EVOLUTION OF THE PHOENIX GROUP The following shows the Group’s original entities and their various acquisitions over the years.
Resolution Life Group acquires UK life operations of Royal & Sun Alliance
Pearl Group renamed Phoenix Group Holdings and achieves Premium Listing on London Stock Exchange
THE ACHIEVEMENTS OF 2014 HAVE POSITIONED PHOENIX GROUP FOR THE FUTURE AND WE HAVE CONTINUED TO APPLY OUR FINANCIAL AND ACTUARIAL EXPERTISE TO GENERATE VALUE FOR BOTH POLICYHOLDERS AND SHAREHOLDERS.”
2014 was a year of significant change, both for Phoenix Group and the wider UK life insurance sector. The impact of changing regulation, with the ending of compulsory annuities announced in the March Budget and the ongoing implementation of the Solvency II regulatory regime, has already been substantial and will continue to develop over the next year.
Phoenix Group has remained focused on financial delivery. The Group has continued its record of meeting or exceeding publicly stated targets and has been particularly successful in enhancing MCEV through management actions. Like other life insurance companies, Phoenix Group will continue to face uncertainties in the future as both the economic environment and the implementation of the Solvency II regulations remain difficult to predict. However, our track record of performance and the quality of our staff provides a solid base to allow us to meet future challenges. We remain focused on delivering good outcomes for our 5 million policyholders who depend on our careful stewardship of their savings.
The Board has recommended a final dividend for 2014 of 26.7p per share. This brings the total dividend for the financial year to 53.4p per share, in line with the dividend paid in respect of the 2013 financial year. Given the long-term run-off nature of the Group’s business, the Board believes it is prudent to maintain a stable, sustainable dividend while the Group builds its financial flexibility to execute its growth strategy and meet the external challenges.
INTRODUCTION Last year saw a number of transformational events for Phoenix Group. Together these have simplified and strengthened our balance sheet, in line with our aim to achieve an investment grade rating in the future, and have enhanced the Group’s ability to deliver on our ambition to play a leading role in the consolidation of the UK closed life fund sector.
The divestment of Ignis to Standard Life Investments for £390 million, the raising of a £300 million senior unsecured bond and the simplification of our bank debt into a new, £900 million unsecured facility have been major steps forward in reducing our leverage and positioning ourselves for the next stage in our development.
As the environment for UK open life insurers has become more challenging, we now believe that the market opportunity for Phoenix Group in the UK is more than £300 billion of assets, increased from our previous estimate of £200 billion. This includes closed or quasi-closed life companies in the UK, plus additional legacy funds that are not writing significant levels of new business. Phoenix Group has the scale, operating model and specialist expertise that will be essential for efficiently managing a wide range of legacy products over time. This will allow us to apply the same skills and management actions to new funds as we have to our existing funds, generating synergies for shareholders and improved outcomes for customers.
Our year-end MCEV increased by £269 million to £2,647 million, versus £2,378 million at 31 December 2013, driven by the divestment of Ignis and £261 million of incremental value generated through management actions. We have therefore already achieved a large proportion of our MCEV management actions target of £300 million for the period from 2014 to 2016.
DIVESTMENT OF IGNIS AND DEBT REFINANCING The debt reduction and refinancing that the Group has achieved in 2014 consisted of three separate transactions: – The divestment of Ignis to Standard Life Investments for £390 million in cash, with £250 million of the proceeds used to prepay bank debt
We have therefore replaced the Group’s complex bank and senior debt, which previously consisted of two debt silos as well as associated PIK notes, with a senior bond and a new single bank facility.
In addition to the above transactions, we have taken two further capital management actions. The first of these was a successful bondholder consent in December that ensured that the £200 million Phoenix Life Limited Tier 2 bonds could be ‘grandfathered’ as capital under Solvency II and which therefore helps clarify the Group’s capital position under the new regime. Second, we announced in January 2015 an exchange of 99% of the Group’s Tier 1 notes for £428 million of new subordinated notes, issued by PGH Capital Limited and maturing in 2025. The terms of the new subordinated notes meet the requirements of Tier 2 capital under Solvency II and have a coupon of 6.625%. This exchange helps to extend further the maturity of the Group’s debt and better align it to the Group’s long-term cash generation profile.
This comprehensive restructuring of the Group’s debt profile is the culmination of a series of actions that have been undertaken to reduce gearing and simplify our capital structure over the past five years, with total shareholder borrowings, including our Tier 1 notes, reducing from £3.5 billion at the end of 2009 to £1.7 billion as at 31 December 2014. This strengthens Phoenix Group’s position as the UK’s largest specialist closed life fund consolidator and the Group will continue to progress its aim to achieve an investment grade credit rating during 2015.
During 2014, our activities in relation to Solvency II have been focused primarily on the preparation of the Group’s Internal Model Application, as well as on monitoring the progress of the developing Solvency II regulations. The UK insurance industry is still awaiting from regulatory authorities the specific details in relation to the implementation of Solvency II, including with respect to the transitional provisions, matching adjustment and volatility balancer.
Given the uncertainty surrounding the transition to Solvency II, it is likely there will be some retention of capital in the short term within the life companies. At a Group level, provided that the regulations are in line with our current expectations, we expect to be well capitalised under the new Solvency II regime, with the Group capital position under Solvency II expected to be in excess of the current PLHL ICA surplus. However, this is subject to regulatory approvals and should not be seen as representing the views of the Prudential Regulation Authority. We are currently on track to formally apply for regulatory approval of our Internal Model in June.
On a pro forma basis, if the divestment of Ignis had occurred on 1 January 2014, the Group’s IFRS operating profits for the year ended 31 December 2014 would have been £17 million lower, reflecting the removal of Ignis’ contribution to the Group’s operating results during that period.
OPERATIONAL HIGHLIGHTS We continued to develop the Group’s operating model in 2014 and undertook a number of specific actions: – We increased the distributable estate by £184 million through a range of management actions, with £185 million of estate distributed to 95,000 policyholders through final bonuses on their with-profits policies
– We successfully streamlined the Group’s actuarial modelling systems, using the new model to produce the 2014 results following decommissioning of the legacy models after a successful parallel run for the 2013 year end. The new model simplifies processes, enables consistent capital management across the business and positions us well to meet the new Solvency II reporting requirements in an efficient manner
– We continued the migration of in-force policies to Diligenta’s BaNCS administration platform, with the transfer of a further 65,000 policies following the expiry of our outsourcing contract with Capita Employee Benefits (formerly Capita Hartshead). We have now migrated a total of 3.24 million in-force policies to BaNCS
– We completed a transaction to re-balance exposure to longevity risk from the PGL Pension Scheme. This involved Phoenix Life Limited de-risking certain with-profit funds (via the closure of a legacy longevity indemnity agreement with a Group holding company) and entering into a longevity swap insurance (covering approximately £900 million of PGL Pension Scheme liabilities) which was simultaneously reinsured on a 50% quota share basis. The overall impact of the transaction on the Group MCEV was a gain of £91 million
REGULATORY AND LEGISLATIVE CHANGES 2014 saw a number of key regulatory and legislative changes to the UK life insurance sector and the financial impact of these changes is still unclear. However, Phoenix Group will continue to take actions to prepare for the possible range of outcomes.
The ending of compulsory annuitisation of pension pots, announced in the 2014 Budget, is expected to have a significant impact across the UK life insurance industry. Phoenix Group, while only providing annuities for our vesting policyholders, wrote a total of £545 million of annuities in 2014.
Of the annuities we wrote in 2014, £390 million had guaranteed annuity rates (‘GARs’). The Group continues to expect that the large majority of the guaranteed business for higher-value pension pots will continue to be annuitised, given both the attractive nature of the rates and that customers using independent financial advice or the free guidance service, ‘PensionWise’, are likely to be strongly encouraged to take advantage of their GARs. However, we do expect an increase in cash being taken for lower-value pension pots. While it is still too early to draw firm conclusions, we have assumed that the future take-up of guaranteed annuities will decline by around 20%, with a negative impact on our MCEV of £15 million.
In respect of non-GAR annuities, again it is still too early to be certain of customers’ long-term behaviour. Volumes of non-GAR annuities written by the Group have fallen by 46% in 2014 compared to 2013, as customers have deferred making decisions with regards to their pension pots following the budget. We believe that, in future, take-up of non-GAR annuities by customers will fall by around two-thirds. The MCEV contribution from writing these annuities was £11 million in 2014 compared to £18 million for 2013.
CUSTOMERS The customer strategy at Phoenix Group is focused on improving customer outcomes. Security of our customer assets is foremost, followed by our aim to maximise returns wherever possible but primarily through enhanced distribution of the estate within the life funds. For example, within the Pearl with-profit fund, now part of Phoenix Life Assurance Limited, estate distribution is adding around 26% to the final pay-out on many policies. In addition, 75% of our with-profit policies are now receiving annual bonus payments, a sign that our with-profit funds are returning to a healthier position under our stewardship.
2015 is likely to be a challenging year for us and, I suspect, for our customers as we all get to grips with these changes. We have therefore been increasing operational capacity and the skill levels of our colleagues to ensure we are in the best place possible to react to these challenges.
Having already achieved £261 million of incremental MCEV in 2014, we are targeting a further £100 million of incremental MCEV and therefore raise our 2014 to 2016 target to £400 million, up from the original £300 million.
Finally, we have started discussions with credit rating agencies to seek an investment grade rating. We will, therefore, target a gearing level that is consistent with the achievement of this ambition, which we hope to attain during the course of 2015. The reduction in gearing that Phoenix Group achieved in 2014 has already resulted in a reduction in the interest margin on our bank facility by 37.5bps to 312.5bps and an investment grade credit rating would trigger a further 50bps margin reduction on the outstanding bank facility, providing further interest cost benefits to the Group.
CONCLUSION Phoenix Group is well positioned to benefit from the numerous changes in the UK life insurance industry. Not only do we have the right platform as the largest UK specialist consolidator of closed life funds, with an effective and scalable operating model and strong outsource partner relationships, we have also demonstrated our ability over the past five years to enhance value for our customers and shareholders through management actions. I believe that there remains a significant opportunity for Phoenix Group to generate further value from future acquisitions as the current regulatory uncertainty clears.
I would also like to thank my colleagues for their hard work during an exceptionally busy year. They have continued to deliver strong performance across all of our key financial metrics and targets, while completing a number of key transactions that have enhanced the Group’s strategic position. I look forward to capitalising on our renewed strength and firmly believe that we can continue to deliver value for all our stakeholders.
We manage life insurance funds which no longer actively sell new life or pension policies and which run-off gradually over time. The Group’s closed life funds consist of around 5 million policyholders and total life company assets of approximately £52 billion.
Unlike open life businesses, we are not required to allocate significant capital to support the writing and distribution of new insurance products. This means that the capital requirements of our operating life companies decline as policies mature, releasing excess capital in the form of cash.
We create value by seeking to enhance policyholder returns from our in-force book of closed life funds and generating profits for shareholders from participation in investment returns, policyholder charges and management fees earned on assets. These additional profits from the in-force policies increase the free surplus which can be released by the Group’s life companies in the form of cash.
– As a closed life business, capital is released as the policies run-off which allows the Group to support a higher degree of leverage in its capital structure than many of our peers who continue to write new business which consume capital
– The Group functions provide support for, and co-ordination and delivery of, the Group’s strategic objectives, whilst managing the relationships with our external stakeholders, including shareholders, banks, debt investors, pension trustees and regulators. The Group functions also consider potential acquisition or disposal opportunities to further enhance value for the Group.
GROUP FUNCTIONS The Group functions provide services to Phoenix Life and manage corporate and strategic activity. This includes Group Finance, Treasury, Group Tax, Group Actuarial, Group Risk, Legal Services, HR, Corporate Communications, Strategy and Corporate Development, Investor Relations, Company Secretariat and Internal Audit. The Group functions are based both in Wythall, Birmingham and Juxon House, London, and the Group is led by the Group Chief Executive Officer, Clive Bannister.
COMPANIES Responsible for providing our life companies with all required services
Further details of our life company consolidations can be found on our website at about-phoenix-life/fund-transfers.aspx
Following a series of life company consolidations, the Group now has three operating UK life companies, being Phoenix Life Limited, Phoenix Life Assurance Limited and National Provident Life Limited (‘NPLL’). Together, they comprise 14 with-profit funds and two non-profit funds. In addition, the Group has an Irish operating life company, Scottish Mutual International Limited (‘SMI’), which is owned by Phoenix Life Limited.
By bringing together separate life companies and funds, the Group’s business model is simplified, which releases capital and reduces complexity. Fund transfers enable the Group to make more efficient use of the capital in its life companies and result in administrative expense savings and increased consistency of management practices and principles across the Group.
The Group has commenced the process of transferring the business of NPLL to Phoenix Life Assurance Limited, thus potentially reducing the number of operating UK life companies from three to two. If approved by the High Court, it is expected that the transfer will take place on 30 June 2015.
The transfer will provide the opportunity to move the NPLL business under the Phoenix Life brand, thereby enabling a consistent brand to be used across all of the Group’s UK life insurance business.
As the number of policies held by the Group gradually declines over time, the fixed cost base of our operations as a proportion of policies will increase. Our management services team manages this risk by putting in place long-term arrangements for third party policy administration. By paying a fixed price per policy to our outsource partners we reduce this fixed cost element of our operations and convert to a variable cost structure. This allows our management services companies to generate profits by managing costs efficiently.
The divestment of Ignis has had a limited impact on the operating structure of Phoenix Life. The relationship with Ignis operated on an arm’s length basis and this has continued with Standard Life Investments. The existing outsourcer model is used to oversee and manage the relationship with Standard Life Investments.
AREAS OF CURRENT STRATEGIC FOCUS The four key areas of current strategic focus are outlined in more detail over the next few pages.
We also continue to focus on optimising our capital structure while addressing the diverse needs of various stakeholders, including policyholders, shareholders, lending banks, bondholders and regulators.
HOW WE MEASURE DELIVERY Effective risk and investment management benefit our capital metrics: IGD surplus and PLHL ICA surplus, both key performance indicators (‘KPIs’) which are used to monitor the strength of our business and our strategy to manage capital efficiently. Going forward we intend to manage our gearing to a level consistent with our aim to achieve an investment grade credit rating.
KEY INITIATIVES AND PROGRESS IN 2014 – In March 2014, we announced the divestment of Ignis to Standard Life Investments for £390 million in cash. The transaction completed on 1 July 2014 and brought significant financial and strategic benefits to the Group, including a reduction in the level of gearing through a £250 million debt prepayment and a strategic alliance with Standard Life Investments.
– In July 2014, we issued a £300 million senior unsecured bond which allowed us to refinance a portion of our bank debt and improved financial flexibility through a reduction in our reliance on bank finance and re-establishing our relationship with the debt capital markets.
– Following on from the bond issue, we completed a comprehensive refinancing of our senior debt structure which unified the two legacy debt silos (Pearl and Impala) into a single new £900 million unsecured bank facility. As part of this refinancing, we repaid £206 million of bank debt and lowered our interest costs with the potential for margin reductions if we reduce gearing further and/or achieve an investment grade rating.
– Together these actions have reduced gearing significantly, supporting our aim to achieve an investment grade rating in the future whilst enhancing our ability to pursue further acquisitions.
– In January 2015, we announced a successful exchange of 99% of the Group’s Tier 1 notes for £428 million of new subordinated notes, issued by PGH Capital Limited and maturing in 2025. The new terms of the subordinated notes meet the requirements of Tier 2 capital under Solvency II and have a coupon of 6.625%. This exchange helps to extend the maturity of the Group’s debt structure and better align it to the Group’s long-term cash generation profile.
PRIORITIES FOR 2015 – Continue to implement new management actions to enhance our capital metrics.
For further details of our capital KPIs Turn to page 33.
In order to drive value there are a number of management actions, planned and undertaken, which release capital, accelerate cash flows or enhance MCEV. These actions are undertaken across four areas: restructuring, risk management, operational management and outsourcing. By improving the efficiency of operational management through the standardisation and streamlining of key processes across the Group, this will in turn reduce costs, improve efficiency and drive value.
HOW WE MEASURE DELIVERY The Group sets external targets for two of its KPIs, cash flow generation and incremental Group MCEV, which underpin how value is delivered.
– In March 2014, we announced a new cumulative target of £300 million incremental embedded value from management actions between 2014 and 2016. Having already achieved £261 million of incremental MCEV in 2014, we commit to achieving a further £100 million of incremental MCEV in the period 2014–2016.
– £545 million of vesting annuities were retained within the Group in 2014, of which £390 million related to policies with guaranteed annuity rates.
– Achieve additional MCEV management actions in 2015 and 2016 to meet our revised target of £400 million in the period 2014–2016.
– Improving value and effective with-profits fund run-off, through accelerating estate distribution and providing appropriate investment exposure
– Effective service delivery, using our outsourcers to leverage expertise and ensure costs run off in line with policy volumes
– Clear and effective communication, recognising many customers no longer have financial advisers
Financial services products are usually long term and in many cases customers cease to be engaged with their product over time. There is more that we as an industry can do to help re-engage customers to ensure they are in a position to make informed decisions about their products. Phoenix is committed to try to increase levels of engagement with its customers.
HOW WE MEASURE DELIVERY A programme of customer research continues, with an average of 1,500 customers each month participating in automated telephone surveys. The results remain positive, with an overall customer satisfaction score of 4.65 on a 5 scale rating. Research of this type is invaluable as it helps inform our service proposition which puts customers at the heart of what we do, and creates an opportunity for customers to recommend improvement. We also monitor volumes of customer complaints about our service, which have reduced by nearly a third in 2014. Service complaints as a percentage of customer transactions were 0.23% against a 0.5% target.
– For many of our funds, we have reintroduced annual bonus payments, a sign that our with profits funds are returning to a healthier position under our stewardship.
– Our Financial Ombudsman Service (FOS) overturn rate has remained stable at 21%.
– Supporting the Government’s new PensionWise service and encouraging our customers to both use this service and seek independent advice on their retirement decision-making.
– Continue to take actions to prepare for the possible range of outcomes following key regulatory and legislative changes in 2014.
For further details of customer service initiatives in 2014 See the full Corporate Responsibility report on our website.
HOW WE MANAGE DELIVERY The engagement of our workforce is hugely important for the success of our business. We keep our finger on the pulse through an annual staff survey, which has again returned scores ahead of the Financial Services Benchmark. 2014 was the fifth year of this annual survey, and our engagement score for Phoenix Life and Group was 78%, which represents a 2% increase compared to 2013. We use the results to drive continuous improvement in staff engagement, planning activities at a Group and team level informed by the MI provided.
KEY INITIATIVES AND PROGRESS IN 2014 We have a principles-led approach to maintaining a collaborative and successful team which we continued to apply in 2014. We have five corporate values which outline how we work as individuals and how we interact with each other. We regularly communicate our vision for the organisation and our shared goals, most recently through a ‘Strategy on a Page’ campaign which brought the fundamental purpose and targets of the business together in one document. Our efforts to provide a positive working environment led 94% of staff who completed our annual survey to agree that they would ‘go the extra mile’ at work, and 80% of our people said they would recommend this company as a great place to work.
Building on the success of development centres held in 2013, we have held a further two centres to develop our future leaders. We currently have leaders enrolled in programmes with both the Open University and Ashridge. This long-term approach and level of commitment to our people has paid off with a number of internal appointments to senior positions in 2014: three to our Executive Committee and one to the Phoenix Life Management Board.
