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 identified four reporting components of the Group� The Group reporting components consist of Phoenix Life Division, Standard Life Assurance Limited (‘SLAL’), the Group Function and Other Companies� In the Phoenix Life Division component, the most significant insurance companies are Phoenix Life Assurance Limited and Phoenix Life Limited� Standard Life Assurance Limited is the most significant company of the respective component� The Group Function consists of Group entities that primarily hold external debt, PA (GI) Limited and the pension schemes of the Group� The Other Companies include the Phoenix Life service companies and Standard Life International Designated Activity Company (‘SLINTL’)�
Of the three full scope components, audit procedures were performed on one of these directly by the primary audit team whilst the remaining two components were audited by the component audit teams� For Other Companies, where the work was performed by component auditors, we determined the appropriate level of involvement to enable us to determine that sufficient audit evidence had been obtained as a basis for our opinion on the Group as a whole�
The primary audit team followed a programme of planned visits that has been designed to ensure that the Senior Statutory Auditor visited each of the components where the Group audit scope was focused at least once a year and the most significant of them more than once a year� For all full scope components, in addition to the component visits, the primary audit team reviewed key working papers and participated in the component teams’ planning, including the component teams’ discussion of fraud and error� The primary audit team attended the closing meetings with the
Materiality The magnitude of an omission or misstatement that, individually or in the aggregate, could reasonably be expected to influence the economic decisions of the users of the financial statements� Materiality provides a basis for determining the nature and extent of our audit procedures�
Performance materiality The application of materiality at the individual account or balance level� It is set at an amount to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality�
Audit work at component locations for the purpose of obtaining audit coverage over significant financial statement accounts is undertaken based on a percentage of total performance materiality� The performance materiality set for each component is based on the relative scale and risk of the component to the Group as a whole and our assessment of the risk of misstatement at that component� In the current year, the range of performance materiality allocated to components was £13 million to £30 million (2018: £10 million to £28 million)�
Reporting threshold An amount below which identified misstatements are considered as being clearly trivial�
We agreed with the Audit Committee that we would report to them all uncorrected audit differences in excess of £5 million (2018: £5 million), which is set at 5% of planning materiality, as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds�
We evaluate any uncorrected misstatements against both the quantitative measures of materiality discussed above and in light of other relevant qualitative considerations in forming our opinion�
Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in this report, we do not express any form of assurance conclusion thereon�
In this context, we also have nothing to report in regard to our responsibility to specifically address the following items in the other information and to report as uncorrected
• Audit committee reporting set out on pages 92 to 96 – the section describing the work of the Audit Committee does not appropriately address matters communicated by us to the Audit Committee; or
• Directors’ statement of compliance with the UK Corporate Governance Code set out on page 133 – the parts of the Directors’ statement required under the Listing Rules relating to the Company’s compliance with the UK Corporate Governance Code containing provisions specified for review by the auditor in accordance with Listing Rule 9�8�10R(2) do not properly disclose a departure from a relevant provision of the UK Corporate Governance Code�
Matters on which we are required to report by exception In the light of the knowledge and understanding of the Group and the parent company and its environment obtained in the course of the audit, we have not identified material misstatements in the Strategic Report or the Directors’ Report�
• we have not received all the information and explanations we require for our audit�
Responsibilities of Directors As explained more fully in the Directors’ Responsibilities Statement set out on page 135, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the Directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error�
In preparing the financial statements, the Directors are responsible for assessing the Group and parent company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Directors either intend to liquidate the Group or the parent company or to cease operations, or have no realistic alternative but to do so�
Auditor’s responsibilities for the audit of the financial statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion� Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists� Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements�
Explanation as to what extent the audit was considered capable of detecting irregularities, including fraud The objectives of our audit: • in respect to fraud, are; to identify and assess the risks of material misstatement of the financial statements due to fraud; to obtain sufficient appropriate audit evidence regarding the assessed risks of material misstatement due to fraud, through designing and implementing appropriate responses; and to respond appropriately to fraud or suspected fraud identified during the audit� However, the primary responsibility for the prevention and detection of fraud rests with both those charged with governance of the entity and management; and
• in respect of irregularities, considered to be noncompliance with laws and regulations, are to obtain sufficient appropriate audit evidence regarding compliance with the provisions of those laws and regulations generally recognised to have a direct effect on the determination of material amounts and disclosures in the financial statements (‘direct laws and regulations’), and perform other audit procedures to help identify instances of non-compliance with other laws and regulations that may have a material effect on the financial statements� We are not responsible for preventing non-compliance with laws and regulations and our audit procedures cannot be expected to detect noncompliance with all laws and regulations�
• For direct laws and regulations, we considered the extent of compliance with those laws and regulations as part of our procedures on the related financial statement items�
A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council’s website at auditorsresponsibilities� This description forms part of our auditor’s report�
Use of our report This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006� Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an Auditor’s Report and for no other purpose� To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed�
Stuart Wilson (Senior statutory auditor) for and on behalf of Ernst & Young LLP, Statutory Auditor London
Independent Auditor’s Report continued 146 PHOENIX GROUP HOLDINGS PLC ANNUAL REPORT & ACCOUNTS 2019
Fees and commissions C1 700 385 Total revenue, net of reinsurance payable 4,182 2,549
Net investment income C2 24,876 (9,457) Other operating income 106 37 Gain on acquisition H2 – 141 Net income 29,164 (6,730)
Change in investment contract liabilities (14,080) 7,832 Change in present value of future profits G2 70 1 Amortisation of acquired in-force business G2 (382) (196) Amortisation of other intangibles G2 (20) (18) Administrative expenses C3 (1,549) (1,056) Net (expense)/income under arrangements with reinsurers F3.3 (274) 2 Net (income)/expense attributable to unitholders (336) 159 Total operating expenses (28,651) 7,131
Attributable to: Owners of the parent 85 379 Non-controlling interests D4 31 31 116 410
Non-controlling interests D4 31 31 148 PHOENIX GROUP HOLDINGS PLC ANNUAL REPORT & ACCOUNTS 2019
Tier 1 Notes D3 494 494 Non-controlling interests D4 314 294 Total equity 5,593 5,949
Reinsurance payables 101 30 Payables related to direct insurance contracts G9 890 902 Current tax G8 – 20 Lease liabilities G10 84 – Accruals and deferred income G11 384 337 Other payables G12 1,043 873 Total liabilities 237,084 224,031
Other comprehensive (expense)/income for the year – – – (29) – 1 (81) (109) – – (109)
Issue of ordinary share capital, net of associated commissions and expenses (note D1) – 2 – – – – – 2 – – 2
Shares distributed by the employee benefit trust – – 3 – – – (3) – – – –
Transfer of reserve (note A1) – (3,077) – – – – 3,077 – – – –
Issue of ordinary share capital, net of associated commissions and expenses (note D1) 33 1,926 – – – – – 1,959 – – 1,959
Credit to equity for equity-settled share based payments – – – – – – 9 9 – – 9
Acquisition of Standard Life Assurance subsidiaries, net of cash acquired – 1,607
Proceeds from issuing ordinary shares, net of associated commission and expenses 2 936
Proceeds from issuance of Tier 1 Notes, net of associated expenses – 494
Cash and cash equivalents at the beginning of the year 4,926 2,245
In 2018, following a scheme of arrangement in accordance with section 86 of the Cayman Islands Companies Law between Phoenix Group Holdings (‘Old PGH’), the former ultimate parent company of the Group, and its shareholders, all of the issued shares in Old PGH were cancelled and an equivalent number of new shares in Old PGH were issued to the Company in consideration for the allotment to Old PGH shareholders of one ordinary share in the Company for each ordinary share in Old PGH that they held on the scheme record date, 12 December 2018.
Statement of compliance The consolidated financial statements have been prepared in accordance with IFRSs as adopted by the European Union (‘EU’).
Statement of consolidated financial position: Financial assets: Reinsurers’ share of investment contract liabilities 5,417 2,914 8,331
Debt securities has been restated to include reclassified loans and deposits designated at fair value through profit and loss and an uplift to the value of certain assets for accrued interest previously classified within prepayments and accrued interest. These reclassifications have resulted in an increase to the fair value hierarchy totals for debt securities as follows: £195 million for level 1; £45 million for level 2; and £3,193 million for level 3 assets.
The reclassifications noted above are also reflected in notes C2 investment income, E1.1 fair value analysis, E2 fair value hierarchy, E6 financial risk analysis, H4 structured entities and I2 cash flows from operating activities.
None of the restatements of prior period information have impacted the total equity attributable to the owners of the parent.
Basis of consolidation The consolidated financial statements include the financial statements of the Company and its subsidiary undertakings, including collective investment schemes, where the Group exercises overall control. In accordance with the principles set out in IFRS 10 Consolidated Financial Statements, the Group controls an investee if and only if the Group has all the following: • power over the investee; • exposure, or rights, to variable returns from its involvement with the investee; and
A2. Accounting Policies The principal accounting policies have been consistently applied in these consolidated financial statements. Where an accounting policy can be directly attributed to a specific note to the consolidated financial statements, the policy is presented within that note, with a view to enabling greater understanding of the results and financial position of the Group. All other significant accounting policies are disclosed below. The impacts of changes in accounting policies during the year are detailed in note A6.
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: • assets and liabilities are translated at the closing rate at the period end; • income, expenses and cash flows denominated in foreign currencies are translated at average exchange rates; and
Foreign currency transactions are translated into the functional currency of the transacting Group entity using exchange rates prevailing at the date of translation. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currencies are recognised in the consolidated income statement.
A3. Critical Accounting Estimates and Judgements The preparation of financial statements requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. Disclosures of judgements made by management in applying the Group’s accounting policies include those that have the most significant effect on the amounts that are recognised in the consolidated financial statements. Disclosures of estimates and associated assumptions include those that have a significant risk of resulting in a material change to the carrying value of assets and liabilities within the next year. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of the judgements as to the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
A3.2 Fair value of financial assets and liabilities Financial assets and liabilities are measured at fair value and accounted for as set out in the accounting policies in note E1. Where possible, financial assets and liabilities are valued on the basis of listed market prices by reference to quoted market bid prices for assets and offer prices for liabilities. These are categorised as Level 1 financial instruments and do not involve estimates. If prices are not readily determinable, fair value is determined using valuation techniques including pricing models, discounted cash flow techniques or broker quotes. Financial instruments valued using valuation techniques based on observable market data at the period end are categorised as Level 2 financial instruments. Financial instruments valued using valuation techniques based on non-observable inputs are categorised as Level 3 financial instruments. Level 2 and Level 3 financial instruments therefore involve the use of estimates.
A3.3 Pension scheme obligations The valuation of pension scheme obligations is determined using actuarial valuations that depend upon a number of assumptions, including discount rate, inflation and longevity. External actuarial advice is taken with regard to setting the financial assumptions to be used in the valuation. As defined benefit pension schemes are long-term in nature, such assumptions can be subject to significant uncertainty.
A3.4 Recognition of pension scheme surplus A pension scheme surplus can only be recognised to the extent that the sponsoring employer can utilise the asset through a refund of surplus or a reduction in contributions. A refund is available to the Group where it has an unconditional right to a refund on a gradual settlement of liabilities over time until all members have left the scheme. A review of the Trust Deeds of the Group’s pension schemes that recognise a surplus has highlighted that the Scheme Trustees are not considered to have the unilateral power to trigger a wind-up of the Scheme and the Trustees’ consent is not needed for the sponsoring company to trigger a wind-up. Where the last beneficiary died or left the scheme, the sponsoring company could close the Scheme and force the Trustees to trigger a wind-up by withholding its consent to continue the Scheme on a closed basis. This view is supported by external legal opinion and is considered to support the recognition of a surplus. Management has determined that the scheme administrator would be subject to a 35% tax charge on a refund and therefore any surplus is reduced by this amount. Further details of the Group’s pension schemes are provided in note G1.
A3.7 Control and consolidation The Group has invested in a number of collective investment schemes and other types of investment where judgement is applied in determining whether the Group controls the activities of these entities. These entities are typically structured in such a way that owning the majority of the voting rights is not the conclusive factor in the determination of control in line with the requirements of IFRS 10
Consolidated Financial Statements. The control assessment therefore involves a number of further considerations such as whether the Group has a unilateral power of veto in general meetings and whether the existence of other agreements restrict the Group from being able to influence the activities. Further details of these judgements are given in note H1.
