CORPORATE GOVERNANCE Chairman’s Introduction ���������������������������� 74 Board Structure ������������������������������������������ 77 Board of Directors �������������������������������������� 78 Executive Management Team ����������������� 80 Corporate Governance Report ������������������ 81 Board Leadership and Company Purpose ��������������������������������� 82 Division of Responsibilities ������������������� 88 Composition, Succession and Evaluation���������������������������������������� 90 Audit, Risk and Internal Control ������������ 92 Directors’ Remuneration report ���������������� 99 Directors’ Report ������������������������������������� 131 Statement of Directors’ Responsibilities ���������������������������������������� 135
FINANCIALS Independent Auditor’s Report ����������������� 137 IFRS Consolidated Financial Statements ������������������������������� 147 Notes to the Consolidated Financial Statements ������������������������������� 154 Parent Company Financial Statements ���244 Notes to the Parent Company Financial Statements ������������������������������� 247 Additional Life Company Asset Disclosures ���������������������������������������������� 255 Additional Capital Disclosures �����������������262 Alternative Performance Measures �������������������������������������������������264
ADDITIONAL INFORMATION Shareholder Information ��������������������������266 Glossary ���������������������������������������������������268 Forward-looking Statements������������������� 272 £707m OPERATING COMPANIES’ CASH GENERATION APM REM
All amounts throughout the report marked with REM are KPIs linked to Executive remuneration� See Directors’ Remuneration Report on page 99�
The acquisition of ReAssure Group plc referenced throughout this report is subject to regulatory approvals�
We inspire confidence through our history and growth, through our track record of value creation, strategic and financial delivery and through continued positive engagement and outcomes for all our stakeholders.
Our culture is founded on a clear set of values: Passion, Responsibility, Growth, Courage and Difference.
Alongside this, we have an Open business which manufactures and underwrites new products and policies to support people saving for their future in areas such as workplace pensions and self-invested personal pensions� This Open business is supported by the Strategic Partnership with Standard Life Aberdeen plc� We also have a market leading brand – SunLife – which sells a range of financial products specifically for the over 50s market�
Our people are at the heart of our business and key to the successful growth of Phoenix Group�
Passion Making a positive impact by caring about customers, colleagues and communities�
1� With-profits 32% 2� With-profit (supported) 3% 3� Unit linked 45% 4� Non-profit (annuities) 16% 5� Non-profit (protection, shareholder funds and other non-profit))
Europe Our European business provides a platform for potential future consolidation� It contains both Open and Heritage products split across Germany and Ireland�
Edinburgh & Glasgow Assurance established 4 PHOENIX GROUP HOLDINGS PLC ANNUAL REPORT & ACCOUNTS 2019
Pearl Group renamed Phoenix Group Holdings and achieves Premium Listing on the London Stock Exchange
Phoenix acquires Standard Life Assurance businesses and enhances strategic partnership with Standard Life Aberdeen PLC
Following completion of the acquisition of ReAssure Group plc (‘ReAssure’), we will be entrusted with the long-term savings of over 14 million customers� It is the Group’s duty to be a good custodian of these savings and to help people enjoy a secure and sustainable retirement� We see our role in helping customers to save for the long-term as the very essence of our social purpose as a business�
To foster a deeper connection between the Board and colleagues across the Group, Karen Green has been appointed as Work Place Director for the business as part of Phoenix’s ‘Employee Voice’ programme� Our Non-Executive Directors and I feel strongly about Phoenix’s purpose, values and strategy and are acutely aware of the increased engagement and insights that this programme brings�
Clive will be succeeded by Andy Briggs who joined the business as CEOdesignate on 1 January 2020 and was appointed to the Board on 10 February 2020 following regulatory approval� Andy has over 30 years of insurance industry leadership experience�
On behalf of the Board I would like to thank both Clive and Jim for their outstanding contributions to the Group�
We see significant potential for further value creation in the Bulk Purchase Annuities (‘BPA’) market� I remain convinced that the drivers for consolidation are inevitably increasing and will tip the balance toward more institutions seeking to divest their capital-heavy legacy businesses to leaders in the Heritage space such as Phoenix� The Group has the track record and platform to remain at the forefront of life consolidation in the future�
Phoenix is committed to its values and driven by its long-term vision of becoming Europe’s Leading Life Consolidator� We are building an enduring organisation, underpinned by mutually beneficial relationships with key stakeholders, and we will continue to take a long-term view to building a sustainable future�
(‘ReAssure’), a strategically compelling transaction which meets all of our acquisition criteria and confirms Phoenix as Europe’s largest life and pensions consolidator� The acquisition was approved by shareholders on 13 February 2020 with 99�99% of votes cast in favour�
flexibility and is due to complete by the end of 2022� In November 2019, we announced an enlarged strategic partnership with our technology and service provider TCS to support the delivery of this model� The partnership will bring together the strengths of Standard Life Assurance, Phoenix and TCS and will build on the strong innovation and customer service excellence to which the partners are committed�
This has offset the run-off of our in-force book, bringing sustainability to our long-term cash generation� We therefore estimate that the long-term cash generation from the business in-force as at 31 December 2019 will be £12 billion�
We also delivered resilience to our Solvency II balance sheet with a surplus of £3�1 billion and a Shareholder Capital Coverage Ratio of 161%�
To date we have achieved £645 million of capital synergies, 90% of our £720 million target� We have also delivered £33 million of cost savings against a target of £75 million per annum and realised £28 million of one-off cost synergies against a target of £30 million�
02. FOSTER RESPONSIBLE INVESTMENT We aim to make responsible investment decisions and consider the sustainability of our investments in safeguarding the interests of our customers, shareholders and other stakeholders.
03. REDUCE OUR ENVIRONMENTAL IMPACT We aim to minimise our impact on the environment and promote good environmental practices.
IMPROVING CUSTOMER OUTCOMES Improving outcomes for our 10 million customers continues to be central to our mission� Therefore, I am delighted to report that we exceeded all of our target metrics for customer service during 2019�
We engage our customers through continuous review and enhancement of our customer proposition so that we are relevant, easy to deal with and are seen as a trusted guide�
Our customer initiatives this year centred around listening more and better understanding our customers, improving communications and enhancing our digital proposition�
We are also ensuring that we connect effectively with our customers� In partnership with Cowry Consulting, a Behavioural Economics consultancy, we have taken actions which are helping to transform customer and employee experiences� This has included redesigning experiences and processes, making the complex simple and removing barriers to create improved outcomes for customers�
We have used an illustration called “The Wedge” (above) to show that growth through new business has the potential to bring sustainability to long-term cash generation and are encouraged that the experience of 2019 brings credibility to this hypothesis�
UK Heritage The majority of our Heritage business is in run-off; however, our annuity book is growing through both vesting annuities and BPA� We take a selective and proportionate approach to BPA and invested £98 million of capital in the year to secure over £1�1 billion of BPA liabilities� This new business will generate £235 million of incremental long-term cash generation and has an average payback period of 6–7 years�
Heritage business generates predictable long-term cash generation to pay dividend and fund growth
Growth brings sustainability to cash generation 10 PHOENIX GROUP HOLDINGS PLC ANNUAL REPORT & ACCOUNTS 2019
We will continue to deliver dependable cash generation from a strong and resilient in-force business whilst pursuing growth opportunities that will build an enduring organisation� Integral to this will be a focus on our key sustainability themes of delivering for our customers, fostering responsible investment, reducing our environmental impact and being a good corporate citizen�
At an operational level, we will continue to progress the Standard Life Assurance transition programme alongside completion of the ReAssure transaction targeted for mid-2020� We are cognisant of the high degree of integration work underway at both Phoenix and ReAssure� We expect the phased integration of ReAssure to take three years and will take a coordinated approach to ensure enterprise stability� Both Phoenix and ReAssure are highly experienced in delivering complex integrations and we are confident in our collective abilities to deliver both programmes safely� We look forward to welcoming our future ReAssure colleagues into the Phoenix family�
The key focus for our Open business will be staying attuned to our customers’ expectations and building relevance as we aim to be our customers’ first choice for their life savings� We will achieve this by investing in our proposition, continuing to listen to our customers, being a trusted guide and investing in the transformation of our platforms�
We are confident that with additional opportunities in excess of £600 billion there remains a wealth of additional acquisition opportunities in the UK, Germany and Ireland� Macro-economic factors such as a ‘lower for longer’ interest rate environment combined with capital inefficiencies and increasing costs of regulatory change will result in institutions looking to off-load their legacy businesses� Phoenix is a safe harbour for this business and a trusted vendor with a proven track record�
Phoenix’s values underpin everything that we do and my colleagues have their sights set on the future, fulfilling our mission and working hard toward our vision of becoming Europe’s Leading Life Consolidator�
Lastly, both Jim and I will take leave of Phoenix in 2020� I wish to take this opportunity to pay tribute to Jim for his extensive contribution during his eight years with the Group�
It is testament to Phoenix’s bench strength that we are fortunate enough to have the opportunity to appoint Rakesh Thakrar, current Group Deputy Finance Director, as Jim’s successor (subject to regulatory approval)�
Rakesh has been Jim’s deputy since 2014 and, alongside proven skills in managing the Group’s finances, has a longstanding knowledge of the Group and the long-term savings industry as a whole�
In November 2019, I informed the Board of my intention to retire� It has been a privilege and pleasure to serve as Phoenix’s Group Chief Executive Officer on what has been an extraordinary nine-year journey� I would like to express my deep gratitude to all of my colleagues for their hard work and determination to drive forward Phoenix’s strategy during this time and extend a warm welcome to Andy Briggs as my successor�
AT PHOENIX CASH IS KING Cash generated by our Life companies and remitted to Group is Phoenix’s key performance metric�
We have a strong track record of delivering management actions, which have contributed £2�5 billion of cash generation in the last decade�
Phoenix operates a risk management framework aimed at bringing resilience to our Solvency II surplus and certainty to cash generation.
Phoenix operates a dynamic risk management framework which seeks to manage our exposure to each of the risks that the Group faces within its risk appetite� This is achieved through a combination of asset liability management and risk reduction actions like hedging and reinsurance�
This approach to risk management results in Phoenix being less sensitive to risk events than the majority of its peers�
We articulate our risk appetite through a target Shareholder Capital Coverage Ratio range of 140% to 180%� The ratio of 161% at 31 December 2019 is in the middle of this range�
GROWING THROUGH NEW BUSINESS AND M&A Growth from new business brings incremental cash generation to Phoenix which offsets the run-off of our in-force business and brings long-term sustainability to cash generation�
BPA brings growth to our Heritage business� Funded from surplus capital, we take a selective and proportionate approach to BPA and are an established participant in this market place� With an average pay-back of 6–7 years, BPA offers attractive returns�
In our capital-light Open business, workplace is the engine for growth and our primary method of customer acquisition� Growth comes organically by retaining existing schemes and is accelerated by new members joining schemes as well as by increases in contributions, both of which are incremental to long-term cash generation�
Phoenix Group has continued to grow in 2019 and has reaffirmed its position as Europe’s largest life and pensions consolidator. In 2019 Phoenix completed four bulk purchase annuity transactions, strengthening its foothold in the market. The Open business, delivered under the Standard Life and SunLife brands, continues to grow, providing a diverse range of products for our customers and increasing cash generation for our shareholders.
In 2019 the dynamics of the life and pensions market continued to evolve, creating new challenges and opportunities for the Group.
“Changes to the industry in which we operate create opportunities which we at Phoenix are well placed to take advantage of ”
Phoenix response Our goal at Phoenix is to support our customers at every stage of their savings lifecycle by providing a diverse range of products to meet their needs�
10 YEARS RETIRED PEOPLE IN THE UK WILL ON AVERAGE OUTLIVE THEIR SAVINGS BY MORE THAN 10 YEARS
Throughout their working life the average person in the UK may work for 11 different firms, potentially accumulating 11 different workplace pension pots along the way (Source: Pensions Policy Institute)� Members who leave a Standard Life workplace pension are given the option to contribute to one of our individual pension products, allowing their investments to be kept in one place� Customers can also consolidate other pension pots into their Standard Life pension, making it easier to keep track of their savings�
Our Active Money Personal Pension has been designed to help people save for their future – and give them the flexibility to control their own investments and change their plan as their own needs change� Individuals can easily upgrade to our Active Money SIPP if and when it is required, which provides access to a greater range of investment options as well as offering access to a suite of flexible drawdown options in retirement�
In addition to the Standard Life Assurance proposition we have our SunLife brand, which provides customers with a range of specialist Over 50s products, including life cover, equity release and funeral plans� These products provide our customers with choices for funding healthcare needs in retirement and protecting loved ones financially after death� The SunLife brand is a leader in the over 50s market with a 61% market share of all whole of life guaranteed acceptance plans bought directly (Source: ABI statistics issued in October 2019 for 12-month period to 30 June 2019 based on new Phoenix Life policy sales trading as SunLife)�
AGEING DEMOGRAPHICS Market dynamics Ageing demographics in the UK have created retirement savings challenges for individuals and companies alike� Individuals will continue to require products that allow them to manage their finances for longer in retirement� For many companies the rising cost of providing Defined Benefit pension scheme benefits to employees is an increasing burden� The Bulk Purchase Annuity (‘BPA’) market offers employers the ability to mitigate the risk of their Defined Benefit pension liabilities whilst allowing the pension scheme trustees the ability to secure and protect their members’ benefits� The size of the BPA market is significant, and 2019 saw continued growth in volumes and transaction sizes� The total value of transactions completed in 2019 was in excess of £40 billion, almost doubling the 2018 record (Source: Hymans Risk Transfer Report 2020)�
Phoenix response We continue to offer products such as pensions drawdown and annuities to our policyholders, offering individuals a range of flexible options for their retirement� We also continue to provide a safe and secure home for our individual annuitants, and look for opportunities to grow our annuity book through back-book transactions� Having successfully completed seven external BPA transactions since entering the market in 2018, we have secured our place in this market and we will continue to grow our presence�
Clive Bannister Group Chief Executive Officer 20 PHOENIX GROUP HOLDINGS PLC ANNUAL REPORT & ACCOUNTS 2019
REGULATORY CHANGE Market dynamics Regulatory change has the potential to generate both challenges and opportunities for insurers in the Life and Pensions market� Regulatory change has historically been a driver for Life and Pensions consolidation, and we expect that pattern to continue in the future�
Phoenix response We continue to invest in the digital journey of our Heritage and Open customers through the online dashboard and mobile app� Not only does digitalisation help reduce administration costs, it supports customer engagement and keeps Phoenix relevant in our customers’ lives day to day� We now record over 1 million mobile app and secure site sessions per month, with monthly online logins now typically outnumbering phone calls 8 to 1� We will continue to grow our digital offering, encouraging as many of our customers as possible to start to ‘think Digital First’� Our digital journey is supported by our enlarged partnership with TCS, and the development of our technology and operating services Hub in Edinburgh will build on strong innovation and deliver excellence in customer service�
ENVIRONMENTAL SUSTAINABILITY Market dynamics In 2019 the global focus on climate change has increased substantially, and the future impacts on our business and customers are being made clear� Insurers and other financial market participants have a responsibility to help address climate change and many are taking steps to reduce the overall carbon footprint of their organisations� Insurers must also understand the financial impacts of climate change risks on their business models, not only physical risks associated with climate change but also transition risks from moving to a low carbon economy�
Within our organisation we have delivered a number of initiatives to reduce, re-use and recycle, and we are creating a Group-wide environmental policy to deliver cohesive action across our Group�
Manage the financial assets for policyholders across our three business segments
The life companies are regulated entities that hold the Group’s policyholder assets� The Group simplifies its business model by bringing together separate life companies and funds, making more efficient use of the capital and liquidity in its life companies� This results in administrative expense savings and increased consistency of management practices and principles across the Group�
Investment management Investment management services are provided to the life companies by a number of external asset management companies, with the main partner being Aberdeen Standard Investments�
In 2019, we announced an enlarged strategic partnership with TCS, which will extend the use of certain outsourced services to Standard Life Assurance and our Open business segment�
They comprise endowments, whole of life and pensions products and (some) guaranteed annuity options which guarantee the annuity that a pension pot will be able to buy�
The policyholders and shareholders share in the risks and rewards of the policy, depending on the structure of the fund�
In the ‘supported’ with-profit funds, the shareholders provide capital support to the fund�
Shareholders benefit from fees earned through management charges, bid/offer spreads and/or policy fees�
Policyholders make fixed or variable payments in lieu of a future lump sum or a future income stream until death�
Shareholders earn a spread on the assets supporting the annuity payments�
The shareholders are directly exposed to all market and demographic risks�
Whole of life policies which cover the entire life and pay a lump sum on death, whenever it occurs�
Shareholders are exposed to the majority of the risks and benefit from 100% of the profits or losses arising�
We have a wide range of products which are written across different funds.
IN FORCE The UK Heritage business has been built from two decades of consolidation and comprises over 100 legacy brands including Britannic, Pearl,Scottish Mutual, AXA and Abbey Life� It also includes the heritage customers of Standard Life Assurance Limited� It has a broad range of life and pensions products which provide Phoenix with natural diversification�
The Group’s strategy for our UK Heritage Business is simple – to deliver value to shareholders and customers and to improve customer outcomes�
Organic cash emerges naturally from our UK Heritage business as it runs off over time and we enhance this organic cash generation through the delivery of management actions which either increase the overall cash flows from the business or accelerate the timing of these cash flows�
Heritage business cash generation runs off at 5–7% per annum depending on the particular features of each legacy book�
Integral to our efficient management of the UK Heritage business is ensuring that our cost base reduces more quickly than our policy count runs off�
NEW BUSINESS The Group generates new business in the Heritage business segment through vesting annuities and bulk purchase annuities, or from incremental contributions from existing pensions�
Our UK Open business comprises products that are actively marketed to customers. Phoenix is committed to growing its capital-light UK Open business.
Our European business provides a platform for potential future consolidation. It contains both Open and Heritage products split across Germany and Ireland.
We aim to be our customers’ first choice for their life savings and to help them achieve a good outcome�
NEW BUSINESS Workplace is the primary method of customer acquisition for the UK Open business and acts as the engine for growth�
Growth in workplace comes organically by retaining existing schemes and is accelerated by new members joining schemes and by increases to contributions� With auto-enrolment increases in 2019, the potential for workplace growth is very powerful and our scheme retention continues to be high� We also compete to win new schemes which bring further opportunities for growth� Our proposition includes a
A number of our insured products sit on the successful Wrap platform owned by Standard Life Aberdeen� Under our strategic partnership, Standard Life Aberdeen manages the adviser relationship and is responsible for sales� Phoenix provides the insurance wrapper for the product and is responsible for administration�
Our strategic partnerships with leading technology and service provider TCS announced in 2019 will also enable us to drive future growth� This will create a single digital operating platform with open architecture for the workplace pensions and savings business, bringing greater agility and speed to market�
SunLife continues to hold a strong position in the over 50s market, generating new business across its life cover, equity release and funeral plans�
SCALE OF OUR PLATFORM Largest life and pensions consolidator in Europe
SPECIALIST OPERATING MODEL Specialist operating model enabling us to efficiently manage and integrate Heritage books
SIGNIFICANT GROWTH A wealth of acquisitions opportunities across the UK and Europe and organic growth through new business is available to us
We are set apart by our strengths which underpin our business model
Our strategic priorities help enhance the value we create through our business model.
