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In March 2012, in response to the Government’s consultation on improving pension transfers and dealing with small pension pots, Phoenix called for the Government to exclude legacy business from any revisions to pension transfer legislation, in order both to protect policyholder interests and avoid an unnecessary administrative burden on the industry. The Government published the results of this consultation exercise in July and confirmed that only new, auto-enrolled business would be included in the legislation, thereby avoiding policyholder detriment and administrative costs to the Group. In addition, Phoenix provided evidence to the Work and Pensions Select Committee to highlight and explain the valuable benefits and guarantees in some of the older with-profit pension products. Phoenix is working to ensure that these valuable benefits to policyholders are not overlooked when the Government is considering any future pension reforms.
By 31 December 2012, cash generation of £1.5 billion since 1 January 2011 had already been achieved against this target. We are aiming to deliver cash generation of between £650 million and £750 million in 2013. In addition, we maintain our annual average target of £100 million of MCEV enhancements through management actions over the period 2011 to 2014. At 31 December 2012, we had already delivered £332 million of this cumulative target.
Life assurance Through Phoenix Life we manage life assurance funds which no longer actively sell new life assurance policies and which run-off gradually over time. These ‘closed life funds’ within the Group consist of approximately 6 million policyholders and a total of approximately £65 billion of financial and property assets.
The Phoenix Way also provides a template which can then be applied in a consistent manner to newly acquired closed life funds within the Group.
Ignis Asset Management Ignis Asset Management is the Group’s asset management business and is led by its Chief Executive Officer, Chris Samuel.
Policyholders’ interests are protected by building a number of safeguards into the transfer process. Most importantly, the transfers required approval by the High Court. In order to decide whether the transfer is fair to affected policyholders, the Court requires a report from an Independent Expert and also the FSA are consulted. Following the transfers, both NPI and London Life policyholders benefit from the protection provided by a legal commitment to a clear capital policy set out in the Scheme document.
Ignis Advisors –Fund of Hedge Funds –Fund of Private Equity –Fund of Real Estate –Retail multi-manager
We are well positioned to adapt to new requirements arising from regulatory changes. Simplifying our capital structure brings greater flexibility and is a fundamental enabler of the strategic growth ambitions of the Group.
Group MCEV operating earnings1 The realisation of value from the delivery of management actions has seen the Group MCEV remain resilient during the period.
Expected existing business contribution 184 254 New business value 20 13 Non-economic experience variances and assumption changes: Experience variances 13 181 Assumption changes (37) (18) Other operating variances 92 (21) Total non-economic experience variances and assumption changes 68 142 Life MCEV operating earnings after tax 272 409
Partially offsetting the above is negative assumption changes of £37 million (2011: negative £18 million), primarily driven by a reduction in assumed surrender rates in funds with valuable policyholder guarantees.
Group MCEV The movement from opening to closing Group MCEV is shown below: Movement in Group MCEV
Phoenix Life Operating profit for Phoenix Life is based on expected investment returns on financial investments backing shareholder and policyholder funds over the reporting period, with consistent allowance for the corresponding expected movements in liabilities (being the release of prudential margins and the interest cost of unwinding the discount on the liabilities). The principal assumptions underlying the calculation of the longer-term investment return are set out in note 5 to the IFRS consolidated financial statements.
The longer-term return on owners’ funds of £22 million (2011: £37 million) reflects the asset mix of owners’ funds: primarily cash based assets and fixed interest securities. The reduction compared to the prior year reflects the upstreaming of dividends in the period and lower expected investment return assumptions for 2012 for non-cash assets (calculated by reference to the market yields on risk-free fixed interest assets at the start of the year). The investment policy for managing these assets remains prudent.
Variance on owners’ funds The negative variance on owners’ funds of £13 million for 2012 is driven by fair value losses on credit default swaps held in the shareholder funds.
Capital management framework The Group’s capital management framework is designed to achieve the following objectives: – Provide appropriate security for policyholders and meet all regulatory capital requirements whilst not retaining unnecessary excess capital
– Meet the dividend expectations of shareholders as set by the Group’s dividend policy, within the restrictions in the Group’s two main credit agreements.
