Today we have announced the planned divestment of Ignis Asset Management to Standard Life Investments subject to regulatory approval, which will accelerate the achievement of the Group’s planned reduction in gearing and position the Group well for future growth. The Board believes that the financial benefits of the divestment and the commencement of a long-term strategic asset management alliance with Standard Life Investments, will mean the Group is well placed to participate in future consolidation of the UK closed life fund market and generate further value for shareholders.
We announced at the start of 2013 a comprehensive capital raising and debt re-terming package which positioned Phoenix for the next phase of its development. During the year, we continued to enhance the value of the business and accelerate the release of capital. I am pleased to report that, once again, Phoenix has either achieved or exceeded its published financial targets.
For further details of the Group’s Risk Management Framework and principal risks and uncertainties Turn to pages 44 and 49
HOW WE MEASURE DELIVERY We have focused consistently on employee engagement for a number of years, with the annual survey1 underpinning our engagement programme, helping shape action plans developed with team managers.
– The Phoenix Group Corporate Responsibility and staff engagement agendas are complementary. Through a programme of community and charity work, the Group leverages significant team building and development benefits from staff through team fundraising, volunteering activities and social events.
PRIORITIES FOR 2014: – Continue to strengthen our pipeline of future senior leaders and further enhance our development offering for all staff
The Ignis Asset Management and management services businesses are included in the Group MCEV at the value of IFRS net assets. The Group MCEV does not include the future earnings from their businesses.
NEW BUSINESS VALUE New business profits generated from vesting annuities without guarantees during 2013 were £18 million after tax (2012: £20 million). Even for those customers who do not have guarantees, we believe the lifelong certainty of income provided by an annuity will mean these products should continue to provide an attractive retirement option for some policyholders, despite the recent Budget proposals.
Group assets under management represent all assets actively managed or administered by or on behalf of the Group including life companies’ funds managed by third parties. It includes holding company cash and cash equivalents but excludes stock lending collateral.
The Group’s IGD assessment is made at the level of the highest EEA insurance group holding company, which is PLHL. The estimated IGD surplus at 31 December 2013 is £1.2 billion (2012: £1.4 billion). The components of the estimated IGD calculation are shown below: 2013 £bn 2012 £bn
Had the divestment of Ignis (which is hoped to complete by the end of the second quarter of 2014) and the £250 million debt prepayment expected to be made in respect of the Impala facility following completion of the divestment taken place before 31 December 2013, the impact on the Group’s IGD surplus and headroom over Group capital policy would have been broadly neutral.
CAPITAL RESOURCES The primary sources of capital used by the Group comprise equity shareholder funds as measured on an MCEV basis, the Perpetual Reset Capital Securities (Tier 1 bonds) and shareholder borrowings.
The Board seeks to ensure that the Group identifies and manages all risks either to create additional value for its stakeholders or to mitigate any potentially adverse effects.
The Group continues to be independently recognised as one of ‘Britain’s Top Employers’. Companies awarded this accreditation are considered amongst the best companies to work for in the UK.
David Woods is a Fellow of the Institute of Actuaries and a Non-Executive Director of Standard Life UK Smaller Companies Trust plc, Murray Income Trust plc and The Moller Centre for Continuing Education. He is also Chairman of the pension fund trustee companies responsible for the governance of all the UK pension schemes in the Steria Group and is a trustee of the Scottish Provident Pension Fund. Between 1988 and 2002, he was Group Managing Director of the Scottish Provident Group and was Non-Executive Chairman of Royal Liver Assurance from 2003 to 2011. He was appointed to the Board of Directors of the Company on 18 February 2010 and is Chairman of the Board Risk Committee.
The remuneration of the directors is shown in the Remuneration report on pages 68 to 89. 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 (other than Manjit Dale who is standing down from the Board, as reported in the Chairman’s opening statement to the Annual Report and Accounts) will submit themselves for election or re-election at the Company’s AGM on 30 April 2014.
INVESTMENT COMMITTEE’S PRINCIPAL ACTIVITIES DURING 2013 − Reviewed regular reports from Ignis Asset Management on investment performance
− Operating companies’ cash generation of £817 million, above the top end of our target range
IAN CORMACK Remuneration Committee Chairman 25 March 2014 69 PHOENIX GROUP HOLDINGS ANNUAL REPORT AND ACCOUNTS 2013
− Base salaries are reviewed each year against companies of similar size and complexity and set by reference to the median data of comparators which the Remuneration Committee considers to be suitable, with consideration given to both relevant insurance companies and the FTSE 31-100 as a whole
− Changes to base salaries normally take effect from 1 January
− Relocation expenses are subject to a maximum limit of £150,000
− On-target performance on all measures produces an outcome of 50% of maximum annual incentive opportunity. However, the Remuneration Committee reserves the right to adjust the threshold and target levels for future financial years in light of competitive practice
2013 AIP − The AIP maximum potential level for 2013 was 150% of base salary with target levels at 50% of this maximum level (75% of base salary)
− For each part of an LTIP award subject to a specific performance condition, the threshold level of vesting is 25% of that part of the LTIP award. The Remuneration Committee reserves the discretion to make changes to these levels which it considers non-material
− 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 shares
The new UK regulations also require that a performance graph is supported by a table summarising aspects of Group Chief Executive Officer remuneration as shown below for the period since the Company’s Premium Listing.
