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.
Maximum • Salary levels are specific to the role and individual. • Maximum salary will be the median level of salaries for CEO’s in the FTSE31-100 (currently £800,000), provided that this figure may be increased in line with UK RPI inflation for the duration of this policy.
Policy and operation • The Group provides market competitive benefits in kind. Details of the benefits provided in each year will be set out in the
Implementation Report. The Remuneration Committee reserves discretion to introduce new benefits where it concludes that it is in the interests of the Group to do so, having regard to the particular circumstances and to market practice.
Maximum • It is not possible to prescribe the likely change in the cost of insured benefits or the cost of some of the other reported benefits year-to-year, but the provision of benefits will normally operate within an annual limit of 10% of an Executive Director’s base salary.
• The Remuneration Committee will monitor the costs in practice and ensure that the overall costs do not increase by more than the Remuneration Committee considers to be appropriate in all the circumstances.
Element and purpose in supporting strategic objectives Pension To provide retirement benefits which keep Phoenix Group competitive within the marketplace and provide for the future of our employees
• Phoenix will honour the pensions obligations entered into under all previous policies in accordance with the terms of such obligations.
Maximum • Pension contributions for Executive Directors are aligned with the wider workforce rate which is currently 12% of salary
(reduced to 10.5% when taken as cash in lieu of contribution).
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.
Performance measures • The performance measures applied to AIP will be set by the Remuneration Committee and may be financial or nonfinancial and corporate, divisional or individual and in such proportions as it considers appropriate. However, the weighting of financial performance measures will not be reduced below 60% of total AIP potential in any year for the duration of this policy.
• On-target performance on all measures produces an outcome of 50% of maximum annual incentive opportunity. However, the Remuneration Committee reserves the right to adjust the threshold and target levels for future financial years in light of competitive practice.
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.
Element and purpose in supporting strategic objectives Long-Term Incentive Plan (‘LTIP’) To motivate and incentivise delivery of sustained performance over the long-term in line with our strategy and purpose, and to promote alignment with shareholders’ interests, the Group operates the Phoenix Group Holdings plc LTIP.
• A holding period will apply so that Executive Directors may not normally exercise vested LTIP awards until the fifth anniversary of the award date.
(as at the award date) of up to 275% of the CEO’s annual base salary and 200% of the CFO’s annual base salary although discretion is reserved to make awards up to the maximum levels for the policy as stated above.
Performance measures • The Remuneration Committee may set such performance measures for LTIP awards as it considers appropriate (whether financial or non-financial and whether corporate, divisional or individual). The measures for the 2020 LTIP are as set out below: Measure Weighting
• For each part of an LTIP award subject to a specific performance condition, the threshold level of vesting will be no more than 25% of that part of the LTIP award.
• 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.
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.
• Only beneficially owned shares, vested share awards, and unvested share awards not subject to performance conditions (discounted for anticipated tax liabilities), may be counted for the purposes of the guidelines. Share awards subject to performance conditions do not count prior to vesting.
• Once shareholding guidelines have been met, individuals are expected to retain these levels as a minimum. The Remuneration Committee will review shareholdings annually in the context of this policy.
• The Group does not adopt a quantitative approach to pay positioning and exercises judgement as to what it considers to be reasonable in all the circumstances as regards quantum.
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.
3. Malus and clawback Malus (being the forfeiture of unvested awards) and clawback (being the ability of the Company to claim repayment of paid amounts as a debt) provisions apply to the AIP, DBSS and LTIP. These provisions may be applied where the Remuneration Committee considers it appropriate to do so following: • a review of the conduct, capability or performance of an individual; • a review of the performance of the Company or a Group member; • any material misstatement of the Company’s or a Group member’s financial results for any period; • any material failure of Risk Management by an individual, a
The AIP and LTIP will operate (including the maximum award levels) as detailed in the general policy in relation to any newly appointed Executive Director.
For an internal appointment, any variable pay element awarded in respect of the prior role may either continue on its original terms or be adjusted to reflect the new appointment as appropriate.
For external and internal appointments, the Remuneration Committee may agree that the Company will meet certain relocation expenses as it considers appropriate.
For external candidates, it may be necessary to make awards in connection with the recruitment to buy out awards forfeited by the individual on leaving a previous employer. For such buy-out awards, Phoenix Group will not pay more than is, in the view of the Remuneration Committee, necessary and will in all cases seek, in the first instance, to deliver any such awards under the terms of the existing incentive pay structure. It may, however, be necessary in some cases to make such awards on terms that are more bespoke than the existing annual and equitybased pay structures in Phoenix Group in order to secure a candidate. Details of any buy-out awards will be appropriately disclosed.
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.
AIP Pro-rated annual incentive. Pro-rating to reflect only the period worked. Performance metrics determined by the Remuneration Committee
LTIP Will receive a pro-rated award subject to the application of the performance conditions at the normal measurement date and, generally, any holding period will continue to apply Remuneration Committee discretion to disapply pro-rating or to accelerate vesting to the date of leaving (subject to pro-rating and performance conditions) and/or the release of any holding period
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.
In the event of cessation of a Non-Executive Director’s appointment (excluding the Chairman) they would be entitled to a one month’s notice period. The Chairman, as detailed in his letter of appointment, would be entitled to a six months’ notice period.
SHAREHOLDERS Dividends Dividends for the year are as follows: Ordinary shares
As a result of regulatory changes applicable to the Group under Solvency II, dividends declared in respect of the Company’s ordinary shares must be capable of being cancelled and withheld or deferred at any time prior to payment. This is in order that the Company’s ordinary shares can be counted towards Group capital. Accordingly, the final dividend will be declared on a conditional basis and the Directors reserve the right to cancel or defer the recommended dividend. The Directors do not expect to exercise this right other than where they believe that it may be necessary to do so as a result of legal or regulatory requirements.
SHARE CAPITAL The issued share capital of the Company was increased by 277,717,200 during 2020 which related to: • shares issued in relation to the acquisition of ReAssure
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
Substantial shareholdings Information provided to the Company pursuant to the FCA’s Disclosure and Transparency Rules is published on a Regulatory Information Service and on the Company’s website. As at 4 March 2021, the Company had been notified of the following significant holdings of voting rights in its shares.
Standard Life Aberdeen plc 168,460,349 16.85% MS&AD Insurance Group Holdings Inc. 144,877,304 14.49% Swiss Re Finance Midco (Jersey) Limited 132,399,834 13.25% BlackRock, Inc. 51,251,518 5.12%
Details of related party transactions which took place during the year with Directors of the Company and consolidated entities where Directors are deemed to have significant influence, are provided in the Directors’ Remuneration Report on pages 124 to 158 and in note I4 to the IFRS consolidated financial statements.
The Directors have been authorised to allot and issue securities and grant options over or otherwise dispose of shares under the Company’s Articles.
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.
The deeds of indemnity remain in-force as at the date of signature of this Directors’ Report.
The Directors have a reasonable expectation that the Group and the Company have adequate resources to continue in operational existence over the period to 31 March 2022, the period covered by the going concern assessment. Thus, they continue to adopt the going concern basis of accounting in preparing the annual financial statements.
Viability statement The Viability Statement, as required by the UK Corporate Governance Code, has been undertaken for a period of five years to align to the Group’s business planning and is contained in the Risk Management section on pages 90 to 91.
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 94 to 123 which is incorporated by reference into this Directors’ Report and comprises the Company’s Corporate Governance Statement.
• Our people and engagement – details of how the Company has engaged with employees during the year can be found in the Stakeholder Engagement section of the Strategic Report on pages 58 to 65. In addition, details of how the Board has considered the interests of employees in key decision making can be found in the section 172 statement included in the Strategic Report on page 60 and the Corporate Governance Report on pages 109 to 111. Information about how the Board has engaged with the workforce can also be found in the Corporate Governance Report on pages 104 to 105.
The Articles are available on the Company’s website at www.thephoenixgroup.com/about-us/corporategovernance /articles-of-association.aspx.
Group Company Secretary The Group Company Secretary throughout the 2020 financial period was Gerald Watson.
basis unless it is inappropriate to presume that the Group and the Company will continue in business.
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Group’s and the Company’s transactions and disclose, with reasonable accuracy at any time, the financial position of the Group and the Company and enable them to ensure that the financial statements and the Directors’ Remuneration Report comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Group and the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
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 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 financial statements have been prepared in accordance with the requirements of the Companies Act 2006.
We have audited the financial statements of Phoenix Group Holdings plc (the ‘parent company’) and its subsidiaries (the ‘Group’) for the year ended 31 December 2020 which comprise: Group Parent company
The consolidated income statement for the year ended 31 December 2020
The statement of changes in equity for the year then ended
The statement of consolidated financial position as at 31 December 2020
The statement of consolidated cash flows for the year then ended
The financial reporting framework that has been applied in their preparation is applicable law and International Accounting Standards in conformity with the requirements of the Companies Act 2006 and, as regards to the consolidated financial statements, International Financial
BASIS FOR OPINION We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) 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. We are independent of the Group 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.
We have observed that in testing the Group’s going concern status, a reasonably foreseeable stress has historically been modelled using a 1 in 10 market stress scenario. However, due to the current economic volatility that is anticipated due to the impacts of COVID-19, this stress is not considered to be appropriate and has been replaced with a more onerous economic downturn scenario for the current year assessment. Based on management’s assessment, we have observed that the Group is able to continue to have surplus cash and solvency above its Solvency Coverage Ratio in a number of extreme downside scenarios and the Group has continued to service customers and meet its commitments in the current environment.
Our responsibilities and the responsibilities of the Directors with respect to going concern are described in the relevant sections of this report. However, because not all future events or conditions can be predicted, this statement is not a guarantee as to the Group and Parent Company’s ability to continue as a going concern.
• Accounting for the acquisition of ReAssure Limited and other associated entities.
• Recoverability of intangible assets arising from the acquisition of Standard Life Assurance Limited and other associated entities.
Four of the reporting components were audited by component teams as set out below: Component Scope Auditor
Changes from the prior year ReAssure Limited is a new reporting component of the Group in 2020 following the acquisition completed on 22 July 2020. Due to the size and risk inherent in the component, we have designated it as a full scope component. ReAssure Life Limited, ReAssure UK Services Limited, ReAssure MidCo Limited, Ark Life Assurance Company and ERIP Limited Partnership, acquired as part of the ReAssure acquisition, are within the ‘Other Companies’ reporting component and are designated as a specific scope component. Ark Life Assurance Company is audited by EY Ireland.
In the prior year, we identified SLIDAC as a specific scope component of the Group. In the 2020 financial year, the size of SLIDAC’s specific accounts decreased relative to the overall Group and, therefore, we instructed the SLIDAC component audit team to perform specified procedures over insurance contract liabilities relating to the contracts in the entity prior to the business transfer from SLAL in 2019.
Of the four full scope components, audit procedures were performed on one of these directly by the primary audit team whilst the remaining three components were audited by the component audit teams. For Other Companies, where the work was performed by component auditors, we determined the appropriate level of involvement to enable us to determine that sufficient audit evidence had been obtained as a basis for our opinion on the Group as a whole.
Due to travel restrictions in place as a result of the COVID-19 global health pandemic, although no site visits were performed, the primary audit team followed a programme of planned virtual meetings and maintained oversight of component teams by using remote collaboration platforms and through regular meetings. This allowed the primary audit team to gain a greater understanding of the business issues faced in each component, discuss the audit approach with the component teams and any issues arising from their work, virtually attend meetings with component management, and review key audit working papers.
For all full scope components, the primary audit team reviewed key working papers and participated in the component teams’ planning, including the component teams’ discussion of fraud and error. The primary audit team virtually attended the closing meetings with the management of the Phoenix Life Division, Standard Life Assurance Limited and ReAssure Limited and the Audit Committee meetings at the components.
The work performed on the components, together with the additional procedures performed at the Group level, gave us appropriate evidence for our opinion on the consolidated financial statements as a whole.
Risk area Our response to the risk Key observations communicated to the Audit Committee
We consider the COVID-19 pandemic to have increased the risk associated with the longevity and assured mortality assumptions.
• benchmarked the demographic and economic assumptions, against those of other comparable industry participants.
We determined that the actuarial assumptions used by management are reasonable based on the analysis of the experience to date (including specific consideration of the impact of COVID-19), industry practice and the financial and regulatory requirements.
We consider it appropriate that assumptions have not been adjusted to reflect the impact of COVID-19 as the longer term impact on morbidity and mortality in particular is not yet clear, and the position adopted by management is consistent with that taken by most companies operating in the life insurance sector.
Over £126bn of the £135.7bn (2019: over £92.0bn of £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 models.
We consider the key risks to relate to i) model developments applied to the core actuarial models and ii) the appropriateness of the calculations that are applied outside of the core actuarial model.
To obtain sufficient audit evidence to conclude on core actuarial modelling systems and balances calculated outside these systems, using EY actuaries as part of our audit team we performed the following procedures: • obtained an understanding of management’s process for model changes to the core actuarial system and tested the design, implementation and operating effectiveness of key controls over that process, including an assessment of the operational impacts of COVID-19 on those controls; • challenged and evaluated the methodology, inputs and assumptions applied to model changes made in the core actuarial modelling systems over the year; • reviewed the governance process around model changes by review of the relevant committee minutes; • being the first year of our appointment as auditors of ReAssure Limited, performed independent model testing procedures on: – Immediate annuity liabilities – we used policy terms and conditions from product literature and management’s reserving methodology and assumptions to create our own independent model to assess the appropriateness of management’s model.
• stratified the components of the balance modelled outside the core actuarial system as at balance sheet date 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 also determined that liabilities modelled outside these core actuarial modelling systems are reasonable.
To obtain sufficient audit evidence to assess the integrity of policyholder data we performed the following procedures: • obtained an understanding and tested the design and operating effectiveness of the key controls, including information technology general controls, over management’s data collection, extraction and validation process, including an assessment of the operational impacts of COVID-19 on the applicable controls; • for Outsourced Service Providers (‘OSP’) where we have placed reliance on the Service Organisation Controls (‘SOC1’) report, we have reviewed the SOC1 report and determined the impact of any identified control exceptions; • for OSPs where we do not receive a SOC1 report we have obtained an understanding of the process over data extraction and input into the actuarial models and performed direct testing of the design and operating effectiveness of the key controls; • confirmed that the actuarial data extracted from policy administration systems and those provided by the OSPs were those used as an input to the actuarial model; • assessed the appropriateness of management’s grouping of data for input into the actuarial model; • through the use of our data visualisation and analytics techniques, performed focussed substantive testing over the completeness and accuracy of the policyholder data and the appropriateness of management’s data cleansing rules; and
Valuation of certain complex and illiquid financial investments (Equity release mortgages £3.5bn; 2019: £2.8bn); (Modelled debt securities £5.7bn; 2019: £1.9bn)
We consider the risk associated with valuation of certain complex and illiquid financial investments to have increased as a result of increased uncertainty due to the COVID-19 pandemic.
The extent of judgment applied by management in valuing the Group’s financial investments varies with the nature of securities held, the markets in which they are traded and the valuation methodology applied.
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.
• validated the accuracy of security related inputs to the valuation of modelled debt securities by tracing a sample of inputs to the underlying agreements and documentation.
We performed full scope audit procedures over this risk area in three components, which covered 100% of the risk amount.
To obtain sufficient audit evidence to conclude on the appropriateness of accounting for the acquisition of ReAssure, we performed the following procedures: • being the first year of our appointment as auditors of ReAssure, performed on-site review of the predecessor auditor working papers and discussed the significant risk and judgmental areas with them; • performed additional first year audit procedures on the model testing and data integrity as discussed in the key audit matter sections above; • ensured appropriate recognition of all identifiable intangible assets by understanding the transaction and comparing it to other acquisitions of similar businesses; • assessed the methodology and assumptions adopted by management for calculating the fair values of intangible assets arising on acquisition and considered how market participants would value identifiable assets and liabilities in an orderly transaction; • with the support of our EY actuarial team and valuation specialists, assessed the appropriateness of the fair value adjustments to the insurance contract liabilities recognised on a best estimate basis within the acquired business, including assessment of the appropriate choice of discount rate; • ensured that the acquisition accounting and disclosure of the acquisition are in compliance with IFRS 3 Business Combinations; and
On 31 August 2018, the Group acquired Standard Life Assurance Limited and other associated entities (collectively ‘Standard Life’) from Standard Life Aberdeen plc (‘SLA plc’) for total consideration of £2.994 billion. This gave rise to the recognition of intangible assets relating to acquired in force business (‘AVIF’) and the Client Service and Proposition Agreement (‘CSPA’) entered into between the Group and SLA plc.
Each reporting period management is required to perform an assessment on the acquired intangible assets to identify any indicators of impairment. Where such indicators exist, management performs a recoverability assessment. This entails the application of a number of assumptions and judgments.
To obtain sufficient audit evidence to assess recoverability of intangible assets arising from the acquisition of Standard Life, using EY actuaries as part of the audit team 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 value as at 31 December 2020; • obtained management’s expectations of future profitability of the acquired entities and challenged the assumptions applied by management by comparing key assumptions and judgments with experience of the wider market and that of Phoenix; and
OUR APPLICATION OF MATERIALITY We apply the concept of materiality in planning and performing the audit, in evaluating the effect of identified misstatements on the audit and in forming our audit opinion.
On the basis of our risk assessments, together with our assessment of the Group’s overall control environment, our judgment was that performance materiality was 50% (2019: 50%) of our planning materiality, namely £70 million (2019: £50 million).
We agreed with the Audit Committee that we would report to them all uncorrected audit differences in excess of £7 million (2019: £5 million), which is set at 5% of planning materiality, as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds.
OPINIONS ON OTHER MATTERS PRESCRIBED BY THE COMPANIES ACT 2006 In our opinion, the part of the Directors’Rremuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006.
In our opinion, based on the work undertaken in the course of the audit: • the information given in the Strategic Report and the
Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements; and
• we have not received all the information and explanations we require for our audit
Based on the work undertaken as part of our audit, we have concluded that each of the following elements of the Corporate Governance Statement is materially consistent with the financial statements or our knowledge obtained during the audit: • Directors’ statement with regards to the appropriateness of adopting the going concern basis of accounting and any material uncertainties identified set out on page 161; • Directors’ explanation as to its assessment of the Company’s prospects, the period this assessment covers and why the period is appropriate set out on page 90; • Directors’ statement on fair, balanced and understandable set out on page 162; • Board’s confirmation that it has carried out a robust assessment of the emerging and principal risks set out on page 83; • The section of the Annual Report that describes the review of effectiveness of risk management and internal control systems set out on page 117; and
• The section describing the work of the Audit Committee set out on pages 116 to 121.
