The Strategic Report was approved by the Board of Directors on 7 March 2021 and signed on its behalf by
Phoenix operates a risk management framework designed to bring resilience to our Solvency II surplus and certainty to cash generation.
This challenging period has demonstrated the strength of Phoenix’s business model. The Group has continued to deliver cash, resilience and growth and has performed strongly against its strategic objectives. This financial stability has enabled Phoenix to continue to pay dividends as planned. The Board recognises that dividends are an important income stream both for retail shareholders and the end consumer who invests in institutional income funds. They are typically ordinary savers and pensioners who need this income stream, which in turn supports the broader economy.
2020 was a landmark year for Phoenix during which the Group became the UK’s largest long-term savings and retirement business and once again delivered on its key attributes of Cash, Resilience and Growth.
Our colleagues also remained deeply involved in community work, operating as NHS responders or by embracing remote volunteering.
STANDARD LIFE BRAND ACQUISITION The recently announced simplification of our Strategic Partnership with Standard Life Aberdeen plc has seen us acquire the Standard Life brand and with it full control over marketing and distribution. This will enable us to provide a more streamlined, multichannel customer experience and allow us to accelerate the delivery of a broader set of product and service propositions. We therefore see this as a key enabler for accelerating our Open business growth strategy and delivering incremental new business long-term cash generation over time.
Our business model leverages our core capabilities and clear strategy to deliver for all of our stakeholders.
TRUST AND CREDIBILITY Our financial strength, combined with our strong track record of successful M&A and integration, means we are a trusted counterparty for vendors looking to dispose of life insurance assets and for pension trustees in the BPA market.
CUSTOMER SAVINGS & INVESTMENTS We offer a range of products across both the accumulation and decumulation stages of the life-savings cycle through our Standard Life brand. Our strategy is built on better understanding our c.14
• Capital synergies associated with the acquisition of ReAssure benefited the Group Solvency II surplus by £479 million in 2020 primarily resulting from applying the Group’s hedging strategy and the harmonisation of methodologies, including the calculation of transitional measures on technical provisions, and the total expected capital synergies have been increased from £450 million to £600 million.
The Solvency II surplus is the regulatory assessment of capital adequacy at PGH plc level.
Furthermore, new business written within our Open division brings additional scale to our in-force business and delivers incremental long-term cash generation. This extends the sustainability of the Group’s cash generation profile and it is hoped in time it can offset the Heritage run-off.
COVID-19 At the start of the pandemic we enabled our colleagues to work from home to ensure their safety whilst continuing to deliver a service to our customers.
• We launched our enhanced client analytics tool for workplace clients, delivered in conjunction with our strategic partner TCS.
The Group’s pension transfer times are better than the industry target.
These positive changes will impact over 3.3 million customers and £28 billion of assets under management in these solutions.
As a result, GAAP measures typically used to assess financial performance, such as IFRS profit after tax, are considered by the Board to be of lower importance when assessing Phoenix’s performance against its strategy. IFRS results exclude any changes to the capital requirements and therefore do not fully reflect the performance of the Group.
CASH RECEIPTS Cash generated by the operating companies during 2020 was £1,713 million (2019: £707 million). This includes £690 million of cash remitted by the ReAssure Life companies in the period prior to completion and accruing to the Group under the ‘locked box’ acquisition completion mechanism. The total is reported net of a £50 million contribution into the Group’s Irish domiciled subsidiary, Standard Life International Designated Activity Company (‘SLIDAC’), in order to strengthen its capital position following the fall in yields during the period.
Following a 12% fall in property values2 4.2 Following a 73bps interest rates rise3 4.7 Following a 88bps interest rates fall3 4.0 Following credit spread widening4 4.3 Following credit downgrade: immediate full letter downgrade on 20% of portfolio5 3.8 Following 6% decrease in annuitant mortality rates6 3.5 Following a 10% change in lapse rates7 4.2 1 Assumes stress occurs on 1 January 2021 and that there is no market recovery. 2 Represents an average fall in property values of 12%. 3 Assumes the impact of a dynamic recalculation of transitionals and an element of dynamic hedging which is performed on a continuous basis to minimise exposure to the interactions of rates with other correlated risks including longevity.
DEBT ISSUANCE (NET OF FEES) The £1,445 million debt issuance in the year comprises the net proceeds of the £572 million (US$750 million) Tier 1 bond in January, the £500 million Tier 2 bond issuance in April and the £398 million (US$500 million) Tier 2 bond issuance in June.