A3.8 Provisions The Group holds a number of provisions and the amount of each provision is determined based on the Group’s estimation of the outflow of resources required to settle each obligation as at 31 December 2019. The recognition and measurement of these provisions involves a high degree of judgement and estimation uncertainty. Further details of these provisions and the key uncertainties identified are included in note G7.
A4. Adoption of New Accounting Pronouncements in 2019 In preparing the consolidated financial statements, the Group has adopted the following standards, interpretations and amendments effective from 1 January 2019: • IFRS 16 Leases. The new standard replaces IAS 17 Leases and removes the classification of leases as operating or finance leases for the lessee, thereby treating all leases as finance leases. This has resulted in the recognition of the Group’s previously classified operating leases on balance sheet as right of use assets (see note G3) and lease liabilities (see note G10). The Group’s finance leases in respect of ground rents payable in connection with investment properties were previously accounted for in accordance with IAS 17 and included within investment properties and other payables. Amounts included in other payables have been reclassified to lease liabilities. Short-term leases (less than 12 months) and leases of lowvalue assets are exempt from the requirements. The Group has applied IFRS 16 using the modified retrospective approach. Accordingly, the comparative information for 2018 has not been restated and continues to be reported under IAS 17 and related interpretations. Further details of the impact of applying IFRS 16 as at 1 January 2019 are included in note A6.
• IFRIC Interpretation 23 Uncertainty over Income Tax Treatments. The Interpretation explains how to recognise and measure deferred and current tax assets and liabilities where there is uncertainty over a tax treatment. There are no new disclosure requirements; however, the Group has reviewed whether further information should be provided about judgements and estimates made in preparing the consolidated financial statements. No specific issues have been identified that require disclosure in the period.
• Amendments to IAS 19 Employee Benefits – Plan Amendment, Curtailment or Settlement. The amendments address the accounting when a defined benefit plan amendment, curtailment or settlement occurs during a reporting period and apply prospectively from 1 January. The Group is required to update the assumptions about its obligation and fair value of its plan assets to calculate costs related to these changes. The proposed amendments to IAS 19 specify that the Group is required to use the updated information to determine current service cost and net interest for the period followed by these changes. There have been no plan amendments, curtailments or settlements within any Group pension scheme during the year and retrospective application is not required.
IFRS 9 will be implemented at the same time as the new insurance contracts standard (IFRS 17 Insurance Contracts) effective from 1 January 2021 (IASB recommended extending the implementation date to 2022). During the year, the Group commenced its implementation activities in respect of IFRS 9 and these will continue through 2020.The Group expects to continue to value the majority of its financial assets at fair value through profit or loss on initial recognition, either as a result of these financial assets being managed on a fair value basis or as a result of using the fair value option to irrevocably designate the assets at fair value through profit or loss.
IFRS 9 also amends the general hedge accounting requirements for the Group’s hedging relationships that are currently accounted for under IAS 39. It is expected that the existing hedging relationships will continue to be accounted for as cash flow hedges under IFRS 9 and hedge effectiveness testing processes and documentation will be updated to reflect the new more principles based requirements. A number of additional disclosures will be required by IFRS 7 Financial Instruments: Disclosures as a result of implementing IFRS 9. Additional disclosures have been made in note E1.2 to the consolidated financial statements to provide information to allow comparison with entities who have already adopted IFRS 9.
• Amendments to IFRS 9 Financial Instruments: Prepayment Features with Negative Compensation (2019 – recommended implementation date extended to 2022 for those companies applying the IFRS 4 deferral option). The proposed amendments would allow for a narrow exception to IFRS 9 that would permit particular financial instruments with prepayment features with negative compensation to be eligible for measurement at amortised cost or at fair value through other comprehensive income. It is not currently expected that these amendments will have an impact on the Group and its consolidated financial statements.
• Amendments to IAS 28 Investments in Associates and Joint Ventures: Long-term Interests in Associates and Joint Ventures (2019 – recommended implementation date extended to 2022 for those companies applying the IFRS 4 deferral option). The amendments to IAS 28 clarify that an entity applies IFRS 9 Financial Instruments to long-term interests in an associate or joint venture that form part of the net investment in the associate or joint venture but to which the equity method is not applied. These amendments do not currently have any impact on the Group.
• Amendments to References to the Conceptual Framework in IFRS Standards (2020).
• Interest Rate Benchmark Reform (Amendments to IFRS 9, IAS 39 and IFRS 7) (2020). The amendments have arisen following the phasing out of interest-rate benchmarks such as interbank offered rates (‘IBOR’). Specific hedge accounting requirements have been modified to provide relief from potential effects of the uncertainty caused by IBOR reform. In addition, these amendments require entities to provide additional information to investors about their hedging relationships which are directly affected by these uncertainties. There is not expected to be an impact for the Group from these amendments but a review will be undertaken in 2020 to confirm this.
In June 2019, the IASB published an exposure draft of amendments to IFRS 17 in response to feedback received. Whilst the IASB has confirmed many of the changes that will be made to the standard, there remains significant uncertainty in respect of certain key areas of the standard. In relation to the implementation date, the IASB staff have recently proposed to the IASB board that the implementation date is extended to annual periods beginning on or after 1 January 2023. The IASB board is expected to approve this change at their March 2020 meeting. Development of the Group’s methodologies and accounting policies is progressing; however, these will not be finalised until after the amended standard is published in mid-2020. All activities will continue throughout 2020.
The Group has applied IFRS 16 using the modified retrospective approach, under which the cumulative effect of initial application is recognised in retained earnings at 1 January 2019. Accordingly, the comparative information for 2018 has not been restated and continues to be reported under IAS 17 and related interpretations.
As a lessee, the Group previously classified certain property leases as operating leases where a significant element of the risks and rewards of title to the asset was retained by the lessor. Under IFRS 16, the Group recognises right-of-use assets and lease liabilities in respect of these property leases in the statement of consolidated financial position. The Group’s finance leases are in respect of ground rents payable in connection with a number of investment properties that the Group owns. These were previously accounted for in accordance with IAS 17 and included within investment properties and other payables in the statement of consolidated financial position.
The Group excludes non-lease components such as service charges and accounts for these on a straight-line basis over the lease term.
Accounting policy The Group recognises a right-of-use asset and a lease liability at the lease commencement date. The property, plant and equipment rightof -use assets are initially measured at cost, and subsequently at cost less any accumulated depreciation and impairments, and adjusted for certain remeasurements of the lease liability. These right-of-use assets are depreciated over the remaining lease term which is between 1 and 11 years. The ground rent right-of-use asset is classified as investment property and measured at fair value. Gains and losses arising from the change in fair value are recognised in the consolidated income statement.
The lease liability is subsequently increased by the interest cost on the lease liability and decreased by lease payments made. It is remeasured when there is a change in future lease payments arising from, for example, rent reviews or from changes in the assessment of whether a termination option is reasonably certain not to be exercised. The Group has applied judgement to determine the lease term for some lease contracts with break clauses.
Transition Previously, the Group classified certain property leases as operating leases under IAS 17. Payments made under operating leases, net of any incentives received from the lessor, were recognised as an expense in the consolidated income statement on a straight-line basis over the period of the lease.
At transition, for leases classified as operating leases under IAS 17, lease liabilities were measured at the present value of the remaining lease payments, discounted at the Group’s incremental borrowing rate as at 1 January 2019. Right-of-use assets were measured at an amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments.
At transition the carrying value of the right of use assets and lease liabilities for the Group’s finance leases is measured in accordance with IAS 17 and the requirements of IFRS 16 are applied to these leases from 1 January 2019.
Impact on consolidated financial statements The impact to the statement of consolidated financial position on transition to IFRS 16 is outlined below: £m
Less: Low value leases recognised on a straight-line basis as expense (1)
Add: Adjustments as a result of different treatment of extension and termination options 7
Lease liabilities as at 1 January 2019 158 1 The opening restatement relates to service agreements incorrectly categorised as operating lease commitments at 31 December 2018.
The UK Heritage segment contains UK businesses which no longer actively sell products to policyholders and which therefore run-off gradually over time. These businesses will accept incremental premiums on in-force policies, and will provide annuities to existing policyholders with vesting products. Bulk Purchase Annuity contracts are included in this segment.
The UK Open segment includes new and in-force life insurance and investment policies in respect of products that the Group continues to actively market to new and existing policyholders. This includes products such as workplace pensions and Self-Invested Personal Pensions (‘SIPPs’) distributed through the Group’s Strategic Partnership with Standard Life Aberdeen plc (‘SLA plc’), and also products sold under the SunLife brand.
The Europe segment includes business written in Ireland and Germany. This includes products that are actively being marketed to new policyholders, and legacy in-force products that are no longer being sold to new customers.
Operating profit includes the effect of variances in experience for noneconomic items, such as mortality and expenses, and the effect of changes in non-economic assumptions. It also incorporates the impacts of significant management actions where such actions are consistent with the Company’s core operating activities (for example, actuarial modelling enhancements and data reviews). Operating profit is reported net of policyholder finance charges and policyholder tax.
Operating profit excludes the impact of the following items: • the difference between the actual and expected experience for economic items and the impacts of changes in economic assumptions on the valuation of liabilities (see notes B2.2 and B2.3); • amortisation and impairments of intangible assets (net of policyholder tax); • finance costs attributable to owners; • gains or losses on the acquisition or disposal of subsidiaries (net of related costs); • the financial impacts of mandatory regulatory change; • the profit or loss attributable to non-controlling interests; • integration, restructuring or other significant one-off projects; and
• any other items which, in the Directors’ view, should be disclosed separately by virtue of their nature or incidence to enable a full understanding of the Company’s financial performance. This is typically the case where the nature of the item is not reflective of the underlying performance of the operating companies.
(Loss)/profit before the tax attributable to owners of the parent (45) 439
Other non-operating items in respect of 2019 include: • an £80 million benefit arising from updated expense assumptions for insurance contracts reflecting reduced future servicing costs as a result of transition activity. Such benefits on the Group’s investment contract business will typically be recognised as incurred. This benefit has been more than offset by staff and external costs incurred or provided for in the period with regard to transition activity and the transformation of the Group’s operating model and extended relationship with Tata Consultancy Services, totalling £190 million, of which £175 million relates to external costs; • £5 million of costs associated with preparations to ready the business for Brexit; • £41 million of other corporate project costs, including the Group’s Internal Model harmonisation project and acquisition of ReAssure Group; and
The principal assumptions underlying the calculation of the long-term investment return are: Other fixed interest 2.9 3.2
The positive variance on owners’ funds of £13 million (2018: £193 million negative) is principally driven by gains on foreign currency swaps held by the holding companies to hedge exposure of future life company profits to movements in exchange rates. The prior year result included realised losses on derivative instruments entered into by the holding companies to hedge exposure to equity risk arising from the Group’s acquisition of the Standard Life Assurance businesses. Losses of £143 million were incurred on these instruments, together with option premiums of £22 million.
B. EARNINGS PERFORMANCE continued B3. Earnings Per Share The Group calculates its basic earnings per share based on the present shares in issue using the earnings attributable to ordinary equity holders of the parent, divided by the weighted average number of ordinary shares in issue during the year.
The basic and diluted earnings per share calculations are also presented based on the Group's operating profit as this non-GAAP performance measure is considered to provide a comparable measure of the underlying performance of the business as it excludes the impact of short-term economic volatility and other one-off items.
B3.1 Basic earnings per share The result attributable to ordinary equity holders of the parent for the purposes of determining earnings per share has been calculated as set out below.
Profit attributable to ordinary equity holders of the parent 62 367
Diluted earnings per share 8.6 66.7 164 PHOENIX GROUP HOLDINGS PLC ANNUAL REPORT & ACCOUNTS 2019
B3.3 Operating earnings per share The operating result attributable to ordinary equity holders of the parent for the purposes of computing earnings per share has been calculated as set out below.
Profit/(loss) before the tax attributable to owners 810 (824) (14) 708 (238) 470
Tax credit attributable to owners (163) 293 130 (129) 69 (60)
Prior to the creation of the UK-registered holding company (see note A1), dividends were charged within equity against the share premium account, as permitted by Cayman Islands Companies Law. From the date of the scheme of arrangement, dividends are charged to retained earnings in accordance with the UK Companies Act 2006.