RESPONSIBILITIES OF DIRECTORS As explained more fully in the Directors’ responsibilities statement set out on page 163, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
EXPLANATION AS TO WHAT EXTENT THE AUDIT WAS CONSIDERED CAPABLE OF DETECTING IRREGULARITIES, INCLUDING FRAUD Irregularities, including fraud, are instances of noncompliance with laws and regulations. We design procedures in line with our responsibilities, outlined above, to detect irregularities, including fraud. The risk of not detecting a material misstatement due to fraud is higher than the risk of not detecting one resulting from error, as fraud may involve deliberate concealment by, for example, forgery or intentional misrepresentations, or through collusion. The extent to which our procedures are capable of detecting irregularities, including fraud is detailed below.
However, the primary responsibility for the prevention and detection of fraud rests with both those charged with governance of the company and management. • We obtained an understanding of the legal and regulatory frameworks that are applicable to the Group and determined that the relevant laws and regulations related to elements of company law and tax legislation, and the financial reporting framework. Our considerations of other laws and regulations that may have a material effect on the financial statements included permissions and supervisory requirements of the Prudential Regulation Authority (‘PRA’), the Financial Conduct Authority (‘FCA’) and the UK Listing Authority (‘UKLA’).
• We understood how Phoenix Group Holdings plc is complying with those frameworks by making enquiries of management and those responsible for legal and compliance matters. We also reviewed correspondence between the Company and UK regulatory bodies; reviewed minutes of the Group Board and Executive Committee; and gained an understanding of the Group’s approach to governance, demonstrated by the Board’s approval of the Group’s governance framework.
• We assessed the susceptibility of the consolidated financial statements to material misstatement, including how fraud might occur by considering the controls that the Company has established to address risks identified by the entity, or that otherwise seek to prevent, deter or detect fraud. We also considered the impact of COVID-19 on the Group’s control environment. Our procedures over the Group’s control environment included assessment of the consistency of operations and controls in place within the Group and the OSPs as they transitioned to operating remotely for a significant proportion of 2020.
– Testing the appropriateness of journal entries recorded in the general ledger, with a focus on manual journals and evaluating the business rationale for significant and/ or unusual transactions.
Other comprehensive income/(expense): Items that are or may be reclassified to profit or loss: Cash flow hedges: Fair value gains/(losses) arising during the year 129 (40)
Reclassification adjustments for amounts recognised in profit or loss (79) 41
Tax charge relating to other comprehensive income items C6 (37) (57)
STATEMENT OF CONSOLIDATED CHANGES IN EQUITY For the year ended 31 December 2020
Total comprehensive income for the year – – – 33 – 50 740 823 – 36 859
Dividends paid on ordinary shares – – – – – – (403) (403) – – (403)
Shares acquired by the employee benefit trust – – (7) – – – – (7) – – (7)
Other comprehensive (expense)/income for the year – – – (29) 1 (81) (109) – – (109)
Total comprehensive income for the year – – – (29) 1 4 (24) – 31 7
Dividends paid to non-controlling interests – – – – – – – – (11) (11)
Shares acquired by employee benefit trust – – (4) – – – (4) – – (4)
Cash and cash equivalents at the beginning of the year 4,466 4,926
Cash and cash equivalents at the end of the year 10,998 4,466 183Phoenix Group Holdings plc Annual Report & Accounts 2020
In applying the principles of reverse acquisition accounting, the consolidated financial statements were presented as a continuation of the Old PGH business and the Group is presented as if the Company had always been the ultimate parent company. The equity structure as at 1 January 2018 was restated to reflect the difference between the par value of shares issued by the Company (£39 million) and the shares issued by Old PGH (£nil) prior to the share for share exchange, with a corresponding adjustment to share premium.
At 31 December 2018, the share premium reserve continued to reflect the position of Old PGH. During 2019, Old PGH, in accordance with Cayman Islands Companies Law, made a distribution of its entire share premium reserve to Phoenix Group Holdings plc. This was reflected as a transfer of share premium in the statement of consolidated changes in equity during 2019.
• the ability to use its power over the investee to affect its returns.
Going concern The consolidated financial statements have been prepared on a going concern basis. In assessing whether the Group is a going concern the Directors have taken into account the guidance issued by the Financial Reporting Council (‘FRC’), Guidance for Directors of UK Companies Going Concern and Liquidity, in October 2009. The considerations and approach are consistent with FRC provisions issued in September 2014 and the assessment has taken into account the requirements of the recent pronouncement from the Financial Reporting Lab, ‘COVID-19 – Going concern, risk and viability’. Further details of the going concern assessment for the period to 31 March 2022 are included in the Directors’ Report on page 161.
A2. Accounting Policies The principal accounting policies have been consistently applied in these consolidated financial statements. Where an accounting policy can be directly attributed to a specific note to the consolidated financial statements, the policy is presented within that note, with a view to enabling greater understanding of the results and financial position of the Group. All other significant accounting policies are disclosed below.
• all resulting exchange differences are recognised through the statement of consolidated comprehensive income.
A3 Critical Accounting Estimates and Judgements The preparation of financial statements requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. Disclosures of judgements made by management in applying the Group’s accounting policies include those that have the most significant effect on the amounts that are recognised in the consolidated financial statements. Disclosures of estimates and associated assumptions include those that have a significant risk of resulting in a material change to the carrying value of assets and liabilities within the next year. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of the judgements as to the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
The valuation of insurance contract liabilities is sensitive to the assumptions which have been applied in their calculation. Details of sensitivities arising from significant non-economic assumptions are detailed on page 231 in note F4.
A3.2 Fair value of financial assets and liabilities Financial assets and liabilities are measured at fair value and accounted for as set out in the accounting policies in note E1. Where possible, financial assets and liabilities are valued on the basis of listed market prices by reference to quoted market bid prices for assets and offer prices for liabilities. These are categorised as Level 1 financial instruments and do not involve estimates. If prices are not readily determinable, fair value is determined using valuation techniques including pricing models, discounted cash flow techniques or broker quotes. Financial instruments valued where valuation techniques are based on observable market data at the period end are categorised as Level 2 financial instruments. Financial instruments valued where valuation techniques are based on non-observable inputs are categorised as Level 3 financial instruments. Level 2 and Level 3 financial instruments therefore involve the use of estimates.
A. SIGNIFICANT ACCOUNTING POLICIES continued A3 Critical Accounting Estimates and Judgements continued A3.4 Recognition of pension scheme surplus A pension scheme surplus can only be recognised to the extent that the sponsoring employer can utilise the asset through a refund of surplus or a reduction in contributions. A refund is available to the Group where it has an unconditional right to a refund on a gradual settlement of liabilities over time until all members have left the scheme. A review of the Trust Deeds of the Group’s pension schemes that recognise a surplus has highlighted that the Scheme Trustees are not considered to have the unilateral power to trigger a wind-up of the Scheme and the Trustees’ consent is not needed for the sponsoring company to trigger a wind-up. Where the last beneficiary died or left the scheme, the sponsoring company could close the Scheme and force the Trustees to trigger a wind-up by withholding its consent to continue the Scheme on a closed basis. This view is supported by external legal opinion and is considered to support the recognition of a surplus. Management has determined that the scheme administrator would be subject to a 35% tax charge on a refund and therefore any surplus is reduced by this amount. Further details of the Group’s pension schemes are provided in note G1.
A3.5 Operating profit Operating profit is the Group’s non-GAAP measure of performance and gives stakeholders a better understanding of the underlying performance of the Group. The Group is required to make judgements as to the appropriate longer-term rates of investment return for the determination of operating profit based on risk-free yields at the start of the financial year, as detailed in note B2, and as to what constitutes an operating or non-operating item in accordance with the accounting policy detailed in note B1.
A3.6 Acquisition of the ReAssure businesses The identification and valuation of identifiable intangible assets, such as acquired in-force business, arising from the Group’s acquisition of the ReAssure businesses during the year, required the Group to make a number of judgements and estimates. Further details are included in notes G2 ‘Intangible assets’ and H2 ‘Acquisitions’.
A3.8 Provisions The Group holds a number of provisions and the amount of each provision is determined based on the Group’s estimation of the outflow of resources required to settle each obligation as at 31 December 2020. The recognition and measurement of these provisions involves a high degree of judgement and estimation uncertainty. Further details of these provisions and the key uncertainties identified are included in note G7.
A4. Adoption of New Accounting Pronouncements in 2020 In preparing the consolidated financial statements, the Group has adopted the following standards, interpretations and amendments effective from 1 January 2020: • Amendments to IFRS 3 Business Combinations: The amendments have revised the definition of a business and aim to assist companies to determine whether an acquisition is of a business or a group of assets. The amended definition emphasises that the output of a business is to provide goods and services to customers, whereas the previous definition focused on returns in the form of dividends, lower costs or other economic benefits to investors and others. These amendments have not impacted the Group’s accounting treatment of business combinations.
• Amendments to IAS 1 Presentation of Financial Statements and IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors: Amendments clarify the definition of material and how it should be applied; and
• Amendment to IFRS 16 Leases COVID-19-Related Rent Concessions (1 June 2020): The amendment permits lessees, as a practical expedient, not to assess whether particular rent concessions occurring as a direct consequence of the COVID-19 pandemic are lease modifications and instead to account for those rent concessions as if they are not lease modifications. The Group does not expect to make use of this practical expedient.
• Amendments to IFRS 4 Insurance Contracts – deferral of IFRS 9 Financial Instruments (1 January 2021): Following the issue of IFRS 17 Insurance Contracts (Revised) in June 2020, the end date for applying the two options under the IFRS 4 amendments (including the temporary exemption from IFRS 9) was extended to 1 January 2023, aligning the date with the revised effective date of IFRS 17. The Group expects to take advantage of this extension to align the implementation of IFRS 9 and IFRS 17.
• IAS 16 Property, Plant and Equipment (1 January 2022): The amendments prohibit the Group from deducting from the cost of property, plant and equipment amounts received from selling items produced while the Group is preparing the asset for its intended use. Instead, such sales proceeds and related costs should be recognised in profit or loss. These amendments do not currently have any impact on the Group.
A. SIGNIFICANT ACCOUNTING POLICIES continued A5. New Accounting Pronouncements not yet Effective continued The following amendments to standards listed above have been endorsed by the EU: • Amendment to IFRS 16 Leases COVID-19-Related Rent Concessions; and
• Amendments to IFRS 4 Insurance Contracts – deferral of IFRS 9 Financial Instruments.
A6. Impacts of COVID-19 during the year The ‘Group Chief Executive Officer’s Report’, ‘Business Review’, ‘Risk Management’, ‘Viability Statement’ and ‘Directors’ Report: Going Concern’ sections of this Annual Report and Accounts provide information as to the broader effects of COVID-19 on the Group’s financial results, its operations and prospects. The Group has given due consideration as to the impact of uncertainty arising from COVID-19 related factors on the production of the consolidated financial statements. This has included an assessment as to the impact of weak economic conditions, market volatility, demographic experience, and government and regulatory intervention on the valuation, recognition and disclosure of the Group’s assets and liabilities.
Disclosures have been included in the following notes to the consolidated financial statements to provide additional information as to the impacts of COVID-19 during the year ended 31 December 2020: Note
Liabilities under insurance contracts – assumptions and insurance risk management F4
An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses relating to transactions with other components of the Group.
For management purposes, the Group is organised into business units based on their products and services. For reporting purposes, business units are aggregated where they share similar economic characteristics including the nature of products and services, types of customers and the nature of the regulatory environment. No such aggregation has been required in the current year.
The UK Heritage segment contains UK businesses which no longer actively sell products to policyholders and which therefore run-off gradually over time. These businesses will accept incremental premiums on in-force policies.
The Management Services segment comprises income from the life and holding companies in accordance with the respective management service agreements less fees related to the outsourcing of services and other operating costs.
Unallocated Group includes consolidation adjustments and Group financing (including finance costs) which are managed on a Group basis and are not allocated to individual operating segments.
Segmental measure of performance: Operating Profit The Group uses a non-GAAP measure of performance, being operating profit, to evaluate segment performance. Operating profit is considered to provide a comparable measure of the underlying performance of the business as it excludes the impact of short-term economic volatility and other one-off items. This measure incorporates an expected return, including a longer-term return on financial investments backing shareholder and policyholder funds over the period, with consistent allowance for the corresponding expected movement in liabilities. Annuity new business profits are included in operating profit using valuation assumptions consistent with the pricing of the business (including the Group’s expected longer-term asset allocation backing the business).
The Group therefore considers that operating profit provides a more representative indicator of the ability of the Group’s operating companies to generate cash available for the servicing of the Group’s debts and for distribution to shareholders. Accordingly, the measure is more closely aligned with the business model of the Group and how performance is managed by those charged with governance.
Restatement of prior period information During the year, the Group reassessed its operating segments as a result of strategic developments. Specifically, the categorisation of the provision of annuities to existing policyholders with vesting products and from Bulk Purchase Annuity contracts has been revised such that this business is now included within the UK Open segment instead of within the UK Heritage segment.
B. EARNINGS PERFORMANCE continued B1. Segmental Analysis continued B1.1 Segmental Result £m £m
Other non-operating items in respect of 2020 include: • a gain on acquisition of £372 million reflecting the excess of the fair value of the net assets acquired over the consideration paid for the acquisition of ReAssure Group plc (see note H2.1 for further details); • a gain of £85 million arising on completion of the Part VII transfer of the mature savings liabilities and associated assets from the L&G Group (see note H2.2 for further details); • a net £43 million of additional costs associated with the delivery of the Group Target Operating Model for IT and Operations, comprising a £74 million increase in expenses recognised within liabilities under insurance contracts and partly offset by a £31 million release within the Transition and Transformation restructuring provision; • costs of £37 million associated with the acquisition of ReAssure Group plc, and £19 million incurred under the subsequent integration programme; • costs of £20 million associated with the on-going integration of the Old Mutual Wealth business acquired by ReAssure Group plc in December 2019, incurred since the Group’s acquisition of ReAssure Group plc in July 2020; • costs of £16 million associated with the transfer and integration of the L&G mature savings business; • £34 million of other corporate project costs; and
Revenue from external customers: Less: premiums ceded to reinsurers (225) (303) (28) – – (556)
Of the revenue from external customers presented in the table above, £3,818 million (2019: £3,131 million) is attributable to customers in the United Kingdom (‘UK’) and £886 million (2019: £1,051 million) to the rest of the world. The Europe operating segment comprises business written in Ireland and Germany to customers in both Europe and the UK. No revenue transaction with a single customer external to the Group amounts to greater than 10% of the Group’s revenue.
The Group has total non-current assets (other than financial assets, deferred tax assets, pension schemes and rights arising under insurance contracts) of £7,042 million (2019: £6,005 million) located in the UK and £433 million (2019: £375 million) located in the rest of the world.
B2.1 Calculation of the long-term investment return The expected return on investments for both owner and policyholder funds is based on opening economic assumptions applied to the funds under management at the beginning of the reporting period. Expected investment return assumptions are derived actively, based on market yields on risk-free fixed interest assets at the start of each financial year.
The effect of differences between actual and expected economic experience on liabilities, and changes to economic assumptions used to value liabilities, are taken outside operating profit. For many types of long-term business, including unit-linked and with-profit funds, movements in asset values are offset by corresponding changes in liabilities, limiting the net impact on profit. For other long-term business, the profit impact of economic volatility depends on the degree of matching of assets and liabilities, and exposure to financial options and guarantees.
The net adverse investment return variances and economic assumption changes on long-term business of £47 million (2019: £177 million adverse) primarily arise as a result of movements in credit spreads, the impact of credit downgrades in the Group’s investment portfolio and a net adverse impact from equity movements. Equity movements arising from future profits in relation to with-profit bonuses and unit-linked charges are hedged to benefit the regulatory capital position. The impact of equity market movements on the value of the hedging instruments is reflected in the IFRS results, but the corresponding change in the value of future profits is not. Losses have been experienced on hedging positions held by the Life companies in respect of rises in certain overseas equity markets in 2020, and on positions held by the ReAssure businesses as a result of improving UK equity markets in the postacquisition period. These losses have been partly offset by gains on UK equity market hedges that the Group has had in place since 1 January 2020. Falling yields and strategic asset allocation activities undertaken by the Group, including investment in higher yielding illiquid assets, also gave rise to positive investment return variances in the year. The prior year result included losses arising on hedging positions held by the life funds reflecting improving equity markets in 2019.
B3. Earnings Per Share The Group calculates its basic earnings per share based on the present shares in issue using the earnings attributable to ordinary equity holders of the parent, divided by the weighted average number of ordinary shares in issue during the year.
The result attributable to ordinary equity holders of the parent for the purposes of determining earnings per share has been calculated as set out below.
Profit/(loss) for the year attributable to ordinary equity holders of the parent 1,000 (166) 834 (59) 775
Profit/(loss) before the tax attributable to owners 810 (127) 683 (697) (14)
Profit/(loss) for the year attributable to owners 647 (92) 555 (439) 116
Deduct: Share of result attributable to non-controlling interests – – – (31) (31)
B. EARNINGS PERFORMANCE continued B3. Earnings Per Share continued The weighted average number of ordinary shares outstanding during the period is calculated as follows: million million
The diluted weighted average number of ordinary shares outstanding during the period is 846 million (2019: 722 million). The Group’s longterm incentive plan, deferred bonus share scheme and sharesave schemes increased the weighted average number of shares on a diluted basis by 2,316,109 shares for the year ended 31 December 2020 (2019: 1,474,170 shares).
Basic operating earnings net of financing costs per share 98.8 73.8
Revenue from investment contracts without DPF 292 293 50 137 772
Fee income from investment contracts without DPF 314 308 70 692
The comparative information for fee income from investments without DPF has been restated. UK Heritage fee income has been reduced by £40 million to £314 million and the UK Open fee income has been increased by the same amount to £308 million. For further details of the restatement see note B1.
C2. Net investment income Net investment income comprises interest, dividends, rents receivable, net interest income/(expense) on the net defined benefit asset/(liability), fair value gains and losses on financial assets (except for reinsurers’ share of investment contract liabilities without DPF, see note E1), financial liabilities and investment property at fair value and impairment losses on loans and receivables.
Financial assets and financial liabilities at FVTPL: Designated upon initial recognition 8,021 17,574
Net investment income 16,935 24,876 195Phoenix Group Holdings plc Annual Report & Accounts 2020
Movement in provision for transition and transformation programme (see note G7) (31) 159
Further information on auditor’s remuneration and the assessment of the independence of the external auditor is set out in the Audit Committee report on pages 116 to 121.