2 2019 has been restated to include incremental long-term cash generation from SunLife.
The Standard Formula is also used in the determination of the capital requirements for the acquired ReAssure businesses.
During the year, total proceeds (net of issue costs) from the issuance of hybrid debt were £1.4 billion, comprising the US$750 million Tier 1 bond, £500 million Tier 2 bond and US$500 million Tier 2 bond. On the pro forma basis, £1.2 billion of the debt issued to fund the cash consideration for the acquisition of ReAssure was assumed to have been issued on 31 December 2019. Remaining proceeds of £0.2 billion provides additional flexibility for the refinancing of existing Phoenix borrowings and increased the surplus in the year.
The long-term return on owners’ funds of £2 million (2019: £(6) million) reflects the return on owners’ assets, primarily cash-based assets and fixed interest securities, and the impact of expenses borne by the shareholder.
OUR CUSTOMERS The Group recognises the responsibility it has to all its customers and operates a number of policies to ensure we are protecting our customers’ interests.
Our new sustainable supply chain standards require our key suppliers* to meet our enhanced requirements for Modern Slavery and Human Rights, Climate and Environment and Health and Safety.
DONATIONS AND CHARITABLE PARTNERSHIPS Donations totalling £2 million were paid to registered charities during the year from the Group, which included colleague fundraising and supplier contributions. Integral to this was a £1 million COVID-19 specific donation.
OUR ENVIRONMENT Our impact on the environment is a material concern for the Group.
Andy Curran, CEO Savings and Retirement UK & Europe and Group Director Scotland, is chair of the ABI Long-Term Savings Committee, which informs the ABI’s work on key initiatives including the pensions dashboard, which over time will enable customers to see all of their pension pots across different providers in one place online.
We support the goals of the Paris Agreement to limit global warming to well below 2°C, preferably to 1.5°C compared to pre-industrial levels and to help achieve this outcome, we have committed to become net-zero carbon by 2050.
• Baseline Scope 3 investment emissions and develop our metrics and targets framework.
March Climate change classified as a principal risk for Phoenix and first TCFD disclosure published
• Greater energy consumption needs due to chronic changes, such as temperature rise, impacting cooling/heating requirements
Phoenix’s climate risk exposure is ultimately driven by the level of direct financial holding. The overall exposure to climate-related risk can be reduced by holding investments in asset classes, sectors or geographies with lower climate risk.
• a disorderly transition would be expected to be more onerous than an orderly one.
More granular policy level appetites are being developed alongside the development of the metrics and targets framework and the embedding of climate risks into the Group’s Risk Policies.
RISK STRATEGY AND CULTURE Risk strategy Our risk strategy is our overall approach to taking rewarded risks that are understood, managed effectively and are consistent with our social purpose and enterprise strategy. Our risk strategy supports a more stable, well-managed business with improved customer, shareholder, colleague and societal outcomes.
Liquidity – The Group and each Life Company will seek to ensure that it has sufficient liquidity to meet its financial obligations under a range of Boardapproved scenarios.
TCS: Our enlarged partnership with TCS is also expected to support growth plans for our Open business, enabling further digital and technology capabilities to be developed to support enhanced customer outcomes.
The changes announced by the Group and SLA plc in February 2021 to simplify and extend the strategic partnership lead to an improvement in this risk, including the conclusion of all legacy issues related to services and expenses in relation to the Transitional Services Agreement, Client Service Proposition Agreement and certain other agreements between the Group and SLA plc entered into when the Group acquired the Standard Life Assurance businesses.
The Group’s Open business has strong foundations and is central to our purpose of helping people secure a life of possibilities. It is also fundamental to our plans of delivering the Wedge which assumes that Open business growth can offset the run-off from the in-force business and bring sustainability to organic cash generation.
The TCFD disclosures (page 67) provide an overview of progress against the recommendations and planned future priorities across each of the TCFD focus areas including, developing internal climate risk appetites linked to metrics and targets framework, embedding climate risk considerations within the Group’s RMF and developing internal climate risk reporting.
The Group’s Change Management Framework is to be strengthened over 2021 with a revised change model, consistent with ensuring empowerment and accountability within Business Units to effectively deliver change. An enhanced prioritisation model will be implemented, with clearer alignment to the Group’s Strategic Framework.