C. OTHER CONSOLIDATED INCOME STATEMENT NOTES C1. Fees and Commissions Fees related to the provision of investment management services and administration services are recognised as services are provided. Front end fees, which are charged at the inception of service contracts, are deferred as a liability and recognised over the life of the contract.
Interest income on financial assets designated at FVTPL on initial recognition 2,113 1,260
Financial assets and financial liabilities at FVTPL: Designated upon initial recognition 17,574 (12,873)
C3. Administrative Expenses Administrative expenses Administrative expenses are recognised in the consolidated income statement as incurred.
Movement in provision for transition and transformation programme (see note G7) 159 –
No tax services were provided by the Company’s auditors in 2019 (2018: £0.1 million). The 2018 fees principally related to services provided to Standard Life Assurance for which the Group’s external auditor was engaged prior to the completion of the acquisition (and their appointment as auditors of those entities), and were terminated as permitted within a period of three months following completion of the acquisition. See page 95 for details of tax services provided by the Group’s external auditor to Aberdeen Standard Investments where the benefit of those services arose in funds controlled by the Group.
Movement on acquired in-force amortisation at less than 19% 9 –
4 The 2019 prior year credit primarily relates to the utilisation of trading losses in Standard Life Assurance Limited and Standard Life International DAC of £(4) million, Standard Life Assurance Limited YE18 tax provision true-up £(8) million, deferred tax asset recognition on software intangibles of £(20) million and deferred acquisition costs of £(6) million and the revised use of tax losses and other items £(13) million.
5 The 2019 profits taxed at rates other than 19% relates to overseas profits and UK life company profits subject to marginal shareholder tax rates.
7 The deferred tax rate change credit predominately relates to the Part VII transfer between Standard Life Assurance Limited and Standard Life International DAC of £(31) million and a reduction in AVIF tax rate relating to the German branch of £(19) million.
Movements in issued share capital during the year: Shares in issue at 1 January 721,199,214 72,119,921
During 2018, 270,142 shares were issued at a premium of £2 million in order to satisfy obligations to employees under the Group’s sharesave schemes (see note I1).
D2. Shares Held by the Employee Benefit Trust Where the Phoenix Group Employee Benefit Trust (‘EBT’) acquires shares in the Company or obtains rights to purchase its shares, the consideration paid (including any attributable transaction costs, net of tax) is shown as a deduction from owners’ equity. Gains and losses on sales of shares held by the EBT are charged or credited to the own shares account in equity.
D3 Tier 1 Notes The Fixed Rate Reset Perpetual Restricted Tier 1 Write Down Notes (‘Tier 1 Notes’) meet the definition of equity and accordingly are shown as a separate category within equity at the proceeds of issue. The coupons on the instruments are recognised as distributions on the date of payment and are charged directly to the statement of consolidated changes in equity.
Summary financial information showing the interest that non-controlling interests have in the Group’s activities and cash flows is shown below: £m
Subsequent to initial recognition, financial liabilities (except for liabilities under investment contracts without DPF and other liabilities designated at FVTPL) are measured at amortised cost using the effective interest method.
E. FINANCIAL ASSETS & LIABILITIES continued E1. Fair Values continued The valuation of liabilities on unit-linked contracts is held at the fair value of the related assets and liabilities. The liability is the sum of the unit-linked liabilities plus an additional amount to cover the present value of the excess of future policy costs over future charges.
Deposits from reinsurers It is the Group’s practice to obtain collateral to cover certain reinsurance transactions, usually in the form of cash or marketable securities. Where cash collateral is available to the Group for investment purposes, it is recognised as a ‘financial asset’ and the collateral repayable is recognised as ‘deposits received from reinsurers’ in the statement of consolidated financial position.
Hedge accounting The Group designates certain derivatives as hedging instruments in order to effect cash flow hedges. At the inception of the hedge relationship, the Group documents the relationship between the hedging instrument and the hedged item, along with its risk management objectives and its strategy for undertaking various hedge transactions. Furthermore, at the inception of the hedge and on an ongoing basis, the Group documents whether the hedging instrument is highly effective in offsetting changes in fair values or cash flows of the hedged item attributable to the hedged risk. Note E3 sets out details of the fair values of the derivative instruments used for hedging purposes.
Total financial liabilities 134,659 134,862 1 These assets and liabilities have no expected settlement date.
2 Total financial assets includes £2,050 million of assets held in a collateral account pertaining to the PGL pension scheme buy-in agreement. See note G1.2 for further details.
Designated upon initial recognition: Net asset value attributable to unitholders1 2,659 – 2,659
Financial liabilities measured at amortised cost: Deposits received from reinsurers 4,438 4,077 4,438
3 Total financial assets includes £1,063 million of assets held in a collateral account pertaining to the PGL pension scheme buy-in agreement. See note G1.2 for further details.
Level 3 financial instruments The Group’s financial instruments determined by valuation techniques using non-observable market inputs are based on a combination of independent third party evidence and internally developed models. In relation to investments in hedge funds and private equity investments, non-observable third party evidence in the form of net asset valuation statements is used as the basis for the valuation. Adjustments may be made to the net asset valuation where other evidence, for example recent sales of the underlying investments in the fund, indicates this is required. Securities that are valued using broker quotes which could not be corroborated across a sufficient range of quotes are considered as Level 3. For a small number of investment vehicles and debt securities, standard valuation models are used, as due to their nature and complexity they have no external market. Inputs into such models are based on observable market data where applicable. The fair value of loans, derivatives and some borrowings with no external market is determined by internally developed discounted cash flow models using appropriate assumptions corroborated with external market data where possible.
Total financial liabilities for which fair values are disclosed – 6,187 249 6,436 176 PHOENIX GROUP HOLDINGS PLC ANNUAL REPORT & ACCOUNTS 2019
Total financial assets measured at fair value 165,901 31,763 6,734 204,398
Loans and deposits at amortised cost – 423 – 423 £m
Total financial liabilities measured at fair value 2,732 115,374 236 118,342
E2.3 Level 3 Financial instrument sensitivities Level 3 investments in equities (including private equity and unlisted property investment vehicles) and collective investment schemes (including hedge funds) are valued using net asset statements provided by independent third parties, and therefore no sensitivity analysis has been prepared.
Total Level 3 debt securities 6,026 4,410 1 See note A1 for details of the restatements.
Debt securities categorised as Level 3 investments predominantly comprise unquoted corporate bonds, equity release mortgages, commercial real estate loans, income strips, bridging loans to private equity funds and corporate transactions. The remaining Level 3 debt securities are valued using broker quotes. Although such valuations are sensitive to estimates, it is believed that changing one or more of the assumptions to reasonably possible alternative assumptions would not change the fair value significantly. These assets are typically held to back investment contract liabilities and participating investments contracts and therefore fair value movements in such financial assets will typically be offset by corresponding movements in liabilities.
Included within debt securities are investments in equity release mortgages with a value of £2,781 million (2018: £2,020 million). The loans are valued using a discounted cash flow model and a Black-Scholes model for valuation of the No-Negative Equity Guarantee (‘NNEG’). The NNEG caps the loan repayment in the event of death or entry into long-term care to be no greater than the sales proceeds from the property.
E. FINANCIAL ASSETS & LIABILITIES continued E2. Fair Value Hierarchy continued E2.3 Level 3 Financial instrument sensitivities continued E2.3.1 Debt securities continued The future cash flows are estimated based on assumed levels of mortality derived from published mortality tables, entry into long-term care rates and voluntary redemption rates. Cash flows include an allowance for the expected cost of providing a NNEG assessed under a real world approach using a closed form model including an assumed level of property value volatility. For the NNEG assessment, property values are indexed from the latest property valuation point and then assumed to grow in line with Office for Budget Responsibility forecasts in the short term and according to an RPI based assumption thereafter.
Considering the fair valuation uses certain inputs that are not market observable, the fair value measurement of these loans has been categorised as a Level 3 fair value. The key non-market observable input is the voluntary redemption rate, for which the assumption varies by the origin, age and loan to value ratio of each portfolio. Experience analysis is used to inform this assumption; however, where experience is limited for more recently originated loans, significant expert judgement is required.
Also included within debt securities are investments in commercial real estate loans of £388 million (2018: £449 million). The loans are valued using a model which discounts the expected projected future cash flows at the risk-free rate plus a spread derived from a basket of comparable securities. The valuation is sensitive to changes in the discount rate. An increase of 35bps in the discount rate would decrease the value by £7 million (2018: £7 million) and a decrease of 35bps would increase the value by £7 million (2018: £8 million).
E2.3.2 Borrowings Included within borrowings measured at fair value and categorised as Level 3 financial liabilities are property reversion loans with a value of £99 million (2018: £127 million), measured using an internally developed model. The valuation is sensitive to key assumptions of the discount rate and the house price inflation rate. An increase in the discount rate of 1% would increase the value by £1 million (2018: £2 million) and a decrease of 1% would decrease the value by £1 million (2018: £2 million). An increase of 1% in the house price inflation rate would decrease the value by £1 million (2018: £2 million) and a decrease of 1% would increase the value by £1 million (2018: £1 million).
An increase of 100bps in the swap curve would decrease the net value by £13 million (2018: £16 million) and a decrease of 100bps would increase the net value by £17 million (2018: £22 million). An increase of 1% in the RPI and CPI inflation rates would increase the value by £10 million (2018: £13 million) and a decrease of 1% would decrease the value by £10 million (2018: £15 million).
Financial assets designated at FVTPL upon initial recognition: Collective investment schemes 19 16
Financial assets designated at FVTPL upon initial recognition: Consistent with the prior year, all the Group’s Level 1 and Level 2 assets have been valued using standard market pricing sources.
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, resulted in an overall net movement of financial assets from Level 1 to Level 2 in the current period and from Level 2 to Level 1 in the comparative period.
E2.5 Movement in Level 3 financial instruments measured at fair value £m
E. FINANCIAL ASSETS & LIABILITIES continued E2. Fair Value Hierarchy continued E2.5 Movement in Level 3 financial instruments measured at fair value continued
E3. Derivatives The Group purchases derivative financial instruments principally 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 Group also holds derivatives to hedge financial liabilities denominated in foreign currency.
In addition, the Group has entered into a transaction under which it has accepted reinsurance on a portfolio of single and regular premium life insurance policies and retroceded the majority of the insurance risk. Taken as a whole, this transaction does not give rise to the transfer of significant insurance risk to the Group and therefore does not meet the definition of an insurance contract under the Group’s accounting policies. The fair value of amounts due from the cedant are recognised within debt securities (see note E1). The fair value of amounts due to the retrocessionaire are recognised as a derivative liability and totalled £4 million at 31 December 2019 (2018: £13 million).
The amounts recognised as financial assets and liabilities from cash collateral received at 31 December 2019 are set out below.
Assets pledged The Group pledges collateral in respect of its OTC derivative liabilities. The value of assets pledged at 31 December 2019 in respect of OTC derivative liabilities of £650 million (2018: £1,009 million) amounted to £692 million (2018: £554 million).
E. FINANCIAL ASSETS & LIABILITIES continued E4. Collateral Arrangements continued E4.3 Stock lending collateral arrangements continued The maximum exposure to credit risk in respect of stock lending transactions is £3,050 million (2018: £2,417 million) of which credit risk of £3,050 million (2018: £2,417 million) is mitigated through the use of collateral arrangements.
Collateral has also been pledged and charges have been granted in respect of certain Group borrowings. The details of these arrangements are set out in note E5.