C5. Finance Costs Interest payable is recognised in the consolidated income statement as it accrues and is calculated using the effective interest method.
Deferred tax charge on defined benefit schemes 25 56 197Phoenix Group Holdings plc Annual Report & Accounts 2020
C. OTHER CONSOLIDATED INCOME STATEMENT NOTES continued C6. Tax charge continued C6.3 Tax Credited to Equity £m
Total tax charge for the year 436 235 1 The Phoenix operating segments are predominantly in the UK. The reconciliation of tax charge has, therefore, been completed by reference to the standard rate of UK tax.
2 £(71) million relates to the non-taxable gain on acquisition of the ReAssure businesses. The balance primarily relates to non-taxable dividends, gains and non-taxable pension scheme items.
5 £65 million charge arising from the movement on acquired in-force amortisation following the L&G Part VII transfer.
On 22 July 2020, the Group acquired 100% of the issued share capital of ReAssure Group plc from Swiss Re Finance Midco (Jersey) Limited, an indirect subsidiary of Swiss Re Limited, for total consideration of £3.1 billion. The consideration consisted of £1.3 billion of cash, funded through the issuance of debt and own resources, and the issue of 277,277,138 shares (‘the Acquisition Shares’) to Swiss Re Group on 23 July 2020.
Pursuant to an agreement between Swiss Re Group and MS&AD Insurance Group Holdings (‘MS&AD’), MS&AD transferred its entire shareholding in ReAssure Group plc to the Swiss Re Group prior to 22 July 2020 in consideration for the transfer of 144,877,304 of the Acquisition Shares at completion. The equity stake in the Group held by Swiss Re Group and MS&AD was valued at £1,847 million, based on the share price at that date.
The Group has applied the relief in section 612 of the Companies Act 2006 to present the difference between the consideration received and the nominal value of the shares issued of £1,819 million in a merger reserve as opposed to in share premium. A merger reserve is required to be used as a result of the Group having issued equity shares as part consideration for the shares of ReAssure Group plc and securing at least a 90% holding in that entity.
During 2019, 315,730 shares were issued at a premium of £2 million in order to satisfy obligations to employees under the Group’s sharesave schemes (see note I1).
During the year 1,230,763 (2019: 508,639) shares were awarded to employees by the EBT and 1,087,410 (2019: 614,193) shares were purchased. The number of shares held by the EBT at 31 December 2020 was 953,003 (2019: 1,096,356).
Owner-occupied property revaluation reserve This reserve comprises the revaluation surplus arising on revaluation of owner-occupied property. When a revaluation loss arises on a previously revalued asset it should be deducted first against the previous revaluation gain. Any excess impairment will then be recorded as an impairment expense in the consolidated income statement.
In April 2020, the Group terminated the derivative instruments which had been designated as hedging instruments in its cash flow hedging relationships. Hedge accounting was discontinued from the point of termination of the derivative instruments. The remaining cash flow hedging reserve will be reclassified to profit or loss over the remaining term of the hedged items.
Further details of the Group’s hedge accounting policy are included in note E1.
On 27 October 2020, the terms of the Tier 1 Notes were amended and the consequence of a trigger event, linked to the Solvency II capital position, was changed. Previously, the Tier 1 Notes were subject to a permanent write-down in value to zero. The amended terms require that the Tier 1 Notes would automatically be subject to conversion to ordinary shares of the Company at the conversion price of £1,000 per share, subject to adjustment in accordance with the terms and conditions of the notes and all accrued and unpaid interest would be cancelled. Following any such conversion there would be no reinstatement of any part of the principal amount of, or interest on, the Tier 1 Notes at any time.
D5. Non-Controlling Interests Non-controlling interests are stated at the share of net assets attributed to the non-controlling interest holder at the time of acquisition, adjusted for the relevant share of subsequent changes in equity.
E. FINANCIAL ASSETS & LIABILITIES E1. Fair Values Financial assets Purchases and sales of financial assets are recognised on the trade date, which is the date that the Group commits to purchase or sell the asset.
Equities, debt securities and collective investment schemes are designated at FVTPL and accordingly are stated in the statement of consolidated financial position at fair value. They are designated at FVTPL because this is reflective of the manner in which the financial assets are managed and reduces a measurement inconsistency that would otherwise arise with regard to the insurance liabilities that the assets are backing.
Movements in the fair value of investment contracts without DPF and reinsurers’ share of investment contract liabilities are included in the ‘change in investment contract liabilities’ in the consolidated income statement.
E. FINANCIAL ASSETS & LIABILITIES continued E1. Fair Values continued Deposits from reinsurers It is the Group’s practice to obtain collateral to cover certain reinsurance transactions, usually in the form of cash or marketable securities. Where cash collateral is available to the Group for investment purposes, it is recognised as a ‘financial asset’ and the collateral repayable is recognised as ‘deposits received from reinsurers’ in the statement of consolidated financial position.
Hedge accounting In 2019 the Group previously designated certain derivatives as hedging instruments in order to effect cash flow hedges. At the inception of the hedge relationship, the Group documents the relationship between the hedging instrument and the hedged item, along with its risk management objectives and its strategy for undertaking various hedge transactions. Furthermore, at the inception of the hedge and on an ongoing basis, the Group documents whether the hedging instrument is highly effective in offsetting changes in fair values or cash flows of the hedged item attributable to the hedged risk. Note E3 sets out details of the fair values of the derivative instruments used for hedging purposes.
E1.1 Fair Values Analysis The table below sets out a comparison of the carrying amounts and fair values of financial instruments as at 31 December 2020: Carrying value £m
Amounts due for settlement after 12 months £m Fair value £m
Financial assets measured at amortised cost: Total financial assets 298,823 298,823
Financial assets measured at amortised cost: Total financial assets 218,871 218,871
All other financial assets that are measured at fair value through profit or loss2 298,176 218,355 1 Other receivables excludes deferred acquisition costs.
An analysis of credit ratings of financial assets with contractual cash flows that are SPPI, excluding those held for trading or managed on a fair value basis, is provided below: 2020 Carrying value
Fair value hierarchy information for non-financial assets measured at fair value is included in note G3 for owner-occupied property and in note G4 for investment property.
Financial assets designated at FVTPL upon initial recognition: Investment in associate 400 – – 400
Total financial assets measured at fair value 251,426 34,424 12,326 298,176
Total financial liabilities for which fair values are disclosed – 6,187 249 6,436 207Phoenix Group Holdings plc Annual Report & Accounts 2020
E. FINANCIAL ASSETS & LIABILITIES continued E2. Fair Value Hierarchy continued E2.3 Level 3 Financial instrument sensitivities As explained in note A6, weak economic conditions from COVID-19 and market volatility have resulted in the fair valuation of all Level 3 assets being subject to increased uncertainty. In response to this, additional analysis has been performed to confirm that the fair value of financial instruments included in the consolidated financial statements is reasonable.
Financial assets designated at FVTPL upon initial recognition: Total financial assets measured at fair value 10,269 2,057 12,326
The Group holds unquoted corporate bonds comprising investments in local authority loans, private placements and infrastructure loans with a total value of £4,561 million (2019: £1,750 million). These unquoted corporate bonds are secured on various assets and are valued using a discounted cash flow model. The discount rate is made up of a risk-free rate and a spread. The risk-free rate is taken from an appropriate gilt of comparable duration. The spread is taken from a basket of comparable securities. The valuations are sensitive to movements in this spread. An increase of 35bps would decrease the value by £246 million (2019: £81 million) and a decrease of 35bps would increase the value by £190 million (2019: £87 million).
As at 31 December 2020, following the effects of the COVID-19 crisis, the credit ratings for a small number of unquoted corporate bonds have been downgraded and the impacts of this have been reflected in the fair values at 31 December 2020. There remains some ongoing uncertainty in respect of the credit ratings for unquoted corporate bonds and commercial real estate loans in light of the continuing economic volatility. Internal review processes are in place to closely monitor credit ratings and additional reviews are carried out as required, for example when triggered by credit performance or market factors. The financial impact of reasonable movements in spreads has been quantified above.
The future cash flows are estimated based on assumed levels of mortality derived from published mortality tables, entry into long-term care rates and voluntary redemption rates. Cash flows include an allowance for the expected cost of providing a NNEG assessed under a real world approach using a closed form model including an assumed level of property value volatility. For the NNEG assessment, property values are indexed from the latest property valuation point and then assumed to grow in line with an RPI based assumption.
Cash flows are discounted using a risk free curve plus a spread, where the spread is based on recent originations, with margins to allow for the different risk profiles of ERM loans.
E2.3.2 Borrowings Included within borrowings measured at fair value and categorised as Level 3 financial liabilities are property reversion loans with a value of £84 million (2019: £99 million), measured using an internally developed model. The valuation is sensitive to key assumption of the discount rate. An increase in the discount rate of 1% would decrease the value by £1 million (2019: £1 million) and a decrease of 1% would increase the value by £1 million (2019: £1 million).
An increase of 100bps in the swap curve would decrease the net value by £15 million (2019: £13 million) and a decrease of 100bps would increase the net value by £17 million (2019: £17 million). An increase of 1% in the RPI and CPI inflation rates would increase the value by £11 million (2019: £10 million) and a decrease of 1% would decrease the value by £12 million (2019: £10 million).
Also included within derivative liabilities is the Equity Release Income Plan (‘ERIP’) total return swap with a value of £75 million, under which a share of the disposal proceeds arising on a portfolio of property reversions is payable to a third party (see note E.3.3 for further details). The carrying value of the financial liability is the discounted present value of all future property sales that will be passed to the counterparty as part of the swap arrangement. The valuation is sensitive to the discount rate applied. An increase of 1% in the discount rate would decrease the value by £3 million and a decrease of 1% in the discount rate would increase the value by £3 million.
The Group also holds investments in commercial real estate loans with a value of £1,075 million (2019: £388 million). The loans are valued using a model which discounts the expected projected future cash flows at the risk-free rate plus a spread derived from a basket of comparable securities. The valuation is sensitive to changes in the discount rate. An increase of 35bps in the discount rate would decrease the value by £15 million (2019: £7 million) and a decrease of 35bps would increase the value by £16 million (2019: £7 million).
E. FINANCIAL ASSETS & LIABILITIES continued E2. Fair Value Hierarchy continued E2.4 Transfers of financial instruments between Level 1 and Level 2
Consistent with the prior year, all the Group’s Level 1 and Level 2 assets have been valued using standard market pricing sources.
Financial liabilities designated at FVTPL upon initial recognition: 210 Phoenix Group Holdings plc Annual Report & Accounts 2020
Financial assets designated at FVTPL upon initial recognition: At 1 January
E3.1 Summary The fair values of derivative financial instruments are as follows: £m £m £m £m
Equity Release Income Plan total return swap – 75 – –
In addition, the Group has entered into a transaction under which it has accepted reinsurance on a portfolio of single and regular premium life insurance policies and retroceded the majority of the insurance risk. Taken as a whole, this transaction does not give rise to the transfer of significant insurance risk to the Group and therefore does not meet the definition of an insurance contract under the Group’s accounting policies. The fair value of amounts due from the cedant are recognised within debt securities (see note E1). The fair value of amounts due to the retrocessionaire are recognised as a derivative liability and totalled £1 million at 31 December 2020 (2019: £4 million).
E4.1 Financial instrument collateral arrangements The Group has no financial assets and financial liabilities that have been offset in the statement of consolidated financial position as at 31 December 2020 (2019: none).
E. FINANCIAL ASSETS & LIABILITIES continued E4. Collateral Arrangements continued E4.1 Financial instrument collateral arrangements continued Related amounts not offset 2019 Financial assets
The fair value of financial assets accepted as collateral for OTC derivatives but not recognised in the statement of consolidated financial position amounts to £885 million (2019: £437 million).
The maximum exposure to credit risk in respect of OTC derivative assets is £6,523 million (2019: £3,908 million) of which credit risk of £5,608 million (2019: £3,585 million) is mitigated by use of collateral arrangements (which are settled net after taking account of any OTC derivative liabilities owed to the counterparty).
Credit risk on exchange traded derivative assets of £357 million (2019: £546 million) is mitigated through regular margining and the protection offered by the exchange.
Assets pledged The Group pledges collateral in respect of its OTC derivative liabilities. The value of assets pledged at 31 December 2020 in respect of OTC derivative liabilities of £886 million (2019: £650 million) amounted to £1,216 million (2019: £692 million).
It is the Group’s practice to obtain collateral in stock lending transactions, usually in the form of cash or marketable financial instruments.
The maximum exposure to credit risk in respect of stock lending transactions is £2,435 million (2019: £3,050 million) of which credit risk of £2,435 million (2019: £3,050 million) is mitigated through the use of collateral arrangements.
E5. Borrowings The Group classifies the majority of its interest bearing borrowings as financial liabilities carried at amortised cost and these are recognised initially at fair value less any attributable transaction costs. The difference between initial cost and the redemption value is amortised through the consolidated income statement over the period of the borrowing using the effective interest method.
E. FINANCIAL ASSETS & LIABILITIES continued E5. Borrowings continued E5.1 Analysis of borrowings
c. Scottish Mutual Assurance Limited issued £200 million 7.25% undated, unsecured subordinated loan notes on 23 July 2001 (‘PLL subordinated debt’). The earliest repayment date of the notes is 25 March 2021 and thereafter on each fifth anniversary so long as the notes are outstanding. With effect from 1 January 2009, following a Part VII transfer, these loan notes were transferred into the shareholder fund of PLL. In the event of the winding-up of PLL, the right of payment under the notes is subordinated to the rights of the higher-ranking creditors (principally policyholders). As a result of the acquisition of the Phoenix Life businesses in 2009, these subordinated loan notes were acquired at their fair value and as such, the outstanding principal of these subordinated loan notes differs from the carrying value in the statement of consolidated financial position. The fair value adjustments, which were recognised on acquisition, will unwind over the remaining life of these subordinated loan notes. With effect from 23 December 2014, minor modifications were made to the terms of the notes to enable them to qualify as Tier 2 capital for regulatory reporting purposes. Expenses incurred in effecting these modifications amounted to £10 million. Given the modifications were not substantial, the carrying amount of the liability was adjusted accordingly and the expenses are being amortised over the life of the notes.
Cash and cash equivalents G6 10,998 4,466 d. On 7 July 2014, the Group’s financing subsidiary, PGH Capital plc (‘PGHC’), issued a £300 million 7 year senior unsecured bond at an annual coupon rate of 5.75% (‘£300 million senior bond’). On 20 March 2017, Old PGH was substituted in place of PGHC as issuer of the £300 million senior bond. On 5 May 2017, Old PGH completed the purchase of £178 million of the £300 million senior bond at a premium of £25 million in excess of the principal amount. Accrued interest on the purchased bonds was settled on this date. On 18 June 2019, the Company was substituted in place of Old PGH as issuer of the £300 million 7 year senior unsecured bond.
g. On 6 July 2017, Old PGH issued US $500 million Tier 2 bonds due 2027 with a coupon of 5.375%. Fees associated with these notes of £2 million were deferred and are being amortised over the life of the notes. On 12 December 2018 the Company was substituted in place of Old PGH as issuer.
j. On 28 April 2020, the Company issued £500 million fixed rate Tier 2 Notes (the ‘Tier 2 Notes’) which are unsecured and subordinated. The Tier 2 Notes have a maturity date of 28 April 2031 and include an issuer par call right for the three month period prior to maturity. The Tier 2 Notes bear interest on the principal amount at a fixed rate of 5.625% per annum payable annually in arrears on 28 April each year.
E. FINANCIAL ASSETS & LIABILITIES continued E5. Borrowings continued E5.1 Analysis of borrowings continued l. On 22 July 2020, as part of the acquisition of ReAssure Group plc, the Group assumed the £500 million 5.867% Tier 2 subordinated notes.
n. On 22 July 2020, as part of the acquisition of ReAssure Group plc, the Group assumed the £250 million 4.016% Tier 3 subordinated notes. On the same date, the Company was substituted in place of ReAssure Group plc as issuer of the notes. The £250 million 4.016% Tier 3 subordinated notes have a maturity date of 13 June 2026 and were initially recognised at their fair value as at the date of acquisition of £259 million. The fair value adjustment is being amortised over the remaining life of the notes. Interest is payable semi-annually in arrears on 13 June and 13 December.
o. The Group has in place a £1.25 billion unsecured revolving credit facility, maturing in June 2025. There are no mandatory or target amortisation payments associated with the facility but the facility does include customary mandatory prepayment obligations and voluntary prepayments are permissible. The facility accrues interest at a margin over LIBOR that is based on credit rating. The facility remains undrawn as at 31 December 2020.
E5.2 Reconciliation of liabilities arising from financing activities The table below details changes in the Group’s liabilities arising from financing activities, including both cash and non-cash changes (with the exception of lease liabilities, which have been included in note G10). Liabilities arising from financing activities are those for which cash flows were, or future cash flows will be, classified in the Group’s consolidated statement of cash flows as cash flows from financing activities.
US $750 million Contingent Convertible Tier 1 notes – 566 – – – (23) 2 545
E6. Risk Management – Financial and Other Risks This note forms one part of the risk management disclosures in the consolidated financial statements. An overview of the Group’s approach to risk management is outlined in note I3 and the Group’s management of insurance risk is detailed in note F4.
E6.1 Financial risk and the Asset Liability Management (‘ALM’) framework The use of financial instruments naturally exposes the Group to the risks associated with them, chiefly market risk, credit risk and financial soundness risk.
The Group is also exposed to insurance risk arising from its Life business. Life insurance risk in the Group arises through its exposure to longevity, persistency, mortality and to other variances between assumed and actual experience. These variances can be in factors such as persistency levels and management, administrative expenses and new business pricing. More detail on the Group’s exposure to insurance risk is provided in note F4.
A Group-wide project is underway to enhance our approach to managing the financial risks of climate change, including embedding climate risk considerations within the Group’s Risk Management Framework, which will meet the requirements of Supervisory Statement 3/19. The Group’s disclosures in line with the Task Force for Climate-related Financial Disclosures (TCFD), including planned future activity across each of the TCFD focus areas, are outlined on page 67 of the Annual Report and Accounts.
E6.2.1 Credit risk Credit risk is defined as the risk of reductions in earnings and/or value, through financial or reputational loss, as a result of the default of a counterparty or an associate of such a counterparty to a financial transaction (i.e. failure to honour their financial obligations, or failing to perform them in a timely manner), whether on or off balance sheet
The Group holds £23,799 million (2019: £10,800 million) of corporate bonds which are used to back annuity liabilities in non-profit funds. These annuity liabilities include an aggregate credit default provision of £1,156 million (2019: £583 million) to fund against the risk of default.