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 GPP or received in cash. Pension contributions paid to GPP are disclosed on page 85. Pension contributions paid as cash supplements are reduced for the effect of employers’ National Insurance contributions.
AIP OUTCOMES FOR 2013 The table below shows the actual out-turn against the annual incentive maximum which follows the AIP terms without discretionary adjustment. For 2013 AIP, KPI performance measures applied to 80% of incentive opportunity, and individual objectives applied to 20% of incentive opportunity.
MCEV 50% Target range between MCEV growth in excess of the riskfree rate by 2.5% per annum and MCEV growth in excess of the risk-free rate by 6% per annum
Cash generation 25% of this part vests at threshold performance rising on a pro rata basis until 100% vests
Debt underpin Notwithstanding the MCEV, cash generation and TSR performance targets, if the Remuneration Committee determines that the Group’s debt levels and associated interest costs have not remained within parameters acceptable to the Remuneration Committee over the performance period and that the Group has not made progress considered to be reasonable by it in executing any strategy agreed by the Board on debt management (and for 2013 onwards, risk management) and capital structuring, the level of awards vesting will either be reduced or lapse in full.
Notes: Sharesave awards granted prior to 2013 were increased as a result of the placing and open offer of 50,000,000 shares on 21 February 2013. The increases were made on the basis of the standard formula of share plan adjustments on such event. The aggregate figure shown in the column ‘As at 31 Dec 2013’ reflects this increase in options for Clive Bannister.
5 Hugh Osmond is a director of Xercise2 Limited and Xercise Limited and as such these are considered as connected persons. Total interests held by these entities amount to 17,394,353. Mr Osmond’s share interests are shown as at his date of leaving on 21 August 2013.
LONG-TERM INCENTIVES Group To encourage the creation of value over the long-term and to align the rewards of the participants with the returns to shareholders, the Group provides employees in senior roles (executive level and selected senior management) the opportunity to receive annual awards of long-term incentives. The full details of the LTIP are given in Part A of the Remuneration 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.
−we have not received all the information and explanations we require for our audit.
Group costs (24) (13) Total operating profit before adjusting items 439 429
−all resulting exchange differences are recognised through the statement of consolidated comprehensive income.
Some insurance and investment contracts contain a DPF. This feature entitles the policyholder to additional discretionary benefits as a supplement to guaranteed benefits. Investment contracts with a DPF are recognised, measured and presented as insurance contracts.
(n) Intangible assets Goodwill Business combinations are accounted for by applying the purchase method. Goodwill represents the difference between the cost of the acquisition and the fair value of the net identifiable assets acquired.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 1. ACCOUNTING POLICIES CONTINUED (x) Income recognition Gross premiums In respect of insurance contracts and investment contracts with DPF, premiums are accounted for on a receivable basis and exclude any taxes or duties based on premiums. Funds at retirement under individual pension contracts converted to annuities with the Group are, for accounting purposes, included in both claims incurred and premiums within gross premiums written.
Fair value gains and losses on financial assets designated at fair value through profit or loss are recognised in the consolidated income statement. Realised gains and losses are the difference between the net sale proceeds and the original cost. Unrealised gains and losses are the difference between the valuation at the period end and their valuation at the previous period end or purchase price, if acquired during the year.
− IFRS 10 Consolidated Financial Statements (2014) provides a single consolidation model that identifies control as the basis for consolidation for all types of entities.
Segment performance is evaluated based on profit or loss which, in certain respects, is presented differently from profit or loss in the consolidated financial statements. Group financing (including finance costs) and owners’ taxes are managed on a Group basis and are not allocated to individual operating segments.
