ABOUT US Phoenix Group is the largest UK consolidator of closed life assurance funds, with assets under management of £76 billion, and more than six million policyholders.
OUR MARKET There are over £300 billion of assets held in closed life funds in the UK (excluding Phoenix).
Phoenix is the UK’s largest specialist closed life assurance fund consolidator.
Our people underpin everything that we do. The Group specifically targets, recruits and develops top quality people to support the achievement of its strategic and operational objectives.
Underpinned by ‘The Phoenix Way’, which characterises an approach and infrastructure for the efficient and effective structuring, integration and management of closed life funds and the investments they hold.
Phoenix has been a well-known name in the insurance world since 1782. From its beginnings more than 200 years ago, it has grown to become the largest UK consolidator of closed life assurance funds.
Issued £300 million Tier 3 bond 2016 Phoenix Group Holdings successfully completes two acquisitions – AXA Wealth’s pension and protection businesses, and Abbey Life Assurance Company Limited
Exchange of Tier 1 bonds into new subordinated notes 2014 Divestment of Ignis Asset Management
Britannic acquires life operations of Allianz Cornhill 2001 Abbey National acquires Scottish Provident 1999 Britannic acquires Alba Life 1996 Royal & Sun Alliance established 1905 Britannic Assurance Company established 1857 Pearl Loan Company established 1837 Scottish Provident established 1836 Edinburgh & Glasgow Assurance established 1835 NPI established 1806 London Life established 1782 Phoenix Assurance established 2016 ACQUISITIONS
THE ACQUISITIONS COMPLETED BY THE GROUP IN 2016 HAVE REINFORCED PHOENIX’S POSITION AS THE UK’S LARGEST CLOSED LIFE FUND CONSOLIDATOR.” HENRY STAUNTON CHAIRMAN
This corporate activity has been undertaken against a backdrop of challenging market conditions, including a sharp decline in long-term interest rates during the year. Phoenix has shown considerable agility in navigating the volatile interest rate environment and has continued its track record of meeting publicly stated targets, successfully executing management actions and further improving customer outcomes. The interest rate hedging strategies implemented during the course of 2016 helped mitigate the adverse impacts of market movements and underpinned Phoenix’s resilient capital position.
During the year René-Pierre Azria left the Board of Directors and I would like to thank him on behalf of the Board and management for seven years of outstanding service. In particular, his expertise in acquisitions has been critical in helping the Group grow over the past year. We also welcomed three new Directors to the Board: Wendy Mayall, John Pollock and Nicholas Shott who all bring extensive experience and highly relevant competencies.
Looking ahead, Isabel Hudson and David Woods will both step down from the Board at the time of the 2017 AGM on 11 May. Their specialist life assurance knowledge and expertise have been invaluable to the Group over the past seven years and I would like to wish them both well for the future. The Group is undertaking a process to recruit a new non-executive Director and I am confident that the robust governance at Phoenix will continue across our enlarged Group following the acquisitions of AXA Wealth and Abbey Life.
Phoenix has delivered its growth strategy during 2016 under turbulent market conditions. I would like to thank all my colleagues for their hard work, determination and commitment in what has been a highly successful year for the Group.
Phoenix has delivered on its strategy of closed life fund consolidation in 2016, despite the macroeconomic uncertainty seen during the year. The ability of the Group to complete two acquisitions, whilst ensuring that it continued to meet its financial targets, is a strong demonstration of the Group’s capabilities. The benefits of the acquisitions are already being realised. Phoenix will continue their integration into the Group’s existing platform during the course of 2017.
Phoenix Group is well positioned to benefit from the evolving UK life insurance industry. As the largest UK specialist consolidator of closed life funds, with a scalable operating model and strong outsource partner relationships, we have demonstrated our ability to enhance value for our customers and shareholders through management actions. There remains a significant opportunity for Phoenix Group to generate further value from future acquisitions.
PROGRESS MADE SO FAR The Group has already delivered £282 million of cash flow from the acquisition, exceeding the target of £250 million within six months of completion. These benefits have been delivered from the mortality exposure of the SunLife business offsetting the Group’s existing longevity exposure from its annuity liabilities and the incorporation of the acquired businesses within the Group’s Solvency II Internal Model.
The cash generated from the acquired businesses facilitated the full repayment of the £182 million acquisition facility in December 2016.
At the time of the announcement of the AXA Wealth acquisition, we stated a target to generate £250 million of cash within six months of completion of the transaction. Including an additional £165 million of cash flow that has been generated so far in 2017 following the Internal Model approval of the AXA Wealth businesses, we have already achieved £282 million from the acquisition and therefore have outperformed this target.
PHOENIX LIFE CAPITAL POSITION The Phoenix Life companies hold capital management buffers, in addition to the required Solvency Capital Requirement (‘SCR’), which provide the life companies with additional resilience in the event of market volatility.
Any excess over these buffers (‘Free Surplus’) is available for distribution to the holding companies as cash. As at the start of 2016 the Free Surplus was £0.1 billion and this has increased to £0.7 billion as at 31 December 2016, on a pro forma basis. The increase over the course of the year incorporates the benefits from the acquisitions of the AXA Wealth businesses and Abbey Life, offset in part by the cash released by the Group’s life companies during the year and the impact of lower long-term interest rates.
The Group implemented further management actions during 2016 in order to increase the Free Surplus and facilitate the release of cash from the Group’s life companies. These included a Part VII transfer of an annuity portfolio, a longevity swap agreement and extending Matching Adjustment portfolios.
BENEFITS OF THE ACQUISITION Phoenix now expects cost synergies of between £13 million to £15 million per annum from the acquisition, to be generated by leveraging our existing operating platform and outsourcing model. This is higher than our original expectation of £10 million of cost savings.
The Group is also investing to ensure a smooth transition of the two businesses from AXA to Phoenix and we are committed to delivering the highest level of service to both direct and IFA customers, as we do for our existing customers. The SunLife business offers additional value through its new business franchise, where it has a recognised brand and a proven track record of direct marketing.
The Group capital position assumes a recalculation of Transitional Measures as at 31 December 2016, to take into account the changes in interest rates over the course of the year.
The volatility of the interest rate environment may well endure for a significant period of time. However, the Group continues to take actions to mitigate the impact of interest rates on the Group’s cash generation and capital position. These include the continued hedging of market risks as well as examining options to generate additional yield on our assets by investing in alternative asset classes such as equity release mortgages.
Phoenix will apply to include Abbey Life within the Group’s Solvency II Internal Model in the second half of 2017.
Phoenix acquired Abbey Life from Deutsche Bank. The consideration of £933 million and related expenses were financed through a fully underwritten rights issue which raised a total of £735 million and a £250 million new short-term bank facility. The bank facility has since been refinanced with the Group’s lending banks into an enlarged Revolving Credit Facility of £900 million, of which £550 million remains outstanding following the Group’s recent Tier 3 bond issue.
SIMPLIFICATION OF GROUP STRUCTURE Phoenix has taken significant steps in recent years to both reduce the level of debt within the Group and simplify its corporate structure. This progress continued in January 2017 with the issue of a £300 million subordinated Tier 3 bond, which matures in July 2022. The net proceeds from the bond issuance reduced further the amount of senior bank debt outstanding to £550 million and will allow the Group to better match its debt profile to its long-term cash flows. Furthermore, the bond provides the Group with additional Solvency II capital, assisting the rationalisation of the Group’s holding company structure.
OPERATING PROFIT The Group achieved operating profits of £351 million in 2016 (2015: £324 million), reflecting an increased impact from management actions.
– Implementation of a £2 billion longevity swap on a portfolio of immediate annuities with an external reinsurer. The attractive terms of this transaction significantly improved the capital efficiency within the Group.
– A £1 billion bulk annuity transaction under which Phoenix Life Limited insured pensions-in-payment from the PGL Pension Scheme. This transaction enhanced the Group’s capital position, and gives potential for further shareholder value creation through investing the assets in line with the Group’s strategic asset allocation.
Given our history of acquisitions, Phoenix has a wide range of legacy products and it is vital to us that we carry out an active programme of product governance, checking that our products continue to deliver appropriate outcomes for both customers and Phoenix.
While we aim to minimise customer complaints, it is important to ensure that the complaint process is straightforward, transparent and fair to consumers while allowing us to learn for the future. Our customerfocused culture is further supported by decisions made by the independent complaints adjudicator, the Financial Ombudsman Service (‘FOS’). For FOS decisions in the year, the overturn rate of 18% is significantly better than the industry average rate of 30%.
Finally, there remains the risk of fraudsters targeting our customers and we therefore continue to take action to identify possible incidences of pension fraud. Phoenix Group prevented policyholders from losing over £4 million to potentially fraudulent schemes during 2016 and we remain active in publicising the risk of pension fraud through specific campaigns in the media.
The regulator has been clear that life companies need to do more to ensure that policyholders have clear communication at the time of retirement, in particular around their options with regards to taking up an annuity. Phoenix Group currently only provides annuities for its own vesting policyholders and wrote a total of £542 million of annuities in 2016 compared with £485 million in 2015. £370 million of the annuities written in 2016 had guaranteed annuity rates (‘GARs’) that are often well above currently available market rates, with the remaining £172 million being non-GAR annuities. Phoenix Group aims to offer our customers an average non-GAR annuity rate that is at least 97.5% of the average of the top five open market providers.
There has been additional regulatory action on ensuring charges to policyholders are reasonable. The cap of 1% on early exit charges for pension customers aged over 55 will come into force in 2017. Over 80% of our unitised policies have no exit charge at all and we have seen no evidence that any of our customers are deterred from taking advantage of pension freedoms before their selected retirement date because of exit charges. The overall financial impact of a 1% cap on exit charges has been estimated at £26 million, including Abbey Life’s business, and this has already been reflected in the Free Surplus position of the life companies.
PEOPLE Phoenix Group’s ability to attract, retain and motivate outstanding talent was, for the fifth year in succession, formally recognised in 2016 through our accreditation as one of the UK’s Top Employers. An engaged workforce, one that feels committed to the goals of the organisation, is fundamental to the success of the Group. Our employee engagement index has increased to 81%, a 3% increase on the scores achieved in 2015.
The Group’s corporate responsibility agenda plays a central part in the engagement of our people. Their commitment extends to a number of community initiatives supported by the organisation and is a critical part of our overarching objective to put the financial, physical and mental wellbeing of our employees at the heart of our people strategy.
I am pleased to report that staff-led fund raising activities in 2016 raised a total of over £212,000. This was raised primarily for our corporate partnerships with Midlands Air Ambulance Charity and London’s Air Ambulance, which we will extend for a further three years. As we reach the half way mark in this six-year partnership, our employees have so far raised over £550,000.
Year on year retention and recruitment have improved our resourcing position and we are well placed to navigate the integration of the newly acquired businesses, including the combined existing management and flexible contract employees. We remain committed to developing our employees and have delivered over 16,000 hours of training in 2016.
We have updated our long-term cash generation target to £2.8 billion of cash between 2016 and 2020, up from £2.0 billion. Of this, we expect to generate £1.0 billion to £1.2 billion of cash between 2017 and 2018, in line with the expected timeframe to integrate the recent acquisitions and incorporate Abbey Life within the Group’s Solvency II Internal Model. These cash generation targets include expectations of future management actions as we seek to generate value for policyholders and shareholders.
Fixed operating costs may become an issue as closed funds decline in size over time
Specialist skill sets are required to manage complex legacy products in closed funds
PHOENIX’S MOTIVATION Phoenix has key competitive advantages in generating value from acquiring and managing closed life funds: The Group’s scale provides the ability to generate capital efficiencies through the diversification of risks
The Group’s outsourcing partners provide policy administration services and allow Phoenix to run a variable cost model
Phoenix’s experienced employees are focused on closed life funds and have significant expertise in managing with-profits products
Phoenix has a wide range of legacy products which are written across different funds.
With-profit £30.2 billion – These are typically savings and investment products.
– In the ‘supported’ with-profit funds, the shareholders’ capital is exposed to all economic movements until the estate is rebuilt to cover the required capital, at which point the fund becomes ‘unsupported’.
Unit-linked £30.9 billion – These are insurance or investment contracts (savings and pensions) without guarantees.
– Policyholders buy units with their premiums which are invested in funds.
– Shareholders benefit from fees earned through management charges, bid/offer spreads or policy fees.
£12.4 billion – Policyholders make fixed or variable payments in lieu of a future lump sum or a future income stream until death.
– Shareholders are exposed to the majority of the risks and benefit from 100% of the profits or losses arising.
CLOSED FUND FOCUS: We specialise in the efficient management of inforce policies with limited writing of new business. This allows high visibility of cash flows over the long term due to the predictable nature and run-off profile of the Group’s funds.
SCALABLE OUTSOURCER MODEL: We operate a low cost, scalable operating model which allows us to benefit from economies of scale, diversification benefits and the ability to save costs both internally and through outsourcing arrangements.
EXPERIENCED AND SKILLED MANAGEMENT TEAM: Our management team have a proven track record of target delivery. They have the required specialist skills in regulation, operational efficiency, capital management, governance and liability customised asset management.
In order to drive value, the Group looks to undertake management actions which increase and accelerate overall cash flows or enhance value.
Effective management of with-profit funds facilitates estate distribution to policyholders and shareholders.
OUTSOURCE PARTNERS Used by the management services companies to provide policy administration services
In addition to the services above, one of the management service companies, AXA Wealth Services Limited, also provides distribution services for SunLife, the over 50s protection business.
OUTSOURCE PARTNERS A key role of the management service companies is the management of relationships with the outsource partners on behalf of the life companies. In the absence of further acquisitions, the number of policies held by the Group gradually decline over time and the fixed cost base of our operations as a proportion of policies will increase. Our management services team manages this risk by putting in place long-term arrangements for third party policy administration. By paying a fixed price per policy to our outsource partners, we reduce this fixed cost element of our operations and convert to a variable cost structure. This allows our management services companies to generate profits by managing costs efficiently.
GROUP FUNCTIONS The Group operates centralised functions that provide Group-wide and corporate-level services and manage corporate and strategic activity. The Group functions include Group Finance, Treasury, Group Tax, Group Actuarial, Group Risk, Legal Services, Human Resources, Corporate Communications, Strategy and Corporate Development, Investor Relations, Company Secretariat and Internal Audit. Based both in Wythall, Birmingham and Juxon House, London, the Group is led by the Group Chief Executive Officer, Clive Bannister.
PHOENIX LIFE Phoenix Life is responsible for the management of the Group’s life funds. Its experienced and focused management team is led by its Chief Executive Officer, Andy Moss. Based in Wythall, Birmingham, it has a track record of successfully integrating life assurance businesses and has developed a leading-edge model and infrastructure into which acquired funds can be integrated.
Investment management services are provided to the life companies by a number of external asset management companies.
RISK MANAGEMENT Managing and mitigating risk within appetite and exercising robust governance supports policyholder security and delivers the Group’s strategy.
EFFECTIVE PARTNERSHIPS Utilising external outsource partners and fund managers with proven track records provides access to expert knowledge and delivers a scalable cost base, maximising returns.
KEY INITIATIVES AND PROGRESS IN 2016 – We have implemented a full upgrade of the Phoenix Life website in order to deliver a fully responsive and engaging platform. Our changes ensure that our website adapts, resizing and rearranging itself to a customer-friendly format based on the size of the device being used.
– We have joined the ABI’s pension dashboard initiative. We believe this important industry initiative will help both existing and new customers keep track of their policies and be better prepared for their retirement as a result.
– Our strong customer-focused culture is further supported by decisions made by the independent complaints adjudicator, the Financial Ombudsman Service (‘FOS’). For FOS decisions in the year, the overturn rate of 18% is significantly below the industry average rate of 30%.
– We have again achieved a positive customer satisfaction score based on the results of the satisfaction survey managed by Ipsos MORI (an external research firm). Customers surveyed were asked to give a satisfaction rating of between 1 and 5 to a number of questions asked (with a rating of 4 or 5 regarded as satisfied) and 91.2% of all questions scored a rating of 4 or above.
– Despite many of our products being long term in nature, we will continue to look for options for customers who may no longer have a need for their product.
WHY IS IT IMPORTANT? This is an externally calculated measure of how satisfied customers are with Phoenix’s servicing proposition.
ANALYSIS The Group achieved a satisfaction score of 91.2% reflecting our commitment to ensuring customers are satisfied with our products and services.
ANALYSIS The Group’s pension transfer times are better than the industry target.
* 2014 and 2015 scores have been updated to reflect only customers scoring 4 or above.
KEY INITIATIVES AND PROGRESS IN 2016 – In line with our growth and acquisition strategy, we completed the acquisition of AXA Wealth’s pension and protection businesses on 1 November 2016.
– As at the end of 2016, £117 million of cash flow was delivered from the acquired AXA businesses, reflecting the benefits of offsetting effects of AXA’s mortality exposure against Phoenix’s existing longevity exposure on its annuity business. To date, further cash flows of £165 million have been delivered in 2017.
– The Group continued to explore investment opportunities which look to maximise value whilst remaining capital efficient. During 2016, this has included investment in equity release mortgages as well as more innovative ways to attract high yield assets such as total return swaps and local authority loans.
– We continued to streamline and simplify the Group’s actuarial modelling, including the alignment of our IFRS and Solvency II reserving methodologies, in order to improve efficiency and generate value.
PRIORITIES FOR 2017 – Focus on the smooth transition and efficient integration of the acquired AXA and Abbey Life businesses to deliver planned synergies whilst providing high quality of service to policyholders.
– Deliver between £13 million and £15 million per year of cost savings from the acquired AXA businesses.
– Explore further investment opportunities in higher yielding assets for example commercial real estate and additional equity release mortgages.
Read more about cash generation 27 Read more about operating profit
ANALYSIS Cash remitted reflects the generation of Free Surplus within the life companies and the benefit of management actions implemented in the period.
A further £4.4 billion of cash generation, excluding the impact of management actions, is expected from 2021 onwards. More details are included in the Business Review section.
A reconciliation of operating profit to the IFRS loss after tax of £(100) million (2015: £249 million, profit) is included in the Business Review section.
ANALYSIS Operating profit has increased by £27 million principally due to the impact of higher management actions compared to the previous period, partly offset by the adverse impacts of actuarial assumption strengthening in light of the continued low interest rate environment.
THE 2016 ACQUISITIONS INCREASE THE SCALE AND STRENGTH OF THE GROUP. TOTAL CASH GENERATION FROM THE ACQUIRED AXA BUSINESS IS £282 MILLION WHICH EXCEEDS THE TARGET OF £250 MILLION OF CASH FROM THE ACQUISITION WITHIN SIX MONTHS OF COMPLETION.”
KEY INITIATIVES AND PROGRESS IN 2016 – We completed a Part VII transfer of a block of with-profit annuities to ReAssure Life Limited delivering Solvency II surplus benefits from the release of expense reserves and a decrease in capital requirements for counterparty credit default and expense risks.
– We entered into a £2.0 billion longevity swap on a portfolio of immediate annuities with an external reinsurer, realising Solvency II surplus benefits as a result of a reduction in longevity risk capital required, thereby increasing the financial resilience of the Group.
