Immediate annuities This type of annuity is purchased with a single premium at the outset, and is paid to the policyholder for the remainder of their lifetime. Payments may also continue for the benefit of a surviving spouse or partner after the annuitant’s death. Annuities may be level, or escalate at a fixed rate, or may escalate in line with a price index and may be payable for a minimum period irrespective of whether the policyholder remains alive.
Known incidents The known incidents provision was created for historical data quality, administration systems problems and process deficiencies on the policy administration, financial reconciliations and operational finance aspects of business outsourced.
Restructuring provision Following the acquisition of AXA Wealth in 2016, the Group commenced the restructuring of these businesses to align their operating model with that of the other Group companies. These activities include separation and integration activities associated with the exiting of interim services agreements entered into with the vendor, and costs involved with implementing the Group’s preferred outsourcer model. A provision of £30 million was recognised in 2016, of which £17 million was utilised during 2017. The remaining £13 million is expected to be utilised within 6 months.
Following the acquisition of Abbey Life on 30 December 2016, a similar restructuring provision of £13 million was recognised in 2017 in respect of committed Abbey Life integration activities. During 2017, £8 million of this provision was utilised with the remaining £4 million expected to be utilised within 6 months.
Other provisions Other provisions include litigation and onerous contract provisions, together with obligations arising under a gift voucher scheme operated by the SunLife business.
G. OTHER STATEMENT OF CONSOLIDATED FINANCIAL POSITION NOTES continued G2. TAX ASSETS AND LIABILITIES continued Movement in deferred tax assets/(liabilities)
The Finance Act 2016 reduced the rates of corporation tax from 20% to 19% in April 2017 and to 17% from April 2020. Consequently a blended rate of tax has been used for the purposes of providing for deferred tax in these financial statements.
On 29 March 2017 the UK Government triggered Article 50 initiating a 2 year process for leaving the EU. There is some uncertainty about how the existing tax legislation will apply after the UK’s exit. No changes are required to the measurement of tax in these financial statements but this will be monitored and reassessed at each reporting period as negotiations continue.
As required by IFRIC 14, IAS 19 – ‘The limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction’, to the extent that the economic surplus will be available as a refund, the economic surplus is stated after a provision for tax that would be borne by the scheme administrators when the refund is made. The Group recognises a pension surplus on the basis that it is entitled to the surplus of each scheme in the event of a gradual settlement of the liabilities, due to its ability to order a winding up of the Trust.
Additionally under IFRIC 14 pension funding contributions are considered to be a minimum funding requirement and, to the extent that the contributions payable will not be available to the Group after they are paid into the scheme, a liability is recognised when the obligation arises. The net defined benefit asset/liability represents the economic surplus net of all adjustments noted above.
The movement in the net defined benefit asset/liability is analysed between the service cost, past service cost, curtailments and settlements (all recognised within administrative expenses in the consolidated income statement), the net interest cost on the net defined benefit asset/liability, including any reimbursement assets (recognised within net investment income in the consolidated income statement), remeasurements of the net defined asset/ liability (recognised in other comprehensive income) and employer contributions.
G. OTHER STATEMENT OF CONSOLIDATED FINANCIAL POSITION NOTES continued G6. PENSION SCHEMES continued An analysis of the defined benefit asset for each pension scheme is set out below: £m £m
Economic surplus (including £420 million (2016: £387 million) available as a refund on a winding-up of the Scheme) 500 465
Adjustment for amounts due from subsidiary eliminated on consolidation – (6)
G6.1 Pearl Group Staff Pension Scheme Scheme details The Pearl Group Staff Pension Scheme (‘the Pearl Scheme’) comprises a final salary section, a money purchase section and a hybrid section (a mix of final salary and money purchase). The final salary and hybrid sections of the Pearl Scheme are closed to new members, and since 1 July 2011 are also closed to future accrual by active members.
To the extent that an economic surplus will be available as a refund, the economic surplus is stated after a provision for tax that would be borne by the scheme administrators when the refund is made. Additionally, pension funding contributions are considered to be a minimum funding requirement and, to the extent that the contributions payable will not be available to the Group after they are paid into the scheme, a liability is recognised when the obligation arises.
Funding A triennial funding valuation of the Pearl Scheme as at 30 June 2015 was completed in September 2016. This showed a deficit as at 30 June 2015 of £300 million, on the agreed technical provisions basis. The funding and IFRS accounting bases of valuation can give rise to different results for a number of reasons. The funding basis of valuation is based on general principles of prudence whereas the accounting valuation is based on best estimates. Discount rates are gilt-based for the funding valuation whereas the rate used for IFRS valuation purposes is based on a yield curve for high quality AA-rated corporate bonds. In addition, the values are prepared at different dates which will result in differences arising from changes in market conditions and employer contributions made in the subsequent period.