DRIVE VALUE In order to drive value, the Group looks to identify and undertake management actions, which increase and accelerate cash flow�
MANAGE CAPITAL We continue to focus on the effective management of our risks and the efficient allocation of capital against those risks�
NEW BUSINESS Capital-light new business under the Strategic Partnership with Standard Life Aberdeen, vesting annuities offered to existing policyholders, our in-house distribution of workplace products and SunLife over 50s offering
MERGERS AND ACQUISITIONS Value accretive acquisitions generate increased cash flows and synergy opportunities through scale advantages
Reduced capital requirements As our in-force business runs off, the Solvency Capital Requirements reduce�
What is the cash remitted from the life companies used for?
Bulk purchase annuity transactions Generate increased cash flows over the longer term and are value accretive�
CASH AT THE HOLDING COMPANY LEVEL PROVIDES RESOURCES AND RESILIENCE FOR THE GROUP
We are entrusted with the long-term savings, investment and protection of 10 million policyholders�
We focus on embedding a strong risk management approach, ensuring that our people are appropriately skilled, motivated and engaged�
• We continued our work towards raising awareness of vulnerability, recognising the potential vulnerabilities our customers can face and creating an environment where people feel safe to disclose issues which affect their wellbeing�
• Online enhancements were made to meet AA website standards allowing improved accessibility and usability for users with cognitive, visual, hearing or dexterity impairments�
• We created new opportunities for customers to interact online� Eligible customers can now use web chat to
We have four areas of strategic focus. Our initiatives and key performance indicators demonstrate how we have delivered against these strategic areas.
• We harmonised our annuity solution across the Group, working with our partner HUBFS, and aligned timescales with requirements for the Retirement Outcomes Review�
• A number of improvements have been made to the ex-Abbey Life products, bringing greater flexibility for customers, reducing the turnaround times for a number of processes and reminding customers of valuable benefits� We began offering customers with qualifying small ex-Abbey Life annuities the option to encash their annuities, which will be rolled out to the remainder of the qualifying ex-Abbey Life customers in 2020�
PRIORITIES FOR 2020 • Continue to improve digital engagement through the Mobile App and the Customer Dashboard, giving our customers further choice�
This is an independent view of how firms are handling complaints. It provides us with an opportunity to review and adjust our complaint handling proposition in line with best industry practice.
This is an internally calculated measure of how easy our customers find it to interact with our business. It asks one question ‘Please tell us how easy it was to get what you needed today between 0 and 10, with 0 being very difficult and 10 being very easy?’.
Analysis The FOS overturn rate of 17% is significantly below the industry average of 34% and the ‘Decumulation, Life and Pensions’ category average of 27%.
The Group achieved a satisfaction score of 94% reflecting our commitment to ensuring customers are satisfied with our products and services.
The Net Easy customer effort score of 71% reflects that overall customers are finding us easy to deal with when they contact us. The method for capturing and assessing customer feedback has evolved through 2019 and the transition to a new approach is now complete.
12 days in line with the industry stated target for Origo Pension Transfers
Additional value can be generated from acquisitions of life and pension books of business and further investment in the bulk purchase annuity market�
• Phase 1 of the Standard Life acquisition transition programme is substantially complete, delivering the end state operating model for the HR, Legal and Risk functions�
• £460 million of management actions were delivered in the year that increased Solvency II Own Funds� This includes the impact of strategic asset allocation actions such as investment in illiquid assets which offer improved matching adjustment benefits in the annuity portfolios, together with methodology harmonisation and matching adjustment fund optimisation actions� £1�3 billion was invested in illiquid assets during the year, including equity release mortgage portfolios and private placements�
Our Strategy and KPIs continued 32 PHOENIX GROUP HOLDINGS PLC ANNUAL REPORT & ACCOUNTS 2019
Operating profit is a non-GAAP measure used by management and is considered a more representative measure of performance than IFRS profit or loss after tax as it provides long-term performance information unaffected by short-term economic volatility�
A reconciliation of operating profit of £810 million to the IFRS profit after tax of £116 million (2018: £410 million) is included in the Business Review section�
The Group’s dividend per share helps measure how the Group delivers value to shareholders in accordance with its stable and sustainable dividend policy�
Operating profit has increased by £102 million compared to prior year, principally reflecting the impact of the inclusion of the Standard Life Assurance businesses for a full 12 month period, partly offset by the lower positive impact of management actions and demographic actuarial assumption changes compared to the prior period�
The Board has proposed a final dividend per share of 23�4 pence�
Target To generate £3�9 billion of cash between 2019 and 2023�
Read more about the Solvency II surplus and Shareholder Capital Coverage Ratio on page 42.
The Group aims to optimise its capital structure while addressing the diverse needs of various stakeholders, including policyholders, shareholders, lending banks, bondholders and regulators�
To ensure that unrewarded exposure to market volatility is minimised or the risks from market movements are managed, we execute our hedging strategy�
In addition, regular re-balancing of asset and liability positions is required to ensure that only those assets which deliver appropriate risk-adjusted returns are held within life funds, taking into account any policyholder guarantees�
• The Group delivered an additional £45 million of management actions that decreased SCR in the year, excluding the impacts of the Standard Life Assurance capital synergies noted above� This included activities such as ERM securitisation and asset de-risking�
• In June 2019, Phoenix Group Holdings plc replaced its £900 million unsecured revolving credit facility with a new £1�25 billion facility, providing additional financial flexibility to the Group�
• The Group continued to work closely with the PRA during 2019 and made progress towards the implementation of a harmonised internal model�
The Solvency II surplus is the regulatory assessment of capital adequacy at PGH plc level�
It is the excess of Eligible Own Funds over the Solvency Capital Requirement�
The Shareholder Capital Coverage Ratio demonstrates the extent to which shareholders’ Eligible Own Funds cover the Solvency Capital Requirements�
Analysis The Group’s Solvency II surplus of £3�1 billion has decreased (2018: £3�2 billion) as a result of the adverse impacts of economic variances, the Part VII transfer of the Standard Life Assurance Limited European business to the Group’s Irish domiciled subsidiary and the capital strain of writing new business� This was largely offset by surplus generation and the delivery of management actions�
A coverage ratio of 161% remains in the middle of our target range of 140% to 180%�
1 Pro forma assuming the acquisition of the Standard Life Assurance businesses took place on 31 December 2019�
KEY INITIATIVES AND PROGRESS IN 2019 Talent and organisational development The Talent and Development team has continued to design and deliver a varied programme of learning and development including leadership development, talent programmes, skills training, online learning, coaching and mentoring�
• As part of the Group’s HR processes, there is an established succession plan which identifies, assesses and develops internal talent for material roles� In 2019 work has been done to independently assess and benchmark future leaders�
• The Group has fully utilised the English Apprenticeship levy funding and has seen over 100 delegates studying to gain qualifications in Project Management, Leadership and Management, Data Analytics and Accountancy� The success of these programmes continues to build internal capability and skills�
Colleague insight survey Building on the cultural survey from 2018, the Group introduced a new six-monthly colleague insight survey�
• 78% of colleagues Group-wide (excluding SunLife) completed the survey and overall engagement was recorded at 65%� The make-up of this engagement index was revised from previous years and moved to a 4-point index that measures the most valid indicators of engagement�
• The Group continues to recognise the importance of corporate charity partnerships� Since 2014, in excess of £876,000 has been donated between Midlands Air Ambulance Charity and London’s Air Ambulance Charity� In addition, across the year, colleagues in Scotland have supported Scotland’s Charity Air Ambulance and colleagues in Basingstoke have supported Hampshire and Isle of Wight Air Ambulance�
• All colleagues within the UK and Ireland are given the opportunity to make a difference in their local community through volunteering activity�
Wellbeing A programme of wellbeing activity took place during the year, including onsite healthchecks, flu immunisation, mental health awareness training, private medical insurance cover, counselling and workshops supporting financial wellbeing matters�
Diversity and Inclusion The Group is committed to creating an inclusive, attractive and safe work environment free of discrimination and where everyone is treated with dignity and respect� Colleagues are not to be disadvantaged in any way as a result of their age, race, gender, disability, religion or belief, sexual orientation, gender re-assignment, marriage and civil partnership or pregnancy and maternity� The Group is committed to achieving equality of opportunity and the equal treatment of existing colleagues and future recruits�
• The Group currently has women in 19% of the top 100 roles (target 30%), 42% of the Group’s green/ amber successors are female (target 40%) and the Group-wide mean gender pay gap is 23�8% (target 22%)� The WIFC targets are based on an internal calculation looking at base salary only, rather than statutory gender pay gap calculations�
Workforce that is of Black, Asian or Minority Ethnic (‘BAME’) background 2072 1413 1 Figures do not include workforce based in Germany/Austria�
3 Figures do not include workforce from Standard Life Assurance Limited or SunLife� Data relates only to Phoenix Corporate and Phoenix Life companies�
Lower Quartile 61% 39% Lower Middle Quartile 59% 41% Upper Middle Quartile 45% 55% Upper Quartile 37% 63%
Company� Over half of the colleague population are voluntarily participating in one or more of the sharesave or share incentive plans�
PRIORITIES FOR 2020 • Remain an employer of choice, offering rewarding careers and opportunities, promoting physical, financial and mental wellbeing in the workplace and empowering a wholly inclusive workforce�
IFRS The Group generated an increased operating profit of £810 million for the year (2018: £708 million), reflecting the contribution of the Standard Life Assurance businesses for a full 12 month period post completion of the acquisition� This has been partly offset by the lower positive impact of management actions and demographic actuarial assumption changes within operating profit compared to the prior period�
The IFRS profit after tax for the year is £116 million (2018: £410 million)� As expected the IFRS results continue to be impacted by investment variances arising from the Group’s hedging programme, which is calibrated to protect the Group’s Solvency II surplus� Improving equity markets during 2019 generated losses on these hedging instruments, which together with the provision of costs associated with the delivery of transition activity and the recognition of a full year’s amortisation charge on intangible assets recognised on acquisition of Standard Life Assurance, has more than offset the increased operating profit�
CAPITAL POSITION The Group’s Solvency II capital surplus position of £3�1 billion (2018: £3�2 billion) remains resilient with the adverse impacts of economic variances, the Part VII transfer of the Standard Life Assurance Limited European business to the Group’s Irish domiciled subsidiary, and the capital strain of writing new business being largely offset by the delivery of management actions�
All amounts in the Business Review section marked with an ’APM’ are alternative performance measures� See ’Alternative Performance Measures’ section on page 264 for further details of these measures� All amounts in the Business Review section marked with a ’REM’ are KPIs linked to executive remuneration� See ’Directors’ Remuneration Report’ on page 99 for further details of executive remuneration including the financial and non-financial performance measures on which it is based�
The cash flow analysis that follows reflects the cash paid by the operating companies to the Group’s holding companies, as well as the uses of those cash receipts�
Cash receipts Cash generated by the operating companies during 2019 was £707 million (2018: £664 million)� Cash generation is reported net of a £250 million cash remittance into the Group’s Irish domiciled subsidiary, Standard Life International� This capital injection preceded a Part VII transfer of the Irish, German and Austrian policies of Standard Life Assurance Limited to Standard Life International, completed in March 2019 as part of preparations to ready the business for Brexit�
Alternative performance measures The Group assesses its financial performance based on a number of measures, some of which are not defined or specified in accordance with Generally Accepted Accounting Principles (‘GAAP’) or statutory reporting framework� These metrics are known as Alternative Performance Measures (‘APMs’)�
The Group’s strategic focus prioritises the generation of sustainable cash flows from its operating companies through the margins earned on different life and pension products and the release of capital requirements� Performance metrics are monitored where they support this strategic purpose, which includes ensuring the capital strength of the Group is maintained�
As a result, GAAP measures typically used to assess financial performance, such as IFRS profit after tax, are considered by the Board to be of lower importance when assessing Phoenix’s performance against its strategy� IFRS results exclude any changes to the capital requirements and therefore do not fully reflect the performance of the Group�
As such, the key performance indicators for the Group mainly focus on cash generation and capital strength� Further information on the Group’s APMs can be found on page 264, including definitions, why the measure is used and if applicable, how the APM can be reconciled to the nearest GAAP measure�
Equity raise (net of fees) The £934 million equity issuance in 2018 relates to proceeds, net of fees, from the rights issue associated with the financing of the acquisition of the Standard Life Assurance businesses�
Cost of acquisitions Cost of acquisitions of £1,971 million in 2018 relates to the cash consideration settlement to finance the acquisition of the Standard Life Assurance businesses�
Target cash flows The Group set a short-term cash generation target of £600 to £700 million for 2019 (net of the £250 million cash remittance into Standard Life International as part of Brexit preparations) and with £707 million of cash generation achieved, the Group has exceeded the upper end of its target range�
Expected cash flows after 2024 There is an expected £8�8 billion of cash to emerge from 2024� This does not include any management actions from 2024 onwards or any additional value from future new business from the Group’s Open business and BPA transactions� It also does not reflect the impact of any future M&A including the ReAssure Group acquisition�Illustrative stress testing1 1 Jan 2019 to £bn
Following a 15% fall in property values 3.6 Following a 73bps interest rates rise2 4.0 Following a 88bps interest rates fall2 3.7 Following credit spread widening3 3.6 Following 6% decrease in annuitant mortality rates4 3.3 Following a 10% increase in assurance mortality rates 3.8 Following a 10% change in lapse rates5 3.5 1 Assumes stress occurs on 1 January 2020� 2 Assumes recalculation of transitionals (subject to PRA approval)� 3 Credit stress equivalent to an average 120bps spread widening across ratings, and includes an allowance for defaults/downgrades� 4 Equivalent of six 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�
Annual pension scheme contributions of £50 million (2018: £49 million) are made on a monthly basis and include total contributions of £40 million into the Pearl Group Scheme and £10 million into the Abbey Life Scheme, including £4 million paid into Charged Accounts and held in escrow�
AUA provides an indication of the potential earnings capability of the Group arising from its insurance and investment business, whilst AUA flows provide a measure of the Group’s ability to deliver new business growth�
It includes £1�1 billion (2018: nil) of inflows arising from the Group’s buy-in of the remaining pensioner liabilities of the PGL Pension Scheme and £1�1 billion (2018: £1�5 billion) of new business inflows arising from BPA transactions completed in the year�
Strong gross inflows in the Workplace product of £4�9 billion (2018 pro forma1: £4�4 billion) benefited from statutory pensions auto-enrolment increases�
Outflows for the UK Open business were £8�1 billion (2018 pro forma: £7�0 billion) mainly due to run-off, resulting in net inflows of £1�7 billion (2018 pro forma1 : £3�7 billion)�
Europe net flows The European business contributed a small net outflow of £0�1 billion to the Group’s AUA�
Other movements including markets AUA increased by £26�4 billion as a result of other movements, largely driven by the impact of strong global equity market performance in the year, together with the positive impact of falling yields on the fair value of fixed interest rate securities�
New business contribution represents the increase in Solvency II shareholder Own Funds (net of tax) arising from new business written in the year, adjusted to exclude the associated risk margin and any restrictions recognised in respect of contract boundaries� It is stated net
Group Solvency II Surplus A Solvency II capital assessment involves a valuation in line with Solvency II principles of the Group’s Own Funds and a risk-based assessment of the Group’s Solvency Capital Requirement (‘SCR’)� The Group’s Own Funds differ materially from the Group’s IFRS equity for a number of reasons, including the recognition of future shareholder transfers from the with-profit funds and future management charges on investment contracts, the treatment of certain subordinated debt instruments as capital items, and a number of valuation differences, most notably in respect of insurance contract liabilities, taxation and intangible assets�
New business contribution for 2019 was £158 million (2018 pro forma*: £154 million)� This includes £153 million (FY18 pro forma*: £137 million) from the Group’s UK Open business which benefited from the statutory pensions auto-enrolment increases; and £5 million (2018 pro forma*: £17 million) from the Europe business which was adversely impacted by lower gross flows and the impact of assumption changes�
Long-term cash generation As a result of new business transacted in the year, long-term cash generation is expected to increase by £475 million (2018 pro forma*: £530 million), comprising £240 million from the UK Open and European business segments (2018 pro forma*: £280 million) and £235 million from BPA transactions (2018 pro forma*: £250million)�
The UK Open long-term cash generation is down on the prior year, reflecting the overall decline in gross in-flows, primarily from Wrap inflows� Long-term cash generation from the Workplace product benefited by circa £50 million as a result of auto-enrolment increases in the year�
The SCR is calibrated so that the likelihood of a loss exceeding the SCR is less than 0�5% over one year� This ensures that capital is sufficient to withstand a broadly ‘1-in-200 year event’�
The Standard Life Assurance businesses determine their capital requirements in accordance with an approved Internal * The pro forma position assumes the acquisition of the Standard life Assurance businesses took place on 1 January 2018�
Surplus generation and the impact of the reduction in capital requirements for the Group added £0�4 billion to the surplus during the year�
Financing costs, pension contributions and dividend payments (including accrual for the 2019 final dividend) amount to £0�5 billion and reduced the surplus in the period�
The adverse impact of economic and other variances reduced the surplus by £0�2 billion� The positive impact of changes to longevity assumptions of circa £0�1 billion, including updates to the latest Continuous Mortality Investigation 2018 projection tables, has been more than offset by the strengthening of assumptions used to determine the SCR held in respect of the Group’s £2�8 billion Equity Release Mortgages portfolio, and the adverse impact of updates to other demographic assumptions including mortality�
Other variances also include the net adverse impact of economic and market movements in the period, notably falling yields and foreign exchange, together with the costs of corporate related projects�
Standard Life Assurance Limited and the Phoenix Life entities undertook a mandatory recalculation of Transitional Measures on Technical Provisions (‘TMTP’) as at 31 December 2019�
Group Shareholder Capital Coverage Ratio (estimated) The Solvency II surplus excludes the surpluses arising in the Group’s unsupported with-profit funds and unsupported Group pension schemes of £2�1 billion (2018: £2�1 billion)� Surpluses within the with-profit funds and the Group Pension Schemes, whilst not included in the Solvency II surplus, are available to absorb economic shocks� This means that the headline surplus is resilient to economic stresses�
Life Company Free Surplus (estimated) Life Company Free Surplus represents the Solvency II surplus of the Life Companies that is in excess of their Board approved capital management policies�
As at 31 December 2019, the Life Company Free Surplus is £1�2 billion (2018: £1�0 billion)� The table below analyses the movement during the period�
Opening Free Surplus 1.0 Surplus generation and run-off of capital requirements 0.5 Management actions 0.6 Part VII transfer (0.3) New business (0.1) Economic, financing and other 0.1 Free Surplus before cash remittances 1.8 Cash remittances to holding companies (0.9) Cash remittances from holding companies 0.3 Closing Free Surplus 1.2
Following a 20% fall in equity markets 3.2 Following a 15% fall in property values 2.9 Following a 73bps interest rates rise2 3.1 Following a 88bps interest rates fall2 3.0 Following credit spread widening3 2.8 Following 6% decrease in annuitant mortality rates4 2.5 Following 10% increase in assurance mortality rates 3.0 Following a 10% change in lapse rates5 2.7 1 Assumes stress occurs on 1 January 2020� 2 Assumes recalculation of transitionals (subject to PRA approval)� 3 Credit stress equivalent to an average 120bps spread widening across ratings and includes allowance for defaults/downgrades� 4 Equivalent of six 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�
As a result, the Group focuses on a shareholder view of the capital coverage ratio which it considers to give a more accurate reflection of the capital strength of the Group� The Shareholder Capital Coverage Ratio is calculated as the ratio of Eligible Own Funds to SCR adjusted to exclude Own Funds and the associated SCR relating to the unsupported with-profit funds and the unsupported Group Pension Schemes�
The sensitivities reflect the impact of any strong with-profit funds or pension schemes that may become weak after application of the stress�
As the analysis is presented on a net of tax basis, cash remittances to the holding companies excludes £112 million of amounts received by the holding companies in respect of tax losses surrendered to the Life companies that is included in the Group’s Cash Generation metric�
Please see the APM section on page 264 for further details of this measure�
The Group has generated an operating profit of £810 million (2018: £708 million)� The increase compared to the prior year is primarily driven by the inclusion of the Standard Life Assurance businesses for a full 12 month period post completion of the acquisition in August 2018� This has been partly offset by the lower positive impact of management actions and demographic actuarial assumption changes within operating profit compared to the prior period�
The principal assumptions underlying the calculation of the long-term investment return are set out in note B2 to the IFRS consolidated financial statements�
UK Heritage operating profit The Group’s UK Heritage business segment does not actively sell new life or pension policies and runs-off gradually over time�
The with-profit operating profit of £126 million (2018: £101 million) represents the shareholders’ one-ninth share of the policyholder bonuses� The increase on prior year primarily reflects the full 12 months contribution from the Standard Life Assurance businesses�
The non-profit and unit-linked funds operating profit increased to £577 million £810m OPERATING PROFIT APM
Group costs Group costs in the period were £35 million (2018: £20 million)� They mainly comprise project recharges from the service companies and the returns on the scheme surpluses/deficits of the Group staff pension schemes� The increase in costs compared to the prior period principally reflects a lower return on the scheme surplus of the PGL Pension Scheme, following the buy-in transaction that took place in March 2019 (see note G1 to the IFRS financial statements)�
With-profit 126 101 With-profit where internal capital support provided 18 20 Non-profit and unit linked 577 524 Long-term return on owners’ funds (27) (5) UK Heritage operating profit before tax 694 640
Business Review continued 46 PHOENIX GROUP HOLDINGS PLC ANNUAL REPORT & ACCOUNTS 2019
relating to the Standard Life Assurance businesses� Amortisation of other intangible assets totalled £20 million in the year (2018: £18 million)�
Other non-operating items Other non-operating items of £169 million negative (2018: £38 million negative) includes an £80 million benefit arising from updated expense assumptions for insurance contracts, reflecting reduced future servicing costs as a result of transition activity� Such benefits on the Group’s investment contract business will typically be recognised as incurred� This benefit has been more than offset by staff and external costs incurred or provided for in the period with regard to transition activity and the transformation of the Group’s operating model and extended relationship with Tata Consultancy Services, totalling £190 million, of which £175 million relates to external costs�
The prior period result included a gain on acquisition of £141 million reflecting the excess of the fair value of the net assets acquired over the consideration paid for the acquisition of the Standard Life Assurance businesses and a net benefit of £45 million reflecting anticipated cost savings associated with the move to a single, digitally enhanced outsourcer platform� These amounts were more than offset by a provision for £68 million in respect of a commitment to reduce ongoing and exit charges for nonworkplace pension products, costs of £59 million associated with the equalisation of accrued Guaranteed Minimum Pension benefits within the Group’s pension schemes, costs of £43 million associated with the acquisition of the Standard Life Assurance businesses and £7 million incurred under the ongoing transition programme� It also included net other one-off items totalling £47 million, including other corporate project costs�
Implicit in the Group’s Tax Strategy and the management of its tax affairs is a desire for greater transparency and openness that will help the Group’s stakeholders better understand the published tax numbers� In this way the Group aims to participate in a substantive manner with HMRC and other insurance industry stakeholders on consultative documents and tax law changes that potentially impact on the insurance sector�
The Group’s insurance operations are primarily based in the UK and are liable to tax in accordance with applicable UK legislation� Following the acquisition of the Standard Life Assurance businesses, the Group’s overseas operations have increased, in Ireland and Germany in particular� The Group complies with the local tax obligations in the jurisdictions in which it operates� Phoenix Group Holdings was a Jersey resident holding company until 31 January 2018 when it became tax resident in the UK�
Over 2019 the Group completed the design and implementation of a harmonised framework following the acquisition of Standard Life Assurance businesses; this takes the best of legacy-Phoenix and legacy-SLAL frameworks and is designed to be appropriate for the risk profile of the enlarged Group�
RISK ENVIRONMENT The Group continues to manage a significant level of change activity� Operational capacity across the Group, and within our outsourcing partners, is being actively monitored by management and Boards to ensure it continues to meet business demands and to prevent any adverse impact to customer outcomes and business performance�
Externally, whilst the UK general election result in December provided greater political certainty, market risk remains heightened due to the possible outcomes of ongoing Brexit trade negotiations and wider geopolitical uncertainty� The Group remains well prepared for operational impacts as a result of potential Brexit outcomes�
In December the Group announced the acquisition of ReAssure Group plc, a leading life insurance closed book consolidator in the UK� This acquisition is highly attractive for the Group� The acquisition is subject to a number of pre-completion conditions including regulatory approval� On completion the acquisition would be expected to heighten existing risks that the Group is exposed to, particularly those related to transition activity for acquired businesses�
“Work to harmonise our Risk Management Framework is now complete. This framework is designed to be appropriate for the risk profile of the enlarged Group.”
OWN RISK AND SOLVENCY ASSESSMENT (ORSA) The Group’s ORSA cycle brings together inter-linked risk management, capital and strategic processes� The ORSA provides: • processes to identify, assess, control and monitor risks the Group faces; • an understanding of current and potential risks to the business; including financial and non-financial risks under base and stressed scenarios; • our appetite to accept these risks and how the Group manages them; and
The ORSA plays an important role in supporting strategic decision-making and strategy development at our Boards and risk committees�
Risk Culture Risk culture is the sum of our shared values, behaviours and attitudes towards risks faced by the Group and our customers� Our risk culture reflects the way we think and act, both individually and collectively�
We seek to grow an environment that supports informed decision-making and controlled risk taking� The creation of this environment is enabled through the Group’s Values of Passion, Responsibility, Growth, Courage and Difference� Underpinning each of these are the individual and collective attitudes and behaviours that allow this environment to be realised�
The risk appetite statements establish the risk boundaries within which we are prepared to operate and set the tolerance for delivery against our objectives� They also encapsulate our risk appetite for policyholder security and conduct, earnings volatility, liquidity and our control environment� The following Risk Appetite statements are adopted by the Group: Capital – The Group and each Life Company will hold sufficient capital to meet business requirements including those of key stakeholders in a number of Board-approved asset and liability stress scenarios�
Control – The Group and each Life Company will, at all times, operate a strong control environment to ensure compliance with all internal policies, applicable laws and regulations, in a commercially effective manner�
PGH Board Nomination Committee PGH Board Remuneration Committee PGH Board Risk Committee PGH Board Audit Committee
RISK POLICIES The Group Risk Policy Framework comprises a set of policies that supports the delivery of the Group’s strategy by establishing operating principles and expectations for managing the key risks to the Group� The policies contain the minimum control standards to which each business unit must adhere�
The policies define: • the individual risks the policy is intended to manage; • the degree of risk the Group is willing to accept, which is set out in the policy risk appetite statements; • the minimum controls standards required in order to manage the risk to an acceptable level; and
The Group Risk Policies are mapped to risks across the Risk Universe to ensure complete coverage of all material risks�
As part of the Risk Policy harmonisation process between legacy-Phoenix and legacy-Standard Life Assurance businesses in 2019, a Group Conduct Risk Framework has been developed� This provides a consistent and comprehensive approach to the management of conduct risk and risks to the achievement of customer outcomes across the Group� The Conduct Risk Framework overarches all risk policies to provide a holistic view of conduct risk�
First line: Management Management of risk is delegated from the Board to the Group Chief Executive Officer, Executive Committee members and through to business managers� Line 1 is responsible for implementation of the RMF, ensuring that risks to the Group and its customers are identified, assessed, controlled, monitored, managed and reported�
Risk Management continued 50 PHOENIX GROUP HOLDINGS PLC ANNUAL REPORT & ACCOUNTS 2019
The governance framework in operation throughout the Group can be found in the chart on page 50�
Senior management and the Board regularly review and challenge the validity of the dashboard and also discuss items which should be added� These conversations help drive out potential new risks and opportunities, pulling on the collective expertise and experiences of senior individuals�
STRATEGIC RISK MANAGEMENT Strategic risks threaten the achievement of the Group strategy through poor strategic decisionmaking, implementation or response to changing circumstances� The Group recognises that core strategic activity brings with it exposure to strategic risk�
A strategic risk policy is also maintained and reported against regularly, with a particular focus on risk management, stakeholder management, corporate activity and overall reporting against the Life Companies’ and Group’s strategic ambitions�
Under Solvency II, the development and production of any Internal Model output contributing to regulatory capital requirements must comply with validation standards� This is supported by a Model Governance Policy, which sets out the standards that must be satisfied to demonstrate meeting Solvency II requirements� The output of the Internal Model is used within the Group’s ORSA process to provide insight into risks associated with Group objectives�
Our Stress and Scenario Testing Programme uses the Internal Model to assess the capital impact of a range of plausible and extreme stresses�
RISK MANAGEMENT EFFECTIVENESS Group Risk conducts an annual assessment of the Group’s adherence to the RMF that provides assurance to management and the Boards that the RMF has been implemented consistently and is operating effectively across the Group�
“Our risk culture promotes an environment that supports informed decision-making and controlled risk taking.”
Following a review of principal risks, the number of principal risks has increased from ten to eleven with ‘Climate Change and wider Environmental, Social and Governance (ESG) risk’ moving from an emerging risk to a principal risk� This is due to the increasing understanding of the potential risks associated with the transition to a low carbon economy and longer-term financial risks� Potential impacts for the Group are wide ranging including material changes in asset valuations, reduced proposition attractiveness and reputational risk if the Group does not respond appropriately�
The Group is exposed to the risk of failing to drive value through inorganic growth opportunities� This includes acquisitions of life and pensions books of business and further investment in the Bulk Purchase Annuity (‘BPA’) market�
The Group applies a clear set of criteria to assess inorganic opportunities�
Our acquisition strategy is supported by the Group’s financial strength and flexibility, its strong regulatory relationships and its track record of managing customer outcomes and generating value�
Our Corporate Development team continues to assess new Merger & Acquisition and BPA opportunities�
Our Strategic Partnerships are a core enabler for delivery of the Group’s strategy; they allow us to meet the needs of our customers and clients, and deliver value for our shareholders� Phoenix’s end state operating model will leverage the strengths of our strategic partners whilst retaining in-house key skills which differentiate us� There is a risk that the Group’s strategic partnerships do not deliver the expected benefits�
The Strategic Partnership with Standard Life Aberdeen plc (‘SLA plc’) is expected to provide additional growth opportunities through our Open business� In addition, SLA plc provides investment-management services to around two thirds of our assets under administration�
The Transitional Services Agreement (‘TSA’) Oversight Committee between SLA plc and Phoenix oversees TSA performance and activity to exit the TSAs in future�
The Group’s engagement with Diligenta, and its parent TCS, adheres to a rigorous governance structure, in line with the Group’s Supplier Management Model� As a result, productive and consistent relationships have been developed with TCS, which will continue to develop throughout future phases of our enlarged partnership�
The Group fails to ensure that its propositions continue to meet the evolving needs of customers and clients
The Group’s ability to deliver growth assumed in business plans could be adversely impacted if our propositions fail to meet the needs of customers and clients�
Our propositions are designed and developed with our customers and clients at the heart�
The Group continues to progress propositional enhancements, in particular across our Workplace business� In October 2019 we launched a new passive investment solution for our Workplace business�
We continue to invest in our digital propositions in line with their importance in delivering our strategy; most recently through the announcement of an enhanced strategic partnership with TCS to increase the Group’s digital and technology capabilities� This aims to build on the strong innovation and customer service excellence to which we are committed�
The Group is exposed to market risks related to climate change as a result of the potential implications of a transition to a low carbon economy�
In addition there are long-term market, insurance, reputational, propositional and operational implications of physical risks resulting from climate change (e�g� the impact of physical risks on the prospects of current and future investment holdings, along with potential impacts on future actuarial assumptions)�
The Group is also exposed to the risk of failing to respond to wider ESG risks; for example failing to meet our corporate and social responsibility commitments� This can result in reputational damage and lead to a reduction in earnings or value�
In March 2020, the Group became a signatory to the Task Force on Climate-related Financial Disclosures (‘TCFD’)� The disclosure included on page 58 outlines the Group’s progress to date in incorporating climate-related risks and opportunities within our governance, strategy, risk management and metrics and targets frameworks�
The Group is exposed to the risk that it fails to deliver fair outcomes for its customers, leading to adverse customer experience and/or potential detriment�
Our Conduct Risk Appetite sets the boundaries within which the Group expects customer outcomes to be managed� This consists of a set of principles and standards for all Group colleagues to follow to meet the changing needs of our customers and our business�
The Group Conduct Risk Framework, which overarches our Risk Universe and all risk policies, is designed to detect where our customers are at risk of poor outcomes, minimise conduct risks, and respond with timely and appropriate mitigating actions�
The Group also has a suite of customer policies which set out key customer risks and minimum control standards in place to mitigate them�
Our remediation programme for customers affected by the outcome of the FCA’s industry-wide annuity review is now substantially complete�
Changes in legislation, such as the implications of Brexit, can also impact the Group’s operations or financial position�
Political uncertainty or changes in the government could see changes in policy that could impact the industry in which we operate�
The Group actively engages with regulators and governments in order to understand potential changes in the regulatory and legislative landscape�
The Group assesses the risks and benefits of regulatory and legislative changes to our customers and to the Group and actively engages with regulators and governments as appropriate�
The Group has contingency plans in place to ensure we can continue to service our non-UK policyholders after the UK leaves the EU�
The Group is well prepared for operational impacts as a result of potential Brexit outcomes and political changes�
The Group is exposed to the risk of being unable to maintain provision of services in the event of major operational disruption, either within our own organisation or those of our outsourcers�
Regulators’ expectations of the speed and effectiveness of firms’ responses to business resilience incidents are increasing�
The Group operates an oversight framework to ensure that our outsource partners and critical suppliers adhere to the same business continuity principles�
Outsourcer service delivery levels remain good against a backdrop of heightened change activity across the Group�
Our Reverse Stress Testing and Recovery Planning Processes demonstrate the Group is resilient to specific Board-approved scenarios�
This risk is inherent in our business model given the nature of our acquisition activity� Potential areas of uncertainty include the transition of the Standard Life Assurance business into the Group; the recently expanded strategic partnership with TCS; and the acquisition of ReAssure Group plc�
Timely communications to our people aim to provide clarity around corporate activities� Communications include details of key milestones to deliver against our plans�
Activity is underway to monitor colleague engagement and protect customer service and IT operations following the announcement of the extended partnership with TCS�
Adverse market movements can impact the Group’s ability to meet its cash flow targets, along with the potential to negatively impact customer sentiment
The Group undertakes regular monitoring activities in relation to market risk exposure, including limits in each asset class, cash flow forecasting and stress and scenario testing� The Group continues to implement de-risking strategies to mitigate against unwanted customer and shareholder outcomes from certain market movements such as equities and interest rates� The Group also maintains cash buffers in its holding companies and has access to a credit facility to reduce reliance on emerging cash flows�
The UK general election result in December 2019 has provided greater political certainty; the potential for adverse market risk remains due to ongoing uncertainty regarding Brexit, geopolitical tensions and the impacts of COVID-19�
Our business planning process stresses our balance sheet to ensure it remains resilient to market movements; contingency actions are available to help us manage markets risks, e�g� as a result of Brexit or global economic downturn�
Our exposure to residential property remains within appetite; however, as noted in our Interim Report this continues to increase in line with investment in Equity Release Mortgages�
The amount of additional capital required to meet additional liabilities could have a material adverse impact on the Group’s ability to meet its cash flow targets�
The Group undertakes regular reviews of experience and annuitant survival checks to identify any trends or variances in assumptions�
The Group continues to actively manage its longevity risk exposures which includes the use of reinsurance contracts to maintain this risk within appetite�
The Group actively monitors persistency risk metrics and exposures against appetite across the Open and Heritage businesses�
Whilst the low yield environment and market volatility continue to impact longevity and persistency risk exposures, we are comfortable with current exposures when considered against our Boardapproved risk appetites�
The Group is exposed to the failure of a significant counterparty
Examples of some emerging risks the Group currently considers are listed in the table opposite�
Market Disruptors The impact of alternative providers in the market or those with more comprehensive digital propositions�
Solvency II Changes Changes to the solvency regime as a result of EIOPA review and evolution of the UK’s regulatory regime following its exit from the EU�
The potential financial impacts from anticipated reform of RPI towards a variant of the Consumer Price Index (CPI)�
COVID-19 COVID-19 may have operational, financial and demographic impacts for the Group�
Risk Management continued 56 PHOENIX GROUP HOLDINGS PLC ANNUAL REPORT & ACCOUNTS 2019
ASSESSMENT PROCESS & KEY ASSUMPTIONS The Group’s prospects are assessed primarily through its strategic and financial planning process� This strategy is outlined within the Strategic Report of the Annual Report and Accounts� The Board fully participates in the annual strategic planning process by means of a Board meeting to review and approve the Annual Operating Plan (‘AOP’)�
The output of the AOP is a set of Group objectives, detailed financial forecasts, and risks and contingent actions to be considered when agreeing the plan� The latest AOP was approved by the Board in November 2019� This considered the Group’s current position and its prospects over a medium term horizon, reflecting the Group’s stated strategy�
• the stresses calculated occur on 1 January 2020 with no allowance for any recovery or contingent actions available, but do take into account the impact of any appropriate Solvency II transitionals recalculation�
• It completed reverse stress testing for the Group to understand how severe the above scenarios would need to be given the Group’s current and expected levels of solvency and liquidity; • It considered the principal medium to long-term risks facing the Group which have the potential to impact on viability as discussed in the Risk Management section; • 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; and
• It reviewed the financials, synergies and risks associated with the acquisition of ReAssure Group, taking into account the current position and under a combined market and longevity stress�
Management responsibilities Overall responsibility for climate-related issues is held by the Group’s Chief Executive Officer, Clive Bannister, as part of his ownership of Phoenix’s sustainability strategy�
Group Responsible Investment Philosophy The Group has developed a Group Responsible Investment Philosophy� This is seen as the first step towards embedding ESG considerations within the Investment Management process and serves as a framework that sets out a high level commitment and focus to both internal and external stakeholders�
Consideration is being given in the 2020 refreshes to ensure that climate change risks are appropriately covered in all policies where material�
Later in 2020, the Group expects to participate in the Bank of England’s Biennial Exploratory Scenario exercise�
Metrics and Targets As part of Phoenix’s overall sustainability strategy and implementation plan, we are currently developing our approach to reporting targets and metrics for each of the Group’s sustainability commitments� This will include specific climate-related targets within our ‘reduce our environmental impact’ commitment� Further details are provided within the Group’s 2019 Sustainability Report�
CULTURE, VALUES AND THEIR LINK TO COMPANIES ACT SECTION 172 81
NON-FINANCIAL INFORMATION STATEMENT Phoenix welcomes the increased focus from all stakeholders on its non-financial performance� As required by the Companies Act 2016 sections 414CA and 414CB, the table below outlines where key content requirements of the non-financial statement can be found within this Report�
HUMAN RIGHTS • Code of Business Ethics • Sourcing and Procurement
Group Policy • Modern Slavery statement • Health and Safety Group Policy
BUSINESS MODEL • Our Business model • Cash generation process • Our strategy and KPIs
CUSTOMERS 10 million policies with £248 billion of assets under administration. Key products and services include with-profit, unit-linked, annuities, protection and workplace pensions.
