the networks, creating a common focus and support network across sites.
The ‘Engagement Forum’ is the longest standing network, which welcomes members from all functions and levels of seniority.
Balance – which incorporates the former ‘Professional Women’s Network’ aims to raise awareness of gender diversity, promoting an inclusive environment where everyone can thrive.
The ‘Armed Forces Network’ supports the recruitment of Armed Forces personnel into the business. In October 2018, the Armed Forces Covenant was signed by the Group.
A new mental health network, Mind Matters was launched initially within Standard Life Assurance. Its purpose is to generate healthy conversation in the workplace around mental health issues. This network will be rolled out to other colleagues in 2019.
All Group employees participate in an Annual Incentive Plan and are able to become shareholders in the Company. Over half of the Phoenix Group and Phoenix Life population are voluntarily participating in one or more of the share-save or share incentive plans, benefiting in the Group’s increased share performance.
Building on the success of the previous year’s wellbeing partnership with Living Streets charity, the Group joined forces to offer additional cultural led-walks for colleagues in London and Basingstoke. The Group’s efforts were featured in the City of London’s Active Travel – Best Practice Guide for 2018. Launched in National Walking Month 2018, Wythall colleagues were trained to deliver weekly walks targeted at individuals aged over 65.
The Group was named as National and Regional Winner in the Chamber Business Awards 2018 for ‘Workplace Wellbeing’ and finalists in Herefordshire and Worcestershire Chamber of Commerce annual awards.
In addition all colleagues are required to complete annual computer-based training in Business Ethics and Ethical Conduct.
The Group had three reportable accidents during 2018 which were reported to the Health and Safety Executive under the Reporting of Incidents, Disease and Dangerous Occurrence Regulations (‘RIDDOR’).
All colleagues are required to complete annual computer-based Health and Safety training.
It is recognised that the true value of a corporate charity partnership allows the Company and employees to explore opportunities beyond just monetary value, often leaving a lasting legacy with those involved. Now into its fifth year of the six-year partnership with Midlands Air Ambulance Charity and London’s Air Ambulance Charity, the Group is continuing to use this collaboration to engage colleagues in fundraising, skills-based volunteering and events.
The Group has donated in excess of £770,000 between these two air ambulance charities since 2014. A festive fundraising ‘Reindeer Run’ through the streets of London, raised over £21,000 (including matching) for the combined charities.
Through the staff-matched fundraising scheme, individuals are able to participate in charitable activity in their own time, and request matching of the amount raised. This also includes an element of ‘payment in lieu of volunteering’ whereby colleagues may regularly support UK-registered charities outside of business hours. Over £52,000 was donated across the year.
COMMUNITY WELLBEING The Group extended its focus on wellbeing to members of the Wythall community, where Phoenix is considered one of the largest employers in the area. A unique initiative named ‘Wythall Walking Friends’ was launched in conjunction with Living Streets charity to help tackle social isolation in individuals aged over 65, through the delivery of regular community led-walks. Volunteers were trained to lead the walks, helping to reduce loneliness, encourage new friendship groups and increase the exercise potential within the group, thus helping to reduce the risk of depression and dementia.
SunLife commenced a two-year partnership at the start of the year with Alive Activities Limited, enriching the lives of older people in care and providing training resources for carers. Colleagues at the Bristol office exceeded their fundraising target for the year by raising over £6,000 for the charity.
To welcome Standard Life Assurance colleagues to the Phoenix family, a charity vote was held onsite in September 2018. St Columba’s Hospice in Edinburgh received the most votes and was awarded a community donation of £10,000, and
Meeting room facilities at the Wythall site were freely available to Acorns Children’s Charity and Coppice School who provided times-table training to 39 school representatives, benefiting the education of over 11,000 pupils within the Midlands area. In addition the grounds have been loaned to Wythall Transport Museum and Kings Norton Marching Band.
The Group signed the Literacy Pledge for 2018, helping to raise literacy levels and increase social mobility within the UK. Volunteers currently support Ark Kings Academy in Birmingham and St Joseph’s Primary School in London with reading programmes. In Dublin, a volunteering in schools programme, arranged in conjunction with Junior Achievement Ireland, works to keep children in education, therefore improving employment and life outcomes. Whilst this programme commenced before the Standard Life Assurance acquisition, the year’s achievements included motivating 412 students across 15 schools. Four Career Ready interns were offered a paid placement, enabling valuable work experience and the Nigel Monaghan Apprenticeship for school leavers was launched, providing a six-month paid work experience placement.
The Group has supported Citizens Advice Solihull Borough with the creation of a new charity shop in Chelmsley Wood, Birmingham. The premises were equipped with furniture donations and wares from the Group.
Volunteers provide weekly financial literacy and reading skills support to pupils. The music department was the focus for this year, inspiring the youth in creative arts. Donations from the Group included staging and lighting towers, branded t-shirts and end-of-year concert support. The school was awarded a Gold Standard by the Incorporated Society of Musicians, recognising the high level of uptake and attainment in GCSE music, and commitment to the subject. The school’s choir ‘Phoenix Singers’ performed to colleagues onsite at Wythall during their festive lunch celebrations.
OUR ENVIRONMENT Our Corporate Responsibility programme supports our commitment to monitoring and reducing our environmental footprint. Having awareness of the potential impacts of climate change is of global importance, however is not considered a material risk to the working practices of the Group.
With technological advances in Information Technology and greater availability to online content the Group’s print and paper consumption is moving in the right direction.
Colleagues across the Enlarged Group were given a re-usable cup to mark the start of a new chapter in Phoenix Group’s journey with Standard Life Assurance. At the Wythall site, colleagues have reduced one-use paper-cup consumption by an estimated 30% since go live. Plans are underway to move to a more sustainable biodegradable cup in 2019, with a view to eliminating other forms of one-use plastic onsite.
RESPONSIBLE INVESTMENT The Group has completed several green investment deals across the year, signifying the importance it places on the wider environment. This signified a new area of investment for the Group, helping to diversify the overall investment portfolio.
This volunteering encouraged healthy exercise whilst taking part in environmentallyfocused activities which will benefit future generations. At one of the Edinburgh sites the roof space is home to a colony of bees. Colleagues are able to meet the beekeeper and attend awareness sessions.
of this. Over 2018, Phoenix has invested in a number of ESG-related opportunities, including renewable energy and green initiatives.
• Expanding the Group’s programme of qualitative and quantitative scenario analysis to take account of the potential impact of climate change scenarios; and to ensure this is appropriately reflected in the Group’s risk management framework.
ENVIRONMENTAL REPORTING This section includes an update on the Group’s annual greenhouse gas emissions. Emissions disclosed relate to facilities and activities where the Group has operational control within the UK.
As of September 2018, the vast majority of Standard Life business (part of Standard Life Aberdeen Plc) was sold to Phoenix Group. As a result, two operational properties were acquired – Standard Life House and Standard Life Data Centre. These two properties have therefore been included in the Group’s carbon footprint (absolute GHG emissions) for the 2018 calendar year. However, as these two properties were not owned for the whole two-year period that is used for intensity measurement calculations, they have been excluded from these metrics to avoid skewed intensity results.
The emissions reported are based on the main requirements of the ISO14064 Part 1 and the GHG Protocol Corporate Standard (revised edition). Data was gathered at meter level to compile the carbon footprint. The Government’s 2018
Conversion Factors for GHG Company Reporting have been used to convert energy data into carbon dioxide equivalent (CO2e) emissions.
The Group reports Scope 2 emissions using the GHG Protocol dual-reporting methodology, stating two figures to reflect the GHG emissions from purchased electricity, using both: • A location-based method that reflects the average emissions intensity of the UK electricity grids from which consumption is drawn; and
Combustion of fuel and operation of facilities (Scope 1) 1,402 1,402 1,203
Electricity, heat, steam and cooling purchased for own use (Scope 2) 2,990 3,042 2,754
Emissions reported above on a per floor area intensity 63 kg CO2e/m2 64 kg CO2e/m2
Emissions reported above on a per full-time equivalent employee (FTE) intensity 3.8 tonnes CO2e/FTE
MEETINGS WITH INSTITUTIONAL EQUITY INVESTORS Throughout the year members of the Executive Committee and the Investor Relations department held meetings with investors to provide updates on the Group’s strategy and operations. This involved 20 shareholder roadshow days and a total of 246 meetings with existing and prospective equity investors.
Phoenix held a Capital Markets Day on 29 November 2018 in London which was attended by 120 investors and analysts and provided an update on the Standard Life Assurance acquisition. The event also provided attendees with the opportunity to meet with management.
CONFERENCES Conferences enable the Group to meet with a significant number of investors and at the same time are important platforms for presenting on Phoenix’s investment proposition. This year, Phoenix attended nine conferences in the UK, including conferences organised by ABN AMRO, Bank of America Merrill Lynch, Deutsche Bank, J.P. Morgan Cazenove, Investec, Lloyds, Morgan Stanley and Natixis.
SHAREHOLDERS I would like to start my introduction to this Governance section by expressing my pleasure and gratitude for the tremendous support from our shareholders in 2018, both through the 96% take-up in July 2018 of our £1bn rights issue to finance the acquisition of Standard Life Assurance and through their strong support of all proposals at the three shareholder meetings we held in 2018 as follows: • May 2018 Annual General Meeting – All 21 resolutions passed with a majority of at least 93% of votes cast�
• June 2018 General Meeting to approve the acquisition of Standard Life Assurance businesses, the associated £1bn rights issue and the issue of shares to Standard Life Aberdeen plc (‘SLA’) as part consideration for the acquisition – All 7 resolutions passed with a majority of at least 91% of votes cast (including 99% for the resolution approving the acquisition)�
Our three general meetings in 2018 were held in London� Following the acquisition of Standard Life Assurance, our 2019 Annual General Meeting will be held on 2 May 2019 in Edinburgh, which is now our largest operational centre�
The UK listing of Phoenix Group Holdings plc as a UK-registered company in place of our former Cayman Islands registration was the final stage of regularising our legacy residency and incorporation status and followed the movement of central management and control for Phoenix Group Holdings from Jersey to the UK in January 2018�
The relatively high amount of recent Board recruitment has enabled us to focus on the skills required for a growing business and the Group’s M&A agenda, which in 2018 delivered the successful acquisition of Standard Life Assurance� Apart from my own appointment in 2018, the new appointees to the Board in 2018 were nominees from SLA, our strategic partner, exercising their rights in line with their c20% shareholding to appoint two directors to our Board� The November 2018 Board evaluation concluded that the Board had a strong and appropriate skillset which had been enhanced by our two new appointees from SLA, Campbell Fleming, who brings asset management skills and expertise, and Barry O’Dwyer, who brings experience as a CEO of a large open life assurance business and the associated customer-focused skills�
I am pleased that several members of our Board have current or recent FTSE 100 financial services Board experience – Alastair Barbour (our Senior Independent Director and Audit Committee Chair), John Pollock (our Risk Committee Chair), Barry O’Dwyer, Karen Green and Belinda Richards as well as myself�
UK CORPORATE GOVERNANCE CODE As detailed in the Corporate Governance Report on pages 65 to 75, we complied in 2018 with all the principles and provisions of the UK Corporate Governance Code (‘the Code’), such that in the last six years we have had only one matter of noncompliance with the Code�
The following sections provide more detail on our Board of Directors, Executive Management team, operation of governance and remuneration practices as follows: • Board and Committee Structure
SINCE JOINING THE PHOENIX BOARD AS CHAIRMAN, I HAVE BEEN IMPRESSED BY THE ATTENTION FROM THE BOARD AND MANAGEMENT ON ROBUST GOVERNANCE, WITH THE AIMS OF BOTH PROTECTING OUR SHAREHOLDERS AND CUSTOMERS AND ENHANCING OUR PERFORMANCE.”
