These icons are used throughout the report to navigate to more information: PHOENIX IS THE LARGEST UK CONSOLIDATOR OF CLOSED LIFE ASSURANCE FUNDS, WITH 5.6 MILLION POLICYHOLDERS.
Overleaf you can read more about Phoenix’s strengths and how this allows us to deliver value to stakeholders.
A specialist operating model focused on closed life funds As closed funds represent the core of our business, we are able to focus our energy and expertise on improving their performance for the benefit of customers and shareholders.
A market leading platform and scale as the largest UK consolidator of closed life funds We have 5.6 million policyholders and £74 billion assets under management. We aim to maximise economies of scale and capital efficiencies through internal fund restructuring and operational improvements.
Phoenix has a long-term cash generation profile with a track record of enhancing value Phoenix has a proven track record of achieving incremental growth through management actions. The Group’s longterm cash generation profile supports our sustainable dividend policy enabling us to return value to our shareholders.
Phoenix employs a talented and experienced team Our area of specialisation allows us to recruit the best and most experienced individuals in the field, particularly in niche areas such as with-profits funds. We rely on the expert skills of our employees to succeed. We are proud that for the sixth year running, the Phoenix Group has been listed as one of Britain’s Top Employers.
A wealth of acquisition opportunities exist in the sector We are a consolidator in the closed fund market for the long-term. Approximately £380 billion of assets are held in other closed life funds in the UK (excluding Phoenix and the proposed Standard Life Assurance acquisition) and there is also significant market opportunity in the Bulk Purchase Annuity space, providing a wealth of further growth opportunities.
Our vision is to be the saver-friendly, industry solution for the safe, innovative and profitable management of closed life funds.
Effective Partnerships Utilising external outsource partners and investment managers with proven track records provides access to expert knowledge and delivers a scalable cost base.
Dear Shareholders, 2017 was another successful year for the Group, with Phoenix continuing its track record of meeting or exceeding its publicly stated targets. In addition, the resilience of the Group’s capital position was underscored by the issuance of over £800 million of subordinated bonds.
On 23 February 2018, Phoenix was delighted to announce the proposed acquisition of Standard Life Assurance and a Strategic Partnership with Standard Life Aberdeen plc.
The £2.9 billion acquisition is transformational for Phoenix, establishing the Group as the largest closed life consolidator in Europe.
The acquisition will be financed by a fully underwritten rights issue of £950 million, with the remaining cash consideration of £1,021 million funded by a mix of new debt and Phoenix’s own resources. In addition, Standard Life Aberdeen will take a 19.99% equity stake in the enlarged Group on completion. The Board believes the acquisition is strategically and financially compelling and hopes the Group’s shareholders will support the proposed rights issue.
RECENT BOARD CHANGES Against a backdrop of regulatory change and macroeconomic uncertainty in light of the prospective withdrawal of the UK from the EU, the Board aims to maintain the breadth and depth of experience required to create shareholder value and improve policyholder returns whilst navigating these risks. Therefore, we were delighted to welcome Karen Green and Belinda Richards to the Board in 2017 who bring with them a vast array of high quality executive and non-executive skills. In addition, as part of the Strategic Partnership, we will welcome two Standard Life Aberdeen Directors to the Board in 2018, bringing their additional skillsets and expertise.
Our Senior Independent Director, Ian Cormack, will retire from the Board at the Annual General Meeting (‘AGM’) in May 2018, having been involved with the Group since 2005. Ian’s experience and strategic approach have been central to the success of Phoenix and I would also like to thank him for his support since I became Chairman. Ian will be replaced as the Senior Independent Director by Alastair Barbour who brings vast experience and business acumen to the role.
DIVIDEND POLICY In line with the Group’s previously stated expectations, the Board proposes a final 2017 dividend per share of 25.1p. This is a 5% increase on the 2016 final dividend and results in a new annualised dividend per share level of 50.2p.
Given the long-term run-off nature of the Group’s business model, the Board believes it is prudent to maintain a stable and sustainable dividend per share which is reviewed at the time of an acquisition, in line with the criterion that any acquisition needs to at least sustain the current level of dividend per share. Therefore, following the announcement of the proposed Standard Life Assurance transaction, the Board expects to raise the dividend to an annualised amount of £338 million from the time of the final 2018 dividend. This corresponded to an equivalent 3% increase of the dividend per share at the time of announcement of the acquisition, taking into account the proposed rights issue and Standard Life Aberdeen shareholding.
To conclude, I would like to take this opportunity to thank all my colleagues for their hard work and commitment in progressing the Phoenix journey during another highly successful year.
“ The proposed acquisition of Standard Life Assurance and the Strategic Partnership with Standard Life Aberdeen is consistent with our strategy and financially compelling.”
Phoenix has substantially completed the integration of the AXA Wealth and Abbey Life acquisitions. The Group exceeded its original synergy targets, delivering significant cost and capital benefits from the transactions.
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In parallel to the closed life fund opportunity, the BPA market is a complementary source of annuity back books. The market has grown steadily in recent years and there is projected demand of approximately £550 billion over the next 15 years, as pension trustees look to derisk current pensioner and deferred liabilities.
We are currently in exclusive discussions for our first external pensions buy-in transaction. Given the current capacity in the bulk annuity market, and recognising that Phoenix possesses both the skills and financial resources, the Group will continue to compete selectively on accretive transactions to generate incremental value.
FINANCIAL PERFORMANCE FINANCIAL TARGETS At the time of Phoenix’s 2016 full year results, the Group set a cash generation target of £1.0 billion to £1.2 billion between 2017 and 2018, in line with the expected timeframe to integrate the recent acquisitions and incorporate Abbey Life within the Group’s Solvency II Internal Model. During the year, the Group generated a total of £653 million of cash and thus we are on track to achieve the top end of this short-term target.
PHOENIX LIFE CAPITAL POSITION The Phoenix Life companies hold capital management buffers in addition to the required Solvency Capital Requirement and any excess over these buffers (‘Free Surplus’) is available for distribution to the holding companies as cash. These capital management buffers provide the life companies with additional resilience in the event of market volatility.
The Free Surplus has remained constant at £0.7 billion as at 31 December 2017, with the remittance of Free Surplus as cash to the Group’s holding companies during the year being offset by management actions undertaken, generation of recurring surplus and a reduction in capital requirements.
With the exception of actuarial reporting, all functions have been fully migrated to Wythall and integrated into the ‘Phoenix Way’. Closure of the Bournemouth office will follow the actuarial reporting migration and secure pre-tax cost synergies of £10m per annum from the first quarter of 2018.
The Abbey Life business was reinsured into Phoenix Life Limited in December 2017. This has allowed the Group to access transitional benefits and will generate further efficiencies from the annuity portfolio by extending the Matching Adjustment benefits to all qualifying annuity liabilities. The use of Matching Adjustment results in the use of a higher discount rate for those annuity liabilities, increasing Free Surplus within Phoenix Life. Together with the transfer of the Abbey Life Pension Scheme to a Group holding company these actions have delivered £236 million of cash from the acquisition since its completion.
The application to move Abbey Life onto the Group’s Internal Model was submitted during the fourth quarter of 2017 and the approval was granted in March 2018.
Key management actions have included a reduction in expenses charged to the life companies due to operational synergies, together with further investments in illiquid asset classes such as Equity Release Mortgages.
GROUP CAPITAL POSITION The Group’s surplus under Solvency II is estimated to be £1.8 billion as at 31 December 2017 compared to £1.1 billion as at 31 December 2016. The increase in the Solvency II surplus reflects the issuance of the subordinated bonds during 2017 together with management actions completed, offset partly by the impact of dividend payments and finance costs. The Shareholder Capital coverage ratio has increased from 139% as at 31 December 2016 to 164% as at 31 December 2017. The Group capital position includes a recalculation of Transitional Measures as at 31 December 2017 and recognises the 2017 final dividend payable in May 2018.
As part of the ongoing Group simplification process, Phoenix will put in place a new UK-registered holding company for the Group. This will be progressed following the completion of the proposed Standard Life Assurance acquisition and will provide greater clarity for the Group’s stakeholders, including investors and regulators.
With regard to annuities sales, Abbey Life has completed the thematic review of annuities and has agreed with the FCA to undertake a Past Business Review. We are working closely with the FCA on the scope of this review.
In addition to these digital enhancements, Phoenix Life continues to introduce initiatives to speed up processing and improve the customer experience. By allowing policyholders to encash small pension pots fully online, we have improved the process for many of our small life insurance claims. Where possible, we allow bereaved claimants to complete the claims process over the telephone.
We have a new programme to contact customers with policies such as endowments well ahead of the maturity date to encourage earlier engagement and ensure customers receive their proceeds rapidly. There are also a number of tools and calculators on the website, which aim to inform and educate customers in an interactive way. These tools, which include a pension and tax calculator, ensure that customers understand all considerations and benefits before making their retirement choice. The website also signposts various external services such as Pension Wise and the Money Advice Service where customers can obtain free, impartial advice.
Ensuring customers are repatriated with policies they may have become detached from as a result of lifestyle changes such as house moves, marriage and illness is a key part of our strategy. Lost policies are fairly typical for legacy books and we have undertaken considerable activity in the past to improve this issue. During 2017 we have focused on the repatriation of life insurance policies we suspect have been left unclaimed by a deceased’s estate; in most cases because the beneficiaries were unaware the policy was in existence. Through our extensive tracing work, a number of policies have been paid out to the beneficiaries of the policy.
Approval granted by the PRA to incorporate the AXA Wealth businesses in the Group’s Internal Model
Transfer of Abbey Life Pension Scheme from Abbey Life Assurance Company Limited to a Group holding company
Application made to incorporate Abbey Life in the Group’s Internal Model
Completion of the Part VII transfer of the AXA Wealth policies to Phoenix Life Limited
PEOPLE Phoenix Group’s ability to attract, retain and motivate outstanding talent was, for the sixth year in succession, formally recognised in 2017 through our accreditation as one of the UK’s Top Employers. An engaged workforce is fundamental to the success of the Group. Our employee engagement index was 80%, in line with the high scores achieved in 2016, despite the challenges of integrating new colleagues from acquired entities.
We are a signatory to the Women In Finance Charter initiative and in 2017 made significant progress against our published targets on gender pay and on increasing female representation at senior levels of the organisation. We remain vigilant in this space and strive for a wholly inclusive culture for the benefit of all stakeholders.
2018 will see us engage with our staff on a specific initiative to re-invigorate our commitment to our corporate values. We want to maintain the conduct of all our employees, from the leadership team downwards, at an exemplary level.
The transaction enables both companies to focus on what they do best – Phoenix will become the largest closed life consolidator in Europe and Standard Life Aberdeen will focus on its world class investment management business and UK wealth platform.
The acquisition represents a pivotal moment in the Group’s history. It will establish Phoenix as the largest closed life consolidator in Europe and increases Phoenix’s potential market from around £380 billion of closed life fund assets in the UK to approximately £540 billion of assets across the UK, Germany and Ireland.
CONCLUSION Phoenix has shown during 2017 that it has the operating platform and integration skills to deliver capital and cost synergies from acquisitions. I continue to believe that the impact of regulatory changes and the desire of open life companies to redeploy capital will provide Phoenix with further acquisition opportunities in future.
Announced the proposed acquisition of Standard Life Assurance and a Strategic Partnership with Standard Life Aberdeen plc
The UK life and pensions market is undergoing fundamental change, driven by changes in regulation and customer behaviour. Phoenix expects continued consolidation within the market.
CLOSED FUNDS Phoenix estimates that the market opportunity is approximately £380 billion in terms of assets held within UK closed life funds (excluding Phoenix and the proposed Standard Life Assurance acquisition). The split of these assets by type of owner and product is set out in the pie charts below.
The proposed Standard Life Assurance acquisition includes operations in Germany and Ireland. Phoenix estimates that there is a potential additional closed life fund opportunity of £160 billion of assets in these two countries.
We believe there are a number of key drivers that will lead to future consolidation of closed life funds. These include the significant capital held within closed funds that owners may wish to redeploy, more intrusive regulation leading to pressure on owners and fixed cost pressures as closed funds decline in size over time.
BULK PURCHASE ANNUITIES Many Defined Benefit pension schemes are now closed to new members but have liabilities that will continue for many decades into the future. The BPA market offers employers the ability to mitigate the risk of their Defined Benefit pension liabilities whilst allowing the pension scheme trustees the ability to secure and protect their members’ benefits.
Phoenix has identified this market as a source for additional annuity assets, offering the potential for Phoenix to apply its proven and pre-existing skills set and acquisition experience to compete on selective transactions using the Group’s existing capital resources. The criteria that Phoenix uses to assess potential BPA transactions are the same as those used for closed life fund acquisitions.
The size of the BPA market is significant, with around £550 billion of transactions forecasted over the next 15 years. During 2017 alone, transactions amounting to a total of approximately £12 billion were announced.
REGULATORY AND LEGISLATIVE LANDSCAPE The Solvency II prudential framework which came into force in 2016 is now fully embedded. The Group’s approved Internal Model is the key tool in managing Phoenix’s capital position under the Solvency II regime. The Prudential Regulatory Authority (‘PRA’) has recently announced a number of consultations on a range of issues relating to Solvency II, including with regard to Matching Adjustments.
There have been significant changes to legislation from a conduct perspective in recent years. This includes the ending of compulsory annuitisation, reviews on the treatment of legacy customers and annuity sales, together with legislation to cap exit charges for customers. This has resulted in customers having a greater range of options at retirement and life companies have had to improve the quality of information provided to legacy customers.
Manage corporate and strategic activity and include the following: – Group Finance including Tax, Treasury and Investor Relations
MANAGEMENT SERVICES COMPANIES The Group’s management services companies are charged with the efficient provision of financial and risk management services, sourcing strategies and delivering all administrative services required by the Group’s life companies. This benefits the life companies by providing price certainty and transferring some operational risks.
Outsource partners have scale and common processes to benefit the Group, including reducing investment requirements, improving technology and reducing our operational risk.
Finance, actuarial, information technology, risk and compliance and oversight of the outsource partners are retained in-house, ensuring that Phoenix Life retains full control over the core capabilities necessary to manage and integrate closed life funds.
These are typically savings and investment products. They comprise endowments, whole of life and pensions products and (some) guaranteed annuity options which guarantee the annuity that a pension pot will be able to buy. The policyholders and shareholders share in the risks and rewards of the policy, depending on the structure of the fund. Excess assets created over time (‘estate’) provide a buffer to absorb cost of guarantees and capital requirements. In the ‘supported’ with-profit funds, the shareholders provide capital support to the fund.
Policyholders make fixed or variable payments in lieu of a future lump sum or a future income stream until death.
Policyholders receive regular payments which start immediately (immediate annuity) or at some time in the future (deferred annuity).
Shareholders earn a spread on the assets supporting the annuity payments. The shareholders are directly exposed to all market and demographic risks.
In-force book cash emergence Capital requirements of operating life companies decline as policies mature, releasing capital in the form of cash
Mergers and acquisitions Value accretive acquisitions generate increased cash flows and synergy opportunities through scale advantages
Any assets which the life companies hold in excess of overall capital buffers required is known as Free Surplus
Margins earned Life companies earn margins on different types of life and pensions products increasing Own Funds
Cash at the holding company level provides resources and resilience for the Group
Bulk purchase annuity transactions Generate increased cash flows over the longer term
We have four areas of strategic focus which support the fulfilment of our mission and the realisation of our vision. Our initiatives and key performance indicators demonstrate how we have delivered against these strategic areas.
– Improving value and effective with-profit fund run-off: through accelerating estate distribution where possible and providing appropriate investment exposure.
– Effective service delivery: using our outsourced model to leverage expertise and ensure costs run-off in line with policy volumes.
– Clear and effective communication: recognising the importance of clarity and simplicity for what can be complex products.
KEY INITIATIVES AND PROGRESS IN 2017 – A secure environment for the encashment journey for our smaller policies has been delivered, which allows customers to download a Digital Retirement Pack and submit their application online, reducing the overall time taken to them receiving their funds.
– We have put measures in place to limit exit charges to less than 1% for customers over the age of 55 looking to access pension freedoms introduced in 2015.
PRIORITIES FOR 2018 – Align the service offering for our recently acquired customers to the Phoenix Service Proposition, to make sure that all customers receive the same fair service.
– Look for further ways to enhance the customer experience, ensuring a positive customer journey, with more focus on the use of the digital channel.
– Explore possibilities to give our customers more flexibility and options around their policies, especially those who may no longer have a need for their product.
ANALYSIS The FOS overturn rate of 17.0% has improved and is significantly below the most recently published industry average rate of 36% and also includes our newly acquired businesses. It is also lower than the 26% average overturn industry rate in the ’Decumulation, Life and Pensions’ category (in which the majority of our business sits).
Note: All amounts in the Strategy and KPI section marked with an ‘APM’ are alternative performance measures. See ‘Alternative Performance Measures’ note on page 200 for further details of these measures. All amounts in the Strategy and KPI section marked with ‘REM’ are KPIs linked to executive remuneration. See ‘Directors Remuneration Report’ on page 63 for further details of executive remuneration including the financial and non-financial performance measures on which it is based.
In order to drive value, the Group looks to identify and undertake management actions, which increase and accelerate cash flows.
There are significant opportunities to increase and accelerate cash flows through the continued implementation of ‘The Phoenix Way’. Management actions cover four key areas: operational management, risk management, restructuring and effective partnerships.
KEY INITIATIVES AND PROGRESS IN 2017 – The Group delivered £653 million in cash generation in the year against a target of £1.0 billion to £1.2 billion to be delivered between 2017 and 2018. This includes £165 million from the acquired AXA Wealth businesses and £236 million from Abbey Life.
– The Group delivered £321 million of management actions that increased Solvency II Own Funds in the year. This included the impact of strategic asset allocation initiatives such as the acquisition of further portfolios of equity release mortgages.
– Continue strategic asset allocation initiatives to invest in higher yielding asset classes such as infrastructure and commercial real estate debt.