– We have continued to enhance the Group’s capital position under Solvency II by further optimising our Matching Adjustment portfolios delivering Solvency II surplus benefits.
– We agreed a revised £650 million unsecured revolving credit facility in March 2016, with no mandatory or target amortisation payments, offering the Group greater flexibility to make acquisitions.
PRIORITIES FOR 2017 – Incorporation of the acquired businesses within the Group’s Solvency II Internal Model, including the application of Transitional Measures. We obtained the PRA’s approval to incorporate the acquired AXA businesses into the Group’s Internal Model in March 2017. An application to include the acquired Abbey Life business in the Group’s Internal Model will be made during the second half of 2017.
– Undertaking a Funds Merger of the acquired AXA businesses into Phoenix Life Limited.
– Continued simplification of the Group’s corporate structure, including the Group’s intention to put in place a new UK-registered holding company for the Group during 2018. This is expected to provide the Group with a streamlined and cost efficient governance structure as well as greater clarity for the Group’s stakeholders.
WHY IS IT IMPORTANT? The Solvency II surplus is the regulatory assessment of capital adequacy at the PLHL level.
Cash generation is underpinned by the Phoenix Life Free Surplus, which represents the life companies’ Solvency II surplus in excess of the Board approved capital management policies.
It is defined as the ratio of the Group Own Funds to Group SCR, after adjusting to exclude amounts relating to unsupported with-profit funds and Group pension schemes.
PRO FORMA SOLVENCY II CAPITAL POSITION The Group’s Solvency II capital adequacy assessment is undertaken at the level of the highest EEA insurance group holding company which is Phoenix Life Holdings Limited (‘PLHL’).
The PLHL sub group excludes holding companies above PLHL in the Group structure whose principal activity is the issue of debt securities for the purposes of financing fellow Group undertakings.
Since the end of 2016, certain actions have been undertaken which are considered to have had a significant impact on the Group’s Solvency II position. These actions comprise: – the issuance in January 2017, of a £300 million subordinated Tier 3 bond that qualifies as Solvency II capital, the proceeds of which have been used to reduce the Group’s outstanding senior bank debt; and
In order to illustrate the impacts of the above, pro forma adjustments have been made to the estimated Solvency II metrics on a basis that assumes these actions took place on 31 December 2016. This pro forma position is considered to provide a more meaningful analysis of the Group’s capital position and its key sensitivities.
Both the estimated and the pro forma Solvency II metrics included in the Annual Report and Accounts reflect the impact of a recalculation of the Transitional Measures on Technical Provisions (‘TMTP’) and the run-off of TMTP since 1 January 2016.
KEY INITIATIVES AND PROGRESS IN 2016 We continued to grow our learning & development offering for all employees with an increased emphasis on management and leadership development.
Following the success of our Open University Executive Education programme in 2015, we supported a second cohort of 16 people who successfully completed the programme in 2016. The delegates worked on current business challenges and presented their findings and recommendations to the Executive Committee in October.
– We received and supported just over 1,000 learning requests that included professional qualifications, continuing professional development, conferences, team building and coaching/mentoring.
– We launched a self-nominating Talent Programme within Phoenix Life. This unique self-nomination approach to talent aims to identify and develop our own talent across middle management creating a transparent and robust process.
– Staff-led fund raising activities in 2016 raised over £212,000 for both our corporate partners and for other charities. The Group chose to extend our corporate charity partnership with Midlands Air Ambulance Charity and London’s Air Ambulance for a further three years and, as we reach the half way mark in the six year partnership, we have so far raised over £550,000.
– Group-wide gender pay gap to be less than, or equal to, 22% of the median and mean across all employees.
ANALYSIS The Group has increased its employee engagement index by 3% to 81%.
– Prioritise our learning and development by increasing managerial strength and breadth.
WE WILL CONTINUE TO BUILD ON OUR STRONG MANAGERIAL CAPABILITY ALONGSIDE HIGH EXPERT SKILL.”
THE ACHIEVEMENT OF MANAGEMENT ACTIONS HAS DRIVEN A ROBUST SET OF FINANCIAL RESULTS IN 2016.” JAMES MCCONVILLE GROUP FINANCE DIRECTOR
The Group has continued to meet financial targets against a backdrop of volatile market movements during 2016, reflecting political uncertainties. Swap yields fell significantly across all durations with the 15-year swap rate decreasing by c.73 bps during the period. Credit spreads narrowed across ratings and implied future inflation rates increased during the year. The FTSE All Share Index closed 16.8% ahead of the 31 December 2015 position. We continue to take management actions to mitigate the effects of market volatility to ensure that the Group maintains a stable capital position. The falling long-term interest rates in particular has meant that management actions have been important in driving cash generation during the year.
The economic volatility experienced has adversely impacted the IFRS result for the year in response to certain market factors where the Group’s hedging programme is optimised to the Solvency II capital position. When combined with the one-off costs associated with acquisition and integration activities, these factors have generated an IFRS loss after tax for the year.
Cash generation Maintaining strong cash generation delivery underpins debt servicing and repayments as well as shareholder dividends.
HOLDING COMPANIES’ CASH FLOWS The statement of cash flows prepared in accordance with IFRS combines cash flows relating to shareholders and cash flows relating to policyholders, but the practical management of cash within the Group maintains a distinction between the two. For this reason, the following analysis of cash flows focuses on the holding companies’ cash flows which reflect cash flows relating only to shareholders and which are, therefore, more representative of the cash that could potentially be distributed as dividends or used for the prepayment of debt, the payment of debt interest, Group expenses and pension contributions (subject to the Group’s liquidity policy, regulatory and other restrictions on the availability and transferability of capital). This cash flow analysis reflects the cash paid by the operating companies to the holding companies as well as the uses of those cash receipts.
Uses of cash before debt repayments and shareholder dividend (287) (197)
Pension scheme contributions of £55 million (2015: £55 million) are in line with the latest triennial funding agreements agreed during 2016.
DEBT ISSUANCE (NET OF FEES) £428 million of debt , net of fees of £4 million, was issued in 2016 comprising the £182 million short-term debt facility in connection with the acquisition of the AXA business, which was fully repaid during the year, and the £250 million short-term bank facility issued in connection with the Abbey Life acquisition. This facility has subsequently been refinanced with the Group’s lending banks into an enlarged revolving credit facility of £900 million.
COST OF ACQUISITIONS The £1,306 million comprise: – £933 million in connection with the acquisition of Abbey Life; and
The resilience of the cash generation target is demonstrated by the following illustrative stress testing1: £bn
Following a 10% change in lapse rates5 2.7 1 Assumes stress occurs on 1 January 2017 and there is no market recovery during the cash generation target period.
– to ensure sufficient liquidity to meet obligations to policyholders and other creditors.
– to support the Group’s progress in putting in place a new UK-registered holding company for the Group.
PLHL’s Own Funds differ materially from the Group’s IFRS equity for a number of reasons, including the exclusion of the Group’s bank debt and the senior bond held outside of the PLHL sub group, the recognition of future shareholder transfers from the with-profit funds (but not the shareholder share of the estate), the treatment of certain subordinated debt instruments as capital items, and a number of valuation differences, most notably with regard to insurance contract liabilities and intangible assets.
In December 2015, the Group was granted the PRA’s approval for use of its Internal Model to assess capital requirements. The capital assessment of the acquired AXA and Abbey Life businesses remained on a Standard Formula basis as at 31 December 2016. Therefore, the estimated Solvency II position of PLHL at that date is based partially on the Group’s Internal Model and partially on Standard Formula.
Impact of incorporating the AXA businesses in the Group’s Internal Model – 0.1 0.1
Pro forma position at 31 December 20164 6.8 (4.9) 1.9 1 Own Funds includes the net assets of the life and holding companies calculated under Solvency II rules, pension scheme surpluses calculated on an IAS19 basis not exceeding the holding companies’ contribution to the Group SCR and qualifying subordinated liabilities. It is stated net of restrictions for assets which are non-transferable and fungible between Group companies within a period of nine months.
2 The SCR reflects the risks and obligations to which the PLHL Group is exposed.
4 The estimated and pro forma Solvency II positions include the adverse impact of an assumed recalculation of Transitional Measures on Technical Provisions (‘TMTP’) and reflect the run-off of TMTP since 1 January 2016. See page 23 for more details.
5 The actual Solvency II position at 31 December 2015 comprised Own Funds of £5.7 billion and SCR of £4.4 billion equating to a coverage ratio of 130%.
– issuance of the new Tier 3 bond which contributed £0.1 billion to the Solvency II surplus on a pro forma basis; partly offset by,
The Solvency II surplus excludes the surpluses arising in the Group’s unsupported with-profit funds and the PGL Pension Scheme of £0.4 billion. In the calculation of the PLHL Solvency II surplus, the SCR of the with-profit funds and the PGL Pension Scheme is included, but the related Own Funds are recognised only to a maximum of the SCR amount. Surpluses that arise in with-profit funds and the PGL Pension Scheme, whilst not included in the PLHL Solvency II surplus, are available to absorb economic shocks. This means that the headline surplus is resilient to economic stresses.
SHAREHOLDER CAPITAL COVERAGE RATIO (PRO FORMA) Excluding the SCR and Own Funds relating to the unsupported withprofit funds and the PGL Pension Scheme, the pro forma Solvency II Shareholder Capital Coverage ratio is 170% as at 31 December 2016 (2015: 154%, actual). The Pearl Group Staff Pension Scheme and the Abbey Life Staff Pension Schemes did not cover their SCR as at 31 December 2016 and the related Own Funds and SCR are therefore included in the Shareholder Capital Coverage ratio calculation.
Own Funds within Phoenix Life of £4.0 billion (2015: £2.8 billion) comprise £1.1 billion (2015: £1.0 billion) in the shareholders’ funds, £1.8 billion (2015: £0.7 billion) in the non-profit funds, £0.6 billion (2015: £0.7 billion) in the supported with-profit funds and future shareholder transfers of £0.5 billion (2015: £0.4 billion).
Following a 10% change in lapse rates5 1.8 1 Assumes stress occurs on 1 January 2017.
4 Equivalent of 6 months increase in longevity applied to the annuity portfolio.
5 Assumes most onerous impact of a 10% increase/decrease in lapse rates across different product groups.
PGH pro forma position3 6.0 (4.9) 1.1 1 Details of the PLHL pro forma are set out on page 23.
The Solvency II technical provisions include a Risk Margin which is highly sensitive to interest rates. As a consequence, a sustained change in interest rates has a direct impact on the Risk Margin. The Solvency II rules allows for recalculation of the transitional deduction under certain circumstances, one of these being a change in the operating conditions due to external market-wide events such as changes in the risk free rate. Such a recalculation requires PRA approval.
The operating profit has increased to £351 million (2015: £324 million), primarily driven by the impact of £157 million of management actions during 2016 (2015: £68 million) and the impact of updates made to the IFRS reserving methodology to more closely align to the Solvency II requirements, partly offset by strengthening of actuarial assumptions to reflect anticipated policyholder behaviour in the continued low interest environment.
The loss after tax attributable to owners is £100 million (2015: £249 million, profit) reflecting adverse economic variances, principally yields and losses on equity hedging positions, together with the one-off impact associated with acquisition and integration activities.
PHOENIX LIFE OPERATING PROFIT Operating profit for Phoenix Life is based on expected investment returns on financial investments backing shareholder and policyholder funds over the reporting period, with consistent allowance for the corresponding expected movements in liabilities (being the release of prudential margins and the interest cost of unwinding the discount on the liabilities). The principal assumptions underlying the calculation of the long-term investment return are set out in note B2 to the IFRS consolidated financial statements.
The with-profit funds where internal capital support has been provided generated an operating loss of £72 million (2015: £84 million profit). The loss is principally driven by impact of strengthening actuarial assumptions to reflect the impact of the continued low interest rate environment on the Group’s expectations of persistency for products with valuable guarantees. The 2015 comparative included the positive impact of actuarial modelling enhancements implemented in the year of £49 million.
The long-term return on owners’ funds of £7 million (2015: £6 million) reflects the asset mix of owners’ funds, primarily cash-based assets and fixed interest securities. The investment policy for managing these assets remains prudent.
GROUP COSTS Group costs in the period were £6 million (2015: £12 million). The reduction compared to the prior period principally reflects an increased return on the higher opening pension scheme surpluses of both the PGL Pension Scheme and the Pearl Group Staff Pension Scheme.
INVESTMENT RETURN VARIANCES AND ECONOMIC ASSUMPTION CHANGES ON LONG-TERM BUSINESS The negative investment return variances and economic assumption changes on long-term business of £207 million (2015: £13 million positive) are primarily driven by adverse market movements during the year.
VARIANCE ON OWNERS’ FUNDS The negative variance on owners’ funds of £5 million (2015: £12 million negative) is driven by losses from equity hedging positions held in the Group Holding Companies, offset by gains from interest rate hedging positions held in the life companies’ shareholders’ funds arising from falling yields.
AMORTISATION OF ACQUIRED IN-FORCE BUSINESS AND OTHER INTANGIBLES Acquired in-force business and other intangibles of £2.7 billion were recognised on the acquisition of the operating companies in 2009. Following the acquisition of the AXA and Abbey Life businesses in 2016, a further £0.2 billion of acquired-in-force business and other intangibles have been recognised in the Group’s balance sheet.
The acquired in-force business is being amortised in line with the run-off of the life companies. Amortisation of acquired in-force business during the period totalled £68 million (2015: £75 million). Amortisation of other intangible assets totalled £14 million in the period (2015: £15 million).
OTHER NON-OPERATING ITEMS Other non-operating items of £(95) million (2015: £49 million positive) include a £26 million gain on the implementation of a longevity swap reassurance contract on a portfolio of the Group’s annuities and a £14 million gain as a result of a premium adjustment of the 2015 reassurance arrangement with RGA International following completion of a data review.
These items have been more than offset by: – acquisition costs of £31 million, comprising £12 million of transaction costs related to the acquisition of AXA Wealth’s pensions and protection business and £19 million of transaction costs related to acquisition of Abbey Life; – a provision for costs of £30m associated with the integration and restructuring of the acquired AXA businesses; – the costs of providing for claims and associated costs relating to creditor insurance underwritten prior to 2016 by a subsidiary of the Group, PA (GI) Limited, of £33 million; – recognition of costs of £10 million associated with the introduction of regulations that cap early exit charges for pension customers aged over 55 at 1%, which will come into force from 2017; – costs of £6 million associated with the transfer of non-profit annuities from with-profit funds to non-profit matching adjustment funds; – the costs of £4 million associated with the PGL pension scheme buy-in; – other corporate project costs of £19 million; and
Finance costs have decreased by £9 million, comprising a £12 million reduction in bank finance costs primarily driven by restructuring and repayments of bank debt, and a £3 million increase in other finance costs attributable to interest on the £428 million subordinated notes issued during the first half of 2015.
Following the 2015 disposal of the Group’s overseas insurance interests, all of the Group’s insurance operations are based in the UK and are liable to tax in accordance with applicable UK legislation. The Group derives a de-minimis level of income from non-UK sources. Although Phoenix Group Holdings is a Jersey resident holding company and subject to a 0% tax rate, its primary source of income is its UK subsidiaries. The tax residency of Phoenix Group Holdings has a negligible impact on the UK tax payable by the Group.
The Group tax credit for the period attributable to owners is £28 million (2015: £64 million) based on a loss (before tax attributable to owners) of £128 million (2015: £185 million profit). The tax credit is different from the expected tax credit (based on the UK corporation tax rate of 20%) of £26 million primarily due to the impact of disallowable expenses including £7 million relating to the provision for costs recognised in respect of the creditor insurance underwritten by PA (GI) Limited and the impact of the consolidation treatment of the PGL pension scheme buy-in agreement of £12 million. These items have been partly offset by the benefit of a 1% reduction in future corporation tax rates and the treatment of certain recurring income and expenses as either nontaxable or taxable at rates of less than 20%. See note C5 to the IFRS consolidated financial statements for further analysis.
The Group is now implementing its risk management approach in the AXA Wealth and Abbey Life businesses and using its framework to manage the associated integration risks.
RISK CULTURE The Group seeks to embed a culture that is forward-looking and competent in its assessment and management of risk, a culture where everyone in the Group is aligned in their goals to deliver better riskbased decisions.
During 2016, Group Risk conducted its latest annual Risk Culture survey. The results of this survey enable us to assess and measure the Group’s Risk Culture over time as well as being able to tailor training programmes to ensure the continued engagement and development of our employees.
RISK STRATEGY The Group’s risk strategy provides an overarching view of how risk management is incorporated consistently across all levels of the business, from decision-making to strategy implementation.
OUR RISK INFRASTRUCTURE HAS ENABLED THE GROUP TO DELIVER KEY STRATEGIC INITIATIVES AMIDST A VOLATILE ECONOMIC AND POLITICAL ENVIRONMENT.” WAYNE SNOW GROUP CHIEF RISK OFFICER
– ensuring that risk management is embedded into day-to-day management and decision-making processes.
– Regulation – The Group and each Life Company will, at all times, operate a strong control environment to ensure compliance with all internal policies and applicable laws and regulations, in a commercially effective manner.
– Conduct – Phoenix has zero appetite for deliberate acts of misconduct, including omissions, that result in customer detriment, reputational damage and/or pose a risk to the Financial Conduct Authority (‘FCA’) statutory objectives.
The risk universe allows the Group to deploy a common risk language, allowing for meaningful comparisons to be made across the business. There are three levels of risk universe categories. The highest risk universe category is Level 1 and includes: – strategic risk; – customer risk; – financial soundness risk; – market risk; – credit risk; – insurance risk; and
GOVERNANCE, ORGANISATION AND POLICIES GOVERNANCE Overall responsibility for approving, establishing and embedding the RMF rests with the Board. The Board recognises the critical importance of having an efficient and effective RMF and appropriate oversight of its operation. There is a clear organisational structure in place with documented, delegated authorities and responsibilities from the Group Board to the PLHL Board, Life Company Boards and the Executive Committee.
Risk oversight is provided by the Group Risk function and the Board Risk Committee. The Board Risk Committee comprises four independent Non-Executive Directors. It is supported by the Group Chief Risk Officer and met six times during 2016. During 2016, the Risk Committee of the Phoenix Life Board met five times and provided additional Board Committee focus on risk matters at Phoenix Life.
The Group operates a Capital Management Policy where capital is allocated across risks where capital is held as a mitigant and the amount of risk capital required is reviewed regularly.
TECHNOLOGY AND INFRASTRUCTURE The Group employs market leading risk systems to support the assessment and reporting of the risks it faces. This enables management to document key risks and controls and evidence the assessment of them at a frequency appropriate to the operation of the control.
The Group’s excess capital position continues to be closely monitored and managed, particularly in the low interest environment.
Markets have been turbulent following the EU Referendum. Yields on UK swap rates fell markedly over the first half of the year, although they have since recovered. Phoenix prepared for this potential outcome by reducing residual interest rate exposure using a combination of interest rate swaps and swaptions.