VALUE GENERATION THROUGH ACQUISITIONS Phoenix Group will assess potential acquisitions in light of the financial condition of the Group. The criteria we would target in making an acquisition are: – Closed life. Any acquisition would be in the closed life fund sector within the UK or Ireland
The divestment of Ignis resulted in a long-term strategic alliance with Standard Life Investments. Given its existing position as the UK’s largest specialist consolidator of closed life funds, Phoenix has agreed with Standard Life Investments a mechanism to share value resulting from any future transfers of assets from Phoenix to Standard Life Investments.
Potentially, our business may be unable to source and execute successful transactions, but as a standalone business and in the absence of further acquisitions, Phoenix is expected to continue to generate strong and predictable cash flows from the operating companies to support commitments at the holding companies including pension scheme contributions, debt servicing and shareholder dividends. However, in order to grow and maximise value for all stakeholders, we will continue to pursue opportunities which meet the criteria set out above as and when they arise.
Management actions contributed £180 million to cash generation, through operational enhancements, restructuring and de-risking activities.
ANALYSIS Group MCEV increased by £269 million at 31 December 2014, benefiting from £261 million of value-enhancing management actions delivered in the period and the positive impact of the divestment of Ignis. This has more than offset dividend payments and the adverse impacts of regulatory changes and increases in the market value of the Group’s debt recognised in the period.
DEFINITION The basis of calculation of Group MCEV is set out in note 1 of the MCEV supplementary information.
Incremental MCEV is defined as the enhancement of MCEV through management actions.
DEFINITION The Group calculates its gearing as gross shareholder debt (gearing basis) as a percentage of gross MCEV. Gross shareholder debt (gearing basis) is defined as the sum of the IFRS carrying value of shareholder debt and 50% of the IFRS carrying value of the Tier 1 notes given the hybrid nature of that instrument. Gross MCEV is defined as the sum of the Group MCEV and the value of the shareholder and Tier 1 debt as included in the MCEV.
DEFINITION The Group calculates financial leverage as gross shareholder debt (financial leverage basis) as a percentage of gross MCEV.
Gross shareholder debt (financial leverage basis) is defined as the sum of the notional face value of shareholder debt and 100% of the face value of the Tier 1 notes. Gross MCEV is defined as the sum of the Group MCEV and the value of the shareholder and Tier 1 debt as included in the MCEV.
QUANTIFIED TARGET The Group will target a financial leverage level consistent with the achievement of an investment grade credit rating, upon which a further 50bps margin reduction on the outstanding bank facility would be triggered.
Financial leverage is the Group’s measure of its level of debt that determines the interest margin payable on its bank debt facilities.
ANALYSIS Group IFRS operating profit has increased by £44 million to £483 million due to one-off benefits generated from system and modelling improvements of £165 million (2013: £98 million) and the positive impact of assumption changes compared to the prior year.
ANALYSIS The Board has recommended a final dividend of 26.7p per share, bringing the total dividend for the year to 53.4p per share. The final dividend is due to be paid on 27 April 2015, subject to shareholder approval at the Company’s AGM.
ANALYSIS The estimated IGD surplus has remained stable at £1.2 billion with capital generation and the positive impact of management actions offsetting dividend payments and debt financing and repayments of £0.6 billion in the period. The surplus of £1.2 billion represents headroom of £0.5 billion (2013: £0.5 billion) over the Group’s IGD regulatory capital policy.
DEFINITION The IGD surplus is a regulatory capital measure which calculates surplus capital at the highest EEA level insurance group holding company, which is Phoenix Life Holdings Limited (‘PLHL’). IGD surplus is defined as Group capital resources less the Group capital resource requirement.
REGULATORY CAPITAL POLICY The Group maintains group capital resources at the PLHL level at an amount in excess of 105% of the with-profit insurance capital component (‘WPICC’), being an additional capital requirement of with-profit funds, plus 145% of the Group capital resource requirement less the WPICC as agreed with the PRA.
Insurance Groups’ Directive (‘IGD’) surplus is the Pillar 1 regulatory assessment of capital adequacy at a PLHL level.
DEFINITION PLHL ICA surplus represents an assessment on an economic basis of the capital resources and requirements arising from the obligations and risks which exist outside the life companies. The measure is calculated at the highest EEA level insurance group holding company, being PLHL.
REGULATORY CAPITAL POLICY As agreed with the PRA, the Group aims to ensure that PLHL maintains an ICA surplus of at least £150 million.
Operating companies’ cash generation: Cash receipts from Phoenix Life 446 794
Other cash receipts 89 – Total receipts of cash by holding companies1 567 817
2 Proceeds of the equity raise of £250 million less associated fees and commission of £18 million, and after the deduction of £21 million of fees associated with the re-terming of the Impala loan facility.
In 2014, the Group delivered cash flows from its operating subsidiaries of £567 million (excluding the proceeds from the divestment of Ignis), including cash flows of £180 million from management actions. The latter increased cash flows
Operating companies’ cash generation Cash remitted by Phoenix Life during 2014 was £446 million (2013: £794 million), reflecting free surplus in the life companies and the benefit of management actions implemented during the period. Cash of £32 million (£2013: £23 million) was remitted by Ignis prior to its divestment. Other cash receipts comprised £68 million from the buy-out of the pension indemnity from the with-profit funds and £21 million from the sale of BA(GI) Limited.
On 1 July 2014, the Group completed the divestment of Ignis to Standard Life Investments (Holdings) Limited (‘Standard Life Investments’) and received gross cash proceeds of £390 million.
Phoenix Life free surplus The generation of free surplus, net of movements in required capital, underpins the cash remittances from Phoenix Life. The table below analyses the movement in free surplus of Phoenix Life which represents the life companies’ free surplus: Year ended 31 £m
Total free surplus generated in the period of £113 million includes the expected surplus arising, the positive impacts from management actions delivered in the period and the inherent release of capital requirements from the run-off of the life funds. Partly offsetting these items is the adverse impact of falling yields on capital requirements and policy, together with the impact of the strengthening of stress assumptions in respect of longevity, credit and correlations. The prior period comparative included the positive impact of the completion of the legal transfer of certain portfolios of annuity liabilities to Guardian Assurance Limited.
RECURRING CASH OUTFLOWS Operating expenses of £29 million (2013: £34 million) decreased as a result of reduced corporate office costs, primarily staff costs.
NON-RECURRING CASH OUTFLOWS Non-recurring cash outflows reflect Group restructuring and corporate related projects. The increase compared to the prior year includes £14 million of consent fees paid in respect of the refinancing of the Group’s bank facilities and a larger number of corporate projects of £22 million, including the divestment of Ignis. Also included are payments to the Employee Benefit Trust for the funding of share awards.
Debt repayments of £85 million1 were made in respect of the old facility agreements. A prepayment of £30 million and a scheduled repayment of £30 million were made in respect of the PGH Capital facility.
The shareholder dividend of £120 million comprises the payment of the 2013 final and 2014 interim dividend. 1 This includes £2 million paid to Phoenix Life Assurance
Limited, a subsidiary undertaking. Phoenix Life Assurance was a lender under the Pearl facility.
Credit spreads widening with no change in expected defaults3 2.5 1 Assumes stress occurs 1 January 2015 and there is no recovery during the target period.
Group costs (28) (27) Group MCEV operating earnings before tax 366 455
Group MCEV operating earnings after tax 288 350 1 The Phoenix Group Market Consistent Embedded Value methodology (referred to herein and in the supplementary information as MCEV) is set out in note 1 in the MCEV supplementary information.
The Ignis (prior to its divestment on 1 July 2014) and management services businesses are included in the Group MCEV at the value of IFRS net assets. The Group MCEV does not include the future earnings from their businesses.
The new business margin is 7% after tax (2013: 6%) and represents the ratio of the net of tax new business value to the amounts received as new single premiums.
In addition, the MCEV includes the value of future profits expected to be earned on annuities with guaranteed rates, based on long-term profit margins and projected take-up rate assumptions. As at 31 December 2014, the Group MCEV included £163 million in respect of these policies (2013: £191 million).
GROUP COSTS Group costs of £28 million (2013: £27 million) include costs relating to Group functions and project spend of £27 million and the IAS 19 pension charge of £1 million on the Pearl Group pension scheme which was in deficit at the start of the year.
NON-RECURRING ITEMS ON NON-LIFE BUSINESS Non-recurring items on non-life business increased embedded value by £317 million before tax (2013: £61 million reduction). Non-recurring items include a gain of £288 million on the divestment of Ignis and £68 million of income received by Pearl Group Holdings (No. 1) Limited (‘PGH1’) from the with-profits funds in relation to the close-out of the PGL Pension Scheme longevity indemnity agreement. Partly offsetting this income are £11 million of Group corporate project costs and debt issue costs of £16 million. Net other one-off items had a negative impact of £12 million and included costs associated with system transformation and regulatory change.
GROUP MCEV The movement from opening to closing Group MCEV is shown below: Movement in Group MCEV
Pension contributions of £16 million (net of tax) in respect of the PGL Pension Scheme (2013: £18 million) and £54 million (net of tax) in respect of the Pearl Group Staff Pension Scheme (2013: nil as the scheme was in deficit) were recognised in other comprehensive income during the period. This was partly offset by an actuarial gain of £43 million (net of tax) (2013: £2 million gain) which was recognised in relation to the Pearl Group Staff Pension Scheme and was capped at the point at which the scheme returned to surplus on an IFRS basis. Planned future contributions will cause a strain to the MCEV as pension surpluses are not recognised under the Group’s MCEV basis.
to variances between actual and expected investment returns, and the impact of changes in economic assumptions on liabilities, are accounted for outside of operating profit. Phoenix Life operating profit is net of policyholder finance charges and policyholder tax.
With-profit 89 106 With-profit where internal capital support provided 33 20
Management services 36 32 Phoenix Life operating profit before tax 487 414
The owners’ one-ninth share of the policyholder with-profit bonus of £89 million decreased by £17 million on the 2013 result. This reflects lower levels of endowment policy maturities, offset by increased estate distribution. The 2013 result included a one-off benefit of £10 million taken in 2013 from shareholder transfers that were underestimated in previous years.
Following the completion of the divestment of Ignis on 1 July 2014, its results have been classified as arising from discontinued operations in the IFRS financial statements for the period.
Group costs (21) (24) Operating profit before tax1 483 439 1 Operating profit is presented before adjusting items. See table on page 32 for details of adjusting items.
Partly offsetting these positive movements is a £12 million reduction in the value generated on annuity new business of £24 million (2013: £36 million). Of this, £9 million related to policies without guaranteed annuity rates (2013: £16 million).
The longer-term return on owners’ funds of £9 million (2013: £13 million) reflects the asset mix of owners’ funds, primarily cash-based assets and fixed interest securities. The reduction compared to the prior year reflects the upstreaming of dividends in the period. The investment policy for managing these assets remains prudent.
The operating profit for management services of £36 million (2013: £32 million) comprises income from the life companies in accordance with the respective management service agreements less fees related to the outsourcing of services and other operating costs. The increase compared to the prior year reflects lower staff and outsource partner costs partly offset by the impacts of life company run-off and the transfer of annuity policies to Guardian Assurance Limited in 2013.
IGNIS The operating profit of the asset management business of £17 million represents its divisional result for the six months prior to its divestment from the Group on 1 July 2014. Ignis has been classified as a discontinued operation in the period.
by the impacts of falling yields, both on short asset positions held relative to the IFRS basis liabilities and from adverse policyholder tax variances arising on resultant investment gains on fixed interest assets in the period, together with the negative impact of widening credit spreads. Partly offsetting these items are the positive impacts of lower inflation and improved property returns.
VARIANCE ON OWNERS’ FUNDS The negative variance on owners’ funds of £14 million for 2014 (2013: £31 million negative) is principally driven by fair value losses on swap and hedging positions held within the shareholder funds of the life companies. The reduction in the negative variance compared to 2013 reflects lower losses on equity index futures and credit default swaps compared to the prior year. The majority of interest rate swaps held by the shareholder funds and holding companies in relation to the Group’s bank debt were closed out during 2013.
AMORTISATION OF ACQUIRED IN-FORCE BUSINESS AND OTHER INTANGIBLES Acquired in-force business and other intangibles of £2.7 billion were recognised on the acquisition of the operating companies in 2009. The acquired in-force business is being amortised in line with the run-off of the life companies. Amortisation of acquired in-force business during the period totalled £88 million (2013: £99 million). Amortisation of other intangible assets totalled £15 million in the period (2013: £19 million).
Profit before the tax attributable to owners: From continuing operations 336 268 From discontinued operations 80 (51)
Debt finance costs have decreased by £38 million, reflecting lower debt principal balances following debt repayments and restructuring during the period and closure of the Group’s interest rate swap arrangements in the second half of 2013 which were responsible for a net finance charge in the comparative period.
With effect from the acquisition of the operating subsidiaries in the third quarter of 2009, the Company has been managed and controlled from Jersey, where its permanent office premises are located. As a Jersey resident holding company, the Company is subject to a 0% tax rate on its income. Consequently, tax charged in these accounts primarily represents UK tax on profits earned in the UK, where the principal subsidiaries, excluding Opal Re, have their centre of operations.
The Group tax charge for the period attributable to owners from continuing operations is £22 million (2013: £26 million) based on a profit (after policyholder tax) of £336 million (2013: £268 million). The actual charge is lower than the expected charge (based on the UK corporation tax rate of 21.5%) of £72 million primarily due to certain profit being either non-taxable or taxable at rates other than the standard rate and the recognition of previously unrecognised deferred tax assets (see note 13 to the IFRS consolidated financial statements for analysis with respect to continuing operations). The tax credit attributable to discontinued operations is £12 million.
– To meet the dividend expectations of shareholders as set by the Group’s dividend policy.
Holdings Limited (‘PLHL’), a subsidiary of Phoenix Group Holdings. The estimated IGD surplus at 31 December 2014 is £1.2 billion (2013: £1.2 billion). The components of the estimated IGD calculation are shown below: 2014 £bn 2013 £bn
The Group’s regulatory capital policy, which is agreed with the PRA, is to maintain GCR at the PLHL level of: – 105% of the with-profit insurance component (‘WPICC’), being an additional capital requirement of with-profit funds plus
The Group’s headroom above the IGD regulatory capital policy at 31 December 2014 was £0.5 billion (2013: £0.5 billion).
PLHL ICA surplus (estimated) In accordance with PRA requirements, the Group undertakes an Individual Capital Assessment (‘ICA’) at the level of the highest EEA insurance group holding company, which is PLHL. This involves an assessment, on an economic basis, of the capital resources and requirements arising from the obligations and risks which exist outside the life companies.
For further details of the regulatory capital requirements of the individual life companies See note 39 of the IFRS consolidated financial statements.
Headroom over the Group’s £150 million capital policy was £0.6 billion as at 31 December 2014 (2013: £1.1 billion).
SENSITIVITY AND SCENARIO ANALYSIS As part of the Group’s internal risk management processes, the regulatory capital requirements are tested against a number of financial scenarios. The results of that stress testing are provided below: Estimated IGD
Following credit spread widening2 1.2 0.5 1 75bps increase/decrease in nominal yields and a 75bps increase/decrease in inflation.
2 11–15 year term: AAA – 46bps, AA – 69bps, A – 102bps, BBB – 144bps.
As agreed with the PRA, the Group aims to ensure that PLHL maintains an ICA surplus of at least £150 million. The estimated PLHL ICA position at 31 December 2014 is set out below: 2013 £bn
PLHL ICA surplus (estimated) 0.7 1.2 1 Capital resources includes the surplus over capital policy in the life companies and the net assets of the holding companies less pension scheme obligations calculated on an economic basis.
Gearing ratio The Group previously monitored the level of debt in its statement of consolidated financial position by reference to the gearing ratio calculated as gross shareholder debt (gearing basis)1 as a percentage of gross MCEV2. Having completed the divestment of Ignis and comprehensive debt refinancing in July, the gearing ratio as at 31 December 2014 under the Group’s methodology reduced to 34% (2013: 44%), thus meeting our original 40% target ahead of schedule. 1 Gross shareholder debt (gearing basis) is defined as the sum of the IFRS carrying value of the shareholder debt and 50% of the IFRS carrying value of the Tier 1 notes given the hybrid nature of that instrument.
For further details of the Pillar 1 capital resources of the individual life companies See note 39 of the IFRS consolidated financial statements.
35PHOENIX GROUP HOLDINGS ANNUAL REPORT AND ACCOUNTS 2014 respect of the Impala facility, a scheduled repayment of £25 million1 made in respect of the Pearl loan facility, and a £30 million targeted prepayment and a scheduled £30 million repayment in respect of the PGH Capital facility.
PGH Capital facility 828 – PGH Capital senior bond 298 –
The Group’s gross shareholder debt decreased by £582 million to £1,479 million in the year. This reduction includes the impacts of the £250 million prepayment following the divestment of Ignis, the £206 million prepayment from internal resources relating to the £900 million debt facility refinancing, a £30 million targeted prepayment and a £30 million scheduled repayment made during the period in
Bank debt – Pearl facility – 327 – Pearl loan notes – 76 – Impala facility – 1,182 Royal London PIK notes and facility – 121
PGH Capital facility 840 – PGH Capital senior bond 300 –
The Group will target a financial leverage level consistent with the achievement of an investment grade rating.
THE GROUP OPERATES A RISK MANAGEMENT FRAMEWORK (‘RMF’) WHICH SEEKS TO ESTABLISH A COHERENT AND PROACTIVE SET OF ARRANGEMENTS AND PROCESSES TO SUPPORT THE EFFECTIVE MANAGEMENT OF RISK THROUGHOUT THE GROUP.
THE GROUP’S RISK MANAGEMENT FRAMEWORK The RMF comprises ten components which are set out in detail below. The outputs of the RMF provide assurance that all risks are being appropriately identified and managed effectively and that an independent assessment of management’s approach to risk management is being performed.
During the year, the Group has continued to strengthen and embed the components of the RMF to ensure that they are aligned with evolving regulatory requirements including Solvency II.
One of the new provisions in the Code relates to being able to monitor the Company’s RMF. Group Risk conducts an annual assessment of the Group’s adherence to the RMF. Now in its third year, this assessment, known as Operation of the Risk Management Framework (ORMF) provides assurance to management and the Boards that the RMF has been implemented consistently and is operating effectively across the Group.
An effective and embedded RMF supports the delivery of the Group’s strategy by ensuring that risks are identified, measured, managed, monitored and reported in a consistent manner.
– Embedded value – The Group will take action to protect embedded value.
– Conduct – Phoenix has zero appetite for deliberate acts of misconduct, including omissions that result in customer detriment, reputational damage and/or pose a risk to the Financial Conduct Authority (FCA) statutory objectives.
RISK UNIVERSE A key element of effective risk management is to ensure that the business has a complete and robust understanding of the risks it faces. Within the Group, these risks are set out, categorised and defined in the risk universe.
The risk universe allows the Group to deploy a common risk language, allowing for meaningful comparisons to be made across business units. There are three levels of risk universe categories. The highest risk universe category is Level 1 and these risks are set out below: – Strategic
TECHNOLOGY AND INFRASTRUCTURE The Group employs systems to support the assessment and reporting of the risks it faces. This enables management to document key risks and controls and evidence the assessment of them at a frequency appropriate to the operation of the control.
ORGANISATION The Chief Risk Officer manages the Group Risk function and has responsibility for the implementation and oversight of the Group’s RMF. The Group Risk function has responsibility for oversight over financial, operational and regulatory risk. The PRA/FCA relationship team manages the relationship and interactions with our primary regulators and reports to the Chief Risk Officer.
POLICIES The Group policy framework comprises a set of 30 policies that support the delivery of the Group’s strategy by establishing operating principles and expectations for managing the key risks to our business. The policy set contains the minimum control standards to which each business unit must adhere to and against which they report compliance. The policies define: – the individual risks the policy is intended to manage; – the degree of risk the Group is willing to accept, which is set out in the policy risk appetite statements; – the minimum controls required in order to manage the risk to an acceptable level; and
Each policy is the responsibility of a member of the Executive Committee who is charged with overseeing compliance throughout the Group.