How we measure delivery OPERATING COMPANIES’ CASH GENERATION £m OPERATING PROFIT £m
WHY IS IT IMPORTANT? Operating companies cash generation represents cash remitted by the Group’s operating companies to the holding companies. Maintaining strong cash flow delivery underpins debt servicing and repayment as well as shareholder dividends.
ANALYSIS Cash remitted reflects the generation of Free Surplus within the life companies and the benefit of management actions implemented in the period. Cash generation in 2017 was £653 million, of which £236 million arose from the acquired Abbey Life business and £165 million from the AXA Wealth businesses.
TARGET To generate cash flows of £1.0 to £1.2 billion of cash between 2017 and 2018 and £2.5 billion of cash between 2018 and 2022.
WHY IS IT IMPORTANT? Operating profit is a non-GAAP measure used by management and is considered a more representative measure of performance than IFRS profit or loss after tax as it provides long-term performance information unaffected by short-term economic volatility.
– Including the impacts of the AXA Wealth actions detailed above, the Group delivered £232 million of management actions that decreased SCR in the year. This included the impacts of risk hedging activities, including implementing the Group’s equity hedging strategy to the acquired Abbey Life business.
– An application to include the acquired Abbey Life business into the Group’s Internal Model was made in the second half of 2017 and was approved in March 2018.
– Completion in December 2017 of the reinsurance of the acquired Abbey Life business into Phoenix Life Limited, allowed the access of transitional benefits for Solvency II technical provisions.
– The on-shoring of the Group is progressing. PGH became UK resident for tax purposes in January 2018.
– Progression of activity to put in place a new UK-registered holding company for the Group as soon as practicable post completion of the proposed acquisition of Standard Life Assurance.
– Implement further management actions and continue to execute the hedging strategy to enhance the Group’s capital position, including for the proposed Standard Life Assurance acquisition.
How we measure delivery SOLVENCY II SURPLUS £bn SHAREHOLDER CAPITAL COVERAGE RATIO %
It is the excess of Eligible Own Funds over the Solvency Capital Requirement.
It is defined as the ratio of the Group Own Funds to Group SCR, after adjusting to exclude amounts relating to unsupported with-profit funds and PGL Pension Scheme.
Read more about the Solvency II surplus and Shareholder Capital Coverage Ratio on page 29 1 The position at 31 December 2016 included pro forma adjustments to illustrate the impacts of the issuance in January 2017 of the £300 million Solvency II qualifying Tier 3 bond and the receipt of the PRA’s approval in March 2017 to include the acquired AXA Wealth businesses within the Group’s Internal Model.
For the sixth consecutive year, we were listed as one of the UK’s Top Employers, an accreditation awarded to the best companies to work for in the UK.
WELLBEING – Our Corporate Responsibility agenda continued to play a central part in the engagement of our people and during 2017 offered a wide range of wellbeing activities for staff.
Engage people volunteering and events. Since partnering in 2014 the Group has raised in excess of £690,000 for the charities.
– In line with the WIF Charter targets previously set, which run to the end of 2018, the Group currently has women in 25% of the top 100 roles (target 30%), 35% of the Group’s green/ amber successors are female (target 40%) and the group-wide mean gender pay gap is 23% (target 22%). The gender pay figure for the WIF charter target is based on an internal calculation looking at base salary only, it is not based on the statutory gender pay gap calculations.
Phoenix’ statutory gender pay figures will be made available on the Group’s website www.thephoenixgroup.com/gpg
– A diversity index was introduced in the 2017 engagement survey and the results will be used to prioritise actions at a functional level.
PRIORITIES FOR 2018 – Continue to attract and retain the very best talent by focusing on developing our people and strengthening our internal succession pipeline by the implementation of an online performance management succession planning tool.
– Grow the Diversity and Inclusion programme, providing a wide range of development opportunities and embedding changes to existing practices to deliver a diverse, engaged and inclusive workforce.
– Maintain support of our communities through employee volunteering and fund raising and engagement with our community projects.
Read more about employee engagement activities undertaken during the year on page 41
2 Does not include workforce from the acquired AXA Wealth and Abbey Life businesses.
WHY IS IT IMPORTANT? We aim to ensure employees understand the purpose of their role and feel that their contribution is valued and we need to understand how well we are performing against these aims. The index is an aggregation of scores against a number of questions considered the most important factors for staff engagement.
An engaged workforce, one that feels committed to our vision, mission and strategic priorities, is fundamental to the success of the Group
“I am pleased to report that the Group’s financial performance in the year has again demonstrated the resilience of our cash generation and capital position.” JAMES MCCONVILLE GROUP FINANCE DIRECTOR
Maintaining strong cash flow delivery underpins debt servicing and repayments as well as shareholder dividends.
CASH RECEIPTS Cash remitted by the operating companies was £653 million (2016: £486 million) including £165 million generated from the acquired AXA Wealth businesses and £236 million generated from the acquired Abbey Life business (which includes a £74 million cash receipt in connection with the transfer of the Abbey Life Pension Scheme from the operating company to a holding company).
CASH GENERATION SUPPORTED BY ACQUISITIONS 2017 saw excellent progress on the integration of the acquired AXA Wealth and Abbey Life businesses and this has supported the Group’s cash generation during the year. The Group has delivered £653 million of cash generation and is on track to be at the top end of its 2017 to 2018 cash generation target range of between £1.0 billion and £1.2 billion.
IFRS LOSS AFTER TAX IMPACTED BY OUR HEDGING STRATEGY BUT GROUP OPERATING PROFIT REMAINS STABLE The IFRS result for the year has been adversely impacted by negative investment variances arising from the hedging programme, which is calibrated to protect the Group’s Solvency II surplus. When combined with one-off costs associated with debt refinancing and integration activities, the Group generated an IFRS loss after tax of £27 million for the year.
Operating companies’ cash generation: Cash receipts from Phoenix Life 653 486
Cash and cash equivalents at 31 December 535 570 1 Includes amounts received by the holding companies in respect of tax losses surrendered to the operating companies of £20 million (2016: £84 million).
RECURRING CASH OUTFLOWS The operating expenses of £36 million (2016: £33 million) are broadly in line with prior year and principally comprise corporate office costs, net of income earned on holding company cash and investment balances.
Pension scheme contributions of £92 million (2016: £55 million) have increased compared to prior year primarily as a result of £32 million of contribution payments to the Abbey Life Staff Pension Scheme for the first time in 2017 and revised timings of contribution payments to the Pearl Group Staff Pension Scheme. Contributions are now made to the Pearl Group Staff Pension Scheme on a monthly basis, whereas previously an annual payment of £40 million was made each September. There is no change in the overall quantum of agreed future funding. The 2017 figure includes £10 million settled in respect of the last quarter of 2016, together with the £40 million annual payment in respect of 2017 settled monthly. £10 million of contributions to the PGL Staff Pension Scheme have also been made in the year with no further contributions required under the existing funding agreement with the Scheme Trustees.
DEBT ISSUANCE (NET OF FEES) The £830 million debt issuance comprises the net proceeds of the Tier 3 bond issuances of £300 million and £150 million completed in January and May 2017 respectively, as well as the Tier 2 bond issuance of US$500 million (£385 million), completed in July 2017.
A new cash flow target of £2.5 billion has been announced in respect of the years 2018 to 2022.
EXPECTED CASH FLOWS AFTER 2022 Cash generation post 2022 is expected to be £3.8 billion. This assumes no management actions after 2022.
NON-RECURRING CASH OUTFLOWS Non-recurring cash outflows of £84 million include Group costs associated with integration activity and corporate related projects, the payment of collateral on hedging transactions partly offset by the receipt of proceeds from the disposal of internal holdings of the £428 million subordinated loan notes.
The 2016 comparative of £239 million comprised £182 million of the debt facility used to finance the acquisition of AXA Wealth, £50 million of the Group’s revolving credit facility and £6 million redemption of the Group’s remaining Tier 1 bonds.
The shareholder dividend of £193 million comprises the payment of the 2016 final dividend of £94 million and the payment of the 2017 interim dividend of £99 million, which reflected the 5% increase in dividend that followed the Abbey Life acquisition.
Following a 10% change in lapse rates5 2.4 1 Assumes stress occurs on 1 January 2018.
PGH SOLVENCY II SURPLUS OVERVIEW A Solvency II capital assessment involves a valuation in line with Solvency II principles of the Group’s Own Funds and a risk-based assessment of the Group’s Solvency Capital Requirement (‘SCR’). Phoenix Group Holdings (‘PGH’) Own Funds differ materially from the Group’s IFRS equity for a number of reasons, including the recognition of future shareholder transfers from the with-profit funds and future management charges on investment contracts, the treatment of certain subordinated debt instruments as capital items, and a number of valuation differences, most notably in respect of insurance contract liabilities and intangible assets.
From 1 January 2016, the Solvency II capital assessment and the Group’s regulatory supervision were performed at the Phoenix Life Holdings Level (‘PLHL’) level being the highest EEA insurance holding company. A waiver that was in place permitting Group supervision to take place at the level of the ultimate parent, PGH, via other methods as opposed to full Group supervision, expired on 30 June 2017. The Group’s capital position is now being managed at the PGH level only.
In December 2015, the Group was granted the PRA’s approval for use of its Internal Model to assess capital requirements. Following the 2016 acquisitions of the AXA Wealth and Abbey Life businesses, the Group obtained the PRA’s approval to incorporate the acquired AXA Wealth businesses within the scope of the Group’s Internal Model in March 2017.
The capital assessment of the Abbey Life business remained on a Standard Formula basis as at 31 December 2017. Therefore, the Solvency II position of the Group at that date is based partially on the Group’s Internal Model and partially on Standard Formula. However, following completion of the reinsurance of the majority of the Abbey Life business into Phoenix Life Limited in December 2017, the SCR for the related risks is now being calculated in accordance with the Group’s Internal Model.
CHANGE IN PGH SOLVENCY II SURPLUS (ESTIMATED) The PGH Solvency II surplus has increased to £1.8 billion (2016: £1.1 billion on a pro forma basis).
The issuance of £150 million of Tier 3 bonds in May 2017 and US$500 million of Tier 2 bonds in July 2017 has increased the estimated Solvency II surplus by a total of £0.5 billion.
Economic and other variances of £(0.1) billion include the premium paid on partial redemption of the Group’s £300 million senior bonds, the impact of the agreement to reduce annual charges on workplace pension products to 1% or lower and project and acquisition integration costs. Financing costs, pension contributions and the dividend payments (including the accrual for the 2017 final dividend) amount to £(0.3) billion.
Unsupported with-profit funds and the PGL Pension Scheme consist of £2.6 billion of Own Funds and £2.0 billion of SCR. Of the £2.6 billion of Own Funds, £2.0 billion consists of estate within the unsupported with-profit funds and £0.6 billion of Own Funds within the PGL Pension Scheme. As described on page 28, surpluses in these funds do not contribute to the PGH Solvency II surplus.
Excluding the SCR and Own Funds relating to the unsupported with-profit funds and the PGL Pension Scheme, the Solvency II Shareholder Capital Coverage ratio is 164% as at 31 December 2017 (2016: 139% on a pro forma basis).
As at 31 December 2017, the Phoenix Life Free Surplus is £0.7 billion (2016: £0.7 billion). The table below analyses the movement during the period: Estimated position as at £bn
In relation to the proposed acquisition of Standard Life Assurance, the Group has undertaken additional hedging activity in 2018 to protect the economic value of the acquired business from adverse equity and currency movements. Upon completion, the Group’s hedging strategy will be applied to the business acquired. The sensitivities below have not been amended to reflect exposure to that additional hedging programme in the period prior to completion of the transaction. The sensitivities represent the standalone position for the Phoenix Group based on hedging in place as at 31 December 2017.
Following a 10% change in lapse rates5 1.7 1 Assumes stress occurs on 1 January 2018. 2 Assumes recalculation of transitionals
4 Equivalent of six months increase in longevity applied to the annuity portfolio.
The Group has generated an operating profit of £368 million (2016: £351 million). The increase compared to the prior year is primarily driven by the inclusion of the AXA Wealth and Abbey Life businesses acquired in 2016, together with the net positive impacts of actuarial assumption and model and methodology changes during 2017; partly offset by the lower impact of management actions within operating profit in 2017 compared to the prior year.
IFRS LOSS AFTER TAX The IFRS loss after tax attributable to owners is £(27) million (2016: £(100) million). This reflects adverse economic variances arising on hedging positions held by the life companies to protect the Group’s Solvency II surplus position, together with the impact of non-operating items. Non-operating items include a £27 million impact of the agreement to reduce annual charges on workplace pension products to 1% or lower, the £25 million premium paid on the partial redemption of the Group’s £300 million senior bonds and acquisition integration costs of £21 million.
The long-term return on owners’ funds of £5 million (2016: £7 million) reflects the asset mix of owners’ funds, primarily cashbased assets and fixed interest securities. The investment policy for managing these assets remains prudent.
The operating profit for management services of £21 million (2016: £27 million) comprises income from the life and holding companies in accordance with the respective management service agreements less fees related to the outsourcing of services and other operating costs. The decrease compared to the prior period reflects the impact of life company run-off.
OTHER NON-OPERATING ITEMS Other non-operating items of £80 million negative (2016: £95 million negative) includes a premium of £25 million paid on redemption of £178 million principal of the senior unsecured bond, costs of £21 million in respect of integration and restructuring of the Abbey Life and AXA Wealth businesses, costs of £20 million in respect of short-term expense overruns arising from the AXA Wealth businesses prior to the completion of the implementation of the Phoenix operating model, a provision of £27 million in respect of a commitment to the reduction of ongoing charges for workplace pension products, a £21 million increase in the provision for costs for claims relating to historic creditor insurance underwritten by a subsidiary of the Group, PA(GI) Limited, offset by the recognition of reimbursements of £39 million in respect of recoveries due or received from third parties under contractual arrangements; and net other one-off items totalling a cost of £5 million, including corporate project costs.
TAX CREDIT ATTRIBUTABLE TO OWNERS The Group’s approach to the management of its tax affairs is set out in its Tax Strategy document which is available in the Corporate Responsibility section of the Group’s website. The Group’s tax affairs and tax controls are managed by an in-house tax team who report on them to the Board and the Audit Committee on a regular basis throughout the year. The Board believes that its Tax Strategy accords with the Group’s approach to its wider Corporate Social Responsibility. In the first half of 2017, the new UK requirement for large UK businesses to publish their tax strategy came into effect.
All of the Group’s insurance operations are based in the UK and are liable to tax in accordance with applicable UK legislation. The Group derives a de minimis level of income from non-UK sources. Phoenix Group Holdings was a Jersey resident holding company until 31st January 2018 when it became tax resident in the UK. In 2017, the Company was subject to a 0% tax rate in Jersey but because its primary source of income was its UK subsidiaries the tax residency of Phoenix Group Holdings had a negligible impact on the UK tax payable by the Group.
THE GROUP’S RISK MANAGEMENT FRAMEWORK The Group’s Risk Management Framework (‘RMF’) embeds proactive and effective risk management across the Group. It seeks to ensure that all risks are identified and managed effectively and that the Group is appropriately rewarded for the risks it takes.
Further detail on the ten components of our RMF and the principal risks facing the Group are provided below.
RISK CULTURE The Group seeks to embed a culture that is forward-looking and competent in its assessment and management of risk, a culture where everyone in the Group is aligned in their goals to deliver better risk-based decisions.
This is achieved not by risk avoidance, but through the identification and management of an acceptable level of risk (its ‘risk appetite’) and by ensuring that the Group is appropriately rewarded for the risks it takes.
– ensuring that risk management is embedded into day-to-day management and decisionmaking processes.
The risk appetite and control framework supports the Group in operating within the boundaries of these statements by limiting the volatility of key parameters under adverse scenarios. Risk appetite limits are chosen which specify the maximum acceptable likelihood for breaching the agreed limits. Assessment against these limits is undertaken through extensive scenario and reverse stress testing.
The risk universe allows the Group to deploy a common risk language, allowing for meaningful comparisons to be made across the business. There are three levels of risk universe category. The highest risk universe category is Level 1 and includes: – strategic risk; – customer risk; – financial soundness risk; – market risk; – credit risk; – insurance risk; and
Embedded within these categories, and customer risk in particular, are the conduct risks faced by the Group and its customers. These risks are separately monitored and reported across the organisation to ensure that conduct risk receives appropriate emphasis and oversight.
The Group has developed a PGH Boardapproved risk appetite statement to manage conduct risk. The appetite statement is supported by the assessment of all conduct related risks faced by the Group on a quarterly basis. This regular assessment and reporting enables us to be forward-looking and proactive in the management of conduct risk.
The RMF is underpinned by the operation of a three lines of defence model with clearly defined roles and responsibilities for statutory boards and their committees, management oversight committees, Group Risk and Group Internal Audit.
First line: Management Management of risk is delegated from the Board to the Group Chief Executive Officer, Executive Committee members and through to business managers. A series of business unit management oversight committees operate within the Group. They are responsible for implementation of the RMF, ensuring the risks associated with the business activities are identified, assessed, controlled, monitored and reported.
The governance framework in operation throughout the Group can be found in the chart below.
The Group operates a capital management policy where capital is allocated across risks where capital is held as a mitigant and the amount of risk capital required is reviewed regularly.
RISK AND CAPITAL ASSESSMENT The Group operates a standardised assessment framework for the identification and assessment of the risks to which it may be exposed 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 in line with Solvency II requirements.
Stress and scenario tests are used extensively to support the assessment of risk and provide analysis of their financial impact.
MANAGEMENT INFORMATION Overall monitoring and reporting against the risk universe takes place in business unit management committees and Boards. This is then reported to the Executive Committee, Life Boards and the Group Board via regular risk reporting.
In times of severe market turbulence, the Group may not have sufficient capital or liquid assets to meet its cash flow targets or may suffer a loss in value.
The Group has liabilities under annuities and other policies that are sensitive to future longevity, persistency and mortality rates. For example, if our annuity policyholders live for longer than expected, then their benefits will be paid for longer. The amount of additional capital required to meet those additional liabilities could have a material adverse impact on the Group’s ability to meet its cash flow targets.