A 100bps narrowing of credit spreads, with all other variables held constant and no change in assumed expected defaults, would result in an increase in the profit after tax in respect of a full financial year, and in equity, of £2 million (2019: £26 million).
Earnings per ordinary share Basic (pence per share) B3 91.8p 8.7p Diluted (pence per share) B3 91.5p 8.6p
Reinsurers’ share of investment contract liabilities – 16 – 1 – – 9,542 9,559 1 For financial assets that do not have credit ratings assigned by external ratings agencies, the Group assigns internal ratings for use in management and monitoring of credit risk. £117 million of AAA, £963 million of AA, £2,446 million of A, £1,741 million of BBB and £219 million of BB and below debt securities are internally rated. If a financial asset is neither rated by an external agency nor internally rated, it is classified as ‘non-rated’.
2 Non-rated debt securities includes equity release mortgages with a value of £3,484 million (further details are set out in note E2.3) and non-rated bonds.
Reinsurers’ share of insurance contract liabilities – 5,913 1,366 – – 45 – 7,324
2 Non-rated debt securities includes equity release mortgages with a value of £2,781 million (further details are set out in note E2.3) and non-rated bonds.
Credit ratings have not been disclosed in the above tables for the directly held assets of the unit-linked funds since the shareholder is not directly exposed to credit risks from these assets. Included in unit-linked funds are assets which are held as reinsured external fund links. Under certain circumstances, the shareholder may be exposed to losses relating to the default of the reinsured external fund link.
The Group operates an Internal Credit Rating Committee to perform oversight and monitoring of internal credit ratings for externally rated and internally rated assets. A variety of methods are used to validate the appropriateness of credit assessments from external institutions and fund managers. Internally rated assets are those that do not have a public rating from an external credit assessment institution. The internal credit ratings used by the Group are provided by fund managers or for certain assets (in particular, equity release mortgages) determined by the Life Companies. The Committee reviews the policies, processes and practices to ensure the appropriateness of the internal ratings assigned to asset classes
E. FINANCIAL ASSETS & LIABILITIES continued E6. Risk Management – Financial and Other Risks continued E6.2 Financial risk analysis continued E6.2.1 Credit risk continued A further indicator of the quality of the Group’s financial assets is the extent to which they are neither past due nor impaired. All of the amounts in the table above for the current and prior year are neither past due nor impaired.
Concentration of credit risk Concentration of credit risk might exist where the Group has significant exposure to an individual counterparty or a group of counterparties with similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic and other conditions. The Group has most of its counterparty risk within its life business and this is monitored by the counterparty limits contained within the investment guidelines and investment management agreements, overlaid by regulatory requirements and the monitoring of aggregate counterparty exposures across the Group against additional Group counterparty limits. Counterparty risk in respect of OTC derivative counterparties is monitored using a Potential Future Exposure (‘PFE’) value metric.
Collateral The credit risk of the Group is mitigated, in certain circumstances, by entering into collateral agreements. The amount and type of collateral required depends on an assessment of the credit risk of the counterparty. Guidelines are implemented regarding the acceptability of types of collateral and the valuation parameters. Collateral is mainly obtained in respect of stock lending, certain reinsurance arrangements and to provide security against the daily mark to model value of derivative financial instruments. Management monitors the market value of the collateral received, requests additional collateral when needed, and performs an impairment valuation when impairment indicators exist and the asset is not fully secured (and is not carried at fair value). See note E4 for further information on collateral arrangements.
The potential for adverse market risk is heightened in 2020 due to the prolonged period of low interest rates and ongoing uncertainty regarding the external environment, particularly COVID-19. Details of how the Group has managed this heightened market risk are included on page 88 of the Risk Management section of the Annual Report.
An increase of 1% in interest rates, with all other variables held constant would result in a decrease in profits after tax in respect of a full financial year, and in equity, of £287 million (2019: £114 million).
A decrease of 1% in interest rates, with all other variables held constant, would result in an increase in profits after tax in respect of a full financial year, and in equity, of £461 million (2019: £233 million).
Currency risk With the exception of Standard Life business sold in Germany and the Republic of Ireland, some historic business written in the latter, and Ark Life domiciled in the Republic of Ireland, the Group’s principal transactions are carried out in sterling. The assets for these books of business are generally held in the same currency denomination as their liabilities, therefore, any foreign currency mismatch is largely mitigated. Consequently, the foreign currency risk relating to this business mainly arises when the assets and liabilities are translated into sterling.
Sensitivity of profit after tax and equity to fluctuations in currency exchange rates is not considered significant at 31 December 2020, since unhedged exposure to foreign currency was relatively low (2019: not considered significant).
Tax risk is defined as the risk of financial failure, reputation damage, loss of earnings/value arising from a lack of liquidity, funding or capital, and/or the inappropriate recording, reporting, understanding of tax legislation and disclosure of financial, taxation and regulatory information. Tax risk is managed by maintaining an appropriatelystaffed tax team who have the qualifications and experience to make judgements on tax issues, augmented by advice from external specialists where required. In addition, the Group has a formal tax risk policy, which sets out its risk appetite in relation to specific aspects of tax risk, and which details the controls the Group has in place to manage those risks.
Liquidity risk is defined as failure to maintain adequate levels of financial resources to meet short-term obligations as they fall due. Funding risk relates to the potential inability to raise additional capital or liquidity when required in order to maintain the resilience of the balance sheet. The Group has exposure to liquidity risk as a result of servicing its external debt and equity investors, and from the operating requirements of its subsidiaries. The Group’s subsidiaries have exposure to liquidity risk as a result of normal business activities, specifically the risk arising from an inability to meet shortterm cash flow requirements. The Board of Phoenix Group Holdings plc has defined a number of governance objectives and principles and the liquidity risk frameworks of each subsidiary are designed to ensure that: • liquidity risk is managed in a manner consistent with the subsidiary company boards’ strategic objectives, risk appetite and Principles and Practices of Financial Management (‘PPFM’); • cash flows are appropriately managed and the reputation of the Group is safeguarded; and
The Group’s funding strategy aims to maintain the appropriate level of debt and equity in order to support the Group’s acquisition ambitions, while maintaining sufficient headroom for hybrid capital under Solvency II rules.
The following table provides a maturity analysis showing the remaining contractual maturities of the Group’s undiscounted financial liabilities and associated interest. Liabilities under insurance contract contractual maturities are included based on the estimated timing of the amounts recognised in the statement of consolidated financial position in accordance with the requirements of IFRS 4 Insurance Contracts: 225Phoenix Group Holdings plc Annual Report & Accounts 2020
Net asset value attributable to unitholders 3,791 – – – 3,791
Obligations for repayment of collateral received 3,671 – – – 3,671
The Group’s strategy and business plan are exposed to external events that could prevent or impact the achievement of the strategy; events relating to how the strategy and business plan are executed; and events that arise as a consequence of following the specific strategy chosen. The identification and assessment of strategic risks is an integrated part of the RMF. Strategic Risk should be considered in parallel with the Risk Universe as each of the risks within the Risk Universe can impact the Group’s strategy.
The Group’s Conduct Risk Appetite, sets the boundaries within which the Group expect customer outcomes to be managed. In addition, the Group Conduct Risk Framework, which overarches our Risk Universe and all risk policies, consists of a set of outcomes, intents and standards for all staff to follow to ensure that we have embedded and effective controls in place across our business activities to detect where our customers are at risk of poor outcome, minimise conduct risks, and respond with timely and appropriate mitigating actions.
Contracts with reinsurers are assessed to determine whether they contain significant insurance risks. Contracts that do not give rise to a significant transfer of insurance risk to the reinsurer are classified as financial instruments and are valued at fair value through profit or loss.
• Sales and Distribution: Inappropriate (unclear, unfair or misleading) financial promotions, sales practices and/or distribution agreements resulting in poor customer outcomes leading to reputational, financial and/or operational detriment.
Contracts under which the transfer of insurance risk to the Group from the policyholder is not significant are classified as investment contracts or derivatives and accounted for as financial liabilities (see notes E1 and E3 respectively).
The realistic liability for any contract is equal to the sum of the WPBR and the cost of future policy-related liabilities.
Amounts due for settlement after 12 months 113,880 8,546 79,508 6,532
L&G Part VII transfer (see note H2.2) 9,558 – – –
1 Other changes in liabilities principally comprise changes in economic and non-economic assumptions and experience. Other changes in liabilities in 2019 also included the recognition of an additional £44 million of policyholder liabilities on the crystallisation of obligations initially included within the FCA thematic reviews provision.
In relation to the HWPF, amounts are considered to be allocated to shareholders when they emerge as recourse cash flows within the HWPF.
F3. Reinsurance This section includes disclosures in relation to reinsurance. Further disclosures and accounting policies relating to reinsurance are included in note F1.
Insurance risk refers to the risk that the frequency or severity of insured events may be worse than expected and includes expense risk. The Life businesses are exposed to the following elements of insurance risk: Mortality higher than expected death claims on assurance products or lower than expected improvements in mortality; Longevity lower than expected number of deaths experienced on annuity products or greater than expected improvements in annuitant mortality; Morbidity higher than expected number of inceptions on critical illness or income protection policies and lower than expected termination rates on income protection policies; Expenses unexpected timing or value of expenses incurred; Persistency adverse movement in surrender rates, premium paying rates, premium indexation rates, cash withdrawal/drawdown rates, GAO surrender rates, GAO take-up rates, policyholder retirement dates or the occurrence of a mass lapse event leading to losses; and
Objectives and policies for mitigating insurance risk The Group uses several methods to assess and monitor insurance risk exposures for both individual types of risks insured and overall risks. These methods include internal risk measurement models, experience analyses, external data comparisons, sensitivity analyses, scenario analyses and stress testing. In addition to this, mortality, longevity and morbidity risks may in certain circumstances be mitigated by the use of reinsurance. Assumptions that are deemed to be financially significant are reviewed at least annually for pricing and reporting purposes.
Where the Group receives collateral in the form of marketable financial instruments which it is not permitted to sell or re-pledge except in the case of default, it is not recognised in the statement of consolidated financial position. The fair value of financial assets accepted as collateral for reinsurance transactions but not recognised in the statement of consolidated financial position amounts to £4,324 million (2019: £3,217 million).
F3.3 Net expense under arrangements with reinsurers The Group has reinsured the longevity and investment risk related to a portfolio of annuity contracts held within the HWPF. At inception of the reinsurance contract the reinsurer was required to deposit an amount equal to the reinsurance premium with the Group. The amount recognised in the statement of consolidated financial position in respect of this deposit is £3.7 billion as at 31 December 2020 (31 December 2019: £3.9 billion). Interest is payable to the reinsurer on the deposit at a floating rate. The Group maintains a ring fenced pool of assets to back this deposit liability. Annuity payments under the reinsured contracts are made by the Group from the ring fenced assets and the deposit liability is reduced by the amount of these payments. Periodically the Group is required to pay to the reinsurer or receive from the reinsurer Premium Adjustments defined as the difference between the fair value of the ring fenced assets and the deposit amount, such that the deposit amount equals the fair value of the ring fenced assets. This has the effect of ensuring that the investment risk on the ring fenced pool of assets falls on the reinsurer. The investment return on the ring fenced assets included within net investment return in the consolidated income statement is equal to an equivalent amount recognised in net expense under arrangements with reinsurers.
The Group’s longevity risk exposures have increased as a result of the Bulk Purchase Annuity deals it has successfully acquired, however the vast majority of these exposures are reinsured to third parties. This longevity exposure has further been increased following the acquisition of the ReAssure businesses and also due to the fall in yields during the year.
Insurance risk and COVID—19 There is currently increased uncertainty around future demographic experience as a result of COVID-19 impacts, particularly mortality, longevity and persistency risk. Some allowance has been made in the valuation and capital calculations for the potential short term effects of COVID-19 on timing of cash flows relating to the insurance risks to which the Group is exposed. The impact over the longer term continues to be monitored on a regular basis however given the uncertainty no adjustments have been deemed necessary to date.
An increase of 5% in annuitant longevity, with all other variables held constant, would result in a decrease in the profit after tax in respect of a full year, and a decrease in equity of £627 million (2019: £298 million).
A decrease of 10% in lapse rates, with all other variables held constant, would result in a decrease in the profit after tax in respect of a full year, and a decrease in equity of £40 million (2019: £20 million).
For certain non-participating insurance contract liabilities (e.g annuities), the Group makes a further explicit adjustment to the risk-free rate to reflect illiquidity in respect of the assets backing those liabilities.
Withdrawal rates used in the valuation of with-profit policies are based on observed experience and adjusted when it is considered that future policyholder behaviour will be influenced by different considerations than in the past. In particular, it is assumed that withdrawal rates for unitised with-profit contracts will be higher on policy anniversaries on which Market Value Adjustments do not apply.
Demographic prudence margin For non-participating insurance contract liabilities, the Group sets assumptions at management’s best estimates and recognises an explicit margin for demographic risks. For participating business in realistic basis funds, the assumptions about future demographic trends represent ‘best estimates’.
Factors related to the COVID-19 pandemic are expected to have impacted policyholder behaviour (including persistency) and demographic experience in the period and are likely to continue to do so in the future. The Group’s results have been impacted during the period by adverse mortality experience on the protection business, but this has been offset by positive longevity experience on the annuity business. The impact over the longer-term continues to be monitored on a regular basis, however given the uncertainty no adjustments to assumptions as a result of the impacts of COVID-19 have been deemed necessary to date.
Following the ‘second wave’ of COVID-19 deaths at the end of 2020, the Group has recognised a short-term actuarial provision of £10 million in anticipation of excess deaths relative to valuation assumptions at 31 December 2020.
With-profit funds: Pensions: Deferred annuities – with guarantees 10,095 62 917 –
Non-profit funds: Deferred annuities – with guarantees 636 – – –
F4.2 Managing product risk The following sections give an assessment of the risks associated with the Group’s main life assurance products and the ways in which the Group manages those risks.
F. INSURANCE CONTRACTS, INVESTMENT CONTRACTS WITH DPF AND REINSURANCE continued F4. Risk Management – Insurance Risk continued F4.2 Managing product risk continued Gross Reinsurance
As required by IFRIC 14, IAS 19 –’The limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction’, to the extent that the economic surplus (prior to the elimination of the insurance policies issued by Group entities) will be available as a refund, the economic surplus is stated after a provision for tax that would be borne by the scheme administrators when the refund is made. The Group recognises a pension surplus on the basis that it is entitled to the surplus of each scheme in the event of a gradual settlement of the liabilities, due to its ability to order a winding up of the Trust.
Additionally under IFRIC 14 pension funding contributions are considered to be a minimum funding requirement and, to the extent that the contributions payable will not be available to the Group after they are paid into the Scheme, a liability is recognised when the obligation arises. The net defined benefit asset/liability represents the economic surplus net of all adjustments noted above.
The Group determines the net interest expense or income on the net defined benefit asset/liability for the period by applying the discount rate used to measure the defined benefit obligation at the beginning of the annual period to the opening net defined benefit asset/liability. The discount rate is the yield at the period end on AA credit rated bonds that have maturity dates approximating to the terms of the Group’s obligations. The calculation is performed by a qualified actuary using the projected unit credit method.
This note describes the Group’s four main staff pension schemes for its employees, the Pearl Group Staff Pension Scheme (‘Pearl Scheme’), the PGL Pension Scheme, the Abbey Life Staff Pension Scheme (‘Abbey Life Scheme’) and the ReAssure Staff Pension
An analysis of the defined benefit (liability)/asset for each pension scheme is set out in the table below and also includes the net pension liability in respect of the Group operated unfunded unapproved retirement benefit scheme (‘ReAssure Private Retirement Trust’): £m
Provision for tax on that part of the economic surplus available as a refund on a winding-up of the Scheme (185) (183)
1 The balance includes plan assets of £382,000 which are primarily held within equities.
The Pearl Scheme and the PGL Pension Scheme have both executed buy-in transactions with a Group life company and subsequently assets supporting the actuarial liabilities are recognised on a line by line basis within financial assets in the statement of consolidated financial position. Further details are included in notes G1.1 and G1.2 below.
Inflation risk – a significant proportion of the schemes’ benefit obligations are linked to inflation, and higher inflation will lead to higher liabilities (although in most cases, caps on the level of inflationary increases are in place to protect against extreme inflation). The majority of the assets are held within a liability driven investment strategy which allows for movements in inflation, meaning that changes in inflation should not materially affect the surplus.
Life expectancy – the majority of the schemes’ obligations are to provide benefits for the life of the member, so increases in life expectancy will result in an increase in the liabilities. For the Pearl and PGL schemes, this is partially offset by the buy in policies that move in line with the liabilities. These buy in policies are eliminated on consolidation (see sections G1.1 and G1.2 for further details).
In 2018, the ReAssure Scheme made allowance for the estimated impact of GMP equalisation and a provision of 0.1% of the defined benefit obligation was made to allow for the cost of GMP equalisation. The methodology and assumptions used to calculate this impact remain appropriate as at 31 December 2020.
Impacts of COVID-19 The market volatility experienced as a result of COVID-19 has contributed towards the movement in the pension scheme IAS 19 valuations for the year ended 31 December 2020. Discount rates used to calculate the IAS 19 defined benefit obligations have fallen by 60bps since 31 December 2019 to 1.4% and this has resulted in a significant increase in the value of the defined benefit obligations at 31 December 2020. This impact has been partially offset in relation to the Pearl Scheme, the Abbey Scheme and the ReAssure Scheme by an increase in the fair value of the plan assets. Falling yields in the period have resulted in an increase to the value of government bonds and corporate bonds which form a substantial part of the plan assets for these Schemes. There is a similar offset in respect of the PGL Pension Scheme as the impact of the increase in the discount rate has been offset by an increase in the fair value of the collateral assets which primarily consist of government bonds.
G1.1 Pearl Group Staff Pension Scheme Scheme details The Pearl Scheme comprises a final salary section, a money purchase section and a hybrid section (a mix of final salary and money purchase). The Pearl Scheme is closed to new members, and has no active members.
Defined benefit scheme The Pearl Scheme is established under, and governed by, the trust deeds and rules and has been funded by payment of contributions to a separately administered trust fund. A Group company, Pearl Group Holdings No.2 Limited (‘PGH2’), is the principal employer of the Pearl Scheme. The principal employer meets the administration expenses of the Pearl Scheme. The Pearl Scheme is administered by a separate Trustee company, P.A.T. (Pensions) Limited, which is separate from the Company. The Trustee company is comprised of four representatives from the Group, three member nominated representatives and one independent trustee in accordance with the Trustee company’s articles of association. The Trustee is required by law to act in the interest of all relevant beneficiaries and is responsible for the investment policy with regard to the assets.