On 27 November 2012 the principal employer and the Trustee of the Pearl Scheme entered into a revised pensions funding agreement (the ‘Pensions Agreement’), the principal terms of which have not been altered following the 30 June 2015 triennial valuation. The principal terms of the Pensions Agreement are: – annual cash payments into the scheme of £70 million in 2013 and 2014 payable on 30 September, followed by payments of £40 million each year from 2015 to 2021. The timing of payment of contributions changed during 2017 so that the contributions are paid on a monthly basis following the last annual payment of £40 million completed in September 2016. The Pensions Agreement includes a sharing mechanism, related to the level of dividends paid out of PGH2, that in certain circumstances allows for an acceleration of the contributions to be paid to the Pearl Scheme;
– additional contributions may become payable if the scheme is not anticipated to meet the two agreed funding targets: (i) to reach full funding on the technical provisions basis by 30 June 2022; and
Contributions totalling £50 million were paid into the scheme in 2017 (2016: £40 million), £10 million in relation to the last quarter of 2016 and £40 million in relation to 2017 by monthly instalments. Contributions totalling £40 million are expected to be paid into the scheme in 2018.
Remeasurements: Return on plan assets excluding amounts included in interest income 76 – – – 76
Change in minimum funding requirement obligation – – – 18 18
G. OTHER STATEMENT OF CONSOLIDATED FINANCIAL POSITION NOTES continued G6. PENSION SCHEMES continued G6.1 Pearl Group Staff Pension Scheme continued
Remeasurements: Return on plan assets excluding amounts included in interest income 453 – – – 453
Loss from changes in financial assumptions – (367) – – (367)
The actual return on plan assets was a gain of £145 million (2016: £537 million gain).
The weighted average duration of the defined benefit obligation at 31 December 2017 is 17 years (2016: 17 years).
Impact on the defined benefit obligation (£m) 2,237 (86) 91 60 (56) 85 (84)
G. OTHER STATEMENT OF CONSOLIDATED FINANCIAL POSITION NOTES continued G6. PENSION SCHEMES continued G6.2 PGL Pension Scheme The PGL Pension Scheme comprises a final salary section and a defined contribution section.
To the extent that an economic surplus will be available as a refund, the economic surplus is stated after a provision for tax that would be borne by the scheme administrators when the refund is made. Additionally pension funding contributions are considered to be a minimum funding requirement and, to the extent that the contributions payable will not be available to the Group after they are paid into the scheme, a liability is recognised when the obligation arises.
At the same time as the buy-in transaction, there was a rule change made with respect to pre-1997 excess benefits for members of the Phoenix section of the PGL Scheme. Pensions increases will now be increased in line with CPI inflation subject to a maximum of 5% per annum. Prior to this, members received discretionary increases in payment on these benefits with the discretionary increases not allowed for in the defined benefit obligation. The financial impact of this change was to recognise in 2016 an increase in the defined benefit obligation of £6 million, and a past service cost in the consolidated income statement.
Change in minimum funding requirement obligation – – – 4 4
Scheme assets transferred as premium for buy-in transactions (1,164) – – – (1,164) Employer’s contributions 15 – – – 15 Benefit payments (85) 85 – – –
Obligations for repayment of stock lending collateral received (254) – (95) –
The actual return on plan assets was £53 million (2016: £425 million).
The Group ensures that the investment positions are managed within an asset liability matching (‘ALM’) framework that has been developed to achieve long-term investments that are in line with the obligations under the pension scheme. Within this framework an allocation of 85% of the scheme assets is invested in a combination of supranational debt and a liability hedging portfolio. The Liability Driven Investment (‘LDI’) portfolio is passively managed against a liability benchmark in order to hedge the duration and inflation risks.
Principal assumptions The principal financial assumptions of the PGL Pension Scheme are set out in the table below: Rate of increase for pensions in payment (7.5% per annum or RPI if lower) 3.20 3.25
1 The 2016 comparative has been restated following the adoption in 2017 of a refined methodology for calculating the life expectancy sensitivity numbers.
The valuation has been based on an assessment of the liabilities of the Abbey Life Scheme as at 31 December 2017 undertaken by independent qualified actuaries. The present values of the defined benefit obligation and the related interest costs have been measured using the projected unit credit method.
Funding The last funding valuation of the Scheme was carried out by a qualified actuary as at 31 March 2015 and showed a deficit of £107 million. A new schedule of contributions was introduced with effect from 1 July 2016 following completion of the 31 March 2015 funding valuation. In respect of future accrual of benefits up until 30 June 2017, Abbey Life paid 39.5% of gross pensionable earnings from 1 July 2016 and in relation to deficit contributions, Abbey Life paid the following: – a lump sum of £15 million into the Scheme (paid on 24 June 2016); – monthly contributions of £246,000 into the Scheme. These amounts were paid to the Scheme on or before the 19th of the calendar month following that to which the payment related; – annual payments of £2.92 million into the 2016 Charged Account by 31 July each year, with the first payment being paid by 31 July 2016.
As the acquisition of Abbey Life took place on 30 December 2016, no amounts are recognised in the 2016 consolidated income statement or in the statement of comprehensive income in relation to the Abbey Life Scheme.
The actual return on plan assets was £12 million (2016: £nil).
The weighted average duration of the defined benefit obligation at 31 December 2017 is 18 years (2016: 18 years).
