Offsetting financial assets and financial liabilities Financial assets and liabilities are offset and the net amount reported in the statement of financial position only when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or to realise the asset and settle the liability simultaneously. When financial assets and liabilities are offset any related interest income and expense is offset in the income statement. Hedge accounting The Group designates certain derivatives as hedging instruments in order to effect cash flow hedges. At the inception of the hedge relationship, the Group documents the relationship between the hedging instrument and the hedged item, along with its risk management objectives and its strategy for undertaking various hedge transactions. Furthermore, at the inception of the hedge and on an ongoing basis, the Group documents whether the hedging instrument is highly effective in offsetting changes in fair values or cash flows of the hedged item attributable to the hedged risk. Note E3 sets out details of the fair values of the derivative instruments used for hedging purposes. Where a cash flow hedging relationship exists, the effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in other comprehensive income and accumulated under the heading of cash flow hedging reserve. The gain or loss relating to the ineffective portion is recognised immediately in profit or loss, and is included in net investment income. Amounts previously recognised in other comprehensive income and accumulated in equity are reclassified to profit or loss in the periods when the hedged item affects profit or loss, in the same line as the recognised hedged item. Hedge accounting is discontinued when the Group revokes the hedging relationship, when the hedging instrument expires or is sold, terminated, or exercised, or when it no longer qualifies for hedge accounting. Any gain or loss recognised in other comprehensive income and accumulated in equity at that time is recycled to profit or loss over the period the hedged item impacts profit or loss.
Financial assets at fair value through profit or loss: Held for trading – derivatives 3,798 3,608 3,798
Financial assets with contractual cash flows that are SPPI excluding those held for trading or managed on a fair value basis3 423
Total financial liabilities 127,484 124,791 1 These assets and liabilities have no expected settlement date. 2 Total financial assets includes £1,063 million (2017: £1,115 million) of assets held in a collateral account pertaining to the PGL pension scheme buy-in agreement.
See note G6.2 for further details. 3 Financial assets that are SPPI are all short-term deposits with highly rated external institutions. 4 The change in fair value during 2018 of all other financial assets that are fair value through profit or loss is a £12,962 million loss. 5 These liabilities have no expected settlement date. As the obligations relate to the repayment of collateral received in the form of cash, the liability is stated at the value of the consideration received and therefore no fair value has been disclosed.
Financial assets at fair value through profit or loss: Held for trading – derivatives 2,760 2,613 2,760
E2. Fair value hierarchy E2.1 Determination of fair value and fair value hierarchy of financial instruments
Level 2 financial instruments Financial instruments traded in active markets with less depth or wider bid-ask spreads which do not meet the classification as Level 1 inputs, are classified as Level 2. The fair values of financial instruments not traded in active markets are determined using broker quotes or valuation techniques with observable market inputs. Financial instruments valued using broker quotes are classified at Level 2, only where there is a sufficient range of available quotes. The fair value of over the counter derivatives is estimated using pricing models or discounted cash flow techniques. Collective investment schemes where the underlying assets are not priced using active market prices are determined to be Level 2 instruments. Where pricing models are used, inputs are based on market-related data at the period end. Where discounted cash flows are used, estimated future cash flows are based on management’s best estimates and the discount rate used is a market-related rate for a similar instrument.
Level 3 financial instruments The Group’s financial instruments determined by valuation techniques using non-observable market inputs are based on a combination of independent third party evidence and internally developed models. In relation to investments in hedge funds and private equity investments, non-observable third party evidence in the form of net asset valuation statements are used as the basis for the valuation. Adjustments may be made to the net asset valuation where other evidence, for example recent sales of the underlying investments in the fund, indicates this is required. Securities that are valued using broker quotes which could not be corroborated across a sufficient range of quotes are considered as Level 3. For a small number of investment vehicles and debt securities, standard valuation models are used, as due to their nature and complexity they have no external market. Inputs into such models are based on observable market data where applicable. The fair value of loans, derivatives and some borrowings with no external market is determined by internally developed discounted cash flow models using appropriate assumptions corroborated with external market data where possible. For financial instruments that are recognised at fair value on a recurring basis, the Group determines whether transfers have occurred between levels in the hierarchy by re-assessing categorisation (based on the lowest level input that is significant to the fair value measurement as a whole) during each reporting period.
Total financial assets measured at fair value 160,325 37,099 6,730 204,154
Financial liabilities designated at FVTPL upon initial recognition: Net asset value attributable to unit-holders 2,659 – – 2,659
Financial assets designated at FVTPL upon initial recognition: Loans and deposits – – 1,444 1,444
Loans and receivables at amortised cost – 368 – 368 £m £m £m
E2.3 Level 3 financial instrument sensitivities Level 3 investments in equities (including private equity and unlisted property investment vehicles) and collective investment schemes (including hedge funds) are valued using net asset statements provided by independent third parties, and therefore no sensitivity analysis has been prepared.
The future cash flows are estimated based on assumed levels of mortality derived from published mortality tables; entry into long-term care rates and voluntary redemption rates. Cash flows include an allowance for the expected cost of providing a NNEG assessed under a real world approach using a closed form model including an assumed level of property value volatility. For the NNEG assessment, property values are indexed from the latest property valuation point and then assumed to grow in line with Office for Budget Responsibility forecasts in the short term and according to an RPI based assumption thereafter.
In order to benefit from the matching adjustment, the equity release mortgage loans are securitised into tranches of fixed rate and junior loan notes via special purpose vehicles in the Group.
The significant sensitivities arise from movements in the yield curve, inflation rate and house prices. An increase of 100bps in the yield curve would decrease the value by £183 million (2017: £108 million) and a decrease of 100bps would increase the value by £205 million (2017: £118 million). An increase of 1% in the inflation rate would increase the value by £11 million (2017: £7 million) and a decrease of 1% would decrease the value by £21 million (2017: £14 million).
An increase of 10% in house prices would increase the value by £6 million (2017: £3 million) and a decrease of 10% would decrease the value by £14 million (2017: £9 million).
Corporate transactions Included within financial assets and liabilities are related loans and deposits of £66 million (2017: £112 million), borrowings of £13 million (2017: £51 million) and derivative liabilities of £13 million (2017: £21 million) pertaining to a reinsurance and retrocession arrangement (see note E3.2 for further information on these arrangements). These assets and liabilities are valued using a discounted cash flow model that includes valuation adjustments in respect of liquidity and credit risk. At 31 December 2018, the net of these balances was an asset of £40 million (2017: asset of £40 million). The valuation is sensitive to movements in the euro swap curve. An increase of 100bps in the swap curve would decrease the aggregate value by £2 million (2017: £3 million) and a decrease of 100bps would increase the aggregate value by £2 million (2017: £3 million).
Also included within derivative assets and derivative liabilities are longevity swap contracts with corporate pension schemes with a fair value of £162 million (2017: £144 million) and £96 million (2017: £77 million) respectively. These derivatives are valued on a discounted cash flow basis, key inputs to which are the EIOPA interest rate swap curve and RPI and CPI inflation rates.
Financial liabilities designated at FVTPL upon initial recognition: E2.5 Movement in Level 3 financial instruments measured at fair value
The Group purchases derivative financial instruments principally in connection with the management of its insurance contract and investment contract liabilities based on the principles of reduction of risk and efficient portfolio management. The Group does not typically hold derivatives for the purpose of selling or repurchasing in the near-term or with the objective of generating a profit from short-term fluctuations in price or margin. The Group also holds derivatives to hedge financial liabilities denominated in foreign currency. Derivative financial instruments are largely classified as held for trading. Such instruments are recognised initially at fair value and are subsequently remeasured to fair value. The gain or loss on remeasurement to fair value is recognised in the consolidated income statement. Derivative financial instruments are not classified as held for trading where they are designated as a hedging instrument and where the resultant hedge is assessed as effective. For such instruments, any gain or loss that arises on remeasurement to fair value is initially recognised in other comprehensive income and is recycled to profit or loss as the hedged item impacts the profit or loss. See note E1 for further details of the Group’s hedging accounting policy.
The maximum exposure to credit risk in respect of OTC derivative assets is £3,435 million (2017: £2,731 million) of which credit risk of £3,259 million (2017: £2,651 million) is mitigated by use of collateral arrangements (which are settled net after taking account of any OTC derivative liabilities owed to the counterparty).
Assets pledged The Group pledges collateral in respect of its OTC derivative liabilities. The value of assets pledged at 31 December 2018 in respect of OTC derivative liabilities of £1,009 million (2017: £1,193 million) amounted to £554 million (2017: £631 million).
The Group conducts stock lending only with well established, reputable institutions in accordance with established market conventions. The financial assets do not qualify for derecognition as the Group retains all the risks and rewards of the transferred assets except for the voting rights.
The maximum exposure to credit risk in respect of stock lending transactions is £2,417 million (2017: £578 million) of which credit risk of £2,417 million (2017: £578 million) is mitigated through the use of collateral arrangements.