• Through a variety of channels, utilising phone, e-mail, digital platforms, surveys, written communications as well as individual research projects and direct interaction.
SUPPLIERS The Group has c.1,000 suppliers of which c.19 are considered strategic or critical to the business.
• The Group has contract and relationship management teams which, using our Governance Framework, defines the engagement with our strategic and critical suppliers to build and develop mutually beneficial partnerships.
ENVIRONMENT The Group is committed to managing and reducing its environmental impact and considers the ongoing effects of climate change on its operations.
• By working with a range of brokers to actively monitor the energy market and help procure in line with risk appetite, exploring green technology whenever possible. The Group benefits from a range of in-house specialists and external expertise to help manage the Group’s carbon reduction programme. Colleagues regularly support a range of environmental-based community groups to volunteer their time to help protect the wider environment.
INVESTORS The Group maintains an active dialogue with its investors throughout the year.
Customers wishing to consolidate their pension pots using the online guidance journey have also continued to increase� Technology has also been implemented to capture customer feedback in real-time�
DATA PRIVACY AND CYBER SECURITY Phoenix Group has an appointed Data Protection Officer to monitor compliance with the GDPR and DPA 2018, providing advice on Phoenix Group’s data privacy obligations and acting as the point of contact for data subjects and regulatory authorities�
The Phoenix Group Data Protection Officer owns the Group Privacy policy and Data Protection Risk policy and maintains oversight of ongoing privacy compliance� This is done through policy assurance testing, privacy reviews and ongoing training�
Phoenix has continued to strengthen and improve its security position around customer data through the deployment of market leading tools, controls and policy harmonisation�
CUSTOMERS IN VULNERABLE CIRCUMSTANCES Phoenix has a vulnerable customer strategy which aims to address vulnerability to the extent that the right outcomes for customers are achieved regardless of whether they are living in vulnerable circumstances�
The Group continues to engage with regulatory authorities and industry working groups on pension scams and looks at ways to better protect customers from becoming victims through raised awareness�
One aspect of the Group’s Customer strategy involves improving communications so that customers understand what they can do with their policy or plan and go on to make an informed decision should they wish to take any action�
During 2019, key communication initiatives included signposting services and organisations to help customers take a proactive role in managing their financial affairs�
We rely on our service providers and partners to support the delivery of our strategic objectives.
The Commercial Partnerships team manages a decentralised procurement model for low value/low volume spend, enabling the business to operate flexibly but within the controls of the Sourcing and Procurement policy� This has a robust oversight and governance model�
For strategic or critical providers, Phoenix has a dedicated professional relationship manager assigned� Their role is to govern the relationship, measure and monitor performance and work to continually improve outcomes for all stakeholders�
PROMPT PAYMENT CODE The Group voluntarily signed the Government’s Prompt Payment Code in 2012 and from January 2018 has been submitting relevant statements under the Small Business, Enterprise and Employment Act 2015 for the duty to report payment practices� The Group is committed to supporting the culture of prompt payment in the business community�
1 A Strategic Relationship is financially important to the Group and provides a critical service� A disruption in supply would create significant issues for Phoenix� A Critical Supplier is where the provision of goods or services is limited to few suppliers and that the goods or services provided would significantly damage Phoenix should these services fail�
INSPIRING CONFIDENCE THROUGH LIVING OUR VALUES Last year’s cultural survey helped shape the new values for the Group.
Passion We make a positive impact by caring about customers, colleagues and communities
COLLEAGUE INSIGHT SURVEY Building on the cultural survey from 2018, the Group introduced a new six-monthly insight survey to understand colleagues’ experiences with regard to direction and change, leadership and the ability to speak up.
INCLUSION NETWORKS Various inclusion networks are in operation across the Group which are sponsored by members of the Executive Committee, portraying the importance placed on colleague collaboration and employee voice.
VALUES AND PERFORMANCE MANAGEMENT The Company’s new values form the foundation for a revised Groupwide approach to performance management and to measuring engagement and colleague insights. This single approach to performance management measures both ‘what’ and ‘how’ and differentiates individual contribution through a clear sixpoint rating scale.
The Group has been recognised for the eighth consecutive year as being listed as one of the UK’s Top Employers, and became a signatory to the Scottish Business Pledge in 2019, which portrays the Group’s commitment to being a responsible employer.
Colleagues are required to complete annual computer-based training around both financial crime prevention and adherence with the Code of Business Ethics and Ethical Conduct� Colleagues are also required to complete a Gifts and Hospitality Register which is overseen and managed by the Financial Crime team�
WHISTLEBLOWING The Group operates a Whistleblowing policy, prompting colleagues to disclose information where they believe wrongdoing, malpractice or risk exists across any of Phoenix’s operations� Colleagues are encouraged to speak up about matters that concern them, with the understanding that confidentiality will be maintained�
All colleagues are required to comply with the policy and take appropriate measures to ensure harassment and bullying do not occur�
The Group aims to reduce this figure by 50% across 2020 through a proactive safety approach to communicate with colleagues and make them aware of workplace risks�
All colleagues are required to complete annual computer-based health and safety training� Arrangements are in place to manage onsite facilities across all sites, ensuring the working environment is compliant and fit for purpose�
We strive to improve educational opportunities and life chances for individuals within our local community. We contribute to our local communities – providing donations, skills, time and resources to the cause.
PHOENIX GROUP’S CHARITY PARTNERS OF THE YEAR The Group continues to recognise the importance of corporate charity partnerships�
The Group’s partnership with Midlands Air Ambulance Charity and London’s Air Ambulance Charity is coming to the end of its six-year collaboration in March 2020� Across this partnership the air ambulances have benefited from in excess of £876,000 since 2014 (c� £97,000 for 2019)� In addition, colleagues in Scotland have supported Scotland’s Charity Air Ambulance donating over £105,000 in 2019� Colleagues in Basingstoke have supported Hampshire and Isle of Wight Air Ambulance, with a donation of £10,000�
SunLife colleagues have supported Alive Activities Limited across the year, enriching the lives of older people in care and supporting training materials for carers� One fundraiser involved 57 colleagues participating in the SunLife Big Charity Challenge, walking the Brecon Beacons�
Further afield colleagues continued to support a local children’s cancer foundation Hilfe für krebskranke Kinder e�V� Frankfurt in Germany, with a donation in excess of €20,000, and the Austrian Cancer Foundation in Vienna, Österreichische Krebshilfe Wien, with a donation of €6,000� Colleagues in Ireland commenced an 18 month partnership with ALONE, benefiting older members of the community� Donations for this cause totalled in excess of €71,000 across the year�
OTHER CHARITABLE DONATIONS Outside of the formal charity partnerships colleagues may also apply for matched funding providing the cause meets the Group’s charity criteria, and is not deemed political or religious� Across the year a range of causes were supported, including: City’s Lord Mayor’s Appeal, St Michael’s Hospice in Basingstoke, Macmillan Cancer Support, Action for Children, Irish Cancer Society and Alzheimer Scotland�
COMMUNITY WELLBEING Following its successful pilot in 2018, the Group in conjunction with Living Streets charity re-launched Wythall Walking Friends� A unique colleagueled walking project, aimed at individuals aged over 65 living in the local community�
The Group’s dementia champions continued to provide awareness sessions to colleagues in England, supporting Alzheimer’s Society�
The 5th Annual Jobs Fair in Bromsgrove, hosted by Rt Hon Sajid Javid MP, was co-sponsored by the Group, attracting over 90 local, national and international employers and promoting local job opportunities in the Midlands area�
In Ireland, support continued for Junior Achievement Ireland, a programme designed to give pupils an appreciation of the value of work and enterprise� Colleagues got involved with offering Science Foundation Ireland FutureWize Workshop events across Dublin� The workshops emphasised the importance of STEM and promoted a career planning module�
Emma Gray, Fundraising and Marketing Director for Midlands Air Ambulance Charity said: “We are very proud to have offered this vital training to 150 staff at Phoenix Group as part of our long-standing partnership�”
In the Edinburgh office, 15 young people are also engaged with the Career Ready programme, receiving regular mentoring sessions with colleagues�
VOLUNTEERING Colleagues throughout the UK and Ireland regularly donate their time and skills to community causes�
Collectively Phoenix Group colleagues donated over 6,000 hours across the year, supporting a variety of beneficiaries ranging from schools, hospices, local parks, environmentalfocused projects to groups supporting the vulnerable�
ENERGY AND WATER SAVING The energy contract for the Group’s main UK offices is managed centrally and from January 2019 all electricity at these sites was provided from 100% renewable sources, which is backed up by Renewable Energy Guarantees of Origin (‘REGO’)�
CONSERVATION Colleagues have continued to support environmental-focused charities and community groups such as Warwickshire Wildlife Trust, National Trust, Bromsgrove District and Redditch Borough Councils, Canal & River Trust, Hampshire and Isle of Wight Wildlife Trust and the Heart of England Forest which is home to the Phoenix Way Wood� The SunLife operation continues its membership of the Woodland Trust�
Read more about our Environmental initiatives in the Group’s Sustainability Report. www.thephoenixgroup.com/ sustainability2019 68 PHOENIX GROUP HOLDINGS PLC ANNUAL REPORT & ACCOUNTS 2019
The emissions reported are based on the main requirements of the ISO14064 Part 1 and the GHG Protocol Corporate Standard (revised edition)� Data was gathered at site level to compile the carbon footprint� International Energy Agency and UK Government Conversion Factors for GHG Company Reporting have been used to convert activity data into carbon dioxide equivalent (‘CO2e’) emissions�
The scope and depth of reporting has been expanded in recognition of the growing importance of tackling the climate emergency and in preparation for Streamlined Energy and Carbon Reporting (‘SECR’) which will apply to next year’s disclosure�
For the first time, fugitive emissions (based on refrigerant top-ups) in Scope 1 and emissions from employee car travel for business purposes in Scope 3 have been disclosed�
Following the purchase in 2018 of much of the Standard Life business property investment portfolios as well as occupied premises in Ireland, Germany, Austria and the UK are included� Further, in property investment portfolios, where energy consumption is sub-metered to tenants, this also falls into Scope 3 reporting, whereas all other landlordobtained consumption remains as Scope 1 or 2 emissions� Also included for the first time is a comparison of performance for occupied premises and appropriate investment properties against the BBP REEB benchmarks�
The Group reports Scope 2 emissions using the GHG Protocol dual-reporting methodology, stating two figures to reflect the GHG emissions from purchased electricity, using both: • a location-based method that reflects the average emissions intensity of the national electricity grids from which consumption is drawn; and
• a market-based method that reflects emissions from electricity specific to each supply / contract� Where electricity supplies are known to be from a certified renewable source, a zero emissions factor is used, otherwise residual mix factors are used�
91% of electricity consumption is from certified renewable sources – which explains why the market-based emissions for Scope 2 are significantly less than the location-based emissions�
Scope 1 – Combustion of fuels, business travel in company cars, and fugitive emissions of refrigerant gases 4,203 4,203 3,463 Scope 2 – Electricity purchased for landlord shared services and own use (purchase of heat, steam and cooling not applicable) 3,702 13,052 12,533 Scopes 1 and 2 – Mandatory carbon footprint disclosure 7,905 17,255 15,997 Scope 3 – Energy sub-metered to tenants, business travel in employees’ cars, and transmissions and distribution losses from electricity 760 4,267 5,728 Scopes 1 and 2 and 3 – Voluntary 3 scopes carbon footprint 8,665 21,523 21,725 1 Emissions factors – IEA (for location-based Scope 2 and Scope 3 T&D losses), AIB (for market-based residual mix factors for non-renewable electricity), and DEFRA (fuels, refrigerants and car travel)� There is a significant time-lag in the availability of IEA factors – the 2019 factors will not be published until late 2021� Therefore all 2019 consumption data are converted using the factors actually arising in 2015 (except car travel which uses DEFRA factors as published in 2019)� Whilst imperfect, we can consistently and readily report emissions internally from the first day of a year (for monthly/quarterly reporting)� Emissions are thus somewhat overstated rather than understated; though this encourages energy reduction and sourcing of renewable energy� Refrigerants – Refrigerants data have only been collected, and shown, from 2019 (390 tonnes CO2e)�
Scope 1 and 2 Emissions from occupied premises per floor area intensity 62 kg CO2e/m2 73 kg CO2e/m2
In 2019 there was 67GWh of Group energy consumption (building energy and business travel in either employees’ cars or company cars) – 97% of which was from UK operations� In greenhouse gas emissions terms (Scopes 1, 2 and 3), UK sites account for 96% of Group emissions�
B ill er ic ay kW h el ec -e q
Office energy intensity in 2019, occupied premises and investment properties 70 PHOENIX GROUP HOLDINGS PLC ANNUAL REPORT & ACCOUNTS 2019
The Chairman and Non-Executive Directors are available for investor meetings to discuss various subjects� The Board also receives feedback on shareholder views through a biennial anonymous shareholder consultation and is kept regularly updated through the distribution of equity research notes, broker briefings and meeting summaries�
RESULTS PRESENTATIONS AND CAPITAL MARKETS DAYS As part of its reporting cycle, the Group holds full year and interim results presentations which are webcast live on Phoenix’s website� In addition, Phoenix held a Capital Markets Day on 28 November 2019 in London which was attended by 133 external attendees and provided detailed insights into the Group’s operating model and strategy� The event also provided attendees with the opportunity to meet with senior management and Phoenix’s subject matter experts�
Investor presentations are generally filmed and the videos, as well as the presentation materials and transcripts, are made available on the Phoenix Group website�
RESEARCH ANALYSTS AND SALES TEAMS Phoenix maintains an active dialogue with its equity and debt research analysts, who are invited to attend investor events such as results presentations and the Capital Markets Day�
DEBT INVESTORS The Debt Investor Relations programme is managed by the Group Treasury department and supported by the Investor Relations department� The Board is kept informed of the current credit views of debt investors through regular debt capital markets updates and summaries of meeting feedback� Senior management conducted three non-deal debt investor roadshows in the UK, Continental Europe and Asia, meeting 96 debt investors overall� In addition, the Group Treasury team also organised a Group lunch aimed at debt investors�
Prior to that the team had given a comprehensive presentation in June as part of the annual review process� The Group Treasury department and senior management also keep a constant dialogue with the Group’s relationship banks�
PRIVATE SHAREHOLDERS Private shareholders are encouraged to engage with the Group through the Investor Relations team and Company Secretariat� Contact details for the Investor Relations team can be found on Phoenix Group’s website�
GENERATION X The Group sponsored the Pensions Policy Institute (‘PPI’) to undertake research into the long-term savings position of ‘Generation X’, encompassing those aged 39–53, totalling around 13 million people� The report considers the challenges facing this generation, who are less likely to have the levels of Defined Benefit provision enjoyed by those before them� The report continues to serve as a useful tool for conversations with policymakers, clients and customers, helping individuals achieve better retirement outcomes�
COLLABORATIONS WITH TRADE ASSOCIATIONS The Group collaborates with a range of trade associations representing the sector� Susan McInnes, Group Director of Open Business, continues as chair of the Association of British Insurers’ (‘ABI’) Long-Term Savings Committee, which informs the ABI’s work on key initiatives including the pensions dashboard, which over time will enable customers to see all of their pension pots across different providers in one place online�
Colleagues also lend their expertise to a variety of expert working groups – Phoenix has, for example, taken a leading role in supporting the Pensions Scams Industry Group, which has been successful in helping to prevent some instances of pension fraud�
A record of our face-to-face meetings with MSPs, members of the Scottish Government and Junior Scottish Ministers is publicly available on the Scottish Lobbying Register� The Group actively supports Scottish Financial Enterprise (‘SFE’), the representative body for Scotland’s financial services industry, on their initiatives and working groups, along with the Edinburgh Chamber of Commerce�
REGULATORY RELATIONSHIPS The Group maintains a strong and open relationship with the Prudential Regulation Authority (‘PRA’), Financial Conduct Authority (‘FCA’) and other regulators� The Regulatory Relationship team, which reports to the Group Chief Risk Officer, manages interactions with the PRA, FCA and other primary regulators and liaises with them regularly�
The Board Risk Committee also receives monthly updates on the Group’s regulatory interaction�
UK CORPORATE GOVERNANCE CODE As detailed in the Corporate Governance Report on pages 81 to 130, we complied in 2019 with all the provisions of the UK Corporate Governance Code (‘the Code’)� This followed our taking steps to comply with the new Code provisions which applied to Phoenix from the accounting year 2019� We have complied with all the provisions of the Code in its appropriate version in each of the last five years�
SHAREHOLDERS I am grateful to our shareholders for their continual strong support, both for ongoing matters at our AGM and for our strategic propositions� Following the tremendous support for two large rights issues in 2016 (Abbey Life acquisition) and 2018 (Standard Life Assurance acquisition), we are not calling on our existing shareholders to provide equity for the acquisition of ReAssure Group� However, I do wish to thank them for their strong support at our May 2019 AGM when all 24 resolutions were passed with a majority of at least 92% of all votes cast and at our General Meeting in February 2020 for the acquisition of ReAssure when both resolutions were passed by at least 99% of all votes cast�
I am particularly grateful for the support we receive from our biggest shareholder and strategic partner, Standard Life Aberdeen and look forward to welcoming two new strong strategic partners, Swiss Re and MS&AD who are each expected to hold approximately 13% to 15% of our total shares in issue on completion of the ReAssure acquisition later this year�
During the year, Karen Green commenced her role as Director for Workforce Engagement� This has commenced encouragingly and further information is provided in our Corporate Governance Report on page 84� I see this as part of a wider programme of enhancing the Board’s engagement with our Phoenix colleagues� We held one particularly successful interactive day when the Board met in October 2019 in our Edinburgh office, and we took the opportunity to hold engagement sessions for colleagues from across the business with all Board members and also each of our Audit, Remuneration and Risk Committee Chairs�
The following sections provide more detail on our Board of Directors, Executive Management team, operation of governance and remuneration practices: • Board and Committee structure
IN THIS SECTION The Corporate Governance Report has been restructured to align with the five pillars of the UK Corporate Governance Code 2018�
BOARD STRUCTURE • Board and Committees and overview of their responsibilities 77
EXECUTIVE MANAGEMENT TEAM • Roles and responsibilities of the Executive Management team 80
DIVISION OF RESPONSIBILITIES • Board roles and responsibilities • Board Independence and Appointment Terms • Board and Committee attendance
• Audit Committee Report – Role of the Committee – Principal Activities during 2019 – Auditor’s Appointment – Assessment of the Effectiveness of the External Audit Process – Auditor’s Independence and External Auditor Policy – Significant Matters considered in relation to the Financial Statements
• Risk Committee Report – Role of the Committee – Significant Matters discussed in 2019 – Principal Activities during 2019 – Review of System of Internal Controls
– Remuneration at a glance – Directors’ remuneration policy – Annual report on remuneration
Corporate Governance 76 PHOENIX GROUP HOLDINGS PLC ANNUAL REPORT & ACCOUNTS 2019
The main focus of the Phoenix Group Holdings Board is on Group strategy and performance, with input from Board committees� The chart below sets out the main activities of the Phoenix Group Holdings Board and its Committees� More detailed operational and customer-focused matters are addressed at the subsidiary board and committee level� 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�
The Board comprises the Non-Executive Chairman, the Group Chief Executive Officer, the Group CEO Designate (until 10 March 2020 when he assumes the role of Group CEO), the Group Finance Director, two SLA nominated Directors and seven independent Non-Executive Directors.
