FOS overturn rate 11 days Speed of pension transfer payouts – ORIGO
C L O S E D funds represent the whole of our business. Because of this we are able to focus all our energy and expertise on improving their performance without being distracted by the need to win new customers.
We aim to be recognised as the ‘industry solution’ for the safe, innovative and profitable management of closed life funds.
As closed funds run off over the long term we believe that a specialist operating model is critical for providing policyholders with a secure, stable and efficient service.
Phoenix is the UK’s largest specialist closed life and pension fund consolidator, looking after c. 4.5 million policyholders.
To be the saverfriendly, industry solution for the safe, innovative and profitable management of closed life funds.
The Group functions provide services to Phoenix Life and manage corporate and strategic activity. Based both in Wythall, Birmingham and Juxon House, London, the Group is led by the Group Chief Executive Officer, Clive Bannister.
Phoenix Life is the Group’s core business segment and is responsible for the management of the Group’s life funds. Based in Wythall, Birmingham, it is led by its Chief Executive Officer, Andy Moss.
HOW WE MANAGE RISK We operate a comprehensive risk management framework which identifies, assesses and mitigates the risks facing our Group.
Read more about how we create value 15 Read more about how we govern our business 42Read more about how we manage risk
Our strategy WE HAVE FOUR AREAS OF STRATEGIC FOCUS: Read more about our strategy and KPIs
DRIVE VALUE In order to drive value, the Group looks to undertake management actions which reduce costs, release capital, accelerate cash flows or enhance economic value.
IMPROVE CUSTOMER OUTCOMES Improving customer outcomes is central to our vision of being the saverfriendly ‘industry solution’ for closed life funds.
The UK life insurance industry is undergoing significant change at present and Phoenix Group is well positioned to take full advantage.”
There were a number of further important achievements by Phoenix during the course of the year. Most notably, the Group achieved an investment grade credit rating from Fitch Ratings, reducing the cost of our bank debt and broadening our access to the debt capital markets in future. In addition, we have navigated the new pension freedom changes, expanding the financial options available to our customers whilst continuing to offer a fair and timely service.
It is also clear that the traditional life company business model must continue to adapt. We concur with the conclusions of the Pensions Institute that there will be further consolidation in the UK life sector as existing providers struggle with issues such as heightened regulatory scrutiny, increased capital requirements and shortages of skilled personnel to manage complex legacy products. Phoenix Group has the expertise and operating model in place to take advantage of this changing environment and I look forward to the Group examining further opportunities to grow the business. However, we will only make acquisitions that are value accretive, would at least sustain our current dividend per share and would support our investment grade credit rating.
I can also announce that Tom Cross Brown will be stepping down from the Board at the time of the Annual General Meeting. Tom has been a Director of Phoenix Group Holdings since 2009 and has been involved with the Group in its various guises since 2005, helping to guide Phoenix through a number of restructurings to its present position at the forefront of the closed life fund industry. His expertise and knowledge of asset management and corporate transactions have been of enormous value to the Group during a period of rapid change. I would like to thank Tom both for his contribution to Phoenix over the past years and his personal help and support during my first few months as Chairman of the Group.
INTRODUCTION Phoenix Group achieved two significant milestones in 2015, both of which were the result of several years of hard work by the Group.
First, the progress we have made over the past years in reducing leverage and simplifying the Group’s structure culminated in Fitch Ratings assigning the Group an investment grade credit rating in August. This marks the achievement of an ambition set out in 2014 and reflects the Group’s strong capital position, cash flows and track record. With a wider potential investor universe the Group now has greater flexibility in future debt issuance, both with regards to the type and maturity of instruments; and an improved ability to issue regulatory compliant subordinated debt. In addition, we have agreed a revised bank facility, further reducing our interest costs and extending the maturity of the Group’s debt.
Phoenix Group is well positioned to benefit from the evolving UK life insurance industry. We have the right platform as the largest UK specialist consolidator of closed life funds, with a scalable operating model and strong outsource partner relationships, and we have also demonstrated our ability to enhance value for our customers and shareholders through management actions. There remains a significant opportunity for Phoenix Group to generate further value from future acquisitions in the coming years.2015 has been another exceptionally busy year, and the Group has continued to meet its targets.”
FINANCIAL HIGHLIGHTS DELIVERY OF FINANCIAL TARGETS Phoenix Group has continued its track record of meeting or exceeding its financial targets.
Our MCEV decreased by £134 million to £2,513 million at 31 December 2015, versus £2,647 million at 31 December 2014. The decrease primarily reflects the payment of dividends in 2015, negative impacts from actions taken to optimise the Group’s Solvency II capital position and market movements during the last quarter of 2015, in particular widening credit spreads. However, these negative impacts have been partly offset by management actions that have enhanced MCEV. In March 2015, we announced an increased cumulative target of £400 million incremental embedded value from management actions between 2014 and 2016. The Group generated £205 million of incremental MCEV during 2015 and, having now achieved £466 million from management actions since 2014, has met this increased target a year ahead of schedule.
SOLVENCY II AND OUR CAPITAL POSITION The new Solvency II regime applies to the Group from 1 January 2016 and therefore the Solvency I Group capital measures, PLHL ICA and IGD, are no longer regulatory measures and will not be reported in future.
At 31 December 2015, our PLHL ICA surplus was estimated to be £0.6 billion, with headroom over our capital policy of £0.5 billion (2014: £0.7 billion surplus, £0.6 billion headroom). Our estimated IGD surplus was £1.5 billion at 31 December 2015, with headroom over our IGD capital policy of £0.7 billion (2014: £1.2 billion surplus, £0.5 billion headroom).
The PRA approved the Group’s Internal Model Application in December, and therefore the Group will report its Solvency II capital position based on the Internal Model and as calculated at the level of Phoenix Life Holdings Limited (‘PLHL’). In addition, the PRA also approved the Group’s use of matching adjustments and transitional measures in 2015.
IFRS OPERATING PROFIT The Group achieved IFRS operating profits of £324 million in 2015 (2014: £483 million), reflecting the divestment of Ignis in 2014 and a reduced impact from management actions.
OPERATIONAL HIGHLIGHTS Despite the changes impacting the UK life insurance industry, Phoenix Group continued to streamline its business and create value. Key actions taken during 2015 include: Ɛ The Part VII transfer of the business of National Provident Life Limited into Phoenix Life Assurance Limited. This fund merger reduces the number of UK life insurance companies within the Group to two and the Group will examine the possible merger of the remaining two life companies in due course.
Ɛ The recapture by Phoenix Life Assurance Limited of £1.4 billion of reinsured annuities from Opal Re, the Group’s captive Bermudan reinsurance company, and entering into a new reinsurance agreement with an external reinsurer which covers the bulk of the recaptured liabilities. This action significantly enhanced our Solvency II capital efficiency by reducing our exposure to longevity risk.
Ɛ An exchange offer of the Group’s Tier 1 notes into new subordinated notes with a maturity of 2025, with a 99% take-up rate by noteholders.
This is a strong list of achievements and we will continue to seek ways to add value for customers and shareholders alike during 2016.
The FCA released its thematic review of the fair treatment of long-standing customers in life insurance earlier this month and, as the UK’s largest specialist closed life fund consolidator, we welcome the focus the review brings to the fair treatment of policyholders. Our customers and the outcomes of their policies are fundamental to our business model. However, we continue to seek ways to improve and we look forward to working with the FCA and industry as part of the subsequent consultation process.
CUSTOMERS The most important change impacting our customers this year has undoubtedly been the introduction of the new pension freedom rules from 6 April 2015. Phoenix Life has put in place an overarching Retirement Strategy in reaction to the new pensions legislation, with the aim of being in a position to meet the future demands of our customers.
Despite all the changes implemented during the year, Phoenix Life has maintained a high level of customer service. We continue to deliver our Pensions Transfers and Open Market Options payments made through the Origo Faster Transfers system in under 11 days on average. Complaint handling is also a key area of focus and this is demonstrated by the level of overall volumes of incoming servicing complaints being only 0.3% of transactions, as well as a customer satisfaction rating of 96% for the year. With regard to the number of our decisions that are referred to and subsequently overturned by the Financial Ombudsman Service (‘FOS’), our overturn rate of 18% is the best performance recorded by Phoenix since FOS started publishing data in 2009.
Phoenix Group Holdings Annual Report and Accounts 2015 11 Strategic report
PEOPLE Phoenix Group’s ability to attract, retain and motivate outstanding talent was, for the fourth year in succession, formally recognised in 2015 through our accreditation as one of the ‘UK’s Top Employers’. Employee engagement is essential for Phoenix Group, as retaining the actuarial and financial skills to manage closed life funds is critical for the execution of the Group’s strategy. The maintenance of our employee engagement survey result at 78% positions the Group positively against the Financial Services benchmark in 2015.
2016 OUTLOOK AND PROSPECTS The potential remains for our business to be impacted by economic headwinds and the uncertain and evolving regulatory environment. However, the Group’s financial performance during 2015 and the strength of our business model give me confidence in the resilience of the Group’s long-term cash flows and our ability to deliver value for all our stakeholders.
Now that Solvency II is in place, we have set a 2016 annual cash generation target of between £350 million and £450 million, a significant increase on 2015. We have also set a new, five year cash generation target of £2.0 billion from 2016 to 2020, matching the maturity of our revised bank facility. Furthermore, we expect a further £3.2 billion of cash generation from 2021 onwards. This is a clear demonstration of the long-term cash flow potential of the Group and how we seek to increase value over time.
We also continue to maintain robust Group solvency levels and have £706 million of cash at the holding company level, providing further support for our stable and sustainable dividend policy.
Finally, we continue to look for opportunities to simplify the Group and improve its resilience. This will include seeking to further diversify away from senior bank debt to longer-term, subordinated debt. This will allow the Group to both match its debt profile to its long-term cash flows whilst offering the opportunity to simplify the holding company structure further, reducing costs and complexity.
Following the removal of the requirement to publish Interim Management Statements, we will no longer formally release quarterly information on cash generation and the Group’s capital position. However, we will continue to ensure investors are kept properly informed on the Group’s development on a regular basis.
Irrespective of the wider ongoing challenges, our focus will remain on the continued delivery of strong organic performance across all of our key financial metrics and targets. We have consistently met or exceeded all of our public financial targets and this is a track record that we are committed to continuing.
The economic, regulatory, legislative and competitive landscape which the Group operates in is evolving at an unprecedented pace.
Modest increases in UK gilt yields across all durations during 2015 positively impacted the Group’s IFRS results given short asset positions compared to the longer-term IFRS basis liabilities. On an MCEV basis, the increase in yields had a minor adverse impact. Credit spreads widened in the year which had a detrimental impact on the Group’s IFRS and MCEV results.
The Group’s 2015 results have also been adversely impacted by amendments to economic assumptions arising from a number of changes to asset portfolios undertaken to optimise the Group’s Solvency II capital position ahead of the implementation of the new regime.
Such regular monitoring is a key part of the Group’s management of its exposure to investment risks, and its importance has again been highlighted by the investment market volatility experienced in the early part of 2016.
Regulatory and legislative landscape The Solvency II prudential framework which came into force on 1 January 2016, has updated, among other things, the existing EU life, non-life, reinsurance and insurance groups directives. The main aim of the framework is to protect policyholders through establishing prudential requirements better matched to the true risks of the business, taking into account other regulatory objectives of ensuring the financial stability of the insurance industry and stability of the markets.
In December 2015, the PRA approved the Group’s Internal Model Application under Solvency II which provided the Group with greater clarity and control over its future capital position. Our 2015 estimated capital position under the new Solvency II regime shows the Group to be in robust financial health.
The ending of compulsory annuitisation of pension pots and the introduction of new pension freedoms rules from 6 April 2015 has provided greater flexibility for our customers in their retirement planning but has also increased the complexity of their decision-making process. Phoenix has put in place a full product range for our customers, either provided directly or through partners, and our current experience demonstrates that our assumptions underpinning our financial planning in respect of take-up rates for vesting annuities remain appropriate.
There are also a number of ongoing reviews, including the recently announced FCA consultation on early exit charges and we will work closely with the FCA as part of their consultation on the implementation of an appropriate cap on exit charges.
We seek to generate value for all our stakeholders and the delivery of our value generation strategy is intrinsically linked to our specialist closed life fund model.
RISK MANAGEMENT Managing and mitigating risk within appetite and exercising robust governance, supports policyholder security and delivers the Group’s strategy.
RESTRUCTURING Simplifying the Group’s operating structure through life company consolidation and fund mergers reduces complexity and releases capital.
SHAREHOLDERS Profits from participation in investment returns, policyholder charges and management fees earned on assets.
EXPERIENCED AND SKILLED Experienced and skilled management team with a proven track record of target delivery.
Phoenix Group will assess potential acquisitions in light of the financial condition of the Group. The criteria we would target in making an acquisition are: Ɛ Closed life. Any acquisition would focus on the closed life fund sector within the UK
Ɛ This Value in Force (‘VIF’) is the present value of future profits expected on the acquired portfolio.
Ɛ Phoenix can increase the value of the VIF and/or accelerate the release of capital through a variety of management actions. It can also further replenish VIF and cash flows through future acquisitions and the extraction of synergies.
As a standalone business and in the absence of further acquisitions which meet our target criterion, Phoenix is expected to continue to generate strong and predictable cash flows from the operating companies to support commitments at the holding companies including pension scheme contributions, debt servicing and shareholder dividends. However, in order to grow and maximise value for all stakeholders, we will continue to pursue opportunities which meet the criteria set out above as and when they arise.
The Phoenix Way, which includes activities related to operational management, risk management, restructuring and effective partnerships, is the methodology used to deliver this value. Some actions which the Group has delivered in the past including funds mergers and the consolidation of our actuarial modelling into one platform, have not only generated value but led to significant improvements in the operations of our business.
Value from acquisitions combined with our ability to add value through management actions, are fundamental drivers of shareholder value accretion.
In order to drive value, the Group looks to identify and undertake management actions, which release capital, accelerate cash flows or enhance economic value.
These actions are undertaken across four areas: operational management, risk management, restructuring and effective partnerships. By improving the efficiency of operational management through the standardisation and streamlining of key processes across the Group, this will in turn reduce costs, improve efficiency and drive value.
Although the life companies are closed and generally do not write new business, they do accept additional policyholder contributions on in-force policies, such as pension savings plans to be reinvested at maturity into annuities. The new pension freedom rules that came into effect during 2015 promise to have a significant impact on the UK life industry but the Group continues to expect a significant stream of internal annuities to vest. This is particularly the case where such vestings have valuable guaranteed annuity rates, as was the case for over 71% of≈such premiums written by the Group in 2015.
KEY INITIATIVES AND PROGRESS IN 2015 Ɛ We continued to streamline the Group’s actuarial modelling systems, simplifying modelling process and ensuring consistent capital management across the business.
Ɛ We acquired a £0.3 billion portfolio of equity release mortgages, in line with our strategy to diversify the asset portfolio by investing in new asset classes which create value and drive capital efficiencies.
PRIORITIES FOR 2016 Ɛ Review future investment opportunities to generate capital efficiencies.
Ɛ Continued focus on capital enhancement which will drive cash flows.
Read more about cash generation 24 Read more about IFRS operating profit
WHY IS IT IMPORTANT? Maintaining strong cash flow delivery underpins debt servicing and repayment as well as shareholder dividends.
ANALYSIS With cash generation of £225 million, the Group met its full year cash generation target for 2015 of £200 million to £250 million.
Cash remitted reflects free surplus within the life companies and the benefit of management actions implemented in the period. The reduction from the prior period reflects the retention of capital in the life companies in advance of the transition to the new Solvency II capital regime.
ANALYSIS Group IFRS operating profit has decreased by £159 million to £324 million principally due to the lower impact of management actions compared to the previous period.
TARGET To generate cash flows of £2 billion between 2016 and 2020, of which £350 million to £450 million to be generated in 2016.
Following the implementation of Solvency II, this is the last time we will report MCEV.
The reduction of Group MCEV from the prior period primarily reflects dividend and financing costs, the adverse impacts of economic conditions and changes in asset portfolios ahead of Solvency II implementation, partly offset by management actions.
WHY IS IT IMPORTANT? Group IFRS operating profit is considered a more representative measure of performance than Group IFRS profit before tax as it provides long-term performance information unaffected by short-term economic volatility.
In addition, regular re-balancing of asset and liability positions is required to ensure that only those assets which deliver appropriate risk-adjusted returns are held within life funds, taking into account any policyholder guarantees.
Ɛ We achieved an investment grade credit rating by Fitch Ratings in August 2015. This provides a lower interest margin on the Group’s bank debt and broader access to the capital markets improving our ability to issue regulatory compliant subordinated debt to support the Group’s capital position.
Ɛ We further simplified the Group’s capital structure with the divestment of the Group’s Irish subsidiary, Scottish Mutual International (‘SMI’) which had become inefficient due to its small scale.
Ɛ PLAL recaptured £1.4 billion of reinsured annuities from the Group’s Bermudan reinsurer, Opal Reassurance Limited (‘Opal’), and we entered into a new reinsurance agreement with an external reinsurer in November 2015.
Ɛ Exploring opportunities to further enhance our capital structure through the continued diversification of the Group’s debt structure.
As a Group we continue to focus on the effective management of our risks and the efficient allocation of capital against those risks.
Phoenix Group Holdings Annual Report and Accounts 2015 19 Strategic report
WHY IS IT IMPORTANT? The ratio provides an indicator of the Group’s financial strength as it measures the level of debt as a percentage of the Group’s gross MCEV. Following achievement of the investment grade credit rating and the discontinuance of MCEV reporting, this is the last time we will report financial leverage.
WHY IS IT IMPORTANT? The PLHL Group’s measure of capital adequacy on an economic basis until 31 December 2015. This measure is replaced by the Solvency II surplus from 1 January 2016.
ANALYSIS Our opening Solvency II surplus of £1.3 billion represents a robust and resilient capital position.
ANALYSIS IGD surplus increased to £1.5 billion at 31 December 2015 mainly reflecting simplification of the Group’s corporate structure, with Impala Holdings Limited now 100% owned by PLHL.
ANALYSIS Financial leverage decreased to 37.8% at 31 December 2015 reflecting repayments of £190 million made in respect of the PGH Capital facility during the period.
We have six key areas of focus related to our customer offering: Ɛ Security: ensuring all policy promises and guarantees are delivered.
Ɛ Effective service delivery: using our outsourced model to leverage expertise and ensure costs run off in line with policy volumes.
Ɛ Clear and effective communication: recognising the importance of clarity and simplicity for what can be complex products.
Ɛ Product governance: including a rolling review of our products to ensure they continue to deliver appropriate outcomes for our customers.
KEY INITIATIVES AND PROGRESS IN 2015 Ɛ We completed an enormous amount of work to implement the new pension freedom rules introduced by the Government. Our customers now have access to all of the new freedoms either within Phoenix Life or via one of our specialist partners.
Ɛ In March we established an Independent Governance Committee (‘IGC’) charged with overseeing the fair treatment of our customers in workplace pensions arrangements. During the course of the year, we have worked with the IGC to understand where those customers are at risk of receiving poor value from their products and formulated proposals seeking to address those areas.