The Scheme transferred £731 million of plan assets to PLL which constituted the payment of £735 million of premium to PLL and was net of a £4 million payment by PLL to the scheme in respect of benefits for October and November 2020. The assets transferred to PLL are recognised in the relevant line within financial assets in the consolidated statement of financial position. The economic effect of the ‘buy-in’ transaction in the Scheme is to replace the plan assets transferred with a single line insurance policy reimbursement asset which is subsequently eliminated on consolidation. The value of this insurance policy at 30 September 2020 was £604 million and at 31 December 2020 was £596 million.
The new agreement contains provisions under which payments by PGH2 to the Scheme are required in the event that the Group does not meet the minimum buy-in completion schedule. There are two different types of payments as follows: • Gilts Deficit Recovery Contributions: These operate in a similar way to the security under the 2012 Pension Agreement. Contributions calculated as amounts required to reach full funding on a gilts-basis by 30 June 2027.
The new agreement also introduces a new form of security provided by PGH2 to the Trustee which will be in place until the final buy-in is completed. The share charges over certain Group entities have been replaced by a new surety bond arrangement. The Surety Bond has been written by two external third-party insurers, each providing £100 million of cover payable to the Scheme following any one of the following trigger events: • Insolvency of the Company, PGH2, PGS, Standard Life Assurance Limited, PLL, or Phoenix Life Assurance Limited; and
Contributions totalling £70 million were paid into the Pearl Scheme in 2020 (2019: £40 million). Following the signing of the new Commitment Agreement PGH2 paid the balance of the remaining contributions under the 2012 Pensions Agreement (£37 million) in addition to the monthly instalments paid up to this date. No further contributions are expected to be paid to the Pearl Scheme however, PGH2 will continue to meet the administrative and non-investment running expenses of the Scheme as set out in the schedule of contributions.
Following the revisions to the schedule of contributions, no additional liability has been recognised at 31 December 2020 (2019: £24 million), to reflect a charge on any refund of the resultant IAS 19 surplus that arises after adjustment for discounted future contributions (2019: £69 million) in accordance with the minimum funding requirement. At 31 December 2019, a deferred tax asset of £12 million was also recognised to reflect tax relief at a rate of 17% that was expected to be available on the contributions, once paid into the Scheme.
Assets transferred as premium for Scheme buy-in (735) – – – (735)
Gain from changes in demographic assumptions – 12 – – 12
Change in provision for tax on economic surplus available as a refund – – (22) – (22)
Change in minimum funding requirement obligation – – – 14 14
Obligations for repayment of stock lending collateral received (789) – (522) –
Add back: Insurance policies eliminated on consolidation 596 596 – –
The Group ensures that the investment positions are managed within an Asset Liability Matching (‘ALM’) framework that has been developed to achieve long-term investments that are in line with the obligations under the Pearl Scheme. Within this framework an allocation of 37% of the scheme assets is invested in collateral for interest rate and inflation rate hedging where the intention is to hedge greater than 100% of the interest rate and inflation rate risk measured on a gilts-basis.
Principal assumptions The principal financial assumptions of the Pearl Scheme are set out in the table below: Rate of increase for pensions in payment (5% per annum or RPI if lower) 2.85 2.90
It has been assumed that post-retirement mortality is in line with a scheme-specific table which was derived from the actual mortality experience in recent years based on the SAPS standard tables for males and for females based on year of use. Future longevity improvements from 1 January 2017 are based on amended CMI 2019 Core Projections (2019: CMI 2018 Core Projections) and a long-term rate of improvement of 1.70% (2019: 1.60%) per annum for males and 1.20% (2019: 1.30%) per annum for females. Under these assumptions, the average life expectancy from retirement for a member currently aged 40 retiring at age 60 is 30.1 years and 31.0 years for male and female members respectively (2019: 29.8 years and 32.2 years respectively).
G1.2 PGL Pension Scheme The PGL Pension Scheme comprises a final salary section and a defined contribution section.
The PGL Scheme is administered by a separate trustee company, PGL Pension Trustee Ltd. The trustee company is comprised of two representatives from the Group, three member nominated representatives and one independent trustee in accordance with the trustee company’s articles of association. The Trustee is required by law to act in the interest of all relevant beneficiaries and is responsible the day to day administration of the benefits.
Insurance policies with Group entities In March 2019, the PGL Pension Scheme entered into a ‘buy-in’ agreement with PLL which covered the remaining pensioner and deferred members of the Scheme not covered by the first such agreement concluded in December 2016. The scheme transferred £1,115 million of plan assets to a collateral account and this transfer constituted the payment of premium to PLL. An adjustment of £13 million to the value of the premium was paid to PLL in 2020. The assets transferred to PLL are recognised in the relevant line within financial assets in the statement of consolidated financial position. As with the initial ‘buy-in’ transaction completed in December 2016, the economic effect of the transaction in the Scheme is to replace the plan assets transferred with a single line insurance policy reimbursement asset which is eliminated on consolidation. The value of this insurance policy at the date of the buy-in was £670 million.
Assets transferred as premium for 2019 scheme buy-in (13) – (13)
Provision for tax on the economic surplus available as a refund £m Total £m
Remeasurements: Return on plan assets excluding amounts included in interest income
Change in provision for tax on economic surplus available as a refund
Add back: Insurance policies eliminated on consolidation 1,749 1,749 1,687 1,687
Adjustment for amounts due to subsidiary eliminated on consolidation – – (13) –
Principal assumptions The principal financial assumptions of the PGL Pension Scheme are set out in the table below: Rate of increase for pensions in payment (7.5% per annum or RPI if lower) 2.90 3.00
A quantitative sensitivity analysis for significant actuarial assumptions is shown below: 2020 Assumptions Base Discount rate RPI Life expectancy
Impact on the defined benefit obligation (£m) 1,754 (67) 70 55 (53) 65 (65)
G1.3 Abbey Life Staff Pension Scheme Scheme details On 30 June 2017, the Abbey Life Scheme was transferred from Abbey Life to Pearl Life Holdings Limited (‘PeLHL’), a fellow subsidiary. PeLHL assumed the scheme covenant together with all obligations of the scheme following implementation of the transfer. The Abbey Life Scheme is a registered occupational pension scheme, set up under Trust, and legally separate from the employer PeLHL. The scheme is administered by Abbey Life Trust Securities Limited (the Trustee), a corporate trustee. There are three Trustee Directors, one of whom is nominated by the Abbey Life Scheme members and two of whom are appointed by PeLHL. The Trustee is responsible for administering the scheme in accordance with the Trust Deed and rules and pensions laws and regulations. The Abbey Life Scheme is closed to new entrants. The last active member ceased employment with the Group and consequently the Abbey Life Scheme no longer recognises a current service cost.
• annual payments of £4 million into the 2016 Charged Account by 31 July each year, with the next payment being made by 31 July 2019, and the last payment due by 31 July 2025.
Remeasurements: Return on plan assets excluding amounts included in interest income 28 – 28
Remeasurements: Return on plan assets excluding amounts included in interest income 26 – 26
The weighted average duration of the defined benefit obligation at 31 December 2020 is 17 years (2019: 17 years).
Rate of increase for deferred pensions (‘CPI’ subject to caps) 2.10 2.20
Impact on the defined benefit obligation (£m) 329 (13) 14 10 (9) 12 (12)
The valuation has been based on an assessment of the liabilities of the ReAssure Scheme as at 31 December 2020 undertaken by independent qualified actuaries. The present values of the defined benefit obligation and the related interest costs have been measured using the projected unit credit method.
Funding The last funding valuation of the ReAssure Scheme was carried out by a qualified actuary as at 31 December 2017 and showed a deficit of £59 million.
Remeasurements: Return on plan assets excluding amounts included in interest income 19 − − 19
Change in provision for tax on economic surplus available as a refund − − 7 7
G. OTHER STATEMENT OF CONSOLIDATED FINANCIAL POSITION NOTES continued G1. Pension Schemes continued G1.4 ReAssure Life Staff Pension Scheme continued Principal assumptions The principal assumptions of the ReAssure Scheme are set out in the table below: Rate of increase for pensions in payment (5% per annum or RPI if lower) 2.85
The mortality base table is based on the SAPS Series 2 light tables with a 96% multiplier for males and a 92% multiplier for females, with CMI 2014 projections in line with a 1.50% pa long term trend up to and including 2014. Improvements from 2015 onwards are in line with CMI 2019 projections with a long term trend of 1.5% pa and an initial addition to improvements parameter of 0.25% p.a.
G2. Intangible Assets Goodwill Business combinations are accounted for by applying the acquisition method. Goodwill represents the difference between the cost of the acquisition and the fair value of the net identifiable assets acquired.
G. OTHER STATEMENT OF CONSOLIDATED FINANCIAL POSITION NOTES continued G2. Intangible Assets continued
Amortisation and impairment At 1 January – (1,546) (154) – (10) (164) (1,710)
Amortisation charge for the year – (382) (15) – (5) (20) (402)
Acquired in-force business on investment contracts without DPF is amortised in line with emergence of economic benefits.
£47 million of goodwill is attributable to the Management Services segment including £8 million that arose on acquisition of Abbey Life. Value in use has been determined as the present value of certain future cash flows associated with this business. The cash flows used in this calculation have been valued using a risk adjusted discount rate of 9.2% (2019: 8.3%) and are consistent with those adopted by management in the Group’s operating plan and, for the period 2026 and beyond, reflect the anticipated run-off of the Phoenix Life insurance business. The underlying assumptions of these projections include management’s best estimates with regards to longevity, persistency, mortality and morbidity.
G. OTHER STATEMENT OF CONSOLIDATED FINANCIAL POSITION NOTES continued G3. Property, plant and equipment Owner-occupied property is stated at its revalued amount, being its fair value at the date of the revaluation less any subsequent accumulated depreciation and impairment. Owner-occupied property is depreciated over its estimated useful life, which is taken as 20 − 50 years. Land is not depreciated. Gains and losses on owneroccupied property are recognised in the statement of consolidated comprehensive income.
Acquisition of ReAssure businesses (see note H2.1) 8 3 – 4 15
This intangible was valued on a ‘multi-period excess earnings’ basis and was being amortised over a period of 15 years.
Owner-occupied properties have been valued by accredited independent valuers at 31 December 2020 on an open market basis in accordance with the Royal Institution of Chartered Surveyors’ requirements, which is deemed to equate to fair value. The fair value measurement for the properties of £33 million (2019: £25 million) has been categorised as Level 3 based on the non-observable inputs to the valuation technique used. Unrealised gains for the current and prior years are £nil.
Investment property includes right-of-use assets, where the Group acts as lessee. Leases, where a significant portion of the risks and rewards of ownership are retained by the lessor, are classified as operating leases. Where investment property is leased out by the Group, rental income from these operating leases is recognised as income in the consolidated income statement on a straight-line basis over the period of the lease.
Losses on adjustments to fair value (recognised in consolidated income statement) (52) (55)
Certain investment properties held by the life companies possess a ground rent obligation which gives rise to both a right-of-use asset and a lease liability under IFRS 16. Under IAS 17, these leases were accounted for as finance leases. The right-of-use asset associated with the ground rent obligation is valued at fair value and is included within the total investment property valuation. The value of the ground rent right-of-use asset as at 31 December 2020 was £17 million (2019: £18 million). The remeasurement gives rise to a reduction of £1 million (2019: £15 million). There were no disposals of ground rent right-of-use assets during the period (2019: £47 million).
Commercial investment property is measured at fair value by independent property valuers having appropriate recognised professional qualifications and recent experiences in the location and category of the property being valued. The valuations are carried out in accordance with the Royal Institute of Chartered Surveyors (‘RICS’) guidelines with expected income and capitalisation rate as the key non-observable inputs.
The ERIP residential property reversions, an interest in the residential property of policyholders who have previously entered into an ERIP policy and been provided with a lifetime annuity in return for the legal title to their property, are valued using unobservable inputs and management’s best estimates. As the inward cash flows on these properties will not be received until the lifetime lease is no longer in force, which is usually upon the death of the policyholder, these interests are valued on a reversionary basis which is a discounted current open market value.
During the year, the valuation of investment properties reflected the fall in market values that have been evidenced throughout the property sector in the first half of the year as a result of the impacts of COVID-19. A significant portion of the investment property valuations at 30 June 2020 included standard valuation uncertainty clauses from the independent RICS valuers, reflective of the increased uncertainty in determining fair values in the market environment. In the second half of the year, the uncertainty clauses were removed by the valuers. At 31 December 2020, updated valuations were obtained for the majority of investment properties and movements in fair values were compared to property indices to provide additional assurance that fair values had moved as expected during the period.
Estimated rental value per parking space £1,169 £1,170 1 Comparative figure has been restated which has increased the estimated rental value per hotel room by £595.
The estimated fair value of commercial properties would increase (decrease) if: • the expected income were to be higher (lower); or
The estimated fair value of the NPI residential property reversions would increase (decrease) if: • the deferred possession rate were to be lower (higher); • the mortality rate were to be higher (lower).
The estimated fair value of the ERIP residential property reversions would increase (decrease) if: • the discount rate were to be lower (higher); • the mortality rate were to be higher (lower).
Future minimum lease rental receivables in respect of noncancellable operating leases on investment properties were as follows: £m
Amount recoverable after 12 months 76 20 258 Phoenix Group Holdings plc Annual Report & Accounts 2020
G6. Cash and Cash Equivalents Cash and cash equivalents comprise cash balances and short-term deposits with an original maturity term of three months or less at the date of placement. Bank overdrafts that are repayable on demand and form an integral part of the Group’s cash management are deducted from cash and cash equivalents for the purpose of the statement of consolidated cash flows.
Short-term deposits (including notice accounts and term deposits)1 4,643 1,199 1 Comparative figures have been restated to reclassify £561 million from short-term deposits to bank and cash balances.
L&G Part VII transfer (see note H2.2) – – 12 – – – – – – – – 12
On 7 September 2020, following completion of the Part VII transfer of the Legal & General business, a £12 million compensation provision was recognised in respect of amounts owed to customers due to various system and processing errors resulting in incorrect rules being applied to policies. There has been no movement in this provision since that date but it is expected to be fully utilised within one year.
Standard Life Assurance Limited (‘SLAL’) was a participant in the thematic review of non-advised annuity sales issued by the FCA on 14 October 2016. On acquisition of the Standard Life Assurance businesses on 31 August 2018, obligations arising as a result of past practices in the area described above were assessed. As a result, it was determined appropriate to recognise a provision of £225 million in respect of SLAL on a fair value basis. The provision recognised the estimated costs associated with redress payable to customers, the costs of the review and other expenses. It did not make allowance for any financial penalties that may arise as a result of the completion of the FCA investigation as it was not possible to determine a reliable estimate in this regard.
Input VAT recovery provision The provision of £15 million (2019: £7 million) reflects the potential outcome of on-going negotiations to agree a new VAT partial exemption method with HMRC in relation to the basis of the recovery of input VAT on the Transitional Services Arrangement with SLA plc. The provision is based upon a likely alternative basis for recovery and was increased by £8 million in the year to reflect input VAT recovered in the period. The provision is subject to uncertainty as the final VAT recovery percentage agreed with HMRC may change. It is currently expected that the provision will be utilised within one to two years.
On acquisition of the ReAssure businesses on 22 July 2020, £6 million of obligations were recognised on a fair value basis and a further £3 million was recognised in respect of other life companies. The balance at 31 December 2020 of £12 million is expected to be utilised within three years.
An additional £7 million restructuring provision was established during the year in respect of the recently acquired Old Mutual Wealth Life Assurance entity to cover severance costs. The majority of this provision is expected to be utilised within one year.
Other provisions Other provisions includes £6 million (2019: £10 million) of obligations arising under a gift voucher scheme operated by the SunLife business and a commission clawback provision which represents the expected future clawback of commission income earned by the SunLife business as a result of assumed lapses of policies or associated benefits. A further £23 million (2019: £23 million) is provided for in respect of indemnities and obligations arising under agreements entered into in association with corporate activity undertaken by the Group. The balance will be utilised within the next 12 months.
Non refundable pension scheme surplus (68) (36) (24) – – – (128)
Committed future pension contributions 12 (13) 1 – – – –
G. OTHER STATEMENT OF CONSOLIDATED FINANCIAL POSITION NOTES continued G8. Tax Assets and Liabilities continued £m
Further details relating to the impact of the increase to the Corporation Tax Rate announced in the March 2021 Budget are detailed in Note I7.
Deferred tax assets not recognised on capital losses1 42 2 1 These can only be recognised against future capital gains and have no expiry date.
There are two technical matters which are currently being discussed with HMRC in relation to the insurance business transfer from Legal and General Assurance Society where discussions are not sufficiently progressed at this stage for recognition of any tax benefit arising but where discussions could progress positively over the next financial year.
G10. Lease Liabilities The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the Group’s incremental borrowing rate as the interest rate implicit in the lease cannot be readily determined. For ground rent leases, the incremental borrowing rate of investment funds holding the associated investment properties is used as the discount rate. The lease liability is subsequently increased by the interest cost on the lease liability and decreased by lease payments made. It is remeasured when there is a change in future lease payments arising from, for example, rent reviews or from changes in the assessment of whether a termination option is reasonably certain not to be exercised. The Group has applied judgement to determine the lease term for some lease contracts with break clauses.
Termination of leases following the disposal of associated investment properties – (47)
G11. Accruals and Deferred Income This note analyses the Group’s accruals and deferred income at the end of the year.
G12. Other Payables Other payables are recognised when due and are measured on initial recognition at the fair value of the consideration payable. Subsequent to initial recognition, these payables are measured at amortised cost using the effective interest rate method.
The Group uses the acquisition method to account for the acquisition of subsidiaries. The cost of an acquisition is measured at the fair value of the consideration. Any excess of the cost of acquisition over the fair value of the net assets acquired is recognised as goodwill. In certain acquisitions an excess of the acquirer’s interest in the net fair value of the acquiree’s identifiable assets, liabilities, contingent liabilities and non-controlling interests over cost may arise. Where this occurs, the surplus of the fair value of net assets acquired over the fair value of the consideration is recognised in the consolidated income statement.
Where Group companies are deemed to control such collective investment schemes they are consolidated in the Group financial statements, with the interests of external third parties recognised as a liability (see the accounting policy for ‘Net asset value attributable to unitholders’ in note E1 for further details).
Each UK life company and the Group must retain sufficient capital at all times to meet the regulatory capital requirements mandated by or otherwise agreed with the relevant national supervisory authority. Further information on the capital requirements applicable to Group entities are set out in the Capital Management note (I3). Under UK company law, dividends can only be paid if a UK company has distributable reserves sufficient to cover the dividend.