Retrocession contracts (note c) – 13 – 13 £200 million 7.25% unsecured subordinated loan (note d) 196 186 211 209 £300 million senior unsecured bond (note e) 121 121 130 132 £428 million Tier 2 subordinated notes (note h) 426 426 503 441 £450 million Tier 3 subordinated notes (note i) 449 448 473 447
The contracts are recognised in the consolidated financial statements at fair value, which in the prior year was a liability of £13 million presented within borrowings and in the current year is an asset of £24 million presented within debt securities. The asset represents the excess of the fair value of the future fees under the reinsurance agreement over the remaining financing liability.
e. On 7 July 2014, the Group’s financing subsidiary, PGH Capital plc (‘PGHC’), issued a £300 million 7 year senior unsecured bond at an annual coupon rate of 5.75% (‘£300 million senior bond’). On 20 March 2017, Old PGH was substituted in place of PGHC as issuer of the £300 million senior bond. On 5 May 2017, Old PGH completed the purchase of £178 million of the £300 million senior bond at a premium of £25 million in excess of the principal amount. Accrued interest on the purchased bonds was settled on this date. On 18 June 2019, the Company was substituted in place of Old PGH as issuer of the £300 million 7 year senior unsecured bond.
h. On 23 January 2015, PGHC issued £428 million of subordinated notes due 2025 at a coupon of 6.625%. Fees associated with these notes of £3 million were deferred and are being amortised over the life of the notes in the statement of consolidated financial position. Upon exchange £32 million of these notes were held by Group companies. On 27 January 2017, £17 million of the £428 million subordinated notes held by Group companies were sold to third parties and a further £15 million were sold to third parties on 31 January 2017, thereby increasing external borrowings by £32 million. On 20 March 2017, Old PGH was substituted in place of PGHC as issuer of the £428 million subordinated notes and then on 12 December 2018 the Company was substituted in place of Old PGH as issuer.
At 31 December £300 million senior unsecured bond 121 – – – – – 121 £1.25 billion revolving credit facility – 100 (100) – – – –
1 Comprises amortisation under the effective interest method applied to borrowings held at amortised cost.
E6. Risk Management – Financial Risk This note forms one part of the risk management disclosures in the consolidated financial statements. The Group’s management of insurance risk is detailed in note F4.
Responsibility for agreeing the financial risk profile rests with the board of each life company, as advised by investment managers, internal committees and the Actuarial function. In setting the risk profile, the board of each life company will receive advice from the appointed investment managers, the relevant with-profit actuary and the relevant Actuarial function holder as to the potential implications of that risk profile with regard to the probability of both realistic insolvency and of failing to meet the regulatory Minimum Capital Requirement. The Chief Actuary will also advise the extent to which the investment risk taken is consistent with the Group’s commitment to treat customers fairly.
E6.2 Financial risk analysis Transactions in financial instruments result in the Group assuming financial risks. These include credit risk, market risk and financial soundness risk. Each of these are described below, together with a summary of how the Group manages the risk, along with sensitivity analysis where appropriate. The sensitivity analysis does not take into account second order impacts of market movements, for example, where a market movement may give rise to potential indicators of impairment for the Group’s intangible balances.
There are two principal sources of credit risk for the Group: • credit risk which results from direct investment activities, including investments in debt securities, derivatives counterparties, collective investment schemes and the placing of cash deposits; and
The impact of non-government debt securities and, inter alia, the change in market credit spreads during the year is fully reflected in the values shown in these consolidated financial statements. Credit spreads are the excess of corporate bond yields over gilt yields to reflect the higher level of risk. Similarly, the value of derivatives that the Group holds takes into account fully the changes in swap rates.
The Group holds £10,800 million (2018: £9,917 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 £583 million (2018: £496 million) to fund against the risk of default.
E. FINANCIAL ASSETS & LIABILITIES continued E6. Risk Management – Financial Risk continued E6.2 Financial risk analysis continued E6.2.1 Credit risk continued A 100bps widening of credit spreads, with all other variables held constant and no change in assumed expected defaults, would result in a decrease in the profit after tax in respect of a full financial year, and in equity, of £70 million (2018: £108 million).
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 £26 million (2018: £100 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.
2 Non-rated debt securities includes equity release mortgages with a value of £2,781 million. Further details are set out in note E2.3.
Reinsurers’ share of investment contract liabilities – – – – – – 8,331 8,331 1 See note A1 for details of restatements.
2 For financial assets that do not have credit ratings assigned by external ratings the Group assigns internal ratings for use in management and monitoring credit risk. £64 million of AAA, £641 million of AA, £1,084 million of A, £291 million of BBB and £24 million of BB and below debt securities are internally rated.
Equity and property risk The Group has exposure to financial assets and liabilities whose values will fluctuate as a result of changes in market prices other than from interest rate and currency fluctuations. This is due to factors specific to individual instruments, their issuers or factors affecting all instruments traded in the market. Accordingly, the Group limits its exposure to any one counterparty in its investment portfolios and to any one foreign market.
Equity and property price risk is primarily borne in respect of assets held in with-profit funds, unit-linked funds or equity release mortgages in the non-profit funds. For unit-linked funds this risk is borne by policyholders and asset movements directly impact unit prices and hence policy values. For with-profit funds policyholders’ future bonuses will be impacted by the investment returns achieved and hence the price risk, whilst the Group also has exposure to the value of guarantees provided to with-profit policyholders. In addition some equity investments are held in respect of shareholders’ funds. For the non-profit fund property price risk from equity release mortgages is borne by the Group with the aim of achieving greater diversification and investment returns, consistent with the Strategic Asset Allocation approved by the Board. The Group as a whole is exposed to price risk fluctuations impacting the income flow of management charges from the invested assets of all funds; this is primarily managed through the use of derivatives.
E. FINANCIAL ASSETS & LIABILITIES continued E6. Risk Management – Financial Risk continued E6.2 Financial risk analysis continued E6.2.3 Financial soundness risk continued The Group’s policy is to maintain sufficient liquid assets of suitable credit quality at all times including, where appropriate, by having access to borrowings so as to be able to meet all foreseeable current liabilities as they fall due in a cost-effective manner. Forecasts are prepared regularly to predict required liquidity levels over both the short and medium term allowing management to respond appropriately to changes in circumstances.
The following table provides a maturity analysis showing the remaining contractual maturities of the Group’s undiscounted financial liabilities and associated interest. ‘Liabilities under insurance contracts’ contractual maturities are included based on the estimated timing of the amounts recognised in the statement of consolidated financial position in accordance with the requirements of IFRS 4 Insurance Contracts: 192 PHOENIX GROUP HOLDINGS PLC ANNUAL REPORT & ACCOUNTS 2019
1 year or less or on demand £m 1–5 years £m
Obligations for repayment of collateral received 2,645 – – – 2,645
For participating business, the liabilities under insurance contracts and investment contracts with DPF are calculated in accordance with the following methodology: • 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; • acquisition costs are not deferred; and
The With-Profit Benefit Reserve (‘WPBR’) for an individual contract is determined by either a retrospective calculation of ‘accumulated asset share’ approach or by way of a prospective ‘bonus reserve valuation’ method. The cost of future policy related liabilities is determined using a market consistent approach, mainly based on a stochastic model calibrated to market conditions at the end of the reporting period. Non-market related assumptions (for example, persistency, mortality and expenses) are based on experience adjusted to take into account of future trends.
Standard Life Assurance Limited (‘SLAL’), a wholly owned subsidiary of the Group, includes the Heritage With Profits Fund (‘HWPF’). In 2006, the Standard Life Assurance Company demutualised. The demutualisation was governed by its Scheme of Demutualisation (‘the Scheme’). Under the Scheme substantially all of the assets and liabilities of the Standard Life Assurance Company were transferred to SLAL.
The Scheme of Demutualisation (‘the Scheme’) provides that certain defined cash flows (recourse cash flows) arising in the HWPF on specified blocks of UK and Ireland business, both participating and non-participating, may be transferred out of that fund when they emerge, being transferred to the Shareholder Fund (‘SHF’) or the Proprietary Business Fund (‘PBF’) of SLAL, and thus accrue to the ultimate benefit of equity holders of the Company. Under the Scheme, such transfers are subject to certain constraints in order to protect policyholders. The Scheme also provides for additional expenses to be charged by the PBF to the HWPF in respect of German branch business in SLAL.
Present value of future profits on non-participating business in the withprofit funds For UK with-profit life funds, an amount may be recognised for the present value of future profits (‘PVFP’) on non-participating business written in a with-profit fund where the determination of the realistic value of liabilities in that with-profit fund takes account, directly or indirectly, of this value.
Where the value of future profits can be shown to be due to policyholders, this amount is recognised as a reduction in the liability rather than as an intangible asset. This is then apportioned between the amounts that have been taken into account in the measurement of liabilities and other amounts which are shown as an adjustment to the unallocated surplus.
The value of the PVFP is determined in a manner consistent with realistic measurement of liabilities. In particular, the methodology and assumptions involve adjustments to reflect risk and uncertainty, are based on current estimates of future experience and current market yields and allow for market consistent valuation of any guarantees or options within the contracts. The value is also adjusted to remove the value of capital backing the non-profit business if this is included in the realistic calculation of PVFP. The principal assumptions used to calculate the PVFP are the same as those used in calculating the insurance contract liabilities given in note F4.
Consolidated income statement recognition 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.
Life assurance business: Investment contracts with DPF 24,958 – 24,339 –
Amounts due for settlement after 12 months 79,508 6,532 75,700 6,801
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.
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 £3,217 million (2018: £3,253 million).
F4. Risk Management – Insurance Risk This note forms one part of the risk management disclosures in the consolidated financial statements. Financial risk is included in note E6.
Objectives and policies for mitigating insurance risk The Group uses several methods to assess and monitor insurance risk exposures for both individual types of risks insured and overall risks. These methods include internal risk measurement models, experience analyses, external data comparisons, sensitivity analyses, scenario analyses and stress testing. In addition to this, mortality, longevity and morbidity risks may in certain circumstances be mitigated by the use of reinsurance.
The Group’s longevity risk exposures have increased as a result of the Bulk Purchase Annuity deals it has successfully acquired; however, the vast majority of these exposures are reinsured to third parties.
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 £298 million (2018: £273 million).
A decrease of 10% in lapse rates, with all other variables held constant, would result in a decrease in the profit after tax in respect of a full year, and a decrease in equity of £20 million (2018: £27 million).
Discretionary participating bonus rate For realistic basis funds, the regular bonus rates assumed in each scenario are determined in accordance with each company’s PPFM. Final bonuses are assumed at a level such that maturity payments will equal asset shares subject to smoothing rules set out in the PPFM.
Some pensions contracts include guaranteed annuity options. The total amount provided in the with-profit and non-profit funds in respect of the future costs of guaranteed annuity options are £1,986 million (2018: £1,865 million) and £109 million (2018: £93 million) respectively.
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 £225 million (2018: £298 million) and £6 million (2018: £7 million) respectively.
Demographic prudence margin For non-participating insurance contract liabilities, the Group sets assumptions at management’s best estimates and recognises an explicit margin for demographic risks. For participating business in realistic basis companies, the assumptions about future demographic trends represent ‘best estimates’.
Assumption changes During the year a number of changes were made to assumptions to reflect changes in expected experience or to reflect transition activity. The impact of material changes during the year was as follows: (Decrease)/ increase in insurance liabilities
The £68 million positive impact of changes in expense assumptions principally reflects updated expense assumptions for insurance contracts reflecting reduced future servicing costs as a result of transition activity.
The £28 million positive impact of changes in expense assumptions principally reflects updated investment expenses in light of updates made to the asset mix and to reflect changes to agreements with the Group’s external funds managers.
With-profit funds: Pensions: Deferred annuities – with guarantees 8,468 63 924 –
With-profit fund (unitised and traditional) The Group operates a number of with-profit funds in which the with-profit policyholders benefit from a discretionary annual bonus (guaranteed once added in most cases) and a discretionary final bonus. Non-participating business is also written in some of the with-profit funds and some of the funds may include immediate annuities and deferred annuities with Guaranteed Annuity Rates (‘GAR’).
F. INSURANCE CONTRACTS, INVESTMENT CONTRACTS WITH DPF AND REINSURANCE continued F4. Risk Management – Insurance Risk continued F4.2 Managing product risk continued Deferred annuities Deferred annuity policies are written to provide either a cash benefit at retirement, which the policyholder can use to buy an annuity on the terms then applicable, or an annuity payable from retirement. The policies contain an element of guarantee expressed in the form that the contract is written in, i.e. to provide cash or an annuity. Deferred annuity policies written to provide a cash benefit may also contain an option to convert the cash benefit to an annuity benefit on guaranteed terms; these are known as GAR policies. Deferred annuity policies written to provide an annuity benefit may also contain an option to convert the annuity benefit into cash benefits on guaranteed terms; these are known as Guaranteed Cash Option (‘GCO’) policies. In addition, certain unit prices in the HWPF are guaranteed not to decrease.