It has been assumed that post-retirement mortality is in line with a scheme-specific table which was derived from the actual mortality experience in recent years, performed as part of the actuarial funding valuation as at 31 March 2015, using the SAPS S2 ‘Light’ tables for males and for females based on year of use. Future longevity improvements are based on CMI 2016 Core Projections (2016: CMI 2015 Core Projections) and a long-term rate of improvement of 1.75% per annum for males and 1.50% per annum for females up to and including age 85 then decreasing linearly to 0% per annum at age 110 (2016: Long-term rate of improvement of 1.25% per annum). Under these assumptions the average life expectancy from retirement for a member currently aged 45 retiring at age 65 is 25.8 years and 27.2 years for male and female members respectively (2016: 25.0 years and 27.2 years respectively).
The UK Government currently intends to equalise benefits between males and females arising from the accrual of Guaranteed Minimum Pension (‘GMP’) requirements. Legislation will be implemented following completion of the ongoing consultation on this matter. Once this consultation process has reached a conclusion, the Group will be able to quantify the impact of this change.
The intangible asset is amortised on a straight-line basis over its useful economic life and assessed for impairment whether there is an indication that the recoverable amount of the intangible asset is less than its carrying value. The customer relationship intangible asset is allocated to relevant cash generating units for the purposes of impairment testing.
Brands Brands acquired in a business combination are recognised at fair value at the acquisition date, and measured on initial recognition at cost. Amortisation is calculated using the straight-line method to allocate the cost of brands over their estimated useful lives. They are tested for impairment annually or when there is evidence of possible impairment. For impairment testing, they are allocated to the relevant cash generating unit. Brands are impaired when the recoverable amount is less than the carrying value.
Acquired in-force business on investment contracts without DPF is being amortised on a 15% diminishing balance basis. This basis of amortisation has been updated following the application of the amendment to IAS 38 Intangible Assets, effective from 1 January 2016. This change has had no impact on the amounts recognised in the consolidated financial statements.
G7.4 Present value of future profits on non-participating business in the with-profit fund The principal assumptions used to calculate the present value of future profits are the same as those used in calculating the insurance contract liabilities given in note F4.1. Revaluation of the present value of future profits is charged or credited to the consolidated income statement as appropriate.
G. OTHER STATEMENT OF CONSOLIDATED FINANCIAL POSITION NOTES continued G7.5 BRANDS The brand intangible of £20 million was recognised on acquisition of AXA Wealth and represents the value attributable to the SunLife brand as at 1 November 2016. The intangible asset was valued on a ‘multi-period excess earnings’ basis. Impairment testing was performed in a combined test with the AXA goodwill (see section G7.1). The value in use continues to exceed its carrying value.
The brand name intangible is being amortised over a 10 year period.
Owner-occupied properties have been valued by accredited independent valuers at 31 December 2017 on an open market basis in accordance with the Royal Institution of Chartered Surveyors’ requirements, which is deemed to equate to fair value. The fair value measurement for the properties of £26 million has been categorised as Level 3 based on the non-observable inputs to the valuation technique used.
The following table shows reconciliation from the opening to the closing fair value for the Level 3 owner-occupied properties at valuation: £m 2016 £m
The fair value of the owner-occupied properties valuation would increase (decrease) if the expected rental values per square foot were to be higher (lower) and the capitalisation rates were to be lower (higher).
Gains on adjustments to fair value (recognised in consolidated income statement) 9 26
Investment properties also include £138 million (2016: £202 million) of property reversions arising from sales of the NPI Extra Income Plan (see note E5 for further details).
The fair value measurement of the investment properties has been categorised as Level 3 based on the inputs to the valuation techniques used. The following table shows the valuation techniques used in measuring the fair value of the investment properties, the significant non-observable inputs used, the inter-relationship between the key non-observable inputs and the fair value measurement of the investment properties: Description Valuation techniques Significant non-observable inputs Range (weighted average) 2017 Range (weighted average) 2016
Mortality 130% IFL92C15 – Female 130% IFL92C15 - Female 130% IML92C15 – Male 130% IML92C15 - Male
– a decrease of 10% in the mortality rate would decrease the market value by £1 million.
Future minimum lease rental receivables in respect of non-cancellable operating leases on investment properties were as follows: £m 2016 £m
Later than 1 year and not later than 5 years 61 57
In addition, contractual requirements may place restrictions on the transfer of funds as follows: – the Pearl Pension Scheme funding agreement includes certain covenants which restrict the transfer of funds within the Group. Details are provided in note G6.1.
H2. ACQUISITIONS AND DISPOSALS H2.1 Acquisition of AXA Wealth On 1 November 2016, the Group acquired 100% of the issued share capital of AXA Wealth Limited (‘AWL’), AXA Wealth Services Limited, AXA Sun Life Direct Limited, Winterthur Life UK Holdings Limited and AXA Trustee Services Limited from AXA UK plc for total cash consideration of £373 million. The fair values of the identifiable assets acquired, liabilities assumed and the resultant goodwill determined at the date of acquisition have not been adjusted within the 12 month period since the date of acquisition.
No gain or loss arose on this effective disposal. The Group’s investment in UKCPT is now treated as an associate and held at fair value.
