Purpose To provide core market related pay to attract and retain the required level of talent.
Purpose To reward EDs for achievement against the Company’s strategic objectives and for demonstrating the Aviva values and behaviours. Deferral provides alignment with shareholder interests and aids retention of key personnel.
Operation Awards are based on performance in the year. Targets are normally set annually and pay-out levels are determined by the Committee based on performance against those targets and a quality of earnings assessment and risk review.
Assessment of performance Performance is assessed against a range of relevant financial, employee, customer and risk targets designed to incentivise the achievement of our strategy, as well as individual strategic objectives as set by the Committee. Although financial performance is the major factor in considering overall expenditure on bonuses, performance against non-financial measures including progress towards our strategic priorities and behaviours in line with our values will also be taken into consideration.
Performance measures Awards will vest based on a combination of financial, TSR and strategic performance metrics. The Policy provides for a minimum aggregate weighting of 80% for financial metrics and TSR and for up to 20% to be based on strategic performance metrics. We would engage with shareholders before changing metrics or weighting in future years.
Operation EDs are eligible to participate in a defined contribution plan up to the annual limit. Any amounts above annual or lifetime limits are paid in cash.
Purpose To provide EDs with a suitable but reasonable package of benefits as part of a competitive remuneration package. This involves both core executive benefits, and the opportunity to participate in flexible benefits programmes offered by the Company (via salary sacrifice). This enables us to attract and retain the right level of talent necessary to deliver the Company’s strategy.
Maximum opportunity Set at a level which the Committee considers appropriate against comparable roles in companies of a similar size and complexity to provide a reasonable level of benefit. Costs would normally be limited to providing a cash car allowance, private medical insurance, life insurance, and reasonable travel benefits (including the tax cost where applicable). In addition, there may be one-off or exceptional items on a case by case basis, which would be disclosed in the DRR.
Operation A requirement to build a shareholding in the Company equivalent to 300% of basic salary for the Group CEO and 225% for other EDs. This shareholding is normally to be built up over a period not exceeding 5 years (subject to the Committee’s discretion where personal circumstances dictate). Post-cessation shareholding requirements also apply to EDs being the lower of 300% of basic salary for the Group CEO and 225% for other EDs, or the holding on termination of employment, for two years post-cessation.
Legacy payments The Committee reserves the right to make any remuneration payments and payments for loss of office (including exercising any discretions available to it in connection with such payments) notwithstanding that they are not in line with the Policy set out above, where the terms of the payment were agreed (i) before May 2014 (the date the Company’s first Policy came into effect), (ii) before the Policy set out above came into effect, provided that the terms of the payment were consistent with the Policy in force at the time they were agreed, or (iii) at a time when the relevant individual was not a director of the Company and, in the opinion of the Committee, the payment was not in consideration for the individual becoming a director of the Company. For these purposes, ‘payments’ includes the Committee satisfying awards of variable remuneration and, in relation to an award over shares, the terms of the payment are ‘agreed’ at the time the award is granted.
Approach to recruitment remuneration On hiring a new ED, the Committee would align the proposed remuneration package with the Policy in place for EDs at the time of the appointment.
• Maximum – basic salary, pension or cash in lieu of pension, benefits, and: – A bonus of 200% and an LTIP of 300% of basic salary (with notional LTIP vesting at maximum) for the Group CEO; and – A bonus of 150% and an LTIP of 225% of basic salary (with notional LTIP vesting at maximum) for the CFO. • Maximum with share price increase – indicative maximum remuneration, assuming a notional LTIP vesting at maximum and share price appreciation of 50% on the LTIP.
Notes to the charts The charts are illustrative only and the actual value EDs could earn is subject to business performance and share price movement to the date of vesting of the LTIP and of the deferred share element of the annual bonus. Fixed pay consists of basic salary, pension as described in table 1, and estimated value of benefits provided under the Remuneration Policy, excluding any one offs. Actual figures may vary in future years. The value of the deferred element of the annual bonus assumes a constant share price and does not include additional shares awarded in lieu of dividends that may have been accrued during the vesting period. The value of the LTIP assumes a constant share price (with the exception of the maximum with share price increase scenario) and does not include additional shares awarded in lieu of dividends that may have been accrued during the vesting period. The LTIP is as proposed to be awarded in 2021, which would vest in 2023, subject to the satisfaction of performance conditions. The shares would then be subject to a further two-year holding period.
Employment contracts and letters of appointment ED employment contracts and NED letters of appointment are available for inspection at the Company’s registered office during normal hours of business, and at the place of the Company’s 2021 AGM on 6 May from 1.45pm until the close of the meeting.
The key employment terms and conditions of the current EDs, and those who served during the year, as stipulated in their employment contracts, are set out in the table below.
Where notice of termination of a contract is given, payments to the ED would continue for the period worked during the notice period. Alternatively, the contract may be terminated, and phased monthly payments made in lieu of notice for, or for the balance of, the 12 months’ notice period. During this period, EDs would be expected to mitigate their loss by seeking alternative employment. Payments in lieu of notice would be reduced by the salary received from any alternative employment, potentially to zero. The Company would typically make a reasonable contribution towards an ED’s legal fees in connection with advice on the terms of their departure.
The treatment of leavers under the ABP and LTIP is determined by the rules of the relevant plans. Good leaver status under these plans would be granted in the event of, for example, the death of an ED. Good leaver status for other leaving reasons is at the discretion of the Committee, taking into account the circumstances of the individual’s departure, but would typically include planned retirement, or their departure on ill health grounds.
In the case of LTIPs, where the Committee determines EDs to be good leavers, vesting is normally based on the extent to which performance conditions have been met at the end of the relevant performance period, and the proportion of the award that vests is pro-rated for the time from the date of grant to final date of service (unless the Committee decides otherwise). Any decision not to apply this would only be made in exceptional circumstances and would be fully disclosed. It is not the practice to allow such treatment.
Consideration of wider employee pay and shareholder views When determining the Policy and arrangements for our EDs, the Committee considers: • Pay and employment conditions elsewhere in the Group to ensure that pay structures are suitably aligned and that levels of remuneration remain appropriate. The Committee reviews levels of basic salary increases for other employees and executives based on their respective locations. It reviews changes in overall bonus pool funding and long-term incentive grants. The Committee considers feedback on pay matters from sources including the employee opinion survey and employee forums. The Committee also takes into account information provided by the people function and external advisers and the Committee Chair has in place a programme of consultation and meetings with employee forums including trade union, Your Forum and the Evolution Council to discuss remuneration; and
For example, there has been detailed engagement with our largest shareholders regarding the proposed Policy during 2020, continuing into 2021.
Pay in lieu of notice up to a maximum of 12 months’ basic salary. Any payment is subject to phasing and mitigation requirements. An ED would be expected to mitigate the loss of office by seeking alternative employment. Any payments in lieu of notice would be reduced, potentially to zero, by any salary received from such employment.
The operation of the annual bonus and LTIP is at the Company’s discretion.
Sickness 100% of salary for the first 52 weeks and up to £150,000 per annum for a further 5 years. Non-compete During employment and for six months after leaving (less any period of garden leave) without the prior written consent of the
Non-Executive Directors The table below sets out details of our Policy for NEDs.
Chair’s Travel Benefits Purpose To provide the Chair with suitable travel arrangements for him to discharge his duties effectively.
Termination By the director or the Company at their discretion without compensation upon giving one month’s written notice for NEDs and three months written notice for the Chair of the Company.
Patrick Flynn ✓ C ✓ ✓ 16 July 2019 AGM 2021
Michael Mire ✓ ✓ ✓ ✓ 12 September 2013 AGM 2021 Key C Chair of Committee ✓ Committee 1 The dates shown below reflect the date the individual was appointed to the Aviva plc Board. 2 Appointment end dates are in accordance with letters of appointment.
Patrick Flynn 15/06/2020 1 1 Chair from 19 February 2014. 2 George Culmer retired from the Committee on 27 May 2020
The Committee met 12 times during 2020, of which 5 were scheduled meetings and 7 were additional meetings outside of the normal timetable. Details of attendance at Committee meetings are shown in the ‘Our Board of Directors’ section and the Directors’ and Corporate Governance report.
The Group Chair attended all meetings of the Committee. The Group General Counsel and Company Secretary acted as secretary to the Committee. The Chair of the Committee reported to subsequent meetings of the Board on the Committee’s work and the Board received a copy of the agenda and the minutes of each Committee meeting.
During the year, Deloitte LLP were paid fees totalling £184,850 and Tapestry Compliance Limited were paid fees totalling £17,504 for their advice to the Committee on these matters. Fees were charged on a time plus expenses basis.
Committee activities during 2020 Governance, regulatory issues and reporting policy • Reviewed updates from external advisers on the regulatory environment and on benchmarking the Company’s remuneration policies and practices against industry best practice
• Formulated and developed a new proposed Policy to be put forward for shareholder approval at the 2021 AGM, taking into account the views of shareholders
• Focused on the alignment of the remuneration policy with Aviva’s overall strategy, risk culture and appropriate ESG metrics
• Engaged with key institutional shareholders on financial and nonfinancial metrics for 2021 annual bonus and 2021-2023 LTIP
• Reviewed and approved the Company’s annual remuneration regulatory reporting and disclosures
Senior management objectives, bonus target setting and pay decisions • Agreed on the withdrawal of Executive Committee (ExCo) salary increases following the pausing of dividend payments. Dividend payments were subsequently reinstated
• Determined appropriate levels of discretion to be applied to EDs and ExCo remuneration outcomes, including in response to the risk and control environment
• Discussed and approved the annual bonus targets for 2020 • Reviewed and approved the proposed individual remuneration for each member of the ExCo in relation to their performance • Agreed an appropriate approach to a remuneration package for incoming and outgoing EDs and ExCo members
• Reviewed wider workforce pay and employment conditions elsewhere in the Group
Share plan operation and performance testing • Reviewed performance testing of all existing LTIP awards, and approved targets for the 2020 LTIP awards • Approved vesting of the 2017 LTIP and noted the interim testing for the 2018, 2019 and 2020 awards • Reviewed the proposed changes to future LTIP grants • Reviewed and approved any application of malus and clawback • Approved the terms of the SAYE and the Aviva Ireland Save as You
Earn Scheme, the Ireland Profit Share Scheme, and the invitation terms for eligible employees 2018 Corporate Governance Code In determining remuneration arrangements at Aviva, the Committee aims to ensure that they support the execution of our strategy and the delivery of sustainable long-term shareholder value. In doing so, the Committee takes into account the 2018 Code, wider workforce remuneration and emerging best practice in relation to ED remuneration.
Directors’ Remuneration Policy Approved by the shareholders, applies to the Directors of Aviva plc
Element of the Reward Governance Framework managed mainly under delegated authority from the Committee
Single total figures of remuneration for 2020 The table below sets out the total remuneration for 2020 and 2019 for each of our EDs.
Total 1,205 — 1,475 469 1,034 2,797 3,714 3,266 1 Basic salary received during the relevant year. 2 The benefits disclosure includes the cost, where relevant, of private medical insurance, life insurance, accommodation, travel and car benefits. In the case of Maurice and Jason this also includes benefits resulting from the UK
HMRC tax-advantaged SAYE plan, in which they participate on the same basis as all eligible employees. All numbers disclosed include the tax charged on the benefits, where applicable. Amanda’s benefits include taxable relocation assistance (£34,000), car benefits (£26,000) and advisor fees (£12,000) in relation to legal assistance. As disclosed on appointment and in last year’s report Maurice was provided with assistance with relocation from Canada to the UK, of an amount up to £250,000 exclusive of tax, payable against receipted costs incurred within a period of 24 months from date of appointment. During 2020, a further £69,000 of this allowance was used reflecting, ongoing residential accommodation. This is included as £132,000 in the table above, grossed-up for tax. Other benefits include: Private medical insurance (£10,000), taxable travel and subsistence (£283,000, of which £281,000 is the grossed-up tax value of flights), car benefits (£24,000) and advisor fees (£19,000) in relation to tax assistance. Travel costs were higher than 2019, reflecting the increased cost of safe international travel during COVID-19.
4 Bonus payable in respect of the financial year including any deferred element at the face value at the date of award. EDs are required to defer two-thirds of any bonus awarded into Aviva shares. The deferred element is made under the ABP and will vest in equal tranches on the first, second and third anniversary of the award date, subject to continued employment. ABP awards will be granted to EDs after the 2021 AGM so will be made under the proposed Policy. The grant will be made using the same share price as if they were granted in March, in line with other employees.
5 For Maurice, the value of the LTIP for 2020 relates to the 2018 award, which had a three-year performance period ending 31 December 2020. 0% of the award will vest in March 2021. The LTIP amounts shown in last year’s report in respect of the LTIPs awarded in 2017 were calculated with an assumed vesting share price of 411.20 pence. The actual share price at vesting was 268.5 pence, and the table has been updated to reflect this change. The estimated value of the awards for the EDs was £670,000; the actual value was £466,000 (decrease of £204,000). Jason, prior to becoming an ED, was granted Restricted Stock Unit (RSU) awards. These awards do not have performance conditions. In accordance with the regulations a pro-rated amount for 2019 is shown in respect of qualifying services during the year, using the share price at grant to determine the value of the award.
Preference shares As referenced in the Chairs’ Governance letter, in line with the comments made at the 2018 AGM, in October 2020 a committee of the board, consisting of the Chair, senior independent NED and the Group CEO, instructed Allen & Overy LLP to conduct a review of the remuneration decisions that had previously been taken in light of the preference shares matter. The scope of the review included a review of all relevant documentation and discussions with key individuals involved in the decisions.
Table 6 2020 performance against bonus scorecard for Executive Directors’ bonuses (audited information)
3 The Committee approved management’s proposal to cap the mechanical outcome to ‘on target’ as it considered this to be a more balanced view of risk resolution across 2020; this reduced the outcome from 24.75% to 15.0%.
Fi na nc ia l m ea su re s 15% IFRS Operating
Discretion The Committee retains overarching discretion to adjust outcomes upwards or downwards in order to align remuneration for the overall performance of the Group and wider circumstances.
Typically, any adjustments would be in the range of +/- 15%, but may be larger for major customer and/or risk and controls issues.
Feedback on Aviva’s culture shows strong improvements in speed of decision-making and on customer and risk-focused behaviours. Three in four colleagues are having performance conversations quarterly or more often. This is an important lead indicator of wider leadership behaviour – listening to, coaching, recognising and supporting teams.
The Committee recognised employee engagement was achieved under challenging conditions with an upward adjustment of 5%.
Customer Trust has shown robust improvement on the baseline measurement and against the competitor benchmark where Aviva has improved from a position that lagged competition by two points to one that now exceeds by seven points. This reflects actions taken to improve customer outcomes, as mirrored in RNPS and TNPS scores, and is underpinned by improvements across the majority of businesses and in the context of a challenging 2020 trading year.
The Committee felt an upward adjustment of 5% was appropriate given the circumstances.
Risk and controls Aviva’s reward strategy includes specific risk and control objectives for all employees. The aim is to help drive and reward effective risk management and a robust control environment across the Group.
Group, announced on 6 August 2020, based on three clear priorities of focusing the portfolio, transforming performance and improving financial strength; • Moved at pace to focus the portfolio by focusing on the core markets of the UK, Ireland and Canada and actively managing the continental Europe and Asian markets for long term shareholder value. Since 6 August the Group has completed the sale of Singapore and Indonesia, and announced the sale of Aviva Vita (Italy) and Vietnam which are both expected to complete in the first half of 2021; • Reinvigorated the senior leadership team with 7 appointments to the Group ExCo including three external appointments; CEO UK Life, CEO International and Chief Brand and Corporate Affairs Officer; • Established a new dividend policy aligned to core business of the UK, Ireland and Canada and clearly articulated a capital framework for excess capital deployment, both of which were communicated on 26 November 2020; • Delivered robust financial results, including record trading levels across the UK business, while continuing to enhance the financial strength of the group; and
• Led the business in a highly visible way during the COVID-19 global pandemic; sustaining high customer service levels and enhanced employee engagement.
Jason was appointed as CFO and as an ED in September 2019, with 2020 reflecting his first full year in role. Jason’s contribution enabled Aviva to move forward with a new strategy, underpinned by a robust financial performance, through a challenging year. Notable achievements included: • Strong visible and engaging leadership across the Group throughout the COVID-19 global pandemic particularly during the first half of the year, including chairing the Group Operational Risk Committee; • Providing critical transitional support to the new Group CEO and Chair ensuring continuity during these changes; • Developing, communicating and implementing the new Group strategy with the Group CEO. He has established detailed plans across the business, and driven significant M&A activity completing the sales of Singapore and Indonesia, and announcing the sales of Aviva Vita (Italy) and Vietnam; • The Group SII shareholder cover ratio1 remained well above the target range in 2020 despite market and economic volatility due to early and proactive action and the financial performance was robust, with SII OCG1 and Group adjusted operating profit2 being ahead of plans and cash remittances1 to centre being robust at £1.5 billion; • Delivery of £180 million of cumulative efficiency savings, ahead of plan, despite incremental expenditure on IT to allow our colleagues to work remotely during COVID-19; • Design and implementation of the dividend policy and capital framework aligned to the new Group strategy; and
• Improvements to the risk and control environment throughout 2020, including taking personal accountability to address the impacts of changes to the French life model.
The Committee carefully considered the individual performance of each ED. Details of the individual adjustments are reflected in table 8. 1 This is an Alternative Performance Measure (APM) which provides useful information to enhance the understanding of financial performance. Further information on APMs, including a reconciliation to the financial statements
Final outcome 120% 100% Target opportunity 100% of salary 100% of salary Maximum opportunity for 20202 200% of salary 150% of salary
Final bonus outcomes % of salary3 120% 100% % of maximum 60% 67% £ amount4 £586,956 £675,000 1 Commentary regarding the bonus outcome for Maurice is provided in the Payments for loss of office section. 2 The Group CEO has a maximum bonus opportunity of two times target (i.e. 200% of salary) while other EDs have a maximum opportunity of one and a half times target (150% of salary). 3 The bonus scorecard for EDs can range from 0 to 200%. When the final outcome is above 100%, the resulting final bonus outcome, as a % of salary, is on a ‘1% for 1%’ basis for the Group CEO and on a ‘2% for 1%’ basis for other
4 This outcome is pro-rated to reflect the time served as Group CEO.
Discretion The Committee is conscious of the provisions of the 2018 Code, with remuneration committees being encouraged to review incentive outcomes against individual and company performance, together with any wider circumstances, and to exercise independent judgement and discretion in relation to remuneration outcomes. Taking into account the impact of the outcome of the quality of earnings assessment and the non-financial modifiers, although the Committee is of the view that these outcomes appropriately reflect the overall performance of Aviva during the year, the outturn (before any individual adjustments) should be capped at 100% to align with the experience of shareholders and reflect wider societal factors caused by the global pandemic.
Operating EPS1 50% 4.0% p.a. 10.0% p.a. 3.7% 0% Relative TSR2 Performance 50% Median Upper quintile and above 10.5/14 0% 1 This measure is derived from the Group adjusted operating profit Alternative Performance Measure (APM). Further details of this measure are included in the ‘Other Information’ section of the Annual Report and Accounts. 2 TSR is a measure of share price growth, calculated as the difference between the share price at the vesting date and the 90 day average for the period immediately preceding the start of the three year performance period.
1 This is an Alternative Performance Measure (APM) which provides useful information to enhance the understanding of financial performance. Further information on APMs, including a reconciliation to the financial statements (where possible), can be found in the ‘Other Information’ section within the Annual Report and Accounts.
Table 10 Awards granted during the year (audited information) Share and option awards granted to EDs during the year are set out below.
Amanda Blanc 06 Aug 2020 LTIP 147% £1,470,000 20% 100% 31 Dec 2022 23 Mar 2025 Jason Windsor 23 Mar 2020 LTIP 225% £1,518,750 20% 100% 31 Dec 2022 23 Mar 2025 23 Mar 2020 ABP 43% £292,396 N/A 23 Mar 2023 Former Directors3
Maurice Tulloch 23 Mar 2020 LTIP 300% £2,925,000 20% 100% 31 Dec 2022 23 Mar 2025 23 Mar 2020 ABP 61% £590,875 N/A 23 Mar 2023 1 ABP and LTIP awards have been granted as conditional share awards. The LTIP is a conditional right to receive shares which vest at the end of a three-year performance period, with an additional two-year holding period. ABP
represents the portion of the 2019 bonus deferred into shares which vests in three equal tranches. Shares issued in lieu of dividends accrue on ABP and LTIP awards during the ABP deferral period and the LTIP performance period.
