Transactions in the bulk purchase annuity market offer a complementary source of growth for the Group and the management actions we deliver help increase and accelerate cash flows.
CORPORATE GOVERNANCE Chairman’s Introduction ............60 Board Structure ..........................61 Board of Directors .....................62 Executive Management Team ...........................................64 Corporate Governance Report .........................................65 Directors’ Remuneration Report .........................................76 Directors’ Report .....................106 Statement of Directors’ Responsibilities ........................ 110
FINANCIALS Independent Auditor’s Report .... 112 IFRS Consolidated Financial Statements ...................121 Notes to the Consolidated Financial Statements ...................128 Parent Company Accounts .........214 Notes to the Parent Financial Statements ....................216 Additional Life Company Asset Disclosures ........................222 Additional Capital Disclosures ....228 Alternative Performance Measures .....................................230
All amounts throughout the report marked with ‘APM’ are alternative performance measures.
DEAR SHAREHOLDERS, I joined Phoenix as Chairman at a pivotal moment in the Group’s history. 2018 was a defining year for the Group marked by outstanding strategic delivery and strong financial performance.
On 31 August, Phoenix completed the £2.9 billion acquisition of the Standard Life Assurance businesses and entered into a Strategic Partnership with Standard Life Aberdeen. This transaction established the Group as the largest life and pensions consolidator in Europe with £226 billion of assets under administration and 10 million policies as at 31 December 2018. Not only did the acquisition bring additional scale to the Group’s Heritage business, but Phoenix also acquired a significant Open business in the form of Standard Life branded insurance products which the Group is committed to growing.
Phoenix marked a number of additional significant achievements this year including the completion of the integration of the AXA Wealth and Abbey Life businesses ahead of plan and targets and successfully entering into the Bulk Purchase Annuity market.
Organic growth through the capital-light new business written as part of the Strategic Partnership with Standard Life Aberdeen represents a fundamental strengthening of the Group’s business model, stemming the natural run-off of our Heritage business and bringing sustainability to the Group’s cash generation profile.
Simultaneously, the drivers for consolidation in the life insurance sector are increasing and we believe institutions will look to divest their capital intensive closed business to consolidators such as Phoenix. Phoenix has a proven track record of delivering value accretive acquisitions and I am confident that the Group is well placed to take advantage of these growth opportunities as and when they arise.
Phoenix will enter the FTSE100 Index on 18 March 2019. Entry into this index is recognition of the progress Phoenix has made as an organisation.
I would like to take this opportunity to thank all my colleagues for their hard work and commitment in what has been another hugely successful year for Phoenix and our investors for their continuing support. I look forward to working with you all in 2019.
The acquisition of the Standard Life Assurance businesses in 2018 was transformational for Phoenix. It allowed us to evolve from being a UK closed life consolidator into the largest life and pensions consolidator in Europe; with Heritage and Open businesses spanning the UK, Germany and Ireland.
Phoenix delivered strong financial performance during the year, generating £664 million of cash and increasing the resilience of the Group’s capital position through the implementation of our hedging programme to the Standard Life Assurance businesses. Our leverage ratio remains below the target range and our credit ratings were affirmed by Fitch Ratings in September following completion of the acquisition.
Phoenix’s substantial new business capabilities bring improved sustainability to our long-term cash generation. Our Open business is growing, driven by the success of the capital-light Standard Life branded products sold through the Strategic Partnership with Standard Life Aberdeen. This growth is augmented by our successful entry into the bulk purchase annuity market which, together with vesting annuities, keeps scale in our Heritage business.
Whilst the acquisition of the Standard Life Assurance businesses represents an important milestone in our consolidation journey, it is not our final destination and we remain confident in our ability to grow further through additional acquisitions.
PHOENIX’S BUSINESS CONTINUES TO BE RESILIENT. OUR OPEN BUSINESS BRINGS IMPROVED SUSTAINABILITY TO CASH GENERATION AND WE ARE CONFIDENT ABOUT OUR GROWTH OPPORTUNITIES.”
Covers the Finance and Actuarial functions. This includes the harmonisation of the Group’s capital framework and related internal model as well as improving the alignment of reporting processes as a combined business.
ACQUISITION OF THE STANDARD LIFE ASSURANCE BUSINESSES AND STRATEGIC PARTNERSHIP WITH STANDARD LIFE ABERDEEN Phoenix completed the acquisition of the Standard Life Assurance businesses on 31 August 2018 with 99.98% of voting shareholders supporting the transaction. The acquisition was funded through a £950 million rights issue completed in July with a take-up rate of 96.25%, and the issuance of £500 million Tier 1 notes in April and a €500 million Tier 2 bond in September. I would like to thank our investors for their overwhelming support for this acquisition.
The acquisition has brought additional scale to Phoenix’s pre-existing UK Heritage business which now has £118 billion of assets under administration. It has also brought a significant Open business to Phoenix in the form of Standard Life branded workplace pension, retail pension and Wrap products.
These products are predominantly capital-light unit linked products and will be delivered to the customer through the Strategic Partnership with Standard Life Aberdeen. Under this partnership, Standard Life Aberdeen will undertake sales, marketing and distribution for new business which Phoenix will underwrite and administer. In this way, both companies continue to provide the services that align to their key strengths and is built to work seamlessly for customers with the full proposition being delivered under the Standard Life Brand.
We also now have a European business which contains both Heritage and Open business. We are poised to complete our preparations to ready this business for Brexit with a Part VII transfer to an Irish domiciled subsidiary, Standard Life International Designated Activity Company (‘SL Intl’) due to complete in March. We have injected £250 million of capital into SL Intl prior to this Part VII and will report our 2019 cash generation figures net of this injection.
Upon completion of the acquisition in August, we worked with our new colleagues from Standard Life Assurance to design the operating model of our combined organisation.
Transition programme Our transition programme is making good progress and will deliver an end state operating model over three phases. We are now targeting savings of £75 million per annum from our 2018 business as usual combined cost base of £600 million and have also set a £30 million target for one-off cost savings.
Assurance for the four-month period post completion of the acquisition together with net positive impacts of management actions and experience and actuarial assumption changes during 2018.
REGULATORY AND LEGISLATIVE CHANGES In September we were informed by the Financial Conduct Authority (‘FCA’) that it had closed its investigation into Abbey Life Assurance Limited following the thematic review into the fair treatment of long standing customers in the life insurance sector. The FCA found that the conduct of Abbey Life Assurance Limited did not warrant enforcement action. Standard Life was referred to the FCA enforcement division to consider whether any of the issues identified in the thematic review on non-advised annuities sales warranted further intervention and we continue to work with the FCA on the ongoing investigation.
In 2018, over 14,000 policies moved into drawdown with Standard Life and digital was the channel of choice for the majority of these customers. Furthermore, with more than three million logins last year, our mobile app is now the easiest way for Standard Life customers to interact with us when they want.
Management actions Management actions increase or accelerate cash generation across the Heritage and Open businesses.
Open Growth of Open business at 2018 levels will offset Heritage run-off.
1 Pro forma assuming the acquisition of the Standard Life businesses took place on 31 December 2017.
COLLEAGUES Corporate responsibility plays a central role in the colleague experience at Phoenix. The three strands of physical, mental and financial wellbeing underpin our colleague and community initiatives, which now extend to the Standard Life Assurance businesses.
Volunteering is a priority across the Group with over 50% of Phoenix Group and Phoenix Life colleagues participating in volunteering activities over the year.
2018 saw Phoenix embark on a significant listening exercise to re-invigorate our commitment to our corporate values. ‘The Big Conversation’ brought these values to life and delivered an agreed set of behaviours – created by staff and championed by senior management sponsors.
2019 will see us engage colleagues in the creation of a combined set of values for the Group, building on previous work conducted at Standard Life Assurance and Phoenix.
This focus on engagement and colleague empowerment creates a rich and diverse working environment, reflected in our continued status as one of the UK’s Top Employers.
The drivers of consolidation in the life insurance industry are numerous: trapped capital, specialist skills shortages, stranded costs, and an increased regulatory burden. These drivers will generate future acquisition opportunities for Phoenix.
PHOENIX LIFE AND STANDARD LIFE Phoenix Life and Standard Life are responsible for the management of the Group’s life funds in the UK, Germany and Ireland across both Heritage and Open product lines. Phoenix Life is based in Wythall, Birmingham and is led by its Chief Executive Officer, Andy Moss. Susan McInnes is the Chief Executive of our Standard Life business which is primarily based in Edinburgh with significant operations in Frankfurt and Dublin.
Investment management Investment management services are provided to the life companies by a number of external asset management companies, with the main partner being Aberdeen Standard Investments.
Distribution Distribution of non-workplace Standard Life branded products is provided by Standard Life Aberdeen under the Client Service and Proposition Agreement. We have also retained the SunLife distribution business within the Open business segment of the Group with a management team based in Bristol focused on their key skills of marketing and sales.
Outsource partners The management services companies manage relationships with the outsource partners for our Phoenix Life business. Without further acquisitions, the number of policies in our Heritage business declines over time and the cost of our Heritage operations as a proportion of policies will increase. This risk is managed by paying a fixed price per policy to our outsource partners for policy administration services, which reduces this fixed cost element of our operations and converts it to a variable cost structure.
The features of each policy influences whether it is the policyholders and/or the shareholders who are exposed to the risks and rewards of a policy.
Policyholders benefit from discretionary annual and/or final bonuses. The bonuses are designed to distribute to policyholders a fair share of the return on the assets in the fund, together with other elements of experience in the fund.
In the ‘supported’ with-profit funds, the shareholders’ capital is exposed to all economic movements until the estate is rebuilt to cover the required capital, at which point the fund becomes ‘unsupported’. In the ‘unsupported’ with-profit funds, typically shareholders receive 10% of declared bonuses (90:10 structure) or nil (100:0 structure), including any estate distributed.
Profits are generated from investment returns and underwriting margins. Shareholders are exposed to the majority of the risks and benefit from 100% of the profits or losses arising.
The Group’s strategy for our UK Heritage Business is simple – to deliver value to shareholders and customers and to improve customer outcomes.
Heritage business cash generation runs off at 5-7% per annum depending on the particular features of each legacy book. Organic cash emerges naturally from our UK Heritage business as it runs off over time and we enhance this organic cash generation through the delivery of management actions which either increase the overall cash flows from the business or accelerate the timing of these cash flows.
PHOENIX HAS THREE MAIN BUSINESS SEGMENTS FOR ITS LIFE AND PENSIONS BUSINESS: UK HERITAGE, UK OPEN AND EUROPE.
The UK Heritage business segment comprises products that are no longer marketed to customers, for example with-profits, annuities and many legacy unit linked life and pension products. UK Open business comprises products that are actively marketed to new and existing customers and includes products sold under the Standard Life and SunLife brands. The European segment comprises both Heritage and Open business.
It contains both open and heritage products split across Germany and Ireland and has £23 billion of assets under administration.
• International Bond 27%£23bn EUROPE* * Based on assets under administration at 31 December 2018.
In Force Germany Germany closed its with-profits business to new business in 2015 and now distributes only unit linked life assurance products which have no material guarantees. These products target the over 50’s market and utilise the broker distribution channels through operations in Frankfurt and Graz, Austria.
International bond This business is all open business managed from our Dublin office targeting customers in the UK. The international bonds are unit linked products distributed by retail advisers, banks and wealth managers.
Our UK Open business comprises products that are actively marketed to customers and has £85 billion of assets under administration.
The Group’s strategy for our Open business is shared with our Heritage book as we aim to deliver value to shareholders and customers alike. Our Strategic Partnership is important in supporting that strategy.
Responsibility for the Wrap Platform, which hosts some of our investment products such as Wrap SIPP and offshore bond also sits with Standard Life Aberdeen.
Under the agreement, Phoenix collects product charges from customers and remits investment management fees to Standard Life Aberdeen. Where relevant, Standard Life Aberdeen may also collect a platform charges directly from the customer.
THE UK LIFE AND PENSIONS MARKET REMAINS COMPETITIVE AND A STRONG BRAND IS THE KEY TO SUCCESS IN WINNING MARKET SHARE. THE PHOENIX BRAND IS DOMINANT IN THE CONSOLIDATION OF THE LIFE AND PENSIONS INDUSTRY AND IS TAKING A FOOTHOLD IN THE BULK PURCHASE ANNUITY MARKET. PHOENIX’S OPEN BUSINESS IS DELIVERED UNDER THE BRANDS OF STANDARD LIFE AND SUNLIFE.
Phoenix has been a brand in the insurance industry since 1782. From its beginnings, more than 200 years ago, Phoenix has grown to become the largest life and pensions consolidator in Europe.
Closed life funds market Phoenix estimates the size of the closed life funds market to be approximately £380 billion in the UK, increasing to £540 billion including Germany and Ireland.
Opportunities and outlook The Group expects to see continued consolidation in the closed life funds market in the future. This will be driven by the significant capital held within closed funds that owners may wish to redeploy, more intrusive regulation leading to pressure on owners and fixed cost pressures as closed funds decline in size over time.
Bulk purchase annuities market Many Defined Benefit pension schemes are now closed to new members but have liabilities that will continue for many decades into the future. The BPA market offers employers the ability to mitigate the risk of their Defined Benefit pension liabilities whilst allowing the pension scheme trustees the ability to secure and protect their members’ benefits.
Phoenix will continue to write new business under the Standard Life Brand through the Strategic Partnership with Standard Life Aberdeen. Phoenix is committed to the development of the Standard Life proposition which holds a strong position across the following markets: Workplace pensions The introduction of auto-enrolment, which obliges employers to provide and contribute to a workplace scheme for all eligible members, has resulted in strong growth in the workplace pensions market with more than 9.5 million people automatically enrolled through the scheme since 2012. (Source ONS)
Opportunities and outlook Continued growth is expected in the workplace pensions market. 280,000 policies joined existing employer schemes in 2018 and the increase in mandatory contribution rates from 5% to 8% from April 2019 will contribute to the growth of this business in the future.
Standard Life has built a strong proposition to compete in this market with 15,000 active schemes serving 1.9 million customers and harnessing the benefit of strong relationships with large employer benefit consultants and employers.
Opportunities and outlook The retail pensions products offering has a strong digital and service offering which is critically important in this marketplace.
We support the introduction of the Pensions Dashboard and are engaging with the Department of Workplace Pensions with the rest of the industry. We believe our business will benefit from customers greater visibility of their retirement savings and increased engagement.
Europe Our European businesses in Germany and Ireland sell unit linked investment style business and the International bond is sold by Standard Life Aberdeen through the retail market and investment platform.
Opportunities and outlook The strong Standard Life brand recognition and a financially strong parent support new business growth.
WE ARE SET APART BY OUR STRENGTHS WHICH UNDERPIN OUR BUSINESS MODEL
SPECIALIST OPERATING MODEL Specialist operating model enabling us to efficiently manage and integrate heritage books
MANAGE CAPITAL We continue to focus on the effective management of our risks and the efficient allocation of capital against those risks.
IMPACT OF NEW BUSINESS? Capital-light open business New business written across our open product range is capital-light and does not require significant capital to be retained.
WHAT IS THE OPENING FREE SURPLUS? Life Company Own Funds Life companies hold capital in accordance with Solvency II regulations, providing appropriate security for policyholders. This capital is known as Solvency II Own Funds.
IN-FORCE BOOK CASH EMERGENCE Capital requirements of operating life companies decline as policies mature, releasing capital in the form of cash
NEW BUSINESS Capital-light new business under the Strategic Partnership with Standard Life Aberdeen and vesting annuities from our Heritage business
HOW IS FREE SURPLUS GENERATED? Margins earned Life companies earn margins on different types of life and pensions products increasing Own Funds.
WHAT IS THE CASH REMITTED FROM THE LIFE COMPANIES USED FOR? Head office costs Including salaries and other administration costs.
WE HAVE FOUR AREAS OF STRATEGIC FOCUS. OUR INITIATIVES AND KEY PERFORMANCE INDICATORS DEMONSTRATE HOW WE HAVE DELIVERED AGAINST THESE STRATEGIC AREAS.
We have seven key areas of focus related to our customer offering: • Product Offering – Offering products based on customer needs using best solutions and value for money, from in-house or through external sourcing.
• Financial Security – Providing security to our customers including continuing to honour all policy guarantees.
• Effective Service Delivery – Delivering a fair, effective and value for money service to customers in a cost effective manner and having appropriate processes for identifying potential customer detriment.
• Clear and Effective Communications – Providing customers with clear, accurate and unbiased information and access to advice and guidance to support them in making informed choices.
• Product Outcomes – Ensuring that Phoenix product terms continue to deliver appropriate outcomes for customers and Phoenix.
• Customer Journey – Delivery of fair outcomes, appropriate quality and improvements in the customer journey.
KEY INITIATIVES AND PROGRESS IN 2018 – PHOENIX LIFE • Customers can now digitally access an annuity shopping around service which can shape and save their annuity quotes and options and provide marketplace comparisons. A full Customer Dashboard has been delivered and allows some customers to access their full policy details, view online documents and self-serve.
• In August we announced a cap on ongoing charges of our non-workplace pension contracts at 1.5% for funds in excess of £5,000 and at 3% for smaller pension pots. All exit charges will be removed on pension pots of less than £5,000. This ensures that our pension contracts offer good value for money and there is no perceived barrier to exit for customers with small pension pots wishing to consolidate their savings.
• Our service offering has been aligned across Phoenix Wealth and Abbey Life, ensuring that all customers receive the same fair service.
• Our performance on complaint handling, as measured by the independent complaints adjudicator, the Financial Ombudsman Service (‘FOS’), once again shows our commitment and focus on our complaint handling. For FOS decisions during this reporting period, the overturn rate of 17% is significantly below the industry average rate of 30%.1
• A positive customer satisfaction score based on the results of the satisfaction survey managed by Ipsos MORI (an external research firm) has been received. Customers surveyed were asked to give a satisfaction rating of between 1 and 5 to a number of questions asked (with a rating of 4 or 5 regarded as satisfied) and 93% of all questions scored a rating of 4 or above.
and Payments) and Maturities and further strengthens our commitment to a continued positive customer experience. We will also be extending our digital operating model to IFAs allowing them to engage and interact through our on-line channels.
• Complete the implementation of our charge reductions on non-workplace pensions contracts.
Why is it important? This is an externally calculated measure of how satisfied customers are with Phoenix’s servicing proposition.
Analysis The Group’s pension transfer times are better than the industry target.
Notes: 1 The customer satisfaction score relates to Phoenix only. 2 Origo Timescales are Phoenix, Phoenix Wealth and Abbey
– the overall timescale has been applied based on the way that timescales are calculated for each individual entity. These will be aligned from 2018.
• Since Auto enrolment we have supported 11,000 schemes into a qualifying workplace pension scheme with 1.7 million new joiners auto enrolled into them by employers. We are continuing to enhance the administration experience we offer via our Workplace Hub platform.
• In 2018, we had 14,000 policies moving into drawdown with the majority using our digital platform, followed by our Telephony Guidance service. Of all cases processed via our retirement application we anticipate that we were able to process 60% ‘straight-through’.
• Furthermore, with more than three million logins last year, our 24/7 mobile app is now the easiest way for our customers to interact with us when they want, time and time again.