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�
EXPERIENCE Nicholas Lyons was appointed Chairman of the board of directors of Phoenix Group Holdings and Chairman of the Nomination Committee of Phoenix Group Holdings with effect from 31 October 2018� Nicholas Lyons joined JP Morgan in 1982, where he worked for 12 years in debt and equity capital markets and mergers and acquisitions� He spent eight years at Lehman Brothers, as a Managing Director in their European financial institutions group, ending his executive career in 2003 as Global Co-Head of Recruitment� Mr Lyons has held a number of positions on the boards of other financial institutions including the Pension Insurance Corporation, where he was the Senior Independent Director from 2016 until July 2018� He also held positions on the boards of the Temple Bar Investment Trust, Catlin Group Limited, Friends Life Group Limited and Friends Life Holdings plc� Mr Lyons has recently joined the Board of the British United Provident Association Limited (BUPA) and is also Chairman of Clipstone Industrial REIT plc� He is an Alderman in the City of London Corporation�
EXPERIENCE Barry O’Dwyer is the Head of UK for Standard Life Aberdeen� Prior to the sale of Standard Life Assurance to Phoenix, he was the CEO of Standard Life Aberdeen’s Pensions & Savings businesses� Mr O’Dwyer initially worked at Standard Life between 1988 and 2008 and held several senior roles at Standard Life after re-joining the company in 2013� A Fellow of the Institute of Actuaries, Mr O’Dwyer has 30 years of experience in the insurance industry, in a career which has also included senior roles at Prudential and HBOS�
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 insurance 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 and Liontrust Asset Management plc (both 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 Specialist Funds Segment of the London Stock Exchange and of The Bank of N� T� Butterfield & Son Limited, a group listed on the New York Stock Exchange and in Bermuda� Mr Barbour was appointed Senior Non-Executive Independent Director on 2 May 2018�
KAREN GREEN INDEPENDENT NON-EXECUTIVE DIRECTOR COMMITTEE MEMBERSHIP Audit Committee, Remuneration Committee
NICHOLAS SHOTT INDEPENDENT NON-EXECUTIVE DIRECTOR COMMITTEE MEMBERSHIP Nomination Committee, Remuneration Committee
JAMES MCCONVILLE GROUP FINANCE DIRECTOR AND GROUP DIRECTOR, SCOTLAND APPOINTED TO THE BOARD
EXPERIENCE Wendy Mayall has over 30 years of asset management experience, including as Group Chief Investment Officer and later consultant at Liverpool Victoria from 2012 to 2015, having previously been Chief Investment Officer for Unilever’s UK pension fund from 1996 to 2011 and holding management responsibility for Unilever’s pension funds globally� From 2006 to 2009, Ms Mayall was the Chair of the Investment Committee of the Mineworkers Pension Scheme, a British government appointment to one of the largest government backed pension schemes in the UK� Ms Mayall is a Non-Executive Director of Old Mutual Wealth Oversight Council� She is also the Senior Independent Director and Audit Committee Chair of Fidelity Investments Life Insurance Company and Chair of the Funding Committee for TPT Retirement Solutions�
JOHN POLLOCK INDEPENDENT NON-EXECUTIVE DIRECTOR COMMITTEE MEMBERSHIP Risk Committee (Chairman), Audit Committee
EXPERIENCE John Pollock had a career in life assurance at the Legal & General Group from 1980 to 2015, including as an Executive Director of Legal & General Group plc from 2003 to 2015� Mr Pollock held numerous senior roles, gaining wide strategic and technical experience, finally as Chief Executive Officer of LGAS (L&G Assurance Society), one of Legal and Generals’ three primary business units� Prior to Mr Pollock’s retirement from Legal and General in 2015, he held positions as Deputy Chair of the FCA Practitioner Panel, Chairman of investment platform Cofunds, and as a NonExecutive Director of the Cala Homes Group�
KORY SORENSON INDEPENDENT NON-EXECUTIVE DIRECTOR COMMITTEE MEMBERSHIP Remuneration Committee (Chair), Nomination Committee
CLIVE BANNISTER GROUP CHIEF EXECUTIVE OFFICER ROLES AND RESPONSIBILITIES • Leads the development of the Group’s strategy for agreement by the Board; • Leads and directs the Group’s businesses in delivery of the Group’s strategy and business plan; • Leads the Group to safeguard returns for policyholders and grow shareholder value; • Embeds a risk-conscious Group culture which recognises policyholder obligations in terms of service and security; and
TONY KASSIMIOTIS GROUP CHIEF OPERATING OFFICER ROLES AND RESPONSIBILITIES • Leads development and delivery of the
Group’s operating platforms in line with regulatory requirements, the Risk Universe and strategy; • Ensures the delivery of the Group’s information technology strategy; • Leads the management of the Group’s long-term outsourcing arrangements; and
• Ensures that the Group’s procurement activities and shared services are efficient and effective�
JAMES MCCONVILLE GROUP FINANCE DIRECTOR AND GROUP DIRECTOR, SCOTLAND ROLES AND RESPONSIBILITIES • Develops and delivers the Group’s financial business plan in line with strategy; • Ensures the Group’s finances and capital are managed and controlled; • Develops and delivers the Group’s debt capital strategy and other treasury matters; • Ensures the Group has effective processes in place to enable all reporting obligations to be met; • Supports the Group Chief Executive Officer in managing the Group’s key external stakeholders; and
SUSAN MCINNES CHIEF EXECUTIVE, STANDARD LIFE ASSURANCE LIMITED, AND GROUP DIRECTOR, OPEN BUSINESS ROLES AND RESPONSIBILITIES • Leads development and delivery of the Standard Life business strategy including ensuring customer proposition is evolved to ensure it continues to meet the market need; • Focuses on a business model which ensures good outcomes for customers, shareholders and all other stakeholders; and
• Ensures that Standard Life deploys capital efficiently and effectively, with due regard to regulatory requirements, the Risk Universe and strategy�
JOHN MCGUIGAN GROUP HEAD OF CUSTOMER ROLES AND RESPONSIBILITIES • Leads the Group’s Customer Function to drive operational and experience delivery for the Group’s customer base; • Sets standards and policies for customer management and interaction; and
JONATHAN PEARS CHIEF RISK OFFICER ROLES AND RESPONSIBILITIES • Leads the Group’s risk management function, embracing changes in best practice and regulation including Solvency II; • Oversees and manages the Group’s relationship with the FCA and PRA; and
RAKESH THAKRAR DEPUTY GROUP FINANCE DIRECTOR ROLES AND RESPONSIBILITIES • Leads on the Group’s Annual Report and
Officer in the formulation of the strategy for the Group; • Leads implementation of the Group’s strategy as regards any potential acquisition or disposal; • Ensures capital is managed efficiently across the Group; • Manages the Group’s solvency position; • Leads the development of the Group’s investment strategy; and
• Identifies and delivers opportunities to enhance shareholder value across the Group�
THE CHAIRMAN, GROUP CHIEF EXECUTIVE OFFICER AND SENIOR INDEPENDENT DIRECTOR Nicholas Lyons is Chairman of the Board of Directors of the Company, having joined the Board as Chairman on 31 October 2018� There is a division of responsibility, approved by the Board, between the Chairman, who is responsible for the leadership and effective operation of the Board and the Group Chief Executive Officer, Clive Bannister, who is responsible to the Board for the overall management and operation of the Group�
BOARD SUCCESSION PLANNING The Board undertakes regular reviews of executive and non-executive succession planning, as it did in 2018, to ensure that robust plans are in place� Succession planning for executive directors and other senior management takes consideration of both external and internal markets� The Board concluded in its November 2018 Board Evaluation Review that a period of Board stability would now be desirable, following the successful succession planning programme resulting in regular changes in the Board’s composition over the last three years, during which eight non-executive directors were appointed�
THE BOARD IS COMMITTED TO HIGH STANDARDS OF CORPORATE GOVERNANCE AND THE GROUP’S CORPORATE GOVERNANCE POLICY IS ALIGNED TO COMPLIANCE WITH THE UK CORPORATE GOVERNANCE CODE (‘THE CODE’) WHICH SETS STANDARDS OF GOOD PRACTICE FOR UK LISTED COMPANIES. IT IS THE BOARD’S VIEW THAT THE COMPANY HAS BEEN FULLY COMPLIANT DURING 2018 WITH THE PRINCIPLES AND PROVISIONS SET DOWN IN THE CODE.
To ensure that the Directors maintain up-to-date skills and knowledge of the Group, all Directors receive regular presentations on different aspects of the Group’s business and on financial, legal and regulatory issues� All Directors receive a tailored induction on joining the Board in accordance with a process approved by the Board� In 2018 the new Chairman, Nicholas Lyons and SLA nominated Directors, Campbell Fleming and Barry O’Dwyer, undertook a comprehensive induction, including detailed strategic and operational briefings and information, before and following their appointments� Comments on their induction process are shown below�
Prior to the acquisition of Standard Life Assurance, I was the CEO of that company and so I am very familiar with the newest part of the Phoenix Group� My induction hence focused on helping me to understand the wider Group and the Phoenix Life company in Wythall� My meetings involved discussing the Group’s strategy and its risk management framework, as well as seeing how the business operates day-to-day�
Since her appointment in 2017, she has attended all other Board meetings, so has attended twelve out of fifteen to date�
The Board met twelve times during 2018 and is scheduled to meet seven times in 2019 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 2018�
Notes: 1 Henry Staunton resigned from the Board on 31 October 2018� 2 Nicholas Lyons was appointed to the Board on 31 October 2018� 3 Ian Cormack resigned from the Board on 2 May 2018� 4 Campbell Fleming and Barry O’Dwyer were appointed to the Board on 31 August 2018� 5 In addition, the following attended meetings of the specially constituted Chair Selection Committee: Kory Sorenson (Chair) – 3 meetings; Karen Green – 3 meetings; Wendy Mayall – 3 meetings; John Pollock – 2 meetings; Belinda Richards – 2 meetings� 6 All three Board meetings missed by Alastair Barbour were ad-hoc meetings called at short notice� His Board attendance record in the prior year (2017) was 100%�
Two of the three Board meetings missed by Belinda Richards were ad-hoc meetings called at short notice� Since her appointment in 2017, she has attended all other Board meetings, so has attended twelve out of fifteen to date�
• Strategy and planning 30% Strategic and operational planning, consideration of corporate transactions
THE BOARD HAS DELEGATED SPECIFIC RESPONSIBILITIES TO FOUR STANDING COMMITTEES OF THE BOARD. THE TERMS OF REFERENCE OF THE COMMITTEES CAN BE FOUND ON THE COMPANY’S WEBSITE.
• Provision of advice to the Board to enable the Board to report on whether the Annual Report and Accounts, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Group’s performance, business model and strategy�
• Responsible for making recommendations to the Board on the appointment of the external auditors and their terms of engagement including approval of external auditor fees and nonaudit services and for reviewing the performance, objectivity and independence of the external auditors�
• Oversight of activities of subsidiary audit committees through receipt and review of minutes, discussions between the Chairs of the Audit Committee and subsidiary audit committees, and the Audit Committee Chair’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 (and from 1 September 2018, the Standard Life Audit Committee papers)� This oversight has been enhanced further through the attendance at the Audit Committee, on at least an annual basis, by the Chair of the Phoenix Life and Standard Life Audit Committee�
AUDIT COMMITTEE The composition of the Audit Committee is in accordance with the requirements of the Code and also with DTR 7.1.1AR in that all four members are independent Non-Executive Directors, that at least one member of the Committee has recent and relevant financial experience and the members of the Committee as a whole have competence relevant to the sector in which the Company is operating.