– The degree of risk the Group is willing to accept (which is set out in the policy risk appetite statements)
The Group’s business units operate capital management processes that meet the Group’s Capital Management Policy. Under these processes, 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 remains within budget. Any increases in capital allocation required by a risk owner are referred to the relevant business unit board for approval to assess whether the increased capital allocation requested is within appetite for that particular risk type or whether further risk mitigation is required.
Risk assessment activity is a continuous process and is performed on the basis of identifying and managing the significant risks to the achievement of the Group’s objectives. Stress and scenario tests are used to support the assessment of risk and analysis of their financial impact.
The Group could be adversely affected if it is unable to repay or refinance its debt when it falls due.
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, Barbon Insurance Group Ltd 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 Santander (UK) Pension Fund. He was appointed to the Board of Directors of the Company on 18 February 2010 and is Chairman of the Board Risk Committee.
The schedule of matters reserved for the Board is available from the Group Company Secretary. Matters which are not reserved for the Board and also its Committees under their terms of reference (which are available on the Group website), or for shareholders in general meetings, are delegated to the executive management under a schedule of delegated authorities approved by the Board.
Chairman Howard Davies1 3 3 – – – – – – – – – –
– Reviewed the Internal Audit macro-opinion report on the adequacy of risk management and control in the Group
The standard process used by the Committee for Board appointments involves the use of an external search consultancy to source candidates external to the Group (and may in the case of executive appointments also consider internal candidates). Detailed assessments of short-listed candidates are undertaken by the search consultancy, followed by interviews with Committee members and other Directors and the sourcing of references before the Committee recommends the appointments to the Board. This process was used for Board appointments (Chairman and Group Finance Director) in 2012.
At the Company’s 2012 AGM, the Company secured the support of 97.91% of shareholders voting on the resolution to approve the Company’s Remuneration report for 2011. Votes against represented 2.09%.
– Approve remuneration practices within Ignis Asset Management, applying similar overall principles as applied to the rest of the Group but relating these to an appropriate peer group of asset managers.
The remuneration policy for Executive Directors from the commencement of the 2012 financial year is summarised in the table below along with the position of the Chairman’s and Non-Executive Directors’ fees: Element and purpose Policy and opportunity Operational and performance measures Implementation of policy in year
Base salaries are reviewed annually with any changes taking effect from 1 January
Directors’ service contracts Executive Directors Executive Director service contracts, which do not contain expiry dates, provide that compensation provisions for termination without notice will only extend to 12 months of salary, fixed benefits and pension (which may be payable in instalments and subject to mitigation). By excluding any entitlement to compensation for loss of the opportunity to earn variable pay, the Committee believes the contracts to be consistent with best practice. The Committee also has discretion to mitigate further by paying on a phased basis with unpaid instalments ceasing if the executive finds alternative employment. Contracts do not contain change of control provisions.
Will receive a pro-rated award subject to the application of the performance conditions at the date of the event
5 Clive Bannister and Jim McConville each receive a Company contribution of 20% of base salary which may, at their choice, be paid to a GPPP or received in cash if the individual is impacted by the lifetime or annual allowance.
2 The performance conditions for the 2012 award are set out in the Remuneration policy section of this report.
Total shareholder return Value of a 100 unit investment made on 5 July 2010
Performance measurement/assessment For Group and life company employees, performance assessment is normally based upon a balanced scorecard of measures related to Group and individual targets. These targets typically include financial performance, risk, people and customer measures. Overall AIP costs are reviewed by the Remuneration Committee at the year end having regard to the Group KPIs and non-financial measures.
Deferral and vesting The Committee requires that one-third of annual incentives for the senior Group employees to be deferred into Phoenix Group Holdings shares. Equivalent rules apply to Ignis employees who are required to defer part of their bonus into phantom shares where the value of the outcome is determined by Ignis’ financial performance.
Group Company Secretary The Group Company Secretary throughout the period was Gerald Watson.
− the consolidated financial statements and the part of the Directors’ remuneration report to be audited are not in agreement with the accounting records and returns; or
Dividends paid on ordinary shares – (73) – – – – (73) – (73) Dividends paid to non-controlling
Statement of compliance The financial statements have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union (‘IFRS’).
Notes to the consolidated financial statements continued 1. Accounting policies (continued) (e) Insurance contracts and investment contracts with DPF Under current IFRS requirements the Group’s insurance contracts and investment contracts with DPF are measured using accounting policies consistent with those previously adopted under UK GAAP. Amounts recoverable from reinsurers are estimated in a manner consistent with the outstanding claims provision or settled claims associated with the reinsured policy.