• For customers in our non-advised Active Money Personal Pension drawdown plan, we have developed an online retirement review to help them assess if they are still on track and in the right investment based on their objectives. The timing of our pre-retirement communications has also been changed as feedback has shown that people start to think about major decisions in the run-up to milestone birthdays. Our communications now trigger at ages 49, 54, 59 and 64.
• We continue to look for ways to improve the administration experience we offer financial advisers. In 2018 we enhanced our digital platform Adviser zone by delivering online portfolio analyser capabilities for an enhanced client experience and continued to provide live, online client valuations and contract enquiries through 15 of the top back office providers.
Note: 1 The acquisition of the Standard Life businesses completed on 31 August 2018 but this measure has been calculated for the full year 2018.
Our Open business provides the opportunity to grow organically through the matching of products to new and existing customers as part of our Strategic Partnership with Standard Life Aberdeen and under the Group’s SunLife brand. Such growth brings additional scale to our business and dampens the run-off of our Heritage books.
Additional value can be generated from acquisitions of life and pension books of business and further investment in the bulk purchase annuity market.
KEY INITIATIVES AND PROGRESS IN 2018 • The Group delivered £664 million in cash generation in the year. With total cash generation in 2017 and 2018 of £1.3 billion, the Group exceeded the upper end of its £1.0 billion to £1.2 billion target range.
• The acquisition of Standard Life Assurance and Strategic Partnership with Standard Life Aberdeen completed in August adding significant scale and supporting future cash generation. The Group expects to deliver cost synergies of £75 million per annum, to be delivered from a combined cost base of £600 million.
• The Open and European businesses delivered new business contribution of £154 million (net of tax on a pro forma basis assuming the acquisition of Standard Life Assurance took place on 1 January 2018). This measure provides a proxy for the expected future cash generation arising from the new business written in the year.
PRIORITIES FOR 2019 • Deliver Phase 1 of the Standard Life acquisition transition programme and finalise the end state operating model for the HR, Legal and Risk functions.
• Commence Phase 2 and 3 of the Standard Life acquisition transition programme related to the operating model for the Finance and Actuarial, Customer and IT functions.
• Implement further management actions including progressing activity to begin applying the Group’s strategic asset allocation to the Standard Life Assurance annuity book.
• Seek further investment opportunities in the bulk purchase annuity market.
Analysis Cash remitted reflects the generation of Free Surplus within the life companies and the benefit of management actions implemented in the period. Cash generation in 2018 was £664 million.
Analysis Operating profit has increased by £340 million compared to prior year, principally reflecting the impact of including the four month contribution of Standard Life Assurance post completion of the acquisition together with the net positive impact of updates to actuarial assumptions.
Why it is important? The Group’s dividend per share helps measure how the Group delivers value to shareholders in accordance with its stable and sustainable dividend policy.
Read more about cash generation on P29 Read more about the link to our executive remuneration on P76
The Group aims to optimise its capital structure while addressing the diverse needs of various stakeholders, including policyholders, shareholders, lending banks, bondholders and regulators.
KEY INITIATIVES AND PROGRESS IN 2018 • Receipt of regulatory approval to incorporate the Abbey Life business into the Group’s Internal Model in March and the subsequent Part VII transfer of that business into Phoenix Life Limited in December.
• Issuance of the capital qualifying £500 million Tier 1 Notes in April and the €500 million Tier 2 bond in September 2018 facilitated the funding strategy for the acquisition of the Standard Life Assurance businesses and provided additional financial flexibility to the Group.
• In September, following completion of the acquisition, Fitch assigned Standard Life Assurance Limited an Insurer Financial Strength rating of A+ with a ‘stable’ outlook. It also affirmed its A+ rating for the other principal insurance subsidiaries of the Group with ‘stable’ outlooks.
• Progress activity to begin harmonisation of the Group’s capital framework towards a single Group Internal Model.
Read more about the Solvency II surplus and Shareholder Capital Coverage Ratio on P32
Why it is important? The Shareholder Capital Coverage Ratio demonstrates the extent to which shareholders’ Eligible Own Funds cover the Solvency Capital Requirements.
It is defined as the ratio of the Group Own Funds to Group SCR, after adjusting to exclude amounts relating to unsupported with – profit funds and PGL Pension Scheme.
£3.2bn 2017: £2.5bn (PRO FORMA ENLARGED GROUP)2 2017: 147% (PRO FORMA ENLARGED GROUP)2
2 Pro forma assuming the acquisition of the Standard Life Assurance businesses took place on 31 December 2017.
• A new online performance management system was launched increasing the efficiency of the performance management process at Phoenix.
Cultural Survey • In the absence of an all-staff employee engagement survey, Phoenix issued a cultural survey to colleagues across the Group in November. This insight will help the Group shape its values and understand more about what is required to create a high-performing organisation following our acquisition of the Standard Life Assurance businesses.
• Now into its fifth year of the sixyear partnership with Midlands Air Ambulance Charity and London’s Air Ambulance, the Group has donated in excess of £770,000 between the two charities since 2014.
Wellbeing • Corporate responsibility continues to play a central role in the colleague experience at Phoenix. The three strands of physical, mental and financial wellbeing continue to underpin our colleague and community initiatives, which now extend to the Standard Life Assurance businesses.
• The Group values the power of its employee voice and through the acquisition of Standard Life Assurance now has further networks in operation across the Enlarged Group. Alongside the combination of the Phoenix and Standard Life Assurance networks, we continue to adopt a ‘best of both’ approach to fusing colleague groups across the enlarged organisation.
• Provide a common incentive plan for all colleagues within the Enlarged Group, ensuring consistency of corporate goals and individual performance management.
• Enter into two further Corporate Charity Partnerships (Scotland’s Charity Air Ambulance and Hampshire and Isle of Wight Air Ambulance), helping to unite the Enlarged Group by sharing common corporate charities.
• Expand the Diversity and Inclusion programme across the Enlarged Group, providing a wide range of development opportunities and embedding changes to existing practices to deliver a diverse, engaged and inclusive workforce.
• In line with the WIF Charter Targets previously set, which were due for completion by the end of 2018, the group currently has women in 20% of the top 100 roles (target 30%), 26% of the Group’s green/ amber successors are female (target 40%) and the Group-wide mean gender pay gap is 23.3% (target 22%). Targets set for completion in 2018 were impacted by changes in senior management through acquisitions, structural changes, resignation and retirement; and these are now carried forward to 2021.
• Gender Pay statistics are calculated based on data gathered on ‘Full Pay Relevant Employees’ in the payroll period covering 5 April 2018. Of the employing entities within the Group, only Pearl Group Management Services Limited (‘PGMS’) has the required 250+ employees and so it is PGMS employees who are included in the regulatory reporting for 2018.
Reward • The Group continues to attract and retain talented staff by offering a comprehensive range of benefits and development opportunities.
• Participation figures for the Phoenix Group flexible benefits scheme have increased to 95%.
• In 2018, private medical insurance was made available to all staff and their partner’s regardless of status within the organisation.
CASH GENERATION IN EXCESS OF TARGET, ENHANCED SCALE AND A RESILIENT CAPITAL POSITION I am delighted to report that Phoenix has delivered a year of strong performance, achieving its financial targets and completing the transformational acquisition of the Standard Life Assurance businesses.
Cash generation remains our key reporting metric. The integration of the AXA Wealth and Abbey Life businesses were completed ahead of plan and this has supported the Group’s cash generation of £664 million in the year. With total cash generation in 2017 and 2018 of £1.3 billion, the Group has exceeded the upper end of its £1.0 – £1.2 billion target range for that period.
Our strong financial position has been recognised by Fitch Ratings who assigned Standard Life Assurance Limited an Insurer Financial Strength rating of A+ with a ‘stable’ outlook in September and reaffirmed its A+ rating for the other insurance subsidiaries of the Group.
Following the acquisition of the Standard Life Assurance businesses, the Group now monitors additional performance metrics to reflect the Group’s Open business capabilities. Assets under Administration (‘AUA’) provides a measure of the Group’s future earnings capabilities and its success in attracting inflows from new business. AUA as at 31 December 2018 was £226 billion (2017: £240 billion pro forma1), with the reduction reflecting adverse equity movements in the year, together with net outflows on the Group’s UK Heritage business. Net flows on the UK Open and European businesses were positive at £3.9 billion.
New business contribution reflects the increase in Solvency II shareholder Own Funds as a result of new business written by the Group’s UK Open and European businesses.
Phoenix has set two new cash targets; a long-term cash generation target of £3.8 billion for the 5-year period 2019 to 2023 and a short term target of £600 to £700 million for 2019. The Group looks forward to the future from a position of financial strength.
1 Pro forma assuming the acquisition of the Standard Life Assurance businesses took place on 31 December 2017.
2018 WAS ANOTHER YEAR OF EXCELLENT PROGRESS WITH THE GROUP ACHIEVING ALL OF ITS FINANCIAL TARGETS SET FOR THE YEAR.”
ALTERNATIVE PERFORMANCE MEASURES The Group assesses its financial performance based on a number of measures, some of which are not defined or specified in accordance with Generally Accepted Accounting Principles (‘GAAP’). These metrics are known as Alternative Performance Measures (‘APMs’).
The Group’s strategic focus prioritises the generation of sustainable cash flows from its operating companies through the margins earned on different life and pension products and the release of capital requirements. Performance metrics are monitored where they support this strategic purpose, which includes ensuring the capital strength of the Group is maintained.
As a result, GAAP measures typically used to assess financial performance, such as IFRS profit after tax, are considered by the Board to be of limited value when assessing Phoenix’s performance against its strategy. IFRS results exclude any changes to the capital requirements and therefore do not fully reflect the performance of the Group.
As such, the key performance indicators for the Group mainly focus on cash generation and capital strength. Further information on the Group’s APMs can be found on page 230, including definitions, why the measure is used and if applicable, how the APM can be reconciled to the nearest GAAP measure.
CASH GENERATION Operating companies’ cash generation represents cash remitted by the Group’s operating companies to the holding companies.
Recurring cash outflows The operating expenses of £32 million (2017: £36 million) principally comprise corporate office costs, net of income earned on holding company cash and investment balances.
The decrease in total contributions compared to prior year reflects the lump sum payment of £25 million paid as part of the transfer of the Abbey Life Scheme to the Group in 2017 and £10 million paid into the Pearl Group Scheme in respect of the final quarter of 2016 as part of the move from annual to monthly funding. In addition, no further contributions are expected to be paid into the PGL Staff Pension Scheme under the existing funding agreement (2017: £10 million).
Debt interest of £88 million (2017: £60 million) principally comprise coupon payments on the Tier 1 Notes issued in April and the Group’s subordinated and senior bond instruments. The Group’s £900 million unsecured revolving credit facility and £600 million acquisition facility are undrawn as at 31 December 2018. The increase compared to the prior year reflects the debt issued in 2018 to finance the acquisition of the Standard Life Assurance businesses.
Non-recurring net cash outflows Non-recurring net cash outflows of £216 million include £22 million of option premiums and £143 million of cash paid to close out derivative instruments entered into by the holding companies to hedge the Group’s exposure to equity and currency risk arising from the Group’s acquisition of the Standard Life Assurance businesses. Standard Life Assurance Limited has subsequently applied the Group’s hedging strategy and the derivative instruments are now held within this entity.
Operating companies’ cash generation: Cash receipts from Phoenix Life 664 653
The shareholder dividend of £262 million represents the payment of £99 million in May for the 2017 final dividend and the payment of the 2018 interim dividend of £163 million in September. The final 2018 dividend per share proposed is 23.4p, which is a 3.5% increase on the 2017 final dividend.
Equity raise (net of fees) The £934 million equity issuance relates to proceeds, net of fees, from the rights issue associated with the financing of the acquisition of the Standard Life Assurance businesses.
A new long-term £3.8 billion cash generation target has been set by the Group for the 5-year period 2019 to 2023. The resilience of the cash generation target is demonstrated by the illustrative stress testing in the table below. In addition the Group has set a new short-term target of £600 to £700 million for 2019 which is net of expected Brexit costs of £250 million.
2 Assumes recalculation of transitionals (subject to PRA approval). 3 Credit stress equivalent to an average 120bps spread widening across ratings, and includes allowance for defaults/downgrades. 4 Equivalent of six months increase in longevity applied to the annuity portfolio. 5 Assumes most onerous impact of a 10% increase/decrease in lapse rates across different product groups.
ASSETS UNDER ADMINISTRATION AND NEW BUSINESS The Group’s Assets under Administration (‘AUA’) represent assets administered by or on behalf of the Group, covering both policyholder funds and shareholder assets. This includes assets recognised in the Group’s IFRS consolidated statement of financial position together with certain assets administered by the Group but for which beneficial ownership resides with customers.
Please see the Alternative Performance Measure (‘APM’) section on page 230 for further details of this measure.
The decrease in Group AUA in the year from £239.8 billion to £226.3 billion was driven by adverse market movements, notably falls in global equity markets and the run-off of the Group’s UK Heritage business; partly offset by net inflows from the Group’s UK Open and European businesses.
New inflows of £3.7 billion equates to 4% of the opening AUA for the UK Open business.
Other movements including markets AUA reduced by £10.3 billion as a result of other movements, largely driven by the impact of adverse equity market movements in the last quarter of the year.
New business contribution represents the increase in Solvency II shareholder Own Funds (net of tax) arising from new business written in the year, adjusted to exclude the associated risk margin and any restrictions recognised in respect of contract boundaries. It is stated net of ‘Day 1’ acquisition costs and is calculated as the value of expected cash flows from new business sold, discounted at the risk free rate. As such, it is considered a prudent proxy for the future cash generation that is expected to emerge over the life of the contract.
New business contribution for 2018 was £154 million (net of tax) and is stated on a pro forma basis, assuming the acquisition of the Standard Life Assurance businesses took place on 31 December 2017. This includes £137 million from the Group’s UK Open business and £17 million from the Europe business.
CAPITAL MANAGEMENT PGH PLC SOLVENCY II SURPLUS OVERVIEW Following completion of the on-shoring of the Group, a new UK-registered holding company, PGH plc was put in place in December 2018. The new company is the ultimate parent company and the highest EEA insurance Group holding company and the Group’s Solvency II capital assessment and Group supervision is now being managed at the PGH plc level only.
A Solvency II capital assessment involves a valuation in line with Solvency II principles of the Group’s Own Funds and a risk-based assessment of the Group’s Solvency Capital Requirement (‘SCR’). PGH plc’s Own Funds differ materially from the Group’s IFRS equity for a number of reasons, including the recognition of future shareholder transfers from the with-profits funds and future management charges on investment contracts, the treatment of certain subordinated debt instruments as capital items, and a number of valuation differences, most notably in respect of insurance contract liabilities and intangible assets.
The acquired Standard Life Assurance businesses determine their capital requirements in accordance with an approved partial Internal Model. As a result, the Enlarged Group currently uses a Partial Internal Model to calculate Group SCR, aggregating outputs from both the existing Phoenix Internal Model and the Standard Life Internal Model with no diversification between the two. A harmonisation programme to combine the two models into a single Internal Model has commenced.
The pro forma position as at 31 December 2017 for the Enlarged Group (i.e. including the acquired Standard Life Assurance businesses) was £2.5 billion, as set out in the acquisition prospectus disclosures.
Surplus generation and the impact of the reduction in capital requirements for the Enlarged Group added £0.3 billion to the surplus during the year.
4 The pro forma position assumes the acquisition of the Standard Life Assurance businesses took place on 31 December 2017.
The PGH plc Solvency II surplus position at 31 December 2018 is set out in the table below: Estimated position as at £bn
Delivery of capital synergies associated with the acquisition of the Standard Life Assurance businesses increased the surplus by £0.5 billion, primarily as a result of implementing Phoenix’s equity and currency hedging strategy in order to protect the economic value of the acquired businesses.
The impact of new business written during the year reduced the surplus by £0.2 billion. This primarily reflects the capital strain associated with the three BPA transactions executed in the year and the vesting annuities in the Heritage business segment.
Assumption, experience and modelling changes decreased the Solvency II surplus by £0.1 billion, reflecting the impact of strengthening lapse risk capital for the Standard Life businesses, together with expense impacts arising from separation of those businesses prior to the acquisition, customer proposition development and other project costs. These items have been offset by the positive impacts of changes to longevity assumptions.
LIFE COMPANY FREE SURPLUS (ESTIMATED) Life Company Free Surplus represents the Solvency II surplus of the Life Companies that is in excess of their Board approved capital management policies.
4 Credit stress equivalent to an average 120bps spread widening across ratings, and includes an allowance for defaults/downgrades. 5 Equivalent of six months increase in longevity applied to the annuity portfolio. 6 Assumes most onerous impact of a 10% increase/decrease in lapse rates across different product groups.
Please see the APM section on page 230 for further details of this measure.
The positive items have been partly offset by the recognition of certain one-off cost provisions including a commitment to reduce charges on non-workplace pension policies and expenses associated with the acquisition.
Amortisation of acquired in-force business, customer relationships and other intangibles (207) (119)
Profit before finance costs and tax attributable to owners 553 76
The with-profits operating profit of £101 million (2017: £84 million) represents the shareholders’ one-ninth share of the policyholder bonuses. The increase on prior year primarily reflects the contribution from the Standard Life Assurance businesses.
The with-profits funds where internal capital support has been provided generated an operating profit of £20 million (2017: £108 million loss). The profit is principally driven by the positive impact of updating actuarial assumptions related to longevity and expenses. The loss in the prior year was due to the adverse impact of updating actuarial assumptions related to persistency of products with valuable guarantees.
The Group’s SunLife business generated an operating profit of £10 million during the year.
GROUP COSTS Group costs in the period were £20 million (2017: £20 million) in line with prior year. They mainly comprise project recharges from the service companies offset by returns on the scheme surplus of the Group staff pension schemes.
INVESTMENT RETURN VARIANCES AND ECONOMIC ASSUMPTION CHANGES ON LONG-TERM BUSINESS The net positive investment return variances and economic assumption changes on long-term business of £283 million (2017: £6 million negative) primarily arise due to the positive impact of strategic asset allocation activities, including investment in higher yielding illiquid assets, together with the impact of gains on hedging positions held by the life funds as a result of declining equity markets in the year. The Group’s exposure to equity movements arising from future profits in relation to with-profit bonuses and unit-linked charges is hedged to benefit the regulatory capital position. The impact of equity market movements on the value of the hedging instruments is reflected in the IFRS results, but the corresponding change in the value of future profits is not.
The acquired in-force business is being amortised in line with the expected run-off profile of the profits to which it relates. Amortisation of acquired in-force business during the year totalled £189 million (2017: £102 million) with the increase from the prior year driven by the additional acquired-inforce business for the Standard Life Assurance businesses noted above. Amortisation of other intangible assets totalled £18 million in the year (2017: £17 million).
OTHER NON-OPERATING ITEMS Other non-operating items of £38 million negative (2017: £80 million negative) includes a gain on acquisition of £141 million reflecting the excess of the fair value of the net assets acquired over the consideration paid for the acquisition of the Standard Life Assurance businesses and a net benefit of £45 million reflecting anticipated costs savings associated with the move to a single, digitally enhanced outsourcer platform. These amounts have been more than offset by a provision for £68 million in respect of a commitment to reduce ongoing and exit charges for non-workplace pension products, costs of £59 million associated with the equalisation of accrued Guaranteed Minimum Pension benefits within the Group’s pension schemes, costs of £43 million associated with the acquisition of the Standard Life Assurance businesses and £7 million incurred under the ongoing transition programme. It also includes net other one-off items totalling £47 million, including other corporate project costs.