RISK IMPROVING The continuing trend of reductions in future mortality improvements saw the Group amending assumptions accordingly. Policyholder persistency rates and the take-up of guarantees have been affected by the low interest rate environment and assumptions strengthened where indicated by recent experience.
NO CHANGE Counterparty exposures continue to be managed and monitored at a consolidated level across the Group. There have been no significant developments in counterparty exposures over 2017. Contingency plans are being progressed in respect of EU-based counterparties in the event of a ‘Hard Brexit’.
The conduct-focused regulator has had a greater focus on customer outcomes. This may continue to challenge existing approaches and/or may result in remediation exercises where Phoenix Life cannot demonstrate that it met the expected customer outcomes in the eyes of the regulator. Changes in legislation such as the implications of Brexit can also impact the Group’s financial position.
The financial and operational risks of the target business were assessed as part of the acquisition phase. Transition plans are being developed and resourced with appropriately skilled staff to ensure that the target operating models are delivered in line with expectations.
High Court ruling that PA(GI) Limited (‘PAGI’), a Group company, retained liability in relation to creditor insurance originally underwritten by PAGI. Cost of redress for these complaints may be greater than provisions held due to uncertainties with regard to the volumes of future complaints, the rates by which those complaints are upheld and the average redress value.
RISK IMPROVING No longer considered a principal risk at 31 December 2017.
Previous consolidation of the industry has led to an increased exposure for the Group to a smaller number of suppliers, with few alternative supply options. Further market concentration creates challenges regarding Phoenix’s ongoing relationships and in the development and viability of effective exit plans under stressed conditions.
The Group’s outsource strategy regularly considers our target operating model in light of the changing marketplace for policy administration outsourcing; the term remaining on current contractual arrangements and evolving regulatory and customer demands. The outcome of these reviews and related recommendations are shared with the Life Companies and approval sought for funding to support initiatives to implement transition/transformation activity where appropriate.
RISK A Market Volatility B Actuarial Assumptions C Counterparty Exposure D Regulatory and Legislative Change E Acquisition Transition F PAGI mis-selling (risk removed) G Outsourcer Market (new risk)
In accordance with the provision of section C.2.2 of the 2016 revision of the UK Corporate Governance Code, the Board has completed an assessment of the prospects and viability of the Group over a five-year period to December 2022. The Board has determined that the five-year period to December 2022 is an appropriate period for the assessment, this being the period covered by the Group’s Board approved annual operating plan (‘AOP’) and therefore the period over which the Directors have reasonable confidence and set internal and external targets.
– it completed reverse stress testing to understand how severe the above scenarios would need to be given the Groups current and expected levels of solvency and liquidity; – It considered the principal medium to long-term risks facing the Group which have the potential to impact on viability as discussed in the Risk report above; – it completed a qualitative assessment of all strategic risks to the Group and contingent actions available that could be implemented should any risk materialise that threatens the Group’s resilience; and
CYBER RISK The Group continues to see itself as a comparatively low target due to the closed book nature of its business.
Changes to the solvency regime as a result of government review and the UK’s exit from the EU.
Positive stakeholder engagement is also key to the Group’s Corporate Responsibility agenda.
1,249 staff supporting Phoenix Group, Phoenix Life and SunLife, based across operational sites: Wythall, London, Basingstoke, Bournemouth, Bristol, Glasgow and Jersey.
Customer research enables improvements to be made to the customer journey. Recent examples include an online facility for the retirement process, to enable some Phoenix Life customers to select retirement options online, secure e-mail launched as an alternative communication channel for customers to make contact, and improvements to annual statements and communications, ensuring that key information can be easily understood and highlighted.
CUSTOMERS IN VULNERABLE CIRCUMSTANCES Phoenix recognises the diversity of its customers and appreciates that a proportion could be living with issues that make them vulnerable and in need of support with their decision-making. The Group’s goal is to ensure that customer vulnerability is recognised and acted upon appropriately, to ensure that it does not have a negative impact on customer outcomes.
“I’m delighted to have the opportunity to help shape the work of the Long-Standing Customer Committee, as I believe it has the potential to help the industry address issues affecting older products and long-standing customers. Phoenix continually looks to improve customer experience, whilst looking for opportunities to improve outcomes and I look forward to working with the industry to do so.”
The Group’s Sourcing and Procurement policy sets the minimum operating standards relating to the management of sourcing and procurement risk throughout the Group and forms part of the sourcing and procurement control framework.
Phoenix is organised so that the Commercial Partnerships team manage a decentralised procurement model for low value / low volume spend, to enable the business to operate flexibly but within the controls of the Sourcing and Procurement policy. This has a robust oversight and governance model, administered and managed by the Commercial Partnerships team.
PROMPT PAYMENT CODE The Group’s culture is to meet its obligations including paying suppliers promptly. The Group voluntarily signed the Government’s Prompt Payment Code in 2012. The Group’s intention was to show its commitment to supply chain sustainability and to aid in the transformation of the culture of late invoice payments in the business community. As at the end of 2017 c.80% of all invoices presented to the Group were paid within 40 days of the invoice being created to allow for invoices to be received via post. This is actively monitored throughout the business and the Group is exploring means to improve on this percentage.
ANTI-BRIBERY AND CORRUPTION In order to ensure that any anti-corruption and bribery matters or occurrences are effectively managed, the Group has a number of policies and practices in operation. The Group’s AntiBribery policy addresses bribery and corruption risks alongside the Financial Crime policy which addresses risks such as anti-money laundering and fraud. Both policies detail the minimum control standards and risks that are to be managed to mitigate any potential issues.
Staff are required to complete annual computerbased training around both financial crime prevention and adherence with the Code of Business Ethics and Ethical Conduct. Staff are also required to complete a Gifts and Hospitality Register which is overseen and managed by the Financial Crime team.
EMPLOYEE CONSULTATION In response to the 2016 employee engagement survey, where 62% of staff (excluding former Abbey and AXA Wealth employees) answered positively that they ‘feel safe to speak up and challenge’, a series of focus groups and surveys were held. The purpose was to raise the level of dialogue around Phoenix’s values and to give greater clarity on associated working behaviours. Planning for the launch of the Big Conversation took place towards the end of 2017, which will provide all employees with an opportunity to voice their opinions. The outcomes of staff workshops will provide a clear behavioural framework aligned to the values and organisational strategy. This will then be embedded into the Group’s recruitment, development and retention programmes.
The Group operates a Whistleblowing policy, prompting staff to disclose information where they believe wrongdoing, malpractice or risk exists across any of Phoenix’s operations. Employees are encouraged to speak up about matters that concern them, with the understanding that confidentiality will be maintained, and that they will not be treated inappropriately.
LEARNING AND DEVELOPMENT A team of Learning and Development professionals offer a programme of development activities which include leadership development, individual skills training, online learning and coaching.
As part of the Group’s HR processes, there is an established succession plan. This tracks internal succession across all material roles and enables appropriate assessment of skills gaps. Internal succession continues to deliver the Group’s most senior appointments.
The Group also works with external organisations to provide a wide range of learning and continual professional development opportunities including the Chartered Management Institute and The Institute of Chartered Accountants in England and Wales.
86% of staff participate in the flexible benefits scheme, which allows benefits to be selected that meet personal circumstances. For 2017 buying and selling annual leave remained the most utilised, followed by childcare vouchers and insurance related products. For 2018, private medical insurance cover will be available to all staff and their partner regardless of their status within the organisation.
All Group employees participate in an Annual Incentive Plan and are able to become shareholders in the Company. Over half of the staff population are voluntarily participating in one or more of the share-save or share incentive plans, benefiting in the Group’s increased share performance.
Read more about key employee engagement activities undertaken during the year on page 24
of staff believe Phoenix does a good job of offering tools and initiatives that help support their health and wellbeing
The Group operates an Employee Assistance Programme which is a service designed to provide free, independent and confidential advice on matters affecting an individual’s wellbeing.
The Group was a sponsor of National Walking Month 2017, working with Living Streets charity to create a series of cultural city walks for staff based at the London office.
Britain’s Healthiest Workplace benchmark was completed for the fourth consecutive year, resulting in improved scores. The Group achieved fourth position from 139 participating companies in the ‘Healthy Employer’ category, and second position when compared with only mid-sized companies.
During the year the Group effectively resolved all employee disputes and as a result was involved in no employment tribunals.
Phoenix launched its Professional Women’s Network in September 2017. The network’s vision is to support and inspire women in the Group to achieve their full potential and help break down barriers through the development of their skills and competencies and through sharing their knowledge and experience.
Phoenix Group is serious about diversity and inclusion and in 2016 was one of the first 72 companies to sign up to the Government’s Women in Finance Charter.
In 2018 there will be further coaching, mentoring and learning opportunities available to members, including an accelerated development programme for women. PR
of staff are happy to ‘go the extra mile’ at work
COMMUNITY INVESTMENT The Group has worked closely with 36 community partners over the year.
The Group was also premier sponsor of the ‘Wythall and Hollywood Fun Run’ which included a 10km, 5km and 1.5km run through the heart of Wythall’s community and entered the site’s grounds as part of the official distance.
VOLUNTEERING Employees regularly volunteer on either an individual basis or with their team to make a difference in their local community. Employees within the Group are permitted 14 hours per year to support a variety of causes.
61% of staff participated in this year’s volunteering programme contributing 3,162 hours, an increase of 11%. There has been a shift in more staff wishing to participate in skills-based volunteering, offering their time to be mentors, reading buddies and number partners at local schools.
At the SunLife operations in Bristol, volunteering is also a key part of their culture, with 43% of staff contributing 408 hours across the year to causes within their local community.
In London the Group supported Draper’s Sixth Form Academy by offering pupils work experience opportunities within Actuarial and Group Finance functions. In addition, the Group’s CEO welcomed maths pupils to a Future Forums event, where they could hear firsthand what it is like to work for the Group.SC
The Group’s environmental aim is to ‘put back’ what it takes out. As a financial services organisation, the Group’s impact on the environment is minimal when compared with other industries.
The Corporate Responsibility Steering Committee reviews environmental progress and agrees activity for future implementation such as the current investigation into electric vehicle charging facilities onsite in 2018.
CONSERVATION The Group has been partners with the Heart of England Forest since 2013 and now boasts over 6,000 trees within its own Phoenix Way Wood. The charity has continued to provide opportunities for staff to get involved in woodland management, tree planting and conservation. Pupils from partner school Ark Kings Academy were given the opportunity to plant trees within the wider Heart of England Forest allowing them to spend time in the greater outdoors, give back to future generations and directly help the charity with its aim of ‘creating the largest broadleaf forest in the UK’. The SunLife operations in Bristol are also members of the Woodland Trust.
INTERNAL PRINT RESOURCE Reducing print and paper consumption onsite remained one of the Group’s primary environmental focuses for 2017. Staff within Phoenix Group and Life received personalised dashboards detailing print usage and ratio of colour print, so they could directly manage what impact their print habits have on the wider environment.
Employees based in Wythall have been assisting Bromsgrove District Council in various conservation projects within their local parklands.
Combustion of fuel and operation of facilities (Scope 1) 1,203 1,203 1,078
Emissions reported above on a per full-time equivalent employee (FTE) intensity 3.5 tonnes CO2e/FTE
1 Our intensity measurement calculations exclude former AXA Wealth and Abbey Life subsidiaries to avoid skewed intensity results over the two-year period.
Since the acquisitions of AXA Wealth’s pension and protection business from AXA UK plc and Abbey Life Assurance Company Limited, Abbey Life Trustee Services Limited and Abbey Life Trust Securities Limited from Deutsche Bank Holdings No. 4 Ltd in late 2016, the three properties acquired (Winterthur Way in Basingstoke and 100 Holdenhurst Way and Marlborough House in Bristol), have been included under the Group’s operational control. These three properties have therefore been included in the Group’s carbon footprint (absolute GHG emissions) for the 2017 calendar year. However, as these three properties were not owned for the whole two-year period that is used for intensity measurement calculations, they have been excluded from these metrics to avoid skewed intensity results.
In 2017 absolute emissions have increased by 18% due to the inclusion of the three ex-AXA Wealth and Abbey Life acquired properties. This increase has outweighed the reduction in the emission factor for consumption of purchased electricity (Scope 2) and the reduced consumption at the end of the year due to the ex-AXA Wealth Bristol office lease expiring on the 21st December 2017. Approximately 7.7% of 2017 emissions are estimated as full year data were not available for all facilities. A sample of emissions from fuel use for company-owned transport, backup generation and fugitive emissions from refrigerants were calculated and were determined to be non-material to the overall footprint, so have not been included.
RESULTS PRESENTATIONS AND INVESTOR DAYS Full year and interim results were presented to analysts and investors by the Group. The presentations were webcast live on Phoenix’s website and presentation materials were also made available.
Phoenix held an Investor Day on 14 June in London with presentations focused on the improvement of the Phoenix customer journey, the Group’s integration process, Solvency II and the Group’s plans to examine selective acquisitions in the BPA market. The event also provided attendees with the opportunity to meet with management. Investor day presentations are filmed and the video as well as the presentation materials and transcript are made available on the Group’s website.
CONFERENCES Conferences enable the Group to meet with a significant number of investors and at the same time are important platforms for presenting on Phoenix’s investment proposition. This year, Phoenix attended seven conferences in the UK and one in the US, including conferences organised by Bank of America Merrill Lynch, Barclays, Berenberg, J.P. Morgan Cazenove and Morgan Stanley.
The results disclosed to the Group in July showed that there was a high degree of confidence in management as well as broad support for the Group’s M&A strategy.
Our most recent Board Evaluation Review, undertaken towards the end of 2017 under the external facilitation of Equity Communications concluded that we have a ‘highly committed Board with an impressive and carefully selected range of skills and experience.’ Further details are contained in our Corporate Governance Report.
SHAREHOLDERS As ever, I am grateful for the strong support of our shareholders. At our May 2017 AGM, all 20 resolutions were passed with a majority of at least 95% of votes cast for each resolution.
– Belinda Richards (appointed October 2017) – Life insurance and pensions, M&A integration, FTSE 100 financial services board experience.
The Board has selected Alastair Barbour to succeed Ian Cormack as Senior Independent Director. Alastair has chaired our Audit Committee since his appointment to the Board in 2013 and brings vast experience and business acumen to the role.
Ian Cormack – SID Clive Bannister James McConville Alastair Barbour Karen Green Wendy Mayall John Pollock Belinda Richards Nicholas Shott Kory Sorenson
Group Strategy Major Transactions Group Budget Group Risk Appetite Performance Monitoring External/Shareholder Reporting External Debt
Board Appointments Senior Executive Appointments Diversity and Inclusion Board and Senior Executive Succession Planning
EXPERIENCE Henry Staunton was appointed Chairman of the Board of Directors with effect from 1 September 2015. Mr Staunton is Non-Executive Chairman of WH Smith plc, the leading FTSE 250 retail group, and a Non-Executive Director of Capital & Counties Properties plc. From 2004 until 2013, Mr Staunton was a NonExecutive Director, Chairman of the Audit Committee and latterly Senior Independent Director and Vice Chairman of Legal & General Group plc, where he gained significant insight into the life and pensions industry. He was also a Non-Executive Director of Ashtead Group from 1997 to 2004 including as Chairman from 2001. During his executive career he was Finance Director of ITV plc from 2003 to 2006, and Finance Director of Granada plc from 1993 to 2003. Prior to that he joined Price Waterhouse as a graduate trainee, rising to become a Senior Partner of the audit practice.
EXPERIENCE Clive Bannister joined the Group in February 2011 as Group Chief Executive Officer. Prior to this, Mr Bannister was Group Managing Director of Insurance and Asset Management at HSBC Holdings plc. He joined HSBC in 1994 and held various leadership roles in planning and strategy in the Investment Bank (USA) and was Group General Manager and CEO of HSBC Group Private Banking. He started his career at First National Bank of Boston and prior to working at HSBC was a partner in Booz Allen Hamilton in the Financial Services Practice providing strategic support to financial institutions including leading insurance companies, banks and investment banks. Mr Bannister is also Chairman of the Museum of London.
EXPERIENCE Alastair Barbour has over 30 years audit experience with KPMG where he worked across the full spectrum of financial services clients from large general insurers and reinsurers to the life insurance 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 Audit Committee Chairman of RSA Insurance Group plc and Liontrust Asset Management plc (both London Stock Exchange listed companies). He is also a Director and Audit Committee Chairman of CATCo Reinsurance Opportunities Fund Ltd, a Bermudabased investment company listed on the London Stock Exchange and of The Bank of N. T. Butterfield & Son Limited, a group listed on the New York Stock Exchange and in Bermuda.
EXPERIENCE Ian Cormack was appointed to the Board of Directors of the Company on 2 September 2009 and was appointed Senior Independent Director on 1 October 2013. Mr Cormack is Non-Executive Chairman of Maven Income & Growth VCT 4 plc and a Non-Executive Director of Just Group plc and Hastings Group Holdings plc. Mr Cormack was Chief Executive Officer of AIG, Inc. in Europe from 2000 to 2002 and prior to that he spent 32 years at Citibank where he was Chairman of Citibank International plc and Co-Head of the Global Financial Institutions Client Group at Citigroup and UK Country Head.
EXPERIENCE Karen Green is the former Chief Executive of Aspen UK, which comprised the UK insurance companies of the global US-listed insurer and reinsurer, Aspen Insurance Holdings and was a member of the Aspen Group Executive Committee for 12 years. She also held a number of other senior positions including as Group Head of Corporate Development, Strategy, and Office of the Group CEO. She remains Deputy Chairman of Aspen Managing Agency Limited, which conducts Aspen’s interests at Lloyd’s of London and continues to act for the Aspen Group on a wide range of corporate development activities.
EXPERIENCE Nicholas Shott is an investment banker, who has been European Vice Chairman of Lazard since 2007 and Head of UK Investment Banking at Lazard since 2009. Mr Shott joined Lazard in 1991 and became a partner in 1997. He is also a Non-Executive Director on the Board of the Home Office.