Ɛ We have again achieved a positive customer satisfaction score based on the results of the satisfaction survey managed by Ipsos MORI (an external research firm). Customers surveyed were asked to give a satisfaction rating of between 1 and 5 to a number of questions asked (with a rating of 3 or above regarded as satisfied) and 96% was the percentage of all questions scoring a rating of 3 or above.
PRIORITIES FOR 2016 Ɛ Make ongoing improvements to customer outcomes, with a particular focus on strengthening communications with our customers.
Ɛ Enhancement of our website, to encourage customer engagement with the products they hold with Phoenix.
Ɛ Ensure our products continue to deliver appropriate outcomes for our customers.
WHY IS IT IMPORTANT? This is a recognised industry measure for the speed of processing Pension Transfers, Open Market Options and Immediate Vesting Personal Pensions. It allows us to benchmark performance and our overall servicing and claims proposition against our peers.
ANALYSIS The Group’s pension transfer times are again better than the industry target.
TARGET 12 days in line with the industry stated target for Origo Pension Transfers.
We maintained an employee engagement index of 78%. This index is an aggregation of scores against a number of questions considered the most important for staff engagement and was completed by 88% of employees.
KEY INITIATIVES AND PROGRESS IN 2015 Ɛ We continued to grow our development offering for all employees with an increased emphasis on management and leadership development.
Ɛ The first cohort of our Open University Executive Education programme successfully completed 90-day business challenges. Set by our Executive Committee, the challenges delivered genuine business improvements as a result of delegates’ learning.
Ɛ We continued to build partnerships with prestigious business schools, including Ashridge and the London Business School, and a number of our most senior employees attended development programmes with them.
Ɛ Our employees contributed a total of 1,942 volunteering hours to charity and community projects.
Ɛ Staff-led fundraising activity during 2015 raised a total of over £174,000 for both our corporate partners and for other charities. Employees elected to extend our corporate charity partnership with Midlands Air Ambulance Charity and London’s Air Ambulance for a further two years and, during the first two years of the extended partnership, we have raised over £402,000.
PRIORITIES FOR 2016 Ɛ Continue to attract and retain the very best talent by focusing on developing our people and strengthening our internal succession pipeline through targeted management and leadership development intervention, with particular emphasis on increasing the number of high-potential female managers undertaking formal management development activity.
Ɛ Build upon our efforts to support the physical and mental wellbeing of our employees.
DIVERSITY We are committed to all forms of diversity and want to see greater equality of opportunity for all our employees. A key focus for 2016 will be to progress actions aimed, over time, at increasing the number of females in senior positions.
CASH GENERATION The Group’s cash flows are generated from the interest earned on capital, the release of excess capital as the life funds run off and policyholder charges earned on assets under management. The Group’s closed life funds provide predictable fund maturity and liability profiles, creating stable long-term cash flows for distribution to shareholders and for repayment of outstanding debt. Although investment returns are less predictable, some of the investment risk is borne by policyholders.
Debt interest increased to £91 million (2014: £80 million), mainly reflecting the coupon payment in relation to the new PGH Capital subordinated notes which replaced the Tier 1 notes in January 2015. This was partially offset by lower principal balances on the PGH Capital facility following repayments made during the period.
NON-RECURRING CASH OUTFLOWS Non-recurring cash outflows of £25 million (2014: £46 million) reflect Group restructuring and corporate related projects. The decrease compared to the prior period reflects that £14 million of consent fees were paid in 2014 in respect of refinancing of the Group’s banking facilities.
The shareholder dividend of £120 million comprises the payment of the 2014 final and 2015 interim dividend.
Phoenix Group Holdings Annual Report and Accounts 2015 25 Strategic report
Operating companies’ cash generation: Cash receipts from Phoenix Life 225 446
Uses of cash before debt repayments and shareholder dividend (197) (243)
PHOENIX LIFE Operating profit for Phoenix Life is based on expected investment returns on financial investments backing shareholder and policyholder funds over the reporting period, with consistent allowance for the corresponding expected movements in liabilities (being the release of prudential margins and the interest cost of unwinding the discount on the liabilities). The principal assumptions underlying the calculation of the longer-term investment return are set out in note B2 to the IFRS consolidated financial statements.
The operating profit on non-profit and unit-linked funds was £124 million (2014: £320 million). The decrease compared with the prior period reflects the lower positive impact from modelling enhancements, balance sheet, processes and controls reviews of £17 million (2014: £167 million) together with the negative impact of strengthening longevity and mortality assumptions.
The operating profit for management services of £30 million (2014: £36 million) comprises income from the life companies in accordance with the respective management service agreements less fees related to the outsourcing of services and other operating costs. The decrease compared with the prior period reflects the impact of life company run-off and a reduction in project activity during the period.
IGNIS ASSET MANAGEMENT The prior period operating profit of the asset management business of £17 million represents its divisional result for the six months prior to its divestment from the Group on 1 July 2014.
GROUP COSTS Group costs in the period were £12 million (2014: £21 million). The reduction compared to the prior period reflects an increased return on the higher opening pension scheme surplus for both the PGL Pension Scheme and the Pearl Group Staff Pension Scheme and a decrease in operating costs.
INVESTMENT RETURN VARIANCES AND ECONOMIC ASSUMPTION CHANGES ON LONG-TERM BUSINESS Positive investment return variances of £13 million (2014: £12 million positive) include the minority share of the result of the consolidated UKCPT property investment structure of £46 million (2014: £75 million) and a £19 million gain on the purchase of a portfolio of equity release mortgages arising from the yield uplift on assets available to back annuity liabilities. Increases in yields during the period have also had a positive impact reflecting short asset positions that were held relative to the longer term IFRS basis liabilities prior to the re-hedging activities that took place towards the end of 2015. These positive items have been partly offset by the adverse impacts of changes in asset portfolios undertaken in preparation for the implementation of the new Solvency II regime, together with the impact of widening credit spreads during the period.
VARIANCE ON OWNERS’ FUNDS The negative variance on owners’ funds of £12 million (2014: £14 million negative) is principally driven by fair value losses on investments and hedging positions held by the shareholder funds and holding companies.
AMORTISATION OF ACQUIRED IN-FORCE BUSINESS AND OTHER INTANGIBLES Acquired in-force business and other intangibles of £2.7 billion were recognised on the acquisition of the operating companies in 2009. The acquired in-force business is being amortised in line with the run-off of the life companies. Amortisation of acquired in-force business during the period totalled £75 million (2014: £88 million). Amortisation of customer relationship intangibles totalled £15 million in the period (2014: £15 million).
NON-RECURRING ITEMS Non-recurring items of £49 million (2014: £126 million) include a gain of £49 million arising on the reassurance of a portfolio of PLAL annuities with an external reinsurer (net of a £64 million impairment of associated acquired in-force business), and a £17 million release of cost provisions associated with external regulatory changes, including the cap on workplace pension charges and the pension guidance levy. These positive items have been partly offset by £11 million of corporate project costs and negative £3 million of net other items. The prior period result included the gain on the disposal of Ignis of £107 million and £68 million of income received by Pearl Group Holdings (No 1) Limited (‘PGH1’) in relation to the close-out of the PGL Pension Scheme longevity indemnity agreement with the with-profit funds. This was partly offset by £17 million of adverse financial impacts associated with external regulatory changes, corporate project costs of £15 million and net other one-off items of negative £17 million, including costs associated with the implementation of Solvency II and systems transformation projects.
Following the recapture of the internal reassurance agreement with the Group’s Bermudan captive reinsurer, Opal Re, and the disposal of the Irish subsidiary, SMI, which took place in 2015, all of the Group’s insurance operations now reside in the UK and are liable to tax in accordance with applicable UK legislation.
The Group tax credit for the period attributable to owners from continuing operations is £64 million (2014: £22 million charge) arising on a profit (after policyholder tax) of £185 million (2014: £336 million). The tax credit differs from the expected charge of £37 million (based on a UK corporate tax rate of 20.25%) as a result of factors including a prior year tax credit (reflecting the utilisation of unprovided tax losses brought forward and the release of provisions following the settlement of previously uncertain tax positions with HMRC), the impact of enacted future corporate tax rate reductions on the Group’s deferred tax position, and the impact of profit items that are either non-taxable or taxed at rates other than 20.25% (including the gain arising on the Opal Re reassurance recapture transaction and tax payable by the consolidated UK Commercial Property Trust).
GROUP MCEV REPORTING The Group has historically provided supplementary reporting information on its MCEV basis. Following the implementation of the Solvency II regulatory regime, this will be the last time the Group presents MCEV information. As Solvency II will be the primary driver of the Group’s cash generation, going forward we will focus on regulatory capital disclosures.
The Group has generated MCEV operating earnings after tax of £223 million (2014: £288 million), a decrease of £65 million on the comparative period.
Group MCEV operating earnings after tax 223 288 1 The Phoenix Group Market Consistent Embedded Value methodology (referred to herein and in the supplementary information as MCEV) is set out in note 1 to the supplementary information. The asset management and management services businesses are included in the Group MCEV at the value of their IFRS net assets. The Group MCEV does not include the future earnings from their businesses.
The Group uses long-term investment returns in calculating the expected existing business contribution. The expected contribution of £109 million after tax is £28 million lower than in 2014, primarily due to a decrease in the long-term risk-free rate used to calculate operating earnings. The long-term risk-free rate is based on the opening position at 1 January 2015.
RECONCILIATION OF GROUP MCEV OPERATING EARNINGS TO GROUP MCEV EARNINGS Group MCEV operating earnings are reconciled to Group MCEV earnings as follows: Year ended 31 December £m
ECONOMIC VARIANCES ON LIFE BUSINESS Negative economic variances on life business of £221 million before tax (2014: positive £54 million) include the negative impact of the difference between actual short-term returns and the long-term investment return assumptions used to determine operating earnings and the adverse impact of widening credit spreads during the year. Also included here is the £98 million adverse impact of changes in asset portfolios undertaken in preparation for the implementation of the new Solvency II regime. This has been partly offset by a gain on the purchase of a portfolio of equity release mortgages and the resultant increase in liquidity premium, together with positive policyholder tax and inflation variances.
OTHER NON-OPERATING VARIANCES ON LIFE BUSINESS Other non-operating variances on life business increased Group MCEV by £98 million (2014: decrease £94 million) and principally comprise the partial release of provisions associated with external regulatory changes, including the cap on workplace pension charges and the pension guidance levy together with the positive impact arising on the reassurance of a portfolio of PLAL annuities with an external reinsurer of £19 million.
Other finance costs have increased by £35 million, reflecting a full year of interest costs on the senior bond issued in July 2014, together with the finance costs accrued on the new PGH Capital subordinated notes, which were exchanged for the Tier 1 notes in January 2015.
Finance costs exclude the costs pertaining to the PLL subordinated debt, which are included in the life division’s result.
CAPITAL MANAGEMENT FRAMEWORK The Group’s capital management framework is designed to achieve the following objectives: Ɛ To provide appropriate security for policyholders and meet all regulatory capital requirements while not retaining unnecessary excess capital.
Ɛ To ensure sufficient liquidity to meet obligations to policyholders and other creditors.
REGULATORY CAPITAL REQUIREMENTS IGD SURPLUS (ESTIMATED) Each UK life company must maintain sufficient capital at all times to meet the regulatory capital requirements mandated by the PRA. Under the Solvency regime effective prior to 1 January 2016, these measures were aggregated under the European Union Insurance Groups’ Directive (‘IGD’) to calculate regulatory capital adequacy at a Group level.
The Group’s IGD assessment was made at the level of the highest EEA insurance group holding company, which is Phoenix Life Holdings Limited (‘PLHL’), a subsidiary of Phoenix Group Holdings. The estimated IGD surplus at 31 December 2015 was £1.5 billion (2014: £1.2 billion). The components of the estimated IGD calculation are shown below: Year ended 31 December £bn
The Group’s headroom above the IGD regulatory capital policy at 31 December 2015 was £0.7 billion (2014: £0.5 billion).
PLHL ICA surplus (estimated) 0.6 0.7 1 Capital resources includes the surplus over capital policy in the life companies and the net assets of the holding companies less pension scheme obligations calculated on an economic basis.
The PLHL ICA surplus decreased during the year and reflects: Ɛ dividend payments, debt financing and repayments of £0.3 billion; Ɛ the adverse impact of management actions undertaken to enhance the Group Solvency II position ahead of implementation of the new regime of £0.2 billion; partly offset by; and
Ɛ capital generation items of £0.4 billion, including the positive impacts of other management actions delivered in the period of £0.2 billion.
The SCR is calibrated so that the likelihood of a loss exceeding the SCR is less than 0.5% over one year. This ensures that capital is sufficient to withstand a broadly ‘1 in 200 year event’ and is calculated in accordance with the Group’s PRA approved internal model. As a closed fund insurer, the Group does not need to hold capital to fund the writing of new business.
2 Solvency capital requirements relate to the risks and obligations, to which the Group is exposed, calculated using an internal model, offset by Group diversification benefits.
These figures exclude surpluses arising in the Group’s with-profit funds and Group pension schemes of £0.5 billion. In the calculation of the Solvency II surplus, the SCR of the with-profit funds and Group pension schemes is included, but the related own funds are recognised only to a maximum of the SCR amount. Surpluses that arise in with-profit funds and Group pension schemes, whilst not included in the PLHL Solvency II surplus, are available to absorb economic shocks. This means that the headline surplus is highly resilient to economic stresses.
1 The Shareholder Capital surplus excludes own funds and SCR of unsupported with-profit funds and Group pension schemes.
2 Unsupported with-profit funds and Group pension schemes refer to those funds whose Solvency II own funds exceed their SCR. Where a with-profit fund or Group pension scheme cannot cover its SCR, its own funds and SCR are included within the Shareholder Capital surplus.
FINANCIAL LEVERAGE RATIO The Group monitors the level of debt in its statement of consolidated financial position by reference to the financial leverage ratio. The financial leverage ratio is used to determine the interest margin payable on the PGH Capital bank facility.
The financial leverage ratio is calculated as gross shareholder debt1 as a percentage of gross MCEV 2. Following the implementation of the Solvency II regime, MCEV will not be reported going forwards. This, together with the Group’s achievement of an investment grade credit rating during 2015, means that the financial leverage calculation will also not be reported in future periods.
Shareholder debt included in MCEV 1,592 1,761 1 Gross shareholder debt is defined as the notional face value of the shareholder and hybrid debt.
The Group’s gross shareholder debt decreased by £182 million to £1,552 million in the year. This reduction includes repayments of £190 million in respect of the PGH Capital facility, including prepayments of £70 million in respect of payments due in 2016 and £30 million in respect of payments due in 2017.
In March 2016, the Group agreed an amendment of its £900 million, 5 year unsecured bank facility into a £650 million unsecured revolving credit facility, maturing in June 2020. There are no mandatory or target amortisation payments associated with the facility but prepayments are permissible.
Further detail on shareholder debt is included in note E5 to the IFRS consolidated financial statements.
RISK CULTURE We seek to embed a culture that is forward-looking and competent in its assessment and management of risk, a culture where everyone in the Group is aligned in their goals to deliver better risk based decisions.
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.
Collectively this means people understand the Group’s approach to risk, take personal responsibility to manage risk in everything they do and encourage others to follow their example.”
During 2015, Group Risk conducted its third annual Risk Culture survey. The results of this survey enable us to assess and measure our Risk Culture over time as well as being able to tailor training programmes to ensure the continued engagement and development of our employees.
Phoenix Group Holdings Annual Report and Accounts 2015 35 Strategic report
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: Ɛ Capital – The Group and each life company will hold sufficient capital to meet regulatory requirements in a number of asset and liability stress scenarios.
Ɛ Cash flow – The Group will seek to ensure that it has sufficient cash flow to meet its financial obligations and will continue to do this in a volatile business environment.
Ɛ Conduct – Phoenix has zero appetite for deliberate acts of misconduct, including omissions that result in customer detriment, reputational damage and/or pose a risk to the Financial Conduct Authority (‘FCA’) statutory objectives.
RISK UNIVERSE A key element of effective risk management is ensuring that the business has a complete and robust understanding of the risks it faces. These risks are defined in the Group’s risk universe.
Embedded within these categories, and Customer risk in particular, are the conduct risks faced by the Group and its customers. These risks are separately monitored and reported on across the organisation to ensure that conduct risk receives appropriate emphasis and oversight.
The Group has developed a PGH Board approved risk appetite statement to manage Conduct Risk. The appetite statement is supported by the assessment of all conduct related risks faced by the Group on a quarterly basis. This regular assessment and reporting enables us to be forward-looking and proactive in the management of conduct risk.
Management of risk is delegated from the Board to the Group Chief Executive Officer, Executive Committee members and through to business managers. A series of business unit management oversight committees operate within the Group. They are responsible for implementation of the RMF, ensuring the risks associated with the business activities are identified, assessed, controlled, monitored and reported.
Risk oversight is provided by the Group Risk function and the Board Risk Committee. The Board Risk Committee comprises four independent Non-Executive Directors. It is supported by the Group Chief Risk Officer and met six times during 2015. During 2015, the Board further improved risk oversight with the establishment of a dedicated Risk Committee of the Phoenix Life Board to provide additional Board Committee focus on risk matters at Phoenix Life.
Now in its fourth year, this independent assessment provides assurance to management and the Boards that the RMF has been implemented consistently and is operating effectively across the Group.
Phoenix Group Holdings Annual Report and Accounts 2015 37 Strategic report
PRINCIPAL RISKS AND UNCERTAINTIES FACING THE GROUP The Group’s top principal risks and uncertainties are detailed in the table below, together with their potential impact, mitigating actions which are in place and changes in the risk profile from last year. As economic changes occur and the industry and regulatory environment evolves, the Group will continue to monitor their potential impact.
In preparation for Solvency II, the Group also sold debt securities valued at £0.8 billion from its with-profits funds.
PRINCIPAL RISKS AND UNCERTAINTIES FACING THE GROUP (CONTINUED) The principal risk relating to the implementation of the Solvency II Directive has been removed following the approval of the Group’s Internal Model and related applications.
The unknown consequences and the potential impact, including retrospective activity, as a result of Thematic Reviews conducted by the regulators.
The Treasury have asked the FCA to legislate on a cap for pension products so that customers can take advantage of the pension freedoms.
The FCA have also noted that they are seeking a ‘voluntary solution’ on exit charges for other legacy products.
The changes in the retirement marketplace have opened up a number of new options for customers. While these options provide greater flexibility for customers, there is a need for customers to ensure that they engage with the process to ensure that they make informed decisions that are suitable for their needs. Additionally, providers need to ensure that their processes facilitate effective decision-making by customers. Failure to do this may result in a risk that a customer takes an option that they do not understand or that may not be appropriate for them.
VIABILITY STATEMENT In accordance with the provision of section C.2.2 of the 2014 revision of the UK Corporate Governance Code, the Board has completed an assessment of the prospects and viability of the Group over a five-year period to December 2020. The Board has determined that the five-year period to December 2020 is an appropriate period for the assessment, this being the period covered by the Group’s Board-approved annual operating plan (‘AOP’).
Ɛ it considered the principal risks facing the Group which have the potential to impact on viability as discussed in the Risk report above.