The Group tax charge for the period attributable to owners is £60 million (2017: £1 million tax credit) based on a profit (after policyholder tax) of £470 million (2017: loss of £(28) million). The significant tax adjustments to the Owners’ profit before tax are primarily due to the impact of non-taxable income which reduces the tax charge by £(31) million, the impact of non-tax deductible costs of £21 million, a prior year credit for shareholders £(5) million and profits taxed at a rate other than the statutory rate of £(14) million. See note C6 to the IFRS consolidated financial statements for further analysis.
Work is well advanced to finalise implementation plans for the harmonised RMF for the Enlarged Group which combines the best of both from the respective frameworks.
BUSINESS AND RISK ENVIRONMENT The acquisition of Standard Life was completed on 31 August and is transformational for the Group. Whilst significant progress has been made with the transition activity the Group must continue to ensure that it operates a robust risk and control environment in the delivery of all objectives across the Heritage, Open and European businesses.
There remains great uncertainty about the timing and terms of the UK’s withdrawal from the EU. The Group continues to closely monitor developments to understand any potential financial or operational implications. The Group identified contingency actions to ensure it could service EU-based customers in the event of a ‘Hard Brexit’ and has continued to progress these.
The regulatory actions in respect of the acquired Abbey Life business were addressed through the implementation of Phoenix’s robust control environment, product governance and oversight model to improve customer outcomes.
To support this goal, the Group defined a Risk Culture Statement which sets out the Group’s aspirations for Risk Management: At its core are the Group’s values and behaviours, clarity of accountability and a healthy tension between the first and second lines of defence.
Risk culture has been one of the five elements of the ERM framework for Standard Life Assurance.
RISK CULTURE, SUPPORTIVE OF COMMERCIAL RISK‑TAKING COUPLED WITH STRONG EXECUTION IN LINE WITH ITS RISK APPETITE.”
To ensure that all risks are managed effectively the Group is committed to: • embedding a risk aware culture; • maintaining a strong system of internal controls; • enhancing and protecting customer and shareholder value by continuous and proactive risk management; • maintaining an efficient capital structure; and
• ensuring that risk management is embedded into day-to-day management and decision- making processes.
RISK APPETITE The Group’s risk appetite is the level of risk the Group is willing to accept in pursuit of its strategic objectives. The statements below encapsulate our risk appetite for policyholder security and conduct, earnings volatility, liquidity and our control environment: Capital – The Group and each Life Company will hold sufficient capital to meet regulatory requirements in a number of asset and liability stress scenarios.
Standard Life Assurance has operated its own framework of quantitative and qualitative risk appetite metrics supported by stress and scenario testing. Work is underway to align these to the Group statements.
PGH Board Remuneration Committee PGH Board Risk Committee PGH Board Audit Committee
The risk universe operated within Standard Life Assurance is very closely aligned to this which enables an efficient adoption of the Group’s risk universe.
Organisation The Group Chief Risk Officer manages the Group Risk function and has responsibility for the implementation and oversight of the Group’s RMF. The Group Risk function has responsibility for oversight over financial, operational and regulatory risk. The PRA/FCA relationship team manages the relationship and interactions with our primary regulators and reports to the Group Chief Risk Officer.
Policies The Group policy framework comprises a set of policies that supports the delivery of the Group’s strategy by establishing operating principles and expectations for managing the key risks to our business. The policy set contains the minimum control standards to which each business unit must adhere to and against which they report compliance.
The policies define: • the individual risks the policy is intended to manage; • the degree of risk the Group is willing to accept, which is set out in the policy risk appetite statements; • the minimum controls required in order to manage the risk to an acceptable level; and
Standard Life Assurance has operated a set of risk policies and the scope of these is very closely aligned to Phoenix’s. Activity is underway to finalise and implement a harmonised set of policies across the combined Group.
MANAGEMENT INFORMATION Overall monitoring and reporting against the risk universe takes place in business unit management committees and Boards. This is then reported to the Executive Committee and the Group Board via regular risk reporting.
PEOPLE AND REWARD Effective risk management is central to the Group’s culture and its values. Processes are operated that seek to measure both individual and collective performance and discourage incentive mechanisms which could lead to undue risk taking. Training and development programmes are in place to support employees in their understanding of the RMF.
We are exposed to the risk of failing to deliver against our primary strategic focus of continuing to achieve inorganic growth through acquisitions. Transition of acquired businesses into the Group could introduce structural or operational challenges that result in Phoenix failing to deliver the expected outcomes for policyholders or value for shareholders.
The Group’s Strategic Partnership with Standard Life Aberdeen fails to deliver the expected benefits
The ongoing Strategic Partnership with Standard Life Assurance plc (SLA plc) will provide additional growth opportunities and is an enabler for delivery of the Group’s strategy. There is a risk that the partnership does not deliver expected benefits. Key areas include implementation and oversight of the Client Service and Proposition Agreement and Transitional Service Agreements.
If our propositions fail to meet the needs of customers and clients it could adversely impact the Group’s ability to deliver growth assumed in our business plans. The risk could materialise through increased outflows or reduced new business levels.
The number of principal risks has increased from six to ten as a result of the transformational Standard Life acquisition which introduces new strategic risks given our substantial new business capabilities. As economic changes occur and the industry and regulatory environment evolves, the Group will continue to monitor their potential impact. During the year we have reviewed our principal risks and consolidated the ‘Concentration in the policy administration outsource industry’ risk into a broader operational resilience risk. Further details of the Group’s exposure to financial and insurance risks and how these are managed are provided in note E6 of the IFRS consolidated financial statements.
The current assessment of the residual risk in respect of each of the Group’s principal risk categories is illustrated in the chart opposite.
Phoenix is exposed to the risk that it fails to deliver fair outcomes for its customers, leading to adverse customer experience and/or potential detriment. This could also lead to reputational damage for the group and/or financial losses.
The Group puts considerable effort into managing relationships with its regulators so that it is able to maintain a forward view regarding potential changes in the regulatory landscape. The Group assesses the risks of regulatory and legislative change and the impact on our operations and lobbies where appropriate. The Group has contingency plans in place to ensure we can continue to service our non-UK policyholders after the UK leaves the EU.
The FCA closed its enforcement investigation into the acquired Abbey Life business. Investigations are ongoing in Standard Life following the thematic review of non-advised annuity sales. Contingency plans continue to be progressed to enable EU policyholders to be serviced in the event of a ‘Hard Brexit’. PRA issued a consultation on potential changes to the valuation and capital treatment of equity release mortgages. Implementation was subsequently deferred until YE19 or later.
The Group has a set of risk policies that map to its risk universe and set out an appetite level for each risk and minimum controls standards. We work with specialist external cyber risk experts to identify new risks and develop our responses. The Group has a business continuity management framework that is subject to annual refresh and regular testing. The Group operates an oversight framework to ensure that our outsource partners and critical suppliers adhere to the same business continuity principles.
The Group places great reliance on its people to help deliver its strategy. Delivery of our strategy could be impacted by the uncertainty caused by the integration of Phoenix and Standard Life, which could result in loss of critical corporate knowledge or unplanned departures of key individuals.
Timely communications to our people aim to provide clarity around any uncertainty brought by the purchase of Standard Life, along with key milestones required to deliver the transition. We regularly benchmark terms and conditions against the market. We maintain and review succession plans for key individuals.
The Group undertakes regular monitoring activities in relation to market risk exposure, including limits in each asset class, cash flow forecasting and stress and scenario testing. In response to this, the Group has implemented de-risking strategies to mitigate against unwanted customer and shareholder outcomes from certain market movements such as equities and interest rates. The Group also maintains cash buffers in its holding companies and has access to a credit facility to reduce reliance on emerging cash flows. The Group’s excess capital position continues to be closely monitored and managed, particularly in the low interest environment and any potential impact on financial markets as a result of Brexit.
The majority of equity markets fell over 2018 after a volatile year. A further increase in the UK base rate was deferred in Q1 but happened in Q3 after economic data returned to expected levels. The Group hedged the majority of market risk exposures associated with the Standard Life acquisition and benefited from capital synergies from these after completion. The Group continues to monitor and review existing market risk exposures in light of political developments, particularly those that may arise from the terms and timing of the UK’s exit from the EU.
The Group has guaranteed liabilities, annuities and other policies that are sensitive to future longevity, persistency and mortality rates. For example, if our annuity policyholders live for longer than expected, then their benefits will be paid for longer. The amount of additional capital required to meet additional liabilities could have a material adverse impact on the Group’s ability to meet its cash flow targets.
The Group undertakes regular reviews of experience and annuitant survival checks to identify any trends or variances in assumptions. The Group continues to actively manage its longevity risk exposures, which includes the use of reinsurance contracts to maintain this risk within appetite. The Group actively monitors persistency risk metrics and exposures across the open and heritage businesses.
The continuing trend of reductions in future mortality improvements again saw the Group amending assumptions accordingly in 2018. Policyholder mortality assumptions were strengthened slightly where indicated by recent experience. The Group completed its first three bulk annuity transactions (totalling £0.8bn) in 2018 and reinsured the vast majority of the longevity risk.
The Group regularly monitors its counterparty exposure and has specific limits relating to individual exposures, counterparty credit rating, sector and geography. Where possible, exposures are diversified through the use of a range of counterparty providers. All material reinsurance and derivative positions are appropriately collateralised.
Although the physical risks are not currently seen as a principal risk for the Group, there are a range of financial and operational risks associated with the transition to a low carbon economy, e.g. the impacts of climate risks on the prospects of current and future investment holdings. (This is considered further in ‘Our Environment’ on page 56).
The output of the AOP is a set of Group objectives, detailed financial forecasts, and risks and contingent actions to be considered when agreeing the plan. The latest AOP was approved by the Board in November 2018. This considered the Group’s current position and its prospects over a medium-term horizon, reflecting the Group’s stated strategy.
Progress against the financial plan is reviewed monthly by both the Group’s executive committee and the Board.
• the stresses calculated occur on 1 January 2019 with no allowance for any recovery or contingent actions available, but do take into account the impact of any appropriate Solvency II transitionals recalculation.
OUR COMMUNITY PARTNERS A range of community partners including charities, schools, hospices and local community groups have benefited from the Group’s support during the year.
OUR INVESTORS The Group maintains an active dialogue with its investors throughout the year.
Positive stakeholder engagement remains of paramount importance to the Group’s Corporate Responsibility agenda.
LISTENING TO CUSTOMERS Listening to the needs and wants of customers is helpful in delivering good customer outcomes. Feedback is gathered through automated telephone surveys, individual research projects and most recently through talking with the wider ‘customer community’ about their experiences and how they like to engage with the Group. These interactions help to shape communications and future propositions that may be of interest.
Within Phoenix Life improvements included an online facility for some customers within the retirement process, the launch of secure e-mail as an alternative communication channel, and improvements to the presentation of annual statements and communications.
DIGITAL PROPOSITION During the year the Group has continued to develop its digital offering for customers. The Phoenix Life website allows visitors 24/7 access to policy information, whilst reducing the volume of paperwork routinely issued. Selected customers can access a secure website where they can review and update their personal information, view policy details and contact Phoenix.
Operationally, Phoenix has selected Diligenta, the FCA regulated subsidiary of Tata Consultancy Services, as its preferred outsource partner to deliver a single, digitally enhanced outsourcer platform that will improve customer outcomes and deliver cost savings for legacy-Phoenix Life policies (c. 5.5 million customers).
Over 80% of cases referred to the Financial Ombudsman Service from Phoenix Life were found to be in agreement with the decision made, giving the Group useful insight and assurance into how well complaints are being handled.
PROTECTING CUSTOMERS FROM PENSION SCAMS The Group is dedicated to protecting its customers from financial crime, including pension scams. The Group continues to engage with Regulatory Authorities and Industry Working Groups on pension scams and looks at ways to better protect customers from becoming victims of pension scams. The Group continues to raise awareness of scams and warns its policyholders to remain vigilant of the evolving methods of fraudsters.
CUSTOMERS IN VULNERABLE CIRCUMSTANCES Phoenix’s vulnerable customer strategy aims to address vulnerability to the extent that the right outcomes for customers are achieved regardless of whether they are living in vulnerable circumstances.
Within Phoenix Group/Phoenix Life an online training module on customer vulnerability was designed and delivered by Money Advice Trust. Alongside this, colleagues have become dementia friends, with awareness sessions delivered by Phoenix’s inhouse dementia champions, helping the Group work towards becoming a dementia-friendly business. The digital team is currently working on a proposal which will look to enhance online accessibility catering for varying customer needs.
Within Standard Life Assurance the Customer Operations team has been working in partnership with Age Scotland and Alzheimer Scotland to deliver training to help colleagues better understand how to handle calls with vulnerable customers. An extensive training programme took place across 2018 which involved face-to-face and e-learning modules. This training programme won ‘Excellence in Skills in Learning and Development’ at the 2018 Contact Centre Association Awards.
OUR SUPPLIERS The Group has c. 1,000 suppliers of which c. 70 are considered Material Service Providers1.
Following the acquisition of Standard Life Assurance Limited in August 2018, Aberdeen Standard Investments has become one of the Group’s key strategic partners.
SUPPLY CHAIN MANAGEMENT Phoenix relies heavily on its service providers to support the delivery of its corporate objectives and management actions, whilst satisfying the outcomes required for all stakeholder groups. A key part of ensuring this takes place is managing the Group’s supply chain in a sustainable and ethical manner.
Sourcing and Procurement at Phoenix is far broader than the initial evaluation and selection process in that it ensures that a beneficial relationship for key stakeholders is implemented and managed. The Group works closely with its partners in order to closely monitor the operational and financial performance from Material Service Providers for any indications of instability and steps are taken where necessary and appropriate to mitigate risks to Phoenix or its stakeholders.
FINANCIAL CRIME PREVENTION In order to ensure that any financial crime matters or occurrences are effectively managed, the Group has a number of policies and practices in operation. The Group’s Anti-Bribery policy addresses bribery and corruption risks alongside the Financial Crime policy which addresses risks such as anti-money laundering and fraud. Both policies detail the minimum control standards and risks that are to be managed to mitigate any potential issues.
Adherence to the Anti-Bribery and Financial Crime policies is managed by the Financial Crime team via assessments of the minimum control standards that make up the policies, as well as themed Financial Crime Reviews and Assurance testing.
PROMPT PAYMENT CODE The Group’s culture is to meet its obligations including paying suppliers promptly. The Group voluntarily signed the Government’s Prompt Payment Code in 2012 and from January 2018 has been submitting relevant statements under the Small Business, Enterprise and Employment Act 2015 for the duty to report payment practices. The Group is committed to supply chain sustainability and supports the culture of prompt payment in the business community.
Note: 1 A Material Service Provider has been identified by the Group as a key supplier due to the nature of the services they provide.
The Group also selects key partners to provide a wide range of learning and continual professional development opportunities including the Chartered Management Institute, Corndell, Moving Ahead and the ACCA. Relationships continue with business schools and executive coaches to develop the Group’s most senior talent pipeline.
OUR COLLEAGUES We are an employer of choice offering rewarding careers and opportunities, promoting physical, financial and mental wellbeing in the workplace and empowering a wholly inclusive workforce.
Read more about key employee engagement activities undertaken during the year on P26
Adherence to this policy is managed by the Group HR department via quarterly assessment of the minimum control standards. There were no material issues raised during the year.
This section details the actions taken and outcomes achieved across the year.
EMPLOYEE CONSULTATION The Big Conversation was a significant listening exercise that was undertaken within Phoenix Group and Phoenix Life at the start of the year to raise the level of dialogue around the Group’s values, and provided greater clarity around associated behaviours. Through a series of facilitated workshops and online channels, colleagues were given the opportunity to voice their opinions on what they perceived as positive or negative behaviours, with a view to developing a common understanding across all levels of the business.
The outcomes were shared with colleagues and provided a clear framework for how individuals are recognised, developed and recruited. The values were continually reinforced throughout the year and culminated in an employee-led recognition awards process, whereby colleagues were asked to nominate individuals who they believed displayed particular values across the year.
Colleagues within Standard Life Assurance have access to Vivo, an employee consultation group based onsite. Championing the employee voice, it provides support and advice when employees need it most, and is actively engaged in any decisions affecting working life.
DIVERSITY AND INCLUSION Phoenix was one of the first companies to sign HM Treasury’s Women in Finance Charter. The Charter is a commitment for signatory firms to work together to build a more balanced and fair industry. Targets for gender diversity are published annually on the Group’s website. Targets set for completion by end of 2018 were not met, as they were largely impacted by changes in senior management through acquisition, structural changes, resignation and retirement. From 2019, the Group will report progress based on the combined entities, with a commitment to achieve targets by end of 2021. The Group remains committed to creating an inclusive and positive environment for all employees.
This group is invited to meet with the management team on a quarterly basis to share views and shape future engagement activity. A similar network called Ignite operates within Standard Life Assurance, encouraging colleagues to be involved and positively influences everyday engagement activity.
Various other employee-driven networks exist which have a common aim of creating a more supportive and inclusive working environment.
The Group has a ‘Lesbian, Gay, Bi-sexual and Transgender Network’ – Affinity in operation, encouraging connections and a safe place to share common experiences, issues or challenges.
A Black, Asian and Minority Ethnic (‘BAME’) Network – Mosaic exists to identify and address any barriers to development and career progression. The network enhances cultural awareness and creates a more inclusive and diverse workforce.
‘Carers Network’ and ‘Working Parents’ Network’ are two groups providing education and support to colleagues with varying caring responsibilities outside of the workplace.
REWARD The Group continues to attract, develop and retain talented individuals by offering a comprehensive range of benefits and development opportunities. All employees are paid at least the Living Wage as set by the Living Wage Foundation.
95% of colleagues within Phoenix Group and Phoenix Life participate in the flexible benefits scheme, which allows benefits to be selected that meet personal circumstances. Examples include cycle to work schemes, home technology and smart phones, critical illness cover through to health assessments and enhanced life cover. For 2018 buying and selling annual leave remained the most utilised, followed by childcare vouchers and insurance-related products.
Private medical insurance cover is available to all colleagues across the Group regardless of their status within the organisation.
OF PHOENIX GROUP/PHOENIX LIFE COLLEAGUES PARTICIPATE IN THE FLEXIBLE BENEFITS SCHEME
EMPLOYEE WELLBEING The Group’s wellbeing programme covers physical, mental and financial matters, offering colleagues and their dependants information, tools and resources covering a range of topics. A programme of wellbeing activity took place during the year which included onsite health-checks, flu vaccinations, self-care workshops and awareness of musculoskeletal issues. A programme of Mental Health First Aid training and bespoke mentally healthy workplace workshops were offered across the year.
‘Wythall Walking Friends’ was a six-month pilot which improved the physical and mental wellbeing of colleagues and members of the local community. This wellbeing initiative will be replicated in 2019 and expanded to reach additional beneficiaries.