Net premiums written from: External customers 1,344 – – – 1,344
Financing costs attributable to owners – – (111) (111) Segmental result before the tax attributable to owners 380 38 (109) 309
Profit for the year 207 424 Share of result attributable to non-controlling interests (note 20) (62) (17) Profit attributable to owners 145 407
During the year, 1,144,993 (2012: 18,146) shares were awarded to employees, nil (2012: 229,370) shares were sold to meet the Group’s obligation under the deferred cash plan (note 19), nil (2012: 47,349) shares were received as scrip dividends, 203,575 (2012: nil) shares were received following take up by the PGH EBT of its rights under the open offer (see note 16) and 1,425,553 (2012: nil) shares were purchased. The number of shares held by the PGH EBT at 31 December 2013 was 1,529,477 (2012: 1,045,342).
Coupons are payable annually in arrears on 25 April, at the rate of 6.5864% per annum, until the first reset date. Thereafter, coupons are payable semi-annually at 2.73% per annum over the then prevailing offered rate for six month sterling deposits.
21. LIABILITIES UNDER INSURANCE CONTRACTS This note contains a summary of the liabilities under insurance contracts and the related reinsurers’ share included within assets in the statement of consolidated financial position. The accounting policies adopted in the preparation of this note are detailed in notes 1(d), 1(e) and 1(s).
Life assurance business: Insurance contracts 31,960 2,850 39,806 8,287 Investment contracts with DPF 10,769 1 11,328 –
Transfer from income statement 77 45 139 PHOENIX GROUP HOLDINGS ANNUAL REPORT AND ACCOUNTS 2013
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 24. DERIVATIVES 24.1 Summary The Group purchases derivative financial instruments in connection with the management of its insurance contract and investment contract liabilities based on the principles of reduction of risk and efficient portfolio management. The Group does not typically hold derivatives for the purpose of selling or repurchasing in the near term or with the objective of generating a profit from short-term fluctuations in price or margin. This note provides an analysis of the derivative instruments held by the Group. The accounting policies adopted in the preparation of this note are detailed in notes 1(g) and 1(r).
The IPO warrants are listed and were previously valued using the warrant price quoted on the LSE for the Company. Due to the relatively low number of IPO warrants in issue, they are thinly traded and the quoted price is not considered to be the best indicator of their fair value. As a result the IPO warrants have been valued using an extended Black-Scholes valuation model. The key assumptions used to ascertain a value as at 31 December 2013 are as follows: −share price as at 31 December 2013 of £7.28; −volatility of 30%; −the warrants are not adjusted for dividends; and
The general insurance element amounts to £48 million (2012: £42 million) which is included within liabilities held for sale.
The actual return on plan assets was £75 million (2012: £68 million).
Impact on the defined benefit obligation 1,908 (71) 75 49 (47) 53 (52)
Cash and other 645 – 455 – Obligations for repayment of stock lending collateral received (1,004) – (1,007) –
Defined benefit obligation The calculation of the defined benefit obligation can be allocated to the scheme’s members as follows: −Deferred scheme members: 37% (2012: 37%)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 31. INTANGIBLE ASSETS CONTINUED 2012
Future cash flows have been valued using a discount rate of 10.8% (2012: 10.1%) for the Ignis Asset Management business and a discount rate of 8.4% (2012: 7.8%) for the management services business of the Phoenix Life segment.
ACQUIRED IN-FORCE BUSINESS Acquired in-force business represents the difference between the fair value of the contractual rights acquired and obligations assumed under insurance and investment contracts with and without DPF and the liability measured in accordance with the Group’s accounting policies for such contracts. This intangible is being amortised in accordance with the run-off of the book of business within the Phoenix Life segment.
At 1 January 15 Depreciation recognised in profit or loss – Remeasurement recognised in other comprehensive income – At 31 December 15 Unrealised gains/(losses) for the year –
The residential property reversions, an interest in customer’s properties which the Group will realise upon their death, are valued using a DCF model based on the Group’s proportion of the current open market value, and discounted for the expected lifetime of the policyholder. The open market value is measured by independent local property surveyors having appropriate recognised professional qualifications with reference to the condition of the property and local market conditions. The individual properties are valued triennially and indexed using regional house price indices to the balance sheet date. The discount rate is a risk-free rate appropriate for the duration of the asset, adjusted for liquidity and mortality risk. The residential property reversions have been substantially refinanced under the arrangements with Santander described in note 23.
34.1 FAIR VALUES The table below sets out a comparison of the carrying amounts and fair values of financial instruments as at 31 December 2013: 2013 Carrying value
Financial assets measured at fair value Derivatives – 5 Financial assets designated at fair value through profit or loss upon initial recognition
It is the Group’s practice to obtain collateral when undertaking such transactions. Such collateral is received in the form of marketable financial instruments which the Group is not permitted to sell or re-pledge except in the case of default, and is therefore not recognised in the statement of consolidated financial position. The fair value of such financial assets accepted as collateral amounts to £1,902 million (2012: £1,785 million).