While the acquisition of the SunLife protection business exposes the Group to increased mortality and new business pricing risk, this business provides a natural hedge to our annuity business.
During the year, the Group entered into a longevity swap arrangement to reinsure £2.0 billion of annuity liabilities.
This risk is reflected in the higher expected return, or spread, over less risky assets.
The Group is also exposed to trading counterparties failing to meet all or part of their obligations, such as reinsurers failing to meet obligations assumed under reinsurance arrangements.
Changes in legislation such as the Pension Freedoms and taxation can also impact the Group’s financial position.
The Abbey Life acquisition increases the Group’s regulatory risk exposure from ongoing FCA investigations. However, warranties and indemnities were agreed as part of the acquisition which mitigate against an adverse outcome.
PGH waiver in respect of Group regulatory supervision expires at 30 June 2017.
The challenge of integrating two new businesses into the Group could introduce structural or operational inefficiencies that results in Phoenix failing to generate the expected outcomes for policyholders or value for shareholders.
Integration plans are developed and resourced with appropriately skilled staff to ensure that the target operating models are delivered in line with expectations.
– it completed a qualitative assessment of all strategic risks to the Group and contingent actions available that could be implemented should any risk materialise that threatens the Group’s resilience.
The Board has also made certain assumptions when making the assessment and these include the following: – the stress occurs on 1 January 2017 with no allowance for any recovery, but do take into account the impact of transitionals recalculation; and
PRINCIPAL RISKS AND UNCERTAINTIES FACING THE GROUP (CONTINUED) The current assessment of the residual risk in respect of each of the Group’s principal risks is illustrated in the chart opposite.
Political Risk Unexpected changes in the legislative environment and the impacts on financial markets driven by the political agenda following the UK’s decision to leave the European Union.
On 1 November 2016, the Group completed the acquisition of AXA Wealth’s pension and protection business from AXA UK plc. The acquisition resulted in two additional properties transferring to our operational control and being included in our carbon footprint.
Combustion of fuel and operation of facilities (Scope 1) 1,078 1,078 986
Electricity, heat, steam and cooling purchased for own use (Scope 2) 2,286 2,679 2,874
– Shareholders supported us at our EGM held on 24 October 2016 for approval of our acquisition of Abbey Life and the rights issue underpinning the acquisition, with a 99.9% vote in favour of both resolutions.
– Shareholders supported us by taking up 97.65% of the shares offered through the rights issue for the Abbey Life acquisition with the remaining 2.35% of shares being placed quickly at a modest discount.
The appointment of three new Non-Executive Directors (Wendy Mayall, John Pollock and Nicholas Shott) from 1 September 2016 was the culmination of a thorough search started at the beginning of 2016, intended to respond to our 2015 Board skills audit and address the skills being lost as Directors retire from the Board. In 2016 we lost the experience of Tom Cross Brown and Rene-Pierre Azria, both after long periods of excellent service to Phoenix. However, I was pleased to see our Board succession working so well with the enhancement to the Board dynamic provided by our three new Non-Executive Directors with their mix of experience bringing skills very relevant to our future needs as follows: – Wendy Mayall – Asset management.
I would like to thank Isabel and David for their outstanding service to the Board since their appointments in 2010.
ALL WE DO MUST BE BASED ON STRONG GOVERNANCE STRUCTURES TO PROVIDE PROTECTION FOR OUR SHAREHOLDERS AND CUSTOMERS. I AM CONFIDENT IN THE ROBUST GOVERNANCE AT PHOENIX WHICH WE WILL ENSURE CONTINUES ACROSS OUR ENLARGED GROUP FOLLOWING THE ACQUISITION OF THE AXA AND ABBEY LIFE BUSINESSES.”
Experience Alastair Barbour has over 30 years audit experience with KPMG where he worked across the full spectrum of financial services clients from large general insurers and reinsurers to the life insurance and investment management sector, working on a range of operational and strategic issues. Mr Barbour is the former Head of Financial Services, Scotland for KPMG. He retired from KPMG in 2011 to build a Non-Executive career. He is a Director and Audit Committee Chairman of RSA Insurance Group plc, Standard Life Private Equity Trust plc and Liontrust Asset Management plc (all London Stock Exchange listed companies). He is also a Director and Audit Committee Chairman of CATCo Reinsurance Opportunities Fund Ltd, a Bermuda-based investment company listed on the London Stock Exchange and of The Bank of N. T. Butterfield & Son Limited, a company listed in both Bermuda and New York.
Experience Henry Staunton was appointed Chairman of the Board of Directors with effect from 1 September 2015. Mr Staunton is Non-Executive Chairman of WH Smith plc, the leading FTSE 250 retail group, and a NonExecutive Director of Capital & Counties Properties plc. He is also Non-Executive Chairman of the privately owned BrightHouse Group, the rent-to-own company. From 2004 until 2013, Mr Staunton was a Non-Executive Director, Chairman of the Audit Committee and latterly Senior Independent Director and Vice Chairman of Legal & General Group plc, where he gained significant insight into the life and pensions industry. From 2008 to 31 December 2014 he was a Non-Executive Director of Merchants Trust plc, where he was the Senior Independent Director. He was also a Non-Executive Director of Ashtead Group from 1997 to 2004 including as Chairman from 2001. During his executive career he was Finance Director of ITV plc from 2003 to 2006, and Finance Director of Granada plc from 1993 to 2003. Prior to that he joined Price Waterhouse as a graduate trainee, rising to become a Senior Partner of the audit practice.
Experience Between April 2010 and December 2011, Mr McConville was Chief Finance Officer of Northern Rock plc. Prior to that, between 1988 and 2010, he worked for Lloyds Banking Group plc (formerly Lloyds TSB Group plc) in a number of senior finance and strategy related roles, latterly as Finance Director of Scottish Widows Group and Director of Finance for the Insurance and Investments Division. During 2011 and 2012, Mr McConville was a Non-Executive Director of the life businesses of Aegon UK. In 2014, Mr McConville joined the board of Tesco Personal Finance plc as Non-Executive Director. Mr McConville qualified as a Chartered Accountant whilst at Coopers and Lybrand.
Experience John Pollock had a career in life assurance at the Legal & General Group from 1980 to 2015, including as an Executive Director of Legal & General Group plc from 2003 to 2015. Mr Pollock held numerous senior roles, gaining wide strategic and technical experience, finally as Chief Executive Officer of LGAS (L&G Assurance Society), one of Legal and Generals’ three primary business units. Prior to Mr Pollock’s retirement from Legal and General in 2015, he held positions as Deputy Chair of the FCA Practitioner Panel, Chairman of investment platform Cofunds, and as a Non-Executive Director of the Cala Homes Group.
Experience Isabel Hudson is Chairman of the National House Building Council and a Non-Executive Director of BT Group plc and RSA Insurance Group plc. Ms Hudson is a former Non-Executive Director of MGM Advantage, The Pensions Regulator, QBE Insurance and Standard Life PLC. Other roles previously held by Ms Hudson include Chief Financial Officer at Eureko BV and Executive Director of Prudential Assurance Company. Ms Hudson is an ambassador to Scope, a UK charity, and has 35 years of experience in the insurance industry in the UK and mainland Europe.
– Supports the Group Chief Executive Officer in managing the Group’s key external stakeholders
– Leads external Group Communications in liaison with the Group Finance Director and Head of Investor Relations.
– Designs and implements a framework to manage legal risk within the Group, including compliance by Group companies and staff with relevant legal obligations.
THE BOARD The Board comprises the Non-Executive Chairman, the Group Chief Executive Officer, the Group Finance Director and eight independent Non-Executive Directors. Biographical details of all Directors are provided on pages 44 to 45.
The Board considers that the following Directors are independent: Alastair Barbour, Ian Cormack, Isabel Hudson, Wendy Mayall, John Pollock, Nicholas Shott, Kory Sorenson and David Woods. The Board has considered the criteria proposed by the Code in assessing the independence of the Directors.
BOARD SUCCESSION PLANNING AND CHANGES The Board skillset must be aligned to the Group strategy of enhancing value for shareholders and policyholders and taking forward the Group’s M&A agenda.
BOARD EFFECTIVENESS In accordance with the Code, an evaluation of the performance of the Board and that of its committees and individual Directors was undertaken in the latter part of 2016. The process was led by the Chairman and internally facilitated by the Company Secretary. The process involved completion by Directors of a questionnaire covering various aspects of Board, Committee and Director effectiveness followed by individual meetings between the Chairman and each Director, concluding in a Board report which was discussed by the Board in November 2016.
A strong theme from the previous year’s 2015 Board Evaluation Review had been the desire to spend more time on strategy. This was actioned with strategy at the forefront of each Board meeting agenda and contributed to the successful Board focus on acquisitions in 2016. The Chairman has reported on the main outputs of the November 2016 Board Evaluation Review in his Corporate Governance introduction on page 42, in particular the Board’s wish for continued focus on strategy and also the integration of the businesses acquired in 2016. The Board, whilst commenting favourably on the quality of Board papers, also provided helpful suggestions to improve the clarity and focus of the papers, which have been actioned.
THE CHAIRMAN, GROUP CHIEF EXECUTIVE OFFICER AND SENIOR INDEPENDENT DIRECTOR Henry Staunton is Chairman of the Board of Directors of the Company, having joined the Board as Chairman on 1 September 2015. There is a division of responsibility, approved by the Board, between the Chairman, who is responsible for the leadership and effective operation of the Board and the Group Chief Executive Officer, Clive Bannister, who is responsible to the Board for the overall management and operation of the Group. The Chairman’s other commitments are set out in his biographical details on page 44. The Chairman was appointed on the basis of committing two days per week to Phoenix.
OPERATION OF THE BOARD The Board is responsible to the shareholders for the overall performance of the Group. The Board’s role is to provide entrepreneurial leadership within a framework of prudent and effective controls, which enables risk to be assessed and managed. The Board has a schedule of matters reserved for its consideration and approval supported by a set of operating principles. These matters include: – Group strategy and business plans
The Board met eight times during 2016 and is scheduled to meet seven times in 2017 including for a two-day strategy-setting meeting. Additional meetings will be held as required, and the Non-Executive Directors will hold meetings with the Chairman, without the Executive Directors being present, as they did on several occasions in 2016.
3 Rene-Pierre Azria resigned from the Board on 30 November 2016.
BOARD COMMITTEES The Board has delegated specific responsibilities to four standing committees of the Board. The terms of reference of the committees can be found on the Company’s website.
Audit Committee Oversight of embedding of controls across the enlarged Group following 2016 acquisitions
Remuneration Committee New Remuneration Policy for May 2017 AGM and continued focus on aligning remuneration with strategic performance
The composition of the Audit Committee is in accordance with the requirements of the Code that the Audit Committee should consist of at least three independent Non-Executive Directors of whom at least one has recent and relevant financial experience. Both Alastair Barbour and Kory Sorenson have that experience. The Audit Committee met seven times during 2016. Its meetings are attended by the Chairman of the Risk Committee (who is also a member of the Audit Committee), the Group Finance Director, the Deputy Group Finance Director, the Group Head of Internal Audit, the external auditors and usually also by the Group Chairman and the Group Chief Executive Officer. The Audit Committee holds private meetings at least annually with each of the Group Finance Director, the Group Head of Internal Audit and the external auditors.
“ Our focus in 2017 will be ensuring the control environment remains strong across our enlarged Group following our recent acquisitions. This will be supported by strengthening the links between the Group and Phoenix Life Audit Committees.”
AUDIT COMMITTEE’S PRINCIPAL ACTIVITIES DURING 2016 EXTERNAL REPORTING AND CONTROLS – Reviewed the Company’s 2015 Annual Report and Accounts and 2016 Interim Financial Statements, recommending their approval to the Board, as well as related disclosures and the financial reporting process, supported by reports from management and the external auditors.
– Reviewed the financial forecasts prepared by management, supported by the sensitivity analysis on the key assumptions underpinning the forecasts, in support of the assumption that the Group will continue as a going concern, the Group’s ongoing viability and in support of dividend payments.
EXTERNAL AUDIT – Undertook an audit tender which included a review of the effectiveness, engagement and remuneration of the current external auditors. This culminated in a recommendation to re-appoint EY, which was approved by the Board and will be recommended to shareholders at the May 2017 AGM – see ‘Assessment of the effectiveness of the external audit process’ and ‘Auditor’s Appointment’ on page 52.
INTERNAL AUDIT – Reviewed an update from Internal Audit on the recommendations from the 2015 External Quality Assessment by Independent Audit and requested, in consequence of one of the recommendations, that the 2017 Internal Audit plan provides details of the use of data analytics.
– Approved the Group Internal Audit Proposition for 2017 and a more dynamic planning approach of six months fixed and six months flexible; and a continuation of the move from a static policy approach to a plan more focused on thematic audits based on emerging risks and topical matters.
– Reviewed the internal audit control environment opinion which included Internal Audit’s view on the embedding of the risk management framework across the Group.
The tender process was overseen by the Audit Committee and undertaken in accordance with internal procurement policies and external regulations. In accordance with the requirements of the regulations, a report on the process was undertaken and the rationale supporting the decision reached was prepared to enable the Audit Committee to validate the appropriateness of the selection procedure undertaken and reach their final conclusions. The report confirmed that there was evidence that the Audit Committee had fulfilled its responsibilities in connection with the competitive tender process as set out in the regulations and that the selection process was transparent, free from influence and was conducted in a fair manner. The Audit Committee concluded, and recommended to the Board, that the incumbent audit firm, EY, should be retained as the external auditor of the Group from 2017.
AUDITOR’S INDEPENDENCE AND EXTERNAL AUDITOR POLICY The Company has an external auditor policy which requires the Company and the external auditors to take measures to safeguard the objectivity and independence of the external auditors. These measures include a prohibition regarding non-audit services in respect of specific areas, such as secondments to management positions, or those which could create a conflict or perceived conflict. It also includes details of the procedures for the rotation of the external engagement partner. The Charter can be found on the Group’s website. The policy was updated in 2016 to reflect changes brought about by the EU Audit Directive and Regulations; in particular that non-audit fees will going forward now be capped at 70% of the average audit fee over the three preceding financial years. In 2016, total fees of £8.7 million were paid to EY. Of this amount, £4.2 million related to statutory audit fees of the parent and its subsidiaries, with a further £0.8 million incurred in relation to services provided pursuant to legal or regulatory requirements. The remaining fees of £3.7 million are classified as non-audit services as defined by the new EU Audit Directive and Regulations, and give rise to a ratio of 87 % of non-audit to audit fees in 2016.
The engagement of EY to perform any non-audit service is subject to a process of pre-approval by the Audit Committee. £1.9 million of the non-audit fees related to actuarial and finance due diligence procedures conducted in relation to the acquisitions of the AXA businesses and Abbey Life. The Audit Committee considers that the engagement of the external auditors in the performance of such diligence procedures should provide synergies with audit work post-completion of the transaction and enhanced insight as to the quality of the control environment operated in the target company by comparison to Group standards. Of the remaining balance and consistent with market practice, a further £1.7 million relates to the provision of assurance services to the Board and the sponsoring banks in support of disclosures made in the public transaction documentation relating to the two acquisitions.
Acquisition Accounting – The Audit Committee has considered the impact of the acquisitions of the AXA businesses and Abbey Life on the Group consolidated IFRS financial statements. This has included consideration of the adoption of Group accounting policies and methodologies by the acquired businesses.
Going concern analysis – A comprehensive going concern assessment was undertaken by the Audit Committee for the 2016 year-end and 2016 interim reporting periods, based on an assessment by management of the Group’s liquidity for the going concern review period together with forecasts and a stress and sensitivity analysis. The analysis also confirmed that all regulatory and working capital requirements would be met under the base case and adverse stress scenarios throughout the going concern review period.
Please note that references in this table to the Phoenix Life Audit Committee include Audit Committees for the acquired AXA Wealth and Abbey Life businesses in respect of post-acquisition activity.
The composition of the Remuneration Committee accords with the requirements of the Code that the Remuneration Committee should consist of at least three independent Non-Executive Directors. The Remuneration Committee met six times during 2016.
The Risk Committee advises the Board on risk appetite and tolerance in setting the future strategy, taking account of the Board’s overall degree of risk aversion, the current financial situation of the Group and the Group’s capacity to manage and control risks within the agreed strategy. It advises the Board on all high-level risk matters. Details of the Risk Management Framework, for which the Risk Committee has oversight, are provided in the Risk Management section on pages 34 to 39.
– Undertook horizon scanning to consider emerging risks that could impact the Group including more prominent badging of forwardlooking work in risk papers.
“ I am confident that on stepping down from the Board and as Risk Committee Chairman (at our May 2017 AGM), the risk management framework and governance is on a sound and robust footing.”
– Taking account of the Board Evaluation Review, reviewed the balance of skills, diversity, experience, independence and knowledge on the Board.
– Reviewed the time spent by Directors in fulfilling their duties, concluding that the time spent appeared to be high in comparison with other FTSE 250 companies.
During 2016, the Company’s Investor Relations department and management held the following activity: – 31 days of roadshows meeting investors.
The Company also held an Investor Day on 12 May 2016, which was attended by investors and research analysts.
The Directors consider it important to understand the views of the market. Board members regularly receive copies of the latest analyst reports on the Company and the insurance sector, as well as market feedback to further develop their knowledge and understanding of external views about the Company. The Chairman and the NonExecutive Directors provide feedback to the Board on topics raised with them by major shareholders. The Company also undertakes perception studies, when appropriate, designed to determine the investment community’s view of the core business from both institutional fund managers and sell-side analysts.
The Company’s AGM provides another opportunity to communicate with its shareholders. At the 2016 meeting, the Company complied with the Code provisions relating to voting and the separation of resolutions. Shareholders were invited to ask questions during the meeting. It is intended that the same processes will be followed at the 2017 AGM. In line with the Code, details of proxy voting by shareholders will be made available at the meeting and will be posted on the Company’s website following the meeting.
The Group’s business activities, together with the factors likely to affect its future development, performance and position are set out in the Strategic Report on pages 2 to 40.
VIABILITY STATEMENT The Viability Statement, as required by section C.2.2 of the Code, has been undertaken for a period of five years to align to the Group’s business planning and is contained in the Risk Management section on page 39.
REVIEW OF SYSTEM OF INTERNAL CONTROLS The Code requires Directors to review the effectiveness of the Company’s risk management and internal control systems which includes financial, operational and compliance controls. The Board has overall responsibility for the Group’s risk management and internal control systems and for reviewing their effectiveness. The Group’s systems of internal controls are designed to manage rather than eliminate the risk of failure to achieve business objectives and can provide only reasonable and not absolute assurance against material misstatement or loss. The Board’s review of the period covered by this report, which was undertaken with the assistance of the Audit and Risk Committees, was completed on 17 March 2017. Where any significant weaknesses were identified, corrective actions have been taken, or are being taken and monitored.
Additional assurance is provided by the internal audit function, which operates and reports independently of management. The internal audit function provides objective assurance on risk mitigation and control to the Audit Committee.
DEAR SHAREHOLDER On behalf of the Board, I am pleased to present our Directors’ Remuneration Report for the year ended 31 December 2016. This report covers remuneration for Executive Directors and Non-Executive Directors of the Company.