In line with the Equality Act 2010 and in order to ensure that the Group is aligned to relevant Articles of the United Nations Universal Declaration of Human Rights, the Group has a Dignity at Work policy in place. The policy covers bullying and harassment of and by managers, employers, contractors, suppliers, agency staff and other individuals engaged with the Group.
All colleagues are required to comply with the policy and take appropriate measures to ensure harassment and bullying does not occur.
Adherence to the policy is managed by the Group HR department via assessments of the minimum control standards, which ensure effective resolution of employee disputes.
HEALTH AND SAFETY The Group operates a Health and Safety policy which helps the organisation to effectively manage risks and any adverse effects. Health and Safety risks that are not properly managed could lead to a reduction in earnings and/or value through financial or reputation loss associated with adverse impacts on the health and safety of employees, customers and third parties in the workplace.
WELLBEING ACCOLADE PHOENIX GROUP WINS NATIONAL WORKPLACE WELLBEING AWARD (Image source: 2018 Chamber Business Awards)
OUR COMMUNITY PARTNERS We contribute to our local communities – providing donations, skills, time and resources to the cause.
The Group has been assisting Alzheimer’s Society with raising awareness of dementia onsite and in the community. Four colleagues are trained as dementia champions and have run awareness sessions to over 160 members of the community, reaching NHS dieticians at Moseley Hall Hospital and pupils within Ark Kings Academy. In addition colleagues attended the Bromsgrove Pensioners Advice and Information Fair, showcasing Phoenix engagement activity that directly improves community wellbeing, for example Age UK’s Men in Sheds project.
Earn and a raffle for the period September to December 2018.
Further afield the German charity partner for 2018 was Hilfe für krebskranke Kinder Frankfurt e.V who received a donation of €13,486.30 to aid children with cancer and the Austrian charity partner was Oesterreichische Krebshilfe Wien who received €6,000, to support individuals living with cancer.
OTHER CHARITABLE DONATIONS Colleagues based in the UK can fundraise for any UK-registered charity through the ‘Our Community, Your Choice’ programme and apply for matching. All applications must meet the Group’s charity criteria, and not be deemed political or religious.
Phoenix was premier sponsor of the ‘Wythall and Hollywood Fun Run’ which included a 10km, 5km and 1.5km run through the heart of Wythall’s community and entered the site’s grounds as part of the official distance.
Standard Life Assurance sponsored a team for the annual Social Bite sleep in the park, which 22 colleagues participated, helping to raise awareness of homelessness in Scotland.
Within the Edinburgh office, 10 young people are engaged with the Career Ready programme, receiving regular mentoring sessions with colleagues, helping to expand their educational opportunities.
VOLUNTEERING Employees regularly volunteer on either an individual basis or with their team to make a difference in their local community.
Employees within Phoenix Group and Phoenix Life are permitted 14 hours per year during working hours to support a variety of causes. 58% of colleagues participated in this year’s volunteering programme contributing 3,547 hours. There has been a shift in more colleagues wishing to participate in skills-based volunteering, offering their time to be mentors, reading buddies and number partners at local schools.
At the SunLife operations in Bristol, volunteering is also a key part of their culture, with 87% of colleagues contributing 700 hours across the year to causes within their local community.
Within Standard Life Assurance colleagues are permitted up to three days community volunteering lieu time for activities they are engaged with inside and outside of working hours. In the period since September 2018, 1,533 hours were donated to community causes. The Armed Forces Network organised a day for volunteers to help collect donations for Poppy Scotland in Edinburgh.
Phoenix Group was a finalist in the Chartered Institute of Personnel and Development (‘CIPD’) annual awards, for Best Skills-based Volunteering Initiative. This accolade recognised the contribution that volunteers made in supporting Midlands Air Ambulance Charity with its Practical Quality Assurance System for Small Organisations (‘PQASSO’) Level 2 accreditation.
SCHOOL PARTNERSHIPS The Group continues its partnership with Ark Kings Academy in Kings Norton, working on a variety of mutually-beneficial initiatives across the year. The Group part-funded the 2018 – 2019 academic year Place2Be mental health service onsite, assisting pupils, their families and teaching staff with wellbeing and enrichment support.
THE SUPPORT OF PHOENIX GROUP HAS VERY MUCH HELPED WITH THE DEVELOPMENT OF MUSIC ONSITE.”
Various employee-led initiatives continue to take place each year, focusing largely on internal resource-use, and the 3 Rs – reduce, re-use and recycle. From an energy contract point, the Group now uses only 100% renewable resources in its owned properties.
The Corporate Responsibility Steering Committee reviews environmental progress and agrees activity for future implementation such as the installation of electric vehicle charging facilities, scheduled for April 2019 at the Wythall site.
WASTE MANAGEMENT All core sites continue to divert 100% of their waste from landfill with a detailed monthly report outlining the volume of waste and method of disposal or recycle. The London office, which is shared tenancy, achieved an accolade for its achievements in waste management, waste minimisation and re-use in the form of the Clean City Awards Scheme. Donations of old furniture, carpet tiles and electrical equipment were distributed to various community partners in the Wythall area, reducing the requirement for waste removal, but adding value by creating a new lease of life for the items being donated. In addition, LED lighting has been installed in three core staircases and other common areas within the Wythall site. The aim was to make the building more energy-efficient, whilst reducing ongoing energy usage.
The first was a £27 million investment in renewable energy at the Walney Extension Project, assisting with the construction and operation of the enlarged offshore wind farm, situated 45 miles north of Liverpool. This project now provides clean energy to a large number of UK homes. Phoenix participated in providing debt-financing for the acquisition of a 50% share in the project.
A further investment was £50 million in Anglian Water’s green projects. The proceeds are to be used to help finance projects that will mitigate climate change impacts and the conservation of water resources.
CLIMATE CHANGE Phoenix’s vision is to be Europe’s leading life consolidator and although it continues to be a predominantly Heritage business, it now also has a substantial Open business element. As the Group is a consolidator of life insurance funds, rather than general insurance, it does not currently consider climate risk as a principal risk. Climate change is one of the risks considered in the Group’s horizon scanning activity and the Group continues to focus on the potential impacts of this risk, for example: • The Group uses external managers for the vast majority of its assets who consider a broad range of environmental, social and governance (‘ESG’) factors in their selection and management of our investments. With the view that ESG and social impact investing can deliver better risk adjusted returns, Phoenix is developing its own ESG policy in support
CONSERVATION Working with Bromsgrove District and Redditch Borough Councils, colleagues have donated 750 volunteering hours to improving the various parklands within the Midlands area. Their efforts have assisted with creating a bark path, building dead hedging and a wildlife hibernaculum, thinning woodland, painting benches, planting floral displays and removing the invasive Himalayan balsam from the waterways.
The Group continues to partner with the Heart of England Forest, planting in excess of 6,000 broadleaf trees since 2013. Pupils from partner school Ark Kings Academy were invited to the education centre at the Forest, to spend a day exploring the greater outdoors. The SunLife operation in Bristol is also a member of the Woodland Trust.
There has been a shift in 2018, with colleagues wishing to support more outdoor environmental-based volunteering projects. The Group has also supported the Canal and River Trust, Warwickshire Wildlife Trust and National Trust across the year.
• Continuing to engage with our regulators on the impact on the Group of near term physical and transition risks associated with climate change.
• Continue to consider the requirements of consultations associated with the risks of climate change and engage with industry bodies on the Group’s response where appropriate.
• A market-based method that reflects emissions from electricity specific to each supply/contract. Currently, the Group has used residual mix factors in the absence of contractual instruments.
In 2018 absolute emissions have increased by 11% due to the inclusion of the two ex-Standard Life acquired properties. This increase has outweighed the reduction in the emission factor for consumption of purchased electricity (Scope 2) and the reduced consumption of energy at a number of properties throughout 2018.
The Group’s chosen intensity metrics detail carbon emissions per floor area and per full-time equivalent employees (FTE). The intensity by floor area has decreased slightly as a larger number of properties have been included within the analysis this year and these properties have largely reduced their energy use in 2018 compared to 2017. The intensity by FTE shows a slight increase from 2017 to 2018 as the number of people employed has reduced.
The Group’s complete Economic, Social and Governance measures are available to download at www.thephoenixgroup.com/esg
THESE INVESTMENTS MARK AN IMPORTANT FIRST STEP FOR THE GROUP IN RENEWABLE ENERGY AND IS PARTICULARLY SUITED TO OUR AMBITIONS. WE HOPE TO SEE FURTHER PROJECTS OF THIS NATURE IN THE FUTURE.”
Note: 1 Our intensity measurement calculations exclude former Standard Life Assurance Limited properties to avoid skewed intensity results over the two-year period.
OUR INVESTORS We value an active dialogue with the Group’s financial audiences including institutional investors, private investors, buy and sell-side analysts and prospective investors. Phoenix therefore conducts a comprehensive investor relations programme.
RESULTS PRESENTATIONS AND CAPITAL MARKETS DAYS Full year and interim results were presented to analysts and investors by the Group. The presentations were webcast live on Phoenix’s website and presentation materials were also made available.
Investor presentations are generally filmed and the videos as well as the presentation materials and transcript are made available on the Group’s website.
ANALYSTS AND EQUITY SALES FORCES Phoenix maintains an active dialogue with its equity and debt research analysts who, in addition to results presentations, are invited to attend investor events such as the Capital Markets Day. The Executive Directors also held nine presentations to the sales teams at major investment banks to promote the Phoenix investment case.
DEBT INVESTORS The Debt Investor Relations programme is managed by the Group Treasury department and supported by the Investor Relations department.
Senior management conducted 13 deal and non-deal related debt investor roadshow days in the UK, Continental Europe and Asia, meeting 168 debt investors overall.
CREDIT RATINGS AGENCIES AND BANKS Phoenix’s life companies and outstanding bonds have credit ratings by Fitch Ratings. The Group meets with the rating agency at least once per year for the annual ratings review. The Group Treasury Team and management last provided Fitch with an update in June 2018. The Group Treasury department and senior management also keep a constant dialogue with the Group’s relationship banks.
IN THIS SECTION Chairman’s Introduction ��������������������������������������������������60 Board Structure ���������������������������������������������������������������61 Board of Directors �����������������������������������������������������������62 Executive Management Team ����������������������������������������64 Corporate Governance Report ����������������������������������������65 Directors’ Remuneration Report �������������������������������������76 Directors’ Report �����������������������������������������������������������106 Statement of Directors’ Responsibilities ���������������������� 110
• November 2018 General Meeting to approve the Scheme of Arrangement and associated capital reduction in connection with the establishment of the Group’s new UK-registered and listed holding company, Phoenix Group Holdings plc – All 8 resolutions passed with a majority of at least 99% of votes cast�
BOARD OF DIRECTORS Our Board has been through a period of renewal over the past three years and our Board Evaluation Review, undertaken in November 2018, concluded that we should now aim for a period of Board stability, following the appointment of eight new non-executive directors out of a total of ten since September 2016�
I am also pleased that our Board complies with the target of the Hampton-Alexander Review for the Board to be at least 33% female�
We have been considering the new requirements of the Code effective from 2019� We have been taking steps to comply with the new provisions and will, as required, report on our compliance with those provisions in our 2019 Annual Report�
However, I am very pleased to report now that, in respect of the provision to enhance the Board’s engagement with the workforce, the Board has appointed Karen Green as our nominated non-executive director who will liaise with the workforce through a Workers’ Advisory Council�
THE GROUP IS GOVERNED BY OUR BOARD OF DIRECTORS. BIOGRAPHICAL DETAILS ARE SHOWN BELOW.
EXPERIENCE Clive Bannister joined the Group in February 2011 as Group Chief Executive Officer� Prior to this, Mr Bannister was Group Managing Director of Insurance and Asset Management at HSBC Holdings plc� He joined HSBC in 1994 and held various leadership roles in planning and strategy in the Investment Bank (USA) and was Group General Manager and CEO of HSBC Group Private Banking� He started his career at First National Bank of Boston and prior to working at HSBC was a partner in Booz Allen Hamilton in the Financial Services Practice providing strategic support to financial institutions including leading insurance companies, banks and investment banks� Mr Bannister is also Chairman of the Museum of London�
EXPERIENCE Between April 2010 and December 2011, Mr McConville was Chief Finance Officer of Northern Rock plc� Prior to that, between 1988 and 2010, he worked for Lloyds Banking Group plc (formerly Lloyds TSB Group plc) in a number of senior finance and strategy related roles, latterly as Finance Director of Scottish Widows Group and Director of Finance for the Insurance and Investments Division� During 2011 and 2012, Mr McConville was a Non-Executive Director of the life businesses of Aegon UK� In 2014, Mr McConville joined the board of Tesco Personal Finance plc as a Non-Executive Director� Mr McConville qualified as a Chartered Accountant whilst at Coopers and Lybrand�
ALASTAIR BARBOUR SENIOR INDEPENDENT DIRECTOR COMMITTEE MEMBERSHIP Audit Committee (Chairman), Nomination Committee, Risk Committee
EXPERIENCE Karen Green is the former Chief Executive of Aspen UK, which comprised the UK insurance companies of the global US-listed insurer and reinsurer, Aspen Insurance Holdings and was a member of the Aspen Group Executive Committee for 12 years� She also held a number of other senior positions including as Group Head of Corporate Development, Strategy, and Office of the Group CEO� Prior to that, she held various senior private equity and corporate finance roles from 1997 to 2005 at GE Capital and then MMC Capital, gaining substantial M&A experience, having worked previously at Baring Brothers and Schroders� Ms Green is Non-Executive Director of Admiral Group plc and is a Council Member of Lloyd’s of London� She is Deputy Chair and Acting Chair of Aspen Managing Agency Limited and is also a Vice President of the Insurance Institute of London�
BELINDA RICHARDS INDEPENDENT NON-EXECUTIVE DIRECTOR COMMITTEE MEMBERSHIP Risk Committee, Audit Committee
EXPERIENCE Kory Sorenson is currently a Non-Executive Director and Chairman of the Audit Committee of SCOR SE, a Non-Executive Director of Pernod Ricard SA, a Non-Executive Director of Prometic Life Sciences Inc and a member of the Supervisory Board of the privately-owned Bank Gutmann AG� Ms Sorenson is currently on the Supervisory Board of Uniqa Insurance Group AG, although will not be seeking renewal of her mandate in May 2019� She has been nominated to join the Board of SGS SA in March 2019� Ms Sorenson has over 25 years of experience in the financial services sector, most of which has been focused on insurance and banking� She was a Non-Executive Director of Aviva Insurance Limited, Managing Director, Head of Insurance Capital Markets of Barclays Capital and also held senior positions in the financial institutions divisions of Credit Suisse, Lehman Brothers and Morgan Stanley� She began her career in the finance department of Total SA�
EXPERIENCE Belinda Richards has held senior executive positions at KPMG, EY, and latterly Deloitte from 2000 to 2010 where she was a senior corporate finance Partner and the Global Head of Merger Integration and Separation Advisory Services� She is an experienced Non-Executive Director, currently on the Boards of WM Morrison Supermarkets plc, Avast plc, The Monks Investment Trust plc and Schroder Japan Growth Fund plc� Previously, she has also been on the Boards of Aviva UK Life & Pensions, Grainger plc and Balfour Beatty plc�
EXPERIENCE Nicholas Shott is an investment banker, who has been European Vice Chairman of Lazard since 2007 and Head of UK Investment Banking at Lazard since 2009� Mr Shott joined Lazard in 1991 and became a partner in 1997� He is also a Non-Executive Director on the Board of the Home Office�
STEPHEN JEFFORD GROUP HUMAN RESOURCES DIRECTOR ROLES AND RESPONSIBILITIES • Leads the implementation of the Group’s employee strategy in order to recruit, retain, motivate and develop high quality employees; • Provides guidance and support on all HR matters to the Group Chief Executive Officer, ExCo and the Group Board and Remuneration Committee; and
• Enhances shareholder value through clear, rigorous assessment of business opportunities�
ANDY MOSS CHIEF EXECUTIVE, PHOENIX LIFE AND GROUP DIRECTOR, HERITAGE BUSINESS ROLES AND RESPONSIBILITIES • Leads the development and delivery of the Phoenix Life business strategy, including the continued integration of life businesses; • Leads the Phoenix Life business to optimise outcomes for customers in terms of both value and security; and
SIMON TRUE GROUP CORPORATE DEVELOPMENT DIRECTOR AND GROUP CHIEF ACTUARY ROLES AND RESPONSIBILITIES • Supports the Group Chief Executive
QUENTIN ZENTNER GENERAL COUNSEL ROLES AND RESPONSIBILITIES • Leads provision of legal advice to the
Group Board, other Group company Boards, ExCo and senior management; • Oversees and co-ordinates maintenance of, and adherence to, appropriate corporate governance procedures across the Group; • Designs and implements a framework to manage legal risk within the Group, including compliance by Group companies and staff with relevant legal obligations; and
THE BOARD The Board comprises the Non-Executive Chairman, the Group Chief Executive Officer, the Group Finance Director, two SLA nominated Directors and seven independent Non-Executive Directors� Biographical details of all Directors are provided on pages 62 to 63�
The Chairman’s other commitments are set out in his biographical details on page 62� The Chairman was appointed on the basis of committing two days per week to Phoenix�
The Senior Independent Director, appointed by the Board, is Alastair Barbour� His role is to be available to shareholders whose concerns are not resolved through the normal channels or when such channels are inappropriate� He is also responsible for leading the annual appraisal of the Chairman’s performance by the Non-Executive Directors�
BOARD EFFECTIVENESS In accordance with the Code, an evaluation of the performance of the Board and that of its Committees and individual Directors was undertaken in the latter part of 2018� The process was led by the Chairman and internally facilitated by the Company Secretary� The process involved completion by Directors of a questionnaire covering various aspects of Board, Committee and Director effectiveness followed by individual meetings between the Chairman and each Director, concluding in a Board report which was discussed by the Board in November 2018�
A strong theme from the review was the desire to continue to focus on strategy and the Group’s future as a heritage and open business� Various process-focused recommendations to support the Board in successfully driving forward the Group’s strategy are being actioned�
OPERATION OF THE BOARD The Board is responsible to the shareholders for the overall performance of the Group� The Board’s role is to provide entrepreneurial leadership within a framework of prudent and effective controls, which enables risk to be assessed and managed� The Board has a schedule of matters reserved for its consideration and approval supported by a set of operating principles�
These matters include: • Group strategy and business plans; • Major acquisitions, investments and capital expenditure; • Financial reporting and controls; • Dividend policy; • Capital structure; • The constitution of Board committees; • Appointments to the Board and Board committees; • Senior executive appointments; and
The terms of appointment for the Directors state that they are expected to attend in person regular (at least six per year) and additional Board meetings and to devote appropriate preparation time ahead of each meeting� In February 2019, the Nomination Committee reviewed the time spent by Directors and concluded that the time required of (and given by) the Directors is considered at least at the level expected in their appointment terms and is believed to be high in comparison with other FTSE 250 companies�
Two new Directors, who joined the Board in 2018, share their insights on their induction.