AUDIT COMMITTEE’S PRINCIPAL ACTIVITIES DURING 2018 External reporting and controls • Reviewed the Company’s 2017
Annual Report and Accounts and 2018 Interim Financial Statements, recommending their approval to the Board, as well as related disclosures and the financial reporting process, supported by reports from management and the external auditors�
• Considered and addressed a number of significant matters in relation to the IFRS consolidated financial statements for 2017 (annual), 2018 (interim) and 2018 (annual) as summarised in the table on page 71� These matters were considered by the Audit Committee to be areas subject to the most significant levels of judgement or estimation, and identified with regard to the significant risks assessed by the Group’s external auditors as set out in their audit opinion on pages 112 to 120�
• Reviewed the Line 1 risk and controls report from management, the Line 2 internal control assessment from Group Risk, and the annual Line 3 internal control environment opinion report (and the half year update) prior to its consideration by the Board and received reports regarding consequential actions; and received a dedicated briefing on acquisition accounting and continued consideration of the future impact of IFRS17�
External audit • Undertook a review of the effectiveness, engagement and remuneration of the current external auditors� This culminated in the re-appointment of Ernst & Young LLP (‘EY’), which was approved by the Board and subsequently approved by shareholders at the May 2018 AGM – see ‘Assessment of the effectiveness of the external audit process’ and ‘Auditor’s Appointment’ on page 70�
Audit committee’s performance • The Committee’s performance was reviewed by the Board in November 2018 as part of its overall Board Evaluation Review�
General • Reviewed arrangements for whistleblowing (and whistleblowing activity) should an employee wish to raise concerns, in confidence, about any possible improprieties; and approved an updated whistleblowing policy which complied with the FCA and PRA’s whistleblowing rules and the appointment of the Phoenix Life Audit Committee Chair as Whistleblowing Champion under the Senior Insurance Managers Regime�
AUDITOR’S INDEPENDENCE AND EXTERNAL AUDITOR POLICY The Company has an external auditor policy which requires the Company and the external auditors to take measures to safeguard the objectivity and independence of the external auditors� These measures include a prohibition regarding non-audit services in respect of specific areas, such as secondments to management positions, or those which could create a conflict or perceived conflict� It also includes details of the procedures for the rotation of the external engagement partner�
In 2018, total fees of £12�2 million were paid to EY� Of this amount £7�2 million related to statutory audit fees of the parent and its subsidiaries, with a further £0�9 million incurred in relation to services provided pursuant to legal or regulatory requirements�
The remaining fees of £4�1 million are classified as non-audit services under the EU Directive and Regulations, and give rise to a non-audit to audit fee ratio of 66% in 2018 within the limits prescribed in the Group’s policy�
In relation to their appointment as auditors of the Standard Life Assurance entities, the Committee reviewed the independence of EY in accordance with the requirements of the Financial Reporting Committee’s Ethical Standards on independence (“the Ethical Standards”)� This included ensuring that any material business relationships between EY and the acquired entities and any prohibited professional services provided by EY to those entities, were terminated within a period of three months from completion of the acquisition as permitted under the Ethical Standards�
The Audit Committee is satisfied that the non-audit services performed during 2018 have not impaired the independence of EY in its role as external auditor� Further information on non-audit fees is provided in Auditor’s Remuneration in Notes to the IFRS Consolidated Financial Statements on page 139�
AUDITOR’S APPOINTMENT In accordance with the requirements of The Statutory Audit Services for Large Companies Market Investigation (Mandatory Use of Competitive Tender Processes and Audit Committee Responsibilities) Order 2014, the Audit Committee undertook a competitive audit tender in 2016 to take effect for the 2017 statutory audit, which it considered to be in the best interests of its shareholders in light of the length of association with the current auditors�
The Committee also reviewed the appointment of EY as auditor to Standard Life Assurance Limited and its subsidiaries in 2018 following the acquisition of those entities by the Group�
• Pension assumptions for use in the IAS 19 Employee Benefits valuations were reviewed and approved by the Audit Committee prior to the finalisation of the valuation reports�
• The Audit Committee received and considered detailed written and verbal reporting from the external auditors setting out their observations and conclusions in respect of the assumptions, methodologies and actuarial models�
Acquisition Accounting • The Audit Committee considered the impact of the acquisition of the Standard Life Assurance entities on the Group consolidated IFRS financial statements� This has included consideration of the adoption of Group accounting policies and methodologies by the acquired entities�
• Management presented papers detailing the basis of fair value adjustments made to the acquisition balance sheets including the valuation of tangible net assets, the valuation of intangibles including the Acquired Value of In-Force business and the gain on bargain purchase� The key methodologies and assumptions applied in determining such adjustments were reviewed and approved by the Audit Committee�
• The Audit Committee considered and confirmed the appropriateness of the results of annual impairment testing carried out in respect of goodwill balances and reviews for indicators of impairment performed in respect of finite life intangibles�
Operating Profit • 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�
• The Audit Committee considered an analysis of the processes and conclusions in support of management’s conclusions that the Annual Report and Accounts are fair, balanced and understandable� As part of the year-end procedures, the Audit Committee discussed with management and EY the review processes that operated over the production of the Annual report and Accounts�
Going concern analysis • A comprehensive going concern assessment was undertaken by the Audit Committee for the 2018 year-end and 2018 interim reporting periods, based on an assessment by management of the Group’s liquidity for the going concern review period together with forecasts and a stress and sensitivity analysis� The analysis also confirmed that all regulatory and working capital requirements would be met under the base case and adverse stress scenarios throughout the going concern review period�
• The Committee receives frequent reporting from the Chief Risk Officer and the Group Risk function on consolidated risk matters affecting the Group to including risk profile assessments and emerging risks�
RISK COMMITTEE The role of the Risk Committee is to advise the Board on risk appetite and tolerance in setting the future strategy, taking account of the Board’s overall degree of risk aversion, the current financial situation of the Group and the Group’s capacity to manage and control risks within the agreed strategy. It advises the Board on all high-level risk matters.
The performance of the Committee during 2018 was assessed as part of both an overall internal annual Board effectiveness review and a Committee-specific effectiveness review� The conclusions demonstrate that the Committee continues to operate effectively�
Details of the Risk Management Framework, for which the Risk Committee has oversight, are provided in the Risk Management section on pages 39 to 46�
• Reviewed the Group’s risk profile, monitoring it against the risk categories of Market, Insurance, Credit, Financial Soundness, Customer and Operational with particular attention to risk appetite, risk trends, risk concentrations, provisions, experience against budget and key performance indicators for risk as well as contingency planning�
• Informed the Remuneration Committee regarding the management of the Group’s material risks to support their consideration of executive’s Annual Incentive Plan rewards�
• Considered a Line 2 review of the 2019 Annual Operating Plan�
The Board (and its subsidiary company boards) monitor internal controls on a continual basis, in particular through the Audit and Risk Committees, which draw upon input from all three lines of defence� There is an ongoing process for identifying, evaluating and managing the significant risks faced by the Group, which has been in place throughout the period covered by this report and up to the date of approval of the Annual Report and Accounts for 2018, in accordance with the ‘Guidance on Risk Management, Internal Control and Related Financial and Business Reporting’ published by the Financial Reporting Council� The assessment for 2018 was presented to the Board, following review by both Audit and Risk Committees, on 4 March 2019� Where any significant weaknesses were identified, corrective actions have been taken, or are being taken and monitored by both the business and the Committees accordingly�
This process was used for the appointment of the new Chairman, Nicholas Lyons, in 2018� The search consultancy used in 2018 for Director appointments was Russell Reynolds which has no other connection with the Company�
NOMINATION COMMITTEE’S PRINCIPAL ACTIVITIES DURING 2018 • As the Chair Selection Committee, delivered a recommendation to the Board for the appointment of Nicholas Lyons as Chairman following a comprehensive search process led by the Chair Selection Committee with Russell Reynolds search consultancy�
• Delivered a recommendation to the Board for Alastair Barbour to succeed Ian Cormack as Senior Independent Director�
• Reviewed progress updates on Diversity and Inclusion, supporting initiatives being undertaken to accelerate and enhance management diversity�
NOMINATION COMMITTEE The composition of the Nomination Committee is in accordance with the requirements of the Code that a majority of its members should be independent Non-Executive Directors. The Nomination Committee is responsible for considering the size, composition and balance of the Board; the retirement and appointment of Directors; succession planning for the Board and senior management; and making recommendations to the Board on these matters.
Note: There were no changes to the composition of the Committee during 2018�
The Remuneration Committee is responsible for making recommendations to the Board on the Company’s remuneration and compensation plans, policies and practices and for determining, within agreed terms of reference, specific remuneration packages for the Executive Directors, Executive Committee members (and other Solvency II identified staff) and the Chairman� Other than in relation to the Chairman, these include pension rights and executive incentive schemes to encourage superior performance� Details of the remuneration structure and the Remuneration Committee’s activities in 2018 are provided in the Directors’ Remuneration Report on pages 76 to 105�
REMUNERATION COMMITTEE The composition of the Remuneration Committee accords with the requirements of the Code that the Remuneration Committee should consist of at least three independent Non-Executive Directors. The Remuneration Committee met seven times during 2018.
2018 was a transformational year for Phoenix with the acquisition of the Standard Life Assurance businesses, as set out in the Group Chief Executive Officer’s report at the beginning of this Annual Report and Accounts. This and other achievements, in line with our strategic objectives, reflect the strong performance, commitment and leadership shown by the Group’s management team.
Particular operational and financial highlights for the year included: Highlights • Cash generation of £664 million in 2018 taking the total cash generation in 2017 and 2018 to £1.3 billion and exceeding the upper end of the target range for this period of £1.0 billion to £1.2 billion.
For completeness, the targets relating to the 2017 and 2018 LTIP awards were also reviewed and the adjustments are described on page 94.
The Committee evaluated the performance of each Executive Director against both business objectives and individual personal objectives and decided the overall outturns of the AIP and LTIP are appropriate, specifically: • 2018 AIP: Clive Bannister and James McConville should receive 85.5% and 88.0% of their maximum bonus opportunity, respectively.
• 2016 LTIP: Awards will vest at 49.5% of maximum opportunity for both Clive Bannister and James McConville.
Further details of the performance assessment are provided in this report.
• Introduction of post-cessation shareholding requirements for both new and current Executive Directors.
BOARD CHANGES During the year, Henry Staunton announced his retirement from the Phoenix Group Holdings Board. Following an intensive search process, Henry was succeeded by Nicholas Lyons from 31 October 2018. Nicholas brings a wealth of experience in life insurance as well as the broader financial services sector. The Board is delighted to welcome Nicholas and looks forward to working with him in the future. The new Chairman’s annual fee is the same as that paid to his predecessor.
LOOKING FORWARD During 2019 the Committee will conduct a full review of the Remuneration Policy to ensure that it continues to align with the Group’s strategy, motivates and incentivises management, and promotes alignment with shareholders’ and customers’ interests. This review will incorporate the new requirements of the UK Corporate Governance Code, which we have already started to embrace through the early adoption of certain aspects of the Code and expanded remit of the Committee as set out in the Terms of Reference. An updated Remuneration Policy will be put to shareholders at the 2020 AGM.
As part of the review process, I will be formally reaching out to engage with and seek the views of the Group’s major shareholders. As ever, I welcome the views of all stakeholders, look forward to these meetings, and am very grateful for your time taken and valuable feedback.
1 See note 5 on page 89 for detail of the FOS Overturn Rate used in the AIP.
Long Term Incentive Plan (‘LTIP’): Below we show outturn against the measures which applied for the 2016 LTIP awards which are reflected in the Single Figure Table on page 88. Cumulative cash generation and TSR performance are shown over the three-year performance period (financial years 2016, 2017 and 2018). TSR is measured against the constituents of the FTSE 250 (excluding Investment Trusts), with median being the 50th percentile and upper quintile being the 80th percentile. Cash generation continues to be one of our key corporate strategic objectives, while TSR provides a direct linkage to shareholder interests.
SHAREHOLDING GUIDELINES (‘SOGs’) The charts below show the shares and vested LTIP awards held by the Executive Directors as a percentage of salary as at 31 December 2018. The figures are based on a share price of £5.63 as at 31 December 2018. LTIPs which have vested but are subject to a holding period have counted towards the SOGs figure. The LTIP vested figure reflects performance outturn, dividend accrual, and the expected impact of income tax and National Insurance that will be payable on exercise. Further details on shareholding requirements are included in the Remuneration Policy under the Shareholding Guidelines section on page 84.
The tables shown on pages 88 and 92 show the total remuneration received by Directors over the full year to 31 December 2018. The DRR regulations require the disclosure of the remuneration paid to the Directors of the Company in respect of services provided to Phoenix Group Holdings plc or its subsidiaries and this is shown on page 104 with services considered to have been provided effective from 13 December 2018.
DIRECTORS’ REMUNERATION POLICY The 2019 AGM is the Company’s first AGM as a UK-registered quoted company, and so the Company is seeking approval from its shareholders for its Directors’ Remuneration Policy (‘Remuneration Policy’).
Ahead of this full review however, the Group has taken the opportunity to make two immediate updates to the Policy: • The alignment of pension entitlement for newly appointed Executive Directors to that of the majority of the workforce.
The Remuneration Policy is set out in section A of this report overleaf.
SECTION A: THIS SECTION CONTAINS THE DIRECTORS’ REMUNERATION POLICY AS PROPOSED FOR APPROVAL BY THE COMPANY’S SHAREHOLDERS AT THE COMPANY’S 2019 AGM ON 2 MAY 2019.
Summary of changes from previous policy: As explained in the Remuneration Committee Chairman’s letter at the beginning of this Directors’ Remuneration Report, the Remuneration Policy proposed for adoption by the Company’s shareholders at the 2019 AGM is largely unchanged from the Remuneration Policy approved by the shareholders of Phoenix Group Holdings at its 2017 AGM with the exception of the specific details outlined on page 79 and the addition of the 2019 LTIP metrics. In line with legislative requirements, a revised Remuneration Policy will be presented to shareholders in 2020 being three years following the 2017 AGM.
