EMPLOYEES Challenging work environment, career development opportunities and commensurate reward and benefits.
ANALYSIS The PLHL ICA surplus decreased during the period as capital generation items, including management actions, were offset by dividend payments, debt financing and repayments and the adverse impact of management actions undertaken to enhance the Solvency II position.
TARGET To maintain a FOS overturn target of less than 33%.
Phoenix Group Holdings Annual Report and Accounts 2015 23 Strategic report
The Group has delivered a strong set of results and has met all of its published financial targets.” JAMES MCCONVILLE GROUP FINANCE DIRECTOR
In 2015, the Group delivered cash flows from its operating subsidiaries of £225 million, including cash flows of £20 million from management actions. The latter increased cash flows through operational enhancements and de-risking activities.
Other finance costs have increased by £39 million mainly reflecting the recognition of £27 million of finance costs relating to the new PGH Capital subordinated notes which were exchanged for the Tier 1 notes in January 2015. The coupon payable on the Tier 1 notes was previously recognised directly in equity and therefore is not included in finance costs. This has been largely offset by the impact of lower debt principal balances following debt repayments and the restructuring of the bank debt.
The IGD surplus increased by £0.3 billion during the year as a result of the following factors: Ɛ £0.3 billion positive impact arising from the simplification of the Group’s corporate structure, with PLHL now recognising 100% of the capital resources and requirements of Impala Holdings Limited and its subsidiaries; Ɛ capital generation items of £0.3 billion, including capital benefits from management actions such as the Part VII transfer of the business of NPLL into PLAL and the acquisition of a portfolio of equity release mortgages; partly offset by; and
The Group’s regulatory capital policy, prior to 1 January 2016, was to maintain GCR at the PLHL level of: Ɛ 105% of the with-profit insurance component (‘WPICC’), being an additional capital requirement of with-profit funds plus; and
Headroom over the Group’s £150 million capital policy was £0.5 billion as at 31 December 2015 (2014: £0.6 billion).
PLHL SOLVENCY II SURPLUS (ESTIMATED) In accordance with European Insurance and Occupational Pension Authority (‘EIOPA’) and PRA requirements, from 1 January 2016 the Group now undertakes a Solvency II capital adequacy assessment at the level of the highest EEA insurance group holding company, which is PLHL.
Adjustments to include the following items at fair value: PLL subordinated debt 12 12
3 Total face value of the PGH Capital subordinated notes is £428 million (2014: £nil), of which bonds with a face value of £32 million (2014: £nil) are held by Group companies. 4 Total face value of the Tier 1 notes is £6 million (2014: £425 million), of which bonds with a face value of £nil (2014: £31 million) are held by Group companies.
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 categories. The highest risk universe category is Level 1 and includes: Ɛ strategic risk; Ɛ customer risk; Ɛ financial soundness risk; Ɛ market risk; Ɛ credit risk; Ɛ insurance risk; and
The Group operates a Capital Management Policy where capital is allocated across risks where capital is held as a mitigant and, in turn, to individual risk owners who hold risk capital budgets. The amount of risk capital required is reviewed regularly to ensure the risk exposure remains within budget. Any requests to increase budgets are referred to the Board for approval.
RISK MANAGEMENT EFFECTIVENESS The provisions of the UK Corporate Governance Code require an annual review of the effectiveness of Risk Management.
In addition, a strong theme emerging from the Board evaluation was the desire to spend more time on strategy. We are now including specific sections of the agenda at each Board meeting devoted to strategy as well as our annual strategic off-site session and the continued monitoring of performance against strategy at each Board meeting. I am convinced that we have a Board equipped to drive our strategy forward and pursue our M&A agenda.
Experience Kory Sorenson is currently a Non-Executive Director of SCOR SE, Pernod Ricard SA, UNIQA Group and Aviva Insurance Limited. She also volunteers as a Director of the Institut Pasteur foundation in Paris. Ms Sorenson has over 20 years of financial services experience, most of which has been focused on insurance and banking. She was Managing Director, Head of Insurance Capital Markets of Barclays Capital from 2005 to 2010 and also held senior positions in the financial institutions divisions of Credit Suisse, Lehman Brothers and Morgan Stanley.
Ɛ Leads implementation of the Group’s strategy as regards any potential acquisitions or disposals
Ɛ Reviewed the financial forecasts prepared by management, supported by the sensitivity analysis on the key assumptions underpinning the forecasts, in support of the assumption that the Group will continue as a going concern and in support of dividend payments.