EXPERIENCE John Pollock had a career in life assurance at the Legal & General Group from 1980 to 2015, including as an Executive Director of Legal & General Group plc from 2003 to 2015. Mr Pollock held numerous senior roles, gaining wide strategic and technical experience, finally as Chief Executive Officer of LGAS (L&G Assurance Society), one of Legal and Generals’ three primary business units. Prior to Mr Pollock’s retirement from Legal and General in 2015, he held positions as Deputy Chair of the FCA Practitioner Panel, Chairman of investment platform Cofunds, and as a Non-Executive Director of the Cala Homes Group.
EXPERIENCE Belinda Richards has held senior executive positions at KPMG, EY, and latterly Deloitte from 2000 to 2010 where she was a senior corporate finance Partner and the Global Head of Merger Integration and Separation Advisory Services. She is an experienced Non-Executive Director, currently on the Boards of WM Morrison Supermarkets plc, The Monks Investment Trust plc and Schroder Japan Growth Fund plc. Previously, she has also been on the Boards of Aviva UK Life & Pensions, Grainger plc and Balfour Beatty plc.
– Leads the Group to safeguard returns for policyholders and grow shareholder value
– Develops and delivers the Group’s financial business plan in line with strategy
– Ensures the Group’s finances and capital are managed and controlled
– Develops and delivers the Group’s debt capital strategy and other treasury matters
– Enhances shareholder value through clear, rigorous assessment of business opportunities.
– Supports the Group Chief Executive Officer in the formulation of the strategy and the business planning for the Group
– Ensures Phoenix Life deploys capital efficiently and effectively, with due regard to regulatory requirements, the risk universe and strategy.
– Leads provision of legal advice to the Group Board, other Group company Boards, ExCo and senior management
THE CHAIRMAN, GROUP CHIEF EXECUTIVE OFFICER AND SENIOR INDEPENDENT DIRECTOR Henry Staunton is Chairman of the Board of Directors of the Company, having joined the Board as Chairman on 1 September 2015. There is a division of responsibility, approved by the Board, between the Chairman, who is responsible for the leadership and effective operation of the Board and the Group Chief Executive Officer, Clive Bannister, who is responsible to the Board for the overall management and operation of the Group. The Chairman’s other commitments are set out in his biographical details on page 50. The Chairman was appointed on the basis of committing two days per week to Phoenix.
The Senior Independent Director, appointed by the Board, is Ian Cormack. His role is to be available to shareholders whose concerns are not resolved through the normal channels or when such channels are inappropriate. He is also responsible for leading the annual appraisal of the Chairman’s performance by the Non-Executive Directors, which occurred in November 2017.
Specific key focus areas covered by the review were Performance & Strategy, Board Dynamics & Structure, and Succession. The review recommended a set of actions which will be taken forward and their progress reviewed by the Board.
– In terms of skills and experience, the review stated: “The Board of Phoenix Group Holdings is a good example of a solidly reliable, highly committed Board with an impressive and carefully selected range of skills and experience.”
BOARD EFFECTIVENESS AND INDUCTION 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 2017. The process was externally facilitated by Equity Communications, who have no connection with the Group. The process involved individual in-depth interviews between the evaluators and each Director and also the Company Secretary and Head of Strategy, who is a regular Board attendee. The interviews covered various aspects of Board, Committee and Director effectiveness, concluding in a Board report which was discussed by the Board in November 2017.
Our two new Directors, who joined the Board in 2017, share their insights on their induction. Karen
The induction process was very well structured and thorough. I experienced an open culture and a general willingness to arrange follow up sessions where I wanted to explore aspects of the business further. This is reflective of the culture of the Group as a whole.
I thought that the induction process at Phoenix was excellent. I have spent nearly eight years as a Non Exec in the UK Life and Pensions sector and the induction truly enabled me to get a good grasp of Phoenix’s approach. The management team has been very open and helpful, and I look forward to spending more time in the business over the coming year.
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. In January 2018, the Nomination Committee reviewed the time spent by Directors and concluded that the time required of (and given by) the Company’s Directors is considered at least at the level expected in their appointment terms and is believed to be high in comparison with other FTSE 250 companies.
The Board met seven times during 2017 and is scheduled to meet seven times in 2018 including for 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 2017.
E 5% Reports from Chairs of Board, Committees and Subsidiary Boards
F 5% Board and Board Committee Changes and Issues Appointments, succession and performance
The composition of the Audit Committee is in accordance with the requirements of the Code and also with DTR 7.1.1AR that the majority of members should be Independent NonExecutive Directors, that at least one member of the committee has recent and relevant financial experience and the members of the Committee as a whole have competence relevant to the sector in which the Company is operating. The Audit Committee met seven times during 2017. Its meetings are attended by the Chairman of the Risk Committee (who is also a member of the Audit Committee), the Group Finance Director, the Deputy Group Finance Director, the Group Head of Internal Audit, the external auditors and usually also by the Group Chairman and the Group Chief Executive Officer. The Audit Committee holds private meetings at least annually with each of the Group Finance Director, the Group Head of Internal Audit and the external auditors.
“As we pursue our acquisition strategy, the Audit Committee will continue to focus on ensuring that robust controls are both in place and are applied across the Group.” ALASTAIR BARBOUR AUDIT COMMITTEE CHAIRMAN
– Karen Green was appointed to the Committee with effect from 1 July 2017.
The Board has delegated specific responsibilities to four standing committees of the Board. The terms of reference of the committees can be found on the Company’s website.
– Monitoring the overall integrity of the financial reporting by the Company and its subsidiaries and the effectiveness of the Group’s internal controls.
EXTERNAL AUDIT – Undertook a review of the effectiveness, engagement and remuneration of the current external auditors. This culminated in a recommendation to re-appoint EY, which was approved by the Board and subsequently approved by shareholders at the May 2017 AGM – see ‘Assessment of the effectiveness of the external audit process’ and ‘Auditor’s Appointment’ on page 58.
– Reviewed the control environment supporting the hedging processes surrounding the EU referendum.
– Reviewed and approved updates to the Group Tax Policy, Group External Auditor Policy and the Group Liquidity & Funding Policy.
AUDIT COMMITTEE’S PRINCIPAL ACTIVITIES DURING 2017 EXTERNAL REPORTING AND CONTROLS – Reviewed the Company’s 2016 Annual Report and Accounts and 2017 Interim Financial 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.
AUDITOR’S APPOINTMENT In accordance with the requirements of The Statutory Audit Services for Large Companies Market Investigation (Mandatory Use of Competitive Tender Processes and Audit Committee Responsibilities) Order 2014, the Audit Committee undertook a competitive audit tender in 2016 to take effect for the 2017 statutory audit, which it considered to be in the best interests of its shareholders in light of the length of association with the current auditors.
The tender process in 2016 was overseen by the Audit Committee. The Audit Committee concluded, and recommended to the Board, that the incumbent audit firm, EY, should be retained as the external auditor of the Group from 2017 and supported the recommendation for the re-appointment of the external auditor for the 2017 statutory audit. EY also became auditor for Abbey Life for the first time in 2017. The current audit partner is Ed Jervis, who has held that role from the 2014 statutory audit and will rotate off that role after the 2018 statutory audit.
The engagement of EY to perform any non-audit service is subject to a process of preapproval by the Audit Committee. Furthermore, the Group’s external auditor policy prescribes a limit for fees associated with non-audit services of 70% of the average statutory audit fee for the three preceding years. This aligns with requirements introduced by the EU Audit Directive and Regulations in 2016. In 2017, total fees of £6 million were paid to EY, of this amount £4.2 million related to statutory audit fees of the parent and its subsidiaries, with a further £0.9 million incurred in relation to services provided pursuant to legal or regulatory requirements. The remaining fees of £0.9 million are classified as non-audit services under the EU Directive and Regulations, and give rise to a ratio of 22% non-audit to audit fees in 2017.
– Management presented papers to the Phoenix Life Audit Committee detailing recommendations for the actuarial assumptions and methodologies to be used for the interim and year-end reporting periods with justification and benchmarking as appropriate. These assumptions and methodologies were debated and challenged by the Phoenix Life Audit Committee, with focus on longevity, persistency and expenses, prior to their approval.
– The Audit Committee received and considered detailed written and verbal reporting from the external auditors setting out their observations and conclusions in respect of the assumptions, methodologies and actuarial models.
– Management presented papers setting out the basis of valuation of financial assets, including changes in methodology and assumptions, for the interim and year-end reporting periods to the Phoenix Life Audit Committee. The assumptions, valuations and processes, particularly for financial assets determined by valuation techniques using significant non-observable inputs (Level 3), were debated and challenged by the Phoenix Life Audit Committee prior to being approved.
– Management presented details on the key judgement areas in deriving the acquisition balance sheets for the AXA Wealth and Abbey businesses, including the valuation of tangible net assets in accordance with IFRS 3, valuation of Acquired Value of In-Force, other intangibles and residual goodwill.
Operating Profit – The Audit Committee reviewed the allocation of key items to operating profit to ensure the allocations were in line with the Group’s operating profit framework and consistent with previous practice.
– The Audit Committee considered an analysis of the processes and conclusions in support of management’s conclusions that the Annual Report and Accounts are fair, balanced and understandable. In particular, the Audit Committee sought assurance from management and EY as to the review processes that operated over the production of the Annual Report and Accounts.
Going concern analysis – A comprehensive going concern assessment was undertaken by the Audit Committee for the 2017 year-end and 2017 interim reporting periods, based on an assessment by management of the Group’s liquidity for the going concern review period together with forecasts and a stress and sensitivity analysis. The analysis also confirmed that all regulatory and working capital requirements would be met under the base case and adverse stress scenarios throughout the going concern review period.
Please note that references in this table to the Phoenix Life Audit Committee include the Audit Committee for the acquired Abbey Life business.
The establishment of a Risk Committee is not a requirement of the Code. However, the Board believes such a Committee is important to ensure the robust oversight of the management of risk within the Group. The composition of the Risk Committee, comprised totally of independent Non-Executive Directors, is in accordance with the final recommendations of the report by Sir David Walker titled ‘A review of corporate governance in UK banks and other financial industry entities’. The Risk Committee met six times in 2017. Its meetings are attended by the Chairman of the Audit Committee (who is also a member of the Risk Committee), the Chief Risk Officer, the Group Head of Internal Audit and occasionally also by the Group Chairman and the Group Chief Executive Officer.
– Monitored compliance with the Group’s principal risk policies, satisfying itself that action plans to address significant breaches of those policies were sufficient.
– Monitored implementation of the Group’s Risk Management Framework in acquired entities.
“Having become Risk Committee Chairman less than a year ago, I am keen to drive a forward-looking agenda as well as maintaining and enhancing the strong Risk Management Framework and governance inherent in Phoenix.” JOHN POLLOCK RISK COMMITTEE CHAIRMAN
– Considered a Line 2 review of the 2018 Annual Operating Plan.
– Undertook horizon scanning to consider emerging risks that could impact the Group including more prominent badging of forward-looking work in risk papers.
– Considered risks, issues and matters that are escalated from the Phoenix Life Risk Committee and Abbey Life Risk Committee.
Additional assurance is provided by the Internal Audit function, which operates and reports independently of management. The Internal Audit function provides objective assurance on risk mitigation and control to the Audit Committee.
The composition of the Nomination Committee is in accordance with the requirements of the Code that a majority of its members should be independent Non-Executive Directors. The Nomination Committee is responsible for considering the size, composition and balance of the Board; the retirement and appointment of Directors; succession planning for the Board and senior management; and making recommendations to the Board on these matters.
The standard process used by the Committee for Board appointments involves the use of an external search consultancy to source candidates external to the Group and, in the case of executive appointments, also considers internal candidates. Detailed assessments of short-listed candidates are undertaken by the search consultancy, followed by interviews with Committee members and other Directors and the sourcing of references before the Committee recommends the appointments to the Board. This process was used for the appointments of Karen Green and Belinda Richards in 2017. The search consultancy used in 2017 for Director appointments was The Zygos Partnership which has no other connection with the Company.
– Nicholas Shott was appointed to the Committee on 11 May 2017.
NOMINATION COMMITTEE’S PRINCIPAL ACTIVITIES DURING 2017 – Delivered recommendations to the Board for the appointments of Karen Green and Belinda Richards as Non-Executive Directors following a comprehensive search process led by the Nomination Committee with Zygos search consultancy.
– In conjunction with the skills audit and taking account of the Board Evaluation Review, reviewed the structure, size and composition of the Board.
– Reviewed progress updates on Diversity and Inclusion, supporting initiatives being undertaken to accelerate and enhance management diversity.
The Board’s policy on diversity is as follows: – The Board supports the enhancement of diversity, including gender, as a consideration when recruiting new Directors.
– The Board’s overriding aim is to appoint the right Directors to the Board to drive forward the Group’s strategy within a robustly compliant framework.
– The Board will undertake regular skills audits to ensure the Board’s skills remain appropriate for its strategy and providing diversity where possible.
“Our key aim is to align remuneration to the achievement of our strategy and value generation. We greatly appreciated the high level of exchange with our shareholders that we have enjoyed over the past year.” KORY SORENSON REMUNERATION COMMITTEE CHAIR
– Isabel Hudson was a member of the Committee up to
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 six times during 2017.
FIT Remuneration Consultants provided advice to the Remuneration Committee in 2017 and are independent of the Group.
DEAR SHAREHOLDER I am delighted to write to you as the Chairman of the Remuneration Committee of Phoenix Group Holdings having served on the Committee as a member since 2014 and becoming its Chairman in May 2017. I am particularly grateful to Ian Cormack for his hard work and guidance as my predecessor in this role.
COMPANY PERFORMANCE 2017 was a year of further progression for Phoenix Group as set out in more detail in the Group Chief Executive Officer’s report at the beginning of this Annual Report and Accounts. These achievements demonstrate a strong performance by the Company’s management team. Accordingly, the Remuneration Committee (‘Committee’) concluded that the outturns of the Annual Incentive Plan (‘AIP’) and Long-Term Incentive Plan (‘LTIP’) are appropriate, as more fully described below.
– Successful integration of the AXA Wealth and Abbey Life acquisitions, realising significant cost and capital synergies from both transactions.
– In Ian Cormack’s letter introducing last year’s Directors’ Remuneration Report, he said that we would be undertaking a wider review of remuneration in 2017. Having undertaken the review and consulted with shareholders, we concluded that our current policy as approved at the 2017 AGM remains appropriate. We are thus not seeking to amend our policy at the 2018 AGM.
• Management Actions are those measures taken by management to increase cash generation and long-term value which are relatively insensitive to external factors and the natural unwind of the closed life assurance funds. Management Actions are a key performance indicator for the Group, tracked closely by management, the Board and investors to assess the success of management’s execution of our strategy. The total figure relating to Management Actions is published annually in the Annual Report and Accounts.
– At the same time, to reflect feedback received from our shareholders during our consultation at the end of 2017, we have increased the weighting on Corporate measures within the AIP to 80% (from 70% in 2017) and correspondingly reduced the weighting on Personal measures to 20% (from 30% in 2017).
Following the year-end, Phoenix announced a proposal to acquire Standard Life Assurance. Consistent both with best practice guidelines and with past practice at Phoenix, following completion, the Committee will review any adjustments to the targets within our variable pay plans (including the potential to review in-flight LTIP targets) that might be necessary to ensure that the plans operate as originally intended and properly reflect our aim to reward long-term value generation for our shareholders. Given the scale of the proposed acquisition, the Committee will of course review our reward policy to ensure that it remains appropriate for the dynamics of the new business.
HOW MUCH THE EXECUTIVE DIRECTORS EARNED IN 2017 (£000) The charts below compare the maximum levels of Total Remuneration payable under the Directors’ Remuneration Policy (see page 80) and the actual payments for 2017 detailed in the Single Figure Table.
Minimum, on-target and maximum represent the scenario charts required by the Directors’ Remuneration Policy – see the data assumptions below which are unchanged from our 2016 Directors’ Remuneration Report (as no element of our Executive Directors’ Remuneration has been changed).
– Maximum with growth is the maximum scenario, but with the LTIP element increased to reflect a 10% CAGR share price growth assumption and assumed current dividend yields being maintained for three years until LTIP vesting. The element of the total representing the value from these assumptions on share price growth and dividends is shown separately.
– Actual represents the values shown in the 2017 Single Figure Table. Within this, the actual share price growth and dividends in the three-year period until LTIP vesting are shown separately.
– LTIP: assumes maximum vesting of awards and valued as on the date of grant (normal award 200% of base salary). Sharesave and SIP valued on the same basis as in the on-target row.
Base Salary Base salaries are set by reference to appropriate market comparables. Salaries in 2018 will remain unchanged at £700,000 for the Group Chief Executive Officer (unchanged from 2011) and £440,000 for the Group Finance Director (unchanged from 2014). This means that their salaries will not have increased for seven and four years respectively.
Benefits There are no proposed changes to the benefits offered to Executive Directors in 2018.
Pension There are no proposed changes to the pension benefits offered to Executive Directors in 2018.
Annual Incentive Plan (‘AIP’) The AIP for 2018 will operate on a basis that is consistent with how the AIP operated in 2017, although there have been changes to the precise measures and weightings of the Corporate (financial and strategic) performance measures to reflect our evolving business focus, and to the percentage weighting for Corporate versus Personal measures to reflect feedback from investors.
The weightings of the AIP performance measures for 2018 are summarised below: Performance measure % of incentive potential
The Company has complied with the DRR regulations as a matter of good practice although it is not strictly required to do so as a non-UK incorporated quoted company.
40% of AIP outcomes for 2018 will be delivered as an award of deferred shares under the Deferred Bonus Share Scheme which will vest after a three-year deferral period.
The three-year deferral period will run to the three-year anniversary of the making of the DBSS awards.
Awards under the LTIP will be made automatically on the fourth dealing day following the announcement of the Company’s 2017 annual results under a procedure similar to that described above for awards under the DBSS.
All annual LTIP awards made to Executive Directors are subject to a holding period so that any LTIP awards for which the performance conditions 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.
Award levels for Executive Directors for 2018 are unchanged at 200% of base salary.
Return on Adjusted Shareholder Solvency II Own Funds is included as an LTIP measure for 2018 awards as it is a proxy value metric and thus rewards the preservation of long-term value as a balance to year-on-year cash generation.