3 Maurice stepped down from the Board on 6 July 2020.
We recognise the wish from shareholders and proxy advisory bodies for companies to be clear about how the use of discretion would be assessed and exercised in practice. For these purposes, the Committee has agreed that factors to be considered in making the assessment will include: • The relationship between the 2020 grant price and those used in previous years, and the resultant impact on the number of shares under award; • The extent to which COVID-19 continues to have an impact on market valuations and volatility. • An analysis of share price performance prior to and following grant, with a focus on: – Performance vs. the broader market; – Performance vs. other Insurance firms; and – Share price growth over the 2020 LTIP performance period vs. that for prior LTIP awards.
Any vesting of the SII RoE1 element of the LTIP is subject to a SII shareholder cover ratio1 that meets or exceeds the minimum of the stated working range (in 2020, this was 160% to 180% and remains the target as announced in the Q3 operating update).
The performance period for the TSR performance condition is the three years beginning 1 January 2020. For the purposes of measuring the TSR performance condition, the Company’s TSR and that of the comparator group will be based on the 90-day average TSR for the period immediately preceding the start and end of the performance period. The vesting schedule is set out in the table below.
Payments to past directors (audited information) Glyn Barker retired from the Board as a NED on 31 December 2019. In 2020 he received a retirement gift with a grossed up value of £5,345.
Payments for loss of office (audited information) We announced on 6 July 2020 Maurice Tulloch would step down as Group CEO and retire as a Director of the Company with immediate effect. • Maurice was placed on garden leave from 6 July 2020 until the end of his six-month notice period on 5 January 2021. During this period, he continued to receive his contractual salary and benefits. For the period 6 July to 5 January 2021 these totalled £574,311 • The Committee exercised its discretion to treat Maurice as a good leaver under the ABP and LTIP by reason of his retirement
– Maurice’s outstanding deferred share awards under ABP will continue to vest on the normal vesting dates – Maurice’s 2018, 2019 and 2020 LTIP awards will continue to vest, pro-rated for the time from the date of grant to his leave date and subject to satisfaction of the relevant performance conditions. The two-year holding period will continue to apply – All outstanding awards under the ABP and LTIP will remain subject to malus and clawback
• Maurice will be required to retain the necessary amount of shares from departure for two years following cessation of employment, in line with the Employment Shareholding Policy and is subject to post-activity restrictions which allow the Committee to reduce or recover awards if certain employment is taken elsewhere
Table 13 Total 2020 remuneration for Non-Executive Directors (audited information) The table below sets out the total remuneration earned by each NED who served during 2020 for Group-related activities.
Chair George Culmer2 392 29 5 2 397 31 — — 397 31 NEDs Patricia Cross 141 128 — — 141 128 60 60 201 188 Patrick Flynn 171 55 2 2 173 57 — — 173 57 Belén Romana García 165 139 8 15 173 154 44 44 217 198 Mohit Joshi3 9 — — — 9 — — — 9 — Jim McConville3 15 — — — 15 — — — 15 — Michael Mire 128 118 1 3 129 121 — — 129 121
The Aviva plc total amount paid to NEDs in 2020 was £1,371,000 which is within the limits set in the Company’s Articles of Association, as previously approved by shareholders.
Subsidiary company board memberships During the year, the following NEDs were appointed as directors of subsidiary companies to support and further enhance the flow of information between material subsidiaries and the Group. The additional emoluments received in respect of these roles are detailed below: • Patricia Cross received an additional fee of £60,000 (2019: £60,000) in respect of her duties as Senior Independent Director of Aviva Investors
% change in salary/ fees 2019-2020 % change in bonus 2019-2020 % change in benefits 2019-20206
EDs reflects relocation and taxable travel and subsistence. The increase in George’s fees is a result of his appointment as Chair on 27 May 2020. 2 The increase in fee levels for NEDs are mainly driven by increases in fees effective July 2020, as set out in table 24. 3 Patrick was appointed as Senior Independent Director of Aviva plc and a Remuneration Committee member on 15 June and 7 September 2020 respectively. 4 Mohit and Jim were appointed to the Board 1 December 2020 therefore no comparison available. 5 The increase in benefits for UK based employees has been mainly driven by the increase in the cost of private medical insurance. Without this, benefits would have increased by 2.3%. 6 The reduction in benefits for NEDs compared to 2019 is largely reflective of reduced taxable travel and subsistence costs due to COVID-19.
Historical TSR performance and Group CEO remuneration outcomes Table 15 compares the TSR performance of the Company over the past ten years against the TSR of the FTSE 100. This index has been chosen because it is a recognised equity market index of which Aviva is a member. In addition, median TSR performance for the LTIP comparator group has been shown. The companies which comprise the LTIP comparator group for TSR purposes are listed above table 12.
The table below summarises the historical Group CEO single figure for total remuneration, and annual bonus and LTIP outcomes as a percentage of maximum over this period.
CEO Pay ratio reporting The table below sets out the ratio at median, 25th and 75th percentile of the total remuneration received by the Group CEO compared to the total remuneration received by our UK employees. Total remuneration reflects all remuneration received by an individual in respect of the relevant years, and includes salary, benefits, pension, and value received from incentive plans.
• In 2019, the single figure for Maurice was aggregated with the pro-rata fees for Sir Adrian as Executive Chairman • The P25, P50 and P75 employees were calculated based on full-time equivalent data as at 31 December of the relevant years • Out of the three alternatives available for calculating the ratio, we chose to use Option A as it is considered to be the most accurate way of identifying employees at P25, P50 and P75, and is aligned with shareholder expectations. Under this approach we calculate total remuneration on a full-time equivalent basis for all of our UK employees and rank them accordingly
The decrease in the ratio reflects the fact that: • 2020 remuneration outcomes for the Group CEO include a lower aggregate bonus figure than 2019 and nil LTIP vesting, compared to 50%
Table 18 provides further information on the total remuneration figure for each quartile employee, and the salary component within this.
Table 18 Salary and total remuneration used in the CEO pay ratio calculations
Relative importance of spend on pay Table 19 outlines Group adjusted operating profit1, dividends paid to shareholders and share buy-backs, compared to overall spend on pay in total. This measure of profit has been chosen as it is used for decision-making and the internal performance management of the Group’s operating segments.
Group adjusted operating profit1 3,184 3,161 (1)% Dividends paid2 1,184 236 (80)% Share buy-backs — — — Total staff costs3 1,944 1,857 (5)% 1 Group adjusted operating profit is an Alternative Performance Measure (APM) which is used by the Group to supplement the required disclosures under IFRS. Please refer to accounting policy B in the ‘Accounting Policies’ section and to the ‘Other Information’ section within the Annual Report and Accounts for further information 2 The total cost of ordinary dividends paid to shareholders. 3 Total staff costs from continuing operations includes wages and salaries, social security costs, post-retirement obligations, profit sharing and incentive plans, equity compensation plans and termination benefits. The average number of employees in continuing operations was 29,079 (2020) and 30,189 (2019).
guideline. The Committee will retain the discretion to waive part or all of the guideline where considered appropriate, for example in exceptional or compassionate circumstances
• EDs are required to retain shares vesting from incentive plans within the Company-sponsored nominee account, and are not permitted to transfer them e.g. into their own brokerage accounts, unless otherwise agreed by the Committee. In this manner, the Committee is able to retain oversight of the shares and is comfortable that this provides it with the ability to enforce the post-cessation guidelines in practice
Amanda Blanc 352,226 641,921 — 300 115% No Jason Windsor 495,587 663,209 317,302 6,338 — 200 239% Yes Maurice Tulloch 625,001 2,282,929 431,698 6,338 — 300 208% No 1 Directors’ beneficial holdings in the ordinary shares of the Company. This information includes holdings of any connected persons. 2 Awards granted under the Aviva LTIPs which vest only if the performance conditions are achieved. 3 Awards arising through the ABP. Under this plan, some of the earned bonuses are paid in the form of conditional shares and deferred for three years. The transfer of the shares to the director at the end of the period is not subject to the attainment of performance conditions but the shares can be forfeited if the ED leaves service before the end of the period. For Jason, this also includes RSU awards, granted under the LTIP prior to his appointment to the Board. Details of these awards can be found in table 22.
4 Savings-related options (without performance conditions) over shares granted under the SAYE plan. 5 Based on the closing middle-market price of an ordinary share of the Company on 31 December 2020 of 325.2 pence. The closing middle-market price of an ordinary share of the Company during the year ranged from 211 pence to 423.6 pence.
There were no changes to the EDs interests in Aviva shares during the period 1 January 2021 to 3 March 2021.
George Culmer 31,276 31,276 Patricia Cross 30,574 31,192 Patrick Flynn — — Belén Romana García 10,223 19,418 Mohit Joshi — — Jim McConville — — Michael Mire 50,000 50,000
Former NEDs3 Amanda Blanc — — 1 This information includes holdings of any connected persons. 2 Sir Adrian retired from the Board on 31 May 2020. 3 Amanda retired from the Board as a NED on 5 July 2020. Amanda was subsequently appointed as Group CEO on 6 July 2020.
Maurice Tulloch6 LTIP3,4 2017 286,091 — 171,7298 143,046 — 523.00 — 268.50 Mar-20 2018 310,863 — — — 310,863 542.60 — — Mar-21 2019 694,774 — — — 694,774 409.00 — — Mar-22 2020 — 1,277,292 — — 1,277,292 211.00 — — Mar-23 ABP — 2017 85,564 — 102,7228 — — 523.00 — 268.50 Mar-20 2018 110,529 — — — 110,529 494.10 — — Mar-21 2019 94,717 — 33,9968 — 63,145 409.00 — — Mar-22 2020 — 258,024 — — 258,024 211.00 — — Mar-23 SAYE7 — 2019 6,338 — — — 6,338 — 284.00 — Dec-22 – May-23 1 The aggregate net value of share awards granted to the EDs in the period was £6.8 million (2019: £8.0 million). The net value has been calculated by reference to the closing middle-market price of an ordinary share of the
Company at the date of grant. 2 The actual price used to calculate the ABP and LTIP awards is based on a three-day average closing middle-market price of an ordinary share of the Company, prior to grant date. These were in 2017: 530 pence, 2018: 504 pence 2019: 421 pence and 2020 229 pence. 3 For the 2017 LTIP grant, the TSR comparator group consisted of the following companies: Aegon, Allianz, Assicurazioni Generali, Axa, CNP Assurances, Direct Line Group, Legal & General, MetLife, NN Group, Old Mutual, Prudential,
4 The performance periods for these awards begin at the commencement of the financial year in which the award is granted and run for a three-year period. 5 LTIP awards for Jason comprise RSUs and were granted prior to his appointment to the Board. The transfer of the shares at the end of the period is not subject to the attainment of performance conditions but the shares can be forfeited if he leaves service before the end of the period. 6 Maurice stepped down from the Board on 6 July 2020. The LTIP awards will be time prorated to reflect the number of days worked from the date of grant to the final date of service. 7 Any unexercised options will lapse at the end of the exercise period. Options are not subject to performance conditions. The option price was fixed by reference to a three day average closing middle-market price of an ordinary share of the Company, prior to invitation date, with a discount of 20% as permitted under the SAYE plan. Options granted under the SAYE are normally exercisable during the six-month period following the end of the relevant (3 or 5 year) savings contract.
The Company monitors the number of shares issued under the Aviva employee share plans and their impact on dilution limits. The Company’s usage of shares compared to the relevant dilution limits set by the Investment Association in respect of all share plans (10% in any rolling ten-year period) and executive share plans (5% in any rolling ten-year period) was 3.58% and 1.89% respectively on 31 December 2020.
Governance Regulatory Remuneration Code Aviva Investors and two small ‘firms’ (as defined by the FCA) within the UK Life Insurance business are subject to the Capital Requirements Directive IV (CRD IV) and the FCA Remuneration Code (SYSC 19A). Additionally, Aviva Investors UK Funds Services Ltd is subject to the Alternative Investment Fund Management Directive (AIFMD), the Undertakings for Collective Investments in Transferrable Securities (UCITS V) directive and the Markets in Financial Instruments Directive II (MiFID II). Remuneration Code requirements include an annual disclosure. For AIFMD and UCITS V the disclosure is part of the Financial Statements and/or Annual accounts of the Alternative Investment Funds or UCITS V. For CRD IV requirements the most recent Aviva Investors disclosure can be found in Section 5 of the Pillar 3 Disclosure available at www.aviva.com/pillar3 and a link to the disclosure for the UK Insurance firms can be found at www.aviva.com/remuneration-committee.
The Solvency II reporting requirements for the year ended 31 December 2020 necessitate firms to produce the Solvency and Financial Condition Report (SFCR) which contains remuneration information and is publicly available. Aviva’s reward principles and arrangements are designed to incentivise and reward employees for achieving stated business goals in a manner that is consistent with the Company’s approach to sound and effective risk management.
Directors’ Remuneration Policy1 97.13% 2.87% 2,809,661,298 83,164,398 3,970,718 Directors’ Remuneration Report 95.84% 4.16% 2,426,163,368 105,081,885 2,308,589 1 Voting on Remuneration Policy at 2018 AGM.
Table 25 Implementation of Policy in 2021 Subject to the approval of the Policy at the 2021 AGM, its implementation will be consistent with that outlined in table 1.
• Group CEO – £1,000,000 per annum • CFO – £675,000 per annum
• The Committee have reviewed performance targets attached to the awards and are comfortable they are stretching and deliver appropriate payout levels
• Personal performance during the year will be taken into account LTIP
1 No changes in salary in 2021. 2 The target ranges are considered by the Board to be commercially sensitive and disclosure of these would put the Company at a disadvantage compared to its competitors. Target ranges will be disclosed in the 2021 DRR. 3 Group adjusted operating profit is an Alternative Performance Measure (APM) which is used by the Group to supplement the required disclosures under IFRS. Please refer to note B in the ‘Accounting Policies’ section and to the
(where possible), can be found in the ‘Other Information’ section within the Annual Report and Accounts. 5 2021 LTIP Comparator Group: Aegon, Allianz, Assicurazioni Generali, Axa, Direct Line Group, Intact, Legal & General, Lloyds Banking Group, M&G, Phoenix, Zurich Insurance Group. LTIP awards will be granted to EDs after the 2021
Approval by the Board This Directors’ Remuneration report was reviewed and approved by the Board on 3 March 2021.
Notes to the consolidated financial statements 1 Changes to comparative amounts 151 2 Significant events in the current reporting period 151 3 Exchange rates 152 4 Strategic transactions 152 5 Segmental information 156 6 Details of income 161 7 Details of expenses 162 8 Finance costs 163 9 Life business investment variances and economic assumption changes 163 10 Non-life business: short-term fluctuations in return on investments 11 Employee information 166 12 Directors 166 13 Auditors’ remuneration 167 14 Tax 168 15 Earnings per share 169 16 Dividends and appropriations 171 17 Goodwill 171 18 Acquired value of in-force business (AVIF) and intangible assets 173 19 Interests in, and loans to, joint ventures 174 20 Interests in, and loans to, associates 175 21 Property and equipment 176 22 Investment property 177 23 Lease assets and liabilities 177 24 Fair value methodology 178 25 Loans 185 26 Securitised mortgages and related assets 186 27 Interest in structured entities 187 28 Financial investments 189 29 Receivables 192 30 Deferred acquisition costs 192 31 Pension surpluses, other assets, prepayments and accrued income 32 Assets held to cover linked liabilities 194 33 Ordinary share capital 194 34 Group’s share plans 194 35 Treasury shares 196 36 Preference share capital 197 37 Direct capital instrument and tier 1 notes 197 38 Currency translation and other reserves 198 39 Retained earnings 198 40 Non-controlling interests 199 41 Contract liabilities and associated reinsurance 199 42 Insurance liabilities 201 43 Insurance liabilities methodology and assumptions 206 44 Liability for investment contracts 209 45 Financial guarantees and options 211 46 Reinsurance assets 212 47 Effect of changes in assumptions and estimates during the year 214 48 Unallocated divisible surplus 215 49 Tax assets and liabilities 215 50 Pension deficits and other provisions 216 51 Pension obligations 217 52 Borrowings 223 53 Payables and other financial liabilities 226 54 Other liabilities 227 55 Contingent liabilities and other risk factors 227 56 Capital commitments 228 57 Group capital management 228 58 Statement of cash flows 230 59 Risk management 231 60 Derivative financial instruments and hedging 245 61 Financial assets and liabilities subject to offsetting, enforceable master netting agreements and similar arrangements 62 Related party transactions 248 63 Organisational structure 249 64 Related undertakings 250 65 Subsequent events 263
Report on the audit of the financial statements Opinion In our opinion, Aviva plc’s Group financial statements and Company financial statements (the “financial statements”): • give a true and fair view of the state of the Group’s and of the Company’s affairs as at 31 December 2020 and of the Group’s profit, the
Act 2006; and • have been prepared in accordance with the requirements of the Companies Act 2006.
Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) (“ISAs (UK)”) and applicable law. Our responsibilities under ISAs (UK) are further described in the Auditors’ responsibilities for the audit of the financial statements section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Other than those disclosed in note 13 to the financial statements, we have provided no non-audit services to the Group in the period under audit.
Our audit approach Overview In addition to forming this opinion, in this report we have also provided information on how we approached the audit, how it has changed from the previous year and details of the significant discussions that we had with the Audit Committee.
COVID-19 has meant that substantially all of our interactions were undertaken virtually, including those between engagement teams, with our component audit teams and Aviva board members, management and staff.
Key audit matters • Valuation of life insurance contract liabilities (Group)
– Annuitant mortality assumptions (Group) – Credit default assumptions for illiquid assets, specifically: commercial mortgages and equity release mortgages (Group) – Expense assumptions (Group)
• Valuation of non-life insurance contract liabilities (Group) • Valuation for hard to value investments (Group) • Risk of error arising from the implementation of new Bulk Purchase Annuities ("BPA") actuarial model (Group) • Impact of COVID-19 (Group and Company)
• Evaluation and testing of the operating effectiveness of management’s controls designed to prevent and detect irregularities; • Assessment of matters reported on the Group and Company’s whistleblowing helpline and fraud register and the results of management’s investigation of such matters; • Meeting with the Prudential Regulation Authority (“PRA”) periodically and reading key correspondence with the PRA and the Financial
Conduct Authority, including those in relation to compliance with laws and regulations; • Reviewing relevant meeting minutes including those of the Board of Directors, Audit, Remuneration and Disclosure Committees; • Identifying and testing journal entries based on risk criteria; • Designing audit procedures to incorporate unpredictability around the nature, timing or extent of our testing; • Testing transactions entered into outside of the normal course of the Group and Company’s business; • Reviewing the Group’s register of litigation and claims, Internal Audit reports, and Compliance reports in so far as they related to noncompliance with laws and regulations and fraud; and • Attendance at Audit and Risk Committee meetings
There are inherent limitations in the audit procedures described above. We are less likely to become aware of instances of non-compliance with laws and regulations that are not closely related to events and transactions reflected in the financial statements. Also, 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 risk of error arising from the implementation of new BPA actuarial model and the impact of COVID-19 are new key audit matters this year. Valuation of specific UK Life provisions, which was a key audit matter last year, is no longer included because of the reduction in the magnitude and related uncertainty of the provisions held in relation to product governance as a result of the progress made to determine and settle amounts due. Otherwise, the key audit matters below are consistent with last year.
Valuation of life insurance contract liabilities (Group) Refer to the Audit Committees’ report, Accounting policy (L) Insurance and participating investment contract liabilities – Long-term business provisions and note 42 Insurance liabilities (b) Long-term business liabilities.