RISK AND CAPITAL ASSESSMENT The Group operates a standardised assessment framework for the identification and assessment of the different types of risk it may be exposed to and how much capital should be held in relation to those exposures. This framework is applicable across the Group and establishes a basis, not only for the approach to risk assessment, management and reporting but also for determining and embedding capital management at all levels of the Group.
Risk assessment activity is a continuous process and is performed on the basis of identifying and managing the significant risks to the achievement of the Group’s objectives. Stress and scenario tests are used to support the assessment of risk and provide analysis of their financial impact.
The emerging cash flows of the Group may be impacted during periods of severe market turbulence by the need to maintain appropriate levels of regulatory capital. The impact of market turbulence may also result in a material adverse impact on the Group’s embedded value.
Assets held to meet obligations to policyholders include debt securities. Phoenix Life is exposed to deterioration in the actual or perceived creditworthiness or default of issuers of relevant debt securities. The Group is also exposed to trading counterparties failing to meet all or part of their obligations, such as reinsurers failing to meet obligations assumed under reinsurance arrangements or stock-borrowers failing to pay as required. An increase in credit spreads on debt securities, particularly if it is accompanied by a higher level of actual or expected issuer defaults, could have a material adverse impact on the Group’s financial condition.
In some cases individual security holdings have been adjusted to ensure the Group remains within risk appetite.
PRINCIPAL RISKS AND UNCERTAINTIES FACING THE GROUP The Group’s top principal risks and uncertainties are detailed in the table below together with their potential impact, mitigating actions which are in place and the change in the risk from last year. As economic changes occur and the industry and regulatory environment evolves, the Group will continue to monitor the potential impact of these principal risks and uncertainties facing the Group.
Further details of the Group’s exposure to financial and insurance risks and how these are managed are provided in note 40 of the IFRS consolidated financial statements.
The Group undertakes regular reviews of experience and annuitant survival checks to identify any variances in assumptions. The Group has also entered into a reinsurance contract to manage this risk within appetite.
The Group continues to participate in the IMAP process and work closely with the PRA on the implementation of the Directive. Contingency plans have been developed to mitigate adverse outcomes, should these be required.
Over 2014, clarity on Solvency II regulations has improved but material uncertainties remain.
The Group puts considerable effort into managing relationships with its regulators so that it is able to maintain a forward view regarding potential changes in the regulatory landscape. The Group assesses the risks of regulatory change and the impact on our operations and lobbies where appropriate.
Phoenix Life has made a number of changes to its retirement processes to take account of the changes. These include ensuring that appropriate risk warnings are provided to customers in advance of them taking a course of action. This is aligned to the new rules that the FCA have outlined in PS15/4.
The current assessment of the residual risk in respect of each of the Group’s principal risks is illustrated in the chart opposite.
RISK a. Market Volatility b. Counterparty Exposure c. Actuarial Assumptions d. Solvency II e. Regulatory and Legislative Changes
– Signed the ‘Time to Change’ Pledge, focusing on mental wellbeing in the workplace
– £238,000 donated to the Group’s chosen charities of the year
Goals were launched at the start of the year for each area we report CR against, namely Environment, Workplace, Community and External Stakeholders. In addition a revised governance structure was launched, introducing new senior management buy-in and an increased level of CR engagement across teams.
GOVERNANCE The CR programme is sponsored by the Group Chief Executive Officer, with all Executive Management team members receiving an update on CR activity every six months. A CR Steering Group was formed at the start of the year, introducing a new layer of CR governance and involves two members of the Executive Management team. The Steering Group meets quarterly to agree the CR programme of activity and overarching strategy.
ENVIRONMENT – OUR COMMITMENT TO MONITORING AND REDUCING OUR ENVIRONMENTAL FOOTPRINT We want our staff to work in an efficient workplace that routinely considers its impact on the environment.
The Group’s biggest environmental impact is ‘internal resource-use’, so initiatives during the year have challenged existing working practices. The focus has been on educating staff, helping them understand how small changes can contribute towards making a big difference.
The Group’s partnership with the Heart of England Forest Limited continued into 2014, creating opportunities for staff volunteering. During 2015, the Group plans to plant a further 500 trees in its ‘Phoenix Way Wood’ and will work with local schools and the Country Trust to sponsor educational woodland visits.
The full Corporate Responsibility is available on the Group’s website at www.thephoenixgroup.com/CRreport2014 donated to the Group’s chosen charities of the year.
This section includes mandatory reporting of greenhouse gas (‘GHG’) emissions pursuant to the Companies Act 2006 (Strategic Report and Directors’ Reports) Regulations 2013. Emissions disclosed relate to properties within Phoenix Group’s portfolios and properties occupied by Phoenix Group companies, as reported in our consolidated financial statement. Phoenix Group has no responsibility for any emission sources that are not included in our consolidated financial statement.
Emissions have arisen principally through the combustion of gas for heating (Scope 1) and the purchase of electricity (Scope 2). Approximately one third of 2014 emissions are estimated as full year data is not yet available for all properties. A sample of emissions from fuel use for transport, back-up generation and fluorinated gases were calculated and were determined to be non-material to the overall footprint, so have not been included.
GREENHOUSE GAS EMISSIONS GLOBAL GHG EMISSIONS DATA IN TONNES OF CO2E
Combustion of fuel and operation of facilities (Scope 1) 3,053 3,836
Electricity, heat, steam and cooling purchased for own use (Scope 2) 11,209 13,565
Emissions reported above normalised to kgs per m2 39.94 kgs CO2e/m2 46.77 kgs CO2e/m2
Emissions from Group corporate offices normalised to per FTE 5.79 tonnes of CO2e/FTE 4.96 tonnes of CO2e/FTE
The Group continues to attract, develop and retain talented staff by offering a comprehensive range of benefits and development opportunities. The Group was included in ‘Britain’s Top Employers’ listing for the third consecutive year, which is an accreditation awarded to the best companies to work for in the UK. In addition, the Group achieved sixth place in the mid-sized category for ‘Britain’s Healthiest Company’*. * Benchmark in association with Pru Health, Mercer and The Telegraph.
The workplace agenda for 2014 focused on ‘mental wellbeing’. A stress management training module was launched and the Group signed the ‘Time to Change’ Pledge, a campaign led by Mind and Rethink Mental Illness to redress the stigma surrounding mental health illness. In addition, a series of educational onsite wellbeing events were held, promoting the importance of diet and exercise, in addition to providing on-site health-checks for staff.
91% of employees participated in the Group’s employee engagement survey. The overall 2014 employee engagement survey results represented a 2% increase compared to 2013 and again compared positively against the Financial Services benchmark. In addition, 75% of staff actively participated in on-site CR events during the year.
The Group chose to continue with a single cause again in 2014 for all staff-led fundraising and in excess of £232,000 was donated to Midlands Air Ambulance Charity and London’s Air Ambulance. An additional £6,000 was donated to other charities the Group supported during the year, and £14,000 through the staff matched fundraising scheme, for causes supported by employees outside of work. £10,000 was donated to community-based initiatives, selecting partners from within the communities in which the Group’s core sites are based. Support was provided to three local primary schools and a secondary school during the year, including funding towards a new mini-bus for school partners and other community groups.
Staff donated 570 hours to volunteering activity in the communities closest to our main office locations, which included support to Business in the Community’s (‘BITC’) ‘Give and Gain’ Day, which is their national day of employee volunteering. The Group continued its partnership with The Money Charity, delivering financial education workshops to over 720 pupils.
All core sites were involved in assisting those in need in our local communities, through on-site collections of food items for local charities SIFA Fireside and the national Trussell Trust Food Bank, further promoting the Group’s ‘give-back initiative’.
EXTERNAL STAKEHOLDERS – OUR RELATIONSHIPS WITH THIRD PARTIES We want our external stakeholders to know we are a responsible corporate citizen.
The Group has been a member of BITC since 2010 and with their guidance completed the Corporate Responsibility Index benchmark for the first time. This Index is a benchmark which is independently assessed alongside peers and other industries, to highlight the Group’s contribution to future sustainability. Results will be communicated in ‘Responsible Business Week 2015’ and will help shape the Group’s on-going CR programme.
The Group is tackling the rise in pension scams by working with its partners to try and prevent transfers to suspicious schemes, whilst communicating this message to customers. So far, the Group’s actions have prevented 1,074 people losing a total of £22.3 million in potential pension fraud. The Group’s Financial Crime team is involved with the Pensions Liberation Industry Working Group and is contributing to the industry code of practice for preventing such scams.
91% of staff completed the annual engagement survey, which included four questions specifically around CR. 68% of staff think it is important that the Group supports the wider community. 70% agree the Group places an appropriate level of importance on CR. 87% believe the Group does the right amount to promote CR internally, whilst 73% believe they take personal responsibility for CR.
HOWARD DAVIES CHAIRMAN Howard Davies was appointed Chairman of the Board of Directors of the Company on 1 October 2012. Howard is the Chairman of the British Government’s Airport Commission. He is also a Professor of Practice at the French School of Political Science in Paris (Sciences Po). He was previously the Director of the London School of Economics and Political Science from 2003 until May 2011. Prior to this appointment he was Chairman of the UK Financial Services Authority from 1997 to 2003. From 1995 to 1997 he was Deputy Governor of the Bank of England, after three years as the Director General of the Confederation of British Industry. Earlier in his career he worked in the Foreign and Commonwealth Office, the Treasury, McKinsey and Co. and as Controller of the Audit Commission. He has been an Independent Director of Morgan Stanley Inc. since 2004, and is Chairman of the risk committee. He is also Chairman of the risk committee at Prudential PLC, whose board he joined in 2010. He is a Director of the Royal National Theatre, whose board he joined in 2011. He is a member of the Regulatory and Compliance Advisory Board of Millennium LLC, a New York-based hedge fund. He has also been a member of the International Advisory Council of the China Banking Regulatory Commission since 2003 and, from 2012, is Chairman of the International Advisory Council of the China Securities Regulatory Commission. He is Chairman of the Board Nomination Committee. As previously reported and referred to within the 2014 Annual Report, Howard Davies will be leaving Phoenix at the end of August 2015 to become Chairman of the Royal Bank of Scotland.
CLIVE BANNISTER GROUP CHIEF EXECUTIVE OFFICER Clive Bannister joined the Group in February 2011 as Group Chief Executive Officer. Prior to this, he was Group Managing Director of Insurance and Asset Management at HSBC Holdings plc. He joined HSBC in 1994 and held various leadership roles in planning and strategy in the Investment Bank (USA) and was Group General Manager and CEO of HSBC Group Private Banking. He started his career at First National Bank of Boston and prior to working at HSBC was a partner in Booz Allen Hamilton in the Financial Services Practice providing strategic support to financial institutions including leading insurance companies, banks and investment banks. Mr Bannister is also Chairman of the Museum of London. Mr Bannister was appointed to the Board of Directors of the Company on 28 March 2011.
RENÉ-PIERRE AZRIA NON-EXECUTIVE DIRECTOR René-Pierre Azria is a senior partner of Lion Tree Advisors LLC, a US private advisory firm specialising in strategic financial analysis and mergers and acquisitions. Previously, Mr Azria was the founder and Chief Executive Officer of Tegris LLC. Prior to this he was a worldwide partner with Rothschild & Co. Prior to joining Rothschild in 1996, Mr Azria served as Managing Director of Blackstone Indosuez and president of Financiére Indosuez Inc. in New York. Mr Azria serves as a director of two privately-held book publishers in France and the US. Mr Azria was appointed to the Board of Directors of the Company on 2 September 2009. He is a member of the Company’s Board Risk Committee.
ALASTAIR BARBOUR NON-EXECUTIVE DIRECTOR Alastair Barbour has had over 30 years’ audit experience with KPMG where he worked across a full spectrum of financial services clients from large general insurers and reinsurers to the life assurance and investment management sector, working on a range of operational and strategic issues. Mr Barbour is the former Head of Financial Services, Scotland for KPMG. He retired from KPMG in 2011 to build a non-executive career. He is a director and the Audit Committee Chairman of RSA Insurance Group plc, Standard Life European Private Equity Trust plc and Liontrust Asset Management plc (all London Stock Exchange listed companies). He is also a director and Audit Committee Chair of CATCo Reinsurance Opportunities Fund Ltd, a Bermuda-based investment company listed on the London Stock Exchange and of The Bank of N.T. Butterfield & Son Limited, a company listed in Bermuda. Mr Barbour was appointed to the Board of Directors of the Company on 1 October 2013 and is Chairman of the Board Audit Committee and a member of the Board Risk Committee.
ISABEL HUDSON NON-EXECUTIVE DIRECTOR Isabel Hudson is a former Executive Director of Prudential Assurance Company Limited and a former Non-Executive Director of QBE Insurance. She was also Chief Financial Officer at Eureko BV and a Non-Executive at The Pensions Regulator. Ms Hudson is Non-Executive Chair of the National House Building Council. In addition during 2014, Ms Hudson was appointed to the Boards of Standard Life PLC and BT Group plc. Ms Hudson is an ambassador to Scope, a UK charity, and has 33 years’ experience in the insurance industry in the UK and mainland Europe. She was appointed to the Board of Directors of the Company on 18 February 2010. She is a member of the Board Audit and Board Remuneration Committees.
EXECUTIVE MANAGEMENT OF THE GROUP IS LED BY THE GROUP CHIEF EXECUTIVE OFFICER, CLIVE BANNISTER, WHO IS SUPPORTED BY THE EXECUTIVE COMMITTEE (‘EXCO’).
– Leads implementation of the Group’s strategy as regards any potential acquisitions or disposals
– Leads and delivers the Group’s financial business plan in line with strategy
– Ensures that the Group’s finances and capital are managed and controlled
– Oversees and manages the Group’s relationship with the FCA and PRA
– Oversees and co-ordinates maintenance of, and adherence to appropriate corporate governance procedures across the Group
THE GROUP’S BOARD STANDS WHOLEHEARTEDLY BEHIND THE STATEMENT THAT STRONG AND EFFECTIVE GOVERNANCE IS CRUCIAL TO THE GROUP’S AIM OF DELIVERING VALUE TO POLICYHOLDERS AND SHAREHOLDERS.”
The appointment of Kory Sorenson to the Board in July 2014 addressed two recommendations from the Board Evaluation review undertaken towards the end of 2013, to ensure that the Board’s M&A/capital markets experience was maintained at a strong level and to add a further female director to the Board. The other changes to the Board in 2014 were the resignations of Manjit Dale at the AGM on 30 April 2014 (as reported in our 2013 Annual Report) and David Barnes on 22 October 2014 (as referred to in my introduction to this 2014 Annual Report).
The Board now has two female directors out of a Board of ten, and our intention remains to appoint a further female director in 2015, subject to the overriding factor of appointing the right individuals to the Board. In this regard, and following a recommendation arising from the Board evaluation review undertaken in November 2014, the Nomination Committee will be undertaking a Board skills audit in the first half of 2015 to re-assess the ideal blend of skills and knowledge on the Board, linked to the Group’s strategy.
The resignations from the Board of shareholder representative directors over the last two years have occurred as their connected shareholdings have reduced significantly, and there has been a material shift in our shareholder base away from legacy shareholders towards long-only investors.
SHAREHOLDER MEETINGS Phoenix Group Holdings achieved a premium listing on the London Stock Exchange in July 2010. The results of our shareholder meetings have been as follows: – 2010 AGM (first AGM) – all 22 resolutions passed by a majority of at least 87% of votes cast
– 2012 AGM – all 21 resolutions passed by a majority of at least 97% of votes cast
– 2013 AGM – all 20 resolutions passed by a majority of at least 96% of votes cast
The following report shows how the Company has in 2014 achieved compliance with the provisions of the UK Corporate Governance Code and provides further details of the work undertaken by our Board and its committees.
We have in 2014 enhanced our engagement with investors on governance matters and intend to continue this process. In this regard, I was pleased in November 2014 to host an ‘investor governance meeting’ for investors and proxy advisers to provide the opportunity for further engagement on our approach to governance, particularly in the context of market developments and expectations.
As previously reported and mentioned in my introduction to this 2014 Annual Report, I shall be leaving Phoenix at the end of August 2015. I am pleased to be leaving the Group with such strong corporate governance.
INTRODUCTION Phoenix Group Holdings is a member of the FTSE 250, having achieved a Premium Listing on the London Stock Exchange in July 2010. The Board is committed to high standards of corporate governance and supports the UK Corporate Governance Code (‘the Code’) which sets standards of good practice for UK listed companies. It is the Board’s view that the Company has been fully compliant during 2014 with the provisions set down in the Code.
The remuneration of the Directors is shown in the Directors’ remuneration report on pages 48 and 49. The terms and conditions of appointment of Non-Executive Directors are on the Group’s website. In accordance with the provisions of the Articles and the Code, all Directors will submit themselves for election or re-election at the Company’s AGM on 23 April 2015.
The head office of the Company is in Jersey and, as such, the Board and its committees hold their meetings in Jersey.
THE CHAIRMAN, GROUP CHIEF EXECUTIVE OFFICER AND SENIOR INDEPENDENT DIRECTOR Howard Davies is Chairman of the Board of Directors of the Company. As previously reported, he will be leaving Phoenix at the end of August 2015 and a process is being undertaken for the recruitment of his successor. There is a division of responsibility, approved by the Board, between the Chairman, who is responsible for the leadership and effective operation of the Board and the Group Chief Executive Officer, Clive Bannister, who is responsible to the Board for the overall management and operation of the Group. The Chairman’s other significant commitments are set out in his biographical details on page 48.
BOARD EFFECTIVENESS In accordance with the Code, an evaluation of the performance of the Board and that of its committees and individual directors was undertaken in the latter part of 2014 and was externally facilitated by Egon Zehnder who have no other connection with the Company. The process involved completion by directors of a questionnaire covering various aspects of Board, committee and director effectiveness followed by individual meetings between Egon Zehnder and each director, concluding in a Board report which was discussed by the Board in November 2014. The following areas were covered: – Board structure and composition including diversity
– Individual director performance which will be used in revising the training programme for directors.
An action list, with senior executive accountability, has been established to address the recommendations from the evaluation, including the recommended Board skills audit as referred to in the Chairman’s introduction to this report.
All Directors receive a tailored induction on joining the Board in accordance with a process approved by the Board. To ensure that the Directors maintain up-to-date skills and knowledge of the Company, all directors receive regular presentations on different aspects of the Company’s business and on financial, legal and regulatory issues.
OPERATION OF THE BOARD The terms of appointment for the Directors state that they are expected to attend in person regular (at least six per year) and additional Board meetings of the Company and to devote appropriate preparation time ahead of each meeting. The Board met ten times during 2014 (including additional meetings convened for special purposes) and is scheduled to meet seven times in 2015 including a two day strategy-setting meeting. Additional meetings will be held as required, and the Non-Executive Directors will hold meetings with the Chairman, without the Executive Directors being present, as they did on several occasions in 2014.
Executive Directors Clive Bannister (CEO) 10 10 Jim McConville (FD) 10 10 Non-Executive Directors 1 David Barnes resigned from the Board on 22 October 2014.
3 Kory Sorenson was appointed to the Board on 1 July 2014.
– Monitoring the overall integrity of the financial reporting by the Company and its subsidiaries and the effectiveness of the Group’s internal controls
– Responsible for making recommendations to the Board on the appointment of the external auditors and their terms of engagement and for reviewing
55PHOENIX GROUP HOLDINGS ANNUAL REPORT AND ACCOUNTS 2014 the performance, objectivity and independence of the external auditors. The terms of reference of the Audit Committee state that it shall meet the external auditor at least once a year without management being present
– Oversight of activities of subsidiary audit committees through receipt and review of minutes, discussions between the Chairmen of the Audit Committee and subsidiary audit committees, and the Audit Committee Chairman’s attendance at the Phoenix Life Audit Committee on an occasional basis, as well as his receipt of all papers going to the Phoenix Life Audit Committee.