Regulatory guidance in respect of operational resilience is expected to be published in 2021, together with a timetable to achieve full compliance. Failure to meet this timetable will expose the business to the potential for regulatory censure and reputational damage.
The Group continues to utilise cyber security tools and capabilities in order to mitigate Information Security and Cyber risk. Our specialist Line 2 Information Security & Cyber Risk team provides independent oversight and challenge of information security controls; identifying trends, internal and external threats and advising on appropriate mitigation solutions.
Prolonged home working, caring and childcare lockdown implications and extended distancing due to COVID-19 can affect colleague engagement, wellbeing and productivity.
During 2020, and as a consequence of COVID-19, a number of our Unit Linked Property funds were put into suspension due to valuation uncertainty; we managed this in line with our standard fund deferral process. At the time of writing the majority of these funds are now out of suspension.
The Group continues to manage its longevity risk exposures, which includes the use of reinsurance contracts to maintain this risk within appetite.
The Group actively monitors persistency risk metrics and exposures against appetite across the Open and Heritage businesses.
The Board was particularly focused on supporting our customers and the wellbeing of our Phoenix colleagues. It was opportune that 2020 was the first full year that Karen Green performed her role as our designated nonexecutive director for workforce engagement. I am very grateful to Karen for the diligence with which she has performed this role and the concern she has shown to ensure she provides a strong interface between the Colleague Advisory Forum and the Board. Two of our other non-executive
Market cap £7.0bn £5.40bn in 2019 directors, Wendy Mayall and Kory Sorenson, attended the last Colleague Advisory Forum meeting with Karen in November 2020, and I am keen that we continue to widen the interaction between our Board and our colleagues.
In March 2020, we wished farewell to Clive Bannister after almost nine tremendous years as the Phoenix CEO. He was succeeded by Andy Briggs whom we were thrilled to welcome as our new CEO after a very thorough recruitment process. Andy has taken to the role with the skill and vigour we expected and the Board is very confident in his ability to drive Phoenix’s strategy forward as the UK’s largest long-term savings and retirement business. Jim McConville retired from the Board at the May 2020 AGM after eight successful years as the Group CFO, to be succeeded by Rakesh Thakrar, previously the Group’s Deputy CFO. I am very pleased that our succession planning achieved this outcome.
Our Board evaluation review undertaken towards the end of 2020 was externally facilitated by Consilium Board Review who reported to the Board on 2 December 2020. Its conclusion was of a very strong Board performance, with extracts being: “The Board is very able, well-led, has guided change deftly in a demanding working environment (COVID-19), and added value in the last year.”
The Group’s high standards of corporate governance are anchored to its compliance with the Code which sets standards of good governance for UK listed companies.
• Simplified governance • Monitoring compliance with the Code • Externally facilitated Board effectiveness review • Holding a successful AGM on scheduled date
Board experience As highlighted in the Chairman’s Introduction on page 93, our 2020 external Board evaluation review stated that ”The Board is very able, well-led, has guided change deftly in a demanding working environment (Covid), and added value in the last year.” In addition, during 2020, the Nomination Committee reviewed the balance of skills, experience and knowledge of the Board which concluded that the Board has strong and diverse skills and experience. Following a review of the Board’s succession plan in 2020, a more detailed Board skills audit is planned for 2021 to ensure the continued suitability of the Board’s mix of experience to drive the Group’s strategy forward, matched to skills, knowledge and diversity requirements. The Board’s current balance of skills, experience and knowledge includes coverage across the spheres of ‘mergers and acquisitions’; ‘finance, accounting and audit’; ‘customer’; ‘insurance’; ‘investment’; and ‘operations’. More detail about the experience of individual Board members can be found below and on pages 98 to 100.
External appointments: European Vice Chairman of Lazard since 2007 and Head of UK Investment Banking at Lazard since 2009 (joined Lazard in 1991 and became a partner in 1997).
Appointed: 1 September 2019 “My role on the Board at Phoenix allows me to utilise my experience which has been accumulated over the last 26 years in my time at Standard Life Aberdeen. My career has predominantly been spent in the Change, Technology and Operations arena. Given the significant change agenda that we have at Phoenix this gives me a great opportunity to utilise my experience for the benefit of the Group and all of our stakeholders.”