The Group’s remaining interest in UKCPT continues to be held in the with-profit funds of the Group’s life companies. Therefore, the shareholder exposure to fair value movements in the Group’s investment in UKCPT continues to be limited to the impact of those movements on the shareholder share of distributed profits of the relevant fund.
The Group has determined that all of its investments in collective investment schemes are structured entities. In addition, a number of debt security structures, private equity funds and the Group’s joint venture have been identified as structured entities. The Group has assessed that it has interests in both consolidated and unconsolidated structured entities as shown below: – Unit trusts; – OEICs; – SICAVs; – Private Equity Funds (‘PEFs’); – Asset backed securities; – Collateralised Debt Obligations (‘CDOs’); – Other debt structures; and
H4.1 Interests in consolidated structured entities The Group has determined that where it has control over funds, these investments are consolidated structured entities.
At 31 December 2017 the Group has granted further loans to the EBT of £4 million (2016: £7 million). Further loans are expected to be granted in 2018. Details of this loan are included in note 10.4 to the parent company accounts.
As at the reporting date the Group has no intention to provide financial or other support in relation to any other consolidated structured entity.
Asset backed securities 607 617 1 Directly held collective investment schemes refer to those structured entities directly invested in by Group companies. Such investments have been analysed by reference to the predominant asset class the structure is investing in.
The Group’s maximum exposure to loss with regard to the interests presented above is the carrying amount of the Group’s investments. Once the Group has disposed of its shares or units in a fund, it ceases to be exposed to any risk from that fund. The Group’s holdings in the above unconsolidated structured entities are largely less than 50% and as such the size of these structured entities are likely to be significantly higher than their carrying value.
H. INTERESTS IN SUBSIDIARIES AND ASSOCIATES continued H5. GROUP ENTITIES The table below sets out the Group’s subsidiaries (including collective investment schemes that have been consolidated within the Group’s financial statements), joint ventures, associates and significant holdings in undertakings (including undertakings where holding amounts to 20% or more of the nominal value of the shares or units and they are not classified as a subsidiary, joint venture or associate).
Pearl Group Services Limited (management services company) Wythall1 Ordinary shares 100.00%
Phoenix Customer Care Limited (financial services company) Wythall1 Ordinary shares 100.00%
Pearl Customer Care Limited (financial services company) Wythall1 Ordinary shares 100.00%
PG Dormant (No 6) Limited (dormant company) Wythall1 Ordinary shares 100.00%
Scottish Mutual Customer Care Limited (dormant company) Wythall1 Ordinary shares 100.00%
Phoenix Life Insurance Services Limited (dormant company) Wythall1 Ordinary shares 100.00%
PG Dormant No 2 Holdings (holding company) Republic of Ireland8 Ordinary shares 100.00%
PG Dormant (No 5) Limited (dormant company) Wythall1 Ordinary shares 100.00%
Alba LAS Pensions Management Limited (dormant company) Glasgow10 Ordinary shares 100.00%
Pearl (Martineau Phase 1) Limited (dormant company) Wythall1 Ordinary shares 100.00%
The Pearl Martineau Limited Partnership (dormant company) Wythall1 Limited Partnership 100.00%
Janus Henderson Global Funds – Janus Henderson Institutional Overseas Bond Fund
Janus Henderson Strategic Investment Funds – Janus Henderson Institutional European Index Opportunities Fund
H. INTERESTS IN SUBSIDIARIES AND ASSOCIATES continued H5. GROUP ENTITIES continued
PUTM Bothwell Floating Rate ABS Fund Wythall1 Authorised unit trust 100.00%
PUTM Bothwell Asia Pacific (Excluding Japan) Fund Wythall1 Authorised unit trust 99.32%
PUTM Bothwell Emerging Markets Equity Fund Wythall1 Authorised unit trust 99.88%
PUTM Bothwell Index-Linked Sterling Hedged Fund Wythall1 Authorised unit trust 100.00%
PUTM Bothwell Credit Non Financial Sterling Hedged Fund Wythall1 Authorised unit trust 100.00%
PUTM Bothwell Sterling Government Bond Fund Wythall1 Authorised unit trust 98.82%
PUTM Bothwell Tactical Asset Allocation Fund Wythall1 Authorised unit trust 100.00%
Standard Life Investments Global SICAV – Emerging Market Debt Unconstrained Fund
AB SICAV I – ESG Responsible Global Factor Portfolio AB Luxembourg17 SICAV, sub fund 71.39%
Associates: UK Commercial Property Trust Limited (property investment company) Guernsey20 Ordinary shares 47.87%
Janus Henderson Institutional UK Index Opportunities Fund London14 Authorised unit trust 72.18%
AB SICAV I – Global Factor Portfolio (SF1) Luxembourg17 SICAV, sub fund 39.22%
AXA Fixed Interest Investment ICVC – Sterling Strategic Bond Fund London18 OEIC, sub fund 59.73%
AQR UCITS Funds – AQR Global Risk Parity UCITS Fund Luxembourg23 OEIC, sub fund 21.60%
Aberdeen UK Smaller Companies Equity Fund Aberdeen25 OEIC, sub fund 26.05%
Architas MA Active Dynamic Fund Class R Net Accumulation London26 OEIC, sub fund 21.86%
I1.1 Share-based payment expense The expense recognised for employee services receivable during the year is as follows: £m £m
Other share schemes During the year, the Group launched a Chairman’s share award which is granted to a small number of employees in recognition of their outstanding contribution in the previous year. On 24 March 2017, 22,830 nil-cost options were granted and these awards are expected to vest on 24 March 2020.