PRINCIPAL ACTIVITIES OF THE AUDIT COMMITTEE DURING 2014 EXTERNAL REPORTING AND CONTROLS – Reviewed the Company’s 2013 Annual Report and Accounts, 2014 Interim Financial Statements and 2014 Interim Management Statements, recommending their approval to the Board, as well as related disclosures and the financial reporting process, supported by reports from management and the external auditors
– Approved a change in the basis of preparation of the Group’s consolidated financial statements from IFRS as endorsed by the European Union to IFRS as issued by the International Accounting Standards Board. Following the approved change in basis, certain provisions of the Dutch Civil Code were no longer applicable, including the requirement to appoint a Dutch registered audit firm. Subsequently, the Audit Committee approved a recommendation to the Board to change the Group’s external auditor from Ernst & Young Accountants LLP (Netherlands) to Ernst & Young LLP (UK)
– Reviewed changes in the Group’s accounting policies applicable to the preparation of the 2014 financial statements, including an assessment of the processes implemented by management to adopt the IFRS 10, 11 and 12 consolidation and disclosure standards and the subsequent implications on the Group financial statements
– The Audit Committee requested and reviewed a report from management setting out the framework for calculation of the Group’s operating profit metric on the IFRS and MCEV bases. The operating profit metric represents a non-GAAP measure presented by management which is considered to provide a comparable measure of underlying performance of the Group’s business as it excludes the impacts of short term economic volatility and other one-off items. The Audit Committee focused on ensuring a suitably robust framework was in place for the allocation of items to operating profit. The Audit Committee was satisfied in this regard and approved enhanced disclosures for inclusion in the 2014 annual financial statements with regard to the accounting policy applied in determining operating profit.
EXTERNAL AUDIT – Reviewed the effectiveness, engagement and remuneration of the external auditors, recommending their re-appointment to the Board and thence to shareholders
– Approved a policy for engagement of the external auditors for non-audit work to support compliance with the Group Charter of Statutory Auditor Independence
– Approved that Independent Audit Limited would undertake the external quality assessment of the Internal Audit function in the fourth quarter of 2014, reporting on the outcome in the first quarter of 2015.
AUDIT COMMITTEE’S PERFORMANCE – Reviewed the Audit Committee’s performance, constitution and terms of reference, noting that all its duties had been addressed in accordance with its terms of reference, and that the Board would undertake its own review of the performance of the Board committees.
– Approved, on recommendation of the Remuneration Committee, changes to the Group Tax Policy to reflect current remuneration practice.
Significant matters in relation to the 2014 IFRS financial statements and MCEV supplementary information
– A summary of these papers was presented for oversight review by the Audit Committee, and the Phoenix Life Audit Committee’s conclusions were reported to the Audit Committee through minutes of its meeting and a discussion between the Chairmen of the two committees. The Audit Committee discussed, and questioned management on, the content of the summary papers and the Phoenix Life Audit Committee’s conclusions.
– Management presented reports to the Phoenix Life Audit Committee with regard to the implementation of the new actuarial modelling and reporting system for use in the actuarial liability calculations on an IFRS and MCEV basis from the 2014 interim results onwards. This included an assessment of the results of a parallel run of the 2013 valuation process, the operational readiness of the new system and the financial impacts of its implementation.
ASSESSMENT OF THE EFFECTIVENESS OF THE EXTERNAL AUDIT PROCESS The effectiveness of the external audit process was assessed through the completion of an assessment questionnaire by the key divisions and Group functions within Phoenix Group. The respondents were asked to answer questions to collate feedback in respect of three areas of audit performance: evaluation of the audit team, quality of service, and the communication and interaction of the auditors with the client. The questions asked respondents to rate performance on a scale of one (poor) to four (excellent) and to provide comments. The effectiveness of the process was then reviewed by the Audit Committee supported by a presentation from the Group Finance Director.
– Reviewed the structure, size and composition of the Board, taking account of the recommendation from the Board Evaluation Report to reduce the size of the Board to around ten, which was achieved in 2014
– Reviewed the time spent by Directors in fulfilling their duties, noting that it was considered substantial in comparison with the FTSE 250 average
– Reviewed the succession plan for Executive and Non-Executive Directors and recommended its approval to the Board
The appointment of Kory Sorenson in 2014 has raised the proportion of female Directors on the Board to 20% and, subject to the overriding factor of appointing the right individuals to the Board, it remains the Board’s intention to appoint a further female Director in 2015. Before appointing any further Directors, the Nomination Committee intends to undertake a skills audit to re-assess the ideal blend of skills and knowledge on the Board, aligned to the strategy, this being a recommendation of the Board performance evaluation undertaken in November 2014.
The standard process used by the Committee for Board appointments involves the use of an external search consultancy to source candidates external to the Group (and will in the case of executive appointments also consider internal candidates). Detailed assessments of short-listed candidates are undertaken by the search consultancy, followed by interviews with Nomination Committee members and other Directors and the sourcing of references before the Nomination Committee recommends the appointments to the Board. This process was used for the appointment of Kory Sorenson in 2014. The search consultancy used in 2014 for director appointments was The Zygos Partnership which has no other connection with the Company.
The composition of the Remuneration Committee accords with the requirements of the Code that the Remuneration Committee should consist of at least three independent Non-Executive Directors. The Remuneration Committee met seven times during 2014.
The Remuneration Committee is responsible for making recommendations to the Board on the Company’s remuneration and compensation plans, policies and practices and for determining, within agreed terms of reference, specific remuneration packages for the Executive Directors. These include pension rights and executive incentive schemes to encourage superior performance. Details of the remuneration structure and the Remuneration Committee’s activities in 2014 are provided in the Directors’ remuneration report on pages 60 to 82.
FIT Remuneration Consultants provided advice to the Remuneration Committee in 2014 and is independent of the Company.
RISK COMMITTEE’S PRINCIPAL ACTIVITIES DURING 2014 – Recommended to the Board the Group’s risk appetite
– Recommended to the Board the Group’s overall risk management strategy
– Monitored compliance with the Group’s principal risk policies, satisfying itself that action plans to address significant breaches of those policies were sufficient
– Provided oversight of, and challenge to, the design and execution of the Group’s stress and scenario testing, including any changes of assumptions
The Risk Committee advises the Board on risk appetite and tolerance in setting the future strategy, taking account of the Board’s overall degree of risk aversion, the current financial situation of the Group and the Group’s capacity to manage and control risks within the agreed strategy. It advises the Board on all high level risk matters. Details of the Risk Management Framework, for which the Risk Committee has oversight, are provided in the Risk Management section on pages 36 to 41.
INVESTMENT COMMITTEE (DISSOLVED JULY 2014) The Investment Committee met twice in 2014 and was dissolved in July 2014 following the sale of Ignis, the oversight of which formed a large part of the Investment Committee’s activity. There remains an active Investment Committee of the Phoenix Life Board. Group investment oversight is undertaken at the Group Board.
In November 2014, the Chairman hosted the Company’s first ‘investor governance event’, engaging with major shareholders and proxy advisers on governance issues. This is part of our increased interaction with shareholders on governance matters which involved several meetings between the Company’s management and shareholders and proxy advisers in 2014.
The Board’s going concern assessment is included within the Directors’ report on page 85.
REVIEW OF SYSTEM OF INTERNAL CONTROLS The Code requires Directors to review the effectiveness of the Company’s risk management and internal control systems which includes financial, operational and compliance controls. The Board has overall responsibility for the Group’s risk management and internal control systems and for reviewing their effectiveness. The Group’s systems of internal controls are designed to manage rather than eliminate the risk of failure to achieve business objectives and can provide only reasonable and not absolute assurance against material misstatement or loss. The Board’s review of the period covered by this report, which was undertaken with the assistance of the Audit and Risk Committees, was completed on 17 March 2015. Where any significant weaknesses were identified, corrective actions have been taken, or are being taken and monitored.
COMPANY PERFORMANCE 2014 was a year of significant change for Phoenix Group with a number of major corporate actions being completed. These are set out in more detail in the Group Chief Executive Officer’s report at the beginning of this Annual Report and Accounts. Particularly relevant operational and financial highlights for the year included: – Operating companies’ cash generation of £567 million
– The issue of a £300 million senior unsecured bond, re-establishing a relationship with the debt capital markets
– The divestment of Ignis to Standard Life Investments (Holdings) Limited which facilitated a comprehensive refinancing of the Group’s bank debt into a single unsecured facility, lowering interest costs and gearing
– The improvement in speed of customer pay-outs and servicing complaints which increased the overall satisfaction rate to 4.65 on a 5 scale rating over a rolling 12-month period.
These factors represent a significant performance by the Company and its management team and, accordingly, the Remuneration Committee (‘Committee’) concluded that the indicative out-turn of the Annual Incentive Plan (‘AIP’) and Long-Term Incentive Plan (‘LTIP’) should be allowed to stand without the exercise of any discretionary adjustment (up or down).
The only adjustment to the targets as set at the start of the year was to remove the impact of the sale of Ignis on the financial targets. These adjustments, while technical in nature, were consistent with institutional shareholder guidelines and maintained the integrity of the original targets to ensure they did not become easier to achieve, and that no benefit was gained from the sale in determining the AIP and LTIP out-turn. No other changes to the targets have been made.
One of our core challenges is how best to select the comparable universe against which to compare our Executive Directors both for performance and for remuneration in a specialised industry. While we do look to FTSE 31-100 data when benchmarking, it should be understood that this is used as a cap rather than a target or aspiration. We recognise that Phoenix Group Holdings is not a FTSE 31-100 company but, given the focus on transactional activity to deliver benefits through management actions, in some respects it has comparable complexity to this market. Additionally, the FTSE 31-100 includes more insurance groups than the FTSE 250 which are felt to be broadly comparable, so some rough comparisons might be useful.
Our practical solution is to use data from both the FTSE 31-100 and FTSE 250 universes, aiming for a target remuneration point that is appropriately positioned between the two. While not perfect, and kept under constant review, this approach has enabled us to attract, motivate and retain the quality of experienced staff we believe the Company needs without paying more than we feel to be appropriate.
SHAREHOLDER APPROVAL At the Annual General Meeting (‘AGM’) on 23 April 2015, shareholders will be invited to approve the 2014 Directors’ remuneration report as set out in the following pages. For ease of reference, the main summary policy tables from the Directors’ Remuneration Policy approved at the 2014 AGM are also set out as an Appendix to the Directors’ remuneration report, although we are not seeking further approval from shareholders for our policy at the 2015 AGM.
The Committee continues to seek to reflect developments in practice as deemed appropriate for Phoenix Group, and I hope that we can continue to rely on the support of our shareholders for the resolution on the 2014 Directors’ remuneration report which will be proposed at the 2015 AGM.
INTRODUCTION We have presented this Directors’ remuneration report to reflect the UK’s Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013 (the ‘UK regulations’). The Company complies with the reporting obligations within the UK regulations as a matter of good practice, although it is not strictly required to do so as a non-UK incorporated quoted company. The Directors’ remuneration report also describes how the Board has complied with the provisions set out in the UK Corporate Governance Code relating to remuneration matters.
ANNUAL IMPLEMENTATION REPORT – UNAUDITED INFORMATION IMPLEMENTATION OF REMUNERATION POLICY IN 2015
BASE SALARY Salaries in 2015 will remain unchanged from the 2014 levels of £700,000 for the Group Chief Executive Officer and £440,000 for the Group Finance Director.
PENSION No changes to the pension arrangements for Executive Directors are anticipated for 2015.
Cash supplement payment in lieu of pension of 20% of base salary (reduced for the effect of employers’ National Insurance contributions). Such cash supplements are not taken into account as base salary for the calculation of the Annual Incentive Plan, Long-Term Incentive Plan or other benefits.
ANNUAL INCENTIVE PLAN (‘AIP’)¹ The AIP for 2015 will operate on a basis that is consistent with how the AIP operated in 2014.
Element of Remuneration Policy Detail of Implementation of Policy for 2015
Corporate Measure: Operating companies’ cash generation 25% 17.5% Group MCEV 25% 17.5% Expense management 15% 10.5% Group MCEV operating earnings after tax 15% 10.5% Customer satisfaction 10% 7% Employee engagement 10% 7% Personal: Individual Objectives 30% TOTAL 100%
LONG-TERM INCENTIVE PLAN (‘LTIP’)1 Award levels for Executive Directors for 2015 are unchanged at 200% of base salary. When awards are made, the number of shares within awards is calculated using the average share price for the three dealing days before the grant of awards (this represents a change from previous years where only the share price on the day of grant was used).
For LTIP awards made in 2015, a holding period has been introduced so that any LTIP awards for which the performance vesting requirements are satisfied will not be released for a further two years from the third anniversary of the original award date. Dividend accrual for LTIP awards will continue until the end of the holding period.
These measures, the relative weightings between the measures and the application of a three-year performance period for each measure, are unchanged from 2014’s LTIP awards and are considered to be the most appropriate measures to align the LTIP out-turn with shareholders’ interests. The relative TSR measure is calculated against the constituents of the FTSE 250 (excluding Investment Trusts), with vesting commencing at median (25% of this part of the award) and with full vesting at upper quintile levels and is subject to an underpin regarding underlying financial performance.
The fee levels for 2015 are £325,000 for the Chairman, £90,000 for the role of Non-Executive Director with additional fees of: (i) £5,000 payable for the role of Senior Independent Director; and/or (ii) £10,000 payable where an individual also chairs the Audit, Remuneration or Risk Committee; and/or (iii) £20,000 payable where a Non-Executive Director also serves on the board of a subsidiary company and/or (iv) £10,000 payable for service on the Solvency II Model Governance Committee. The fees of Non-Executive Directors who are not paid for serving on subsidiary company boards and who were appointed before 2014 remained at £100,000 in accordance with their agreements on joining the Board.
BALANCE OF TOTAL TARGET REMUNERATION FOR EXECUTIVE DIRECTORS The balance of total target remuneration for the Executive Directors is illustrated in the Appendix to the Directors’ remuneration report where the disclosure for ‘Potential Rewards under Various Scenarios’ from the Remuneration Policy is included for information. The scenarios shown remain the same as for 2014 due to the underlying remuneration arrangements and participation levels remaining substantially unchanged.
4 Long-term incentive vesting rates against maximum opportunity values are not applicable for 2011 and 2012 due to no awards vesting in those financial years.
PERCENTAGE CHANGE IN PAY OF THE GROUP CHIEF EXECUTIVE OFFICER 2013 TO 2014 In accordance with UK regulations, the table below provides a comparison of the percentage change in the prescribed pay elements of the Group Chief Executive Officer (salaries, taxable benefits, and annual incentive outcomes) between financial years 2013 and 2014 and the equivalent percentage changes in the average of all staff (representing all permanent staff during 2013 and 2014 on a matched basis).
Group Chief Executive Officer 0.00 (5.88) (1.24) (0.69) Staff 4.00 1.30 2.30 3.45
To approve the Directors’ Remuneration Policy 125,192,451 84.7 22,610,598 15.3 7,826,087 To approve the Directors’ remuneration report for the year ended 31 December 2013 125,877,015 80.9 29,545,118 19.0 168,478
– use of the FTSE 31-100 as a benchmarking reference point on the basis that these companies’ larger market capitalisations provide an appropriate proxy for the complexity and scale of Phoenix Group.
The Company engaged with its shareholders on these issues both in advance of, and subsequent to, the AGM. No salary increases have been awarded to either of the Executive Directors in respect of the 2015 review and page 68 of this report includes additional disclosure regarding the 2014 AIP out-turn. Consistent with evolving best practice, 2015 LTIP awards will also be subject to a two-year holding period. As explained in the Committee Chairman’s report on page 60, while the FTSE 31-100 is used as a reference point, it is seen as a cap subject to negative moderation rather than a figure to match.
4 In accordance with the requirements of the UK regulations, the 2014 value for long-term incentives is an estimate of the vesting outcomes for LTIP awards granted in 2012 and which are due to vest on 2 April 2015 for Clive Bannister and 23 August 2015 for James McConville. These estimated vesting levels are at 85% respectively, reflecting outcomes against the MCEV growth and Cumulative cash generation performance measures to 31 December 2014, and an anticipated TSR outcome until 2 April 2015 which reflects only TSR performance to 31 December 2014. This estimated vesting outcome, including assumptions for dividends, is then applied to the average share price between 1 October 2014 and 31 December 2014 (769.93p) to produce the estimated long-term incentives figures shown for 2014 in the above table. These assumptions will be trued up for actual share prices, actual TSR performance and dividends on vesting in the report for 2015. Details of the performance measures and targets applicable to the 2012 LTIP are set out on page 69.
6 Clive Bannister and James McConville are entitled to each receive a Company pension contribution of 20% of base salary, which may at their own choice, be paid to their Group Personal Pension (‘GPP’) or received in cash. Pension contributions paid as cash supplements are reduced for the effect of employers’ National Insurance contributions.
The aggregate remuneration of all Directors under salary, fees, benefits, cash supplements in lieu of pensions and annual incentive was £3.771 million (2013: £3.880 million; this 2013 figure has been restated to reflect (i) the adjustment to James McConville’s benefits as referred to in footnote 2 to the single figure table above, and (ii) restated expenses for Non-Executive Directors referred to in the notes to the table of Non-Executive Directors’ Fees).
AIP OUTCOMES FOR 2014 The Committee seeks to set suitable ranges for each measure in the context both of the Company’s own internal budgets and of external projections (whether through management guidance or consensus forecasts). As an entirely closed life business, targets are significantly impacted by management actions and year on year growth is not an inherent objective. The ranges are considered appropriate in that context.
Expense management £278m £248m £253m 15% 13% Group MCEV operating earnings after tax £196m £230m £288m 15% 15% Customer satisfaction 3 rating 5 rating 4.65 rating 10% 8% Employee engagement 72 rating 80 rating 78 rating 10% 8% Total 76%
The above targets are those set for the 2014 year in accordance with the normal processes subject only to the Committee excluding the budgeted performance of Ignis for the period following its disposal and, on the basis that it was not practical to pro-rate expenses, the budgeted and actual expenses of Ignis were excluded for the full financial year. For the avoidance of doubt, participants did not benefit under the AIP from the sale proceeds of Ignis.
In line with market best practice, the Company has disclosed both the actual performance targets for the specific Corporate (financial and strategic) performance measures used for the 2014 AIP and the relevant levels of attainment for those targets. Specific performance measures and targets for the Personal (individual objectives) performance elements of the 2014 AIP are not disclosed as these performance measures and targets are regarded as commercially sensitive by the Committee and are likely to remain so although key achievements included the comprehensive refinancing of the bank debt, the divestment of Ignis and the successful appointment of the new Phoenix Life Chief Executive Officer together with very good financial performance, a more diversified investor base and a well-managed life company which has delivered a wide range of management actions.
MCEV growth¹ (40%) Target range between MCEV growth in excess of the risk-free rate by 3% per annum and MCEV growth in excess of the risk-free rate by 6% per annum.
TSR³ (20%) Target range between median performance against the constituents of the FTSE 250 (excluding Investment Trusts) rising on a pro rata basis until full vesting for upper quintile performance. In addition, the Committee must consider whether the TSR performance is reflective of the underlying financial performance of the Company.