• leads development of the Heritage business strategy including the integration of acquired life businesses; • focuses on optimising outcomes for customers in terms of service, value and security; and
SPOTLIGHT ON THE BOARD’S DECISION TO PAY THE 2019 FINAL DIVIDEND During the course of May 2020 the Board considered the payment of the 2019 Final Dividend. The impact of the payment on stakeholders was assessed using stress scenarios, testing solvency and liquidity positions. Despite the extreme market volatility resulting from COVID-19, the Board considered the Group’s solvency position to remain robust in all modelled scenarios. The Board considered the need to protect our customers across the 14 million life and pension policies Phoenix has in-force and the impact of the dividend decision on them. Following such considerations and paying due regard to regulatory guidance and investor feedback, the Board concluded that the proposed 2019 Final Dividend of 23.4 pence per share was prudent and consistent with our risk appetite. See page 110 for more detail about the Board’s consideration of the dividend payment on its stakeholders.
• Horizon scanning – The Committee keeps sustainability best practice under review, referring to thought leadership and monitors the Group’s position with regard to relevant emerging sustainability issues.
Ed Jackson, Investment Operations Unit Linked Manager (Colleague Advisory Forum 2020)
• When considering the need for a Board Sustainability Committee (‘BSC’), the Board discussed the long-term impact of driving forward the Group’s sustainability agenda. It was understood that the BSC’s role would evolve and adapt with the dynamic nature of the sustainability environment. The BSC’s role in overseeing the sustainability strategy was considered by the Board, noting that the associated commitments would benefit the business in the long term. Key commitments can be found on pages 9 and 10 of the Company’s Sustainability Report.
• Considered risks, issues and matters that are escalated from the Phoenix Life Risk Committee.
• Considered regular updates on the 2020 Internal Audit Plan; and
The valuation information was then presented for oversight review by the Audit Committee who considered and further challenged the information prior to confirmation of the appropriateness of the basis of valuation.
Acquisition accounting The Audit Committee considered the impact of the acquisition of ReAssure on the Group consolidated IFRS financial statements. This included consideration of the adoption of Group accounting policies and methodologies by the acquired entities.
• July 2020 – MS&AD nominee, Hiroyuki Iioka; Swiss Re nominee, Chris Minter
Board with some “matters to be mindful of” which the Board will address to ensure it continues to enhance its performance. In the case of the Nomination Committee, Consilium concluded that it was very effective and very well chaired, with a strong challenge on Diversity & Inclusion. The outputs from the review will be taken into account in the Board’s succession planning.
IMPACT OF COVID-19 The safety of our colleagues has been one of our top priorities throughout the pandemic. 99% of our colleagues were enabled to work from home within 10 days of lockdown. We rapidly introduced practical support for home working including paid emergency leave to colleagues with carers’ responsibilities. Our employees have all received full pay throughout the period with none furloughed. The Group has not accessed any government support schemes. During this period, the Group’s annual engagement survey highlighted an increase in pride and advocacy of Phoenix as a place of work as well as an increase in the overall engagement score.
Full details of the remuneration arrangements for both our joining and departing Executive Directors were set out in last year’s report and are repeated for reference on page 134 of this report.
Group Chief Executive Officer Andy Briggs Shareholding guidelines 300% Shares held at 31 December 2020 231%
Foster responsible investment Be a good corporate citizen Governance and good business practice Reduce environmental impact Work ethically with our supply chain
Net Operating Cash Receipts 25% of this part vests at threshold performance rising on a pro rata basis until 100% vests. Measured over three financial years commencing with the year of award.
Andy Briggs DBSS – – – – – – – – –
The extent to which Executive Directors have achieved the requirements by 31 December 2020 (using the share price of 701.4 pence as at 31 December 2020) is summarised below. Unvested share awards no longer subject to performance conditions (discounted for tax liabilities) are included within the Guidelines. Clive Bannister and James McConville’s shareholding ownership guidelines percentage has been based on the three-month average closing share price for the period up to their date of leaving the Group: Position
DBSS awards made in 2021 (in respect of 2020’s AIP outcome) will be made automatically on the fourth dealing day following the announcement of the Group’s 2020 annual results in accordance with the Remuneration Policy.
Jonathan Moss8,9 704 n/a n/a 1 Clive Bannister left the role of Group Chief Executive Officer on 10 March 2020 and left Phoenix Group on the same date. Andy Briggs was appointed to the Board on 10 February 2020 and remained as CEO-designate until 10 March 2020.