This section includes mandatory reporting of greenhouse gas (‘GHG’) emissions pursuant to the Companies Act 2006 (Strategic and Directors’ Reports) Regulations 2013. Emissions disclosed relate to properties where the Group has operational control. The Group has no responsibility for any emission sources that are not included in our consolidated financial statements.
Emissions have arisen principally through the combustion of fuel and operation of facilities (Scope 1) and the consumption of purchased electricity, heat, steam and cooling, (Scope 2). Approximately 7% of 2015 emissions are estimated as full year data is not yet available for all properties. A sample of emissions from fuel use for transport, back-up generation and fluorinated gases were calculated and were determined to be non-material to the overall footprint, so have not been included.
The data reported is based on the main requirements of the ISO14064 Part 1 and the GHG Protocol Corporate Accounting and Reporting Standard (revised edition); data gathered for ongoing reporting against the UK Carbon Reduction Commitment (‘CRC’) scheme and energy and fuel consumption data for occupied properties has been used to calculate the carbon footprint. The Government’s Conversion Factors for Company Reporting 2015 have been used to convert energy data into CO2e emissions.
Due to organisational structure changes in 2014 following the divestment of Ignis Asset Management Limited to Standard Life Investments (Holdings) Limited, the Group has restated 2014 data to represent only properties where the Group has operational control. This is in line with the Greenhouse Gas Protocol’s guidance on organisational boundaries.
Combustion of fuel and operation of facilities (Scope 1) 1,013 1,028
Electricity, heat, steam and cooling purchased for own use (Scope 2) 2,939 3,508
Our Corporate Responsibility programme supports our commitment to monitoring and reducing our environmental footprint.
As detailed in the Corporate Governance Report on pages 47 to 55, we complied in 2015 with the provisions of the UK Corporate Governance Code (‘the Code’) apart from one unavoidable matter when a Director was unable to attend our AGM for personal reasons, resulting in a technical breach of code provision E2.3. This has been our only matter of non-compliance with the Code in the past four years.
Phoenix Group Holdings Annual Report and Accounts 2015 43 Corporate governance
2010 AGM (first AGM) 22 87% * All resolutions passed by majority of at least this % of votes cast.
RISK COMMITTEE David Woods (Chair) Rene-Pierre Azria Alastair Barbour Tom Cross Brown
RISK COMMITTEE Risk appetite and highlevel risk matters The Group’s Risk Management Framework
PHOENIX GROUP HOLDINGS BOARD Group Strategy Group Budget Group Risk Appetite Performance Monitoring External/Shareholder Reporting External Debt Major transactions
NOMINATION COMMITTEE Board appointments Senior executive appointments Board and senior executive succession planning
Experience Mr Staunton is Non-Executive Chairman of WH Smith plc, the leading FTSE250 retail group, and a NonExecutive Director of Capital & Counties Properties plc. He is also Non-Executive Chairman of the privately owned BrightHouse Group, the rent-to-own company, and a Non-Executive Director of ICBC Standard Bank, a subsidiary of ICBC.
Ɛ Leads the development of the Group’s strategy for agreement by the Board
Ɛ Leads and directs the Group’s businesses in delivery of the Group strategy and business plan
Ɛ Leads the Group to safeguard returns for policyholders and grow shareholder value
Ɛ Embeds a risk-conscious Group culture which recognises policyholder obligations in terms of service and security
Ɛ Develops and delivers the Group’s financial business plan in line with strategy
Ɛ Ensures the Group’s finances and capital are managed and controlled
Ɛ Maximises shareholder value through clear, rigorous assessment of business opportunities.
Ɛ Leads the Phoenix Life business to optimise outcomes for customers in terms of both value and security
Ɛ Supports the Group Chief Executive Officer in the formulation of the strategy and the business planning for the Group
Ɛ Provides guidance and support on all HR matters to the Group Chief Executive Officer, ExCo and the Group Board and Remuneration Committee
Ɛ Oversees and manages the Group’s relationship with the FCA and PRA
Ɛ Identifies and delivers opportunities to enhance shareholder value across the Group.
Phoenix Group Holdings Annual Report and Accounts 2015 47 Corporate governance
INTRODUCTION The Board is committed to high standards of corporate governance and the Group’s Corporate Governance policy is aligned to compliance with the UK Corporate Governance Code (‘the Code’) which sets standards of good practice for UK listed companies. It is the Board’s view that the Company has been fully compliant during 2015 with the provisions set down in the Code apart from provision E.2.3 due to one Director being unable to attend the AGM for personal reasons.
THE BOARD The Board comprises the Non-Executive Chairman, the Group Chief Executive Officer, the Group Finance Director and seven independent Non-Executive Directors. Biographical details of all Directors are provided on pages 44 to 45.
Ɛ Tom Cross Brown is the non-executive Chairman of Just Retirement Group plc. The Group has an arrangement with Just Retirement whereby Phoenix customers may be referred to Just Retirement to enable them to explore enhanced annuities should they wish to do so. The decisions regarding this arrangement are not made by the Board of Phoenix Group Holdings and the relationship is not considered to impact the independent status of Tom Cross Brown.
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: Ɛ Group strategy and business plans
THE CHAIRMAN, GROUP CHIEF EXECUTIVE OFFICER AND SENIOR INDEPENDENT DIRECTOR Henry Staunton is Chairman of the Board of Directors of the Company, having succeeded Howard Davies on 1 September 2015. There is a division of responsibility, approved by the Board, between the Chairman, who is responsible for the leadership and effective operation of the Board and the Group Chief Executive Officer, Clive Bannister, who is responsible to the Board for the overall management and operation of the Group. The Chairman’s other commitments are set out in his biographical details on page 44. The Chairman was appointed on the basis of committing two days per week to Phoenix.
The Senior Independent Director, appointed by the Board, is Ian Cormack. 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.
Ɛ The Board skillset is considered balanced and right, with a continued focus on required skills in capital markets and M&A.
The table below shows how the main recommendations from the November 2014 evaluation were addressed in 2015.
The output from the November 2015 Board and individual director reviews informed the review of the Board composition undertaken by the Board Nomination Committee in January 2016, leading to the Board’s recommendations to shareholders regarding re-election of Directors at the 2016 Annual General Meeting (‘AGM’).
Phoenix Group Holdings Annual Report and Accounts 2015 49 Corporate governance
KEY FOCUS AREAS AT BOARD MEETINGS Ɛ Reports from Chairs of Board committees and subsidiary Boards
David Woods 7 7 1 Howard Davies resigned from the Board on 31 August 2015. 2 Henry Staunton was appointed to the Board on 1 September 2015.
Conduct skills audit over next 12 months. Skills Audit conducted, matching Board skills to the Group’s strategic requirements and reported to the Board in April 2015. The output has informed the skills required to replace those Directors due to vacate the Board over the next 18 months.
Provide more life assurance sector intelligence (acknowledging that this is addressed in detail at the regulated life company subsidiary boards).
Briefings provided to the Board on the commercial and regulatory environment facing the life assurance sector and the Senior Insurance Manager Regime; process established to provide Non-Executive Directors with ongoing media and press information on the life and pensions sector.
Conduct reviews of significant past decisions. Reviews of major recent decisions presented to the Board in April 2015 and October 2015.
Ɛ Considered and addressed a number of significant matters in relation to the IFRS and MCEV financial statements for 2014 (annual), 2015 (interim) and 2015 (annual) as summarised in the table on page 52. These matters were considered by the Audit Committee to be areas subject to the most significant levels of judgement or estimation, and identified with regard to the significant risks assessed by the Group’s external auditors as set out in their audit opinion on page 87.
Ɛ Approved the internal controls framework which set out the process by which controls were set across the risk management framework. The Committee requested the development of an assurance strategy to provide clarity of the roles of line 1 (Executive Management), line 2 (Risk Function) and line 3 (Internal Audit) for the assurance work surrounding the framework. The assurance strategy was developed through the course of 2015 and reviewed by the Audit Committee prior to its finalisation.
AUDIT COMMITTEE’S ROLE Ɛ Receiving and reviewing the Annual Report and Accounts and other related financial disclosures, although the ultimate responsibility for these matters remain with the Board.
Ɛ Monitoring the overall integrity of the financial reporting by the Company and its subsidiaries and the effectiveness of the Group’s internal controls.
Ɛ Considered and agreed the timing for a tendering exercise for the external audit engagement – see ‘Auditor’s appointment’.
INTERNAL AUDIT Ɛ Reviewed the External Quality Assessment of the internal audit function (‘EQA’), undertaken by Independent Audit, the conclusion being that the internal audit function was effective in its role, and suggesting areas for development.
Ɛ Reviewed the internal audit control environment opinion which included Internal Audit’s view on the embedding of the risk management framework across the Group.
Ɛ Reviewed the report by the Internal Audit Function on internal audit effectiveness in the Group’s outsource service providers (‘OSPs’); and reviewed internal audit reports on information security in the OSPs, noting the extensive oversight in Phoenix and that more detailed OSP oversight was undertaken by the Phoenix Life Audit Committee.
Ɛ Noted an initial review of the potential role of internal audit in risk culture governance.
GENERAL Ɛ Reviewed arrangements for whistleblowing (and whistleblowing activity) should an employee wish to raise concerns, in confidence, about any possible improprieties; this being reviewed in the context of the market data available, requested by the Audit Committee and provided by EY.
Ɛ Reviewed and approved updates to the Group Tax Policy and the Group Liquidity & Funding Policy.
ASSESSMENT OF THE EFFECTIVENESS OF THE EXTERNAL AUDIT PROCESS The effectiveness of the external audit process was assessed through the completion of an assessment questionnaire by the key divisions and Group functions within Phoenix Group. The feedback covered EY’s performance with regard to their audits under the IFRS, MCEV, Solvency I and Solvency II bases of reporting. To provide a more detailed analysis, the review was supported by the utilisation of an online questionnaire based tool provided by a third party supplier. The output from the review enabled management to identify key areas of focus to facilitate the audit process and enhanced understanding of the importance of various criteria with regard to the external auditor relationship for a future tender exercise. The Audit Committee contributed feedback to the exercise, considered the effectiveness of the process and reviewed the overall findings.
AUDITOR’S APPOINTMENT The current auditors, EY, were appointed in September 2009. However, EY have been auditors to significant parts of the Group for a longer period. In accordance with the requirements of The Statutory Audit Services for Large Companies Market Investigation (Mandatory Use of Competitive Tender Processes and Audit Committee Responsibilities) Order 2014, the Audit Committee has decided to undertake a competitive audit tender in 2016 to be effective for the 2017 statutory audit, which it considers in the best interests of its shareholders in light of the length of association with the current auditors.
Review of the actuarial valuation process, to include the setting of actuarial assumptions and methodologies, and the robustness of actuarial data
Ɛ A summary of these papers was presented for oversight review by the Audit Committee, and the Phoenix Life Audit Committee’s conclusions were reported to the Audit Committee through minutes of its meeting and a discussion between the Chairmen of the two committees. The Audit Committee discussed, and questioned management and EY on, the content of the summary papers and the Phoenix Life Audit Committee’s conclusions.
Ɛ The Audit Committee received and considered detailed written and verbal reporting from the external auditors setting out their observations and conclusions in respect of the assumptions, methodologies and actuarial models. Pension assumptions for use in the IAS 19 Employee Benefits valuations were reviewed and approved by the Audit Committee prior to the finalisation of the valuation reports.
Ɛ Economic assumptions for use in the MCEV valuation were reviewed and approved by the Audit Committee.
Ɛ As part of the interim and year-end reporting process, the Audit Committee considered presentations from management that provided an update on taxation risks and exposures, provisioning levels and matters pertaining to the recoverability of deferred tax assets.
Ɛ The valuation information was then presented for oversight review by the Audit Committee who considered and confirmed the appropriateness of the basis of valuation.
Ɛ The Audit Committee considered an analysis of the processes (which had been further developed during 2015) and conclusions in support of management’s conclusions that the Annual Report and Accounts are fair, balanced and understandable. In particular, the Audit Committee sought assurance as to the review processes that operated over the production of the Annual Report and Accounts.
Going concern analysis Ɛ A comprehensive going concern assessment was undertaken by the Audit Committee for the 2015 year end and 2015 interim reporting periods, based on an assessment by management of the Group’s liquidity for the going concern review period together with forecasts and a stress and sensitivity analysis. The analysis also confirmed that all regulatory and working capital requirements would be met under the base case and adverse stress scenarios throughout the going concern review period.
Viability Statement Ɛ The Audit Committee reviewed the processes to support the Viability Statement proposed by provision C2.2 in the UK Corporate Governance Code. The Committee decided that the period covered by the viability statement should be five years to align it to the Group’s business planning.
The Remuneration Committee is responsible for making recommendations to the Board on the Company’s remuneration and compensation plans, policies and practices and for determining, within agreed terms of reference, specific remuneration packages for the Executive Directors. These include pension rights and executive incentive schemes to encourage superior performance. Details of the remuneration structure and the Remuneration Committee’s activities in 2015 are provided in the Directors’ Remuneration Report on pages 57 to 80.
FIT Remuneration Consultants provided advice to the Remuneration Committee in 2015 and are independent of the Group.
The establishment of a Risk Committee is not a requirement of the Code. However, the Board believes such a Committee is important to ensure the robust oversight of the management of risk within the Group. The composition of the Risk Committee, with a majority of independent Non-Executive Directors, is in accordance with the final recommendations of the report by Sir David Walker titled ‘A review of corporate governance in UK banks and other financial industry entities’. The Risk Committee met six times in 2015. Its meetings are attended by the Chairman of the Audit Committee (who is also a member of the Risk Committee), the Chief Risk Officer, the Group Head of Internal Audit and occasionally also by the Group Chairman and the Group Chief Executive Officer.
RISK COMMITTEE’S PRINCIPAL ACTIVITIES DURING 2015 Ɛ Reviewed the Group’s risk appetite and recommended to the Board the Group’s overall risk management strategy.
Ɛ Approved the Group Risk Function’s 2016 plan and monitored progress against the 2015 Group Risk Function plan.
Ɛ Monitored compliance with the Group’s principal risk policies, satisfying itself that action plans to address significant breaches of those policies were sufficient.
Ɛ Provided oversight of, and challenge to, the design and execution of the Group’s stress and scenario testing, including any changes of assumptions.
Ɛ Conducted a detailed risk governance review which included the establishment of a dedicated Risk Committee of the Phoenix Life Board to provide additional Board Committee focus on risk matters.
Phoenix Group Holdings Annual Report and Accounts 2015 55 Corporate governance
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). Detailed assessments of shortlisted 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. This process was used for the appointment of Henry Staunton as Chairman in 2015. The search consultancy used in 2015 for Director appointments was The Zygos Partnership which has no other connection with the Company.
Ɛ Undertook a skills audit in response to a recommendation from the 2014 Board Evaluation Report to re-assess the ideal blend of skills and knowledge on the Board, aligned to the Group’s strategy. The output of this audit was used in deciding the skills and experience required for the new Chairman and will inform the requirements for new Non-Executive Director appointments intended for 2016 .
Ɛ In conjunction with the skills audit and taking account of the Board Evaluation Review, reviewed the balance of skills, diversity, experience, independence and knowledge on the Board.
Ɛ In conjunction with the skills audit and taking account of the Board Evaluation Review, reviewed the structure, size and composition of the Board.
Ɛ Reviewed the succession plan for Executive and Non-Executive Directors and recommended its approval to the Board.
Ɛ The Board will undertake regular skills audits to ensure the Board’s skills remain appropriate for its strategy and providing diversity where possible; the 2015 skills audit having been being assessed against ten strategic skill categories.
Tom Cross Brown 8 5 * Howard Davies up to 31 August 2015.
During 2015 the Company’s Investor Relations department and management held the following activity: Ɛ 11 days of roadshows meeting investors
Ɛ 7 institutional conferences holding one-on-one or group meetings with investors
At these meetings a wide range of relevant issues including strategy, performance, management and governance are discussed. The Chairman, Senior Independent Director and Executive Directors are available to meet investors and analysts when required. Should major shareholders wish to meet newly appointed Directors, or any of the Directors generally, they are welcome to do so.
The Company’s AGM provides another opportunity to communicate with its shareholders. At the 2015 meeting, the Company complied with the Code provisions relating to voting and the separation of resolutions. Shareholders were invited to ask questions during the meeting. It is intended that the same processes will be followed at the 2016 AGM. In line with the Code, details of proxy voting by shareholders will be made available at the meeting and will be posted on the Company’s website following the meeting.
The Company’s Annual Report and Accounts, together with the Company’s Interim Report, Interim Management Statements and other public announcements and presentations, are designed to present a fair, balanced and understandable view of the Group’s activities and prospects. These are available on the Company’s website at www.thephoenixgroup.com, along with a wide range of relevant information for private and institutional investors, including the Company’s financial calendar.
REVIEW OF SYSTEM OF INTERNAL CONTROLS The Code requires Directors to review the effectiveness of the Company’s risk management and internal control systems which includes financial, operational and compliance controls. The Board has overall responsibility for the Group’s risk management and internal control systems and for reviewing their effectiveness. The Group’s systems of internal controls are designed to manage rather than eliminate the risk of failure to achieve business objectives and can provide only reasonable and not absolute assurance against material misstatement or loss. The Board’s review of the period covered by this report, which was undertaken with the assistance of the Audit and Risk Committees, was completed on 22 March 2016. Where any significant weaknesses were identified, corrective actions have been taken, or are being taken and monitored.
The Board (and its subsidiary company boards) monitor internal controls on a continual basis, in particular through Audit and Risk Committees. There is an ongoing process for identifying, evaluating and managing the significant risks faced by the Group, which has been in place throughout the period covered by this report and up to the date of approval of the Annual Report and Accounts for 2015, in accordance with the ‘Guidance on Risk Management, Internal Control and Related Financial and Business Reporting’ published by the Financial Reporting Council.
LINKING REMUNERATION TO COMPANY PERFORMANCE 2015 was a year of major achievements for Phoenix Group as set out in more detail in the Group Chief Executive Officer’s report at the beginning of this Annual Report and Accounts. Particular operational and financial highlights for the year included: Ɛ Operating companies’ cash generation of £225 million
Ɛ Incremental Market Consistent Embedded Value (‘MCEV’) from management actions of £205 million, meeting the target of £400 million of management actions between 2014 and 2016, one year ahead of schedule
Ɛ The achievement of an investment grade credit rating from Fitch Ratings
Ɛ The accreditation, for the fourth successive year, that Phoenix has been formally recognised as one of the ‘UK’s Top Employers’
As a closed life business, success for the Company is not assessed in the same way as at many other companies but through the efficient delivery of management actions and maintenance of our capital strength both to ensure that we can meet our obligations to policyholders and to maintain dividends to shareholders.
There were three direct consequences of delivering on the Board’s additional priorities on the AIP: Ɛ MCEV was included as a measure on the basis that it was a fair measure of the capital strength of the Company and, generally, positive actions by management improve it. As explained more fully on page 64 under the section headed ‘AIP Outcomes for 2015’, a consequence of our achieving an investment grade credit rating was that the value of bonds issued by the Company increased due to the positive market impact. The Committee clearly did not want to penalise management for this positive development.
Ɛ Similarly, management successfully adjusted the investment portfolio in line with the new priorities set by the Board to enable our Internal Model to be approved and so the Committee, again, excluded the direct negative consequences of the recalibration from the AIP out-turn.