2 Following the sale of Ignis, the Cumulative cash generation target has been reduced by the budgeted dividend expected in the period from Ignis between the completion date at 1 July 2014 and the LTIP closing date of 31 December 2014. The absolute level of stretch under the Cumulative cash generation targets remains unchanged and the proceeds from the sale of Ignis are excluded from the final calculation. Cumulative cash generation takes into account a certain level of interest costs and expenses.
NON-EXECUTIVE DIRECTORS’ FEES The emoluments of the Non-Executive Directors based on the current disclosure requirements were as follows: Name
1 The amounts within the benefits column reflect the fact that the reimbursement of expenses to Non-Executive Directors for travel and accommodation costs incurred in attending Phoenix Life Holdings Limited board and associated meetings represent a taxable benefit. This position has been clarified with HMRC and the amounts shown are for reimbursed travel and accommodation expenses (and the related tax liability which is settled by the Company).
2 The figures for 2013 in respect of Alastair Lyons and David Woods have been restated to reflect the position referred to in note 1 above, and includes reimbursed travel and accommodation costs (and related tax liabilities) in 2013 (Alastair Lyons: £3,000; David Woods: £2,000).
3 Ian Ashken, Charles Clarke, Alastair Lyons and Hugh Osmond retired from the Board in 2013.
4 David Barnes retired from the Board on 22 October 2014.
SHARE-BASED AWARDS As at 31 December 2014, Directors’ interests under long-term share-based arrangements were as follows: LTIP
2 Gains of Directors from share options exercised under the LTIP in 2014 were £1,295,305 (2013: £nil). The share price on date of exercise (29 August 2014) was £7.41.
4 The shares outstanding at the end of the year related to dividend roll-up and were exercised on 7 January 2015.
5 Following the year-end, the Group Chief Executive Officer elected to waive voluntarily his entitlement to any vesting of the 2012 LTIP in excess of two-thirds of the shares which would otherwise have vested.
6 The face value of awards granted in 2014 represents the maximum vesting of awards (but before any credit for dividends) and is calculated using a share price of 741.5p being the closing middle market price on the award date, giving £1,399,996 for Clive Bannister and £879,997 for James McConville. The vesting percentage at threshold performance (2014 awards) is 25%.
MCEV growth1 25% of this part vests at threshold performance rising on a pro rata basis until 100% vests.
Target range between MCEV growth in excess of the risk-free rate by 3% per annum and MCEV growth in excess of the risk-free rate by 6% per annum.
As the 2013 rights issue was known before the date of award, the base MCEV for 2013’s award increased by £211m.
Cumulative cash generation2 25% of this part vests at threshold performance rising on a pro rata basis until 100% vests.
Target range of £1.307bn to £1.807bn (£1.330bn to £1.830bn before adjustment).
Target range of £1.277bn to £1.477bn (£1.329bn to £1.529bn before adjustment).
Target range of £1.348bn to £1.548bn (£1.416bn to £1.616bn before adjustment).
TSR3 25% of this part vests at threshold performance rising on a pro rata basis until 100% vests. In addition, the Committee must consider whether the TSR performance is reflective of the underlying financial performance of the Company.
Underpin: Notwithstanding the MCEV growth, Cumulative cash generation and TSR performance targets, if the Committee determines that the Group’s debt levels and associated interest costs have not remained within parameters acceptable to the Committee over the performance period, and that the Group has not made progress considered to be reasonable by it in executing any strategy agreed by the Board on debt management and capital structuring (and for 2013 onwards, risk management), the level of awards vesting will either be reduced or lapse in full.
As noted in the section describing the Implementation of Remuneration Policy in 2015, LTIP awards to be made in 2015 will be subject to performance measures similar to those described in the table above, and the exact performance targets will be determined by the Committee shortly before the awards are made. 1 The MCEV growth targets included a 5x EBITDA element for the value of Ignis. Given the sale of Ignis during the performance period and that best practice is to exclude transactional benefits, the actual sale proceeds were substituted (less refinancing costs). This had a very modest impact on the base year MCEV figures used for the targets: 2012 (£12 million), 2013 (£3 million), 2014 (£26 million).
James McConville 1 The face value of awards granted in 2014 is equivalent to 50% of the cash element of the 2013 AIP and is calculated using a share price of 710.17p, being the average closing market price on the 3 days preceding the award date, giving £241,664 for Clive Bannister and £144,995 for James McConville.
During the year ended 31 December 2014, the highest mid-market price of the Company’s shares was 833p and the lowest mid-market price was 626p. At 31 December 2014, the Company’s share price was 830p.
DIRECTORS’ INTERESTS The number of shares held by each director is shown below: As at 1 Jan 2014 or date of appointment if later
René-Pierre Azria 34,491 34,491 – – – Alastair Barbour – 3,000 – – – David Barnes1 2,747 2,747 – – – Ian Cormack 3,650 3,650 – – – Tom Cross Brown 1,988 1,988 – – – Manjit Dale2 – – – – – Howard Davies 3,623 3,623 – – – Isabel Hudson 3,880 3,880 – – – Kory Sorenson – 1,380 – – – David Woods 3,500 3,500 – – –
1 David Barnes’ share interests are shown as at his date of leaving on 22 October 2014.
Note: The Executive Directors are required to sign a declaration that they have not and will not at any time during their employment with the Phoenix Group, enter into any hedging contract in respect of their participation in the AIP, LTIP, Sharesave, SIP or any other incentive plan of the Company, or pledge awards in such plans as collateral, and additionally that they will neither enter into a hedging contract in respect of, nor pledge as collateral, any shares which are required to be held for the purposes of the Company’s Shareholding Guidelines or any vested LTIP award shares subject to a LTIP holding period.
ADDITIONAL UNAUDITED INFORMATION DIRECTORS’ SERVICE CONTRACTS The dates of contracts and letters of appointment and the respective notice periods for directors are as follows: Executive Directors’ contracts
Name Date of letter of appointment Date of joining the Board Appointment end date Unexpired term (months)
René-Pierre Azria 2 September 2009 2 September 2009 23 April 2015 1 Alastair Barbour 11 September 2013 1 October 2013 1 October 2016 18 Ian Cormack 2 September 2009 2 September 2009 23 April 2015 1 Tom Cross Brown 24 September 2009 24 September 2009 23 April 2015 1 Howard Davies 19 October 2012 1 October 2012 1 October 2015 6 Isabel Hudson 11 December 2009 18 February 2010 23 April 2015 1 Kory Sorenson 9 May 2014 1 July 2014 1 July 2017 27 David Woods 21 December 2009 18 February 2010 23 April 2015 1
The above tables have been included to comply with Listing Rule 9.8.8. In the event of cessation of a Non-Executive Director’s appointment (excluding the Chairman) they would be entitled to one month’s notice. The Chairman, as detailed in his letter of appointment, would be entitled to six months’ notice.
THE GOVERNANCE OF THE REMUNERATION COMMITTEE The Group established the Remuneration Committee in 2010. The terms of reference of the Committee are available at www.thephoenixgroup.com. During 2014 the Committee invited Kory Sorenson to become a member and also saw the retirement of David Barnes from the Committee and Board. The main determinations of the Committee in 2014 in respect of the application of the Remuneration Policy are summarised in the Committee Chairman’s letter to shareholders at the start of the Directors’ remuneration report. In addition to this, in 2014, the Committee considered the impact of the disposal of Ignis on the remuneration arrangements of both Ignis and the wider Group.
The table below shows the independent Non-Executive Directors who served on the Remuneration Committee during 2014 and their date of appointment: Member From To
Ian Cormack (Remuneration Committee Chairman) 18 February 2010 To date David Barnes 18 February 2010 22 October 2014 Isabel Hudson 18 February 2010 To date Kory Sorenson 3 July 2014 To date
– The Remuneration Committee does not strictly follow data but uses it as a reference point in considering, in its judgement, the appropriate level of salary having regard to other relevant factors including corporate and individual performance and any changes in an individual’s role and responsibilities, and the level of salary increase awarded to other employees of the Group
– The Remuneration Committee will apply the factors set out in the previous column in considering any salary adjustments during the duration of this policy and, in any event, no increase will be made if it would take an Executive Director’s salary above the median level of salaries for the Remuneration Committee’s assessment of that role in the FTSE 31-100 at or shortly prior to when any increase is considered
– Where appropriate, the Company will meet certain costs relating to Executive Director relocations
– It is not possible to prescribe the likely change in the cost of insured benefits or the cost of some of the other reported benefits year-toyear, but the provision of benefits will normally operate within an annual limit of 10% of an Executive Director’s base salary
– The Remuneration Committee will monitor the costs in practice and ensure that the overall costs do not increase by more than the Remuneration Committee considers to be appropriate in all the circumstances
– All Executive Directors are eligible to participate in the Group Personal Pension (‘GPP’). Executive Directors receive a contribution to GPP or they may opt to receive the contribution in cash if they are impacted by the relevant lifetime or annual limits
– A contribution limit of 20% of base salary per annum per Executive Director has been set for the duration of this policy
– AIP levels and the appropriateness of measures are reviewed annually to ensure they continue to support the Group’s strategy
– One-third of any annual AIP award is to be deferred into shares for a period of three years although the Remuneration Committee reserves discretion to alter the current practice of deferral (whether by altering the portion deferred, the period of deferral or whether amounts are deferred into cash or shares). Such alterations may be required to ensure compliance with regulatory guidelines for pay within the insurance sector, but will not otherwise reduce the current portion deferred or the period of deferral
– Deferral of AIP outcomes into shares is currently made under the Phoenix Group Holdings’ Deferred Bonus Share Scheme (‘DBSS’) and DBSS awards are made following the announcement of annual results in accordance with the DBSS rules
– Awards under DBSS will be in the standard form of awards to receive shares for nil-cost (with the shares either being delivered automatically at vesting or being delivered at a time following vesting at the individual’s choice)
– Malus/clawback provisions apply to the AIP and to amounts deferred and may be operated in a broad range of circumstances, including those prescribed by the FCA’s Remuneration Code
– The maximum annual incentive level for an Executive Director is 150% of base salary per annum
– On-target performance on all measures produces an outcome of 50% of maximum annual incentive opportunity. However, the Remuneration Committee reserves the right to adjust the threshold and target levels for future financial years in light of competitive practice
– The AIP operates subject to three levels of moderation: i. The Remuneration Committee sets targets for relevant AIP metrics. Recognising that the business of the Company is to engage in corporate activity, the Remuneration Committee may adjust targets during the year to ensure they operate as originally intended if there is activity not contemplated by the business plan (which may or may not include reflecting the consequences of such activity depending on the circumstances)
– The formal limit under the LTIP is 300% of base salary per annum (and 400% per annum in exceptional cases)
– The Remuneration Committee expressly reserves discretion to make such awards as it considers appropriate within these limits
– The Remuneration Committee may set such performance conditions for LTIP awards as it considers appropriate (whether financial or non-financial and whether corporate, divisional or individual)
– Executive Directors are able to participate in all-employee share plans on the same terms as other Group employees as required by HMRC legislation
– Sharesave – the Remuneration Committee has the facility to allow individuals to save up to a maximum of £500 each month (or such other level as permitted by HMRC legislation) for a fixed period of three or five years. At the end of the savings period, individuals may use their savings to buy ordinary shares in the Company at a discount of up to 20% (although for 2014 and past years this has been set at 15%) of the market price set at the launch of each scheme
– Share Incentive Plan (‘SIP’) – the Remuneration Committee has the facility to allow individuals to have the opportunity to purchase, out of their pre-tax salary, shares in the Company (up to such level as permitted by the Company in line with HMRC legislation) and receive up to two matching shares for every purchased share (although for 2014 and past years matching has been offered at one matching share for every six shares purchased). SIP also has the facility to allow for reinvestment of dividends in further shares, or the award of additional free shares (up to the limits as permitted by HMRC legislation)
– Consistent with normal practice, such awards are not subject to performance conditions
– Only beneficially owned shares and vested share awards (discounted for anticipated tax liabilities) may be counted for the purposes of the guidelines. Share awards do not count prior to vesting (including DBSS awards)
– The fees paid to the Chairman and the fees of the other Non-Executive Directors are set to be competitive with other listed companies of equivalent size and complexity (both relevant insurance companies and the FTSE 31-100 as a whole)
– Additional fees are paid to NonExecutive Directors who chair or sit on a Board committee, or on boards of subsidiary entities or on the Solvency II Model Governance Committee and to the Senior Independent Director (‘SID’)
– Fee levels for Non-Executive Directors are reviewed annually with any changes normally taking effect from 1 January
2. Holding Period for LTIP awards from 2015 For LTIP awards from 2015 a two-year holding period has been introduced as explained in the ‘Implementation of Remuneration Policy in 2015’ table on page 63.
3. Shareholding Guidelines from 2015 These have been extended to 200% of base salary for all Executive Directors.
– The AIP and LTIPs will operate (including the maximum award levels) as detailed in the general policy in relation to any newly appointed Executive Director.
– All such replacement awards, whether under the AIP, LTIP or otherwise, will take account of the service obligations and performance requirements for any remuneration relinquished by the individual when leaving a previous employer. The Remuneration Committee will seek to make replacement awards subject to what are, in its opinion, comparable requirements in respect of, service and performance. However, the Committee may choose to relax this requirement in certain cases (such as where the service and/or performance requirements are materially completed), and where the Remuneration Committee considers it to be in the interest of shareholders or where such factors are, in the view of the Remuneration Committee, reflected in some other way, such as a significant discount to the face value of the awards forfeited. Exceptionally, where necessary, this may include a guaranteed or non pro-rated annual incentive in the year of joining.
– For the avoidance of doubt, such replacement awards are not subject to a formal cap. The Remuneration Committee has not placed a maximum limit on any such awards which it may be necessary to make as it is not considered to be in shareholders’ interests to set any expectations for prospective candidates regarding such awards. Any recruitment-related awards which do not replace awards with a previous employer will be subject to the limits for incentive pay as stated in the general policy.
– LTIP: consists of the threshold level of vesting (50% of base salary). The benefit of a single year’s participation in the Sharesave scheme is recognised using an expected value for the Sharesave options of 30%. The benefit of a single year’s participation in the SIP is recognised using one matching share for every six shares invested on the maximum value which can be invested.
SHARE CAPITAL The issued share capital of the Company was increased by 271,983 ordinary shares during 2014 which related to the Company’s Sharesave Scheme. At 31 December 2014, the issued ordinary share capital totalled 225,090,284. Subsequently, 25,484 ordinary shares have been issued in 2015 in connection with the Company’s Sharesave Scheme to bring the total in issue to 225,115,768 at the date of this report.
The rights and obligations attaching to the Company’s ordinary shares are set out in the Company’s Articles of Association (the ‘Company’s Articles’) which are available on the Company’s website at www.thephoenixgroup.com/about-us/corporate-governance/ articles-of-association.aspx.
BOARD BOARD OF DIRECTORS The membership of the Board of Directors during 2014 is given within the Corporate Governance Report on page 54 which is incorporated by reference into this report. Details of directors and their connected persons’ beneficial and non-beneficial interests in the shares of the Company are shown in the Directors’ remuneration report.
– Kory Sorenson joined the Board as a Non-Executive Director with effect from 1 July 2014
Details of related party transactions which took place during the year with directors of the Company and consolidated entities where directors are deemed to have significant influence, are provided in the Directors’ remuneration report and in note 43 to the IFRS consolidated financial statements.
In accordance with the UK Corporate Governance Code, directors must stand for re-election annually. The Board of Directors will be unanimously recommending that all of the directors should be put forward for election/re-election at the forthcoming AGM to be held on 23 April 2015.
The directors have been authorised to allot and issue securities and grant options over or otherwise dispose of shares under Article 14.
DIRECTORS’ INDEMNITIES Following shareholder approval on 15 March 2010, the Company entered into a deed of indemnity by way of deed poll with its directors whereby the Company has agreed to indemnify each director against all losses incurred by them in the exercise, execution or discharge of their powers or duties as a director of the Company, provided that the indemnity shall not apply to the extent prohibited by any applicable law.
On an ongoing basis, directors are responsible for informing the Company Secretary of any new, actual or potential conflicts that may arise.
GOVERNANCE GOING CONCERN The Group’s business activities, together with the factors likely to affect its future development, performance and position are set out in the Strategic Report. The Strategic Report also provides details of any key events affecting the Company (and its consolidated subsidiaries) since the end of the financial year. The Strategic Report includes details of the Group’s cash flow and solvency position, including sensitivities for both. Principal risks and their mitigation are detailed on pages 39 to 41. In addition, the financial statements include, amongst other things, notes on the Group’s borrowings (note 23), management of its financial and insurance risk including market, credit and liquidity risk (note 40), its commitments and contingent liabilities (notes 42 and 44) and its capital position and management (note 39). The Strategic Report (on pages 12 to 21) sets out the business model and how we create value for shareholders and policyholders.
CORPORATE GOVERNANCE STATEMENT The disclosures required by section 7.2 of the FCA’s Disclosure and Transparency Rules can be found in the Corporate Governance Report on pages 51 to 59 which is incorporated by reference into this Directors’ Report and comprises the Company’s Corporate Governance Statement. The UK Corporate Governance Code (the ‘Code’) applies to the Company and full details on the Company’s compliance with the Code are included in the Corporate Governance Report. The Code is available on the website of the Financial Reporting Council – www.frc.org.uk.
GREENHOUSE GAS EMISSIONS All disclosures concerning the Group’s greenhouse emissions are contained in the Corporate Responsibility Report forming part of the Strategic Report on pages 42 to 45.
MEMORANDUM AND ARTICLES Changes to the Company’s Memorandum and Articles require prior shareholder approval.
RE-APPOINTMENT OF THE AUDITORS During 2014 the Board approved the change in auditor from Ernst & Young Accountants LLP (Netherlands) to Ernst & Young LLP (UK). Ernst & Young LLP has indicated its willingness to continue in office and a resolution that it is re-appointed will be proposed at the AGM.
GROUP EMPLOYEES The Group is committed to achieving equality of opportunity and the equal treatment of all our people and those applying to join us. To this end, all our people share an obligation to their colleagues, customers and business partners to provide a safe, fair and equitable working environment in which every individual can seek, obtain and continue employment without experiencing any unfair or unreasonable discrimination.
The views and opinions of staff are sought through Phoenix’s annual Engagement Survey and more regular interim surveys and employee communication and engagement forums. Phoenix undertakes meaningful consultation with staff representatives on all major organisational changes and other matters affecting employees.
OTHER INFORMATION For the purposes of Listing Rule 9.8.4C R, the information required to be disclosed under Listing Rule 9.8.4 R can be found within the following sections of the Report and Accounts: Section Requirement Location 1 Statement of interest capitalised
The Strategic Report and the Directors’ Report were approved by the Board of Directors on 17 March 2015.
Our strategic partnerships provide our customers with access to a wide range of investment products and expertise.
STATEMENT OF DIRECTORS’ RESPONSIBILITIES IN RESPECT OF THE ANNUAL REPORT AND ACCOUNTS STATEMENT OF DIRECTORS’ RESPONSIBILITIES IN RESPECT OF THE ANNUAL REPORT AND ACCOUNTS OF PHOENIX GROUP HOLDINGS The Directors of Phoenix Group Holdings are responsible for the preparation of the Annual Report and Accounts, the Strategic Report, the Directors’ Report, the Directors’ remuneration report, the Group consolidated financial statements and the Company financial statements in accordance with applicable law and regulations.
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Group’s and the Company’s transactions and disclose, with reasonable accuracy at any time, the financial position of the Company and the Group. They are also responsible for safeguarding the assets of the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
The table below sets out the risks we identified that had the greatest effect on our overall audit strategy, the allocation of resources in the audit and directing the efforts of the engagement team and present the most significant risks of material misstatements to the financial statements. The table also sets out how our audit addressed these risks.