The work to address the valuation of the life insurance contract liabilities included the following procedures: • Understood and evaluated the process and controls in place to determine the insurance contract liabilities; • Tested the design and operating effectiveness of controls in place over insurance contract liabilities, including those covering the approval of assumptions and completeness and accuracy of data used; • Using our actuarial specialist team members, applied industry knowledge and experience and compared the methodology, models and assumptions used against recognised actuarial practices. This included consideration of the reasonableness of assumptions against actual historical experience and the appropriateness of any judgements applied; • Tested the key judgements over the preparation of the liabilities, including manually calculated components focussing on the consistency in treatment and methodology period-on-period and with reference to recognised actuarial practice; • Used the results of an independent PwC annual benchmarking survey of assumptions to further challenge the assumption setting process by comparing certain assumptions used relative to the Group’s industry peers; and
Annuitant mortality assumptions used to value insurance contract liabilities for UK Life require a high degree of judgement due to the number of factors which may influence mortality experience. The differing factors which affect the assumptions are underlying mortality experience (in the portfolio), industry and management views on the future rate of mortality improvements and external factors arising from developments in the annuity market.
There are two main components to the annuitant mortality assumptions: • Mortality base assumption: this component is typically less subjective as it is derived using the external Continuous Mortality Investigation (CMI) tables for individual annuities and Club Vita 3 (CV3) tables for BPA, adjusted for internal experience. However, judgement is required in choosing the appropriate table and fitting internal experience to this table.
Management have adopted the most recent CMI 2019 model and dataset in setting this assumption with specific parameters for the long term rate of improvement and tapering at older ages and adjustments to reflect the profile of their portfolio. This reflects their views on the rate of mortality improvement.
In addition, a margin of prudence is applied to these assumptions.
• Considered alternative assumptions that could be used in the CMI 2019 model such as the smoothing factor and used externally published information to validate the choice management made.
Based on the work performed and the evidence obtained, we consider the assumptions used for credit default risk on commercial mortgages and equity release mortgages to be appropriate.
Expense assumptions (Group) Refer to the Audit Committee report, Accounting policy (L) Insurance and participating investment contract liabilities – Long term business provisions and note 42 Insurance liabilities methodology and assumptions (b) Long-term business liabilities.
Future maintenance expenses and expense inflation assumptions are used in the measurement of life insurance contract liabilities at UK Life. The assumptions reflect the expected future expenses that will be required to maintain the inforce policies at the balance sheet date, including an allowance for project costs and a margin for prudence. The assumptions used require significant judgement.
Based on the work performed and the evidence obtained, we consider the methodology and assumptions used by management to value hard to value assets to be appropriate.
UK Life have introduced a new model for the valuation of £4.3 billion of Bulk Purchase Annuities during the year.
The key risk in relation to any new model is the risk of error in the implementation or the functionality of the model. This model is being used to value large BPA schemes written during the year and we have assessed the risk of error in relation to the BPA model to be significant given its complexity and the magnitude of the contracts that it will be used to value.
Impact of COVID-19 (Group and Company) Refer to the Audit and Risk Committee Reports and note 2 Significant events in the current reporting period.
The impacts of the global pandemic due to the Coronavirus COVID-19 continue to cause significant social and economic disruption up to the date of reporting. In our audit we have identified the following key impacts of COVID-19: Ability of the entity to continue as a going concern There are a number of potential matters in relation to COVID-19 which could impact on the going concern status of the Group and Company. Using downside scenarios driven by the required Own Risk and Solvency Assessment (ORSA) process, the Directors have considered the ability of the Company to remain solvent with sufficient liquidity to meet future obligations. The Directors have also considered its requirements in respect of regulatory capital under Solvency II and the potential operational impacts on the business arising from remote working.
The Directors’ have concluded that the Company is a going concern.
Impact on Estimation Uncertainty in the Financial Statements The pandemic has increased the level of estimation uncertainty in the financial statements. The Directors have therefore considered how COVID-19 has impacted the key estimates that determine the valuation of material balances, particularly the Non Life Insurance Contract Liabilities, Life Insurance Contract Liabilities and Hard to Value Financial Investments.
We agree with the Director’s conclusions in respect of going concern. • Considered whether there have been any impacts from remote working on the design and operating effectiveness of key controls impacting the preparation of financial statement information; • Challenged management’s judgements in the valuation of nonlife insurance contracts in relation to COVID-19, specifically the treatment of the Business Interruption test case; and
Qualitative Disclosures in the Annual Report and Financial Statements In addition, the Directors have considered the qualitative disclosures included in the Annual Report and Accounts in respect of COVID-19 and the impact that the pandemic has had, and continues to have, on the Group and Company.
mortality, credit default and expense assumptions, in light of the emerging COVID-19 experience and by comparing these relative to the Company’s industry peers; We have audited the balances impacted by estimation uncertainty and believe the values presented in the Financial Statements to be reasonable. • Reviewed the appropriateness of disclosures within the Annual
Based on the procedures performed and evidence obtained, we consider the disclosure of COVID-19 in the financial statements to be appropriate.
Based on the output of our risk assessment, along with our understanding of the Aviva Group structure, we performed full scope audits over the following components; UK Life, UK General Insurance, Canada and France.
We identified a further two components: Aviva Investors and Italy Life, where specific account balances were considered to be significant in size in relation to the Group, and scoped our audit to include detailed testing of those account balances. We also performed audit procedures over the head office operations and the consolidation process, as well as over certain other group activities, including specific account balances in the Aviva Employment Services, Aviva Central Services and Aviva Group Holdings components.
As the Group audit team, we determined the level of involvement required at those components to be able to conclude whether sufficient and appropriate audit evidence had been obtained as a basis for our opinion on the consolidated financial statements as a whole. In our role as Group auditors, we exercised oversight of the work performed by auditors of the components including performing the following procedures: • Issued Group instructions outlining areas requiring additional audit focus, including the key audit matters included above; • Maintained an active dialogue with reporting component audit teams throughout the year; • Attended meetings with local management; • Attended Audit Committee meetings for certain in-scope components; • Reviewed reporting requested from component teams, including those areas determined to be of heightened audit risk; and • Reviewed the detailed working papers, where relevant.
Materiality The scope of our audit was influenced by our application of materiality. We set certain quantitative thresholds for materiality. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures on the individual financial statement line items and disclosures and in evaluating the effect of misstatements, both individually and in aggregate on the financial statements as a whole.
How we determined it 5% of three-year average of the Group adjusted operating profit before tax attributable to shareholders’ profits (2019: Group adjusted operating profit before tax attributable to shareholders’ profits)
0.5% of net assets (2019: 5% of profit for the year before tax)
In determining our materiality, we considered financial metrics which we believed to be relevant and concluded that net assets was the most appropriate benchmark. The primary use of the financial statements is to determine the entity’s ability to pay dividends and the users will therefore be focussed on distributable reserves, a balance captured using a net asset benchmark.
We agreed with the Audit Committee that we would report to them misstatements identified during our audit above £7,000,000 (Group audit) (2019: £7,000,000) and £3,062,500 (Company audit) (2019: £2,390,000) as well as misstatements below those amounts that, in our view, warranted reporting for qualitative reasons.
Conclusions relating to going concern Our evaluation of the directors’ assessment of the Group’s and the Company’s ability to continue to adopt the going concern basis of accounting included: • Obtained the Directors’ Going Concern assessment and challenged the rationale for the downside scenarios adopted and material assumptions made using our knowledge of Aviva’s business performance, review of regulatory correspondence and obtaining further corroborating evidence; • Considered management's assessment of the regulatory Solvency coverage and liquidity position in the forward looking scenarios considered which have been driven from Aviva’s ORSA; • Considered information obtained during the course of the audit and publicly available market information to identify any evidence that would contradict management’s assessment of going concern (including the impacts of COVID-19); and
• Enquired and understood the actions taken by management to mitigate the impacts of COVID-19, including review of Board Risk Committee minutes and attendance of all Audit Committees.
Based on the work we have performed, we have not identified any material uncertainties relating to events or conditions that, individually or collectively, may cast significant doubt on the Group’s and the Company’s ability to continue as a going concern for a period of at least twelve months from when the financial statements are authorised for issue.
However, because not all future events or conditions can be predicted, this conclusion is not a guarantee as to the Group’s and the Company’s ability to continue as a going concern.
In relation to the Company’s reporting on how they have applied the UK Corporate Governance Code, we have nothing material to add or draw attention to in relation to the directors’ statement in the financial statements about whether the directors considered it appropriate to adopt the going concern basis of accounting.
Directors’ Remuneration In our opinion, the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006.
Corporate governance statement The Listing Rules require us to review the directors’ statements in relation to going concern, longer-term viability and that part of the corporate governance statement relating to the Company’s compliance with the provisions of the UK Corporate Governance Code specified for our review. Our additional responsibilities with respect to the corporate governance statement as other information are described in the Reporting on other information section of this report.
Based on the work undertaken as part of our audit, we have concluded that each of the following elements of the corporate governance statement, included within the Directors’ and Corporate Governance Report is materially consistent with the financial statements and our knowledge obtained during the audit, and we have nothing material to add or draw attention to in relation to: • The directors’ confirmation that they have carried out a robust assessment of the emerging and principal risks; • The disclosures in the Annual Report and Accounts that describe those principal risks, what procedures are in place to identify emerging risks and an explanation of how these are being managed or mitigated; • The directors’ statement in the financial statements about whether they considered it appropriate to adopt the going concern basis of accounting in preparing them, and their identification of any material uncertainties to the Group’s and Company’s ability to continue to do so over a period of at least twelve months from the date of approval of the financial statements; • The directors’ explanation as to their assessment of the Group’s and Company’s prospects, the period this assessment covers and why the period is appropriate; and
Our review of the directors’ statement regarding the longer-term viability of the Group was substantially less in scope than an audit and only consisted of making inquiries and considering the directors’ process supporting their statement; checking that the statement is in alignment with the relevant provisions of the UK Corporate Governance Code; and considering whether the statement is consistent with the financial statements and our knowledge and understanding of the Group and Company and their environment obtained in the course of the audit.
In addition, 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 and our knowledge obtained during the audit: • The directors’ statement that they consider the Annual Report, taken as a whole, is fair, balanced and understandable, and provides the information necessary for the members to assess the Group’s and Company’s position, performance, business model and strategy; • The section of the Annual Report that describes the review of effectiveness of risk management and internal control systems; and • The section of the Annual Report describing the work of the Audit Committee.
We have nothing to report in respect of our responsibility to report when the directors’ statement relating to the Company’s compliance with the Code does not properly disclose a departure from a relevant provision of the Code specified under the Listing Rules for review by the auditors
Auditors’ responsibilities for the audit of the financial statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors’ report that includes our opinion. Reasonable assurance is a high level of assurance but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.
Our audit testing might include testing complete populations of certain transactions and balances, possibly using data auditing techniques. However, it typically involves selecting a limited number of items for testing, rather than testing complete populations. We will often seek to target particular items for testing based on their size or risk characteristics. In other cases, we will use audit sampling to enable us to draw a conclusion about the population from which the sample is selected.
Use of this report This report, including the opinions, has been prepared for and only for the Company’s members as a body in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.
Alex Bertolotti (Senior Statutory Auditor) for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors London 3 March 2021
Accounting policies Aviva plc (the ‘Company’), a public limited company incorporated and domiciled in the United Kingdom (UK), together with its subsidiaries (collectively, the ‘Group’ or ‘Aviva’) transacts life assurance and long-term savings business, fund management and most classes of general insurance and health business through its subsidiaries, joint ventures, associates and branches in the UK, Ireland, continental Europe, Canada and Asia.
Items included in the financial statements of each of the Group’s entities are measured in the currency of the primary economic environment in which that entity operates (the functional currency). The consolidated financial statements are stated in pounds sterling, which is the Company’s functional and presentational currency. Unless otherwise noted, the amounts shown in these financial statements are in millions of pounds sterling (£m).
Comparative figures have been re-presented for adjustments as detailed in note 1.
(iv) Interest Rate Benchmark Reform: Amendments to IFRS 9, IAS 39 and IFRS 7 (published by the IASB in October 2019)
Eligibility for the deferral approach was based on an assessment of the Group’s liabilities as at 31 December 2015, in accordance with the date specified in the amendments to IFRS 4. At this date the Group’s liabilities connected with insurance exceeded 90% of the carrying amount of the Group’s total liabilities. The Group’s total liabilities were £369,642 million and liabilities connected with insurance in the statement of financial position at this date primarily included insurance and participating investment contracts within the scope of IFRS 4 (£218,604 million), nonparticipating investment contract liabilities (£103,125 million), unallocated divisible surplus (£8,811 million), borrowings (£8,770 million), and certain amounts within payables and other financial liabilities which arise in the course of writing insurance business (£10,285 million).
(iv) Interest Rate Benchmark Reform Phase 2: Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 Published by the IASB in August 2020. The amendments are effective for annual reporting beginning on or after 1 January 2021 and have not yet been endorsed by the EU.
(B) Group adjusted operating profit The long-term nature of much of the Group’s operations means that, for management’s decision-making and internal performance management of our operating segments, the Group focuses on Group adjusted operating profit, a non-GAAP alternative performance measure (APM) which is not bound by IFRS. The APM incorporates the expected return on investments which supports its long-term and non-long-term businesses.
The Group adjusted operating profit APM should be viewed as complementary to IFRS Generally Accepted Accounting Principles (GAAP) measures. It is important to consider Group adjusted operating profit and profit for the year together to understand the performance of the business in the period.
(C) Critical accounting policies and the use of estimates Critical accounting policies The preparation of financial statements requires the Group to select accounting policies and make estimates and assumptions that affect items reported in the consolidated income statement, consolidated statement of financial position, other primary statements and notes to the consolidated financial statements.
The Audit Committee reviews the reasonableness of judgements and assumptions applied and the appropriateness of significant accounting policies. The significant issues considered by the Committee in the year are included within the Audit Committee report.
All estimates are based on management’s knowledge of current facts and circumstances, assumptions based on that knowledge and their predictions of future events and actions. Actual results may differ from those estimates, possibly significantly.
Where quoted market prices are not available, valuation techniques are used to value financial instruments and investment property. These include broker quotes and models using both observable and unobservable market inputs. The valuation techniques involve judgement with regard to the valuation models used and the inputs to these models can lead to a range of plausible valuations for financial investments.
Additionally, the Group’s percentage ownership in these vehicles can fluctuate on a daily basis according to the level of participation of the Group and third-parties. To avoid transitory or minor changes in fund holdings (which do not reflect the wider facts and circumstances of the Group’s involvement) resulting in binary changes in the consolidation conclusions, the Group takes into account the trend of ownership over a period of time. This is performed in line with the following principles: • Where the entity is managed by a Group asset manager, and the
• Where the entity is managed by a Group asset manager, and the Group’s ownership holding in the entity is between 30% and 40%, the facts and circumstances of the Group’s involvement in the entity are considered, in forming a judgement as to whether the Group has control over the entity. Considerations include the rights held by other parties, the Group’s rights to fees from the entity, the variability in the returns associated with the Group’s aggregate economic interest in the fund and the nature of the Group’s exposure to variability compared with that of other investors; and
• Where the entity is managed by a Group asset manager, and the Group’s ownership holding in the entity is less than 30%, the Group is judged to not have control over the entity.
Where the Group is deemed to control such vehicles, they are consolidated, with the interests of parties other than Aviva being classified as liabilities. These appear as ‘Net asset value attributable to unitholders’ in the consolidated statement of financial position. The interest of parties other than Aviva in the investment return on these funds appear as ‘Investment expense/(income) attributable to unitholders’ in the income statement.
The excess of the consideration transferred over the fair value of the net assets of the subsidiary acquired is recorded as goodwill (see accounting policy O below). Acquisition-related costs are expensed as incurred.
Associates and joint ventures Associates are entities over which the Group has significant influence. Significant influence is the power to participate in the financial and operating policy decisions of the investee, but is not control or joint control. Generally, it is presumed that the Group has significant influence if it has between 20% and 50% of voting rights. Joint ventures are joint arrangements whereby the Group and other parties that have joint control of the arrangement have rights to the net assets of the joint venture. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require unanimous consent of the parties sharing control. In a number of these, the Group’s share of the underlying assets and liabilities may be greater or less than 50% but the terms of the relevant agreements make it clear that control is not exercised. Such jointly controlled entities are referred to as joint ventures in these financial statements.
General insurance and health premiums written reflect business incepted during the year, and exclude any sales-based taxes or duties. Unearned premiums are those proportions of the premiums written in a year that relate to periods of risk after the statement of financial position date. Unearned premiums are calculated on either a daily or monthly pro rata basis. Premiums collected by intermediaries, but not yet received, are assessed based on estimates from underwriting or past experience, and are included in premiums written.
Deposits collected under investment contracts without a discretionary participation feature (non-participating contracts) are not accounted for through the income statement, except for the fee income (covered in accounting policy I) and the investment income attributable to those contracts, but are accounted for directly through the statement of financial position as an adjustment to the investment contract liability.
Initiation and other ‘front-end’ fees (fees that are assessed against the policyholder balance as consideration for origination of the contract) are charged on some non-participating investment and investment fund management contracts. For investment contracts measured at fair value, the front-end fees that relate to the provision of investment management services are deferred and recognised as the services are provided. Origination fees are recognised immediately where the sale of fund interests represent a separate performance obligation.
(J) Other fee and commission income Other fee and commission income consists primarily of fund management fees, distribution fees from mutual funds, commissions on reinsurance ceded, commission revenue from the sale of mutual fund shares and transfer agent fees for shareholder record keeping. Reinsurance commissions receivable are deferred in the same way as acquisition costs, as described in accounting policy X. All other fee and commission income is recognised over time as the services are provided.
The long-term business provisions are calculated separately for each life operation, based either on local regulatory requirements or existing local GAAP (at the later of the date of transition to IFRS or the date of the acquisition of the entity); and actuarial principles consistent with those applied in each local market. Each calculation represents a determination within a range of possible outcomes, where the assumptions used in the calculations depend on the circumstances prevailing in each life operation. The principal assumptions are disclosed in note 42(a). For the UK with-profits funds, FRS 27 required liabilities to be calculated on the realistic basis adjusted to remove the shareholders’ share of future bonuses. FRS 27 was grandfathered from UK regulatory requirements prior to the adoption of Solvency II. For UK non-profit insurance contracts, the liabilities are calculated using the gross premium valuation method. This method uses the amount of contractual premiums payable and includes explicit assumptions for interest and discount rates, mortality and morbidity, persistency and future expenses. These assumptions are set on a prudent basis, can vary by contract type and reflect current and expected future experience. These estimates depend upon the outcome of future events and may need to be revised as circumstances change. The liabilities are based on the UK regulatory requirements prior to the adoption of Solvency II, adjusted to remove certain regulatory reserves and margins in assumptions, notably for annuity business.
Liability adequacy At each reporting date, an assessment is made of whether the recognised long-term business provisions are adequate, using current estimates of future cash flows. If that assessment shows that the carrying amount of the liabilities (less related assets) is insufficient in light of the estimated future cash flows, the deficiency is recognised in the income statement by setting up an additional liability in the statement of financial position.
If these estimates show that the carrying amount of its insurance liabilities (less related deferred acquisition costs) is insufficient in light of the estimated future cash flows, the deficiency is recognised in the income statement by setting up an additional liability in the statement of financial position.
(N) Reinsurance The Group assumes and cedes reinsurance in the normal course of business, with retention limits varying by line of business. Premiums on reinsurance assumed are recognised as revenue in the same manner as they would be if the reinsurance were considered direct business, taking into account the product classification of the reinsured business.
The cost of reinsurance related to long-duration contracts is accounted for over the life of the underlying reinsured policies, using assumptions consistent with those used to account for these policies.
• Motor vehicles Three years, or lease term (up to useful life) if longer
The assets’ residual values, useful lives and method of depreciation are reviewed regularly, at least at each financial year end, and adjusted if appropriate. Where the carrying amount of an asset is greater than its estimated recoverable amount, it is written down immediately to its recoverable amount. Gains and losses on disposal of property and equipment are determined by reference to their carrying amount.
Financial assets and liabilities are offset and the net amount reported in the statement of financial position when there is a currently enforceable legal right to set off the recognised amounts and there is the ability and intention to settle on a net basis, or realise the asset and settle the liability simultaneously.
(T) Financial investments The Group classifies its investments as either FVTPL or AFS.
Debt securities are initially recorded at their fair value, which is taken to be amortised cost, with amortisation credited or charged to the income statement. Investments classified as trading, other than trading and AFS, are subsequently carried at fair value. Changes in the fair value of trading and other than trading investments are included in the income statement in the period in which they arise.