I spent several days with senior executives in London and Edinburgh on a full and very detailed programme covering all aspects of the businesses from Solvency models to client service� The sessions all involved excellent presentations and full, as well as open, discussions with the team� I also spent some time with the client service teams and learned about the strategy to better serve clients in future� I am yet to visit the life company operations in Wythall but hope to do so as soon as possible�
The induction process was very well structured and thorough� I experienced an open culture and a general willingness to arrange follow up sessions where I wanted to explore aspects of the business further� This is reflective of the culture of the Group as a whole�
I was very impressed by the way in which the Group approached the induction process – it was extremely well organised and everyone I met was very open and helpful in answering questions� As a Director, it felt very well-designed to get me up to speed quickly with ongoing events, allowing me to contribute immediately to Board discussions�
This included Alastair Barbour and Belinda Richards, who each missed three of twelve Board meetings in 2018� All three meetings missed by Mr Barbour were ad-hoc meetings called at short notice� His Board attendance record in the prior year (2017) was 100%� Two of the three meetings missed by Belinda Richards in 2018 were ad-hoc meetings called at short notice�
The remuneration of the Directors is shown in the Directors’ Remuneration Report on pages 88 to 105� The terms and conditions of appointment of Non- Executive Directors are on the Group’s website� In accordance with the provisions of the Articles and the Code, all Directors will submit themselves for election at the Company’s AGM on 2 May 2019�
• Reports from Chairs of Committees 5% Audit, Nomination, Remuneration and Risk Committee activity
Report and Accounts and other financial results, statements and disclosures, although the ultimate responsibility for these matters remains with the Board�
The Audit Committee met seven times during 2018� Its meetings are attended by the Chair of the Risk Committee (who is also a member of the Audit Committee), the Group Finance Director, the Deputy Group Finance Director, the Group Head of Internal Audit, the external auditors and usually also by the Group Board Chair and the Group Chief Executive Officer� The Audit Committee holds private meetings at least annually with each of the Group Finance Director, the Group Head of Internal Audit and the external auditors, without management present�
• Considered various financial disclosures included within the transaction documents pertaining to the acquisition of Standard Life Assurance�
• Reviewed and monitored the independence of the external auditors including their provision of non-audit services and fees and their appointment as external auditors to the Standard Life Assurance entities – see Auditor’s Independence and External Auditor Policy on page 70�
Internal audit • Assessed the effectiveness of Internal Audit, noting the positive responses received from Management�
• Approved the annual update of the Group Internal Audit Charter and the Group Internal Audit Plan (including its link to the Risk Management Framework), receiving regular reports to monitor progress against the plan�
• Reviewed the internal audit control environment opinion which included Internal Audit’s view of the risk management framework across the Group�
• Reviewed and approved updates to the Group Tax Policy, Group External Auditor Policy and the Group Liquidity & Funding Policy�
THE ACQUISITION OF STANDARD LIFE IN 2018 WAS SIGNIFICANT FOR THE GROUP, AND FOR THE AUDIT COMMITTEE THERE WILL BE ADDITIONAL FOCUS ON ENSURING THAT ROBUST CONTROLS ARE IN PLACE AND ARE APPLIED ACROSS THE WHOLE ENLARGED GROUP.”
ASSESSMENT OF THE EFFECTIVENESS OF THE EXTERNAL AUDIT PROCESS The effectiveness of the external audit process was assessed through the completion of a questionnaire by the key divisions and Group functions within Phoenix Group covering EY’s performance during the 2017 financial reporting cycle�
The engagement of EY to perform any non-audit service is subject to a process of pre-approval by the Audit Committee� Furthermore, the Group’s external auditor policy prescribes a limit for fees associated with nonaudit services of 70% of the average statutory audit fee for the three preceding years� This aligns with requirements introduced by the EU Audit Directive and Regulations in 2016�
The engagement of EY to perform any non-audit service is subject to a process of pre-approval by the Audit Committee� £1�6 million of the non-audit fees related to actuarial and finance due diligence procedures conducted in relation to the acquisition of Standard Life Assurance� The Audit Committee considers that the engagement of the external auditors in the performance of such diligence procedures provides synergies with audit work post-completion of the transaction and enhanced insight as to the quality of the control environment operated in the target company by comparison to Group standards� Of the remaining balance, a further £2�0 million relates to the provision of assurance services to the Board and the sponsoring banks in support of disclosures made in the public transaction documents relating to the acquisition and debt issuances undertaken in the year� The engagement of the Group’s independent external auditor for the provision of such services is consistent with market practice in transactions of this nature�
The tender process in 2016 was overseen by the Audit Committee� The Audit Committee concluded, and recommended to the Board, that the incumbent audit firm, EY, should be retained as the external auditor of the Group from 2017 and supported the recommendation for the re-appointment of the external auditor for the 2018 statutory audit�
Following completion of the onshoring of the Group, a new UK-registered holding company, PGH plc was put in place in December 2018� Effective from December 2018, EY has been appointed as auditor of the Group by the Directors of PGH plc�
EY has been appointed as auditor of the Group by the Directors of PGH plc� EY has indicated its willingness to continue in office and shareholders’ approval will be sought at the AGM on 2 May 2019�
• Management presented papers to the Life Company Audit Committees detailing recommendations for the actuarial assumptions and methodologies to be used for the interim and year-end reporting periods with justification and benchmarking as appropriate� These assumptions and methodologies were debated and challenged by the Life Company Audit Committees, with focus on longevity, persistency and expenses, prior to their approval�
• A summary of these papers was presented for oversight review by the Audit Committee, and the Life Company Audit Committees’ conclusions were reported to the Audit Committee through minutes of its meeting and a discussion between the Chairmen of the committees� The Audit Committee discussed, and questioned management and EY on, the content of the summary papers and the Life Company Audit Committee’s conclusions�
• Management presented papers setting out the basis of valuation of financial assets, including changes in methodology and assumptions, for the interim and year-end reporting periods to the Life Company Audit Committees� The assumptions, valuations and processes, particularly for financial assets determined by valuation techniques using significant non-observable inputs (Level 3), were debated and challenged by the Life Company Audit Committee prior to being approved�
• The valuation information was then presented for oversight review by the Audit Committee who considered and confirmed the appropriateness of the basis of valuation�
Viability Statement • The Audit Committee reviewed the process to support, and the contents of, the Viability Statement� The Committee concluded that the period covered by the Viability Statement should continue to be five years to align it to the Group’s strategic plan�
Note: Please note that references in this table to Life Company Audit Committees include Audit Committees for the acquired Standard Life Assurance entities in respect of post-acquisition activity�
• A set of ‘Operating Principles’ are in place to define the responsibilities and accountabilities of the Risk Committees of Phoenix Group Holdings and its subsidiary company boards to avoid any overlap of focus or assurance activity�
• The Chairman of the Phoenix Life and Standard Life Risk Committees and Model Governance Committee, John Lister, is a regular attendee to the Committee and provides members with a regular update on the risk matters pertinent to these key subsidiaries and the matters being dealt with at the Model Governance Committee (which is a Board Committee of the Group’s Life Companies)�
• Other regular attendees to the Committee include the Group Chief Actuary, Deputy Group Finance Director, the Chief Executives of the subsidiary company boards, the Group General Counsel and the Group Head of Internal Audit�
• The Committee met a total of seven times in 2018 to including two out of cycle meetings by telephone�
• A joint briefing session was held between the Phoenix Group and Phoenix Life Risk Committee members to review Emerging Risks and Forward Looking Scenarios, the Counterparty Concentration Exposures Process and a deep dive into Credit and Illiquid Assets�
Group’s acquisition strategy in line with risk appetite, the Committee evaluated the acquisition and provided a recommendation to the Board based on the risk profile, execution risks and overall risk appetite� In doing so, the Committee considered the financing and capital structure of the acquisition, reverse stress testing, acquiring risk infrastructure and regulatory engagement�
• Throughout the acquisition, the Risk Committee continued to be informed on any risk matters including review of the Risk Factors included in the acquisition prospectus, the capital policy framework in operation at Standard Life and the execution risks presented at the time of transfer�
• Reviewed Reverse Stress Testing analysis, completed and provided oversight of, and challenge to, the design and execution of the Group’s stress and scenario testing, including any changes of assumptions�
Consequences/Implications of a ‘Hard Brexit’ • Due to the ongoing uncertainty of the UK’s exit from the European Union, the Committee reviewed and considered the preparations in place for a ‘Hard Brexit’ and the potential financial and operational impacts on the Group� This continued to be reflected within the top risk reporting to the Committee during the course of 2018 and 2019 to date�
Implementation of a single, digitally enhanced outsourcer platform • The Committee considered the estimated impact that delivery of this platform would have on the risk profile of Phoenix Life�
Building the UK Financial Sector’s Operational Resilience • Following the issue of a tripartite discussion paper from the Bank of England, PRA and FCA, the Committee discussed the drive to move the industry toward a more comprehensive risk-based view of operational resilience which is more visible to boards� The Committee considered and supported the prepared response by the Risk function on behalf of the Company�
Detailed assessments of short-listed candidates are undertaken by the search consultancy, followed by interviews with Committee members and other Directors and the sourcing of references before the Committee recommends the appointments to the Board�
• Taking account of the Board Evaluation Review, reviewed the balance of skills, diversity, experience, independence and knowledge on the Board�
• Taking account of the Board Evaluation Review, reviewed the structure, size and composition of the Board�
• Reviewed the succession plans for Executive and Non-Executive Directors and recommended their approval to the Board�
The Board’s policy on diversity is as follows: • The Board supports the enhancement of diversity, including gender, as a consideration when recruiting new Directors�
The Nomination Committee also met three times in 2018 as the Chair Selection Committee, chaired by Kory Sorenson, with other members being Karen Green, Wendy Mayall, John Pollock and Belinda Richards�
The standard process used by the Committee for Board appointments involves the use of an external search consultancy to source candidates external to the Group and, in the case of executive appointments, also considers internal candidates�
Note: Henry Staunton (Chair until 31 October 2018, when he was succeeded by Nicholas Lyons)�
THE NOMINATION COMMITTEE HAS PERFORMED ITS ROLE SUCCESSFULLY OVER THE LAST THREE YEARS OF BOARD RENEWAL, WITH EIGHT NEW NON-EXECUTIVE DIRECTORS APPOINTED OVER 2016, 2017 AND 2018, REFLECTING THE SKILLS AND EXPERIENCE REQUIRED TO DRIVE THE GROUP FORWARD.”
THE COMMITTEE BELIEVES THAT PHOENIX GROUP HOLDINGS’ APPROACH TO REMUNERATION PLAYS A KEY PART IN SUPPORTING THE GROUP’S STRATEGIC PRIORITIES AND ALIGNMENT WITH SHAREHOLDERS’ AND CUSTOMERS’ INTERESTS.”
Our Remuneration Committee terms of reference were updated during the course of this year to reflect the expectations of the new Corporate Governance Code, of which we are fully supportive�
DEAR SHAREHOLDER On behalf of the Board and its Remuneration Committee (‘Committee’), I am pleased to present the Directors’ Remuneration Report for the year ended 31 December 2018. This report covers remuneration for Executive Directors and Non-Executive Directors of the Company, operated in line with the Remuneration Policy approved by shareholders at the 2017 AGM.
• Completion of the acquisition of the Standard Life Assurance businesses financed in part by a £950 million rights issue and a £945 million debt issuance.
INCENTIVE OUTCOMES FOR 2018 The Committee believes that Phoenix’s approach to remuneration plays a key part in supporting the Group’s strategic priorities and alignment with shareholders’ and customers’ interests. As indicated in last year’s report, following the acquisition of the Standard Life Assurance businesses, the Committee reviewed the business targets within our variable pay plans and made the necessary adjustments to ensure that the plans operated as originally intended and properly reflected our aim to reward longterm value generation.
Specifically: • 2018 Annual Incentive Plan (‘AIP’): – Solvency II Management Action targets have been increased by £260 million to reflect the equity hedging action announced to the market.
– Solvency II Own Funds targets have been increased by £1,837 million to reflect equity raised as part of the acquisition.
• 2016 Long Term Incentive Plan (‘LTIP’): – No changes were made to the targets, recognising that no net cash is expected from the Standard Life Assurance businesses over the performance period ending December 2018.
REMUNERATION POLICY APPROVAL FOR 2019 The current Directors’ Remuneration Policy was approved by shareholders at the 2017 AGM, with a 99% vote in favour. While this policy was put in place for three years, the recent establishment of Phoenix Group Holdings plc as the ultimate parent company of the Group means that the Directors’ Remuneration Policy will need to be submitted for a formal binding shareholder approval at this year’s AGM before an updated Remuneration Policy is put to shareholders at the 2020 AGM.
This will largely be a roll forward of the previously approved Phoenix Group Holdings policy. However, in recognition of the 2018 update to the UK Corporate Governance Code, we propose the following two changes to our current Policy: • Alignment of pension contributions for new Executive Directors with those provided to the wider workforce, with a review of the policy for current Executive Directors as part of the full policy review later this year.
AIP AND LTIP FOR 2019 The Committee reviewed the AIP and LTIP metrics in light of the acquisition of the Standard Life Assurance businesses and concluded that they continue to reflect the Group’s evolving business focus and are aligned to the success of the Enlarged Group. Therefore, we propose no changes for the 2019 performance measures.
Adjusted Shareholder Solvency II Own Funds 24% (30% of Corporate component)
Annual Incentive Plan (‘AIP’): Below we show the target ranges and outturn against the metrics within the 2018 AIP. More details of the 2018 AIP can be found on page 89. AIP metrics that are stated Group KPIs are flagged below and evidences the direct link between Company strategy and remuneration outcomes.
• Threshold • Target • Maximum Outturn. . . . .
Group Finance Director and Group Director, Scotland (’Group FD’) – James McConville
INTRODUCTION This report contains the material required to be set out as the Directors’ Remuneration Report (‘Remuneration Report’) for the purposes of Part 4 of The Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013, which amended The Large and Mediumsized Companies and Groups (Accounts and Reports) Regulations 2008 (‘the DRR regulations’).
The appointment of the Directors of Phoenix Group Holdings plc, as shown on page 102, became effective from the date of admission of Phoenix Group Holdings plc to the London Stock Exchange on 13 December 2018.
The Remuneration Policy which is being put forward for approval by shareholders of Phoenix Group Holdings plc at the 2019 AGM is in all material respects the same as the policy approved by the shareholders of Phoenix Group Holdings at that company’s AGM on 11 May 2017. From the date of listing of Phoenix Group Holdings plc on 13 December 2018 the Remuneration Committee has voluntarily applied the policy previously established by Phoenix Group Holdings. This Policy will be reviewed in 2019 in light of changes to the UK Corporate Governance Code and other investor body guidelines and a new revised Policy will be presented to shareholders for approval at the AGM of Phoenix Group Holdings plc in 2020.
• The introduction of a shareholding requirement post cessation of employment.
– Our Remuneration Policy benchmarks the total target remuneration for the Executive Directors between FTSE 31-100 and FTSE 250 data sets, and remuneration for both Executive Directors is positioned appropriately between these data sets. This benchmark will be reviewed in 2019 in accordance with Phoenix’s position within the FTSE market.
• ‘Maximum with growth’ is the maximum scenario, but with the LTIP element increased to reflect a 50% share price growth assumption over the three-year period until LTIP vesting. The element of the total representing the value from these assumptions on share price growth and dividends is shown separately.
Minimum Consists of base salary, benefits and pension: – Base salary is the salary to be paid in 2019 (unchanged from 2018). – Benefits measured as benefits paid in 2018 as set out in the Single Figure Table. – Pension measured as the full entitlement of approximately 17.6% of base salary receivable (after the reduction to payments made in cash for employers’ National Insurance Contributions).
On-target Based on what the Executive Director would receive if performance was on-target: – AIP: consists of the on-target annual incentive (75% of base salary). – LTIP: consists of the threshold level of vesting (50% of base salary). In addition, the potential value of Sharesave and Share Incentive Plan (‘SIP’) participation is also recognised.
Maximum Based on the maximum remuneration receivable: – AIP: consists of the maximum annual incentive (150% of base salary). – LTIP: assumes maximum vesting of awards and valued as on the date of grant (normal award 200% of base salary). Sharesave and SIP valued on the same basis as in the on-target row.
– Base salary is paid monthly in cash. – Changes to base salaries normally take effect from 1 January.
Remuneration Committee considers to be appropriate in all the circumstances. – Relocation expenses are subject to a maximum limit of £150,000.
– Phoenix will honour the pensions obligations entered into under all previous policies in accordance with the terms of such obligations.
Maximum – Pension contributions for new Executive Directors will be aligned with the wider workforce. The exact contribution rate will be disclosed next year following a review of overall Company pension provision.
– Pension contributions for current Executive Directors are limited to 20% of base salary per annum (reduced to 17.6% when taken as cash in lieu of contribution), with the intention to review this against the wider workforce as part of the full policy review later this year.
Performance measures – The performance measures applied to AIP will be set by the Remuneration Committee and may be financial or non-financial and corporate, divisional or individual and in such proportions as it considers appropriate. However, the weighting of financial performance measures will not be reduced below 50% of total AIP potential in any year for the duration of this policy.
– In respect of the financial performance measures, attaining the threshold performance level produces a £nil annual incentive payment and for non-financial performance measures the threshold performance level produces an annual incentive outcome that is 10% of the weighting given to these measures.
– The AIP operates subject to three levels of moderation: i. The Committee seeks to set suitable ranges for each measure in the context both of the Company’s own internal budgets and of external projections (whether through management guidance or consensus forecasts). As an entirely closed life business, targets are significantly impacted by management actions and year-on-year growth is not an inherent objective. Recognising that the business of the Company is to engage in corporate activity, the Remuneration Committee may adjust targets during the year to take account of such activity and ensure the targets continue to reflect performance as originally intended.
ii. There is a specific adjustment factor of 80%-120% of the provisional outturn whereby the Remuneration Committee may adjust the provisional figure (but subject to any over-riding cap) to take account of its broad assessment of performance both against pre-set targets and more generally, of the wider universe of stakeholders. With respect to financial performance measures, this assessment will include consideration of the quality of how particular outcomes were achieved.
iii. The AIP remains a discretionary arrangement and the Remuneration Committee reserves discretion to adjust the outturn (from zero to any cap) should it consider that to be appropriate. In particular, the Remuneration Committee may operate this discretion in respect of any risk concerns.
Maximum – The formal limit under the LTIP is 300% of base salary per annum (and 400% per annum in exceptional cases). – The Remuneration Committee’s practice is to make LTIP awards to Executive Directors each year over shares with a value (as at the award date) of 200% of the individual’s annual base salary although discretion is reserved to make awards up to the maximum levels for the policy as stated above.
Performance measures – The Remuneration Committee may set such performance measures for LTIP awards as it considers appropriate (whether financial or non-financial and whether corporate, divisional or individual). The measures for the 2019 LTIP are as set out below (unchanged from 2018): Measure Weighting
– For each part of an LTIP award subject to a specific performance condition, the threshold level of vesting will be no more than 25% of that part of the LTIP award.
Maximum – Sharesave – the Remuneration Committee has the facility to allow individuals to save up to a maximum of £500 each month
(or such other level as permitted by HMRC legislation) for a fixed period of three or five years. At the end of the savings period, individuals may use their savings to buy ordinary shares in the Company at a discount of up to 20% of the market price set at the launch of each scheme.
Performance measures – Consistent with normal practice, such awards are not subject to performance conditions.