This produced an AIP out-turn for the Chief Executive Officer, after reflecting personal performance, of approximately 82% of maximum.
While, in principle, the Committee felt that a similar adjustment could have been made to the Long Term Incentive Plan (‘LTIP’), no such adjustment was made. The LTIP vesting level of 57% was approved.
Our Directors’ remuneration report for 2016 will include a re-statement of the Directors’ remuneration policy which, in line with the normal requirement for Directors’ remuneration policies to be renewed every three years, will be put to the Company’s shareholders for approval at the 2017 AGM.
SHAREHOLDER APPROVAL At the AGM on 11 May 2016, shareholders will be invited to approve the 2015 Directors’ remuneration report as set out in the following pages. For ease of reference, and consistent with our approach last year, the main summary policy tables from the Directors’ remuneration policy approved at the 2014 AGM are also set out as an Appendix to the Directors’ remuneration report, although we are not seeking further approval from shareholders for our policy at the 2016 AGM.
I hope that we can continue to rely on the support of our shareholders for the resolution on the 2015 Directors’ remuneration report which will be proposed at the 2016 AGM.
ANNUAL IMPLEMENTATION REPORT – UNAUDITED INFORMATION IMPLEMENTATION OF REMUNERATION POLICY IN 2016
Base Salary Salaries in 2016 will remain unchanged from the 2014 and 2015 levels of £700,000 for the Group Chief Executive Officer and £440,000 for the Group Finance Director.
Benefits There are no proposed changes to the benefits offered to Executive Directors in 2016.
DIRECTORS’ REMUNERATION POLICY The Directors’ remuneration policy (‘Remuneration Policy’) was approved by the Company’s shareholders at the Company’s AGM on 30 April 2014 and has effect for all payments made to Directors from that date.
The Company’s full Remuneration Policy is available within the Remuneration Committee (‘Committee’) section under Board Committees on the Company’s website. For information and ease of reference, the main summary policy tables from the Remuneration Policy are included in the Appendix to this Directors’ remuneration report. The information in the Appendix is not subject to the advisory vote on the Directors’ remuneration report at the 2016 AGM.
The weightings of the AIP performance measures for 2016 are summarised below: Performance Measure Weighting of Corporate Measure % of incentive potential
Ɛ Greater weighting has been given to customer experience, reflecting the focus of the Board as well as of our regulators.
In addition, and as previously stated in the Remuneration Policy, there are three potential levels at which the performance measures and targets and related outcomes from AIP in 2016 may be moderated (downwards or upwards) by the Committee – more details are provided in the summary Remuneration Policy table set out in the Appendix to the Directors’ remuneration report.
For all LTIP awards made from 2015 onwards, a holding period applies so that any LTIP awards for which the performance vesting requirements are satisfied will not be released for a further two years from the third anniversary of the original award date. Dividend accrual for LTIP awards will continue until the end of the holding period.
The weightings of the LTIP performance measures for 2016 are summarised below: Performance Measure Weighting of Performance Measure
These weightings represent a change from the weightings for 2015 LTIP awards, where MCEV growth had a 40% weighting, Cumulative cash generation 40% and TSR 20%. As explained above for AIP, under Solvency II, embedded value metrics are expected to be less relevant measures within the insurance industry and Phoenix will no longer be reporting MCEV; therefore MCEV growth has been removed for 2016’s LTIP awards and the other measures re-balanced accordingly.
The relative TSR measure is calculated against the constituents of the FTSE 250 (excluding Investment Trusts), with vesting commencing at median (25% of this part of the award) and full vesting at upper quintile levels, subject to an underpin regarding underlying financial performance.
As in past years, the performance targets for Cumulative cash generation will be set by the Committee shortly before the LTIP awards are made. The Company will disclose the performance targets for the Cumulative cash generation measure for 2016’s LTIP awards in next year’s Directors’ remuneration report.
The fee levels for 2016 are £325,000 for the Chairman, £105,000 for the role of Non-Executive Director with additional fees of: (i) £5,000 payable for the role of Senior Independent Director; and/or (ii) £10,000 payable where an individual also chairs the Audit, Remuneration or Risk Committee; and/or (iii) £20,000 payable where a Non-Executive Director also serves on the board of a subsidiary company and/or (iv) £10,000 payable for service on the Solvency II Model Governance Committee.
1 All incentive plans are subject to malus and/or clawback provisions. These provisions may be applied where the Committee considers it appropriate to do so following: Ɛ A review of the conduct, capability or performance of an individual Ɛ A review of the performance of the Company or a Group member Ɛ Any material misstatement of the Company’s or a Group member’s financial results for any period Ɛ Any material failure of risk management by an individual, a Group member or the Company Ɛ Any other circumstances that have a sufficiently significant impact on the reputation of the Company.
BALANCE OF FIXED TO VARIABLE REMUNERATION FOR EXECUTIVE DIRECTORS The balance of fixed to variable remuneration for the Executive Directors is illustrated in the Appendix to the Directors’ remuneration report where the disclosure for ‘Potential Rewards under Various Scenarios’ from the Remuneration Policy is included for information. The scenarios shown remain the same as for 2014 due to the underlying remuneration arrangements and participation levels remaining substantially unchanged.
Profit distributed by way of dividend has been taken as the dividend paid and proposed in respect of the relevant financial year. For 2015 this is the interim dividend paid (£60 million) and the recommended final dividend of 26.7p multiplied by the total share capital issued at the date of the Annual Report as set out in note D1 ‘Share capital’ in the notes to the consolidated financial statements. No share buy-backs were made in either year.
PERFORMANCE GRAPH AND TABLE The graph below shows the value to 31 December 2015, on a TSR basis, of £100 invested in Phoenix Group Holdings on 5 July 2010 (the date of the Company’s Premium Listing) compared with the value of £100 invested in the FTSE 250 Index (excluding Investment Trusts).
The UK regulations also require that a performance graph is supported by a table summarising aspects of the Group Chief Executive Officer’s remuneration for the period covered by the above graph (which will in due course be for a period of ten years).
Jonathan Moss 5,6 704 n/a n/a 1 Figures restated for 2014. See footnote 3 for detail. 2 The long-term incentive vesting rate for 2013 is shown at 67% and for 2014 is shown as 57%. In both years the Group Chief Executive Officer decided to waive voluntarily any entitlement in excess of two-thirds of the shares which would otherwise have vested.
PERCENTAGE CHANGE IN PAY OF THE GROUP CHIEF EXECUTIVE OFFICER 2014 TO 2015 In accordance with UK regulations, the table below provides a comparison of the percentage change in the prescribed pay elements of the Group Chief Executive Officer (salary, taxable benefits and annual incentive outcomes) between financial years 2014 and 2015 and the equivalent percentage changes in the average of all staff (representing all permanent staff during 2014 and 2015 on a matched basis). This group was selected as being representative of the wider workforce using the same process as was used for this comparison in last year’s accounts.
VOTING OUTCOMES FROM THE 2015 AGM The table below shows the votes cast to approve the Directors’ remuneration report for the year ended 31 December 2014 at the 2015 AGM held on 23 April 2015.
4 In accordance with the requirements of the UK regulations, the 2015 value for long-term incentives is an estimate of the vesting outcomes for LTIP awards granted in 2013 and which are due to vest on 15 November 2016 for Clive Bannister and James McConville. These estimated vesting levels are at 57% reflecting outcomes against the MCEV growth, Cumulative cash generation and TSR performance measures to 31 December 2015 and assumptions regarding dividends for the period until vesting. This vesting outcome is then applied to the average share price between 1 October 2015 and 31 December 2015 (873.4924p) to produce the estimated long-term incentives figures shown for 2015 in the above table. These assumptions will be trued up for actual share prices and dividends on vesting in the report for 2016. Details of the performance measures and targets applicable to the 2013 LTIP are set out on page 66.
5 For 2012’s LTIP grants which are reflected in the 2014 long-term incentives columns above, the performance conditions were met as to 84.24% of maximum. The Group Chief Executive Officer decided to waive voluntarily any entitlement in excess of two-thirds of the shares which would otherwise have vested. The 2014 long-term incentives values in the above table reflect the value of the Company’s shares on the date of vesting which, due to extended closed and prohibited periods, was 23 September 2015 (836p per share) multiplied by the number of shares vesting, whereas the equivalent figure within the published 2014 single figure table was an estimate which reflected the average share price between 1 October 2014 and 31 December 2014 (769.93p per share) and certain assumptions regarding the cumulative value of dividends on the number of shares vesting.
The aggregate remuneration of all Executive and Non-Executive Directors under salary, fees, benefits, cash supplements in lieu of pensions and annual incentive was £3.937 million (2014: £3.771 million).
Similarly, following clarity on the regulations under Solvency II and the actions necessary to ensure approvals in relation to full internal model approval and matching adjustment be obtained, management took the decision to change the credit portfolio by selling assets which attracted a high capital charge under the new regime, which were outside of the Group’s risk appetite or which were ineligible or inefficient for matching adjustment (such as callable bonds). Furthermore, management also reduced the longevity and credit exposure by reinsuring c.£1.3 billion of liabilities to an external reinsurer, both of which attract the highest level of risk capital under Solvency II for the Group. Accordingly, the Committee concluded again that it would operate contrary to the principles of the AIP if management was penalised for such actions which were clearly in the interests of the Group.
It was felt appropriate to ensure that management was not disincentivised from bringing such opportunities to the Board. This could have been the case had appropriate adjustments to the 2015 AIP targets not been made for the additional costs required to deliver these important developments. The impact of the adjustments on the AIP Corporate measures is shown below.
Against the specific Corporate measures, out-turns were as follows: Performance measure
Group MCEV operating earnings after tax £123m £246m £223m 15% 12%
In line with market best practice, the Company has disclosed both the actual performance targets for the specific Corporate (financial and strategic) performance measures used for the 2015 AIP and the relevant levels of attainment for those targets. Specific performance measures and targets for the Personal (individual objectives) performance elements of the 2015 AIP are not disclosed as these performance measures and targets are regarded as commercially sensitive by the Committee and are likely to remain so, although key achievements included the approval of the Group’s Internal Model under Solvency II and managing the introduction of the new Pension Freedoms, together with meeting the MCEV management actions target one year ahead of schedule.
In addition, whilst the performance measures for the AIP for 2016 have been disclosed (see Implementation of Remuneration Policy for 2016), the performance targets for these measures are regarded as commercially sensitive at the current time and accordingly are not disclosed. However, the Company intends to disclose the performance targets for the Corporate (financial and strategic) performance measures for 2016’s AIP retrospectively in next year’s Directors’ remuneration report on a similar basis to the disclosures made above in respect of 2015’s AIP Corporate (financial and strategic) performance measures.
MCEV growth (40%) Target range between MCEV growth in excess of the risk-free rate by 4% per annum and MCEV growth in excess of the risk-free rate by 6% per annum.
Target range between cumulative cash generation of £1.277 billion and cumulative cash generation of £1.477 billion.
James McConville 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).
As the 2013 rights issue was known before the date of award, the base MCEV for 2013’s award increased by £211 million.
As noted in the section describing the Implementation of Remuneration Policy in 2016, LTIP awards to be made in 2016 will be subject to Cumulative cash generation and Relative TSR performance measures similar to those described in the table above. The exact performance targets for Cumulative cash generation will be determined by the Committee shortly before the awards are made. Such targets will be disclosed in the 2016 Directors’ remuneration report.
2 As explained in the Implementation of Remuneration Policy in 2016 table on page 60, the DBSS award made in 2015 will vest on 19 March 2018, being the day following the third anniversary of the announcement of 2015’s annual results.
Aggregate gains of Directors from share options exercised and vesting shares under all share plans in 2015 were £3,476,618 (2014: £1,299,183).
Total share plan interests as at 31 December 2015 – LTIP
Total share plan interests as at 31 December 2015 – DBSS
ADDITIONAL UNAUDITED INFORMATION 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. During 2015, Clive Bannister received £37,500 from Punter Southall Group and CHF60,000 from UniGestion in respect of two external directorships. James McConville received £112,000 from Tesco Personal Finance plc.
René-Pierre Azria 2 September 2009 2 September 2009 11 May 2016 2
Tom Cross Brown 24 September 2009 24 September 2009 11 May 2016 2
Henry Staunton 19 August 2015 1 September 2015 1 September 2018 30
The table below shows the independent Non-Executive Directors who served on the Committee during 2015 and their date of appointment: Member From To
ADVICE The Committee received independent remuneration advice during the year from its appointed adviser, FIT Remuneration Consultants LLP (‘FIT’). FIT is a member of the Remuneration Consultants Group (the professional body for consultants) and adheres to its code of conduct. This appointment was made by the Committee following consideration of FIT’s experience in this sector. FIT provided no other services to the Group and accordingly the Committee was satisfied that the advice provided by FIT was objective and independent. FIT’s fees in respect of 2015 were £246,582. FIT’s fees were charged on the basis of the firm’s standard terms of business for advice provided.
Ɛ The Remuneration Committee will apply the factors set out in the previous column in considering any salary adjustments during the duration of this policy and, in any event, no increase will be made if it would take an Executive Director’s salary above the median level of salaries for the Remuneration Committee’s assessment of that role in the FTSE 31-100 at or shortly prior to when any increase is considered
Ɛ Where appropriate, the Company will meet certain costs relating to Executive Director relocations
Ɛ Phoenix will honour the pensions obligations entered into under all previous policies in accordance with the terms of such obligations
Ɛ AIP outcomes are paid in cash in one tranche (less the deferred share award)
Ɛ Deferral of AIP outcomes into shares is currently made under the Phoenix Group Holdings’ Deferred Bonus Share Scheme (‘DBSS’) and DBSS awards are made following the announcement of annual results in accordance with the DBSS rules
Ɛ Awards under DBSS will be in the standard form of awards to receive shares for nil-cost (with the shares either being delivered automatically at vesting or being delivered at a time following vesting at the individual’s choice)
Ɛ Malus/clawback provisions apply to the AIP and to amounts deferred and may be operated in a broad range of circumstances, including those prescribed by the FCA’s Remuneration Code
Ɛ The AIP operates subject to three levels of moderation: i. The Remuneration Committee sets targets for relevant AIP metrics. Recognising that the business of the Company is to engage in corporate activity, the Remuneration Committee may adjust targets during the year to ensure they operate as originally intended if there is activity not contemplated by the business plan (which may or may not include reflecting the consequences of such activity depending on the circumstances)
Ɛ Awards under the LTIP may be in any of the standard forms of awards to receive shares for nil-cost (as described for DBSS above), forfeitable awards of shares or in the form of cash-based ‘phantom’ awards
Ɛ The formal limit under the LTIP is 300% of base salary per annum (and 400% per annum in exceptional cases)
Ɛ The Remuneration Committee expressly reserves discretion to make such awards as it considers appropriate within these limits
Ɛ For each part of an LTIP award, subject to a specific performance condition, the threshold level of vesting is 25% of that part of the LTIP award. The Remuneration Committee reserves the discretion to make changes to these levels which it considers non-material
All-employee share plans To encourage share ownership by employees, thereby allowing them to share in the longterm success of the Group and align their interests with those of the shareholders
Ɛ 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% (although for 2014 and past years this has been set at 15%) of the market price set at the launch of each scheme
Ɛ Share Incentive Plan (‘SIP’) – the Remuneration Committee has the facility to allow individuals to have the opportunity to purchase, out of their pre-tax salary, shares in the Company (up to such level as permitted by the Company in line with HMRC legislation) and receive up to two matching shares for every purchased share (although for 2014 and past years matching has been offered at one matching share for every six shares purchased). SIP also has the facility to allow for reinvestment of dividends in further shares, or the award of additional free shares (up to the limits as permitted by HMRC legislation)
Ɛ Only beneficially owned shares and vested share awards (discounted for anticipated tax liabilities) may be counted for the purposes of the guidelines. Share awards do not count prior to vesting (including DBSS awards)
Ɛ 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
Ɛ Fees are paid monthly in cash Ɛ Fee levels for Non-Executive Directors are reviewed annually with any changes normally taking effect from 1 January
Ɛ The Company reserves the right to vary the structure of fees within this limit including, for example, introducing time-based fees or reflecting the establishment of new board committees
Ɛ The AIP and LTIPs will operate (including the maximum award levels) as detailed in the general policy in relation to any newly appointed Executive Director.
Ɛ For an internal appointment, any variable pay element awarded in respect of the prior role may either continue on its original terms or be adjusted to reflect the new appointment as appropriate.
Ɛ For the avoidance of doubt, such replacement awards are not subject to a formal cap. The Remuneration Committee has not placed a maximum limit on any such awards which it may be necessary to make as it is not considered to be in shareholders’ interests to set any expectations for prospective candidates regarding such awards. Any recruitment-related awards which do not replace awards with a previous employer will be subject to the limits for incentive pay as stated in the general policy.
The above chart aims to show how the Remuneration Policy set out above for Executive Directors is applied using the following assumptions.
Pension measured as the 20% of base salary receivable either as a pension contribution or as cash, and ignoring the reduction to payments made in cash for employer’s national insurance contributions
Ɛ AIP: consists of the on-target annual incentive (75% of base salary)
Phoenix Group Holdings Annual Report and Accounts 2015 81 Corporate governance
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/articlesof -association.aspx.
ANNUAL GENERAL MEETING (‘AGM’) The AGM of the Company will be held at 32 Commercial Street, St Helier, Jersey JE2 3RU on Wednesday, 11 May 2016 at 12.30pm.
BOARD BOARD OF DIRECTORS The membership of the Board of Directors during 2015 is given within the Corporate Governance Report on page 47 which is incorporated by reference into this report. Details of Directors and their connected persons’ beneficial and non-beneficial interests in the shares of the Company are shown in the Directors’ remuneration report.
Ɛ Henry Staunton was appointed to the Board as Chairman with effect from 1 September 2015.
Details of related party transactions which took place during the year with Directors of the Company and consolidated entities where directors are deemed to have significant influence, are provided in the Directors’ remuneration report and in note I5 to the IFRS consolidated financial statements.
The powers of the Directors are determined by Cayman Islands Company Law, Cayman Islands common law, the provisions of the Company’s Memorandum and Articles and by any valid directions given by shareholders by way of special resolution.
At the Company’s AGM held on 23 April 2015, shareholders granted the Company authority to purchase up to 10% of its issued ordinary shares. Any ordinary shares purchased under the authority would, subject to the Cayman Islands Companies Law (as amended), either be cancelled by operation of law or held in treasury. These authorities were not used during the year or up to the date of this report.
GOVERNANCE GOING CONCERN The Group’s business activities, together with the factors likely to affect its future development, performance and position are set out in the Strategic Report. The Strategic Report also provides details of any key events affecting the Company (and its consolidated subsidiaries) since the end of the financial year. The Strategic Report includes details of the Group’s cash flow and solvency position, including sensitivities for both. Principal risks and their mitigation are detailed on pages 37 to 38 and the viability statement is included on pages 39. In addition, the financial statements include, amongst other things, notes on the Group’s borrowings (note E5), management of its financial and insurance risk including market, credit and liquidity risk (note E6), its commitments and contingent liabilities (notes I7 and I8) and its capital position and management (note I4). The Strategic Report (on pages 4 to 40) sets out the business model and how we create value for shareholders and policyholders.
