Transferred business of NPI Limited to Phoenix Life Limited and London Life Limited to Phoenix Life Assurance Limited 2010 Pearl Group renamed Phoenix Group Holdings and achieves Premium Listing on London Stock Exchange 2009 Liberty Acquisition Holdings (International) acquires Pearl Group 2008 Pearl Group acquires Resolution plc 2006 Resolution plc acquires Abbey National’s life business 2005 Pearl Group created
REGULATORY AND LEGISLATIVE CHANGES The Financial Conduct Authority (‘FCA’) published two separate thematic reviews during the course of 2016. The review of the fair treatment of long-standing customers in life insurance was published in March and the review into annuity sales practices was published in October. We welcome the focus that these reviews bring to the fair treatment of policyholders and the manner in which customer communication can be enhanced. Our customers and the outcomes of their policies are fundamental to our business model and we continue to seek ways to improve.
CONCLUSION I continue to believe that the impact of regulatory changes will provide Phoenix with further opportunities, as open life companies reappraise their business models and strategies for their legacy policies. During the year, the Group demonstrated how it drives value from a strategy of acquiring and integrating closed life policies and the Group is well placed to generate additional benefits from future acquisitions.
Life companies writing new business are now focusing on a more limited range of products in future
The effective management of our risks and the efficient allocation of capital against them is critical in allowing us to achieve our strategic and operational objectives.
These outsource partners have scale and common processes, often across multiple clients, which provide several benefits for the Group, including reducing investment requirements, improving the technology used within our administrative capability and reducing our operational risk.
– We have also digitised parts of the customer journey which enables those customers with funds under £10,000 to encash their small pots online.
TARGET To maintain a FOS overturn target of less than the industry average of 30%.
– receipt of the PRA’s approval in March 2017 to include the acquired AXA businesses within the scope of the Group’s Solvency II Internal Model.
3 Does not include workforce from the acquired AXA and Abbey Life businesses.
At 31 December 2016, PLHL’s Solvency II surplus includes the effects of an assumed recalculation of the transitional deduction as at that date and reflects amortisation since 1 January 2016. Accordingly the year end position includes a transitional deduction of £1.9 billion (excluding the unsupported with-profit funds), which offset £1.3 billion of Risk Margin and £0.6 billion of other technical provisions recognised in the life companies. As the acquired Abbey Life business has not recognised a transitional deduction, it is excluded from the analysis above. The run-off of the transitional deduction over time will be substantially offset by the reduction of the Risk Margin therefore mitigating any resulting impact on the Solvency II surplus.
Surplus assets have been retained in life companies to mitigate any potential adverse impact of deferred tax restrictions being introduced in 2017.
– that corporate acquisitions are not relevant, as any acquisition would only be progressed on the basis it was value accretive.
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.
– Leads the Group’s risk management function, embracing changes in best practice and regulation including Solvency II
The remuneration of the Directors is shown in the Directors’ Remuneration Report on pages 58 to 84. The terms and conditions of appointment of Non-Executive Directors are on the Group’s website. In accordance with the provisions of the Articles and the Code, all Directors (except Isabel Hudson and David Woods, who are standing down from the Board) will submit themselves for election or re-election at the Company’s AGM on 11 May 2017.
David Woods 8 6 1 Tom Cross Brown resigned from the Board on 11 May 2016.
During 2016, the Financial Reporting Council undertook an Audit Quality Review of EY’s audit of the PGH financial statements for the year ended 31 December 2015 and reported to the Chair of the Audit Committee. None of their findings were considered to be of sufficient significance for inclusion in the report.
– Reviewed the Group’s risk profile, monitoring it against the risk categories of Market, Insurance, Credit, Financial Soundness, Customer and Operational with particular attention to risk appetite, risk trends, risk concentrations, provisions, experience against budget and key performance indicators for risk.
NOMINATION COMMITTEE’S PRINCIPAL ACTIVITIES DURING 2016 – Delivered a recommendation to the Board for the appointments of Wendy Mayall, John Pollock and Nicholas Shott as Non-Executive Directors following a comprehensive search process led by the Nomination Committee with Korn Ferry search consultancy.