E5.1 Analysis of borrowings Carrying value Fair value £m £m £m £m
Property Reversions loan (note b) 114 131 114 131 £200 million 7.25% unsecured subordinated loan (note d) 186 177 209 225 £300 million senior unsecured bond (note e) 121 121 132 137 £450 million Tier 3 subordinated notes (note i) 448 448 447 481
US $500 million Tier 2 bonds (note j) 390 368 342 390 €500 million Tier 2 bonds (note k) 443 – 390 –
c. In July 2012, AXIA Insurance Limited (‘AXIA’) provided financing to Abbey Life, a Group company, for Abbey Life to in turn provide the financing for the securitisation of the future surplus arising on a block of 1.7 million life insurance policies originating from the wholly-owned Spanish and Portuguese insurance subsidiaries of Banco Santander, S.A. (the ‘Cedants’). This transaction was executed in the form of a reinsurance and retrocession arrangement that, taken as a whole, does not meet the definition of an insurance contract under the Group’s accounting policies (see note E3.2). Abbey Life received an upfront reinsurance commission from AXIA and makes monthly repayments based on the surplus emerging from the securitised policies as defined in the contracts. The repayments comprise a minimum guaranteed surplus amount and a share of any excess surplus, net of certain other amounts. Any excess amount serves to accelerate the repayment of the principal. Repayments are contingent on the receipt of payments due from the Cedants. Repayment of the loan principal is expected to occur by 2021. The contracts are recognised in the consolidated financial statements at fair value. On 31 December 2018, the retrocession contracts were transferred from Abbey Life to Phoenix Life Limited (‘PLL’), another Group company, under the terms of a scheme Part VII of the Financial Services and Markets Act 2000.
f. The Group has in place an unsecured revolving credit facility (‘the facility’), maturing in June 2022. Old PGH drew down £295 million under the facility on 31 August 2018. Following the issuance of €500 million Tier 2 bond on 24 September 2018, the facility was fully repaid. The facility is undrawn as at 31 December 2018 (2017: undrawn). There are no mandatory or target amortisation payments associated with the facility but prepayments are permissible. The facility currently accrues interest at LIBOR plus 1.1%, a utilisation fee of between 0.1% and 0.4% is applicable dependent on the amount drawn. On 12 December 2018, the Company became an additional borrower and guarantor under the facility.
E5. Borrowings continued E5.1 Analysis of borrowings continued h. On 23 January 2015, PGHC issued £428 million of subordinated notes due 2025 at a coupon of 6.625%. Fees associated with these notes of £3 million were deferred and are being amortised over the life of the notes in the statement of consolidated financial position. Upon exchange £32 million of these notes were held by Group companies. On 27 January 2017, £17 million of the £428 million subordinated notes held by Group companies were sold to third parties and a further £15 million were sold to third parties on 31 January 2017, thereby increasing external borrowings by £32 million. On 20 March 2017, Old PGH was substituted in place of PGHC as issuer of the £428 million subordinated notes and then on 12 December 2018 the Company was substituted in place of Old PGH as issuer.
i. On 20 January 2017, PGHC issued £300 million Tier 3 subordinated notes due 2022 at a coupon of 4.125%. On 20 March 2017, Old PGH was substituted in place of PGHC as issuer of the £300 million Tier 3 subordinated notes. On 5 May 2017, Old PGH completed the issue of a further £150 million of Tier 3 subordinated notes, the terms of which are the same as the Tier 3 subordinated notes issued in January 2017. The Group received a premium of £2 million in excess of the principal amount. Fees associated with these notes of £5 million were deferred and are being amortised over the life of the notes. On 12 December 2018 the Company was substituted in place of Old PGH as issuer.
£428 million subordinated notes 426 – – – – – 426 £450 million Tier 3 subordinated notes 448 – – – – – 448 1 Comprises amortisation under the effective interest method applied to borrowings held at amortised cost.
E6. Risk Management – financial risk This note forms one part of the risk management disclosures in the consolidated financial statements. The Group’s management of insurance risk is detailed in note F4.
E6.2.1 Credit risk Credit risk is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation. These obligations can relate to both on and off balance sheet assets and liabilities.
• credit risk which results indirectly from activities undertaken in the normal course of business. Such activities include premium payments, outsourcing contracts, reinsurance, exposure from material suppliers and the lending of securities.
The impact of non-government fixed and variable rate income securities and, inter alia, the change in market credit spreads during the year is fully reflected in the values shown in these consolidated financial statements. Credit spreads are the excess of corporate bond yields over gilt yields to reflect the higher level of risk. Similarly, the value of derivatives that the Group holds takes into account fully the changes in swap rates.
The Group holds £9,917 million (2017: £5,640 million) of corporate bonds which are used to back annuity liabilities in non-profit funds. These annuity liabilities include an aggregate credit default provision of £496 million (2017: £225 million) to fund against the risk of default.
A 100bps widening of credit spreads, with all other variables held constant and no change in assumed expected defaults, would result in a decrease in the profit after tax in respect of a full financial year, and in equity, of £108 million (2017: £55 million).
Fixed and variable rate income securities2 9,709 31,043 13,242 10,793 1,992 954 199 67,932
Reinsurers’ share of investment contract liabilities – – – – – – 5,417 5,417 1 For financial assets that do not have credit ratings assigned by external ratings the Group assigns internal ratings for use in management and monitoring credit risk. £280 million of AA, £198 million of A, and £65 million of BBB loans and deposits are internally rated.
Reinsurers’ share of insurance contract liabilities – 1,406 1,849 – – 65 – 3,320
Credit ratings have not been disclosed in the above tables for holdings in unconsolidated collective investment schemes and investments in associates. The credit quality of the underlying debt securities within these vehicles is managed by the safeguards built into the investment mandates for these vehicles.
Please refer to page 222 for additional life company asset disclosures which include the life companies’ exposure to peripheral Eurozone debt securities. Peripheral Eurozone is defined as Portugal, Spain, Italy, Ireland and Greece. The Group’s exposure to peripheral Eurozone debt continues to be relatively small compared to total assets.
Collateral The credit risk of the Group is mitigated, in certain circumstances, by entering into collateral agreements. The amount and type of collateral required depends on an assessment of the credit risk of the counterparty. Guidelines are implemented regarding the acceptability of types of collateral and the valuation parameters. Collateral is mainly in respect of stock lending, certain reinsurance arrangements to provide security against the daily mark to model value of derivative financial instruments and as part of securities lending activity. Management monitors the market value of the collateral received, requests additional collateral when needed, and performs an impairment valuation when impairment indicators exist and the asset is not fully secured (and is not carried at fair value). See note E4.1 for further information on collateral arrangements.
With-profit business and non-participating business within the with-profit funds are exposed to interest rate risk as guaranteed liabilities are valued relative to market interest rates and investments include fixed interest securities and derivatives. For unsupported with-profit business the profit or loss arising from mismatches between such assets and liabilities is largely offset by increased or reduced discretionary policyholder benefits dependent on the existence of policyholder guarantees. The contribution of unsupported participating business to the Group result is largely limited to the shareholders’ share of the declared annual bonus. The contribution of the supported participating business to the Group result is determined by the shareholders’ interest in any change in value in the capital advanced to the withprofit funds.
An increase of 1% in interest rates, with all other variables held constant would result in a decrease in profits after tax in respect of a full financial year, and in equity, of £141 million (2017: £110 million).
A 10% increase in equity prices, with all other variables held constant, would result in a decrease in profits after tax in respect of a full financial year, and in equity, of £197 million (2017: £71 million).
The Group is exposed to inflation risk through certain contracts, such as annuities, which may provide for future benefits to be paid taking account of changes in the level of experienced and implied inflation, and also through the Group’s cost base. The Group seeks to manage inflation risk within the ALM framework through the holding of derivatives, such as inflation swaps, or physical positions in relevant assets, such as index-linked gilts, where appropriate.
Some of the Group’s with-profit funds have an exposure to overseas assets which is not driven by liability considerations. The purpose of this exposure is to reduce overall risk whilst maximising returns by diversification. This exposure is limited and managed through investment mandates which are subject to the oversight of the investment committees of the boards of each life company. Fluctuations in exchange rates from certain holdings in overseas assets are hedged against currency risks.
Tax risk is defined as the risk of financial or reputational loss arising from a lack of liquidity, funding or capital due to an unforeseen tax cost, or by the inappropriate reporting and disclosure of information in relation to taxation. Tax risk is managed by maintaining an appropriately-staffed tax team who have the qualifications and experience to make judgements on tax issues, augmented by advice from external specialists where required.
• appropriate information on liquidity risk is available to those making decisions.
The Group’s policy is to maintain sufficient liquid assets of suitable credit quality at all times including, where appropriate, by having access to borrowings so as to be able to meet all foreseeable current liabilities as they fall due in a cost-effective manner. Forecasts are prepared regularly to predict required liquidity levels over both the short and medium-term allowing management to respond appropriately to changes in circumstances.
E. FINANCIAL ASSETS & LIABILITIES continued E6. Risk Management – financial risk continued E6.2 Financial risk analysis continued The vast majority of the Group’s derivative contracts are traded OTC and have a two day collateral settlement period. The Group’s derivative contracts are monitored daily, via an end-of-day valuation process, to assess the need for additional funds to cover margin or collateral calls.
Accruals and deferred income 329 5 3 – 337 1 year or less or on demand £m 1–5 years £m
Other payables 144 – – – 144 1 These financial liabilities are disclosed at their undiscounted value and therefore differ to amounts included in the statement of consolidated financial position which discloses the discounted value.
For unit-linked insurance contract liabilities the provision is based on the fund value, together with an allowance for any excess of future expenses over charges, where appropriate. For participating business, the liabilities under insurance contracts and investment contracts with DPF are calculated in accordance with the following methodology: • liabilities to policyholders arising from the with-profit business are stated at the amount of the realistic value of the liabilities, adjusted to exclude the owners’ share of projected future bonuses; • acquisition costs are not deferred; and • reinsurance recoveries are measured on a basis that is consistent with the valuation of the liability to policyholders to which the reinsurance applies.
Gross benefits and claims Claims on insurance contracts and investment contracts with DPF reflect the cost of all claims arising during the period, including policyholder bonuses allocated in anticipation of a bonus declaration. Claims payable on maturity are recognised when the claim becomes due for payment and claims payable on death are recognised on notification. Surrenders are accounted for at the earlier of the payment date or when the policy ceases to be included within insurance contract liabilities. Where claims are payable and the contract remains in-force, the claim instalment is accounted for when due for payment. Claims payable include the costs of settlement. Reinsurance The Group cedes insurance risk in the normal course of business. Reinsurance assets represent balances due from reinsurance providers. Reinsurers’ share of insurance contract liabilities is dependent on expected claims and benefits arising under the related reinsured policies. Reinsurance assets are reviewed for impairment at each reporting date, or more frequently, when an indication of impairment arises during the reporting period. Impairment occurs when there is objective evidence, as a result of an event that occurred after initial recognition of the reinsurance asset, that the Group may not receive all outstanding amounts due under the terms of the contract and the event has a reliably measurable impact on the amounts that the Group will receive from the reinsurer. The impairment loss is recognised in the consolidated income statement. The reinsurers’ share of investment contract liabilities is measured on a basis that is consistent with the valuation of the liability to policyholders to which the reinsurance applies. Reinsurance premiums payable in respect of certain reinsured individual and group pensions annuity contracts are payable by quarterly instalments and are accounted for on a payable basis. Due to the period of time over which reinsurance premiums are payable under these arrangements, the reinsurance premiums and related payables are discounted to present values using a pre-tax risk-free rate of return. The unwinding of the discount is included as a charge within the consolidated income statement. Reinsurance claims are recognised when the related gross insurance claim is recognised according to the terms of the relevant contract.