Impairment The Group reviews the carrying value of its AFS investments on a regular basis. If an AFS investment is deemed to be impaired, the impairment losses are recognised as a charge to the income statement in the period in which they occur. The following policies are used to determine the level of any impairment, some of which involve considerable judgement.
All derivatives are initially recognised in the statement of financial position at their fair value, which usually represents their cost. They are subsequently remeasured at their fair value. Fair values are obtained from quoted market prices or, if these are not available, by using valuation techniques such as discounted cash flow models or option pricing models. All derivatives are carried as assets when the fair values are positive and as liabilities when the fair values are negative. Premiums paid for derivatives are recorded as an asset on the statement of financial position at the date of purchase, representing their fair value at that date.
Hedge accounting Hedge accounting is applied to certain transactions which meet the criteria set out in IAS 39, in order to mitigate the Group’s exposure to risk. At the inception of the transaction, the Group documents the relationship between the hedging instrument and the hedged item, as well as the risk management objective and the strategy for undertaking the hedge transaction. The Group also documents its assessment of whether the hedge is expected to be, and has been, highly effective in offsetting the risk in the hedged item, both at inception and on an ongoing basis.
However, for the majority of mortgage loans, the Group has taken advantage of the fair value option under IAS 39 to present the mortgages, associated borrowings and derivative financial instruments at fair value, since they are managed as a portfolio on a fair value basis. This presentation provides more relevant information and eliminates any accounting mismatch that would otherwise arise from using different measurement bases for these three items. The fair values of these mortgages are estimated using discounted cash flow models, based on a risk-adjusted discount rate which reflects the risks associated with these products. They are revalued at each period end, with movements in their fair values being taken to the income statement.
Collateral received in the form of cash, which is not legally segregated from the Group, is recognised as an asset in the statement of financial position with a corresponding liability for the repayment in financial liabilities (see note 61). However, where the Group has a currently enforceable legal right of set-off and the ability and intent to settle net, the collateral liability and associated derivative balances are shown net. Non-cash collateral received is not recognised in the statement of financial position unless the transfer of the collateral meets the derecognition criteria from the perspective of the transferor. Such collateral is typically recognised when the Group either (a) sells or repledges these assets in the absence of default, at which point the obligation to return this collateral is recognised as a liability; or (b) the counterparty to the arrangement defaults, at which point the collateral is seized and recognised as an asset.
The defined benefit obligation is calculated by independent actuaries using the projected unit credit method. The pension obligation is measured as the present value of the estimated future cash outflows, using a discount rate based on market yields for highquality corporate bonds that are denominated in the currency in which the benefits will be paid and that have terms to maturity approximating to the terms of the related pension liability. The resultant net surplus or deficit recognised as an asset or liability on the statement of financial position is the present value of the defined benefit obligation at the end of the reporting period less the fair value of plan assets.
(AC) Income taxes The current tax expense is based on the taxable profits for the year, after any adjustments in respect of prior years. Tax, including tax relief for losses if applicable, is allocated over profits before taxation and amounts charged or credited to components of other comprehensive income and equity, as appropriate.
The rates enacted or substantively enacted at the statement of financial position date are used to value the deferred tax assets and liabilities.
Continuing operations – basic (pence per share) 48.1 62.7 Continuing operations – diluted (pence per share)2 47.8 62.5 1 The 2019 comparative results have been re-presented from those previously published to reclassify certain operations in Asia as discontinued operations as described in note 1. 2 Following a revision to the methodology to calculate the dilutive effect of share awards, the 2019 comparative amounts have been amended from those previously reported. See note 15 for more information.
The above consolidated income statement should be read in conjunction with the accounting policies and accompanying notes to the financial statements.
Share of other comprehensive income of joint ventures and associates 38 17 22 Foreign exchange rate movements 38, 40 131 (193) Aggregate tax effect – shareholder tax on items that may be reclassified subsequently to income statement 14(b) (11) 6
Owner-occupied properties – fair value gains 38 3 3 Remeasurements of pension schemes 39 (150) (867) Aggregate tax effect – shareholder tax on items that will not be reclassified subsequently to income statement 14(b) (22) 103
Total other comprehensive income, net of tax from continuing operations (17) (906)
Non-controlling interests From continuing operations 145 77 From discontinued operations 1 (1)
2,897 1,731 1 The 2019 comparative results have been re-presented from those previously published to reclassify certain operations in Asia as discontinued operations as described in note 1.
Adjusted for the following: Life business: Investment variances and economic assumption changes 9 174 654 Non-life business: Short-term fluctuation in return on investments 10(a) (64) 167 General insurance and health business: Economic assumption changes 10(a) (104) (54) Impairment of goodwill, joint ventures, associates and other amounts expensed 17(a), 20 (30) (15) Amortisation and impairment of intangibles acquired in business combinations 18 (76) (87) Amortisation and impairment of acquired value of in-force business 18 (278) (406) Profit/(loss) on the disposal and remeasurement of subsidiaries, joint ventures and associates 4(a) 725 (22) Other2 (34) (47)
Profit for the year 2,910 2,663 1 The 2019 comparative results have been re-presented from those previously published to reclassify certain operations in Asia as discontinued operations as described in note 1. 2 Other in 2020 includes a charge of £16 million relating to costs on contracts that have become onerous following the disposals of FPI, Singapore, Indonesia and Hong Kong. This is disclosed outside of Group adjusted operating profit as the onerous contracts arise as a result of disposal transactions which we consider to be strategic in nature. Also included is a charge of £18 million relating to the estimated additional liability arising in the UK defined benefit pension schemes as a result of the requirement to equalise members’ benefits for the effects of Guaranteed Minimum Pension (GMP) for former members. This is disclosed outside of Group adjusted operating profit as the additional liability arose as a consequence of a further High Court judgement in November 2020 in the case involving Lloyds Banking Group and does not reflect the financial performance of the Group for the year. Other in 2019 relates to a charge of £45 million in relation to a change in the discount rate used for estimating lump sum payments in settlement of bodily injury claims and a charge of £2 million relating to negative goodwill which arose on the acquisition of Friends First.
Reconciliation of Group adjusted operating profit to profit for the year continued Group adjusted operating profit can be further analysed into the following operating segments and by product and services (details of segments can be found in note 5): Products and services
Other Group activities — (3) — (19) (22) 2,743 722 85 (81) 3,469 Corporate Centre (250) Group debt costs and other interest (370) Group adjusted operating profit before tax attributable to shareholders’ profits from continuing operations (note 5) 2,849 Group adjusted operating profit before tax attributable to shareholders’ profits from discontinued operations 312 Group adjusted operating profit before tax attributable to shareholders’ profits 3,161
Balance at 1 January 980 200 10,257 (7) 814 (101) 5,065 500 17,708 977 18,685 Profit for the year — — — — — — 2,798 — 2,798 112 2,910 Other comprehensive income — — — — 221 (97) (171) — (47) 34 (13) Total comprehensive income for the year — — — — 221 (97) 2,627 — 2,751 146 2,897 Dividends and appropriations — — — — — — (280) — (280) — (280) Non-controlling interests share of dividends declared in the year — — — — — — — — — (30) (30) Reclassification of DCI to financial liabilities2 — — — — — — 1 (500) (499) — (499) Reserves credit for equity compensation plans — — — — — 37 — — 37 — 37 Shares issued under equity compensation plans 2 — 3 1 — (51) 46 — 1 — 1 Treasury shares held by subsidiary companies — — — — — — — — — — — Forfeited dividend income — — — — — — 2 — 2 — 2 Changes in non-controlling interests in subsidiaries — — — — — — 7 — 7 (61) (54) Change in equity accounted option — — — — — — — — — — — Transfer to profit on disposal of subsidiaries, joint ventures and associates — — — — (173) — — — (173) (26) (199) Aggregate tax effect – shareholder tax — — — — — — — — — — — Balance at 31 December 982 200 10,260 (6) 862 (212) 7,468 — 19,554 1,006 20,560 1 Capital reserves consist of share premium of £1,242 million, a capital redemption reserve of £44 million and a merger reserve of £8,974 million. 2 On 23 June 2020, notification was given that the Group would redeem the 5.9021% £500 million DCI. The instrument was reclassified as a financial liability of £499 million, representing its fair value, and the difference of £1 million charged to retained earnings. On 27 July 2020, the instrument was redeemed in full. See note 37 for further information.
Balance at 1 January 975 200 10,232 (15) 1,122 (279) 4,523 731 17,489 966 18,455 Adjustment at 1 January 2019 for adoption of IFRS 162 — — — — — — (110) — (110) — (110)
Balance at 1 January restated2 975 200 10,232 (15) 1,122 (279) 4,413 731 17,379 966 18,345 Profit for the year — — — — — — 2,548 — 2,548 115 2,663 Other comprehensive income — — — — (308) 178 (763) — (893) (39) (932) Total comprehensive income for the year — — — — (308) 178 1,785 — 1,655 76 1,731 Dividends and appropriations — — — — — — (1,244) — (1,244) — (1,244) Non-controlling interests share of dividends declared in the year — — — — — — — — — (63) (63) Reclassification of tier 1 notes to financial liabilities3 — — — — — — 21 (231) (210) — (210) Reserves credit for equity compensation plans — — — — — 62 — — 62 — 62 Shares issued under equity compensation plans 5 — 25 (5) — (62) 55 — 18 — 18 Treasury shares held by subsidiary companies — — — 13 — — — — 13 — 13 Forfeited dividend income — — — — — — 4 — 4 — 4 Changes in non-controlling interests in subsidiaries — — — — — — — — — (2) (2) Change in equity accounted option — — — — — — 22 — 22 — 22 Transfer to profit on disposal of subsidiaries, joint ventures and associates — — — — — — — — — — — Aggregate tax effect – shareholder tax — — — — — — 9 — 9 — 9
Balance at 31 December 980 200 10,257 (7) 814 (101) 5,065 500 17,708 977 18,685 1 Capital reserves consist of share premium of £1,239 million, a capital redemption reserve of £44 million and a merger reserve of £8,974 million. 2 The Group adopted IFRS 16 Leases from 1 January 2019. In line with the transition options available, prior period comparatives were not restated and the impact of the adoption was shown as an adjustment to opening retained earnings. 3 On 17 October 2019, notification was given that the Group would redeem the 6.875% £230 million tier 1 notes. The instrument was reclassified as a financial liability of £210 million, representing its fair value, and the difference of £21 million charged to retained earnings. On 21 November 2019, the instruments were redeemed in full.
Ordinary share capital 33 982 980 Preference share capital 36 200 200
Share premium 33(b) 1,242 1,239 Capital redemption reserve 33(b) 44 44 Merger reserve D 8,974 8,974 10,260 10,257 Treasury shares 35 (6) (7) Currency translation reserve 38 862 814 Other reserves 38 (212) (101) Retained earnings 39 7,468 5,065 Equity attributable to shareholders of Aviva plc 19,554 17,208 Direct capital instrument and tier 1 notes 37 — 500
Equity excluding non-controlling interests 19,554 17,708 Non-controlling interests 40 1,006 977
The above consolidated statement of financial position should be read in conjunction with the accounting policies and accompanying notes to the financial statements.
Cash flows from investing activities Acquisitions of, and additions to, subsidiaries, joint ventures and associates, net of cash acquired 58(b) (11) (19) Disposals of subsidiaries, joint ventures and associates, net of cash transferred 58(c) 12 12 Purchases of property and equipment (97) (63) Proceeds on sale of property and equipment 3 4 Purchases of intangible assets (72) (57)
The above consolidated statement of cash flows should be read in conjunction with the accounting policies and accompanying notes to the financial statements.
Strategic report Governance IFRS financial statements Other information 1 – Changes to comparative amounts (a) Discontinued operations In the second half of 2020, Aviva has announced the completion of the disposal of its controlling interest in Friends Provident International Limited (FPI), its entire shareholdings in the Hong Kong and Indonesia joint ventures and its majority shareholding in Aviva Singapore. The sale of its entire shareholding in Aviva Vietnam Life Insurance Limited has been agreed and is subject to regulatory approval, expected in 2021.
In accordance with IFRS 5 Non-current assets held for sale and discontinued operations, the results of these operations have been reclassified as discontinued operations in these consolidated financial statements, as they represent an exit from a single geographical area of business. Profit from discontinued operations for the year ended 31 December 2020 has been shown as a single line in the consolidated income statement and net cash flows from discontinued operations have been shown as a single line in the consolidated statement of cash flows, with 2019 comparatives re-presented accordingly. Further analysis of the results from discontinued operations is provided in note 4(d).
2 – Significant events in the current reporting period On 11 March 2020, the World Health Organization declared the outbreak of a strain of novel coronavirus disease, COVID-19, a global pandemic. Governments in affected areas have imposed a number of measures designed to contain the outbreak, including business closures, travel restrictions, stay at home orders and prohibition of gatherings and events. The spread of COVID-19 has had a significant impact on the global economy, causing volatile equity markets and falls in interest rates.
In our interim results announcement on 6 August 2020, we assessed the emerging situation and provided details of the significant impacts of COVID-19 on the Group’s results for the first half of 2020. The Group has been impacted by the COVID-19 pandemic through its operations, insurance products and assets holdings as well as ongoing difficult conditions in the global financial markets and the wider macroeconomic environment. The effects of COVID-19 continue to present unprecedented uncertainty that may adversely impact the results of the Group. However, the strength of the Group’s capital and liquidity means it is well positioned to manage this crisis and continue to support customers.
Business and performance (i) Long-term business The Group’s life insurance business is long-term in nature. As such the ultimate impact of COVID-19 has a high degree of uncertainty and will emerge over a long period of time. The reported results include a net £16 million increase in long-term insurance contract liabilities as a result of the changes in non-economic assumptions for COVID-19, noting that this includes the offsetting impacts of an increase attributable to mortality and a decrease attributable to longevity assumptions. The valuation of the Group’s long-term insurance liabilities is closely linked to market movements and therefore the impact of COVID-19 on global markets has had a consequential impact on the valuation of the Group’s long-term business. It is not possible however to disaggregate the impact of the pandemic from wider economic movements in the period, and as such quantification of the economic impact of COVID-19 on long term insurance contract liabilities is not possible. The effect of COVID-19 on assumptions and estimates for the long-term business is set out in note 47.
Fair value measurement In addition to the increased volatility in financial markets, the economic disruption caused by COVID-19 has led to declines in the level of trading in some asset classes giving rise to additional valuation uncertainty. Information on the fair value of the Group’s assets and liabilities and the methodology for calculating this fair value can be found within note 24.
Strategic report Governance IFRS financial statements Other information 2 – Significant events in the current reporting period – continued Capital management The Group’s balance sheet exposure and solvency position has been reviewed and actions taken to protect the solvency position and further reduce the sensitivity to economic shocks. The estimated Solvency II regulatory own funds is £29.3 billion at 31 December 2020 (2019: £28.3 billion) and the estimated Solvency II shareholder own funds is £25.8 billion (2019: £24.5 billion). Further information on Group capital management can be found within note 57.
(a) Acquisitions On 5 June 2020, the Group completed the acquisition of a further 40% shareholding in Wealthify, a Group subsidiary, for a consideration of £11 million. Following the transaction, Wealthify is now a wholly owned subsidiary.
(b) Disposals and remeasurements The profit on the disposal and remeasurement of subsidiaries, joint ventures and associates comprises: £m
The net gain on the disposal and remeasurement of subsidiaries, joint ventures and associates during the year of £725 million predominantly relates to the disposals of Friends Provident International Limited (FPI), Singapore, Indonesia and Hong Kong. In 2019, the loss on disposal of £22 million comprised of £6 million of gains relating to small disposals and a £28 million remeasurement loss relating to FPI.
Net consideration 298 1,506 1,804 Reserves recycled to the income statement — 160 160
The classification as held for sale has resulted in a loss on remeasurement of £118 million in 2017, £13 million in 2018, £28 million in 2019 and an additional remeasurement loss of £19 million at 30 June 2020. The transaction completed on 16 July 2020.
(iii) Other On 6 March 2020, Aviva announced the sale of its entire shareholding in its joint venture in Indonesia, PT Astra Aviva Life, to the joint venture partner, PT Astra International Tbk. The consideration received was INR 1,389 billion (approximately £72 million). The transaction completed on 16 November 2020.
On 20 November 2019, Aviva announced the sale of its entire 40% shareholding in its Hong Kong joint venture (Blue) to Hillhouse AV Holdings Limited for HKD 450 million (approximately £44 million). The transaction completed on 10 December 2020.
Strategic report Governance IFRS financial statements Other information 4 –Strategic transactions continued (c) Assets and liabilities of operations classified as held for sale The assets and liabilities of operations classified as held for sale as at 31 December 2020 are as follows: £m
Assets and liabilities of operations classified as held for sale as at 31 December 2020 relate to the expected disposal of the Group’s operations in Vietnam and of Aviva Vita S.p.A. (Aviva Vita). See below for further details. Assets and liabilities classified as held for sale at 31 December 2019 related primarily to FPI and Hong Kong.
(d) Discontinued operations In the second half of 2020, Aviva has announced the completion of the disposal of its controlling interest in FPI, its entire shareholdings in the Hong Kong and Indonesia joint ventures and its majority shareholding in Aviva Singapore. The sale of its entire shareholding in Aviva Vietnam Life Insurance Limited has been agreed and is subject to regulatory approval, expected in 2021.
Further analysis of the results and cash flows for the discontinued operations presented in the consolidated financial statements are analysed below.
Strategic report Governance IFRS financial statements Other information 4 – Strategic transactions continued (d) Discontinued operations continued Income Statement
Net earned premiums 1,287 1,137 Net investment income 119 966 Other income 119 205 Share of loss after tax of joint ventures and associates (12) (9) Profit/(loss) on the disposal and remeasurement of subsidiaries, joint ventures and associates 713 (28)
Claims and benefits paid, net of recoveries from reinsurers (749) (1,004) Change in insurance liabilities, net of reinsurance (265) (32) Change in investment contract provisions 342 (217) Change in unallocated divisible surplus (161) (369) Other expenses (445) (537) Total expenses (1,278) (2,159)
Profit before tax from discontinued operations 948 112 Tax attributable to policyholders’ returns (44) (58)
Profit before tax attributable to shareholders’ profits from discontinued operations 904 54 Tax expense (36) (11) Profit for the year from discontinued operations 868 43
Total net cash from operating activities 102 119 Cash proceeds from disposal of subsidiaries, joint ventures and associates 1,208 — Less: Net cash and cash equivalents divested with subsidiaries (1,065) — Other investing activities 4 (27) Total net cash from investing activities 147 (27) Total net cash (used in)/from financing activities (4) 20
(f) Subsequent events For the following subsequent events, management undertook an assessment of the facts and circumstances at 31 December 2020 and concluded that for each of the transactions, the IFRS 5 criteria for classification as held for sale were not met at that date.
(i) Aviva France On 23 February 2021, Aviva announced it had approved the sale of its entire shareholding in Aviva France to Aéma Groupe for cash consideration of €3.2 billion (approximately £2.9 billion), including €1.1 billion (approximately £1.0 billion) in respect of Aviva France’s intra-group debt. The transaction will significantly strengthen the Group’s capital and liquidity on completion, and covers the French life, general insurance, and asset management businesses and the 75% shareholding in L’Union Financière de France, a wealth manager listed on the Paris Bourse. The transaction is subject to consultation and customary closing conditions, including regulatory approval, and is expected to complete in the second half of 2021. The transaction would have decreased the Group’s IFRS net asset value by approximately £0.5 billion, increased Solvency II surplus on a shareholder basis by approximately £0.8 billion and strengthened the Solvency II cover ratio on a shareholder basis by approximately 22 percentage points as at 31 December 2020.
(ii) AvivaSA (Turkey) On 24 February 2021, Aviva announced the sale of its entire 40% shareholding in its joint venture in Turkey, AvivaSA Emeklilik ve Hayat AS (AvivaSA), to Ageas Insurance International N.V. for cash consideration of £122 million. The transaction is subject to customary closing conditions, including regulatory approval, and is expected to complete in 2021.