As required by IFRIC 14, IAS 19 ‘The limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction’, to the extent that the economic surplus (prior to the elimination of the insurance policies issued by Group entities) will be available as a refund, the economic surplus is stated after a provision for tax that would be borne by the scheme administrators when the refund is made. The Group recognises a pension surplus on the basis that it is entitled to the surplus of each scheme in the event of a gradual settlement of the liabilities, due to its ability to order a winding up of the Trust.
Provision for tax on that part of the economic surplus available as a refund on a winding-up of the Scheme (183) (157)
Economic surplus (including £nil million (2018: £432 million) available as a refund on a winding-up of the Scheme) 37 506
Risks The Group’s defined benefit schemes typically expose the Group to a number of risks, the most significant of which are: Asset volatility – the value of the schemes’ assets will vary as market conditions change and as such is subject to considerable volatility. The liabilities are calculated using a discount rate set with reference to corporate bond yields; if assets underperform this yield, this will create a deficit. The majority of the assets are held within a liability driven investment strategy which is linked to the funding basis of the schemes (set with reference to government bond yields). As such, to the extent that movements in corporate bond yields are out of line with movements in government bond yields, volatility will arise.
Life expectancy – the majority of the schemes’ obligations are to provide benefits for the life of the member, so increases in life expectancy will result in an increase in the liabilities. For the PGL scheme, this is partially offset by the buy in policies that move in line with the liabilities. These buy in policies are eliminated on consolidation (see note G1.2 for further details).
Guaranteed Minimum Pension (‘GMP’) Equalisation GMP is a portion of pension that was accrued by individuals who were contracted out of the State Second Pension prior to 6 April 1997. Historically, there was an inequality of benefits between male and female members who have GMP. A High Court case concluded on 26 October 2018 and confirmed that GMPs need to be equalised. The Group has undertaken an initial assessment, and has included an allowance for the potential cost of equalising GMP for the impact between males and females in its IAS 19 actuarial liabilities as at 31 December 2018, pending further discussions with the scheme Trustees and the issuance of guidance as to how equalisation should be achieved. The cost of GMP equalisation across all schemes of £59 million (Pearl Scheme: £32 million; PGL Scheme: £23 million; and Abbey Scheme £4 million) was recognised as a past service cost in the 2018 consolidated income statement. As at 31 December 2019 it is considered that the current rate of uplift to the liabilities as a result of the GMP equalisation remains appropriate.
G1.1 Pearl Group Staff Pension Scheme Scheme details The Pearl Scheme comprises a final salary section, a money purchase section and a hybrid section (a mix of final salary and money purchase). The final salary and hybrid sections of the Pearl Scheme are closed to new members, and since 1 July 2011 are also closed to future accrual by active members.
The valuation has been based on an assessment of the liabilities of the Pearl Scheme as at 31 December 2019, undertaken by independent qualified actuaries. The present values of the defined benefit obligation and the related interest costs have been measured using the projected unit credit method.
A triennial funding valuation of the Pearl Scheme as at 30 June 2018 was completed in 2019. This showed a surplus as at 30 June 2018 of £104 million, on the agreed technical provisions basis. The cash flows utilised in the IFRS valuation as at 31 December 2018 were updated to reflect the latest data available from the 30 June 2018 funding valuation and together with the impact of modelling enhancements implemented during 2018, this resulted in the recognition of an experience loss of £145 million in 2018. The funding and IFRS accounting bases of valuation can give rise to different results for a number of reasons. The funding basis of valuation is based on general principles of prudence whereas the accounting valuation is based on best estimates. Discount rates are gilt-based for the funding valuation whereas the rate used for IFRS valuation purposes is based on a yield curve for high quality AA-rated corporate bonds. In addition the values are prepared at different dates which will result in differences arising from changes in market conditions and employer contributions made in the subsequent period.
(ii) to reach full funding on a gilts flat basis by 30 June 2031; • the Trustee continues to benefit from a first charge over shares in Phoenix Life Assurance Limited, National Provident Life Limited, Pearl Group Services Limited and PGS2 Limited. The security claim granted under the share charges is capped at the lower of £600 million and 100% of the Pearl Scheme deficit (calculated on a basis linked to UK government securities) revalued every three years thereafter; and
Liability management exercise In June 2018, the Group commenced a pension increase exchange (‘PlE’) exercise in respect of the Pearl Scheme. Existing in-scope pensioners were offered the option to exchange future non-statutory pension increases for a one-off uplift to their current pension, thereby reducing longevity and inflation risk for the Group. The financial effect of all acceptances received was recognised in the 2018 consolidated financial statements as a reduction in scheme liabilities of £2 million shown as past service credit in the consolidated income statement.
Gain from changes in demographic assumptions – 8 – – 8
Gain from changes in financial assumptions – 70 – – 70
G. OTHER STATEMENT OF CONSOLIDATED FINANCIAL POSITION NOTES continued G1. Pension Schemes continued G1.1 Pearl Group Staff Pension Scheme continued A quantitative sensitivity analysis for significant actuarial assumptions is shown below: 2019 Assumptions Base Discount rate RPI Life expectancy
The above sensitivity analyses are based on a change in an assumption while holding all other assumptions constant. In practice, this is unlikely to occur, and changes in some of the assumptions may be correlated. When calculating the sensitivity of the defined benefit obligation to significant actuarial assumptions the same method has been applied as when calculating the pension asset recognised within the statement of financial position.
Scheme details Defined contribution scheme Contributions in the year amounted to £7 million (2018: £7 million).
To the extent that an economic surplus will be available as a refund, the economic surplus is stated after a provision for tax that would be borne by the scheme administrators when the refund is made.
A triennial funding valuation of the PGL Pension Scheme as at 30 June 2018 was completed in 2019. This showed a surplus as at 30 June 2018 of £246 million. The IFRS valuation cash flows have been updated to reflect the latest valuation data.
At the same time as the December 2016 buy-in transaction, there was a rule change made with respect to pre-1997 excess benefits for members of the Phoenix section of the PGL Pension Scheme. Pension increases are now increased in line with CPI inflation subject to a maximum of 5% per annum. Prior to this, members received discretionary increases in payment on these benefits with the discretionary increases not allowed for in the defined benefit obligation.
In March 2019, the PGL Pension Scheme entered into a further ‘buy-in’ agreement with Phoenix Life Limited (‘PLL’) which covered the remaining pensioner and deferred members of the Scheme. The scheme transferred £1,115 million of plan assets to a collateral account and this transfer constituted the payment of premium to PLL. An adjustment of £13 million to the value of the premium is due to be paid to PLL in 2020. The assets transferred to PLL are recognised in the relevant line within financial assets in the statement of consolidated financial position. As with the initial ‘buy-in’ transaction completed in December 2016, the economic effect of the transaction in the Scheme is to replace the plan assets transferred with a single line insurance policy reimbursement asset which is eliminated on consolidation. The value of this insurance policy at the date of the buy-in was £670 million.
Change in provision for tax on economic surplus available as a refund – – (1) (1)
G. OTHER STATEMENT OF CONSOLIDATED FINANCIAL POSITION NOTES continued G1. Pension Schemes continued G1.2 PGL Pension Scheme continued Scheme assets The distribution of the scheme assets at the end of the year was as follows: Total £m
Obligations for repayment of stock lending collateral received – – (24) –
Adjustment for amounts due to subsidiary eliminated on consolidation (13) – – –
The weighted average duration of the defined benefit obligation at 31 December 2019 is 16 years (2018: 16 years).
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) 3.00 3.20
The valuation has been based on an assessment of the liabilities of the Abbey Life Scheme as at 31 December 2019 undertaken by independent qualified actuaries. The present values of the defined benefit obligation and the related interest costs have been measured using the projected unit credit method.
Funding The last funding valuation of the Abbey Life Scheme was carried out by a qualified actuary as at 31 March 2018 and showed a deficit of £98 million.
Prior to 19 November 2018, the following schedule of contributions was applicable from 1 July 2017 and PeLHL was required to pay 39.5% of gross pensionable earnings and the following amounts in respect of deficit contributions: • a lump sum of £25 million into the Scheme settled on 31 July 2017; • fixed monthly contributions of £400,000 payable up to 30 June 2026 and monthly contributions of £83,552 in respect of administration expenses which are payable up to 30 June 2028 and will increase annually in line with the Retail Prices Index assumption; and
The Charged Accounts are Escrow accounts which were created in 2010 to provide the Trustees with additional security in light of the funding deficit. The amounts held in the Charged Accounts do not form part of Abbey Life Scheme assets.
G. OTHER STATEMENT OF CONSOLIDATED FINANCIAL POSITION NOTES continued G1. Pension Schemes continued G1.3 Abbey Life Staff Pension Scheme continued Summary of amounts recognised in the consolidated financial statements The amounts recognised in the consolidated financial statements are as follows: Fair value of scheme assets £m
Defined benefit obligation The calculation of the defined benefit obligation can be allocated to the Abbey Life Scheme’s members as follows: • Deferred scheme members: 49% (2018: 49%); and
The weighted average duration of the defined benefit obligation at 31 December 2019 is 17 years (2018: 17 years).
Principal assumptions The principal financial assumptions of the Abbey Life Scheme are set out in the table below: Rate of increase for pensions in payment (5% per annum or RPI if lower) 2.90 3.10
Rate of increase for deferred pensions ('CPI' subject to caps) 2.20 2.40
G. OTHER STATEMENT OF CONSOLIDATED FINANCIAL POSITION NOTES continued G1. Pension Schemes continued G1.3 Abbey Life Staff Pension Scheme continued A quantitative sensitivity analysis for significant actuarial assumptions is shown below: 2019 Assumptions Base Discount rate RPI Life expectancy
In certain acquisitions an excess of the acquirer’s interest in the net fair value of the acquiree’s identifiable assets, liabilities, contingent liabilities and non-controlling interests over cost may arise. Where this occurs, the surplus of the fair value of net assets acquired over the fair value of the consideration is recognised in the consolidated income statement.
Acquired in-force business Insurance and investment contracts with 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. This acquired in-force business is amortised over the estimated life of the contracts on a basis which recognises the emergence of the economic benefits.
Customer relationships The customer relationship intangible asset includes vesting pension premiums and is measured on initial recognition at cost. The cost of this intangible asset acquired in a business combination is the fair value as at the date of acquisition. Following initial recognition, the customer relationship intangible asset is carried at cost less any accumulated amortisation and any accumulated impairment losses.
Present value of future profits on non-participating business in the with-profit fund The present value of future profits (‘PVFP’) is determined in a manner consistent with the realistic measurement of insurance contract liabilities. The Group’s accounting policy for PVFP is described in note F1.
£47 million of goodwill is attributable to the Management Services segment including £8 million that arose on acquisition of Abbey Life. Value in use has been determined as the present value of certain future cash flows associated with this business. The cash flows used in this calculation have been valued using a risk adjusted discount rate of 8.3% (2018: 8.9%) and are consistent with those adopted by management in the Group’s operating plan and, for the period 2025 and beyond, reflect the anticipated run-off of the Phoenix Life insurance business. The underlying assumptions of these projections include management’s best estimates with regards to longevity, persistency, mortality and morbidity.
G2.3 Customer relationships The customer relationships intangible at 31 December 2019 relates to vesting pension premiums which captures the new business arising from policies in-force at the acquisition date, specifically topups made to existing policies and annuities vested from matured pension policies.
G2.4 Present value of future profits on non-participating business in the with-profit fund The principal assumptions used to calculate the present value of future profits are the same as those used in calculating the insurance contract liabilities given in note F4.1. Revaluation of the present value of future profits is charged or credited to the consolidated income statement as appropriate.
This intangible was valued on a ‘multi-period excess earnings’ basis and is being amortised over a period of 15 years. The remaining useful life as at 31 December 2019 was 13.7 years.
G3. Property, Plant and Equipment Owner-occupied property is stated at its revalued amount, being its fair value at the date of the revaluation less any subsequent accumulated depreciation and impairment. Owner-occupied property is depreciated over its estimated useful life, which is taken as 20-50 years. Land is not depreciated. Gains and losses on owner-occupied property are recognised in the statement of consolidated comprehensive income.
Equipment consists primarily of computer equipment and fittings. Equipment is stated at historical cost less deprecation. Where acquired in a business combination, historical cost equates to the fair value at the acquisition date. Depreciation on equipment is charged to the consolidated income statement over its estimated useful life of between 2 and 15 years.