“ I am very pleased with the Nomination Committee’s role in our three new NonExecutive Director appointments from 1 September 2016 and the effective renewal of skills on our Board.”
– Additional fees are paid to Non-Executive Directors who chair a Board committee, or sit on the board of a subsidiary company or on the Solvency II Model Governance Committee, and to the Senior Independent Director (‘SID’). No separate Board committee membership fees are currently paid.
– LTIP – our most senior employees participate in the LTIP currently based on the same performance conditions as those for Executive Directors, although the Committee reserves the discretion to vary the performance conditions for awards made to employees below the Board for future awards.
Remuneration Committee discretion to disapply pro-rating or to accelerate vesting to the date of leaving (subject to pro-rating and performance conditions) and/or the release of any holding period
Performance measure and weighting Target range Performance achieved Vesting outcome % achieved
The rights and obligations attaching to the Company’s ordinary shares are set out in the Company’s articles of association (the ‘Company’s Articles’) which are available on the Company’s website at www.thephoenixgroup.com/about-us/corporate-governance/articles-ofassociation. aspx.
The Directors as at the date of this report, whose names and functions are listed in the Board of Directors section on pages 44 and 45, confirm that, to the best of their knowledge: – the Group’s consolidated financial statements and the Company financial statements, which have been prepared in accordance with IFRS as issued by the IASB, give a true and fair view of the assets, liabilities, financial position and profit of the Group and the Company; and
Actuarial modelling 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.
The actuarial data is a key input into the valuation process. The valuation of insurance contract liabilities is therefore conditional upon the accuracy and completeness of the data used.
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 appropriateness of management’s grouping of data for input into the actuarial model; and
INVOLVEMENT WITH COMPONENT TEAMS In establishing our overall approach to the Group audit, we determined the type of work that needed to be undertaken at each of the components by us, as the primary audit engagement team, or by the component auditors operating under our instruction.
STATEMENT OF COMPREHENSIVE INCOME For the year ended 31 December 2016
Elimination of non-controlling interest following loss of control – – – – – – – (564) (564)
Shares in subsidiaries subscribed for by non-controlling interests – – – – – – – 35 35
Other non-operating items include: – gain of £49 million (net of a £64 million impairment of associated acquired in-force business) arising as a result of the reassurance arrangement entered into with RGA International (see note F3.1); – release of provisions associated with external regulatory changes, including the cap on workplace pension charges and the pension guidance levy, of £17 million; – corporate project costs of £13 million; and
From 1 January 2016, the long-term risk-free rate used as a basis for deriving the long-term investment return is set by reference to the swap curve plus 10bps (2015: annualised return on the FTSE UK Gilt Index plus 10bps). A risk premium of 350bps is added to the risk-free yield for equities (2015: 300bps), 250bps for properties (2015: 200bps), 150bps for other fixed interest assets (2015: 100bps) and 50bps for gilts (2015: nil). If the current period long-term investment return had been calculated using a gilts plus 10bps reference rate adjusted for the relevant risk premium (as used in prior periods), the impact on operating profit for the period would be negligible.
Basic earnings per share is as follows: 2016 pence 2015 pence
Other non-audit services of £0.1 million (2015: £0.3 million) primarily include fees payable in respect of assurance over aspects of the Group’s Solvency II internal model. In 2015, the fees principally related to applications made to the regulator with regard to the Group’s implementation of Solvency II.
Equities, fixed and variable rate income securities, collective investment schemes and certain loans and receivables are designated at fair value through profit or loss and accordingly are stated in the statement of consolidated financial position at fair value. They are designated at fair value through profit or loss because this is reflective of the manner in which the financial assets are managed and reduces a measurement inconsistency that would otherwise arise with regard to the insurance liabilities that the assets are backing.
Movements in the fair value of investment contracts without DPF are included in the ‘change in investment contract liabilities’ in the consolidated income statement.
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.
Assets pledged The Group pledges collateral in respect of its OTC derivative liabilities. The value of assets pledged at 31 December 2016 in respect of OTC derivative liabilities of £1,543 million (2015: £1,325 million) amounted to £625 million (2015: £738 million).