All 2018 LTIP awards are subject to a further underpin measure relating to debt and risk management within the Group, consideration of customer satisfaction and, to meet Solvency II requirements, in exceptional cases, personal performance. These measures and the relative weightings are considered to be appropriate for 2018’s LTIP awards.
The performance targets for the Cumulative cash generation measure are £1,474 million (where 25% of this part of the award vests) and £1,674 million (full vesting of this part of the award).
All-Employee Share Plans Executive Directors have the opportunity to participate in HMRC tax advantaged Sharesave and Share Incentive Plans on the same basis as all other UK employees.
DISTRIBUTION STATEMENT The DRR regulations require each quoted company to provide a comparison between profits distributed by way of dividend and overall expenditure on pay.
PERFORMANCE GRAPH AND TABLE The graph below shows the value to 31 December 2017 on a TSR basis, of £100 invested in Phoenix Group Holdings on 5 July 2010 (the date of the Company’s Premium Listing) compared with the value of £100 invested in the FTSE 250 Index (excluding Investment Trusts).
The FTSE 250 Index (excluding Investment Trusts) is considered to be an appropriate comparator for this purpose as it is a broad equity index of which the Company is a constituent.
PERCENTAGE CHANGE IN PAY OF THE GROUP CHIEF EXECUTIVE OFFICER 2016 TO 2017 In accordance with the DRR regulations, the table below provides a comparison of the percentage change in the prescribed pay elements of the Group Chief Executive Officer (salary, taxable benefits and annual incentive outcomes) between financial years 2016 and 2017 and the equivalent percentage changes in the average of all staff (representing all permanent staff during 2016 and 2017 on a matched basis). This group was selected as being representative of the wider workforce using the same process as was used for this comparison in last year’s annual report and accounts.
CONSIDERATION OF EMPLOYEE PAY When determining Executive Directors’ remuneration, the Committee takes into account pay throughout the Group to ensure that the arrangements in place remain appropriate.
As required by Solvency II regulations, the Group has one consistent reward policy for all levels of employees, and this policy is made available to all staff. Therefore, the same reward principles guide reward decisions for all Group employees, including Executive Directors, although remuneration packages differ to take into account appropriate factors in different areas of the business: – Fixed Pay – the Remuneration Committee reviews the average Group-wide base salary increase each year. All employees are paid at least the Living Wage as set by the Living Wage Foundation. All Group employees are invited to participate in the Company’s Group Pension Plan or contributory defined contributions pension arrangement in accordance with the plans that are open at that time. Death in service benefits are provided for all staff.
– Benefits – All Group employees have access to a range of benefits under our flexible benefits scheme and, from 2018, all are eligible to receive private medical insurance cover.
– AIP – all Group employees participate in the AIP, although the quantum and balance of corporate to individual objectives varies by grade (and may also vary between different business lines). The most senior staff are subject to the regulatory requirements of Solvency II, and these individuals also receive part of their bonus in Company shares deferred for a period of three years. A different scorecard of AIP performance measures applies for employees in ‘control functions’ (risk, compliance, internal audit and actuarial) to exclude financial performance measures.
1 The Executive Directors are entitled to adjust their salary/benefit combination under flexible benefits arrangements and the figures shown are before individual elections. 2 Benefits for Clive Bannister comprise car allowance and private medical insurance totalling £16,157. Benefits for James McConville comprise car allowance and private medical insurance totalling £15,926.
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. Both Clive Bannister and James McConville received the pension contributions as cash supplements. No Director participated in a defined benefit pension arrangement in the year.
There were no payments made to former Directors and no payments for loss of office in the year.
Origo timescales2 <12 days <11 days <9.5 days 11.03 days 8.57 4.16%
overturn rate is calculated based on an average of the H1 current year and H2 prior year rates. This is due to the timing of when the FOS rates are published. The 17.0% FOS overturn disclosed in the KPI section on page 19 is the latest available 2017 year end position and includes our newly acquired businesses.
6 Excludes the AXA Wealth and Abbey Life operating business. All five customer experience measures in 2018 will include the performance of the AXA Wealth and Abbey Life businesses.
The Board regards a number of the personal objectives set for the Executive Directors as commercially sensitive and, accordingly, it is not appropriate for such objectives to be disclosed. However a number of achievements for the Executive Directors are shown below: – Executive Director Strategic Achievements: In addition to the significant achievements of meeting all financial KPIs (including in relation to expense management), exceeding staff engagement target levels, and maintaining a satisfactory risk and control environment across the Group, further specific individual achievements by the Executive Directors which were considered by the Remuneration Committee included the following: – Clive Bannister: • Progression of our on-shoring strategy enabling the announcement to the market of this major corporate restructure; • Maintaining a rigorous discipline in delivering across the full range of Phoenix KPI’s ; • Successful integration of AXA Wealth and Abbey Life delivering favourable synergies and value to the Group; and
For the Personal objectives element of 2017 AIP, the performance of both the Executive Directors was discussed with the Board, and the Remuneration Committee considered individual performance in light of their objectives, on the basis of a 5-point scale, separately assessing both ‘what’ was achieved and ‘how’ it was delivered, with equal weightings given to each assessment.
Taking account of the attainment of objectives, each of the Group Chief Executive Officer and the Group Finance Director received a 75% payout for this element, consistent with their ratings for 2017.
The table below shows the actual outturn against the annual incentive maximum. For 2017 AIP, Corporate (financial and strategic) measures applied to 70% of incentive opportunity and Personal (individual objectives) measures applied to 30% of incentive opportunity.
In addition, whilst the performance measures for the AIP for 2018 have been disclosed (see Implementation of Remuneration Policy for 2018), the performance targets for these measures are regarded as commercially sensitive at the current time and accordingly are not disclosed. However, the Company intends to disclose the performance targets for 2018’s AIP retrospectively in next year’s Remuneration Report on a similar basis to the disclosures made above in respect of 2017’s AIP.
Target range between Embedded Value growth in excess of the risk-free rate by 3% per annum and Embedded Value growth in excess of the risk-free rate by 5% per annum.
Target range between Cumulative cash generation of £1.032 billion and Cumulative cash generation of £1.182 billion.
TSR (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.
1 The amounts within the benefits columns 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 Group).
2 Rene-Pierre Azria retired from the Board 30 November 2016. 3 Tom Cross-Brown retired from the Board 11 May 2016. 4 Karen Green joined the Board 1 July 2017. 5 Isabel Hudson retired from the Board 11 May 2017. 6 Wendy Mayall joined the Board 1 September 2016. 7 John Pollock joined the Board 1 September 2016. 8 Belinda Richards joined the Board 1 October 2017. 9 Nicholas Shott joined the Board 1 September 2016. 10 David Woods retired from the Board 11 May 2017.
1 The number of shares for outstanding LTIP awards granted between 2013 and 2016 were increased to take into account the impact of the rights issue which took place on 9 November 2016. This adjustment was based on the Theoretical Ex-Rights Price (‘TERP’) and approved by the Remuneration Committee. The share price on grant shown has also been adjusted to reflect the impact of the rights issue on all share prices.
1 Please see footnote 1 on page 72 regarding the discontinuation of reporting on MCEV Growth.
1 The number of shares for all outstanding DBSS awards was increased to take into account the impact of the rights issue which took place on 9 November 2016. This adjustment was based on the Theoretical Ex Rights Price (‘TERP’) and approved by the Remuneration Committee. The share price on grant shown has also been adjusted to reflect the impact of the rights issue on all share prices.
3 The face value of DBSS awards granted as nil cost options in 2017 is £294,482 for Clive Bannister and £185,101 for James McConville. This is calculated using a share price of £7.881667, being the average closing market price on the three days preceding the award date.
The DBSS is the share scheme used for the deferral of AIP. No performance conditions apply therefore, other than being subject to continued employment. In addition to the shares awarded under the DBSS presented above, participants receive an additional number of shares to reflect the dividends paid during the vesting period.
Aggregate gains of Directors from share options exercised and vesting shares under all share plans in 2017 were £3,129,255 (2016: £1,656,694).
As at 1 January 2017 or date of appointment if later
Total share plan interests as at 31 December 2017 – DBSS
Total share plan interests as at 31 December 2017 – Sharesave
1 Isabel Hudson retired from the Board 11 May 2017. 2 David Woods retired from the Board 11 May 2017.
SHAREHOLDING REQUIREMENTS As explained in the Remuneration Policy under the Shareholding guidelines section, the Executive Directors are subject to shareholding requirements.
Value of shares held at 31 December 2017 (% of salary)
ADDITIONAL UNAUDITED INFORMATION DIRECTORS’ SERVICE CONTRACTS The dates of contracts and letters of appointment and the respective notice periods for Directors are as follows: EXECUTIVE DIRECTORS’ CONTRACTS
Subject to Board approval, Executive Directors are permitted to accept outside appointments on external boards as long as these are not deemed to interfere with the business of the Group. The Executive Directors are entitled to retain any external fees. During 2017, Clive Bannister received £45,000 from Punter Southall Group and CHF 50,000 from UniGestion in respect of two external directorships. James McConville received £112,000 from Tesco Personal Finance plc.
John Pollock 24 August 2016 1 September 2016 1 September 2019 18
Nicholas Shott 24 August 2016 1 September 2016 1 September 2019 18
Ian Cormack (Committee Chairman to 11 May 2017) 18 February 2010 1 July 2017
Kory Sorenson (Committee Chair from 11 May 2017) 3 July 2014 To date
Consistent with the requirements of Solvency II, the Committee is responsible for establishing, implementing, overseeing and reviewing the firm-wide remuneration policy in the context of business strategy and changing risk conditions. The firm-wide remuneration policy focuses on ensuring sound and effective risk management so as not to encourage risk-taking outside of the Company’s risk appetite. None of the Committee members has any personal financial interest (other than as shareholders), conflicts of interests arising from cross-directorships or day-to-day involvement in running the business.
As part of our normal governance process, a review of the independent remuneration adviser was undertaken by the Committee in 2017. Following tender submissions and a full review, the Committee decided to appoint PwC as adviser from May 2018.
– Increasing the level of bonus deferral to 40% of outcomes (from 33% of outcomes).
– 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.
Maximum – A contribution limit of 20% of base salary per annum per Executive Director has been set for the duration of this policy.
– AIP outcomes are paid in cash in one tranche (less the deferred share award).
– Deferral of AIP outcomes into shares is currently made under the DBSS.
Maximum – The maximum annual incentive level for an Executive Director is 150% of base salary per annum.
Provides for the automatic making of DBSS awards on the fourth dealing day following the announcement of annual results.
Policy and operation – Awards under the LTIP may be in any of the forms of awards to receive shares for nil-cost (as described for DBSS above).
– LTIP awards are made automatically each year on the fourth dealing day following the announcement of annual results, using the average of the preceding three dealing days’ share prices to calculate the number of shares in awards.
Maximum – The formal limit under the LTIP is 300% of base salary per annum (and 400% per annum in exceptional cases).
– For every LTIP award, appropriate disclosures regarding the proposed performance conditions will be made in the annual Implementation Report.
– Recognises the introduction of holding periods on LTIP awards since the previous policy was approved (holding periods have applied to all LTIP awards for Executive Directors since 2015).
– Consistent with normal practice, such awards are not subject to performance conditions.
Shareholding guidelines To encourage share ownership by the Executive Directors and ensure interests are aligned
– Fee levels for Non-Executive Directors are reviewed annually with any changes normally taking effect from 1 January.
The Group has (as required by Solvency II regulations) one consistent reward policy for all levels of employees and this policy is made available to all staff. Therefore, the same reward principles guide reward decisions for all Group employees, including Executive Directors, although remuneration packages differ to take into account appropriate factors in different areas of the business: – AIP – all Group employees participate in the AIP, although the quantum and balance of corporate to individual objectives varies by level. The most senior staff are subject to the regulatory requirements of Solvency II, and these individuals also receive part of their bonus in Company shares deferred for a period of three years. A different scorecard of AIP performance measures applies for employees in ‘control functions’ (risk, compliance and internal audit) to exclude financial performance measures.
– any other circumstances that have a sufficiently significant impact on the reputation of the Company.
5. Discretions reserved in operating incentive plans The Remuneration Committee will operate the AIP, DBSS and LTIP according to their respective rules and the above Remuneration Policy table. The Remuneration Committee retains certain discretions, consistent with market practice, in relation to the operation and administration of these plans including: – (as described in the Remuneration Policy table) the determination of performance measures and targets and resultant vesting and pay-out levels; – (as described in the Remuneration Policy table) the ability to adjust performance measures and targets to reflect events and/or to ensure the performance measures and targets operate as originally intended; – (as described in the Termination Policy section below) determination of the treatment of individuals who leave employment, based on the rules of the incentive plans, and the treatment of the incentive plans on exceptional events, such as a change of control of the Company; and
– the ability to make adjustments to existing awards made under the incentive plans in certain circumstances (e.g. rights issues, corporate restructurings or special dividends).
– For external candidates, it may be necessary to make awards in connection with the recruitment to buy-out awards forfeited by the individual on leaving a previous employer. For such buy-out awards, Phoenix Group will not pay more than is, in the view of the Remuneration Committee, necessary and will in all cases seek, in the first instance, to deliver any such awards under the terms of the existing incentive pay structure. It may, however, be necessary in some cases to make such awards on terms that are more bespoke than the existing annual and equity-based pay structures in Phoenix in order to secure a candidate. Details of any buy-out awards will be appropriately disclosed.
DIRECTORS’ SERVICE CONTRACTS Executive Directors Executive Director service contracts, which do not contain expiry dates, provide that compensation provisions for termination without notice will only extend to 12 months of salary, certain fixed benefits and pension (which may be payable in instalments and subject to mitigation). By excluding any entitlement to compensation for loss of the opportunity to earn variable pay, the Remuneration Committee believes the contracts to be consistent with best practice. The Remuneration Committee also has discretion to mitigate further by paying on a phased basis with unpaid instalments ceasing after the initial period of six months if the Executive Director finds alternative employment. Contracts do not contain change of control provisions. The template contract is reviewed from time-time and may be amended provided it is not overall more generous than the terms described above.
All awards will normally lapse Will receive a pro-rated award subject to the application of the performance conditions at the date of the event. Remuneration Committee discretion to disapply pro-rating 1 Where the reason for leaving is retirement, the individual will be required to provide confirmation of his continued retirement before any payments are released to him after the end of the vesting period.
The Directors of the Group present their report for the year ended 31 December 2017.
Phoenix Group Holdings is incorporated in the Cayman Islands (registered no. 202172) and has a Premium Listing on the London Stock Exchange. The Company is therefore not required to comply with the requirements of section 415 of the UK Companies Act 2006. However, the Directors support these enhanced standards for disclosure and have sought to comply voluntarily with these requirements.
1 2016 dividends per share figures have been rebased to take into account the bonus element of the rights issue completed in November 2016.
Full details of the authorised, issued and fully paid share capital as at 31 December 2017 and movements in share capital during the period are presented in note D1 to the IFRS consolidated financial statements.
SUBSTANTIAL SHAREHOLDINGS Information provided to the Company pursuant to the FCA’s Disclosure and Transparency Rules is published on a Regulatory Information Service and on the Company’s website. As at 13 March 2018, the Company had been notified of the following significant holdings of voting rights in its shares.
COMMUNICATION WITH INVESTORS AND SHAREHOLDERS The Company places considerable importance on communication with investors/shareholders and regularly engages with them on a wide range of issues.
The Directors consider it important to understand the views of the market. Board members regularly receive copies of the latest analyst reports on the Company and the insurance sector, as well as market feedback to further develop their knowledge and understanding of external views about the Company. The Chairman and the Non-Executive Directors provide feedback to the Board on topics raised with them by major shareholders. The Company also undertakes perception studies, when appropriate, designed to determine the investment community’s view of the core business.
BOARD BOARD OF DIRECTORS The membership of the Board of Directors during 2017 is given within the Corporate Governance Report on pages 53 and 55, which is incorporated by reference into this report. Details of Directors’ (and persons closely associated with them) interests in the shares of the Company are shown in the Directors’ remuneration report.
During 2017 and up to the date of this report, the following changes to the Board took place: – Isobel Hudson and David Woods resigned from the Board on 11 May 2017.
– Karen Green and Belinda Richards were appointed to the Board with effect from 1 July and 1 October 2017 respectively.
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 I4 to the IFRS consolidated financial statements.
We value the individuality, diversity, and creativity that every employee brings to the workplace. Everyone has the right to be treated with dignity and respect and not to be disadvantaged in any way as a result of their age, race, gender, disability, religion or belief, sexual orientation, gender re-assignment, marriage and civil partnership or pregnancy and maternity. The Company is committed to achieving equality of opportunity and the equal treatment of all our people and those applying to join us. Equality of opportunity, which includes equality of pay, is seen as an integral part of our employment practices, policies and procedures. 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.
EMPLOYEE ENGAGEMENT Phoenix Group continues to communicate with staff across a wide variety of channels, including regular news bulletins via the intranet, Executive Committee presentations and other face-to-face briefings. The staff briefings and Executive Committee presentations typically include updates on the Company’s strategy and plans, progress against key financial and operational targets, regulatory and risk management updates and review of economic or other factors which could affect the Company’s strategy and performance. Regular feedback mechanisms are also in place, ensuring communication at Phoenix is a continuous twoway dialogue.
EMPLOYEE SHAREHOLDING The Group also provides the opportunity for employees to participate in the Company’s all-employee share schemes, Sharesave and the Share Incentive Plan, to encourage broader share ownership in the Company.
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 35 to 37. In addition, the IFRS consolidated financial statements include, amongst other things, notes on the Group’s borrowings (note E5), management of its financial risk including market, credit and liquidity risk (note E6), its commitments and contingent liabilities (notes I6 and I7) and its capital and management (note I3). The Strategic Report (on pages 2 to 38) sets out the business model and how the Group creates value for shareholders and policyholders.
The Directors have acknowledged their responsibilities in the Statement of Directors’ Responsibilities in relation to the IFRS financial statements for the year ended 31 December 2017.