– Completion of the acquisition of Abbey Life, financed in part by a £735 million rights issue
– The accreditation, for the fifth successive year, that Phoenix has been formally recognised as one of the ‘UK’s Top Employers’
The above highlights have been achieved whilst also meeting the challenges of the introduction of the new Solvency II regime at the start of 2016. In addition, the volatile macroeconomic environment experienced over the course of the year, including the sharp fall in long-term interest rates, has had a negative impact on the Group’s financial position.
REMUNERATION POLICY FOR 2017 As I explained in my letter introducing our Directors’ Remuneration Report for 2015, during the course of 2016 the Committee has undertaken a review of our current Directors’ Remuneration Policy in anticipation of updating the policy at the 2017 Annual General Meeting (‘AGM’). Whilst the Company is a non-UK incorporated Company, and so is not technically subject to the UK’s Directors’ Remuneration Report regime we have always complied with this regime voluntarily, including establishing a 3-year Directors’ Remuneration Policy which we first had approved by our shareholders in 2014. As this 3-year authority is now expiring we intend to seek our shareholders’ authority for a new Directors’ Remuneration Policy at our 2017 AGM.
In considering any changes to the policy the Committee was mindful of the wider external environment. In particular, it noted the findings of the Executive Remuneration Working Group which endorsed replacing traditional LTIPs with smaller awards of more certain restricted stock. This could have particular attractions for the Company given the additional challenges we face in setting robust targets for a business which has as its strategy the enhancement of shareholder value and dividend income through suitable acquisitions. The proposed new policy is largely a carry-forward of the current policy with the Committee planning to undertake a fuller review during 2017.
The policy to be proposed at the 2017 AGM, therefore, contains a high degree of consistency with the Company’s previous policy: – No increases to the potential quantum of Executive Directors’ remuneration are proposed.
– Within the policy, each element of remuneration contains an appropriate cap. These are in place in order to comply with regulations and do not reflect aspirations or targets. None of these caps have been increased from the previous policy. Specifically within the policy section for base salary we have clarified the target positioning of Executive Directors’ base salaries as between the FTSE31-100 and FTSE250 data sets.
– Within the AIP we have retained the current maximum opportunity of 150% of base salary per annum. We have increased the element of compulsory deferral into shares to 40% (from 33%), with the deferral period remaining at three years and subject to continued employment.
– Share Ownership Guidelines for Executive Directors remain at a minimum of 200% of base salary.
– The holding periods applying to the LTIP awards together with bonus deferral will continue to apply post-cessation to ‘good leavers’.
As Phoenix is a non-UK incorporated company both of these votes will be advisory in nature.
I hope that we can continue to rely on the support of our shareholders for the resolutions which will be proposed at the 2017 AGM.
Annual Incentive Plan (‘AIP’): Below we show outturn against the metrics within the 2016 AIP. More details of the 2016 AIP can be found on page 76.
The Company’s overall positioning on remuneration for Executive Directors remains unchanged from prior years: – An appropriate balance is maintained between fixed and variable components of remuneration.
– Our Remuneration Policy benchmarks the total target remuneration for the Executive Directors between FTSE 31-100 and FTSE 250 data sets, and remuneration for both Executive Directors is positioned appropriately between these data sets.
Summary of Changes from Previous Policy: As more fully detailed in the ‘Changes from Previous Policy’ column in the Remuneration Policy table, the key changes to the Remuneration Policy are the following: Element Changes from previous policy
– Confirming that at least 50% of performance measures in any year will relate to financial measures.
– Confirming that no material changes will be made to the current performance measures or the current mix of performance measures for LTIP awards made in any year without consulting major shareholders.
– No material changes. ‘Cap’ for base salaries re-expressed as a monetary amount and relative positioning is confirmed.
– The Group provides market competitive benefits in kind. Details of the benefits provided in each year will be set out in the Implementation Report. The Remuneration Committee reserves discretion to introduce new benefits where it concludes that it is in the interests of Phoenix Group to do so, having regard to the particular circumstances and to market practice.
Annual Incentive Plan (‘AIP’) and Deferred Bonus Share Scheme (‘DBSS’) To motivate employees and incentivise delivery of annual performance targets
– Awards under DBSS will be in the form of awards to receive shares for nil-cost (with the shares either being delivered automatically at vesting or being delivered at a time following vesting at the individual’s choice).
– Dividend entitlements will accrue over the three-year deferral period and be delivered as additional vesting shares.
– Malus/clawback provisions apply to the AIP and to amounts deferred under DBSS as explained in the notes to this table.
Annual Incentive Plan (‘AIP’) and Deferred Bonus Share Scheme (‘DBSS’) continued
– Increased the minimum level of compulsory deferral from 33% to 40%.
– Confirmed that financial performance measures will always have at least a 50% weighting for any year.
Long-Term Incentive Plan (‘LTIP’) To motivate and incentivise delivery of sustained performance over the long term, and to promote alignment with shareholders’ interests, the Group operates the Phoenix Group Holdings Long-Term Incentive Plan
– The Remuneration Committee’s practice is to make LTIP awards to Executive Directors each year over shares with a value (as at the award date) of 200% of the individual’s annual base salary although discretion is reserved to make awards up to the maximum levels for the policy as stated above.
– The Remuneration Committee may set such performance measures for LTIP awards as it considers appropriate (whether financial or nonfinancial and whether corporate, divisional or individual). The Remuneration Committee would expect to consult with its major shareholders if it proposed changing materially the current performance measures applied for LTIP awards made to Executive Directors or the relative weightings between these performance measures.
All-employee share plans To encourage share ownership by employees, thereby allowing them to participate in the long-term success of the Group and align their interests with those of the shareholders
– Executive Directors are able to participate in all-employee share plans on the same terms as other Group employees as required by HMRC legislation.
– Once shareholding guidelines have been met, individuals are expected to retain these levels as a minimum. The Remuneration Committee will review shareholdings annually in the context of this policy.
– In terms of the principles for setting a package for a new Executive Director, the starting point for the Remuneration Committee will be to apply the general policy for Executive Directors as set out above and structure a package in accordance with that policy. Consistent with the DRR regulations, the caps contained within the policy for fixed pay do not apply to new recruits, although the Remuneration Committee would not envisage exceeding these caps in practice.
– All such buy-out awards, whether under the AIP, LTIP or otherwise (for example, specific arrangements made under Listing Rule 9.4.2), will take account of the service obligations and performance requirements for any remuneration relinquished by the individual when leaving a previous employer. The Remuneration Committee will seek to make buy-out awards subject to what are, in its opinion, comparable requirements in respect of service and performance. However, the Remuneration Committee may choose to relax this requirement in certain cases (such as where the service and/or performance requirements are materially completed), and where the Remuneration Committee considers it to be in the interests of shareholders and where such factors are, in the view of the Remuneration Committee, reflected in some other way, such as a significant discount to the face value of the awards forfeited. Exceptionally, where necessary, this may include a guaranteed or non pro-rated annual incentive in the year of joining.
Executive Director service contracts, which do not contain expiry dates, provide that compensation provisions for termination without notice will only extend to 12 months of salary, certain fixed benefits and pension (which may be payable in instalments and subject to mitigation). By excluding any entitlement to compensation for loss of the opportunity to earn variable pay, the Remuneration Committee believes the contracts to be consistent with best practice. The Remuneration Committee also has discretion to mitigate further by paying on a phased basis with unpaid instalments ceasing after the initial period of six months if the Executive Director finds alternative employment. Contracts do not contain change of control provisions. The template contract is reviewed from time-time and may be amended provided it is not overall more generous than the terms described above.
POTENTIAL REWARDS UNDER VARIOUS SCENARIOS The potential total rewards available to the Executive Directors, ignoring any change in share price and roll-up of dividends are: TOTAL REMUNERATION OPPORTUNITY (£000)
Benefits measured as benefits paid in 2016 as set out in the single figure table. Pension measured as the 20% of base salary receivable either as a pension contribution or as cash, and ignoring the reduction to payments made in cash for employers’ national insurance contributions
Consistent with normal practice, the Remuneration Committee did not consult with employees in preparing the Remuneration Policy.
Annual Incentive Plan (‘AIP’) The AIP for 2017 will operate on a basis that is consistent with how the AIP operated in 2016, although there have been changes to the precise measures and weightings of the Corporate (financial and strategic) performance measures for 2017’s AIP to reflect our evolving business focus.
The overall weightings between Corporate and Personal performance measures for AIP in 2017 are unchanged from 2016: – Corporate (financial and strategic) performance measures – 70%.
The weightings of the AIP performance measures for 2017 are summarised below: Performance measure % of incentive potential
The changes made from 2016’s Corporate performance measures for AIP can be summarised as follows: – In 2017, the sole financial metric will be operating companies’ cash generation which remains core to our business and is linked directly to Phoenix Life free surplus under Solvency II. The overall weighting for cash generation has increased from 2016 (35% of incentive potential). At the same time, the profit-based metric (operating profit) has been removed.
– Greater weighting has been given to customer experience (2016: 17.5% of incentive potential), reflecting the focus of the Board as well as the general preference of our regulators. The 2017 customer experience measures will combine a number of measures reflecting the customer experience. The measures, the specific targets and attainment levels will be disclosed in the Directors’ Remuneration Report for 2017.
– Personal performance retains a 30% weighting. As for 2016, specific targets of employee engagement and expense management are included as part of the objectives for the Personal performance element.
In addition, and as previously stated in the Remuneration Policy, there are three potential levels at which the performance measures and targets and related outcomes from AIP in 2017 may be moderated (downwards or upwards) by the Committee – more details are provided in the Remuneration Policy table set out on pages 63 and 64.
For DBSS awards made in 2017 (in respect of 2016’s AIP outcome) and for DBSS awards to be made in subsequent years: – The DBSS award will be made automatically on the fourth dealing day following the announcement of the Company’s 2016 annual results.
– Dividend entitlements for the DBSS shares will accrue over the three-year deferral period.
– However, all annual LTIP awards made to Executive Directors under this process will also be subject to a holding period so that any LTIP awards for which the performance conditions are satisfied will not be released for a further two years from the third anniversary of the original award date. Dividend accrual for LTIP awards will continue until the end of the holding period.
Award levels for Executive Directors for 2017 are unchanged at 200% of base salary.
The weightings of the LTIP performance measures for 2017 are summarised below: Performance measure Weighting of performance measure
These weightings are unchanged from the weightings for 2016 LTIP awards. The performance measures are measured over a period of three financial years, commencing with financial year 2017.
Additionally, all 2017 LTIP awards are subject to a further underpin measure relating to debt and risk management within the Group, consideration of customer satisfaction and, to meet Solvency II requirements, in exceptional cases, personal performance. These measures and the relative weightings are considered to be appropriate for 2017’s LTIP awards.
The performance targets for the Cumulative cash generation measure are £1,372 million (25% of this part of the award vests) and £1,572 million (full vesting of this part of the award).
Shareholding requirements Requirement levels are 200% of base salary level for the Group Chief Executive Officer and the Group Finance Director.
Where any performance vested LTIP awards are subject to a holding period requirement, the relevant LTIP award shares (discounted for anticipated tax liabilities) will count towards the shareholding requirements.
Fee levels for the Chairman and the Non-Executive Directors are unchanged from 2016.
Profit distributed by way of dividend has been taken as the dividend paid and proposed in respect of the relevant financial year. For 2016 this is the interim dividend paid (£66 million) and the recommended final dividend of 23.9p per share multiplied by the total share capital issued at the date of the Annual Report as set out in note D1 ‘Share capital’ in the notes to the consolidated financial statements. No share buy-backs were made in either year.
1 The single figure of total remuneration for 2015 has been restated and now reflects the actual price of shares on the day the 2013 LTIP vested (15 November 2016: 736.50p per share) rather than the three-month average share price to 31 December 2015 (873.4924p per share) which was required to be used last year for the single figure of total remuneration, and also reflects the actual dividends accrued on the award until the date of vesting.
4 Jonathan Moss left the role of Group Chief Executive Officer on 7 February 2011 and left Phoenix Group on 29 March 2011. Clive Bannister joined Phoenix Group on 7 February 2011 and was appointed to the Board as a Director on 28 March 2011.
5 Jonathan Moss’ 2011 single figure of total remuneration does not include compensation for loss of office.
A vote to approve the Remuneration Policy was passed at the 2014 AGM held on 30 April 2014. Details of the votes cast in relation to this resolution were disclosed in the Company’s Directors’ Remuneration Report for 2014 which is available as part of the Phoenix Group Holdings Annual Report and Accounts 2014.
(restated 1 The Executive Directors are entitled to adjust their salary/benefit combination under flexible benefits arrangements and the figures shown are before individual elections.
2 Benefits for Clive Bannister comprise car allowance and private medical insurance totalling £16,111. Benefits for James McConville comprise car allowance and private medical insurance totalling £15,889.
4 In accordance with the requirements of the DRR regulations, the 2016 value for long-term incentives is an estimate of the vesting outcomes for LTIP awards granted in 2014 and which are due to vest on 26 March 2017 for Clive Bannister and James McConville. These estimated vesting levels are at 55% reflecting outcomes against the embedded value growth (see page 77), Cumulative cash generation and TSR performance measures to 31 December 2016 and assumptions regarding dividends for the period until vesting. This vesting outcome is then applied to the average share price between 1 October 2016 and 31 December 2016 (730.0761p) to produce the estimated long-term incentives figures shown for 2016 in the above table. These assumptions will be trued up for actual share prices and dividends on vesting in the report for 2017. Details of the performance measures and targets applicable to the 2014 LTIP are set out on page 77.
AIP OUTCOMES FOR 2016 The Committee seeks to set suitable ranges for each measure in the context both of the Company’s own internal budgets and of external projections (whether through management guidance or consensus forecasts). As an entirely closed life business, targets are significantly impacted by management actions and year-on-year growth is not an inherent objective. The ranges are considered appropriate in that context.
As set out in the Remuneration Policy, the business of the Company is to engage in corporate activity and the Remuneration Committee may adjust targets during the year to include such activity and ensure the targets continue to reflect performance as originally intended. 2016 was an exceptional year in terms of corporate activity with respect to both the AXA and Abbey Life acquisitions. As management was able to close the AXA acquisition in November 2016, the Committee approved an increase in the original cash generation target range for the AIP of £20 million to be broadly consistent with the original basis for setting the original target range. We believe that this increased target range provides a fair measure of the actual achievement for both staff and shareholders. The range disclosed below is inclusive of this £20 million addition.
Operating companies’ cash generation £370m £445m £520m £ 486m 50% 38.7%
Customer satisfaction1 4.6 rating 4.65 rating 4.75 rating 4.66 rating 10% 5.5%
1 The rating is a score based on questions answered by customers in a satisfaction survey managed by Ipsos MORI. Customers surveyed were asked to give a satisfaction rating of between 1 and 5 to a number of questions (with a rating of 3 or above regarded as satisfied). The 4.66 rating (out of 5) in 2016 is the average score of all questions answered.
3 This element of customer experience is judged by the Committee as a broad assessment of the overall outcome for Phoenix customers throughout 2016. It allows for consideration of subjective and qualitative matters for customer experience which the Committee considers to be relevant and which may not be captured in the quantitative assessments which are otherwise considered in this part of the AIP, thereby ensuring a holistic assessment.
Personal objectives (which were agreed by the PGH Board and shared with the Remuneration Committee at the start of the year) are viewed across four quadrants: – Customer/business
Whilst the Board regards a number of the personal objectives set as commercially sensitive (and accordingly, it is not appropriate for such objectives to be disclosed), achievements by the Executive Directors which were considered by the Remuneration Committee included: – The successful acquisition of the Abbey Life and AXA businesses
– Maintaining a satisfactory risk and control environment across the Group and the extent to which the Group has operated within its risk appetite.
For the Personal (individual objectives) element of 2016 AIP, performance of both Executive Directors was discussed with the Board, and the Remuneration Committee considered individual performance in light of their objectives, on the basis of a 5-point scale, separately assessing both ‘what’ was achieved and ‘how’ it was delivered, with equal weightings given to each assessment.
The table below shows the actual outturn against the annual incentive maximum. For 2016 AIP, Corporate (financial and strategic) measures applied to 70% of incentive opportunity and Personal (individual objectives) measures applied to 30% of incentive opportunity.
Target range between Embedded value growth in excess of the risk-free rate by 4% per annum and Embedded value growth in excess of the risk-free rate by 6% per annum.
1 As disclosed on page 68 of the 2015 Directors’ remuneration report, with the introduction of Solvency II, Phoenix no longer reports MCEV.
For the only other ‘inflight’ LTIP award subject to an MCEV growth measure (2015’s LTIP award measured over three financial years to 31 December 2017) a similar calculation will be followed, using MCEV in 2015 and then the growth in Solvency II Own Funds in 2016 and 2017 for the balance sheet growth element of MCEV growth in this three-year period.
2 The Committee followed the same approach as reported above for the AIP in increasing the LTIP cash generation target ranges so the figures below are £20 million higher than previously.
The above targets were all measured over the period of three financial years 1 January 2014 to 31 December 2016.
In addition to the above targets, the Committee confirmed that the underpin performance condition relating to debt levels and associated interest costs, and management of debt, capital restructuring and risk management within the Group (as described more fully on page 80 had been achieved in the performance period.
NON-EXECUTIVE FEES The emoluments of the Non-Executive Directors for 2016 based on the current disclosure requirements were as follows: Name
SHARE-BASED AWARDS As at 31 December 2016, Directors’ interests under long-term share-based arrangements were as follows: LTIP
1 The number of shares for all outstanding LTIP awards have been increased to take into account the impact of the rights issue. This adjustment has been based on the Theoretical Ex-Rights Price (‘TERP’) and approved by the Remuneration Committee. The share price on grant shown is the actual price used at the date of the grant and has not been adjusted following the Rights Issue.
5 The face value of awards granted in 2016 represents the maximum vesting of awards (but before any credit for dividends over the period to vesting) and is calculated using a share price of 877.50p being the average of the closing middle market prices of Phoenix shares for the 3 dealing days preceding the award date, being £1,399,999 for Clive Bannister and £879,992 for James McConville. The vesting percentage at threshold performance (2016 awards) for Clive Bannister and James McConville is 25%.
The performance conditions for the 2014, 2015 and 2016 awards are set out below including the adjustment to the cash generation targets to reflect the impact of both the AXA and Abbey Life acquisitions to ensure that the acquisitions are treated consistently with the underlying assets and are not, overall, more or less challenging to achieve: Performance measure 2014 award (40% Embedded value growth, 40% Cumulative cash generation and 20% TSR)
Target range between Embedded value growth in excess of the risk-free rate by 3% per annum and Embedded value growth in excess of the risk-free rate by 5% per annum.
This was increased to £1.368 billion to £1.568 billion to reflect the AXA acquisition (£20 million increase to the range).
TSR 25% of this part vests at threshold performance rising on a pro rata basis until 100% vests. In addition, the Committee must consider whether the TSR performance is reflective of the underlying financial performance of the Company.