Transition to IFRS 16 (see note A6) – 75 2 – 77
Owner-occupied properties have been valued by accredited independent valuers at 31 December 2019 on an open market basis in accordance with the Royal Institution of Chartered Surveyors’ requirements, which is deemed to equate to fair value. The fair value measurement for the properties of £25 million (2018: £31 million) has been categorised as Level 3 based on the non-observable inputs to the valuation technique used. Unrealised gains for the current and prior years are £nil.
The fair value of the owner-occupied properties was derived using the investment method supported by comparable evidence. The significant non-observable inputs used in the valuations are the expected rental values per square foot and the capitalisation rates.
Unrealised losses on properties held at end of period (124) (28)
As at 31 December 2019, a property portfolio of £5,824 million (2018: £6,401 million) is held by the life companies in a mix of commercial sectors, spread geographically throughout the UK and Europe.
Estimated rental value per parking space £1,170 £1,170 218 PHOENIX GROUP HOLDINGS PLC ANNUAL REPORT & ACCOUNTS 2019
Deposits are subject to a combination of fixed and variable interest rates. The carrying amounts approximate to fair value at the period end. Cash and cash equivalents in long-term business operations and consolidated collective investment schemes of £4,201 million (2018: £4,572 million) are primarily held for the benefit of policyholders and so are not generally available for use by the owners.
Where it is expected that a part of the expenditure required to settle a provision will be reimbursed by a third party the reimbursement is recognised when, and only when, it is virtually certain that the reimbursement will be received. This reimbursement shall be recognised as a separate asset within other receivables and will not exceed the amount of the provision.
Staff related Staff related provisions include provisions for unfunded pensions of £13 million (2018: £12 million), private medical and other insurance costs for former employees of £3 million (2018: £3 million).
The PA(GI) provision of £7 million (2018: £17 million) represents the Group’s best estimate of the likely future costs. The FCA deadline of 29 August 2019 for submission of complaints has now passed and consequently no new claims are expected. Following the passing of the FCA deadline the level of uncertainty with respect to the remaining exposure has reduced. At 31 December 2019, a reimbursement asset of £15 million (2018: £8 million) has been recognised in other receivables in connection with the Group’s exposure to these complaints. This represents recoveries due from third parties under contractual arrangements. Recoveries of £10 million (2018: £18 million) have been received during the year.
Under the terms of the Abbey Life acquisition, Deutsche Bank provided Phoenix Life Holdings Limited (‘PLHL’) with an indemnity, with a duration of up to eight years, in respect of exposures that may arise in Abbey Life as a result of the FCA’s final thematic review findings. The indemnity was subject to a limit of £175 million and applied to all regulatory fines and to 80%-90% of the costs of customer remediation. Reflecting the status of the review and remediation processes, agreement was reached with Deutsche Bank during 2019 to close out this indemnity and a payment was received to reflect this closure. Recoveries of £15 million (2018: £9 million) have been received during the year and the reimbursement asset recognised in other receivables was £nil (2018: £14million).
FCA thematic reviews provision – SLAL Standard Life Assurance Limited was also a participant in the thematic review of non-advised annuity sales issued by the FCA on 14 October 2016. On acquisition of the Standard Life Assurance businesses on 31 August 2018, obligations arising as a result of past practices in the area described above were assessed. As a result, it was determined appropriate to recognise a provision of £225 million in respect of SLAL on a fair value basis. The provision recognised the estimated costs associated with redress payable to customers, the costs of the review and other expenses. It did not make allowance for any financial penalties that may arise as a result of the completion of the FCA investigation as it was not possible to determine a reliable estimate in this regard.
To the extent that total costs are less than £225 million, Old PGH is required to pay the balance to SLA plc, together with any interest that may have accrued on such sum, and subject to recovery of any lost tax relief on the £225 million. In light of the release from the thematic review provision in the year, a liability of £64 million has been recognised within other payables at 31 December 2019 to reflect obligations to SLA plc in this regard.
Restructuring provisions AXA restructuring provision Following the acquisition of AXA Wealth in 2016, the Group commenced the restructuring of these businesses to align their operating model with that of the other Group companies. These activities involved separation and integration activities associated with the exiting of interim services agreements entered into with the vendor, and costs involved with implementing the Group’s preferred outsourcer model. A provision of £30 million was recognised in 2016, of which £4 million remained at the start of the 2019. This provision was fully utilised in the year.
Transfer of policy administration A significant proportion of the Group’s policy administration is outsourced to Diligenta Limited (‘Diligenta’), a UK-based subsidiary of Tata Consultancy Services (‘TCS’). Diligenta provide life and pension business process services to a large number of the Group’s policyholders. During 2018, the Group announced its intention to move to a single outsourcer platform and as a result a further 2 million of the Group’s legacy policies will be transferred to Diligenta by 31 December 2021.
Transition and Transformation provision Following the acquisition of the Standard Life Assurance businesses in August 2018, the Group established a transition and transformation programme which aims to deliver the integration of the Group’s operating models via a series of phases. During the year, the Group announced its intention to extend its strategic partnership with TCS to provide customer servicing, to develop a digital platform and for migration of existing Standard Life policies to this platform by 2022 which raised a valid expectation of the impacts in those likely to be affected. It is envisaged that £159 million of costs will be incurred over a three year period and will include migration costs, severance costs and other expenses. Migration costs payable to TCS are subject to limited uncertainty as they are fixed under the terms of the agreement entered into. The severance costs are subject to uncertainty and will be impacted by the number of staff that transfer to TCS, and the average salaries and number of years’ service of those affected.
Deferred tax assets have not been recognised in respect of: Tax losses carried forward 30 53
The Group in conjunction with a number of other companies has challenged HMRC’s position on the corporation tax treatment of overseas portfolio dividends from companies resident in the EU (‘EU dividends’) using a Group Litigation Order (‘GLO’). The issue relates to whether the UK tax rules, which taxed EU dividends received prior to 1 July 2009 was contrary to EU law given that dividends received from UK companies were exempt from tax. In 2009 UK tax law was changed with both overseas and UK dividends being treated as exempt from corporation tax.
The Supreme Court concluded in favour of the tax payer in July 2018 and a tax benefit of £13 million was recognised at the end of 2018 in relation to enhanced double tax relief claims which the Group is entitled to in accordance with the Court judgement. The tax refund is for the benefit of Group with-profits funds (total c£11 million) and unit linked life funds (£2 million). In the case of the with-profits funds there was an increase in unallocated surplus and for the unit linked life funds there is a corresponding increase in investment contract liabilities as a result of the recognition of the tax asset.
The Group has elected not to apply the measurement requirements of IFRS 16 to its low value leases and as such costs of these leases are recognised on a straight-line basis as expense within administrative expenses. The expense for the year was £1 million.
The Group adopted IFRS 16 effective from 1 January 2019 and as noted in note A6 has applied the standard using the modified retrospective approach. As a result, the comparative information for 2018 has not been restated and continues to be reported under IAS 17. The following disclosures are in respect of the operating leases previously reported in the 2018 consolidated financial statements.
Amount due to SLA plc on deed of indemnity (see note G7) 64 –
• Pearl Life Holdings Limited (‘PeLHL’) is required to make payments of contributions into charged accounts on behalf of the Abbey Life Scheme. These amounts do not form part of the pension scheme assets and at 31 December 2019, PeLHL held £49 million (2018: £46 million) within debt securities and £7 million (2018: £1 million) within cash and cash equivalents in respect of these charged accounts. Further details of when these amounts may become payable to the pensions scheme are included in note G1.3.
H2. Acquisition of Standard Life Assurance Businesses On 31 August 2018, the Group acquired 100% of the issued share capital of Standard Life Assurance Limited, Standard Life Pensions Fund Limited, Standard Life International Designated Activity Company, Vebnet (Holdings) Limited, Vebnet Limited, Standard Life Lifetime Mortgages Limited, Standard Life Assets and Employee Services Limited and Standard Life Investment Funds Limited (together known as ‘the Standard Life Assurance businesses’) from SLA plc for total consideration of £2,994 million. The consideration consisted of £1,971 million of cash funded by a fully underwritten rights issue of £950 million, with the remaining balance of £1,021 million funded by a mix of new debt and Phoenix’s own resources. In addition, SLA plc took a 19.98% equity stake in the Enlarged Group on completion valued at £1,023 million, based on the share price at 31 August 2018.
H. INTERESTS IN SUBSIDIARIES AND ASSOCIATES continued H3. Associates: Investment in UK Commercial Property Trust Limited (‘UKCPT’) continued As at 31 December 2019, the Group held 44.6% (2018: 44.7%) of the issued share capital of UKCPT and the value of this investment, measured at fair value, was £513 million (2018: £496 million). Management has concluded that the Group did not control UKCPT in either the current or comparative periods. The Group does not hold a unilateral power of veto in general meetings and is restricted by the terms of an existing relationship agreement it has with UKCPT.
The Group’s holdings in the above investments are subject to the terms and conditions of the respective fund’s prospectus and are susceptible to market price risk arising from uncertainties about future values. The Group holds redeemable shares or units in each of the funds. The funds are managed by internal and external fund managers who apply various investment strategies to accomplish their respective investment objectives. All of the funds are managed by fund managers who are compensated by the respective funds for their services. Such compensation generally consists of an assetbased fee and a performance-based incentive fee and is reflected in the valuation of each fund.
H5. Group Entities The table below sets out the Group's subsidiaries (including collective investment schemes that have been consolidated within the Group's financial statements), associates and significant holdings in undertakings (including undertakings where holding amounts to 20% or more of the nominal value of the shares or units and they are not classified as a subsidiary or associate).
Standard Life International Designated Activity Company (life assurance company – directly owned by the Company)
PGH Capital plc (finance company – directly owned by the Company)
Axial Fundamental Strategies (US Investments) LLC Wilmington18 Limited Liability Company 100.00%
PGH (TC1) Limited (holding company – directly owned by the Company)
PGH (TC2) Limited (holding company – directly owned by the Company)
28 Ribera del Loira SA (dormant company) Madrid36 Ordinary Shares 100.00%
Janus Henderson Strategic Investment Funds – Janus Henderson Institutional North American Index Opportunities Fund
Standard Life Trust Management Pan European Trust Edinburgh25 Unit Trust 99.97%
Standard Life Investments Global SICAV Global Emerging Markets Local CCY Debt
Seabury Assets Fund Standard Life Investments The Sterling VNAV Liquidity Fund
Seabury Assets Fund Standard Life Investments The Euro VNAV Liquidity Fund
North American Strategic Partners (Feeder) 2008 L.P. Edinburgh25 Limited Partnership 100.00%
ASI Financial Equity Fund A Inc London17 OEIC, sub fund 80.78%
Standard Life Investment Company – Global Emerging Market Equity Income Fund
Standard Life Investments Global Real Estate Fund Edinburgh25 Unit Trust 46.97%
Aberdeen Liquidity Fund (Lux) Sterling Fund Luxembourg35 SICAV, sub fund 37.23%
Aberdeen Liquidity Fund (Lux) Euro Fund Luxembourg35 SICAV, sub fund 37.55%
Standard Life Investments UK Shopping Centre Trust Jersey37 Unit Trust 40.67%
BlackRock Market Advantage X GBP (Acc) London39 UCITS, sub fund 54.64%
Amundi Index Solutions SICAV Funds – AIS Amundi Index Msci World SRI I14 HG Cap
The following subsidiaries were either fully disposed of or holdings became insignificant to the Group. The subsidiaries were deconsolidated either from the date of disposal or from the date when the holdings became insignificant: • Janus Henderson Strategic Investment Funds – Janus Henderson Institutional European Index Opportunities Fund; • Janus Henderson Institutional UK Gilt Fund; • AB SICAV I – Global Factor Portfolio; • Aberdeen Capital Trust Inc; • Standard Life Investment Company Emerging Market Debt Fund; • Standard Life Investments Global SICAV Emerging Market Debt Unconstrained.
I. OTHER NOTES I1. Share-Based Payment 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 out below.
Assuming no good leavers or other events which would trigger early vesting rights, the 2017 LTIP award is subject to performance conditions tied to the Company’s performance in respect of cumulative cash generation and Total Shareholder Return (‘TSR’). The 2018 and 2019 LTIP awards are subject to performance conditions tied to the Company’s performance in respect of cumulative cash generation, return on Adjusted Shareholder Solvency II Own Funds and TSR.