The Group operates a Share Incentive Plan (‘SIP’) which allows participating employees to purchase ‘Partnership shares’ in the Company through monthly contributions which are limited to the lower of £150 per month and 10% of gross monthly salary. For every three Partnership shares purchased, the Company gives the employee one ‘Matching share’. Matching shares are required to be held for three years.
The weighted average remaining contractual life for the rewards outstanding as at 31 December 2017 is 1.5 years (2016: 1.3 years).
The following analysis gives further detail behind the ‘cash utilised by operations’ figure in the statement of consolidated cash flows.
Non-cash movements in profit for the year before tax: Fair value gains on: Investment property (9) (26)
This note sets out the Group’s approach to managing capital and provides an analysis of Own Funds and SCR.
Capital Management Framework The Group’s Capital Management Framework is designed to achieve the following objectives: – to provide appropriate security for policyholders and meet all regulatory capital requirements under the Solvency II regime while not retaining unnecessary excess capital; – to ensure sufficient liquidity to meet obligations to policyholders and other creditors; – to optimise the Fitch Rating’s financial leverage to maintain an investment grade credit rating; and
Group capital Group capital is managed on a Solvency II basis.
The capital policy of each Group Holding Company is designed to ensure that there is sufficient liquidity to meet creditor obligations through the combination of cash buffers and cash flows from the Group’s operating companies.
In December 2015, the Group was granted the PRA’s approval for use of its Internal Model to assess capital requirements. Following the 2016 acquisitions of the AXA Wealth and Abbey Life businesses, the Group obtained the PRA’s approval to incorporate the acquired AXA Wealth businesses within the scope of the Group’s Internal Model in March 2017. The capital assessment of the Abbey Life business remained on a Standard Formula basis as at 31 December 2017. Therefore, the Solvency II position of the Group at that date is based partially on the Group’s Internal Model and partially on Standard Formula. However, following completion of the reinsurance of the majority of the Abbey Life business into Phoenix Life Limited in December 2017, the SCR for the related risks is now being calculated in accordance with the Group’s Internal Model.
Approval to include the Abbey Life business within the scope of the Group’s Internal Model was received in March 2018.
An analysis of the PGH Solvency II surplus as at 31 December 2017 is provided in the business review section on page 28 of the Annual Report and Accounts.
Additional information on the PGH Own Funds, SCR and MCR is included in the additional capital disclosures on pages 198 to 199 of the Annual Report and Accounts.
In the ordinary course of business, the Group and its subsidiaries carry out transactions with related parties as defined by IAS 24 Related party disclosures.
I4.1 Transactions with pension scheme and associate During the year, the Group entered into the following transactions with its pension schemes and associate: Transactions 2017 £m
The principal operating lease commitments for 2017 concern office space located at St Vincent Street, Glasgow, Juxon House, London and Redcliff Street, Bristol (2016: St Vincent Street, Glasgow and Juxon House, London).
During 2016, the FCA published two thematic reviews into the fair treatment of long-standing customers and into the practices of nonadvised annuity sales. Following the acquisition of Abbey Life, a provision has been recognised in respect of obligations identified as a result of past practices adopted by the entity in the areas covered by the two reviews. As part of this exercise, other potential exposures were identified where it is not yet possible to conclude that the Group has a present obligation that will require an outflow of economic benefits. The determination of any liability arising remains dependent on the occurrence of uncertain future events, including finalisation of the FCA’s enforcement investigation into Abbey Life that commenced in response to the findings of the review into the fair treatment of long-standing customers. Further detailed information on these exposures is included in note G1.
The acquisition facility has a final maturity date of twelve months after completion. The Group is entitled to request two six month extensions to the term of the facility (which would together extend the maturity date to 24 months after completion). The interest period may be selected by the Group and the interest rate for the initial six month period is LIBOR plus a margin of 0.5%.
On 14 March 2018, the Board recommended a final dividend of 25.1p per share (2016: 23.9p per share) for the year ended 31 December 2017. Payment of the final dividend is subject to shareholder approval at the AGM. The cost of this dividend has not been recognised as a liability in the financial statements for 2017 and will be charged to the statement of changes in equity in 2018.
H Staunton C Bannister J McConville A Barbour I Cormack K Green W Mayall J Pollock B Richards N Shott K Sorenson
Total comprehensive income for the year attributable to owners 87 38
There are no other comprehensive income items for 2017 and 2016.
The notes identified numerically on pages 185 to 190 are an integral part of these Company financial statements. Where items also appear in the consolidated financial statements, reference is made to the notes (identified alphanumerically) on pages 110 to 181.