HOW MUCH THE EXECUTIVE DIRECTORS EARNED IN 2018/POTENTIAL REWARDS UNDER VARIOUS SCENARIOS (£000) The charts below compare the maximum levels of Total Remuneration payable under the Directors’ Remuneration Policy (see page 81) and the actual payments for 2018 detailed in the Single Figure Table (see page 88).
• Share price growth and dividends Minimum On-target Maximum Maximum with growth Actual
• Minimum, on-target and maximum represent the scenario charts required under the Directors’ Remuneration Policy – see the data assumptions below.
• ‘Actual’ represents the values shown in the 2018 Single Figure Table. Within this, the actual share price growth and dividends in the three-year period until LTIP vesting are shown separately.
Element and purpose Base Salary This is the core element of pay and reflects the individual’s role and position within the Group with some adjustment to reflect their capability and contribution
Policy and operation – Base salaries are reviewed each year against companies of similar size and complexity. Both salary levels and overall remuneration are set by reference to the median data of comparators which the Remuneration Committee considers to be suitable using both the FTSE 31-100 and the FTSE 250 as a whole, and positioning the Executive Directors’ salaries around the average of the median positions in these pan-sector groups. Consideration is also given to other relevant insurance company data.
– The Remuneration Committee uses this data as a key reference point in considering the appropriate level of salary. Other relevant factors including corporate and individual performance and any changes in an individual’s role and responsibilities, and the level of salary increases awarded to other employees of the Group are also considered.
Maximum – The Remuneration Committee will apply the factors set out above in considering any salary adjustments during the duration of this policy. No increase will be made if it would take an Executive Director’s salary above £780,000 (being the median level of salaries for CEOs in the FTSE 31-100 when the prior policy was adopted in 2017), provided that this figure may be increased in line with UK RPI inflation from the adoption of the prior policy in May 2017.
Policy and operation – The Group provides market competitive benefits in kind. Details of the benefits provided in each year will be set out in the
Maximum – It is not possible to prescribe the likely change in the cost of insured benefits or the cost of some of the other reported benefits year-to-year, but the provision of benefits will normally operate within an annual limit of 10% of an Executive Director’s base salary. – The Remuneration Committee will monitor the costs in practice and ensure that the overall costs do not increase by more than the
Element and purpose Pension To provide retirement benefits and remain competitive within the marketplace
Policy and operation – The Group provides a competitive employer sponsored defined contribution pension plan. – All Executive Directors are eligible to participate in the Group Personal Pension (‘GPP’). Executive Directors receive a contribution to the GPP or they may opt to receive the contribution in cash if they are impacted by the relevant lifetime or annual limits. Any such cash payments are reduced for the effect of employers’ National Insurance Contributions.
– AIP outcomes are paid in cash in one tranche (less the deferred share award). – At least 40% of any annual AIP award is to be deferred into shares for a period of three years although the Remuneration Committee reserves discretion to alter the current practice of deferral (whether by altering the portion deferred, the period of deferral or whether amounts are deferred into cash or shares). Such alterations may be required to ensure compliance with regulatory guidelines for pay within the insurance sector, but will not otherwise reduce the current deferral level or the period of deferral.
– Deferral of AIP outcomes into shares is currently made under the DBSS. – Awards under DBSS will be in the form of awards to receive shares for nil-cost (with the shares either being delivered automatically at vesting or being delivered at a time following vesting at the individual’s choice).
– DBSS awards are made automatically each year on the fourth dealing day following the announcement of annual results, using the average of the preceding three dealing days’ share prices to calculate the number of shares in awards. – The three-year period of deferral will run to the third anniversary of the award date. – Dividend entitlements will accrue over the three-year deferral period and be delivered as additional vesting shares. – Malus/clawback provisions apply to the AIP and to amounts deferred under DBSS as explained in the notes to this table.
– The Remuneration Committee retains discretion to adjust the weightings/substitute metrics but would expect to consult with its major shareholders if it proposed changing materially the current performance measures applied for LTIP awards made to Executive Directors or the relative weightings between these performance measures.
– 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 measures, provided that any adjusted performance measure is, in its opinion, neither materially more nor less difficult to satisfy than the original measure.
Policy and operation – Executive Directors are able to participate in all-employee share plans on the same terms as other Group employees as required by HMRC legislation.
Element and purpose Shareholding guidelines To encourage share ownership by the Executive Directors and ensure interests are aligned
Policy and operation – Executive Directors are expected to retain all shares (net of tax) which vest under the DBSS and under the LTIP (or any other discretionary long term incentive arrangement introduced in the future) until such time as they hold a minimum of 200% of their base salary in shares.
Policy and operation – 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.
Maximum – The aggregate fees of the Chairman and Non-Executive Directors will not exceed the limit from time to time prescribed within the Company’s Articles of Association for such fees (currently £2 million per annum in aggregate). – The Company reserves the right to vary the structure of fees within this limit including, for example, introducing time-based fees or reflecting the establishment of new Board committees.
The Group has (as required by Solvency II regulations) one consistent reward policy for all levels of employees and this policy is made available to all staff. Therefore, the same reward principles guide reward decisions for all Phoenix employees, including Executive Directors, although remuneration packages differ to take into account appropriate factors in different areas of the business: • AIP – all Phoenix employees participate in the AIP, although the quantum and balance of corporate to individual objectives varies by level. The most senior staff are subject to the regulatory requirements of Solvency II, and these individuals also receive part of their bonus in Company shares deferred for a period of three years. A different scorecard of AIP performance measures applies for employees in ‘control functions’ (risk, compliance, internal audit and actuarial) to exclude financial performance measures.
3. Malus and clawback Malus (being the forfeiture of unvested awards) and clawback (being the ability of the Company to claim repayment of paid amounts as a debt) provisions apply to the AIP, DBSS and LTIP. These provisions may be applied where the Remuneration Committee considers it appropriate to do so following: • a review of the conduct, capability or performance of an individual; • a review of the performance of the Company or a Group member; • any material misstatement of the Company’s or a Group member’s financial results for any period; • any material failure of Risk Management by an individual, a Group member or the Company; or
5. Discretions reserved in operating incentive plans The Remuneration Committee will operate the AIP, DBSS and LTIP according to their respective rules and the above Remuneration Policy table. The Remuneration Committee retains certain discretions, consistent with market practice, in relation to the operation and administration of these plans including: • (as described in the Remuneration Policy table) the determination of performance measures and targets and resultant vesting and pay-out levels; • (as described in the Remuneration Policy table) the ability to adjust performance measures and targets to reflect events and/or to ensure the performance measures and targets operate as originally intended; • (as described in the Termination Policy) determination of the treatment of individuals who leave employment, based on the rules of the incentive plans, and the treatment of the incentive plans on exceptional events, such as a change of control of the Company; and
• 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.
• The AIP and LTIP will operate (including the maximum award levels) as detailed in the general policy in relation to any newly appointed Executive Director.
• For external and internal appointments, the Remuneration Committee may agree that the Company will meet certain relocation expenses as it considers appropriate.
• For external candidates, it may be necessary to make awards in connection with the recruitment to buy-out awards forfeited by the individual on leaving a previous employer. For such buy-out awards, Phoenix 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 buy-out awards will be appropriately disclosed.
• A new Non-Executive Director would be recruited on the terms explained in the Remuneration Policy for such Directors.
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 1 Where the reason for leaving is retirement, the individual will be required to provide confirmation of their continued retirement before any payments are released to them after the end of the vesting period.
The Remuneration Committee also seeks to build an active and productive dialogue with investors on developments in the remuneration aspects of corporate governance generally and any changes to the Company’s executive pay arrangements in particular. The Remuneration Committee consulted extensively with shareholders prior to the approval of the prior policy which was approved with 99.7% support in 2017. As this new policy is largely a rollover of the previous shareholder approved policy subject to the amendments described on page 79, it was not considered necessary to re-consult.
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 £16,290. Benefits for James McConville comprise car allowance and private medical insurance totalling £16,032.
5 For 2015’s LTIP awards which are reflected in the 2017 long-term incentives column above, the performance conditions were met as to 64.28% of maximum. The 2017 long-term incentives values in the above table reflect the value of the Company’s shares on the date of vesting which was 28 September 2018 (676p per share) multiplied by the number of shares vesting whereas the equivalent figure within the published 2017 Single Figure Table was an estimate which reflected the average share price between 1 October 2017 and 31 December 2017 (759.8462p per share) and certain assumptions regarding the cumulative value of dividends on the number of shares vesting.
6 Clive Bannister and James McConville are entitled to each receive a Company pension contribution of 17.6% which is paid in cash. Pension contributions paid as cash supplements are reduced for the effect of employers’ National Insurance contributions. Both Clive Bannister and James McConville received the pension contributions as cash supplements. No Director participated in a defined benefit pension arrangement in the year and none have any prospective entitlement to a defined benefit pension arrangement.
Solvency II Management Actions are disclosed on page 32 and 33 of the Business Review and includes capital synergies associated with the acquisition of the Standard Life Assurance businesses.
Adjusted Shareholder Solvency II Own Funds represents the Group’s Own Funds adjusted to remove the impacts of unsupported with-profit funds, the unsupported pension scheme (PGL Pension Scheme), restricted Tier 1 notes and Tier 2 or Tier 3 subordinated liabilities.
Adjusted Shareholder Solvency II Own Funds £4,700m £4,750m £4,850m £5,603m 30.0% 30.0%
3 This measure looks at the resolution of incidents for which there could be customer detriment (financial or non-financial). It measures the timeliness of actions when things go wrong. The metrics in the table represent the percentage of cases closed within nine months.
4 This measure looks at servicing (ie not product or advice) complaints which are closed within three days. 5 This measure looks at the proportion of cases where the Financial Ombudsman Service disagrees with our decision making in dealings with customers or an aspect of it.
Personal objectives were agreed by the Group Board and shared with the Remuneration Committee at the start of the year. The Board regards a number of the personal objectives set as commercially sensitive and, accordingly, it is not appropriate for such objectives to be disclosed. However a number of achievements for the Executive Directors are shown below: Clive Bannister, Group Chief Executive Officer (‘Group CEO’)
Maintain or improve solvency In conjunction with the Group FD, has helped deliver raising £1 billion of equity, £0.9 billion of subordinated debt, retaining a stable outlook from Fitch, delivering the highest Solvency II surplus and the lowest leverage ratio in the Group’s history.
Deliver management actions and deliver on the strategic asset allocation strategy
Actively sponsored the Group’s evolving strategic asset allocation and the sourcing of £1.4 billion of alternative illiquid assets and the establishment of the Group’s Bulk Purchase Annuity capabilities. Drove £570 million of SII management actions and a further £510 million of capital synergies to the Standard Life Assurance businesses.
Re-domiciled Phoenix Group Holdings to the UK and established Phoenix Group Holdings plc as the new parent company of the Group.
Deliver on Diversity targets Diversity targets were not met as they were largely impacted by changes in senior management through acquisition, structural changes, resignation and retirement. However improved metrics, governance, and accountability have re-enforced the importance of Phoenix’s broader diversity agenda.
All financial targets have been exceeded with reference to our Corporate targets: generating £664 million of cash, a reduced expense base (excluding acquisition costs), a reduced Fitch leverage ratio (22%) and an operating profit of £708 million.
Management actions have been delivered materially ahead of target, including securing of over £1.4 billion of alternative assets.
Deliver on Diversity targets The Group FD chairs the Diversity Committee. Improved metrics, governance, and accountability have re-enforced the importance of Phoenix’s broader diversity agenda. Diversity targets were not met as they were largely impacted by changes in senior management through acquisition, structural changes, resignation and retirement.
In addition, whilst the performance measures for the AIP for 2019 have been disclosed (see Implementation of Remuneration Policy for 2019 on page 97), the performance targets for these measures are regarded as commercially sensitive at the current time and accordingly are not disclosed. However, the Company intends to disclose the performance targets for 2019’s AIP retrospectively in next year’s Remuneration Report on a similar basis to the disclosures made above in respect of 2018’s AIP.
The above targets were all measured over the period of three financial years 1 January 2016 to 31 December 2018.
In addition to the above targets, the Committee confirmed that the underpin performance condition relating to debt levels and associated interest costs, and management of debt, capital restructuring and Risk Management within the Group, customer satisfaction and, in exceptional cases, personal performance (as described more fully on page 94, had been achieved in the performance period.