CORPORATE GOVERNANCE STATEMENT The disclosures required by section 7.2 of the FCA’s Disclosure and Transparency Rules can be found in the Corporate Governance Report on page 82 which is incorporated by reference into this Directors’ Report and comprises the Company’s Corporate Governance Statement. 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.
Phoenix Group Holdings Annual Report and Accounts 2015 83 Corporate governance
GREENHOUSE GAS EMISSIONS All disclosures concerning the Group’s greenhouse emissions are contained in the Environmental Report forming part of the Strategic Report on page 40.
GROUP COMPANY SECRETARY The Group Company Secretary throughout the 2015 financial period was Gerald Watson.
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 PGH Capital revolving credit facility has a provision which would enable the lending banks to require repayment of all amounts borrowed following a change of control. In addition, certain provisions of the Articles relating to the City Code on Takeovers and Mergers apply in connection with a takeover bid.
ESSENTIAL CONTRACTS OR ARRANGEMENTS There are a number of relationships with third parties which are of significant value to the Group. Apart from the PGH capital revolving credit facility, £300 million unsecured bonds, the £200 million Phoenix Life Limited Tier 2 bonds and the £428 million subordinated notes, no single relationship is considered to be essential to the Group.
EMPLOYEE PRACTICE 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.
Directors’ remuneration report 7 Non pre-emptive issue of equity for cash
Not applicable 10 Contracts of significance Not applicable 11 Controlling shareholder provision of services
Ɛ prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group and the Company will continue in business.
Ɛ the Directors’ Report and the Strategic Report include a fair review of the development and the performance of the business and the position of the Company and its consolidated subsidiaries taken as a whole, together with a description of the principal risks and uncertainties that they face.
WHAT WE HAVE AUDITED We have audited the consolidated financial statements of Phoenix Group Holdings and its subsidiaries (collectively ‘the Group’) and the parent company for the year ended 31 December 2015, included within the Annual Report and Accounts, which comprise: Group Parent company
Ɛ The consolidated income statement for the year then ended Ɛ The statement of comprehensive income for the year then ended
Ɛ The statement of financial position as at 31 December 2015
Ɛ The statement of consolidated financial position as at 31 December 2015
Ɛ The statement of changes in equity for the year then ended
Ɛ Related notes A1 to I9 to the consolidated financial statements
Materiality Ɛ Overall Group materiality of £46m (2014: £41m) which represents 1.9% (2014: 1.7%) of total equity attributable to owners of the parent (‘Group equity’).
The assumptions that we consider to have the most significant impact are the rate of interest used for discounting liabilities, the allowance for expected credit default within the investment portfolio, life expectancy of policyholders and the lapse rates of policies.
Ɛ benchmarked the demographic and economic assumptions against those of other industry participants.
In obtaining sufficient audit evidence to conclude on actuarial models, including those models outside the core system, we: Ɛ confirmed in the prior period that the core system is appropriately valuing liabilities, we assessed the design, implementation and operating effectiveness of key controls over management’s process for model changes during the year; Ɛ confirmed, on a sample basis, that model changes have been appropriately implemented by comparing the impacts of model changes to our own calculations of what we would expect the impact to be; Ɛ assessed the results of the analysis of movements in insurance contract liabilities in order to confirm the completeness of model changes; Ɛ tested the design, implementation and operating effectiveness of key controls over management’s process for modelling liabilities outside the core system; and
We determined that the models used are appropriate and that changes to the models were implemented as intended.
Data There has been no change in our assessment of this risk from the prior year. The actuarial 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.
Ɛ tested reconciliations of premiums and claims information from the actuarial data extract to the general ledger, where applicable.
We determined based on our audit work that the data used for the actuarial model inputs are materially complete and accurate.
Risk Our response to the risk What we concluded to the Audit Committee
Valuation of complex and illiquid financial investments (‘Level 3 assets’) (£1.4bn; 2014: £1.8bn) There have been a number of disposals of Level 3 assets in the year and there have also been investments in new areas such as equity release mortgages. Overall we have assessed that the risk has reduced compared with the prior year. Refer to the Audit Committee Report (page 50 to 52); Critical accounting estimates (page 103); Accounting policies and notes E1 and E2 of the consolidated financial statements (pages 118 to 127). The extent of judgment applied by management in valuing the Group’s financial investments varies with the nature of securities held, the markets in which they are traded and the valuation methodology applied.
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 (‘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 entity.
In assessing the risk of material misstatement to the consolidated financial statements, and to ensure we had adequate quantitative coverage of significant accounts in the financial statements, we selected all three reporting components of the Group. The Group reporting components consists of Insurance Companies, Group Function and Other Companies. In the Insurance Companies component the most significant insurance companies are Phoenix Life Assurance Limited and Phoenix Life Limited. The Group Function consists of Group entities that primarily hold external debt and the pension schemes of the Group. The Other Companies are the service companies and Opal Reassurance Limited.
Of the three components selected, we performed an audit of the complete financial information of the Insurance Companies and the Group Function components (‘full scope components’) which were selected based on their size or risk characteristics. For the remaining Other Companies component (‘specific scope component’), we performed audit procedures on specific accounts within that component that we considered had the potential for the greatest impact on the significant accounts in the financial statements either because of the size of these accounts or their risk profile.
For the Other Companies component, we performed audit procedures on provisions and administrative expenses for the service companies and on cash and investments for Opal Reassurance Limited. The extent of audit work in respect of the Other Companies component was based on our assessment of the risks of material misstatement at a financial statement line level.
The reporting components where we performed audit procedures accounted for more than 99% of the Group equity and the Group’s operating profit. For the current year, the full scope components contributed 97% (2014: 98%) of the equity and 88% (2014: 93%) of the Group’s operating profit. The specific scope component contributed 2% (2014: 2%) of the Group’s equity and 11% (2014: 7%) of the Group’s operating profit.
The Group audit team is responsible for the audit of the Group Function. The Group team visited the full scope component of the Insurance Companies, and reviewed key work papers and participated in the planning and execution of the component team’s audit of the identified risks. The Group team attended the closing meetings with the management of the Insurance Companies and attended key audit committee meetings. For the specific scope component, the Group team have reviewed the audit procedures performed by the component team on the specific accounts.
We determined materiality for the Group to be £46 million (2014: £41 million), which is 1.9% (2014: 1.7%) of Group equity. Our aim is that materiality should not exceed 2% of year-end Group equity. At the planning stage we set a slightly lower level of materiality to allow for forecasting error. Whilst profit before tax or operating profit are common bases used across the life insurance industry, we believe that the use of equity as the basis for assessing materiality is more appropriate given that the Group is 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 Insurance Group Directive (‘IGD’) surplus and Market Consistent Embedded Value (‘MCEV’). However, as these measures are non-GAAP measures, we consider equity to be most appropriate.
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% (2014: 50%) of our planning materiality, namely £23.0 million (2014: £20.5 million).
Ɛ the financial statements are in agreement with the records and returns; or
REPORT ON MATTERS PRESCRIBED BY OUR ENGAGEMENT LETTER In our opinion: Ɛ the information given in the Strategic Report and the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements; Ɛ the information given in the Corporate governance report set out on pages 47 to 56 with respect to internal control and risk management systems in relation to financial reporting processes is consistent with the financial statements; and
Ɛ the part of the Directors’ remuneration report that has been described as audited has been properly prepared in accordance with the basis of preparation as described therein.
We are required to report to you if, in our opinion, financial and non-financial information in the Annual Report and Accounts is: Ɛ materially inconsistent with the information in the audited financial statements; or
Ɛ apparently materially incorrect based on, or materially inconsistent with, our knowledge of the Group acquired in the course of performing our audit; or
In particular, we are required to report whether we have identified any inconsistencies between our knowledge acquired in the course of performing the audit and the Directors’ statement that they consider the Annual Report and Accounts taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the entity’s performance, business model and strategy; and whether the Annual Report and Accounts appropriately addresses those matters that we communicated to the audit committee that we consider should have been disclosed.
We are required to review: Ɛ the Directors’ statement in relation to going concern set out on page 82 and the longerterm viability set out on page 39; and
We are required to report to you if, in our opinion: Ɛ adequate accounting records have not been kept (including returns from those branches which have not been visited); or
Ɛ the financial statements are not in agreement with the accounting records and returns; or
Gross premiums written 902 981 Less: premiums ceded to reinsurers F3 (1,376) (1,792) Net premiums written (474) (811)
Gain on transfer of business I1.5 – 4 Other operating income 7 9 Net income 692 5,330
Tax credit/(charge) attributable to policyholders’ returns C5 33 (129) Profit before the tax attributable to owners 185 336
Tax credit/(charge) C5 97 (151) Add: tax attributable to policyholders’ returns C5 (33) 129 Tax credit/(charge) attributable to owners C5 64 (22) Profit from continuing operations for the year attributable to owners 249 314
Profit for the year from continuing operations 249 314 Profit from discontinued operations – 92
Operating profit Phoenix Life 336 487 Ignis – discontinued operations – 17
Investment return variances and economic assumption changes on long-term business B2.2 13 12 Variance on owners’ funds B2.3 (12) (14) Amortisation of acquired in-force business (75) (88) Amortisation of customer relationships (15) (15) Non-recurring items B1.2 49 126 Profit before finance costs attributable to owners 284 504
STATEMENT OF CONSOLIDATED FINANCIAL POSITION As at 31 December 2015 Continued
STATEMENT OF CONSOLIDATED CASH FLOWS For the year ended 31 December 2015
Proceeds from issuing ordinary shares, net of associated commission and expenses 2 1
Proceeds from new policyholder borrowings, net of associated expenses 99 –
Shares held by the employee benefit trust and Group entities (note D2)
Total comprehensive (expense)/income for the year – – – (7) 4 204 201 48 249
Coupon paid to non-controlling interests, net of tax relief – – – – – – – (15) (15)
Credit to equity for equity-settled share-based payments – – – – – 4 4 – 4
STATEMENT OF CONSOLIDATED CHANGES IN EQUITY For the year ended 31 December 2014
Profit for the year – – – – 310 310 96 406
Dividends paid on ordinary shares – (120) – – – (120) – (120)
Dividends paid to non-controlling interests – – – – – – (22) (22)
Shares in subsidiaries subscribed for by non-controlling interests – – – – – – 82 82
Shares distributed by employee benefit trust – – 10 – (10) – – –
Shares acquired by employee benefit trust – – (8) – – (8) – (8)
Shares sold by Group entities – – 3 – 1 4 – 4
A. SIGNIFICANT ACCOUNTING POLICIES A1. BASIS OF PREPARATION The consolidated financial statements for the year ended 31 December 2015 comprise the financial statements of Phoenix Group Holdings (‘the Company’) and its subsidiaries (together referred to as ‘the Group’).
The consolidated financial statements have been prepared on a going concern basis and on a historical cost basis except for investment property, owner-occupied property and those financial assets, financial liabilities and insurance and investment contracts with discretionary participation features (‘DPF’) that have been measured at fair value.
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: Ɛ power over the investee; Ɛ exposure, or rights, to variable returns from its involvement with the investee; and
Ɛ the ability to use its power over the investee to affect its returns.
The results and financial position of all Group companies that have a functional currency different from the presentation currency are translated into the presentation currency as follows: Ɛ assets and liabilities are translated at the closing rate at the period end; Ɛ income, expenses and cash flows denominated in foreign currencies are translated at average exchange rates; and
Ɛ all resulting exchange differences are recognised through the statement of consolidated comprehensive income.
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, impairment tests for intangible assets, income tax assets and liabilities and pension scheme assets and liabilities. The determination of operating profit requires management to make judgements, detail of which is included below at A3.6.
Deferred tax assets are recognised to the extent that they are regarded as recoverable, that is to the extent that, on the basis of all the available evidence, it can be regarded as more likely than not that there will be suitable taxable profits against which the losses can be relieved. Forecasts of future profitability are made which by their nature involve management’s judgement.
A4. ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS IN 2015 The consolidated financial statements for the year ended 31 December 2015, set out on pages 95 to 101, were authorised by the Board of Directors for issue on 22 March 2016.
Ɛ IFRS 15 Revenue from Contracts with Customers (2018). IFRS 15 establishes a single comprehensive framework for determining whether, how and when revenue is recognised. The standard does not apply to insurance contracts and the financial instruments within the scope of IAS 39. The Group anticipates that the application of IFRS 15 in the future is likely to have limited impact on the measurement and presentation of amounts reported in respect of the Group’s financial statements.
Ɛ Clarification of Acceptable Methods of Depreciation and Amortisation (Amendments to IAS 16 and IAS 38) (2016).
Ɛ IFRS 16 Leases (2019). IFRS 16 will replace IAS 17 Leases. The new standard removes the classification of leases as either operating or finance leases for the lessee, thereby treating all leases as finance leases. This will result in the recognition of a right-to use asset and a lease liability for all of the Group’s previously classified operating leases. Short-term leases (less than 12 months) and leases of low-value assets are exempt from the requirements. The Group anticipates that the application of IFRS 16 in the future is likely to have limited impact on amounts reported in respect of the Group’s financial statements.
The Group defines and presents operating segments based on the information which is provided to the Board, and therefore segmental information in this note is presented on a different basis from profit or loss in the consolidated financial statements.
For management purposes, the Group is organised into business units based on their products and services and only has the Phoenix Life operating segment during the reporting period. In the comparative period, the Group had two operating segments as follows: Ɛ Phoenix Life – this segment provides a range of whole life, term assurance and pension products; and
Ɛ Ignis – this segment provided investment management services to the life companies within the Group and to third parties, covering both retail and institutional investors. The segment has been disposed of effective from 1 July 2014 (see note I1.1).
Gain on transfer of business (18) – 129 – (107) 4
Amortisation of customer relationships and other intangibles (15) – – – – (15)
Ɛ 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 Group’s financial performance.
Segmental result before the tax attributable to owners 309 11 96 416
Non-recurring items include: Ɛ income received in relation to the close-out of the PGL Pension Scheme longevity agreement with the with-profit funds of £68 million (see note G6.2); Ɛ the profit arising as a result of the divestment of Ignis of £107 million (see note I1.1); Ɛ costs associated with external regulatory changes, including the cap on workplace pension charges of £17 million; Ɛ corporate project costs of £15 million; and
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 B1.2. 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 expected return on investments for both owner and policyholder funds is based on opening economic assumptions applied to the funds under management at the beginning of the reporting period. Expected investment return assumptions are derived actively, based on market yields on risk-free fixed interest assets at the start of each financial year. The long-term risk-free rate is defined as the annualised return on the FTSE UK Gilt Index plus 10bps. A risk premium of 300bps is added to the risk-free yield for equities, 200bps for properties and 100bps for other fixed interest assets, to obtain investment return assumptions.
The investment return variances and economic assumption changes excluded from the long-term business operating profit are as follows: 2015 £m 2014 £m
Investment return variances and economic assumption changes on long-term business 13 12
For non-long-term business including owners’ funds, the total investment income, including fair value gains, is analysed between a calculated longer-term return and short-term fluctuations.
The variances excluded from operating profit in relation to owners’ funds are as follows: 2015 £m 2014 £m
Diluted earnings per share are calculated based on the potential future shares in issue assuming the conversion of all potentially dilutive ordinary shares. The weighted average number of ordinary shares in issue is adjusted to assume conversion of dilutive share awards granted to employees and warrants.
Analysed as: Profit attributable to owners of the parent from continuing operations 201 218
The weighted average number of ordinary shares outstanding during the period is calculated as follows: 2015 Number million million
Basic earnings per share is as follows: 2015 pence 2014 pence
The result attributable to owners for the parent used in the calculation of diluted earnings per share is the same as that used in the basic earnings per share calculation in B3.1 above. The diluted weighted average number of ordinary shares outstanding during the period is 225 million (2014: 225 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 490,276 shares for the year ended 31 December 2015 (2014: 465,256).
Diluted earnings per share is as follows: 2015 pence 2014 pence
The following instruments could potentially dilute basic earnings per share in the future but have not been included in the diluted earnings per share figure because they did not have a dilutive effect for the periods presented due to the exercise price being significantly higher than the share price of the Company: Ɛ 5 million warrants issued to certain entities providing finance to the Group on 2 September 2009.
Final dividends on ordinary shares are recognised as a liability and deducted from equity when they are approved by the Group’s owners. Interim dividends are deducted from equity when they are paid.
On 17 March 2015, the Board recommended a final dividend of 26.7p per share in respect of the year ended 31 December 2014. The dividend was approved at the Company’s Annual General Meeting, which was held on 23 April 2015. The dividend amounted to £60 million and was paid on 27 April 2015.
C3. AUDITOR’S REMUNERATION During the year the Group obtained the following services from its auditor at costs as detailed in the table below.
On financial liabilities at fair value through profit or loss 14 15
C5.2 Tax charged/(credited) to other comprehensive income 2015 £m 2014 £m
Tax at standard UK1 rate of 20.25% (2014: 21.5%) 37 72
Movement on acquired in-force amortisation at less than 20.25% (2014: 21.5%) 15 2
Total tax (credit)/charge for the period (97) 151 1 The Phoenix Life operating segment operates predominantly in the UK. The reconciliation of the tax (credit)/charge has, therefore, been completed by reference to the standard rate of UK tax rather than by reference to the Jersey income tax rate of 0% which is applicable to Phoenix Group Holdings.
Issued and fully paid: 225.4 million (2014: 225.1 million) ordinary shares of €0.0001 each 18,444 18,439
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:
D2. SHARES HELD BY THE EMPLOYEE BENEFIT TRUST AND GROUP ENTITIES
During the year 1,398,290 (2014: 1,478,921) shares were awarded to employees by the PGH EBT and 735,068 (2014: 1,200,000) shares were purchased. The number of shares held by the PGH EBT at 31 December 2015 was 587,334 (2014: 1,250,556).
The Company provides the PGH EBT with an interest-free facility arrangement to enable it to purchase the shares. Details of this loan are included in note 9 to the parent company accounts.
Non-controlling interests are stated at the share of net assets attributed to the non-controlling interest holder at the time of acquisition, adjusted or the relevant share of subsequent changes in equity.
The outstanding Notes have no fixed maturity date and coupon payments may be deferred at the option of PGH1; accordingly the Notes meet the definition of equity for financial reporting purposes and are disclosed as a non-controlling interest in the consolidated financial statements.
As at 31 December 2015 the Group held 50% (2014: 53%) of the issued share capital of UKCPT. The Group’s interest in UKCPT is held in the with-profit funds of the Group’s life companies. Therefore, the shareholder exposure to the results of UKCPT is limited to the impact of those results on the shareholder share of distributed profits of the relevant fund.
On initial recognition, financial liabilities are recognised when due and measured at the fair value of the consideration received less directly attributable transaction costs (with the exception of liabilities at fair value through profit or loss for which all transaction costs are expensed).
Financial liabilities are designated upon initial recognition at fair value through profit or loss and where doing so results in more meaningful information because either: Ɛ it eliminates or significantly reduces accounting mismatches that would otherwise arise from measuring assets or liabilities or recognising the gains and losses on them on different bases; or
The table below sets out a comparison of the carrying amounts and fair values of financial instruments as at 31 December 2015: Carrying value
Less amounts classified as held for sale (see note I1.2) (149) – (149)
Total financial liabilities 17,486 16,864 1 These assets and liabilities have no expected settlement date. 2 These liabilities have no expected settlement date. As the obligations relate to the repayment of collateral received in the form of cash, the liability is stated at the value of the consideration received and therefore no fair value has been disclosed.