Statement of Cash Flows For the year ended 31 December 2017 £m £m
Repayment of loans from Group entities including price premium received 929 775
Return of share capital from Opal ReAssurance Limited (’Opal Re’) – 77
Cash and cash equivalents at the beginning of the year – –
Dividends paid on ordinary shares (note B4) – (193) – – (193)
Statement of Compliance The financial statements have been prepared in accordance with International Financial Reporting Standards (’IFRSs’) as issued by the International Accounting Standards Board (’IASB’).
2. FINANCIAL INFORMATION In preparing the financial statements the Company has adopted the standards, interpretations and amendments effective 1 January 2017 which have been issued by the IASB as detailed in note A4 to the consolidated financial statements, none of which have had a significant impact on the Company’s financial statements. Details of standards, interpretations and amendments to be adopted in future periods are also detailed in note A5 to the consolidated financial statements and details about adoption of the standard IFRS 9 Financial Instruments effective from 1 January 2018 are outlined below.
3. SEGMENTAL ANALYSIS The Company has one reportable segment, comprising its investment in and loans to/from its subsidiaries. Its revenue principally comprises the dividend and interest income derived from these investments and loans. Information relating to this segment is included in the Company’s primary financial statements on pages 182 to 184. The accounting policy for segmental analysis is included in note B1 to the consolidated financial statements.
4. NET INVESTMENT INCOME The accounting policy for net investment income is included in note C1 to the consolidated financial statements.
Premium on partial redemption of loans due from PGH (LCA) Limited and PGH (LCB) Limited 3 –
Gain on return of capital from subsidiary (note 9) 25 12
Notes to the Parent Company Financial Statements continued 5. ADMINISTRATIVE EXPENSES The accounting policy for administrative expenses is included in note C2 to the consolidated financial statements.
6. FINANCE COSTS The accounting policy for finance costs is included in note C4 to the consolidated financial statements.
This note analyses the interest costs on the Company’s borrowings which are described in note 7.
US $500 million Tier 2 bonds (note d) 368 – 390 –
e. On 28 February 2017, the Company became an additional borrower under a £900 million 5 year unsecured revolving credit facility with an outstanding balance on that date of £544 million, net of issue costs. On 6 July 2017, the proceeds from the issuance of the US $500 million Tier 2 bonds were used to repay £384 million of the revolving credit facility and on 8 August 2017, the remaining outstanding balance of £166 million was repaid. There are no mandatory or target amortisation payments associated with the revolving credit facility but prepayments are permissible. The facility accrues interest at LIBOR plus 1.1%, a reduced rate following the upgrade to the Company’s credit rating on 25 July 2017 (previously LIBOR plus 1.35%). On 20 January 2017, the utilisation fee was reduced from 0.4% per annum to 0.2% per annum and it was further reduced to 0.1% per annum on 6 July 2017 following subsequent repayments of the outstanding balance (2016: 0.4% per annum).
RECONCILIATION OF LIABILITIES ARISING FROM FINANCING ACTIVITIES The table below details changes in the Company’s liabilities arising from financing activities, including both cash and non-cash changes. Liabilities arising from financing activities are those for which cash flows were, or future cash flows will be, classified in the Company’s statement of cash flows as cash flows from financing activities.
On 24 March 2016, the Company received £77 million as a result of a return of share capital from Opal Re. As the cost of the Company’s investment in Opal Re was £65 million, a gain in 2016 of £12 million was recognised on return of the capital. On 1 September 2017, a further gain of £25 million was recognised in respect of the return of the remaining share capital from Opal Re.
Notes to the Parent Company Financial Statements continued 10. FINANCIAL ASSETS The accounting policy for financial assets is included in note E1 to the consolidated financial statements.
All investments are categorised as Level 3 financial instruments. The investment is an equity holding in a property investment structure and was acquired by the Company during 2017 and all fair value movements are included in net investment income in the statement of comprehensive income. Unrealised losses of £3 million were recognised in other comprehensive income in the current period. Sensitivities are included in note E2.3 10.2 FIXED AND VARIABLE RATE INCOME SECURITIES
Investment in fixed and variable rate income securities 41 – 41 –
Loans due from PGH (MC1) Limited and PGH (MC2) Limited (note b) 142 128 250 235
Loans due from Phoenix Life Holdings Limited (note c) 1,291 – 1,388 –
a. On 22 March 2010, the Company subscribed for £325 million of Eurobonds which were issued equally by PGH (LCA) Limited and PGH (LCB) Limited. On 23 March 2010, the Eurobonds were listed on the International Stock Exchange. Interest accrues on these Eurobonds at a rate of LIBOR plus a margin of 2.5% and the final maturity date is 30 June 2025. The Eurobonds were initially recognised at fair value and are accreted to par over the period to 2025. At 31 December 2017, £207 million was due (2016: £191 million).
On 20 March 2017, the Company was assigned a £295 million loan equally by PGH (LCA) Limited and PGH (LCB) Limited. These loans were initially recognised at fair value of £337 million and are accreted to par over the period to 2021. These loans accrue interest at a rate of 6.15% and mature on 7 July 2021. Interest of £27 million has been deferred and has been added to the loan value and becomes due and payable on 31 July 2018. Interest will accrue on the deferred interest at LIBOR plus a margin of 1%. During the year, £176 million of repayments were received in addition to a premium of £27 million. At 31 December 2017, £170 million was due (2016: £nil).