F. INSURANCE CONTRACTS, INVESTMENT CONTRACTS WITH DPF AND REINSURANCE continued F1. Liabilities under insurance contracts continued The table below shows a summary of the liabilities under insurance contracts and the related reinsurers’ share included within assets in the statement of consolidated financial position.
Acquisition of Standard Life Assurance businesses (see note H2) 51,487 4,264 – –
1 Other changes in liabilities principally comprise of changes in economic and non-economic assumptions and experience. Other changes in liabilities also includes the recognition of an additional £22 million (2017: £nil) of policyholder liabilities on the crystallisation of obligations initially included within the FCA thematic reviews provision – SLAL.
The unallocated surplus comprises the excess of the assets over the policyholder liabilities of the with-profit business of the Group’s life operations. For the Group’s with-profit funds this represents amounts which have yet to be allocated to owners since the unallocated surplus attributable to policyholders has been included within liabilities under insurance contracts. If the realistic value of liabilities to policyholders exceeds the value of the assets in the with-profit fund, the unallocated surplus is valued at £nil.
F3.1 Premiums ceded to reinsurers Premiums ceded to reinsurers during the period were £481 million (2017: £356 million).
Where the Group receives collateral in the form of marketable financial instruments which it is not permitted to sell or re-pledge except in the case of default, it is not recognised in the statement of consolidated financial position. The fair value of financial assets accepted as collateral for reinsurance transactions but not recognised in the statement of consolidated financial position amounts to £3,253 million (2017: £3,640 million).
Where the Group receives collateral on reinsurance transactions in the form of cash it is recognised in the statement of consolidated financial position along with a corresponding liability to repay the amount of collateral received, disclosed as ‘Deposits received from reinsurers’. Where there is interest payable on such collateral, it is recognised within ‘Net income under arrangements with reinsurers’ (see F3.3). The amounts recognised as financial assets and liabilities from cash collateral received at 31 December 2018 are set out below.
F4. Risk Management – Insurance risk This note forms one part of the Risk Management disclosures in the consolidated financial statements. Financial risk is included in note E6.
Insurance risk refers to the risk that the frequency or severity of insured events may be worse than expected and includes expense risk. The contracts for the Life businesses include the following sources of insurance risk: Mortality higher than expected number of death claims on assurance products and occurrence of one or more large claims; Longevity faster than expected improvements in life expectancy on immediate and deferred annuity products; Morbidity higher than expected number of serious illness claims or more sickness claims which last longer on income protection policies; Expenses policies cost more to administer than expected; Lapses the numbers of policies terminating early is different to that expected in a way which increases expected claims costs or expenses or reduces future profits; Options unanticipated changes in policyholder option exercise rates giving rise to increased claims costs; and
Objectives and policies for mitigating insurance risk The Group uses several methods to assess and monitor insurance risk exposures both for individual types of risks insured and overall risks. These methods include internal risk measurement models, experience analyses, external data comparisons, sensitivity analyses, scenario analyses and stress testing. In addition to this, mortality, longevity and morbidity risks may in certain circumstances be mitigated by the use of reinsurance.
A decrease of 5% in assurance mortality, with all other variables held constant, would result in an increase in the profit after tax in respect of a full year, and an increase in equity of £54 million (2017: £34 million).
An increase of 5% in annuitant longevity, with all other variables held constant, would result in a decrease in the profit after tax in respect of a full year, and a decrease in equity of £273 million (2017: £138 million).
A decrease of 10% in lapse rates, with all other variables held constant, would result in a decrease in the profit after tax in respect of a full year, and a decrease in equity of £27 million (2017: £40 million1).
An increase of 10% in lapse rates, with all other variables held constant, would result in an increase in the profit after tax in respect of a full year, and an increase in equity of £26 million (2017: £31 million1).
F4.1 Assumptions For participating business which is with-profit business (insurance and investment contracts), the insurance contract liability is calculated on a realistic basis, adjusted to exclude the shareholders’ share of future bonuses and the associated tax liability. This is a market consistent valuation, which involved placing a value on liabilities similar to the market value of assets with similar cash flow patterns.
Some pensions contracts include guaranteed annuity options (see deferred annuities in note F4.2 for details). The total amount provided in the with-profit and non-profit funds in respect of the future costs of guaranteed annuity options are £1,865 million (2017: £1,965 million) and £93 million (2017: £131 million) respectively.
2018: The £168 million positive impact of changes in longevity assumptions reflects updates to base and improvement assumptions to reflect latest experience analyses and where applicable the most recent Continuous Mortality Investigation 2017 projection tables.
The £79m million positive impact of changes in expense assumptions includes the impact of expense synergies arising from integration of the acquired Abbey Life business, together with the impact of revisions to the life expense agreements between the life and management services companies.
Life: Immediate annuities 171 – 4 – Unitised with-profit 6,145 791 (79) – Life with-profit 2,391 – 3 –
Non-profit funds: Deferred annuities – without guarantees 844 – – – Immediate annuities 17,600 – 1,776 –
A provision is recognised when the Group has a present legal or constructive obligation, as a result of a past event, which is likely to result in an outflow of resources and where a reliable estimate of the amount of the obligation can be made. If the effect is material, the provision is determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. A provision is recognised for onerous contracts when the expected benefits to be derived from the contracts are less than the related unavoidable costs. The unavoidable costs reflect the net cost of exiting the contract, which is the lower of the cost of fulfilling it and any compensation or penalties arising from failure to fulfil it. Where it is expected that a part of the expenditure required to settle a provision will be reimbursed by a third party the reimbursement is recognised when, and only when, it is virtually certain that the reimbursement will be received. This reimbursement shall be recognised as a separate asset within other receivables and will not exceed the amount of the provision.
Leasehold properties The leasehold properties provision includes a £3 million (2017: £3 million) dilapidations provision in respect of obligations under operating leases. In addition, a provision has been made for £2 million (2017: £2 million) in respect of the excess of lease rentals and other payments on properties that are currently vacant or are expected to become vacant, over the amounts to be recovered from subletting these properties.
On acquisition of the Standard Life Assurance businesses on 31 August 2018, obligations arising as a result of the areas described above were recognised at £37 million on a fair value basis. £5 million of this balance has been utilised since the acquisition date, with the remainder expected to be utilised in 2019.
PA(GI) provision In 2015, PA(GI) Limited, a subsidiary of the Group, was subject to a Companies Court judgement that directed that PA(GI) is liable to claimants for redress relating to creditor insurance policies within a book of insurance underwritten by PA(GI) until 2006. As a consequence, PA(GI) is liable for complaint handling and redress with regard to the complaints.
The PA(GI) provision of £17 million (2017: £40 million) represents the Group’s best estimate of the likely future costs. However, this is subject to a number of risks and uncertainties including volumes of future complaints, the rates by which those complaints are upheld and the average redress value.
FCA thematic reviews provision – Abbey Life On 3 March 2016, the FCA published a thematic review report on the fair treatment of long-standing customers in the life insurance sector. Following completion of the review, Abbey Life was subject to additional investigations. Specifically, the FCA explored whether remedial and/or disciplinary action was necessary or appropriate in respect of exit or paid-up charges being applied. Additionally, Abbey Life was investigated for potential contravention of regulatory requirements across a number of other areas assessed in the thematic review.
In addition, on 14 October 2016, the FCA published its thematic review of non-advised annuity sales. In its findings, the FCA identified concerns in a small number of firms relating to significant communications that took place orally, usually on the telephone. The FCA also identified other areas of possible concern, including in relation to the recording and maintenance of records of calls. The FCA encouraged all firms to consider its feedback and take appropriate action to address the points raised. The Group has recognised provisions in respect of its best estimate of the likely costs associated with its obligations in this regard.
On 14 December 2018, the Group was informed by the FCA that it had closed its investigation into Abbey Life following completion of the thematic review into the fair treatment of long-standing customers in the life insurance sector, having found that the conduct of Abbey Life did not warrant enforcement action. Accordingly, £10 million of the provision remaining at 1 January 2018 has been released during the year.
On acquisition of the Standard Life Assurance businesses on 31 August 2018, obligations arising as a result of past practices in the area described above were assessed. As a result, it was determined appropriate to recognise a provision of £225 million in respect of SLAL on a fair value basis in this regard. Any resultant outflow of economic benefits is subject to uncertainty given the absence of final findings from the FCA review procedures, which would determine the extent to which the FCA may require SLAL to carry out remediation activities or impose financial penalties.
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 involved 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 £76 million has been recognised for the expected cost of the platform migration. During 2018, £3 million of this provision was utilised, with the remaining £73 million expected to be utilised within three years.
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 consolidated financial statements.
G. OTHER STATEMENT OF CONSOLIDATED FINANCIAL POSITION NOTES continued G3. Payables related to direct insurance contracts
Defined benefit pension schemes The net surplus or deficit (the economic surplus or deficit) in respect of the defined benefit pension schemes is calculated by estimating the amount of future benefit that employees have earned in return for their service in the current and prior years; that benefit is discounted to determine its present value and the fair value of any scheme assets is deducted. The economic surplus or deficit is subsequently adjusted to eliminate on consolidation the carrying value of insurance policies issued by Group entities to the defined benefit pension schemes (the reported surplus or deficit). A corresponding adjustment is made to the carrying values of insurance contract liabilities and investment contract liabilities. 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 (prior to the elimination of the insurance policies issued by Group entities) 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 Group determines the net interest expense or income on the net defined benefit asset/liability for the period by applying the discount rate used to measure the defined benefit obligation at the beginning of the annual period to the opening net defined benefit asset/liability. The discount rate is the yield at the period end on AA credit rated bonds that have maturity dates approximating to the terms of the Group’s obligations. The calculation is performed by a qualified actuary using the projected unit credit method. 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.