In addition, contractual requirements may place restrictions on the transfer of funds as follows: • Pearl Life Holdings Limited (‘PeLHL’) is required to make payments of contributions into charged accounts on behalf of the Abbey Life Scheme. These amounts do not form part of the pension scheme assets and at 31 December 2020, PeLHL held £50 million (2019: £49 million) within debt securities and £13 million (2019: £7 million) within cash and cash equivalents in respect of these charged accounts. Further details of when these amounts may become payable to the pensions scheme are included in note G1.3.
• ReAssure Midco Limited (‘RML’) is required to make payments of contributions into a ring-fenced account on behalf of the ReAssure Staff Pension Scheme. These amounts do not form part of the pension scheme assets and at 31 December 2020, RML held £57 million within debt securities and £2 million within cash and cash equivalents in respect of this account. Further details of when these amounts may become payable to the pensions scheme are included in note G1.4.
H2. Acquisitions and Portfolio Transfers H2.1 Acquisition of ReAssure businesses On 22 July 2020, the Group acquired 100% of the issued share capital of ReAssure Group plc from Swiss Re Finance Midco (Jersey) Limited, an indirect subsidiary of Swiss Re Limited, for total consideration of £3.1 billion. The consideration consisted of £1.3 billion of cash, funded through the issuance of debt and own resources, and the issue of 277,277,138 shares (‘the Acquisition Shares’) to Swiss Re Group on 23 July 2020.
Pursuant to an agreement between Swiss Re Group and MS&AD Insurance Group Holdings (‘MS&AD’), MS&AD transferred its entire shareholding in ReAssure Group plc prior to 22 July 2020 to the Swiss Re Group in consideration for the transfer of 144,877,304 of the Acquisition Shares at completion. The equity stake in the Group held by Swiss Re Group and MS&AD was valued at £1,847 million, based on the share price at that date.
Analysis of cash flows on acquisition: Net cash acquired with the subsidiaries (included in cash flow from investing activities) 286
The valuation of the AVIF has been determined by reference to the assumptions expected to be applied by a market participant in an orderly transaction. The valuation approach uses present value techniques applied to the best estimate cash flows expected to arise from policies that were in-force at the acquisition date, adjusted to reflect the price of bearing the uncertainty inherent in those cash flows. This approach incorporates a number of judgments and assumptions which have impacted on the resultant valuation, the most significant of which include annuitant longevity, expected policy lapses and surrender costs, and the expenses associated with servicing the policies, together with economic assumptions such as future investment returns and the discount rate allowing for an appropriate illiquidity premium based on the assets existing at the balance sheet date. The determination of the majority of these assumptions is carried out on a consistent basis with that described in note F4.1 with appropriate adjustments to reflect a market participant’s view. The risk adjustment for the uncertainty in the cashflows has been determined using a cost of capital approach.
Deferred acquisition costs of £483 million have been derecognised on acquisition and replaced as part of the AVIF balance.
Other receivables The financial assets acquired include other receivables with a fair value of £379 million. The gross amount due under the contracts is £379 million, of which no balances are expected to be uncollectible.
Tax The tax impact of the fair value adjustments recognised on acquisition has been reflected in the acquisition balance sheet.
The consideration for the acquisition was fixed and determined using a ‘locked box’ pricing mechanism as agreed on 6 December 2019, with the number of consideration shares issued being determined on the basis of the Company’s share price leading up to that date. As the result of a decline in the Company’s share price between 6 December 2019 and the completion date, the value of the consideration shares issued was lower than the ‘locked box’ position. Over the same period, the fair value of the net assets acquired increased. This principally reflected the positive impact associated with a decline in yields on fixed interest assets backing capital requirements, management actions undertaken including hedging and strategic asset allocation activity, together with favourable demographic experience.
H2.2 L&G Part VII Transfer The Group applies the requirements of IFRS 3 Business Combinations to the acquisition of a business. IFRS 3 does not apply in circumstances where such an acquisition does not constitute a business, and is instead a portfolio of assets and liabilities, including insurance liabilities. In such cases, the Group’s policy is to recognise and measure the assets acquired and insurance and other liabilities assumed in accordance with the Group's accounting policies for those assets and liabilities. The difference between the consideration and the net assets or liabilities acquired is recognised in the consolidated income statement.
On 6 December 2017, ReAssure Limited, a subsidiary of ReAssure Group plc, entered into an agreement to acquire the mature savings business of Legal and General Assurance Society ('LGAS'). The mature savings book consists of a block of unit linked and withprofit business, predominantly comprising traditional insurance based pensions, savings and protection products which are closed and in run-off. On that date, ReAssure Limited entered into a risk transfer agreement ('RTA') under which it assumed the risk and rewards associated with the business for cash consideration of £650 million. The RTA was in-force as at the date of the Group's acquisition of the ReAssure businesses.
The Part VII transfer directly resulted in an increase in net assets of £85 million, which included £110 million associated with reduced expense assumptions used for insurance contract liabilities arising upon migration of the business to the Group's operating model partially offset by the recognition of net liabilities transferred of £25 million. The gain arising upon the transfer has been recognised in the consolidated income statement.
The following table summarises the net liabilities transferred to the Group.
Summary financial information (at 100%) for UKCPT is shown below: £m
The EBT is a consolidated structured entity that holds shares to satisfy awards granted to employees under the Group’s share-based payment schemes.
Details of commitments to subscribe to private equity funds and other unlisted assets are included in note I5.
Standard Life Assurance Limited (life assurance company – directly owned by the Company) Edinburgh26 Ordinary Shares 100.00%
Standard Life Pension Funds Limited (life assurance company) Edinburgh26 Limited by Guarantee 100.00%
Ark Life Assurance Company DAC (life assurance company) Dublin50 Ordinary Shares 100.00%
Pearl Group Management Services Limited (management services company) Wythall2 Ordinary Shares 100.00%
Pearl Group Services Limited (management services company) Wythall2 Ordinary Shares 100.00%
ReAssure UK Services Limited (management services company) Telford41 Ordinary Shares 100.00%
Pearl Group Holdings (No. 1) Limited (finance company) London3 Ordinary Shares 100.00%
PGH Capital plc (finance company – directly owned by the Company) Dublin8 Ordinary Shares 100.00%
Phoenix Unit Trust Managers Limited (unit trust manager) Wythall2 Ordinary Shares 100.00%
Pearl Assurance Group Holdings Limited (investment company) Wythall2 Ordinary Shares 100.00%
Standard Life Private Equity Trust plc (investment company) Edinburgh25 Ordinary Shares 53.60%
Abbey Life Trust Securities Limited (pension trustee company) Wythall2 Ordinary Shares 100.00%
Abbey Life Trustee Services Limited (dormant company) Wythall2 Ordinary Shares 100.00%
G Assurance & Pensions Services Limited (non-trading company) Telford41 Ordinary Shares 100.00%
Gallions Reach Shopping Park (Nominee) Limited (dormant company) London17 Ordinary Shares 100.00%
Impala Loan Company 1 Limited (dormant company)1 Edinburgh26 Ordinary Shares 100.00%
Pearl (Martineau Phase 1) Limited (dormant company) Wythall2 Ordinary Shares 100.00%
Pearl (Martineau Phase 2) Limited (dormant company) Wythall2 Ordinary Shares 100.00%
Pearl (Moor House 2) Limited (dormant company) Wythall2 Ordinary Shares 100.00%
Pearl Group Secretariat Services Limited (dormant company) Wythall2 Ordinary Shares 100.00%
PG Dormant (No. 7) Limited (dormant company) London3 Ordinary Shares 100.00%
Phoenix Life Holdings Limited (holding company – directly owned by the Company) Wythall2 Ordinary Shares 100.00%
Scottish Mutual Pension Funds Investment Limited (trustee company) Edinburgh26 Ordinary Shares 100.00%
Standard Life Assurance (HWPF) Luxembourg S.à.r.l. (investment company) Luxembourg24 Ordinary Shares 100.00%
The London Life Association Limited (dormant company) Wythall2 Limited by Guarantee 100.00%
The Pearl Martineau Limited Partnership (dormant company) Lynch Wood21 Limited Partnership 100.00%
The Scottish Mutual Assurance Society (dormant company) Glasgow11 Limited by Guarantee 100.00%
3 St Andrew Square Apartments Limited (property management company) Edinburgh25 Ordinary Shares 100.00%
Janus Henderson Institutional Short Duration Bond Fund London28 Unit Trust 100.00%
Janus Henderson Institutional High Alpha UK Equity Fund London28 Unit Trust 85.09%
Janus Henderson Strategic Investment Funds – Janus Henderson Institutional Asia Pacific ex Japan Index Opportunities Fund London28 OEIC, sub fund 84.39%
Janus Henderson Strategic Investment Funds – Janus Henderson Institutional Japan Index Opportunities Fund London28 OEIC, sub fund 78.13%
PUTM UK Stock Market Fund (Series 3) Wythall2 Unit Trust 100.00%
PUTM Bothwell Long Gilt Sterling Hedged Fund Wythall2 Unit Trust 100.00%
ASI Emerging Markets Income Equity Fund Edinburgh25 OEIC, sub fund 80.03%
ASI Emerging Markets Local Currency Bond Tracker Fund London17 OEIC, sub fund 74.38%
Standard Life Standard Life Global Equity Trust II Edinburgh25 Unit Trust 100.00%
Impairment tests have been performed using assumptions which management consider reasonable. Management does not believe that a reasonably foreseeable change in key assumptions would cause value in use to be materially lower than the carrying value.
Standard Life Investments Global SICAV II Global Short Duration Corporate Bond Fund Luxembourg29 SICAV, sub fund 97.49%
Standard Life Investments Global SICAV Absolute Return Global Bond Strategies Fund Luxembourg29 SICAV, sub fund 77.47%
Standard Life Investments Global SICAV European Government All Stocks Fund Luxembourg29 SICAV, sub fund 99.99%
Standard Life Investments Global SICAV Japanese Equities Fund Luxembourg29 SICAV, sub fund 97.01%
Standard Life Investments Global SICAV Global Bond Fund Luxembourg29 SICAV, sub fund 93.53%
Standard Life Investments Global SICAV China Equities Fund Luxembourg29 SICAV, sub fund 76.48%
Standard Life Investments Global SICAV II EnhancedDiversification Multi Asset Fund Luxembourg29 SICAV, sub fund 79.41%
Standard Life Investments Global SICAV II − MyFolio Multi-Manager II Fund Luxembourg29 SICAV, sub fund 72.54%
Standard Life Investments Global SICAV − European Equity Unconstrained Fund Luxembourg29 SICAV, sub fund 97.47%
Standard Life Managed Trust − Standard Life Global REIT Fund Edinburgh25 Unit Trust 82.95%
Aberdeen Standard Liquidity Fund (Lux) − Seabury Sterling Liquidity 3 Fund Dublin27 UCITS, sub fund 100.00%
Aberdeen Standard Liquidity Fund (Lux) − Seabury Euro Liquidity 1 Fund Dublin27 UCITS, sub fund 100.00%
Ignis Strategic Solutions Funds plc – Fundamental Strategies Fund Dublin9 OEIC, sub fund 100.00%
Ignis Strategic Solutions Funds plc − Systematic Strategies Fund Dublin9 OEIC, sub fund 100.00%
ASI Financial Equity Fund A Inc London17 OEIC, sub fund 80.74%
ASI Phoenix Global Private Equity III LP Edinburgh25 Limited Partnership 100.00%
Beresford Funds ICAV − Indexed Emerging Market Equity Fund Dublin48 ICAV, sub fund 100.00%
Legal & General European Equity Income Fund London44 Unit Trust 85.36%
Legal & General Real Capital Builder Fund London44 Unit Trust 82.89%
UK Commercial Property Holdings Limited (property investment company) Guernsey13 Ordinary Shares 44.59%
Significant holdings: Janus Henderson Institutional Global Responsible Managed Fund London28 OEIC, sub fund 45.78%
Standard Life Investments UK Real Estate Accumulation Feeder Fund Edinburgh25 Unit Trust 60.47%
ASI UK High Income Equity Fund Edinburgh25 OEIC, sub fund 52.78%
ASI Europe ex UK Growth Equity Fund Edinburgh25 OEIC, sub fund 26.67%
ASI Global Real Estate Share Fund Edinburgh25 OEIC, sub fund 38.01%
Standard Life Investments Global SICAV Euro Smaller Companies Fund Luxembourg29 SICAV, sub fund 25.49%
Standard Life Investments Global SICAV Global Corporate Bond Fund Luxembourg29 SICAV, sub fund 73.16%
Standard Life Investments UK Shopping Centre Trust Jersey35 Unit Trust 40.67%
H. INTERESTS IN SUBSIDIARIES AND ASSOCIATES continued H5. Group Entities continued
AXA Fixed Interest Investment ICVC − Sterling Strategic Bond Fund London30 UCITS, sub fund 51.35%
AB SICAV I − Diversified Yield Plus Portfolio Luxembourg29 SICAV, sub fund 38.65%
iShares Bloomberg Roll Select Commodity Swap UCITS ETF GBP (Acc) Dublin38 UCITS, sub fund 31.16%
Aberdeen Standard SICAV I − Global Bond Fund Luxembourg33 SICAV, sub fund 93.46%
Beresford Funds − Indexed Euro Large Cap Corporate Bond Fund Dublin48 ICAV, sub fund 82.89%
Fidelity Multi Asset Open Adventurous Fund Surrey45 OEIC, sub fund 64.53%
L&G Absolute Return Bond Plus Fund Luxembourg51 SICAV, sub fund 69.95%
Legal & General Emerging Markets Government Bond USD Index Fund London44 Unit Trust 29.81%
Legal & General UK Equity Income Fund London44 Unit Trust 25.50%
Quilter Investors Monthly Income and Growth Portfolio Fund London49 OEIC, sub fund 26.72%
Quilter Investors UK Equity Index Fund London49 OEIC, sub fund 35.78%
Merian Global Equity Income Fund (IRL) Dublin40 UCITS, sub fund 22.18%
2 1 Wythall Green Way, Wythall, Birmingham, West Midlands, B47 6WG, United Kingdom 3 Juxon House, 100 St. Paul’s Churchyard, London, EC4M 8BU, United Kingdom 4 Avenue Louise 326, bte 33 1050 Brussels, Belgium 5 Ugland House, Grand Cayman, KY1-1104, Cayman Islands 6 90 St. Stephen’s Green, Dublin, D2, Ireland 7 Goodbody Secretarial Limited, International Financial Services Centre, 25/28 North Wall Quay, Dublin 1, Ireland 8 Arthur Cox Building, 10 Earlsfort Terrace, Dublin 2, Dublin, Ireland 9 25/28 North Wall Quay, Dublin 1, Dublin, Ireland 10 Telestone 8, Teleport, Naritaweg 165, 1043 BW, Amsterdam, Netherlands 11 301 St Vincent Street, Glasgow, G2 5HN, United Kingdom 12 Ogier House, The Esplanade, St Helier, JE4 9WG, Jersey 13 Trafalgar Court, Les Banques, St Peter Port, GY1 3QL, Guernsey 14 Kings Place, 90 York Way, London, N1 9GE, United Kingdom 15 22-24 New Street, St Pauls Gate, 4th Floor, JE1 4TR, Jersey 16 32 Commercial Street, St Helier, Jersey, Channel Islands, JE2 3RU, Jersey 17 Bow Bells House, 1 Bread Street, London, EC4M 9HH, United Kingdom 18 Corporation Service Company, 2711 Centerville Rd Suite 400, Wilmington, DE 19808, United States 19 Suite 202, 103 Foulk Road, Wilmington, Delaware, 19803, USA
20 8 Boulevard Royal, L-2449, Luxembourg, Luxembourg 21 The Pearl Centre, Lynch Wood, Peterborough, PE2 6FY, England 22 Citco (Sweden) Ab Stureplan 4c 4 Tr 114 35 Stockholm 23 Aqr Capital Management LLC, Greenwich, 06830, United States 24 6B, rue Gabriel Lippmann, Parc d’Activité Syrdall 2, L-5365 Münsbach, Luxembourg 25 1 George Street, Edinburgh, EH2 2LL, United Kingdom 26 Standard Life House, 30 Lothian Road, Edinburgh, EH1 2DH, United Kingdom 27 70 Sir Rogerson’s Quay, Dublin 2, Republic of Ireland 28 201 Bishopsgate, London, EC2M 3AE, United Kingdom 29 88 2-4, Rue Eugène Ruppert, L-2453 Luxembourg, Luxembourg 30 155 Bishopsgate, London, EX2M 3JX, United Kingdom 31 Springfield Lodge, Colchester Road, Chelmsford, Essex CM2 5PW, United Kingdom 32 49, Avenue J.F. Kennedy, L-1855 Luxembourg 33 35a Avenue J.F. Kennedy, L-1855, Luxembourg 34 Avenida de Aragon 330 – Building 5, 3rd Floor, Parque Empresarial Las Mercedes, 28022 – Madrid, Spain 35 Elizabeth House, 9 Castle Street, St Helier, JE4 2QP, Jersey 36 2 Snowhill, Birmingham, B4 6WR, United Kingdom 37 12 Throgmorton Avenue, London EC2N 2DL
38 1st Floor, 2 Ballsbridge Park, Ballsbridge, Dublin, D04 YW83, Ireland 39 5, Allée Scheffer, 2520 Luxembourg, Luxembourg 40 33 Sir John Rogerson’s Quay, Dublin 2, Ireland 281Phoenix Group Holdings plc Annual Report & Accounts 2020
H. INTERESTS IN SUBSIDIARIES AND ASSOCIATES continued H5. Group Entities continued 41 Windsor House, Telford Centre, Telford, Shropshire, TF3 4NB
43 c/o Citco (Denmark) ApS, Holbergsgade 14, 2 .tv, 1057 København K Denmark 44 One Coleman Street, London, EC2R 5AA
50 3rd Floor, College Park House, Nassau Street, Dublin 2 Nassau Street, Ireland 51 6, rue Lou Hemmer, L-1748 Senningerberg, Grand Duchy of Luxembourg 52 Grove House, Green Street, St Helier, Jersey JE1 2ST
The following subsidiaries were dissolved during the period. The subsidiaries were deconsolidated from the date of dissolution: • Phoenix Life Pension Trust Limited; • Hundred S.à r.l.; and
The following subsidiaries were either fully disposed of or holdings became insignificant to the Group. The subsidiaries were deconsolidated from either the date of disposal or from the date when the holdings became insignificant: • Lake Meadows Management Company Limited; • Mutual Securitisation plc; • AB SICAV I − ESG Responsible Global Factor Portfolio SF1 GBP (Acc); • BMO Barclays 1-3 Year Global Corporate Bond (GBP Hedged) UCITS ETF; • PUTM Cautious Unit Trust; • PUTM Growth Unit Trust; • PUTM Opportunity Unit Trust; • PUTM International Growth Unit Trust; • PUTM Bothwell Institutional Credit Fund; • Standard Life Trust Management Pan European Trust; and
• Standard Life Investment Company III MyFolio Multi-Manager Inc III Fund.