Strategic report Governance IFRS financial statements Other information 4 – Strategic transactions continued (f) Subsequent events continued (iii) Aviva Italy On 3 March 2021, the Group entered into agreements to sell its remaining Italian Life and General Insurance businesses (Aviva Italy). The sale of the remaining Life business primarily comprises the entire 100% shareholding in Aviva Life S.p.A. and the 51% shareholding in Aviva S.p.A. to CNP Assurances for cash consideration of €543 million (approximately £486 million). The sale of the General Insurance business comprises the entire 100% shareholding in Aviva Italia S.p.A. to Allianz for cash consideration of €330 million (approximately £295 million). The transactions are subject to customary closing conditions, including regulatory and anti-trust approvals, and are expected to complete in the second half of 2021. The transactions would have increased the Group’s IFRS net asset value by approximately £0.2 billion, increased Solvency II surplus on a shareholder basis by approximately £0.2 billion and strengthened the Solvency II cover ratio on a shareholder basis by approximately 7 percentage points as at 31 December 2020. Following completion of these transactions, Aviva will retain Aviva Italia Holdings S.p.A, which will have no underlying operating insurance entities.
5 – Segmental information The Group’s results can be segmented either by activity or by geography. Our primary reporting format is along market reporting lines, with supplementary information being given by business activity. This note provides segmental information on the consolidated income statement. At our 2020 interim results announcement on 6 August 2020, we announced our strategic priorities to focus on building and extending our leadership in the UK, Ireland and Canada (Core markets), and managing International businesses for long-term shareholder value (Manage-for-value markets). As a result, the financial performance of our ‘Core markets’ is presented as UK & Ireland Life, General Insurance (which brings together our UK & Ireland businesses and Canada) and Aviva Investors. Our ‘Manage-for-value markets’ consists of our other international businesses: France, Italy, Poland and Other. The 2019 comparative results have been restated (see note 1) from those previously published to reclassify operations to reflect these changes. Segmental information is presented for continuing operations only, an analysis of results from discontinued operations is presented in note 4(d).
(a) Operating segments UK & Ireland Life The principal activities of our UK & Ireland Life operations are life insurance, long-term health and accident insurance, savings, pensions and annuity business.
General Insurance UK & Ireland The principal activities of our UK & Ireland General Insurance operations are the provision of insurance cover to individuals and businesses, for risks associated mainly with motor vehicles, property and liability (such as employers’ liability and professional indemnity liability) and medical expenses.
Canada The principal activity of our Canada General Insurance operation is the provision of personal and commercial lines insurance products principally distributed through insurance brokers.
Other Our other continuing activities principally comprise our long-term business operations in China, India and Singapore and our life operations in Turkey. These have been aggregated into a single reporting segment in line with IFRS 8 Operating Segments.
(a) (i) Segmental income statement for the year ended 31 December 2020
Gross written premiums 8,921 5,066 3,204 — 6,883 4,994 643 — — 29,711 Premiums ceded to reinsurers (2,477) (428) (143) — (86) (36) (12) (2) — (3,184) Internal reinsurance revenue — — — — — — — 1 (1) — Premiums written net of reinsurance 6,444 4,638 3,061 — 6,797 4,958 631 (1) (1) 26,527 Net change in provision for unearned premiums (2) (55) (99) — (28) (11) 2 — — (193)
Net earned premiums 6,442 4,583 2,962 — 6,769 4,947 633 (1) (1) 26,334 Fee and commission income 984 114 24 320 305 89 99 — 1 1,936 7,426 4,697 2,986 320 7,074 5,036 732 (1) — 28,270 Net investment income 28,247 252 171 61 6,267 3,218 155 1 1,239 39,611 Inter-segment revenue — — — 247 — — — — — 247 Share of profit/(loss) after tax of joint ventures and associates 20 — — — 48 — — 55 (29) 94 Profit on the disposal and remeasurement of subsidiaries, joint ventures and associates — — 6 — — — — — — 6
Profit/(loss) before tax 2,825 338 211 91 410 227 198 44 (523) 3,821 Tax attributable to policyholders’ returns (501) — — — — — — — — (501)
Adjusting items: Reclassification of unallocated interest 54 (8) 33 5 46 — — — (130) — Life business: Investment variances and economic assumption changes (735) — — — 84 (3) (4) (17) (8) (683) Non-life business: Short-term fluctuation in return on investments — (105) (64) — (95) (30) (5) — 132 (167) General insurance and health business: Economic assumption changes — 27 2 — 24 — — — 1 54 Impairment of goodwill, joint ventures, associates and other amounts expensed — — 2 — — — — 9 — 11 Amortisation and impairment of intangibles acquired in business combinations 54 — 13 — 2 1 5 1 1 77 Amortisation and impairment of acquired value of in-force business 275 — — — 2 — — — 3 280 Profit on the disposal and remeasurement of subsidiaries, joint
General insurance and health Our general insurance and health business provides insurance cover to individuals and to small and medium-sized businesses, for risks associated mainly with motor vehicles, property and liability, such as employers’ liability and professional indemnity liability, and medical expenses.
Other Other includes service companies, head office expenses, such as Group treasury and finance functions, and certain financing costs and taxes not allocated to business segments and elimination entries for certain inter-segment transactions and group consolidation adjustments.
Gross written premiums2 18,288 10,727 — — 29,015 Premiums ceded to reinsurers (2,948) (690) — — (3,638) Premiums written net of reinsurance 15,340 10,037 — — 25,377 Net change in provision for unearned premiums — (123) — — (123) Net earned premiums 15,340 9,914 — — 25,254 Fee and commission income 1,423 126 321 76 1,946 16,763 10,040 321 76 27,200 Net investment income 18,213 365 1 751 19,330 Inter-segment revenue — — 219 — 219 Share of profit/(loss) after tax of joint ventures and associates 16 (4) — 15 27 Profit on the disposal and remeasurement of subsidiaries, joint ventures and associates — 12 — — 12 Segmental income 34,992 10,413 541 842 46,788 Claims and benefits paid, net of recoveries from reinsurers (15,345) (5,700) — — (21,045) Change in insurance liabilities, net of reinsurance (6,073) (567) — — (6,640) Change in investment contract provisions (6,413) — — — (6,413) Change in unallocated divisible surplus (1,528) — — — (1,528) Fee and commission expense (1,290) (2,794) (27) (50) (4,161) Investment expense attributable to unitholders 9 — — (588) (579) Other expenses (1,347) (751) (430) (509) (3,037) Inter-segment expenses (206) (13) — — (219) Finance costs (139) (10) — (404) (553) Segmental expenses (32,332) (9,835) (457) (1,551) (44,175) Profit/(loss) before tax 2,660 578 84 (709) 2,613 Tax attributable to policyholders’ returns (43) — — — (43) Profit/(loss) before tax attributable to shareholders’ profits 2,617 578 84 (709) 2,570 Adjusting items 126 144 1 8 279 Group adjusted operating profit/(loss) before tax attributable to shareholders’ profits 2,743 722 85 (701) 2,849 1 General insurance and health business segment includes gross written premiums of £100 million relating to health business. The remaining business relates to property and liability insurance. 2 Gross written premiums include inward reinsurance premiums assumed from other companies amounting to £637 million, which all relates to property and liability insurance.
Claims and benefits paid, net of recoveries from reinsurers (15,774) (6,318) — — (22,092) Change in insurance liabilities, net of reinsurance (5,540) (130) — — (5,670) Change in investment contract provisions (23,878) — — — (23,878) Change in unallocated divisible surplus (3,616) — — — (3,616) Fee and commission expense (1,151) (2,653) (27) (93) (3,924) Investment expense attributable to unitholders (157) — — (1,198) (1,355) Other expenses (1,628) (622) (445) (362) (3,057) Inter-segment expenses (237) (13) — — (250) Finance costs (162) (10) — (396) (568)
Group adjusted operating profit/(loss) before tax attributable to shareholders’ profits 2,799 652 96 (614) 2,933 1 The 2019 comparative results have been re-presented from those previously published to reclassify certain operations in Asia as discontinued operations as described in note 1. 2 General insurance and health business segment includes gross written premiums of £704 million relating to health business. The remaining business relates to property and liability insurance. 3 Gross written premiums include inward reinsurance premiums assumed from other companies amounting to £62 million, which all relates to property and liability insurance.
General insurance and health 10,727 10,653 29,015 29,711 Less: premiums ceded to reinsurers (3,638) (3,184) Gross change in provision for unearned premiums (150) (216) Reinsurers’ share of change in provision for unearned premiums 27 23 Net change in provision for unearned premiums (123) (193)
Fee and commission income Fee income from investment contract business 863 886 Fund management fee income 439 437 Other fee income 436 426 Reinsurance commissions receivable 40 31 Other commission income 162 175 Net change in deferred revenue 6 (19)
From financial instruments designated as trading and other than trading 5,604 5,819 From AFS investments and financial instruments at amortised cost 19 49 5,623 5,868 Dividend income 3,434 5,568 Other income from investments designated as trading
Gains arising in the year 1,242 1,839 Gains/(losses) recognised now realised 238 (1,393)
Realised gains on disposals 4,081 8,847 Unrealised gains and losses (see accounting policy K)
Gains recognised in prior periods as unrealised in equity 7 19
Total income 48,795 70,252 1 The 2019 comparative results have been re-presented from those previously published to reclassify certain operations in Asia as discontinued operations as described in note 1.
Claims and benefits paid, net of recoveries from reinsurers 21,045 22,092
Change in insurance liabilities Change in insurance liabilities (note 41(b)) 8,121 6,434 Change in reinsurance asset for insurance provisions (note 41(b)) (1,481) (764)
Change in investment contract provisions Investment expense allocated to investment contracts 5,783 14,972 Other changes in provisions
Participating investment contracts (note 44(c)(i)) 405 7,365 Non-participating investment contracts 225 1,550
Change in reinsurance asset for investment contract provisions — (9) Change in investment contract provisions 6,413 23,878
Change in unallocated divisible surplus 1,528 3,616 Fee and commission expense Acquisition costs
Commission expenses for insurance and participating investment contracts 2,718 2,669 Change in deferred acquisition costs for insurance and participating investment contracts (207) (161) Deferrable costs for non-participating investment contracts 32 39 Other acquisition costs 1,058 976 Change in deferred acquisition costs for non-participating investment contracts 98 (71)
Impairments Net impairment on loans 2 4 Net impairment on financial investments 1 — Net impairment on receivables and other financial assets (7) 10 Net impairment on non-financial assets (1) —
Expenses from continuing operations 43,956 64,160 Expenses from discontinued operations 1,278 2,159 Total expenses 45,234 66,319 1 The 2019 comparative results have been re-presented from those previously published to reclassify certain operations in Asia as discontinued operations as described in note 1.
Strategic report Governance IFRS financial statements Other information 8 – Finance costs This note analyses the interest costs on our borrowings (which are described in note 52) and similar charges. Finance costs comprise: £m
9 – Life business investment variances and economic assumption changes (a) Definitions Group adjusted operating profit for life business is based on expected long-term investment returns on financial investments backing shareholder funds over the period, with consistent allowance for the corresponding expected movements in liabilities. Group adjusted operating profit includes the effect of variance in experience for operating items, such as mortality, persistency and expenses, and the effect of changes in operating assumptions. Changes due to economic items, such as market value movements and interest rate changes, which give rise to variances between actual and expected investment returns, and the impact of changes in economic assumptions on liabilities, are disclosed separately outside Group adjusted operating profit, in investment variances and economic assumption changes.
(b) Methodology The expected investment returns and corresponding expected movements in life business liabilities are calculated separately for each principal life business unit.
The actual investment return is affected by differences between the actual and expected funds under management and changes in asset mix, as well as movements in interest rates. To the extent that these differences arise from the operating experience of the life business, or management decisions to change asset mix, the effect is included in the Group adjusted operating profit. The residual difference between actual and expected investment return is included in investment variances, outside Group adjusted operating profit but included in profit before tax attributable to shareholders’ profits.
Strategic report Governance IFRS financial statements Other information 9 – Life business investment variances and economic assumption changes continued (c) Assumptions The expected rate of investment return is determined using consistent assumptions at the start of the period between operations, having regard to local economic and market forecasts of investment return and asset classification under IFRS.
The impact of this change is an increase of £12 million to the expected return on the life business over 2020.
(d) Investment variances and economic assumption changes The investment variances and economic assumption changes excluded from the life adjusted operating profit are as follows: Life business 2020 £m
At 31 December 2019 we included a specific allowance for the possible adverse impacts of the UK’s exit from the European Union on UK commercial and residential property, which we have now removed. Our future property growth assumptions are reviewed on a quarterly basis and as at 31 December 2020 they include a cumulative 5-year growth assumption, from 2021-25, of -1% for UK commercial property (with variation by sector) and 4% for UK residential property.
Investment variance and economic assumption changes in 2019 was primarily due to the UK where there was a positive variance as a result of a reduction in yields, a narrowing of fixed income spreads and a consequent impact from economic assumption changes, including an alignment of methodology across the UK, partially offset by the impact of increases in equities. The impact of yields and equities reflect that we hedge on an economic rather than on an IFRS basis.
Short-term fluctuations in investment return (see (d) below) (64) 167 Economic assumption changes (see (e) below) (104) (54)
Strategic report Governance IFRS financial statements Other information 10 – Non-life business: short-term fluctuations in return on investments continued (b) Methodology continued The long-term rate of investment return is determined using consistent assumptions between operations, having regard to local economic and market forecasts of investment return. The allocated long-term return for other investments (including debt securities) is the actual income receivable for the year. Actual income and long-term investment return both contain the amortisation of the discounts/premium arising on the acquisition of fixed income securities. For other operations, the long-term return reflects assets backing non-life business held in Group centre investments.
The impact of realised and unrealised gains and losses on Group centre investments, including the centre hedging programme which is designed to economically protect the total Group’s capital against adverse equity and foreign exchange movements, is included in shortterm fluctuations on other operations.
United Kingdom 4.5 4.9 3.0 3.4 France1 4.5 4.3 3.5 2.8 Other eurozone 3.7 4.3 2.2 2.8 Canada 5.7 6.0 4.2 4.5 1 In light of the current unprecedented low interest rates, the expected investment return on equity and property in France have been determined taking into account local economic and market forecasts of the long-term return.
The impact of this change is an increase of £5 million to the expected return on the general insurance business over 2020.
Analysed between: Long-term investment return, reported within Group adjusted operating profit 341 399 Short-term fluctuation in investment return, reported outside Group adjusted operating profit General insurance and health (15) 296 Other operations1 (49) (129) (64) 167 277 566 1 Other operations represents short-term fluctuations on assets backing non-life business in Group centre investments, including the centre hedging programme.
(e) Economic assumption changes In the general insurance and health business, there is a negative impact of £104 million (2019: £54 million negative) primarily as a result of a decrease in the interest rates used to discount claims reserves for both periodic payment orders (PPOs) and latent claims.
Continuing operations UK & Ireland Life 8,746 9,022 8,860 9,312 UK & Ireland General Insurance 7,817 7,759 7,942 7,964 Canada 4,163 4,264 4,198 4,338 Aviva Investors 1,483 1,495 1,492 1,485 Manage-for-value
Profit sharing and incentive plans 185 193 Equity compensation plans 48 62 Termination benefits 19 34 Staff costs from continuing operations 1,857 1,944 Staff costs from discontinued operations 73 92
Total staff costs 1,930 2,036 12 – Directors Information concerning individual directors’ emoluments, interests and transactions is given in the Directors’ Remuneration report in the ‘Corporate governance’ section of this report. For the purposes of the disclosure required by Schedule 5 to the Companies Act 2006, the total aggregate emoluments of the directors in respect of 2020 was £5.0 million (2019: £7.0 million). Employer contributions to pensions for executive directors for qualifying periods were £nil (2019: £18,813). The aggregate net value of share awards granted to the directors in the period was £6.8 million (2019: £8.0 million). The net value has been calculated by reference to the closing middle market price of an ordinary share at the date of grant. During the year, no share options were exercised by directors (2019: no share options).
Total audit fees 15.5 15.0 Audit related assurance 4.9 4.6 Other assurance services 3.4 0.7
Fees payable to PwC LLP, BDO LLP, Mazars LLP and their associates for services to Group companies classified as continuing operations 24.5 21.1
Total fees payable to PwC LLP and its associates for services to Group companies 0.8 1.6 1 The 2019 comparative amounts have been re-presented from those previously published to reclassify the amounts relating to certain operations in Asia as discontinued operations as described in note 1.
Total tax charged to income statement from continuing operations 571 1,201 Total tax charged to income statement from discontinued operations 80 69
(ii) The Group, as a proxy for policyholders in the UK, Ireland and Singapore, is required to record taxes on investment income and gains each year. Accordingly, the tax benefit or expense attributable to UK, Ireland and Singapore life insurance policyholder returns is included in the tax charge. The tax charge attributable to policyholder returns included in the charge above is £87 million (2019: £559 million) of which £43 million (2019: £501 million) relates to continuing operations and £44 million (2019: £58 million) relates to discontinued operations.
(iv) Unrecognised tax losses and temporary differences of previous years were used to reduce the current tax expense and deferred tax charge by £6 million and £11 million (2019: £nil and £11 million), respectively.
Continuing operations Long-term business technical provisions and other insurance items (339) (1,241) Deferred acquisition costs 16 4 Unrealised gains on investments 343 1,554 Pensions and other post-retirement obligations (2) 21 Unused losses and tax credits (32) 13 Subsidiaries, associates and joint ventures 6 4 Intangibles and additional value of in-force long-term business (23) (63) Provisions and other temporary differences 18 46
Current tax from continuing operations In respect of pensions and other post-retirement obligations (34) (49) In respect of foreign exchange movements 9 (10)
In respect of pensions and other post-retirement obligations 55 (56) In respect of fair value gains on owner-occupied properties 1 1 In respect of unrealised gains on investments 2 5
(c) Tax credited to equity Tax credited directly to equity in the year in respect of coupon payments on the direct capital instrument and tier 1 notes amounted to £nil (2019: £9 million).
(d) Tax reconciliation The tax on the Group’s profit before tax differs from the theoretical amount that would arise using the tax rate of the home country of the Company as follows: Shareholder £m Policyholder £m Shareholder £m Policyholder £m
15 – Earnings per share This note shows how to calculate earnings per share on profit attributable to ordinary shareholders, based both on the present shares in issue (the basic earnings per share) and the potential future shares in issue, including conversion of share options granted to employees (the diluted earnings per share). We have also shown the same calculations based on our Group adjusted operating profit as we believe this gives an important indication of operating performance. Consideration of both these measures gives a full picture of the performance of the business in the period. The comparative amounts in (a) and (b) have been re-presented from those previously published to reclassify certain operations in Asia as discontinued operations as described in note 1.
(a) Basic earnings per share (i) The profit attributable to ordinary shareholders is: Group adjusted operating profit £m
Profit attributable to ordinary shareholders 2,385 369 2,754 2,367 130 2,497
Strategic report Governance IFRS financial statements Other information 15 – Earnings per share continued (a) Basic earnings per share continued (ii) Basic earnings per share is calculated as follows: Before tax £m
Profit attributable to ordinary shareholders 3,474 2,754 70.2 3,374 2,497 63.8 1 DCI includes the direct capital instrument and tier 1 notes. 2 Group adjusted operating earnings per share from continuing operations and discontinued operations is 60.8p (2019: 60.5p).
Continuing operations Profit attributable to ordinary shareholders 1,886 3,925 48.1 2,454 3,911 62.7 Dilutive effect of share awards and options — 19 (0.3) — 14 (0.2)
Diluted earnings per share from continuing operations 1,886 3,944 47.8 2,454 3,925 62.5 Discontinued operations Profit attributable to ordinary shareholders 868 3,925 22.1 43 3,911 1.1 Dilutive effect of share awards and options — 19 (0.1) — 14 —
Diluted earnings per share 2,754 3,944 69.8 2,497 3,925 63.6 1 Following a revision to the methodology to correctly allow for unvested share options in the calculation of the dilutive effect of share awards, the 2019 comparative amounts have been amended from those previously reported.
Continuing operations Group adjusted operating profit attributable to ordinary shareholders 2,111 3,925 53.8 2,144 3,911 54.8 Dilutive effect of share awards and options — 19 (0.3) — 14 (0.2)
Diluted group adjusted operating profit per share from continuing operations 2,111 3,944 53.5 2,144 3,925 54.6
Discontinued operations Group adjusted operating profit attributable to ordinary shareholders 274 3,925 7.0 223 3,911 5.7 Dilutive effect of share awards and options — 19 — — 14 —
Diluted group adjusted operating profit per share 2,385 3,944 60.5 2,367 3,925 60.3 1 Following a revision to the methodology to correctly allow for unvested share options in the calculation of the dilutive effect of share awards, the 2019 comparative amounts have been amended from those previously reported.