We assessed management’s analysis of movements in insurance contract liabilities and obtained evidence to support large or unexpected movements. This provided important audit evidence over the valuation of insurance contract liabilities. Further additional audit procedures performed to respond to the specific significant risks are set out below: ACTUARIAL ASSUMPTIONS AND METHODOLOGY Economic assumptions are set by management taking account of market conditions as at the valuation date. Non-economic assumptions such as expenses, longevity and mortality are set based on past experience, market practice, regulations and expectations about future trends.
– Compared the methodology and assumptions used with those we would expect based on our knowledge of the Group, industry standards and regulatory and financial reporting requirements.
– Evaluated the choice of the industry standard Continuous Mortality Investigation (‘CMI’) model and the parameters used to ensure that it was appropriate given the demographics of policyholders.
IMPLEMENTATION OF THE NEW ACTUARIAL REPORTING SYSTEM The implementation of the new actuarial reporting system impacted all aspects of the actuarial valuation process, from extraction and conversion of data through to the presentation of the results and analysis of movement.
In obtaining sufficient audit evidence to assess the integrity of actuarial data we: – Assessed the adequacy of Outsourced Service Provider controls regarding the maintenance of policyholder data.
– Verified that the revised data conversion rules in the new application were applied as intended.
– Tested the design and operating effectiveness of key controls including Information Technology general controls over management’s data collection, extraction and validation process.
The extent of judgement applied by management in valuing the Group’s financial investments varies with the nature of securities held, the markets in which they are traded and the valuation methodology applied.
These investments are referred to as ‘Level 3’ assets in the financial statements.
– Evaluated the methodology, inputs and assumptions used for a sample of mark to model investments, by comparing yields, spreads, earnings and market rents to published market benchmarks to identify drivers of valuation movements which were not consistent with industry norms.
The Group provides for current and deferred tax. Judgement is required in setting those provisions as there is a risk of challenge in respect of some of the Group’s provisions.
In assessing the recoverability of the Group’s deferred tax assets forecasts of future profitability are made which by their nature involve management’s judgement.
– Considered the latest available information to ensure that management had provided reasonably for known risks.
– Assessed the adequacy of specific provision pertaining to open year tax computations.
We evaluated any uncorrected misstatements against both the quantitative measures of materiality discussed above and other relevant qualitative considerations.
Following our assessment of the risk of material misstatement to the Group financial statements, we selected the insurance companies and Group functions as full scope locations. We have also performed a full scope audit of the Ignis companies (discontinued operations) as at the disposal date, the result of which is included in the Group’s financial statements.
Other companies within Phoenix Group Holdings were selected for specific scope audit procedures in respect of provisions, administrative expenses and cash balances. The extent of audit work in respect of other companies was based on our assessment of the risks of material misstatement at a financial statement line level.
The work performed on the components, together with additional procedures performed at the Group level gave us the evidence we needed to form our opinion on the consolidated financial statements as a whole.
WHAT WE HAVE AUDITED We have audited the consolidated financial statements of Phoenix Group Holdings and its subsidiaries (collectively ‘the Group’) and the parent company for the year ended 31 December 2014, which comprise: – the statement of consolidated financial position; – the consolidated income statement and the statement of consolidated comprehensive income; – the pro forma reconciliation of Group operating profit to result attributable to owners; – the statement of consolidated changes in equity; – the statement of consolidated cash flows; – the notes to the consolidated financial statements; – the parent company statement of comprehensive income; – the parent company statement of financial position; – the parent company statement of changes in equity; – the parent company statement of cash flows; and
The financial reporting framework that has been applied in the preparation of the financial statements is IFRSs as issued by the IASB.
This report is made solely to the Company’s members, as a body, in accordance with our engagement letter dated 1 August 2014. 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.
RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITOR As explained more fully in the Statement of Directors’ Responsibilities set out on page 90, the Directors are responsible for the preparation of the financial statements and the parent company financial statements and for being satisfied that they give a true and fair view.
Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and ISAs (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors.
Phoenix Group Holdings is a non-UK company and as such is not required to comply with the UK Companies Act 2006. As the Group is listed on the UK Stock Exchange, the Directors have voluntarily chosen to comply with the Companies Act 2006 and listing rules that apply to UK Companies and have engaged us to provide an opinion as if they were. Accordingly we have been engaged to: – report as to whether the Strategic Report and Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements; – report as to whether the information given in the Corporate Governance Statement with respect to internal control and risk management systems in relation to financial reporting processes is consistent with the financial statements; – report as to whether the section the Directors’ remuneration report that is described as audited has been properly prepared in accordance with the basis of preparation described therein; – report if we are not satisfied that: – adequate accounting records have been kept (including returns from those branches which have not been visited); – the financial statements are in agreement with the records and returns; or
– review in accordance with listing rules: – the Directors’ statement in relation to going concern; or
REPORT ON MATTERS PRESCRIBED BY OUR ENGAGEMENT LETTER – the information given in the Strategic Report and the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements; – the information given in the Corporate Governance Statement set out on pages 51 to 59 with respect to internal control and risk management systems in relation to financial reporting processes is consistent with the financial statements; and
– We have not received all the information and explanation which we require for the audit; or
– The Directors’ Statement set out on page 85 in relation to going concern; or
– the requirements of Schedule 8 to the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 of the United Kingdom pertaining to Directors’ remuneration that UK quoted companies are required to comply with.
Notes: 1. The maintenance and integrity of the Phoenix Group Holdings web site is the responsibility of the Directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the web site.
Net investment income 9 6,034 2,786 Total revenue, net of reinsurance payable 5,317 4,223
Gain on transfer of business 4 4 42 Other operating income 9 7 Net income 5,330 4,272
Policyholder claims (3,724) (4,830) Less: reinsurance recoveries 341 464 Change in insurance contract liabilities (1,990) 3,411 Change in reinsurers’ share of insurance contract liabilities 1,651 (710) Transfer to unallocated surplus 22 (11) (77) Net policyholder claims and benefits incurred (3,733) (1,742)
Tax (charge)/credit 13 (151) 1 Add: tax attributable to policyholders’ returns 13 129 (27)
Tax charge attributable to owners 13 (22) (26) Profit from continuing operations for the year attributable to owners 314 242
Attributable to: Owners of the parent 310 145 Non-controlling interests 20 96 62
Earnings per ordinary share Basic (pence per share) 15 137.7p 68.2p Diluted (pence per share) 15 137.5p 68.1p Earnings per share from continuing operations Basic earnings per share from continuing operations 15 96.7p 85.3p Diluted earnings per share from continuing operations 15 96.5p 85.2p
STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2014
Profit for the year from continuing operations 314 242 Profit/(loss) from discontinued operations 92 (35)
Items that will not be reclassified to profit or loss: Remeasurements of net defined benefit asset/liability 30 240 – Tax credit/(charge) relating to other comprehensive income items 13 11 (12)
Attributable to: Owners of the parent 571 141 Non-controlling interests 96 62
Group costs (21) (24) Total operating profit before adjusting items 483 439
Tax charge attributable to owners from continuing operations (22) (26) Tax credit attributable to owners from discontinued operations 12 16 Profit for the year attributable to owners 406 207
Equity attributable to owners of the parent Share capital 16 – – –
Total equity attributable to owners of the parent 2,365 1,909 1,658
Insurance contract liabilities Liabilities under insurance contracts 21 42,930 42,729 45,730
STATEMENT OF CONSOLIDATED FINANCIAL POSITION AS AT 31 DECEMBER 2014 CONTINUED
Acquired in-force business 1,413 1,511 1,622 Customer relationships and other intangibles 217 368 384 Present value of future profits 23 32 23
Cash and cash equivalents 37 5,067 9,294 9,085 Assets classified as held for sale 4.2 1,713 66 5,310
STATEMENT OF CONSOLIDATED CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 2014
Cash flows from investing activities Proceeds from disposal of businesses, net of cash disposed of 4 332 – Net cash flows from investing activities 332 –
Separate disclosure of the cash flows relating to discontinued operations is provided in note 4.1.2.
Profit for the year – – – – 310 310 96 406 Other comprehensive income for the year – – – 10 251 261 – 261 Total comprehensive income for the year – – – 10 561 571 96 667
Issue of ordinary share capital, net of associated commissions and expenses – 1 – – – 1 – 1 Dividends paid on ordinary shares – (120) – – – (120) – (120) Dividends paid on shares held by the employee trust and Group entities – 1 – – – 1 – 1 Dividends paid to non-controlling interests – – – – – – (22) (22) Coupon paid to non-controlling interests, net of tax relief – – – – – – (21) (21) Credit to equity for equity-settled share-based payments – – – – 7 7 – 7 Shares in subsidiaries subscribed for by non-controlling interests – – – – – – 82 82 Shares distributed by employee trust – – 10 – (10) – – – Shares acquired by employee trust – – (8) – – (8) – (8) Shares sold by Group entities – – 3 – 1 4 – 4
STATEMENT OF CONSOLIDATED CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2014
Profit for the year – – – – – 145 145 62 207 Other comprehensive income/(expense) for the year – – – – 8 (12) (4) – (4) Total comprehensive income for the year – – – – 8 133 141 62 203
Issue of ordinary share capital, net of associated commissions and expenses – 233 – – – – 233 – 233 Dividends paid on ordinary shares – (120) – – – – (120) – (120) Dividends paid on shares held by the employee trust and Group entities – 2 – – – – 2 – 2 Dividends paid to non-controlling interests – – – – – – – (25) (25) Coupon paid to non-controlling interests, net of tax relief – – – – – – – (20) (20) Credit to equity for equity-settled share-based payments – – – – – 6 6 – 6 Shares in subsidiaries subscribed for by non-controlling interests – – – – – – – 37 37 Shares distributed by employee trust – – – 8 – (8) – – – Shares acquired by employee trust – – – (11) – – (11) – (11) Expired contingent rights – – (5) – – 5 – – –
Collective investment schemes The Group has invested in a number of collective investment schemes such as Open-ended Investments Companies (‘OEICs’), unit trusts, Société d’Investissement à Capital Variable (‘SICAVs’) and private equity funds. These invest mainly in equities, bonds, property and cash and cash equivalents. The Group’s percentage ownership in these collective investment schemes can fluctuate according to the level of Group and third party participation in structures.
For such collective investment schemes, the following circumstances may indicate, in substance that the Group has power over an investee: – where the investee is managed by asset managers outside the Group, the Group has existing substantive rights (such as power of veto and liquidation rights) that give it the ability to direct the current activities of the investee. In assessing the Group’s ability to direct an investee the Group considers its ability relative to other investors
Insurance and investment contract liabilities Insurance and investment contract liability accounting is discussed in more detail in accounting policies (e) and (f) with further detail of the key assumptions made in determining insurance and investment contract liabilities included in note 40.
Income tax assets and liabilities Deferred tax assets are recognised to the extent that they are regarded as recoverable, that is to the extent that, on the basis of all the available evidence, it can be regarded as more likely than not that there will be suitable taxable profits against which the losses can be relieved. Forecasts of future profitability are made which by their nature involve management’s judgement.
1. ACCOUNTING POLICIES CONTINUED (b) CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS CONTINUED Consolidation of collective investment schemes Collective investment schemes are consolidated where it is determined that the Group controls the investee. Such an assessment requires the application of judgement with regard to the factors discussed in note 1(a) ‘Basis of consolidation’.
Operating profit Operating profit is the Group’s non-GAAP measure of performance. The Group is required to make judgements as to the appropriate longer-term rates of investment return for the determination of operating profit, as detailed in note 6.3, and as to what constitutes an operating or non-operating item in accordance with the accounting policy detailed in note 1(v).
(c) FOREIGN CURRENCY TRANSACTIONS Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (the ‘functional currency’). The consolidated financial statements are presented in sterling, which is the Group’s presentation currency.
– all resulting exchange differences are recognised through the statement of consolidated comprehensive income.
(d) CLASSIFICATION OF CONTRACTS Contracts under which the Group accepts significant insurance risk are classified as insurance contracts.
In calculating the realistic liabilities, account is taken of the future management actions consistent with those set out in the Principles and Practices of Financial Management (‘PPFM’).
The valuation of liabilities on unit-linked contracts is held at 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.
(g) FINANCIAL LIABILITIES On initial recognition, financial liabilities are recognised when due and measured at the fair value of the consideration received less directly attributable transaction costs (with the exception of liabilities at fair value through profit or loss for which all transaction costs are expensed).
(j) NET ASSET VALUE ATTRIBUTABLE TO UNITHOLDERS The net asset value attributable to unitholders represents the non-controlling interest in collective investment schemes which are consolidated by the Group. This interest is classified at fair value through profit or loss and measured at fair value, which is equal to the bid value of the number of units of the collective investment scheme not owned by the Group.
(k) OBLIGATIONS FOR REPAYMENT OF COLLATERAL RECEIVED It is the Group’s practice to obtain collateral in stock lending and derivative 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 ‘obligations for repayment of collateral received’ in the statement of consolidated financial position. The ‘obligations for repayment of collateral received’ are measured at amortised cost, which in the case of cash is equivalent to the fair value of the consideration received.
A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised. The tax charge is analysed between tax that is payable in respect of policyholders’ returns and tax that is payable on owners’ returns. This allocation is calculated based on an assessment of the effective rate of tax that is applicable to owners for the year.
The Group determines the net interest expense or income on the net defined benefit asset/liability for the period by applying the discount rate used to measure the defined benefit obligation at the beginning of the annual period to the net defined benefit asset/ liability. The discount rate is the yield at the period end on AA credit rated bonds that have maturity dates approximating to the terms of the Group’s obligations. The calculation is performed by a qualified actuary using the projected unit credit method.
(n) INTANGIBLE ASSETS Goodwill Business combinations are accounted for by applying the purchase method. Goodwill represents the difference between the cost of the acquisition and the fair value of the net identifiable assets acquired.
Goodwill is measured on initial recognition at cost. Following initial recognition, goodwill is stated at cost less any accumulated impairment losses. It is tested for impairment annually or when there is evidence of possible impairment. Goodwill is not amortised. For impairment testing, goodwill is allocated to cash generating units (Phoenix Life and Ignis). Goodwill is impaired when the recoverable amount is less than the carrying value.
Customer relationships Intangible assets include vesting pension premiums and investment management contracts as detailed in note 31. These are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination is their fair value as at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and any accumulated impairment losses. Internally generated intangible assets are not capitalised and expenditure is reflected in the consolidated income statement in the year in which the expenditure is incurred.
(s) REINSURANCE The Group cedes insurance risk in the normal course of business. Reinsurance assets represent balances due from reinsurance providers. Reinsurers’ share of insurance contract liabilities is dependent on expected claims and benefits arising under the related reinsured policies.
Gains or losses on purchasing reinsurance are recognised in the consolidated income statement at the date of purchase and are not amortised. They are the difference between the premiums ceded to reinsurers and the related change in the reinsurers’ share of insurance contract liabilities.
(u) PROVISIONS AND CONTINGENT LIABILITIES A provision is recognised when the Group has a present legal or constructive obligation as a result of a past event and it is probable that an outflow of economic benefits will be required to settle the obligation. If the effect is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. Where the Group has a present legal or constructive obligation, but it is not probable that there will be an outflow of resources to settle the obligation or the amount cannot be reliably estimated, this is disclosed as a contingent liability.
(v) OPERATING PROFIT The Group has chosen to report a non-GAAP measure of performance being operating profit. Operating profit is considered to provide a comparable measure of the underlying performance of the Group’s business as it excludes the impact of short term economic volatility and other one-off items. This measure incorporates an expected return, including a longer term return on financial investments backing shareholder and policyholder funds over the period, with consistent allowance for the corresponding expected movements in liabilities. Operating profit includes the effect of variances in experience for non-economic 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 Group’s core operating activities (for example, actuarial modelling enhancements and data reviews).
Impacts arising from the difference between the actual and expected experience for economic items (on both assets and liabilities) and the impacts of changes in economic assumptions on the valuation of liabilities are excluded from operating profit and are presented in profit before the tax attributable to owners.
Operating profit also excludes the impact of the following items: – amortisation and impairments of intangible assets; – finance costs attributable to owners; – gains or losses on the disposal or remeasurement of subsidiaries, associates or joint ventures (net of related costs of disposal); – the financial impacts of mandatory regulatory change in the year of first-time recognition; – integration, restructuring or other significant one-off projects; and
(w) EARNINGS PER SHARE Basic earnings per share is calculated 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.
For the diluted earnings per share, the weighted average number of ordinary shares in issue is adjusted to assume conversion of all potentially dilutive ordinary shares, including warrants and potentially issuable ordinary shares.
(z) BENEFITS, CLAIMS AND EXPENSES RECOGNITION Gross benefits and claims Claims on insurance contracts and investment contracts with DPF reflect the cost of all claims arising during the period, including policyholder bonuses allocated in anticipation of a bonus declaration. Claims payable on maturity are recognised when the claim becomes due for payment and claims payable on death are recognised on notification. Surrenders are accounted for at the earlier of the payment date or when the policy ceases to be included within insurance contract liabilities. Where claims are payable and the contract remains in-force, the claim instalment is accounted for when due for payment. Claims payable include the costs of settlement.
Share-based payments 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. Details regarding the determination of the fair value of equity-settled share-based transactions are set out in note 19.
Finance costs Interest payable is recognised in the consolidated income statement as it accrues and is calculated using the effective interest method.
Shares held by the employee benefit trust and Group entities Where an employee trust or other Group entity 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 employee trust and Group entities are charged or credited to the own shares account in equity.
(cc) LEASES Where a significant element of the risks and rewards of title to the asset is retained by the lessor, such leases are treated as operating leases. Property leased out by the Group under operating leases are included in investment property, rental income from such leases is recognised as income in the statement of comprehensive income on a straight line basis over the period of the lease.
(dd) GENERAL BUSINESS The general insurance business has been closed to new business for a number of years and is in run-off. The results are included within other operating income in the consolidated income statement. Provisions are made for the estimated cost of claims, including claims incurred but not reported after taking into account handling costs, anticipated inflation and settlement trends. Any difference between the estimated provision and subsequent settlement is included in the consolidated income statement.
(ee) SEGMENTAL REPORTING The Group’s results are analysed across two reportable segments: Phoenix Life and Ignis. The revenues generated in each reported segment are shown in the segmental information in note 5.
2. FINANCIAL INFORMATION The consolidated financial statements for the year ended 31 December 2014, set out on pages 97 to 189, were authorised by the Board of Directors for issue on 17 March 2015.
The basis of preparation for the Group’s consolidated financial statements has been amended from IFRSs adopted for use in the European Union to IFRSs issued by the IASB, effective from 1 January 2014.
As a result of adopting this new basis of preparation in 2014, the following standards and amendments have been adopted by the Group with an initial application date of 1 January 2014.
– IFRS 10 Consolidated Financial Statements (2013) provides a single consolidation model that identifies control as the basis for consolidation for all types of entities. The impact of the adoption of the new standard and the effect on amounts previously reported at 31 December 2013 is set out in note 3.
– IFRS 12 Disclosure of Interests in Other Entities (2013) combines, enhances and replaces the disclosure requirements for all forms of interests in subsidiaries, joint arrangements, associates and unconsolidated structured entities. The adoption of IFRS 12 has resulted in additional disclosures in respect of these interests. The standard has been applied retrospectively with disclosure for the comparative period. The additional disclosures are included in notes 1 (a), 4, 20, 35 and 45.
– IAS 28 Investments in Associates and Joint Ventures (Revised) (2013). This standard supersedes IAS 28 Investments in Associates and prescribes the accounting for investments in associates and sets out the requirements for the application of the equity method when accounting for investments in associates and joint ventures. There are no impacts on the consolidated financial statements as a result of these amendments.