Ɛ Monitored the engagement of the external auditors for non-audit work in accordance with approved policy.
Ɛ Approved the annual update of the Group Internal Audit Charter (which was aligned to the CIIA Code for ‘Effective Internal Audit in Financial Services’) and the Group Internal Audit Plan (including its link to the Risk Management Framework), receiving regular reports to monitor progress against the plan. In line with the developing proposition, the Internal Audit Plan was split between static/risk policy audits and dynamic/thematic audits.
FINANCIAL REPORTING AND GOING CONCERN 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 2015.
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 on pages 4 to 40.
INTRODUCTION We have presented this Directors’ remuneration report in accordance with the UK’s Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 (the ‘UK regulations’). The Company complies with the reporting obligations within the UK regulations as a matter of good practice although it is not strictly required to do so as a non-UK incorporated quoted company. The Directors’ remuneration report also describes how the Board has complied with the provisions set out in the UK Corporate Governance Code relating to remuneration matters.
2015 award (40% MCEV growth, 40% Cumulative cash generation and 20% TSR)
Underpin: Notwithstanding the MCEV growth, Cumulative cash generation and TSR performance targets, if the Committee determines that the Group’s debt levels and associated interest costs have not remained within parameters acceptable to the Committee over the performance period, and that the Group has not made progress considered to be reasonable by it in executing any strategy agreed by the Board on debt management, capital structuring and risk management, the level of awards vesting will either be reduced or lapse in full.
Ɛ All Executive Directors are eligible to participate in the Group Personal Pension (‘GPP’). Executive Directors receive a contribution to GPP or they may opt to receive the contribution in cash if they are impacted by the relevant lifetime or annual limits
Ɛ AIP levels and the appropriateness of measures are reviewed annually to ensure they continue to support the Group’s strategy
Phoenix Group Holdings Annual Report and Accounts 2015 75 Corporate governance
Long-Term Incentives To motivate and incentivise delivery of sustained performance over the long-term, and to promote alignment with shareholders’ interests, the Group operates the Phoenix Group Holdings Long-Term Incentive Plan
Ɛ Malus/Clawback provisions apply on a basis consistent with the equivalent provisions in the AIP and DBSS
Ɛ The performance period for LTIP awards will be at least three years, but the Remuneration Committee reserves discretion to lengthen (but not reduce) any performance period and/or introduce a separate holding period for vested shares2
Ɛ Consistent with normal practice, such awards are not subject to performance conditions
Maximum Based on the maximum remuneration receivable: Ɛ AIP: consists of the maximum annual incentive (150% of base salary)
The Directors of the Group present their report for the year ended 31 December 2015.
SHARE CAPITAL The issued share capital of the Company was increased by 329,162 ordinary shares during 2015 which related to the Company’s Sharesave Scheme. At 31 December 2015, the issued ordinary share capital totalled 225,419,446. Subsequently, 786 ordinary shares have been issued in 2016 in connection with the Company’s Sharesave Scheme to bring the total in issue to 225,420,232 at the date of this report.
Certain restrictions on the transfer of shares may be imposed from time to time by applicable laws and regulations (for example, insider trading laws), and pursuant to the Listing Rules of the Financial Conduct Authority (‘FCA’) and the Group’s own share dealing rules whereby Directors and certain employees of the Group require the approval of the Company to deal in the Company’s ordinary shares.
Details of fees paid to EY during 2015 for audit and non-audit work are disclosed in note C3 to the IFRS consolidated financial statements.
Directors’ remuneration report 6 Waiver of any future emoluments by a Director
STRATEGIC AND DIRECTORS’ REPORT APPROVAL The Board has prepared a Strategic Report which provides an overview of the development and performance of the Group’s business for the year ended 31 December 2015, covers the future developments in the business of Phoenix Group Holdings and its consolidated subsidiaries, and provides details of any important events affecting the Company and its subsidiaries after the year-end. For the purposes of compliance with DTR 4.1.5R(2) and DTR 4.1.8R, the required content of the ‘Management Report’ can be found in the Strategic Report and this Directors’ Report, including the sections of the Annual Report and Accounts incorporated by reference.