Assuming no good leavers or other events which would trigger early vesting rights, the 2018 and 2019 LTIP awards are subject to performance conditions tied to the Company’s performance in respect of cumulative cash generation, return on Adjusted Shareholder Solvency II Own Funds and Total Shareholder Return (‘TSR’). The 2020 LTIP awards are subject to performance conditions tied to the Company’s performance in respect of net operating cash receipts, return on shareholder value, persistency and TSR.
2020 LTIP awards were granted on 13 March 2020 and are expected to vest on 13 March 2023. The 2017 LTIP awards vested on 24 March 2020. The 2018 awards will vest on 21 March 2021 and the 2019 awards will vest on 11 March 2022. The number of shares for all outstanding LTIP awards was increased in July 2018 to take account of the impact of the 2018 Group rights issue.
The fair value of these awards is estimated at the average share price in the three days preceding the date of grant, taking into account the terms and conditions upon which the instruments were granted. The fair value of the 2018, 2019 and 2020 LTIP awards is adjusted in respect of the TSR performance condition which is deemed to be a ‘market condition’. The fair value of the 2018, 2019 and 2020 TSR elements of the LTIP awards has been calculated using a Monte Carlo model. The inputs to this model are shown below: 2020 TSR performance condition 2019 TSR performance condition 2018 TSR performance condition
On 14 August 2020, LTIP awards were granted to certain senior management employees. The vesting periods and performance conditions for these awards are linked to the core 2018, 2019 and 2020 LTIP awards.
Each year, the Group issues a Chairman’s share award under the terms of the LTIP which is granted to a small number of employees in recognition of their outstanding contribution in the previous year. On 13 March 2020, awards were granted and are expected to vest on 13 March 2023. The 2017 awards vested on 24 March 2020. The 2018 and 2019 awards are expected to vest on 21 March 2021 and 11 March 2022 respectively. These grants of shares are conditional on the employees remaining in employment with the Group for the vesting period and achieving an established minimum performance grading. Good leavers will be able to, at the discretion of the Remuneration Committee, exercise their full award at vesting.
I. OTHER NOTES continued I1. Share-Based Payment continued I1.2 Share-based payment schemes continued Deferred Bonus Share Scheme (‘DBSS’) Each year, part of the annual incentive for certain executives is deferred into shares of the parent company. The grant of these shares is conditional on the employee remaining in employment with the Group for a period of three years from the date of grant. Good leavers will be able to, at the discretion of the Remuneration Committee, exercise their full award at vesting. Dividends will accrue for DBSS awards over the three year deferral period. The number of shares for all outstanding DBSS awards was increased in July 2018 to take account of the impact of the 2018 Group rights issue.
The 2020 DBSS was granted on 13 March 2020 and is expected to vest on 13 March 2023. The 2017 DBSS awards vested during the year. The 2018 awards are expected to vest on 15 March 2021 and the 2019 awards are expected to vest on 11 March 2022.
Sharesave scheme The sharesave scheme allows participating employees to save up to £500 each month for the UK scheme and up to €500 per month for the Irish scheme over a period of either three or five years. The 2020 sharesave options were granted on 8 April 2020.
Under the sharesave arrangement, participants remaining in the Group’s employment at the end of the three or five year saving period are entitled to use their savings to purchase shares at an exercise price at a discount to the share price on the date of grant. Employees leaving the Group for certain reasons are able to use their savings to purchase shares if they leave prior to the end of their three or five year period.
• Risk-free rate (%): 0.3 (for 3.25 year scheme) and 0.2 (for 5.25 year scheme).
Share Incentive Plan The Group operates two Share Incentive Plan (‘SIP’) open to UK and Irish employees which allows participating employees to purchase ‘Partnership shares’ in the Company through monthly contributions. In respect of the UK SIP, the contributions are limited to the lower of £150 per month and 10% gross monthly salary. In 2019 the matching element of the UK SIP was amended to give the employee one ‘Matching share’ for each ‘Partnership share’ purchased limited to £50. Contributions above £50 are not matched. The Irish SIP, was launched in 2019, gives the employee 1.4 ‘Matching shares’ for each ‘Partnership share’ purchased. For this plan monthly contributions are limited to the lower of €40 per month and 7.5% of gross monthly salary.
The fair value of the Matching shares granted is estimated as the share price at date of grant, taking into account terms and conditions upon which the instruments were granted. At 31 December 2020, 287,547 matching shares (including unrestricted shares) were conditionally awarded to employees (2019: 146,769).
Granted during the year 1,657,107 1,669,701 356,872 Forfeited/cancelled during the year (588,747) (186,878) –
Group capital Group capital is managed on a Solvency II basis. Under the Solvency II framework, the primary sources of capital managed by the Group comprises the Group’s Own Funds as measured under the Solvency II principles adjusted to exclude surplus funds attributable to the Group’s unsupported with-profit funds and unsupported pension schemes.
The acquired Standard Life Assurance businesses determine their capital requirements in accordance with an approved partial Internal Model. The Irish life entity, Standard Life International Designated Activity Company, determines its capital requirements in accordance with the Standard Formula.
In accordance with the approvals received from the PRA, the Enlarged Group currently operates a partial Internal Model to calculate Group SCR, aggregating outputs from the existing Phoenix Internal Model, the Standard Life Internal Model and the Standard Formula with no further diversification. A harmonisation programme to combine the two models into a single Internal Model is expected to be completed during 2021.
Group capital resources − unaudited The Group capital resources are based on the Group’s Eligible Own Funds adjusted to remove amounts pertaining to unsupported with-profit funds and Group pension schemes: Unaudited 2020 £bn
Remove Own Funds pertaining to unsupported with-profit funds and pension schemes (3.2) (2.5)
Fees under Transitional Services Arrangement and material outsource agreements (6) (2) (6) (4)
During the year to 31 December 2020 key management personnel and their close family members contributed £9,100 (2019: £16,395) to Pensions and Savings products sold by the Group. At 31 December 2020, the total value of key management personnel’s investments in Group Pensions and Savings products was £2,842,300 (2019: £2,590,240).
To subscribe to private equity funds and other unlisted assets 565 396
G2.2 Acquired In-Force Business Acquired in-force business on insurance contracts and investment contracts with DPF represents the difference between the fair value of the contractual rights under these contracts and the liability measured in accordance with the Group’s accounting policies for such contracts. This intangible is being amortised in accordance with the run-off of the book of business.
I7. Events After the Reporting Period The financial statements are adjusted to reflect significant events that have a material effect on the financial results and that have occurred between the period end and the date when the financial statements are authorised for issue, provided they give evidence of conditions that existed at the period end. Events that are indicative of conditions that arise after the period end that do not result in an adjustment to the financial statements are disclosed.
The sale of the Wrap SIPP, Onshore Bond and TIP business currently within Standard Life Assurance Limited, will be effected through a Part VII transfer targeted for completion in late 2022. The economic risk and rewards for this business will transfer to SLA effective from 1 January 2021 via a profit transfer arrangement. As at 31 December 2020, the Group held investment contracts liabilities, assets backing the liabilities, acquired in-force intangible assets, a CSPA intangible asset and related tax balances in its statement of consolidated financial position in relation to this business.
The Group will receive cash consideration for the overall transaction of £115 million, the majority of which has already been received. When taking into account all aspects of the transaction the IFRS financial impact in profit or loss and to net assets is not expected to be material.
On 3 March 2021, an increase from the current 19% UK corporation tax rate to 25%, effective from 1 April 2023, was announced in the Budget. As a result of the rate increase, the net deferred tax liability in existence at the end of 2020 is expected to increase in value by approximately £162 million to £1,198 million.
On 5 March 2021, the Board recommended a final dividend of 24.1p per share (2019: 23.4p per share) for the year ended 31 December 2020. Payment of the final dividend is subject to shareholder approval at the AGM. The cost of this dividend has not been recognised as a liability in the financial statements for 2020 and will be charged to the statement of changes in equity in 2021.
The notes identified numerically on pages 293 to 302 are an integral part of these separate financial statements. Where items also appear in the consolidated financial statements, reference is made to the notes (identified alphanumerically) on pages 184 to 289.
Credit to equity for equitysettled share-based payments (note I1) – – – – 13 13 – 13
Total comprehensive income for the year attributable to owners – – – 1,643 1,643 – 1,643
Cash and cash equivalents at the beginning of the year 45 1
Cash and cash equivalents at the end of the year 4 45 292 Phoenix Group Holdings plc Annual Report & Accounts 2020
Statement of Compliance The Company’s financial statements have been prepared in accordance with International Accounting Standards in conformity with the requirements of the Companies Act 2006 as applied in accordance with section 408 of the Companies Act 2006.
Assets and liabilities are offset and the net amount reported in the statement of financial position only when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or to realise the assets and settle the liability simultaneously.
Investments in Group entities Investments in Group entities are carried in the statement of financial position at cost less impairment.
These financial assets are initially recognised at cost, being the fair value of the consideration paid for the acquisition of the financial asset. All transaction costs directly attributable to the acquisition are also included in the cost of the financial asset. Subsequent to initial recognition, these financial assets are carried at amortised cost, using the effective interest method.
Equities, debt securities, collective investment schemes and derivatives are measured at FVTPL as they are managed on a fair value basis.
For those credit exposures for which credit risk has not increased significantly since initial recognition, the Company measures loss allowances at an amount equal to the total expected credit losses resulting from default events that are possible within 12 months after the reporting date (‘12-month ECL’). For those credit exposures for which there has been a significant increase in credit risk since initial recognition, the Company measures and recognises an allowance at an amount equal to the expected credit losses over the remaining life of the exposure, irrespective of the timing of the default (‘Lifetime ECL’). If the financial asset becomes ‘credit-impaired’ (following significant financial difficulty of issuer/borrower, or a default/breach of a covenant), the Company will recognise a Lifetime ECL. ECLs are derived from unbiased and probability-weighted estimates of expected loss.
2. FINANCIAL INFORMATION New accounting pronouncements not yet effective Details of the standards, interpretations and amendments to be adopted in future periods are detailed in note A5 to the consolidated financial statements, none of which are expected to have a significant impact on the Company’s financial statements.
Note A5 outlines that the Group has taken advantage of the temporary exemption granted to insurers in IFRS 4 Insurance Contracts from applying IFRS 9 until 1 January 2023 as a result of meeting the exemption criteria as at 31 December 2015. As detailed above, such an exemption is not applicable to the Company given it is not an insurer. Therefore IFRS 9 has been adopted by the Company and the relevant disclosures are included in these financial statements.
3. SHARE CAPITAL, SHARE PREMIUM AND MERGER RESERVE On 22 July 2020, the Group acquired ReAssure Group plc and as part consideration for the acquisition issued 277,277,138 new ordinary shares to Swiss Re Group, 144,877,304 shares of which were subsequently transferred to MS&AD Insurance Group Holdings (‘MS&AD’). The equity stake in the Group held by Swiss Re Group and MS&AD was valued at £1,847 million, based on the share price at that date.
During 2020, the Company issued 440,062 shares (2019: 315,730 shares) at a premium of £2 million (2019: £2 million) in order to satisfy its obligations to employees under the Group’s sharesave schemes.
Issued and fully paid: 999.2 million ordinary shares of £0.10 each (2019: 721.5 million) 100 72
Ordinary shares in issue at 31 December 721,514,944 72,151,494 4. TIER 1 NOTES The accounting policy for the Tier 1 Notes is included in note D4 to the consolidated financial statements.
On 12 December 2018 the Company was substituted in place of Old PGH as issuer of the Tier 1 Notes and these were recognised at the £411 million fair value of an intragroup loan that was received as consideration. Details of the terms of the Tier 1 Notes can be found in note D4 to the consolidated financial statements.
Loan due to Standard Life Assurance Limited (note f) 294 288 294 288
£500 million 5.867% Tier 2 subordinated notes (note j) 556 – 620 –
£250 million Fixed Rate Reset Callable Tier 2 subordinated notes (note k) 272 – 280 –
£250 million 4.016% Tier 3 subordinated notes (note l) 259 – 266 –
d. On 12 December 2018, the Company was substituted in place of Old PGH as issuer of the €500 million Tier 2 notes due 2029 with a coupon of 4.375%, which were initially recognised at fair value of £407 million.
g. On 29 January 2020, the Company issued US $750 million fixed rate reset perpetual restricted Tier 1 contingent convertible notes (the ‘contingent convertible Tier 1 Notes’) which are unsecured and subordinated. The contingent convertible Tier 1 Notes have no fixed maturity date and interest is payable only at the sole and absolute discretion of the Company. The contingent convertible Tier 1 Notes bear interest on their principal amount at a fixed rate of 5.625% per annum up to the ‘First Reset Date’ of 26 April 2025. Thereafter the fixed rate of interest will be reset on the First Reset Date and on each fifth anniversary of this date by reference to the sum of the yield of the Constant Maturity Treasury (‘CMT’) rate (based on the prevailing five year US Treasury yield) plus a margin of 4.035%, being the initial credit spread used in pricing the notes. Interest is payable on the contingent convertible Tier 1 Notes semi-annually in arrears on 26 April and 26 October. If an interest payment is not made it is cancelled and it shall not accumulate or be payable at any time thereafter. Refer to note E5(j) to the consolidated financial statements for further details.
j. On 22 July 2020, the Company was substituted in place of ReAssure Group plc as issuer of the £500 million 5.867% Tier 2 Subordinated Notes. These notes have a maturity date of 13 June 2029 and were initially recognised at their fair value of £559 million.
5. BORROWINGS continued k. On 22 July 2020, the Company was substituted in place of
ReAssure Group plc as issuer of the £250 million fixed rate reset callable Tier 2 subordinated notes The £250 million fixed rate reset callable Tier 2 subordinated notes have a maturity date of 13 June 2029 and were initially recognised at their fair value of £275 million. The fair value adjustment will be amortised over the remaining life of the notes. The notes include an issuer par call right exercisable on 13 June 2024. Interest is payable semiannually in arrears on 13 June and 13 December. These notes initially bear interest at a rate of 5.766% on the principal amount and the rate of interest will reset on 13 June 2024, and on each interest payment date thereafter, to a margin of 5.17% plus the yield of a UK Treasury Bill of similar term.
US $750 million Contingent Convertible Tier 1 notes – 566 – (23) 2 – 545
US $500 million Fixed Rate Reset Tier 2 notes – 396 – (32) – – 364 £250 million Fixed Rate Reset Callable Tier 2 subordinated notes – – 275 – (3) – 272 1 Loans issued via substitution are a non-cashflow item as consideration was the transfer of loans and deposits (refer to note 10).
At 31 December £1.25 billion revolving credit facility – 100 (100) – – – – – –
Loan due to Standard Life Assurance Limited – – – – 282 – – 6 288 1 Loans issued via substitution are a non-cashflow item as consideration was the transfer of loans and deposits (refer to note 10).
6. DERIVATIVES The Company entered into a cross currency swap with another group company in 2018 to hedge against adverse currency movements in respect of the €500 million Tier 2 notes.
In 2019, the Company entered into a forward currency swap with another group company to hedge against adverse currency movements in respect of the €287 million capital injection into SLIDAC.
The fair value of the derivative financial instruments are as follows: Asset Liability £m
8. ACCRUALS AND DEFERRED INCOME The accounting policy for accruals and deferred income is included in note G11 to the consolidated financial statements.
On 22 July 2020, the Company acquired ReAssure Group plc from Swiss Re Finance Midco (Jersey) Limited, an indirect subsidiary of Swiss Re Limited, for a total consideration of £3,112 million. The consideration consisted of £1,265 million cash and the issue of 277,277,138 shares to Swiss Re Group on 23 July 2020, 144,877,304 shares of which were subsequently transferred to MS&AD Insurance Group Holdings (‘MS&AD’). The equity stake in the Group held by Swiss Re Group and MS&AD was valued at £1,847 million, based on the share price at that date.
On 18 June 2019, the Company acquired Phoenix Life Holdings Limited from its subsidiaries PGH (LCA) Limited and PGH (LCB) Limited, for a consideration of £3,356 million and also acquired SLAL from Old PGH for a consideration of £2,994 million. The consideration for the acquisition of SLAL was increased by £46 million comprising of £33 million due to Standard Life Aberdeen plc under the deed of indemnity and £13 million under the terms of the Purchase Price Adjustment mechanism included in the Sale and Purchase Agreement agreed as part of the acquisition of the Standard Life Assurance businesses (see note G7 of the consolidated financial statement).
On 12 December 2018, the Company became the ultimate parent undertaking of the Group by acquiring the entire share capital of Old PGH via a share for share exchange. The cost of investment in Old PGH, reflected in the table above, was determined as the carrying amount of the Company’s share of the equity of Old PGH on the date of the transaction. The difference between the cost of investment and the market capitalisation of Old PGH immediately before the share for share exchange of £4 million has been recognised as an Other reserve, and is shown as a separate component of equity.
For a list of principal Group entities, refer to note H5 of the consolidated financial statements. The entities directly held by the Company are separately identified.
Loan due from ReAssure Group plc (note c) 704 – 710 –
On 12 December 2018, the Company was assigned a US $500 million loan by PLHL due 2027 with a coupon of 5.375%. This loan was initially recognised at fair value of £349 million and is accreted to par over the period to 2027. Movement in foreign exchange during the period decreased the carrying value by £10 million (2019: £13 million). At 31 December 2020, the carrying value of the loan was £328 million (2019: £334 million).
b) On 18 June 2019, the Company was assigned an interest free facility arrangement with Phoenix Group Employee Benefit Trust (‘EBT’). As at 31 December 2020, the carrying value of the loan was £6 million (2019: £7 million). In 2020, an additional £7million (2018: £4 million) was drawn down against this facility. The loan is fully recoverable until the point the awards held in the EBT vest to the participants, at which point the loan is reviewed for impairment. Any impairments are determined by comparing the carrying value to the estimated recoverable amount of the loan. Following the vesting of awards in 2020 £8million (2019: £3 million) of the loan has been written off.
c) On 22 July 2020, the Company entered into a £1,099 million loan agreement with ReAssure Group Plc, a Group subsidiary as consideration for the transfer of subordinated loans notes into the Company. The loan accrues interest at a rate of 6 month LIBOR plus 1.30% and matures on 31 December 2025. During the year, the Company received a partial repayment of £400 million. As at 31 December 2020, the carrying value of the loan was £704 million, and also includes £5 million of interest that has been capitalised.