– Recoverable Amount Disclosures for Non-Financial Assets (Amendments to IAS 36 Impairment of Assets) (2014). Modifications to the disclosures required by IAS 36 have been made as a result of the requirements of IFRS 13. These amendments require disclosure of the recoverable amounts for the assets or cash-generating units for which an impairment loss has been recognised or reversed during the period. The adoption of these amendments has not required any additional disclosures in the consolidated financial statements.
– IFRS 15 Revenue from Contracts with Customers (2017). IFRS 15 establishes a single comprehensive framework for determining whether, how and when revenue is recognised. The standard does not apply to insurance contracts and the Group anticipates that the application of IFRS 15 in the future is likely to have limited impact on amounts reported in respect of the Group’s financial statements.
– Annual Improvements to IFRS 2010-2012 cycle (1 July 2014). This makes a number of minor improvements to existing standards and interpretations.
– Clarification of Acceptable Methods of Depreciation and Amortisation (Amendments to IAS 16 and IAS 38) (2016).
In addition, the following standards, interpretations and amendments have been issued but are not currently relevant to the Group: – Novation of Derivatives and Continuation of Hedge Accounting (Amendments to IAS 39 Financial Instruments: Recognition and Measurement) (2014).
– Defined Benefit Plans: Employee Contributions (Amendments to IAS 19) (1 July 2014).
– Agriculture: Bearer Plants (Amendments to IAS 16 and IAS 41) (2016).
(a) IFRS 10 The Group has adopted IFRS 10 Consolidated Financial Statements for the first time in its 2014 financial statements.
As a result of the Group changing its basis of preparation to IFRS issued by the IASB, the effective date of application of IFRS 10 by the Group is now 1 January 2013.
The Group controls an investee if and only if the Group has all the following: – power over the investee; – exposure, or rights, to variable returns from its involvement with the investee; and
The Group considers all relevant facts and circumstances in assessing whether it has power over an investee, including: relevant activities, substantive and protective rights, voting rights and purpose and design of an investee. The Group re-assesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control.
The Group is invested in a number of collective investment schemes which in turn invest in a range of financial assets. The Group’s percentage ownership in these collective investment schemes can fluctuate according to the Group and third party participation in them. When assessing the control over these collective investment schemes the Group considers the scope of its decision making authority including its ability to direct the relevant activities of the fund, powers of veto and exposure to variability of returns. The Group also assesses substantive removal rights that may affect the Group’s ability to direct the relevant activities.
Consolidated income statement Net investment income 81 Other operating income (1) Administrative expenses (1) Net income attributable to unitholders (79) Profit for the period –
4. DISCONTINUED OPERATIONS AND ASSETS AND LIABILITIES HELD FOR SALE CONTINUED 4.1 DISCONTINUED OPERATIONS On 25 March 2014, the Group and Standard Life Investments (Holdings) Limited (‘Standard Life Investments’) signed a disposal agreement under which Standard Life Investments agreed to acquire the entire issued share capital of Ignis in return for gross cash consideration of £390 million. The divestment was completed on 1 July 2014 and the results for the business have been included in the Ignis operating segment up to this date. A post completion payment of £6 million, calculated in accordance with the sale and purchase agreement, was paid to Standard Life Investments on 24 September 2014.
4.1.1 Results of discontinued operations The results of Ignis are as follows: 2014 £m 2013 £m
Amortisation of customer relationships – (3) Administrative expenses (47) (103) Total operating expenses (47) (106)
Loss per share Basic loss per share from discontinued operations (8.2)p (17.1)p Diluted loss per share from discontinued operations (8.2)p (17.1)p
The loss before tax for the period from discontinued operations excludes intra-group fee income of £38 million (year ended 31 December 2013: £102 million). This intra-group fee income represents the difference between the result before tax for the period from discontinued operations (excluding the gain on disposal and attributable tax credit) and the Ignis segmental result before tax attributable to owners results shown in note 5.1 and reflects the income earned by Ignis on managed assets of the Group’s life companies.
The profit for the period from discontinued operations was entirely attributable to the owners of the parent.
The gain on disposal of discontinued operations is as follows: 2014 £m
117PHOENIX GROUP HOLDINGS ANNUAL REPORT AND ACCOUNTS 2014 4.1.2 Cash flows generated by discontinued operations The net cash flows generated by Ignis (including cash flows relating to the divestment) are as follows: 2014 £m 2013 £m
Liabilities classified as held for sale: Liabilities under insurance contracts 1,776 – Payables related to direct insurance contracts – 48 Other liabilities – 1
In 2012 the Group entered into a reinsurance agreement, effective 1 July 2012, to reinsure certain portfolios of the Group’s annuity liabilities held within the non-profit funds to Guardian in exchange for the transfer of financial assets of £5.1 billion. The business was transferred to Guardian on 30 September 2013 using a Part VII transfer which was approved by the High Court on 12 September 2013.
As part of the Part VII transfer, the Group paid £78 million consideration to Guardian in connection with the ongoing servicing of the transferred policies. Net liabilities disposed of were £143 million and the Group recognised a gain on transfer of £65 million, comprising £42 million within gain on transfer of business and £23 million within tax charge attributable to owners in the consolidated income statement for the year ending 31 December 2013.
4.4 DISPOSAL OF BAGI The Group completed the sale of its entire interest in BAGI to National Indemnity Company on 18 March 2014 for cash consideration of £21 million. The carrying value of the net assets transferred was £17 million, resulting in a pre-tax gain of £4 million. Asset and liabilities classified as held for sale as at 31 December 2013 are no longer included in the consolidated statement of financial position.
Net investment income: Other operating income: Gain on transfer of business: Net policyholder claims and benefits incurred: Impairment and amortisation: Amortisation of acquired in-force business (98) – – – – (98) Amortisation of customer relationships and other intangibles (15) – – – – (15)
Other operating expenses: Profit/(loss) before finance costs and tax 529 11 161 – (80) 621
Net premiums written from: External customers 1,344 – – – – 1,344
Operating profit/(loss) before adjusting items 487 17 (21) 483 Investment return variances and economic assumption changes on long-term business 12 – – 12 Variance on owners’ funds (8) – (6) (14) Amortisation of acquired in-force business (88) – – (88) Amortisation of customer relationships (15) – – (15)
– net other one-off items (including Solvency II implementation and systems transformation costs) totalling a cost of £17 million.
Operating profit/(loss) before adjusting items 414 49 (24) 439 Investment return variances and economic assumption changes on long-term business 64 – – 64 Variance on owners’ funds (67) – 36 (31) Amortisation of acquired in-force business (99) – – (99) Amortisation of customer relationships (16) (3) – (19)
Financing costs attributable to owners (12) – (114) (126) Segmental result before the tax attributable to owners 315 51 (149) 217
Non-recurring items include: – arrangement and structuring fees of £21 million associated with the extinguishment and re-terming of the Impala loan facility; – gain on transfer of business of £42 million (see note 4.3); – regulatory change and systems transformation costs of £25 million; – net settlement cost of pension liability management initiatives of £9 million (see note 30); and
– net other items of positive £2 million includes a gain on the reinsurance agreement with Guardian offset by corporate project costs.
6.1 LIFE ASSURANCE BUSINESS Operating profit for life assurance business is based on expected investment returns on financial investments backing owners’ and policyholder funds over the reporting period, with consistent allowance for the corresponding expected movements in liabilities. Operating profit includes the effect of variance in experience for non-economic items, for example mortality, persistency and expenses, and the effect of changes in non-economic assumptions. Changes due to economic items, for example market value movements and interest rate changes, which give rise to variances between actual and expected investment returns, and the impact of changes in economic assumptions on liabilities, are disclosed separately outside operating profit.
The effect of differences between actual and expected economic experience on liabilities, and changes to economic assumptions used to value liabilities, are taken outside operating profit. For many types of long-term business, including unit-linked and with-profit funds, movements in asset values are offset by corresponding changes in liabilities, limiting the net impact on profit. For other long-term business the profit impact of economic volatility depends on the degree of matching of assets and liabilities, and exposure to financial options and guarantees.
The investment variances and economic assumption changes excluded from the long-term business operating profit are as follows: 2014 £m 2013 £m
6.2 OWNERS’ FUNDS For non-long-term business including owners’ funds, the total investment income, including fair value gains, is analysed between a calculated longer-term return and short-term fluctuations.
Variances on owners’ funds of: Subsidiary undertakings (19) (29) The Company 5 (2)
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 £3,829 million (2013: £1,881 million). The increase is largely driven by the business transfer agreement entered into with Guardian during the period over selected portfolios of the Group’s annuity liabilities (see note 7.1).
Where the Group receives collateral on reinsurance transactions in the form of cash it is recognised in the statement of consolidated financial position along with a corresponding liability to repay the amount of collateral received, disclosed as ‘Deposits received from reinsurers’. The amounts recognised as financial assets and liabilities from cash collateral received at 31 December 2014 are set out below.
Investment income Interest income on loans and receivables 4 11 Interest income on financial assets designated at fair value through profit or loss on initial recognition 1,156 1,348 Dividend income 1,098 1,005 Rental income 95 96 Net interest income/(expense) on Group defined benefit pension scheme asset/liability 4 (1)
Fair value gains/(losses) Loans and receivables 1 10 Financial assets at fair value through profit or loss Designated upon initial recognition 2,333 560 Held for trading – derivatives 1,143 (315)
This note has been restated for the impacts of adopting IFRS 10 ‘Consolidated financial statements’. In addition, as part of the Group’s investment systems transformation activities, the availability of enhanced analysis has identified that the prior year disclosures of certain investment income amounts are more appropriately reallocated between line items in the table above. The impact of this change on the 2013 comparative information is to decrease interest income on financial assets designated at fair value through profit and loss on initial recognition by £259 million, increase dividend income by £318 million, decrease fair value gains on financial assets at fair value through profit or loss designated upon initial recognition by £75 million and increase rental income by £16 million. There is no impact on the total 2013 net investment income balance as a result of these changes.
Wages and salaries 77 78 Social security contributions 9 9 2014 Number 2013 Number
Corporate finance services 0.6 2.7 Other non-audit services 0.3 – Total fees for other services 0.9 2.7
Corporate finance services of £0.6 million (2013: £2.7 million) primarily includes fees for services performed in association with the divestment of Ignis, where management concluded that significant efficiencies would arise as a result of engaging the Group’s auditors to perform the work.
Other non-audit services of £0.3 million (2013: £nil) primarily includes fees payable in respect of a Solvency II preparedness review required in response to an industry-wide request from the Prudential Regulatory Authority.
127PHOENIX GROUP HOLDINGS ANNUAL REPORT AND ACCOUNTS 2014 13. TAX CHARGE/(CREDIT) This note analyses the Group’s tax credit and explains the factors that affect it. The accounting policy adopted in the preparation of this note is detailed in note 1(l).
Current tax: UK corporation tax 120 62 Overseas tax 18 14
Adjustment in respect of prior years (11) (8) Total current tax charge 127 68 Deferred tax: Origination and reversal of temporary differences 28 (62) Change in the rate of UK corporation tax (2) (32) Write (up)/down of deferred tax assets (2) 25
The tax credit for the year from discontinued operations is shown in note 4.1.
Current tax credit on share schemes (2) – Deferred tax (credit)/charge on defined benefit schemes (9) 12
13. TAX CHARGE/(CREDIT) CONTINUED 13.3 RECONCILIATION OF TAX CHARGE/(CREDIT) FROM CONTINUING OPERATIONS
Profit before tax 465 241 Policyholder tax (charge)/credit (129) 27 Profit before the tax attributable to owners 336 268
Tax at standard UK1 rate of 21.5% (2013: 23.25%) 72 63 Non-taxable income and gains (6) 4 Disallowable expenses 7 6 Adjustment to shareholders’ tax charge in respect of prior years (16) 23 Movement on acquired in-force amortisation at less than 21.5% (2013: 23.25%) 2 – Profits taxed at rates other than 21.5% (2013: 23.25%) (21) (39) Recognition of previously unrecognised deferred tax assets (19) – Deferred tax rate change (7) (33) Temporary differences not valued 4 4
15. EARNINGS PER SHARE This note shows how the Group calculates earnings per share based on the present shares in issue (basic earnings per share) and on the potential future shares in issue, including the conversion of share awards granted to employees (diluted earnings per share). The accounting policy adopted in the preparation of this note is detailed in note 1(w).
Profit for the period 406 207 Share of result attributable to non-controlling interests (96) (62) Profit attributable to owners of the parent 310 145
Analysed as: Profit attributable to owners of the parent from continuing operations 218 180 Profit/(loss) attributable to owners of the parent from discontinued operations 92 (35)
Issued ordinary shares at beginning of the period 225 174 Effect of ordinary shares issued 1 39 Own shares held by employee benefit trust and Group entities (1) (1) Weighted average number of ordinary shares 225 212
Basic earnings per share from continuing operations 96.7p 85.3p Basic earnings/(loss) per share from discontinued operations 41.0p (17.1)p Total basic earnings per share 137.7p 68.2p 15.2 DILUTED EARNINGS/(LOSS) PER SHARE The result attributable to owners for the parent used in the calculation of diluted earnings/(loss) per share is the same as that used in the basic earnings/(loss) per share calculation in 15.1 above. The diluted weighted average number of ordinary shares outstanding during the period is 225 million (year ended 31 December 2013: 212 million). The Group’s deferred bonus share scheme and Save As You Earn share-based schemes increased the weighted average number of shares on a diluted basis by 465,256 shares for the year ended 31 December 2014 (2013: 350,795).
16. SHARE CAPITAL This note gives details of Phoenix Group Holding’s ordinary share capital and shows the movements during the year. The accounting policy adopted in the preparation of this note is detailed in note 1(aa).
Issued and fully paid: 225.1 million (2013: 224.8 million) ordinary shares of €0.0001 each 18,439 18,418
In January 2013, the Group announced an equity raising of £250 million as part of the re-terming of the Impala facility. The equity raising comprised equity placings with certain Och-Ziff funds and an open offer to raise aggregate proceeds of £250 million through the issuance on 21st February 2013 of 50 million ordinary shares. The proceeds of the equity raising net of deduction of commissions and expenses were £232 million.
17. OTHER RESERVES This note gives details of the other reserve balance which arose on 2 September 2009 when the Company issued 36,000,000 contingent rights over its shares.
On 5 July 2010, the Company completed the restructure of the contingent rights over its shares which saw 32,400,000 of the contingent rights over shares converted into the same number of ordinary shares. The holders of the contingent rights over shares would have been entitled to receive a further 3,600,000 ordinary shares in aggregate if before 22 June 2013 (i) an offer had been made to acquire all or a majority of the Company’s issued ordinary share capital or substantially all of the Company’s assets; or (ii) any party or parties acting in concert had become interested in more than 50% of the ordinary shares of the company through the issue of shares by the Company.
Shares acquired by the PGH EBT in year 8 11 Shares awarded to employees by the PGH EBT in year (10) (8) Shares sold by other Group entities in year (3) –
During the year 1,478,921 (2013: 1,144,993) shares were awarded to employees by the PGH EBT, 1,200,000 (2013: 1,425,553) shares were purchased and nil (2013: 203,575) shares were received following take up by the PGH EBT of its rights under the open offer (see note 16). The number of shares held by the PGH EBT at 31 December 2014 was 1,250,556 (2013: 1,529,477).
The Company provides the PGH EBT with an interest-free facility arrangement to enable it to purchase the shares. Details of this loan are included in note K to the parent company accounts.
19.1 SHARE-BASED PAYMENT EXPENSE The expense recognised for employee services receivable during the year is as follows: 2014 £m 2013 £m
Expense arising from equity-settled share-based payment transactions 7 6 19.2 SHARE-BASED PAYMENT SCHEMES IN ISSUE Long-term incentive plan (‘LTIP’) In 2009, the Group implemented a long-term incentive plan to retain and motivate its senior management group. The awards under this plan are in the form of nil-cost options to acquire an allocated number of ordinary shares. Assuming no good leavers or other events which would trigger early vesting rights, these awards will be subject to performance conditions tied to the Company’s financial performance in respect of growth in MCEV, cumulative cash generation over a three year period and, with respect to the 2012, 2013 and 2014 LTIPs only, total shareholder return (‘TSR’). There are no cash settlement alternatives. The 2011 LTIP awards vested during the year. The 2012 award will vest on 2 April 2015, the 2013 award will vest on 15 November 2016 and the 2014 award will vest on 26 March 2017. The 2010, 2011 and 2012 LTIP awards were increased during 2013 as a result of the equity raising on 21 February 2013 (see note 16).
The weighted average fair value of options granted during the year was £5.65 (2013: £5.93).
The weighted average share price at the date of exercise for the rewards exercised is £6.90 (2013: £6.88).
Profit for the year 21 75 96 Dividends paid – (22) (22) Coupon paid, net of tax relief (21) – (21) Shares in subsidiaries subscribed for by non-controlling interests – 82 82
Notes with a principal amount of £31 million as at 31 December 2014 (2013: £31 million) are held by other Group entities and are therefore eliminated in the preparation of the consolidated financial statements.
On 25 April 2014, the 2014 coupon was settled in full by PGH1, other than to two companies within the Group which waived their right to receive that coupon.
In January 2015, the Group announced the successful exchange of 99% of the Notes (see note 46 for details).
The Group now holds 53% (2013: 58%) of the issued share capital of UKCPT. The Group’s interest in UKCPT is held in the with-profit funds of the Group’s life companies. Therefore, the shareholder exposure to the results of UKCPT is limited to the impact of those results on the shareholder share of distributed profits of the relevant fund. Further information on the Group’s with-profit funds is provided in note 39.
Profit before tax 75 42 Income tax – – Profit for the year after tax 75 42
135PHOENIX GROUP HOLDINGS ANNUAL REPORT AND ACCOUNTS 2014 21. LIABILITIES UNDER INSURANCE CONTRACTS This note contains a summary of the liabilities under insurance contracts and the related reinsurers’ share included within assets in the statement of consolidated financial position. The accounting policies adopted in the preparation of this note are detailed in notes 1 (d), (e) and (s).
23. BORROWINGS This note shows the carrying values and fair values of each of the Group’s borrowings and explains their main features and movements during the year. The accounting policy adopted in the preparation of this note is detailed in note 1(h).