G6. Pension schemes continued An analysis of the defined benefit asset/(liability) for each pension scheme is set out below: £m £m
Defined benefit scheme The Pearl Scheme is established under, and governed by, the trust deeds and rules and is funded by payment of contributions to a separately administered trust fund. A Group company, Pearl Group Holdings No.2 Limited (‘PGH2’), is the principal employer of the Pearl Scheme. The principal employer meets the administration expenses of the Pearl Scheme. The Pearl Scheme is administered by a separate Trustee company, P.A.T. (Pensions) Limited, which is separate from the Company. The Trustee company is comprised of two representatives from the Group, three member nominated representatives and one independent trustee in accordance with the Trustee company’s articles of association. The Trustee is required by law to act in the interest of all relevant beneficiaries and is responsible for the investment policy with regard to the assets.
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.
G. OTHER STATEMENT OF CONSOLIDATED FINANCIAL POSITION NOTES continued G6. Pension schemes continued G6.1 Pearl Group Staff Pension Scheme continued The valuation has been based on an assessment of the liabilities of the Pearl Scheme as at 31 December 2018, 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.
Contributions totalling £40 million were paid into the Pearl Scheme in 2018 (2017: £50 million) reflecting the monthly instalments. The contributions paid into the Scheme for 2017 reflect £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 2019.
G6. Pension schemes continued G6.1 Pearl Group Staff Pension Scheme continued Summary of amounts recognised in the consolidated financial statements The amounts recognised in the consolidated financial statements are as follows: Fair value of scheme assets £m
G. OTHER STATEMENT OF CONSOLIDATED FINANCIAL POSITION NOTES continued G6. Pension schemes continued G6.1 Pearl Group Staff Pension Scheme continued
Change in provision for tax on economic surplus available as a refund – – (39) – (39)
G6. Pension schemes continued G6.1 Pearl Group Staff Pension Scheme continued The Group ensures that the investment positions are managed within an Asset Liability Matching (‘ALM’) framework that has been developed to achieve long-term investments that are in line with the obligations under the Pearl Scheme. Within this framework an allocation of 25% of the scheme assets is invested in collateral for interest rate and inflation rate hedging where the intention is to hedge greater than 90% of the interest rate and inflation rate risk measured on the Technical Provisions basis.
The Pearl Scheme uses swaps, UK Government bonds and UK Government stock lending to hedge the interest rate and inflation exposure arising from the liabilities which are disclosed in the table above as ‘Hedging Portfolio’ assets. Under the Scheme’s stock lending programme, the Scheme lends a Government bond to an approved counterparty and receives a similar value in the form of cash in return which is typically reinvested into other Government bonds. The Scheme retains economic exposure to the Government bond, hence the bonds continue to be recognised as scheme assets with a corresponding liability to repay the cash received as disclosed in the table above.
The weighted average duration of the defined benefit obligation at 31 December 2018 is 16 years (2017: 17 years).
A quantitative sensitivity analysis for significant actuarial assumptions is shown below: Assumptions Base Discount rate RPI Life expectancy
Scheme details Defined contribution scheme Contributions in the year amounted to £7 million (2017: £6 million).
The valuation has been based on an assessment of the liabilities of the PGL Pension Scheme as at 31 December 2018, undertaken by independent qualified actuaries.
G6. Pension schemes continued G6.2 PGL Pension Scheme continued Summary of amounts recognised in the consolidated financial statements The amounts recognised in the consolidated financial statements are as follows: Fair value of scheme assets £m
Remeasurements: Return on plan assets excluding amounts included in interest income (41) – – – (41)
Loss from changes in demographic assumptions – (3) – – (3)
The PGL Pension Scheme uses swaps, UK Government bonds and UK Government stock lending to hedge the interest rate and inflation exposure arising from the liabilities. Under the Scheme’s stock lending programme, the Scheme lends a Government bond to an approved counterparty and receives a similar value of cash in return which it typically reinvested into other Government bonds. The PGL Pension Scheme retains economic exposure to the Government bonds, hence the value of the gilts continues to be recognised as a scheme asset with a corresponding liability to repay the cash received as disclosed in the table above.
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 3.20
It has been assumed that post-retirement mortality is in line with 86%/94% of S1PL base tables with future longevity improvements from 1 January 2017 in line with CMI 2017 Core Projections (2017: CMI 2016 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% at age 110 (unchanged from 2017). Under these assumptions, the average life expectancy from retirement for a member currently aged 40 retiring at age 62 is 28.3 years (2017: 28.3 years) and 29.6 years (2017: 29.6 years) for male and female members respectively.
G6. Pension schemes continued G6.2 PGL Pension Scheme continued A quantitative sensitivity analysis for significant actuarial assumptions is shown below: Assumptions Base Discount rate RPI Life expectancy
Impact on the defined benefit obligation (£m) 1,528 (59) 60 48 (51) 57 (57)
The valuation has been based on an assessment of the liabilities of the Abbey Life Scheme as at 31 December 2018 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.
Principal assumptions The principal financial assumptions of the Abbey Life Scheme are set out in the table below: Rate of increase for pensions in payment 3.10 3.05
Rate of increase for deferred pensions (‘CPI’ subject to caps) 2.40 2.20
Sensitivity level 25bps increase 25bps decrease 25bps increase 25bps decrease increase decrease
Goodwill Business combinations are accounted for by applying the acquisition method. Goodwill represents the difference between the cost of the acquisition and the fair value of the net identifiable assets acquired. Goodwill is measured on initial recognition at cost. Following initial recognition, goodwill is stated at cost less any accumulated impairment losses. It is tested for impairment annually or when there is evidence of possible impairment. Goodwill is not amortised. For impairment testing, goodwill is allocated to relevant cashgenerating units. Goodwill is impaired when the recoverable amount is less than the carrying value.
On acquisition of Standard Life Assurance businesses (see note H2.1) – 2,931 – – 36 36 2,967
Amortisation charge for the year – (196) (15) – (3) (18) (214)
Amortisation charge for the year – (109) (15) – (2) (17) (126)
G7.1 Goodwill The carrying value of goodwill has been tested for impairment at the year-end. No impairment has resulted as the value in use of this intangible continues to exceed its carrying value. £47 million of goodwill is attributable to the Management Services segment including £8 million that arose on acquisition of Abbey Life. Value in use has been determined as the present value of certain future cash flows associated with this business. The cash flows used in this calculation have been valued using a risk-adjusted discount rate of 8.9% (2017: 7.1%) and are consistent with those adopted by management in the Group’s operating plan and, for the period 2023 and beyond, reflect the anticipated run-off of the Phoenix Life insurance business. The underlying assumptions of these projections include management’s best estimates with regards to longevity, persistency, mortality and morbidity.
Acquired in-force business of £2,931 million was recognised during 2018 upon acquisition of the Standard Life Assurance businesses (see note H2).
Equipment includes £14 million which was recognised on acquisition of the Standard Life Assurance businesses. Additions in the year were £5 million and depreciation charged was £2 million.
Owner-occupied properties have been valued by accredited independent valuers at 31 December 2018 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 £31 million (2017: £26 million) has been categorised as Level 3 based on the non-observable inputs to the valuation technique used.
On acquisition of Standard Life Assurance businesses (see note H2.1) 5 –
Investment property is stated at fair value. Fair value is the price that would be received to sell a property in an orderly transaction between market participants at the measurement date. Gains and losses arising from the change in fair value are recognised in the consolidated income statement. Leases, where a significant portion of the risks and rewards of ownership are retained by the lessor, are classified as operating leases. Where investment property is leased out by the Group, rental income from these operating leases is recognised as income in the consolidated income statement on a straight-line basis over the period of the lease.
On acquisition of the Standard Life Assurance businesses (see note H2.1) 5,878 –
G9. Investment property continued As at 31 December 2018, a property portfolio of £6,401 million (2017: £474 million) is held by the life companies in a mix of commercial sectors, spread geographically throughout the UK and Europe.
Investment properties also include £119 million (2017: £138 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 nonobservable inputs Range (weighted average) 2018 Range (weighted average) 2017
Estimated rental value per hotel room £4,789 – £13,800 (£8,948) –
The key valuation sensitivities in respect of the residential property reversions are noted below: • an increase of 1% in the deferred possession rate would decrease the market value by £5 million; • a decrease of 1% in the deferred possession rate would increase the market value by £5 million; • an increase of 10% in the mortality rate would increase the market value by £1 million; and
Future minimum lease rental receivables in respect of non-cancellable operating leases on investment properties were as follows: £m 2017 £m
Subsidiaries are consolidated from the date that effective control is obtained by the Group (see basis of consolidation in note A1) and are excluded from consolidation from the date they cease to be subsidiary undertakings. For subsidiaries disposed of during the year, any difference between the net proceeds, plus the fair value of any retained interest, and the carrying amount of the subsidiary including non-controlling interests, is recognised in the consolidated income statement. The Group uses the acquisition method to account for the acquisition of subsidiaries. The cost of an acquisition is measured at the fair value of the consideration. Any excess of the cost of acquisition over the fair value of the net assets acquired is recognised as goodwill. In certain acquisitions an excess of the acquirer’s interest in the net fair value of the acquiree’s identifiable assets, liabilities, contingent liabilities and non-controlling interests, over cost may arise. Where this occurs, the surplus of the fair value of net assets acquired over the fair value of the consideration is recognised in the consolidated income statement. Directly attributable acquisition costs are included within administrative expenses, except for acquisitions undertaken prior to 2010 when they are included within the cost of the acquisition. Costs directly related to the issuing of debt or equity securities are included within the initial carrying amount of debt or equity securities where these are not carried at fair value. Intra-group balances and income and expenses arising from intra-group transactions are eliminated in preparing the consolidated financial statements. The Group has invested in a number of collective investment schemes such as Open-ended Investments Companies (‘OEICs’), unit trusts, Société d’Investissement à Capital Variable (‘SICAVs’), investment trusts and private equity funds. These invest mainly in equities, bonds, property and cash and cash equivalents. The Group’s percentage ownership in these collective investment schemes can fluctuate according to the level of Group and third party participation in structures. When assessing control over collective investment schemes, the Group considers those factors described under the ‘Basis of consolidation’ in note A1. In particular, the Group considers the scope of its decision-making authority, including the existence of substantive rights (such as power of veto, liquidation rights and the right to remove the fund manager) that give it the ability to direct the relevant activities of the investee. The assessment of whether rights are substantive rights, and the circumstances under which the Group has the practical ability to exercise them, requires the exercise of judgement. This assessment includes a qualitative consideration of the rights held by the Group that are attached to its holdings in the collective investment schemes, rights that arise from contractual arrangements between the Group and the entity or fund manager and the rights held by third parties. In addition, consideration is made of whether the Group has de facto power, for example, where third party investments in the collective investment schemes are widely dispersed. Where Group companies are deemed to control such collective investment schemes they are consolidated in the Group financial statements, with the interests of external third parties recognised as a liability, see the accounting policy for ‘Net asset value attributable to unitholders’ in note E1. Certain of the collective investment schemes have noncoterminous period ends and are consolidated on the basis of additional financial statements prepared to the period end.