– Post cessation of employment, Executive Directors are expected to retain their full level of employment shareholding requirement in the first year and half the level of their employment shareholding requirement in the second year.
– Fee levels are periodically reviewed. The Company does not adopt a quantitative approach to pay positioning and exercises judgement as to what it considers to be reasonable in all the circumstances as regards quantum. – Additional fees are paid to Non-Executive Directors who chair a Board committee, or sit on the board of a subsidiary company or on the
Solvency II Model Governance Committee, and to the Senior Independent Director (‘SID’). No separate Board committee membership fees are currently paid.
– Fees are paid monthly in cash. – Fee levels for Non-Executive Directors are reviewed annually with any changes normally taking effect from 1 January.
NOTES TO THE REMUNERATION POLICY TABLE 1. Differences between the Policy on Remuneration for Directors and the Policy on Remuneration of other employees When determining Executive Directors’ remuneration, the Committee takes into account pay throughout the Group to ensure that the arrangements in place remain appropriate.
• All-employee share plans – the Committee considers it is important for all employees to have the opportunity to become shareholders in the Company. The Company offers two HMRC tax advantaged arrangements in which all UK employees can participate and acquire shares on a discounted and tax advantaged basis (Sharesave and SIP), and equivalent arrangements in foreign jurisdictions (including on a tax advantaged basis permitted under local laws). In addition, selected individuals may receive ad-hoc share awards contingent on continued employment.
• any other circumstances that have a sufficiently significant impact on the reputation of the Company.
• the ability to make adjustments to existing awards made under the incentive plans in certain circumstances (e.g. rights issues, corporate restructurings or special dividends). Any exercise of discretion will be disclosed in the Implementation Report for the year.
RECRUITMENT REMUNERATION POLICY The Company’s recruitment remuneration policy aims to give the Remuneration Committee sufficient flexibility to secure the appointment and promotion of high calibre executives to strengthen the management team and secure the skill sets to deliver our strategic aims.
• All such buy-out awards, whether under the AIP, LTIP or otherwise (for example, specific arrangements made under Listing Rule 9.4.2), will take account of the service obligations and performance requirements for any remuneration relinquished by the individual when leaving a previous employer. The Remuneration Committee will seek to make buy-out awards subject to what are, in its opinion, comparable requirements in respect of service and performance. However, the Remuneration Committee may choose to relax this requirement in certain cases (such as where the service and/or performance requirements are materially completed), and where the Remuneration Committee considers it to be in the interests of shareholders and where such factors are, in the view of the Remuneration Committee, reflected in some other way, such as a significant discount to the face value of the awards forfeited. Exceptionally, where necessary, this may include a guaranteed or non pro-rated annual incentive in the year of joining.
Copies of Executive Director service contracts and NonExecutive Director letters of appointment are available for inspection at the Company’s registered office.
TERMINATION POLICY SUMMARY In practice, the facts surrounding any termination do not always fit neatly into defined categories for good or bad leavers. Therefore, it is appropriate for the Remuneration Committee to consider the suitable treatment on a termination having regard to all of the relevant facts and circumstances available at that time. This policy applies both to any negotiations linked to notice periods on a termination and any treatment which the Remuneration Committee may choose to apply under the discretions available to it under the terms of the AIP, DBSS and LTIP plans. The potential treatments on termination under these plans are summarised below.
Consistent with previous practice, the Remuneration Committee did not consult with employees in preparing the 2017 Remuneration Policy although will be establishing further employee engagement in 2019 in accordance with the requirement under the Corporate Governance Code. Further details are shown on page 101.
SECTION B: THIS SECTION CONTAINS THE ANNUAL REPORT ON REMUNERATION WHICH FORMS PART OF THE DIRECTORS’ REMUNERATION REPORT TO BE PROPOSED FOR APPROVAL BY THE COMPANY’S SHAREHOLDERS AT THE COMPANY’S 2019 AGM ON 2 MAY 2019.
As explained on page 79 Phoenix Group Holdings plc became the ultimate parent company of the Group and was listed on the London Stock Exchange on 13 December 2018. For ease of comparison to 2017, 2018 full year data is shown below. Details of remuneration paid by each of the two entities Phoenix Group Holdings and Phoenix Group Holdings plc is shown in the Appendix to this report on page 104.
3 Annual incentive amounts are presented inclusive of any amounts which must be deferred into shares for three years (ie 40% of the AIP award for 2018). In 2018 and 2017, £359,100 and £360,835 respectively of Clive Bannister’s incentive payment is subject to three-year deferral delivered in shares, and £232,320 and £226,810 of James McConville’s incentive payment is subject to a similar deferral. Deferred amounts are subject to continued employment.
4 In accordance with the requirements of the DRR regulations, the 2018 value for long-term incentives is an estimate of the vesting outcomes for LTIP awards granted in 2016 and which are due to vest on 2 June 2019 for Clive Bannister and James McConville. These vesting levels are at 49.5% reflecting outcomes against the Cumulative cash generation and TSR performance measures to 31 December 2018 (see page 91) and assumptions regarding dividends for the period until vesting. This vesting outcome is then applied to the average share price between 1 October 2018 and 31 December 2018 (600.04p) to produce the estimated long-term incentives figures shown for 2018 in the above table. These assumptions will be trued up for actual share prices and dividends on vesting in the report for 2019. The disclosed LTIP figure of £745,255 for Clive Bannister reflects the proportion of the original award which ultimately vested (£619,744) plus the value of dividend roll-up on those shares (£125,511). For James McConville the equivalent values are £468,433 as the disclosed LTIP figure, comprising £389,547 for the value of the proportion of the original LTIP award which ultimately vested plus the value of dividend roll-up on those shares (£78,886). All values are calculated using the three month average share price to 31 December 2018 (600.04p).
AIP OUTCOMES FOR 2018 – AUDITED INFORMATION As explained in the Committee Chairman’s statement, the business of the Group is to engage in corporate activity and the Remuneration Committee may adjust targets during the year to include such activity and ensure the targets continue to reflect performance as originally intended. 2018 was a transformational year for the Group in terms of corporate activity with respect to the acquisition of the Standard Life Assurance businesses. In light of this acquisition, the Committee approved the following adjustments to the AIP targets: Solvency II Management Actions: Threshold, target and maximum levels increased by £260 million to reflect the equity hedging action announced to the market. The range therefore increased from £100 million (threshold), £140 million (target), £200 million (maximum) to £360 million (threshold), £400 million (target), £460 million as shown in the table below.
Origo timescales2 ≤12 days ≤11 days ≤9.5 days 10.73 days 7.5% 4.4%
1 The rating is a customer satisfaction score based on the results of a satisfaction survey managed by Ipsos MORI (an external research firm). Customers surveyed were asked to give a satisfaction rating of between 1 and 5 to a number of questions (with a rating of 4 or 5 regarded as satisfied). 93.1% of all questions asked scored a rating of 4 or above.
2 The Origo Options service is a recognised industry-wide initiative for processing Pension Transfers to ensure payments are made in a timely fashion. The service has set a benchmark standard of a 12 calendar day average elapsed time for processing transfers.
Before confirming these outcomes for the 2018 AIP, the Committee undertook a review which confirmed that the Company had operated within its stated risk appetite during the year and that there were no other risk-related concerns that required the moderation of 2018 AIP outcomes.
Championed another solid year of maintaining a wholly effective and transparent relationship with our regulators.
Completed the outstanding matters related to the AXA and Abbey Life integrations with total cost savings of £27 million per annum, £10 million above target. £1 billion of cash generation delivered from these businesses to date, 75% of total consideration.
The Group FD has played a critical role in supporting the Group’s transformational acquisition of the Standard Life Assurance businesses both as a transaction, with its associated successful rights issue, and in its strategic on-boarding in Q4 2018. The Group FD has taken in Q3 2018 further responsibility as Group Director Scotland, and Head of Transformation for the acquisition.
Maintain or improve solvency The Group FD has delivered the raising £1 billion of equity, £0.9 billion of subordinated debt, retaining a stable outlook from Fitch, delivering the highest Solvency II surplus and the lowest leverage ratio in the Group’s history.
Re-domiciled Phoenix Group Holdings plc to the UK and established Phoenix Group Holdings plc as the new parent company of the group.
The Group FD ran a comprehensive Investor engagement programme across debt and equity with 33 investor roadshows and met 414 debt and equity investors, plus a capital markets event attended by 120 investors and analysts. These activities supported the successful rights issue and debt issues undertaken as part of the financing for the acquisition of the Standard Life Assurance businesses.
As described in the Remuneration Policy, 40% of 2018 AIP outcomes will be delivered as an award of deferred shares under the Deferred Bonus Share Scheme which will vest after a three-year deferral period.
Target range between Cumulative cash generation of £1.311 billion and Cumulative cash generation of £1.511 billion. £1.507bn 99% 49.5%
NON-EXECUTIVE FEES – AUDITED INFORMATION The emoluments of the Non-Executive Directors for 2018 based on the current disclosure requirements were as follows: Name
SHARE-BASED AWARDS – AUDITED INFORMATION As at 31 December 2018, Directors’ interests under long-term share-based arrangements were as follows: LTIP
1 In addition to the shares awarded under the LTIP presented above, participants receive an additional number of shares (based on the number of LTIP awards which actually vest) to reflect the dividends paid during the vesting period (and which for awards made from 2015, will include dividends paid during any applicable holding period).
Return on Adjusted Solvency II Shareholders Own Funds: rebasing of the opening position to reflect the equity issued and any synergy benefits expected by the end of 2020.
Performance measure 2016 award (50% Cumulative cash generation and 50% TSR)
TSR 25% of this part vests at threshold performance rising on a pro rata basis until 100% vests. In addition, the Committee must consider whether the TSR performance is reflective of the underlying financial performance of the Company. Measured over three financial years commencing with the year of award.
1 In addition to the shares awarded under the DBSS presented above, participants receive an additional number of shares (based on the number of DBSS awards which actually vest) to reflect the dividends paid during the vesting period.
The DBSS is the share scheme used for the deferral of AIP. No performance conditions apply therefore, other than being subject to continued employment.
Recipient Date of award Type of award Basis on which award made
Clive Bannister 21 March 2018 LTIP Nil cost option £1,399,854 25% 21 March 2021 See page 94
James McConville 21 March 2018 DBSS1 Nil cost option £226,784 – 15 March 2021 None 1 The DBSS awards have no threshold performance level.
The face value represents the maximum vesting of awards granted (but before any credit for dividends over the period to vesting) and is calculated using a share price of the average of the closing middle market prices of Phoenix shares for the three dealing days preceding the award date.
The number of options were increased to take into account the impact of the rights issues which took place on 27 June 2018. This adjustment was based on the Theoretical Ex-Rights Price (‘TERP’) and approved by the Remuneration Committee and HMRC. The share price on grant shown has also been adjusted to reflect the impact of the rights issue on the share price.
During the year ended 31 December 2018, the highest mid-market price of the Company’s shares was 733p and the lowest mid-market price was 544p. At 31 December 2018, the Company’s share price was 563.4p.
As at 1 January 2018 or date of appointment if later
Total share plan interests as at 31 December 2018 – Not subject to performance measures
Benefits There are no proposed changes to the benefits offered to Executive Directors in 2019.
Annual Incentive Plan (‘AIP’) The AIP for 2019 will operate on a basis that is consistent with how the AIP operated in 2018.
The overall weightings between Corporate and Personal performance measures for AIP in 2019 are: – Corporate (financial and strategic) performance measures – 80% (2018: 80%).
DBSS awards made in 2019 (in respect of 2018’s AIP outcome) will be made automatically on the fourth dealing day following the announcement of the Company’s 2018 annual results in accordance with the Remuneration Policy.
Awards under the LTIP will be made automatically on the fourth dealing day following the announcement of the Company’s 2018 annual results under a procedure similar to that described above for awards under the DBSS.
Award levels for Executive Directors for 2019 are unchanged at 200% of base salary. The weightings of the LTIP performance measures for 2019 remain unchanged from 2018 and are summarised below: Performance measure Weighting of performance measure
The performance measures are measured over a period of three financial years, commencing with financial year 2019.
The relative TSR measure is calculated against the constituents of the FTSE 250 (excluding Investment Trusts), with vesting commencing at median (where 25% of this part of the award vests) and full vesting at upper quintile levels, subject to an underpin regarding underlying financial performance.
The performance targets for the Cumulative cash generation measure are £2,097 million (where 25% of this part of the award vests) and £2,397 million (full vesting of this part of the award).
Where any performance vested LTIP awards are subject to a holding period requirement, the relevant LTIP award shares (discounted for anticipated tax liabilities) will count towards the shareholding requirements. Unvested awards under the LTIP and DBSS are not included in this assessment. Details of current shareholding levels are shown on page 97.
Phoenix Group Holdings/Phoenix Group Holdings plc FTSE 250 (excluding investment trusts)
Value of a 100 unit investment made on 5 July 2010
Profit distributed by way of dividend has been taken as the dividend paid and proposed in respect of the relevant financial year. For 2018 this is the interim dividend paid (£163 million) and the recommended final dividend of 23.4p per share multiplied by the total share capital issued at the date of the Annual Report as set out in note D1 in the notes to the consolidated financial statements. No share buy-backs were made in either year.
Jonathan Moss4,5 704 n/a n/a 1 The single figure of total remuneration for 2017 has been restated and now reflects the actual price of shares on the day the 2015 LTIP vested (28 September 2018: 676p per share) rather than the three-month average share price to 31 December 2017 (759.8642p per share) which was required to be used last year for the single figure of total remuneration.
CONSIDERATION OF EMPLOYEE PAY As explained in the Notes to the Remuneration Policy table: • when determining Executive Directors’ remuneration, the Committee takes into account pay throughout the Group to ensure that the arrangements in place remain appropriate, and
ADDITIONAL UNAUDITED INFORMATION The information provided below relates to the Directors’ membership of both the Phoenix Group Holdings and Phoenix Group Holdings plc boards and committees throughout 2018.
DIRECTORS’ SERVICE CONTRACTS The dates of contracts and letters of appointment and the respective notice periods for Directors are as follows: Executive Directors’ contracts
Subject to Board approval, Executive Directors are permitted to accept outside appointments on external boards as long as these are not deemed to interfere with the business of the Group. The Executive Directors are entitled to retain any external fees. During 2018, Clive Bannister received £45,000 from Punter Southall Group and CHF 50,000 from UniGestion in respect of two external directorships. He is also Chairman of the Museum of London for which he receives no payment. James McConville received £112,000 from Tesco Personal Finance plc.
Campbell Fleming 1 November 2018 31 August 2018 31 August 2021 30
Wendy Mayall 1 November 2018 1 September 2016 1 September 2019 6
Kory Sorenson 1 November 2018 1 July 2014 2 May 2019 2 1 All Directors above joined the Phoenix Group Holdings plc Board on 15 October 2018 and services are considered to have commenced with effect from 13 December 2018.
FIT have provided some technical specialist advice to management since stepping down as the Committee’s adviser. PwC also provided general consultancy services to management during the year. Separate teams within PwC provided unrelated services in respect of tax, assurance, risk consulting and transaction support during the year. The Committee is satisfied that these activities do not compromise the independence or objectivity of the advice it has received from PwC.
The Committee assesses the performance of its advisers annually, the associated level of fees and reviews the quality of advice provided to ensure that it is independent of any support provided to management.
APPENDIX – STATUTORY SINGLE FIGURE TABLES – AUDITED INFORMATION Following the completion of a Scheme of Arrangement on 12 December 2018, Phoenix Group Holdings plc was inserted into the Group as the new ultimate parent company of the Group in place of Phoenix Group Holdings (further details are included in note A1 to the consolidated financial statements). The appointment of the Directors of Phoenix Group Holdings plc, as shown on page 102, became effective from the date of admission of Phoenix Group Holdings plc to the London Stock Exchange on 13 December 2018.
For comparison purposes, the remuneration paid for the period up to 13 December in respect of services to Phoenix Group Holdings has also been included.
Phoenix Group Holdings plc is incorporated in the United Kingdom (registered no. 11606773) and has a Premium Listing on the London Stock Exchange.
As a result of regulatory changes applicable to the Group under Solvency II, dividends declared in respect of the Company’s ordinary shares must be capable of being cancelled and withheld or deferred at any time prior to payment. This is in order that the Company’s ordinary shares be counted towards Group capital. Accordingly, the final dividend will be declared on a conditional basis and the Directors reserve the right to cancel or defer the recommended dividend. The Directors do not expect to exercise this right other than where they believe that it may be necessary to do so as a result of legal or regulatory requirements.
At 31 December 2018, the issued ordinary share capital totalled 721,199,214. Subsequently, 3,531 ordinary shares have been issued in 2019 in connection with the Group’s Sharesave Scheme to bring the total in issue to 721,202,745 at the date of this report.
Full details of the issued and fully paid share capital as at 31 December 2018 and movements in share capital during the period are presented in note D1 to the IFRS consolidated financial statements.
The rights and obligations attaching to the Company’s ordinary shares are set out in the Company’s Articles of Association (the ‘Company’s Articles’) which are available on the Company’s website at www.thephoenixgroup.com/about-us/ corporate-governance/articles-of-association.aspx.
Substantial shareholdings Information provided to the Company pursuant to the FCA’s Disclosure and Transparency Rules is published on a Regulatory Information Service and on the Company’s website. As at 4 March 2019, the Company had been notified of the following significant holdings of voting rights in its shares.
Communication with investors The Company places considerable importance on communication with investors and regularly engages with them on a wide range of topics.
The Company’s Investor Relations department is dedicated to facilitating communication with investors and analysts and maintains an active investor relations programme. Please see page 58 for further details regarding the Company’s engagement with investors.
The Company’s AGM provides another opportunity to communicate with its shareholders. At the 2018 meeting, the Code provisions were complied with. Shareholders were invited to ask questions during the meeting. It is intended that the same processes will be followed at the 2019 AGM.
• Henry Staunton resigned from the Board on 31 October 2018.
• Nicholas Lyons was appointed to the Board on 31 October 2018.
The deeds of indemnity remains in-force as at the date of signature of this Directors’ Report.
Employee engagement Phoenix Group continues to communicate with staff across a wide variety of channels, including regular news bulletins via the intranet, Executive Committee presentations and other face-to-face briefings. The staff briefings and Executive Committee presentations typically include updates on the Company’s strategy and plans, progress against key financial and operational targets, regulatory and risk management updates and review of economic or other factors which could affect the Company’s strategy and performance. Regular feedback mechanisms are also in place, ensuring communication at Phoenix is a continuous two-way dialogue.
The views and opinions of staff are sought through Phoenix’s Engagement Survey and more regular interim surveys and employee communication and engagement forums. While no survey was undertaken in 2018 as a result of the Standard Life acquisition, all employees of the Enlarged Group took part in a Culture survey in December 2018. Phoenix undertakes meaningful consultation with staff representatives on all major organisational changes and other matters affecting employee engagement. An Engagement survey of the Enlarged Group is planned for Q3 2019.