7 Long-term incentive vesting rates against maximum opportunity values are not applicable for 2011 and 2012 due to no awards vesting in those financial years. 8 Jonathan Moss left the role of Group CEO on 7 February 2011 and left Phoenix Group on 29 March 2011. Clive Bannister joined Phoenix Group on 7 February 2011 and was appointed to the Board as a Director on 28 March 2011.
Predictability • The range of potential award levels to individual Executive Directors are set out in the scenario chart on page 151 which also demonstrates the impact of potential share price growth by 50% over the three-year performance period until LTIP vesting.
Policy and operation • The Group provides a competitive employer sponsored defined contribution pension plan. • All Executive Directors are eligible to participate in the Defined Pension Contribution plan available to all new joiners or they may opt to receive the contribution in cash if they are impacted by the relevant lifetime or annual limits. Any such cash payments are reduced for the effect of employers’ National Insurance Contributions.
Maximum • The maximum annual incentive level for an Executive Director is 150% of base salary per annum.
• Once set, performance measures and targets will generally remain unaltered unless events occur which, in the Remuneration Committee’s opinion, make it appropriate to make adjustments to the performance measures to ensure alignment with strategic objectives, provided that any adjusted performance measure is, in its opinion, neither materially more nor less difficult to satisfy than the original measure.
• consistent with the latest Corporate Governance Code, the Remuneration Committee may apply discretion to override formulaic outcomes if they are considered inconsistent with the underlying performance of the group (see pages 150 and 153).
Full details of the issued and fully paid share capital as at 31 December 2020 and movements in share capital during the period are presented in note D1 to the IFRS consolidated financial statements.
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 83 to 89. 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 I5 and I6) and its capital management (note I3). The Strategic Report (on pages 1 to 91) sets out the business model and how the Group creates value for shareholders and policyholders.
• Our business relationships – details of how the Company has engaged with its customers, suppliers and others can be found in the Stakeholder Engagement section of the Strategic Report on pages 58 to 65. In addition, details of how the Board has considered the need to foster the Company’s business relationships with suppliers, customers and others can be found in the section 172 statement included in the Strategic Report on page 60 and Corporate Governance Report on pages 109 to 111.
Re-Appointment of the Auditors Ernst & Young LLP (‘EY’) has indicated its willingness to continue in office and shareholders’ approval will be sought at the AGM on 14 May 2021.
Important post balance sheet events Details of important events affecting the Company which have occurred since the end of the financial year are contained in note I7 to the IFRS consolidated financial statements.
Fair, balance and understandable In accordance with the UK Corporate Governance Code, the Directors confirm that they have reviewed the Annual Report and consider that it is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group’s position, performance, business model and strategy.
The Directors as at the date of this Directors’ Report, whose names and functions are listed in the Board of Directors section on pages 98 to 100, confirm that, to the best of their knowledge: • the consolidated financial statements, which have been prepared in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006 and IFRSs adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union, give a true and fair view of the assets, liabilities, financial position and profit and loss of the Company and its consolidated subsidiaries taken as a whole; and
For the specific scope component, the primary audit team have reviewed the audit procedures performed by the component team on the specific accounts.
The specific audit procedures performed to address the significant risk are set out below. In addition, we assessed management’s analysis of movements in insurance contract liabilities and obtained evidence to support large or unexpected movements as this provided important audit evidence over the valuation of insurance contract liabilities.
Accounting for the acquisition of ReAssure Limited and other associated entities
On 22 July 2020, the Group acquired ReAssure Limited, ReAssure Life Limited, ReAssure UK Services Limited, Ark Life Assurance Company and other related entities (collectively ‘ReAssure’) from Swiss Re Finance Midco (Jersey) Limited for total consideration of £3.1bn.
• read relevant agreements and board minutes which supported the final conclusions in respect of the acquisition accounting.
Proceeds from new shareholder borrowings, net of associated expenses E5.2 1,445 100
• Annual Improvements Cycle 2018 – 2020 (1 January 2022): Minor amendments to IFRS 1 First-time Adoption of International Financial Reporting Standards, IFRS 9 Financial Instruments, IAS 41 Agriculture and the Illustrative Examples accompanying IFRS 16 Leases. These amendments do not currently have any impact on the Group.