DEBENTURE LOANS a. In 1998, National Provident Institution raised £260 million of capital through the securitisation of embedded value on a block of existing unit-linked and unitised with-profit life and pension policies. Following the demutualisation of National Provident Institution, these were transferred to National Provident Life Limited (‘NPLL’). The bonds were split between two classes, which rank pari passu. The £140 million 7.39% class A1 limited recourse bonds matured in 2012 with no remaining outstanding principal. The £120 million 7.59% class A2 limited recourse bonds with an outstanding principal of £94 million (2013: £105 million) have an average remaining life of 4 years maturing in 2022. NPLL has provided collateral of £39 million (2013: £44 million) to provide security to the holders of the NPLL recourse bonds in issue. During 2014, repayments totalling £11 million were made (2013: £11 million).
c. In 2008, UKCPT entered into an £80 million revolving loan facility agreement. This loan accrues interest at LIBOR plus a variable margin of 0.50% to 0.60% per annum. The lender holds a floating charge over certain assets of UKCPT and its subsidiaries. The repayment date for this facility is 19 June 2015. This facility was fully utilised during 2014 and 2013.
d. On 19 May 2011, UKCPT entered into a £150 million investment term loan facility agreement. The £150 million investment term loan facility agreement accrues interest at LIBOR plus a variable margin of 1.60% to 2.00% per annum. The lender holds security over the assets of UK Commercial Property Estates Holdings Limited and UK Commercial Property Estates Limited, both of which are subsidiaries of UKCPT. The repayment date for this facility is 19 May 2018. As at 31 December 2014, the facility was fully drawn down (2013: Fully drawn down).
f. On 7 July 2014 the Group’s financing subsidiary, PGH Capital Limited, issued a £300 million 7 year senior unsecured bond at an annual coupon rate of 5.75% (‘the senior bond’). The senior bond is subject to guarantee by the Company. The net proceeds from the bond issue of £296 million were used to prepay the Impala loan facility (see note h).
g. On 23 July 2014 PGH Capital Limited entered into a new £900 million 5 year unsecured bank facility which along with a £206 million debt prepayment from internal resources was used to refinance the entirety of the Group’s existing two bank facilities and PIK notes, replacing the Impala and Pearl loan facilities with a single debt facility (see notes h and j). The new facility comprises a £450 million revolving credit facility (‘RCF’) loan and a £450 million amortising term loan. Both loans are repayable by July 2019 with an option to request an extension to the term of the RCF loan by two years to July 2021. Further terms of the facilities agreement include: – term facility repayment instalments of £30 million are due semi-annually on 30 June and 31 December each year. Additional target repayments of £30 million may be paid semi-annually on 30 June and 31 December each year from 30 June 2015, non-payment of which would trigger restrictions on the Group regarding the declaration of dividends; – the term loan bears interest at LIBOR plus an opening margin of 3.50% p.a. and the RCF loan at LIBOR plus an opening margin of 3.25% p.a. After six months the margins will change in accordance with a margin ratchet which operates by reference to the Group’s gearing ratio. Margins will reduce by 0.50% on achievement of an investment grade rating; and
h. On 14 May 2008, PGH (LC1) Limited and PGH (LC2) Limited jointly obtained a £2,260 million loan facility from a syndicate of external banks (the ‘Impala Facility’). This facility was split into Tranche loans A, B and C of £1,275 million, £492.5 million and £492.5 million respectively. On 22 February 2013, Tranche A, Tranche B and Tranche C of the Impala Facility were converted into a £1,851 million single tranche term loan facility and an initial prepayment of £450 million was paid. The original financial liability was treated as an extinguishment and was replaced in the statement of consolidated financial position by a new financial liability. Arrangement and structuring fees of £21 million associated with this financial liability were shown in the consolidated income statement in 2013. Further scheduled payments of £60 million, target repayments of £60 million and voluntary repayments of £100 million were also made during 2013.
During the year, a scheduled repayment of £23 million (2013: £24 million) was made on the £425 million loan facility and interest of £1 million (£2013: £1 million) was capitalised on the £75 million secured C loan notes. Tax relief has been recognised on the capitalised interest at the standard rate of 21.50% (2013: 23.25%).
24. DERIVATIVES 24.1 SUMMARY The Group purchases derivative financial instruments in connection with the management of its insurance contract and investment contract liabilities based on the principles of reduction of risk and efficient portfolio management. The Group does not typically hold derivatives for the purpose of selling or repurchasing in the near term or with the objective of generating a profit from short-term fluctuations in price or margin. This note provides an analysis of the derivative instruments held by the Group. The accounting policies adopted in the preparation of this note are detailed in notes 1(g) and 1(r).
24.2 WARRANTS OVER SHARES The Company had in issue the following warrants over shares: IPO warrants Number
Warrants over shares expired during the year (8,169,868) – (12,360,000) At December 2014 – 5,000,000 –
The IPO warrants were listed and were initially valued using the warrant price quoted on the LSE for the Company. Due to the relatively low number of IPO warrants in issue, they were thinly traded and the quoted price was not considered to be the best indicator of their fair value. As a result the IPO warrants were valued using an extended Black-Scholes valuation model. The key assumptions used to ascertain the £2 million value as at 31 December 2013 were as follows: – share price as at 31 December 2013 of £7.28; – volatility of 30%; – the warrants are not adjusted for dividends; and
Lenders’ warrants On 2 September 2009, the Company issued 5 million warrants over its shares to the Lenders. These warrants entitled the holder to purchase one ‘B’ ordinary share at a price of £15 per share, subject to adjustment. Following the achievement of the Company’s Premium Listing on 5 July 2010, the Lenders’ warrants relate to ordinary shares rather than ‘B’ ordinary shares. At 31 December 2014 the terms of Lenders’ warrants entitled the holders to purchase 1.027873 (2013: 1.027873) ordinary shares per Lenders’ warrant for an exercise price of £14.59 (2013: £14.59).
These Lenders’ warrants are not traded in an active market and have therefore been valued using an extended Black-Scholes valuation model to capture the embedded barrier feature. The key assumptions used to ascertain a value as at 31 December 2014 are: – the share price as at 31 December 2014 of £8.30; – volatility of 30%; – the warrants are not adjusted for dividends; and
The exercise period for the Royal London Warrants expired on 3 September 2014.
The Royal London warrants were not traded in an active market and had therefore been valued using an extended Black-Scholes valuation model.
The key assumptions used to ascertain a value of £3 million as at 31 December 2013 are as for the IPO warrants (see before).
The leasehold properties provision has been made for amounts in respect of the excess of lease rentals and other payments on properties that are currently vacant or are expected to become vacant, over the amounts to be recovered from subletting these properties. The discount rate used was 1.7% (2013: 1.7%) and it is expected that the provision will be utilised over the next 4 years (2013: 5 years).
Discontinued operations disposed of during the year relates to the divestment of Ignis on 1 July 2014.
IFRS transitional adjustments (72) 8 – – (64) Adjustment for insurance policies held with related parties in respect of the PGL pension scheme (19) 14 – – (5)
The Finance Act 2013 set the rate of corporation tax at 21% from 1 April 2014 and 20% from 1 April 2015. Consequently a blended rate of tax has been used for the purposes of providing for deferred tax in these financial statements.
Deferred tax assets have not been recognised in respect of: Tax losses carried forward 39 50 Excess expenses and deferred acquisition costs – 2 Provisions and other temporary differences 6 9 Deferred tax assets not recognised on capital losses1 116 121 1 These can only be recognised against future capital gains and have no expiry date.
27. PAYABLES RELATED TO DIRECT INSURANCE CONTRACTS This note analyses the Group’s payables arising from direct insurance contracts at the end of the year.
Payables related to direct insurance contracts 358 443 Less amounts classified as held for sale (note 4.2) – (48)
The general insurance element amounts to £nil million (2013: £48 million – included within liabilities held for sale).
28. ACCRUALS AND DEFERRED INCOME This note analyses the Group’s accruals and deferred income at the end of the year.
Less amounts classified as held for sale (note 4.2) – (1)
An analysis of the defined benefit asset/liability for each pension scheme is set out below: 2014 £m 2013 £m
Pearl Group Staff Pension Scheme Economic surplus/(deficit) 218 (53) Minimum funding requirement obligation (86) (84) Provision for tax on that part of the economic surplus available as a refund on a winding-up of the Scheme (76) – Net defined benefit asset/(liability) 56 (137)
The Group defined benefit schemes typically expose the Group to a number of risks, the most significant of which are: Asset volatility – the value of the scheme’s assets will vary as market conditions change and as such is subject to considerable volatility. The volatility in the scheme’s assets can be caused by both volatility within the markets or variations in the return achieved by the schemes’ investment managers relative to market performance. In particular there is the risk that the variation in asset values will not be in line with the variation in pension liability values, and as such differences in the nature and duration of the assets and liabilities can cause difference in the way that the assets and liabilities vary.
The valuation has been based on an assessment of the liabilities of the Pearl Scheme as at 31 December 2014, 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.
On 27 November 2012 the principal employer and the Trustee of the Pearl Scheme entered into a revised pensions funding agreement (the ‘Pensions Agreement’), which forms the basis of the 30 June 2012 triennial valuation. The principal terms of the Pensions Agreement are: – annual cash payments into the scheme of £70 million in 2013 and 2014 payable on 30 September, followed by payments of £40 million each year from 2015 to 2021. The Pensions Agreement includes a sharing mechanism, related to the level of dividends paid out of PGH, that in certain circumstances allows for an acceleration of the contributions to be paid to the Pearl Scheme; – increased and further contributions may become payable if the scheme is not anticipated to meet the two agreed funding targets: (i) to reach full funding on the technical provisions basis by 30 June 2022; and
– covenant tests relating the embedded value of certain companies within the Group.
It should be noted that the terms of the new £900 million facility agreement (see note 23) restrict the Group’s ability, with certain exceptions, to transfer assets into the secured companies over which the Trustee holds a charge over shares.
Contributions totalling £68 million were paid into the scheme in 2014. The £70 million due by 30 September 2014 was reduced by £2 million in respect of accelerated deficit funding contributions which were paid in 2013 as a result of the enhanced transfer value (‘ETV’) exercise.
Employer’s contributions 68 – – – 68 Benefit payments (87) 87 – – –
Remeasurements: Return on plan assets excluding amounts included in interest income (8) – – (8) Gain from change in demographic assumptions – 57 – 57 Loss from change in financial assumptions – (44) – (44) Experience losses – (3) – (3) Change in minimum funding requirement obligation – – 2 2
Employer’s contributions 73 – – 73 Benefit payments (90) 90 – –
30. PENSION SCHEMES CONTINUED 30.1 PEARL GROUP STAFF PENSION SCHEME CONTINUED During 2013 the Group completed an ETV exercise which offered in-scope deferred members of the Pearl Scheme the option to take an equivalent cash transfer value to exit the scheme, thereby extinguishing any future liability and risk for the Group with respect of these members. The financial effect of all completed transfers was recognised in the consolidated financial statements in 2013.
As at 31 December 2013, ETVs of £72 million had been paid out, reducing scheme assets, and there was a resultant reduction in scheme liabilities of £63 million. The net settlement cost of £9 million was recognised in the 2013 consolidated income statement.
Cash and other 90 – 57 – Obligations for repayment of stock lending collateral received (1,167) – (1,137) –
The weighted average duration of the defined benefit obligation at 31 December 2014 is 17 years (2013: 17 years).
Principal assumptions The principal financial assumptions of the Pearl Scheme are set out in the table below: Rate of increase for pensions in payment (5% per annum or RPI if lower) 2.90 3.15 Rate of increase for deferred pensions (‘CPI’) 2.00 2.35 Discount rate 3.65 4.50 Inflation – RPI 3.00 3.35 Inflation – CPI 2.00 2.35
Defined contribution scheme Contributions in the year amounted to £6 million (2013: £5 million).
The PGL Scheme is administered by a separate Trustee company, PGL Pension Trustee Ltd. The Trustee company is comprised of two representatives from the Group, three member nominated representatives and one independent trustee in accordance with the Trustee company’s articles of association. The Trustee is required by law to act in the interest of all relevant beneficiaries and is responsible for the investment policy with regard to the assets plus the day to day administration of the benefits.
Funding A triennial funding valuation of the PGL Pension Scheme as at 30 June 2012 was completed in September 2013. This showed a deficit as at 30 June 2012 of £39 million. Following discussions with the Trustee of the PGL Pension Scheme it was agreed that the existing schedule of cash contributions to the scheme amounting to £59 million would continue to be paid over the period from October 2013 to August 2017. Total future contributions amount to £40 million at 31 December 2014 and contributions totalling £15 million are expected to be paid into the scheme in 2015.
In accordance with an agreement dated November 2005, certain of the Group’s with-profit funds indemnified the shareholders in respect of contribution calls equal to their share of the costs of changes in longevity assumptions. In January 2014, PGH1 received £8 million under this agreement. In June 2014, PGH1 and Phoenix Life Limited (‘PLL’) entered into an agreement whereby in exchange for a payment by the PLL with-profit funds to PGH1 of £68 million, PGH1 released the with-profit funds from any future obligations to indemnify the company. On the same date, the PLL non-profit fund entered into a longevity swap with the PGL Pension Scheme with effect from 1 January 2014, under which the Scheme has transferred the risk of longevity improvements to PLL. The financial effect of this contract is eliminated on consolidation.
Plan assets previously eliminated on consolidation 74 – – – 74 Employer’s contributions 20 – – – 20 Benefit payments (58) 58 – – –
Administrative expenses (3) – – – (3) Included in profit or loss 69 (60) (4) (1) 4
The economic value of the PGL Pension Scheme assets as at 31 December 2014, amounted to £2,047 million (2013: £1,734 million). For financial reporting purposes, the carrying value of the insurance policies effected by the PGL Pension Scheme with the Group have been eliminated on consolidation (including the longevity swap entered into during the period with PLL), resulting in reported assets of the PGL Pension Scheme as at 31 December 2014 of £2,024 million (2013: £1,639 million).
The Group ensures that the investment positions are managed within an asset liability matching (ALM) framework that has been developed to achieve long-term investments that are in line with the obligations under the pension scheme. Within this framework an allocation of 85% of the scheme assets is invested in a combination of supranational debt and a liability hedging portfolio. The Liability Driven Investment (‘LDI’) portfolio is actively managed against a liability benchmark in order to hedge the duration and inflation risks.
The weighted average duration of the defined benefit obligation at 31 December 2014 is 17 years (2013: 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 3.35 Rate of increase for deferred pensions (‘CPI’) 2.00 2.35 Discount rate 3.65 4.50 Inflation – RPI 3.00 3.35 Inflation – CPI 2.00 2.35
The discount rate and inflation assumptions have been determined by considering the shape of the appropriate yield curves and the duration of the PGL Scheme liabilities. This method determines an equivalent single rate for each of the discount and inflation rates, which is derived from the profile of projected benefit payments.
It has been assumed that post-retirement mortality is in line with 90% of S1PXA base tables with future longevity improvements in line with CMI 2012 Core Projections and a long-term rate of improvement of 2% p.a. up to and including age 75 then decreasing linearly to 0% at age 110. Under these assumptions, the average life expectancy from retirement for a member currently aged 40 retiring at age 62 is 28 years and 30 years for male and female members respectively.
Impact on the defined benefit obligation (£m) 1,366 (51) 56 42 (38) 45 (42)
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 liability recognised within the statement of financial position.
Additions – – – – – Discontinued operations disposed of during the year (57) – (151) – (208)
Discontinued operations disposed of during the year – – 15 – 15 Charge for the year – from continuing operations – (98) (15) – (113)
Charge for the year From continuing operations – (111) (16) – (127) From discontinuing operations – – (3) – (3)
GOODWILL Goodwill disposed of during the year relates to the disposal of the discontinued operations of Ignis on 1 July 2014 (see note 4.2).
The carrying value of goodwill has been tested for impairment at the period end. No impairment has resulted as the value in use of this intangible continues to exceed its carrying value. Value in use has been determined as the present value of certain future cash flows associated with the management services business of the Phoenix Life segment. The cash flows used in this calculation are consistent with those adopted by management in the Group’s operating plan and, for the period 2019 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.
Future cash flows have been valued using a discount rate of 8.1% (2013: 8.4%) for the management services business of the Phoenix Life segment.
The carrying amount of goodwill allocated to the Phoenix Life segment is £39 million (2013: £96 million).
32. PROPERTY, PLANT AND EQUIPMENT This note analyses the Group’s tangible fixed assets which consist primarily of land and buildings at valuation, computer equipment and equipment and fittings. Fair value hierarchy disclosures for land and buildings at valuation are also included. The accounting policy adopted in the preparation of this note is detailed in note 1(o).
The useful lives of plant and equipment have been taken as follows: motor vehicles 3–4 years, computer equipment 3–4 years, furniture and office equipment 5–10 years. Owner-occupied property is depreciated over its estimated useful life, which is taken as 50 years.
The following table shows a reconciliation from the opening to the closing fair value for the Level 3 land and buildings at valuation: At 1 January 15 Depreciation recognised in profit or loss – Remeasurement recognised in other comprehensive income – At 31 December 15 Unrealised gains for the year –
The fair value of the land and buildings at valuation was derived using the investment method supported by comparable evidence. The significant non-observable inputs used in the valuation are expected rental value per square foot and capitalisation rate.
34.1 FAIR VALUES The table below sets out a comparison of the carrying amounts and fair values of financial instruments as at 31 December 2014: Carrying value
Financial liabilities measured at carrying and fair values Financial liabilities at fair value through profit or loss: Held for trading – derivatives 2,192 2,122 2,192 Designated upon initial recognition: Net asset value attributable to unitholders1 4,659 – 4,659 Investment contract liabilities1 8,451 – 8,451
Total financial liabilities 18,426 17,592 1 These assets and liabilities have no expected settlement date.
2 These liabilities have no expected settlement date. As the obligations relate to the repayment of collateral received in the form of cash, the liability is stated at the value of the consideration received and therefore no fair value has been disclosed.
Financial assets measured at carrying and fair values Loans and receivables at amortised cost 1,977 145 1,985 Financial assets at fair value through profit or loss: Held for trading – derivatives 1,966 1,008 1,966 Designated upon initial recognition: Investment in joint ventures1 125 – 125 Fixed and variable rate income securities 35,510 25,978 35,510 Collective investment schemes1 3,772 – 3,772
Financial liabilities measured at carrying and fair values Financial liabilities at fair value through profit or loss: Held for trading – derivatives 2,161 1,234 2,161 Designated upon initial recognition: Net asset value attributable to unitholders1 5,744 – 5,744 Investment contract liabilities1 8,578 – 8,578
Financial liabilities measured at amortised cost: Deposits received from reinsurers 385 350 385 Obligations for repayment of collateral received2 7,284 – –
34. FINANCIAL INSTRUMENTS CONTINUED 34.2 FAIR VALUE HIERARCHY 34.2.1 Determination of fair value and fair value hierarchy of financial instruments Level 1 financial instruments The fair value of financial instruments traded in active markets (such as exchange traded securities and derivatives) is based on quoted market prices at the period end provided by recognised pricing services. Market depth and bid-ask spreads are used to corroborate whether an active market exists for an instrument. Greater depth and narrower bid-ask spread indicates higher liquidity in the instrument and are classed as Level 1 inputs. For collective investment schemes, fair value is by reference to published bid prices.
Total financial assets measured at fair value 39,551 12,622 1,653 53,826 Financial assets for which fair values are disclosed Loans and receivables at amortised cost – 36 186 222
Total financial liabilities measured at fair value 4,699 10,602 185 15,486 Financial liabilities for which fair values are disclosed Borrowings at amortised cost – 553 1,145 1,698 Deposits received from reinsurers – 408 – 408 Total financial liabilities for which fair values are disclosed – 961 1,145 2,106
34. FINANCIAL INSTRUMENTS CONTINUED 34.2 FAIR VALUE HIERARCHY CONTINUED 2013 Restated
Less amounts classified as held for sale (note 4.2) (55) – – (55)
Total financial assets measured at fair value 41,215 12,212 1,804 55,231 Financial assets for which fair values are disclosed Loans and receivables at amortised cost – 1,869 116 1,985
Level 3 investments in indirect property, equities (including private equity) 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.
Included within fixed and variable rate securities are investments in local authority loans. These investments are valued using a simple calculation model taking a comparable UK Treasury stock and applying a credit spread to reflect reduced liquidity. The credit spread is derived from a sample broker quote. The valuations are sensitive to movements in this spread, an increase of 25 bps would decrease the value by £1 million (2013: £1 million) and a decrease of 25 bps would increase the value by £1 million (2013: £1 million).
Financial assets measured at fair value Derivatives – 5 Financial assets designated at fair value through profit or loss upon initial recognition Fixed and variable rate income securities 724 238 Collective investment schemes 243 –
The application of the Group’s fair value hierarchy classification methodology at an individual security level, in particular observations with regard to measures of market depth and bid-ask spreads, have resulted in an overall net movement of financial assets from level 2 to level 1 in the period.
Financial assets Financial assets designated at fair value through profit or loss upon initial recognition: Investment in joint ventures 125 8 – – – – 133 8 Fixed and variable rate income securities 935 57 427 (502) 8 (190) 735 19