Adjustments onto a regulatory basis: Other qualifying capital: Subordinated debt – – – – – – – Contingent loans – – – – – 272 272
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 39. RISK MANAGEMENT CONTINUED 39.3 FINANCIAL RISK ANALYSIS CONTINUED 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).
A 10% decrease in property prices, with all other variables held constant, would result in a decrease in the profit after tax in respect of a full financial year, and in equity, of £23 million (2012: £19 million).
Objectives and policies for mitigating insurance risk The Group uses several methods to assess and monitor insurance risk exposures, both for individual types of risks insured and overall risks. These methods include internal risk measurement models, experience analyses, external data comparisons, sensitivity analyses, scenario analyses and stress testing.
PGH (TC2) Limited (holding company)2 UK ‘A’ ordinary shares of £1 and Ordinary shares of £1 and
Other amounts due from Group entities R 5 8 Cash and cash equivalents L 9 16
STATEMENT OF CHANGES IN EQUITY For the year ended 31 December 2013
Derivatives (2) – (2) – Net investment income 105 61 201 PHOENIX GROUP HOLDINGS ANNUAL REPORT AND ACCOUNTS 2013
There is a restriction on the ability of certain subsidiaries to distribute funds to Phoenix Group Holdings as a result of restrictions imposed by the Group’s two main credit agreements, namely the Pearl Facility and the Impala Facility (as described in note 23 to the consolidated financial statements).
On 16 July 2010, the Company was granted a loan from Impala Holdings Limited of £2.5 million. The loan accrues interest at six month LIBOR plus 2% which is capitalised semi-annually on 7 April and 7 October. The loan has a maturity date of 31 December 2016. Interest of £0.1 million (2012: £0.1 million) was accrued during the year. The balance outstanding at 31 December 2013, was £2.8 million (2012: £2.7 million).
All borrowings are categorised as Level 3 financial instruments. The fair value of Borrowings with no external market is determined by internally developed discounted cash flow models using a risk adjusted discount rate corroborated with external market data where possible.
1 As a result of the reinsurance agreement entered into with Guardian Assurance Limited (‘Guardian’) effective 1 July 2012, £5.1 billion of shareholder financial assets were transferred to Guardian. These assets were made up of £610 million of cash and cash equivalents, £1,934 million of gilts and £2,580 million of bonds. Subsequent to this transfer, £292 million of gilts were purchased to rebalance the remaining portfolio of financial assets.
Group MCEV equity at 31 December 2,378 2,122 221 PHOENIX GROUP HOLDINGS ANNUAL REPORT AND ACCOUNTS 2013
2 Pension scheme surpluses valued on an IFRS basis are removed. This includes the IFRIC 14 adjustments as described in note 30 to the IFRS consolidated financial statements.
The Finance Act 2012 set the rate of corporation tax at 23% from 1 April 2013 and further reductions to 21% from April 2014 and 20% from April 2015 were set by the Finance Act 2013. The impact of these tax rate reductions has been reflected in the Group’s MCEV.
COVERED BUSINESS The MCEV calculations cover all long-term insurance business written by the Group, but exclude Ignis Asset Management and the management service companies.
The Group holds £4.1 billion (2012: £3.6 billion) of corporate bonds which are used to back annuity in-payment liabilities in non-profit funds. The MCEV includes an aggregate credit default provision of £210 million (2012: £312 million), to fund against the risk of default on these corporate bonds.
If you deal with an unauthorised firm, you would not be eligible to receive payment under the Financial Services Compensation Scheme (‘FSCS’). The FCA can also be contacted by completing an online form available at www.fca.org.uk/consumers/scams/investmentscams /share-fraud-and-boiler-room-scams/reporting-form.
− The policies and actions of governmental and/or regulatory authorities, including, for example, new government initiatives related to the financial crisis and the effect of the PRA’s planned ‘ICA+’ regime and ultimate transition to the European Union’s ‘Solvency II’ requirements on the Group’s capital maintenance requirements
The 2013 Annual Report and Accounts has been prepared for the members of the Company and no one else. The Company, its directors or agents do not accept or assume responsibility to any other person in connection with this document and any such responsibility or liability is expressly disclaimed.
ACSM Alternative Coupon Satisfaction Mechanism – The mechanism under the Tier 1 Notes, under which, if Pearl Group Holdings (No. 1) Limited opts to defer a coupon payment, the deferred coupon payment may only be satisfied through the proceeds of the issue of certain forms of securities, which may be made at any time
FCA Financial Conduct Authority – The body responsible for supervising the conduct of all financial services firms and for the prudential regulation of those financial services firms not supervised by the Prudential Regulation Authority (‘PRA’), such as asset managers and independent financial advisers