1 Please see footnote 1 on page 77 regarding the discontinuation of reporting on MCEV Growth.
As noted in the section describing the Implementation of Remuneration Policy in 2017 on page 72, LTIP awards made in 2017 will be subject to Cumulative cash generation and Relative TSR performance measures similar to those described in the table above.
1 The number of shares for all outstanding DBSS awards have been increased to take into account the impact of the rights issue. This adjustment has been based on the Theoretical Ex-Rights Price (‘TERP’) and approved by the Remuneration Committee. The share price on grant shown is the actual price used at the date of the grant and has not been adjusted following the Rights Issue.
2 Gains of Directors from share options exercised and vesting shares under the DBSS in 2016 were £530,014 (Clive Bannister’s gain was £399,875 arising from an award exercised on 3 June 2016 at a share price of £8.722509; James McConville’s gain was £130,139 arising from an award exercised on 2 June 2016 at a share price of £8.695086.
3 The face value of awards granted in 2016 is equivalent to 50% of the cash element of the 2015 AIP and is calculated using a share price of 877.50p, being the average closing market price on the three days preceding the award date giving £286,995 for Clive Bannister and £188,645 for James McConville.
The DBSS is the share scheme used for the deferral of AIP. No performance conditions apply therefore other than being subject to continued employment. In addition to the shares awarded under the DBSS presented above, participants receive an additional number of shares to reflect the dividends paid during the vesting period (or until transfer of shares for DBSS awards made before 2014).
Gains of Directors from share options exercised under Sharesave during 2016 were £4,998 (2015: nil). Sharesave options are granted with an option price that is a 15% discount to the three-day average share price when invitations are made. This is permitted by HMRC regulations for such options. For options from 2016 this discount will be 20%. Sharesave options are not subject to performance conditions. The Sharesave options exercised by James McConville represented options granted for the then maximum monthly savings of £250 per calendar month for three years.
Aggregate gains of Directors from share options exercised and vesting shares under all share plans in 2016 were £1,656,694 (2015: £3,476,618).
During the year ended 31 December 2016, the highest mid-market price of the Company’s shares was 809.654p and the lowest mid-market price was 610.217p. At 31 December 2016, the Company’s share price was 735.00p.
As at 1 January 2016 or date of appointment if later
Total share plan interests as at 31 December 2016 – DBSS
Subject to Board approval, Executive Directors are permitted to accept outside appointments on external boards as long as these are not deemed to interfere with the business of the Group. The Executive Directors are entitled to retain any external fees. During 2016, Clive Bannister received £45,000 from Punter Southall Group and CHF 50,000 from UniGestion in respect of two external directorships. James McConville received £112,000 from Tesco Personal Finance plc.
Name Date of letter of appointment Date of Joining the Board Appointment end date Unexpired term (months)
Isabel Hudson 25 May 2016 18 February 2010 11 May 2017 2
Wendy Mayall 24 August 2016 1 September 2016 1 September 2019 30
The table below shows the independent Non-Executive Directors who served on the Committee during 2016 and their date of appointment: Member From To
Under the Committee’s Terms of Reference, the Committee meets at least twice a year but more frequently if required. During 2016, six Committee meetings were held and details of attendance at meetings are set out in the Corporate Governance Report on page 54.
The Directors of the Group present their report for the year ended 31 December 2016.
SHARE CAPITAL The issued share capital of the Company was increased by 167,430,371 ordinary shares during 2016 which related to: – the placement of shares in relation to the acquisition of the AXA business; – shares issued in relation to the Abbey Life acquisition; and
At 31 December 2016, the issued ordinary share capital totalled 392,849,817. Subsequently, 2,258 ordinary shares have been issued in 2017 in connection with the Company’s Sharesave Scheme to bring the total in issue to 392,852,375 at the date of this report.
Full details of the authorised, issued and fully paid share capital as at 31 December 2016 and movements in share capital during the period are presented in note D1 to the IFRS consolidated financial statements.
Subject to obtaining shareholder approval for the renewal of this authority at the forthcoming AGM on 11 May 2017, the Company is authorised to make purchases of its own shares under Article 20 and make payment for the redemption or purchase of its own shares in any manner permitted by the Cayman Islands Companies Law (as amended), including without limitation, out of capital, profits, share premium or the proceeds of a new issue of shares. The Company held no treasury shares during the year or up to the date of this report.
Certain restrictions on the transfer of shares may be imposed from time to time by applicable laws and regulations (for example, insider trading laws), and pursuant to the Listing Rules of the Financial Conduct Authority (‘FCA’) and the Group’s own share dealing rules whereby Directors and certain employees of the Group require individual authorisation to deal in the Company’s ordinary shares.
BOARD BOARD OF DIRECTORS The membership of the Board of Directors during 2016 is given within the Corporate Governance Report on pages 44 and 45, which is incorporated by reference into this report. Details of Directors’ (and persons closely associated with them) interests in the shares of the Company are shown in the Directors’ remuneration report.
During 2016 and up to the date of this report, the following changes to the Board took place: – Tom Cross-Brown resigned from the Board on 11 May 2016.
– Rene-Pierre Azria resigned from the Board on 30 November 2016
– Wendy Mayall, John Pollock and Nicholas Shott were appointed to the Board with effect from 1 September 2016.
In accordance with the UK Corporate Governance Code, Directors must stand for re-election annually. The Board of Directors will be unanimously recommending that all of the Directors, except Isabel Hudson and David Woods who are standing down from the Board, should be put forward for election/re-election at the forthcoming AGM to be held on 11 May 2017.
DIRECTORS’ CONFLICTS OF INTEREST The Board has established procedures for handling conflicts of interest in accordance with Cayman Islands law and the Company’s Articles.
EMPLOYEES EQUAL OPPORTUNITIES The Group is committed to achieving equality of opportunity and the equal treatment of all our people and those applying to join us. To this end, all our people share an obligation to their colleagues, customers and business partners to provide a safe, fair and equitable working environment in which every individual can seek, obtain and continue employment without experiencing any unfair or unreasonable discrimination.
GOVERNANCE GOING CONCERN The Group’s business activities, together with the factors likely to affect its future development, performance and position are set out in the Strategic Report. The Strategic Report also provides details of any key events affecting the Company (and its consolidated subsidiaries) since the end of the financial year. The Strategic Report includes details of the Group’s cash flow and solvency position, including sensitivities for both. Principal risks and their mitigation are detailed on pages 37 to 38 and the viability statement is included on page 39. In addition, the IFRS consolidated financial statements include, amongst other things, notes on the Group’s borrowings (note E5), management of its financial risk including market, credit and liquidity risk (note E6), its commitments and contingent liabilities (notes I7 and I8) and its capital position and management (note I4). The Strategic Report (on pages 2 to 40) sets out the business model and how the Group creates value for shareholders and policyholders.
RE-APPOINTMENT OF THE AUDITORS Ernst & Young LLP (‘EY’) has indicated its willingness to continue in office and a resolution that it is re-appointed will be proposed at the AGM on 11 May 2017.
The Audit tender exercise undertaken in 2016 is described in the Corporate Governance Report on page 52.
There is no cap on auditor liability in place in relation to audit work carried out on the IFRS consolidated financial statements and the Group’s UK subsidiaries’ individual financial statements.
CONTRACTUAL/OTHER SIGNIFICANT AGREEMENTS IMPACTED BY A CHANGE OF CONTROL OF THE COMPANY There are change of control clauses contained in certain of the Group’s financing agreements. The £900million revolving credit facility has a provision which would enable the lending banks to require repayment of all amounts borrowed following a change of control. In addition, certain provisions of the Articles relating to the City Code on Takeovers and Mergers apply in connection with a takeover bid.
Page 8 – Group Chief Executive Report 8 As per 7, but for major subsidiary undertakings
In addition, the Directors at the date of this report consider that the Annual Report and Accounts, taken as a whole, provides users (who have a reasonable knowledge of business and economic activities) the information necessary to assess the Group’s performance, business model and strategy and is fair, balanced and understandable.
The Strategic Report and the Directors’ Report were approved by the Board of Directors on 17 March 2017.
In preparing these financial statements the Directors are required to: – select suitable accounting policies and then apply them consistently; – make judgements and accounting estimates that are reasonable and prudent; – state whether IFRS, as adopted by the IASB, have been followed, subject to any material departures disclosed and explained in the Group and the Company financial statements; and
The Directors are responsible for: – keeping adequate accounting records that are sufficient to show and explain the Group’s and the Company’s transactions and disclose, with reasonable accuracy at any time, the financial position of the Group and the Company; – safeguarding the assets of the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities; and
– The consolidated income statement for the year then ended – The statement of comprehensive income for the year then ended
– The consolidated statement of comprehensive income for the year then ended
– The statement of consolidated cash flows for the year then ended – Related notes 1 to 16 to the financial statements
Materiality – Overall Group materiality of £67 million (2015: £46 million) which represents 2.0% (2015: 1.9%) of total equity attributable to owners of the parent (‘Group equity’).
Audit scope – We performed an audit of the complete financial information of the Group Function, Phoenix Life Division and Abbey Life Assurance Company Limited and audit procedures on specific balances for Other Companies. These are explained further on pages 95 to 96.
– Valuation of insurance contract liabilities, comprising of the following risk areas: – actuarial assumptions; – actuarial modelling; and
Valuation of insurance contract liabilities (£46.7 billion; 2015: £40.9 billion) Refer to the Audit Committee Report (page 53); Critical accounting estimates (page 107); Accounting policies and notes F1, F2 and F4 of the consolidated financial statements (pages 145 to 153).
We considered the valuation of insurance contract liabilities to be a significant risk for the Group. Specifically we considered the actuarial assumptions and modelling that are applied, as these involve complex and significant judgements about future events, both internal and external to the business for which small changes can result in a material impact to the resultant valuation. Additionally, the valuation process is conditional upon the accuracy and completeness of the data.
We consider changes in the valuation basis, following discontinuation of Solvency I, not to increase the significant risk in actuarial assumptions and modelling from the prior year as the approach has streamlined financial reporting and reduced the reliance on legacy Solvency I processes and requirements.
Actuarial assumptions There has been no change in our assessment of this risk from the prior year.
Economic assumptions are set by management taking into account market conditions as at the valuation date. Noneconomic assumptions such as future expenses, longevity and mortality are set based on past experience, market experience, market practice, regulations and expectations about future trends.
To obtain sufficient audit evidence to conclude on the appropriateness of actuarial assumptions, we: – tested the design and operating effectiveness of key controls over management’s process for setting and updating actuarial assumptions; – compared the methodology and assumptions used with those we would expect based on our knowledge of the Group, industry standards and regulatory and financial reporting requirements; – assessed the results of management’s experience analysis, which supports the adopted assumptions and methodology, and checked that the assumptions used are consistent with this experience analysis; – evaluated the choice of the industry standard Continuous Mortality Investigation (‘CMI’) model and the parameters used to ensure that it was appropriate given the demographics of policyholders; – benchmarked the demographic and economic assumptions against those of other industry participants; and
– reviewed that disclosures have been made in the financial statements regarding the sensitivity of the valuation of insurance contract liabilities to changes in the key assumptions.
To obtain sufficient audit evidence to conclude on actuarial models, including those models outside the core system, we: – having confirmed in prior periods that the core system is appropriately valuing liabilities, tested the design, implementation and operating effectiveness of key controls over management’s process for model changes during the year; – evaluated the methodology, inputs and assumptions used for a sample of model changes based on our knowledge of the Group, industry standards and regulatory and financial reporting requirements; – assessed the results of the analysis of movements in insurance contract liabilities in order to confirm the completeness of model changes; – tested the design, implementation and operating effectiveness of key controls over management’s process for modelling insurance contract liabilities outside the actuarial modelling systems; and
Valuation of complex and illiquid financial investments (‘Level 3 assets’) (£1.8 billion; 2015: £1.4 billion) There has been no change in assessment of this risk from the prior year.
Acquisition of AXA Wealth Limited and Abbey Life Assurance Company Limited This is a new significant risk for the current year.
On 30 December 2016, the Group acquired Abbey Life Assurance Company Limited, Abbey Life Trustee Services Limited and Abbey Life Trust Securities Limited (collectively the ‘Abbey entities’) for £933 million. Abbey Life Assurance Company Limited is material to the Group.
We focused on this area as it involved significant judgements in respect of the identification of the intangible assets acquired and the valuation of the assets and liabilities acquired.
To obtain sufficient audit evidence to assess the impact of the acquisition of AXA Wealth Limited and Abbey Life Assurance Company Limited we: – reviewed the work performed by the Phoenix Life Division component audit team on the AXA Wealth Limited statement of financial position as at the date of acquisition; – reviewed the work performed by the Abbey Life Assurance Company Limited component audit team on the statement of financial position as at the date of acquisition; – assessed the methodology and assumptions adopted by management and its appointed expert for calculating the fair values of intangible assets arising on acquisition; – ensured that the acquisition accounting and disclosure of these acquisitions are in compliance with IFRS 3 Business Combinations; and
For the Other Companies component, we performed audit procedures on provisions and administrative expenses for the service companies and on financial assets for Opal Reassurance Limited. The extent of audit work in respect of Other Companies component was based on our assessment of the risks of material misstatement at a financial statement line level.
The reporting components where we performed audit procedures accounted for more than 99% of the Group equity and the Group’s operating profit. For the current year, the full scope components contributed 98% (2015: 97%) of the equity and 92% (2015: 88%) of the Group’s operating profit. The specific scope component contributed 1% (2015: 2%) of the Group’s equity and 7% (2015: 11%) of the Group’s operating profit.
CHANGES FROM THE PRIOR YEAR We have an additional component as a result of the acquisition of Abbey Life Assurance Company Limited. AXA Wealth Limited was incorporated into the Phoenix Life Division during the year.
The Group audit team is responsible for the audit of the Group Function. The Group team visited the full scope component of the Phoenix Life Division, and reviewed key work papers and participated in the planning and execution of the component team’s audit of the identified risks. The Group team attended the closing meetings with the management of the Phoenix Life Division and attended key audit committee meetings. As Abbey Life Assurance Company Limited was acquired on 30 December 2016, audit planning by the non-EY component audit team was already complete at the acquisition date. The Group team then reviewed and challenged their audit plan and approach, especially with a focus on the significant risk areas for the Group. The Group team held weekly meetings with the Abbey Life Assurance Company Limited auditors and a specific meeting to discuss the actuarial assumptions. The Group team then performed a detailed review of the execution audit procedures and reporting performed by the non-EY component team. The Group team attended the closing meeting with the management of Abbey Life Assurance Company Limited.
For the specific scope component, the Group team have reviewed the audit procedures performed by the component team on the specific accounts.
The work performed on the components, together with the additional procedures performed at Group level, gave us appropriate evidence for our opinion on the consolidated financial statements as a whole.
On the basis of our risk assessments, together with our assessment of the Group’s overall control environment, our judgement was that performance materiality was 50% (2015: 50%) of our planning materiality, namely £34 million (2015: £23 million).
We agreed with the Audit Committee that we would report all uncorrected audit differences in excess of £3.0 million (2015: £2.3 million), which is set at 5% of planning materiality, as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds.
SCOPE OF THE AUDIT OF THE FINANCIAL STATEMENTS An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Group’s and the parent company’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the Directors; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the Annual Report and Accounts to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.
– the financial statements are in agreement with the records and returns; or
REPORT ON MATTERS PRESCRIBED BY OUR ENGAGEMENT LETTER In our opinion: – the information given in the Strategic Report and the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements; – the information given in the Corporate Governance Statement set out on pages 47 to 57 with respect to internal control and risk management systems in relation to financial reporting processes is consistent with the financial statements; and
We are required to report to you if, in our opinion, financial and non-financial information in the Annual Report and Accounts is: – materially inconsistent with the information in the audited financial statements; or
We are required to review: – the Directors’ statement in relation to going concern, set out on page 87, and the longerterm viability, set out on page 39; and
We are required to report to you if, in our opinion: – adequate accounting records have not been kept (including returns from those branches which have not been visited); or
– the Directors’ explanation in the Annual Report and Accounts as to how they have assessed the prospects of the entity, over what period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the entity will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions.
(Loss)/profit for the year attributable to owners (100) 249 £m £m
Other comprehensive income: Items that are or may be reclassified to profit or loss: Reclassification adjustments relating to foreign collective investment schemes disposed of in the period – (10)
Items that will not be reclassified to profit or loss: Owner-occupied property revaluation gains G8 – 4
STATEMENT OF CONSOLIDATED FINANCIAL POSITION As at 31 December 2016 £m £m
STATEMENT OF CONSOLIDATED CASH FLOWS For the year ended 31 December 2016 £m £m
Acquisition of Abbey Life subsidiaries, net of cash acquired H2.2 (886) –
Proceeds from issuing shares in subsidiaries to non-controlling interests D3 – 35
Fees associated with the amendment of existing bank facility (3) –
Proceeds from new shareholder borrowings, net of associated expenses 1,079 –
(Loss)/profit for the year – – – – (101) (101) 1 (100)
A. SIGNIFICANT ACCOUNTING POLICIES A1. BASIS OF PREPARATION The consolidated financial statements for the year ended 31 December 2016 comprise the financial statements of Phoenix Group Holdings (‘the Company’) and its subsidiaries (together referred to as ‘the Group’).
Insurance and investment contract liability accounting is discussed in more detail in the accounting policies in note F1 with further detail of the key assumptions made in determining insurance and investment contract liabilities included in note F4.
The identification and valuation of identifiable intangible assets, such as acquired in-force business or brand intangibles, arising from the Group’s acquisitions requires the Group to make a number of judgements and estimates. Further details of the judgements made are included in notes G7 ‘Intangible assets’ and H2 ‘Acquisitions and disposals’.
A4. ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS IN 2016 The consolidated financial statements for the year ended 31 December 2016, set out on pages 99 to 192, were authorised by the Board of Directors for issue on 17 March 2017.
In preparing the consolidated financial statements, the Group has adopted the following amendments effective from 1 January 2016: – Annual Improvements to IFRS 2012 – 2014 cycle. The adoption of these amendments had no impact on the disclosures or amount recognised in the consolidated financial statements.
– Clarification of Acceptable Methods of Depreciation and Amortisation (Amendments to IAS 16 and IAS 38). The accounting policy for the amortisation of acquired in-force business arising on investment contracts without DPF has been updated as a result of the application of these amendments. This change has been applied prospectively from 1 January 2016. See note G7 for further details.
A5. NEW ACCOUNTING PRONOUNCEMENTS NOT YET EFFECTIVE The IASB has issued the following new or amended standards and interpretations which apply from the dates shown. The Group has decided not to early adopt any of these standards, interpretations or amendments where this is permitted.
– Disclosure initiative (Amendments to IAS 7) (2017). The amendments require disclosures that enable users of the financial statements to evaluate changes in liabilities arising from financing activities, including both changes arising from cash flow and non-cash changes.
– IFRS 15 Revenue from Contracts with Customers (2018). IFRS 15 establishes a single comprehensive framework for determining whether, how and when revenue is recognised. The standard does not apply to insurance contracts and the financial instruments within the scope of IAS 39. The Group anticipates that the application of IFRS 15 in 2018 will have limited impact on the measurement and presentation of amounts reported in the Group’s financial statements.