STATEMENT OF DIRECTORS’ RESPONSIBILITIES IN RESPECT OF THE ANNUAL REPORT AND ACCOUNTS OF PHOENIX GROUP HOLDINGS The Directors of Phoenix Group Holdings are responsible for the preparation of the Annual Report and Accounts, the Strategic Report, the Directors’ Report, the Directors’ remuneration report, the Group consolidated financial statements and the Company financial statements in accordance with applicable law and regulations.
The Directors have elected to comply with certain Companies Act and Listing Rules (‘LR’) which would otherwise only apply to companies incorporated in the UK – namely: Ɛ the Directors’ statement under LR 9.8.6R(3) (statement by the Directors that the business is a going concern); Ɛ the Directors remuneration disclosures made under LR 9.8.4R(5) and (6); and
In obtaining sufficient audit evidence to conclude on the appropriateness of actuarial assumptions, we: Ɛ tested the design and operating effectiveness of key controls over management’s process for setting and updating actuarial assumptions; Ɛ 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; Ɛ 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; Ɛ 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; and
In obtaining sufficient audit evidence to conclude on valuation of complex and illiquid financial investments, we: Ɛ tested the design and operating effectiveness of key controls over management’s process in respect of the valuation of investments; Ɛ evaluated the methodology, inputs and assumptions used for a sample of mark to model investments, by comparing yields, spreads, earnings, house prices and market rents to published market benchmarks to confirm that key valuation inputs were consistent with industry norms and our understanding of the asset type; Ɛ recalculated a sample of modelled valuations to assess their reasonableness. This year this included assessing the appropriateness of the models and assumptions used for the portfolio of equity release mortgages; Ɛ obtained net asset valuation (‘NAV’) statements provided by third party administrators in respect of direct equity and fund of fund structures and compared them with management’s valuations. We performed back testing of recent realisations in order to confirm that NAV continues to be an appropriate proxy for fair value; Ɛ used our real estate valuation specialists to assess the reasonableness of investment property valuations; and
The charts below illustrate the coverage obtained from the work performed by our audit teams.
Audit work at component locations for the purpose of obtaining audit coverage over significant financial statement accounts is undertaken based on a percentage of total performance materiality. The performance materiality set for each component is based on the relative scale and risk of the component to the Group as a whole and our assessment of the risk of misstatement at that component. In the current year, the range of performance materiality allocated to components was £4.6 million to £18.4 million (2014: £4.2 million to £13.7 million). In the prior year performance materiality was allocated separately to the two life companies but in the current year it was allocated to the Insurance Companies component taken as a whole.
Finance costs attributable to owners (99) (88) Profit before the tax attributable to owners From continuing operations 185 336 From discontinued operations – 80
Cash and cash equivalents at the beginning of the year 5,067 9,294
Dividends paid on ordinary shares – (120) – – – – (120) – (120)
Dividends paid to non-controlling interests – – – – – – – (23) (23)
Profit/(loss) before finance costs and tax 529 11 161 – (80) 621
Own shares held by employee benefit trust and Group entities (1) (1)
No services were provided by the Company’s auditors to the Group’s pension schemes in either 2015 or 2014.
In the prior period 540,612 shares held by other Group entities were sold. The number of shares held by other Group entities as at 31 December 2015 was nil (2014: nil).
On 1 January 2010, Pearl Group Holdings (No. 1) Limited (‘PGH1’) had in issue £500 million of Perpetual Reset Capital Securities (‘the Notes’) which are admitted to the Official List of the UK Listing Authority and to trading on the LSE. Following amendments made to the Notes in 2010, the principal amount outstanding was £425 million.
On 21 March 2016, PGH1 gave notice to the noteholders to redeem the remaining Notes on 25 April 2016.
Summary financial information for the UKCPT is shown below: 2015 £m 2014 £m
Ɛ a group of financial assets, financial liabilities or both is managed and its performance is evaluated and managed on a fair value basis, in accordance with a documented risk management or investment strategy, and information about the investments is provided internally on that basis to the Group’s key management personnel.
The Group receives and pledges collateral in the form of cash or non-cash assets in respect of stock lending transactions, derivative contracts and reinsurance arrangements in order to reduce the credit risk of these transactions. The amount and type of collateral required where the Group receives collateral depends on an assessment of the credit risk of the counterparty.
£200 million 7.25% unsecured subordinated loan (note f) 158 149 212 212 £300 million senior unsecured bond (note g) 298 298 324 324 £450 million revolving credit facility (note h) 443 441 450 450 £450 million amortising term loan (note h) 199 387 200 390 £428 million subordinated loans (note i) 393 – 400 –
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 actuarial function holder will also advise the extent to which the investment risk taken is consistent with the Group’s commitment to treat customers fairly.