CORPORATE GOVERNANCE STATEMENT The disclosures required by section 7.2 of the FCA’s Disclosure Guidance and Transparency Rules can be found in the Corporate Governance Report on pages 47 to 62 which is incorporated by reference into this Directors’ Report and comprises the Company’s Corporate Governance Statement. The disclosures required in respect of the Company’s diversity policy are addressed in the Strategy and KPIs section of the Strategic Report on page 24. 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.
FINANCIAL RISK MANAGEMENT The Group operates a Risk Management Framework (‘RMF’) consisting of several components, as detailed in the Risk Management section of the Strategic Report. The RMF provides a consistent approach to highlighting and controlling key risks throughout the organisation. This is achieved primarily through review and compliance, at a functional level, with the risk universe and related policies (and the risk appetites therein). At its highest level the RMF considers the following risks: strategic, market, credit, insurance, financial soundness, customer and operational. As a result, in preparing the consolidated financial statements, assessment is given to a broad range of risk categories.
RE-APPOINTMENT OF THE AUDITORS Ernst & Young LLP (‘EY’) has indicated its willingness to continue in office and a resolution that it is re-appointed will be proposed at the AGM on 2 May 2018.
Details of fees paid to EY during 2017 for audit and non-audit work are disclosed in note C3 to the IFRS consolidated financial statements.
Not applicable 9 Parent participation in any placing of a subsidiary
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.
In addition, the Directors as at the date of this report consider that the Annual Report and Accounts, taken as a whole, provides users (who have a reasonable knowledge of business and economic activities) with the information necessary for shareholders to assess the Group’s performance, business model and strategy, and is fair, balanced and understandable.
– 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.
The Strategic Report and the Directors’ Report were approved by the Board of Directors on 14 March 2018.
OUR OPINION ON THE FINANCIAL STATEMENTS In our opinion: – Phoenix Group Holdings’ consolidated financial statements and parent company financial statements (the ‘financial statements’) give a true and fair view of the state of the Group’s and of the parent company’s affairs as at 31 December 2017 and of the Group’s loss and of the parent company’s profit for the year then ended; and
– the financial statements have been properly prepared in accordance with International Financial Reporting Standards (‘IFRSs’) as issued by the International Accounting Standards Board (‘IASB’).
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 financial statements for the year ended 31 December 2017, included within the Annual Report and Accounts, which comprise: Group Parent company
– The statement of comprehensive income for the year then ended
– The pro forma reconciliation of Group operating profit to results attributable to owners for the year then ended
– The statement of cash flows for the year then ended
– The statement of consolidated cash flows for the year then ended
Certain required disclosures have been presented elsewhere in the Annual Report and Accounts, rather than in the notes to the financial statements. These have been cross-referenced from the financial statements and are identified as audited.
USE OF OUR REPORT This report is made solely to the company’s members, as a body, in accordance with our engagement letter dated 7 March 2018 and with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed.
CONCLUSIONS RELATING TO PRINCIPAL RISKS, GOING CONCERN AND VIABILITY STATEMENT We have nothing to report in respect of the following information in the Annual Report, in relation to which the ISAs require us to report to you whether we have anything material to add or draw attention to: – the disclosures in the Annual Report set out on page 32- 37 that describe the principal risks and explain how they are being managed or mitigated; – the Directors’ confirmation set out on page 37 in the Annual Report that they have carried out a robust assessment of the principal risks facing the entity, including those that would threaten its business model, future performance, solvency or liquidity; – the Directors’ statement set out on page 90 in the consolidated financial statements about whether they considered it appropriate to adopt the going concern basis of accounting in preparing them, and their identification of any material uncertainties to the entity’s ability to continue to do so over a period of at least 12 months from the date of approval of the financial statements
Audit scope – We performed an audit of the complete financial information of the Group Function and Phoenix Life Division, and audit procedures on specific balances for Other Group Companies. We further subdivided Phoenix Life Division into two locations, separately identifying Abbey Life Assurance Company Limited (‘ALAC’) and the remaining Life Division operations. Our scope is explained further on page 98.
Refer to the Audit Committee Report (page 59); Critical accounting estimates (page 111); Accounting policies and notes F1 of the consolidated financial statements (pages 145 to 146) . We considered the valuation of insurance contract liabilities to be a significant risk for the Group. Specifically we considered the actuarial assumptions and modelling that are applied, as these involve complex and significant judgements about future events, both internal and external to the business for which small changes can result in a material impact to the resultant valuation. Additionally, the valuation process is conditional upon the accuracy and completeness of the data.
We assessed management’s analysis of movements in insurance contract liabilities over the year and obtained evidence to support large or unexpected movements. This provided important audit evidence over the valuation of insurance contract liabilities. Further additional audit procedures performed to respond to the specific risk areas are set out below: Risk area Our response to the risk Key observations communicated to the Audit Committee
The assumptions that we consider to have the most significant impact are the base and trend longevity and persistency assumptions.
To obtain sufficient audit evidence to conclude on the appropriateness of actuarial assumptions, we: – tested the design and operating effectiveness of key controls over management’s process for setting and updating actuarial assumptions; – 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; – assessed the results of management’s experience analysis, which supports the adopted assumptions and methodology, and checked that the assumptions used are consistent with this experience analysis; – in respect of mortality we have 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; – benchmarked the demographic and economic assumptions against those of other industry participants; and
There has been no change in our assessment of this risk from the prior year. We consider the integrity and appropriateness of models to be critical to the overall valuation of insurance contract liabilities.
To conclude on actuarial models, including those models outside the core system, we: – have for existing businesses, confirmed in prior periods that the core system appropriately values liabilities, and tested the design, implementation and operating effectiveness of key controls over management’s process for testing and approval of model changes during the year; – for ALAC, being the first year of our appointment as auditors, performed independent re-projections based on underlying policy terms to substantiate the reserve calculated; – evaluated the methodology, inputs and assumptions used for a sample of model changes based on our knowledge of the Group, industry standards and regulatory and financial reporting requirements; – reviewed the governance process around model changes and assessed the completeness of identified model changes; – assessed the results of the analysis of movements in insurance contract liabilities in order to confirm the completeness of model changes; and
To obtain sufficient audit evidence to assess the integrity of actuarial data we: – tested the adequacy of Outsourced Service Provider (‘OSP’) controls regarding the maintenance of policyholder data and, where applicable, reviewed the Service Organisation Controls (‘SOC1’) Reports produced by the OSPs; – confirmed that the actuarial model data extracts provided by the OSPs were those used as an input to the actuarial model; – tested the design and operating effectiveness of key controls, including information technology general controls, over management’s data collection, extraction and validation process; – assessed the integrity of policy level data, performing corroborative testing on i) changes to static data during the period and ii) unusual trends and anomalies in the data. We did this based upon our knowledge of the Group’s products, industry standards and through using advanced data analytics; – assessed the appropriateness of management’s grouping of data for input into the actuarial model; and
We have refined our assessment of risk from the prior year, focussing on those investments with the highest degree of judgement such as Equity Release Mortgages (‘ERM’), In Retirement Services property reversions (‘IRS’), a form of equity release product, and the Abbey Life longevity contracts (known as Corporate Transactions). Refer to the Audit Committee Report (page 59); Critical accounting estimates (page 111); Accounting policies and notes E1 and E2 of the consolidated financial statements (page 123-127). 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.
In assessing the risk of material misstatement to the consolidated financial statements, and to ensure we had adequate quantitative coverage of significant accounts in the consolidated financial statements, we selected four reporting components of the Group. The Group reporting components consists of Phoenix Life Division, ALAC, Group Function and ‘Other Companies’. In the Phoenix Life Division component the most significant insurance companies are Phoenix Life Assurance Limited and Phoenix Life Limited. The Group Function consists of Group entities that primarily hold external debt, PA(GI) Limited and the pension schemes of the Group. The Other Companies include the service companies.
Management refers to Phoenix Life as a reporting segment in the accounts. This includes the Phoenix Life Division, Abbey Life Assurance Company Limited and Service Companies as defined in our scope.
We determined materiality for the Group to be £63 million (2016: £67million), which is 2.0% (2016: 2.0%) of Group equity. Whilst profit before tax or operating profit are common bases used across the life insurance industry, we believe that the use of equity as the basis for assessing materiality is more appropriate given that the Group is a closed life assurance consolidator and as such equity provides a more stable, long-term measure of value. We note also that equity more closely correlates with key Group performance metrics such as Solvency II capital requirements and Own Funds. However, as these measures are non-GAAP measures, we consider equity to be most appropriate.
PERFORMANCE MATERIALITY The application of materiality at the individual account or balance level. It is set at an amount to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality.
We agreed with the Audit Committee that we would report all uncorrected audit differences in excess of £3.0 million (2016: £3.0 million), which is set at 5% of planning materiality, as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds.
REPORTING THRESHOLD The other information comprises the information included in the annual report set on pages 2 to 92, other than the financial statements and our auditor’s report thereon. The Directors are responsible for the other information.
In this context, we also have nothing to report in regard to our responsibility to specifically address the following items in the other information and to report as uncorrected material misstatements of the other information where we conclude that those items meet the following conditions: • Fair, balanced and understandable set out on page 92 – the statement given by the Directors that they consider the annual report and financial statements taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group’s performance, business model and strategy, is materially inconsistent with our knowledge obtained in the audit; or
• Audit committee reporting set out on pages 56 to 59 – the section describing the work of the audit committee does not appropriately address matters communicated by us to the audit committee; or
• Directors’ statement of compliance with the UK Corporate Governance Code set out on page 92 – the parts of the directors’ statement required under the Listing Rules relating to the Company’s compliance with the UK Corporate Governance Code containing provisions specified for review by the auditor in accordance with Listing Rule 9.8.10R(2) do not properly disclose a departure from a relevant provision of the UK Corporate Governance Code.
We have nothing to report in respect of the following matters in relation to which the Companies Act 2006 requires us to report to you if, in our opinion: • adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or
RESPONSIBILITIES OF DIRECTORS As explained more fully in the Statement of Directors’ Responsibilities set out on page 92, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
AUDITOR’S RESPONSIBILITIES FOR THE AUDIT OF THE FINANCIAL STATEMENTS Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.
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 in the Directors’ Remuneration Report that is described as audited has been properly prepared in accordance with the basis of preparation described therein; and
• we have obtained all the information and explanations which we consider necessary for the purposes of the audit.
– in respect of irregularities, considered to be non-compliance with laws and regulations, are to obtain sufficient appropriate audit evidence regarding compliance with the provisions of those laws and regulations generally recognised to have a direct effect on the determination of material amounts and disclosures in the financial statements (‘direct laws and regulations’), and perform other audit procedures to help identify instances of non-compliance with other laws and regulations that may have a material effect on the financial statements. We are not responsible for preventing non-compliance with laws and regulations and our audit procedures cannot be expected to detect noncompliance with all laws and regulations.
– for both direct and other laws and regulations, our procedures involved: making enquiry of those charged with governance and senior management for their awareness of any non-compliance of laws or regulations, inquiring about the policies that have been established to prevent non-compliance with laws and regulations by officers and employees, inquiring about the Company’s methods of enforcing and monitoring compliance with such policies, inspecting significant correspondence with the FCA and PRA.
– we assessed the susceptibility of the Company’s financial statements to material misstatement, including how fraud might occur by considering the controls that the Company has established to address risks identified by the entity, or that otherwise seek to prevent, deter or detect fraud. We also considered areas of significant judgement, including complex transactions, performance targets, external pressures and the impact these have on the control environment. Where this risk was considered to be higher, we performed audit procedures to address each identified fraud risk (valuation of insurance contract liabilities). These procedures included testing manual journals and were designed to provide reasonable assurance that the financial statements were free from fraud or error.
OTHER MATTERS WE ARE REQUIRED TO ADDRESS – we were appointed as auditors by the Company in May 2009 to audit the financial statements for the year ending 31 December 2009 and subsequent financial periods.
– the audit opinion is consistent with the additional report to the Audit Committee.
Consolidated Income Statement For the year ended 31 December 2017 £m £m
Pro forma Reconciliation of Group Operating Profit to Result attributable to owners For the year ended 31 December 2017 £m £m
Investment return variances and economic assumption changes on long-term business B2.2 (6) (207)
Reclassification adjustments for amounts recognised in profit or loss 2 –
Items that will not be reclassified to profit or loss: Owner-occupied property revaluation gains G8 1 –
Tax credit/(charge) relating to other comprehensive income items C5 3 (1)
Statement of Consolidated Financial Position As at 31 December 2017 £m £m
Statement of Consolidated Cash Flows For the year ended 31 December 2017 £m £m
Cash and cash equivalents at the end of the year G11 2,245 1,666
Statement of Consolidated Changes in Equity For the year ended 31 December 2017
Issue of ordinary share capital, net of associated commissions and expenses – 2 – – – – – 2
Dividends paid on ordinary shares – (193) – – – – (193)
Shares distributed by the employee benefit trust – – 9 – – (9) –
Statement of Consolidated Changes in Equity For the year ended 31 December 2016
Coupon paid to non-controlling interests, net of tax relief – – – – – – – (1) (1)
Redemption of non-controlling interests – – – – – – – (6) (6)
A2. ACCOUNTING POLICIES The principal accounting policies have been consistently applied in these consolidated financial statements. Where an accounting policy can be directly attributed to a specific note to the consolidated financial statements, the policy is presented within that note, with a view to enabling greater understanding of the results and financial position of the Group. All other significant accounting policies are disclosed below.
Critical accounting estimates are those which involve the most complex or subjective judgements or assessments. The areas of the Group’s business that typically require such estimates are the measurement of insurance and investment contract liabilities, determination of the fair value of financial assets and liabilities, income tax assets and liabilities and valuation of pension scheme assets and liabilities. Impairment of intangible assets is no longer included as a critical accounting estimate as management currently believes that a reasonably foreseeable change in key assumptions would not result in a material change to the carrying value of the intangible assets.
The valuation of insurance contract liabilities is sensitive to the assumptions which have been applied in their calculation. Details of sensitivities arising from significant non-economic assumptions are detailed on page 148 in note F4.
The UK taxation regime applies separate rules to trading and capital profits and losses. The distinction between temporary differences that arise from items of either a capital or trading nature may affect the recognition of deferred tax assets.
In preparing the consolidated financial statements, the Group has adopted the following amendments effective from 1 January 2017: Amendments to IAS 7 Disclosure initiative The Group has applied these amendments for the first time in the current year. The amendments require an entity to provide disclosures that enable users of financial statements to evaluate changes in liabilities arising from financing activities, including both cash and non-cash changes.
Amendments to IAS 12 Recognition of Deferred Tax Assets for Unrealised Losses The Group has applied these amendments for the first time in the current year. The amendments clarify how an entity should evaluate whether there will be sufficient future taxable profits against which it can utilise a deductible temporary difference.
IFRS 12 states that an entity need not provide summarised financial information for interests in subsidiaries, associates or joint ventures that are classified (or included in a disposal group that is classified) as held for sale. The amendments clarify that this is the only concession from the disclosure requirements of IFRS 12 for such interests.
The application of these amendments has had no effect on the Group’s consolidated financial statements as none of the Group’s interests in these entities have been classified, or included in a disposal group that is classified, as held for sale in either the current or prior period.
A5. NEW ACCOUNTING PRONOUNCEMENTS NOT YET EFFECTIVE The IASB has issued the following new or amended standards and interpretations which apply from the dates shown. The Group has decided not to early adopt any of these standards, interpretations or amendments where this is permitted. – IFRS 9 Financial Instruments (2018 – Deferred to 2021). Under IFRS 9, all financial assets will be measured either at amortised cost or fair value and the basis of classification will depend on the business model and the contractual cash flow characteristics of the financial assets. In relation to the impairment of financial assets, IFRS 9 requires the use of an expected credit loss model, as opposed to the incurred credit loss model required under IAS 39. The expected credit loss model will require the Group to account for expected credit losses and changes in those expected credit losses at each reporting date to reflect changes in credit risk since initial recognition.
– Annual Improvements to IFRSs 2014-2016 Cycle (2018). The Annual Improvements include amendments to IFRS 1 and IAS 28 which are not yet mandatorily effective for the Group. The package also includes amendments to IFRS 12 which is mandatorily effective for the Group in the current year (see note A4). The Group does not anticipate that the application of the amendments in the future will have any impact on the Group’s consolidated financial statements as the Group is neither a first-time adopter of IFRS nor a venture capital organisation. Furthermore, the Group does not have any associate or joint venture that is an investment entity.
– IFRIC 22 Foreign Currency Transactions and Advance Consideration (2018). IFRIC 22 addresses how to determine the ‘date of transaction’ for the purpose of determining the exchange rate to use on initial recognition of an asset, expense or income, when consideration for that item has been paid or received in advance in a foreign currency which resulted in the recognition of a non-monetary asset or nonmonetary liability (e.g. a non-refundable deposit or deferred revenue). The Group does not anticipate that the application of the amendments in the future will have an impact on the Group’s consolidated financial statements.
For management purposes, the Group is organised into business units based on their products and services. For reporting purposes, business units are aggregated where they share similar economic characteristics including the nature of products and services, types of customers and the nature of the regulatory environment. As such, Phoenix Life is considered to be the Group’s only reportable segment, which includes all of the operating insurance entities and management services entities in the Group.
Predominantly all revenues from external customers are sourced in the UK. No revenue transaction with a single customer external to the Group amounts to greater than 10% of the Group’s revenue.
Segmental result before the tax attributable to owners 149 (177) (28)
– any other items which, in the Directors’ view, should be disclosed separately by virtue of their nature or incidence to enable a full understanding of the Company’s financial performance. This is typically the case where the nature of the item is not reflective of the underlying performance of the operating companies.
Whilst the excluded items are important to an assessment of the consolidated financial performance of the Group, management considers that the presentation of the operating profit metric provides useful information for assessing the performance of the Group’s operating companies on an ongoing basis. This is considered particularly important given the Group’s acquisitive strategy of closed life fund consolidation and the underlying long term business. The IFRS results are significantly impacted by the amortisation of intangible balances arising on acquisition, the one-off costs of integration activities and the costs of servicing debt used to finance acquisition activity, which are not indicative of the underlying operational performance of the Group’s segments.