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.
H. INTERESTS IN SUBSIDIARIES AND ASSOCIATES continued H2. Acquisitions continued The table below summarises the fair value of identifiable assets acquired and liabilities assumed as at the date of acquisition.
Analysis of cashflows on acquisition: Net cash acquired with the subsidiaries (included in cash flow from investing activities) 3,617
Acquired Value in-Force (‘AVIF’) and other intangibles An asset of £2,931 million arises reflecting the present value of future profits associated with the acquired in-force business.
Under the Group’s accounting policy (see note G7), AVIF arising on acquired insurance contracts and investment contracts with DPF is measured as the difference between the fair value of contractual rights acquired and obligations assumed and the liability measured in accordance with the Group’s accounting policies for such contracts. AVIF relating to investment contracts without DPF, is recognised at its fair value.
H2. Acquisitions continued Acquired Value in-Force (‘AVIF’) and other intangibles continued The valuation of the AVIF has been determined by reference to the assumptions expected to be applied by a market participant in an orderly transaction. The valuation approach uses present value techniques applied to the best estimate cash flows expected to arise from policies that were in-force at the acquisition date, adjusted to reflect the price of bearing the uncertainty inherent in those cash flows. This approach incorporates a number of judgments and assumptions which have impacted on the resultant valuation, the most significant of which include mortality rates, expected policy lapses and surrender costs, and the expenses associated with servicing the policies, together with economic assumptions such as future investment returns and the discount rate allowing for an appropriate illiquidity premium based on the assets existing at the balance sheet date. The determination of the majority of these assumptions is carried out on a consistent basis with that described in note F4.1 with appropriate adjustments to reflect a market participant view. The risk adjustment for the uncertainty in the cashflows has been determined using a cost of capital approach.
Deferred acquisition costs of £584 million and deferred front end fees of £(139) million, recognised by the Standard Life Assurance businesses have been derecognised on acquisition and replaced with the AVIF.
A separately identifiable intangible asset of £36 million relating to the Client Service and Proposition Agreement (‘CSPA’) entered into between Phoenix and SLA plc has been recognised in the acquisition balance sheet. This reflects the value associated with the receipt of marketing, distribution and customer relationship services from SLA plc at a nil or below market rate cost and the rights acquired for the usage of the Standard Life brand for the marketing of certain specified products. Further details are set out in note G7. The asset has been valued using a multi-period excess earnings method. The useful economic life of the intangible has been assessed as 15 years.
Goodwill A gain on acquisition of £141 million has been 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.
At the time of the announcement, the Group entered into arrangements to hedge the shareholder exposure to equity and currency risk in the Standard Life Assurance businesses in the period prior to completion of the transaction. Losses of £143 million were recognised on these hedges within net investment income during this period. These losses offset the gain arising on acquisition.
Transaction costs Transaction costs of £43 million have been expensed and are included in administrative expenses in the consolidated income statement. £39 million of these costs were paid during the period.
The Group has determined that all of its investments in collective investment schemes are structured entities. In addition, a number of debt security structures and private equity funds 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
The Group’s holdings in the above investments are subject to the terms and conditions of the respective fund’s prospectus and are susceptible to market price risk arising from uncertainties about future values. The Group holds redeemable shares or units in each of the funds. The funds are managed by internal and external fund managers who apply various investment strategies to accomplish their respective investment objectives. All of the funds are managed by fund managers who are compensated by the respective funds for their services. Such compensation generally consists of an asset-based fee and a performancebased incentive fee and is reflected in the valuation of each fund.
During the year, the Group granted further loans to the EBT of £8 million (2017: £4 million). Further loans are expected to be granted in 2019.
Collective investment schemes: Directly held collective investment schemes1: Short-term liquidity 12,464 8,465
Details of commitments to subscribe to private equity funds and other unlisted assets are included in note I6.
Subsidiaries: Phoenix Life Limited (life assurance company) Wythall1 Ordinary Shares 100.00% Phoenix Life Assurance Limited (life assurance company) Wythall1 Ordinary Shares 100.00% Abbey Life Assurance Company Limited (life assurance company)
Standard Life Assurance Limited (life assurance company) Edinburgh27 Ordinary Shares 100.00% Standard Life International Designated Activity Company (life assurance company)
Standard Life Pension Funds Limited (life assurance company) Edinburgh27 Limited by Guarantee 100.00% Britannic Finance Limited (finance and insurance services company)
Pearl Customer Care Limited (financial services company) Wythall1 Ordinary Shares 100.00% Pearl Group Holdings (No. 1) Limited (finance company) London2 Ordinary Shares 100.00% Pearl Group Management Services Limited (management services company)
Phoenix ER1 Limited (finance company) Wythall1 Ordinary Shares 100.00% Pearl Group Services Limited (management services company)
PGH (LC1) Limited (finance company) Wythall1 Ordinary Shares 100.00% PGH (LC2) Limited (finance company) Wythall1 Ordinary Shares 100.00% PGH (LCA) Limited (finance company) Wythall1 Ordinary Shares 100.00% PGH (LCB) Limited (finance company) Wythall1 Ordinary Shares 100.00% PGH (MC1) Limited (finance company) Wythall1 Ordinary Shares 100.00% PGH (MC2) Limited (finance company) Wythall1 Ordinary Shares 100.00% PGH Capital plc (finance company) Dublin7 Ordinary Shares 100.00% PGMS (Ireland) Limited (management services company) Dublin6 Ordinary Shares 100.00% Phoenix ER3 Limited (finance company) Wythall1 Ordinary Shares 100.00% Phoenix ER4 Limited (finance company) Wythall1 Ordinary Shares 100.00% Phoenix SL Direct Limited (management services company) Wythall1 Ordinary Shares 100.00% Phoenix Unit Trust Managers Limited (unit trust manager) Wythall1 Ordinary Shares 100.00% Phoenix Wealth Services Limited (management services company)
Vebnet Limited (management service company) Wythall1 Ordinary Shares 100.00% Mutual Securitisation plc (finance company) Dublin28 N/A 100.00% Britannic Money Investment Services Limited (investment advice company)
SPL (Holdings 1) Limited (non-trading company) Glasgow12 Ordinary Shares 100.00% Impala Holdings Limited (holding company) Wythall1 Ordinary Shares 100.00% Pearl Group Holdings (No. 2) Limited (holding company) Wythall1 Ordinary Shares 100.00% NP Life Holdings Limited (holding company) Wythall1 Ordinary Shares 100.00% London Life Limited (non-trading company) Wythall1 Ordinary Shares 100.00% Alba Life Trustees Limited (non-trading company) Edinburgh27 Ordinary Shares 100.00% National Provident Life Limited (non-trading company) Wythall1 Ordinary Shares 100.00% Phoenix AW Limited (non-trading company) Wythall1 Ordinary Shares 100.00% PA (GI) Limited (non-trading company) Wythall1 Ordinary Shares 100.00% Phoenix Group Holdings (holding company – directly owned by the Company)
SLA Netherlands No.1 B.V. (financial holding company) Amsterdam9 Ordinary Shares 100.00% Standard Life Trustee Company Limited (trustee company) Edinburgh27 Ordinary Shares 100.00% SunLife Limited (financial services distribution company) Wythall1 Ordinary Shares 100.00% Phoenix Wealth Holdings Limited (holding company) Wythall1 Ordinary Shares 100.00% Pearl Life Holdings Limited (holding company) Wythall1 Ordinary Shares 100.00% PGH (TC1) Limited (holding company) Wythall1 Ordinary Shares 100.00% PGH (TC2) Limited (holding company) Wythall1 Ordinary Shares 100.00% Vebnet (Holdings) Limited (holding company) Wythall1 Ordinary Shares 100.00% Abbey Life Trustee Services Limited (dormant company) Wythall1 Ordinary Shares 100.00% Alba LAS Pensions Management Limited (dormant company) Glasgow10 Ordinary Shares 100.00%
BA (FURBS) Limited (dormant company) Wythall1 Ordinary Shares 100.00% Britannic Group Services Limited (dormant company) Wythall1 Ordinary Shares 100.00% Century Trustee Services Limited (dormant company) Wythall1 Ordinary Shares 100.00% Cityfourinc (dormant company) Wythall1 Unlimited with Shares 100.00% Clearfol Investment Limited (dormant company) Wythall1 Ordinary Shares 100.00% Corunna Limited (dormant company) Glasgow11 Ordinary Shares 100.00% Evergreen Trustee Limited (dormant company) Wythall1 Ordinary Shares 100.00% Gallions Reach Shopping Park (Nominee) Limited (dormant company)