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 Group Holdings and Phoenix Group Holdings plc 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 Henry Staunton retired from the Board of Phoenix Group Holdings on 31 October 2018. 3 Nicholas Lyons became Chairman designate of Phoenix Group Holdings from 1 September 2018 and was confirmed in this appointment on 31 October 2018. Figure above reflects fee paid from 31 October 2018. 4 Ian Cormack retired from the Board of Phoenix Group Holdings on 2 May 2018. 5 Campbell Fleming and Barry O’Dwyer joined the Board of Phoenix Group Holdings on 31 August 2018 and waived all current and future emoluments with regard to their
Directors’ fees. 6 Karen Green joined the Board of Phoenix Group Holdings on 1 July 2017. 7 Isabel Hudson retired from the Board of Phoenix Group Holdings on 11 May 2017. 8 Belinda Richards joined the Board of Phoenix Group Holdings on 1 October 2017. 9 David Woods retired from the Board of Phoenix Group Holdings on 11 May 2017.
The aggregate remuneration of all Executive and Non-Executive Directors under salary, fees, benefits, cash supplements in lieu of pensions and annual incentive was £4.055 million (2017: £4.082million).
The number of shares for outstanding LTIP awards granted between 2015 and 2016 were increased to take into account the impact of the rights issues which took place on 9 November 2016 and 27 July 2018. The number of shares for outstanding LTIP awards granted between 2017 and 2018 were increased to take into account the impact of the rights issues which took place on 27 July 2018. All adjustments were based on the Theoretical Ex-Rights Price (‘TERP’) and approved by the Remuneration Committee. The share price on grant shown has also been adjusted to reflect the impact of the rights issue on all share prices.
2 Gains of Directors from share options exercised and vesting shares under the LTIP in 2018 were £nil (2017: £2,533,277). 3 The 2016 LTIP award vested at 49.5% of maximum. 4 All LTIP awards are now subject to a holding period so that any LTIP awards for which the performance vesting requirements are satisfied will not be released for a further two years from the third anniversary of the original award date.
LTIP Targets Following the acquisition of the Standard Life Assurance businesses, the Committee reviewed the business targets within the variable pay plans and made the necessary adjustments to ensure that the plans continue to operate as originally intended, properly reflect the aim to reward long-term value generation and are aligned to the market announcements directly in connection with the acquisition. This review resulted in an adjustment to the 2018 targets as follows: Cumulative Cash Generation: target range increased from £1.474 billion (threshold) to £1.674 billion (maximum) to £1.824 billion (threshold) to £2.024 billion (maximum) as shown below reflecting the additional net cash generation expected by the end of 2020.
The performance conditions for the 2016, 2017 and 2018 awards are set out below and include these adjustments to the 2018 targets.
2018 award (40% Cumulative cash generation, 35% Return on Adjusted Shareholder Solvency II Own Funds and 25% TSR)
Underpin: Notwithstanding the Return on Adjusted Shareholder Solvency II Own Funds, Cumulative cash generation and TSR performance targets, if the Committee determines that the Group’s debt levels and associated interest costs have not remained within parameters acceptable to the Committee over the performance period, and that the Group has not made progress considered to be reasonable by it in executing any strategy agreed by the Board on debt management, capital structuring and Risk Management, the level of awards vesting will either be reduced or lapse in full. The underpin also includes consideration of customer satisfaction and, to meet Solvency II requirements, in exceptional cases, personal performance.
2 Gains of Directors from share options exercised and vesting shares under the DBSS in 2018 were £525,707 (2017: £595,978). Clive Bannister’s gain was £316,099 arising from an award exercised on 20 March 2018 at a share price of £7.825. James McConville’s gain was £209,608 arising from an award exercised on 20 March 2018 at a share price of £7.825.
Clive Bannister 21 March 2018 DBSS1 Nil cost option £360,785 – 15 March 2021 None
Gains of Directors from share options exercised under Sharesave during 2018 were nil (2017: nil). Sharesave options are granted with an option price that is a 20% discount to the three-day average share price when invitations are made. This is permitted by HMRC regulations for such options.
Aggregate gains of Directors from share options exercised and vesting shares under all share plans in 2018 were £525,707 (2017: £3,129,255).
DIRECTORS’ INTERESTS – AUDITED INFORMATION The number of shares and share plan interests held by each Director and their connected persons are shown below: Name
Total share plan interests as at 31 December 2018 – Vested but unexercised scheme interest
There have been no changes in the Directors’ share interests between 31 December 2018 and 22 February 2019 (being one month prior to the date of the notice of the AGM).
The extent to which Executive Directors have achieved the requirements by 31 December 2018 (using the share price of 563.4p as at 31 December 2018) can be summarised as follows: Name
The Executive Directors are required to sign a declaration that they have not and will not at any time during their employment with Phoenix, enter into any hedging contract in respect of their participation in the AIP, LTIP, Sharesave, SIP or any other incentive plan of the Company, or pledge awards in such plans as collateral, and additionally that they will neither enter into a hedging contract in respect of, nor pledge as collateral, any shares which are required to be held for the purposes of the Company’s Shareholding requirements or any vested LTIP award shares subject to a LTIP holding period.
Element of Remuneration Policy Detail of Implementation of Policy for 2019
Base Salary Base salaries are set by reference to appropriate market comparables. Salaries in 2019 will remain unchanged at £700,000 for the Group Chief Executive Officer (unchanged from 2011) and £440,000 for the Group Finance Director (unchanged from 2014). This means that their salaries will not have increased for eight and five years respectively.
Pension There are no proposed changes to the pension benefits offered to current Executive Directors in 2019. Pension benefits for newly appointed Executive Directors will be aligned to that of the wider workforce.
The weightings of the AIP performance measures for 2019 remain unchanged from 2018 and are summarised below: Performance measure % of incentive potential
Outcomes from performance measures for 2019’s AIP may be moderated by the Committee in line with the approved Remuneration Policy. This will include a review by the Committee that the Company has operated within its stated risk appetite and that there are no other risk-related concerns before any 2019 AIP outcomes are confirmed.
The targets for the specific performance measures for AIP in 2019 are regarded as commercially sensitive by the Company but will be disclosed retrospectively in the Remuneration Report for 2019.
40% of AIP outcomes for 2019 will be delivered as an award of deferred shares under the Deferred Bonus Share Scheme which will vest after a three-year deferral period.
All 2019 LTIP awards are subject to a further underpin measure relating to debt and risk management within the Group, 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 2019’s LTIP awards.
The performance targets for the return on Adjusted Shareholder Solvency II Own Funds measure are 4.5% in excess of the risk-free rate (where 25% of this part of the award vests) and 6.5% in excess of the risk-free rate (full vesting of this part of the award).
The rules of the Company’s LTIP reserves discretion for the Committee to adjust the outturn for any LTIP performance measures (from zero to any cap) should it consider that to be appropriate. The Committee may operate this discretion having regard to such factors as it considers relevant, including the performance of the Company, any individual or business.
Post cessation of employment, Executive Directors are expected to retain their full shareholding requirement in Year 1 and 50% of the requirement in Year 2.
The fee levels for 2019 remain the same as for 2018 and are £325,000 for the Chairman, £105,000 for the role of Non-Executive Director with additional fees of: (i) £10,000 payable for the role of SID; and/or (ii) £20,000 payable where an individual also chairs the Audit, Remuneration or Risk Committee; and/or (iii) £20,000 payable where a Non-Executive Director also serves on the board of a subsidiary company; and/ or (iv) £10,000 payable for service on the Solvency II Model Governance Committee.
Note: All incentive plans are subject to malus/clawback. See page 85 ‘Notes to the Remuneration Policy’ for details.
The DRR regulations also require that a performance graph is supported by a table summarising aspects of the Group Chief Executive Officer’s remuneration for the period covered by the above graph (which will in due course be for a period of ten years).
Overall expenditure on pay has been taken as the employee costs as set out in note C2 ‘Administrative expenses’ in the notes to the consolidated financial statements. Expenditure on pay has increased by 47%, and decreased by 5% on a like for like basis excluding the impact of the acquisition of the Standard Life Assurance businesses.
The decrease was primarily driven by the reduction in the number of AXA Wealth employees during the year, a significant portion of whom transferred to the Group’s outsource provider. This was partly offset by small increases in share-based payment costs (see note I2) and AIP costs, increased salaries for new activities such as Bulk Purchase Annuities and also the impact of the salary increase for staff during the year.
There has been minimal movement overall in the level of remuneration for the Group Chief Executive Officer; the small increase in taxable benefits is due to a rise in the cost of funding for Private Medical Insurance. There was a slight reduction in AIP which was a result of a lower outcome under the Corporate element of the 2018 AIP.
Staff more generally have seen a slight overall increase, the primary reason for this is due to an increase in taxable benefits as a result of the implementation of Private Medical Insurance to all employees, extending the benefit to c.150 employees within the Company. The median salary increase for staff was 2.5%; this is lower than the figures above which are based on averages. There has been a small increase in average AIP for employees, which is linked in part to increases in employee salary levels.
VOTING OUTCOMES ON REMUNERATION MATTERS The table below shows the votes cast to approve the Directors’ Remuneration Report for the year ended 31 December 2017 at the 2018 AGM held on 2 May 2018 and to approve the Directors’ Remuneration Policy at the 2017 AGM held on 11 May 2017.
To approve the Directors’ Remuneration Report for the year ended 31 December 2017 (2018 AGM) 294,152,705 99.15 2,528,520 0.85 1,291,938
To approve the Directors’ Remuneration Policy (2017 AGM) 296,336,785 99.67 976,191 0.33 2,243
DILUTION The Company monitors the number of shares issued under the Phoenix Group employee share plans and their impact on dilution limits. The Company’s practice is for all the executive share plans to use market purchase shares on exercise of any awards. For the Company’s all-employee Sharesave scheme only, new shares are issued. Therefore the usage of shares compared to the 10% dilution limits (in any rolling 10-year period) set by the Investment Association in respect of all share plans as at 31 December 2018 is 0.23%, and no shares count towards the dilution limit for executive plans only (5% in any rolling ten-year period).
• the Group has one consistent reward policy for all levels of employees, and therefore the same reward principles guide reward decisions for all Group employees, including Executive Directors, although remuneration packages differ to take into account appropriate factors in different areas of the business.
The Remuneration Committee intends to publish the ratios comparing CEO to employee pay as prescribed by the DRR regulations for financial year 2019. Following the acquisition of the Standard Life Assurance businesses on 31 August 2018, we have been integrating our employee pay systems and are not in the position to adopt this disclosure requirement early. Accordingly, Phoenix has come to the conclusion that it would not be appropriate to publish on a voluntary basis a CEO to employee pay ratio disclosure for 2018.
GENDER PAY GAP The reporting entity for Gender Pay Gap reporting remains as Pearl Group Management Services; details of the 2018 Gender Pay Gap are shown on page 27 of the Annual Report and Accounts within the People Section. Employees who transferred from Standard Life Aberdeen are included in the Gender Pay Gap reporting for Standard Life Aberdeen as they were employees of that entity on the relevant date.
Alastair Barbour 1 November 2018 1 October 2013 2 May 2019 2
Karen Green 1 November 2018 1 July 2017 1 July 2020 16
Nicholas Lyons 1 November 2018 31 October 2018 31 October 2021 32
Barry O’Dwyer 1 November 2018 31 August 2018 31 August 2021 30
John Pollock 1 November 2018 1 September 2016 1 September 2019 6
Nicholas Shott 1 November 2018 1 September 2016 1 September 2019 6
Belinda Richards 1 November 2018 1 October 2017 1 October 2020 19
The above tables have been included to comply with UKLA Listing Rule 9.8.8. In the event of cessation of a Non-Executive Director’s appointment (excluding the Chairman) they would be entitled to a one month notice period. The Chairman, as detailed in his letter of appointment, would be entitled to a six months’ notice period.
The table below shows the independent Non-Executive Directors who served on the Committee during 2018 and their date of appointment: Member From To
Under the Committee’s Terms of Reference, the Committee meets at least twice a year but more frequently if required. During 2018, seven Committee meetings were held and details of attendance at meetings are set out in the Corporate Governance Report on page 67.
ADVICE During the year, the Committee received independent remuneration advice from its appointed advisers, FIT Remuneration Consultants LLP (‘FIT’) and PwC (who were appointed by the Committee as their adviser from May 2018 following a competitive tender). Both firms are members of the Remuneration Consultants Group (the professional body for remuneration consultants) and adhere to its code of conduct.