Financial assets designated at fair value through profit or loss upon initial recognition: Loans and receivables – – 268 268
Total financial liabilities measured at fair value 4,699 10,602 185 15,486
Total financial liabilities for which fair values are disclosed – 961 1,145 2,106
The investment is valued by taking the fair value of the equity holdings in the structure, using market data less a discount spread to reflect reduced liquidity due to redemption restrictions. The fair value of the debt in the structure is valued using a simple calculation model taking a comparable overseas bond issue and applying a credit spread to reflect reduced liquidity.
The valuation of the debt investment is sensitive to a change in the credit spread whereby an increase of 100bps in the credit spread would decrease the value by £1 million and a spread reduction of 100bps would increase the value by £1 million. The valuation of the equity investment is sensitive to changes in the equity discount rate, whereby an increase of 5% in the discount spread would decrease the value by £2 million and a 5% reduction would increase the value by £1 million.
An increase of 100bps in the gilt curve would decrease the value by £22 million and a decrease of 100bps would increase the value by £25 million. An increase of 1% in the inflation rate would increase the value by £2 million and a decrease of 1% would decrease the value by £3 million. An increase of 10% in house prices would increase the value by £1 million and a decrease of 10% would decrease the value by £1 million.
Financial assets designated at fair value through profit or loss upon initial recognition: Fixed and variable rate income securities 173 210
Financial assets designated at fair value through profit or loss upon initial recognition: Fixed and variable rate income securities 167 372
The application of the Group’s fair value hierarchy classification methodology at an individual security level, in particular observations with regard to measures of market depth and bid-ask spreads, have resulted in an overall net movement of financial assets from Level 2 to Level 1 in the current and comparative periods.
Financial assets designated at fair value through profit or loss upon initial recognition: Investment in joint venture 133 16 – – – – 149 16
Fixed and variable rate income securities 935 57 427 (502) 8 (190) 735 19
The Group purchases derivative financial instruments in connection with the management of its insurance contract and investment contract liabilities based on the principles of reduction of risk and efficient portfolio management. The Group does not typically hold derivatives for the purpose of selling or repurchasing in the near term or with the objective of generating a profit from short-term fluctuations in price or margin.
The fair values of derivative financial instruments are as follows: £m £m £m £m
The value of the warrants at the year end was £100,000 (2014: £200,000).
The Group has no financial assets and financial liabilities that have been offset in the statement of consolidated financial position as at 31 December 2015 (2014: none).
The maximum exposure to credit risk in respect of OTC derivative assets is £1,483 million (2014: £2,540 million) of which credit risk of £1,408 million (2014: £2,353 million) is mitigated by use of collateral arrangements (which are settled net after taking account of any OTC derivative liabilities owed to the counterparty).
Credit risk on exchange traded derivative assets of £15 million (2014: £18 million) is mitigated through regular margining and the protection offered by the exchange.
Certain of the Group’s consolidated collective investment schemes lend financial assets held in their investment portfolios to other institutions.
The consolidated collective investment schemes conduct stock lending only with well-established, reputable institutions in accordance with established market conventions. The financial assets do not qualify for derecognition as the Group retains all the risks and rewards of the transferred assets except for the voting rights.
The fair value of financial assets accepted as such collateral but not recognised in the statement of financial position amounts to £272 million (2014: £152 million).
No collateral has been accepted in the form of cash as at 31 December 2015 (2014: £3 million).
The maximum exposure to credit risk in respect of stock lending transactions is £254 million (2014: £143 million) of which credit risk of £254 million (2014: £143 million) is mitigated through the use of collateral arrangements.
In November 2014, the Group entered into agreements to sell securities in the form of UK Treasury Stocks to another party with an agreement to repurchase these stocks at an agreed date and price in the future. This arrangement was wound down during 2015 and no related balances are recognised in the statement of consolidated financial position at 31 December 2015.
The repurchase arrangement was in substance a short-term collateralised cash loan with the securities being used as collateral. These arrangements were completed only with well-established, reputable institutions in accordance with established market conventions.
The maximum exposure to credit risk in respect of these repurchase transactions as at 31 December 2014 was £84 million and this was fully mitigated through the use of collateral arrangements.
Borrowings are classified as either policyholder or shareholder borrowings. Policyholder borrowings are those attributable to with-profit operations and are held by the with-profit funds. Shareholder exposure to these borrowings is limited to their participation in these with-profit funds.
c. In 2008, UKCPT entered into an £80 million revolving loan facility agreement. This loan accrues interest at LIBOR plus a variable margin of 0.50% to 0.60% per annum. The lender holds a floating charge over certain assets of UKCPT and its subsidiaries. This facility was due for repayment on 19 June 2015 and was refinanced on 2 April 2015 (see note e).
d. On 19 May 2011, UKCPT entered into a £150 million investment term loan facility agreement. The £150 million investment term loan facility agreement accrued interest at LIBOR plus a variable margin of 1.60% to 2.00% per annum. The lender holds security over the assets of UK Commercial Property Estates Holdings Limited and UK Commercial Property Estates Limited, both of which are subsidiaries of UKCPT. On 8 April 2015, UKCPT amended the agreement, extending the repayment date to April 2020. The facility now accrues interest at LIBOR plus a margin of 1.50% per annum. The amendment includes the provision of a five year additional revolving credit facility of up to £50 million. As at 31 December 2015, the main facility was fully drawn down (2014: Fully drawn down) and the additional facility had not been drawn down.
e. On 2 April 2015, UK Commercial Property Finance Holdings Limited, a wholly-owned subsidiary of UKCPT, entered into a new £100 million 12-year fixed rate term loan facility agreement with Cornerstone Real Estate Advisers Europe LLP. This facility accrues interest at a rate of 3.03% per annum. The lender holds security over the assets of the UK Commercial Property Finance Holdings Limited and a further subsidiary of UKCPT. As at 31 December 2015, the facility was fully drawn down.
f. Scottish Mutual Assurance Limited issued £200 million 7.25% undated, unsecured subordinated loan notes on 23 July 2001 (‘PLL subordinated debt’). The earliest repayment date of the notes is 25 March 2021 and thereafter on each fifth anniversary so long as the notes are outstanding. With effect from 1 January 2009, as a part of a Part VII transfer, these loan notes were transferred into the shareholder fund of PLL. In the event of the winding-up of PLL, the right of payment under the notes is subordinated to the rights of the higher-ranking creditors (principally policyholders). As a result of the acquisition of the Phoenix Life businesses in 2009, these subordinated loan notes were acquired at their fair value and as such, the outstanding principal of these subordinated loan notes differs from the carrying value in the statement of consolidated financial position. The fair value adjustments, which were recognised on acquisition, will unwind over the remaining life of these subordinated loan notes.
g. On 7 July 2014, the Group’s financing subsidiary, PGH Capital Limited, issued a £300 million 7 year senior unsecured bond at an annual coupon rate of 5.75% (‘PGH Capital senior bond’). The senior bond is subject to guarantee by the Company.
h. On 23 July 2014, PGH Capital Limited entered into a £900 million 5 year unsecured bank facility (‘PGH Capital facility’). The facility comprises a £450 million revolving credit facility (‘RCF’) loan and a £450 million amortising term loan of which £200 million remained outstanding at 31 December 2015. Both loans are guaranteed by the Company and are repayable by July 2019 with an option to request an extension to the term of the RCF loan by two years to July 2021. Further terms of the facilities agreement include: (i) term facility repayment instalments of £30 million are due semiannually on 30 June and 31 December each year. Additional target repayments of £30 million may be paid semi-annually on 30 June and 31 December each year, non-payment of which would trigger restrictions on the Group regarding the declaration of dividends; (ii) the term loan and RCF loan bear interest at LIBOR plus a margin which changes in accordance with a margin ratchet which operates by reference to the Group’s gearing ratio. As at 31 December 2015 the margin on the term loan was 2.625% and the margin on the RCF loan was 2.375%; and
(iii) amongst other fees, a utilisation fee of 0.25% p.a. is payable in respect of the RCF loan for so long as the amount outstanding under the RCF exceeds 50% of the total commitments of the RCF loan.
The use of financial instruments naturally exposes the Group to the risks associated with them, mainly, market risk, credit risk and financial soundness risk.
There are two principal sources of credit risk for the Group: Ɛ credit risk which results from direct investment activities, including investments in fixed and variable rate income securities, derivatives, collective investment schemes and the placing of cash deposits; and
The Group holds £3,942 million (2014: £3,589 million) of corporate bonds which are used to back annuity liabilities in non-profit funds. These annuity liabilities include an aggregate credit default provision of £214 million (2014: £266 million) to fund against the risk of default.
A 100bps narrowing of credit spreads, with all other variables held constant and no change in assumed expected defaults, would result in an increase in the profit after tax in respect of a full financial year, and in equity, of £62 million (2014: £102 million).
Quality of credit assets An indication of the Group’s exposure to credit risk is the quality of the investments and counterparties with which it transacts. The following table provides information regarding the aggregate credit exposure split by credit rating: AAA £m
Fixed and variable rate income securities 4,777 17,184 6,824 4,065 529 505 441 59 34,384
Reinsurers’ share of insurance contract liabilities – 631 2,138 2 – – 1 – 2,772
Reinsurers’ share of insurance contract liabilities 2,772 – – – – – 2,772
Cash and cash equivalents 4,962 – – – – 105 5,067
Please refer to pages 199 to 205 for additional life company asset disclosures which include the life companies’ exposure to peripheral Eurozone debt securities. Peripheral Eurozone is defined as Portugal, Spain, Italy, Ireland and Greece. The Group’s exposure to peripheral Eurozone debt continues to be relatively small compared to total assets.
Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market influences. Market risk comprises interest rate risk, currency risk and other price risk (comprising equity risk, property risk, inflation risk and alternative asset class risk).
Ɛ the income flow of management charges from the invested assets of the business.
Ɛ monitoring of compliance with market risk policy and review of market risk policy for pertinence to the changing environment.
Interest rate risk Interest rate risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate relative to the respective liability due to the impact of changes in market interest rates on the value of interest-bearing assets and on the value of future guarantees provided under certain contracts of insurance.
A decrease of 1% in interest rates, with all other variables held constant, would result in an increase in profit after tax in respect of a full financial year, and in equity, of £89 million (2014: a decrease of £52 million).
A 10% decrease in property prices, with all other variables held constant, would result in a decrease in the profit after tax in respect of a full financial year, and in equity, of £21 million (2014: a decrease of £27 million).
Sensitivity of profit after tax and equity to fluctuations in currency exchange rates is not considered significant at 31 December 2015, since unhedged exposure to foreign currency was relatively low (2014: not considered significant).
Capital management risk is defined as the failure of the Group, or one of its separately regulated subsidiaries, to maintain sufficient capital to provide appropriate security for policyholders and meet all regulatory capital requirements whilst not retaining unnecessary capital. The PLHL Group has exposure to capital management risk through the requirements of the new Solvency II capital regime, as implemented by the PRA, to calculate regulatory capital adequacy at a Group level. The Group’s UK life subsidiaries have exposure to capital management risk through the Solvency II regulatory capital requirements mandated by the PRA at the solo level. The Group’s approach to managing capital management risk is described in detail in note I4.
Tax risk is defined as the risk of financial or reputational loss arising from a lack of liquidity, funding or capital due to an unforeseen tax cost, or by the inappropriate reporting and disclosure of information in relation to taxation. Tax risk is managed by maintaining an appropriately-staffed tax team who have the qualifications and experience to make judgements on tax issues, augmented by advice from external specialists where required. The Group has a formal tax risk policy, which sets out its risk appetite in relation to specific aspects of tax risk, and which details the controls the Group has in place to manage those risks. These controls are subject to a regular review process. The Group’s subsidiaries have exposure to tax risk through the annual statutory and regulatory reporting and through the processing of policyholder tax requirements.
Net asset value attributable to unitholders 4,659 – – – 4,659
Other payables 360 – – – 360 1 These financial liabilities are disclosed at their undiscounted value and therefore differ to the statement of consolidated financial position which discloses the discounted value.
In extreme circumstances, the Group could be exposed to liquidity risk in its unit-linked funds. This could occur where a high volume of surrenders coincides with a tightening of liquidity in a unit-linked fund to the point where assets of that fund have to be sold to meet those withdrawals. Where the fund affected consists of property, it can take several months to complete a sale and this would impede the proper operation of the fund. In these situations, the Group considers its risk to be low since there are steps that can be taken first within the funds themselves both to ensure the fair treatment of all investors in those funds and to protect the Group’s own risk exposure.
Contracts under which the Group accepts significant insurance risk are classified as insurance contracts.
Under current IFRS requirements the Group’s insurance contracts and investment contracts with DPF are measured using accounting policies consistent with those previously adopted under UK GAAP. Amounts recoverable from reinsurers are estimated in a manner consistent with the outstanding claims provision or settled claims associated with the reinsured policy.
Insurance liabilities Insurance contract liabilities for non-participating business, other than unit-linked insurance contracts, are calculated on the basis of current data and assumptions, using either a net premium or gross premium method. Where a gross premium method is used, the liability includes allowance for prudent lapses. Negative policy values are allowed for on individual policies: Ɛ where there are no guaranteed surrender values; or
For participating business, the liabilities under insurance contracts and investment contracts with DPF are calculated in accordance with the following methodology: Ɛ liabilities to policyholders arising from the with-profit business are stated at the amount of the realistic value of the liabilities, adjusted to exclude the owners’ share of projected future bonuses; Ɛ acquisition costs are not deferred; and
Embedded derivatives Embedded derivatives, including options to surrender insurance contracts, that meet the definition of insurance contracts or are closely related to the host insurance contract, are not separately measured. All other embedded derivatives are separated from the host contract and measured at fair value through profit or loss.
Gross premiums In respect of insurance contracts and investment contracts with DPF, premiums are accounted for on a receivable basis and exclude any taxes or duties based on premiums. Funds at retirement under individual pension contracts converted to annuities with the Group are, for accounting purposes, included in both claims incurred and premiums within gross premiums written.
The table below shows a summary of the liabilities under insurance contracts and the related reinsurers’ share included within assets in the statement of consolidated financial position.
Amounts due for settlement after 12 months 37,337 3,909 39,636 2,705
Amounts classified as held for sale at 1 January 1,776 1,713 – –
F2. UNALLOCATED SURPLUS The unallocated surplus comprises the excess of the assets over the policyholder liabilities of the with-profit business of the Group’s life operations. For the Group’s with-profit funds this represents amounts which have yet to be allocated to owners since the unallocated surplus attributable to policyholders has been included within liabilities under insurance contracts.
Premiums ceded to reinsurers during the period were £1,376 million (2014: £1,792 million).
On 31 July 2014, the Group entered into a business transfer agreement with Guardian Assurance Limited (‘Guardian’) (see note I1.2). The transfer has been initially effected under a reinsurance agreement effective from 1 January 2014.
It is the Group’s practice to obtain collateral to mitigate the counterparty risk related to reinsurance transactions usually in the form of cash or marketable financial instruments.
Where the Group receives collateral in the form of marketable financial instruments which it is not permitted to sell or re-pledge except in the case of default, it is not recognised in the statement of consolidated financial position. The fair value of financial assets accepted as collateral for reinsurance transactions but not recognised in the statement of consolidated financial position amounts to £4,909 million (2014: £3,829 million). The increase is largely driven by the reinsurance agreement entered into with RGA International during the period over certain portfolios of the Group’s annuity liabilities (see note F3.1).
An increase of 5% in assurance mortality, with all other variables held constant, would result in a decrease in the profit after tax in respect of a full year, and a decrease in equity of £12 million (2014: £14 million).
An increase of 5% in annuitant longevity, with all other variables held constant, would result in a decrease in the profit after tax in respect of a full year, and a decrease in equity of £99 million (2014: £135 million).
Process used to determine assumptions For participating business in realistic basis companies the assumptions about future demographic trends are intended to be ‘best estimates’. They are determined after considering the companies’ recent experience and/or relevant industry data. Economic assumptions are market consistent.
During the year a number of changes were made to assumptions to reflect changes in expected experience or to harmonise the approach across the enlarged Group. The impact of material changes during the year was as follows: (Decrease)/ increase in insurance liabilities 2015 £m
Valuation interest rates (after tax for life policies) are typically in the following ranges: %
In common with other life companies in the UK which have written pension transfer and opt-out business, the Group has set up provisions for the review and possible redress relating to personal pension policies. These provisions, which have been calculated from data derived from detailed file reviews of specific cases and using a certainty equivalent approach, which give a result very similar to a market consistent valuation, are included in liabilities arising under insurance contracts. The total amount provided in the with-profit funds and non-profit funds in respect of the review and possible redress relating to pension policies, including associated costs, are £254 million (2014: £284 million) and £14 million (2014: £15 million) respectively.
The tables above exclude insurance contract liabilities and related reinsurer’s share of insurance contract liabilities classified as held for sale at 31 December 2015 and 31 December 2014.
The Group seeks to manage this risk in accordance with both the terms of the issued policies and the interests of customers, and has obtained external advice supporting the manner in which it operates the longterm funds in this respect.
The pricing assumption for mortality risk is based on both historic internal information and externally-generated information on mortality experience, including allowances for future mortality improvements. Pricing will also include a contingency margin for adverse deviations in assumptions.
A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised.
Discontinued operations disposed of during the year £m 31 December £m
Expenses and deferred acquisition costs carried forward 37 (35) – – 2
Deferred tax assets have not been recognised in respect of: Tax losses carried forward 16 39
Other payables are recognised when due and are measured on initial recognition at the fair value of the consideration payable. Subsequent to initial recognition, these payables are measured at amortised cost using the effective interest rate method.
The economic surplus or deficit is subsequently adjusted to eliminate on consolidation the carrying value of insurance policies issued by Group entities to the defined benefit pension schemes (the reported surplus or deficit). A corresponding adjustment is made to the carrying values of insurance contract liabilities and investment contract liabilities.
This note describes the Group’s two main staff pension schemes for its employees, the Pearl Group Staff Pension Scheme and the PGL Pension Scheme and explains how the pension asset/liability is calculated.
An analysis of the defined benefit asset for each pension scheme is set out below: £m £m
Economic surplus (including £570 million (2014: £526 million) available as a refund on a winding-up of the Scheme) 631 590
Funding A triennial funding valuation of the Pearl Scheme as at 30 June 2012 was completed in May 2013. This showed a deficit as at 30 June 2012 of £480 million, on the agreed technical provisions basis.