NPI (Printworks) Limited (dormant company) Wythall1 Ordinary Shares 100.00% NPI (Westgate) Limited (dormant company) Wythall1 Ordinary Shares 100.00% NPI Limited (dormant company) Wythall1 Ordinary Shares 100.00% Pearl (Barwell 2) Limited (dormant company) Wythall1 Ordinary Shares 100.00% Pearl (Chiswick House) Limited (dormant company) Wythall1 Ordinary Shares 100.00% Pearl (Covent Garden) Limited (dormant company) Wythall1 Ordinary Shares 100.00% Pearl (Martineau Phase 1) Limited (dormant company) Wythall1 Ordinary Shares 100.00% Pearl (Martineau Phase 2) Limited (dormant company) Wythall1 Ordinary Shares 100.00% Pearl (Moor House 1) Limited (dormant company) Wythall1 Ordinary Shares 100.00% Pearl (Moor House 2) Limited (dormant company) Wythall1 Ordinary Shares 100.00% Pearl (Moor House) Limited (dormant company) Wythall1 Ordinary Shares 100.00% Pearl (Printworks) Limited (dormant company) Wythall1 Ordinary Shares 100.00% Pearl (Stockley Park) Limited (dormant company) Wythall1 Ordinary Shares 100.00% Pearl AL Limited (dormant company) Glasgow10 Ordinary Shares 100.00% Pearl Group Secretariat Services Limited (dormant company) Wythall1 Ordinary Shares 100.00% Pearl MG Birmingham Limited (dormant company) Wythall1 Ordinary Shares 100.00% Pearl MP Birmingham Limited (dormant company) Wythall1 Ordinary Shares 100.00% Pearl RLG Limited (dormant company) Wythall1 Ordinary Shares 100.00% Pearl Trustees Limited (dormant company) Wythall1 Ordinary Shares 100.00% Pearl ULA Limited (dormant company) Wythall1 Ordinary Shares 100.00% PG Dormant (No 3) Limited (dormant company) Wythall1 Ordinary Shares 100.00% PG Dormant (No 4) Limited (dormant company) Wythall1 Ordinary Shares 100.00% PG Dormant (No 5) Limited (dormant company) Wythall1 Ordinary Shares 100.00% PG Dormant (No 6) Limited (dormant company) Wythall1 Ordinary Shares 100.00% PG Dormant (No. 7) Limited (dormant company) London2 Ordinary Shares 100.00% Phoenix & London Assurance Limited (dormant company) Wythall1 Ordinary Shares 100.00% Phoenix ER2 Limited (dormant company) Wythall1 Ordinary Shares 100.00% Phoenix ER5 Limited (dormant company) Wythall1 Ordinary Shares 100.00% Phoenix Life Insurance Services Limited (dormant company) Wythall1 Ordinary Shares 100.00% Phoenix Life Pension Trust Limited (dormant company) Wythall1 Ordinary Shares 100.00% Phoenix Pension Scheme (Trustees) Limited Wythall1 Ordinary Shares 100.00% Phoenix Pensions Limited (dormant company) Wythall1 Ordinary Shares 100.00% Phoenix Pensions Trustee Services Limited (dormant company)
Scottish Mutual Assurance Limited (dormant company) Edinburgh27 Ordinary Shares 100.00% Scottish Mutual Customer Care Limited (dormant company) Wythall1 Ordinary Shares 100.00% Scottish Mutual Nominees Limited (dormant company) Edinburgh27 Ordinary Shares 100.00% SL (NEWCO) Limited (dormant company) Edinburgh27 Ordinary Shares 100.00% SL Liverpool plc (dormant company) Wythall1 Public Limited Company 100.00% SLACOM (No. 10) Limited (dormant company) Edinburgh27 Ordinary Shares 100.00% SLACOM (No. 9) Limited (dormant company) Edinburgh27 Ordinary Shares 100.00% Standard Life Agency Services Limited (dormant) Edinburgh27 Ordinary Shares 100.00%
PUTM Bothwell Index-Linked Sterling Hedged Fund Wythall1 Authorised Unit Trust 100.00% PUTM Bothwell Japan Tracker Fund Wythall1 Authorised Unit Trust 99.58% PUTM Bothwell Long Gilt Sterling Hedged Fund Wythall1 Authorised Unit Trust 99.91% PUTM Bothwell North America Fund Wythall1 Authorised Unit Trust 99.40% PUTM Bothwell Sterling Credit Fund Wythall1 Authorised Unit Trust 99.82% PUTM Bothwell Sterling Government Bond Fund Wythall1 Authorised Unit Trust 99.02% PUTM Bothwell Tactical Asset Allocation Fund Wythall1 Authorised Unit Trust 100.00% PUTM Cautious Unit Trust Wythall1 Authorised Unit Trust 99.33% PUTM European Unit Trust Wythall1 Authorised Unit Trust 99.42% PUTM Far Eastern Unit Trust Wythall1 Authorised Unit Trust 99.69% PUTM Growth Unit Trust Wythall1 Authorised Unit Trust 100.00% PUTM International Growth Unit Trust Wythall1 Authorised Unit Trust 99.62% PUTM Opportunity Unit Trust Wythall1 Authorised Unit Trust 99.99% PUTM UK All-Share Index Unit Trust Wythall1 Authorised Unit Trust 99.96% PUTM UK Equity Unit Trust Wythall1 Authorised Unit Trust 99.84% PUTM UK Stock Market Fund Wythall1 Authorised Unit Trust 100.00% PUTM UK Stock Market Fund (Series 3) Wythall1 Authorised Unit Trust 100.00% Seabury Assets Fund – Standard Life Investments The Euro VNAV Liquidity Fund
Janus Henderson Diversified Growth Fund London30 OEIC, sub fund 83.18% Janus Henderson Institutional Mainstream UK Equity Trust London30 Authorised Unit Trust 100.00% Janus Henderson Institutional UK Gilt Fund London30 OEIC, sub fund 75.29% Janus Henderson Institutional Short Duration Bond Fund London30 Authorised unit trust 99.00% PUTM Bothwell UK All Share Listed Equity Fund Wythall1 Authorised Unit Trust 99.43% PUTM Bothwell UK Equity Income Fund Wythall1 Authorised Unit Trust 100.00% PUTM Bothwell Sub-Sovereign Bond Fund Wythall1 Authorised Unit Trust 100.00% PUTM Bothwell Institutional Credit Fund Wythall1 Authorised Unit Trust 100.00% Janus Henderson Institutional UK Equity Tracker Trust London30 Authorised Unit Trust 100.00% Janus Henderson Global Funds – Janus Henderson Institutional Overseas Bond Fund
Janus Henderson Institutional UK Index Opportunities Fund London30 OEIC, sub fund 75.53% Janus Henderson Strategic Investment Funds – Janus Henderson Institutional North American Index Opportunities Fund
Standard Life Trust Management – UK Corporate Bond trust Edinburgh26 Unit Trust 100.00% Standard Life Trust Management – Standard Life Active Plus Bond Trust
Standard Life Multi Asset Trust Edinburgh26 Unit Trust 99.99% Standard Life European Trust II Edinburgh26 Unit Trust 100.00% Standard Life Investment Company – Global Emerging Markets Equity
Standard Life Investments Global SICAV II – Global Short Duration Corporate Bond Fund
H. INTERESTS IN SUBSIDIARIES AND ASSOCIATES continued H5. Group entities continued
Standard Life Investments Global SICAV – Global Emerging Markets Local CCY Debt
AB SICAV I – Global Factor Portfolio Luxembourg31 SICAV, sub fund 53.14% Ignis Private Equity Fund LP Cayman Islands4 Limited Partnership 100.00% Ignis Strategic Credit Fund LP Cayman Islands4 Limited Partnership 100.00% Crawley Unit Trust Jersey13 Unit Trust 100.00% North American Strategic Partners 2008 L.P. Wilmington19 Limited Partnership 80.00% North American Strategic Partners (Feeder) 2008 L.P. Wilmington19 Limited Partnership 100.00% Ignis Strategic Solutions Funds plc – Systematic Strategies Fund
Associates: The Moor House Limited Partnership London15 Limited Partnership 33.27% Moor House General Partner Limited London15 Limited Partnership 33.30% UK Commercial Property Estates Limited (property investment company)
UK Commercial Property GP Limited Guernsey14 Ordinary Shares 44.73% UK Commercial Property Holdings Limited (property investment company)
UK Commercial Property REIT Limited Guernsey14 Ordinary Shares 44.73% UK Commercial Property Estates Holdings Limited (property investment company)
Standard Life Capital Infrastructure I L.P. Edinburgh26 Limited Partnership 26.30% Standard Life Investments Global Absolute Return Strategies Retail Acc
Standard Life Investments UK Retail Park Trust Jersey41 Unit Trust 56.60% Standard Life Investments UK Shopping Centre Trust Jersey41 Unit Trust 40.66% Standard Life Investment Company – UK Equity Recovery Fund
Standard Life Investment Company III – MyFolio Managed Income II Fund
Standard Life Investments Strategic Bond Fund Edinburgh26 Unit Trust 53.29% Standard Life Investments Dynamic Distribution Fund Edinburgh26 Unit Trust 49.15% Standard Life Investments UK Real Estate Accumulation Feeder Fund
Standard Life Managed Trust – Standard Life Japan Fund Edinburgh26 Unit Trust 45.28% Standard Life Investments Global Real Estate Fund Edinburgh26 Unit Trust 51.85% Standard Life Investments Global SICAV – Euro Smaller Companies
Standard Life Investments Global SICAV – Absolute Return Global Bond Strategies
Standard Life Investments Real Estate Income Feeder Fund London18 Unit Trust 30.19% Scottish Widows Tracker and Specialist Investment Funds – International Bond Fund
AB SICAV I – Diversified Yield Plus Portfolio Luxembourg31 SICAV, sub fund 42.34% MI Somerset Global Emerging Markets Essex34 OEIC, sub fund 34.49% Aberdeen Liquidity Fund (Lux) – Euro Fund Luxembourg39 SICAV, sub fund 36.62% Aberdeen Liquidity Fund (Lux) – Sterling Fund Luxembourg39 SICAV, sub fund 22.21% Aberdeen Liquid (Lux) Ultra Short Duration Sterling Fund Luxembourg39 SICAV, sub fund 34.60% AXA Sterling Index Linked Bond Fund London33 OEIC, sub fund 22.71% BMO Barclays 1-3 Year Global Corporate Bond (GBP Hedged) UCITS ETF
I1.2 Share-based payment expense Long-Term Incentive Plan (‘LTIP’) The Group implemented a long-term incentive plan to retain and motivate its senior management group. The awards under this plan are in the form of nil-cost options to acquire an allocated number of ordinary shares. Following the scheme of arrangement on 12 December 2018 (see note A1), participants in the Old PGH LTIP plan had their outstanding awards automatically exchanged for equivalent awards over PGH plc ordinary shares.