A further indicator of the quality of the Group’s financial assets is the extent to which they are neither past due nor impaired. The following table gives information regarding the ageing of financial assets that are past due but not impaired and the carrying value of financial assets that have been impaired.
In the non-participating funds, policy liabilities’ sensitivity to interest rates are matched primarily with fixed and variable rate income securities, with the result that sensitivity to changes in interest rates is very low.
Other payables 677 – – – 677 1 year or less or on demand £m 1–5 years £m
Obligations for contributions to defined contribution pension schemes are recognised as an expense in the consolidated income statement as incurred.
Provision for tax on that part of the economic surplus available as a refund on a winding-up of the Scheme (97) (76)
The actual return on plan assets was a loss of £3 million (2014: £443 million gain).
The Group ensures that the investment positions are managed within an asset liability matching (‘ALM’) framework that has been developed to achieve long-term investments that are in line with the obligations under the Pearl Scheme. Within this framework an allocation of 25% of the scheme assets is invested in collateral for interest rate and inflation rate hedging where the intention is to hedge greater than 90% of the interest rate and inflation rate risk measured on the Technical Provisions basis.
Not later than 1 year 91 92 Later than 1 year and not later than 5 years 295 284 Later than 5 years 436 414
For such collective investment schemes, the following circumstances may indicate, in substance that the Group has power over the investee: Ɛ where the investee is managed by fund managers outside the Group, the Group has existing substantive rights (such as power of veto and liquidation rights) that give it the ability to direct the current activities of the investee. In assessing the Group’s ability to direct an investee the Group considers its ability relative to other investors; and
London Life Limited (Non-trading company) Ordinary shares 100.00% Pearl RLG Limited (Dormant company) Ordinary shares 100.00% The London Life Association Limited (Dormant company) Limited by guarantee N/A Pearl BULA Limited (Dormant company) Ordinary shares 100.00% The Scottish Mutual Assurance Society (Dormant company) Limited by guarantee N/A The Phoenix Life SCP Institution (Dormant company) Limited by guarantee N/A Alba LAS Pensions Management Limited (Dormant company) Ordinary shares 100.00% Axial Fundamental Strategies (US Investments) LLC (Non-trading company)
Assets classified as held for sale: Reinsurer’s share of insurance contract liabilities 1,521 1,713 Investment in joint venture 149 –
Difference between IFRS and MCEV carrying values of shareholder borrowings 95 78
Details of the shareholdings and emoluments of individual Directors are provided in the Remuneration report on pages 57 to 80.
Later than 1 year and not later than 5 years 22 33
Where the Group has a present legal or constructive obligation, but it is not probable that there will be an outflow of resources to settle the obligation or the amount cannot be reliably estimated, this is disclosed as a contingent liability.
Cash and cash equivalents at the end of the year 10 – 3
(B) ACCOUNTING POLICIES The accounting policies in the separate financial statements are the same as those presented in the notes to the consolidated financial statements on pages 102 to 187, except for the policy noted below. Where an accounting policy can be directly attributed to a specific note to the consolidated financial statements, the policy is presented within that note. Each note within the Company financial statements makes reference to the note to the consolidated financial statements containing the applicable accounting policy. The accounting policy in relation to foreign currency transactions is included within note A2.1.
Administrative expenses 19 22 1 In addition to the Non-Executive Directors, one employee was employed by Phoenix Group Holdings during the period (2014: one). Other Group employees are employed by other
8. COLLECTIVE INVESTMENT SCHEMES The accounting policy for collective investment schemes is included in note E1.
The Company guarantees certain borrowings of PGH Capital Limited as detailed in note E5 to the consolidated financial statements.
Phoenix Group Holdings Annual Report and Accounts 2015 217 Financials 4. NEW BUSINESS The value generated by new business written during the period is calculated as the present value of the projected stream of after‑tax distributable profits from that business. This contribution has been valued using economic and non‑economic assumptions at the point of sale. The value of new business is shown after the effect of frictional costs of holding required capital on the same basis as for the in‑force covered business.
Shareholder helpline number +44 (0) 870 707 4040 Fax number +44 (0) 870 873 5851 Shareholder helpline email address info@computershare.co.je
GEARING Gross shareholder debt (gearing basis) as a percentage of the gross MCEV
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