Ordinary dividends declared and charged to equity in the period Final 2019 – 21.40 pence per share, withdrawn on 8 April 2020 — — Final 2018 – 20.75 pence per share, paid on 30 May 2019 — 812 Second interim 2019 – 6.00 pence per share, paid on 24 September 2020 236 — Interim 2019 – 9.50 pence per share, paid on 26 September 2019 — 372 236 1,184 Preference dividends declared and charged to equity in the period 17 17 Coupon payments on DCI and tier 1 notes 27 43
On 21 January 2021, an interim dividend of 7.00 pence per ordinary share was paid in respect of the 2020 financial year, amounting to £275 million, and will be accounted for as an appropriation of retained earnings in the year ending 31 December 2021. In respect of the 2019 financial year, two interim dividends were paid: 9.50 pence per ordinary share, amounting to £372 million, on 26 September 2019, accounted for as an appropriation of retained earnings in the year ended 31 December 2019, and a second payment of 6.00 pence per ordinary share, amounting to £236 million, on 24 September 2020, accounted for as an appropriation of retained earnings in the year ended 31 December 2020.
17 – Goodwill This note analyses the changes to the carrying amount of goodwill during the year and details the results of our impairment testing on both goodwill and intangible assets with indefinite lives.
Gross amount At 1 January 1,968 1,991 Acquisitions and additions — 4 Disposals (55) (5) Foreign exchange rate movements 8 (22)
At 31 December 1,921 1,968 Accumulated impairment At 1 January (113) (119) Impairment charges (16) (6) Disposals 16 — Foreign exchange rate movements (3) 12
Disposals in 2020 relate to the disposals of FPI, Singapore and a small disposal in Canada. Disposals in 2019 relate to a small disposal in Canada.
The total impairment of goodwill in 2020 is a charge of £16 million (2019: £6 million) comprised of impairments of goodwill relating to businesses in Canada. Impairment tests on goodwill were conducted as described in note 17(b) below.
Strategic report Governance IFRS financial statements Other information 17 – Goodwill continued (b) Goodwill allocation and impairment testing A summary of the goodwill and intangibles with indefinite useful lives allocated to groups of cash generating units (CGUs) is presented below.
Results of impairment testing Management’s impairment review of the Group’s cash generating units identified the need to impair goodwill by a total amount of £16 million which relates to two different cash generating units within the Canada operating segment. This impairment is due to current and forecast performance of the related cash generating units being below the original financial plan.
Gross amount At 1 January 2019 2,692 2,726 1,623 134 7,175 Additions and transfers — — 136 2 138 Disposals — — (36) (1) (37) Foreign exchange rate movements (21) (1) (6) (7) (35) At 31 December 2019 2,671 2,725 1,717 128 7,241 Additions and transfers — — 76 — 76 Disposals (108) (1,295) (187) — (1,590) Foreign exchange rate movements 18 2 1 6 27 At 31 December 2020 2,581 1,432 1,607 134 5,754 Accumulated amortisation At 1 January 2019 (1,247) (1,081) (703) — (3,031) Amortisation for the year (180) (226) (212) — (618) Disposals and transfers — — 28 — 28 Foreign exchange rate movements 18 1 — — 19
Strategic report Governance IFRS financial statements Other information 18 – Acquired value of in-force business (AVIF) and intangible assets continued (a) Acquired value of in-force business continued In 2020, an impairment charge of £19 million (2019: £28 million) was recognised in relation to the AVIF on non-participating investment contracts relating to FPI, to write down the AVIF balance to its recoverable amount measured at the estimated fair value less costs to sell.
Less: Joint venture classified as held for sale — — — — (8) (8)
Ascot Real Estate Investments LP Property management UK 50.00% 50.00% 2-10 Mortimer Street Limited Partnership Property management UK 50.00% 50.00% Aviva-COFCO Life Insurance Co. Ltd Life insurance China 50.00% 50.00% Aviva Singlife Holdings Pte. Ltd Insurance holding company Singapore 25.95% — PT Astra Aviva Life Life and Health insurance Indonesia — 50.00% Aviva Life Insurance Company Limited Life insurance Hong Kong — 40.00% AvivaSA Emeklilik ve Hayat A.S Life insurance Turkey 40.00% 40.00%
(a) Carrying amount and details of associates (i) The movements in the carrying amount comprised: Equity interests £m
Share of results after tax 29 76 Impairment (13) (9) Share of profit after tax 16 67 Additions 3 2 Disposals (38) — Reduction in Group interest (3) (1) Dividends received from associates (18) (54) Foreign exchange rate movements (1) (14)
Disposals of £38 million represents the Group’s interest in Lend Lease JEM Partners Fund Limited which formed part of the sale of a majority shareholding in Aviva Singapore, as set out in note 4(b).
The Group’s share of total comprehensive income related to associates is £16 million (2019: £67 million).
(ii) No associates are considered to be material from a Group perspective (2019: none). All investments in principal associates are held by subsidiaries. The Group’s principal associates are as follows: Proportion of ownership interest
At 31 December 2019 349 1,185 — 4 175 296 2,009 Additions 20 65 — 10 5 7 107 Disposals (11) (31) — — (82) (42) (166) Fair value losses (2) — — — — — (2) Foreign exchange rate movements 15 (3) — — 3 7 22 At 31 December 2020 371 1,216 — 14 101 268 1,970 Depreciation and impairment At 1 January 2019 (3) — — (3) (137) (148) (291) Adjustment at 1 January 2019 for adoption of IFRS 16 — (739) — — — — (739)
At 31 December 2019 (25) (800) — (3) (135) (149) (1,112) Depreciation charge for the year — (66) — (4) (16) (24) (110) Disposals — 22 — — 77 39 138 Impairment charge (11) (40) — — — (1) (52) Foreign exchange rate movements — 5 — — (1) (1) 3 At 31 December 2020 (36) (879) — (7) (75) (136) (1,133)
If owner-occupied properties were stated on a historical cost basis, the carrying amount would be £426 million (2019: £431 million).
Carrying value At 1 January 9,379 1,824 11,203 9,601 1,881 11,482 Additions 1,190 17 1,207 731 189 920 Capitalised expenditure on existing properties 41 14 55 143 68 211 Fair value (losses)/gains (298) (74) (372) 183 (90) 93 Disposals (662) (337) (999) (1,036) (200) (1,236) Foreign exchange rate movements 256 19 275 (243) (24) (267)
The fair value of investment properties leased to third parties under operating leases at 31 December 2020 was £11,094 million (2019: £10,931 million). Future contractual aggregate minimum lease rentals receivable under the non-cancellable portion of these leases are given in note 23.
23 – Lease assets and liabilities On 1 January 2019 the Group adopted IFRS 16 Leases, the standard which replaced IAS 17 Leases. Adoption of the standard resulted in assets previously held under operating leases (and their corresponding lease liabilities) being recognised on the statement of financial position for the first time within the comparative numbers. Adoption of the standard resulted in the following assets and liabilities being included within the statement of financial position for the first time at 1 January 2019: • £410 million owner-occupied property assets, included within Property and equipment (see note 21); • £24 million deferred tax assets; and • £544 million lease liabilities, included within Payables and other financial liabilities (see note 53).
The Group’s leased assets primarily consist of properties occupied by Group companies carried at amortised cost (see note 21) and leasehold investment properties carried at fair value (see note 22) which are sublet to third parties. Leasehold investment properties are measured in accordance with IAS 40 Investment Property (see accounting policy Q).
(iii) Lease liabilities included within note 53 total £533 million (2019: £572 million). Future contractual aggregate minimum lease payments are as follows: £m
Within 1 year 152 89 Later than 1 year and not later than 5 years 214 296 Later than 5 years 198 237 564 622
Level 2 Inputs to Level 2 fair values are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. If the asset or liability has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the instrument. Level 2 inputs include the following: • Quoted prices for similar assets and liabilities in active markets. • Quoted prices for identical or similar assets and liabilities in markets that are not active, the prices are not current, or price quotations vary substantially either over time or among market makers, or in which little information is released publicly. • Inputs other than quoted prices that are observable for the asset or liability (for example, interest rates and yield curves observable at commonly quoted intervals, implied volatilities and credit spreads). • Market corroborated inputs.
There has been a £13 million increase (2019: £24 million increase) in the fair value of SPPI instruments, and a £8,668 million increase (2019: £20,090 million increase) in the fair value of non-SPPI instruments during the reporting period.
Recurring fair value measurements Investment property (note (22)) — — 11,369 11,369 — 11,369 Loans (note 25(a)) — — 29,839 29,839 13,840 43,679 Financial investments measured at fair value (note 28(a)) Fixed maturity securities 53,880 129,904 19,053 202,837 — 202,837 Equity securities 99,997 — 407 100,404 — 100,404 Other investments (including derivatives) 31,481 9,997 6,659 48,137 — 48,137 Financial assets classified as held for sale 9,696 6,178 1,033 16,907 — 16,907 Total 195,054 146,079 68,360 409,493 13,840 423,333 Financial liabilities measured at fair value Non-participating investment contracts1 (note 44(a)) 135,308 39 — 135,347 — 135,347 Net asset value attributable to unit holders 20,151 — 150 20,301 — 20,301 Borrowings (note 52(a)) — — 1,166 1,166 8,518 9,684 Derivative liabilities (note 60(b)) 421 6,570 571 7,562 — 7,562 Financial liabilities classified as held for sale 2,837 — 98 2,935 43 2,978 Total 158,717 6,609 1,985 167,311 8,561 175,872 1 In addition to the balances in this table, included within reinsurance assets in the statement of financial position and note 46 are £3,860 million of non-participating investment contracts, which are legally reinsurance but do not meet the definition of a reinsurance contract under IFRS. These assets are financial instruments measured at fair value through profit and loss and are classified as Level 1 assets.
Non-recurring fair value measurement Properties occupied by group companies — — 335 335 Total — — 335 335 Less: Assets classified as held for sale — — (69) (69) — — 266 266
Strategic report Governance IFRS financial statements Other information 24 – Fair value methodology continued (d) Fair value hierarchy analysis continued
Fixed maturity securities, in line with market practice, are generally valued using an independent pricing service. These valuations are determined using independent external quotations from multiple sources and are subject to a number of monitoring controls, such as monthly price variances, stale price reviews and variance analysis. Pricing services, where available, are used to obtain the third-party broker quotes. Where pricing services providers are used, a single valuation is obtained and applied. When prices are not available from pricing services, quotes are sourced from brokers.
(f) Transfers between levels of the fair value hierarchy For financial instruments that are recognised at fair value on a recurring basis, the Group determines whether transfers have occurred between levels of the fair value hierarchy by re-assessing categorisation (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of the reporting period.
Transfers between Level 1 and Level 2 £1.0 billion of assets transferred from Level 1 to Level 2 relate to fixed maturity securities held by our business in France, primarily due to a reclassification of certain securities from government debt to corporate bonds. There were no significant transfers from Level 2 to Level 1.
Strategic report Governance IFRS financial statements Other information 24 – Fair value methodology continued (g) Further information on Level 3 assets and liabilities continued
Opening balance at 1 January 2019 11,482 25,008 16,503 414 5,182 1,992 — (25) (534) (1,225) (3,100) Total net gains/(losses) recognised in the income statement1 151 844 505 (66) 6 134 — — (86) (52) (134) Purchases 1,131 3,461 2,090 427 1,350 185 (100) (56) (128) — (134) Issuances — 190 12 — — — — — — — — Disposals (1,294) (1,170) (1,454) (39) (532) (262) 100 (31) 88 44 261 Settlements — — (50) — — — — — — — — Transfers into Level 3 — — 1,449 1 — 49 — — — — (49) Transfers out of Level 3 — — (919) — (142) (112) — — — — 111 Foreign exchange rate movements (267) (14) (541) (17) (191) — — — 5 — —
Balance at 31 December 2019 11,203 28,319 17,595 720 5,673 1,986 — (112) (655) (1,233) (3,045) 1 Total net gains/(losses) recognised in the income statement includes realised gains/(losses) on disposals.
(ii) Loans • Commercial mortgage loans and Primary Healthcare loans held by our UK Life business are valued using a Portfolio Credit Risk Model. This model calculates a Credit Risk Adjusted Value for each loan. The risk adjusted cash flows are discounted using a yield curve, taking into account the term dependent gilt yield curve and global assumptions for the liquidity premium. Loans valued using this model have been classified as Level 3 as the liquidity premium is deemed to be non-market observable. The liquidity premium used in the discount rate ranges between 80 bps to 110 bps (2019: 65 bps to 80 bps).
• Non-standard debt products and privately placed bonds held by our businesses in the UK do not trade in an active market. These fixed maturity securities are valued using discounted cash flow models, designed to appropriately reflect the credit and illiquidity risk of the instrument. These bonds have been classified as Level 3 because the valuation approach includes significant unobservable inputs and an element of subjectivity in determining appropriate credit and illiquidity spreads.
• Fixed maturity securities held by our French, UK and Asian businesses which are not traded in an active market have been valued using third party or counterparty valuations. These prices are considered to be unobservable due to infrequent market transactions.
(v) Other investments (including derivatives) • Other investments are held for index-linked, unit-linked and with-profit funds and are valued based on external valuation reports received from fund managers. The investments consist of: – Unit trusts; – Other investment funds including property funds; – External hedge funds held principally by business in the UK and France; and – Derivatives.
The tables below show the sensitivity of the fair value of Level 3 assets and liabilities to changes in unobservable inputs to a reasonable alternative: Sensitivities 2020 Fair value £bn Most significant unobservable input Reasonable alternative
Investment property 11.4 Equivalent rental yields +/- 5-10% 0.8 (0.8) Loans Commercial mortgage loans and Primary Healthcare loans 12.6 Illiquidity premium +/- 20 bps 0.2 (0.2) Base property growth rate +/- 100 bps p.a. 0.1 (0.1) Equity release mortgage loans 11.8 Base property growth rate +/- 40 bps p.a. 0.2 (0.2) Current property market values +/- 10% 0.3 (0.4) Infrastructure and Private Finance Initiative (PFI) loans 4.9 Illiquidity premium +/- 25 bps1 0.2 (0.2) Other 0.5 Illiquidity premium +/- 25 bps1 — — Fixed maturity securities Structured bond-type and non-standard debt products 7.6 Market spread (credit, liquidity and other) +/- 25 bps 0.1 (0.1) Privately placed notes 1.9 Credit spreads +/- 25 bps1 0.1 (0.1) Other debt securities 10.0 Credit and liquidity spreads +/- 20-25 bps 0.5 (0.5) Equity securities 0.4 Market spread (credit, liquidity and other) +/- 25 bps — — Other investments Property Funds 1.8 Market multiples applied to net asset values +/- 15-20% 0.3 (0.4) Other investments (including derivatives) 5.4 Market multiples applied to net asset values +/- 10-40%2 0.4 (0.3) Liabilities Non-participating investment contract liabilities — Fair value of the underlying unit funds +/- 20-25% — — Borrowings (1.2) Illiquidity premium +/- 50 bps — — Other liabilities (including derivatives) (0.7) Independent valuation vs counterparty N/A — — Total Level 3 investments 66.4 3.2 (3.3) 1 On discount rate spreads. 2 Dependent on investment category.
Equity securities 0.8 Market spread (credit, liquidity and other) +/- 25 bps — (0.1) Other investments Property Funds 0.8 Market multiples applied to net asset values +/- 15-20% 0.1 (0.1) Other investments (including derivatives) 6.4 Market multiples applied to net asset values +/- 10-40%3 0.8 (0.6)
Liabilities Non-participating investment contract liabilities (3.0) Fair value of the underlying unit funds +/- 20-25% 0.4 (0.4) Borrowings (1.2) Illiquidity premium +/- 50 bps — — Other liabilities (including derivatives) (0.8) Independent valuation vs counterparty N/A — — Total Level 3 investments 60.5 4.0 (3.9) 1 The sensitivity impacts for base property growth rate and current property market values for equity release mortgage loans were incorrectly transposed at 31 December 2019 and have been amended from the impacts previously reported. 2 On discount rate spreads. 3 Dependent on investment category.
Liabilities not carried at fair value Borrowings 52(a) 8,561 9,558 204 213 9,975
Liabilities not carried at fair value Borrowings 52(a) 7,834 8,583 235 217 9,035 25 – Loans This note analyses the loans our Group companies have made, the majority of which are mortgage loans.
(a) Carrying amounts The carrying amounts of loans were as follows: At fair value through profit or loss other than trading £m
Of the above total loans, £29,629 million (2019: £28,938 million) are due to be recovered in more than one year after the statement of financial position date.
Non-securitised mortgage loans include £9,360 million (2019: £8,558 million) of residential equity release mortgages, £7,518 million (2019: £7,681 million) of commercial mortgages and £2,804 million (2019: £2,878 million) relating to UK primary healthcare and PFI businesses. The healthcare and PFI mortgage loans are secured against General Practitioner premises, other primary health-related premises or other emergency services related premises. For all such loans, government support is provided through either direct funding or reimbursement of rental payments to the tenants to meet income service and provide for the debt to be reduced substantially over the term of the loan. Although the loan principal is not government-guaranteed, the nature of these businesses and premises provides considerable comfort of an ongoing business model and low risk of default.
Loans at amortised cost The carrying amount of these loans at both 31 December 2020 and 31 December 2019 was a reasonable approximation for their fair value.
The movements in the impairment provisions on these loans were as follows: £m
At 1 January (13) (10) Increase during the year (2) (4) Foreign exchange rate movements (1) 1
(c) Collateral Loans to banks include cash collateral received under stock lending arrangements (see note 61 for further discussion regarding these collateral positions). The obligation to repay this collateral is included in payables and other financial liabilities (see note 53).
All the shares in the ERF companies are held by independent companies, whose shares are held on trust. Although AER does not own, directly or indirectly, any of the share capital of the ERF companies or their parent companies, it has control of the securitisation companies, and they have therefore been treated as subsidiaries in the consolidated financial statements. AER has no right to repurchase the benefit of any of the securitised mortgage loans, other than in certain circumstances where AER is in breach of warranty or loans are substituted in order to effect a further advance.
Strategic report Governance IFRS financial statements Other information 26 – Securitised mortgages and related assets continued (b) Carrying values The following table summarises the securitisation arrangements: Securitised assets £m
Loan notes held by third parties (note 52(c)(i)) 1,166 1,233 27 – Interests in structured entities A structured entity is defined as an entity that has been designed so that voting or similar rights are not the dominant factor in deciding who controls the entity, such as when any voting rights relate to administrative tasks only, or when the relevant activities are directed by means of contractual arrangements. The Group has interests in both consolidated and unconsolidated structured entities as described below.
(PFIs). • Specialised investment vehicles include Open Ended Investment Companies (OEICs), Property Limited Partnerships (PLPs), Sociétés d’Investissement a Capital Variable (SICAVs), Tax Transparent Funds (TTFs) and other investment vehicles.
(b) Interests in unconsolidated structured entities As part of its investment activities, the Group invests in unconsolidated structured entities. As at 31 December 2020, the Group’s total interest in unconsolidated structured entities was £55,961 million (2019: £58,519 million) on the Group’s statement of financial position. The Group’s total interest in unconsolidated structured entities is classified as ‘Interests in and loans to joint ventures and associates’ and ‘financial investments held at fair value through profit or loss’. The Group does not sponsor any of the unconsolidated structured entities.
Structured debt securities1 — — 4,504 — 4,504 — — 4,746 — 4,746 Other investments and equity securities 807 173 41,594 — 42,574 792 209 44,669 — 45,670
Total 807 173 46,098 8,883 55,961 792 209 49,415 8,103 58,519 1 Primarily reported within ‘other debt securities’ in note 28(a). 2 Following a review of the presentation of investments held by the Singapore business, comparative amounts have been amended to reclassify £318 million of investments from Other (Including other funds and equity securities)
Total 10,348 53 9,993 42 1 Investment funds relate primarily to the Group’s Polish pension funds.