• IFRS 17 Insurance Contracts (1 January 2023). Once effective IFRS 17 will replace IFRS 4 the current insurance contracts standard and it is expected to significantly change the way the Group measures and reports its insurance contracts. The overall objective of the new standard is to provide an accounting model for insurance contracts that is more useful and consistent for users. The new standard uses three measurement approaches and the principles underlying two of these measurement approaches will significantly change the way the Group measures its insurance contracts and investment contracts with Discretionary Participation Features (‘DPF’). These changes will impact profit emergence patterns and add complexity to valuation processes, data requirements and assumption setting. The Group’s implementation project continued through 2020 with an increasing focus on implementation activities alongside ongoing financial and operational impact assessments and methodology development.
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 segments on an ongoing basis. 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.
Diluted operating earnings net of financing costs per share 98.5 73.7
Interest income on loans and deposits at amortised cost 8 6
Interest income on financial assets designated at FVTPL on initial recognition 2,313 2,113
C4. Auditor’s Remuneration During the year the Group obtained the following services from its auditor at costs as detailed in the table below.
Other non-audit services were £0.4 million (2019: £nil). The 2020 fees related to services provided to the ReAssure businesses where the engagement occurred prior to completion of the acquisition and which were terminated within the three-month grace period.
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 £326 million (2019: £365 million).
D. EQUITY D1. Share Capital The Group has issued ordinary shares which are classified as equity. Incremental external costs that are directly attributable to the issue of these shares are recognised in equity, net of tax.
The EBT holds shares to satisfy awards granted to employees under the Group’s share-based payment schemes.
At the issue date, the Tier 1 Notes were unsecured and subordinated obligations of Old PGH. On 12 December 2018, the Company was substituted in place of Old PGH as issuer.
Summary financial information showing the interest that noncontrolling interests have in the Group’s activities and cash flows is shown below: £m
Impairment of financial assets The Group assesses at each period end whether a financial asset or group of financial assets held at amortised cost are impaired. The Group first assesses whether objective evidence of impairment exists. If it is determined that no objective evidence of impairment exists for an individually assessed financial asset, the asset is included in a group of financial assets with similar credit risk characteristics and that group of financial assets is collectively assessed for impairment. Assets that are individually assessed for impairment and for which an impairment loss is, or continues to be recognised, are not included in the collective assessment of impairment.
Net asset value attributable to unitholders The net asset value attributable to unitholders represents the noncontrolling interest in collective investment schemes which are consolidated by the Group. This interest is classified at FVTPL and measured at fair value, which is equal to the bid value of the number of units of the collective investment scheme not owned by the Group.
E. FINANCIAL ASSETS & LIABILITIES continued E1. Fair values analysis continued E1.1 Fair Values Analysis continued Carrying value £m
2 The change in fair value during 2020 of all other financial assets that are measured at fair value through profit or loss is a £11,087 million gain (2019: £20,231 million gain).
E. FINANCIAL ASSETS & LIABILITIES continued E3. Derivatives The Group purchases derivative financial instruments principally in connection with the management of its insurance contract and investment contract liabilities based on the principles of reduction of risk and efficient portfolio management. The Group does not typically hold derivatives for the purpose of selling or repurchasing in the near term or with the objective of generating a profit from short-term fluctuations in price or margin. The Group also holds derivatives to hedge financial liabilities denominated in foreign currency.
E4.4 Other collateral arrangements Details of collateral received to mitigate the counterparty risk arising from the Group’s reinsurance transactions is given in note F3.
US $500 million Fixed Rate Reset Tier 2 notes (note k) 364 – 395 –
On 8 February 2021, the Group provided notice that it would repay the loan notes on their first call date in March 2021 and accordingly they are presented as due within 12 months.
The terms of the Contingent Convertible Tier 1 Notes contain a contingent settlement provision which is linked to the occurrence of a ‘Capital Disqualification Event’. Such an event is deemed to have taken place where, as a result of a change to the Solvency II regulations, the Contingent Convertible Tier 1 Notes are fully excluded from counting as own funds. On the occurrence of such an event and where the Company has chosen not to use its corresponding right to redeem the notes the Company shall no longer be able to exercise its discretion to cancel any interest payments due on such Contingent Convertible Tier 1 Notes on any interest payment date following the occurrence of this event. Accordingly the Contingent Convertible Tier 1 Notes are considered to meet the definition of a financial liability for financial reporting purposes.