GOVERNANCE Going concern The Group’s business activities, together with the factors likely to affect its future development, performance and position are set out in the Strategic Report. The Strategic Report also provides details of any key events affecting the Company (and its consolidated subsidiaries) since the end of the financial year. The Strategic Report includes details of the Group’s cash flow and solvency position, including sensitivities for both. Principal risks and their mitigation are detailed on pages 43 to 45. In addition, the IFRS consolidated financial statements include, amongst other things, notes on the Group’s borrowings (note E5), management of its financial risk including market, credit and liquidity risk (note E6), its commitments and contingent liabilities (notes I6 and I7) and its capital and management (note I3). The Strategic Report (on pages 2 to 47) sets out the business model and how the Group creates value for shareholders and policyholders.
Having thoroughly considered the going concern assessment, including a detailed review of the regulatory capital and cash flow positions of each principal subsidiary company and the availability across the Group of a range of management actions, the Board has concluded that there are no material uncertainties that may cast significant doubt about the Group and the Company’s ability to continue as a going concern.
The Directors have a reasonable expectation that the Group and the Company have adequate resources to continue in operational existence for the foreseeable future. Thus, they continue to adopt the going concern basis of accounting in preparing the annual financial statements.
The Directors have acknowledged their responsibilities in the Statement of Directors’ Responsibilities in relation to the IFRS financial statements for the year ended 31 December 2018.
The disclosures required in respect of the Company’s diversity policy are addressed in the Strategy and KPIs section of the Strategic Report on page 51. The UK Corporate Governance Code (the ‘Code’) applies to the Company and full details on the Company’s compliance with the Code are included in the Corporate Governance Report. The Code is available on the website of the Financial Reporting Council – www.frc.org.uk.
Greenhouse gas emissions All disclosures concerning the Group’s greenhouse emissions are contained in the Environmental Report forming part of the Strategic Report on pages 56 and 57.
Re-Appointment of the Auditors Ernst & Young LLP (‘EY’) has indicated its willingness to continue in office and shareholders’ approval will be sought at the AGM on 2 May 2019.
Disclosure of information to Auditors The Directors who held office at the date of approval of this Directors’ Report confirm that, so far as they are aware, there is no relevant audit information of which the Company’s auditor is unaware and that each Director has taken all the steps that they ought to have taken as a Director to make themselves aware of any relevant audit information and to establish that the Company’s auditor is aware of that information.
CONTRACTUAL/OTHER Significant agreements impacted by a change of control of the Company There are change of control clauses contained in certain of the Group’s financing agreements. The £900million revolving credit facility and £600million acquisition facility have provisions which would enable the lending banks to require repayment of all amounts borrowed following a change of control.
The Board has prepared a Strategic Report which provides an overview of the development and performance of the Group’s business for the year ended 31 December 2018, covers the future developments in the business of Phoenix Group Holdings plc and its consolidated subsidiaries; and provides details of any important events affecting the Company and its subsidiaries after the year-end. For the purposes of compliance with DTR 4.1.5R(2) and DTR 4.1.8R, the required content of the ‘Management Report’ can be found in the Strategic Report and this Directors’ Report, including the sections of the Annual Report and Accounts incorporated by reference.
The Directors have prepared the consolidated financial statements and the Company financial statements in accordance with International Financial Reporting Standards (‘IFRSs’) as adopted by the European Union (‘EU’). The Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and the Company and of the profit or loss of the Group and the Company for that period.
• Make judgements and accounting estimates that are reasonable and prudent.
The Directors as at the date of this report, whose names and functions are listed in the Board of Directors section on pages 62 and 63, confirm that, to the best of their knowledge: • The Group’s consolidated financial statements and the Company financial statements, which have been prepared in accordance with IFRS as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit of the Group and the Company.
The statement of changes in equity for the period then ended
Related notes A1 to I8 to the consolidated financial statements (except for note I3 which is marked as unaudited), including a summary of significant accounting policies
INDEPENDENCE Further to our confirmation that we are independent of the Group and parent company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the FRC’s Ethical Standard as applied to listed public interest entities, we have specifically considered the impact of the acquisition of Standard Life Assurance Limited (‘SLAL’) and other associated entities during the period on our independence. Material business relationships and prescribed non-audit services with the acquired entities at the time of the acquisition were terminated within the provisions of the Ethical Standard and appropriate safeguards were put in place. These safeguards included the migration of our workplace pension scheme arrangement to a different provider.
Key audit matters – Valuation of insurance contract liabilities, comprising the following risk areas: – actuarial assumptions; – actuarial modelling; and – data.
Audit scope – We performed an audit of the complete financial information of the Group Function, Phoenix Life Division and SLAL and audit procedures on specific balances for Other Companies. Our scope is explained further on pages 117 to 118.
– The components where we performed full or specific audit procedures accounted for more than 99% of the equity and profit before tax of the Group.
Key audit matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) that we identified. These matters included those which had the greatest effect on: the overall audit strategy, the allocation of resources in the audit; and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements as a whole and in our opinion thereon, and we do not provide a separate opinion on these matters.
We assessed management’s analysis of movements in insurance contract liabilities over the year and obtained evidence to support large or unexpected movements. This provided important audit evidence over the valuation of insurance contract liabilities. Further additional audit procedures performed to respond to the specific risk areas are set out below: Risk area
There has been no change in our identification of this risk from the prior year. Whilst we consider the risks to be similar in nature, due to the increased account balances following the acquisition of Standard Life Assurance Limited and other associated entities in the year, we believe the identified risk to have a higher magnitude of potential misstatement. Economic assumptions are set by management taking into account market conditions as at the valuation date. Non-economic assumptions such as future expenses, longevity and mortality are set based on the Group’s past experience, market experience, market practice, regulations and expectations about future trends.
In addition, we are satisfied that the disclosures made in the financial statements are in compliance with the applicable financial reporting standards.
There has been no change in our identification of this risk from the prior year. Whilst we consider the risks to be similar in nature, due to the increased account balances following the acquisition of Standard Life Assurance Limited and other associated entities in the year, we believe the identified risk to have a higher magnitude of potential misstatement. We consider the integrity and appropriateness of models to be critical to the overall valuation of insurance contract liabilities.
– assessed the results of the analysis of movements in insurance contract liabilities in order to corroborate the completeness of model changes.
There has been no change in our identification of this risk from the prior year. Whilst we consider the risks to be similar in nature, due to the increased account balances following the acquisition of Standard Life Assurance Limited and other associated entities in the year, we believe the identified risk to have a higher magnitude of potential misstatement. The policyholder data is a key input into the valuation process. The valuation of insurance contract liabilities is therefore conditional upon the accuracy and completeness of the data used.
To obtain sufficient audit evidence to assess the integrity of policyholder data we performed the following procedures: – obtained an understanding of the process and tested the design and operating effectiveness of key controls, including information technology general controls, over management’s data collection, extraction and validation process; – for Outsourced Service Providers (‘OSP’) where we have placed reliance on the Service Organisation Controls (‘SOC1’) report, we have reviewed the SOC1 report and concluded on the design effectiveness of the relevant controls; – for OSPs where we do not receive a SOC1 we have obtained an understanding of the process and performed direct testing of the operating effectiveness of the key controls; – where we have not relied on controls at the OSP, or for policies administered internally, we have performed additional procedures including agreeing policyholder documentation to the policyholder data used in the actuarial model on a sample basis; – assessed the integrity of policy level data, performing corroborative testing on i) changes to static data during the period and ii) unusual trends and anomalies in the data. We did this based upon our knowledge of the Group’s products, industry standards and through using advanced data analytics; – confirmed that the actuarial model data extracts provided by the OSPs were those used as an input to the actuarial model; – assessed the appropriateness of management’s grouping of data for input into the actuarial model; and
We have refined our assessment of risk from the prior year, focussing on those investments with the highest degree of judgement such as Equity Release Mortgages (‘ERM’). In addition, following the acquisition of SLAL and other associated entities, we have identified heightened risk on the Standard Life modelled corporate bonds due to a combination of size of these financial investments and level of judgement involved in valuation. Refer to the Audit Committee Report (pages 68 to 71); Critical accounting estimates (page 129); Accounting policies and notes E1 and E2 of the consolidated financial statements (pages 143 to 151). The extent of judgement applied by management in valuing the Group’s financial investments varies with the nature of securities held, the markets in which they are traded and the valuation methodology applied.
To obtain sufficient audit evidence to conclude on the valuation of ERMs, we: – tested the design and operating effectiveness of key controls over management’s process in respect of the valuation of ERMs; – tested the completeness and accuracy of the mortgage data used in the valuation model by agreeing a sample of new loans to supporting evidence and validating any movements on static data over the period; – evaluated the methodology, inputs and assumptions used (such as house price inflation, residential house price volatility, longevity improvement and base mortality, as well as economic assumptions such as discount rate); – we have validated the key assumptions by comparing them to published market benchmarks and demographic and economic assumptions used by other industry participants, to confirm that key valuation inputs were consistent with industry norms and our understanding of the instrument type; – assessed the reasonableness of the fair value of the mortgages at the reporting date including an assessment of the valuation approach to the no-negative equity guarantee; and
We performed full scope audit procedures over this risk area in two components, which covered 100% of the risk amount.
Accounting for the acquisition of Standard Life Assurance Limited and other associated entities
This is a new significant risk for the current year. Refer to the Audit Committee Report (pages 68 to 71); Critical accounting estimates (page 130); Accounting policies and notes G7 and H2 of the consolidated financial statements (pages 190 to 192 and pages 195 to 197). On 31 August 2018, the Group acquired SLAL, Standard Life International Designated Activity Company, Standard Life Assets and Employee Services Limited and other related entities (collectively ‘the Standard Life Assurance businesses’) from Standard Life Aberdeen plc (‘SLA plc’) for total consideration of £2,994 million.
The primary elements of the valuation exercise assessed the fair value of the identifiable intangible assets in the form of AVIF (£2,931 million) and a separately identifiable intangible asset of £36 million relating to the CSPA, both gross of tax.
– read relevant agreements and board minutes which supported the final conclusions in respect of the acquisition accounting.
AN OVERVIEW OF THE SCOPE OF OUR AUDIT Tailoring the scope Our assessment of audit risk, our evaluation of materiality and our allocation of performance materiality determine our audit scope for each reporting unit (‘reporting component’) within the Group. Taken together, this enables us to form an opinion on the consolidated financial statements. We take into account size, risk profile, the organisation of the Group and effectiveness of Group-wide controls, changes in the business environment and other factors when assessing the level of work to be performed at each reporting component.
Of the four components selected, we performed an audit of the complete financial information of three components (‘full scope components’) which were selected based on their size or risk characteristics. For the remaining Other Companies (‘specific scope components’), we performed audit procedures on specific accounts of Phoenix Life service companies (provisions, accruals and deferred income, wages and salaries and administrative expenses) and of SL Intl (cash and cash equivalents and insurance contract liabilities).
The reporting components where we performed audit procedures accounted for more than 99% (2017: 99%) of the Group’s equity and the Group’s profit before tax. For the current year, the full scope components contributed 93% (2017: 98%) of the Group’s equity and 97% (2017: 99%) of the Group’s profit before tax. The specific scope component contributed 6% (2017: 2%) of the Group’s equity and 2% (2017: 1%) of the Group’s profit before tax. The audit scope of these components may not have included testing of all significant accounts of the component but will have contributed to the coverage of significant accounts tested for the Group.
SLAL is a new component of the Group in 2018 following the acquisition completed on 31 August 2018. Due to the size and risk inherent in the component, we have designated it as a full scope component. SL Intl, acquired as part of the Standard Life Assurance businesses, is within the ‘Other Companies’ component and is designated as a specific scope component.
We determined materiality for the Group to be £100 million (2017: £63 million), which is 1.9% (2017: 2%) of Group equity. In the current year we considered profit-based measures for materiality given that the Standard Life Assurance business changed the business mix of the Group to include a greater proportion of open business. Whilst profit before tax or operating profit are common bases used across the life insurance industry and might be an appropriate measure for an open business, we believe that the use of equity as the basis for assessing materiality remains more appropriate given that the Group remains primarily a closed life assurance consolidator and as such equity provides a more stable, long-term measure of value. We note also that equity more closely correlates with key Group performance metrics such as Solvency II capital requirements and Own Funds. However, as these measures are non-GAAP measures, we consider equity to be most appropriate.
The parent company was incorporated in 2018 under the UK Companies Act 2006 and is domiciled in England and Wales. The financial statements for the period ended 31 December 2018 are the first set of financial statements prepared by the parent company. Accordingly, there is no comparative information to disclose in the individual financial statements of the parent company. We determined materiality for the parent company to be £82 million, which is 2% of the parent company equity attributable to owners. We have used a capital based measure for determining materiality for consistency with the approach taken for the Group where we consider equity to be the most appropriate basis when considering against other measures such as IFRS profit before tax with its inherent volatility considering the nature of the parent company as a holding company.
On the basis of our risk assessments, together with our assessment of the Group’s overall control environment, our judgement was that performance materiality was 50% (2017: 50%) of our planning materiality, namely £50 million (2017: £31 million).
Audit work at component locations for the purpose of obtaining audit coverage over significant financial statement accounts is undertaken based on a percentage of total performance materiality. The performance materiality set for each component is based on the relative scale and risk of the component to the Group as a whole and our assessment of the risk of misstatement at that component. In the current year, the range of performance materiality allocated to components was £10 million to £28 million (2017: £6 million to £24 million).
We agreed with the Audit Committee that we would report to them all uncorrected audit differences in excess of £5 million (2017: £3 million), which is set at 5% of planning materiality, as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds.
OTHER INFORMATION The other information comprises the information included in the Annual Report set out on pages 1 to 110, other than the financial statements and our auditor’s report thereon. The Directors are responsible for the other information.
In this context, we also have nothing to report in regard to our responsibility to specifically address the following items in the other information and to report as uncorrected material misstatements of the other information where we conclude that those items meet the following conditions: • Fair, balanced and understandable set out on page 110 – the statement given by the Directors that they consider the Annual Report and financial statements taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group’s performance, business model and strategy, is materially inconsistent with our knowledge obtained in the audit; or
• the Strategic Report and the Directors’ Report have been prepared in accordance with applicable legal requirements.
• For both direct and other laws and regulations, our procedures involved: making enquiry of those charged with governance and senior management for their awareness of any non-compliance of laws or regulations, inquiring about the policies that have been established to prevent non-compliance with laws and regulations by officers and employees, inquiring about the company’s methods of enforcing and monitoring compliance with such policies, inspecting significant correspondence with the FCA and PRA.
Other matters we are required to address • Following the completion of the on-shoring exercise and the incorporation of Phoenix Group Holdings plc, we were appointed by the Company Directors on 13 December 2018 and signed an engagement letter on 20 February 2019 to audit the financial statements for the period ending 31 December 2018 and subsequent financial periods.
USE OF OUR REPORT This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed.
Other comprehensive income/(expense): Items that are or may be reclassified to profit or loss: Cash flow hedges: Fair value gains/(losses) arising during the year 31 (13)
Items that will not be reclassified to profit or loss: Remeasurement of owner-occupied property G8 – 1
Acquisition of Standard Life Assurance subsidiaries, net of cash acquired H2.1 1,607 –
Proceeds from issuing ordinary shares, net of associated commission and expenses D1 936 2
Proceeds from sale of internal holding in £428 million subordinated notes – 32
Cash and cash equivalents at the beginning of the year 2,245 1,666
STATEMENT OF CONSOLIDATED CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 2018
Profit for the year – – – – – – 379 379 – 31 410
Other comprehensive income/ (expense) for the year – – – 2 – 3 (64) (59) – – (59)
Total comprehensive income for the year – – – 2 – 3 315 320 – 31 351
Issue of ordinary share capital, net of associated commissions and expenses (note D1) 33 1,926 – – – – 1,959 – – 1,959
Shares acquired by the employee benefit trust – – (8) – – – – (8) – – (8)
Coupon paid on Tier 1 Notes, net of tax relief – – – – – – (12) (12) – – (12)
Loss for the year – – – – – – (27) (27)
Other comprehensive income for the year – – – – 1 (11) 46 36
Total comprehensive income for the year – – – – 1 (11) 19 9
Dividends paid on ordinary shares – (193) – – – – – (193)
Shares distributed by the employee benefit trust – – 9 – – – (9) –
The comparative equity structure has been restated to reflect the difference between the par value of shares issued by Phoenix Group Holdings plc (the ‘Company’) and the shares issued by Old PGH prior to the share for share exchange with a corresponding adjustment to share premium. Further details are provided in note A1.
STATEMENT OF CONSOLIDATED CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2017
A. SIGNIFICANT ACCOUNTING POLICIES A1. Basis of preparation The consolidated financial statements for the year ended 31 December 2018 set out on pages 121 to 213 comprise the financial statements of Phoenix Group Holdings plc (‘the Company’) and its subsidiaries (together referred to as ‘the Group’), and were authorised by the Board of Directors for issue on 4 March 2019.
In applying the principles of reverse acquisition accounting, the consolidated financial statements have been presented as a continuation of the Old PGH business and the Group is presented as if the Company had always been the ultimate parent company. The comparative equity structure has been restated to reflect the difference between the par value of shares issued by the Company (£39 million) and the shares issued by Old PGH (£nil) prior to the share for share exchange, with a corresponding adjustment to share premium. In addition, the presentation within the consolidated statement of changes in equity of the impact of shares issued during the year by Old PGH up to the date of the share for share exchange reflects the par value of the shares issued by the Company.
As noted above the equity structure disclosed for the 2017 comparative period has been restated to reflect the difference between the par value of shares issued by the Company and the shares issued by Old PGH prior to the share for share exchange. This impacts the statement of consolidated financial position and the statement of consolidated changes in equity.
In addition, the presentation of gross premiums written, premiums ceded to reinsurers, policyholder claims and reinsurance recoveries in respect of certain corporate pension de-risking transactions has been updated in the 2017 comparative amounts to better reflect the underlying structure of the transactions.
None of the restatements of prior period information have impacted the profit or loss or total equity attributable to the owners of the parent.
Basis of consolidation The consolidated financial statements include the financial statements of the Company and its subsidiary undertakings, including collective investment schemes, where the Group exercises overall control. In accordance with the principles set out in IFRS 10 Consolidated Financial Statements, the Group controls an investee, if and only, if the Group has all the following: • power over the investee; • exposure, or rights, to variable returns from its involvement with the investee; and
The Group considers all relevant facts and circumstances in assessing whether it has power over an investee, including relevant activities, substantive and protective rights, voting rights and purpose and design of an investee. The Group reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control. Further details about the consolidation of subsidiaries, including collective investment schemes, is included in note H1.
A2. Accounting policies The principal accounting policies have been consistently applied in these consolidated financial statements. Where an accounting policy can be directly attributed to a specific note to the consolidated financial statements, the policy is presented within that note, with a view to enabling greater understanding of the results and financial position of the Group. All other significant accounting policies are disclosed below.
Translation differences on debt securities and other monetary financial assets measured at fair value through profit or loss are included in foreign exchange gains and losses. Translation differences on non-monetary items at fair value through profit or loss are reported as part of the fair value gain or loss.
A3. Critical accounting estimates and judgements The preparation of financial statements requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. Disclosures of judgements made by management in applying the Group’s accounting policies include those that have the most significant effect on the amounts that are recognised in the consolidated financial statements. Disclosures of estimates and associated assumptions include those that have a significant risk of resulting in a material change to the carrying value of assets and liabilities within the next year. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
Critical accounting estimates are those which involve the most complex or subjective judgements or assessments. The areas of the Group’s business that typically require such estimates are the measurement of insurance and investment contract liabilities, determination of the fair value of financial assets and liabilities, valuation of pension scheme assets and liabilities and the valuation of intangibles on initial recognition.