2019 LTIP awards were granted on 11 March 2019 and are expected to vest on 11 March 2022. The number of shares for all outstanding LTIP awards as at 10 July 2018 were increased to take into account the impact of the Group’s rights issue (see note D1). This adjustment was based on the Theoretical Ex-Rights Price. The 2016 LTIP awards vested on 30 March 2019 and 2 June 2019. The 2017 awards will vest on 24 March 2020 and the 2018 awards will vest on 21 March 2021.
The fair value of the options has been determined using a BlackScholes valuation model. Key assumptions within this valuation model include expected share price volatility and expected dividend yield.
• Risk-free rate (%): (0.1) (for 3.25 year scheme) and nil (for 5.25 year scheme).
I1.3 Movements in the year The following tables illustrate the number of, and movements in, LTIP, Sharesave and DBSS share options during the year: Number of share options 2019
The weighted average fair value of options granted during the year was £4.10 (2018: £5.75).
Acquisition related expenses to be included within cash flows from investing activities – 43
I3. Capital Management The Group’s capital management is based on the Solvency II framework. This involves a valuation in line with Solvency II principles of the Group’s Own Funds and risk-based assessment of the Group’s Solvency Capital Requirement (‘SCR’).
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 48 to 56 of the Annual Report and Accounts.
Operational risk Operational risk is the risk of reductions in earnings and/or value, through financial or reputational loss, from inadequate or failed internal processes and systems, or from people related or external events.
Capital Management Framework The Group’s Capital Management Framework is designed to achieve the following objectives: • to provide appropriate security for policyholders and meet all regulatory capital requirements under the Solvency II regime while not retaining unnecessary excess capital; • to ensure sufficient liquidity to meet obligations to policyholders and other creditors; • to optimise the Fitch Ratings financial leverage to maintain an investment grade credit rating; and
A Solvency II capital assessment involves valuation in line with Solvency II principles of the Group's Own Funds and a risk-based assessment of the Group's Solvency Capital Requirement ('SCR'). Solvency II surplus is the excess of Own Funds over the SCR.
In December 2015, the Group was granted the PRA’s approval for use of its Internal Model to assess capital requirements. Following the 2016 acquisitions of the AXA Wealth and Abbey Life businesses, the Group obtained the PRA’s approval to incorporate the acquired AXA Wealth and Abbey Life businesses within the scope of the Group’s Internal Model in March 2017 and March 2018 respectively.
Remove Own Funds pertaining to unsupported with-profit funds and pension schemes (2.5) (2.3)
Fees under Transitional Services Arrangement and material outsource agreements (6) (4) (2) (2)
Details of the shareholdings and emoluments of individual Directors are provided in the Remuneration report on pages 99 to 130.
To subscribe to private equity funds and other unlisted assets 396 655
I7. Events After the Reporting Period The consolidated 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 consolidated financial statements are disclosed.
On 6 March 2020, the Board recommended a final dividend of 23.4p per share (2018: 23.4p per share) for the year ended 31 December 2019. Payment of the final dividend is subject to shareholder approval at the AGM. The cost of this dividend has not been recognised as a liability in the consolidated financial statements for 2019 and will be charged to the consolidated statement of changes in equity in 2020.
The notes identified numerically on pages 247 to 254 are an integral part of these separate financial statements. Where items also appear in the consolidated financial statements, reference is made to the notes (identified alphanumerically) on pages 154 to 243.
Total comprehensive expense for the period attributable to owners – – – (3) (3) – (3)
Issue of ordinary shares under scheme of arrangement 72 4,078 (4) – 4,146 – 4,146
Proceeds from new shareholder borrowings, net of associated expenses 5 100 –
The Company has taken advantage of the exemption in section 408 of the Companies Act 2006 not to present its own income statement in these financial statements. Profit attributable to owners for the year ended 31 December 2019 was £1,643 million (2018: £3 million loss).
Where an accounting policy can be directly attributed to a specific note to the consolidated financial statements, the policy is presented within that note. Each note within the Company financial statements makes reference to the note to the consolidated financial statements containing the applicable accounting policy. The accounting policy in relation to foreign currency transactions is included within note A2.1 to the consolidated financial statements.
The Company assesses at each reporting date whether an investment is impaired by assessing whether any indicators of impairment exist. If objective evidence of impairment exists, the Company calculates the amount of impairment as the difference between the recoverable amount of the Group entity and its carrying value and recognises the amount as an expense in the income statement.
For those credit exposures for which credit risk has not increased significantly since initial recognition, the Company measures loss allowances at an amount equal to the total expected credit losses resulting from default events that are possible within 12 months after the reporting date (‘12-month ECL’). For those credit exposures for which there has been a significant increase in credit risk since initial recognition, the Company measures and recognises an allowance at an amount equal to the expected credit losses over the remaining life of the exposure, irrespective of the timing of the default (‘Lifetime ECL’). If the financial asset becomes ‘creditimpaired ’ (following significant financial difficulty of issuer/borrower, or a default/breach of a covenant), the Company will recognise a Lifetime ECL. ECLs are derived from unbiased and probabilityweighted estimates of expected loss.
Note A4 outlines that the Group has adopted IFRS 16 ‘Leases’ and amendments to IAS19 ‘Employee benefits’ but the Company currently does not have any leases or pension schemes and therefore has not adopted these changes.
On 31 October 2018 all issued redeemable preference shares were cancelled.
Following court approval on 18 December 2018, the entire issued share premium of the Company as at that date was cancelled. The sum of £4,078 million arising on the share premium cancellation has been credited to the Company’s retained earnings.
During 2019, the Company issued 315,730 shares at a premium of £2 million in order to satisfy its obligations to employees under the Group’s sharesave schemes.
Issued and fully paid: 721.5 million ordinary shares of £0.10 each (2018: 721.2 million) 72 72
Carrying value Fair value £m £450 million Tier 3 subordinated notes (note b) 448 447 473 447
e. On 18 June 2019, the Company was substituted in place of Old PGH as issuer of the £300 million 7 year senior unsecured bond due 2021 at an annual coupon of 5.75% with principal outstanding of £122 million, which was initially recognised at fair value of £131 million.
g. On 12 December 2018, the Company became an additional borrower on a £900 million unsecured revolving credit facility, maturing in June 2022. On 27 June 2019, the Company replaced this facility with a £1.25 billion unsecured revolving credit facility (the ‘revolving facility’), maturing in June 2024. There are no mandatory or target amortisation payments associated with the facility but the facility does include customary mandatory prepayments obligations and voluntary prepayments are permissible.
h. On 12 December 2018, the Company became an additional borrower and guarantor to an acquisition facility with an aggregate principal amount of £600 million. The acquisition facility was undrawn as at 31 December 2018. On 27 June 2019, the facility was cancelled.
As part of the substitutions, accrued interest was also transferred to the Company and was settled prior to 31 December 2018.
Reconciliation of Liabilities Arising from Financing Activities The table below details changes in the Company’s liabilities arising from financing activities, including both cash and non-cash changes. Liabilities arising from financing activities are those for which cash flows were, or future cash flows will be, classified in the Company’s statement of cash flows as cash flows from financing activities.
Loan due to Standard Life Assurance Limited – – – – 282 – – 6 288
The Company entered into a cross currency swap with another group company in 2018 to hedge against adverse currency movements in respect of the €500 million Tier 2 notes.
On 12 December 2018, the Company became the ultimate parent undertaking of the Group by acquiring the entire share capital of Old PGH via a share for share exchange. The cost of investment in Old PGH, reflected in the table above, was determined as the carrying amount of the Company’s share of the equity of Old PGH on the date of the transaction. The difference between the cost of investment and the market capitalisation of Old PGH immediately before the share for share exchange of £4 million has been recognised as an other reserve, and is shown as a separate component of equity.
On 18 June 2019, the Company acquired Phoenix Life Holdings Limited from its subsidiaries PGH (LCA) Limited and PGH (LCB) Limited for a consideration of £3,356 million, settled via a distribution in-specie. On the same day, the Company also acquired SLAL from Old PGH for an initial consideration of £2,994 million which was subsequently increased by £46 million. The consideration for this acquisition was settled partly through the cancellation of the £825 million loan due from Old PGH (see note 10), with the remainder settled through a distribution in-specie.
The value in use has been used as the recoverable amount and this has been determined using the present value of the future cash flows of the Company’s subsidiaries including the in-force long-term business, the asset management business and the service company. The cash flows used in this calculation are consistent with those adopted by 250 PHOENIX GROUP HOLDINGS PLC ANNUAL REPORT & ACCOUNTS 2019
On 12 December 2018, the Company was assigned a £450 million subordinated loan by PLHL. The loan accrues interest at a rate of 4.175% and matures on 20 July 2022. This loan was initially recognised at fair value of £447 million and is accreted to par over the period to 2022. At 31 December 2019, the carrying value of the loan was £448 million (2018: £448 million).
b) On 12 December 2018, the Company entered into a new £825 million loan agreement with Old PGH as consideration for the substitution of the Company as issuer of the Tier 1 Notes and €500 million Tier 2 notes. The loan accrued interest at a rate of 6 month LIBOR plus 1.22% and matured on 31 December 2023. On 18 June 2019 the loan was settled as part of the consideration for the Company’s acquisition of SLAL from Old PGH (see note 9).
Financial assets at fair value through profit or loss: Collective investment schemes 200 – – 200
Level 3 Financial Instrument Sensitivities The investment in equity and debt securities is in respect of equity and debt holdings in a property investment structure which was transferred to the Company via an in-specie dividend received from Old PGH during 2019.
The structure is valued as a whole on a discounted cash flow basis and allocated to the debt and equity components in order of priority. The valuation is sensitive to the discount rate applied. A decrease in the discount rate of 175bps would increase the value by £9 million whilst an increase of 200bps would decrease the value by £6 million.
The Finance Act 2016 reduced the rates of corporation tax from 20% to 19% in April 2017 and to 17% from April 2020. Consequently a blended rate of tax has been used for the purposes of providing for deferred tax in the Company.
Bank and cash balances 45 1 14. CASH FLOWS FROM OPERATING ACTIVITIES
15. CAPITAL AND RISK MANAGEMENT The Company’s capital comprises share capital, the Tier 1 Notes and all reserves as calculated in accordance with IFRSs, as set out in the statement of changes in equity. Under English company law, dividends must be paid from distributable profits. As the ultimate parent undertaking of the Group, the Company manages its capital to ensure that it has sufficient distributable profits to pay dividends in accordance with its dividend policy.
At 31 December 2019, total capital was £5,849 million (2018: £4,554 million). The movement in capital in the period comprises the total comprehensive income for the period attributable to owners of £1,643 million (2018: £3 million expense), dividends paid of £338 million (2018: £nil), coupon paid on Tier 1 Notes, net of tax relief of £23 million (2018: £nil), credit to equity for equity-settled share-based payments of £11 million (2018: £nil), issue of ordinary share capital of £2 million (2018: £nil), proceeds from the issue of shares under the scheme of arrangement of £nil (2018: 4,146 million) and the substituted Tier 1 Notes of £nil (2018: £411 million).
The principal risks and uncertainties facing the Company are interest rate risk, liquidity risk, foreign currency risk and credit risk. The Company has hedged the currency risk on its foreign currency hybrid debt (US $500 million Tier 2 bonds and €500 million Tier 2 notes) through a US $500 million internal loan and a €500 million internal cross currency swap.
Other amounts due from Group entities (note 18) N/A Performing 12 month ECL 198 – 198
Cash and cash equivalents (note 13) A N/A 12 month ECL 45 – 45
Loans and deposits (note 10) N/A Performing 12 month ECL 2,056 – 2,056
Other amounts due from Group entities (note 18) N/A Performing 12 month ECL 20 – 20
The Company considers reasonable and supportable information that is relevant and available without undue cost or effort to assess whether there has been a significant increase in risk since initial recognition. This includes quantitative and qualitative information and also forwardlooking analysis.
Amounts due from other Group entities – The credit risk from activities undertaken in the normal course of business is considered to be extremely low risk. Given their low risk, the loss allowance has been set at less than £1 million. The Company assesses whether there has been a significant increase in credit risk since initial recognition by assessing past credit impairments, history of defaults and the long-term stability of the Group.