Notes to the consolidated financial statements continued 1. Accounting policies (continued) (z) Share capital and shares held by the employee trust and Group entities Ordinary 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.
− Disclosure – Transfer of Financial Assets (Amendments to IFRS 7) (2012). This revises the required disclosures to help users of financial statements evaluate the risk exposures relating to transfers of financial assets and the effect of those risks on an entity’s financial position.
General insurance During 2012 the Group made considerable progress with its strategy to exit from its residual, non-core general insurance business. In January 2012, the business of PA(GI) Limited was transferred under a Part VII scheme to RSA, to whom the business had previously been reinsured. In April 2012, the general insurance business of Phoenix Life Assurance Limited (formerly Pearl Assurance Limited) was transferred under a Part VII scheme to BAGI, a fellow group company – which resulted in all of the Group’s residual general insurance liabilities being held in the same entity. It is highly probable that the Group will complete a sale of its entire interest in BAGI during 2013 and accordingly its assets and liabilities have been classified as held for sale as at 31 December 2012.
Audit of the consolidated financial statements 0.4 0.5 Audit of the Group’s subsidiaries financial statements 2.7 2.9 Audit of MCEV supplementary information 0.5 0.6 Tax advisory services 0.1 0.4 Other assurance services 1.8 1.8 Corporate finance services 1.6 0.5 Other non-audit services 0.5 –
Policyholder tax charge 33 173 Total tax (credit)/charge for the year (86) 94 1 The Group’s two operating segments operate predominantly in the UK. The reconciliation of the tax (credit)/charge has, therefore, been completed by reference to the standard rate of UK tax rather than by reference to the Jersey income tax rate of 0% which is applicable to Phoenix Group Holdings.
The amount recoverable after one year is £2,829 million (2011: £4,320 million). The amount payable after one year is £2,222 million (2011: £3,368 million).
Payables related to direct insurance contracts 435 707 Less amounts classified as held for sale (42) –
PGL Pension Scheme Economic surplus (including £285 million (2011: £471 million) available as a refund on a windingup of the scheme) 344 520 Adjustment for insurance policies eliminated on consolidation (95) (94) Net economic surplus 249 426 Provision for tax on that part of the economic surplus available as a refund on a winding-up of the scheme (112) (149) Reported surplus 137 277
Contributions totalling £70 million are expected to be paid into the scheme in 2013.
Financial assets at fair value Derivatives – 6,038 61 6,099 Financial assets designated at fair value through profit or loss upon initial recognition
The maximum exposure to credit risk in respect of stock lending transactions is £9,179 million (2011: £10,924 million) of which credit risk of £9,179 million (2011: £10,913 million) is mitigated through the use of collateral arrangements.
Decrease in investment assets 7,082 1,400 Decrease/(increase) in reinsurance assets 156 (201) (Decrease)/increase in insurance contract and investment contract liabilities (6,262) 450 (Decrease)/increase in deposits received from reinsurers (18) 53 (Decrease)/increase in obligation for repayment of collateral received (2,547) 2,845 Net (increase)/decrease in working capital (93) 310 Cash (utilised)/generated by operations (2,291) 3,692 41. Capital statement Capital Management Framework The Group’s Capital Management Framework is designed to achieve the following objectives: − provide appropriate security for policyholders and meet all regulatory capital requirements whilst not retaining unnecessary excess capital; − ensure sufficient liquidity to meet obligations to policyholders and other creditors; and
Total IFRS equity attributable to owners of the parent1 1,658 1,652 Adjustments between IFRS equity attributable to owners of the parent and MCEV net worth2 (1,913) (2,163) MCEV value of in-force business2 2,377 2,629 Group MCEV 2,122 2,118 Gross shareholder debt: 50% of the Perpetual Reset Capital Securities given their hybrid nature 18 204 204
Difference between IFRS and MCEV carrying values of shareholder borrowings 112 71 Gross MCEV 4,975 5,087 1 As shown in the consolidated statement of financial position.