The Committee was satisfied that the advice provided by both firms was objective and independent. FIT’s fees in respect of 2018 were £45,250, all of which were attributed to work relating to the Committee and were charged on the basis of the firm’s standard terms of business for advice provided. PwC’s fees in respect of 2018 were £160,850 all of which were attributed to work relating to the Committee and were charged on the basis of the firm’s standard terms of business for advice provided. PwC have not provided any other services to Phoenix Group Holdings plc in relation to remuneration.
The Committee consulted with the Group Chief Executive Officer, Group HR Director and Deputy Group Finance Director 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. The Chief Risk Officer is asked to confirm each year that the Company has operated within its stated risk appetite during the year and also to confirm whether there were otherwise any risk-related concerns that required the Committee to consider using its judgement to moderate incentive plan outcomes. There were no such concerns in 2018.
The tables shown on pages 88 and 92 show the total remuneration received by Directors over the full year to 31 December 2018. The DRR regulations require the disclosure of the remuneration paid to the Directors of the Company in respect of services provided to Phoenix Group Holdings plc or its subsidiaries. Services are considered to have been provided effective from 13 December 2018. As there was no change to the remuneration arrangements this simply reflects the annual data pro-rated from 13 December 2018 to 31 December 2018 and therefore the separate footnotes shown under the Single Figure Table on page 88 have not been repeated.
Phoenix Group Holdings plc – Single Figure Table from 13 December 2018 to 31 December 2018
Phoenix Group Holdings – Single Figure Table from 1 January 2018 to 12 December 2018
Phoenix Group Holdings plc – NED fees from 13 December 2018 to 31 December 2018
APPROVAL This report in its entirety has been approved by the Remuneration Committee and the Board of Directors and signed on its behalf by: KORY SORENSON REMUNERATION COMMITTEE CHAIR
The Directors present their report for the year ended 31 December 2018.
1 2017 dividends per share figures have been rebased to take into account the bonus element of the rights issue completed in July 2018.
SHARE CAPITAL The issued share capital of the Company* was increased by 327,966,570 during 2018 which related to: • shares issued in relation to the acquisition of Standard Life Assurance Limited (SLAL); • shares issued to Standard Life Aberdeen plc (SLA plc) in relation to the acquisition of SLAL; • 144,114,450 shares were issued to SLA plc on 31 August 2018; and
At the General Meeting of Phoenix Group Holdings plc held in October 2018, shareholders granted the Company authority to purchase up to 10% of its issued ordinary shares. Any ordinary shares purchased under this authority would, subject to the Companies Act 2006 either be cancelled by operation of law or held in treasury.
* Any references to the Company refer to both Phoenix Group Holdings (the Group’s former Cayman Islands registered holding company) and Phoenix Group Holdings plc (the Group’s new UK registered holding company).
Subject to obtaining shareholder approval for the renewal of this authority at the forthcoming AGM on 2 May 2019, the Company is authorised to make purchases of its own shares and make payment for the redemption or purchase of its own shares in any manner permitted by the Companies Act 2006 including without limitation, out of capital, profits, share premium or the proceeds of a new issue of shares. The Company held no treasury shares during the year or up to the date of this report.
Annual General Meeting (‘AGM’) The AGM of the Company will be held at Standard Life House, 30 Lothian Road, Edinburgh, EH1 2DH on Thursday 2 May 2019 at 9.00am.
The Directors consider it important to understand the views of the market. Board members regularly receive copies of the latest analyst reports on the Company and the insurance sector, as well as market feedback to further develop their knowledge and understanding of external views about the Company. The Chairman and the Non-Executive Directors provide feedback to the Board on topics raised with them by major shareholders. The Company also undertakes perception studies, designed to determine the investment community’s view of the core business.
The Company’s Annual Report and Accounts, together with the Company’s Interim Report and other public announcements and presentations, are designed to present a fair, balanced and understandable view of the Group’s activities and prospects. These are available on the Company’s website at www.thephoenixgroup.com, along with a wide range of relevant information for private and institutional investors, including the Company’s financial calendar.
BOARD Board of Directors The membership of the Board of Directors during 2018 is given within the Corporate Governance Report on pages 65 and 67, which is incorporated by reference into this report. Details of Directors’ (and persons closely associated with them) interests in the shares of the Company are shown in the Directors’ Remuneration Report.
During 2018 and up to the date of this report, the following changes to the Board took place: • Ian Cormack resigned from the Board on 2 May 2018.
• Campbell Fleming and Barry O’Dwyer were appointed to the Board on 31 August 2018.
The rules about the appointment and replacement of Directors are contained in the Company’s Articles. These state that a Director may be appointed by an ordinary resolution of the shareholders or by a resolution of the Directors. If appointed by a resolution of the Directors, the Director concerned holds office only until the conclusion of the next AGM following the appointment.
In accordance with the UK Corporate Governance Code, Directors must stand for election/re-election annually. The Board of Directors will be unanimously recommending that all of the Directors should be put forward for election at the forthcoming AGM to be held on 2 May 2019.
Directors’ and Officers’ liability insurance The Company maintains Directors’ and Officers’ liability insurance cover which is renewed annually.
We value the individuality, diversity, and creativity that every colleague brings to the workplace. Everyone has the right to be treated with dignity and respect and not to be disadvantaged in any way as a result of their age, race, gender, disability, religion or belief, sexual orientation, gender re-assignment, marriage and civil partnership or pregnancy and maternity. The Company is committed to achieving equality of opportunity and the equal treatment of all colleagues and those applying to join us. Equality of opportunity, which includes equality of pay, is seen as an integral part of our employment practices, policies and procedures. To this end all our people share an obligation to their colleagues, customers and business partners to provide a safe, fair and equitable working environment in which every individual can seek, obtain and continue employment without experiencing any unfair or unreasonable discrimination.
Employee shareholding The Group also provides the opportunity for employees to participate in the Company’s all-employee share schemes, which includes Sharesave and the Share Incentive Plan, to encourage broader share ownership in the Company.
Viability statement The Viability Statement, as required by section C.2.2 of the Code, has been undertaken for a period of five years to align to the Group’s business planning and is contained in the Risk Management section on page 46.
Financial risk management The Group operates a Risk Management Framework (‘RMF’) consisting of several components, as detailed in the Risk Management section of the Strategic Report. The RMF provides a consistent approach to highlighting and controlling key risks throughout the organisation. This is achieved primarily through review and compliance, at a functional level, with the risk universe and related policies (and the risk appetites therein). At its highest level the RMF considers the following risks: strategic, market, credit, insurance, financial soundness, customer and operational. As a result, in preparing the consolidated financial statements, assessment is given to a broad range of risk categories. The Risk Management section also describes how the Enterprise Risk Management (ERM) framework operated by the acquired Standard Life Assurance businesses aligns with the Phoenix RMF.
Articles of Association Changes to the Company’s Articles require prior shareholder approval.
The Articles are available on the Company’s website at www.thephoenixgroup.com/about-us/corporate-governance/ articles-of-association.aspx.
Details of fees paid to EY during 2018 for audit and non-audit work are disclosed in note C4 to the IFRS consolidated financial statements.
Group Company Secretary The Group Company Secretary throughout the 2018 financial period was Gerald Watson.
Directors’ Remuneration Report 6 Waiver of any future emoluments by a Director
Directors’ Remuneration Report 7 Non pre-emptive issue of equity for cash
In preparing these financial statements the Directors are required to: • Select suitable accounting policies and then apply them consistently.
• State whether IFRS, as adopted by the EU, have been followed, subject to any material departures disclosed and explained in the Group and the Company financial statements.
• Prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group and the Company will continue in business.
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Group’s and the Company’s transactions and disclose, with reasonable accuracy at any time, the financial position of the Group and the Company and enable them to ensure that the financial statements and the Directors’ Remuneration Report comply with the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulations. They are also responsible for safeguarding the assets of the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
• The Strategic Report and the Corporate Governance and Directors’ Report include a fair review of the development and the performance of the business and the position of the Company and its consolidated subsidiaries taken as a whole, together with a description of the principal risks and uncertainties that they face.
The Strategic Report and the Directors’ Report were approved by the Board of Directors on 4 March 2019.
IN THIS SECTION Independent Auditor’s Report .............................................112 IFRS Consolidated Financial Statements .......................... 121 Notes to the Consolidated Financial Statements ............. 128 Parent Company Accounts ................................................. 214 Notes to the Parent Company Financial Statements ....... 216 Additional Life Company Asset Disclosures .....................222 Additional Capital Disclosures ............................................228 Alternative Performance Measures ...................................230
OPINION In our opinion: • Phoenix Group Holdings plc’s 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 2018 and of the Group’s profit for the year then ended; • the consolidated financial statements have been properly prepared in accordance with International Financial Reporting Standards (‘IFRSs’) as adopted by the European Union (‘EU’); • the parent company financial statements have been properly prepared in accordance with IFRSs as adopted by the EU as applied in accordance with the provisions of the Companies Act 2006; and
• the financial statements have been prepared in accordance with the requirements of the Companies Act 2006, and, as regards the consolidated financial statements, Article 4 of the IAS Regulation.
We have audited the consolidated financial statements of Phoenix Group Holdings plc and it’s subsidiaries (collectively ‘the Group’) and the parent company financial statements which comprise: Group Parent company
BASIS FOR OPINION We conducted our audit in accordance with International Standards on Auditing (UK) (‘ISAs’) and applicable law. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial statements section of our report below. We are independent of the Group and parent company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the FRC’s Ethical Standard as applied to listed public interest entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements.
Conclusions relating to principal risks, going concern and viability statement We have nothing to report in respect of the following information in the Annual Report, in relation to which the ISAs (UK) require us to report to you whether we have anything material to add or draw attention to: • the disclosures in the Annual Report set out on pages 43 to 45 that describe the principal risks and explain how they are being managed or mitigated; • the Directors’ confirmation set out on page 110 in the Annual Report that they have carried out a robust assessment of the principal risks facing the entity, including those that would threaten its business model, future performance, solvency or liquidity; • the Directors’ statement set out on page 108 in the financial statements 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; • whether the Directors’ statement in relation to going concern required under the Listing Rules in accordance with Listing Rule 9.8.6R(3) is materially inconsistent with our knowledge obtained in the audit; or
• the Directors’ explanation set out on page 46 in the Annual Report as to how they have assessed the prospects of the entity, over what period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the entity will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions.
INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF PHOENIX GROUP HOLDINGS PLC
Materiality – Overall Group materiality of £100 million (2017: £63 million) which represents 1.9% (2017: 2%) of total equity attributable to owners of the parent (‘Group equity’).
Valuation of insurance contract liabilities (£92.6bn; 2017: £45.4bn) Refer to the Audit Committee Report (pages 68 to 71); Critical accounting estimates (page 129); Accounting policies and note F1 of the consolidated financial statements (pages 166 to 168). We considered the valuation of insurance contract liabilities to be a significant risk for the Group. Specifically, we considered the actuarial assumptions and modelling that 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 resultant valuation. Additionally, the valuation process is conditional upon the accuracy and completeness of the data.
We have split the risks relating to the valuation of insurance contract liabilities into the following component parts: • actuarial assumptions; • actuarial modelling; and
To obtain sufficient audit evidence to conclude on the appropriateness of actuarial assumptions, we engaged our actuaries as part of our audit team and performed the following procedures: – obtained an understanding and tested the design and operating effectiveness of key controls over management’s process for setting and updating actuarial assumptions; – challenged and assessed whether the assumptions applied were appropriate based on our knowledge of the Group, industry standards and regulatory and financial reporting requirements; – reviewed the results of management’s experience analysis to assess whether these justified the adopted assumptions, and checked that the assumptions used are consistent with this experience analysis; – in respect of longevity improvements we have evaluated the use of the chosen industry standard Continuous Mortality Investigation (‘CMI’) model and the parameters used to validate that it was appropriate relative to the industry; – benchmarked the demographic and economic assumptions against those of other comparable industry participants; and
– reviewed and assessed whether the disclosures in the financial statements, relating to insurance contract liabilities, complied with the applicable financial reporting standards.
We performed full scope audit procedures over this risk area in two components and specific scope audit procedures in one component, which covered 100% of the risk amount.
Over £88.0bn of the £92.6bn insurance contract liabilities are modelled using the core actuarial modelling systems with the residual balance modelled outside these systems to cater for any additional required liabilities not reflected in the model. The key risk is therefore associated with the modelling systems but risks also exist in the calculation of amounts outside these systems.