Cash and cash equivalents – The Company’s cash and cash equivalents are held with bank and financial institution counterparties, which have investment grade ‘A’ credit ratings. The Company considers that its cash and cash equivalents have low credit risk based on the external credit ratings of the counterparties and there being no history of default, and therefore the impact to the net carrying amount shown in the table above is not material.
16. SHARE-BASED PAYMENTS For detailed information on the long-term incentive plans, sharesave schemes and deferred bonus share schemes refer to note I1 in the consolidated financial statements.
On 31 August 2018, SLA plc took a 19.98% equity stake in the Enlarged Group, and as a result became a related party of the Company. SLA plc is considered to have significant influence over the Group due to its equity stake and representation on the Board.
19. AUDITOR’S REMUNERATION Details of auditor’s remuneration, for Phoenix Group Holdings plc and its subsidiaries, is included in note C4 to the consolidated financial statements.
N LYONS C BANNISTER J MCCONVILLE A BRIGGS A BARBOUR C FLEMING K GREEN W MAYALL J POLLOCK B RICHARDS N SHOTT K SORENSON M TUMILTY
1 Includes assets where shareholders of the life companies bear the investment risk.
1 Following the acquisition of the Standard Life Assurance businesses in 2018, the Group has revised the presentation of certain balances within the statement of consolidated financial position. Total Group consolidated assets has been restated to include £244 million of accrued interest previously reported in prepayments and accrued income. In addition, £2,914 million of unit-linked assets previously reported as collective investments schemes and presented on a look-through basis within the disclosure has been reclassified to reinsurers’ share of investment contract liabilities.
2 Includes assets where shareholders of the life companies bear the investment risk.
3 Includes assets where policyholders bear most of the investment risk.
5 Includes equity release mortgages of £2,020 million, commercial real estate loans of £449 million, income strips of £654 million, policy loans of £9 million, other loans of £170 million, net derivative assets of £2,825 million, reinsurers’ share of investment contracts of £8,331 million and other investments of £712 million.
The following table provides a reconciliation of the total life company assets to the Assets under Administration (‘AUA’) as at 31 December 2019 detailed in the Business Review on page 41: £bn
The life companies’ debt portfolio was £93.3 billion at 31 December 2019 (2018: £91.3 billion). Shareholders had direct exposure to £19.9 billion (2018: 18.0 billion) of these assets (including supported participating funds), of which 99.8% (2018: 99.5%) of rated securities were investment grade. The shareholders’ credit risk exposure to the non-supported participating funds is primarily limited to the shareholders’ share of future bonuses. Shareholders’ credit risk exposure to the unit-linked funds is limited to the level of asset management fee, which is dependent on the underlying assets.
The life companies had £94 million (2018: £87 million) shareholder exposure to financial institution corporate debt of the Peripheral Eurozone, defined as Portugal, Italy, Ireland, Greece, and Spain, at 31 December 2019. The £6,444 million (2018: £5,850 million) total shareholder exposure to financial institution corporate debt comprised £3,376 million (2018: £3,107 million) senior debt, £2,567 million (2018: £2,249 million) Tier 1 debt and £501 million (2018: £494 million) Tier 2 debt.
Participating non-supported £m Unit-linked £m Total £m 260 PHOENIX GROUP HOLDINGS PLC ANNUAL REPORT & ACCOUNTS 2019
Indirectly held debt securities – – – 8,680 8,680 96.7% of rated securities were investment grade at 31 December 2019 (2018: 94.7%). The percentage of rated securities that were investment grade in relation to the shareholder and policyholders’ funds were 99.8% and 95.7% respectively (2018: 99.5% and 93.4% respectively).
PGH PLC SOLVENCY II SURPLUS The PGH plc surplus at 31 December 2019 is £3.1 billion (2018: £3.2 billion).
CALCULATION OF GROUP SOLVENCY The Solvency II regulations set out two methods for calculating Group solvency, ‘Method 1’ (being the default accounting based consolidation method) and ‘Method 2’ (the deduction and aggregation method).
PGH plc’s total Own Funds are analysed by Tier as follows: Estimated £bn
Restricted Tier 1 capital comprises the Tier 1 Notes issued in April 2018, the terms of which enable it to qualify as restricted Tier 1 capital for regulatory reporting purposes. There is no impact to the treatment of the restricted Tier 1 capital in the Group solvency calculation as a result of the PRA policy statement PS4/19 ‘Solvency II: Adjusting for the reduction of loss absorbency where own fund instruments are taxed on write down’, issued during the period.
Tier 3 items include the Tier 3 subordinated notes of £0.4 billion (2018: £0.4 billion) and the deferred tax asset of £0.1 billion (2018: £0.1 billion).
The Group assesses its financial performance based on a number of measures. Some measures are management derived measures of historic or future financial performance, position or cash flows of the Group; which are not defined or specified in accordance with relevant financial reporting frameworks such as International Financial Reporting Standards (‘IFRS’) or Solvency II. These measures are known as Alternative Performance Measures (‘APMS’).
APMs are disclosed to provide stakeholders with further helpful information on the performance of the Group and should be viewed as complementary to, rather than a substitute for, the measures determined according to IFRS and Solvency II requirements� Accordingly, these APMs may not be comparable with similarly titled measures and disclosures by other companies�
The Group’s Assets under Administration (‘AUA’) represents assets administered by or on behalf of the Group, covering both policyholder fund and shareholder assets� It includes assets recognised in the Group’s IFRS consolidated statement of financial position together with certain assets administered by the Group for which beneficial ownership resides with customers�
The Group seeks to manage the level of debt on its balance sheet by monitoring its financial leverage ratio� This is to ensure the Group maintains its investment grade credit rating as issued by Fitch Ratings and optimises its funding costs and financial flexibility for future acquisitions�
The debt and equity figures are directly sourced from the Group’s IFRS consolidated statement of financial position on pages 149 and 150 and the analysis of borrowings note on page 184�
Incremental long-term cash generation represents the operating companies’ cash generation that is expected to arise in future years as a result of new business transacted in the current period within our UK Open and Europe segments, and from the writing of bulk purchase annuities within our Heritage segment� It excludes any costs associated with the acquisition of the new business�
Incremental long-term cash generation is not directly reconcilable to the financial statements as it relates to cash generation expected to arise in the future�
Represents the increase in Solvency II shareholder Own funds arising from new business written in the year, adjusted to exclude the associated risk margin and any restrictions in respect of contract boundaries and stated on a net of tax basis�
New business contribution is not directly reconcilable to the Group’s Solvency II metrics as it represents an in-year movement� Further analysis is provided on page 41�
The statement of consolidated cash flows prepared in accordance with IFRS combines cash flows relating to shareholders with cash flows relating to policyholders, but the practical management of cash within the Group maintains a distinction between the two� The Group therefore focuses on the cash flows of the holding companies which relate only to shareholders� Such cash flows are considered more representative of the cash generation that could potentially be distributed as dividends or used for debt repayment and servicing, group expenses and pension contributions�
Operating companies’ cash generation is a key performance indicator used by management for planning, reporting and executive remuneration�
Further details of holding companies’ cash flows are included within the business review on pages 39 to 40 and a breakdown of the Group’s cash position by type of entity is provided in the additional life company asset disclosures section on page 255�
Operating profit is a financial performance measure based on expected long-term investment returns� It is stated before tax and nonoperating items including amortisation and impairments of intangibles, finance costs attributable to owners and other non-operating items which in the Director’s view should be excluded by their nature or incidence to enable a full understanding of financial performance�
Further details of the components of this measure and the assumptions inherent in the calculation of the longterm investment return are included in note B1�2 to the IFRS consolidated financial statements�
This measure provides a more representative view of the Group’s performance than the IFRS result after tax as it provides long-term performance information unaffected by short-term economic volatility and one-off items, and is stated net of policyholder finance charges and tax�
A reconciliation of operating profit to the IFRS result before tax attributable to owners is included in the business review on page 45 and in the primary financial statements on page 161�
Please see business review section page 44 for further analysis of the solvency positions of the life companies�
The unsupported with-profit funds and Group pension funds do not contribute to the Group Solvency II surplus� However, the inclusion of related Own Funds and SCR amounts dampens the implied Solvency II capital ratio�
The voting results for our 2020 AGM, including proxy votes and votes withheld, will be available on the Group’s website shortly after the meeting.
Dividend mandates Shareholders may find it convenient to have their dividends paid directly to their bank or building society account�
Warning to shareholders Over recent years, many companies have become aware that their shareholders have received unsolicited phone calls or correspondence concerning investment matters� These are typically from overseas-based ‘brokers’ who target UK shareholders, offering to sell them what often turn out to be worthless or high-risk shares in US or UK investments� These operations are commonly known as ‘boiler rooms’�
If you receive any unsolicited investment advice: • make sure you get the correct name of the person and organisation; • check that they are properly authorised by the Financial Conduct Authority (‘FCA’) before getting involved by visiting www�fca�org�uk/firms/systems-reporting/register; • report the matter to the FCA by calling the FCA Consumer Helpline on 0800 111 6768; and
More detailed information on this or similar activity can be found on the FCA website available at www�fca�org�uk/ consumers�
ENLARGED GROUP The Phoenix Group including the acquired Standard Life Assurance businesses
Calculated by Phoenix using Fitch Ratings stated methodology as debt as a percentage of the sum of debt and equity� Debt is defined as the IFRS carrying value of shareholder borrowings� Equity is defined as the sum of equity attributable to the owners of the parent adjusted to exclude goodwill, the unallocated surplus and the Tier 1 Notes
FCA Financial Conduct Authority – The body responsible for supervising the conduct of all financial services firms and for the prudential regulation of those financial services firms not supervised by the Prudential Regulation Authority (’PRA’), such as asset managers and independent financial advisers
OWN FUNDS Basic Own Funds comprise the excess of assets over liabilities valued in accordance with the Solvency II principles and subordinated liabilities which qualify to be included in Own Funds under the Solvency II rules� Eligible Own Funds are the amount of Own Funds that are available to cover the Solvency Capital Requirements after applying prescribed tiering limits and transferability restrictions to Basic Own Funds
PART VII TRANSFER The transfer of insurance policies under Part VII of Financial Services and Markets Act 2000� The insurers involved can be in the same corporate group or in different groups� Transfers require the consent of the High Court, which will consider the views of the PRA and FCA and of an Independent Expert
TIER 1 NOTES The £500 million fixed rate reset perpetual restricted Tier 1 write down Notes issued by Phoenix
UK OPEN The Group’s business segment where products are actively marketed to new and existing customers
INVESTOR RELATIONS Our Investor Relations section includes information such as our most recent news and announcements, results presentations, annual and interim reports, share-price performance, AGM and EGM information, UK Regulatory Returns and contact information�
NEWS AND UPDATES To stay up-to-date with Phoenix Group news and other changes to our site’s content, you can sign up for e-mail alerts, which will notify you when content is added�
FORWARD-LOOKING STATEMENTS The 2019 Annual Report and Accounts contains, and the Group may make other statements (verbal or otherwise) containing, forward-looking statements and other financial and/or statistical data about the Group’s current plans, goals and expectations relating to future financial conditions, performance, results, strategy and/or objectives, including in relation to the enlarged Group following the acquisition of ReAssure Group plc and the acquired businesses�
Statements containing the words: ‘believes’, ‘intends’, ‘will’, ’may’, ‘should’, ‘expects’, ‘plans’, ‘aims’, ‘seeks’, ‘targets’, ’continues’ and ‘anticipates’ or other words of similar meaning are forward-looking� Such forward-looking statements and other financial and/or statistical data involve risk and uncertainty because they relate to future events and circumstances that are beyond the Group’s control� For example, certain insurance risk disclosures are dependent on the Group’s choices about assumptions and models, which by their nature are estimates�
As a result, the Group’s actual future financial condition, performance and results may differ materially from the plans, goals and expectations set out in the forward-looking statements and other financial and/or statistical data within the 2019 Annual Report and Accounts� No representation is made that any of these statements will come to pass or that any future results will be achieved� As a result, you are cautioned not be place undue reliance on such forward-looking statements contained in this 2019 Annual Report and Accounts�
The 2019 Annual Report and Accounts has been prepared for the members of the Company and no one else� The Company, its Directors or agents do not accept or assume responsibility to any other person in connection with this document and any such responsibility or liability is expressly disclaimed� Nothing in the 2019 Annual Report and Accounts is or should be construed as a profit forecast or estimate