Fixed maturity securities Debt securities UK government — 30,249 — 30,249 — 27,044 — 27,044 UK local authorities — 214 — 214 — 202 — 202 Non-UK government (note 28(d)) — 64,508 1,257 65,765 — 60,569 1,133 61,702 Corporate bonds
Equity securities Ordinary shares Public utilities — 3,098 1 3,099 — 2,883 — 2,883 Banks, trusts and insurance companies — 17,835 — 17,835 — 20,635 1 20,636 Industrial miscellaneous and all other — 79,313 6 79,319 — 76,082 14 76,096 — 100,246 7 100,253 — 99,600 15 99,615 Non-redeemable preference shares — 251 — 251 — 211 — 211
Of the above total, £185,544 million (2019: £172,649 million) is due to be recovered in more than one year after the statement of financial position date.
Fixed maturity securities 197,789 24,814 (6,449) 216,154 186,753 20,040 (7,312) 199,481 Equity securities 87,181 20,669 (7,346) 100,504 87,436 16,835 (4,445) 99,826 Other investments
Unit trusts and other investment vehicles1 30,691 8,188 (934) 37,945 35,138 7,699 (683) 42,154 Derivative financial instruments 4,634 5,258 (170) 9,722 3,413 4,517 (833) 7,097 Deposits with credit institutions 211 — — 211 169 — — 169 Minority holdings in property management undertakings 3,557 263 (173) 3,647 2,226 259 (90) 2,395 Other investments – long-term1 102 — (1) 101 138 12 (31) 119 Other investments – short-term 1 — — 1 1 — — 1
Singapore 4 12 14 784 74 374 92 1,170 Other 2,465 2,932 4,248 3,862 1,071 671 7,784 7,465 Asia Pacific and other 2,469 2,944 4,262 4,646 1,145 1,045 7,876 8,635
Total (excluding assets held for sale) 8,769 9,288 34,387 39,408 13,825 12,890 56,981 61,586
Expected to be recovered in less than one year 9,701 9,032 Expected to be recovered in more than one year 24 32 9,725 9,064
Carrying amount at 1 January 993 116 1,108 1,141 — 3,358 Acquisition costs deferred during the year 226 7 88 2,622 — 2,943 Amortisation (98) (11) (88) (2,610) — (2,807) Impact of assumption changes (22) 1 (1) — — (22) Effect of portfolio transfers, acquisitions and disposals1 (39) — (166) (9) — (214) Foreign exchange rate movements 15 5 9 2 — 31 Other movements — — — — — — Carrying amount at 31 December 1,075 118 950 1,146 — 3,289 Less: Classified as held for sale — — (25) — — (25) 1,075 118 925 1,146 — 3,264 1 The movement during 2020 includes the disposal of FPI and Singapore businesses
Surpluses in the staff pension schemes (note 51(a)) 2,780 2,746 Other assets 55 53 Total 2,835 2,799
Strategic report Governance IFRS financial statements Other information 32 – Assets held to cover linked liabilities The assets which back unit-linked liabilities are included within the relevant balances in the statement of financial position, while the liabilities are included within insurance and investment contract provisions. This note analyses the carrying values of assets backing these liabilities.
At the 2020 Annual General Meeting, the Company was authorised to allot up to a further maximum nominal amount of: • £654,611,032 of which £327,305,516 can be in connection with an offer by way of a rights issue • £100 million of new ordinary shares in relation to any issue of Solvency II compliant capital instruments
(b) During 2020, a total of 7,361,275 were allotted and issued by the Company as follows: Number of shares Share capital £m
34 – Group’s share plans This note describes various equity compensation plans operated by the Group, and shows how the Group values the options and awards of shares in the Company.
(ii) Aviva long-term incentive plan awards These awards have been made under the Aviva Long-Term Incentive Plan 2011 (LTIP), and are described in section (b) below and in the Directors’ Remuneration report.
(b) Outstanding options The following table summarises information about options outstanding at 31 December 2020: Range of exercise prices
Share price 291p 394p Exercise price 220p 284p Expected volatility 29.50% 20.22% Expected life 3.91 years 3.80 years Expected dividend yield 5.32% 7.68% Risk-free interest rate (0.10)% 0.23%
Share price 222p 405p Expected volatility1 29% 23% Expected volatility of comparator companies’ share price1 30% 23% Correlation between Aviva and comparator competitors’ share price1 54% 53% Expected life1 2.77 years 2.77 years Expected dividend yield 0.00% 0.00% Risk-free interest rate1 0.08% 0.63% 1 For awards with market-based performance conditions only.
Cost debited to ‘shareholders’ funds At 1 January 1,714,288 7 455,986 2 Acquired in the year 687,326 2 2,165,032 9 Distributed in the year (664,576) (3) (906,730) (4)
The shares are owned by employee share trusts with an undertaking to satisfy awards of shares in the Company under the Company’s share plans and schemes. Details of the features of the plans can be found in the directors’ remuneration report and/or in note 34.
The issued preference shares are non-voting except where their dividends are in arrears, on a winding up or where their rights are altered.
Following our March 2018 statement in the full year 2017 results that we “have the ability to cancel our preference shares”, Aviva listened to the views of investors, who expressed concerns, and as a result Aviva subsequently announced on 23 March 2018 that it had decided to take “no action to cancel its preference shares”. On 30 April 2018 Aviva announced a charge of £14 million relating to a provision for the goodwill payment scheme to those preference shareholders who sold preference shares in the period from 8 to 22 March 2018 (inclusive) at a share price that was lower than the price that the preference shares returned to following the announcement on 23 March 2018. The total cost of the goodwill payment scheme was £10 million relating to the goodwill payments to preference shareholders, and associated administration costs, against our initial estimate of £14 million.
On 26 October 2020, the Financial Conduct Authority published the outcome of its investigation into Aviva’s announcement on preference shares in March 2018, which found that Aviva contravened certain provisions of the Listing Rules and the Disclosure Guidance and Transparency Rules by failing to take reasonable care to ensure that information in that announcement was not misleading and did not omit anything likely to affect the import of the information in the announcement. Aviva released its response the same day accepting the FCA finding.
Under current regulation the preference shares will no longer count as regulatory capital in 2026. Aviva will work towards obtaining regulatory approval for the preference shares, or a suitable substitute, to qualify as capital from 2026 onwards. If as we approach 2026 Aviva needs to reconsider this position, it will do so after taking into account the fair market value of the preference shares at that time.
At the 2020 Annual General Meeting, the Company was authorised to allot sterling new preference shares, as defined in the Company’s articles of association, up to a maximum nominal value of £500 million.
Notional amount 2020 £m 5.9021% £500 million direct capital instrument – Issued November 2004 — 500 6.875% £210 million STICS – Issued November 2003 — —
On 17 October 2019, notification was given that the Group would redeem the 6.875% £210 million tier 1 notes. At that date, the instruments were reclassified as a financial liability of £210 million, representing the fair value at that date. On 21 November 2019 the instruments were redeemed in full at a cost of £210 million. The difference of £21 million between the carrying amount of £231 million and fair value of £210 million was charged to retained earnings.
Foreign exchange rate movements recorded in the consolidated statement of comprehensive income of £131 million for continuing operations (2019: £(193) million) and £4 million (2019: £(26) million) for discontinued operations (see note 4(d)) relate to foreign exchange rate movements on the currency translation reserve of £230 million (2019: £(318) million), the hedging instrument reserve of £(129) million (2019 £138 million) and non-controlling interests (see note 40) of 34 million (2019: £(39) million).
Balance at 31 December 7,468 5,065 1 Net remeasurements of pension schemes recorded in the consolidated statement of comprehensive income of £150 million loss (2019: £867 million loss) includes £148 million of remeasurement losses (2019: £867 million losses)
41 – Contract liabilities and associated reinsurance The Group’s liabilities for insurance and investment contracts it has sold, and the associated reinsurance, is covered in the following notes: • Note 42 covers insurance liabilities; • Note 43 covers the methodology and assumptions used in calculating the insurance liabilities; • Note 44 covers liabilities for investment contracts; • Note 45 details the financial guarantees and options on certain contracts; • Note 46 details the associated reinsurance assets on these liabilities; and • Note 47 shows the effects of changes in the assumptions on the liabilities.
Long-term business Insurance liabilities (135,409) 7,176 (128,233) (131,182) 6,369 (124,813) Liabilities for participating investment contracts (97,073) 1 (97,072) (92,762) 1 (92,761) Liabilities for non-participating investment contracts (138,183) 3,860 (134,323) (137,689) 4,006 (133,683)
(12,384) 1,933 (10,451) (11,503) 1,687 (9,816) Provision for unearned premiums (5,210) 299 (4,911) (5,138) 275 (4,863) Provision arising from liability adequacy tests1 (2) — (2) (15) — (15)
(375,313) 13,338 (361,975) (371,465) 12,356 (359,109) 1 Provision arising from liability adequacy tests relates to general insurance business only. Additional liabilities arising from liability adequacy test for life operations, where applicable, are included in unallocated divisible surplus.
General insurance and health Change in insurance liabilities (note 42(c)(iv) and 46(c)(ii))1 234 (94) 140 Change in provision arising from liability adequacy tests — — — Less: Unwind of discount (14) 10 (4)
Total change in insurance liabilities from continued operations (note 7) 6,434 (764) 5,670 1 Includes £45 million in the UK General Insurance and Health business relating to a change in the discount rate used for estimating lump sum payments of bodily injury claims from 0.00% to -0.25%.
General insurance and health Outstanding claims provisions 9,017 8,831 Provision for claims incurred but not reported 3,367 2,672 12,384 11,503 Provision for unearned premiums 5,210 5,138 Provision arising from liability adequacy tests1 2 15
(b) Long-term business liabilities (i) Business description The Group underwrites long-term business in a number of countries as follows: • In the UK and Ireland, long-term business is mainly written in the ‘Non-Profit’ funds and in a number of ‘With-Profits’ sub-funds. In the
‘Non-Profit’ funds shareholders are entitled to 100% of the distributed profits. In the ‘With-Profits’ sub-funds the with-profits policyholders are entitled to between 40% and 100% of distributed profits, depending on the fund rules. There is also the Reattributed Inherited Estate External Support Account (RIEESA) in the UK, which does not itself underwrite any business, but provides capital support to one of the withprofits sub-funds and receives any surplus or deficit emerging from it. In the RIEESA, shareholders are entitled to 100% of the distributed profits, but these cannot be distributed until the ‘lock-in’ criteria set by the Reattribution Scheme have been met; • In France, the majority of policyholders’ benefits are determined by investment performance, subject to certain guarantees, and shareholders’ profits are derived largely from management fees. In addition, a substantial number of policies participate in investment returns, with the balance being attributable to shareholders; and
• In other Manage-for-value operations in Europe and Asia, a range of long-term insurance and savings products are written.
Bonuses paid during the year are reflected in claims paid, whereas those allocated as part of the bonus declaration are included in the movements in the long-term business liabilities.
A description of the main methodology and most material valuation assumptions has been provided (see note 43).
Strategic report Governance IFRS financial statements Other information 42 – Insurance liabilities continued (b) Long-term business liabilities continued (iii) Movements in long-term business liabilities The following movements have occurred in the gross long-term business liabilities during the year: £m
2 The movement during 2020 includes the disposal of FPI, Hong Kong and Singapore businesses. 3 Other movements include the reclassification in the UK from participating investment contracts to insurance contracts of £97 million during 2020 (2019: £972 million). Other movements in 2019 also included £(427) million of negative reinsurance assets in the UK which were reclassified from insurance liabilities to reinsurance assets following a review of the presentation of negative reinsurance assets.
For many types of long-term business, including unit-linked and participating insurance liabilities, movements in asset values are offset by corresponding changes in liabilities, limiting the net impact on profit. The gross long-term business liabilities increased by £4.2 billion during 2020 (2019: £5.4 billion increase) mainly driven by: • New business net of the expected change on existing business of £2.7 billion, primarily due to growing bulk purchase annuities sales in the
(c) General insurance and health liabilities (i) Business description The Group underwrites general insurance and health business in a number of countries as follows: • In the UK and Ireland, providing individual and corporate customers with a wide range of insurance products; • In Canada, providing a range of personal and commercial lines products; and • In other Manage-for-value operations in Europe, providing a range of general insurance and health products.
Strategic report Governance IFRS financial statements Other information 42 – Insurance liabilities continued (c) General insurance and health liabilities continued (iii) Provisions for outstanding claims The table below shows the total general insurance and health liabilities split by outstanding claim provisions and provision for claims incurred but not reported (IBNR provisions), gross of reinsurance, by major line of business.
Carrying amount at 1 January 11,503 11,406 Impact of changes in assumptions 184 126 Claim losses and expenses incurred in the current year 6,909 7,045 Decrease in estimated claim losses and expenses incurred in prior periods (122) (186) Incurred claims losses and expenses 6,971 6,985 Less: Payments made on claims incurred in the current year (3,315) (3,834) Payments made on claims incurred in prior periods (3,137) (3,327) Recoveries on claim payments 322 396
The impact of COVID-19 on general insurance incurred claims losses is estimated as £150 million after allowing for an estimated £500 million of offsetting favourable impacts in other product lines as a result of reduced economic activity. Claims are primarily as a result of disruption to business insured by the Group; partially offset by a reduction in claims frequency on other product lines. Further information on the impact of COVID-19 on general insurance and health liabilities can be found within note 59.
Since the ultimate cost of claims is not known in advance, there are uncertainties involved in estimating the loss reserves including those relating to the COVID-19 pandemic. Allowances for uncertainties in the reserving process are discussed in note 43.
Carrying amount at 1 January 5,138 4,946 Premiums written during the year 10,956 10,908 Less: Premiums earned during the year (10,807) (10,677) Changes in UPR recognised as an expense/(income) 149 231 Gross portfolio transfers and acquisitions1 (104) — Foreign exchange rate movements 27 (39) Carrying amount at 31 December 5,210 5,138 1 The movement during 2020 relates to the disposal of the Singapore business.
Strategic report Governance IFRS financial statements Other information 42 – Insurance liabilities continued (vi) Analysis of general insurance and health claims development The tables that follow present the development of claims payments and the estimated ultimate cost of claims for the accident years 2011 to 2020. The upper half of the tables shows the cumulative amounts paid during successive years related to each accident year, while the lower section of the tables shows the original estimated ultimate cost of claims and how these original estimates have increased or decreased, as more information becomes known about the individual claims and overall claim frequency and severity.
Key elements of the development of prior accident year general insurance and health net provisions during 2020 were: • £47 million release from the UK and Ireland primarily due to favourable experience in personal property and personal motor lines, partially offset by strengthening across commercial lines due to adverse large claims experience; • £13 million release from Canada primarily due to favourable injury experience in personal motor, offset by strengthening and large loss development in latent claims; • £20 million release from Manage-for-value markets mainly due to favourable claims development in France.
• £83 million release from other markets mainly due to favourable claims development in France.
Strategic report Governance IFRS financial statements Other information 42 – Insurance liabilities continued Net of reinsurance After the effect of reinsurance, the loss development table is: Accident year All prior years £m Total £m
Estimate of net ultimate claims At end of accident year 6,202 5,941 5,838 5,613 5,548 6,489 6,714 6,997 6,774 6,378 One year later 6,103 5,765 5,745 5,575 5,635 6,458 6,591 6,944 6,729 Two years later 6,095 5,728 5,752 5,591 5,608 6,377 6,569 6,983 Three years later 6,077 5,683 5,733 5,559 5,517 6,334 6,560 Four years later 6,034 5,717 5,689 5,490 5,495 6,335 Five years later 6,005 5,680 5,653 5,472 5,469 Six years later 6,003 5,631 5,612 5,449 Seven years later 5,967 5,600 5,612 Eight years later 5,952 5,607 Nine years later 5,961
(i) UK Non-profit business The valuation of non-profit business is based on grandfathered regulatory requirements under IFRS 4 prior to the adoption of Solvency II, adjusted to remove certain regulatory reserves and margins in assumptions, notably for annuity business. Conventional non-profit contracts, including those written in the with-profits funds, are valued using the gross premium method. For non-profit business in the ex. Friends Life with-profits funds, the liabilities are measured on a realistic basis with implicit recognition of the present value of future profits.
Strategic report Governance IFRS financial statements Other information 43 – Insurance liabilities methodology and assumptions continued (a) Long-term business continued Discount rates continued Valuation discount rates for business in the non-profit funds are as follows: Valuation discount rates (Gross of investment expenses) 2020 2019
Income Protection Active lives 0.5% 0.6% to 2.1% Claims in payment (level and index linked) 0.5% 1.1%
Expenses Maintenance expense assumptions for non-profit business are generally expressed as a per policy charge set with regards to an allocation of current year expense levels by broad category of business and using the policy counts for in-force business. The assumptions also include an allowance for prudence and increase by future expense inflation over the lifetime of each contract. Expense inflation is assumed to be in line with RPI, and in line with external agreements for business administered externally. An additional liability is held if projected per policy expenses in future years are expected to exceed current assumptions. Further, explicit project expense liabilities are held for non-discretionary project costs that typically relate to mandatory requirements. Expense-related liabilities are only held where expenses are not covered by anticipated future profits in the liability methodology, notably for unit-linked contracts. Investment expense assumptions are generally expressed as a proportion of the assets backing the liabilities.
Mortality Mortality assumptions for non-profit business are set with regard to recent Company experience and general industry trends. The mortality tables used in the valuation are summarised below: Mortality tables used 2020 2019
The WPBR for an individual contract is generally calculated on a retrospective basis and represents the accumulation of the premiums paid on the contract, allowing for investment return, taxation, expenses and any other charges levied on the contract.
Future investment return A risk-free rate equal to the spot yield on UK swaps is used for the valuation of with-profits business. The rates vary according to the outstanding term of the policy, with a typical rate as at 31 December 2020 of 0.40% (2019: 1.02%) for a policy with ten years outstanding.
Mortality Mortality assumptions for with-profits business are set with regard to recent Company experience and general industry trends. The mortality tables used in the valuation are summarised below: Mortality table used 2020 2019
Allowance for future mortality improvement is in line with the rates for non-profit business.
Expenses Maintenance fee assumptions for with-profits business are generally expressed as a fixed per policy charge in line with a memorandum of understanding between the with-profits funds and the non-profit fund within the company. The memorandum of understanding specifies the charges for a five-year period ending in 2023 and specifies a level of charge inflation during that period of CPI+2% or CPI+3% depending on the product type. After the end of the period covered by the memorandum of understanding we assume that the charges will remain unchanged, and a level of charge inflation of RPI+1% for all products will apply. Any difference of expenses charged by Aviva Life Services UK Limited (UKLS) to Aviva Life & Pensions UK Limited (AVLAP) over the charges specified by the memorandum of understanding accrues to the non-profit fund.
Allowance for risk and uncertainty The uncertainties involved in estimating loss reserves are allowed for in the reserving process and by the estimation of explicit reserve uncertainty distributions. The reserve estimation basis requires all non-life businesses to calculate booked claim provisions as the best estimate of the cost of future claim payments, plus an explicit allowance for risk and uncertainty. The allowance for risk and uncertainty is calculated by each business unit in accordance with the requirements of the Group non-life reserving policy, taking into account the risks and uncertainties specific to each line of business and type of claim in that territory. The requirements of the Group non-life reserving policy also seek to ensure that the allowance for risk and uncertainty is set consistently across both business units and reporting periods.
Strategic report Governance IFRS financial statements Other information 43 – Insurance liabilities methodology and assumptions continued (b) General insurance and health continued Lump sum payments in settlement of bodily injury claims that are decided by the UK courts are calculated in accordance with the Ogden Tables and discount rate. The Ogden discount rate is set by the Lord Chancellor and is applied when calculating the present value of future care costs and loss of earnings for claims settlement purposes. The balance sheet reserves in the UK have been calculated using the current Ogden discount rate of -0.25%, as this is the enacted legislative rate that was announced by the Lord Chancellor in August 2019. The Ogden discount rate is expected to be reviewed by the Lord Chancellor by summer 2024.
Long-term business Liabilities for participating investment contracts 97,073 92,762 Liabilities for non-participating investment contracts 138,183 137,689
For participating business, the discretionary participation feature is recognised separately from the guaranteed element and is classified as a liability, referred to as unallocated divisible surplus, except for the with-profits sub-fund supported by the RIEESA. Guarantees on long-term investment products are discussed in note 45.