Experience: Nicholas Lyons was appointed Chairman of the Board of Directors of Phoenix Group Holdings and Chairman of the Nomination Committee of Phoenix Group Holdings with effect from 31 October 2018� Nicholas Lyons joined JP Morgan in 1982, where he worked for 12 years in debt and equity capital markets and mergers and acquisitions� He spent eight years at Lehman Brothers, as a Managing Director in their European financial institutions group, ending his executive career in 2003 as Global Co-Head of Recruitment� Mr Lyons has held a number of positions on the boards of other financial institutions including the Pension Insurance Corporation, where he was the Senior Independent Director from 2016 until July 2018� He also held positions on the boards of the Catlin Group Limited, Miller Insurance Services Ltd where he was Chairman from 2008 until 2016, Friends Life Group Limited and Friends Life Holdings plc� Mr Lyons is on the Board of the British United Provident Association Limited (BUPA) and Convex Group Limited and is also Chairman of Clipstone Industrial REIT plc� He is an Alderman in the City of London Corporation�
3. ANDY BRIGGS Group Chief Executive Officer (From 10 March 2020)
Experience: Alastair Barbour has over 30 years’ audit experience with KPMG where he worked across the full spectrum of financial services clients from large general insurers and reinsurers to the life insurance and investment management sector, working on a range of operational and strategic issues� Mr Barbour is the former Head of Financial Services, Scotland for KPMG� He retired from KPMG in 2011 to build a non-executive career� He is a Director and Audit Committee Chairman of RSA Insurance Group plc and Chairman of Liontrust Asset Management plc (both London Stock Exchange listed companies)� He is also a Director of The Bank of N� T� Butterfield & Son Limited, a group listed on the New York Stock Exchange and in Bermuda� Mr Barbour was appointed Senior Non-Executive Independent Director on 2 May 2018�
Experience: Campbell Fleming is the Global Head of Distribution at Aberdeen Standard Investments, the asset management business of Standard Life Aberdeen� He joined Aberdeen Asset Management in August 2016 from Columbia Threadneedle Investments where he was the Chief Executive – EMEA and Global COO for four years� Mr Fleming recently stepped down as Chair of the Investment Association Trade Committee and has previously held senior positions at JP Morgan Asset Management 7. KAREN GREEN Independent Non-Executive Director
CLIVE BANNISTER (ANDY BRIGGS, FROM 10 MARCH 2020) Group Chief Executive Officer
Roles and responsibilities • Leads development and delivery of the Group’s operating platforms in line with regulatory requirements, the Risk Universe and strategy; • Ensures the delivery of the Group’s information technology strategy; • Leads the management of the Group’s long-term outsourcing arrangements; and
Roles and responsibilities • Leads the Group’s Customer Function to drive operational and experience delivery for the Group’s customer base; • Sets standards and policies for customer management and interaction; and
ANDY MOSS Chief Executive, Phoenix Life and Group Director, Heritage Business
Roles and responsibilities • Leads the Group’s risk management function, embracing changes in best practice and regulation including Solvency II; • Oversees and manages the Group’s relationship with the FCA and PRA; and
• Supports the Group Board Risk Committee in the oversight of the Group’s risk framework, in line with risk strategy and appetite�
ORSA and Pillar 3 reporting; • Manages the Group’s financial plans and management information in line with strategy; • Contributes to the effective management of the
Roles and responsibilities • Supports the Group Chief Executive Officer in the formulation of the strategy for the Group; • Leads implementation of the Group’s strategy as regards any potential acquisition or disposal; • Ensures capital is managed efficiently across the Group; • Manages the Group’s solvency position; • Leads the development of the Group’s investment strategy; and • Identifies and delivers opportunities to enhance shareholder value across the Group�
Executive Management of the Group is led by the Group Chief Executive Officer, Clive Bannister (Andy Briggs, from 10 March 2020), who is supported by the Executive Committee (‘ExCo’).
The Board is committed to high standards of corporate governance and the Group’s corporate governance policy is aligned to compliance with the UK Corporate Governance Code (‘the Code’) which sets standards of good practice for UK listed companies.
The following report demonstrates how Phoenix Group Holdings plc has applied the principles of the Code and complied with the provisions of the Code in 2019� It is the Board’s view that the Company has been fully compliant during 2019 with the principles and provisions set down in the Code�
This has influenced the Board’s application of Section 172 of the Companies Act (see below), which has been applied in a manner consistent with the Group’s purpose of inspiring confidence in the future for its stakeholders, in particular customers, shareholders, employees and considering the environment more generally; and at all times having regard to the Group’s regulatory responsibilities as a financial services operation�
Section 172 of the Companies Act 2006 requires a director of a company to act in the way he or she considers, in good faith, would most likely promote the success of the company for the benefit of its members as a whole� In doing this section 172 requires a director to have regard, amongst other matters, to the: • likely consequences of any decisions in the long term; • interests of the company’s employees; • need to foster the company’s business relationships with suppliers, customers and others; • impact of the company’s operations on the community and environment; • desirability of the company maintaining a reputation for high standards of business conduct, and
The Board Discharging Section 172 duties In discharging its section 172 duties, the Board has regard to the section 172 factors set out above which are listed as focus points on the agenda for each set of Board papers�
The Board received various information during 2019 which helped it understand the interests and views of the Company’s key stakeholders when making decisions�
The Company’s Investor Relations department is dedicated to facilitating communication with investors and analysts and maintains an active investor relations programme� Please see page 71 for further details regarding the Company’s engagement with investors�
In addition, continued engagement is undertaken with shareholders and proxy advisers on evolving governance issues�
The Company’s AGM provides another opportunity to communicate with its shareholders� At the 2019 meeting, the Code provisions were complied with� Shareholders were invited to ask questions during the meeting� It is intended that the same processes will be followed at the 2020 AGM�
The following are examples of how the Board has acted and taken decisions in a manner which has regard to its various stakeholders�
Shareholders 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, designed to determine the investment community’s view of the core business�
The Board is continually focused on delivering value for shareholders and enhancing sustainability of the dividend, including through its decisions in 2018 to purchase the Standard Life Assurance businesses and in 2019 to purchase ReAssure Group� During 2019 the Board authorised the payment of dividends of 46�8p per share in accordance with its stable and sustainable dividend policy� The market cap of Phoenix Group has grown from c£1�8bn (1 January 2015) to £5�4bn (31 December 2019) and its position in the FTSE index over that time has risen from 167th to 91st� Over 2019, the Phoenix share price rose by 32%�
Customers Following two education sessions in the latter part of 2018 on the customer proposition and customer ethos and experience for Standard Life Assurance (acquired in August 2018), the Board received external and internal briefings in early 2019 on their responsibilities under the Senior Managers & Certification Regime� In addition, the subsidiary Life Company Board (and its specifically customer-focused With-Profits and Independent Governance Committees) spends considerable time to understand customers’ views including visits to Outsource Service Providers who service much of the customer base�
The Board’s decisions have regard to the highly-regulated environment in which Phoenix operates� The Board’s decision in December 2019 to acquire ReAssure Group plc is specifically subject to the change in control receiving regulatory approval� The Boards of the regulated Phoenix Life subsidiaries have approved a Capital Management Policy, agreed with the PRA, which governs distributions up the Group from the Phoenix Life subsidiaries to provide protection to customers� The decisionmaking structure of the Group includes the regulated Phoenix Life subsidiaries’ Boards and also their With-Profits and Independent Governance Committees, all including independent members and established to provide further protection to customers’ funds in accordance with regulation�
Environmental, Social and Governance (‘ESG’) As well as various briefings from management, the Board received an external presentation in October 2019 on topical ESG matters and their increasing relevance�
Following significant Board focus on ESG matters in 2019, a Head of Sustainability, Yvonne Gray, was appointed in November 2019, following which the Board approved a new ESG strategy in March 2020 after discussing it in January 2020�
• Social housing – c£100 million investment to help fund the development of more social and affordable homes
• Infrastructure – c£150 million investment in new rail rolling stock to improve the journeys of both commuters and leisure travellers�
Please see page 84 for further information on how Karen Green has engaged with the Phoenix workforce in 2019�
Contracts material to the Group require the approval of the Phoenix Group Holdings Board� During 2019, the Board considered the relationship with Phoenix’s main Outsource Service Providers at its strategy offsite in July 2019 and over several meetings considered and then approved the material expansion of the outsource arrangement with TCS / Diligenta to provide support to Open as well as Heritage business and enhance the digital proposition for customers�
“My main objective in this role is to provide a direct unfiltered line of communication between our colleagues and the Board. We hope that our colleagues’ feel that this will be a further helpful channel for their views to be conveyed.”
Following consideration by the Board as to the ways in which it engages with our colleagues, in conjunction with compliance with section 172 of the Companies Act, I was appointed as the Designated Non-Executive Director for Workforce engagement in April to help develop a closer connection between the Board and our colleagues�
How we engaged with colleagues in 2019 During the course of 2019, I undertook a number of visits across the business in Edinburgh, Wythall, London, Bristol, Frankfurt and Dublin� I also met with Senior HR business partners in each location to review key themes that related to our corporate culture� These visits were informative and provided the Board with timely additional perspective on the level of organisational engagement generally; progress in creating a unified set of values and key considerations for our colleagues, as the next phases of the planned integration of the Standard Life and Phoenix organisations took place during the year�
INSPIRING CONFIDENCE BY BRIDGING THE GAP BETWEEN THE BOARDROOM AND COLLEAGUES
The output of our Colleague Insight Survey was a key discussion point at the Forum� We met soon after the survey results were available and this provided a further opportunity for review and to ensure feedback could be provided by all members� This survey will now take place on a bi-annual basis to provide colleagues with an additional opportunity to voice their opinions�
• colleagues aspirations for more development and wishes to make a broader contribution�
Broader Board engagement The Board also hosted additional engagement activities with colleagues in 2019 such as lunches with the NonExecutive Directors and additional interactive sessions hosted by the Committee Chairs in October� In addition the Board reviews regular reporting from the Group Human Resources Director and also had a ‘deep dive’ on work place culture�
I would like to thank the colleagues that I have met in 2019 and the Forum members for their engagement to date and honest feedback� I look forward to continued discussions with colleagues from around the business in 2020 and anticipate that the Group’s sustainability strategy, ‘committing to a sustainable future’ will be a key focus area�
The Chairman’s other commitments are set out in his biographical details on page 78� The Chairman was appointed on the basis of committing two days per week to Phoenix�
BOARD INDEPENDENCE AND APPOINTMENT TERMS The Board considers that the following Directors are independent: Alastair Barbour, Karen Green, Wendy Mayall, John Pollock, Belinda Richards, Nicholas Shott and Kory Sorenson� The Board has considered the criteria proposed by the Code in assessing the independence of the Directors�
The Board met nine times during 2019 and is scheduled to meet seven times in 2020 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 2019�
BOARD COMPOSITION AS AT 31 DECEMBER 2019 88 PHOENIX GROUP HOLDINGS PLC ANNUAL REPORT & ACCOUNTS 2019
Mike Tumilty2 3/4 1 Barry O’Dwyer resigned from the Board on 28 June 2019� 2 Mike Tumilty was appointed to the Board on 1 September 2019�
The Nomination Committee has been very active in non-executive recruitment over the last few years� Recruitment since 2016 has included the role of Group Chair in 2018, with new Non-Executive Directors as follows: • September 2016 – Wendy Mayall, John Pollock, Nicholas Shott
• August 2018 – SLA nominees, Campbell Fleming and Barry O’Dwyer
The Board’s policy on diversity is as follows: • The Board promotes the enhancement of diversity, including gender, as a consideration when recruiting new Directors�
• The Board will undertake regular skills audits to ensure the Board’s skills remain appropriate for its strategy and providing diversity where possible�
The report from the Board Evaluation Review was discussed at a Board meeting in November 2019 before the Board had approved the proposal to acquire ReAssure� The review concluded that the Board operates well with strong and diverse skills and experience, adding that more open business skills and experience would be an incremental benefit� That has since been achieved with the appointment of Andy Briggs as Group CEO� The report also concluded that stability in Board membership in the near-term would be preferred� It is the intention of the Board and Nomination Committee that the skills and experience on the Board will be re-assessed once the new Board appointees nominated by Swiss Re and MS&AD are known, following the intended completion of the ReAssure acquisition�
“I am pleased with the very successful outcome from the Nomination Committee’s work on the succession planning for the Group CEO, resulting in the appointment of Andy Briggs to succeed Clive Bannister.”