Capital management risk is defined as the failure of the Group, or one of its separately regulated subsidiaries, to maintain sufficient capital to provide appropriate security for policyholders and meet all regulatory capital requirements whilst not retaining unnecessary capital. The PLHL Group has exposure to capital management risk through the requirements of the Solvency II capital regime, as implemented by the PRA, to calculate regulatory capital adequacy at a Group level. The Group’s UK life subsidiaries have exposure to capital management risk through the Solvency II regulatory capital requirements mandated by the PRA at the solo level. The Group’s approach to managing capital management risk is described in detail in note I4.
1 Gross liabilities in respect of the acquisition of the AXA businesses and Abbey Life are stated after the recognition of negative reserves of £181 million that arise on acquisition of the AXA businesses (see note H2).
Released during the year – – – – – – (1) (1)
In addition, on 14 October 2016, the FCA published its thematic review of non-advised annuity sales. In its findings, the FCA identified concerns in a small number of firms relating to significant communications that took place orally, usually on the telephone. The FCA also identified other areas of possible concern, including in relation to the recording and maintenance of records of calls. The FCA encouraged all firms to consider its feedback and take appropriate action to address the points raised.
Contributions totalling £40 million were paid into the scheme on 30 September 2016 (2015: £40 million), and contributions totalling £50 million are expected to be paid into the scheme in 2017, £10 million in relation to the last quarter of 2016 and £40 million by monthly instalments.
Change in provision for tax on economic surplus available as a refund – – (57) – (57)
The fair value of the owner-occupied properties at valuation was derived using the investment method supported by comparable evidence. The significant non-observable inputs used in the valuations are the expected rental values per square foot and the capitalisation rates.
Subsidiaries are consolidated from the date that effective control is obtained by the Group (see basis of consolidation in note A1) and are excluded from consolidation from the date they cease to be subsidiary undertakings. For subsidiaries disposed of during the year, any difference between the net proceeds, plus the fair value of any retained interest, and the carrying amount of the subsidiary including non-controlling interests, is recognised in the consolidated income statement.
– the investee is managed by the Group’s fund manager, and the Group holds a significant investment in the investee. It is generally presumed that the Group has rights to variable returns and has the ability to use its power to affect its returns where the Group’s holding is greater than 50%. For holdings between 25% and 50% the Group performs an assessment of power and associated control on a case-by-case basis. This assessment includes establishing the nature of the decision-making rights that the fund manager has over the investee and whether these rights give it the power to control the investee.
– Abbey Life is required to make payments of contributions into charged accounts on behalf of the Abbey Life Staff Pension Scheme. These amounts do not form part of the pension scheme assets and at 31 December 2016, Abbey Life held £37 million within fixed and variable rate income securities in respect of these charged accounts. Further details of when these amounts may become payable to the pensions scheme are included in note G6.
AVIF and other intangibles An asset of £38 million arises reflecting the present value of future profits associated with the acquired in-force business. The £38 million asset comprises AVIF of £116 million in respect of acquired investment contracts without DPF and negative AVIF of £78 million relating to the acquired insurance business.
PUTM UK Stock Market Fund (Series 3) Wythall1 Authorised unit trust 100.00%
20 Trafalgar Court, Les Banques, St Peter Port, Guernsey, GY1 3QL
The following subsidiaries were reclassified as significant holdings due to the loss of effective control by the Group during the period: – Henderson Institutional UK Enhanced Equity Trust.
The following tables illustrate the number of, and movements in, share options during the year: Number of share options 2016
The total compensation of key management personnel, being those having authority and responsibility for planning, directing and controlling the activities of the Group, including the Executive and Non-Executive Directors, are as follows: 2016 £m 2015 £m
The notes identified numerically on pages 197 to 202 are an integral part of these Company financial statements. Where items also appear in the consolidated financial statements, reference is made to the notes (identified alphanumerically) on pages 106 to 192.
Administrative expenses 54 19 1 In addition to the Non-Executive Directors, one employee was employed by Phoenix Group Holdings during the period (2015: one). Other Group employees are employed by other Group entities.
Loans due from PGH (MC1) Limited and PGH (MC2) Limited 128 113 235 262