Of the non-participating investment contracts measured at fair value, £138,044 million at 31 December 2020 (2019: £137,040 million) are unit-linked in structure and the fair value liability is equal to the current unit fund value, including any unfunded units, plus if required, additional non-unit reserves based on a discounted cash flow analysis. These contracts are generally classified as Level 1 in the fair value hierarchy, as the unit reserve is calculated as the publicly quoted unit price multiplied by the number of units in issue, and any non-unit reserve is insignificant.
Carrying amount at 31 December 97,073 92,762 1 Other movements recognised as an expense during 2020 relate to a special bonus distribution to with-profits policyholders in UK Life. In 2019 this related to a special bonus distribution and the recognition of unitised with-profits annual management charges in UK Life. 2 Total interest expense for participating investment contracts recognised in profit or loss is £1,311 million (2019: £5,269 million). 3 Other movements include the reclassification in the UK from participating investment contracts to insurance contracts of £(97) million during 2020 (2019: £(972) million). Other movements in 2019 also included a reclassification in the UK from participating investment contracts to outstanding claims reserves of £(32) million.
The variance between actual and expected experience in 2020 of £0.3 billion is primarily due to higher bond and gilt values as a result of lower interest rates and increases in US and Japanese equity markets; partially offset by decreases in UK and European equity performance.
Carrying amount at 1 January 137,689 120,354 Liabilities in respect of new business 4,187 5,520 Expected change in existing business (3,231) (3,742) Variance between actual and expected experience 6,970 16,345 Impact of operating assumption changes 19 (22) Impact of economic assumption changes 6 (1) Other movements recognised as an expense — 2 Change in liability 7,951 18,102 Effect of portfolio transfers, acquisitions and disposals1 (8,038) — Foreign exchange rate movements 583 (575) Other movements2 (2) (192)
Carrying amount at 31 December 138,183 137,689 1 The movement during 2020 relates to the disposal of FPI. 2 Other movements during 2019 relate to a reclassification from non-participating investment to outstanding claims reserves in the UK (£(180) million).
(iii) Return of premium guarantees German pension products sold in Friends Life between 2006 and 2014 are subject to a return of premium guarantee whereby the product guarantees to return the maximum of the unit fund value or total premiums paid (before deductions). Provisions for this guarantee are calculated using a market-consistent stochastic model and amount to £223 million at 31 December 2020 (2019: £178 million).
(b) UK with-profits business The Group’s UK with-profits liabilities are evaluated by reference to FRS 27, which was grandfathered under IFRS 4, prior to the adoption of Solvency II. Under the PRA’s rules, provision for guarantees and options within realistic liabilities are measured using market-consistent stochastic models. A stochastic approach includes measuring the time value of guarantees and options, which represents the additional cost arising from uncertainty surrounding future economic conditions.
(ii) No market valuation reduction (MVR) guarantees For unitised business, there are circumstances where a ‘no MVR’ guarantee is applied, for example on certain policy anniversaries, guaranteeing that no market value reduction will be applied to reflect the difference between the accumulated value of units and the market value of the underlying assets.
Realistic liabilities for GAOs in the UK with-profits funds were £1,587 million at 31 December 2020 (2019: £1,628 million). With the exception of the with-profits sub-fund supported by the RIEESA, movements in the realistic liabilities in the with-profits funds are offset by a corresponding movement in the unallocated divisible surplus, with no net impact on IFRS profit. Realistic liabilities for GAOs in the with-profits sub-fund supported by the RIEESA were £137 million at 31 December 2020 (2019: £129 million).
(v) Guaranteed minimum maturity payments on mortgage endowments The with-profits funds made promises to certain policyholders in relation to their with-profits mortgage endowments. Top-up payments will be made on these policies at maturity to meet the mortgage value up to a maximum of the 31 December 1999 illustrated shortfall.
The most significant of these contracts is the AFER Eurofund which has total liabilities of £38 billion at 31 December 2020 (2019: £37 billion). The guaranteed minimum bonus is agreed between Aviva France and the AFER association at the end of each year, in respect of the following year. The bonus was 1.70% for 2020 (2019: 1.85%) compared with an accounting income from the fund of 2.186% (2019: 2.336%).
General insurance and health Outstanding claims provisions 794 683 Provisions for claims incurred but not reported 1,139 1,004 13,356 12,431 Less: Assets classified as held for sale (18) (75)
(b) Assumptions The assumptions, including discount rates, used for reinsurance contracts follow those used for insurance liabilities. Reinsurance assets are valued net of an allowance for recoverability.
Carrying amount at 31 December 11,037 10,376 1 Other movements recognised as an expense during 2020 primarily relate to the reclassification of collective investments in unit-linked funds in the UK following a restructure of a reinsurance treaty. The movement in 2019 primarily relates to the ceding of reinsurance for annuity business offset by basis methodology changes in Ireland, the reclassification of health reinsurance assets in Singapore and collective investments in unit-linked funds in the UK following a restructure of a reinsurance treaty.
2 Change in assets does not reconcile with values in note 41(b) due to the inclusion of reinsurance assets classified as non-participating investment contracts where, for such contracts, deposit accounting is applied on the income statement.
Change in reinsurance asset recognised as income (note 41(b)) 259 94 Effect of portfolio transfers, acquisitions and disposals1 (9) — Foreign exchange rate movements (4) (15) Other movements — (3)
Carrying amount at 1 January 275 254 Premiums ceded to reinsurers in the year 725 683 Less: Reinsurers’ share of premiums earned during the year (696) (661) Changes in reinsurance asset recognised as income 29 22 Reinsurers’ share of portfolio transfers and acquisitions1 (4) — Foreign exchange rate movements — (1)
The impact of mortality assumption changes for annuitant contracts on long-term business relates primarily to a reduction in reserves of £390 million in the UK. This is due to changes in assumptions on both individual and bulk purchase annuities arising from: • Updates to base mortality to reflect recent experience of £224 million; • Updates to the rate of mortality improvements, including moving to CMI 2019 and changing the long-term rate of future mortality improvements for males of £210 million; • Changes to assumptions for anti-selection on individual annuities of £(68) million; • Net impacts arising from COVID-19 of £24 million.
Carrying amount at 31 December 9,736 9,597 1 Other movements relates to additional liabilities arising from the liability adequacy test for France of £8 million (2019: £nil). 2 The movement during 2020 relates to disposal of the Singapore business.
The amount of UDS at 31 December 2020 has increased to £9.7 billion (2019: £9.6 billion). The movement in UDS is mainly due to market movements in Europe as a result of decreasing interest rates and narrowing credit spreads; partially offset by a decrease in the UK due to an increase in liabilities for special bonus distributions, the disposal of the Singapore business and business now held for sale in Italy. Where the aggregate amount of participating assets is less than the participating liabilities within a fund then the shortfall may be held as negative UDS, subject to recoverability testing as part of the liability adequacy requirements of IFRS 4. There are no material negative UDS balances at the participating fund-level within each life entity in the current period (2019: no material negative UDS).
(a) Current tax Current tax assets recoverable and liabilities payable in more than one year are £121 million and £3 million (2019: £104 million and £9 million), respectively.
The Group is party to the CFC & Dividend Group Litigation Order, which challenged the tax treatment of dividends received from non-UK entities before 2009. The Group is attempting to recover claims from HMRC covered by this judgement. A recoverable balance of £108 million is included within current tax assets.
Amounts classified as held for sale include £9 million of deferred tax assets and £61 million of deferred tax liabilities. (2019: deferred tax assets £11 million).
Strategic report Governance IFRS financial statements Other information 49 – Tax assets and liabilities continued (b) Deferred tax continued (ii) The net deferred tax liability arises on the following items: £m
Net liability at 1 January (1,993) (1,700) Adjustment at 1 January for adoption of IFRS 16 — 24
Net liability at 1 January restated (1,993) (1,676) Acquisition and disposal of subsidiaries 362 — Amounts (charged) to income statement (note 14(a)) (57) (387) Amounts (charged)/credited to other comprehensive income (note 14(b)) (58) 50 Foreign exchange rate movements (14) 23 Other movements (1) (3) Net liability at 31 December (1,761) (1,993)
In addition, the Group has unrecognised gross capital losses of £581 million (2019: £612 million). These have no expiry date.
• The second relates to past communications to a specific sub-set of pension policyholders, that may not have adequately informed them of switching options into with-profit funds that were available to them. This issue is restricted to a product originally sold between 1985 and 1989 and acquired by Aviva through the purchase of Friends Life. It does not affect any other part of our business. We have completed a review to identify affected customers and we will ensure those affected are not disadvantaged. The most significant assumption in relation to the calculation of the provision is the estimated rates of customer switching. Each 10% reduction/increase in the rates of switching would reduce/increase the estimate of the provision by £30 million (2019: £40 million). The valuation of the provision involves a high degree of judgement and estimation uncertainty due to the dependence on decisions made by customers, and therefore the possible range of outcomes is significant.
51 – Pension obligations (a) Introduction The Group operates a number of defined benefit and defined contribution pension schemes. The material defined benefit schemes are in the UK, Ireland and Canada. The assets and liabilities of these defined benefit schemes as at 31 December 2020 are shown below.
Total fair value of scheme assets (see b(ii) below) 18,915 941 269 20,125 17,671 833 264 18,768 Present value of defined benefit obligation (16,623) (1,123) (345) (18,091) (15,416) (1,035) (341) (16,792)
Net IAS 19 surpluses/(deficits) in the schemes 2,292 (182) (76) 2,034 2,255 (202) (77) 1,976
All schemes are closed to future accrual. Closure of the schemes has removed the volatility associated with additional future accrual for active members.
(i) UK schemes In the UK, the Group operates three main pension schemes, the ASPS, the RAC Scheme, which was retained after the sale of RAC Limited in September 2011, and the FPPS, which was acquired as part of the Friends Life acquisition in 2015. As the defined benefit sections of the UK schemes are now closed to both new members and future accrual, existing deferred members in active service and new entrants participate in the defined contribution section of the ASPS. The UK schemes operate within the UK pensions’ regulatory framework.
(b) IAS 19 disclosures Disclosures under IAS 19 for the material defined benefit schemes in the UK, Ireland and Canada are given below. Where schemes provide both defined benefit and defined contribution pensions, the assets and liabilities shown exclude those relating to defined contribution pensions.
Net IAS 19 surplus in the schemes at 1 January 18,768 (16,792) 1,976 Past service costs – amendments1 — (18) (18) Administrative expenses2 — (17) (17) Total pension cost charged to net operating expenses — (35) (35) Net interest credited/(charged) to investment income /(finance costs)3 350 (309) 41 Total recognised in income 350 (344) 6
Employer contributions 211 — 211 Plan participant contributions 2 (2) — Benefits paid (631) 631 — Administrative expenses paid from scheme assets2 (17) 17 — Foreign exchange rate movements 46 (57) (11) Net IAS 19 surplus in the schemes at 31 December 20,125 (18,091) 2,034 1 Past service costs include a charge of £18 million relating to the estimated liability arising in the UK defined benefit pension schemes as a result of the requirement to equalise the cash equivalent transfer values paid to former scheme members for the effects of Guaranteed Minimum Pension (GMP). This additional liability has arisen following the High Court judgement in November 2020 in the case involving Lloyds Banking Group. 2 Administrative expenses are expensed as incurred. 3 Net interest income of £58 million has been credited to investment income and net interest expense of £17 million has been charged to finance costs (see note 8).
Net IAS 19 surplus in the schemes at 1 January 18,083 (15,520) 2,563 Administrative expenses1 — (19) (19) Total pension cost charged to net operating expenses — (19) (19) Net interest credited/(charged) to investment income /(finance costs)2 479 (406) 73
During the period the ASPS completed a bulk annuity buy-in transaction with Aviva Life & Pensions UK Limited, a Group Company. Due to different measurement bases applying for accounting purposes, the premium paid by the scheme exceeded the valuation of the plan asset recognised. This has been recognised as a loss in the actual return on assets within other comprehensive income. The plan asset recognised is transferable and so has not been subject to consolidation within the Group’s financial statements.
Bonds 19,702 921 119 20,742 17,343 723 141 18,207 Equities — 31 — 31 — — — — Property 352 — — 352 392 — — 392 Pooled investment vehicles 4,182 272 146 4,600 4,497 283 122 4,902 Derivatives — 13 — 13 60 4 — 64 Insurance Policies 2,714 — — 2,714 1,977 — — 1,977 Cash and other1 (7,368) (296) 4 (7,660) (5,952) (177) 1 (6,128) Total fair value of scheme assets 19,582 941 269 20,792 18,317 833 264 19,414 Less: consolidation elimination for non-transferable Group
Bonds 16,770 3,972 20,742 14,399 3,808 18,207 Equities 31 — 31 — — — Property — 352 352 — 392 392 Pooled investment vehicles 128 4,472 4,600 178 4,724 4,902 Derivatives 12 1 13 9 55 64 Insurance Policies — 2,714 2,714 — 1,977 1,977 Cash and other1 (2,021) (5,639) (7,660) (2,611) (3,517) (6,128)
Total fair value of scheme assets 14,920 5,872 20,792 11,975 7,439 19,414 Less: consolidation elimination for non-transferable Group insurance policy2 — (667) (667) — (646) (646)
(iii) Assumptions on scheme liabilities The valuations used for accounting under IAS 19 have been based on the most recent funding actuarial valuations, updated to take account of the standard’s requirements in order to assess the liabilities of the material schemes at 31 December 2020.
members and 1.22% for FPPS members included in annuity policies held by the scheme. The different rates reflect the differences in the duration of the liabilities between the schemes. 5 For the Irish schemes, a discount rate of 0.75% and 0.85% is used for AISPF and FFPS respectively, reflecting the differences in the duration of the liabilities between the two schemes.
Strategic report Governance IFRS financial statements Other information 51 – Pension obligations continued (b) IAS 19 disclosures continued Mortality assumptions Mortality assumptions are material in measuring the Group’s obligations under its defined benefit schemes. The assumptions used are summarised in the table below and have been selected to reflect the characteristics and experience of the membership of these schemes.
The mortality tables, average life expectancy and pension duration used at 31 December 2020 for scheme members are as follows: Life expectancy/(pension duration) at NRA of a male Life expectancy/(pension duration) at NRA of a female
– FFPS 88%/91% ILT15 with allowance for future improvements 65 86.7 89.0 89.1 91.1 (21.7) (24.0) (24.1) (26.1) Canada Canadian Pensioners’ Mortality 2014 Private Table, including allowance for future
Sensitivity analysis Significant actuarial assumptions for the determination of the defined benefit obligation are discount rate, inflation rate and mortality. The sensitivity analysis below has been determined by changing the respective assumptions while holding all other assumptions constant. The following table summarises how the defined benefit obligation would have increased/(decreased) as a result of the change in the respective assumptions: Impact on present value of defined benefit obligation
It is unlikely that the changes in assumptions would occur in isolation of one another as some of the assumptions may be correlated. In addition, the sensitivities shown are for liabilities only and ignore the impact on assets, which would significantly mitigate the net interest rate and inflation sensitivity impact on the net surplus, as well as the longevity sensitivity impact due to the insurance policy and longevity swap assets held by the UK schemes.
Strategic report Governance IFRS financial statements Other information 51 – Pension obligations continued (b) IAS 19 disclosures continued Maturity profile of the defined benefit obligation The discounted scheme liabilities have an average duration of 19 years in ASPS, 21 years in FPPS, 19 years in the RAC scheme, 19 years in AISPF, 28 years in FFPS and 11 years in the Canadian scheme. The expected undiscounted benefits payable from the main UK defined benefit scheme, ASPS, is shown in the chart below: Undiscounted benefit payments (£m)
Main UK scheme The Company works closely with the trustee, who is required to consult with the Company on the investment strategy.
In October 2019 the ASPS completed a bulk annuity buy-in transaction with Aviva Life & Pensions UK Limited, a Group Company. This covered approximately £1.1 billion of liabilities related to deferred pensioners and current pensioners, removing the investment and longevity risk for these members from the scheme. A further buy-in transaction with Aviva Life & Pensions UK Limited took place in October 2020, and covered approximately £0.6 billion of liabilities relating to deferred pensioners and current pensioners.
Strategic report Governance IFRS financial statements Other information 51 – Pension obligations continued (d) Charge to staff costs in the income statement The total pension charge to staff costs for all of the Group’s defined benefit and defined contribution schemes were: £m
Continuing operations UK defined benefit schemes 17 21 Overseas defined benefit schemes 1 1 Total defined benefit schemes from continuing operations (note 11(b)) 18 22 UK defined contribution schemes 147 141 Overseas defined contribution schemes 21 21
Total defined contribution schemes from continuing operations (note 11(b)) 168 162
There were no significant contributions payable or prepaid in the consolidated statement of financial position as at either 31 December 2020 or 2019.
52 – Borrowings Our borrowings are classified as either core structural borrowings, which are included within the Group’s capital employed, or operational borrowings drawn by operating subsidiaries. This note shows the carrying values and contractual maturity amounts of each type and explains their main features and movements during the year.
Core structural borrowings, at amortised cost 8,253 7,496 Operational borrowings, at amortised cost 308 338 Operational borrowings, at fair value 1,166 1,233 1,474 1,571 9,727 9,067 Less: Liabilities classified as held for sale (43) (28)
Subordinated debt 6.125% £700 million subordinated notes 2036 695 695 6.125% £800 million undated subordinated notes 798 797 6.875% £600 million subordinated notes 2058 595 594 12.000% £162 million subordinated notes 2021 166 179 8.250% £500 million subordinated notes 2022 526 545 6.625% £450 million subordinated notes 2041 450 449 6.125% €650 million subordinated notes 2043 581 549 3.875% €700 million subordinated notes 2044 624 591 5.125% £400 million subordinated notes 2050 396 395 3.375% €900 million subordinated notes 2045 799 756 4.500% C$450 million subordinated notes 2021 258 261 4.375% £400 million subordinated notes 2049 395 395 4.000% £500 million subordinated notes 2055 493 — 4.000% C$450 million subordinated notes 2030 257 —
7,033 6,206 Senior notes 0.625% €500 million senior notes 2023 446 422 1.875% €750 million senior notes 2027 666 630
Total contractual undiscounted cash flows 8,270 7,713 15,983 7,478 7,131 14,609
Borrowings are considered current if the contractual maturity dates are within a year. Where subordinated debt is undated or loan notes are perpetual, the interest payments have not been included beyond 15 years. Annual interest payments in future years for these borrowings are £49 million (2019: £49 million).
(ii) Senior notes All senior notes are at fixed rates and their total fair value at 31 December 2020 was £1,217 million (2019: £1,134 million).
Non-recourse Loans to property partnerships 22 64 Other non-recourse loans 52 52
As explained in accounting policy D, the UK long-term business policyholder funds have invested in a number of property funds and structures (the ‘Property Funds’), some of which have raised external debt, secured on the relevant Property Fund’s property portfolio. The lenders are only entitled to obtain payment of interest and principal to the extent there are sufficient resources in the relevant Property Fund and they have no recourse whatsoever to the policyholder or shareholders’ funds of any companies in the Group. Loans of £22 million (2019: £64 million) included in the table above relate to Property Funds.
Other non-recourse loans primarily include external debt raised by special purpose vehicles in the UK long-term business. The lenders have no recourse whatsoever to the shareholders’ funds of any companies in the Group. The outstanding balance of these loans at 31 December 2020 was £52 million (2019: £52 million).
Other loans of £234 million (2019: £222 million) include external debt raised by overseas long-term businesses to fund operations.
New borrowings drawn down, excluding commercial paper, net of expenses 754 (2) 752 — 75 75 Repayment of borrowings, excluding commercial paper1 (499) (69) (568) (210) (231) (441) Movement in commercial paper2 (150) — (150) 19 — 19 Net cash outflow 105 (71) 34 (191) (156) (347) Foreign exchange rate movements 177 36 213 (204) (28) (232) Borrowings reclassified/(loans repaid) for non-cash consideration1 499 (26) 473 210 (4) 206 Fair value movements — (11) (11) — 38 38 Amortisation of discounts and other non-cash items (24) — (24) (23) — (23) Movements in debt held by Group companies3 — (25) (25) 5 — 5