To conclude on core actuarial modelling systems, including balances calculated outside these systems, we engaged our actuaries and performed the following procedures: – obtained an understanding of the process and tested the design, implementation and operating effectiveness of key controls over management’s process for testing and approval of model changes and key adjustments outside of the actuarial model during the year; – we challenged and evaluated the methodology, inputs and assumptions applied for model changes and out of model adjustments, on a sample basis, based on our knowledge of the Group, industry standards and regulatory and financial reporting requirements; – reviewed the governance process around model changes and assessed the completeness of identified model changes; and
– tested the reconciliations of premiums and claims information extracted from the policy administration systems to the general ledger, where applicable.
We determined based on our audit work that the data used for the actuarial model inputs is materially complete and accurate.
– reviewed that disclosures have been made in the financial statements regarding the sensitivity of the valuation of the ERMs to changes in the key assumptions and audited the figures in the sensitivity disclosures.
To obtain sufficient audit evidence to conclude on the valuation of modelled corporate bonds, we: – tested the design and operating effectiveness of key controls over management’s process in respect of the valuation of modelled corporate bonds; – tested inputs in the models including coupons and maturity and assessed reasonableness of assumptions and judgements in particular related to spread at the acquisition date; – performed independent valuation of a sample of modelled corporate bonds and benchmarked management’s valuation approach against market best practice; and
– reviewed that disclosures have been made in the financial statements regarding the sensitivity of the valuation of the modelled corporate bonds to changes in the key assumptions and audited the figures in the sensitivity disclosures.
Based on our procedures performed on the ERM and modelled corporate bonds, we are satisfied that the valuation of these complex and illiquid assets is reasonable.
We consider the identification and valuation of identifiable intangible assets, such as acquired in-force business (‘AVIF’) and other intangibles, arising from the acquisition of the Standard Life Assurance businesses to be a significant risk due to the nature of judgements and estimates involved.
As a result, we focused on significant judgements in respect of the identification of the intangible assets acquired, GAAP valuation of the SLAL insurance contract liabilities as at the date of acquisition, the fair value adjustments required in the insurance contract liabilities and their impact on the calculation of goodwill and AVIF and the valuation of an intangible asset relating to the Client Service and Proposition Agreement (‘CSPA’) entered into between the Group and SLA plc.
This resulted in a gain on acquisition of £141 million that was recognised in the consolidated income statement for the year ended 31 December 2018, reflecting the excess of the fair value of the net assets acquired over the consideration paid for the acquisition of the Standard Life Assurance businesses.
To obtain sufficient audit evidence to assess the impact of the acquisition of the Standard Life Assurance businesses, we: – being the first year of our appointment as auditors of the Standard Life Assurance businesses, performed review of the predecessor auditor working papers and discussed the significant risk and judgemental areas with them; – agreed the key product features on a sample of products to underlying policy terms/documentations and reviewed the output of management’s own model reviews in order to gain assurance that the actuarial models appropriately capture the product features and that the calculations reflect the approved business and reporting requirements; – assessed the integrity of data used in the valuation process through a combination of re-performance of key reconciliations and the use of analytic techniques to compare, on a sample basis, policy level data between data in the actuarial models and that contained within the policy administration systems; – audited the SLAL statement of financial position as at the date of acquisition; – Ensured appropriate recognition of all identifiable intangible assets by understanding the transaction and comparing it to other acquisitions of similar businesses; – assessed the methodology and assumptions adopted by management for calculating the fair values of intangible assets arising on acquisition and considered how market participants would value identifiable assets and liabilities in an orderly transaction; – considered whether any fair value adjustments are required in the insurance contract liabilities recognised on a best estimate basis within the acquired business, and assess any impact on the calculation of goodwill and AVIF; – ensured that the acquisition accounting and disclosure of the acquisition are in compliance with IFRS 3 Business Combinations; and
In addition, we are satisfied that the acquisition accounting and disclosures are in compliance with the applicable accounting framework.
In assessing the risk of material misstatement to the consolidated financial statements, and to ensure we had adequate quantitative coverage of significant accounts in the financial statements, we identified four reporting components of the Group. The Group reporting components consist of Phoenix Life Division, SLAL, the Group Function and Other Companies. In the Phoenix Life Division component, the most significant insurance companies are Phoenix Life Assurance Limited and Phoenix Life Limited. SLAL is a newly acquired subsidiary of the Group. The Group Function consists of Group entities that primarily hold external debt, PA (GI) Limited and the pension schemes of the Group. The Other Companies include the Phoenix Life service companies and Standard Life International Designated Activity Company (‘SL Intl’).
Changes from the prior year In prior year, we identified Abbey Life Assurance Company Limited (‘ALAC’) as a separate component of the Group. In the 2018 financial year, management completed the Part VII transfer of the ongoing insurance business of ALAC into Phoenix Life Division and at 31 December 2018 ALAC is no longer a separate identifiable component of the Group.
Of the three full scope components, audit procedures were performed on one of these directly by the primary audit team whilst the remaining two components were audited by the component audit teams. For Other Companies, where the work was performed by component auditors, we determined the appropriate level of involvement to enable us to determine that sufficient audit evidence had been obtained as a basis for our opinion on the Group as a whole.
The primary audit team followed a programme of planned visits that has been designed to ensure that the Senior Statutory Auditor visited each of the components where the Group audit scope was focused at least once every year and the most significant of them more than once a year. For all full scope components, in addition to the component visits, the primary audit team reviewed key working papers and participated in the component teams’ planning, including the component teams’ discussion of fraud and error. The primary audit team attended the closing meetings with the management of the Phoenix Life Division and SLAL and attended key Audit Committee meetings at the components.
• Audit committee reporting set out on pages 68 to 71 – the section describing the work of the audit committee does not appropriately address matters communicated by us to the audit committee; or
• Directors’ statement of compliance with the UK Corporate Governance Code set out on page 109 – the parts of the Directors’ statement required under the Listing Rules relating to the company’s compliance with the UK Corporate Governance Code containing provisions specified for review by the auditor in accordance with Listing Rule 9.8.10R(2) do not properly disclose a departure from a relevant provision of the UK Corporate Governance Code.
OPINIONS ON OTHER MATTERS PRESCRIBED BY THE COMPANIES ACT 2006 In our opinion, the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006.
RESPONSIBILITIES OF DIRECTORS As explained more fully in the Statement of Directors’ Responsibilities set out on page 110, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the Directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, the Directors are responsible for assessing the Group and parent company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Directors either intend to liquidate the Group or the parent company or to cease operations, or have no realistic alternative but to do so.
• in respect of irregularities, considered to be non-compliance with laws and regulations, are to obtain sufficient appropriate audit evidence regarding compliance with the provisions of those laws and regulations generally recognised to have a direct effect on the determination of material amounts and disclosures in the financial statements (‘direct laws and regulations’), and perform other audit procedures to help identify instances of non-compliance with other laws and regulations that may have a material effect on the financial statements. We are not responsible for preventing noncompliance with laws and regulations and our audit procedures cannot be expected to detect non-compliance with all laws and regulations.
Our approach was as follows: • We obtained an understanding of the legal and regulatory frameworks that are applicable to the company and its subsidiaries and determined that the relevant laws and regulations related to elements of company law and tax legislation, and the financial reporting framework. Our considerations of other laws and regulations that may have a material effect on the financial statements included permissions and supervisory requirements of the Prudential Regulation Authority (‘PRA’) and the Financial Conduct Authority (‘FCA’) and UK Listing Authority (‘UKLA’). We obtained a general understanding of how Phoenix Group Holdings is complying with those frameworks by making enquiries of management and those responsible for legal and compliance matters. We also reviewed correspondence between the Company and UK regulatory bodies; reviewed minutes of the Board and Executive Committee; and gained an understanding of the Company’s approach to governance, demonstrated by the Board’s approval of the Company’s governance framework.
• For direct laws and regulations, we considered the extent of compliance with those laws and regulations as part of our procedures on the related financial statement items.
• The Company operates in the insurance industry which is a highly regulated environment. As such the Senior Statutory Auditor considered the experience and expertise of the engagement team to ensure that the team had the appropriate competence and capabilities, which included the use of specialists where appropriate.
• We assessed the susceptibility of the consolidated financial statements to material misstatement, including how fraud might occur by considering the controls that the Company has established to address risks identified by the entity, or that otherwise seek to prevent, deter or detect fraud. We also considered areas of significant judgement, including complex transactions, performance targets, external pressures and the impact these have on the control environment. Where this risk was considered to be higher, we performed audit procedures to address each identified fraud risk (valuation of insurance contract liabilities). These procedures included testing manual journals and were designed to provide reasonable assurance that the financial statements were free from fraud or error.
• The non-audit services prohibited by the FRC’s Ethical Standard were not provided to the group or the parent company and we remain independent of the group and the parent company in conducting the audit.
• The audit opinion is consistent with the additional report to the audit committee.
ED JERVIS (SENIOR STATUTORY AUDITOR) FOR AND ON BEHALF OF ERNST & YOUNG LLP, STATUTORY AUDITOR London
Reclassification adjustments for amounts recognised in profit or loss (28) 2
STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2018
Total equity attributable to ordinary shareholders of the parent 5,161 3,155
Proceeds from new shareholder borrowings, net of associated expenses 733 830
Proceeds from issuance of Tier 1 Notes, net of associated expenses D3 494 –
Cash and cash equivalents at the end of the year G11 4,926 2,245
Dividends paid on ordinary shares – (262) – – – – (262) – – (262)
Credit to equity for equity-settled share-based payments – – – – – – 9 9 – – 9
Dividends paid to non-controlling interests – – – – – – – – – (2) (2)
STATEMENT OF CONSOLIDATED CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2018
Phoenix Group Holdings (‘Old PGH’), the former holding company of the Group was subject to Cayman Islands Companies Law. Under Cayman Islands Companies Law distributions can be made out of profits or share premium subject, in each case, to a solvency test. The solvency test is broadly consistent with the Group’s going concern assessment criteria.
In accordance with Cayman Islands Companies Law, dividends shown in the table above were charged within equity against the share premium account. Upon creation of the new UK-registered holding company (as detailed in note A1), future dividends will be charged to retained earnings in accordance with the UK Companies Act 2006.
Retained earnings comprise the owners’ interest in the post-acquisition retained earnings of the subsidiary companies and the retained earnings of the Company. Distribution of retained earnings held within the long-term business funds and surplus assets held within the owners’ funds of the life companies is subject to retaining sufficient funds to protect policyholders’ interests.
Under a scheme of arrangement in accordance with section 86 of the Cayman Islands Companies Law between Phoenix Group Holdings (‘Old PGH’), the former ultimate parent company of the Group, and its shareholders, all of the issued shares in Old PGH were cancelled and an equivalent number of new shares in Old PGH were issued to the Company in consideration for the allotment to Old PGH shareholders of one ordinary share in the Company for each ordinary share in Old PGH that they held on the scheme record date, 12 December 2018.
The scheme of arrangement had the effect of the Company being inserted above Old PGH in the Group legal entity organisational structure and constitutes a group reconstruction. It has been accounted for in accordance with the principles of a reverse acquisition under IFRS 3 Business Combinations.
The consolidated financial statements have been prepared on a going concern basis and on a historical cost basis except for investment property, owner-occupied property and those financial assets and financial liabilities (including derivative instruments) that have been measured at fair value.
The consolidated financial statements are presented in sterling (£) rounded to the nearest million except where otherwise stated.
Statement of compliance Following the creation of the new UK-registered holding company, the consolidated financial statements have been prepared in accordance with IFRSs as adopted by the European Union (‘EU’). The consolidated financial statements were previously prepared in accordance with IFRSs as issued by the International Accounting Standards Board (‘IASB’). As at 31 December 2018 there were no differences between IFRSs adopted by the EU and those issued by the IASB in terms of their application to the Group, and therefore there is no impact on the consolidated financial statements in the current or prior period as a result of this change.
Restatement of prior period information Following the acquisition of the Standard Life Assurance businesses (see note H2), the Group has chosen to revise the presentation of its 2018 consolidated income statement to aid understanding of the Enlarged Group’s results. Where necessary, 2017 comparative amounts and accompanying notes have been restated to reflect line item reclassifications.
The Group has reassessed its operating segments to reflect the way in which the business is now being managed following the acquisition of the Standard Life Assurance businesses. Comparative segmental performance information has been restated in line with the revised segments and further details are provided in note B1.
A2.1 Foreign currency transactions Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (the ‘functional currency’). The consolidated financial statements are presented in sterling, which is the Group’s presentation currency.