The composition of the Audit Committee is detailed within the table shown above and is in accordance with the requirements of the UK Corporate Governance Code 2018 (‘Code’) and also with DTR 7�1�1AR� As part of the 2019 Effectiveness review, it was confirmed that all four members of the Audit Committee are considered as independent Non-Executive Directors� In accordance with the Code, it is confirmed that at least one member has recent and relevant financial experience and the members of the Committee as a whole have competence relevant to the insurance industry�
The Audit Committee met six times during 2019� Its meetings are attended by the Chair 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 Board Chair 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� The Audit Committee acts independently of management, and engages closely with both the Group Risk Committee and the Life Company Audit Committee to ensure there is a good understanding of the work undertaken by each and enable efficient communication between the Committees�
AUDIT COMMITTEE’S ROLE AND FOCUS 2019 has been a year of continued change for the Group with the ongoing transition activities that have followed the acquisition of Standard Life� The political landscape remained turbulent during the year with sustained uncertainty around the UK’s decision to leave the European Union and other macroeconomic factors leading to continuing volatility in financial markets� Against this backdrop, the main focus for the Audit Committee continues to be the oversight of the integrity of the Company’s financial statements and the soundness and effectiveness of the Group’s systems and controls, together with monitoring the effectiveness of both the Internal and External auditors� This encompasses the following key functions: • Receiving and reviewing the Annual Report and Accounts, the Solvency and Financial Condition Report and other financial results, statements and disclosures, and recommending their approval to the Board�
• Monitoring the overall integrity of the financial reporting by the Company and its subsidiaries and the effectiveness of the Group’s internal controls�
KEY AUDIT COMMITTEE ACTIVITIES IN 2019 • Reviewed the Company’s 2018 Annual
• Considered the financial aspects of the proposed ReAssure acquisition 92 PHOENIX GROUP HOLDINGS PLC ANNUAL REPORT & ACCOUNTS 2019
AUDIT COMMITTEE’S PRINCIPAL ACTIVITIES DURING 2019 External reporting and controls The Audit Committee in 2019 carried out the following activities in relation to the Group’s external reporting and the effectiveness of its internal controls: • Reviewed the Company’s 2018 Annual Report and Accounts, and the 2019 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 Group’s annual Solvency II results and the Solvency and Financial Condition Report, recommending their approval to the Board�
• Reviewed the financial forecasts and target setting 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�
• Reviewed the Line 1 risk and controls report from management, the Line 2 internal control assessment from Group Risk, and the annual Line 3 internal control environment opinion report (and the half year update) from Internal Audit prior to its consideration by the Board and received reports regarding consequential actions; and received a dedicated briefing on 21 January 2020�
• Considered financial disclosures pertaining to the announcement of the proposed acquisition of ReAssure Group plc, supported by reports from management and the Group’s external auditors�
• Reviewed reports from Internal Audit on the control environment in the Group’s outsource service providers and on the effectiveness of the internal audit work undertaken within the outsource service providers, noting that this was addressed in more detail at the Phoenix Life Audit Committee�
External audit A key part of the role of the Audit Committee is the review and oversight of the work of the Group’s External Auditor� The Audit Committee reviewed various reports from the External Auditor, including the 2019 Audit Plan, progress reports against that plan, and results report for their audit procedures on the 2019 annual IFRS and Solvency II results, and their interim review of the half year IFRS results�
The Audit Committee considered throughout 2019 the effectiveness, engagement and remuneration of the current external auditors� These activities supported the recommendation of the re-appointment of Ernst & Young (‘EY’), which was approved by the Board and subsequently approved by shareholders at the May 2019 AGM – see ‘Assessment of the effectiveness of the external audit process’ and ‘Auditor’s Appointment’ on page 95�
The Audit Committee has also considered matters pertaining to the mandatory rotation of the External Audit firm – see Auditor’s Appointment on page 95�
Audit Committee’s performance The Committee’s performance was reviewed by the Board in November 2019 as part of its overall Board Evaluation Review� The conclusions from the Evaluation Review showed that the Committee continues to operate effectively�
Alastair Barbour Chair of Audit Committee 04. AUDIT, RISK AND INTERNAL CONTROL CONTINUED
Corporate Governance Report continued 94 PHOENIX GROUP HOLDINGS PLC ANNUAL REPORT & ACCOUNTS 2019
EY has been auditor to the Company since December 2018� EY has indicated its willingness to continue in office and shareholders’ approval will be sought at the AGM on 15 May 2020�
The current lead audit engagement partner is Stuart Wilson, who has held the role from the 2019 statutory audit�
After consideration of the findings of the 2018 effectiveness review, EY proposed enhancements to their audit approach as part of their 2019 audit plan, which have been monitored by the Committee�
The engagement of EY to perform any non-audit service is subject to a process of pre-approval by the Audit Committee� Furthermore, the Group’s external auditor policy prescribes a limit for fees associated with non-audit services of 70% of the average statutory audit fee for the three preceding years� This aligns with requirements introduced by the EU Audit Directive and Regulations in 2016�
The engagement of EY to perform any non-audit service is subject to a process of pre-approval by the Audit Committee� Of the £3�3 million of non-audit fees, £1�6million related to actuarial and finance due diligence procedures conducted in relation to the proposed acquisition of ReAssure� Consistent with previous transactions, the Audit Committee concluded that the engagement of the external auditors in the performance of such diligence procedures would facilitate audit work post-completion of the transaction, and provide enhanced insight as to the quality of the control environment operated in the target company by comparison to Group standards� 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 documents relating to the acquisition� The engagement of the Group’s independent external auditor for the provision of such services is consistent with market practice in transactions of this nature�
During 2019, EY reported a breach of the rules of the FRC Ethical Standards to the Audit Committee� The breach occurred as a result of the provision of prohibited tax services by EY to Aberdeen Standard Investments (‘ASI’) legal entities, where the benefit of those services arose in ASI managed funds that, following the acquisition of the Standard Life Assurance business, are now controlled by the Phoenix Group� In considering these matters, the Audit Committee concluded that the independence of EY was not impaired, reflecting the trivial nature of the impact of the services on the Group’s financial statements, the fact that the work was undertaken by personnel who were wholly separate to the audit team, and that no reliance was placed by the audit team on the output of the services�
A summary of these papers was presented for oversight review by the Audit Committee, and the Life Company Audit Committees’ conclusions were reported to the Audit Committee through minutes of its meeting and a discussion between the Chairmen of the committees� The Audit Committee discussed, and questioned management and EY on, the content of the summary papers and the Life Company Audit Committee’s conclusions�
Pension assumptions for use in the IAS 19 Employee Benefits valuations were reviewed and approved by the Audit Committee prior to the finalisation of the valuation reports�
Management presented papers setting out the basis of valuation of financial assets, including changes in methodology and assumptions, for the interim and year-end reporting periods to the Life Company Audit Committees� The assumptions, valuations and processes, particularly for financial assets determined by valuation techniques using significant non-observable inputs (Level 3), were debated and challenged by the Life Company Audit Committee prior to being approved�
The valuation information was then presented for oversight review by the Audit Committee who considered and confirmed the appropriateness of the basis of valuation�
Management presented papers detailing the results of annual impairment testing carried out in respect of goodwill balances and reviews for indicators of impairment performed in respect of finite life intangibles�
The Audit Committee considered the results of the work performed and confirmed the appropriateness of the conclusions reached�
Assessment of whether the Annual Report and Accounts are fair, balanced and understandable
Viability Statement The Audit Committee reviewed the process to support, and the contents of, the Viability Statement� The Committee concluded that the period covered by the Viability Statement should continue to be five years to align it to the Group’s strategic plan�
Corporate Governance Report continued 96 PHOENIX GROUP HOLDINGS PLC ANNUAL REPORT & ACCOUNTS 2019
• The Committee’s meetings are attended by the Chair of the Audit Committee, Alastair Barbour, which allows the review of internal control effectiveness to be managed through collaborative working and oversight�
• Other regular attendees to the Committee include the Group Chief Actuary, Deputy Group Finance Director, the Chief Executives of the subsidiary Life Company boards, the Group General Counsel and the Group Head of Internal Audit�
• The Committee met a total of seven times in 2019 including one out of cycle meeting by telephone�
• A briefing session was held to review Brexit Impact planning and interest rate risk management�
• The Chief Risk Officer, Jonathan Pears, has full access to the Chair and the Committee and attends all meetings�
• The Committee receives frequent reporting from the Chief Risk Officer and the Group Risk function on consolidated risk matters affecting the Group including risk profile assessments and emerging risks�
SIGNIFICANT MATTERS DISCUSSED IN 2019 ReAssure Group plc Acquisition • The Committee considered and evaluated the proposed acquisition of ReAssure Group plc and provided a recommendation to the Board� The recommendation was based on the assessment of the strategic risk and financial resilience of the enlarged Group; the impact on the risk appetite and risk profile of the Group; and operational resilience including the proposed operating model�
KEY RISK COMMITTEE ACTIVITIES IN 2019 • Considered regular updates on the
• Evaluated and considered the proposed acquisition of ReAssure Group plc
• Continued to review the Group’s Risk Profile and principle Risk Policies�
• - Reviewed the Group's Annual Own Risk and Solvency Assessment Report
Transformation of the Heritage and Open business platforms and operating model • The Committee reviewed the key risks and actions associated with the material expansion of the Phoenix outsource arrangement and delivery of the proposed Transformation Programme�
Financial Risks of Climate Change • Following the PRA's publications in April 2019 regarding "insurers' approach in managing the financial risks from Climate Change", the Committee has considered the impact and taken a number of actions to implement the Regulator's requirements� In addition the Committee reviewed the results of the Climate Change Scenario Stress Tests which were required as part of the PRA's Insurance Stress Test Exercise�
• Consideration of the annual ORSA Report for the Group and its regulated subsidiaries� The committee rocommended the ORSA Report for approval by the Board�
BOARD CHANGES (FURTHER INFORMATION ON PAGES 122 TO 124) As we enter 2020, the Board is delighted to welcome Andy Briggs as Group Chief Executive Officer ('CEO') designate from January 2020, and as CEO from 10 March 2020� His wealth of experience will be invaluable to the Group as it continues the integration of the SLA business and progresses its long-term growth strategy�
Andy has over 30 years of insurance industry leadership experience including as the CEO of a public limited company, former Chairman of the ABI, and the Government Business Champion for Older Workers�
DEAR SHAREHOLDER On behalf of the Board and its Remuneration Committee (‘Committee’), I am pleased to present the Directors’ Remuneration Report ('DRR') for the year ended 31 December 2019� This report is subject to two shareholder votes at the 2020 Annual General Meeting ‘AGM’: • An advisory vote on the implementation in 2019 of the existing Directors’ Remuneration Policy
• A binding vote on the proposed Directors’ Remuneration Policy which, if approved, will apply from the date of the AGM for up to three years�
SUMMARY OF THE YEAR 2019 was a momentous year for Phoenix, with entry into the FTSE 100 in March, strong progress made in the Standard Life Assurance ('SLA') transition programme and the anticipated synergies throughout the year, and the announcement of our acquisition of ReAssure Group plc in December� These highlights were achieved while exceeding all 2019 financial targets, integrating 3,500 new colleagues and continuing to focus on our mission to inspire confidence in the future, improve outcomes for customers and deliver value for shareholders�
Andy will be remunerated in line with our current and proposed Remuneration Policies� He will receive: • an annual base salary of £800,000; • a maximum bonus of 150% of base salary; • a face value Long-Term Incentive Plan ('LTIP') grant of 275% of base salary; • a cash payment in lieu of pension contribution of 12% of base salary (10�5% when taken as a cash payment in lieu), in line with the Directors’ Remuneration Policy approved at the 2019 AGM to align Executive Director pensions with the wider workforce; and
• benefits in accordance with our Directors’ Remuneration Policy which will be reported in the single figure table each year�
In addition, the Company will award Phoenix shares to the equivalent value to the forfeited in-flight awards granted by his former employer in March 2017 and May 2018, pro-rated to the end of his former employment� The buy-out award will vest subject to the achievement of the former employer’s original published performance targets� The vesting date will be as soon as practicable following verification of the level of vesting achieved�
• 4�8 million additional policyholders, increasing our policyholder total by 86%�
• Additional cash generation of £5�5 billion, an increase of 87% on pre-acquisition expectations�
After thorough review, the Committee determined that the base structure of the policy remains appropriate in motivating and encouraging positive behaviours in line with our mission to improve outcomes for customers and deliver value for shareholders� However, the change to the overall business merited certain changes to the variable pay plans to ensure it is relevant to all employees across the business�
The second change is in relation to the Personal element of the AIP� Previously 20% of AIP for Executive Directors was linked to their personal objectives� To provide greater transparency and better linkage with the Group’s strategic priorities and wider workforce, a new Strategic Scorecard reflecting core strategic priorities will replace the Personal element� These targets will be clearly articulated and measured, whilst avoiding duplication with any outcomes under the Corporate element� The targets for this Strategic Scorecard, which will include Environmental Social Governance ('ESG') metrics, will be disclosed retrospectively in the 2020 DRR consistent with current practice for the personal element�
In 2019, the Committee conducted the full triennial review of our remuneration policy in respect of its alignment to the Company’s strategy, the provisions of the 2018 UK Corporate Governance Code and emerging best practice� Since the Committee’s last full review of the Remuneration Policy in 2017, the business has fundamentally changed, including: The Committee approved a remuneration package for Andy in line with the highly competitive market for talent in our specialist area of financial services and quality of the candidate� Given there has been no change to any element of the remuneration package for the outgoing CEO since his arrival in 2011, the higher package offered reflects the increased size and complexity of Phoenix Group and is commensurate with the deep experience and expertise that Andy will bring to Phoenix in both the Open and Heritage businesses�
The new CFO will be appointed on a remuneration package consisting of: • an annual base salary of £420,000; • a maximum bonus of 150% of base salary; • a face value LTIP grant of 200% of base salary; • a pension contribution of 12% of base salary (10�5% if taken as a cash payment in lieu); • benefits in accordance with our Directors’ Remuneration Policy which will be reported in the single figure table each year�
LONG-TERM INCENTIVE PLAN (‘LTIP’) The key change to the LTIP is the addition of a Persistency metric to reflect the Open business, similar to our approach with the AIP� Persistency is a key metric for the Group’s long term strategy as it measures long term customer retention� Persistency will have a weighting of 20% of the award� The existing measures which have been renamed for clarity (Net Operating Cash Receipts, Return on Shareholder Value, Total Shareholder Return ('TSR') remain in place, with a slight reduction in their weighting to accommodate the new metric, as set out in the chart above�
Pension – Following the departure of Clive Bannister and Jim McConville, pension contributions have been aligned to the wider workforce (currently 12% of base salary) in line with our new Policy� This applies to both Executive Directors being proposed for election at the Company’s AGM on 15 May 2020�
INCENTIVE OUTCOMES FOR 2019 (FURTHER INFORMATION ON PAGES 115 TO 118) For the 2019 AIP, the Committee determined that Clive Bannister and Jim McConville should receive 92�3% and 87�3% of their maximum bonus opportunity, respectively�
As detailed in the strategy section of the 2018 Annual Report and Accounts under the 'Engage Colleagues' section, a common incentive plan was launched for all colleagues within the enlarged Group, ensuring consistency of corporate goals and individual performance management�
2019 SINGLE FIGURE The outcomes under the AIP and LTIP resulted in a single figure outcome for Clive Bannister of £2,976k and for James McConville of £1,843k�
✔ – AIP scorecard engages employees across the Group to achieve common targets
HOW WE PERFORMED IN 2019 Group performance measures Annual Incentive Plan (‘AIP’): Below we show the target ranges and outturn against the metrics within the 2019 AIP� More details of the 2019 AIP can be found on page 115� AIP metrics that are stated Group KPIs are flagged below and evidences the direct link between Group strategy and remuneration outcomes� Those metrics that are not stated KPIs were felt by the Committee to be appropriate metrics which are reflective of the shareholder experience�
Outturn 1 See note 6 on page 115 for detail of the FOS Overturn Rate used in the AIP�
Base Salary Base salaries reviewed against comparator groups, including the FTSE31-100 and FTSE250, with changes taking effect from 1 January�
Executive Director salaries may not exceed £780,000 adjusted for inflation since 2017 (currently £834,000)�
Base salaries are reviewed against comparator groups which the Remuneration Committee deems suitable with changes taking effect from 1 April�
The salary of an Executive Director may not exceed the average median positioning within these groups adjusted for inflation�
Financial performance measures will not be reduced below 50% of potential�
2019 performance measures: 2020 performance measures: • Cumulative Cash Generation (40%); • Net Operating Cash Receipts1 (35%); • Return on Adjusted Shareholder Solvency II Own Funds (35%); and
• Return on Shareholder Value1 (25%); • Total Shareholder Return (35%)� • Total Shareholder Return (20%); and
1 These metrics have been renamed simply to provide clarity� The calculations for these remain unchanged from last year� Shareholder Value represents shareholder Solvency II own funds adjusted to remove the Group's capital qualifying sub-debt�
ALIGNMENT TO SHAREHOLDERS Our Executive remuneration is designed to align with shareholder interests to deliver long-term sustainable value� The diagram below shows how a significant portion of Executive remuneration under the proposed remuneration policy is delivered in shares and deferred for up to five years� At face value, 65% of the CEO’s maximum remuneration is delivered in shares�
DIRECTORS’ REMUNERATION POLICY The Company is seeking approval from its shareholders at its 2020 AGM for its updated Directors’ Remuneration Policy (‘Remuneration Policy’)�
The Remuneration Policy which is being put forward for approval by shareholders of Phoenix Group Holdings plc at the 2020 AGM has been updated as described in the Chairman’s covering letter� The Remuneration Policy is set out in section A of this report overleaf�
Predictability • The range of potential award levels to individual Executive Directors are set out in the scenario chart on page 107 which also demonstrates the impact of potential share price growth by 50% over the three-year performance period until LTIP vesting�
Proportionality • A high percentage of rewards are delivered in the form of shares, meaning Executive Directors are strongly aligned with shareholders� We have increased the share ownership guidelines to 300% for the CEO and 250% for the CFO and introduced a post-employment shareholding requirement for our Executive Directors to ensure that they are aligned to the long-term performance of the Group�
• Executive Directors are required to hold shares from LTIP awards for two years following vesting which provides focus on sustainable share price growth� We have also extended deferral levels under the AIP to further align to shareholders�
Alignment to culture • We have engaged with our employees through our Colleague Insight Survey and Employee Networks (see further details on pages 36 and 84) to develop our values and to improve our understanding of what is required to become a high-performing organisation� Our remuneration philosophy supports our purpose and core values�
On-target Based on what the Executive Director would receive if performance was on-target: • AIP: consists of the on-target annual incentive (75% of base salary)� • LTIP: consists of the threshold level of vesting (50% of base salary, 68�75% for Andy Briggs)� In addition, the potential value of Sharesave and Share Incentive Plan (‘SIP’) participation is also recognised�
Maximum Based on the maximum remuneration receivable: • AIP: consists of the maximum annual incentive (150% of base salary)� • LTIP: assumes maximum vesting of awards and valued as on the date of grant (award of 200% of base salary for
CFO and 275% of base salary for CEO� Sharesave and SIP valued on the same basis as in the on-target row�
REMUNERATION POLICY TABLE Element and purpose in supporting strategic objectives Base Salary This is the core element of pay which supports the recruitment and retention of Executive Directors and reflects the individual’s role and position within the Group as well as their capability and contribution
Policy and operation • Base salaries are reviewed each year against companies of similar size and complexity� Both salary levels and overall remuneration are set by reference to the median data of comparators which the Remuneration Committee considers to be suitable based on index, size and sector� • The Remuneration Committee uses this data as a key reference point in considering the appropriate level of salary� Other relevant factors including corporate and individual performance and any changes in an individual’s role and responsibilities, and the level of salary increases awarded to other employees of the Group are also considered�
• Base salary is paid monthly in cash� • Changes to base salaries normally take effect from 1 April�
Remuneration Committee considers to be appropriate in all the circumstances� • Relocation expenses are subject to a maximum limit of £50,000�
• Phoenix will honour the pensions obligations entered into under all previous policies in accordance with the terms of such obligations�
Policy and operation • AIP levels and the appropriateness of measures are reviewed annually to ensure they continue to support the Group’s strategy� • AIP outcomes are paid in cash in one tranche (less the deferred share award)� • At least 50% of any annual AIP award is to be deferred into shares for a period of three years although the Remuneration Committee reserves discretion to alter the current practice of deferral (whether by altering the portion deferred, the period of deferral or whether amounts are deferred into cash or shares)� Such alterations may be required to ensure compliance with regulatory guidelines for pay within the insurance sector, but will not otherwise reduce the current deferral level or the period of deferral�
• Deferral of AIP outcomes into shares is currently made under the DBSS� • Awards under DBSS will be in the form of awards to receive shares for nil-cost (with the shares either being delivered automatically at vesting or being delivered at a time following vesting at the individual’s choice)� • DBSS awards are made automatically each year on the fourth dealing day following the announcement of annual results, using the average of the preceding three dealing days’ share prices to calculate the number of shares in awards� • The three-year period of deferral will run to the third anniversary of the award date� • Dividend entitlements will accrue over the three-year deferral period and be delivered as additional vesting shares� • Malus/clawback provisions apply to the AIP and to amounts deferred under DBSS as explained in the notes to this table�
Maximum • The maximum annual incentive level for an Executive Director is 150% of base salary per annum�
• The AIP operates subject to three levels of moderation: i� The Committee seeks to set suitable ranges for each measure in the context both of the Group's own internal budgets and of external projections
(whether through management guidance or consensus forecasts)� Recognising that the business of the Group is to engage in corporate activity, the Remuneration Committee may adjust targets during the year to take account of such activity and ensure the targets continue to reflect performance as originally intended�
ii� There is a specific adjustment factor of 80%–120% of the provisional outturn whereby the Remuneration Committee may adjust the provisional figure (but subject to any over-riding cap) to take account of its broad assessment of performance both against pre-set targets, risk considerations, and more generally, of the wider universe of stakeholders� With respect to financial performance measures, this assessment will include consideration of the quality of how particular outcomes were achieved�
The AIP remains a discretionary arrangement and the Remuneration Committee reserves discretion to adjust the outturn (from zero to any cap) should it consider that to be appropriate� In particular, the Remuneration Committee may operate this discretion in respect of any risk concern�
Maximum • The formal limit under the LTIP is 300% of base salary per annum (and 400% per annum in exceptional cases)� • 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)
Net Operating Cash Receipts 35% Return on Shareholder Value 25% Total Shareholder Return 20% Persistency 20%
• The performance period for LTIP awards will be at least three years, but the Remuneration Committee reserves discretion to lengthen the applicable performance periods for LTIP awards�
Policy and operation • Executive Directors are able to participate in all-employee share plans on the same terms as other Group employees as required by HMRC legislation�
• Share Incentive Plan (‘SIP’) – the Remuneration Committee has the facility to allow individuals to have the opportunity to purchase, out of their pre-tax salary, shares in the Company and receive up to two matching shares for every purchased share� Maximum saving is £150 each month (or up to such level as permitted by the Company in line with HMRC legislation)� SIP also has the facility to allow for reinvestment of dividends in further shares, or the award of additional free shares (up to the limits as permitted by HMRC legislation)�
Policy and operation • Executive Directors are expected to retain all shares (net of tax) which vest under the DBSS and under the LTIP (or any other discretionary long-term incentive arrangement introduced in the future) until such time as they hold a minimum of 300%of base salary in shares for the CEO and 250% of base salary in shares for the CFO�
Model Governance Committee, and to the Senior Independent Director (‘SID’) and dedicated Workforce Director of Engagement� No separate Board committee membership fees are currently paid�
Maximum • The aggregate fees of the Chairman and Non-Executive Directors will not exceed the limit from time to time prescribed within the Company’s Articles of Association for such fees (currently £2 million per annum in aggregate)� • The Company reserves the right to vary the structure of fees within this limit including, for example, introducing time-based fees or reflecting the establishment of new Board committees�
The Group has (as required by Solvency II regulations) one consistent reward policy for all levels of employees and this policy is made available to all staff� Therefore, the same reward principles guide reward decisions for all Phoenix employees, including Executive Directors, although remuneration packages differ to take into account appropriate factors in different areas of the business as follows: • AIP – all Phoenix employees participate in the AIP, although the quantum and balance of corporate to individual objectives varies by level� The most senior staff are subject to the regulatory requirements of Solvency II, and these individuals also receive part of their bonus in Company shares deferred for a period of three years� A different scorecard of AIP performance measures applies for Solvency II Identified staff in ‘control functions’ (risk, compliance, internal audit and actuarial) to exclude financial performance measures�
• LTIP – our most senior employees participate in the LTIP currently based on the same performance conditions as those for Executive Directors, although the Committee reserves the discretion to vary the performance conditions for awards made to employees below the Board for future awards�
2. Stating maximum amounts for the Remuneration Policy The DRR regulations and related investor guidance encourages companies to disclose a cap within which each element of remuneration policy will operate� Where maximum amounts for elements of remuneration have been set within the Remuneration Policy, these will operate simply as caps and are not indicative of any aspiration�
• any other circumstances that have a sufficiently significant impact on the reputation of the Company or Group�
• consistent with the latest Corporate Governance Code, the Remuneration Committee may apply discretion to override formulaic outcomes if they are considered inconsistent with the underlying performance of the group (see pages 106 and 101)�
RECRUITMENT REMUNERATION POLICY The Group’s recruitment remuneration policy aims to give the Remuneration Committee sufficient flexibility to secure the appointment and promotion of high calibre executives to strengthen the management team and secure the skill sets to deliver our strategic aims�
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�
For external and internal appointments, the Remuneration Committee may agree that the Company will meet certain relocation expenses as it considers appropriate�
• For the avoidance of doubt, such buy-out awards are not subject to a formal cap�
• A new Non-Executive Director would be recruited on the terms explained in the Remuneration Policy for such Directors�
DIRECTORS’ SERVICE CONTRACTS Executive Directors 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 to time and may be amended provided it is not overall more generous than the terms described above�
Non-Executive Directors The Non-Executive Directors, including the Chairman, have letters of appointment which set out their duties and responsibilities� Appointment is for an initial fixed term of three years (which may be renewed), terminable by one month’s notice from either side (six months in the case of the Chairman)� Non-Executive Directors are not eligible to participate in incentive arrangements or receive pension provision or other benefits such as private medical insurance and life insurance�
Copies of Executive Director service contracts and Non-Executive Director letters of appointment are available for inspection at the Company’s registered office�
The Group has power to enter into settlement agreements with executives and to pay compensation to settle potential legal claims� In addition, and consistent with market practice, in the event of termination of an Executive Director, the Group may pay a contribution towards the individual’s legal fees and fees for outplacement services as part of a negotiated settlement� Any such fees would be disclosed as part of the detail of termination arrangements� For the avoidance of doubt, the policy does not include an explicit cap on the cost of termination payments�
CONSIDERATION OF EMPLOYMENT CONDITIONS ELSEWHERE IN THE GROUP As explained in the notes to the Remuneration Policy table, the Remuneration Committee takes into account Group-wide pay and employment conditions� The Remuneration Committee reviews the average Group-wide base salary increase and annual incentive costs and is responsible for all discretionary and all-employee share arrangements�
AIP Pro-rated annual incentive� Pro-rating to reflect only the period worked� Performance metrics determined by the Remuneration Committee
All awards will normally lapse Will receive a pro-rated award subject to the application of the performance conditions at the date of the event� Remuneration Committee discretion to disapply pro-rating 1 Where the reason for leaving is retirement, the individual will be required to provide confirmation of their continued retirement before any payments are released to them after the end of the vesting period�
The Remuneration Committee also seeks to build an active and productive dialogue with investors on developments in the remuneration aspects of corporate governance generally and any changes to the Company’s executive pay arrangements in particular� The Remuneration Committee consulted with shareholders prior to submission of this policy� The previous Remuneration Policy was submitted to shareholders at the 2019 AGM due to the completion of a Scheme of Arrangement in 2018 and this was approved with 99�7% support�
1 The Executive Directors are entitled to adjust their salary/benefit combination under flexible benefits arrangements and the figures shown are before individual elections�
3 Annual incentive amounts are presented inclusive of any amounts which must be deferred into shares for three years (ie 40% of the AIP award for 2019)� In 2019 and 2018, £387,660 and £359,100 respectively of Clive Bannister’s incentive payment is subject to three-year deferral delivered in shares, and £230,472 and £232,320 of James McConville’s incentive payment is subject to a similar deferral� Deferred amounts are subject to continued employment or good leaver status�
6 Clive Bannister and James McConville are entitled to each receive a Company pension contribution of 17�6% which is paid in cash� Pension contributions paid as cash supplements are reduced for the effect of employers’ National Insurance contributions� Both Clive Bannister and James McConville received the pension contributions as cash supplements� No Director participated in a defined benefit pension arrangement in the year and none have any prospective entitlement to a defined benefit pension arrangement�
2 This measure looks at the resolution of incidents for which there could be customer detriment (financial or non-financial)� It measures the timeliness of actions when things go wrong� The metrics in the table represent the percentage of cases closed within nine months�
3 This measure assesses how easy customers have found Phoenix Group to deal with using a scale of 0 – 10� The NetEasy score is the difference between the number of promotors (those scoring 9 or 10) and the number of detractors (those scoring 0)�
5 This measure looks at servicing (i�e� not product or advice) complaints which are closed within three days� 6 This measure looks at the proportion of cases where the Financial Ombudsman Service disagrees with our decision-making in dealings with customers or an aspect of it� For the AIP the FOS overturn rate is calculated based on an average of the H1 current year and H2 prior year rates� This is due to the timing of when the FOS rates are published�
As described in the Group Chairman's and Group CEO's reports (pages 6 to 11), 2019 has been a year of significant achievement for the Phoenix Group in which all strategic and financial targets were met, and cash, resilience and growth were delivered�
Identify acquisition opportunities capable of individually and collectively, materially enhancing shareholder value, and execute as appropriate
The acquisition of ReAssure Group plc, subject to regulatory approval, continues Phoenix Group’s strategy of aligned acquisitions that are accretive in value and focused on our competencies� The Group CEO was critical to this transaction and reflects sustained strategic interest in this outcome�
Oversaw delivery of a consecutive year of BPA growth and appropriate management of Illiquid Investments (£1�1 billion and £1�3 billion respectively)�
Drove the customer engagement agenda including advancing its proposition for pot consolidation with almost £1 billion new cash invested (up c�30% from 2018)� Across the Heritage books the level of retention has been broadly in line with or favourable to plan� There has been a sharpened focus on the workplace proposition with developments agreed to retain and grow the business going forward, underpinned by the announcement of an expanded strategic partnership with Tata Consultancy Services ('TCS')�
Championed another solid year of maintaining a wholly effective and transparent relationship with our regulators�
Oversaw delivery of a common bonus scheme with higher exposure to corporate outcomes and a unified approach to performance management, with greater differentiation�
The Group FD played a critical role in supporting the Group’s significant acquisition of ReAssure Group plc leading the Finance support to the transaction, the associated funding plan and presentation to the Fitch rating agency and equity and debt investors�
Ensured the Group remained on target to deliver 2019–2023 cash generation ≥ £3�9 billion� All financial targets have been exceeded with reference to our Corporate targets and delivered an operating profit of £810 million�
The Group FD has led the Transition Programme post the acquisition of the Standard Life Assurance businesses with increased financial targets issued during the year and 2019 delivery being in line or ahead of expectations�
Promote the Group’s interests in Scotland The Group FD successfully led the engagement with the Scottish Government and political parties and trade bodies in Scotland to widen knowledge of Phoenix Group and our plans for our business operated in Scotland�
The Group FD ran a comprehensive investor engagement programme across debt and equity which comprised 20 investor roadshows, meetings with 406 debt and equity investors, and a capital markets event attended by 133 external attendees including investors and analysts� The number of analysts increased by a net 3 to 14�
Taking account of the attainment of personal objectives, the Group Chief Executive Officer received an 87�5% payout (£183,750) for this element and the Group Finance Director received a 62�5%payout (£82,500) for this element, consistent with their ratings for 2019� These Personal (individual objectives) measures applied to 20% of incentive opportunity and Corporate (financial and strategic) measures applied to 80% of incentive opportunity� Overall outturns as a percentage of maximum opportunity are 92�3% for the Group Chief Executive Officer and 87�3% for the Group Finance Director�
The table below shows the actual outturn against the annual incentive maximum�
Clive Bannister 93�50 112�20 87�50 26�25 138�45 150�00 92�30 James McConville 93�50 112�20 62�50 18�75 130�95 150�00 87�30
As described in the Remuneration Policy, 40% of 2019 AIP outcomes will be delivered as an award of deferred shares under the DBSS which will vest after a three-year deferral period� This deferral level rises to 50% from the 2020 performance year�
Target range between Cumulative cash generation of £1�372 billion and Cumulative cash generation of £1�572 billion�
The above targets were all measured over the period of three financial years 1 January 2017 to 31 December 2019�
Ian Cormack4 – 39 – – – 39 Campbell Fleming5 – – – – – –
2 Henry Staunton retired from the Board of Phoenix Group Holdings on 31 October 2018� 3 Nicholas Lyons became Chairman designate of Phoenix Group Holdings from 1 September 2018 and was confirmed in this appointment on 31 October 2018� 4 Ian Cormack retired from the Board of Phoenix Group Holdings on 2 May 2018� 5 Campbell Fleming and Barry O’Dwyer joined the Board of Phoenix Group Holdings on 31 August 2018 and waived all current and future emoluments with regard to their Directors’ fees� 6 On 1 September 2019 Mike Tumilty joined the Board of Phoenix Group Holdings plc, replacing Barry O’Dwyer following his resignation from the Board on 28 June 2019� Mike Tumilty has waived all current and future emoluments with regard to his Directors fees�
SHARE-BASED AWARDS – AUDITED INFORMATION As at 31 December 2019, Directors’ interests under long-term share-based arrangements were as follows: LTIP
Performance measure 2017 award (50% Cumulative cash generation and 50% TSR)
2019 award (40% Cumulative cash generation, 35% Return on Adjusted Shareholder Solvency II Own Funds and 25% TSR)
Cumulative cash generation 25% of this part vests at threshold performance rising on a pro rata basis until 100% vests� Measured over three financial years commencing with the year of award�
Underpin: Notwithstanding the Return on Adjusted Shareholder Solvency II Own Funds, Cumulative cash generation and TSR performance targets, if the Committee determines that the Group’s debt levels and associated interest costs have not remained within parameters acceptable to the Committee over the performance period, and that the Group has not made progress considered to be reasonable by it in executing any strategy agreed by the Board on debt management, capital structuring and Risk Management, the level of awards vesting will either be reduced or lapse in full� The underpin also includes consideration of customer satisfaction and, to meet Solvency II requirements, in exceptional cases, personal performance�
James McConville 1 In addition to the shares awarded under the DBSS presented above, participants receive an additional number of shares (based on the number of DBSS awards which actually vest) to reflect the dividends paid during the vesting period�
2 Gains of Directors from share options exercised and vesting shares under the DBSS in 2019 were £590,721 (2018: £525,707)� Clive Bannister’s gain was £350,504 arising from an award exercised on 4 June 2019 at a share price of £6�675 James McConville’s gain was £240,217 arising from an award exercised on 26 June 2019 at a share price of £6�96�
Clive Bannister 11 March 2019 LTIP Nil cost option £1,399,854 25% 11 March 2022 See page 119 Clive Bannister 11 March 2019 DBSS1 Nil cost option £359,060 – 11 March 2022 None James McConville 11 March 2019 LTIP Nil cost option £879,905 25% 11 March 2022 See page 119 James McConville 11 March 2019 DBSS1 Nil cost option £232,294 – 11 March 2022 None 1 The DBSS awards have no threshold performance level�
Gains of Directors from share options exercised under Sharesave during 2019 were nil (2018: nil)� Sharesave options are granted with an option price that is a 20% discount to the three-day average share price when invitations are made� This is permitted by HMRC regulations for such options�
During the year ended 31 December 2019, the highest mid-market price of the Company’s shares was 758�7p and the lowest mid-market price was 558p� At 31 December 2019, the Company’s share price was 749p�
Alastair Barbour 9,716 9,716 – – – Campbell Fleming – – – – – Karen Green – – – – – Nicholas Lyons 20,000 20,000 – – – Wendy Mayall 30,000 30,000 – – – Barry O’Dwyer – – – – – John Pollock 14,666 14,666 – – – Belinda Richards – – – – – Nicholas Shott 7,333 7,333 – – – Kory Sorenson 15,704 20,704 – – – Michael Tumilty – – – – –
There have been no changes in the Directors’ share interests between 31 December 2019 and 3 March 2020 (being one month prior to the date of the notice of the AGM)�
SHAREHOLDING REQUIREMENTS – AUDITED INFORMATION As explained in the Remuneration Policy under the Shareholding Guidelines section, the Executive Directors are subject to shareholding requirements�
IMPLEMENTATION OF REMUNERATION POLICY IN 2020 – NON-AUDITABLE Board Changes A summary of the packages of the new Executive Directors is set out in the table below�
In order to secure the best candidate, the Committee agreed to offer a remuneration package reflective of the highly competitive market for talent in our specialist area of financial services� Given there has been no change to any element of the remuneration package for the outgoing CEO (Clive Bannister) since his arrival in 2011, the package offered to Andy Briggs is higher reflecting the size and complexity of Phoenix Group over the last few years and is commensurate with the deep experience and expertise that Andy will bring to the Group in both the Open and Heritage business� Andy has over 30 years of insurance industry leadership experience including as the CEO of a public limited company and former Chairman of the ABI as well as being the Government Business Champion for Older Workers� The Committee is confident that the new package is appropriately positioned relative to our peers and reflective of Andy’s experience and expertise� The Committee believes it represents excellent value for shareholders and is therefore delighted that Andy accepted the offer� The table below details the remuneration package for the new CEO�
Pension Contribution rate of 12% of base salary (10�5% when taken as a cash payment), aligned to our workforce under our Unified People Proposition (see page 126 for further details)
May 2018, pro-rated to the end of his former employment� The buy-out award will vest subject to the achievement of the former employer’s original published performance targets� The vesting date will be as soon as possible following verification of the level of vesting achieved� Details will be disclosed in the relevant Remuneration Report�
Shareholding requirement 300% of base salary� 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� Unvested awards under the DBSS which are not subject to performance conditions are included in this assessment on a net of tax basis� Unvested awards under the LTIP are not included in this assessment�
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� Unvested awards under the DBSS which are not subject to performance conditions are included in this assessment on a net of tax basis� Unvested awards under the LTIP are not included in this assessment�
Annual Incentive Plan (‘AIP’) Following the acquisition of the Standard Life Assurance businesses in 2018, metrics have been revised to reflect the performance of the Open business� The largest component of our Open business proposition is Workplace Pensions and an annual target for Net Workplace Flows is a transparent and robust measure of performance in the Open business� Drivers include new business sales performance, attractiveness of propositions, maintaining and servicing client relationships and market forces� The Management Actions metric will be removed in recognition of the challenges faced in setting appropriately stretching targets and following feedback from shareholders on this metric� This also allows space for the inclusion of Net Flows metric, which aligns with the strategic focus on the Open business� The Cash Generation and Shareholder Value metrics remain as they represent both the Open and the Heritage business� Additionally, a Strategic Scorecard will replace the Personal element of the AIP to provide greater transparency and will include a number of the strategic priorities for the year (but avoiding duplication with any outcomes under the Corporate element) and which can be clearly articulated and measured� This will include appropriate ESG metrics� The overall weightings between Corporate measures and the new Strategic Scorecard for AIP in 2020 are: • Corporate (financial and customer) performance measures – 80% (2019: 80%)� • Strategic Scorecard (strategic company priorities 20% (2019: Personal – individual objectives 20%)� The weightings of the AIP performance measures for 2020 are summarised below: Performance measure % of incentive potential
Corporate measure Cash Generation1 (30% of Corporate component) 24% Shareholder Value1 (30% of Corporate component) 24% Net Flows (Workplace) (15% of Corporate component) 12% Customer Experience (25% of Corporate component) 20% Strategic Scorecard 20% Total 100% Outcomes from performance measures for 2020’s AIP may be moderated by the Remuneration Committee in line with the approved Remuneration Policy� This will include a review by the Remuneration Committee on the extent to which the Group has operated within its stated risk appetite and that there are no other risk-related concerns that would necessitate moderation before any 2020 AIP outcomes are confirmed� The targets for the specific performance measures for AIP in 2020 are regarded as commercially sensitive by the Group but will be disclosed retrospectively in the Remuneration Report for 2020� Bonus deferral under the AIP for 2020 will increase from 40% to 50% for both Executive Directors� 50% of AIP outcomes for 2020 will therefore be delivered as an award of deferred shares under the DBSS which will vest after a three-year deferral period�
DBSS awards made in 2020 (in respect of 2019’s AIP outcome) will be made automatically on the fourth dealing day following the announcement of the Group’s 2019 annual results in accordance with the Remuneration Policy� The number of shares for DBSS awards will be calculated using the average share price for the three dealing days before the grant of the DBSS awards� The three-year deferral period will run to the three-year anniversary of the making of the DBSS awards� Dividend entitlements for the shares subject to DBSS awards will accrue over the three-year deferral period�
The performance measures are measured over a period of three financial years, commencing with financial year 2020� All 2020 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 2020’s LTIP awards� The performance targets for the Net Operating Cash Receipts measure are £2,375 million (where 25% of this part of the award vests) and £2,725 million (full vesting of this part of the award)� The performance targets for the Return on Shareholder Value measure (return above risk free on Shareholder value (pre shareholder dividends) over a 3 year period) are 2% in excess of the risk-free rate (where 25% of this part of the award vests) and 4% in excess of the risk-free rate (full vesting of this part of the award)� The performance targets for the Persistency measure are 6�5% (where 25% of this part of the award vests) and 8�0% (full vesting of this part of the award)� In recognition of our move to the FTSE 100 index, for 2020 awards the relative TSR measure is calculated against the constituents of the FTSE 350 (excluding Investment Trusts), with vesting commencing at median (where 25% of this part of the award vests) and full vesting at upper quintile levels, subject to an underpin regarding underlying financial performance� The rules of the Company’s LTIP reserves discretion for the Committee to adjust the outturn for any LTIP performance measures (from zero to any cap) should it consider that to be appropriate� The Committee may operate this discretion having regard to such factors as it considers relevant, including the performance of the Group, any individual or business�
All-Employee Share Plans Executive Directors have the opportunity to participate in HMRC tax advantaged Sharesave and Share Incentive Plans on the same basis as all other UK employees�
Note: All incentive plans are subject to malus/clawback� See page 111 ‘Notes to the Remuneration Policy’ for details�
EXECUTIVE DIRECTOR DEPARTURES In November we announced that Clive Bannister would step down as CEO following the publication of our 2019 full year results and after nine very successful years with the business� His departure arrangements will be in line with the Remuneration Policy�
Clive Bannister will leave the Company on 9 March 2020� He will receive pay in lieu of notice for the period starting on this date and ending on 7 November 2020, comprising salary, pension allowance and insurance benefits� He will receive no compensation for loss of car allowance� Clive’s 2019 AIP will be paid in the normal way and subject to 40% deferral in line with the current policy� Clive will be eligible for a 2020 AIP award for the portion of the year in which he remains employed by the Group, which will be payable in March 2021 and subject to 50% deferral in line with the proposed policy� Clive’s in-flight LTIP awards will be time pro-rated to his end date� A summary of the arrangements is set out in the table below� Actual figures will be disclosed in the 2020 Remuneration Report
Termination payment • Balance of 12 months from date of departure to one-year anniversary of announcement of departure (7 November 2020)�
• Payment comprises salary plus certain benefits plus pension� • Paid monthly and subject to reduction in relation to payments for the periods from 8 November 2019 onwards if a new role found� 2019 AIP • Paid in the normal way including 40% deferral in line with the current policy� 2020 AIP • Eligible for payment to termination date�
• In-flight awards pro-rated for period employed of the three-year period commencing on the date of grant�
DISTRIBUTION STATEMENT The DRR regulations require each quoted company to provide a comparison between profits distributed by way of dividend and overall expenditure on pay�
Overall expenditure on pay has been taken as the employee costs as set out in note C2 ‘Administrative expenses’ in the notes to the consolidated financial statements� Expenditure on pay has increased by 78% in the period which is mostly as a result of the inclusion of a full year's expenditure in relation to the Standard Life Assurance businesses which were acquired in the prior year (2018: 4 months' expenditure)� An increase in BAU expenditure accounts for c�5% of the increase and is largely as a result of the increased bonus and share-based payment costs during the year�
VOTING OUTCOMES ON REMUNERATION MATTERS The table below shows the votes cast to approve the Directors’ Remuneration Report for the year ended 31 December 2018 and the Directors’ Remuneration Policy at the 2019 AGM held on 2 May 2019�
Additionally in 2019 Karen Green was appointed the designated Non-Executive Director for workforce engagement� Details of Karen’s activities during the year are given on page 84 under the Corporate Governance Report�
GENDER PAY GAP The two reporting entities for Gender Pay Gap reporting are Pearl Group Management Services Limited and Standard Life Assets and Employee Services Limited; details of the 2019 Gender Pay Gap are shown on page 37 of the Annual Report and Accounts�
CEO PAY RATIO This reporting year new legislation has come into force which requires quoted companies with 250 or more UK employees to publish information on the ratio of CEO pay to UK employee pay� In accordance with these requirements we have provided in the table below the ratio of the CEO single total figure of remuneration for 2019 (as detailed on page 114 as a ratio of the equivalent single figure for the lower quartile, median and upper quartile employee (calculated on a full-time equivalent basis)�
The table below sets out the salary and total single figure remuneration for the CEO and percentile employees included in the above ratios�
Phoenix Group’s principles for pay setting and progression in our wider workforce are the same as for our executives – total reward being sufficiently competitive to attract and retain high calibre individuals without over-paying and providing the opportunity for individual development and career progression� The pay ratios reflect how remuneration arrangements differ as accountability increases for more senior roles within the organisation and in particular the ratios reflect the weighting towards long-term value creation and alignment with shareholder interests for the Group CEO� We are satisfied that the median pay ratio reported this year is consistent with our wider pay, reward and progression policies for employees� All employees have the opportunity for annual pay increases, annual performance payments and career progression and development opportunities�
The DRR regulations also require that a performance graph is supported by a table summarising aspects of the Group CEO's remuneration for the period covered by the above graph (which will in due course be for a period of ten years)�
Jonathan Moss4,5 704 n/a n/a 1 The single figure of total remuneration for 2018 has been restated and now reflects the actual price of shares on the day the 2016 LTIP vested (2 June 2019, 671�1p per share) rather than the three-month average share price to 31 December 2018 (600�04p per share) which was required to be used last year for the single figure of total remuneration�
3 Long-term incentive vesting rates against maximum opportunity values are not applicable for 2011 and 2012 due to no awards vesting in those financial years� 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�
PERCENTAGE CHANGE IN PAY OF THE GROUP CHIEF EXECUTIVE OFFICER 2018 TO 2019 In accordance with the DRR regulations, the table below provides a comparison of the percentage change in the prescribed pay elements of the Group Chief Executive Officer (salary, taxable benefits and annual incentive outcomes) between financial years 2018 and 2019 and the equivalent percentage changes in the average of all staff (representing all permanent staff during 2018 and 2019 on a matched basis)� This group was selected as being representative of the wider workforce using the same process as was used for this comparison in last year’s annual report and accounts although these figures now include both heritage Phoenix and heritage SLAL entities�
The above tables have been included to comply with UKLA Listing Rule 9�8�8� In the event of cessation of a Non-Executive Director’s appointment (excluding the Chairman) they would be entitled to a one-month notice period� The Chairman, as detailed in his letter of appointment, would be entitled to a six-month notice period�
Under the Committee’s Terms of Reference, the Committee meets at least twice a year but more frequently if required� During 2019, seven Committee meetings were held and details of attendance at meetings are set out in the Corporate Governance Report on page 89�
Consistent with the requirements of Solvency II, the Committee is responsible for establishing, implementing, overseeing and reviewing the Company-wide remuneration policy in the context of business strategy and changing risk conditions� The Company-wide remuneration policy focuses on ensuring sound and effective risk management so as not to encourage risk-taking outside of the Company’s risk appetite� None of the Committee members has any personal financial interest (other than as shareholders), conflicts of interests arising from cross-directorships or day-to-day involvement in running the business�
The Committee makes recommendations to the Board� No Director plays a part in any discussion about his or her own remuneration�
Summary of engagement with shareholders and consideration of feedback ✔ ✔ ✔
Executive Directors’ remuneration Review of fixed and variable remuneration ✔ ✔ ✔ ✔ ✔
Review of fixed and variable remuneration ✔ ✔ ✔ ✔ ✔
Annual and long-term incentive performance measures, targets and outcomes ✔ ✔ ✔ ✔ ✔
Workforce engagement mechanisms, gender pay and pay ratio ✔ ✔ ✔
PwC also provided general consultancy services to management during the year including support on other Board and Risk matters and technical advice regarding share schemes� Separate teams within PwC provided unrelated services in respect of tax, assurance, risk consulting and transaction support during the year� The Committee is satisfied that these activities did not compromise the independence or objectivity of the advice it has received from PwC as remuneration committee advisers�
Phoenix Group Holdings plc is incorporated in the United Kingdom (registered no� 11606773) and has a Premium Listing on the London Stock Exchange�
At 31 December 2019, the issued ordinary share capital totalled 721,514,944� Subsequently, 5,985 ordinary shares have been issued in 2020 in connection with the Group’s Sharesave Scheme to bring the total in issue to 721,520,929 at the date of this report�
Full details of the issued and fully paid share capital as at 31 December 2019 and movements in share capital during the period are presented in note D1 to the IFRS consolidated financial statements�
The rights and obligations attaching to the Company’s ordinary shares are set out in the Company’s Articles of Association (the ‘Company’s Articles’) which are available on the Company’s website at www�thephoenixgroup�com/ about-us/corporate-governance/articles-of-association�aspx�
Restrictions on transfer of shares Under the Company’s Articles, the Directors may in certain circumstances refuse to register transfers of shares� 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�
Standard Life Aberdeen plc 179,249,478 24�84% Ameriprise Financial Inc� and its group 42,847,290 5�93% BlackRock Inc� 38,875,162 5�38% Aviva plc and its subsidiaries 36,512,061 5�06% Artermis Investment Management LLP 36,250,486 5�06%
A separate notice convening this meeting will be distributed to shareholders in due course and will include an explanation of the items of business to be considered at the meeting�
Investor Communications The Company’s Annual Report and Accounts, together with the Company’s Interim Report and other public announcements and presentations, are designed to present a fair, balanced and understandable view of the Group’s activities and prospects� These are available on the Company’s website at www�thephoenixgroup�com, along with a wide range of relevant information for private and institutional investors, including the Company’s financial calendar�
BOARD Board of Directors The membership of the Board of Directors during 2019 is given within the Corporate Governance section on pages 78 and 79, which is incorporated by reference into this report� During 2019 and up to the date of this report, the following changes to the Board took place: One of SLA's Nominated Directors, Barry O’Dwyer resigned from the Board on 28 June 2019 and was replaced by Mike Tumility on 1 September 2019�
The powers of the Directors are determined by the Companies Act 2006, the provisions of the Company’s Articles and by any valid directions given by shareholders by way of special resolution�
Directors’ remuneration and interests A report on Directors’ remuneration is presented within the Directors’ Remuneration Report including details of their interests in shares and share options or any rights to subscribe for shares in the Company�
Directors’ indemnities The Company has entered into deeds of indemnity with each of its Directors whereby the Company has agreed to indemnify each Director against all losses incurred by them in the exercise, execution or discharge of their powers or duties as a Director of the Company, provided that the indemnity shall not apply when prohibited by any applicable law�
The deeds of indemnity remain in-force as at the date of signature of this Directors’ Report�
Directors’ conflicts of interest The Board has established procedures for handling conflicts of interest in accordance with the Companies Act 2006 and the Company’s Articles�
On an ongoing basis, Directors are responsible for informing the Company Secretary of any new, actual or potential conflicts that may arise�
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 52 to 56� 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 I5 and I6) and its capital management (note I3)� The Strategic Report (on pages 2 to 72) sets out the business model and how the Group creates value for shareholders and policyholders�
Having thoroughly considered the going concern assessment, including a detailed review of the regulatory capital and cash flow positions of each principal subsidiary company and the availability across the Group of a range of management actions, the Board has concluded that there are no material uncertainties that may cast significant doubt about the Group and the Company’s ability to continue as a going concern�
The Directors have a reasonable expectation that the Group and the Company have adequate resources to continue in operational existence for the foreseeable future� Thus, they continue to adopt the going concern basis of accounting in preparing the annual financial statements�
The Directors have acknowledged their responsibilities in the Statement of Directors’ Responsibilities in relation to the IFRS financial statements for the year ended 31 December 2019�
Corporate governance statement The disclosures required by section 7�2 of the FCA’s Disclosure Guidance and Transparency Rules can be found in the Corporate Governance Report on pages 81 to 98 which is incorporated by reference into this Directors’ Report and comprises the Company’s Corporate Governance Statement�
Greenhouse gas emissions All disclosures concerning the Group’s greenhouse emissions are contained in the Environmental Report forming part of the Strategic Report on pages 69 and 70�
Re-Appointment of the Auditors Ernst & Young LLP (‘EY’) has indicated its willingness to continue in office and shareholders’ approval will be sought at the AGM on 15 May 2020�
Disclosure of information to Auditors The Directors who held office at the date of approval of this Directors’ Report confirm that, so far as they are aware, there is no relevant audit information of which the Company’s auditor is unaware and that each Director has taken all the steps that they ought to have taken as a Director to make themselves aware of any relevant audit information and to establish that the Company’s auditor is aware of that information�
All of the Company’s employee share and incentive plans contain provisions relating to a change of control� Outstanding awards and options would normally vest and become exercisable on a change of control, subject to the satisfaction of any performance conditions and pro rata reduction as may be applicable under the rules of the employee share incentive plans�
Disclosures under listing rule 9.8.4R For the purposes of Listing Rule 9�8�4C, the information required to be disclosed under Listing Rule 9�8�4R can be found within the following sections of the Report and Accounts: Section Requirement Location
In preparing these financial statements the Directors are required to: • select suitable accounting policies and then apply them consistently�
• state whether IFRS, as adopted by the EU, have been followed, subject to any material departures disclosed and explained in the Group and the Company financial statements�
The Directors are responsible for making, and continuing to make, the Company’s Annual Report and Accounts available on the Company’s website� Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions�
The Directors as at the date of this report, whose names and functions are listed in the Board of Directors section on pages 78 and 79, confirm that, to the best of their knowledge: • The Group’s consolidated financial statements and the Company financial statements, which have been prepared in accordance with IFRS as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit and loss of the Group and the Company�
• The Strategic Report and the Corporate Governance and Directors’ Report include a fair review of the development and the performance of the business and the position of the Company and its consolidated subsidiaries taken as a whole, together with a description of the principal risks and uncertainties that they face�
The Strategic Report and the Directors’ Report were approved by the Board of Directors on 6 March 2020�
OPINION In our opinion: • Phoenix Group Holdings plc’s consolidated financial statements and parent company financial statements (the ‘Financial Statements’) give a true and fair view of the state of the Group’s and of the parent company’s affairs as at 31 December 2019 and of the Group’s profit for the year then ended; • the consolidated financial statements have been properly prepared in accordance with International Financial Reporting Standards (‘IFRSs’) as adopted by the European Union (‘EU’); • the parent company financial statements have been properly prepared in accordance with IFRSs as adopted by the EU as applied in accordance with the provisions of the Companies Act 2006; and
We have audited the consolidated financial statements of Phoenix Group Holdings plc and its subsidiaries (collectively ‘the Group’) and the parent company financial statements which comprise: Group Parent Company
The statement of consolidated financial position as at 31 December 2019
BASIS FOR OPINION We conducted our audit in accordance with International Standards on Auditing (UK) (‘ISAs’) and applicable law� Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial statements section of our report below� We are independent of the Group and parent company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the FRC’s Ethical Standard as applied to listed public interest entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements�
• the Directors’ explanation set out on page 57 in the Annual Report as to how they have assessed the prospects of the entity, over what period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the entity will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions�
Audit scope • We performed an audit of the complete financial information of the Group Function, Phoenix Life Division and Standard Life Assurance Limited and audit procedures on specific balances for Other Companies� Our scope is explained further on pages 143 to 144�
Key audit matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) that we identified� These matters included those which had the greatest effect on: the overall audit strategy, the allocation of resources in the audit; and directing the efforts of the engagement team� These matters were addressed in the context of our audit of the financial statements as a whole and in our opinion thereon, and we do not provide a separate opinion on these matters�
Risk Valuation of insurance contract liabilities (£97.0bn; 2018: £92.6bn) Refer to the Audit Committee Report (page 96); Critical accounting estimates (page 155); Accounting policies and note F1 of the consolidated financial statements (pages 194 to 196)
The specific audit procedures performed to address the significant risk are set out below� In addition, we assessed management’s analysis of movements in insurance contract liabilities and obtained evidence to support large or unexpected movements as this provided important audit evidence over the valuation of insurance contract liabilities�
The assumptions that we consider to have the most significant impact are the base and trend longevity, persistency and expenses�
• benchmarked the demographic and economic assumptions against those of other comparable industry participants�
We consider the integrity and appropriateness of models to be critical to the overall valuation of insurance contract liabilities�
Over £92�0bn of the £97�0bn insurance contract liabilities are modelled using the core actuarial modelling systems, with the residual balance modelled outside these systems to cater for any additional required liabilities not reflected in the model�
• stratified the components of the balance modelled outside the core actuarial system and focused our testing on those that, in our professional judgment, present a higher risk of material misstatement� As part of the testing, we gained an understanding of the rationale for balances calculated outside of the core actuarial system and assessed the appropriateness of the applied calculation methodology�
We determined that the models used are appropriate, that changes to the models were implemented as intended and that controls over management’s processes for modelling insurance contract liabilities outside of the actuarial modelling system were operating effectively� We also determined that liabilities modelled outside these core actuarial modelling systems are reasonable�
Data There has been no change in our assessment of this risk from the prior year.
The insurance contract data held on policy administration systems (‘the policyholder data’) is a key input into the valuation process� The valuation of insurance contract liabilities is therefore conditional upon the accuracy and completeness of the data used�
• tested the reconciliations of premiums and claims information extracted from the policy administration systems to the actuarial data used in the actuarial models�
We determined based on our audit work that the data used for the actuarial model inputs is materially complete and accurate�
We performed full scope audit procedures over this risk area in two components and specific scope audit procedures in one component, which covered 100% of the risk amount�
Independent Auditor’s Report continued 140 PHOENIX GROUP HOLDINGS PLC ANNUAL REPORT & ACCOUNTS 2019
Refer to the Audit Committee Report (page 96); Critical accounting estimates (page 155); Accounting policies and notes E1 and E2 of the consolidated financial statements (pages 171 to 180).
• Observable inputs are not readily available for the valuation of equity release mortgages (‘ERM’) financial investments and the modelled debt securities, such as private placements, local authority loans, infrastructure loans and commercial real estate loans� Consequently, management use models and other inputs to estimate their value�
To obtain sufficient audit evidence to conclude on the valuation of ERMs, we: • tested the design and operating effectiveness of key controls over management’s process in respect of the valuation of ERMs; • tested the completeness of the ERM financial investments and underlying data at the period end through independent confirmation from the OSPs; • tested the accuracy of mortgage data used in the valuation model by agreeing a sample of new loans to supporting evidence and validating any movements on static data over the period; • evaluated the methodology, inputs and assumptions used to value the ERM financial investments including the No Negative Equity Guarantee (‘NNEG’) (such as house price inflation, residential house price volatility, longevity improvement and base mortality, as well as economic assumptions such as discount rate); • validated the key assumptions by comparing them to published market benchmarks and demographic and economic assumptions used by other industry participants, to confirm that key valuation inputs were consistent with industry norms and our understanding of the instrument type; and
• developed our own independent model to value the ERM loans and compared the output to the results produced by the Group�
We performed full scope audit procedures over this risk area in two components, which covered 100% of the risk amount�
The 2019 financial year is the first full year following the acquisition of Standard Life and as required management performed a recoverability assessment on the acquired intangible assets to satisfy themselves that the carrying value remains appropriate�
Recoverability assessment of these intangible assets involves consideration of a number of judgmental and sensitive assumptions such as: • market movements and their impact on economic assumptions such as cost of capital; • significant changes to core valuation assumptions, being: lapses, longevity, late retirements; • any change in experience on earnings relating to the CSPA�
To obtain sufficient audit evidence to assess recoverability of intangible assets arising from the acquisition of Standard Life, using EY actuaries we performed the following procedures: • understood and evaluated management’s process, model and assumptions supporting the recoverability assessment; • tested the controls over the completeness and accuracy of the data used in the recoverability assessment; • challenged management’s assessment of impairment indicators by considering current market factors and assumption changes not modelled in the fair value exercise at the acquisition date and assessed their impact on the Standard Life AVIF and CSPA values as at 31 December 2019; and
• Based on our procedures performed on the recoverability of intangible assets arising from the acquisition of Standard Life, we are satisfied that there are no impairment indicators present as at 31 December 2019