Remeasurements: Return on plan assets excluding amounts included in interest income (85) – – – (85)
Gain from changes in financial assumptions – 55 – – 55
Change in provision for tax on economic surplus available as a refund – – (18) – (18)
Remeasurements: Return on plan assets excluding amounts included in interest income 360 – – – 360
Loss from changes in financial assumptions – (195) – – (195)
Change in provision for tax on economic surplus available as a refund – – (76) – (76)
Change in minimum funding requirement obligation – – – 2 2
Defined benefit obligation The calculation of the defined benefit obligation can be allocated to the scheme’s members as follows: Ɛ deferred scheme members: 40% (2014: 40%)
In accordance with an agreement dated November 2005, certain of the Group’s with-profit funds indemnified the shareholders in respect of contribution calls equal to their share of the costs of changes in longevity assumptions. In January 2014, PGH1 received £8 million under this agreement. In June 2014, PGH1 and Phoenix Life Limited (‘PLL’) entered into an agreement whereby in exchange for a payment by the PLL with-profit funds to PGH1 of £68 million, PGH1 released the with-profit funds from any future obligations to indemnify the company. On the same date, the PLL non-profit fund entered into a longevity swap with the PGL Pension Scheme with effect from 1 January 2014, under which the scheme has transferred the risk of longevity improvements to PLL. The financial effect of this contract is eliminated on consolidation.
Remeasurements: Return on plan assets excluding amounts included in interest income (40) – – – (40)
Change in provision for tax on economic surplus available as a refund – – (9) – (9)
Remeasurements: Return on plan assets excluding amounts included in interest income 277 – – – 277
Loss from change in financial assumptions – (143) – – (143)
Change in minimum funding requirement obligation – – – 6 6
Plan assets previously eliminated on consolidation 74 – – – 74
Fixed interest gilts 930 – 1,570 – Index-linked bonds 984 – 373 –
The actual return on plan assets was £33 million (2014: £353 million).
The Group ensures that the investment positions are managed within an asset liability matching (ALM) framework that has been developed to achieve long-term investments that are in line with the obligations under the pension scheme. Within this framework an allocation of 85% of the scheme assets is invested in a combination of supranational debt and a liability hedging portfolio. The Liability Driven Investment (‘LDI’) portfolio is passively managed against a liability benchmark in order to hedge the duration and inflation risks.
Principal assumptions The principal financial assumptions of the PGL Pension Scheme are set out in the table below: Rate of increase for pensions in payment (7.5% per annum or RPI if lower) 3.10 3.00 Rate of increase for deferred pensions (‘CPI’) 2.05 2.00 Discount rate 3.85 3.65 Inflation – RPI 3.05 3.00 Inflation – CPI 2.05 2.00
A quantitative sensitivity analysis for significant actuarial assumptions as at 31 December 2015 is shown below: Assumptions Base Discount rate RPI Life expectancy
Impact on the defined benefit obligation (£m) 1,397 (54) 57 37 (39) 46 (46)
Insurance and investment contracts with and without DPF acquired in business combinations and portfolio transfers are measured at fair value at the time of acquisition. The difference between the fair value of the contractual rights acquired and obligations assumed and the liability measured in accordance with the Group’s accounting policies for such contracts is recognised as acquired in-force business.
Intangible assets include vesting pension premiums and investment management contracts. These are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination is their fair value as at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and any accumulated impairment losses. Internally generated intangible assets are not capitalised and expenditure is reflected in the consolidated income statement in the year in which the expenditure is incurred.
Discontinued operations disposed of during the year (57) – (151) – (208)
The carrying amount of goodwill allocated to the Phoenix Life segment is £39 million (2014: £39 million).
The new UK legislation on pension freedoms that came into force in April 2015 is expected to impact the level of future annuity business written by the Group. This is considered to be an indicator of impairment for the Group’s vesting pension premiums intangible and as a result an impairment test was carried out during the year.
The impairment test was carried out using assumptions which management consider reasonable. However, given the limited experience available to date since the implementation of the pension freedoms, there remains considerable uncertainty as to the long-term impact on policyholder behaviour of the changes to the annuities rules. Were actual experience with regard to the take-up rates and profit margins for annuity business to differ significantly from management’s current best estimate assumptions, there is a potential for the carrying value of the intangible to exceed the value in use.
Owner-occupied property is stated at its revalued amount, being its fair value at the date of the revaluation less any subsequent accumulated depreciation and impairment. Owner-occupied property is depreciated over its estimated useful life, which is taken as 50 years. Land is not depreciated. Gains and losses on owneroccupied property are recognised in the statement of consolidated comprehensive income.
Jones Lang Lasalle, an accredited independent valuer, completed a valuation of owner-occupied property at 31 December 2015 on an open market basis in accordance with the Royal Institution of Chartered Surveyors’ requirements, which is deemed to equate to fair value. The fair value measurement for the property of £19 million has been categorised as a Level 3 fair value based on the non-observable inputs to the valuation technique used.
Gains on adjustments to fair value (recognised in profit and loss) 140 200
Unrealised gains on properties held at end of period 120 194
The property portfolio consists of a mix of commercial sectors, held by the life companies, £420 million (2014: £407 million), and by the UK Commercial Property Trust, £1,312 million (2014: £1,265 million). The portfolio is spread geographically throughout the UK. Investment properties also include £210 million (2014: £186 million) of property reversions arising from sales of the NPI Extra Income Plan (see note E5 for further details).
The fair value measurement of the investment properties has been categorised as a Level 3 fair value based on the inputs to the valuation techniques used. The following table shows the valuation techniques used in measuring the fair value of the investment properties, the significant non-observable inputs used, the inter-relationship between the key non-observable inputs and the fair value measurement of the investment properties: Description Valuation techniques Significant non-observable inputs Range (weighted average)
RICS valuation Expected income per sq. ft. £4.65 – £149.21 (£31.87)
Yield methodology Expected income per sq. ft. Retail: £3 – £324 (£67)
Ɛ a decrease of 1% in the discount rate would increase the fair value by £11 million.
Direct operating expenses (offset against rental income in the income statement) in respect of investment properties that generated rental income during the year amounted to £5 million (2014: £5 million). The direct operating expenses arising from investment property that did not generate rental income during the year amounted to £3 million (2014: £2 million).
Investment broker balances 73 98 Cash collateral pledged 327 597 Other debtors 74 55
Subsidiary undertakings are consolidated from the date that effective control is obtained by the Group (see basis of consolidation in note A1) and are excluded from consolidation from the date they cease to be subsidiary undertakings. For subsidiary undertakings disposed of during the year, any difference between the net proceeds, plus the fair value of any retained interest, and the carrying amount of the subsidiary undertaking including non-controlling interests, is recognised in the consolidated income statement.
Ɛ where the investee is managed by the Group’s fund manager, and the Group holds a significant investment in the investee. It is generally presumed that the Group has rights to variable returns and has the ability to use its power to affect its returns where the Group’s holding is greater than 50%. For holdings between 25% and 50% the Group performs an assessment of power and associated control on a case by case basis. This assessment includes establishing the nature of the decision making rights that the fund manager has over the investee and whether these rights give it the power to control the investee.
H2. STRUCTURED ENTITIES A structured entity is an entity that has been designed so that voting or similar rights are not the dominant factor in deciding who controls the entity, such as when any voting rights relate to administrative tasks only, and the relevant activities are directed by means of contractual arrangements. A structured entity often has some or all of the following features or attributes: (a) restricted activities; (b) a narrow and welldefined objective, such as to provide investment opportunities for investors by passing on risks and rewards associated with the assets of the structured entity to investors; (c) insufficient equity to permit the structured entity to finance its activities without subordinated financial support; and (d) financing in the form of multiple contractually linked instruments to investors that create concentrations of credit or other risks (tranches).
As at the reporting date the Group has no intention to provide financial or other support in relation to any consolidated structured entity.
PGH (MC1) Limited (Finance company) Ordinary shares 100.00% PGH (MC2) Limited (Finance company) Ordinary shares 100.00% PGH (TC1) Limited (Holding company)2 Ordinary shares 100.00% PGH (TC2) Limited (Holding company)2 Ordinary shares 100.00% Pearl Group Holdings (No. 1) Limited (Finance company) Ordinary shares 100.00% Pearl Group Holdings (No. 2) Limited (Holding company) Ordinary shares 100.00% Pearl Life Holdings Limited (Holding company) Ordinary shares 100.00% Pearl Group Services Limited (Management services company) Ordinary shares 100.00% Pearl Group Management Services Limited (Management services company)
Phoenix Life Holdings Limited (Holding company) Ordinary shares 100.00% PGMS (Ireland) Limited (Management services company) Republic of
PA (GI) Limited (Non-trading company) Ordinary shares 100.00% Phoenix Customer Care Limited (Financial services company) Ordinary shares 100.00% Britannic Finance Limited (Finance and insurance services company)
Impala Loan Company 1 Limited (Investment company) Ordinary shares 100.00% SMA (Jersey) Limited (Investment company) Jersey Ordinary shares 100.00% ILC1 (Jersey) Limited (Investment company) Jersey Ordinary shares 100.00% PGH1 (Jersey) Limited (Investment company) Jersey Ordinary shares 100.00% IH (Jersey) Limited (Investment company) Jersey Ordinary shares 100.00% Pearl Assurance Group Holdings Limited (Investment company) Ordinary shares 100.00% PGMS (Ireland) Holdings (Holding company) Republic of
PGMS (Glasgow) Limited (Investment company) Ordinary shares 100.00% Phoenix SCP Pensions Trustees Limited (Trustee company) Ordinary shares 100.00% Phoenix SCP Trustees Limited (Trustee company) Ordinary shares 100.00% PGS2 Limited (Investment company) Ordinary shares 100.00% Century Group Limited (Investment company) Ordinary shares 100.00% Pearl RLH Limited (Investment holding company) Ordinary shares 100.00% SPL (Holdings) Limited (Investment holding company) Ordinary shares 100.00% Alcobendas Entrust Limited (Investment company) Ordinary shares 100.00% Scottish Mutual Pension Funds Investment Limited (Trustee company)
Phoenix & London Assurance Limited (Dormant company) Ordinary shares 100.00% Cityfournic (Dormant company) Ordinary shares 100.00% Phoenix Life Insurance Services Limited Ordinary shares 100.00% Scottish Mutual International Holdings (Holding company) Republic of
Bellevale Properties Limited (Holding company) Gibraltar Ordinary shares 100.00% Pearl Breakfast Unit Trust (Jersey Property Unit Trust) Jersey Units 100.00% Pearl (Martineau Phase 2) Limited (Dormant company) Ordinary shares 100.00% Pearl MG Birmingham Limited (Dormant company) Ordinary shares 100.00% The Pearl Martineau Galleries Limited Partnership (Dormant) Limited Partnership 100.00% Pearl (Martineau Phase 1) Limited (Dormant company) Ordinary shares 100.00% Pearl MP Birmingham Limited (Dormant company) Ordinary shares 100.00% The Pearl Martineau Limited Partnership (Dormant company) Limited Partnership 100.00% Pearl (Moor House 1) Limited (Dormant company) Ordinary shares 100.00% Pearl (Moor House 2) Limited (Dormant company) Ordinary shares 100.00% Pearl (Moor House) Limited (Dormant company) Ordinary shares 100.00% UK Commercial Property Trust Limited (Property investment company)
UK Commercial Property GP Limited Guernsey Ordinary shares 50.02% UKCPT Limited Partnership Guernsey Limited Partnership 50.02%
Henderson Strategic Investment Funds – Henderson Institutional Japan Enhanced Equity Fund
PUTM European Unit Trust Wythall 4 Authorised unit trust 99.51% PUTM Far Eastern Unit Trust Wythall 4 Authorised unit trust 99.75% PUTM International Growth Unit Trust Wythall 4 Authorised unit trust 99.87% PUTM North American Unit Trust Wythall 4 Authorised unit trust 99.25% PUTM Opportunity Unit Trust Wythall 4 Authorised unit trust 100.00% PUTM UK Stock Market Fund (Series 3) Wythall 4 Authorised unit trust 99.76% PUTM UK Stock Market Fund Wythall 4 Authorised unit trust 100.00% PUTM UK Equity Unit Trust Wythall 4 Authorised unit trust 99.79% PUTM Growth Unit Trust Wythall 4 Authorised unit trust 100.00% Ignis Liquidity Fund Plc – Euro Liquidity Fund Dublin 5 OEIC, sub fund 100.00% Ignis Liquidity Fund Plc – Sterling Liquidity Fund Dublin 5 OEIC, sub fund 59.20% Ignis Liquidity Fund Plc – Sterling Short Duration Cash Fund Dublin 5 OEIC, sub fund 81.37% Ignis Strategic Solutions Funds Plc – Fundamental Strategies Fund Dublin 5 OEIC, sub fund 100.00% Ignis Strategic Solutions Funds Plc – Systematic Strategies Fund Dublin 5 OEIC, sub fund 100.00% Ignis Private Equity Fund LP Cayman Islands 6 Limited Partnership 100.00% Ignis Strategic Credit Fund LP Cayman Islands 6 Limited Partnership 100.00%
Joint ventures: The Tesco Property Limited Partnership (property joint venture) Limited Partnership 50.00% Tesco Property Partner (GP) Limited (property joint venture) Ordinary shares 50.00%
I. OTHER NOTES I1. DISCONTINUED OPERATIONS, ASSETS AND LIABILITIES HELD FOR SALE AND DISPOSALS
A discontinued operation is a component of the Group’s business, the operations and cash flows of which can be clearly distinguished from the rest of the Group and which: Ɛ represents a separate major line of business; and
Non-current assets or disposal groups are classified separately as held for sale in the statement of financial position when their carrying amount will be recovered through a sale transaction rather than through continuing use. This condition is met only when the sale is highly probable, the asset or disposal group is available for immediate sale in its present condition, and management is committed to the sale, which should be expected to qualify for recognition as a completed sale within one year from the date of classification. Liabilities directly associated with the assets classified as held for sale and expected to be included as part of the sale transaction are correspondingly also classified separately. The net assets and liabilities of a disposal group classified as held for sale are measured at the lower of their carrying amount and fair value less costs to sell.
On 25 March 2014, the Group and Standard Life Investments (Holdings) Limited (‘Standard Life Investments’) signed a disposal agreement under which Standard Life Investments agreed to acquire the entire issued share capital of Ignis in return for gross cash consideration of £390 million. The divestment was completed on 1 July 2014 and the results for the business have been included in the Ignis operating segment up to this date. A post completion payment of £6 million, calculated in accordance with the sale and purchase agreement, was paid to Standard Life Investments on 24 September 2014.
As part of the divestment, the Group agreed to a purchase price adjustment for a period of 10 years from the date of the divestment in the event that assets held by the life companies are withdrawn from management by Ignis Asset Management, other than for specific reasons such as poor investment performance or for material breaches of investment management contracts. In 2015 a liability of £2 million was recognised as due to Standard Life Investments in respect of assets no longer managed by Ignis Asset Management following the recapture of annuity liabilities from Opal Re, a subsidiary undertaking of the Company, and the subsequent reinsurance to RGA International. The expense has been recognised in the consolidated income statement in administrative expenses.
I1.1.1 Results of discontinued operations The results of Ignis are as follows: 2014 £m
The loss before tax for the year ended 31 December 2014 excludes intra-group fee income of £38 million. This intra-group fee income represents the difference between the result before tax for the period from discontinued operations (excluding the gain on disposal and attributable tax credit) and the Ignis segmental result before tax attributable to owners results shown in note B1.1 and reflects the income earned by Ignis on managed assets of the Group’s life companies.
The profit for the year ended 31 December 2014 from discontinued operations was entirely attributable to the owners of the parent.
Cash flows from operating activities 31 Cash flows from investing activities 311 Cash flows from financing activities (29) Net cash inflow 313
I1.1.3 Effect of disposal on the financial position of the Group £m
The balances transferred to assets and liabilities classified as held for sale in the statement of consolidated financial position as at 31 December 2015 relate to the anticipated Part VII transfer of a portfolio of annuity liabilities to Guardian and to the sale of the Pearl Breakfast Unit Trust. The balances as at 31 December 2014 relate to the anticipated Part VII transfer to Guardian.
Liabilities classified as held for sale: Liabilities under insurance contracts 1,587 1,776
Under the terms of this reinsurance agreement Guardian holds assets in a collateral account over which the Group has a fixed charge as disclosed in note F3.2.
The Group’s investment in the joint venture has therefore been classified as held for sale as at 31 December 2015.
On 2 December 2015, the Group completed the sale of its entire interest in SMI for gross cash consideration of £14 million following a precompletion return of capital by SMI. The carrying value of the net assets transferred was £1 million which excludes £11 million of recoverables under an intercompany reinsurance agreement that is eliminated on consolidation.
During the second half of 2015, the Group completed the disposal of its entire investment in the Sterling (Class A) loan notes of CHCOHL. No gain or loss arose on the disposal of the investment as the net assets of the structure were carried at fair value in the consolidated financial statements.
Equity-settled share-based payments to employees and others providing services are measured at the fair value of the equity instruments at the grant date. The fair value excludes the effect of non-market-based vesting conditions. Further details regarding the determination of the fair value of equity-settled share-based transactions are set below.
The expense recognised for employee services receivable during the year is as follows: 2015 £m 2014 £m
The 2015 LTIP awards were granted on 28 September 2015. The 2012 LTIP awards vested during the year. The 2013 award will vest on 15 November 2016, the 2014 award will vest on 26 March 2017 and the 2015 award will vest on 28 September 2018.
Sharesave scheme The sharesave scheme allows participating employees to save up to £250 each month over a period of either three or five years. This amount was increased to £500 each month with respect to the 2014 and 2015 sharesave schemes.
The 2010, 2011 and 2012 sharesave awards were increased during 2013 as a result of the equity raising on 21 February 2013. The exercise price of these awards were also amended as a result of the equity raising. The 2015 sharesave awards were granted on 21 April 2015.
Risk-free rate (%) – based on UK government gilts commensurate with the expected term of the award 0.8 (for 3.25 year scheme) and 1.2 (for 5.25 year scheme)
The weighted average fair value of options granted during the year was £6.93 (2014: £5.65).
Separate disclosure of the cash flows from operating activities generated by discontinued operations is provided in note I1.1.1.
The risk management objectives and policies of the Group are based on the requirement to protect the Group’s regulatory capital position, thereby safeguarding policyholders’ guaranteed benefits whilst also ensuring the Group can meet its various cash flow requirements. Subject to this, the Group seeks to use available capital to achieve increased returns, balancing risk and reward, to generate additional value for policyholders and shareholders.
The risk management disclosures in the consolidated financial statements set out the major risks that the Group businesses are exposed to and describe the Group’s approach to managing these. The section on financial risk is included in note E6, the section on insurance risk is included in note F4 and the sections on risk and capital management objectives and other risks are included below. The Group’s risk management framework is described in the risk management commentary on pages 34 to 39 of the Annual Report and Accounts.
Ɛ to meet the dividend expectations of shareholders as set by the Group’s dividend policy.
Capital resources The primary sources of capital used by the Group prior to 1 January 2016 comprised equity shareholder funds as measured on an MCEV basis, the Perpetual Reset Capital Securities and shareholder borrowings. This is analysed as follows: Notes £m £m
Total IFRS equity attributable to owners of the parent1 2,434 2,365
Adjustments between IFRS equity attributable to owners of the parent and MCEV net worth2 (1,863) (1,899)
Gross MCEV 4,105 4,408 1 As shown in the consolidated statement of financial position. 2 As detailed in the reconciliation of Group IFRS equity to MCEV net worth in the MCEV financial statements.
Further detail on the Group’s financial leverage calculation (unaudited) is provided in the business review on page 33.