Furthermore, the hedging strategy of the Group is calibrated to protect the Solvency II surplus position and cash generation capability of the operating companies, as opposed to the IFRS financial position. This can create additional volatility in the IFRS result which is excluded from the operating profit metric.
The Company therefore considers that operating profit provides a more representative indicator of the ability of the Group’s operating companies to generate cash available for the servicing of the Group’s debts and for distribution to shareholders. Accordingly, the measure is more closely aligned with the business model of the Group and how performance is managed by those charged with governance.
Other non-operating items include: – a premium of £25 million paid on redemption of £178 million principal of the senior unsecured bond; – costs of £21 million in respect of integration and restructuring of the Abbey Life and AXA Wealth businesses; – costs of £20 million in respect of short-term expense overruns arising from the AXA Wealth businesses prior to completion of the implementation of the Phoenix operating model; – a provision of £27 million in respect of a commitment to the reduction of ongoing charges for workplace pension products; – a £21 million increase in the provision for costs for claims relating to historic creditor insurance underwritten by a subsidiary of the Group, PA(GI) Limited, offset by the recognition of recoveries due or received from third parties under contractual arrangements of £39 million; and
– net other one-off items totalling a cost of £5 million, including corporate project costs.
Further details of the investment return variances and economic assumption changes on long-term business, and the variance on owners funds are included in note B2.
Segmental result before the tax attributable to owners 40 (168) (128)
– net other one-off items totalling a cost of £2 million.
B2.1 Calculation of the long-term investment return The expected return on investments for both owner and policyholder funds is based on opening economic assumptions applied to the funds under management at the beginning of the reporting period. Expected investment return assumptions are derived actively, based on market yields on risk-free fixed interest assets at the start of each financial year, and reflects hedging arrangements the Group has in place .
The net adverse investment return variances and economic assumption changes on long-term business of £6 million (2016: £207 million adverse) primarily arise on hedging positions held by the life funds following equity market gains during the year. The Group’s exposure to equity movements arising from future profits in relation to with-profit bonuses and unit-linked charges is hedged to benefit the Solvency II surplus position. The impact of equity market movements on the value of the hedging instruments is reflected in the IFRS results, but the corresponding change in the value of future profits is not. Losses on these hedging positions have been partly offset by the positive impact of strategic asset allocation activities, including investment in higher yielding illiquid assets.
The net adverse investment return variances and economic assumption changes on long-term business for the year ended 31 December 2016 of £207 million primarily resulted from the adverse impact of a fall in yields on the life funds, which increased the margin held within insurance liabilities in respect of longevity risk. The investment return variances were adversely impacted by losses arising on equity hedging positions held by life funds following equity market gains in the period. Included in the negative variance is the minority share of the result of the consolidated UKCPT property investment structure prior to its deconsolidation during 2016 of a positive £1 million.
The adverse variance on owners’ funds for the year ended 31 December 2016 of £5 million was principally driven by losses from equity hedging positions held in the Group holding companies offset by gains on interest rate hedging positions held in the life companies’ shareholder funds arising from falling yields.
Issued ordinary shares at beginning of the period (restated for bonus element of rights issue) 393 266
B3.2 Diluted earnings per share The result attributable to owners of the parent used in the calculation of diluted earnings per share is the same as that used in the basic earnings per share calculation in B3.1 above. The diluted weighted average number of ordinary shares outstanding during the period is also the same as that used in the basic earnings per share calculation in B3.1 above. As losses have an anti-dilutive effect, none of the share-based awards have a dilutive effect for the years ended 31 December 2017 and 31 December 2016.
5 million warrants issued on 2 September 2009 to certain entities providing finance to the Group could potentially dilute basic earnings per share in the future. The warrants would not have had a dilutive effect for the periods presented due to the exercise price being significantly higher than the share price of the Company. Details of the warrants are given in note E3.3.
As permitted by Cayman Islands Companies Law, dividends have been charged within equity against the share premium account.
Interest income on financial assets designated at fair value through profit or loss on initial recognition 972 859
Premium paid on part redemption of the £300 million senior bond 25 –
Corporate finance services fees were £0.7 million (2016: £3.6 million). These fees include the provision of assurance services to the Board and sponsoring banks in support of disclosures made in public transaction documentation relating to debt issuances undertaken in the period. It also includes fees associated with the performance of due diligence activities. The 2016 balance reflects services provided in connection with the acquisition of AXA Wealth and Abbey Life. £1.9 million of the fees related to the engagement of the external auditors to perform actuarial and finance due diligence procedures where synergies were anticipated to arise with subsequent audit work. The remaining balance of £1.7m related to the provision of assurance services to the Board and the sponsoring banks in support of disclosures made in the public transaction documentation relating to the two acquisitions.
Interest payable is recognised in the consolidated income statement as it accrues and is calculated using the effective interest method.
This note analyses the interest costs on the Group’s borrowings which are described in note E5.
The Group, as a proxy for policyholders in the UK, is required to pay taxes on investment income and gains each year. Accordingly, the tax credit or expense attributable to UK life assurance policyholder earnings is included in income tax expense. The tax charge attributable to policyholder earnings was £21 million (2016: £58 million).
Tax credit at standard UK rate of 19.25%1 (2016: 20%) (5) (26)
Profits taxed at rates other than 19.25% (2016: 20%) 2 –
2 Includes non-taxable dividends and gains, non-taxable pension scheme items, non-taxable hedge accounting adjustment on consolidation and non-taxable recoveries from third parties relating to the claims for redress on creditor insurance underwritten by PA(GI) Limited.
3 2016 included non-recurring disallowable deductions in relation to claims and other costs relating to creditor insurance underwritten by PA(GI) Limited of £7 million and a consolidation adjustment on the PGL Pension scheme ‘buy-in’ agreement £12 million.
4 Represents current year losses carried forward and recognised at future lower tax rates. (2016 represented the effect of the 1% reduction in tax rate from April 2020).
Issued and fully paid: 393.2 million (2016: 392.8 million) ordinary shares of €0.0001 each 33,145 33,112
During the year 1,217,505 (2016: 690,711) shares were awarded to employees by the EBT and 445,560 (2016: 1,196,011) shares were purchased. The number of shares held by the EBT at 31 December 2017 was 320,689 (2016: 1,092,634).
The Company provides the EBT with an interest-free facility arrangement to enable it to purchase the shares. Details of this loan are included in note 10.4 to the parent company accounts.
Financial assets Purchases and sales of financial assets are recognised on the trade date, which is the date that the Group commits to purchase or sell the asset.
The majority of the Group’s loans and deposits are designated as loans and receivables and are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and only include assets where a security has not been issued. These loans and deposits are initially recognised at cost, being the fair value of the consideration paid for the acquisition of the investment. All transaction costs directly attributable to the acquisition are also included in the cost of the investment. Subsequent to initial recognition, these investments are carried at amortised cost, using the effective interest method. The Group also holds a portfolio of loans that are designated at fair value through profit or loss.
Derivative financial instruments are largely classified as held for trading. They are recognised initially at fair value and subsequently are remeasured to fair value. The gain or loss on remeasurement to fair value is recognised in the consolidated income statement. Derivative financial instruments are not classified as held for trading where they are designated and effective as a hedging instrument. For such instruments, the timing of the recognition of any gain or loss that arises on remeasurement to fair value in profit or loss depends on the nature of the hedge relationship.
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).
Financial liabilities are designated upon initial recognition at fair value through profit or loss and where doing so results in more meaningful information because either: – it eliminates or significantly reduces accounting mismatches that would otherwise arise from measuring assets or liabilities or recognising the gains and losses on them on different bases; or
Movements in the fair value of investment contracts without DPF are included in the ’change in investment contract liabilities’ in the consolidated income statement.
Where a cash flow hedging relationship exists, the effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in other comprehensive income and accumulated under the heading of cash flow hedging reserve. The gain or loss relating to the ineffective portion is recognised immediately in profit or loss, and is included in net investment income.
Financial liabilities measured at amortised cost: Deposits received from reinsurers 392 363 392
2 Total financial assets includes £1,196 million of assets held in a collateral account pertaining to the PGL pension scheme buy-in agreement. See note G6.2 for further details. 3 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.
E2. FAIR VALUE HIERARCHY E2.1 Determination of fair value and fair value hierarchy of financial instruments
Level 2 financial instruments Financial instruments traded in active markets with less depth or wider bid-ask spreads which do not meet the classification as Level 1 inputs, are classified as Level 2. The fair values of financial instruments not traded in active markets are determined using broker quotes or valuation techniques with observable market inputs. Financial instruments valued using broker quotes are classified at Level 2, only where there is a sufficient range of available quotes. The fair value of unquoted equities, over the counter derivatives, loans and deposits and collective investment schemes, where published bid prices are not available, are estimated using pricing models or discounted cash flow techniques. Where pricing models are used, inputs are based on market related data at the period end. Where discounted cash flows are used, estimated future cash flows are based on management’s best estimates and the discount rate used is a market related rate for a similar instrument.
Level 3 financial instruments The Group’s financial instruments determined by valuation techniques using non-observable market inputs are based on a combination of independent third party evidence and internally developed models. In relation to investments in hedge funds and private equity investments, non-observable third party evidence in the form of net asset valuation statements are used as the basis for the valuation. Adjustments may be made to the net asset valuation where other evidence, for example recent sales of the underlying investments in the fund, indicates this is required. Securities that are valued using broker quotes which could not be corroborated across a sufficient range of quotes are considered as Level 3. For a small number of investment vehicles and debt securities, standard valuation models are used, as due to their nature and complexity they have no external market. Inputs into such models are based on observable market data where applicable. The fair value of loans, derivatives and some borrowings with no external market is determined by internally developed discounted cash flow models using appropriate assumptions corroborated with external market data where possible.
For financial instruments that are recognised at fair value on a recurring basis, the Group determines whether transfers have occurred between levels in the hierarchy by re-assessing categorisation (based on the lowest level input that is significant to the fair value measurement as a whole) during each reporting period.
Financial assets designated at fair value through profit or loss upon initial recognition: Loans and deposits – – 1,444 1,444
Loans and deposits at amortised cost – 368 – 368 £m £m £m
Financial liabilities designated at fair value through profit or loss upon initial recognition: Net asset value attributable to unitholders 840 – – 840
Total financial liabilities for which fair values are disclosed – 1,889 291 2,180
Financial assets designated at fair value through profit or loss upon initial recognition: Loans and deposits – – 812 812
Loans and receivables at amortised cost – 420 – 420 £m £m £m
An increase of 100bps in the yield curve would decrease the value by £108 million (2016: £42 million) and a decrease of 100bps would increase the value by £118 million (2016: £47 million). An increase of 1% in the inflation rate would increase the value by £7 million (2016: £3 million) and a decrease of 1% would decrease the value by £14 million (2016: £4 million).
An increase of 10% in house prices would increase the value by £3 million (2016: £1 million) and a decrease of 10% would decrease the value by £9 million (2016: £2 million).
Included within financial assets and liabilities are related loans and deposits of £112 million (2016: £380 million), borrowings of £51 million (2016: £87 million) and derivative liabilities of £21 million (2016: £255 million) pertaining to a reinsurance and retrocession arrangement assumed following the acquisition of Abbey Life. These assets and liabilities are valued using a discounted cash flow model that includes valuation adjustments in respect of liquidity and credit risk. At 31 December 2017, the net of these balances was an asset of £40 million (2016: asset of £38 million). The valuation is sensitive to movements in the euro swap curve. An increase of 100bps in the swap curve would decrease the aggregate value by £3 million (2016: £4 million) and a decrease of 100bps would increase the aggregate value by £3 million (2016: £4 million).
During 2017, the valuation methodology for each leg of this transaction was revised such that the period covered by the cash flow projections for the valuation of both the derivative liability and loan asset were restricted to the date of the expected contractual novation of the arrangement. The change reduced the fair value of both instruments but did not impact the valuation of the arrangement on a net basis.
Also included within derivative assets and derivative liabilities are longevity swap contracts with corporate pension schemes assumed following the acquisition of Abbey Life with a fair value of £144 million (2016: £53 million) and £77 million (2016: £17 million) respectively. These derivatives are valued on a discounted cash flow basis, key inputs to which are the EIOPA interest rate swap curve and RPI and CPI inflation rates.
An increase of 100bps in the swap curve would decrease the value by £13 million (2016: £10 million) and a decrease of 100bps would increase the value by £17 million (2016: £10 million). An increase of 1% in the RPI and CPI inflation rates would increase the value by £10 million (2016: £5 million) and a decrease of 1% would decrease the value by £10 million (2016: £5 million).
Financial liabilities designated at fair value through profit or loss upon initial recognition:
Financial assets designated at fair value through profit or loss upon initial recognition: Investment in joint venture 149 – – (149) – – – –
Less amounts classified as held for sale (149) – – 149 – – – –
Financial liabilities designated at fair value through profit or loss upon initial recognition: During the year, updates to the Group’s observations, in particular with regard to the nature and liquidity of underlying assets held within a collective investment scheme, resulted in a net transfer from Levels 1 and 2 to Level 3.
The Group purchases derivative financial instruments principally in connection with the management of its insurance contract and investment contract liabilities based on the principles of reduction of risk and efficient portfolio management. The Group does not typically hold derivatives for the purpose of selling or repurchasing in the near term or with the objective of generating a profit from short-term fluctuations in price or margin. The Group also holds derivatives to hedge financial liabilities denominated in foreign currency.
E3.1 Summary The fair values of derivative financial instruments are as follows: Assets 2017 £m
Cross currency swap held for hedging purposes – 32 – –
In addition, Abbey Life has entered into a transaction under which it has accepted reinsurance on a portfolio of single and regular premium life insurance policies and retroceded the majority of the insurance risk. Taken as a whole, this transaction does not give rise to the transfer of significant insurance risk to the Group and therefore does not meet the definition of an insurance contract under the Group’s accounting policies. The fair value of amounts due from the cedant are recognised within loans and deposits (see note E1). The fair value of amounts due to the retrocessionaire are recognised as a derivative liability and totalled £21 million at 31 December 2017 (2016: £255 million). A loan liability has been recognised in respect of financing obtained for the initial reinsurance premium (see note E5). During 2017, the valuation methodology for these instruments was changed (see note E2.3).
– the valuation incorporates the impact of amending some of the terms of the warrants on 8 May 2012.
E4.1 Financial instrument collateral arrangements The Group has no financial assets and financial liabilities that have been offset in the statement of consolidated financial position as at 31 December 2017 (2016: none).
E. FINANCIAL ASSETS & LIABILITIES continued E4.2 Derivative collateral arrangements Assets accepted It is the Group’s practice to obtain collateral to mitigate the counterparty risk related to over-the-counter (’OTC’) derivatives usually in the form of cash or marketable financial instruments.
Certain borrowings are designated upon initial recognition at fair value through profit or loss and measured at fair value where doing so provides more meaningful information due to the reasons stated in the financial liabilities accounting policy (see note E1). Transaction costs relating to borrowings designated upon initial recognition at fair value through profit or loss are expensed as incurred.
Borrowings are classified as either policyholder or shareholder borrowings. Policyholder borrowings are those borrowings where there is either no or limited shareholder exposure, for example, borrowings attributable to the Group’s with-profit operations or secured on a block of business
Property Reversions loan (note b) 131 183 131 183 £200 million 7.25% unsecured subordinated loan (note d) 177 167 225 207 £300 million senior unsecured bond (note e) 121 298 137 332 £900 million unsecured revolving credit facility (note f) – 843 – 850 £450 million Tier 3 subordinated notes (note h) 448 – 481 –
US $500 million Tier 2 bonds (note i) 368 – 390 –
Amount due for settlement after 12 months 1,727 2,005 a. In 1998, Mutual Securitisation plc 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. The bonds were split between two classes, which ranked pari passu and were listed on the Irish Stock Exchange. 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 £60 million (2016: £72 million) have an average remaining life of 2 years and mature in 2022. Phoenix Life Assurance Limited (’PLAL’) has provided collateral of £26 million (2016: £29 million) to provide security to the holders of the recourse bonds in issue. During 2017, repayments totalling £12 million were made (2016: £11 million).
b. The Property Reversions loan from Santander UK plc (’Santander’) was recognised in the consolidated financial statements at fair value. It relates to the sale of Extra-Income Plan policies that Santander finances to the value of the associated property reversions. As part of the arrangement Santander receive an amount calculated by reference to the movement in the Halifax House Price Index and the Group is required to indemnify Santander against profits or losses arising from mortality or surrender experience which differs from the basis used to calculate the reversion amount. Repayment will be on a policy-by-policy basis and is expected to occur over the next 10 to 20 years. During 2017, repayments totalling £24 million were made (2016: £27 million). Note G9 contains details of the assets that support this loan.
c. In July 2012, AXIA Insurance Limited (’AXIA’) provided financing to Abbey Life, a Group company, for Abbey Life to in turn provide the financing for the securitisation of the future surplus arising on a block of 1.7 million life insurance policies originating from the wholly owned Spanish and Portuguese insurance subsidiaries of Banco Santander, S.A. (the ’Cedants’). This transaction was executed in the form of a reinsurance and retrocession arrangement that, taken as a whole, does not meet the definition of an insurance contract under the Group’s accounting policies (see note E3.2). Abbey Life received an upfront reinsurance commission from AXIA and makes monthly repayments based on the surplus emerging from the securitised policies as defined in the contracts. The repayments comprise a minimum guaranteed surplus amount and a share of any excess surplus, net of certain other amounts. Any excess amount serves to accelerate the repayment of the principal. Repayments are contingent on the receipt of payments due from the Cedants. Repayment of the loan principal is expected to occur by 2021. The contracts are recognised in the consolidated financial statements at fair value.