Determination of fair value and fair value hierarchy of financial assets Details of the factors considered in determination of the fair value are included in note E2 to the consolidated financial statements.
Level 3 financial instrument sensitivities The investment in equity and debt securities is in respect of equity and debt holdings in a property investment structure which was transferred to the Company via an in-specie dividend received from Old PGH during 2019. The holding was disposed of during the year however a balance of £1 million remains in respect of a potential repayment of cash reserves that may be due to the Company. The amount recognised has taken account of both the uncertain nature of the value of the proceeds and when they will be received.
The structure was valued as a whole on a discounted cash flow basis and allocated to the debt and equity components in order of priority. The valuation is sensitive to the discount rate applied. In 2019, a decrease in the discount rate of 175bps would increase the value by £9 million) whilst an increase of 200bps would decrease the value by £6 million).
13. CASH AND CASH EQUIVALENTS The accounting policy for cash and cash equivalents is included in note G6 to the consolidated financial statements.
Non-cash movements in profit for the year before tax: Dividend income from other Group entities – (5,640)
Cash (utilised)/generated by operations (71) 411 15. CAPITAL AND RISK MANAGEMENT The Company’s capital comprises share capital, the Tier 1 Notes and all reserves as calculated in accordance with IFRSs, as set out in the statement of changes in equity. Under English company law, dividends must be paid from distributable profits. As the ultimate parent undertaking of the Group, the Company manages its capital to ensure that it has sufficient distributable profits to pay dividends in accordance with its dividend policy.
Write-off There is evidence indicating that the counterparty is in severe financial difficulty and the Group has no realistic prospect of recovery Amount is written off
Loans and deposits (note 10) N/A Performing 12 month ECL 2,119 − 2,119
Other amounts due from Group entities (note 18) N/A Performing 12 month ECL 295 − 295
Cash and cash equivalents (note 13) A N/A 12 month ECL 45 − 45
The Company considers reasonable and supportable information that is relevant and available without undue cost or effort to assess whether there has been a significant increase in risk since initial recognition. This includes quantitative and qualitative information and also, forwardlooking analysis.
The Company writes off a financial asset when there is information indicating that the counterparty is in severe financial difficulty and there is no realistic prospect of recovery, e.g. when the counterparty has been placed into liquidation or has entered into bankruptcy proceedings. Financial assets written off may still be subject to enforcement activities under the Company’s recovery procedures, taking into account legal advice where appropriate. Any recoveries made are recognised in profit or loss.
17. DIRECTORS’ REMUNERATION Details of the remuneration of the Directors of Phoenix Group Holdings plc is included in the appendix to the Directors’ Remuneration Report on pages 124 to 158 of the Annual Report and Accounts.
On 31 August 2018, SLA plc took a 19.98% equity stake in the Enlarged Group, and as a result became a related party of the Group. As at 31 December 2020 the SLA plc holding is 14.42%. SLA plc is considered to have a significant influence over the Group due to their equity stake, representation on the Board of Directors and the existence of a strategic partnership between the two parties.
Amounts due to related parties at the end of the year: £m
Amount due for settlement after 12 months 294 288 19. AUDITOR’S REMUNERATION Details of auditor’s remuneration, for Phoenix Group Holdings plc and its subsidiaries, is included in note C4 to the consolidated financial statements.
20. EVENTS AFTER THE REPORTING PERIOD Details of events after the reporting date are included in note I7 to the consolidated financial statements.
Debt securities − other government and supranational 2,257 294 2,220 7,815 12,586
Debt securities − UK local authority loans4 696 − − − 696
2 Includes assets where policyholders bear most of the investment risk.
4 Total UK local authority loans of £696 million include £646 million classified as Level 3 debt securities in the fair value hierarchy.
Debt securities − gilts and foreign government bonds 3,911 342 20,644 9,095 33,992
Debt securities − UK local authority loans 262 − − − 262
Financial assets held by the non-controlling interest in consolidated collective investment schemes
4 Total private placements of £1,521 million include £1,147 million classified as Level 3 debt securities in the fair value hierarchy.
5 Includes policy loans of £10 million, other loans of £284 million, net derivative assets of £3,976 million, reinsurers’ share of investment contracts of £8,881 million and other investments of £519 million.
Assets Under Administration 337.7 248.3 1 Off-balance sheet AUA represents assets held in respect of certain Group Self-Invested Personal Pension products where the beneficial ownership interest resides with the customer (and which are therefore not recognised in the statement of consolidated financial position) but on which the Group earns fee revenue.
All of the life companies’ debt securities are held at fair value through profit or loss in accordance with IAS 39 Financial Instruments: recognition and Measurement, and therefore already reflect any reduction in value between the date of purchase and the reporting date.
The table below shows the Group’s market exposure analysed by credit rating for the debt securities held in the shareholder and non-profit funds.
2 Includes £696 million reported as UK local authority loans and £197 million reported as private placements in the summary table on page 303.
PGH PLC SOLVENCY II SURPLUS The PGH plc surplus at 31 December 2020 is £5.3 billion (2019: £3.1 billion).
Under Method 2, the solo Own Funds are aggregated rather than consolidated on a line by line basis. The SCR is also aggregated, with no allowance for diversification. Method 2 is used for all entities within the Standard Life Assurance businesses acquired in 2018 and Method 1 is used for all other entities of the Group (including the ReAssure entities acquired in 2020). The Group has approval to use a combination of Methods 1 and 2 for consolidating its Group solvency results.
PGH plc’s unrestricted Tier 1 capital accounts for 70% (2019: 77%) of total Own Funds and comprises ordinary share capital, surplus funds of the unsupported with-profit funds which are recognised only to a maximum of the SCR, and the accumulated profits of the remaining business.
Restricted Tier 1 capital comprises the contingent convertible Tier 1 Notes issued in January 2020 and the Tier 1 Notes issued in April 2018, the terms of which enable the instruments to qualify as restricted Tier 1 capital for regulatory reporting purposes.
Tier 2 capital is comprised of subordinated notes whose terms enable them to qualify as Tier 2 capital for regulatory reporting purposes.
The Group’s Assets under Administration (‘AUA’) represents assets administered by or on behalf of the Group, covering both policyholder fund and shareholder assets. It includes assets recognised in the Group’s IFRS consolidated statement of financial position together with certain assets administered by the Group for which beneficial ownership resides with customers.
A reconciliation from the Group’s IFRS consolidated statement of financial position to the Group’s AUA is provided on page 305.
The debt and equity figures are directly sourced from the Group’s IFRS consolidated statement of financial position on pages 179 and 180 and the analysis of borrowings note on page 216.
Incremental long-term cash generation is not directly reconcilable to the financial statements as it relates to cash generation expected to arise in the future.
This figure provides a view of the level of surplus capital in the Life Companies that is available for distribution to the holding companies, and the generation of Free Surplus underpins future operating cash generation.
Please see business review section page 54 for further analysis of the solvency positions of the Life Companies.
APM Definition Why is this measure used Reconciliation to financial statements
Long-term Free Cash (‘LTFC’) is comprised of long-term cash to emerge from in-force business, plus holding company cash, less an allowance for costs associated with in-flight mergers and acquisitions and the related transition activities, and a deduction for shareholder debt outstanding.
LTFC provides a measure of the Group’s total long-term cash available for operating costs, interest, growth and shareholder returns. Increases in LTFC will be driven by sources of long-term cash i.e. new business and overdelivery of management actions. Decreases in LTFC will reflects the uses of cash at holding company level, including expenses, interest, investment in BPA and dividends.
New business contribution is not directly reconcilable to the Group’s Solvency II metrics as it represents an in-year movement. Further analysis is provided on page 51.
Operating companies’ cash generation is not directly reconcilable to an equivalent GAAP measure (IFRS statement of consolidated cash flows) as it includes amounts that eliminate on consolidation.
Operating profit Operating profit is a financial performance measure based on expected long-term investment returns. It is stated before tax and non-operating items including amortisation and impairments of intangibles, finance costs attributable to owners and other non-operating items which in the Director’s view should be excluded by their nature or incidence to enable a full understanding of financial performance.
It helps give stakeholders a better understanding of the underlying performance of the Group by identifying and analysing non-operating items.
The unsupported with-profit funds and Group pension funds do not contribute to the Group Solvency II surplus. However, the inclusion of related Own Funds and SCR amounts dampens the implied Solvency II capital ratio.
Further details of the Shareholder Capital Coverage Ratio and its calculation are included in the business review on page 54.
SHARE PRICE PERFORMANCE Phoenix Group Holdings plc share price performance Price pence per share (rebased to Phoenix)
SHAREHOLDER SERVICES Managing your shareholding Our registrar, Computershare, maintains the Company’s register of members. Shareholders may request a hard copy of this Annual Report from our registrar and if you have any further queries in respect of your shareholding please contact them directly using the contact details set out below.
Access Computershare’s web-based enquiry service www. investorcentre.co.uk to download forms such as a dividend mandate form or submit dividend mandate details online; view details of your Phoenix Group shareholding and recent dividend payments; update your address details and register for shareholder electronic communications to receive notification of Phoenix Group shareholder mailings by email.
Conduct Authority (‘FCA’) before getting involved by visiting www.fca.org.uk/firms/systems-reporting/register; • report the matter to the FCA by calling the FCA Consumer Helpline on 0800 111 6768; and
If you deal with an unauthorised firm, you will not be eligible to receive payment under the Financial Services Compensation Scheme (‘FSCS’). The FCA can also be contacted by completing an online form available at www.fca.org.uk/consumers/report-scam-unauthorised-firm. Details of any share dealing facilities that the Company endorses will be included in Company mailings.
SHARE PRICE You can access the current share price of Phoenix Group Holdings plc on the Group’s website together with electronic copies of the Group’s financial reports and presentations at www.thephoenixgroup.com/investor-relations.aspx.
ESG Environmental, social, and governance criteria are a set of standards for a company’s operations that investors use to screen potential investments: how a company performs as a steward of nature; how it manages relationships with employees, suppliers, customers, and the communities where it operates; and a company’s leadership, executive pay, audits, internal controls and shareholder rights
An Alternative Performance Measure (’APM’) is a financial measure of historic or future financial performance, financial position or cash flows, other than a financial measure defined under IFRS or under Solvency II regulations. The Group uses a range of these metrics to provide a better understanding of the underlying performance of the Group. All APMs are defined within this glossary and the APM section on page 309
Annuity policy A policy that pays out regular benefit amounts, either immediately and for the remainder of a policyholder’s lifetime (immediate annuity), or deferred to commence at some future date (deferred annuity)
CAGR Compound annual growth rate, or CAGR, is the mean annual growth rate of an investment over a specified period of time longer than one year
The Bank of England’s exercise to test the resilience of the current business models of the largest banks, insurers and the financial system to climate-related risks
Heritage The Group’s business segment where products are no longer marketed to customers, for example with-profits and many legacy unit linked life and pension products
Refers to Phoenix Group Holdings plc, Phoenix Group Holdings, PGH Capital plc, Phoenix Life Holdings Limited, Pearl Group Holdings (No. 2) Limited, Impala Holdings Limited, Pearl Group Holdings (No. 1) Limited, PGH (LCA) Limited, PGH (LCB) Limited and Pearl Life Holdings Limited
Represents the increase in the expected future operating companies’ cash generation to arise as a result of new business transacted in a period. It excludes ‘Day 1’ acquisition costs and is stated on an undiscounted basis
Inherited estate The assets of the long-term with-profit funds less the realistic reserves for non-profit policies written into the non-profit fund, less asset shares aggregated across the withprofit policies and any additional amounts expected at the valuation date to be paid to in-force policyholders in the future in respect of smoothing costs and guarantees
The United Nations body created to provide policymakers with regular scientific assessments on climate change, its implications and potential future risks, as well as to put forward adaptation and mitigation options
A measure of the Group’s long-term cash available for operating costs, interest, growth and shareholder returns. LTFC is comprised of long-term cash to emerge from in-force business plus holding company cash less M&A and transition costs and shareholder debt outstanding
MSA Management Services Agreement – Contracts that exist between Phoenix Life and management services companies or between management services companies and their outsource partners
Net-zero carbon A state where no incremental greenhouse gases are added to the atmosphere, with remaining emissions output being balanced by the removal of carbon from the atmosphere
A group of central banks, supervisors and observers committed to sharing best practices, contributing to the development of climate and environment-related risk management in the financial sector and mobilising mainstream finance to support the transition towards a sustainable economy
Paris Agreement A legally binding international treaty on climate change. It was adopted by 196 parties at COP 21 in Paris on 12 December 2015. Its goal is to limit global warming to well below 2, preferably to 1.5 degrees celsius, compared to preindustrial levels
Part VII transfer The transfer of insurance policies under Part VII of Financial Services and Markets Act 2000. The insurers involved can be in the same corporate group or in different groups. Transfers require the consent of the High Court, which will consider the views of the PRA and FCA and of an Independent Expert
Physical risks Risks related to the physical impacts of climate change which can either be acute or chronic. Acute physical risks refer to those that are event-driven, including increased severity of extreme weather events, such as cyclones, hurricanes, or floods. Chronic physical risks refer to longer-term shifts in climate patterns (e.g., sustained higher temperatures) that may cause sea level rise or chronic heatwaves
A policy which provides benefits payable on certain events. The benefits may be a single lump sum or a series of payments and may be payable on death, serious illness or sickness
Non-profit fund A fund which is not a with-profit fund, where risks and rewards of the fund fall wholly to shareholders
Open The Group’s business segment where products are actively marketed to new and existing customers
Operating companies’ cash generation represents cash remitted by the Group’s operating companies to the holding companies
Operating profit Operating profit is a non-GAAP measure that is considered a more representative measure of performance than IFRS profit or loss after tax as it is based on expected long-term investment returns
Own funds Basic Own Funds comprise the excess of assets over liabilities valued in accordance with the Solvency II principles and subordinated liabilities which qualify to be included in Own Funds under the Solvency II rules. Eligible Own Funds are the amount of Own Funds that are available to cover the Solvency Capital Requirements after applying prescribed tiering limits and transferability restrictions to Basic Own Funds
The processes undertaken to provide a forward looking assessment of the Group’s risk and capital profile, under normal and stress scenarios, as a result of its proposed business strategy and Annual Operating Plan
A GHG concentration trajectory adopted by the IPCC. The pathways (RCP2.6, RCP4.5, RCP6, and RCP8.5) describe different climate futures, all of which are considered possible depending on the volume of GHGs emitted in the years to come. RCP 2.6 is a very stringent” pathway. According to the IPCC, RCP 2.6 requires that carbon dioxide emissions start declining by 2020 and go to zero by 2100. In RCP 8.5, emissions continue to rise throughout the 21st century. It is generally taken as the basis for worst-case climate change scenario
Scope 1 covers direct GHG emissions from owned or controlled sources. Scope 2 covers indirect GHG emissions from the generation of purchased electricity, steam, heating and cooling consumed by the reporting company. Scope 3 includes all other indirect GHG emissions that occur in the value chain
Represents total Eligible Own Funds divided by the Solvency Capital Requirements (‘SCR’), adjusted to a shareholder view through the exclusion of amounts relating to those ring-fenced with-profit funds and Group pension schemes whose Own Funds exceed their SCR
The excess of Eligible Own Funds over the Solvency Capital Requirement
Reporting of emissions sources required under the Companies (Directors’ Report) and Limited Liability Partnerships (Energy and Carbon Report) Regulations 2018.
Tier 1 notes The £500 million fixed rate reset perpetual restricted Tier 1 write down Notes issued by Phoenix
Transitional Measures on Technical Provisions (’TMTP’) is an allowance, subject to the PRA’s approval, to apply a transitional deduction to technical provisions. The transitional deduction corresponds to the difference between net technical provisions calculated in accordance with Solvency II principals and net technical provisions calculated in accordance with the previous regime and is expected to decrease linearly over a period of 16 years starting from 1 January 2016 to 1 January 2032. TMTP is subject to a mandatory recalculation every two years or on the occurrence of certain defined events
Standards of good corporate governance practice in the UK relating to issues such as board composition and development, remuneration, accountability, audit and relations with shareholders
Statements containing the words: ‘believes’, ‘intends’, ‘will’, ’may’, ‘should’, ‘expects’, ‘plans’, ‘aims’, ‘seeks’, ‘targets’, ’continues’ and ‘anticipates’ or other words of similar meaning are forward-looking. Such forward-looking statements and other financial and/or statistical data involve risk and uncertainty because they relate to future events and circumstances that are beyond the Group’s control. For example, certain insurance risk disclosures are dependent on the Group’s choices about assumptions and models, which by their nature are estimates.
As such, actual future gains and losses could differ materially from those that the Group has estimated. Other factors which could cause actual results to differ materially from those estimated by forward-looking statements include but are not limited to: • domestic and global economic and business conditions; • asset prices; • market-related risks such as fluctuations in interest rates and exchange rates, the potential for a sustained low-interest rate environment, and the performance of financial markets generally; • the policies and actions of governmental and/or regulatory authorities, including, for example, initiatives related to the financial crisis and the effect of the European Union’s ‘Solvency II’ requirements on the Group’s capital maintenance requirements; • the political, legal, social and economic effects of the COVID-19 pandemic and the UK’s exit from the European Union; • the impact of inflation and deflation; • market competition; • changes in assumptions in pricing and reserving for insurance business (particularly with regard to mortality and morbidity trends, gender pricing and lapse rates); • the timing, impact and other uncertainties of future acquisitions or combinations within relevant industries; • risks associated with arrangements with third parties; • inability of reinsurers to meet obligations or unavailability of reinsurance coverage; and • the impact of changes in capital, solvency or accounting standards, and tax and other legislation and regulations in the jurisdictions in which members of the Group operate.
As a result, the Group’s actual future financial condition, performance and results may differ materially from the plans, goals and expectations set out in the forward-looking statements and other financial and/or statistical data within the 2020 Annual Report and Accounts. No representation is made that any of these statements will come to pass or that any future results will be achieved. As a result, you are cautioned not be place undue reliance on such forward-looking statements contained in this 2020 Annual Report and Accounts.
The 2020 Annual Report and Accounts has been prepared for the members of the Company and no one else. The Company, its Directors or agents do not accept or assume responsibility to any other person in connection with this document and any such responsibility or liability is expressly disclaimed. Nothing in the 2020 Annual Report and Accounts is or should be construed as a profit forecast or estimate.
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