On 20 March 2017, the Company was assigned a £900 million revolving credit facility with a balance outstanding of £544 million net of issue costs by PGH (LCA) Limited and PGH (LCB) Limited. Interest of £10 million has been deferred and has been added to the loan value and becomes due and payable on 31 July 2018. Interest will accrue on the deferred interest at LIBOR plus a margin of 1%. On 6 July 2017, £384 million repayments were received and on 8 August 2017, a further £166 million was repaid. At 31 December 2017, £10 million was due (2016: £nil).
c. On 20 March 2017, the Company was assigned a £428 million subordinated loan by Phoenix Life Holdings Limited. This loan was initially recognised at fair value of £466 million and is accreted to par over the period to 2025. The loan accrues interest at a rate of 6.675% and matures on 18 December 2025. Fees associated with this loan of £3 million were deferred and are being amortised over the life of the loan. At 31 December 2017, £461 million was due (2016: £nil).
On 20 March 2017, the Company was assigned a £300 million subordinated loan by Phoenix Life Holdings Limited. This loan was initially recognised at fair value of £306 million and is accreted to par over the period to 2022. The loan accrues interest at a rate of 4.175% and matures on 20 July 2022. Interest of £9 million has been deferred and has been added to the loan balance and becomes due and payable on 20 July 2018. Interest will accrue on the deferred interest at 6 month LIBOR plus a margin of 3%. On 5 May 2017, the Company issued another £150 million subordinated loan. Fees associated with these loans of £5 million were deferred and are being amortised over the life of the loan. At 31 December 2017, £462 million was due (2016: £nil).
On 6 July 2017, the Company issued a US $500 million loan to Phoenix Life Holdings Limited due 2027 with a coupon of 5.375%. Fees associated with this loan of £2 million were deferred and being amortised over the life of the loans. The foreign exchange movement in the period was £15 million. At 31 December 2017, £368 million was due (2016: £nil).
Amounts due from related parties at the end of the year: 2017 £m 2016 £m
Amounts due to related parties at the end of the year: 2017 £m 2016 £m
The analysis of the asset portfolio provided below comprises the assets held by the Group’s life companies, and it is stated net of derivative liabilities. It excludes other Group assets such as cash held in the holding and service companies and the assets held by the non-controlling interests in consolidated collective investment schemes.
The following table provides an overview of the exposure by asset category of the Group’s life companies’ shareholder and policyholder funds: Carrying value
The following table analyses by type the debt securities of the life companies: Analysis by type of debt securities
The life companies’ debt portfolio was £29.2 billion at 31 December 2017. Shareholders had direct exposure to £12.5 billion of these assets (including supported participating funds), of which 99% of rated securities were investment grade. The shareholders’ credit risk exposure to the non-supported participating funds is primarily limited to the shareholders’ share of future bonuses. Shareholders’ credit risk exposure to the unit-linked funds is limited to the level of asset management fee, which is dependent on the underlying assets.
Sovereign and supranational debt represented 40% of the debt portfolio in respect of shareholder exposure, or £5.0 billion, at 31 December 2017. The vast majority of the life companies’ exposure to sovereign and supranational debt holdings is to UK gilts.
The £3,255 million shareholder exposure to financial institution corporate debt comprised £2,037 million (2016: £2,170 million) bank debt and £1,218 million (2016: £1,736 million) non-bank debt.
The following table sets out the credit rating analysis of the debt portfolio: Credit rating analysis of debt portfolio
Further information is provided in note I3 of the IFRS financial statements.
PGH SOLVENCY II SURPLUS The PGH surplus at 31 December 2017 is £1.8 billion (2016: £1.1 billion, pro forma). The rationale for the use of the pro forma metric in 2016 is set out on page 23.
– availability to be called up on demand to fully absorb losses on a going-concern basis, as well as in the case of winding-up (‘permanent availability’); – in the case of winding-up, the total amount that is available to absorb loses before repayment to the holder until all obligations to policyholders and other beneficiaries have been met (‘subordination’).
BREAKDOWN OF SCR An analysis of the undiversified SCR of PGH is presented below: %
The principal risks of the Group are described in detail in note E6 and F4 in the IFRS financial statements.
BREAKDOWN OF SHAREHOLDER CAPITAL POSITION The shareholder capital position is an adjusted PGH position which excludes Own Funds and the associated SCR relating to the unsupported with-profit funds and the PGL Pension Scheme of £2.0 billion as at 31 December 2017 (2016: £2.0 billion).
The shareholder capital position is further analysed between the contributions of the life companies and holding companies as follows: Estimated £bn
Own Funds within the holding companies of £0.6 billion (2016: £nil) principally comprises cash and other financial assets held in the holding companies, net of shareholder borrowings which do not qualify as capital under the Solvency II regulations.
PGH’s eligible Own Funds to cover MCR is £5.3 billion (2016: £5.2 billion) leaving an excess of eligible Own Funds over MCR of £4.1 billion (2016: £4.0 billion), which translates to an MCR coverage ratio of 448% (2016: 409%).