The Group has chosen to report a non-GAAP measure of performance being operating profit. Operating profit is considered to provide a more relevant measure of the underlying performance of the Group’s business as it excludes the impact of short-term economic volatility and other one-off items. This measure incorporates an expected return, including a longer-term return on financial investments backing shareholder and policyholder funds over the period, with consistent allowance for the corresponding expected movements in liabilities. Operating profit includes the effect of variances in experience for non-economic items, such as mortality and expenses, and the effect of changes in noneconomic assumptions. It also incorporates the impacts of significant management actions where such actions are consistent with the Group’s core operating activities (for example, actuarial modelling enhancements and data reviews).
Operating profit also excludes the impact of the following items: – amortisation and impairments of intangible assets; – finance costs attributable to owners; and
– any other items which, in the Directors’ view, should be excluded by virtue of their nature or incidence to enable a full understanding of the Group’s financial performance.
Investment return variances and economic assumption changes on long-term business (207) – (207)
Investment return variances and economic assumption changes on long-term business 13 – 13
Negative investment return variances and economic assumption changes on long-term business of £207 million (2015: positive £13 million) primarily resulted from the adverse impact of a fall in yields on the life funds, which has increased the margin held within insurance liabilities in respect of longevity risk. The investment return variances have also been adversely impacted by losses arising on equity hedging positions held by life funds following equity market gains in the period. Equity market gains have resulted in an unfavourable variance as the value of the hedging instruments fall without the corresponding benefit from expected future profits within the life funds being recognised. Included in the negative variance is the minority share of the result of the consolidated UKCPT property investment structure prior to its deconsolidation during the year of positive £1 million (2015: positive £46 million).
For non-long-term business including owners’ funds, the total investment income, including fair value gains, is analysed between a calculated longerterm return and short-term fluctuations.
The negative variance on owners’ funds of subsidiary undertakings of £5 million (2015: £12 million) is principally driven by losses from equity hedging positions held in the Group holding companies offset by gains on interest rate hedging positions held in the life companies’ shareholders’ funds arising from falling yields.
The result attributable to owners of the parent for the purposes of computing earnings per share has been calculated as set out below. This is after adjusting for the result attributable to non-controlling interests.
Issued ordinary shares at beginning of the period (restated for bonus element of rights issue) 266 266
The result attributable to owners for the parent used in the calculation of diluted earnings per share is the same as that used in the basic earnings per share calculation in note B3.1 above. The diluted weighted average number of ordinary shares outstanding during the period is also the same as that used in the basic earnings per share calculation in note B3.1 above. As losses have an anti-dilutive effect, none of the share-based awards have a dilutive effect for the year ended 31 December 2016. The Group’s deferred bonus share scheme and sharesave schemes increased the weighted average number of shares on a diluted basis by 490,276 shares for the year ended 31 December 2015.
Diluted earnings per share (restated for bonus element of rights issue) (34.3) 76.0 5 million warrants issued on 2 September 2009 to certain entities providing finance to the Group could potentially dilute basic earnings per share in the future. The warrants have not been included in the diluted earnings per share figure because they did not have a dilutive effect for the periods presented due to the exercise price being significantly higher than the share price of the Company. Details of the warrants are given in note E3.3.
On 22 March 2016, the Board recommended a final dividend of 26.7p per share in respect of the year ended 31 December 2015. The dividend was approved at the Company’s Annual General Meeting, which was held on 11 May 2016. The dividend amounted to £60 million and was paid on 13 May 2016.
Net investment income comprises interest, dividends, rents receivable, net interest income/(expense) on the net defined benefit asset/ (liability), fair value gains and losses on financial assets, financial liabilities and investment property at fair value, and impairment losses on loans and receivables.
Interest income is recognised in the consolidated income statement as it accrues using the effective interest method.
Dividend income is recognised in the consolidated income statement on the date the right to receive payment is established, which in the case of listed securities is the ex-dividend date.
Interest income on loans and receivables at amortised cost 1 3
Interest income on financial assets designated at fair value through profit or loss on initial recognition 859 1,076
Reporting accountant assurance services relate to assurance reporting on historical information included within investment circulars. In 2016, this includes public reporting associated with the issuance of equity as part of the acquisition of Abbey Life and the issuance of a Medium-Term Note Programme.
Corporate finance services fees were £3.6 million (2015: £0.1 million). The increase in the year reflects services provided in connection with the acquisition of the AXA businesses and Abbey Life. £1.9 million of the fees relates to the engagement of the external auditors to perform actuarial and finance due diligence procedures where synergies were anticipated to arise with subsequent audit work. The remaining balance of £1.7 million relates to the provision of assurance services to the Board and the sponsoring banks in support of disclosures made in the public transaction documentation relating to the two acquisitions.
The Group, as a proxy for policyholders in the UK, is required to pay taxes on investment income and gains each year. Accordingly, the tax credit or expense attributable to UK life assurance policyholder earnings is included in income tax expense. The tax charge/(credit) attributable to policyholder earnings was £58 million (2015: £(33) million).
Tax at standard UK1 rate of 20% (2015: 20.25%) (26) 37
Profits taxed at rates other than 20%6 (2015: 20.25%) – (36)
3 Includes non-recurring disallowable deductions in relation to claims and other costs relating to creditor insurance underwritten by PA(GI) Limited of £7 million and a consolidation adjustment on the PGL Pension scheme ‘buy-in’ agreement of £12 million.
4 The 2015 prior year tax credit represents the impact of reaching agreement with HMRC in respect of the Group’s uncertain tax positions for the years 2007 to 2014.
5 2015 included a non-recurring write off for the acquired in-force business relating to Opal Reassurance Limited (‘Opal Re’) of £13 million as a result of the reinsurance of annuity liabilities.
Authorised: 410 million (2015: 410 million) ordinary shares of €0.0001 each 31,750 31,750
The holders of ordinary shares are entitled to one vote per share on matters to be voted on by owners and to receive such dividends, if any, as may be declared by the Board of Directors in its discretion out of legally available profits. Movements in issued share capital during the year: Number £
During the year, the Company issued 161,089 shares at a premium of £1 million in order to satisfy its obligations to employees under the Group’s sharesave schemes (see note I2).
Where the Phoenix Group Holdings Employee Benefit Trust (‘PGH EBT’) acquires shares in the Company or obtains rights to purchase its shares, the consideration paid (including any attributable transaction costs, net of tax) is shown as a deduction from owners’ equity. Gains and losses on sales of shares held by the PGH EBT are charged or credited to the own shares account in equity.
The PGH EBT holds shares to satisfy awards granted to employees under the Group’s share-based payment schemes.
During the year 690,711 (2015: 1,398,290) shares were awarded to employees by the PGH EBT and 1,196,011 (2015: 735,068) shares were purchased. The number of shares held by the PGH EBT at 31 December 2016 was 1,092,634 (2015: 587,334).
Non-controlling interests are stated at the share of net assets attributed to the non-controlling interest holder at the time of acquisition, adjusted for the relevant share of subsequent changes in equity.
Shares in subsidiaries subscribed for by non-controlling interests – 35 35
Reinsurers share of investment contracts liabilities without DPF are valued on a basis consistent with investment contracts liabilities without DPF as detailed under Financial liabilities below.
Associates Investments in associates that are held for investment purposes are accounted for under IAS 39 Financial Instruments: Recognition and Measurement as permitted by IAS 28 Investments in Associates and Joint Ventures. These are measured at fair value through profit or loss. There are no investment in associates which are of a strategic nature.
Financial assets at fair value through profit or loss: Held for trading – derivatives 3,003 2,909 3,003
Financial liabilities at fair value through profit or loss: Held for trading – derivatives 1,567 1,482 1,567
Financial assets at fair value through profit or loss: Held for trading – derivatives 1,498 1,335 1,498
Financial liabilities at fair value through profit or loss: Held for trading – derivatives 1,360 1,255 1,360
Designated upon initial recognition: Net asset value attributable to unitholders1 5,120 – 5,120
Financial liabilities measured at amortised cost: Deposits received from reinsurers 378 347 378
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 unquoted equities, over the counter derivatives, loans and deposits, and collective investment schemes, where published bid prices are not available, are estimated using pricing models or discounted cash flow techniques. Where pricing models are used, inputs are based on market-related data at the period end. Where discounted cash 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.
Financial assets designated at fair value through profit or loss upon initial recognition: Loans and receivables – – 812 812
Total financial liabilities for which fair values are disclosed – 1,140 1,131 2,271
Total financial liabilities measured at fair value 5,153 9,232 194 14,579
Level 3 investments in equities and fixed and variable rate income securities include equity and debt holdings in a property investment structure with a value of £22 million (2015: £22 million) and £22 million (2015: £14 million) respectively.
Also included within fixed and variable rate income securities are investments in local authority loans. These investments are valued using a calculation model that takes a comparable UK Treasury stock and applies a credit spread to reflect reduced liquidity. The credit spread is derived from a sample broker quote. The valuations are sensitive to movements in this spread, an increase of 25bps would decrease the value by £1 million (2015: £1 million) and a decrease of 25bps would increase the value by £nil (2015: £1 million).
Included within loans and receivables are investments in equity release mortgages with a value of £433 million (2015: £268 million). The loans are valued using a discounted cash flow model, the key inputs to which include demographic assumptions, economic assumptions (including house price index) and the use of a Black-Scholes model for valuation of the no-negative equity guarantee. The no-negative equity guarantee caps the loan repayment in the event of death or entry into long-term care to be no greater than the sales proceeds from the property. The significant sensitivities arise from movements in the yield curve, inflation rate and house prices.
Included within borrowings measured at fair value and categorised as Level 3 financial liabilities are property reversion loans with a value of £183 million, measured using an internally developed model. The valuation is sensitive to key assumptions of the discount rate and the house price inflation rate. An increase in the discount rate of 1% would decrease the value by £5 million (2015: £5 million) and a decrease of 1% would increase the value by £5 million (2015: £5 million). An increase of 1% in the house price inflation rate would increase the value by £6 million (2015: £6 million) and a decrease of 1% would decrease the value by £6 million (2015: £6 million).
Included within financial assets and liabilities are related loans and receivables of £380 million, borrowings of £87 million and derivative liabilities of £255 million pertaining to a reinsurance and retrocession arrangement assumed following the acquisition of Abbey Life (see note E3.2). 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 2016, the net of these balances was an asset of £38 million (2015: £nil). The valuation is sensitive to movements in the euro interest rate swap curve.
Financial assets designated at fair value through profit or loss upon initial recognition: Fixed and variable rate income securities 155 153
Financial liabilities designated at fair value through profit or loss upon initial recognition: £m
Gains and losses on Level 3 financial instruments are included in net investment income in the consolidated income statement. There were no gains or losses recognised in other comprehensive income in either the current or comparative periods.
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.
Lenders’ warrants On 2 September 2009, the Company issued 5 million warrants over its shares to the Lenders. These warrants entitled the holder to purchase one ‘B’ ordinary share at a price of £15 per share, subject to adjustment. Following the achievement of the Company’s Premium Listing on 5 July 2010, the lenders’ warrants relate to ordinary shares rather than ‘B’ ordinary shares. At 31 December 2016 the terms of lenders’ warrants entitled the holders to purchase 1.027873 (2015: 1.027873) ordinary shares per lenders’ warrant for an exercise price of £14.59 (2015: £14.59).
All outstanding lenders’ warrants may be redeemed at the option of the Company at any time after they become exercisable and prior to their expiration at a price of €0.01 per warrant provided that the last closing bid price of the ordinary shares is equal to or exceeds £18.97 (2015: £18.97) on each of 20 consecutive trading days. The Company must give not less than 30 days’ notice of the redemption date. Each warrant may then be exercised by the warrant holder (in whole or any part) at its option.
Assets accepted It is the Group’s practice to obtain collateral to mitigate the counterparty risk related to over-the-counter (‘OTC’) derivatives usually in the form of cash or marketable financial instruments.
The fair value of financial assets accepted as collateral for OTC derivatives but not recognised in the statement of consolidated financial position amounts to £820 million (2015: £259 million).
The Group classifies the majority of its interest-bearing borrowings as financial liabilities carried at amortised cost and these are recognised initially at fair value less any attributable transaction costs. The difference between initial cost and the redemption value is amortised through the consolidated income statement over the period of the borrowing using the effective interest method.
Borrowings are classified as either policyholder or shareholder borrowings. Policyholder borrowings are those borrowings where there is either no or limited shareholder exposure, for example, borrowings attributable to the Group’s with-profit operations.
Property Reversions loan (note b) 183 194 183 194 £150 million term facility (note c) – 148 – 148 £100 million facility agreement (note c) – 99 – 99
Amount due for settlement after 12 months 2,005 1,966 a. In 1998, Mutual Securitisation plc raised £260 million of capital through the securitisation of embedded value on a block of existing unit-linked and unitised with-profit life and pension policies. The bonds were split between two classes, which ranked pari passu and were listed on the Irish Stock Exchange. The £140 million 7.39% class A1 limited recourse bonds matured in 2012 with no remaining outstanding principal. The £120 million 7.59% class A2 limited recourse bonds with an outstanding principal of £72 million (2015: £83 million) have an average remaining life of 3 years and mature in 2022. Phoenix life Assurance Limited (‘PLAL’) has provided collateral of £29 million (2015: £34 million) to provide security to the holders of the recourse bonds in issue. During 2016, repayments totalling £11 million were made (2015: £11 million).
Financials c. In February 2016 the Group assessed that it no longer controlled UKCPT and consequently deconsolidated this group of subsidiaries effective from this date (see note H3). As a result the UKCPT £150 million and £100 million policyholder borrowings are no longer included within Group borrowings.
d. 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.
e. Scottish Mutual Assurance Limited issued £200 million 7.25% undated, unsecured subordinated loan notes on 23 July 2001 (‘PLL subordinated debt’). The earliest repayment date of the notes is 25 March 2021 and thereafter on each fifth anniversary so long as the notes are outstanding. With effect from 1 January 2009, following a Part VII transfer, these loan notes were transferred into the shareholder fund of Phoenix Life Limited (‘PLL’). In the event of the winding-up of PLL, the right of payment under the notes is subordinated to the rights of the higher-ranking creditors (principally policyholders). As a result of the acquisition of the Phoenix Life businesses in 2009, these subordinated loan notes were acquired at their fair value and as such, the outstanding principal of these subordinated loan notes differs from the carrying value in the statement of consolidated financial position. The fair value adjustments, which were recognised on acquisition, will unwind over the remaining life of these subordinated loan notes. With effect from 23 December 2014, minor modifications were made to the terms of the notes to enable them to qualify as Tier 2 capital for regulatory reporting purposes. Expenses incurred in effecting these modifications amounted to £10 million. Given the modifications were not substantial, the carrying amount of the liability was adjusted accordingly and the expenses are being amortised over the life of the notes.
i. On 27 May 2016, the Group entered into a £220 million AXA bridge facility agreement of which £182 million was drawn down on 31 October 2016. The facility was repaid in full on 20 December 2016.
The use of financial instruments naturally exposes the Group to the risks associated with them, chiefly market risk, credit risk and financial soundness risk.
The Group is also exposed to insurance risk arising from its Phoenix Life segment. Life insurance risk in the Group arises through its exposure to longevity, persistency, mortality and to other variances between assumed and actual experience. These variances can be in factors such as persistency levels and management, administrative expenses and new business pricing. More detail on the Group’s exposure to insurance risk is provided in note F4.
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.
There is an exposure to spread changes affecting the prices of corporate bonds and derivatives. This exposure applies to with-profit funds, non-profit funds (where risks and rewards fall wholly to shareholders) and shareholders’ funds.
The Group holds £6,253 million (2015: £3,942 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 £322 million (2015: £225 million) to fund against the risk of default.
The Group has established an Internal Credit Rating Committee to monitor and control oversight of both externally rated and internally rated assets. A variety of methods are used to validate the appropriateness of credit assessment from external institutions and fund managers. Internally rated assets are those that do not have a public rating from an external credit assessment institution. This committee reviews the policies, processes and practices to ensure the appropriateness of the internal ratings assigned to asset classes.
Fixed and variable rate income securities 31,795 – – 2 12 5 31,814
Cash and cash equivalents 3,905 – – – – 35 3,940
Please refer to page 203 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 with total assets.
During the year and as a result of the Solvency II regime, management has reviewed the matching position of assets and liabilities resulting in changes to the hedging positions for certain asset portfolios. As a result, an increase of 1% in interest rates, with all other variables held constant, would now result in a decrease in profits after tax in respect of a full financial year, and in equity, of £146 million (2015: £89 million).
A 10% decrease in equity prices, with all other variables held constant, would result in an increase in profits after tax in respect of a full financial year, and in equity, of £75 million (2015: £48 million).
A 10% increase in property prices, with all other variables held constant, would result in an increase in profits after tax in respect of a full financial year, and in equity, of £2 million (2015: £21 million).
Certain Phoenix Life 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.
Sensitivity of profit after tax and equity to fluctuations in currency exchange rates is not considered significant at 31 December 2016, since unhedged exposure to foreign currency was relatively low (2015: not considered significant).
The Board of Phoenix Group Holdings has defined a number of governance objectives and principles and the liquidity risk frameworks of each subsidiary are designed to ensure that: – liquidity risk is managed in a manner consistent with the subsidiary company boards’ strategic objectives, risk appetite and Principles and Practices of Financial Management (‘PPFM’); – cash flows are appropriately managed and the reputation of the Group is safeguarded; and
Some of the Group’s commercial property investments are held through collective investment schemes. The collective investment schemes have the power to restrict and/or suspend withdrawals, which would, in turn, affect liquidity. As a result of the market volatility experienced following the result of the referendum on membership of the European Union, and in line with other firms across the industry, customer-driven transactions in certain unit trusts were temporarily suspended during July, August and September. All other unit trusts have continued to process investment and realisations in a normal manner and have not imposed any restrictions or delays.
Some of the Group’s cash and cash equivalents are held through collective investment schemes. The collective investment schemes have the power, in extreme stress, to restrict and/or suspend withdrawals, which would, in turn, affect liquidity. To date, the collective investment schemes have continued to process both investments and realisations in a normal manner and have not imposed any restrictions or delays.
The following table provides a maturity analysis showing the remaining contractual maturities of the Group’s undiscounted financial liabilities and associated interest. Liabilities under insurance contract contractual maturities are included based on the estimated timing of the amounts recognised in the statement of consolidated financial position in accordance with the requirements of IFRS 4 Insurance Contracts: 1 year or less or on demand £m 1–5 years £m
Other payables 102 – – – 102 1 These financial liabilities are disclosed at their undiscounted value and therefore differ from the statement of consolidated financial position which discloses the discounted value.
E6. RISK MANAGEMENT – FINANCIAL RISK continued 1 year or less or on demand £m 1–5 years £m
Net asset value attributable to unitholders 5,120 – – – 5,120
Obligations for repayment of collateral received 725 – – – 725
A significant proportion of the Group’s financial assets are held in equities, gilts, cash, supranationals and investment grade securities which the Group considers sufficient to meet the liabilities as they fall due. The vast majority of these investments are readily realisable since most of them are quoted in an active market.