Responsibility for agreeing the financial risk profile rests with the board of each life company, as advised by investment managers, internal committees and the actuarial function. In setting the risk profile, the board of each life company will receive advice from the appointed investment managers, the relevant with-profit actuary and the relevant actuarial function holder as to the potential implications of that risk profile with regard to the probability of both realistic insolvency and of failing to meet the regulatory Minimum Capital Requirement. The Chief Actuary will also advise the extent to which the investment risk taken is consistent with the Group’s commitment to deliver fair customer outcomes.
The Group has increased exposure to illiquid credit assets such as equity release mortgages, private placements and commercial real estate loans) with the aim of achieving greater diversification and investment returns, consistent with the Strategic Asset Allocation approved by the Board.
E. FINANCIAL ASSETS & LIABILITIES continued E6. Risk Management – Financial and Other Risks continued E6.2 Financial risk analysis continued E6.2.2 Market risk continued 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 £25 million (2019: £26 million).
Risk capital requirement for customer risk is assessed using the Group’s PRA approved Internal Model which is calibrated to withstand a stress event to a 99.5% confidence level over a one-year period. The methodology is based on scenarios assessed by experts within the business. From a qualitative perspective, the customer risks for the Group are regularly reported to management oversight committees.
Insurance contracts and investment contracts with DPF 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
Reinsurance claims are recognised when the related gross insurance claim is recognised according to the terms of the relevant contract.
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’. Where there is interest payable on such collateral, it is recognised within ‘Net expense under arrangements with reinsurers’ (see note F3.3). The amounts recognised as financial assets and liabilities from cash collateral received at 31 December 2020 are set out below
Scheme (‘ReAssure Scheme’) and explains how the pension asset/liability is calculated.
The cover provided by the surety bonds will be reduced from £200 million to £100 million (in aggregate) once the completed aggregate buy-in proportion exceeds 75%. The agreements between the Trustee and the surety providers are backed by a guarantee and an indemnity from the Company, PGH2 and PGS to the surety providers to repay them in the event of a claim under the surety bond. A liability would only be recognised upon the occurrence of one of the above trigger events.
Remeasurements: Return on plan assets excluding amounts included in interest income 198 – – – 198
Change in minimum funding requirement obligation – – – 25 25
G1.4 ReAssure Life Staff Pension Scheme Scheme details The ReAssure Scheme was consolidated within the Group financial statements following the acquisition of the ReAssure businesses on 22 July 2020 (see note H2.1). The ReAssure Scheme is a registered occupational pension scheme, set up under Trust, and legally separate from the employer ReAssure Midco Limited (‘RML’). The scheme is administered by ReAssure Pension Trustees Limited, a corporate trustee. There are six Trustee Directors, two of whom are nominated by the ReAssure Scheme members and four of whom are appointed by RML. The Trustee is responsible for administering the scheme in accordance with the Trust Deed and rules and pensions laws and regulations. The ReAssure Scheme is closed to future accrual.
The acquired in-force business is allocated to relevant cash generating units for the purposes of impairment testing.
Acquisition of ReAssure businesses (see note H2.1) – 1,831 – – – – 1,831
G2.3 Customer Relationships The customer relationships intangible at 31 December 2020 relates to vesting pension premiums which captures the new business arising from policies in-force at the acquisition date, specifically top-ups made to existing policies and annuities vested from matured pension policies. The total value of this customer relationship intangible at acquisition was £297 million and has been allocated to the UK Heritage segment. This intangible is being amortised over a 20 year period, and had a remaining useful life as at 31 December 2020 of 8.9 years.
As at 31 December 2020, a property portfolio of £7,025 million (2019: £5,824 million) is held by the life companies in a mix of commercial sectors, spread geographically throughout the UK and Europe.
The remaining provisions of £13 million as at 31 December are expected to be utilised within one year.
Transition and Transformation provision Following the acquisition of the Standard Life Assurance businesses in August 2018, the Group established a transition and transformation programme which aims to deliver the integration of the Group’s operating models via a series of phases. During 2019, the Group announced its intention to extend its strategic partnership with TCS to provide customer servicing, to develop a digital platform and for migration of existing Standard Life policies to this platform by 2022 which raised a valid expectation of the impacts in those likely to be affected. An initial provision of £159 million was established in 2019 and included migration costs, severance costs and other expenses. Migration costs payable to TCS are subject to limited uncertainty as they are fixed under the terms of the agreement entered into. The severance costs are subject to uncertainty and will be impacted by the number of staff that transfer to TCS, and the average salaries and number of years’ service of those affected. During the year, £19 million of the provision has been utilised, £31 million released, and the remaining £109 million is expected to be utilised within three years.