The Group assesses its financial performance based on a number of measures. Some measures are management derived measures of historic or future financial performance, position or cash flows of the Group; which are not defined or specified in accordance with relevant financial reporting frameworks such as International Financial Reporting Standards (’IFRS’) or Solvency II. These measures are known as Alternative Performance Measures (’APMs’). APMs are disclosed to provide stakeholders with further helpful information on the performance of the Group and should be viewed as complementary to, rather than a substitute for, the measures determined according to IFRS and Solvency II requirements. Accordingly, these APMs may not be comparable with similarly titled measures and disclosures by other companies.
A list of the APMs used in our results as well as their definitions, why they are used and, if applicable, how they can be reconciled to the nearest equivalent GAAP measure is provided below.
Further discussion of these measures can be found in the business review on page 26 and the definitions of all APMs are included in the glossary on page 204.
Operating profit is a financial performance measure based on expected long-term investment returns. It is stated before tax and non-operating items including amortisation and impairments of intangibles, finance costs attributable to owners and other non-operating items which in the Director’s view should be excluded by their nature or incidence to enable a full understanding of financial performance. Further details of the components of this measure and the assumptions inherent in the calculation of the long-term investment return are included in note B1.2 to the IFRS financial statements.
This measure provides a more representative view of the Group’s performance than the IFRS result after tax as it provides long-term performance information unaffected by short-term economic volatility and one-off items, and is stated net of policyholder finance charges and tax. It helps give stakeholders a better understanding of the underlying performance of the Group by identifying and analysing non-operating items.
The unsupported with-profit funds and Group pension funds do not contribute to the Group Solvency II surplus. However, the inclusion of related Own Funds and SCR amounts dampens the implied Solvency II capital ratio. The Group therefore 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.
Further details of the Shareholder Capital Coverage Ratio and its calculation are included in the business review on page 29 and the additional capital disclosures note on page 198.
SHAREHOLDER PROFILE AS AT 31 DECEMBER 2017 Range of shareholdings No. of shareholders % No. of shares %
Shareholder helpline number +44 (0) 370 702 0000 Fax number +44 (0) 370 703 6101 Shareholder helpline e-mail address info@computershare.co.je
DIVIDEND MANDATES Shareholders may find it convenient to have their dividends paid directly to their bank or building society account. If you wish to take advantage of this facility please call Computershare and request a ’Dividend Mandate’ form.
WARNING TO SHAREHOLDERS Over recent years, many companies have become aware that their shareholders have received unsolicited phone calls or correspondence concerning investment matters. These are typically from overseas-based ’brokers’ who target UK shareholders, offering to sell them what often turn out to be worthless or high-risk shares in US or UK investments. These operations are commonly known as ’boiler rooms’.
SHARE PRICE You can access the current share price of Phoenix Group Holdings on the Group’s website together with electronic copies of the Group’s financial reports and presentations at www.thephoenixgroup.com/investorrelations. aspx.
As a result, the Group’s actual future financial condition, performance and results may differ materially from the plans, goals and expectations set out in the forward-looking statements and other financial and/or statistical data within the 2017 Annual Report and Accounts.
The Group undertakes no obligation to update any of the forward-looking statements contained within the 2017 Annual Report and Accounts or any other forward-looking statements it may make or publish.
The present value of future profits on a portfolio of long-term insurance and investment contracts, acquired either directly or through the purchase of, or investment in, a business
Represents all assets managed or administered by or on behalf of the Group, including those assets managed by third parties.
Current period differences between the actual experience incurred and the assumptions used in the calculation of IFRS insurance liabilities
INHERITED ESTATE The assets of the long-term with-profit funds less the realistic reserves for non-profit policies written into the non-profit fund, less asset shares aggregated across the withprofit policies and any additional amounts expected at the valuation date to be paid to in-force policyholders in the future in respect of smoothing costs and guarantees
LTIP Long-Term Incentive Plan – The part of an executive’s remuneration designed to incentivise long-term value for shareholders through an award of shares with vesting contingent on employment and the satisfaction of stretching performance conditions linked to Group strategy
MCR is the minimum amount of capital that the Group needs to hold to cover its risks under the Solvency II regulatory framework
OPERATING PROFIT Operating profit is a non-GAAP measure that is considered a more representative measure of performance than IFRS profit or loss after tax as it is based on expected long-term investment returns
Represents total eligible Own Funds divided by the Solvency Capital Requirements (‘SCR’), adjusted to a shareholder view through the exclusion of amounts relating to those ring-fenced with-profit funds and Group pension schemes whose Own Funds exceed their SCR
Standard Life Assurance means the majority of the business of Standard Life Assurance Limited and Vebnet Limited that is proposed to be acquired by the Group as announced on 23 February 2018. It includes Standard Life Assurance Limited’s UK and European life insurance, pensions and savings business, but excludes Standard Life Assurance Limited’s retail platform and growth business infrastructure, as well as its advice business
A policy where the benefits are determined by the investment performance of the underlying assets in the unit-linked fund