For unit-linked contracts the Group matches all the liabilities with assets in the portfolio on which the unit prices are based. There is therefore no interest, price, currency or credit risk for the Group on these contracts.
Amounts recoverable from reinsurers are estimated in a manner consistent with the outstanding claims provision or settled claims associated with the reinsured policy.
– in the periods where guaranteed surrender values do not apply even though guaranteed surrender values are applicable after a specified period of time.
The with-profit bonus reserve for an individual contract is determined by either a retrospective calculation of ‘accumulated asset share’ approach or by way of a prospective ‘bonus reserve valuation’ method. The cost of future policy-related liabilities is determined using a market consistent approach, mainly based on a stochastic model calibrated to market conditions at the end of the reporting period. Non-market-related assumptions (for example, persistency, mortality and expenses) are based on experience adjusted to take into account of future trends.
The realistic liability for any contract is equal to the sum of the with-profit bonus reserve and the cost of future policy-related liabilities.
The value of the PVFP is determined in a manner consistent with realistic measurement of liabilities. In particular, the methodology and assumptions involve adjustments to reflect risk and uncertainty, are based on current estimates of future experience and current market yields, and allow for market consistent valuation of any guarantees or options within the contracts. The value is also adjusted to remove the value of capital backing the non-profit business if this is included in the realistic calculation of PVFP. The principal assumptions used to calculate the PVFP are the same as those used in calculating the insurance contract liabilities given in note F4.
Liability adequacy At each reporting date, liability adequacy tests are performed to assess whether the insurance contract and investment contract with DPF liabilities are adequate. Current best estimates of future cash flows are compared with the carrying value of the liabilities. Any deficiency is charged to the consolidated income statement.
Life assurance business: Investment contracts with DPF 11,058 1 10,420 1
Amounts classified as held for sale at 1 January 1,587 1,521 1,776 1,713
Acquisition of the AXA businesses and Abbey Life1 (see note H2) 3,875 100 – –
Less amounts classified as held for sale at 31 December (see note I1) – – (1,587) (1,521)
Premiums ceded to reinsurers during the period were £75 million (2015: £1,376 million).
During 2016, the Group entered into a longevity swap arrangement with RGA International in respect of a portfolio of the Group’s in-force immediate annuity liabilities of £2.0 billion.
On 9 November 2015, the Group entered into an agreement with RGA International, effective from 1 November 2015, to reinsure substantively all of the PLAL annuity liabilities previously ceded to Opal Reassurance Limited (‘Opal Re’), a subsidiary undertaking of the Company. The Group paid a reinsurance premium of £1,346 million to RGA International. Under the terms of the arrangement, RGA International holds assets in a collateral account over which the Group has a floating charge as disclosed in note F3.2.
A decrease of 5% in assurance mortality, with all other variables held constant, would result in an increase in profits after tax in respect of a full year, and an increase in equity of £43 million (2015: £12 million).
A decrease of 25% in lapse rates, with all other variables held constant, would result in a decrease in profits after tax in respect of a full year, and a decrease in equity of £38 million (2015: £76 million).
Valuation of participating insurance and investment contracts 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 involves placing a value on liabilities similar to the market value of assets with similar cash flow patterns.
Process used to determine assumptions Following the implementation of the Solvency II regulatory regime effective from 1 January 2016, the Group has made certain changes to the assumptions and estimates used in the valuation of insurance contracts, as follows: – In determining the discount rate to be applied when calculating participating and non-participating insurance contract liabilities, the Group has amended the risk-free reference curve from a gilt yield curve plus a liquidity premium of 10bps to the swap curve plus 10bps.
The amendments to the risk-free reference rate and the approach for adjusting for illiquidity increased insurance contract liabilities by £77 million. This has been more than offset by the impact of the change in approach for determining the demographic prudence margin, which reduced insurance contract liabilities by £115 million. After allowing for other second order impacts of the changes of £7 million (including the revaluation of certain current liabilities using the swap rather than gilt curve), the overall impact of the above changes in the period is a benefit to profit before tax of £31 million.
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 £2,239 million (2015: £1,710 million) and £5 million (2015: £5 million) respectively.
In common with other life companies in the UK which have written pension transfer and opt-out business, the Group has set up provisions for the review and possible redress relating to personal pension policies. These provisions, which have been calculated from data derived from detailed file reviews of specific cases and using a certainty equivalent approach, which give a result very similar to a market consistent valuation, are included in liabilities arising under insurance contracts. The total amount provided in the with-profit funds and non-profit funds in respect of the review and possible redress relating to pension policies, including associated costs, are £376 million (2015: £254 million) and £13 million (2015: £14 million) respectively.
The following sections give an assessment of the risks associated with the Group’s main life assurance products, as shown below, and the ways in which the Group manages those risks.
Non-profit funds: Deferred annuities – with guarantees 479 – – –
With-profit funds: Pensions: Deferred annuities – with guarantees 8,534 142 726 –
Non-profit funds: Deferred annuities – with guarantees 14 – – –
The investment strategy of each fund differs, but is broadly to invest in a mixture of fixed interest investments and equities and/or property and other asset classes in such proportions as is appropriate to the investment risk exposure of the fund and its capital resources.
Deferred annuities Deferred annuity policies are written to provide either a cash benefit at retirement, which the policyholder can use to buy an annuity on the terms then applicable, or an annuity payable from retirement. The policies contain an element of guarantee expressed in the form that the contract is written in, i.e. to provide cash or an annuity. Deferred annuity policies written to provide a cash benefit may also contain an option to convert the cash benefit to an annuity benefit on guaranteed terms; these are known as GAR policies. Deferred annuity policies written to provide an annuity benefit may also contain an option to convert the annuity benefit into cash benefits on guaranteed terms; these are known as Guaranteed Cash Option (‘GCO’) policies.
As noted earlier, a number of strategic initiatives were completed in 2016 that impacted the immediate annuity book.
Additions in the year – 1 – 33 – 30 – 64
Acquisition of Abbey Life during the year (see note H2.2) – – – – 25 – – 25
The leasehold properties provision has been made for amounts in respect of the excess of lease rentals and other payments on properties that are currently vacant or are expected to become vacant, over the amounts to be recovered from subletting these properties. The discount rate used was 1.7% (2015: 1.7%) and it is expected that the provision will be utilised over the next 2 years (2015: 3 years).
Under the terms of the acquisition, Deutsche Bank has provided PLHL with an indemnity, with a duration of up to eight years, in respect of exposures that may arise in Abbey Life as a result of the FCA’s final thematic review findings in respect of annuity sales and enforcement in respect of long-standing customers. The maximum amount that can be claimed under the indemnity is £175 million and it applies to all regulatory fines and 80% to 90% of the costs of customer remediation. The indemnity would be expected to mitigate the Group’s costs in the event of a crystallisation of exposures deemed not to trigger the recognition of a provision based on current information, or deterioration in management’s estimate of the liabilities associated with present obligations.
Adjustment for insurance policies held with related parties in respect of the PGL Pension Scheme (4) 4 – – –
Recognised in other comprehensive income £m Disposals in year £m £m
Adjustment for insurance policies held with related parties in respect of the PGL Pension Scheme (5) 1 – – (4)
Deferred tax assets have not been recognised in respect of: Tax losses carried forward 25 16
Adjustment for amounts due from subsidiary eliminated on consolidation (6) –
In December 2016, the PGL Pension Scheme entered into a buy-in transaction with PLL which converted the existing longevity swap contract into a bulk annuity contract. Plan assets transferred as a result of this transaction are no longer recognised in the pension scheme asset/liability, but are instead recognised within financial assets in the consolidated statement of financial position. Further details are included in section G6.2.
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 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.
The valuation has been based on an assessment of the liabilities of the Pearl Scheme as at 31 December 2016, 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.
A triennial funding valuation of the Pearl Scheme as at 30 June 2015 was completed in September 2016. This showed a deficit as at 30 June 2015 of £300 million, on the agreed technical provisions basis.
(ii) to reach full funding on a gilts flat basis by 30 June 2031; – the Trustee continues to benefit from a first charge over shares in Phoenix Life Assurance Limited, Pearl Group Services Limited and PGS2 Limited. The security claim granted under the share charges is capped at the lower of £600 million and 100% of the Pearl Scheme deficit (calculated on a basis linked to UK government securities) revalued every three years thereafter; and
It should be noted that the terms of the £900 million facility agreement (see note E5) restrict the Group’s ability, with certain exceptions, to transfer assets into the companies over which the Trustee holds a charge over shares.
An additional liability of £66 million (2015: £74 million) has been recognised, reflecting a charge on any refund of the resultant IAS 19 surplus that arises after adjustment for discounted future contributions of £189 million (2015: £213 million) in accordance with the minimum funding requirement. A deferred tax asset of £32 million (2015: £38 million) has also been recognised to reflect tax relief at a rate of 17% (2015: 18%) that is expected to be available on the contributions, once paid into the scheme.
The weighted average duration of the defined benefit obligation at 31 December 2016 is 17 years (2015: 17 years).
Contributions in the year amounted to £6 million (2015: £6 million).
The valuation has been based on an assessment of the liabilities of the PGL Pension Scheme as at 31 December 2016, undertaken by independent qualified actuaries.
Funding A triennial funding valuation of the PGL Pension Scheme as at 30 June 2015 was completed in June 2016. This showed a surplus as at 30 June 2015 of £164 million. Following discussions with the Trustee of the PGL Pension Scheme it was agreed that the existing schedule of cash contributions to the scheme amounting to £59 million in total over the period from October 2013 to August 2017 would remain unchanged. Contributions totalling £15 million were paid into the scheme in 2016 (2015: £15 million) and the remaining outstanding contributions totalling £10 million are expected to be paid into the scheme in 2017.
An additional liability has been recognised of £4 million (2015: £9 million) reflecting a charge on any refund of the resultant economic surplus (prior to the elimination of insurance policies) that arises after adjustment for discounted future contributions of £10 million (2015: £24 million) in accordance with the minimum funding requirement. A deferred tax asset of £2 million (2015: £4 million) has also been recognised to reflect tax relief at a rate of 17% (2015: 18%) that is expected to be available on the contributions, once paid into the scheme.
Liability management exercises In January 2016, the Group carried out a pension increase exchange (‘PlE’) exercise in respect of the PGL Pension Scheme. Existing in-scope pensioners were offered the option to exchange future non-statutory pension increases for a one-off uplift to their current pension, thereby reducing longevity and inflation risk for the Group. The financial effect of all acceptances received in the period has been recognised in the consolidated financial statements as a reduction in scheme liabilities of £3 million shown as a past service credit in the condensed consolidated income statement.
In February 2016, the Group commenced a flexible retirement option (‘FRO’) exercise whereby defined members who are eligible to retire within the PGL Pension Scheme were offered a transfer value on standard terms or a pension in the scheme. The financial effect of all acceptances received have been recognised in the consolidated financial statements and an experience gain of £2 million on liabilities arose as a result of this exercise.
Insurance policies with Group entities In June 2014, the PLL non-profit fund entered into a longevity swap with the PGL Pension Scheme with effect from 1 January 2014, under which the Scheme transferred the risk of longevity improvements to PLL. The financial effect of this contract was eliminated on consolidation.
Remeasurements: Return on plan assets excluding amounts included in interest income 349 – – – 349
Change in provision for tax on economic surplus available as a refund – – 72 – 72
Gain from changes in financial assumptions – 36 – – 36
Obligations for repayment of stock lending collateral received (95) – (113) –
Add back: Insurance policies eliminated on consolidation 913 – 22 –
Amounts due from subsidiary eliminated on consolidation 6 – – –
The weighted average duration of the defined benefit obligation at 31 December 2016 is 19 years (2015: 17 years).
Impact on the defined benefit obligation (£m) 1,649 (70) 75 47 (51) 55 (55)
The trust deed under which the Abbey Life Scheme is established provides for the gradual settlement of the plan liabilities over time until all members have left the scheme. Where appropriate, any excess value of the assets over the liabilities is recognised in the consolidated statement of financial position in accordance with IFRIC 14.
The valuation has been based on an assessment of the liabilities of the Abbey Life Scheme as at 31 December 2016 undertaken by independent qualified actuaries. The present values of the defined benefit obligation and the related interest costs have been measured using the projected unit credit method.
Funding The last funding valuation of the Scheme was carried out by a qualified actuary as at 31 March 2015 and showed a deficit of £107 million. A new schedule of contributions was introduced with effect from 1 July 2016 following completion of the 31 March 2015 funding valuation. In respect of future accrual of benefits, Abbey Life will pay 39.5% of gross pensionable earnings from 1 July 2016. In relation to deficit contributions, Abbey Life will pay the following: – a lump sum of £15 million into the Scheme by 30 June 2016 (paid on 24 June 2016); – monthly contributions of £246,000 into the Scheme between 1 July 2016 and 30 June 2026. These amounts are to be paid to the Scheme on or before the 19th of the calendar month following that to which the payment relates; – annual payments of £2.92 million into the 2016 Charged Account by 31 July each year, with the first payment being due by 31 July 2016, and the last payment due by 31 July 2025.
The Charged Accounts are escrow accounts which were created to provide the Trustees with additional security in light of the funding deficit. The amounts held in the Charged Accounts do not form part of Scheme assets.
Under the terms of the 2013 Funding Agreement dated 28 June 2013, the funding position of the Scheme will be assessed as at 31 March 2021. A payment will be made from the 2013 Charged Account to the Scheme if the results of the assessment reveal a shortfall calculated in accordance with the terms of the 2013 Funding Agreement. The amount of the payment will be the lower of the amount of the shortfall and the amount held in the 2013 Charged Account.
The weighted average duration of the defined benefit obligation at 31 December 2016 is 18 years.
Rate of increase for deferred pensions (‘CPI’ subject to caps) 2.20
It has been assumed that post-retirement mortality is in line with a scheme-specific table which was derived from the actual mortality experience in recent years, performed as part of the actuarial funding valuation as at 31 March 2015, using the SAPS S2 ‘Light’ tables for males and for females based on year of use. Future longevity improvements are based on CMI 2015 Core Projections with long-term improvements of 1.25% p.a. Under these assumptions the average life expectancy from retirement for a member currently aged 45 retiring at age 65 is 25.0 years and 27.2 years for male and female members respectively.
A quantitative sensitivity analysis for significant actuarial assumptions as at 31 December 2016 is shown below: Assumptions Base Discount rate RPI Life expectancy
Business combinations are accounted for by applying the purchase 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 cash generating units and is impaired when the recoverable amount is less than the carrying value.
The customer relationship intangible asset includes vesting pension premiums and is measured on initial recognition at cost. The cost of this intangible asset acquired in a business combination is its fair value as at the date of acquisition. Following initial recognition, the customer relationship intangible asset is carried at cost less any accumulated amortisation and any accumulated impairment losses.
Amortisation charge for the year – (76) (14) – – (14) (90)
During the year, goodwill of £10 million was recognised on the acquisition of the AXA businesses and £8 million was recognised on the acquisition of Abbey Life. These businesses are considered to be separate cash generating units for the purpose of impairment testing.
Acquired in-force business of £38 million and £180 million was recognised upon the acquisitions of the AXA businesses and Abbey Life respectively (see note H2). The £38 million arising upon the acquisition of the AXA businesses is analysed as £116 million in respect of the value in-force of acquired unit-linked business and negative AVIF of £78 million arising in respect of the acquired protection business. Further detail is provided in note H2.
The customer relationships intangible at 31 December 2016 relates to vesting pension premiums which captures the new business arising from policies in-force at the acquisition date in September 2009, specifically top-ups made to existing policies and annuities vested from matured pension policies. The total value of this customer relationship intangible at acquisition was £297 million and has been allocated to the Phoenix Life segment. This intangible is being amortised over a 20 year period.
No indicators of impairment were identified during the period and consequently no impairment test on this intangible has been carried out.
G7.4 Present value of future profits on non-participating business in the with-profit fund
The brand intangible of £20 million was recognised on acquisition of the AXA businesses and represents the value attributable to the SunLife brand as at 1 November 2016. The intangible asset was valued on a ‘multi-period excess earnings’ basis.
The brand intangible is being amortised over a 10 year period.
Owner-occupied property is stated at its revalued amount, being its fair value at the date of the revaluation less any subsequent accumulated depreciation and impairment. Owner-occupied property is depreciated over its estimated useful life, which is taken as 50 years. Land is not depreciated. Gains and losses on owner-occupied property are recognised in the statement of consolidated comprehensive income.
Owner-occupied properties have been valued by accredited independent valuers at 31 December 2016 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 measurements for the properties of £25 million have been categorised as Level 3 fair values based on the non-observable inputs to the valuation technique used.
The following table shows a reconciliation from the opening to the closing fair value for the Level 3 owner-occupied properties at valuation: £m
Gains on adjustments to fair value (recognised in consolidated income statement) 26 140
Unrealised gains on properties held at end of period 27 120
As at 31 December 2016, the property portfolio of £444 million is held by the life companies and is held in a mix of commercial sectors. As at 31 December 2015, the portfolio consisted of a mix of commercial sectors, held by the life companies, of £420 million, and by the UK Commercial Property Trust, of £1,312 million. The portfolio is spread geographically throughout the UK.
In February 2016, the Group assessed that it no longer controlled UKCPT and consequently deconsolidated this group of subsidiaries effective from this date. As a result, the UKCPT property portfolio is no longer included within the Group investment property portfolio as at 31 December 2016.
The fair value measurement of the investment properties has been categorised as a Level 3 fair value 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 nonobservable inputs used, the inter-relationship between the key non-observable inputs and the fair value measurement of the investment properties: Description Valuation techniques Significant non-observable inputs Range (weighted average)
RICS valuation Expected income per sq. ft. £4.91 – £99.97 (£22.62)
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.
On 1 November 2016, the Group acquired 100% of the issued share capital of AXA Wealth Limited (‘AWL’), AXA Wealth Services Limited, AXA Sun Life Direct Limited, Winterthur Life UK Holdings Limited and AXA Trustee Services Limited from AXA UK plc for a total cash consideration of £373 million.
The AXA businesses comprise a pensions and investments business (‘Embassy’), offering a range of propositions catering to both individual and corporate requirements and SunLife, a leader in the over 50’s protection sector. The Group has acquired this group of companies to realise capital and cost synergies to be generated by leveraging the Group’s existing operating platform and outsourcing model.
Analysis of cash flows on acquisition: Net cash acquired with the subsidiaries (included in cash flow from investing activities) 40
Liabilities under insurance contracts The Group’s accounting policy permits the recognition of negative policy values within insurance liabilities where guaranteed surrender values do not apply. On acquisition, this results in the recognition of a negative reserve of £181 million in respect of the acquired protection business that is offset against liabilities under insurance contracts in the consolidated statement of financial position.
Under the Group’s accounting policy (see note G7), AVIF arising on acquired insurance contracts is measured as the difference between the fair value of contracted rights acquired and obligations assumed and the liability measured in accordance with the Group’s accounting policies for such contracts.