ReAssure restructuring provision On acquisition of the ReAssure businesses on 22 July 2020, an £11 million restructuring provision was recognised on a fair value basis and included severance costs for Legal & General employees following completion of the Part VII transfer. During the year, £8 million of the provision has been utilised and the remaining £3 million released.
On 7 September 2020, the Group completed a Part VII transfer of the mature savings liabilities and associated assets with LGAS, which resulted in the cancellation of the RTA. No further consideration was payable in respect of the Part VII transfer. This transfer was not deemed to be an acquisition of a business and consequently the requirements of IFRS 3 have not been applied.
The Group has determined that all of its investments in collective investment schemes are structured entities. In addition, a number of debt security structures and private equity funds have been identified as structured entities. The Group has assessed that it has interests in both consolidated and unconsolidated structured entities as shown below: • Unit trusts; • OEICs; • SICAVs; • Private Equity Funds; • Asset backed securities; • Collateralised Debt Obligations (‘CDOs’); • Other debt structures; and
Standard Life Master Trust Co. Ltd (dormant company) Wythall2 Ordinary Shares 100.00%
The Phoenix Life SCP Institution (dormant company) Edinburgh26 Limited by Guarantee 100.00%
PUTM ACS Lothian North American Equity Fund Wythall2 Unit Trust 100.00%
PUTM ACS Lothian UK Listed Equity Fund Wythall2 Unit Trust 100.00%
Standard Life Investments Global SICAV II − MyFolio Multi-Manager IV Fund Luxembourg29 SICAV, sub fund 60.49%
Standard Life Managed Trust − Standard Life Japan Fund Edinburgh25 Unit Trust 79.20%
ASI Short Duration Global Inflation-Linked Bond Fund Edinburgh25 OEIC, sub fund 46.83%
I1.3 Movements in the year The following tables illustrate the number of, and movements in, LTIP, Sharesave and DBSS share options during the year: Number of share options 2020 LTIP Sharesave DBSS
Dividends paid on ordinary shares (note B4) – – – (338) (338) – (338)
Credit to equity for equity-settled share-based payments (note I1) – – – 11 11 – 11 291Phoenix Group Holdings plc Annual Report & Accounts 2020
c. On 12 December 2018, the Company was substituted in place of Old PGH as issuer of the US $500 million Tier 2 bonds due 2027 with a coupon of 5.375%, which were initially recognised at fair value of £349 million.
a) On 12 December 2018, the Company was assigned a £428 million subordinated loan by Phoenix Life Holdings Limited (‘PLHL’). The loan accrues interest at a rate of 6.675% and matures on 18 December 2025. This loan was initially recognised at fair value of £439 million and is accreted to par over the period to 2025. At 31 December 2020, the carrying value of the loan was £437 million (2019: £438 million).
In addition, the Group also manages its capital on a regulatory basis as described in note I3 to the consolidated financial statements.
Debt securities − other government and supranational 1,280 297 3,252 4,512 9,341
Calculation of Group Solvency The Solvency II regulations set out two methods for calculating Group solvency, ‘Method 1’ (being the default accounting based consolidation method) and ‘Method 2’ (the deduction and aggregation method).
The Group seeks to manage the level of debt on its balance sheet by monitoring its financial leverage ratio. This is to ensure the Group maintains its investment grade credit rating as issued by Fitch Ratings and optimises its funding costs and financial flexibility for future acquisitions.
The statement of consolidated cash flows prepared in accordance with IFRS combines cash flows relating to shareholders with cash flows relating to policyholders, but the practical management of cash within the Group maintains a distinction between the two. The Group therefore focuses on the cash flows of the holding companies which relate only to shareholders. Such cash flows are considered more representative of the cash generation that could potentially be distributed as dividends or used for debt repayment and servicing, Group expenses and pension contributions.
Assets administered by or on behalf of the Group, covering both policyholder funds and shareholder assets. This includes assets recognised in the Group’s IFRS consolidated statement of financial position together with certain assets administered by the Group but for which beneficial ownership resides with customers
A set of calculations prescribed by the Solvency II regulations for generating the SCR