UK Life companies Capital resources of the UK life companies comprise capital arising within their long-term fund, i.e. within the with-profit funds and non-participating funds; and capital arising outside their long-term fund. There are certain restrictions that operate over the capital in these funds which are summarised as follows: With-profit funds – any available surplus held in each fund can only be used to meet the requirements of the fund itself or be distributed to policyholders and owners. In 90:10 with-profit funds, policyholders are entitled to at least 90% of the distributed profits while owners receive the balance. In 100:0 with-profit funds, policyholders are entitled to 100% of the distributed profits.
Non-participating funds – any available surplus held in these funds is attributable to owners. Capital within the non-participating funds may be made available to meet capital requirements elsewhere in the Group subject to meeting regulatory and legal requirements, and after consideration of the internal capital requirements of the relevant fund and company.
Pillar 1 capital requirements The regulatory capital requirement under Pillar 1 for the Group’s UK life companies applicable until 31 December 2015 was the total amount held in respect of investment, expense and insurance risks (the ‘long-term insurance capital requirement’ (‘LTICR’)) and an additional amount in respect of with-profit funds which may result in an additional capital requirement referred to as the ‘with-profit insurance capital component’ (‘WPICC’).
Pillar 2 capital requirements The Pillar 2 capital requirements applicable until 31 December 2015 were based on a self-assessment methodology, called the ‘Individual Capital Assessment’ (‘ICA’). This methodology determined the capital requirement to ensure that the life company’s realistic liabilities could be met in one year’s time with a 99.5% confidence level, or in other words to be able to withstand a one in 200 year event. The PRA reviewed each life company’s ICA and could impose additional capital requirements if necessary in the form of ‘Individual Capital Guidance’ (‘ICG’).
The Group’s IGD assessment was made at the ultimate insurance parent undertaking within the EEA, which is PLHL. The assessment aggregated the capital resources of the UK life companies and insurance holding companies headquartered within the EEA and made adjustments to remove internal holdings and apply regulatory rules pertaining to the calculation. The result is compared with the aggregate regulatory Pillar 1 capital requirements (see below) to determine the overall surplus for the IGD measure of regulatory capital.
As at 31 December 2015, the unaudited estimated PLHL Group Capital Resources were £5.9 billion (2014: £5.6 billion) and the unaudited estimated PLHL Group IGD Surplus was £1.5 billion (2014: £1.2 billion).
Further detail of the PLHL IGD position (unaudited) is provided in the business review on page 31.
Further detail of the PLHL ICA position is provided in the business review (unaudited) on page 31.
Group Own Funds are assessed for their eligibility to cover the Group SCR with reference to both the quality of capital and its availability and transferability and restrictions are applied accordingly.
The unaudited estimated PLHL Solvency II surplus position at 1 January 2016 is set out below: Year ended 31 December £bn
Further details of the PLHL Solvency II excess (unaudited) is provided in the Financial performance section on page 32.
I5. RELATED PARTY TRANSACTIONS In the ordinary course of business, the Group and its subsidiaries carry out transactions with related parties as defined by IAS 24 Related party disclosures.
During the year, the Group entered into the following transactions with its pension schemes: £m
The Pearl Scheme has invested in collective investment schemes that are controlled by the Group. At 31 December 2015, the Pearl Scheme held 44,354,178 units in the Castle Hill Enhanced Floating Rate Opportunities Limited Fund. The value of these investments at 31 December 2015 was £74 million. At 31 December 2014, Castle Hill Enhanced Floating Rate Opportunities Limited Fund was not a related party, and therefore no comparatives have been reported.
To subscribe to private equity funds and other unlisted assets 443 334
In the normal course of business the Group is exposed to certain legal issues, which involve litigation and arbitration. At the period end, the Group has a number of contingent liabilities in this regard, none of which are considered by the Directors to be material.
The financial statements are adjusted to reflect significant events that have a material effect on the financial results and that have occurred between the period end and the date when the financial statements are authorised for issue, provided they give evidence of conditions that existed at the period end. Events that are indicative of conditions that arise after the period end that do not result in an adjustment to the financial statements are disclosed.
In March 2016, the Group agreed an amendment of its £900 million 5 year unsecured bank facility into a £650 million unsecured revolving credit facility, maturing in June 2020. There are no mandatory or target amortisation payments associated with the facility but prepayments are permissible.
STATEMENT OF COMPREHENSIVE INCOME For the year ended 31 December 2015
Total comprehensive income for the year attributable to owners 164 125
The notes identified numerically on pages 192 to 197 are an integral part of these Company financial statements. Where items also appear in the consolidated financial statements, reference is made to the notes (identified alphanumerically) on pages 102 to 187.
Total comprehensive income for the year attributable to owners – – – 125 125
Phoenix Group Holdings is subject to Cayman Islands Companies Law. Under Cayman Islands Companies Law distributions can be made out of profits or share premium subject, in each case, to a solvency test. The solvency test is broadly consistent with the Group’s going concern assessment criteria. The notes identified numerically on pages 192 to 197 are an integral part of these Company financial statements. Where items also appear in the consolidated financial statements, reference is made to the notes (identified alphanumerically) on pages 102 to 187.
Assets and liabilities are offset and the net amount reported in the statement of financial position only when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or to realise the assets and settle the liabilities simultaneously.
2. FINANCIAL INFORMATION In preparing the financial statements the Company has adopted the standards, interpretations and amendments effective 1 January 2015 which have been issued by the IASB as detailed in note A4 of the consolidated financial statements, none of which have had a significant impact on the Company’s financial statements. Details of standards, interpretations and amendments to be adopted in future periods are also detailed in note A5.
Phoenix Group Holdings Annual Report and Accounts 2015 193 Financials 4. NET INVESTMENT INCOME The accounting policy for net investment income is included in note C1.
Write down of loans due from other Group entities 8 10
On 16 July 2010, the Company was granted a loan from Impala Holdings Limited of £3 million. The loan accrues interest at six month LIBOR plus a margin of 3.25% (2014: 3.25%) which is capitalised semi-annually on 7 April and 7 October. The loan has a maturity date of 31 December 2016. Interest of £0.1 million (2014: £0.1 million) was accrued during the year. The balance outstanding at 31 December 2015 was £3 million (2014: £3 million).
NOTES TO THE PARENT COMPANY FINANCIAL STATEMENTS Continued 7. INVESTMENTS IN GROUP ENTITIES
Following a restructure of the Company’s holdings in PGH (LCA) Limited, PGH (LCB) Limited, PGH (TC1) Limited and PGH (TC2) Limited, the Company received dividends of £205 million and £232 million from PGH (TC1) Limited and PGH (TC2) Limited respectively, settled by the novation of intragroup loan receivables to the Company. The Company impaired its investments in PGH (TC1) Limited and PGH (TC2) Limited to the extent of dividends received.
For a list of principal Group entities, refer to note H3 of the consolidated financial statements. The entities directly held by Phoenix Group Holdings are separately identified.
All investments are categorised as Level 1 financial instruments. Details of the factors considered in determination of the fair value are included in note E2 to the consolidated financial statements.
Phoenix Group Holdings Annual Report and Accounts 2015 195 Financials 9. LOANS AND RECEIVABLES
The accounting policy for loans and receivables is included in note E1.
On 16 July 2010, the Company entered into an interest free facility arrangement with Phoenix Group Holdings’ Employee Benefit Trust (‘EBT’). In 2015, an additional £6 million was drawn down against this facility (2014: £6 million). The loan is recoverable until the point the awards held by the EBT vest to the participants, at which point the loan is reviewed for impairment. Any impairments are determined by comparing the carrying value to the estimated recoverable amount of the loan. Following the vesting of awards in 2015, £8 million of the loan (2014: £10 million) has been written off. At 31 December 2015, £5 million was due (2014: £7 million).
Adjustments to reconcile profit for the year to cash flows from operating activities: Interest income from other Group entities (58) (48)
17. EVENTS AFTER THE REPORTING PERIOD Details of events after the reporting date are included in note I9 to the consolidated financial statements.
H Staunton C Bannister J McConville A Barbour R P Azria I Cormack T Cross Brown I Hudson D Woods K Sorenson
The analysis of the asset portfolio provided below comprises the assets held by the Group’s life companies. It excludes other Group assets such as cash held in the holding and service companies; the assets held by the non-controlling interests in consolidated collective investment schemes and UK Commercial Property Trust; and is stated net of derivative liabilities.
1 Includes assets where shareholders of the life companies bear the investment risk. 2 Includes assets where policyholders bear most of the investment risk. 3 This information is presented on a look through basis to underlying funds where available. 4 Includes equity release mortgages of £268 million, policy loans of £11 million, other loans of £15 million, net derivative assets of £139 million and other investments of £568 million.
The life companies had £39 million (2014: £5 million) shareholder exposure to financial institution corporate debt of the Peripheral Eurozone at 31 December 2015. The £2,226 million (2014: £2,691 million) total shareholder exposure comprised £1,742 million (2014: £1,644 million) senior debt, £4 million (2014: £215 million) Tier 1 debt and £480 million (2014: £832 million) Tier 2 debt.
Participating non-supported £m Unit-linked £m Total £m 97% of rated securities were investment grade at 31 December 2015 (2014: 97%). The percentage of rated securities that were investment grade in relation to the shareholder and policyholders’ funds were 99% and 96% respectively (2014: 95% and 98% respectively).
When compliance with the CFO Forum MCEV principles published in June 2008 and amended in October 2009 is stated, those principles require the Directors to prepare supplementary information in accordance with the MCEV principles and to disclose and provide reasons for any non‑compliance with the principles.
The MCEV methodology adopted by the Group is in accordance with these MCEV principles, with the exception of: Ɛ risk‑free rates have been defined as the annually compounded UK Government bond nominal spot curve plus ten basis points rather than as the swap rate curve; Ɛ the value of the asset management (prior to divestment on 1 July 2014) and the management service companies has been included on an IFRS basis; and
Specifically, the Directors have: Ɛ determined assumptions on a realistic basis, having regard to past, current and expected future experience and to relevant external data, and then applied them consistently; Ɛ made estimates that are reasonable and consistent; and
OPINION In our opinion the Phoenix Group MCEV supplementary information, for the year ended 31 December 2015, has been prepared, in all material respects, in accordance with the basis of preparation set out on pages 213 to 215.
BASIS OF ACCOUNTING AND RESTRICTION ON USE Without modifying our opinion, we draw attention to pages 213 to 215 of the Phoenix Group MCEV supplementary information, which describe the basis of preparation. The Phoenix Group MCEV supplementary information is prepared by Phoenix Group Holdings in accordance with the basis of preparation set out on pages 213 to 215. As a result, the Phoenix Group MCEV supplementary information may not be suitable for another purpose. This report, including the opinion, has been prepared for and only for the Group’s Directors as a body in accordance with our letter of engagement dated 10 March 2016 and for no other purpose. We do not, in giving this opinion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.
SUMMARISED CONSOLIDATED INCOME STATEMENT – GROUP MCEV BASIS For the year ended 31 December 2015 £m £m
MCEV EARNINGS PER ORDINARY SHARE For the year ended 31 December 2015
The earnings on life business are calculated on a post‑tax basis and are grossed up at the effective rate of shareholder tax for presentation in the consolidated income statement. The tax rate used is the UK corporate tax rate of 20.25% (2014: 21.5%).
Dividends paid on shares held by the employee trust and Group entities – 1
GROUP MCEV ANALYSIS OF EARNINGS For the year ended 31 December 2015
Capital and dividend flows – external – – – (115) (115)
Group net assets attributable to owners of the parent as reported under IFRS 2,434 2,365
Eliminate after tax pension scheme surpluses (including IFRIC 14 adjustments)1 (560) (492)
MCEV net worth attributable to owners of the parent 571 466
RECONCILIATION OF GROUP IFRS EQUITY TO MCEV NET WORTH For the year ended 31 December 2015
Ɛ the asset management (prior to its divestment on 1 July 2014) and management service companies’ values are calculated and presented on a basis consistent with IFRS. Under CFO Forum principles and guidance, productivity gains should not be recognised until achieved. This treatment is inconsistent with the cost profile of a closed fund where continual cost reductions are expected to maintain unit costs as the business runs off. In the opinion of the Directors, if the MCEV principles and guidance were to be applied to the asset management and the management service companies, it would not provide a fair reflection of the Group’s financial position. These companies are therefore reported alongside the Group’s other holding companies at their IFRS net asset value.
In January 2015, the Group announced the successful exchange of 99% of the Group’s Perpetual Reset Capital Securities (‘Tier 1 notes’) for £428 million of new listed subordinated notes issued by PGH Capital Limited and maturing in 2025. The terms of the new notes meet the requirement of Tier 2 capital under Solvency II and have a coupon of 6.625%. Upon exchange, new notes with a face value of £32 million were held by Group companies and continue to be held as at 31 December 2015.
The Finance (No.2) Act 2015 was enacted in November 2015 and set out reductions in rates of corporation tax from 20% to 19% in April 2017 and from 19% to 18% in April 2020. The impact of these changes has been reflected in the Group’s MCEV at 31 December 2015.
On 9 November 2015 the Group entered into an agreement with RGA International, effective from 1 November 2015, to reinsure substantively all of the PLAL annuity liabilities previously ceded to Opal Re, a subsidiary undertaking of the Company. The Group paid a reinsurance premium of £1,346 million to RGA International. A favourable impact of £13 million has arisen as a result of entering the reassurance arrangement, consisting of an £18 million gain recognised in ‘Other non‑operating variances on life business’ and attributable transaction expenses of £5 million recognised in ‘Non‑recurring items on non‑life business’.
COVERED BUSINESS The MCEV calculations cover all long‑term insurance business written by the Group, but exclude Ignis (prior to its divestment on 1 July 2014) and the management service companies.
Opal Re was included within covered business prior to its de‑authorisation as an insurance company in December 2015, and was valued on a basis consistent with the annuity business within the UK life companies. Following the de‑authorisation, the residual net assets of Opal Re are included within non‑covered business and valued in accordance with IFRS.
MCEV METHODOLOGY The embedded value of covered business is based on a market‑ consistent methodology. Under this methodology, assets and liabilities are valued in line with market prices and consistently with each other.
The key components of MCEV are net worth plus the value of in‑force covered business.
Loans from the life companies to holding companies have been consolidated out such that they do not appear as an asset in the life company or as a liability in the holding company. This presentation has no impact on the overall MCEV but does affect the allocation of net assets between covered and non‑covered business.
The market consistent VIF represents the present value of profits attributable to shareholders arising from the in‑force business, less an allowance for the time value of financial options and guarantees embedded within life insurance contracts and frictional costs of required capital.
The approach adopted to calculate VIF combines deterministic and stochastic techniques (each of which is discussed in more detail below): Ɛ deterministic techniques have been used to value cash flows whose values vary in a linear fashion with market movements. These cash flows are valued using discount rates that reflect the risk inherent in each cash flow. In practice, it is not necessary to discount each cash flow at a different discount rate, as the same result is achieved by projecting and discounting all cash flows at risk‑free rates. This is known as the ‘certainty equivalent approach’; and
The VIF consists of the following components: Present value of future profits (‘PVFP’) The PVFP represents the present value of profits attributable to shareholders arising from the in‑force business. The PVFP is calculated by projecting and discounting using risk‑free rates, with an allowance for liquidity premiums where appropriate.
Required capital is defined as the minimum regulatory capital requirement, which is the greater of Solvency I Pillar 1 and Pillar 2 capital requirements, plus the capital required under the Group’s capital management policy. This equates to 146% of the Solvency I Pillar 1 minimum regulatory capital requirement or 123% of the Solvency I Pillar 2 minimum regulatory capital requirement (2014: 142% Pillar 1, 124% Pillar 2).
Solvency II introduces a new capital regime for insurers with effect from 1 January 2016. No allowance has been made within the Group’s MCEV information for the impact of this, in accordance with the additional guidance issued by the CFO Forum in October 2015.
Costs of residual non‑hedgeable risks (‘CNHR’) The CNHR should allow for risks that can have an asymmetric impact on shareholder value to the extent these risks have not already been reflected in the PVFP or TVFOGs. The majority of such risks within the Group are operational and tax risks.
For with‑profits business the CNHR would increase the TVFOGs by £23 million (2014: £14 million).
For other business the cost would be £106 million (2014: £105 million). This equates to an equivalent average cost of capital charge of 0.76% (2014: 0.95%). The level of capital assumed in this calculation is determined based on a 99.5% confidence level over a 1 year time horizon, consistent with the ICA methodology. Allowance is made for diversification benefits between non‑hedgeable risks, but not between hedgeable and non‑hedgeable risks.
Listed debt issued by the Group is valued at the market value quoted at the reporting date which is consistent with MCEV principles.
Full allowance has been made for the value of tax that would become payable on the transfer of surplus assets out of non‑profit funds. This allowance reflects the projected pace of releases of surplus from non‑profit funds that is not required to support with‑profit funds.
The MCEV places a value on the profits expected to be earned on annuities arising from policies vesting with guaranteed annuity terms. The value is calculated based on management’s assumptions as to long‑term profit margins and projected take‑up rates. As at 31 December 2015, the Group MCEV included £165 million in respect of these policies (2014: £180 million). These policies are excluded from the definition of new business on the basis that the annuity being provided is an obligation under an existing policy and the life companies are already reserving for the cost of these guarantees.
Policies with guarantees are fully reserved for on an economic basis.
Allowance is made for future bonus rates on a basis consistent with the projection assumptions and established company practice.
The MCEV allows for pension scheme deficits as calculated on an IFRS basis, but no benefit is taken for pension scheme surpluses.
On 22 March 2016, the Board recommended a final dividend of 26.7p per share (2014: 26.7p per share) for the year ended 31 December 2015. Payment of the final dividend is subject to shareholder approval at the AGM. The cost of this dividend will be charged to the Reconciliation of Movement in Equity – Group MCEV basis in 2016.
Expected existing business contribution (in excess of reference rate)2 (1) 39 38
1 Expected existing business contribution (reference rate) represents the expected return on the opening MCEV at the long‑term risk‑free rate at 2.29% (2014: 3.55%). 2 Expected existing business contribution (in excess of reference rate) represents the additional expected return above the risk‑free rate arising from long‑term risk premiums on equities, property and corporate bonds.
Expected existing business contribution (in excess of reference rate) (8) 35 27
Years 1–5 £m 6–10 £m 11–15 £m 16–20 £m 20+ £m
Risk‑free rates are based on the annually compounded UK Government bond nominal spot curve plus 10bps, extrapolated as necessary to meet the term of the liabilities.
Had the Group used the swap rate curve as set out in the CFO Forum principles, the MCEV would have been £309 million lower (2014: £218 million lower).
The liabilities to which a liquidity premium is applied include immediate annuities, pensions policies with benefits defined as an annuity or in‑the‑money guaranteed annuity options. The liquidity premium is determined by reference to the yield on the bond portfolios held after allowing for credit risk by deducting margins for best estimate defaults and unexpected default risk premiums. The additional yield above risk‑free rates implied by the calculated liquidity premium is as follows: Additional yield over risk‑free rates 0.52% 0.46%
STOCHASTIC ECONOMIC ASSUMPTIONS The time value of options and guarantees is calculated using an economic scenario generator. The model is calibrated to market conditions as at 31 December 2015. The scenario generator and calibration are consistent with that used for realistic balance sheet reporting.