The fair value of the acquired insurance contracts has been assessed as £103 million, which is lower than the value of the negative reserves recognised in accordance with the Group’s accounting policies of £181 million. This results in the recognition of a negative AVIF of £78 million in the consolidated statement of financial position.
A separately identifiable intangible asset of £20 million relating to the SunLife brand has been recognised in the acquisition balance sheet. The brand has been valued using a multi-period excess earnings basis. The useful economic life of the brand has been assessed as 10 years. Further details on this intangible asset are outlined in note G7.
Goodwill The residual goodwill of £10 million is not considered to be tax deductible and is considered to represent the value of the workforce assumed and the potential for future value creation.
AVIF and other intangibles The AVIF of £180 million has been determined by reference to the fair value of the insurance contract liabilities and contractual rights acquired in respect of investment contracts, and calculated in accordance with the Group’s accounting policy. Deferred acquisition costs of £74 million and deferred front end fees of £(71) million have been derecognised on acquisition and replaced with the AVIF.
From the date of acquisition, the AXA group of companies contributed £209 million of total revenue, net of reinsurance payable, and £8 million to profit before tax attributable to owners. Abbey Life did not contribute to either total revenue or profit before tax attributable to owners. If the acquisition of the AXA businesses and Abbey Life had taken place at the beginning of the year, total revenue, net of reinsurance payable, would have been £10,519 million and the loss before tax attributable to owners would have been £110 million.
H3. ASSOCIATES: LOSS OF CONTROL OF INVESTMENT IN UK COMMERCIAL PROPERTY TRUST LIMITED (‘UKCPT’) UKCPT is a property investment company which is domiciled in Guernsey and is admitted to the official list of the UK Listing Authority and to trading on the London Stock Exchange.
Less: Group’s share of net assets on the date of loss of control
As at 31 December 2016 the Group held 47.9% (2015: 50.0%) of the issued share capital of UKCPT and the value of this investment, measured at fair value, was £525 million. Summary financial information for UKCPT, showing the Group's share, is shown below: 2016 £m 2015 £m
The Group has determined that all of its investments in collective investment schemes are structured entities. In addition, the PGH EBT, a number of debt security structures, private equity funds and the Group’s joint venture have been identified as structured entities. The Group has assessed that it has interests in both consolidated and unconsolidated structured entities as shown below: – Unit trusts
The Group has interests in unconsolidated structured entities. These investments are held as financial assets in the Group’s consolidated statement of financial position held at fair value through profit or loss. Any change in fair value is included in the consolidated income statement in ‘net investment income’. Dividend and interest income is received from these investments.
Fixed and variable rate income securities: Asset backed securities 617 669 1 Directly held collective investment schemes refer to those structured entities directly invested in by Group companies. Such investments have been analysed by reference to the predominant asset class the structure is investing in.
Subsidiaries: Phoenix Life Assurance Limited (life assurance company) Wythall1 Ordinary shares 100.00%
AXA Sun Life Direct Limited (management services company) Wythall1 Ordinary shares 100.00%
Winterthur Life UK Holdings Limited (holding company) Wythall1 Ordinary shares 100.00%
Abbey Life Trustee Services Limited (life assurance company) Wythall1 Ordinary shares 100.00%
Abbey Life Trust Securities Limited (pension trustee company) Wythall1 Ordinary shares 100.00%
Pearl Group Holdings (No. 2) Limited (holding company) Wythall1 Ordinary shares 100.00%
Impala Loan Company 1 Limited (investment company) Glasgow10 Ordinary shares 100.00%
PG Dormant No. 1 Limited (dormant company) Wythall1 Ordinary shares 100.00%
The Pearl Martineau Galleries Limited Partnership (dormant company) Wythall1 Limited Partnership 100.00%
Henderson Strategic Investment Funds – Henderson Institutional Japan Index Opportunities Fund
Henderson Strategic Investment Funds – Henderson Institutional North American Index Opportunities Fund
Henderson Institutional UK Equity Tracker Trust London14 Authorised unit trust 100.00%
Henderson Institutional Short Duration Bond Fund London14 Authorised unit trust 80.20%
PUTM Bothwell Long Gilt Sterling Hedged Fund Wythall1 Authorised unit trust 100.00%
PUTM Bothwell Sterling Government Bond Fund Wythall1 Authorised unit trust 98.88%
PUTM UK All-Share Index Unit Trust Wythall1 Authorised unit trust 99.97%
Henderson Global Care Funds – Henderson Institutional Global Care Managed Fund London14 OEIC, sub fund 62.79%
Henderson UK & Europe Funds – Henderson Institutional UK Gilt Fund London14 OEIC, sub fund 69.89%
Henderson Institutional UK Index Opportunities Fund London14 Authorised unit trust 73.19%
Ignis Liquidity Fund plc – Sterling Liquidity Fund Dublin8 OEIC, sub fund 45.59%
Standard Life UK Real Estate Income Feeder Fund Edinburgh22 OEIC, sub fund 37.57%
2 Marsh Management Services (Dublin) Limited, DS-28 Adelaide Road, Dublin 2, Republic of Ireland 3 The shares of this subsidiary undertaking are held by a trust. The Group has assessed that it exercises overall control in respect of this subsidiary undertaking 4 These subsidiary undertakings are directly owned by Phoenix Group Holdings 5 The Argus Building, 12 Wesley Street, Hamilton, Bermuda 6 Arthur Cox Building, Earlsfort Terrace, Dublin 2, Dublin, Republic of Ireland 7 Juxon House, 100 St Paul’s Churchyard, London, EC4M 8BU
8 25–28 North Wall Quay, IFSC, Dublin 1, Republic of Ireland 9 c/o Corporation Service Company, 2711 Centerville Road, Suite 400, Wilmington, USA
17 2–4, Rue Eugène Ruppert, Luxembourg, L-2453 18 7 Newgate Street, London, EC1A 7NX
The deconsolidation of the Ignis Liquidity Fund plc – Sterling Liquidity Fund has had a significant impact on the following line items in the statement of consolidated financial position: – increase in the value of collective investment schemes; – decrease in the value of net asset value attributable to unitholders; and
The Group no longer has significant holdings in the following undertakings: – Ignis Liquidity Fund plc – Euro Liquidity Fund.
I. OTHER NOTES I1. ASSETS AND LIABILITIES HELD FOR SALE The balances as at 31 December 2015 relate to the Part VII transfer of a portfolio of annuity liabilities to ReAssure Limited and the agreement to sell the Group’s interest in an investment property joint venture held by Pearl Breakfast Unit Trust.
Liabilities classified as held for sale: Liabilities under insurance contracts – 1,587
On 31 July 2014, the Group entered into a reinsurance agreement, effective from 1 January 2014 to reinsure certain portfolios of the Group’s annuity liabilities to ReAssure Life Limited (formerly Guardian Assurance Limited) in exchange for the transfer of financial assets of £1.7 billion. The annuity in-payment liabilities were held in the Group’s with-profit funds. On 30 December 2016, the reinsurance agreement was replaced by a formal scheme under Part VII of the Financial Services and Market Act 2000 to transfer the annuity liabilities to ReAssure Limited, a fellow subsidiary of ReAssure Life Limited. Assets and liabilities classified as held for sale in 2015 were extinguished at the time of transfer. The carrying value of liabilities and assets transferred and the resulting gain are set out below: £m
As the portfolio of annuities was previously held in unsupported withprofit funds, the gain is offset by an equivalent increase in policyholder liabilities and there is no net impact on the Group’s result for the period.
At 31 December 2015, under the terms of this reinsurance agreement, ReAssure Life Limited held assets in a collateral account over which the Group had a fixed charge as disclosed in note F3.2.
2016 LTIP awards were granted on 30 March 2016 and 2 June 2016. The number of shares for all outstanding LTIP awards has been 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 2013 LTIP awards vested during the year. The 2014 award will vest on 26 March 2017, the 2015 award will vest on 28 September 2018 and the 2016 awards will vest on 30 March 2019 and 2 June 2019.
Sharesave scheme The sharesave scheme allows participating employees to save up to £250 each month over a period of either three or five years. This amount was increased to £500 each month with respect to the sharesave schemes from 2014 onwards.
The following information was relevant in the determination of the fair value of the 2012 to 2016 sharesave awards in the year: 2016 sharesave 2015 sharesave 2014 sharesave 2013 sharesave 2012 sharesave
Risk-free rate (%) – based on UK government gilts commensurate with the expected term of the award 0.6 (for 3.25 year scheme) and 1.0
Outstanding at the end of the year 3,469,421 1,037,156 633,118 1 Includes 861,845 share options granted following the Group’s rights issue
Net interest (income) on Group defined benefit pension scheme asset/liability (21) (17)
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.
The risk management disclosures in the IFRS consolidated financial statements set out the major risks that the Group businesses are exposed to and describe the Group’s approach to managing these. The section on financial risk is included in note E6, the section on insurance risk is included in note F4 and the sections on risk and capital management objectives and other risks are included below. The Group’s risk management framework is described in the Risk Management section on pages 34 to 39 of the Annual Report and Accounts.
Customer risk Customer risk is the risk of reductions in earnings and/or value, through inappropriate or poor customer treatment (including poor advice).
Operational risk Operational risk is the risk of reductions in earnings and/or value, through financial or reputational loss, from inadequate or failed internal processes and systems, or from people-related or external events.
Following the implementation of the Solvency II Directive effective from 1 January 2016, Group capital is managed on a Solvency II basis.
Under the Solvency II framework, the primary sources of capital managed by the Group comprise of the Group's Own Funds as measured under the Solvency II principles, adjusted so as to exclude surplus funds attributable to the Group's unsupported with-profit funds and unsupported pension schemes. The Group also considers its senior bond and revolving credit facility to represent sources of capital, measured at their market value.
Prior to 1 January 2016 the primary sources of capital used by the Group comprised of equity shareholder funds as measured on an MCEV basis, the Perpetual Reset Capital Securities and shareholder borrowings. Following the implementation of Solvency II, the Group no longer reports financial information on an MCEV basis, and such an approach is no longer considered relevant to the management of the Group's capital. In addition, the Perpetual Reset Capital Securities were redeemed in April 2016 and therefore no longer represent a source of capital.
The Group aims to maintain a Solvency II surplus at least equal to its Board-approved capital policy, which reflects board risk appetite for meeting prevailing solvency requirements.
Remove Own Funds pertaining to unsupported with-profit funds and the PGL pension scheme (2.0)
Group capital resources 4.8 1 Further information on the PGH pro forma Own Funds and SCR is included on page 31.
2 Further details on the pro forma basis are provided on page 23.
3 The senior borrowings are treated as liabilities within the PGH pro forma Own Funds as they do not qualify as Own Funds under Solvency II principles. Other shareholder borrowings comprising the £200 million unsecured subordinated loan, the £428 million subordinated loan and the £300 million Tier 3 bond issued in January 2017, qualify as capital under Solvency II principles, and are included within Own Funds.
The Group’s Solvency II assessment and Group supervision is performed at the PLHL level as this is the highest EEA insurance holding company. A waiver is currently in place which permits Group supervision to take place at the level of the ultimate parent, PGH, via other methods as opposed to full Group supervision. This waiver is due to expire on 30 June 2017. As part of the ongoing simplification of the Group structure, Phoenix intends to put in place a new UK-registered holding company which will be the ultimate holding company and the highest EEA insurance Group holding company at which Group supervision will be performed. From 1 July 2017 and pending completion of the simplification of the Group structure, Group supervision and the Solvency II capital adequacy assessment are expected to be performed at the PLHL and PGH level.
Further information on the PLHL's pro forma Own Funds, SCR and MCR is included in the additional capital disclosures on pages 211 to 213 of the Annual Report and Accounts.
Details of the shareholdings and emoluments of individual Directors are provided in the Remuneration report on pages 58 to 84.
The Group has commitments under non-cancellable operating leases as set out below: £m £m
Later than 1 year and not later than 5 years 16 22
During 2016, the FCA published the findings of its thematic reviews into the fair treatment of long-standing customers and into the practices of non-advised annuity sales. Following the acquisition of Abbey Life, a provision has been recognised in respect of obligations identified as a result of past practices adopted by the entity in the areas covered by the two reviews. As part of this exercise, other potential exposures were identified where it is not yet possible to conclude that the Group has a present obligation that will require an outflow of economic benefits. The determination of any liability arising remains dependent on the occurrence of uncertain future events, including finalisation of the FCA’s enforcement investigation into Abbey Life that commenced in response to the findings of the review into the fair treatment of long-standing customers. Further detailed information on these exposures is included in note G1.
On 20 January 2017, PGH Capital plc (‘PGHC’) issued £300 million of subordinated notes ('PGH Capital Tier 3 subordinated') due 2022 at a coupon of 4.125%. The net proceeds from the bond issuance were used to repay the PGH Capital revolving credit facility.
On 17 March 2017, documentation was entered into which will substitute PGH in place of PGHC as issuer of the PGH Capital senior bond, PGH Capital subordinated notes and PGH Capital Tier 3 subordinated notes ('Substitutions'). The Substitutions will become effective on 20 March 2017.
On 28 February 2017, PGH became an additional borrower under the PGH Capital revolving credit facility. On 17 March 2017, PGH irrevocably committed to drawing down under this facility on 20 March 2017 and PGHC is due to repay its borrowings under the PGH Capital revolving credit facility.
Total comprehensive income for the year attributable to owners 38 164
STATEMENT OF CHANGES IN EQUITY For the year ended 31 December 2016
Total comprehensive income for the year attributable to owners – – – 38 38
Issue of ordinary share capital (note D1) – 908 – – 908
Dividends paid on ordinary shares (note B4) – (126) – – (126)
Credit to equity for equity-settled share-based payments (note I2.1) – – – 7 7
1. ACCOUNTING POLICIES (A) BASIS OF PREPARATION The financial statements have been prepared on an historical cost basis except for those financial assets and financial liabilities that have been measured at fair value.
2. FINANCIAL INFORMATION In preparing the financial statements the Company has adopted the standards, interpretations and amendments effective 1 January 2016 which have been issued by the IASB as detailed in note A4 to the consolidated financial statements, none of which have had a significant impact on the Company’s financial statements. Details of standards, interpretations and amendments to be adopted in future periods are also detailed in note A5 to the consolidated financial statements.
3. SEGMENTAL ANALYSIS The Company has one reportable segment, comprising its investment in and loans to/from its subsidiaries. Its revenue principally comprises the dividend and interest income derived from these investments and loans. Information relating to this segment is included in the Company’s primary financial statements on pages 194 to 196. The accounting policy for segmental analysis is included in note B1 to the consolidated financial statements.
NOTES TO THE PARENT COMPANY FINANCIAL STATEMENTS Continued 4. NET INVESTMENT INCOME The accounting policy for net investment income is included in note C1 to the consolidated financial statements.
6. BORROWINGS The accounting policy for borrowings is included in note E5 to the consolidated financial statements.
Carrying value Fair value 2016 £m 2015 £m 2016 £m 2015 £m
On 16 July 2010, the Company was granted a loan from Impala Holdings Limited of £3 million which matured on 31 December 2016. The loan accrued interest at six month LIBOR plus a margin of 3.25% which was capitalised semi-annually on 7 April and 7 October. Interest of £0.2 million (2015: £0.1 million) was accrued during the year. The balance outstanding at the maturity date was £3 million (2015: £3 million) and has been repaid.
On 24 March 2016, the Company received £77 million (2015: £90 million) as a result of a return of share capital from Opal Re. As the cost of the Company’s investment in Opal Re was £65 million, a gain of £12 million was recognised on return of the capital.
On 27 April 2015, the Company received a £10 million dividend from Opal Re in the form of preference shares.
During 2015, following a restructure of the Company’s holdings in PGH (LCA) Limited, PGH (LCB) Limited, PGH (TC1) Limited and PGH (TC2) Limited, the Company received dividends of £205 million and £232 million from PGH (TC1) Limited and PGH (TC2) Limited respectively. The Company impaired its investments in PGH (TC1) Limited and PGH (TC2) Limited to the extent of dividends received.
For a list of principal Group entities, refer to note H5 of the consolidated financial statements. The entities directly held by Phoenix Group Holdings are separately identified.
8. COLLECTIVE INVESTMENT SCHEMES The accounting policy for collective investment schemes is included in note E1 to the consolidated financial statements.
NOTES TO THE PARENT COMPANY FINANCIAL STATEMENTS Continued 9. LOANS AND RECEIVABLES
The accounting policy for loans and receivables is included in note E1 to the consolidated financial statements.
On 16 July 2010, the Company entered into an interest free facility arrangement with Phoenix Group Holdings’ Employee Benefit Trust (‘EBT’). In 2016, an additional £7 million was drawn down against this facility (2015: £6 million). The loan is recoverable until the point the awards held by the EBT vest to the participants, at which point the loan is reviewed for impairment. Any impairments are determined by comparing the carrying value to the estimated recoverable amount of the loan. Following the vesting of awards in 2016 £6 million of the loan (2015: £8 million) has been written off. At 31 December 2016 £6 million was due (2015: £5 million).
On 22 April 2010, Pearl Group Holdings (No.1) Limited (‘PGH1’) issued a balancing instrument under which notes with a principal of £75 million were issued to Phoenix Group Holdings. During January 2015 the notes were transferred from PGH1 to Phoenix Life Holdings Limited (‘PLHL’). The notes have no fixed maturity. Phoenix Group Holdings paid no consideration for the notes and has waived its right to receive a coupon on the notes. At 31 December 2015, £75 million was due. On 25 April 2016, having obtained the necessary approvals PLHL repaid the notes in full.
Adjustments to reconcile profit for the year to cash flows from operating activities: Interest income from other Group entities (72) (58)
11. CAPITAL AND RISK MANAGEMENT The Company’s capital comprises share capital and all reserves. At 31 December 2016 total capital was £2,331 million (2015: £1,504 million). The movement in capital in the year comprises the total comprehensive income for the year attributable to owners of £38 million (2015: £164 million), proceeds from the issue of ordinary share capital of £908 million (2015: £2 million) and a credit to equity for equity-settled share-based payments of £7 million (2015: £4 million), partly offset by payment of dividends of £126 million (2015: £120 million).
During the year ended 31 December 2016 the Company entered into the following transactions with Group entities: 2016 £m 2015 £m
Interest received on loans and receivables due from Group entities 72 58
15. AUDITOR’S REMUNERATION Details of auditor’s remuneration, for Phoenix Group Holdings subsidiaries, is included in note C3 to the consolidated financial statements.
4 Includes equity release mortgages of £433 million, policy loans of £10 million, other loans of £308 million, net derivative assets of £1,468 million, reinsurers’ share of investment contracts of £6,808 million, and other investments of £1,292 million.
5 Includes equity release mortgages of £268 million, policy loans of £11 million, other loans of £15 million, net derivative assets of £139 million and other investments of £568 million.
Participating non-supported £m Unit-linked £m Total £m 6 Includes debt issued by governments; public and statutory bodies; government backed institutions and supranationals.