The application of critical accounting judgements that could have the most significant effect on the recognised amounts include recognition of pension surplus, the determination of operating profit, identification of intangible assets arising on acquisitions, the recognition of an investment as an associate and determination of control with regards to underlying entities. Details of all critical accounting estimates and judgements are included below.
The valuation of insurance contract liabilities is sensitive to the assumptions which have been applied in their calculation. Details of sensitivities arising from significant non-economic assumptions are detailed on page 169 in note F4.
A. SIGNIFICANT ACCOUNTING POLICIES continued A3.3 Pension scheme obligations The valuation of pension scheme obligations is determined using actuarial valuations that depend upon a number of assumptions, including discount rate, inflation and longevity. External actuarial advice is taken with regard to setting the financial assumptions to be used in the valuation. As defined benefit pension schemes are long-term in nature, such assumptions can be subject to significant uncertainty.
Further detail on these estimates and the sensitivity of the defined benefit obligation to key assumptions is provided in note G6.
A3.4 Recognition of pension scheme surplus A pension scheme surplus can only be recognised to the extent that the sponsoring employer can utilise the asset through a refund of surplus or a reduction in contributions. A refund is available to the Group where it has an unconditional right to a refund on a gradual settlement of liabilities over time until all members have left the scheme. A review of the Trust Deeds of the Group’s pension schemes that recognise a surplus has highlighted that the Scheme Trustees are not considered to have the unilateral power to trigger a wind-up of the Scheme and the Trustees’ consent is not needed for the sponsoring company to trigger a wind-up. Where the last beneficiary died or left the scheme, the sponsoring company could close the Scheme and force the Trustees to trigger a wind-up by withholding its consent to continue the Scheme on a closed basis. This view is supported by external legal opinion and is considered to support the recognition of a surplus. Management has determined that the scheme administrator would be subject to a 35% tax charge on a refund and therefore any surplus is reduced by this amount. Further details of the Group’s pension schemes are provided in note G6.
A4. Adoption of new accounting pronouncements in 2018 In preparing the consolidated financial statements, the Group has adopted the following amendments, standards, and interpretations effective from 1 January 2018: IFRS 15 Revenue from Contracts with Customers IFRS 15 establishes a single comprehensive framework for determining whether, how and when revenue is recognised. The standard does not apply to insurance contracts or financial instruments within the scope of IAS 39 Financial Instruments: Recognition and Measurement. The Group adopted IFRS 15 using the full retrospective method of adoption however the effect of adopting IFRS 15 has been minimal and has not resulted in any adjustment in either the current or prior period. There has been no change to the Group’s accounting policies or to the basis of revenue recognition. As required by the standard, ‘Disaggregation of Revenue’ disclosures have been included in note C1 to the consolidated financial statements. The practical expedient under IFRS 15 has been applied and remaining performance obligations are not disclosed as the Group has the right to consideration from customers in amounts that correspond with the performance completed to date.
Amendments to IFRS 4 Insurance Contracts: Applying IFRS 9 Financial Instruments with IFRS 4 The amendments address concerns arising from implementing the new financial instruments standard, IFRS 9, before implementing IFRS 17 Insurance Contracts, which replaces IFRS 4. The amendments introduce two options for entities issuing insurance contracts: a temporary exemption from applying IFRS 9 and an overlay approach. The Group has taken advantage of the temporary exemption granted to insurers in IFRS 4 from applying IFRS 9 until 1 January 2021 as a result of meeting the exemption criteria as at 31 December 2015. As required by IFRS 4, a number of disclosures have been included in note E1 to the consolidated financial statements to provide information to allow comparison with entities adopting the standard in 2018. The IASB has recommended that the deferral period is extended to 1 January 2022.
Amendments to IAS 40 Transfers of Investment Property The amendments clarify when an entity should transfer property, including property under construction or development into, or out of investment property. The amendments state that a change in use occurs when the property meets, or ceases to meet, the definition of investment property and there is evidence of the change in use. A change in management’s intentions for the use of a property in and of itself does not provide evidence of a change in use. These amendments do not currently have any impact on the Group.
IFRIC Interpretation 22 Foreign Currency Transactions and Advance Consideration The Interpretation clarifies that, in determining the spot exchange rate to use on initial recognition of the related asset, expense or income (or part of it) on the derecognition of a non-monetary asset or non-monetary liability relating to advance consideration, the date of the transaction is the date on which an entity initially recognises the non-monetary asset or non-monetary liability arising from the advance consideration. If there are multiple payments or receipts in advance, then the entity must determine a date of the transactions for each payment or receipt of advance consideration. This Interpretation does not have any impact on the Group.
A5. New accounting pronouncements not yet effective The IASB has issued the following new or amended standards and interpretations which apply from the dates shown. The Group has decided not to early adopt any of these standards, amendments or interpretations where this is permitted.
The Group has taken advantage of the temporary exemption granted to insurers in IFRS 4 Insurance Contracts from applying IFRS 9 until 1 January 2021 (recommended deferral period extended by the IASB to 2022) as a result of meeting the exemption criteria as at 31 December 2015. As at this date the Group’s activities were considered to be predominantly connected with insurance as the percentage of the total carrying amount of its liabilities connected with insurance relative to the total carrying amount of all its liabilities was greater than 90%. Following the acquisition of the Standard Life Assurance businesses on 31 August 2018, this assessment was reperformed and the Group’s activities were still considered to be predominately connected with insurance. IFRS 9 will instead be implemented at the same time as the new insurance contracts standard (IFRS 17 Insurance Contracts) effective from 1 January 2021 (IASB recommended extending the implementation date to 2022). The Group expects to continue to value the majority of its financial assets as at FVTPL on initial recognition, as these financial assets are managed on a fair value basis. As detailed in note A4, a number of disclosures have been made in note E1 to the consolidated financial statements to provide information to allow comparison with entities adopting the standard in 2018.
• IFRS 16 Leases (2019). IFRS 16 will replace IAS 17 Leases. The new standard removes the classification of leases as either operating or finance leases for the lessee, thereby treating all leases as finance leases. This will result in the recognition of a right to use asset and a lease liability for all of the Group’s previously classified operating leases. Short-term leases (less than 12 months) and leases of low-value assets are exempt from the requirements. The Group has commenced an assessment of the impact of the new standard and has concluded that it will bring its property leases currently classified as operating leases (see note I5) onto the statement of consolidated financial position. A depreciation charge on the right-of-use assets and an interest expense on the lease liabilities will be recognised. The overall impact on financial performance and net equity will be immaterial due to the limited number of these contracts and their relative value.
A. SIGNIFICANT ACCOUNTING POLICIES continued A5. New accounting pronouncements not yet effective continued • Annual Improvements Cycle 2015-2017: Amendments to
• Amendments to IAS 19 Employee Benefits: Plan Amendment, Curtailment or Settlement (2019). The amendments address the accounting when a defined benefit plan amendment, curtailment or settlement occurs during a reporting period. The entity is required to update the assumptions about its obligation and fair value of its plan assets to calculate costs related to these changes. The proposed amendments to IAS 19 Employee Benefits specify that the entity is required to use the updated information to determine current service cost and net interest for the period followed by these changes. The Group will apply these changes to any plan amendments, curtailments or settlements occurring on or after 1 January 2019.
• Amendments to IFRS 9 Financial Instruments: Prepayment Features with Negative Compensation (2018 – recommended implementation date extended by the IASB to 2022 for those companies applying the IFRS 4 deferral option). The proposed amendments would allow for a narrow exception to IFRS 9 that would permit particular financial instruments with prepayment features with negative compensation to be eligible for measurement at amortised cost or at fair value through other comprehensive income.
• Sale or Contribution of Assets between an Investor and its Associate or Joint Venture (Amendments to IFRS 10 and IAS 28) (effective date deferred). The amendments address the conflict between IFRS 10 and IAS 28 in dealing with the loss of control of a subsidiary that is sold or contributed to an associate or joint venture.
All of the above have been endorsed by the EU with exception of the following amendments: • Annual Improvements Cycle 2015-2017: Amendments to IAS 12 Income Taxes, IAS 23 Borrowing Costs and IFRS 3 Business combinations/IFRS 11 Joint Arrangements (2019); • IAS 19 Employee Benefits: Plan Amendment, Curtailment or Settlement; • IAS 28 Investments in Associates and Joint Ventures References to the Conceptual Framework in IFRS Standards; • IAS 1 Presentation of Financial Statements and IAS 8 Accounting Policies; • IFRS 3 Business Combinations; and
Where not specifically stated, the impact on the Group of adopting the above standards, amendments and interpretations is subject to evaluation.
The Group defines and presents operating segments in accordance with IFRS 8 ‘Operating Segments’ which requires such segments to be based on the information which is provided to the Board, and therefore segmental information in this note is presented on a different basis from profit or loss in the consolidated financial statements. An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses relating to transactions with other components of the Group. Following the acquisition of the Standard Life Assurance businesses, the Group has reassessed its operating segments to reflect the way the business is now being managed. The Group now has four reportable segments comprising UK Heritage, UK Open, Europe and Management Services, as set out in note B1.1. In the prior year, the Group had one operating segment being Phoenix Life which provided a range of whole life, term assurance and pension products. Comparative segmental information for prior periods has been presented on a basis consistent with the current year. For management purposes, the Group is organised into business units based on their products and services. For reporting purposes, business units are aggregated where they share similar economic characteristics including the nature of products and services, types of customers and the nature of the regulatory environment. No such aggregation has been required in the current year. Prior to the acquisition of the Standard Life Assurance businesses, Phoenix Life was considered to be the Group’s only reportable segment, which included the Group’s operating insurance entities and the Management Services entities in the Group. The UK Heritage segment contains UK businesses which no longer actively sell products to policyholders and which therefore run-off gradually over time. These businesses will accept incremental premiums on in-force policies, and will provide annuities to existing policyholders with vesting products. Bulk Purchase Annuity contracts are included in this segment. The UK Open segment includes new and in-force life insurance and investment policies in respect of products that the Group continues to actively market to new and existing policyholders. This includes products such as workplace pensions and SelfInvested Personal Pensions (‘SIPPs’) distributed through the Group’s Strategic Partnership with Standard Life Aberdeen plc (‘SLA plc’), and also products sold under the SunLife brand.
Segmental measure of performance: Operating Profit The Company uses a non-GAAP measure of performance, being operating profit, to evaluate segment performance. Operating profit is considered to provide a comparable measure of the underlying performance of the 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 movement in liabilities. Annuity new business profits are included in operating profit using valuation assumptions consistent with the pricing of the business (including the Company’s expected longer-term asset allocation backing the business). Operating profit includes the effect of variances in experience for non-economic items, such as mortality and expenses, and the effect of changes in non-economic assumptions. It also incorporates the impacts of significant management actions where such actions are consistent with the Company’s core operating activities (for example, actuarial modelling enhancements and data reviews). Operating profit is reported net of policyholder finance charges and policyholder tax. Operating profit excludes the impact of the following items: • the difference between the actual and expected experience for economic items and the impacts of changes in economic assumptions on the valuation of liabilities (see notes B2.2 and B2.3); • amortisation and impairments of intangible assets (net of policyholder tax); • finance costs attributable to owners; • gains or losses on the acquisition or disposal of subsidiaries
B. EARNINGS PERFORMANCE continued B1.1 Segmental result £m 2017 – restated £m
Other non-operating items in respect of 2018 include: • a provision for £68 million in respect of a commitment to reduce ongoing and exit charges for non-workplace pension products; • costs of £43 million associated with the acquisition of the Standard Life Assurance businesses, and £7 million incurred under the on-going transition programme; • costs of £59 million associated with the equalisation of accrued Guaranteed Minimum Pension (‘GMP’) benefits within the Group’s pension schemes (see note G6 for further details); • a net benefit of £45 million reflecting anticipated costs savings associated with process improvements and continued investment in the digitalisation of the customer journey; • a gain on acquisition of £141 million reflecting the excess of the fair value of the net assets acquired over the consideration paid for the acquisition of the Standard Life Assurance businesses (see note H2 for further details); and
The Group has total non-current assets (other than financial assets, deferred tax assets, pension schemes and rights arising under insurance contracts) of £6,479 million located in the UK and £367 million located in the rest of the world.
Revenue from external customers: Gross premiums written 1,132 165 – – – 1,297
B. EARNINGS PERFORMANCE continued B2. Investment return variances and economic assumption changes
The principal assumptions underlying the calculation of the long-term investment return are: Other fixed interest 3.2 3.0
Investment return variances and economic assumption changes on long-term business 283 (6)