Total available capital resources at 1 January 2011 1,048 963 1,032 295 713 1,023 709 1,441 7,224
Notes to the consolidated financial statements continued 42. Risk management (continued) 42.5 Insurance risk Insurance risk refers to the risk that the frequency or severity of insured events may be worse than expected and includes expense risk. The Phoenix Life segment contracts include the following sources of insurance risk: Mortality higher than expected number of death claims on assurance products and occurrence of one or more large claims; Longevity faster than expected improvements in life expectancy on immediate and deferred annuity products; Morbidity higher than expected number of serious illness claims or more sickness claims which last longer on income protection policies; Expenses policies cost more to administer than expected; Lapses the numbers of policies terminating early is different to that expected in a way which increases expected claims costs or expenses or reduces future profits; Options unanticipated changes in policyholder option exercise rates giving rise to increased claims costs; and
The principal operating lease commitments concern office space located at Bothwell Street, Glasgow; St Vincent Street, Glasgow; Juxon House, London and Cheapside, London.
Phoenix Life Assurance Limited (formerly Pearl Assurance Limited) (life assurance company)
The information disclosed above is only in respect of those undertakings which materially affect the figures shown in the Group’s consolidated financial statements. There are a number of other subsidiaries and associated undertakings whose business does not materially affect the Group’s profits or the amount of its assets and particulars of these have been omitted in view of their excessive length.
H Davies C Bannister J McConville A Lyons I Ashken R P Azria D Barnes C Clarke I Cormack T Cross Brown M Dale I Hudson H Osmond D Woods
The life companies had £6 million shareholder exposure to financial institution corporate debt of the Peripheral Eurozone at 31 December 2012. This exposure has been reduced from £88 million at 31 December 2011, a reduction of £82 million. The reduction again reflects the decision to reduce the levels of Peripheral Eurozone financial institution corporate debt. The £2,555 million (2011: £2,896 million) total shareholder exposure comprised £1,771 million (2011: £2,148 million) senior debt, £321 million (2011: £261 million) Tier 1 debt and £463 million (2011: £487 million) Tier 2 debt.
MCEV earnings per ordinary share For the year ended 31 December 2012
Total comprehensive income for the year 71 63 1 During 2012, the Group has amended its MCEV policy for recognising contributions to Group pension schemes in an IFRS (IAS 19) surplus position (refer note 1 g). The 2011 comparatives have been restated in this regard. The impact of the 2011 restatement is to reduce ‘Group costs’ by £30 million from £84 million to £54 million, to increase ‘Tax on operating earnings’ by £7 million from £141 million to £148 million and other comprehensive income reduces by £23 million.
b) Value of in-force business (‘VIF’) The value of in-force covered business consists of the following components: – present value of future profits; – time value of financial options and guarantees; and
The approach adopted to calculate VIF combines deterministic and stochastic techniques (each of which is discussed in more detail below): – deterministic techniques have been used to value cash flows whose values vary in a linear fashion with market movements. These cash flows are valued using discount rates that reflect the risk inherent in each cash flow. In practice, it is not necessary to discount each cash flow at a different discount rate, as the same result is achieved by projecting and discounting all cash flows at risk-free rates. This is known as the ‘certainty equivalent approach’; and
Unlisted bank debt owed by the holding companies is included at face value.
g) Pension schemes The MCEV allows for pension scheme deficits as calculated on an IFRS (IAS 19) basis, but no benefit is taken for pension scheme surpluses.
(2) 1% decrease in risk-free rates 91 153 (3) 1% increase in risk-free rates (95) (157) (4) 10% decrease in equity market values (70) (75) (5) 10% increase in equity market values 69 71 (6) 10% decrease in property market values (48) (72) (7) 10% increase in property market values 47 72 (8) 100 bps increase in credit spreads1 (150) (170) (9) 100 bps decrease in credit spreads1 175 196 (10) 25% increase in equity/property implied volatilities (9) (20) (11) 25% increase in swaption implied volatilities (1) 11 (12) 25% decrease in lapse rates and paid-up rates (38) (43) (13) 5% decrease in annuitant mortality (148) (203) (14) 5% decrease in non-annuitant mortality 29 27 (15) Required capital equal to the minimum regulatory capital2 15 32 1 25 bps is assumed to relate to default risk.
FSA Financial Services Authority – Regulator of all providers of financial services in the UK; Bank of England retains responsibility for systemic risk