Assuming no good leavers or other events which would trigger early vesting rights, the 2016 and 2017 LTIP awards are subject to performance conditions tied to the Company’s performance in respect of cumulative cash generation and Total Shareholder Return (‘TSR’). The 2018 LTIP award is subject to performance conditions tied to the Company’s performance in respect of cumulative cash generation, return on Adjusted Shareholder Solvency II Own Funds and TSR.
The fair value of these awards is estimated at the share price at the grant date, taking into account the terms and conditions upon which the instruments were granted. The fair value of the 2016, 2017 and 2018 LTIP awards is adjusted in respect of the TSR performance condition which is deemed to be a ‘market condition’. The fair value of the 2016, 2017 and 2018 TSR elements of the LTIP awards has been calculated using a Monte Carlo model. The inputs to this model are shown below: 2018 TSR performance condition 2017 TSR performance condition 2016 TSR performance condition – March grant 2016 TSR performance condition – June grant
The 2018 DBSS was granted on 21 March 2018 and is expected to vest on 15 March 2021. The number of shares for all outstanding DBSS awards as at 10 July 2018 were increased to take into account the impact of the Group’s rights issue (see note D1). This adjustment has been based on the Theoretical Ex-Rights Price. The 2015 DBSS awards vested during the year. The 2016 awards are expected to vest on 24 March 2019 and the 2017 awards are expected to vest on 20 March 2020.
I1. Share-based payment continued I1.2 Share-based payment expense continued The fair value of these awards is estimated at the share price at the grant date, taking into account the terms and conditions upon which the options were granted.
The fair value of the options has been determined using a Black-Scholes valuation model. Key assumptions within this valuation model include expected share price volatility and expected dividend yield.
Share Incentive Plan 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 fair value of the Matching shares granted is estimated as the share price at date of grant, taking into account terms and conditions upon which the instruments were granted. At 31 December 2018, 49,854 matching shares were conditionally awarded to employees (2017: 33,705).
I1.3 Movements in the year The following tables illustrate the number of, and movements in, LTIP, Sharesave and DBSS share options during the year: Number of share options 2018
I. OTHER NOTES continued I1. Share-based payment continued I1.3 Movements in the year continued The weighted average fair value of options granted during the year was £5.75 (2017: £4.75).
The weighted average share price at the date of exercise for the rewards exercised is £6.82 (2017: £7.72).
In pursuing these objectives, the Group deploys financial and other assets and incurs insurance contract liabilities and financial and other liabilities. Financial and other assets principally comprise investments in equity securities, fixed and variable rate income securities, collective investment schemes, property, derivatives, reinsurance, trade and other receivables, and banking deposits. Financial liabilities principally comprise investment contracts, borrowings for financing purposes, derivative liabilities and net asset value attributable to unit holders.
I3. Capital management continued The framework comprises a suite of capital management policies that govern the allocation of capital throughout the Group to achieve the framework objectives under a range of stress conditions. The policy suite is defined with reference to policyholder security, creditor obligations, owner dividend policy and regulatory capital requirements.
Group capital resources – unaudited The Group capital resources are based on the Group’s Eligible Own Funds adjusted to remove amounts pertaining to unsupported with-profit funds and Group pension schemes: Unaudited £bn £bn
Remove Own Funds pertaining to unsupported with-profit funds and the PGL pension scheme (2.3) (2.0)
Solvency II surplus Until 1 July 2017, the Group’s Solvency II assessment and Group supervision was performed at the PLHL level as this was the highest EEA insurance holding company. A waiver which permitted Group supervision to take place at the level of the ultimate parent, Old PGH, via other methods as opposed to full Group supervision expired on 30 June 2017. The Group’s capital position is now being managed at the PGH plc level only.
An analysis of the PGH plc Solvency II surplus as at 31 December 2018 is provided in the business review section on page 28. The Group has complied with all externally imposed capital requirements during the year.
I4.1 Related party transactions During the year, the Group entered into the following transactions with related parties. As set out in note H2, SLA plc took a 19.99% equity stake in the Enlarged Group, and as a result became a related party of the Group. SLA plc is considered to have a significant influence over the Group due to their equity stake and representation on the Board of Directors.
Operating lease rentals charged within administrative expenses amounted to £10 million (2017: £6 million).
Later than 1 year and not later than 5 years 35 11
To purchase, construct or develop investment property and income strips 125 –
I7.2 Legal proceedings In the normal course of business the Group is exposed to certain legal issues, which involve litigation and arbitration. At the period end, the Group has a number of contingent liabilities in this regard, none of which are considered by the Directors to be material.
N LYONS C BANNISTER J MCCONVILLE A BARBOUR C FLEMING K GREEN W MAYALL B O’DWYER J POLLOCK B RICHARDS N SHOTT K SORENSON
PARENT COMPANY ACCOUNTS STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2018
Issue of shares under scheme of arrangement 72 4,078 (4) – 4,146 – 4,146
Issue of Tier 1 Notes via substitution – – – – – 411 411
STATEMENT OF CHANGES IN EQUITY FOR THE PERIOD FROM 5 OCTOBER 2018 TO 31 DECEMBER 2018
The Company has taken advantage of the exemption in section 408 of the Companies Act 2006 not to present its own income statement in these financial statements.
Statement of Compliance The Company’s financial statements have been prepared in accordance with International Financial Reporting Standards (‘IFRSs’) as adopted by the European Union (‘EU’) and in accordance with the provisions of the UK Companies Act 2006.
(b) Accounting policies Where applicable, the accounting policies in the separate financial statements are the same as those presented in the consolidated financial statements on pages 121 to 213, with the exception of the two policies detailed below.
Financial assets Classification of Financial assets Financial assets are measured at amortised cost where they have: • contractual terms that give rise to cash flows on specified dates, that represent solely payments of principal and interest on the principal amount outstanding; and
• are held within a business model whose objective is achieved by holding to collect contractual cash flows.
Financial assets measured at amortised cost are included in note 9.
See note 12 for detail of how the Company assesses whether the credit risk of a financial asset has increased since initial recognition and the approach to estimating ECLs.
Following court approval on 18 December 2018, the entire issued share premium of the Company as at 18 December 2018 was cancelled. The sum of £4,078 million arising on the share premium cancellation has been credited to the Company’s retained earnings.
Issued and fully paid: 721 million ordinary shares of £0.10 each 72,119,921
Amount due for settlement after 12 months 1,634 a. On 12 December 2018, the Company was substituted in place of Old PGH as issuer of the £428 million subordinated notes due 2025 at a coupon of 6.625%, which were initially recognised at fair value of £439 million.
5. BORROWINGS continued f. On 12 December 2018, the Company became an additional borrower and guarantor to an acquisition facility with an aggregate principal amount of £600 million. The acquisition facility is undrawn as at 31 December 2018 and has a final maturity date of 31 August 2019. The Group is entitled to request two six-month extensions to the term of the facility (which would together extend the maturity date to 31 August 2020). 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%.
Borrowings initially recognised at fair value are being amortised to par value over the life of the borrowings. As part of the substitutions, accrued interest was also transferred to the Company and was settled prior to 31 December 2018.
For the purposes of the additional fair value disclosure for liabilities recognised at amortised cost, all borrowings have been categorised as Level 2 financial instruments.
6. DERIVATIVES The accounting policy for derivatives is included in note E3 to the consolidated financial statements.
The fair value of the derivative liability is as follows: £m
For a list of principal Group entities, refer to note H5 of the consolidated financial statements. The entity directly held by the Company is separately identified.
a. On 12 December 2018, the Company was assigned a £428 million subordinated loan by Phoenix Life Holdings Limited (‘PLHL’). The loan accrues interest at a rate of 6.675% and matures on 18 December 2025. This loan was initially recognised at fair value of £440 million and is accreted to par over the period to 2025. At 31 December 2018, the carrying value of the loan was £440 million.
On 12 December 2018, the Company was assigned a £450 million subordinated loan by PLHL. The loan accrues interest at a rate of 4.175% and matures on 20 July 2022. This loan was initially recognised at fair value of £448 million and is accreted to par over the period to 2022. At 31 December 2018, the carrying value of the loan was £448 million.
None of the loans are considered to be past due or impaired.
10. CASH AND CASH EQUIVALENTS The accounting policy for cash and cash equivalents is included in note G11 to the consolidated financial statements.
Bank and cash balances 1 11. CASH FLOWS FROM OPERATING ACTIVITIES
At 31 December 2018, total capital was £4,554 million. The movement in capital in the period comprises the total comprehensive expense for the period attributable to owners of £3 million, proceeds from the issue of shares under the scheme of arrangement of £4,146 million and the substituted Tier 1 Notes of £411 million.
The principal risks and uncertainties facing the Company are interest rate risk, liquidity risk, foreign currency risk and credit risk. The Company has hedged the currency risk on its foreign currency hybrid debt (US $500 million and €500 million) through a US $500 million internal loan and a €500 million internal cross currency interest rate swap.
The table below details the credit quality of the Company’s financial assets, as well as the Company’s maximum exposure to credit risk by credit risk rating grades: External credit rating
Loans and receivables (note 9) N/A Performing 12 month ECL 2,056 – 2,056
The Company considers reasonable and supportable information that is relevant and available without undue cost or effort to assess whether there has been a significant increase in risk since initial recognition. This includes quantitative and qualitative information and also, forward-looking analysis.