E. FINANCIAL ASSETS & LIABILITIES continued E5. BORROWINGS continued d. Scottish Mutual Assurance Limited issued £200 million 7.25%
undated, unsecured subordinated loan notes on 23 July 2001 (’PLL subordinated debt’). The earliest repayment date of the notes is 25 March 2021 and thereafter on each fifth anniversary so long as the notes are outstanding. With effect from 1 January 2009, following a Part VII transfer, these loan notes were transferred into the shareholder fund of Phoenix Life Limited (’PLL’). In the event of the winding-up of PLL, the right of payment under the notes is subordinated to the rights of the higher-ranking creditors (principally policyholders). As a result of the acquisition of the Phoenix Life businesses in 2009, these subordinated loan notes were acquired at their fair value and as such, the outstanding principal of these subordinated loan notes differs from the carrying value in the statement of consolidated financial position. The fair value adjustments, which were recognised on acquisition, will unwind over the remaining life of these subordinated loan notes. With effect from 23 December 2014, minor modifications were made to the terms of the notes to enable them to qualify as Tier 2 capital for regulatory reporting purposes. Expenses incurred in effecting these modifications amounted to £10 million. Given the modifications were not substantial, the carrying amount of the liability was adjusted accordingly and the expenses are being amortised over the life of the notes.
f. In March 2016, the Group agreed an amendment of its PGHC £900 million 5 year unsecured bank facility, which comprised a £450 million revolving credit facility and a £450 million amortising term loan, into a £650 million unsecured revolving credit facility, maturing in June 2020. On 9 November 2016, this facility was fully repaid using proceeds from the rights issue before being drawn down again on 28 December 2016. On the same date the Group drew down a further £250 million tranche of this facility to finance part of the Abbey Life acquisition, increasing borrowings on the revolving credit facility to £900 million. On 29 December 2016, £50 million of the facility was repaid. On 20 January 2017, the proceeds from the issue of £300 million of Tier 3 subordinated notes were used to repay £300 million of the facility. On 28 February 2017, the Company became an additional borrower under the £900 million revolving credit facility. On 6 July 2017, the proceeds from the issuance of the US $500 million Tier 2 bonds were used to repay £384 million of the revolving credit facility and on 8 August 2017, the remaining outstanding balance of £166 million was repaid. There are no mandatory or target amortisation payments associated with the revolving credit facility but prepayments are permissible. The facility accrues interest at LIBOR plus 1.1%, a reduced rate following the upgrade to the Company’s credit rating on 25 July 2017 (previously LIBOR plus 1.35%). On 20 January 2017, the utilisation fee was reduced from 0.4% p.a. to 0.2% p.a. and it was further reduced to 0.1% p.a. on 6 July 2017 following subsequent repayments of the outstanding balance (2016: 0.4% p.a.).
g. On 23 January 2015, PGHC issued £428 million of subordinated notes due 2025 at a coupon of 6.625%. Fees associated with these notes of £3 million were deferred and are being amortised over the life of the notes in the statement of consolidated financial position. Upon exchange £32 million of these notes were held by Group companies. On 27 January 2017, £17 million of the £428 million subordinated notes held by Group companies were sold to third parties and a further £15 million were sold to third parties on 31 January 2017, thereby increasing external borrowings by £32 million. On 20 March 2017, the Company was substituted in place of PGHC as issuer of the £428 million subordinated notes.
h. On 20 January 2017, PGHC issued £300 million Tier 3 subordinated notes due 2022 at a coupon of 4.125%. On 20 March 2017, the Company was substituted in place of PGHC as issuer of the £300 million Tier 3 subordinated notes. On 5 May 2017, PGH completed the issue of a further £150 million of Tier 3 subordinated notes, the terms of which are the same as the Tier 3 subordinated notes issued in January 2017. The Group received a premium of £2 million in excess of the principal amount. Fees associated with these notes of £5 million were deferred and are being amortised over the life of the notes.
At 31 Dec 2017 £m £900 million unsecured revolving credit facility 843 – (850) – – 7 –
1 Repayment of shareholder borrowings in the statement of consolidated cash flows includes a premium of £25 million in excess of the principal amount on repayment of the £300 million senior unsecured bond.
2 Primarily comprises amortisation under the effective interest method applied to borrowings held at amortised cost.
E6.1 Financial risk and the asset liability management (’ALM’) framework The use of financial instruments naturally exposes the Group to the risks associated with them, chiefly market risk, credit risk and financial soundness risk.
The Group’s overall exposure to market and credit risk is monitored by appropriate committees, which agree policies for managing each type of risk on an ongoing basis, in line with the investment strategy developed to achieve investment returns in excess of amounts due in respect of insurance contracts. The effectiveness of the Group’s ALM framework relies on the matching of assets and liabilities arising from insurance and investment contracts, taking into account the types of benefits payable to policyholders under each type of contract. Separate portfolios of assets are maintained for with-profit business funds (which include all of the Group’s participating business), non-linked non-profit funds and unitlinked funds.
The amount disclosed in the statement of consolidated financial position in respect of all financial assets, together with rights secured under off balance sheet collateral arrangements, and excluding the minority interest in consolidated collective investment schemes and those assets that back policyholder liabilities, represents the Group’s maximum exposure to credit risk.
There is an exposure to spread changes affecting the prices of corporate bonds and derivatives. This exposure applies to with-profit funds, nonprofit funds (where risks and rewards fall wholly to shareholders) and shareholders’ funds.
A 100bps widening of credit spreads, with all other variables held constant and no change in assumed expected defaults, would result in a decrease in the profit after tax in respect of a full financial year, and in equity, of £55 million (2016: £41 million).
A 100bps narrowing of credit spreads, with all other variables held constant and no change in assumed expected defaults, would result in an increase in the profit after tax in respect of a full financial year, and in equity, of £53 million (2016: £29 million).
Reinsurers’ share of investment contract liabilities – – – – – – – 6,808 6,808
Assets held directly by the life companies backing unit-linked business have not been analysed in these tables as the credit risk on such financial assets is borne by the policyholders. However, these assets have been included as a separate column in these tables to reconcile the information to the statement of consolidated financial position. Shareholder credit exposure on unit-linked assets is limited to the level of fee income to the extent it is dependent on the underlying assets.
E. FINANCIAL ASSETS & LIABILITIES continued E6. RISK MANAGEMENT – FINANCIAL RISK continued
Fixed and variable rate income securities 26,783 – – – – 215 26,998
Prepayments and accrued income 355 – – – – – 355
Cash and cash equivalents 2,208 – – – – 37 2,245
Fixed and variable rate income securities 29,098 – – – – 192 29,290
Cash and cash equivalents 1,584 – – – – 82 1,666
Concentration of credit risk Concentration of credit risk might exist where the Group has significant exposure to an individual counterparty or a group of counterparties with similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic and other conditions. The Group has most of its counterparty risk within its life business and this is monitored by the counterparty limits contained within the investment guidelines and investment management agreements, overlaid by regulatory requirements and the monitoring of aggregate counterparty exposures across the Group against additional Group counterparty limits. Counterparty risk in respect of OTC derivative counterparties is monitored using a Value-at-Risk (VaR) exposure metric.
The Group is also exposed to concentration risk with outsource partners. This is due to the nature of the outsourced services market. The Group operates a policy to manage outsourcer service counterparty exposures and the impact from default is reviewed regularly by executive committees and measured through stress and scenario testing.
Collateral The credit risk of the Group is mitigated, in certain circumstances, by entering into collateral agreements. The amount and type of collateral required depends on an assessment of the credit risk of the counterparty. Guidelines are implemented regarding the acceptability of types of collateral and the valuation parameters. Collateral is mainly in respect of stock lending, certain reinsurance arrangements and to provide security against the maturity proceeds of derivative financial instruments. Management monitors the market value of the collateral received, requests additional collateral when needed, and performs an impairment valuation when impairment indicators exist and the asset is not fully secured (and is not carried at fair value). See note E4 for further information on collateral arrangements.
– the income flow of management charges derived from the value of invested assets of the business.
Interest rate risk Interest rate risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate relative to the respective liability due to the impact of changes in market interest rates on the value of interestbearing assets and on the value of future guarantees provided under certain contracts of insurance.
Interest rate risk is managed by matching assets and liabilities where practicable and by entering into derivative arrangements for hedging purposes where appropriate. This is particularly the case for the nonparticipating funds and supported participating funds. For unsupported participating business, some element of investment mismatching is permitted where it is consistent with the principles of treating customers fairly. The with-profit funds of the Group provide capital to allow such mismatching to be effected. In practice, the life companies of the Group maintain an appropriate mix of fixed and variable rate instruments according to the underlying insurance or investment contracts and will review this at regular intervals to ensure that overall exposure is kept within the risk profile agreed for each particular fund. This also requires the maturity profile of these assets to be managed in line with the liabilities to policyholders.
With-profit business and non-participating business within the with-profit funds are exposed to interest rate risk as guaranteed liabilities are valued relative to market interest rates and investments include fixed interest securities and derivatives. For unsupported with-profit business the profit or loss arising from mismatches between such assets and liabilities is largely offset by increased or reduced discretionary policyholder benefits dependent on the existence of policyholder guarantees. The contribution of unsupported participating business to the Group result is largely limited to the shareholders’ share of the declared annual bonus. The contribution of the supported participating business to the Group result is determined by the shareholders’ interest in any change in value in the capital advanced to the with-profit funds.
An increase of 1% in interest rates, with all other variables held constant would result in a decrease in profits after tax in respect of a full financial year, and in equity, of £110 million (2016: £146 million).
E. FINANCIAL ASSETS & LIABILITIES continued E6. RISK MANAGEMENT – FINANCIAL RISK continued Equity, property and inflation risk The Group has exposure to financial assets and liabilities whose values will fluctuate as a result of changes in market prices other than from interest rate and currency fluctuations. This is due to factors specific to individual instruments, their issuers or factors affecting all instruments traded in the market. Accordingly, the Group limits its exposure to any one counterparty in its investment portfolios and to any one foreign market.
Equity and property price risk is managed through the agreement and monitoring of financial risk profiles that are appropriate for each of the Group’s life funds in respect of maintaining adequate regulatory capital and treating customers fairly. This is largely achieved through asset class diversification and within the Group’s ALM framework through the holding of derivatives or physical positions in relevant assets where appropriate.
A 10% increase in equity prices, with all other variables held constant, would result in a decrease in profits after tax in respect of a full financial year, and in equity, of £71 million (2016: £74 million).
A 10% decrease in property prices, with all other variables held constant, would result in a decrease in profits after tax in respect of a full financial year, and in equity, of £11 million (2016: £4 million).
Sensitivity of profit after tax and equity to fluctuations in currency exchange rates is not considered significant at 31 December 2017, since unhedged exposure to foreign currency was relatively low (2016: not considered significant).
Tax risk is defined as the risk of financial or reputational loss arising from a lack of liquidity, funding or capital due to an unforeseen tax cost, or by the inappropriate reporting and disclosure of information in relation to taxation. Tax risk is managed by maintaining an appropriately-staffed tax team who have the qualifications and experience to make judgements on tax issues, augmented by advice from external specialists where required. The Group has a formal tax risk policy, which sets out its risk appetite in relation to specific aspects of tax risk, and which details the controls the Group has in place to manage those risks. These controls are subject to a regular review process. The Group’s subsidiaries have exposure to tax risk through the annual statutory and regulatory reporting and through the processing of policyholder tax requirements. Industry consultation resulted in changes to mitigate the impact of restrictions on the rules relating to the loss absorbing capacity of deferred tax introduced during 2017.
The Board of Phoenix Group Holdings has defined a number of governance objectives and principles and the liquidity risk frameworks of each subsidiary are designed to ensure that: – liquidity risk is managed in a manner consistent with the subsidiary company boards’ strategic objectives, risk appetite and Principles and Practices of Financial Management (’PPFM’); – cash flows are appropriately managed and the reputation of the Group is safeguarded; and
Some of the Group’s commercial property investments are held through collective investment schemes. The collective investment schemes have the power to restrict and/or suspend withdrawals, which would, in turn, affect liquidity. This was invoked as a result of the market volatility experienced following the result of the referendum on membership of the European Union in 2016 in line with other firms across the industry. In 2017, all unit trusts processed investments and realisations in a normal manner and have not imposed any restrictions or delays.
Obligations for repayment of collateral received 1,961 – – – 1,961
Net asset value attributable to unitholders 1,040 – – – 1,040
Obligations for repayment of collateral received 1,623 – – – 1,623
Payables related to direct insurance contracts 484 – – – 484
Other payables 102 – – – 102 1 These financial liabilities are disclosed at their undiscounted value and therefore differ to the statement of consolidated financial position which discloses the discounted value.
E6.3 Unit-linked contracts For unit-linked contracts the Group matches all the liabilities with assets in the portfolio on which the unit prices are based. There is therefore no interest, price, currency or credit risk for the Group on these contracts.
Classification of contracts Contracts are classified as insurance contracts where the Group accepts significant insurance risk from the policyholder by agreeing to compensate the policyholder if a specified uncertain event adversely affects the policyholder.
Insurance liabilities Insurance contract liabilities for non-participating business, other than unit-linked insurance contracts, are calculated on the basis of current data and assumptions, using either a net premium or gross premium method. Where a gross premium method is used, the liability includes allowance for prudent lapses. Negative policy values are allowed for on individual policies: – where there are no guaranteed surrender values; or
For participating business, the liabilities under insurance contracts and investment contracts with DPF are calculated in accordance with the following methodology: – liabilities to policyholders arising from the with-profit business are stated at the amount of the realistic value of the liabilities, adjusted to exclude the owners’ share of projected future bonuses; – acquisition costs are not deferred; and
The realistic liability for any contract is equal to the sum of the withprofit bonus reserve and the cost of future policy-related liabilities.
The Group’s accounting policies for insurance contracts meet the minimum specified requirements for liability adequacy testing under IFRS 4 Insurance Contracts, as they allow for current estimates of all contractual cash flows and of related cash flows such as claims handling costs. Cash flows resulting from embedded options and guarantees are also allowed for, with any deficiency being recognised in the consolidated income statement.
Reinsurance assets are reviewed for impairment at each reporting date, or more frequently, when an indication of impairment arises during the reporting period. Impairment occurs when there is objective evidence, as a result of an event that occurred after initial recognition of the reinsurance asset, that the Group may not receive all outstanding amounts due under the terms of the contract and the event has a reliably measurable impact on the amounts that the Group will receive from the reinsurer.
Amounts due for settlement after 12 months 39,697 2,996 42,401 3,478
Amounts classified as held for sale at 1 January – – 1,587 1,521
Acquisition of AXA Wealth and Abbey Life1 – – 3,875 100
Other changes in liabilities2 1,375 (185) 4,697 100 1 Gross liabilities in respect of the acquisition of AXA Wealth businesses and Abbey Life are stated after the recognition of negative reserves of £181 million that arise on acquisition of AXA Wealth.
2 Other changes in liabilities principally comprise changes in economic and non-economic assumptions and experience.
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 £3,640 million (2016: £3,780 million).
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 2017 are set out below.
A decrease of 5% in assurance mortality, with all other variables held constant, would result in an increase in the profit after tax in respect of a full year, and an increase in equity of £34 million (2016: £43 million).
An increase of 5% in assurance mortality, with all other variables held constant, would result in a decrease in the profit after tax in respect of a full year, and a decrease in equity of £34 million (2016: £41 million).
A decrease of 5% in annuitant longevity, with all other variables held constant, would result in an increase in the profit after tax in respect of a full year, and an increase in equity of £137 million (2016: £127 million).
An increase of 5% in annuitant longevity, with all other variables held constant, would result in a decrease in the profit after tax in respect of a full year, and a decrease in equity of £138 million (2016: £128 million).
– For non-participating insurance contract liabilities, the Group previously used a valuation rate of interest and adjusted the liability discount rate by reference to the yield on the assets backing the liabilities to account for credit, default and reinvestment risk. The Group now makes an explicit adjustment to the risk-free rate to adjust for illiquidity in respect of assets backing illiquid liabilities. This approach does not take any additional credit for investment margins compared to the previous methodology.
– For non-participating insurance contract liabilities, the Group previously derived demographic assumptions by adding an implicit prudent margin to best estimate assumptions. The Group amended its approach in this regard and now sets assumptions at management’s best estimates and recognises an explicit margin for demographic risks. For participating business in realistic basis companies, the assumptions about future demographic trends continue to represent ‘best estimates’.
The £79 million positive impact of changes in expense assumptions includes the impact of expense synergies arising from integration of the acquired Abbey Life business, together with the impact of revisions to the life expense agreements between the life and service companies.
Life: Immediate annuities 11 – 4 – Unitised with-profit 633 751 6 – Life with-profit 4,166 – 6 1
Non-profit funds: Deferred annuities – with guarantees 479 – – – Deferred annuities – without guarantees 571 – 2 – Immediate annuities 11,376 – 2,247 –
The Group has significant discretion regarding investment policy, bonus policy and early termination values. The process for exercising discretion in the management of the with-profit funds is set out in the PPFM for each with-profit fund and is overseen by with-profit committees. Advice is also taken from the with-profit actuary of each with-profit fund. Compliance with the PPFM is reviewed annually and reported to the PRA, Financial Conduct Authority (‘FCA’) and policyholders.
During the last decade, interest rates and inflation have fallen and life expectancy has increased more rapidly than originally anticipated. The guaranteed terms on GAR policies are more favourable than the annuity rates currently available in the market available for cash benefits. The guaranteed terms on GCO policies are currently not valuable. Deferred annuity policies which are written to provide annuity benefits are managed in a similar manner to immediate annuities and are exposed to the same risks.
A provision is recognised when the Group has a present legal or constructive obligation, as a result of a past event, which is likely to result in an outflow of resources and where a reliable estimate of the amount of the obligation can be made. If the effect is material, the provision is 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.
Released during the year (1) (1) – – – – – (2)
Leasehold properties The leasehold properties provision includes a £3 million (2016: £3 million) dilapidations provision in respect of obligations under operating leases. In addition, a provision has been made for £2 million (2016: £2 million) 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.
Staff related Staff related provisions mainly includes provisions for unfunded pensions of £6 million (2016: £6 million) and private medical insurance costs for former employees of £2 million (2016: £3 million).
PA(GI) provision In 2015, PA(GI), a subsidiary of the Group, was subject to a Companies Court judgement that directed that PA(GI) is liable to claimants for redress relating to creditor insurance policies within a book of insurance underwritten by PA(GI) until 2006. As a consequence, PA(GI) is liable for complaint handling and redress with regard to the complaints.