Further details of the estimates made are included in note E2. In relation to the Level 3 financial instruments, sensitivity analysis is performed in respect of the key assumptions used in the valuation of these financial instruments. The details of this sensitivity analysis are included in note E2.3.
A3.7 Control and consolidation The Group has invested in a number of collective investment schemes and other types of investment where judgement is applied in determining whether the Group controls the activities of these entities. These entities are typically structured in such a way that owning the majority of the voting rights is not the conclusive factor in the determination of control in line with the requirements of IFRS 10 Consolidated Financial Statements. The control assessment therefore involves a number of further considerations such as whether the Group has a unilateral power of veto in general meetings and whether the existence of other agreements restrict the Group from being able to influence the activities. Further details of these judgements are detailed in note H1.
Amendments to IFRS 2 Classification and Measurement of Share-based Payment Transactions The IASB issued amendments to IFRS 2 Share-based Payment that address three main areas: the effects of vesting conditions on the measurement of a cash-settled share-based payment transaction; the classification of a share-based payment transaction with net settlement features for withholding tax obligations; and accounting where a modification to the terms and conditions of a share-based payment transaction changes its classification from cash-settled to equity-settled. On adoption, entities are required to apply the amendments without restating prior periods, but retrospective application is permitted if elected for all three amendments and other criteria are met. The Group has reviewed its current sharebased payment schemes and has determined that it does not have any cash-settled share based payment schemes and that the narrow scope amendment regarding ‘net settlement features’ does not apply. As a consequence, these amendments do not currently have any impact on the Group.
Annual Improvements Cycle 2014-2016: Amendments to IFRS 1 First-time adoption of IFRSs and Amendments to IAS 28 Investments in Associates and Joint Ventures. The first amendment deletes short-term exemptions for first time adopters as they have now served their intended purpose. The second amendment clarifies that an entity that is a venture capital organisation, or other qualifying entity, may elect, at initial recognition on an investment-by-investment basis, to measure its investments in associates and joint ventures at fair value through profit or loss (‘FVTPL’). The Group currently applies the election to measure its investments in associates at FVTPL. There are no further impacts as a result of the amendments.
• IFRS 9 Financial Instruments (2018). Under IFRS 9, all financial assets will be measured either at amortised cost or fair value and the basis of classification will depend on the business model and the contractual cash flow characteristics of the financial assets. In relation to the impairment of financial assets, IFRS 9 requires the use of an expected credit loss model, as opposed to the incurred credit loss model required under IAS 39. The expected credit loss model will require the Group to account for expected credit losses and changes in those expected credit losses at each reporting date to reflect changes in credit risk since initial recognition.
IAS 12 Income Taxes, IAS 23 Borrowing Costs and IFRS 3 Business combinations/IFRS 11 Joint Arrangements (2019). These amendments do not currently have any impact on the Group.
• Amendments to IAS 28 Investments in Associates and Joint Ventures: Long-term interests in Associates and Joint Ventures (2019). The amendments to IAS 28 clarify that an entity applies IFRS 9 Financial Instruments to long-term interests in an associate or joint venture that form part of the net investment in the associate or joint venture but to which the equity method is not applied. The amendments are deferred as a result of the extension of the implementation date of IFRS 9 to 2021.
• IFRIC 23 Uncertainty over Income Tax Treatments (2019). This interpretation clarifies the accounting for income tax treatments that have yet to be accepted by tax authorities, whilst also aiming to enhance transparency.
• Amendments to IAS 1 Presentation of Financial Statements and IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors (2020). The amendments clarify the definition of material and how it should be applied and ensures that the definition of material is consistent across all IFRS Standards.
• IFRS 17 Insurance Contracts (2021 – IASB recommended extension of implementation date to 2022). Once effective IFRS 17 will replace IFRS 4 the current insurance contracts standard and it is expected to significantly change the way the Group measures and reports its insurance contracts. The overall objective of the new standard is to provide an accounting model for insurance contracts that is more useful and consistent for users. The new standard uses three measurement approaches and the principles underlying these measurement approaches will significantly change the way the Group measures its insurance contracts and investment contracts with Discretionary Participation Features (‘DPF’). These changes will impact profit emergence patterns and add complexity to valuation processes, data requirements and assumption setting. During 2017, the Group commenced a project to perform an initial impact assessment of the standard on the Group and to produce a detailed implementation plan. Implementation activities during 2018 have included the development of detailed methodologies and policies and the identification of specific data and systems requirements. These activities will continue into 2019.
The Europe segment includes business written in Ireland and Germany. This will include products that are actively being marketed to new policyholders, and legacy in-force products that are no longer being sold to new customers. The Management Services segment comprises income from the life and holding companies in accordance with the respective management service agreements less fees related to the outsourcing of services and other operating costs. Unallocated Group includes consolidation adjustments and Group financing (including finance costs) which are managed on a Group basis and are not allocated to individual operating segments. Inter-segment transactions are set on an arm’s length basis in a manner similar to transactions with third parties. Segmental results include those transfers between business segments which are then eliminated on consolidation.
(net of related costs); • the financial impacts of mandatory regulatory change; • the profit or loss attributable to non-controlling interests; • integration, restructuring or other significant one-off projects; and • any other items which, in the Directors’ view, should be disclosed separately by virtue of their nature or incidence to enable a full understanding of the Company’s financial performance. This is typically the case where the nature of the item is not reflective of the underlying performance of the operating companies.
Whilst the excluded items are important to an assessment of the consolidated financial performance of the Group, management considers that the presentation of the operating profit metric provides useful information for assessing the performance of the Group’s operating segments on an ongoing basis. The IFRS results are significantly impacted by the amortisation of intangible balances arising on acquisition, the one-off costs of integration activities and the costs of servicing debt used to finance acquisition activity, which are not indicative of the underlying operational performance of the Group’s segments. Furthermore, the hedging strategy of the Group is calibrated to protect the capital Solvency II surplus position and cash generation capability of the operating companies, as opposed to the IFRS financial position. This can create additional volatility in the IFRS result which is excluded from the operating profit metric. The Company therefore considers that operating profit provides a more representative indicator of the ability of the Group’s operating companies to generate cash available for the servicing of the Group’s debts and for distribution to shareholders. Accordingly, the measure is more closely aligned with the business model of the Group and how performance is managed by those charged with governance.
Other non-operating items in respect of 2017 include: • a premium of £25 million paid on redemption of £178 million principal of the senior unsecured bond; • costs of £21 million in respect of integration and restructuring of the Abbey Life and AXA Wealth business; • costs of £20 million in respect of short-term expense overruns arising from the AXA Wealth business prior to completion of the implementation of the Phoenix operating model; • a provision of £27 million in respect of a commitment to the reduction of ongoing charges for Workplace Pension products; • a £21 million increase in the provision for costs for claims relating to historic creditor insurance underwritten by a subsidiary of the Group, PA (GI) Limited, offset by the recognition of recoveries due or received from third parties under contractual arrangements of £39 million; and
• net other one-off items totalling a cost of £5 million, including corporate project costs.
Of the revenue from external customers presented in the table above, £2,199 million is attributable to customers in the United Kingdom (‘UK’) and £350 million to the rest of the world. The Europe operating segment comprises business written in Ireland and Germany to customers in both Europe and the UK. No revenue transaction with a single customer external to the Group amounts to greater than 10% of the Group’s revenue.
Less: premiums ceded to reinsurers (356) – – – – (356)
The long-term nature of much of the Group’s operations means that, for internal performance management, the effects of short-term economic volatility are treated as non-operating items. The Group focuses instead on an operating profit measure that incorporates an expected return on investments supporting its long-term business. The accounting policy adopted in the calculation of operating profit is detailed in note B1. The methodology for the determination of the expected investment return is explained below together with an analysis of investment return variances and economic assumption changes recognised outside of operating profit.
The long-term risk-free rate used as a basis for deriving the long-term investment return is set by reference to the swap curve at the 15 year duration plus 10bps at the start of the year. A risk premium of 350bps is added to the risk-free yield for equities (2017: 350bps), 250bps for properties (2017: 250bps), 150bps for other fixed interest assets (2017: 150bps) and 50bps for gilts (2017: 50bps).
B2.2 Life assurance business Operating profit for life assurance business is based on expected investment returns on financial investments backing owners’ and policyholder funds over the reporting period, with consistent allowance for the corresponding expected movements in liabilities. Operating profit includes the effect of variance in experience for non-economic items, for example mortality, persistency and expenses, and the effect of changes in non-economic assumptions. Changes due to economic items, for example 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 operating profit.
The effect of differences between actual and expected economic experience on liabilities, and changes to economic assumptions used to value liabilities, are taken outside operating profit. For many types of long-term business, including unit-linked and with-profit funds, movements in asset values are offset by corresponding changes in liabilities, limiting the net impact on profit. For other long-term business, the profit impact of economic volatility depends on the degree of matching of assets and liabilities and exposure to financial options and guarantees.
The net investment return variances and economic assumption changes on long term business of £283 million (2017: £6 million adverse) primarily arise due to the positive impact of strategic asset allocation activities, including investment in higher yielding illiquid assets, together with the impact of gains on hedging positions held by the life funds as a result of declining equity markets in the year. The Group’s exposure to equity movements arising from future profits in relation to with-profit bonuses and unit-linked charges is hedged to benefit the regulatory capital position. The impact of equity market movements on the value of the hedging instruments is reflected in the IFRS results, but the corresponding change in the value of future profits is not.
The adverse variance on owners’ funds of £193 million (2017: £87 million negative) is principally driven by realised losses on derivative instruments entered into by the holding companies to hedge the Group’s exposure to equity risk arising from the Group’s acquisition of Standard Life Assurance. Losses of £143 million were incurred on these instruments, together with option premiums of £22 million.
The adverse variance on owners’ funds for the year ended 31 December 2017 of £87 million was principally driven by interest rate swaption positions held in the life companies’ shareholder funds. Such positions were held to hedge the impact of interest rate risk on the Group’s regulatory capital position. With swap yields remaining relatively stable during 2017, option value associated with these contracts fell due to expected option expiry and reduced volatility.
Coupon payable in respect of Tier 1 Notes, net of tax relief (12) –
Basic earnings per share (restated for bonus element of rights issue) 66.8 (6.3)
B3.2 Diluted earnings per share The result attributable to ordinary equity holders of the parent used in the calculation of diluted earnings per share is the same as that used in the basic earnings per share calculation in B3.1 above. The diluted weighted average number of ordinary shares outstanding during the period is 551 million (2017 restated: 436 million). The Group’s deferred bonus share scheme and sharesave share-based schemes increased the weighted average number of shares on a diluted basis by 375,020 shares for the year ended 31 December 2018. As losses have an anti-dilutive effect, none of the share-based awards had a dilutive effect for the year ended 31 December 2017.
On 14 March 2018, the Board recommended a final dividend of 25.1p per share in respect of the year ended 31 December 2017. The dividend was approved at the Group’s Annual General Meeting, which was held on 2 May 2018. The dividend amounted to £99 million and was paid on 4 May 2018.
Fees related to the provision of investment management services and administration services are recognised as services are provided. Front end fees, which are charged at the inception of service contracts, are deferred as a liability and recognised over the life of the contract. The table below details the ‘Disaggregation of Revenue’ disclosures required by IFRS15 Revenue from contracts with customers.
Significant judgements in determining costs to obtain or fulfil investment contracts No significant judgements are required in determining the costs incurred to obtain or fulfil contracts with customers, and no amortisation is required, as income directly matches costs with management charges being applied on an ongoing (or pro-rata) basis.
In the period no amortisation or impairment losses were recognised in the statement of comprehensive Income.
Dividend income is recognised in the consolidated income statement on the date the right to receive payment is established, which in the case of listed securities is the ex-dividend date. Rental income from investment property is recognised in the consolidated income statement on a straight-line basis over the term of the lease. Lease incentives granted are recognised as an integral part of the total rental income. Fair value gains and losses on financial assets and financial liabilities designated at fair value through profit or loss are recognised in the consolidated income statement. Fair value gains and losses includes both realised and unrealised gains and losses.
Interest income on loans and deposits at amortised cost 10 1
Net interest (expense)/income on Group defined benefit pension scheme liability/asset (6) (11)
Financial assets and financial liabilities at FVTPL: Designated upon initial recognition (13,016) 2,754
Movement in restructuring and integration costs provision (see note G1) – 21
Premium paid on part redemption of the £300 million senior bond – 25
No services were provided by the Company’s auditors to the Group’s pension schemes in either 2018 or 2017.
Tax services fees of £0.1 million (2017: £nil) principally relates to services provided to Standard Life Assurance for which the Group’s external auditor was engaged prior to the completion of the acquisition and their appointment as auditors of those entities. All such services were terminated within a period of three months following completion of the acquisition, as permitted under the Financial Reporting Committee’s Ethical Standards.
Income tax comprises current and deferred tax. Income tax is recognised in the consolidated income statement except to the extent that it relates to items recognised in the statement of consolidated comprehensive income or the statement of consolidated changes in equity, in which case it is recognised in these statements. Current tax is the expected tax payable on the taxable income for the year, using tax rates and laws enacted or substantively enacted at the date of the statement of consolidated financial position together with adjustments to tax payable in respect of previous years. The tax charge is analysed between tax that is payable in respect of policyholders’ returns and tax that is payable on owners’ returns. This allocation is calculated based on an assessment of the effective rate of tax that is applicable to owners for the year.
The Group, as a proxy for policyholders in the UK, is required to pay taxes on investment income and gains each year. Accordingly, the tax credit or expense attributable to UK life assurance policyholder earnings is included in income tax expense. The tax credit attributable to policyholder earnings was £211 million (2017: £21 million charge).
C6. Tax charge continued C6.3 Reconciliation of tax (credit)/charge £m £m
Profits taxed at rates other than 19.0% (2017: 19.25%)5 (14) 2
6 Represents tax losses recognised in 2017 which have now reversed. 7 Represents the utilisation of brought forward tax losses from 2017 in 2018 at the current tax rate of 19% rather than the longer term rate of 17%.
Issued and fully paid: 721.2 million ordinary shares of £0.10 each (2017: 393.2 million ordinary shares of £0.10 each – restated) 72 39 1 Comparative figures have been restated for the scheme of arrangement as detailed in note A1.
The holders of ordinary shares are entitled to one vote per share on matters to be voted on by owners and to receive such dividends, if any, as may be declared by the Board of Directors in its discretion out of legally available profits.
Movements in issued share capital during the year: Shares in issue at 1 January 393,232,644 39,323,264
On 31 August 2018, the Group issued 144,114,450 shares to SLA plc, giving them a 19.99% equity stake in the Group valued at £1,023 million, based on the share price at that date.
During 2017, 382,827 shares were issued at a premium of £2 million in order to satisfy obligations to employees under the Group’s sharesave schemes (see note I1).
Where the Phoenix Group Employee Benefit Trust (‘EBT’) acquires shares in the Company or obtains rights to purchase its shares, the consideration paid (including any attributable transaction costs, net of tax) is shown as a deduction from owners’ equity. Gains and losses on sales of shares held by the EBT are charged or credited to the own shares account in equity.
D. EQUITY continued D2. Shares held by the Employee Benefit Trust continued The EBT holds shares to satisfy awards granted to employees under the Group’s share-based payment schemes.
Shares awarded to employees by the EBT in year (4) (9)
During the year 518,322 (2017: 1,217,505) shares were awarded to employees by the EBT and 1,188,435 (2017: 445,560) shares were purchased. The number of shares held by the EBT at 31 December 2018 was 990,802 (2017: 320,689).
Old PGH provided the EBT with an interest-free facility arrangement to enable it to purchase the shares.
The Fixed Rate Reset Perpetual Restricted Tier 1 Write-Down Notes (‘Tier 1 Notes’) meet the definition of equity and accordingly are shown as a separate category within equity at the proceeds of issue. The coupons on the instruments are recognised as distributions on the date of payment and are charged directly to the statement of consolidated changes in equity.
The Tier 1 Notes have no fixed maturity date and interest is payable only at the sole and absolute discretion of the Company; accordingly the Tier 1 Notes meet the definition of equity for financial reporting purposes and are disclosed as such in the consolidated financial statements. If an interest payment is not made it is cancelled and it shall not accumulate or be payable at any time thereafter.
Non-controlling interests recognised on acquisition of the Standard Life Assurance business (see note H2) 265
The Group’s interest in SLPET is held in the with-profit and unit-linked funds of the Group’s life companies. Therefore the shareholder exposure to the results of SLPET is limited to the impact of those results on the shareholder share of distributed profits of the relevant fund.
The majority of the Group’s loans and deposits are designated as loans and receivables and are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and only include assets where a security has not been issued. These loans and deposits are initially recognised at cost, being the fair value of the consideration paid for the acquisition of the investment. All transaction costs directly attributable to the acquisition are also included in the cost of the investment. Subsequent to initial recognition, these investments are carried at amortised cost, using the effective interest method. The Group holds a portfolio of loans that are designated at FVTPL. Derivative financial instruments are largely classified as held for trading. They are recognised initially at fair value and subsequently are remeasured to fair value. The gain or loss on remeasurement to fair value is recognised in the consolidated income statement. Derivative financial instruments are not classified as held for trading where they are designated and effective as a hedging instrument. For such instruments, the timing of the recognition of any gain or loss that arises on remeasurement to fair value in profit or loss depends on the nature of the hedge relationship. Equities, fixed and variable rate income securities, collective investment schemes and certain loans and deposits are designated at FVTPL and accordingly are stated in the statement of consolidated financial position at fair value. They are designated at FVTPL because this is reflective of the manner in which the financial assets are managed and reduces a measurement inconsistency that would otherwise arise with regard to the insurance liabilities that the assets are backing. Reinsurers share of investment contracts liabilities without DPF are valued on a basis consistent with investment contracts liabilities without DPF as detailed under the ‘Financial liabilities’ section below.
Impairment of financial assets The Group assesses at each period end whether a financial asset or group of financial assets held at amortised cost are impaired. The Group first assesses whether objective evidence of impairment exists. If it is determined that no objective evidence of impairment exists for an individually assessed financial asset, the asset is included in a group of financial assets with similar credit risk characteristics and that group of financial assets is collectively assessed for impairment. Assets that are individually assessed for impairment and for which an impairment loss is, or continues to be recognised, are not included in the collective assessment of impairment. Fair value estimation The fair value of financial instruments traded in active markets such as publicly traded securities and derivatives are based on quoted market prices at the period end. The quoted market price used for financial assets is the applicable bid price on the period end date. The fair value of investments that are not traded in an active market is determined using valuation techniques such as broker quotes, pricing models or discounted cash flow techniques. Where pricing models are used, inputs are based on marketrelated data at the period end. Where discounted cash flow techniques are used, estimated future cash flows are based on contractual cash flows using current market conditions and market calibrated discount rates and interest rate assumptions for similar instruments.
• a group of financial assets, financial liabilities or both is managed and its performance is evaluated and managed on a fair value basis, in accordance with a documented risk management or investment strategy, and information about the investments is provided internally on that basis to the Group’s key management personnel.