Loans and receivables – The Company is exposed to credit risk relating to loans and receivables from other Group Companies, which are considered low risk. Given their low risk and the short time period since inception of the loan, the loss allowance has been set at less than £1 million. The Company assesses whether there has been a significant increase in credit risk since initial recognition by assessing whether there have been any historic defaults, by reviewing the going concern assessment of the borrower and the ability of the Group to prevent a default by providing a capital or cash injection.
Cash and cash equivalents – The Company’s cash and cash equivalents are held with bank and financial institution counterparties, which have AAA investment grade ratings. The Company considers that its cash and cash equivalents have low credit risk based on the external credit ratings of the counterparties and there being no history of default, and therefore the impact to the net carrying amount shown in the table above is not material.
Further detailed information on the Group’s share-based plans is included in note I1 in the consolidated financial statements.
14. DIRECTORS’ REMUNERATION Details of the remuneration of the Directors of Phoenix Group Holdings plc is included in the appendix to the Directors’ Remuneration Report on pages 76 to 105 of the Annual Report and Accounts.
15. RELATED PARTY TRANSACTIONS The Company has related party transactions with Group entities and its key management personnel. Details of the total compensation of key management personnel, being those having authority and responsibility for planning, directing and controlling the activities of the Group, including the Executive and Non-Executive Directors, are included in note I4 to the consolidated financial statements.
During the period ended 31 December 2018, the Company entered into the following transactions with Group entities: 2018 £m
Amounts due to related parties at the end of the year: 2018 £m
16. AUDITOR’S REMUNERATION Details of auditor’s remuneration, for Phoenix Group Holdings plc and its subsidiaries, is included in note C4 to the consolidated financial statements.
On 22 February 2019, the Company acquired Standard Life International Designated Activity Company from another Group entity. The consideration was £162 million and this was in the form of an intra-group loan liability assumed.
1 Includes assets where shareholders of the life companies bear the investment risk. 2 Includes assets where policyholders bear most of the investment risk.
1 Includes equity release mortgages of £1,255 million, policy loans of £12 million, other loans of £199 million, net derivative assets of £1,563 million, reinsurers’ share of investment contracts of £6,085 million, and other investments of £487 million.
All of the life companies’ debt securities are held at fair value through profit or loss under IAS 39, and therefore already reflect any reduction in value between the date of purchase and the reporting date.
The life companies have in place a comprehensive database that consolidates credit exposures across counterparties, geographies and business lines. This database is used for credit monitoring, stress testing and scenario planning. The life companies continue to manage their balance sheets prudently and have taken extra measures to ensure their market exposures remain within risk appetite.
The life companies had £87 million (2017: £10 million) shareholder exposure to financial institution corporate debt of the Peripheral Eurozone, defined as Portugal, Italy, Ireland, Greece, and Spain, at 31 December 2018. The £5,800 million (2017: £3,255 million) total shareholder exposure to financial institution corporate debt comprised £3,080 million (2017: £2,648 million) senior debt, £2,230 million (2017: £2 million) Tier 1 debt and £490 million (2017: £605 million) Tier 2 debt.
Indirectly held debt securities – – 84 5,125 5,209 94% of rated securities were investment grade at 31 December 2018 (2017: 99%). The percentage of rated securities that were investment grade in relation to the shareholder and policyholders’ funds were 99% and 93% respectively (2017: 99% and 98% respectively).
The surplus has increased during the period largely due to the acquisition of the Standard Life Assurance businesses financed through an equity raise and the issuance of capital qualifying debt, capital synergies achieved associated with the acquisition and the delivery of management actions partly offset by the impact of dividends paid (including accrual for the 2018 final dividend), financing costs and net adverse economic and other variances.
• in the case of winding-up, the total amount that is available to absorb losses before repayment to the holder until all obligations to policyholders and other beneficiaries have been met (‘subordination’).
PGH plc’s total Own Funds are analysed by Tier as follows: Estimated £bn £bn
The principal risks of the Group are described in detail in note E6 and F4 in the IFRS consolidated financial statements.
BREAKDOWN OF SHAREHOLDER CAPITAL POSITION The shareholder capital position is an adjusted PGH plc position which excludes Own Funds and the associated SCR relating to the unsupported with-profit funds and the PGL Pension Scheme of £2.3 billion as at 31 December 2018 (2017: £2.0 billion).
The shareholder capital position is further analysed between the contributions of the life companies and holding companies as follows: Estimated £bn 31 December 2017 £bn
The MGSCR represents the sum of the underlying insurance companies’ MCRs in respect of the Method 1 part of the Group.
The Eligible Own Funds to cover the MGSCR is subject to quantitative limits as shown below: • the Eligible amounts of Tier 1 items should be at least 80% of the MGSCR; and
PGH plc’s MGSCR at 31 December 2018 is £1.0 billion (2017: £1.2 billion).
PGH plc’s Method 1 Eligible Own Funds to cover MGSCR is £4.2 billion (2017: £5.3 billion) leaving an excess of Eligible Own Funds over MGSCR of £3.2 billion (2017: £4.1 billion), which translates to an MGSCR coverage ratio of 408% (2017: 448%).
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 reconciliation from the Group’s IFRS consolidated statement of financial position to the Group’s AUA is provided on page 222.
Financial leverage is calculated by Phoenix (using Fitch Ratings’ stated methodology) 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.
New business contribution is not directly reconcilable to the Group’s Solvency II metrics as it represents an in-year movement. Further analysis is provided on page 31.
A reconciliation of operating profit to the IFRS result before tax attributable to owners is included in the business review on page 28 and in the primary financial statements on page 121.
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 withprofit funds and Group pension schemes whose Own Funds exceed their SCR.
Further details of the Shareholder Capital Coverage Ratio and its calculation are included in the business review on page 28 and the additional capital disclosures section on page 228.
IN THIS SECTION Shareholder Information ������������������������������������������� 232 Forward-looking Statements ������������������������������������ 233 Glossary ��������������������������������������������������������������������� 234
ANNUAL GENERAL MEETING Our Annual General Meeting (’AGM’) will be held on 2 May 2019 at 9:00am�
The voting results for our 2019 AGM, including proxy votes and votes withheld, will be available on the Group’s website shortly after the meeting�
Shareholder helpline number +44 (0) 370 707 0181 Fax number +44 (0) 370 703 6116 www�investorcentre�co�uk/contactus
Access Computershare’s web-based enquiry service www�investorcentre�co�uk to download forms such as a dividend mandate form or submit dividend mandate details online; view details of your Phoenix Group shareholding and recent dividend payments; update your address details and register for shareholder electronic communications to receive notification Phoenix Group shareholder mailings by email�
If you receive any unsolicited investment advice: • make sure you get the correct name of the person and organisation; • check that they are properly authorised by the Financial Conduct Authority (’FCA’) before getting involved by visiting www�fca�org�uk/firms/systems-reporting/register; • report the matter to the FCA by calling the FCA Consumer Helpline on 0800 111 6768; and
More detailed information on this or similar activity can be found on the FCA website available at www�fca�org�uk/consumers�
FORWARD-LOOKING STATEMENTS The 2018 Annual Report and Accounts contains, and the Group may make other statements (verbal or otherwise) containing, forward-looking statements and other financial and/or statistical data about the Group’s current plans, goals and expectations relating to future financial conditions, performance, results, strategy and/or objectives�
Statements containing the words: ’believes’, ’intends’, ’will’, ’may’, ’should’, ’expects’, ’plans’, ’aims’, ’seeks’, ’targets’, ’continues’ and ’anticipates’ or other words of similar meaning are forward-looking� Such forward-looking statements and other financial and/or statistical data involve risk and uncertainty because they relate to future events and circumstances that are beyond the Group’s control� For example, certain insurance risk disclosures are dependent on the Group’s choices about assumptions and models, which by their nature are estimates�
As such, actual future gains and losses could differ materially from those that we have estimated� Other factors which could cause actual results to differ materially from those estimated by forward-looking statements include but are not limited to: • domestic and global economic and business conditions; • asset prices; • market-related risks such as fluctuations in interest rates and exchange rates, the potential for a sustained low-interest rate environment, and the performance of financial markets generally; • the policies and actions of governmental and/or regulatory authorities, including, for example, new government initiatives related to the financial crisis and the effect of the European Union’s ’Solvency II’ requirements on the Group’s capital maintenance requirements; • the political, legal and economic effects of the UK’s vote to leave the European Union; • the impact of inflation and deflation; • market competition; • changes in assumptions in pricing and reserving for insurance business (particularly with regard to mortality and morbidity trends, gender pricing and lapse rates); • the timing, impact and other uncertainties of future acquisitions or combinations within relevant industries; • risks associated with arrangements with third parties; • inability of reinsurers to meet obligations or unavailability of reinsurance coverage; and
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 2018 Annual Report and Accounts�
CLOSED LIFE FUND A fund that no longer accepts new business� The fund continues to be managed for the existing policyholders
EEA European Economic Area – Established on 1 January 1994 and is an agreement between Norway, Iceland, Liechtenstein and the European Union� It allows these countries to participate in the EU’s single market without joining the EU
OWN FUNDS Basic Own Funds comprise the excess of assets over liabilities valued in accordance with the Solvency II principles and subordinated liabilities which qualify to be included in Own Funds under the Solvency II rules�
The model used to calculate the Group Solvency Capital Requirement pursuant to Solvency II� It aggregates outputs from both the existing Phoenix Internal Model and the Standard Life Internal Model with no diversification between the two
PRA Prudential Regulation Authority – The body responsible for the prudential regulation and supervision of banks, building societies, credit unions, insurers and major investment firms� The PRA and FCA use a Memorandum of Understanding to co-ordinate and carry out their respective responsibilities
SUNLIFE SunLife Limited� The Company which distributes SunLife branded products on behalf of its immediate parent company, Phoenix Life Limited and certain third parties
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